Spring Refresh – Compliance and Fintech Developments
With spring around the corner, it’s a good time for clean-up and a refresh of regulatory filings, testing and policies. This edition encourages a reset on expectations for OFAC, privacy, digital assets and disclosures. This spring we are also launching a new NSCP Fintech & Blockchain Round Table for a fresh approach to networking, bench marking and staying ahead of regulatory trends. Save the Date April 13 @ 12:30. Details to follow.
Fintech and Blockchain Developments
OFAC Enforcement Cases
Recent Office of Foreign Assets Control (OFAC) enforcement cases are a reminder that screening names alone is not an adequate sanctions compliance program; the location of transactions through IP address surveillance is also crucial. This OFAC enforcement case against BitPay is another example of OFAC citing companies for violations based, at least in part, on a failure to implement IP geo-blocking.
BitPay, the Atlanta-based payment processor, settled claims it maintained an inadequate sanctions compliance program for a penalty just over $500,000. Notably, penalties were reduced for BitPay’s cooperation and remediation efforts. The sanctions related to digital currency transactions on the BitPay platform between individuals located in Cuba, North Korea, Iran, Sudan, Syria, and Crimea and merchants primarily in the US. BitPay had screened its customers, against US sanctions lists but, OFAC alleged that BitPay had reason to know that purchasers were located in sanctioned jurisdictions, because the company had location information including IP address data. OFAC noted that this case “emphasized the importance of screening all available information including IP addresses and other location data of customers and counter-parties to mitigate sanctions risks….”
OFAC Compliance Program is more than a KYC exercise. This guidance is a good reminder to also review, test and refresh sanctions software and your sanctions risk assessments for changes to business and any data feeds. Sanctions Enforcement Blog
Privacy Developments
- Broadening the definition of security events to include any unauthorized access;
- Expanding audit trail obligations;
- Mandating real-time monitoring of digital financial services to improve fraud detection; and
- Time-limiting data retention.
Recent SEC Actions
License and Business Development Reminders
SEC v. Moleski. In this recent complaint, the SEC alleges defendants promoted and solicited investments in private funds they controlled. In doing so, the SEC claims defendants made a series of misrepresentations including false claims that: “investor funds would be put into “high grade investments”; the investment objective was “phenomenal returns:’ a “full-time licensed broker would monitor the investments daily;” “investors would achieve financial freedom;” and, that “we treat you money like it’s our own.” Defendants are also alleged to have solicited individuals to purchase securities without proper securities registrations. This is a good reminder to stay aligned and connected to business development including which individuals are paid for success.
SEC v. Coinseed, Inc. In another recent complaint, the SEC brought an action against the founder of Coinseed. The complaint alleges that defendants inappropriately offered and sold tokens, called CSD, to the public. Purchasers were allegedly told that they would receive a percentage of revenue from certain fees generated by the business, and that their funds would be used to develop the firm’s business which was claimed to include a mobile phone app that would enable users to purchase and sell digital assets. No registration statement was in effect. The complaint alleges violation of Securities Act Sections 5(a) and 5(c) and is a good reminder to work carefully with experts for any capital raising efforts. The SEC’s recent Risk Alert covering digital assets is another important development. Compliance officers can audit their compliance programs against the 8 pages of issues.
ESG Investing and Sustainability Developments
ESG Developments to watch include the Department of Labor (DOL) leadership. There are indications that the DOL rules curbing ESG retirement investments may be revisited by new DOL leadership.
How are you reviewing and sourcing climate-related disclosures? In the wake of the severe storm in Texas, this is an opportunity to review your process and test its effectiveness. Two practical questions to ask are 1) Is the process objective and documented? 2) Have you permitted use of media sources or non-media institutions such as the Task Force on Climate-related Financial Disclosures (“TCFD”)?
Guest Column
by Courtney Lang
When I think of climate change affecting Texas, I immediately picture sea level rise and stronger hurricanes. My brain can easily associate these occurrences with a warming planet. Although I have a formal education in climate science, the counterintuitive effects of climate change such as increasing snowfall in certain regions aren’t top-of-mind. Nonetheless, the intensity of the North American winter storm was most likely caused by climate change. The rate of warming in the Arctic is faster than that of the rest of the planet because of the ice-albedo positive feedback loop wherein warmer temperatures cause snow to melt over land-ice, reducing its “whiteness” and therefore its ability to reflect the sun’s energy back to space. Thus, the planet absorbs more of the sun’s energy, and gets even warmer, and so on. As the Arctic region warms, the difference in temperature between the typically circular-flowing “polar vortex” of colder winds in the North Pole and warmer winds in North America, called Westerlies, decreases thereby decreasing pressure and allowing the polar jet stream to meander south and cause large storms. Here is a helpful visualization.
To write about the above phenomenon, I had to Google it, cross-check my notes from climate science courses, and explain it to my mom for good measure. While much of nature seems intuitive to us, earth science is not common knowledge. But it must become common if we are to effectively prepare for climate change. Investors can avoid losses and reap benefits by understanding and evaluating geographical climate risks to real assets as showcased by this storm. The TCFD provides a framework to consider these risks in context of different climate change scenarios.
Take Texas’s energy grid as an example. Despite what many believe Fox News has wrongfully stated 128 times thus far, wind power is not to blame for the tragic losses of life. Fossil fuel-created climate change is most likely to blame for the intensity of this storm and the vast majority of the power outages in Texas were caused by coal and gas-fired power plants. However, wind and fossil fuel-fired power plant projects alike may have benefitted financially from selecting equipment better suited for climate change and lives could have been saved by a more resilient energy grid. Wind turbines can be equipped with de-icing technologies such as a special coating that prevents ice from forming. The specific technologies chosen for Texas would need to be conducive to the typically warm climate and rare wet, icy winter events. Similarly, fossil fuel-fired power plants, wells, and pipes, can be equipped with devices that combat freezing. Current Texas energy infrastructure could be retrofitted and new builds could incorporate winterization technology from the start as long as it does not significantly compromise the output of power plants as climate warms in the region. In the event of another storm like this, power plants that can operate will benefit financially from high energy prices due to decreased supply and increased demand on the grid.
