On July 19, 2021, the United States and Vietnam announced an agreement on currency practices. The announcement was made following a high-level meeting between U.S. Treasury Secretary Yellen and Vietnamese State Bank Governor Hong and in the context of rising U.S. concern over Vietnam’s foreign exchange market interventions. The agreement aims to address the currency concerns by focusing on the three primary criteria used by the Treasury Department in determining if trading partners are manipulating their exchange rates to gain an unfair competitive advantage.

Concerns, as outlined by the Treasury Department’s April 16, 2021, report to Congress:

  1. Persistent, one-sided intervention in the foreign exchange market occurs when net purchases of foreign currency are conducted repeatedly, in at least 6 out of 12 months, and these net purchases total at least 2% of an economy’s gross domestic product (GDP) over a 12-month period.
  2. A material current account surplus is one that is at least 2% of GDP over a 12-month period.
  3. A significant bilateral trade surplus with the United States is one that is at least $20 billion over a 12-month period.

Notably, Vietnam met all three criteria in the Treasury Department’s December 16, 2020, and April 16, 2021, semiannual reports to Congress.

As a result of continued U.S. pressure, including: (1) an additional Section 301 investigation launched by the U.S. Trade Representative in October of 2020; (2) a February 4, 2020, final rule allowing the Department of Commerce to consider currency undervaluation as a countervailable subsidy; and (3) the Treasury Department’s enhanced engagement process, Vietnam has agreed to address U.S. concerns.

Remedies Vietnam has agreed to, as outlined by the July 19, 2021, joint statement:

  1. Vietnam confirms that it is bound under the Articles of Agreement of the IMF to avoid manipulating its exchange rate in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage and will refrain from any competitive devaluation of the Vietnamese dong.
  2. The SBV is also making ongoing efforts to further modernize and make more transparent its monetary policy and exchange rate framework.
  3. In support of these efforts, the SBV will continue to improve exchange rate flexibility over time, allowing the Vietnamese dong to move in line with the stage of development of the financial and foreign exchange markets and with economic fundamentals, while maintaining macroeconomic and financial market stability.

Reactions and Context

Treasury Department

Secretary Yellen stated the she “believed the State Bank of Vietnam’s attention to these issues over time not only will address Treasury’s concerns, but also will support the further development of Vietnam’s financial markets and enhance its macroeconomic and financial resilience.”

U.S. Trade Representative

USTR Tai stated that “In light of Treasury and the SBV having reached agreement to address the concerns regarding Vietnam’s currency policies, USTR, in coordination with Treasury, will monitor Vietnam’s implementation of its commitments and work with Vietnam to ensure that it addresses the acts, policies and practices related to the valuation of its currency that were found actionable in the Section 301 investigation.”

Commerce Department

While neither the Commerce Department nor Secretary Raimondo has issued a formal statement on the currency agreement, the development could have a material impact on Vietnamese companies subject to the Department’s Currency Rule in Countervailing Duty Investigations. The rule, which allows the Department to consider currency undervaluation as a countervailable subsidy in (CVD) investigations was first used on May 24, 2021, in an affirmative final determination in the CVD investigation of passenger vehicle and light truck tires (PVLT). Notably, the affirmative final determination took into consideration an August 2020 decision by Commerce to accept evidence related to currency undervaluation under regulations from a valuation assessment conducted by the Treasury Department.

The full Joint Statement can be found here.

USTR Tai’s statement can be found here.

For more information on the Vietnam and currency issues please reach out to our team and see previous posts below.

Vietnam Archives | International Trade Law (cmtradelaw.com)

In ruling NY N320329 (July 16, 2021), Customs and Border Protection (CBP) discussed the classification of an electric surfboard from China that is put up in a set for retail sale. The surfboard is a designed to surf in water without it needing waves or boats to pull or push it. Rather, it is propelled by a small motor mounted underneath the board on a three-foot mast and a fin that goes into the water. The entire item is made up of the surfboard, a hydrofoil (which is the mast and fin), a battery, and a motor that is controlled by a handheld remote. Additionally, the product comes with the tools and hardware to connect the mast and fin to the surfboard.

Customs defines the term “goods put up in sets for retail sale” as goods which:

  • Consist of at least two different articles which are, prima facie, classifiable in different headings;
  • Consist of products or articles put up together to meet a particular need or carry out a specific activity; and
  • Are put up in a manner suitable for sale directly to users without repacking.

To determine the essential character of the good, CBP referred to General Rule of Interpretation (GRI) 3(b), which states “in part, that goods put up in sets for retail sale shall be classified as if consisting of the component that gives them their essential character.” CBP found that in this case the surfboard imparts that essential character of the set.

