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Recent Enforcement Actions Taken Against Financial Institutions

Over the past several weeks, a series of regulatory and compliance actions have been taken against financial institutions as well as entities that are active in digital instruments. A few of those most recent actions which relate to cryptocurrencies and curtailing growth, the FX markets and AML / KYC are highlighted below.

SEC Shuts Down Initial Coin Offering

The Securities and Exchange Commission (SEC) issued a complaint which froze the assets of what they alleged was the fraudulent initial coin offering to use cryptocurrency to “revolutionize banking.”  The SEC complaint was filed on January 25th in a federal district court in Dallas. 

The complaint by the SEC noted that the defendants (AriseCoin) was an improperly unregistered security.  In addition, the SEC argued that the defendants made misrepresentations seeking to solicit investments from retail investors.  The SEC noted that AriseBank had claimed that they were FDIC insured, that it had raised $600 million in just over two months and that the defendants failed to disclose the executives’ pertinent criminal histories.  The claim noted that AriseBank (according to a SEC release) “allegedly offered and sold unregistered investments in their purported ‘AriseCoin” cryptocurrency by depicting Arise Bank as a first of its kind decentralized bank offering a variety of consumer facing banking products and services using more than 700 different virtual currencies.”  The sales pitch, the SEC release concluded, “claimed that it developed an algorithmic trading application that automatically trades in various cryptocurrencies.” 

The Court in response to the SEC complaint appointed a digital receiver over AriseBank.   Steven Peikin, the Co-Director of the SEC’s Enforcement Division noted that “we allege that Arise Bank and its principals sought to raise hundreds of millions from investors by misrepresenting the company…..and we…sought emergency relief to prevent investors from being victimized by what we allege to be an outright scam.”  

Other Negative News on Bitcoin

The price of Bitcoin has fallen sharply over January and at the beginning of February . Close to $20,000 at their peak, bitcoins dropped to below $9,000 after the Indian government said it would ban all cryptocurrency trading and Facebook announced a ban on digital currency adverts. 

The 10th largest Cryptocurrency firm globally, Japanese based, NEM, is refunding $400 million (USD) to over 260,000 investors as a result of a hack to its exchange.  The firm noted that the coins had been kept in a hot wallet as opposed to the more secure cold wallet which is off line.  This was due to a shortage of staff and technological challenges.  Last month, reflecting the continued Japanese fervor over the crypto opportunities, one third of the global bitcoin market were denominated in yen.

The Chinese have continued their wariness of the crypto currency market with a series of moves very recently to stem the growth in the market.  While Bitcoin and peer currencies can still be traded in the over the counter market, this slows the process and also can in some experts view, increase credit risk.  The Chinese regulators have banned initial coin offerings (ICO’s) as a virtual new currency.  They have initiated efforts to halt bitcoin mining, the technology that allows the computation that makes cryptocurrency transactions possible.  The regulators intend to block on line access to mobile apps and platforms that promote exchange like services for cryptocurrencies.  These initiatives have been undertaken by a series of the Chinese regulatory bodies including the Chinese Central Bank, the office of Industry and Information Technology and the Cyberspace Administration. 

AML Rules & Bitcoin

Secretary of Treasury Steven Mnuchin recently made a series of warnings and a commitment to enhanced utilization of anti-money laundering and know-your-customer rules as it would apply to bitcoin and cryptocurrencies and traders and firms offering these products.

Mnuchin expressed concern in a recent speech that “cryptocurrencies could be used to conduct money laundering.”  He noted that the Financial Stability Oversight Council has set up an interagency working group to examine the ‘burgeoning market’ and shore up AML rules for cryptocurrencies.

Mnuchin added, “under our laws if you have a wallet to own bitcoins, that company has the same obligation as a bank to know your customer.” (Bloomberg News)  In the US we have rules for anti-money laundering for all different types of entities.  The rest of the world doesn’t have that, so we are working with the G-20 to ensure that this does not become the Swiss numbered bank account.”

The comments from Mnuchin were consistent with a flurry of regulatory scrutiny of the significant increase in virtual currencies.  Newly appointed Fed Reserve Vice Chairman for Supervision Randal Quarles warned on the dangers of virtual currencies last month.  Outgoing Fed Chairman Yellen referred to cryptocurrencies as “highly speculative”.  Last year in July the Fincen (enforcement network for the Department of Treasury) levied a fine for over $100 million against the bitcoin exchange BTC-e for numerous AML violations.

CFTC Actions on Spoofing Charges

On January 29th, the CFTC filed eight separate anti spoofing enforcement actions against three separate banks (Deutsche Bank, UBS, HSBC) and six individuals.  The filing was issued in conjunction with the Department of Justice and the FBI’s Criminal Investigative Division .

The Division of Enforcement Head at the CFTC (James McDonald) noted that “spoofing is a particularly pernicious example of bad actors seeking to manipulate the market through the abuse of technology.  The technological developments that enabled electronic and algorithmic trading have created new opportunities in our markets, but at the same time….these new development also present new opportunities for bad actors.”  Spoofing involves placing bids or making offers on futures products with the prior intent to cancel orders before execution.  The purpose of spoofing is to attempt to create a view that there is market depth which does not actually exist. 

