Author Archives: Antonia Miller

Honesty Pledges for the Behavioral Regulation of Dishonesty

by Eyal Pe’er and Yuval Feldman

One of the main challenges in interactions between regulators and regulatees, as well as between managers and employees or between companies and their customers, is whether mutual trust can be achieved, especially when options for monitoring are limited. Ample evidence on the prevalence of unethical behaviors, be they intentional or not, which exists in most societies in various contexts, has justified the hesitance to trust other people, especially when the consequences of breach of trust might be dire. At the same time, many governments and organizations that (justly) wish to reduce regulatory burden often ask citizens and businesses to state, in advance, that their reports are truthful or that they abide by the relevant rules and regulations (“honesty pledges”). However, while such pledges can indeed reduce unneeded procedures, they might also tempt some agents, aware of the reduced monitoring, to cheat in their reports. We study how ex-ante honesty pledges can be used as a behaviorally-based regulatory tool to enhance the likelihood that people who are entrusted with behaving in a certain way will do so, with as limited as possible regulatory burden. We find that, when done properly, adoption of such an approach is likely to reduce dishonesty, and we believe that could also increase mutual trust and carry other positive effects. 

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The German Government Escalates Its Fight Against Money Laundering

by Finn Zeidler and Ralf van Ermingen-Marbach

Germany’s AML framework has already been described as insufficient by the FATF (Financial Action Task Force) in the past. Since the collapse of payment service provider Wirecard, the prevention of money laundering has been placed even higher on the German government’s agenda.

The implementation of the 5th EU Money Laundering Directive on January 1, 2020 already exceeded the EU’s requirements. Furthermore, the German government adopted a “National Strategy Package” and—in direct conjunction with the Wirecard collapse—a “16-Points Action Plan” at the beginning and in the middle of last year.

Additional amendments to the German Criminal Code (Strafgesetzbuch) and the German Anti Money Laundering Act (Geldwäschegesetz), plus new structures to be implemented in law enforcement agencies, all of which we describe below, shall bring further improvements in combating money laundering in Germany more effectively.

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Life Sciences Companies Face Heightened Insider Trading Risks and Scrutiny

by Anne E. Railton and Courtney D. Orazio

Insider trading has long been a key enforcement priority for the U.S. Securities and Exchange Commission (SEC) and the U.S. Department of Justice (DOJ).  The COVID-19 pandemic has caused market volatility not seen in decades, creating heightened concerns about insider trading that have only sharpened this focus.  Life sciences companies—including biotechnology, pharmaceutical, medical device, and healthcare product and services businesses—are likely to be particular subjects of scrutiny.  Already frequent targets of SEC and DOJ focus even before the pandemic, many life sciences companies on the frontlines of fighting COVID-19 have been privy to a regular stream of material COVID-related, market-moving information.  The ongoing opportunities for breakthroughs in responding to the pandemic create opportunities for lucrative trading, too—and regulators and prosecutors have taken notice.  Life sciences companies, along with their executives and directors, have already—and will continue to—face scrutiny arising out of event-driven trading issues relating to COVID-19 diagnostics, treatments, and vaccines. 

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The Dual Threat of Identity Theft Red Flags and Cybersecurity Deficiencies in FINRA and SEC Enforcement

by Marc Gilman

In the last few years, cybersecurity, with an emphasis on protection of customer data, has topped the exam priorities and risk alerts of both the Financial Industry Regulatory Authority (“FINRA”) and the Securities and Exchange Commission (the “SEC”).  And, as the global pandemic pushes the financial services industry into the second year of a work from anywhere business environment, the deployment and continued improvement of cybersecurity controls to secure customer and firm data are critical.

Perhaps it should come as no surprise that regulations underpinning cybersecurity practices are coming to the fore.  A case in point is the announcement of FINRA’s letter of Acceptance, Waiver, and Consent (“AWC”) with Supreme Alliance LLC (“Supreme”) in December 2020 for violations of the SEC’s Regulation S-ID, also known as the identity theft red flags rule, and FINRA Rule 2010.[1]  FINRA’s settlement with Supreme is significant as it potentially signals a more aggressive and meaningful focus on Reg S-ID, which saw its first major enforcement in 2018 when the SEC fined Voya Financial Advisors, Inc. $1 million for violating it as well as the SEC’s Reg S-P.[2] 

This post will analyze the unique fact pattern of Supreme and offer practical suggestions for compliance officers navigating the nuances of identity theft protection and cybersecurity in this new, remote work world.