CBP determined that the applicable subheading for the electric surfboard is 9506.29.0030, Harmonized Tariff Schedule of the United States (HTSUS), which provides for “Articles and equipment for general physical exercise, gymnastics, athletics, other sports…or outdoor games…; Water skis, surf boards, sailboards and other water-sport equipment; parts and accessories thereof: Other…Surf-boards.” The rate of duty is free. Additionally, pursuant to U.S. Note 20 to Subchapter III, Chapter 99, HTSUS, Chinese products under subheading 9506.29.0030, HTSUS, unless specifically excluded, are subject to an additional 7.5% ad valorem duty rate. As such, the chapter subheading 9903.88.15 must be reported in addition to subheading 9506.29.0030, HTSUS.

On July 1, 2021, the Federal Trade Commission’s (FTC) finalized a new Made in USA labeling rule that becomes effective August 13, 2021. The new rule codifies the FTC’s “all or virtually all” standard for unqualified “Made in USA” claims.  The rule is intended to “crack down on marketers who make false, unqualified claims that their products are Made in the USA.” Until now, the FTC has primarily enforced Made in USA claims under its Section 5 authority, issuing hundreds of closing letters.  In recent years, the FTC has pursued penalties, for example obtaining a $1.2 million settlement in a follow-on action against a  glue manufacturer and  a consent decree resolving allegations the company falsely claimed novelty products were “Made in USA.”

The FTC conducted this rulemaking under Section 45a of the FTC Act, which authorizes the Commission to issue rules governing ‘‘Made in the U.S.A.” claims on “labels,” which the FTC defines as including advertisements disseminated electronically, including by e-mail and on websites. The new rule applies not only to product labeling, but to any “mail order catalog” or “mail order promotional material” that includes a seal, mark, tag, or stamp that labels a product as having been made in the United States. The FTC defines mail order catalogs and promotional material as “any materials, used in the direct sale or direct offering for sale of any product or service, that are disseminated in print or by electronic means, and that solicit the purchase of such product or service by mail, telephone, electronic mail, or some other method without examining the actual product purchased

The final Rule provides that “labels” may not contain unqualified “Made in USA” claims unless:

(1) Final assembly or processing of the product occurs in the United States;

(2) all significant processing that goes into the product occurs in the United States; and

(3) all or virtually all ingredients or components of the product are made and sourced in the United States.

The Rule does not cover qualified claims, which will remain subject to the FTC’s general authority to police deceptive and unfair claims under Section 5 of the FTC Act. The FTC has said that, even if certain components of a product cannot be sourced from the U.S., and must be imported, they still must be included in the analysis of whether a product was made in the United States.

The Rule outlines a procedure for partial or full exemption where an advertiser can sufficiently demonstrate that their Made in USA claims are not deceptive. The rule also allows the agency to seek civil penalties of up to $43,280 per violation and expands the FTC’s remedial options.

One of the FTC Commissioners, Rohit Chopra, explained that this is a restatement rule that is intended to affirm past FTC guidance and legal precedent. Apparently, the final Rule does not significantly deviate from the one proposed nor from the FTC’s 1997 Enforcement Policy on U.S. Origin Claims, and, more importantly, the Rule does not appear to impose additional requirements on advertisers.

Following the issuance of FTC’s Made in USA Rule, Agriculture Secretary Tom Vilsack released the following statement “the Federal Trade Commission took important steps to enhance its ability to enforce the Made in USA standard….USDA will complement the FTC’s efforts with our own initiative on labeling for products regulated by FSIS, an area of consumer labeling where USDA has a long tradition of protecting consumers from false and misleading labels.”

On July 20, 2021, Deputy Secretary of the Treasury Wally Adeyemo held a virtual roundtable discussion with six former U.S. government sanctions leaders from the last three presidential Administrations to discuss the application of U.S. economic and financial sanctions. The roundtable comes as part of a series of discussions Deputy Secretary Adeyemo is leading to review, identify challenges, and improve the use of U.S. sanctions. The goal of this bipartisan meeting is part of the Treasury Department’s commitment that sanctions continue to effectively advance U.S. national security, foreign policy, and economic aims.

A notable takeaway from the group of former sanctions leaders was that U.S. sanctions work most effectively “when employed in the context of a broader U.S. government strategy to address foreign policy or national security threat.” The Deputy Secretary and the group also discussed the importance of calibrating both economic and financial sanctions to limit their unintended impact on U.S. business, foreign partners, and other third parties, including those engaging in legitimate humanitarian activities.

A readout from the meeting is available here.

For more information regarding sanctions and the Treasury’s Office of Foreign Assets Control (OFAC), contact our team and see previous posts below.

U.S. Government Issues Business Advisory – Warns Companies About Risks of Doing Business in Hong Kong | International Trade Law (cmtradelaw.com)

President Biden Imposes Additional Sanctions on Russia | International Trade Law (cmtradelaw.com)

On July 19, 2021, the President’s Working Group on Financial Markets (PWG) met to discuss stablecoins – including their recent rapid growth, potential uses as a form of payment, and potential risks to end-users, the financial system, and U.S. national security.

At the meeting Treasury Secretary Yellen “underscored the need to act quickly to ensure there is an appropriate U.S. regulatory framework in place.”

