The UK wants to include crypto companies in reporting requirements, a Minnesota man was arrested for laundering PPP funds and the US calls on the UN to reinstate Iran sanctions.
We share our financial regulatory highlights from the week of 24 August 2020.
FCA Adds Crypto Reporting Requirements
On 24 August 2020, the Financial Conduct Authority (FCA) published a consultation paper detailing its proposal to expand the scope of its annual money laundering reporting requirements to encompass more companies.
The proposed changes would affect, “irrespective of their total annual revenue,” cryptocurrency exchanges and custodian wallet companies as well as e-money institutions and multilateral and organized trading facilities. Most FSMA authorized companies and payment institutions will also be impacted, although there are some exceptions.
Companies within these categories would be required to submit a report each year that details the makeup of their customer base, including how many are considered PEPs or high-risk and how many were “refused or exited for financial crime reasons.” Further, reports must include information on the companies’ compliance programs and the top fraud trends encountered that year.
The inclusion of cryptocurrency companies should come as no surprise. The EU’s 5AMLD, which came into effect on 10 January 2020, attempts to address the increasing popularity of cryptocurrencies by bringing providers under the EU’s current AML/CFT regime. This action by the UK regulator is seeking to meet 5AMLD’s requirements on cryptocurrency exchanges.
If implemented, these policy changes would go into effect for most of the added companies as of “their next accounting reference date 12 months after any FCA rules are made.” The sole exception would be cryptocurrency companies, which would have until their “next accounting reference date after 10 January 2022.”
The proposed policy changes will be available to the public for feedback until November 23.
Minnesota Man Indicted for Laundering PPP Funds
The former owner of a construction company in Brooklyn Park, Minnesota, allegedly obtained a PPP loan under false pretenses and is facing charges of wire fraud and money laundering, US officials announced on 21 August 2020.
According to the Department of Justice, on 1 May 2020, 32-year-old Kyle William Brenizer submitted a “false and misleading” PPP application on behalf of his company, True-Cut Construction LLC — a company that closed two years ago after the Minnesota Department of Labor issued a cease and desist order. The application was denied.
However, just 12 days later, Brenizer submitted a second application. This time, he allegedly submitted it under the name of someone else, who was said to own 90% of the company. This second application was approved.
Prosecutors say that, throughout the application process, Brenizer provided fabricated supporting documentation and misrepresented his average payroll expenses, which he said amounted to $336,400 per month for around 30 employees. He also allegedly lied and stated on the application that he was not subject to pending criminal charges: in reality, he was facing multiple pending charges, including check forgery and identity theft.
Upon receipt of a little over $840,000, Brenizer allegedly transferred the majority of the funds — around $650,000 — to another bank account and went on a personal shopping spree, which included spending $29,000 on a Harley Davidson motorcycle and over $1,000 on golf-related purchases.
Regardless of whether Brenizer is ultimately found guilty, the case serves as a reminder that bad actors can and will try to game the system, especially in times of crisis and when money is free-flowing. Increased diligence in customer screening, including scanning for adverse media and negative news mentions, is critical to minimizing such instances of fraud.
US Calls on UN to Reinstate Iran Sanctions
US Secretary of State Pompeo formally called on the UN Security Council to reinstate UN sanctions on Iran on Thursday, 20 August 2020.
Pompeo invoked what is referred to as a “snapback” provision within the Joint Comprehensive Plan of Action (JCPOA) — colloquially known as the Iran nuclear deal — that reinstates UN sanctions lifted as per the JCPOA within 30 days if a participant state notifies the UN Security Council of violations by Iran.
The action, taken after a UN vote to extend a five-year arms embargo on Iran failed, has been met with controversy and opposition, including from 13 of the security council’s 15 members. Many argue that since the US formally withdrew from the JCPOA in 2018 and unilaterally reinstated sanctions on Iran, it can no longer be considered a participant in the deal. Of particular note, France, Germany and the UK — collectively, the E3 — have issued a joint statement in which they assert that the US “ceased to be a participant” and that they “cannot therefore support this action.”
But the US disagrees, asserting that it was a participant and an original signatory in 2015, which gives it legal authority to invoke the snapback provision regardless of its status now.
If successful, the reinstatement of UN sanctions would deal another blow to Iran, whose economy has suffered significantly due to the US’ withdrawal from the deal and its decision to reimpose sanctions unilaterally. It also would, by default, reinstate the arms embargo, which would further hinder Iran’s ability to build its nuclear program.
Iran, for its part, slammed the action and declared it “doomed to failure.” In a retaliatory show of force, it disclosed on 20 August that it had built a new surface-to-surface ballistic missile and a cruise missile with a range of over 620 miles.
Nevertheless, given such heated opposition from all other permanent members of the UN Security Council as well as Germany, a strategic ally, it’s unclear how the US plans to move forward and how companies should prepare.
On Tuesday, 25 August 2020, Indonesia’s ambassador to the UN and current UN Security Council president, Dian Triansyah Djani, declared that given the lack of consensus, “the president is not in the position to take further action.” At the same time, the US is unlikely to back down quietly. Companies should, therefore, be prepared to act on additional sanctions or secondary sanctions, whether issued from the UN or the US or both.