Sanctions, Crackdowns and Revelations

July 3, 2020 5 minute read

Wirecard has further revelations, Singapore cracks down on payment licenses, the IRS funds the dead and the US has sanctioned China.

We share our financial regulatory highlights from the week of 29 June 2020.

Wirecard’s Dirty Laundry

Wirecard’s story is continuing to move at a tremendous pace. The disintegrating fintech was suspended from operations by the Financial Conduct Authority (FCA) in the UK last Friday – immediately putting into jeopardy a number of fintechs who were using the payment processor to handle customer money. Some fintechs were even posting notices on Twitter advising customers to quickly withdraw their cash from accounts.

It was a bold move by the FCA, criticized by some as heavy-handed, but by 30 June 2020, the suspension had been removed and customers were able to access their money again. The FCA defended its decision as the suspension was done “in order to further protect customer money”.

However, the ban may have been lifted earlier due to fears of causing further damage to the UK’s fintech economy. Wirecard was popular with many fintechs and lobby groups feared the scandal could damage the fintech sector as a whole – pressuring the FCA to end the suspension.

Wirecard UK has been linked to cash laundering in revelations made as the business unravels. Senior employees were connected to a network of UK shell companies in Consett, County Durham – ordinary citizens of the town were paid to be directors of companies set up by a local entrepreneur, Simon Dowson who ran Brinken Merchant Incorporations, a now-defunct company formation agent after it was dissolved in 2015.

Wirecard North America has remained untouched by the scandal, a business unit bought by Wirecard AG from Citi in 2016, it has now put itself up for sale.

Seth Brennan, managing director of Wirecard North America, says: “The strong, independent cash flow and financial position of Wirecard North America allow us to operate the business on a completely standalone basis.”

First Charge for New AML Law

Singapore has strengthened its AML stance on payments by implementing and enforcing a new law preventing payment services without a license.

The Payment Services Act was introduced on 28 January 2020 and has just been used for the first time to charge a 23 year old woman. She had allegedly provided a digital payment token service and received 13 fraudulent transactions between 27 and 28 February 2020.
She received approximately $3000, believed to originate from online scams, which was then used to buy Bitcoin. Her case resembles money muling to some degree but with the caveat that she was aware of the illegality and has prior convictions for working for a loan shark.

The arrest highlights the need for proper licensing and enforcement of payment services as without them it would have been easy for this illicit money to enter the global financial system. And it’s interesting that the alleged criminal was able to open an account so easily given her prior criminal history. Something that could have been revealed with a simple adverse media check.

The US Sanctions China

The US Senate passed a bill on Thursday, 25 June 2020, that would sanction Chinese officials and entities identified as helping to undermine Hong Kong’s semi-autonomy. Banks and other companies that are found to be doing business with those designated would also be subject to sanctions.

The move is just one in a series taken by the US government to penalize China for its crackdown on Hong Kong. The Hong Kong Human Rights and Democracy Act of 2019, for example, passed in late 2019 and provides, among other things, a framework to identify those who have undermined Hong Kong’s autonomy and freedoms.

But tensions have ratcheted up recently because Beijing intends to pass a controversial national security law enabling China to more directly quell protests in Hong Kong, as well as impose restrictions on free speech and other subversive acts. Indeed, one of the bill’s co-sponsors, Senator Pat Toomey, elaborating on who might be sanctioned, called out police who take action against protesters and officials who enforce the new law — which is expected to glide through China’s legislative process this week.

The bill passed through the House unanimously on 1 July 2020. Secretary of State Mike Pompeo announced on 26 June 2020 that the US plans to restrict the visas of Communist Party officials in China that undermine Hong Kong’s freedoms, prompting China to retaliate with visa restrictions against the US. Then the US confirmed Tuesday that it will no longer allow defense equipment exports to Hong Kong and will impose on Hong Kong the same dual-use technology restrictions it imposes on China.

What long-term impact these actions may have on already-strained US-China relations remains to be seen, including whether this upends the trade deal, which is on tenuous ground. Nevertheless, these further serve to illustrate how sanctions continue to be used not just as a key foreign policy tool but as a tool of first resort for the US.

$1 Billion for the Dead

The US recently sent out checks ranging in value up to $1200 to a large number of citizens. The money was meant to tide over those who had been financially affected by the lockdown in response to COVID-19 and the sudden loss of jobs.

Unfortunately, 1.1 million recipients were no longer alive – $1.4 billion was sent out to deceased Americans. The Internal Revenue Service (IRS) didn’t check social security numbers (an identifier for US citizens) against Social Security death records in its haste to get the money out to those who needed it. Checks were made against 2019 income returns and failing the presence of those, 2018 income returns.

The IRS has distributed 160.4 million stimulus checks as of 31 May 2020, these payments totaled $269.3 billion. The $1.4 billion paid to dead people accounts for 0.5% of that total.

Treasury Secretary Steven Mnuchin has said the relatives of dead stimulus checks recipients needed to return the money. The IRS outlined a process on how to remit payment, but there’s no word on the consequences if people do not send the money back.