Staff from the Treasury Department also presented to the PWG about preparing a report on stablecoins, which would cover, among other things, potential benefits and risks, the current U.S. regulatory framework, and the development of recommendations to address any regulatory gaps.  The PWG expects to issue recommendations in the coming months.

Attendees at the meeting included:

  • Janet L. Yellen, Secretary of the Treasury
  • Jerome Powell, Chair, Board of Governors of the Federal Reserve System
  • Gary Gensler, Chair, Securities and Exchange Commission
  • Rostin Behnam, Acting Chairman, Commodity Futures Trading Commission
  • Jelena McWilliams, Chairman, Federal Deposit Insurance Corporation
  • Michael J. Hsu, Acting Comptroller of the Currency
  • Randal Quarles, Vice Chair for Supervision, Board of Governors of the Federal Reserve System
  • J. Nellie Liang, Under Secretary for Domestic Finance, U.S. Department of the Treasury

A link to the readout of the meeting is here.

For more information regarding digital currencies, contact our team and see a previous post below.

Treasury Secretary Janet Yellen to Hold a Meeting of the President’s Working Group on Financial Markets (PWG) to Discuss Stablecoins | International Trade Law (cmtradelaw.com)

On July 19, 2021, the Department of Commerce’s Bureau of Industry and Security (BIS) added six Russian entities to the Entity List for their relation to the Russian government’s “harmful foreign activities” that present a threat to the United States’ national security, foreign policy, and economy. Specifically, the entities were added to the Entity List for being a part of the Russian government’s efforts to undermine the U.S. elections, engage in malicious cyber activities against the U.S. and other foreign governments, foster transnational corruption to influence foreign governments, and pursue extraterritorial activities targeting dissidents or journalists. The six entities include:

  • Aktsionernoe Obshchestvo AST;
  • Aktsionernoe Obshchestvo Pasit;
  • Aktsionernoe Obshchestvo Pozitiv Teknolodzhiz;
  • Federal State Autonomous Institution Military Innovative Technopolis Era;
  • Federal State Autonomous Scientific Establishment Scientific Research Institute Specialized Security Computing Devices and Automation; and
  • Obshchestvo S Ogranichennoi Otvetstvennostyu NEOBIT.

Notably, these six entities were also sanctioned by the Department of the Treasury’s Office of Foreign Assets Control (OFAC) in April 2021. As such, the BIS’s action to add the six entities to the Entity List will “complement the actions already taken by OFAC by ensuring that U.S. sanctions on these entities will apply to all items subject to the EAR regardless of whether a U.S. person is involved in the transaction or whether the transaction involves the U.S. financial system.”

The Entity List is a tool used by the BIS to restrict the export, reexport, and transfer (in-country) of items subject to the EAR to entities believed to be participating in actions that go against the interests of the United States’ national security or foreign policy. Additional licenses are required for the exportation, re-exportation, and transfer of commodities, software, and technology to any listed entities. No license exceptions apply and license applications are subject to a presumption of denial.

The announcement by the BIS is available here.

For more information on Russia, EAR, and OFAC, contact our team and see previous posts below.

OFAC Revokes Belarus General License (General License 2G or GL 2G) | International Trade Law (cmtradelaw.com)

Five Charged in Scheme to Export Thermal Imaging Scopes and Night Vision Goggles to Russia, in Violation of the Arms Export Control Act | International Trade Law (cmtradelaw.com)

On July 16, 2021, Secretary of the Treasury Janet Yellen announced that the President’s Working Group on Financial Markets (PWG), the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (FDIC) would all convene to discuss interagency work on stablecoins this upcoming July 19. A stablecoin is a type of cryptocurrency that is backed by a reserve asset, which could be a fiat currency like the U.S. dollar, gold, or other cryptocurrencies, and which attempts to offer more price stability compared to the volatility often present in other cryptocurrencies.

The goal of the meeting and the PWG is to examine the current regulation of stablecoins, identify any existing and potential risks, and develop recommendations to address those risks. The meeting aims to build upon the PWG’s December 2020 “Statement on Key Regulatory and Supervisory Issues Relevant to Certain Stablecoins” (the “Statement”). The Statement provided the following initial assessment on key regulatory and supervisory considerations regarding stablecoins:

  • The U.S. encourages responsible payment innovations
  • Stablecoins must comply with applicable U.S. legal, regulatory, and oversight requirements, including but not limited to “safety and soundness, countering illicit finance, end-user protection, and market integrity”
  • Participants and arrangements of stablecoins must meet all applicable anti-money laundering and countering the financing of terrorism (AML/CFT) and sanctions obligations, including potential registration with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), implementation of an effective AML program, and complying with record-keeping requirements and suspicious activity reporting
  • Some stablecoins may constitute a security, commodity, or derivative subject to U.S. federal securities, commodities, and/or derivatives laws
  • Stablecoins that are primarily used for retail payments and adopted at a significant scale may require additional safeguards
  • U.S. authorities will continue to assess evolving technology and market landscapes as well as the U.S. regulatory framework for stablecoin oversight
  • Authorities will pursue robust international collaboration in matters related to stablecoins

The PWG was created to strengthen U.S. financial markets and its current members include Treasury Secretary Yellen, Chair of the Board of Governors of the Federal Reserve Jerome Powell, Chair of the Securities and Exchange Commission (SEC) Gary Gensler, and Acting Chairman of the Commodity Futures Trading Commission (CFTC) Rostin Behnam.

