Crypto currencies and SARs are two recurring matters in recent SEC Enforcement Actions. The agency has brought a series of cases and issued warnings regarding the necessity of complying with the federal securities laws when dealing with coin offerings. Last week, for example, Commissioner Hester Pierce discussed crypto currencies in a speech. Similarly, SARs – Suspicious Activity Reports – are an area of continuing interest to the Enforcement Division as reflected in recent actions.
The SEC’s Enforcement Division’s focus on crypto currencies and SARs may have converged in a May 9, 2019 advisory issued by the Financial Crimes Network, or FinCEN, titled Advisory on Illicit Activity Involving Convertible Virtual Currency (here). The advisory appears to be a broad warning regarding the nefarious use of crypto currencies. It is addressed to CEOs, COOs, Chief Risk and Compliance Offers and Cybersecurity Units.
Using subtitles such as “The Risks Posed by Virtual Currencies,” and “Darknet Marketplaces,” the Advisory trumpets the dangers of these currencies. Its potential reach and application is perhaps best reflect in the subtitle offered at the outset: “Criminals continue to exploit virtual currency to support illegal activity, money laundering and other behavior endangering U.S. national security, including through entities facilitating its anonymous use,”
In fact, the Advisory is narrowly drawn, focusing largely on two points. One is the used of convertible virtual currencies or CVCs. The other is a subset of peer-to-peer or P2P exchanges, particularly those tied to the dark web.
CVCs create a risk of illicit financial transactions, according to the Advisory, because of the global nature, distribution structure and limited transparency of the most widely used virtual currency systems. According to FinCEN “New types of anonymity-enhanced CVCs have emerged that further reduce the transparency of transactions and identities” as well as the source of the transaction. Indeed, some transactions appear to have been crafted for concealment. This makes it difficult for law enforcement to identify these transactions. At the same time, it places increased emphasis on compliance by financial institution with anti-money laundering/counter terrorism (AML/CFT) systems, according to the Advisory. The prevalence of unregistered CVC entities that lack adequate AML/CFT controls enhances the risk from these transactions.
The advisory also focuses on a limited class of P2P transactions. Generally, these exchanges involve individuals or entities offering to exchange fiat currencies for virtual currencies or one virtual currency for another. The transactions are typically informal and may be on-line or in-person. Those involved in the transactions are frequently money service businesses or MSBs, some of which are foreign based. P2P exchange functioning as MSBs are required under to comply with the Bank Secrecy Act and the implementing regulations. Many involved in these transactions may, however, not be registered.
Transactions such as these with little transparency – a result which at times may be by design – increase the risk of illicit transactions involving money laundering, sanctions violations and similar prohibited conduct. To aid in identifying these transactions the advisory lists a series of 30 possible red flags tied largely to either to the darknet or unregistered P2P exchanges. Those include:
· A CVC address linked to the darknet or illicit activity;
· A customer address tied to illicit activity;
· Blockchain analytics indicates that the transferring CVC has a suspicious source;
· Surrounding facts and circumstances suggest an intent to conceal;
· Customer receipt of multiple cash deposits or wires from a number of institutions shortly prior to using the funds to acquire virtual currency;
· Customer receipt of a series of deposits from various sources that in aggregate are about equal to fund transfers to known virtual currency exchange platforms in a short time; and
· A customer phone number or email address that is connected to a known CVC P2P exchange platform advertising exchange services.
While the Advisory focuses on CVC and select P2P transactions tied to a lack of transparency, it speaks broadly in terms of crypto currency transactions. Since crypto currencies emanate from an “off the grid” culture, the lack of full transparency for such arrangements should not be a surprise. Nevertheless, CCOs and others responsible for compliance would be well advised to carefully monitor their systems for the type of transactions identified in the Advisory as well as other similar ones.
SEC 85th Anniversary Gala: On June 3, 2019, the SEC Historical Society will host a gala celebration to commemorate the 85th Anniversary of the founding of the U.S. Securities and Exchange Commission and its 20th Anniversary. The event will be held at the Building Museum, Washington, D.C. There will be cocktails and dinner followed by a brief program featuring remarks by SEC Chairman Jay Clayton. For further information regarding tables and tickets please contact the Society on or before May 17, 2019 here (full disclosure Mr. Gorman is the President of the Society).