The three institutions paid fines ranging from $1.5 to $30 million to settle the charges as well as entering into an agreement to enhance systems and controls to identify and seek to prevent and deter spoofing as a practice among traders. 

In all three of the financial institution cases, the CFTC found that certain previous metal traders or traders in futures products in gold and precious metals, which were traded on the Commodity Exchange, Inc. (COMEX) “attempted to manipulate the price of precious metals futures contracts…by utilizing a variety of manual spoofing techniques…..and by trading in a manner to trigger customer stop-loss orders. (CFTC Release: pr7681-18)

Violations of Antitrust Guidelines Related to FX Currency Rigging

As part of the Department of Justice’s on-going investigation into potential violations of antitrust and fraud crimes in the Foreign Exchange Market, further enforcement actions were taken in late January of 2018.  A bank subsidiary of BNPP Paribas S.A., BNP Paribas USA Inc. plead guilty to violations for conspiring to manipulate prices in foreign currencies from CEEMEA currencies (Central and Eastern Europe, Middle East and Africa).  In addition, BNPP plead guilty to agreeing to work with other firms on types of pricing to quote to customers and undertaking a variety of measures to conceal its misconduct.   There was no recommendation for probation for BNP in lieu of the efforts that bank had already undertaken and cooperation with the on-going DOJ investigations into FX misconduct.

Federal Reserve Cease and Desist Order against Société Générale

The Board of Governors of the Federal Reserve System (FED) issued a consent Cease and Desist Order against Société Générale.  The order (agreed to on December 8th, 2017) came as a result of the 2016 examination of the NY Branch conducted by the FED which ‘identified deficiencies in the Branch’s risk management and compliance with applicable federal laws, rules, regulations relating to (“AML”) compliance, including the Bank Secrecy Act (“BSA”)….and the requirements of Regulation K of the Board of Governors to report suspicious activity and to maintain an adequate BSA/AML compliance program…”). 

The order from the Board of Governors outlined a series of actions that the Bank and Branch should undertake covering Corporate Governance and Management Oversight; BSA/AML Compliance Review and Compliance Programs, as well as enhanced Customer Due Diligence, and increased Suspicious Activity Monitoring and Reporting.  The Board requires the bank to meet a series of approvals, implementation and progress reports to be submitted to ensure compliance with the orders.

Federal Reserve Cease and Desist Order against Mega International Commercial Bank

On January 17th, Mega International Commercial Bank Ltd., of Taipei, Taiwan was issued a cease and desist order and agreed to a $29 million penalty against its operations in the US.  The bank was cited for a series of violations related to anti-money laundering and agreed that it would enhance and improve its policies, procedures, controls, and oversight in that area.

In the consent decree, Mega Bank had argued that the most recent penalty arose from a previous breach of the money laundering and banking secrecy laws where they had paid $180 million fine to the New York State Department of Financial Services.  That fine prompted a further review by the US Federal Reserve Board of the banks’ branches in NY, Illinois and California and the most recent fines and requirements on the bank.

As part of the agreement with the Federal Reserve the bank branch agreed to a broader and built out BSA/AML compliance program which included (a) enhanced internal controls which would be designed to ensure compliance with the BSA/AML requirements; (b) separate controls which are designed to ensure compliance with the procedures, controls and policies in place for correspondent banking accounts for foreign financial institutions.

Federal Reserve Cease and Desist Order against Wells Fargo

On February 2, 2018 Wells Fargo was issued a cease and desist order by the U.S. Federal Reserve. The order - Janet Yellen’s last act before the end of her term and unprecedented by its severity - “restricts the growth of the firm until it sufficiently improves its governance and controls”.  In addition to the growth restriction, the Bank’s Board will have to replace three current board members by April and a fourth one by the end of the year. This enforcement action came after Wells Fargo had already paid a $185 million fine in September 2016 to the U.S. Consumer Financial Protection Bureau for opening more than a million fake accounts over the course of a decade.  This enforcement action is seen as a signal to other bank Boards that they will be held personally accountable for governance and risk management issues that cause them to not meet U.S. Federal Reserve's expectations.


• Although Blockchain is seen as a valuable contributor to ledger technology, cryptocurrency markets continue to be volatile as, globally, regulators escalate efforts to control its expansion.

• As regulators identify additional FX market manipulation issues, it is our view that financial institutions will continue to be pressured to implement / adhere to the FX Global Code. 

• The enforcement action taken against Wells Fargo, by its severity, signals that Bank Boards have to increase their supervision on governance and risk management and may be held accountable for issues arising. 

• Finally, AML/KYC risks continue to pose challenges to Banks. Business areas including Front Office Client Onboarding and Compliance, which have conducted significant remediation efforts will be required to maintain focus to manage business as usual activity which otherwise could result in large client due diligence backlogs.



- Department of Justice Criminal Fine for Manipulation of Foreign Exchange Markets against BNPP Paribas USA, Inc.

- OCC Semi-Annual Assessment of Risks for Fall, 2017

- CFTC Release: p7681-18

- Congressional Consideration of Overhaul of the Bank Secrecy Act

- Order to Cease and Desist Issued in the matter of Societe Generale SA and Societe Generale New York Branch

- https://www.federalreserve.gov/newsevents/pressreleases/enforcement20180...

- https://www.theguardian.com/technology/2018/feb/01/bitcoins-january-fall...


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