A press release of Secretary Yellen’s July 16 announcement is available here.

For more information regarding digital currencies, contact our team and see a previous post below.

OFAC’s First Enforcement Actions Against Digital Currency Service Providers | International Trade Law (cmtradelaw.com)

On July 16, 2021, several U.S. government agencies issued a business advisory highlighting for U.S. companies the risks of doing business in Hong Kong. The advisory, which was issued by the Departments of Commerce, Homeland Security, State, and the Treasury, stated that companies operating in Hong Kong face potential regulatory, financial, legal, and reputational risks due China’s recently enacted National Security Law (NSL) in Hong Kong.  The NSL states that “an incorporated or unincorporated body, such as a company or organization” that breaches the law may be subject to a criminal fine and suspension of operations. Notably, the NSL also states that provisions may apply to companies set up in the region even if an offense takes place outside the region.  As a result, the advisory notes that the NSL could adversely affect businesses and individuals operating in Hong Kong.

The U.S. government advisory outlines for individuals, business, research providers, and investors the following potential risks:

  • Heightened risk for businesses and individuals operating in Hong Kong:  Under the NSL, businesses operating in Hong Kong and individuals conducting business in Hong Kong on their behalf are subject to the NSL.  According to the advisory, foreigners, including one U.S. citizen, have been arrested under the NSL.  The advisory explains that under the NSL, protected rights and freedoms in Hong Kong have been substantially curtailed, and individuals have been arrested under the NSL for publishing news articles and attending public gatherings.  Punishments under the NSL can include criminal fines and imprisonment, including life imprisonment in certain situations.  Under the NSL, business can be subject to criminal fines and can have their operations or license suspended.  Individuals who are arrested may have their travel documents confiscated and may be prevented from leaving Hong Kong.
  • Heightened risk regarding data privacy, including warrantless electronic surveillance, and surrender of data. The NSL also expanded the Hong Kong and People’s Republic of China (PRC) authorities’ ability to collect business and individual data for actions that may violate “national security.”  Hong Kong authorities have interpreted “national security” to include participating in elections, political advocacy, and posting on social media.  Hong Kong law enforcement are permitted under the NSL to conduct searches of electronic devices and to require Internet services providers to either provide or delete data for national security cases.
  • Access to business information and open press. Since the NSL’s introduction to Hong Kong, authorities have increased pressure on freedom of expression – primarily freedom of the press. Recently, Hong Kong authorities have exercised powers under the NSL to pursue journalists and a print media company.
  • Exposure to U.S. sanctioned persons and entities. Businesses operating in Hong Kong should be aware of potential consequences of engaging with individuals and/or entities subject to U.S. sanctions. U.S. individuals and entities are prohibited from engaging in certain transactions with blocked persons without a general or specific license from the Treasury Department’s Office of Foreign Assets Control (OFAC), or other exemption. Violations of U.S. sanctions may result in civil or criminal penalties.  Companies should also be aware that Hong Kong has been removed as a separate destination under the Export Administration Regulations (EAR) and items subject to the EAR destined for Hong Kong, including reexport or transfer, will be treated as exports, reexports, or transfers to or from the PRC. Similarly, companies operating in Hong Kong could face retaliation from the Chinese government for complying with U.S. sanction laws.

The PRC Anti-foreign Sanctions Law (enacted June 10, 2021) (the “ASL”) provides China with the legal basis for retaliating against foreign actions deemed to be “restrictive discriminatory” – a vague and nebulous term that provides China with an incredibly broad tool to counter a wide range of actions that it views as counter to its sovereign interests (ranging from foreign sanctions programs to politically sensitive positions such as geopolitical flash points involving Taiwan, South China Sea or Senkaku Islands to the US Withhold Release Order aimed at addressing allegations of forced labor in Xinjiang).  Not only does the ASL give the Chinese government the ability to penalize foreign subsidiaries operating in China, but it also gives aggrieved Chinese parties and entities a private cause of action in Chinese courts to recover losses incurred.  Further, the ASL contains a “catch-all” that allows China to determine what practices are “restrictive discriminatory.” Since many Hong Kong businesses are historically linked with mainland China operations, it is very important that companies review carefully the potential impact of the ASL when entering into new business as well as deciding to terminate businesses as to avoid actions  that could be perceived as “restrictive discriminatory” from a PRC perspective and be subject to retaliation by China or private parties.

The recent advisory comes days after the U.S. government agencies released an updated version of its Xinjiang Supply Chain Business Advisory and following a separate announcement to add 14 Chinese companies to the Department of Commerce’s Entity List for their direct involvement in human rights abuses in Xinjiang.

A link to the advisory is available here.

