Issue 47: Love Scams

Welcome to This Week in GRC, MBK Search's?weekly digest of the news and views in the world of governance, risk, and compliance.

The Opening Bell

While restaurants and flower shops enjoyed the annual Valentine's Day boom, the Federal Deposit Insurance Corporation (FDIC) took to LinkedIn with a different love bomb:

Romance scams are on the rise, with a staggering 60% increase reported in the UK.

The methods romance scammers are deploying are becoming more sophisticated, and with the advent of AI technology, much harder to detect.

AML is a core focus this week, as we cover:

• FinCEN's proposed investment adviser rule
• The SEC's plans to increase VC fund thresholds
• And why regulators expect strong pushback on coming climate regulations

FinCEN's proposed investment adviser rule: What you need to know

The Financial Crimes Enforcement Network (FinCEN) recently proposed a new rule to establish anti-money laundering and countering the financing of terrorism (AML/CFT) requirements for certain investment advisers.

As investment advisers oversee trillions of dollars of assets and provide services like other financial institutions, bringing them into the fold of AML/CFT regulation has significant implications. MBK Search breaks down FinCEN's new rule's key requirements and changes proposed.

Covered Investment Advisers

The proposed rule would apply to SEC-registered investment advisers (RIAs) and exempt reporting advisers (ERAs). Specifically, it covers advisers required to register with the SEC or those exempt from SEC registration under specific provisions.

Notably, most state-registered advisers would be fine. The proposed rule also does not cover advisers' activities involving mutual funds, as mutual funds already have their own AML/CFT obligations.

AML/CFT Program Requirements

A core component of the proposed rule requires covered RIAs and ERAs to implement a written AML/CFT program approved by senior management. The program must include internal policies, procedures, and controls to guard against money laundering and terrorist financing risks.

Key aspects of the AML/CFT programs would include:

Designating a Compliance Officer:

• Investment advisers must designate an individual or committee responsible for overseeing AML/CFT compliance. This person(s) should have appropriate knowledge, competence, and authority.
• For larger firms, this may be a dedicated role. Smaller firms can dual-hat personnel like the chief compliance officer.

Conducting Employee Training:

• Covered investment advisers must carry out AML/CFT training for appropriate staff. This includes training on regulatory requirements, money laundering/terrorism financing risks, and identifying suspicious activity.
• Training should be risk-based and cover those whose duties may expose them to illicit finance risks. It must be conducted when an employee assumes such responsibilities.

Independent Testing of Program Compliance:

• Investment advisers must provide for periodic independent testing of their AML/CFT program's compliance. This can be done internally or by an external party. Testing would assess if the program met requirements and functions properly to discover deficiencies. Testing frequency can be risk-based.

Risk-Based Ongoing Customer Due Diligence:

• Investment advisers must have risk-based procedures for conducting ongoing customer due diligence. This consists of:Understanding customer relationships to develop a risk profile.Ongoing monitoring to identify suspicious activity and update customer information.

Implementing Procedures in Line with BSA:

• The AML/CFT program must include internal policies, procedures, and controls designed to ensure compliance with BSA requirements and prevent illicit financial activities.

Suspicious Activity Reporting

• The proposed rule would mandate RIAs and ERAs to file Suspicious Activity Reports (SARs) on transactions of $5,000 or more when illicit activity is suspected. The filing deadlines and procedures outlined are aligned with existing SAR regulations.

Filing CTRs Instead of Form 8300s:

• Investment advisers must file CTRs for currency transactions above $10,000 instead of the current Form 8300 requirement. This aligns with other financial institutions.

Recordkeeping and Travel Rules:

• Investment advisers must comply with the Recordkeeping Rule and Travel Rule in the BSA, which require:Obtaining/recording information on originators/beneficiaries for funds transmittals ≥ $3,000Travel Rule - Ensuring such information "travels" with certain transmittals

By extending core pillars of AML/CFT compliance to RIAs and ERAs, the proposed rule aims to mitigate exploitation risks and collect useful financial information for authorities.

Staffing and Resourcing Implications

Investment advisers would likely need to devote significant staffing capacity and resources to develop, implement, and oversee the extensive AML/CFT compliance stipulated under this proposed rule.

Firms needing comprehensive AML/CFT policies may need to create and fill new compliance positions and roles to handle the additional responsibilities. This includes potentially hiring dedicated AML/CFT compliance officers, consultants, and other personnel to develop training programs, draft internal policies/procedures, handle due diligence processes, and review alerts for suspicious activity reporting.

For instance, investment advisers may need financial crime specialists to file higher quality, more complete SARs as required.

MBK Search's industry-trained GRC hiring experts are on hand to advise any firms thinking about boosting their compliance teams. Speak to us today.

SEC Proposes lifting VC fund threshold: 3 Must-Knows

The SEC published a proposed rule that would increase the dollar threshold used to define a "qualifying venture capital fund" under the Investment Company Act.

The change aims to account for inflation since the definition was first introduced in 2018.

If adopted, more venture capital funds would qualify for reduced regulatory burdens going forward.

Here are 3 things you need to know.

1) New $12 Million Threshold

The proposed rule would immediately boost the capital limit for qualifying venture funds from US $10 million to $12 million. This adjustment reflects inflation since 2018 based on the Personal Consumption Expenditures price index.

In addition, the SEC would issue an order every five years to update the threshold for inflation. This aims to maintain the original scope of venture funds intended to qualify under the definition over time.

2) More Funds Potentially Excluded from 1940 Act

By raising the dollar limit, the proposed rule would enable more venture capital funds to qualify for an exclusion under the Investment Company Act of 1940. Currently, three funds that currently fall between the old and new thresholds could newly qualify based on SEC analysis.