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FinCEN Notice on Efforts Related to Trade in Antiquities and Art

by Sharon Cohen Levin, Elizabeth Davy, Jennifer Sutton and Samantha Rosenthal

On March 9, 2021, the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) issued a notice (“Notice”) to inform financial institutions about new provisions in the Anti-Money Laundering Act of 2020 (“AMLA”) relating to the illicit trade in antiquities and art.  As the Notice highlights, the AMLA amended the Bank Secrecy Act (“BSA”) to apply to dealers in antiquities and directed the Secretary of the Treasury, acting through the Director of FinCEN, to issue proposed rules to carry out the amendments.  The AMLA also directed the Secretary of the Treasury to perform a study of the facilitation of money laundering and the financing of terrorism through the trade in works of art.  The Notice emphasizes the heightened risk of the antiquities and art markets being exploited to launder money and finance terrorism and warns financial institutions with existing BSA obligations that illicit activity associated with the trade in antiquities and art may involve their institutions.  Finally, the Notice provides specific instructions to financial institutions for filing a Suspicious Activity Report (“SAR”) related to trade in antiquities and art.[i]  

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First Resolution by the DFS Under Its Cyber Rules Highlights the Risks of Inadequate Cyber Investigations and the Importance of Satisfying State Breach Notification Obligations

by Luke Dembosky, Avi Gesser, Jim Pastore, Chris Ford, Alexandra Mogul, and Sarah Smith

Last year, we discussed the first enforcement action brought by the New York State Department of Financial Services (“DFS”), which involved charges against First American Title Insurance Company. That hearing is scheduled for March 22.

On March 3, 2021, the DFS reached its first full resolution under its Part 500 Cybersecurity Regulation, a Consent Order with Residential Mortgage Services that imposes a $1.5 million penalty for several violations including:

  • Failure to investigate whether an attacker, who compromised a single email mailbox, accessed private data of individuals.
  • Failure to satisfy various state breach notification obligations.
  • Failure to notify the DFS of the incident.
  • Failure to conduct a cybersecurity risk assessment, as required by Part 500.

In addition to the $1.5 million fine, Residential Mortgage must undertake various risk mitigation measures to prevent future incidents.

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Changes on the Horizon: Race in the Anticipated Garland DOJ

by Amanda J. Raines and Paul J. Fishman

During his testimony before the Senate Judiciary Committee, Judge Garland skillfully avoided taking firm positions on a variety of topics—which made his statements regarding criminal justice reform and the effect of systemic racism and implicit bias in the justice system particularly notable. Criminal justice reform came up several times, specifically in questions by Ranking Member Grassley (R-IA) and Senators Chris Coons (D-DE), Pat Leahy (D-VT), Cory Booker (D-NJ), Jon Ossoff (D-GA), Tom Cotton (R-AK), and John Kennedy (R-LA). In each instance, Judge Garland was unequivocal that the issue is a priority for him and the President.

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White-Collar and Regulatory Enforcement: What Mattered in 2020 and What to Expect in 2021

by John F. Savarese, Ralph M. Levene, Wayne M. Carlin, David B. Anders, Sarah K. Eddy, Lauren M. Kofke, Carol Miller, and Tamara Livshiz

As we write this memorandum, a new administration is forming in Washington, with new leadership teams being nominated at DOJ, SEC, CFTC and other regulatory and law-enforcement agencies — thus prompting the question of what these changes may portend for white-collar and regulatory enforcement priorities, trends and policies. Having watched many administrations come and go over the years, our sense is that, in this area at least, continuity tends to prevail over disruption. That said, we can offer the following educated guesses on what to expect going forward:

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Second Circuit Affirms SEC’s Bank Secrecy Act Powers

by William R. Baker III, Douglas N. Greenburg, Benjamin A. Naftalis, Nabil Sabki, John J. Sikora Jr., Eric S. Volkman, Douglas K. Yatter, Timothy H. McCarten, and Hye Eun (Michelle) Cho

The Second Circuit’s recent decision gives the SEC the green light to continue enforcing broker-dealer compliance with the Bank Secrecy Act.

Key Points:

  • In U.S. Securities and Exchange Commission v. Alpine Securities Corp., the Second Circuit affirmed the SEC’s authority to require broker-dealers to comply with the BSA’s reporting and recordkeeping requirements, under Section 17(a) and Rule 17a-8 of the Securities Exchange Act of 1934 (Exchange Act).
  • The Alpine decision validates the SEC’s focus on broker-dealer AML programs. In anticipation of such scrutiny, broker-dealers and Chief Compliance Officers should evaluate whether their compliance programs satisfy existing anti-money laundering obligations, and particularly BSA reporting obligations.

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Protesting Racism: Was It a Moment or a Movement? And What Does This Have to Do with Corporate Compliance?

by Cheryl L. Wade

For several months in 2020, news reports and articles began with a recitation of the names of black men and women killed by police violence. We engaged daily in a national discourse about systemic racism, and many business leaders joined the discussion. No longer reticent on this topic, corporate executives issued statements that pledged a commitment to antiracism work. Companies sent letters to consumers, employees and the general public. All of the statements mentioned injustice, racism or bias. Business leaders seemed to have moved beyond cosmetic rhetorical flourishes that focused solely on diversity, access and inclusion. This was a seismic and potentially powerful shift in corporate discourse relating to race. The promise of elevating the discourse on race was ripe with possibility.

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