For more information on actions regarding China as well as actions addressing U.S. sanctions, human rights, and export controls, contact our team and see previous posts below.

Government Releases Updated Version of Xinjiang Supply Chain Business Advisory | International Trade Law (cmtradelaw.com)

Commerce Adds 23 Companies to Entity List Citing Forced-Labor, Military Technology, and Sanctions Concerns | International Trade Law (cmtradelaw.com)

On June 30, 2021, the Financial Crimes Enforcement Network (“FinCEN”) issued its first-ever Anti-Money Laundering and Countering the Financing of Terrorism National Priorities (the “Priorities”). FinCEN was required to do this by the Anti-Money Laundering Act of 2020 (“AMLA”), enacted on January 1, 2021, as part of the National Defense Authorization Act of 2021. FinCEN identified the following as anti-money laundering (“AML”) and countering the financing of terrorism (“CFT”) priorities, in no particular order:

  • Corruption;
  • Cybercrime, including cybersecurity and virtual currency considerations;
  • Foreign and domestic terrorist financing;
  • Fraud;
  • Transnational criminal organization activity;
  • Drug trafficking organization activity;
  • Human trafficking and human smuggling; and
  • Proliferation financing.

FinCEN Acting Director Michael Mosier said that these represent the “most significant AML/CFT threats currently facing the United States.” Financial institutions will be required to incorporate these priorities into their AML programs after FinCEN finalizes implementing regulations, which must occur by December 27, 2021. FinCEN and federal and state banking regulators also issued a parallel interagency statement emphasizing that they will not examine banks for incorporation of the Priorities until after FinCEN issues implementing regulations. However, in the interim, these regulators suggest that covered financial institutions may wish to start considering how they will incorporate the Priorities into their AML programs, “such as by assessing the potential related risks associated with the products and services they offer, the customers they serve, and the geographic areas in which they operate.”

On June 30th, FinCEN also announced that it had submitted to Congress its assessment of no-action letters, which the AMLA also required. FinCEN concluded that it should undertake a rulemaking to establish a no-action letter process as a supplement to other forms of guidance and relief available from the agency. On the same day, FinCEN’s Acting Director also issued an update on FinCEN’s progress implementing the AMLA in the first 180 days following its enactment.

Finally, on July 6, 2021, FinCEN announced that Michele Korver is now serving as the agency’s first-ever Chief Digital Currency Advisor. Korver joins FinCEN from the Department of Justice’s (“DOJ”) Criminal Division, Money Laundering and Asset Recovery Section, where she served as Digital Currency Counsel. According to Acting Director Mosier, Korver will bolster FinCEN’s leadership role in the digital currency regulatory space by working with other parties “toward strategic and innovative solutions to prevent and mitigate” illicit practices unique to the virtual currency sector and to maximize its potential for financial expansion.

FinCEN’s National AML/CFT Priorities List

FinCEN developed the Priorities in consultation with DOJ, federal and state banking regulators, and relevant national security agencies. The Priorities represent areas for which FinCEN believes covered financial institutions should assess their risk and make appropriate changes to their AML programs to address any such risk. In addition to the implementing regulations that FinCEN must promulgate by the end of December this year, federal banking agencies suggested in their parallel statement that they also may promulgate their own rules to address these Priorities. FinCEN also will update the Priorities every four years, as required by the AMLA, to “account for new and emerging threats to the U.S. financial system and national security.” We summarize briefly below the eight Priorities, and points for covered financial institutions to consider in advance of forthcoming regulations. Covered financial institutions should keep in mind that FinCEN’s Priorities do not displace existing risks facing covered institutions, who must still implement risk-based AML programs that address risks not covered by the Priorities.

Corruption

FinCEN emphasized points made in President Biden’s National Security Study Memorandum issued on June 3, 2021, stating that “[c]orruption, both domestic and foreign, threatens U.S. national security by eroding citizens’ faith in government, distorting economies, and weakening democratic institutions.” FinCEN said that corrupt actors and their financial facilitators may exploit vulnerabilities in the U.S. financial system to launder the proceeds of crime, including bribes. FinCEN declared the money laundering risks associated with corruption to be a threat to U.S. national security.

Covered financial institutions may wish to consult FinCEN’s advisories on human rights abuses enabled by corrupt political figures in NicaraguaSouth Sudan, and Venezuela, and determine whether the typologies and red flags identified by FinCEN can assist covered financial institutions in assessing Bank Secrecy Act (“BSA”) risks associated with these and other countries. To the extent that a corruption risk is present at a covered financial institution, it may wish to ensure that its AML program addresses it. This includes risks associated with politically-exposed persons (referred to in BSA rules as “senior foreign political figures)”.

Cybercrime, including Relevant Cybersecurity and Virtual Currency Considerations

FinCEN broadly defines cybercrime as “any illegal activity that involves a computer, another digital device, or a computer network.” FinCEN explains that covered financial institutions are “attractive targets” to criminals, including terrorists and state actors, and that cybercriminals may target covered institutions’ websites, systems, and employees to unlawfully obtain access credentials and proprietary information, engage in fraud, and disrupt business operations. FinCEN expressed particular concern about cyber-enabled financial crime, ransomware attacks, and misuse of virtual assets (or cryptocurrencies) to launder criminal proceeds.