Funds that meet the definition of a qualifying venture capital fund do not have to register with the SEC as investment companies. This reduces regulatory burdens in areas like disclosure, governance, and compliance.

3) Maintaining Intent of Earlier Reforms

The proposed inflation adjustment seeks to uphold the aim of 2018 reforms that first defined qualifying venture funds. Those changes sought to strike the right balance in regulating an innovative sector of the economy. Keeping the thresholds current for inflation maintains the calibration of those earlier reforms.

Use of crypto surges among human traffickers - FinCEN

Cryptocurrency flows related to human trafficking surged nearly six-fold from 2020 to 2021, according to new data from FinCEN.

The regulator periodically surveys suspicious activity reports (SARs) mentioning high-risk sectors like cybercrime and human exploitation. Experts mine the bank document repository for activity changes pointing to typology pivots.

In this case, SARs referencing conversion between human trafficking funds and cryptocurrencies leaped from 336 instances in 2020 to 1,975 alerts in 2021 based on submitted bank filings.

The figures mean that over 29% of human trafficking warnings came alongside crypto details last year - up from under 3% prior. And reported suspicious transaction activity nearly doubled to $278 million over the same period.

FinCEN tied the spike directly to cybercriminal innovation, advancing money laundering and abuses like online child exploitation. Group flexibility in adopting permissionless systems risks outpacing dated controls.

Director Andrea Gacki pressed financial institutions to stay vigilant in uncovering abuse-linked transactions with cryptocurrency platforms or wallets. However, some compliance experts argue that the limited mandate scope hinders policing sprawling digital ecosystems.

Critics want urgent reforms like mandatory exchange oversight and cryptocurrency classification as monetary instruments to enable tracking. They consider voluntary surveillance measures to lose efficacy as adoption trends multiply.

Banks face heavy penalties for overlooking suspicious customer activity touched by crypto channels. Attentive monitoring can thus help victims while avoiding steep fines.

Clear crypto-related risk patterns for FinCEN justify strengthening cross-border coordination trace funds through convoluted mixers and exchanges. But policy lags technical leaps absent aggressive legislative intervention.

Escalating abuse indicators will likely spur louder calls to modernize frameworks as lawmakers grow weary of dire statistics marking systemic oversight failures.

SEC Chief Expects Climate Disclosure Rule Lawsuits Amid Criticism

Securities and Exchange Commission (SEC) Chair Gary Gensler suggested during a speech this week that legal disputes represent a normal function of US rulemaking processes this week. He also anticipates court challenges to the agency's long-pending climate risk disclosure proposal.

Nearly two years on, the SEC is still finalizing mandates requiring companies to outline greenhouse gas emissions and related financial impacts. But growing doubts plague the ambitious transparency initiative both internally and externally.

In remarks Tuesday, Gensler framed lawsuits as a healthy demonstration of oversight mechanisms ensuring executive actions follow the statute. He pledged to tailor the climate reporting framework to support judicial scrutiny.

"That's part of our democracy. We live in a great democracy," Gensler said. "That's what the public wants. I think we're doing everything according to the law and how the courts interpret the law, but as the courts shift their interpretations, jobs like mine are both more challenging and more interesting."

The Chair maintains disclosures help inform investors on material risks without imposing emission regulations exceeding SEC authority. However, many organizations argue that compelled speech and compliance burdens fail legal and cost-benefit tests.

Among contested elements, detailing indirect supply chain emissions faces opposition for benefiting data quality minimally versus expenses assumed. Thresholds limiting smaller firms' reporting may also need to be revised to exempt some carbon-intensive sectors.

Such potential gaps and inconsistencies lead critics to consider the requirements arbitrary. They expect court petitions highlighting flaws in economic analysis, climate materiality arguments, and process integrity.

While asserting diligence in crafting durable policy, Gensler admits that shifting legal interpretations constantly test adaptive capabilities. Recent Supreme Court rulings against agency regulatory overreach intensify pressures.

But the Chair believes tying proposals explicitly to investor protection aims gives tailwinds if logic holds appeal. He blasts accusations of environmental activism deterring capital formation or corporate operations.

Nonetheless, these perceived procedural risks account for extended delays in finalizing initial climate proposals. And while asserting preparedness defending ambitious transparency regulations, Gensler can only speculate on likely court reception.

• Anna Stylianou explores FinCEN’s proposed investor rule and asks if compliance teams should feel optimistic or concerned.
• Wall Street Journal reporter Mengqi Sun has this piece about the Biden administration’s plans to crack down on money laundering in the residential real estate market.?
• Norman Marks asks whether risk managers can, literally, quantify every risk they face:

"There are situations and times where sophisticated modelling, etc. is justified. And there are (IMHO) more situations and times when you and the decision-maker simply don’t have the time and must do the best you can."

• And Jennifer L. Gaskin poses this pointed defense of “bad bosses”.

“I didn’t talk to every person I ever managed for this column, but I know some of them will have stories like that one and others won’t. I doubt many of them have gauzy, warm memories of my steady leadership in their lives, but I know that my management style was a better fit for some than it was for others.”

The Securities Compliance Podcast speaks with David Scalzetti, Senior Director of Regulatory Products and Strategy at ICE, as part one of a two-part program looking at the impact of data on compliance.

• Venture Capital Analyst — San Francisco — Up to $140,000
• AVP, Entity & KYC Specialist Tax & Treasury Ops — LA — $115,000 - $130,000
• Policy Program Analyst — Charlotte, NC — $100,000 - $130,000

See the full list of GRC jobs MBK Search is recruiting for on our website — mbksearch.com/jobs

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