FinCEN directed financial institutions to its previous advisories on ransomware and COVID-19 related cybercrime for information on the trends and typologies of cybercrime, including phishing, remote application compromise, and business email compromise, particularly involving financial and health care systems. FinCEN noted that covered institutions are uniquely positioned to identify cybercrime-related suspicious activity and encouraged them to lawfully share that information with other financial institutions under the BSA.

FinCEN indicated that ransomware is a “particularly acute concern,” and that countering ransomware is a “top priority” for the U.S. government. In particular, FinCEN noted a dramatic rise in the scale and sophistication of ransomware attacks from 2020 to 2021, and that these sometimes are associated with adversary regimes and sanctioned parties. FinCEN pointed out that ransomware attacks now pose a national security threat to U.S. health care systems and other “critical infrastructure,” as well as a threat to the U.S. economy (see our alerts last month on the evolution of ransomware from a cybersecurity issue to a financial crimes and national security threat and the need for ransomware response plans). FinCEN and the Treasury Department’s Office of Foreign Assets Control (“OFAC”) both issued advisories in October 2020 highlighting sanctions and AML risks associated with ransomware payments. Among other risks, FinCEN recognized that convertible virtual currencies (“CVCs”) are a “substantial financial innovation” but are the preferred payment method for ransomware-related activities, child exploitation, and illegal drugs. OFAC, for its part, noted that sanctioned persons are increasingly involved in ransomware attacks, and that paying ransoms to such parties may result in liability.

Given FinCEN’s increased prioritization of cybercrime, and in particular the use of virtual currency to further it, covered institutions may wish to ensure that they have fully incorporated FinCEN’s guidance on reporting suspicious activity involving cyber-events, and including cyber-related information in all suspicious activity reports (“SAR”), and its guidance for SAR filing relating to cybercrime (in 2016) and virtual currency (in 2019). Separately, covered institutions may wish to consider including specific consideration of cybercrime in their AML risk assessments, and establishing methods for dealing with the information problems associated with virtual currency transactions. Finally, they may wish to pay attention in particular to transactions that appear to represent ransomware payments, and the risks that such payments may involve sanctioned persons or jurisdictions.

Terrorist Financing: International & Domestic

FinCEN reminded covered financial institutions of their existing obligations to report suspicious activity involving potential terrorist financing transactions, including appropriately identifying those transactions that may require immediate attention. FinCEN declared the prevention of terrorist financing as “essential to counter the threat of terrorism successfully.” Covered institutions should ensure their AML/CFT programs include an up-to-date sanctions compliance component, including sanctions screening against government lists and country-based sanctions. For international terrorism, FinCEN identified the Islamic State of Iraq and Syria (“ISIS”), Al Qaeda, Lebanese Hizballah, and Iran’s Islamic Revolutionary Guard Corps (“IRGC”) as key threats. FinCEN focused on the funding of overseas terrorists and terrorist groups from the U.S. through banks, money services businesses, and cash couriers, but also highlighted that small-dollar donations in virtual assets were becoming a more regular form of support. FinCEN also noted a movement away from complex attacks toward less sophisticated attacks by self-radicalized and “homegrown” attackers. FinCEN also, for the first time ever, described the threat posed by domestic terrorism, noting that such activity can be based on purported political or religious beliefs to support criminal activities, and that some groups have focused on “accessible targets” such as “civilians, law enforcement and the military, symbols or members of the U.S. government, houses of worship, retail locations, and mass public gatherings.” Covered financial institutions may wish to evaluate their AML programs to account for these evolving international terrorist financing typologies and to consider methods to detect and report potential domestic terrorist financing.

Fraud

FinCEN stated that fraud, in particular “bank, consumer, health care, securities and investment, and tax fraud—is believed to generate the largest share of illicit proceeds in the United States,” exceeding other types of crime such as drug trafficking and human smuggling. Fraud schemes are more commonly Internet-enabled, and the proceeds of such schemes may be laundered through offshore legal entities, accounts controlled by cyber criminals, and money mules. FinCEN also highlighted the use of fraud by foreign intelligence agencies and their proxies to influence political campaigns and to facilitate espionage activity, such as establishing front companies and gaining access to sensitive information on U.S. individuals, technology, and intellectual property. FinCEN directed financial institutions to its earlier advisories on COVID-19 related fraud and business email compromise (“BEC”) fraud. In addition to reviewing this Priority and ensuring that they have addressed the related risks in their AML programs, covered financial institutions may wish to consider whether their AML programs can detect fraud involving foreign intelligence actors. Further, covered financial institutions may wish to evaluate the interaction between their AML/CFT group and their fraud organizations to ensure potentially fraudulent activity is appropriately reported as suspicious activity. FinCEN previously has identified the failure to do so as the basis for significant civil penalties.

Transnational Criminal Organization Activity, Drug Trafficking Organization Activity, and Human Trafficking and Human Smuggling

FinCEN noted that Transnational Criminal Organizations (“TCOs”), including drug trafficking organizations (“DTOs”), represent “priority threats” due to their involvement in a wide range of criminal activities, including, among other illicit activities, cybercrime, drug trafficking, fraud, human smuggling, and weapons trafficking. FinCEN pointed to Mexican and Russian TCOs as being active in the United States, with TCOs in Africa and Asia becoming more relevant. FinCEN stated that these organizations increasingly use professional money laundering networks that launder proceeds generated by others, without regard to the predicate criminal activity. It also noted that certain states host these groups, under a variety of arrangements, enabling activities that destabilize other jurisdictions.

FinCEN highlighted that Mexican and Colombian DTOs continue to operate sophisticated schemes to import illegal drugs into the United States, and that DTOs also launder their criminal proceeds through the United States. Increasingly, FinCEN said, DTOs rely more on Asia-based professional money laundering networks to facilitate the exchange of U.S. and Chinese currency, or to serve as currency brokers in trade-based money laundering schemes. With respect to human smuggling and human trafficking, FinCEN noted that these organizations use professional money launderers as well, and may have logistics-based criminal proceeds derived from the housing and transportation of victims. Covered financial institutions may wish to consider which of these threats affect their institutions and which of the described typologies may be relevant, and to address these in their AML programs.

Proliferation Financing

FinCEN’s final Priority is proliferation financing by those who seek to “exploit the U.S. financial system to move funds that will be used either: (1) to acquire weapons of mass destruction or delivery systems or their components; or (2) in the furtherance or development of state-sponsored weapons programs, including the evasion of United Nations or U.S. sanctions.” FinCEN noted that global correspondent banking is a “principal vulnerability and driver” of proliferation financing risk in the United States. FinCEN encouraged covered financial institutions to review previous advisories issued by the Treasury Department (including both FinCEN and OFAC) regarding proliferation financing risk. Covered financial institutions may wish to ensure that their risk-based AML programs account for the various economic and trade sanctions administered by OFAC, the Department of Commerce’s Bureau of Industry and Security, and the Department of State’s Bureau of International Security and Nonproliferation.

FinCEN’s Assessment on the Use of No-Action Letters

FinCEN completed its assessment (the “Assessment”) “on whether to establish a process for the issuance of no-action letters in response to inquiries concerning the application of [AML/CFT] laws and regulations to specific conduct,” including as to whether FinCEN or a functional regulator intends to bring an enforcement action with respect to such conduct. FinCEN concluded that it should undertake a rulemaking to establish a FinCEN-specific no-action letter process to supplement forms of regulatory guidance and relief it currently offers. In reaching its conclusion, FinCEN consulted with numerous state and federal banking regulators, including the Federal Reserve and Office of the Comptroller of the Currency, as well as the DOJ and the Commodity Futures Trading Commission.

While it remains to be seen what no-action letter process FinCEN ultimately adopts, this appears to be a welcome development for covered financial institutions, fintechs, and companies operating in the digital assets space. These entities – particularly those considering offering novel and innovative products and services – may benefit from additional opportunity to engage with FinCEN on proposed or current activities and to receive definitive statements that FinCEN will not take enforcement action.

Historically, no-action letters are generally issued by a federal regulatory agency, through which the agency states that it does not plan to take enforcement action against a submitting party for the specific conduct described by the submitting party. Currently, FinCEN offers two forms of regulatory guidance or relief: (1) administrative rulings; and (2) exceptive or exemptive relief. An administrative ruling is a written determination by FinCEN “interpreting the relationship between [Title 31 of the Code of Federal Regulations, Chapter X] and each situation for which such a ruling has been requested,” provided it meets certain requirements. Administrative rulings are binding on FinCEN if there is a specified situation addressed and it also has precedential value for others who may wish to rely on it, but only if FinCEN makes the administrative ruling public. If the ruling is not publicized by FinCEN, then the ruling has no precedential value for similarly-situated parties. Exceptive relief, on the other hand, is a decision by FinCEN to grant an exemption, or exception, from the requirements of Chapter X. Exceptive relief is not precedential, applies only to certain transactions or types of transactions, and may be revoked by FinCEN or the Treasury Secretary. A no-action letter would represent a new form of regulatory relief from FinCEN, in that FinCEN would exercise its enforcement discretion to determine “that it would not take an enforcement action against the submitting party for engaging in the specific conduct described in the request.”

As part of the Assessment, FinCEN also considered whether any no-action letter process would include a statement as to whether other “relevant Federal functional regulators” would take an enforcement action. This is important because many federal financial regulators have parallel authorities that they use to enforce compliance with the requirements of the BSA. FinCEN concluded that it lacked the authority to make statements about the enforcement authorities of other agencies. Conversely, FinCEN noted that coordinating with such agencies to issue joint statements in response to every request it received might unduly delay the granting of relief from rules administered by FinCEN. At the same time, FinCEN recognized that federal functional regulators, as well as the DOJ and state regulators, may in particular cases be affected by, and thus have a stake in, how FinCEN rules. The agency decided to pursue an approach of consulting with these agencies on a discretionary, ad hoc basis as appropriate.

While FinCEN provided some initial estimates for a no-action letter process, such as 90 to 120 days for straightforward requests, it said that any timing for issuing a no-action letter could be impacted if it and other regulators disagree on whether FinCEN should issue a no-action letter or the scope of such a letter. FinCEN also noted current resources limitations also could delay any no-action process, and that, absent additional resources, it would not be able to process such requests in a reasonable timeframe without impacting other FinCEN work. It pointed out that that other agencies sometimes took months to more than a year to issue no-action letters, depending on the complexity of the request.

While FinCEN did not state when it might commence a rulemaking process for a no-action letter procedure, it indicated that it will provide opportunity for public comment. Covered institutions and those who are contemplating engaging in BSA-regulated activity may wish to consult with counsel and submit comments reflecting business or industry concerns.

FinCEN’s AMLA 180-Day Update

In its 180-day update, FinCEN highlighted several of the agency’s achievements since the passage of the AMLA, including the issuance of the AML/CFT Priorities and its No-Action Letter Assessment. FinCEN said that it will continue to issue additional regulations required under the AMLA, and institutions should anticipate further rulemaking regarding, among other things, a beneficial ownership database, the potential application of the BSA to the arts and antiquities trade, and digital assets and virtual currencies.

FinCEN’s New Chief Digital Currency Advisor

By appointing Michelle Korver as FinCEN’s first-ever Chief Digital Currency Advisor, FinCEN has further bolstered its virtual assets expertise. FinCEN already is unusual in having a chief officer, Acting Director Michael Mosier, with extensive work experience in the digital assets sector.

While at the DOJ, Korver was a key advisor on digital currency matters, investigations, and charging decisions. She served as a contributor to the DOJ’s first-ever Cryptocurrency Enforcement Framework, which set forth various threats posed by virtual currencies, the current legal regime applicable to virtual currencies, and challenges and strategies for enforcement against unlawful activity involving virtual currencies. Korver also served as a U.S. delegate to the Financial Action Task Force, which is currently addressing virtual assets and virtual asset service providers, and developed cryptocurrency seizure and forfeiture policy and legislation.

FinCEN has been one the most active regulators of virtual currency, and the addition of Korver suggests a desire to continue that trend. It remains to be seen if Korver’s move to FinCEN also reflects an intent to bring a more “prosecutorial” mindset to virtual currency enforcement. Virtual asset companies or those considering entering into the space may wish to consult with counsel to ensure their operations or proposed operations comply with the AMLA and FinCEN’s virtual currency guidance, and also account for FinCEN’s recently announced Priorities.

On July 13, 2021, the U.S. government released an updated version of the Xinjiang Supply Chain Business Advisory. The notice, which was originally released last summer, states that the PRC government is perpetrating genocide and crimes against humanity in Xinjiang, highlights the legal risks posed to companies and supply chains, updates the list of U.S. governments authorities and enforcement actions, and provides a list of other countries’ relevant regulatory provisions and information on forced labor in supply chains. Notably, the new advisory adds the Department of Labor (DOL) and the Office of the U.S. Trade Representative (USTR) as co-signatories.

The risks and types of exposure companies and supply chains face, as outlined by the Xinjiang Supply Chain Business Advisory and State Department Press Release, are provided below.

Risks related to investment in PRC companies linked to surveillance and forced labor in Xinjiang:

  • Violation of statutes criminalizing forced labor including knowingly benefitting from participation in a venture, while knowing or in reckless disregard of the fact that the venture has engaged in forced labor
  • Sanctions violations if dealing with designated persons
  • Export control violations
  • Violation of the prohibition of importations of goods produced in whole or in part with forced labor or convict labor.

Primary types of potential supply chain exposure to entities engaged in human rights abuses:

  • Assisting or investing in the development of surveillance tools for the PRC government in Xinjiang, including tools related to genetic collection and analysis
  • Sourcing labor or goods from Xinjiang, or from entities elsewhere in China connected to the use of forced labor of individuals from Xinjiang, or from entities outside of China that source inputs from Xinjiang
  • Supplying U.S.-origin commodities, software, and technology to entities engaged in such surveillance and forced labor practices
  • Aiding in the construction and operation of internment facilities used to detain Uyghurs and members of other Muslim minority groups, and/or in the construction and operation of manufacturing facilities that are in close proximity to camps and reportedly operated by businesses accepting subsidies from the PRC government to subject minority groups to forced labor.

The full version of the Advisory is available here.

For more information on actions addressing human rights and forced labor abuses contact our team and see previous posts below.

Forced Labor/U.K. Modern Slavery Act Archives | International Trade Law (cmtradelaw.com)

Xinjiang Archives | International Trade Law (cmtradelaw.com)