Financial Services Law Archives - Page 23 of 41

Curbing Greenhouse Gas (GHG) Emissions – Good for the Environment, Bad for Investors?

On June 2, 2014, EPA issued a proposed rule to control greenhouse gas emissions (GHGs) from the electric power generation sector of the United States. EPA’s goal is to obtain a reduction of GHG emissions in 2030 from this sector of 30% from the baseline year 2005. The 2005 baseline allows EPA to take credit for GHG emission reductions that have occurred since that time without any regulatory obligation. The proposal establishes GHG emission targets for each State (expect the District of Columbia and Vermont who do not have goals under the rule). Interim emission targets must be obtained in the 2020-2029 timeframe with final targets obtained by 2030.

The proposal does not suggest any particular emission limit on particular plants, but imposes the obligation on the States to derive a plan to achieve the reductions. The only penalty for noncompliance in the proposal is that EPA would impose an EPA-developed plan within the State if it fails to submit an approvable plan. While EPA has not dictated any particular approach a State may employ, the proposal favors a cap and trade or carbon tax system as the primary manner to obtain GHG emissions reductions.

So here are the two burning questions from the perspective of investors. First, will this rule actually survive in anywhere near this form? Second, when will affected power projects need to start ramping up investment in order to comply with the rule, i.e., when should investors start to worry about financial capacity?

In terms of a “review for reality,” many industry experts suggest that it is nearly impossible to obtain the proposed 6% efficiency improvement at existing coal-fired power plants without major capital improvements, which could require complex Clean Air Act permitting under other provisions of the law. Other goals can only be achieved through substantial purchases of carbon credits (i.e., offsets) or the implementation of technologies that haven’t yet been proven to be commercially viable. (You’ve likely heard the aspirations to develop carbon capture and sequestration.) EPA also assumes that natural gas-fired power plants will be running at 70% capacity year-round, which may be difficult to achieve in practice. Finally, EPA assumes that energy efficiency improvements at the consumer level will be obtained at a rate of 1.5% every year until 2030 – an ambitious goal.

In terms of a “review for timing,” this is only the beginning of a very long process. After the usual rounds of public comment, EPA has targeted issuance of the final rule by June 1, 2015. Then the lawsuits will start. Then a new President with his/her own views will take office. Plus, even under the EPA’s own best case scenario, the proposed rule allows states until June 2016 to submit plans, with the potential for extension to June 2017. Once a state submits a plan, EPA must approve or disapprove it through notice and comment rulemaking. The proposal allows for EPA to complete the review of the plans within 12 months of the state plan submittal. If a state doesn’t submit a plan or EPA disapproves the plan, EPA must make a plan for the state. State plans must begin to meet an interim goal in 2020 and must achieve their final goal by 2030. Plus, State plans and EPA approval/disapproval present a separate source of litigation and associated delay.

So no need for panic dumping of carbon-intensive investments just yet, but keeping an eye on the process would be wise, including consideration of whether, if your industry investments are large enough, you should participate in, or form/join a group to participate in, the comment-making phase plus working with members of Congress. The earlier the involvement, the greater the opportunity to help shape the results.

Article By:

Of:

Bracewell & Giuliani LLP

Office of Foreign Assets Control Publishes New Syria and Ukraine Sanctions Regulations; Designates Russian Bank For its Involvement in Syrian Unrest

The U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) recently published a final rule amending and reissuing in their entirety the Syrian Sanctions Regulations (“SSR”), 31 C.F.R. Part 542. The reissued SSR contain six new general licenses, including one that authorizes the provision by a U.S. person or from the United States of services ordinarily incident to the supply to Syria of non-U.S. food, medicine, and medical devices that are non-sensitive in nature.

In addition, OFAC last week issued new Ukraine-Related Sanctions Regulations to implement executive orders that the Administration issued in March 2014, and designated a Russian bank (Tempbank) and the Chairman of its Management Committee (Mikhail Georgievich Gagloev) for providing material support and services to the Government of Syria.

Background on Syrian Regulations

Syria has been the target of U.S. economic sanctions since it was designated as a state sponsor of terrorism in 1979. The SSR, which first went into effect in April 2005, constitute one of the primary regulatory regimes that implements these sanctions. (The Commerce Department’s Export Administration Regulations (“EAR”) also broadly prohibit, absent licensing, exports and reexports to Syria of most items, other than food and non-sensitive medicines, that are of U.S.-origin or that incorporate more than de minimis U.S.-origin content.) Since the original issuance of the SSR in 2005, the Bush and Obama Administrations have issued executive orders broadening the U.S. sanctions against Syria by imposing new blocking measures and other trade restrictions. OFAC also has issued a number of general licenses authorizing certain otherwise prohibited transactions. These developments had created a complex patchwork of authorities imposing sanctions on Syria. OFAC’s overhaul of the SSR combines many of these authorities into a single, unified, and up-to-date set of regulations.

Incorporated Executive Orders

The reissued SSR, which went into effect on May 2, 2014, incorporate asset-blocking measures and other trade restrictions imposed under six executive orders issued between 2006 and 2012. As a result, Section 542.201 of the SSR now requires the blocking of all property and interests in property of the Government of Syria (including its agencies, instrumentalities, and controlled entities) that are or hereafter come into the United States or the possession or control of a U.S. person, as well as such assets of Specially Designated Nationals (“SDNs”) sanctioned because they were determined to have undertaken activities specified in the executive orders. U.S. persons may not transfer, pay, export, withdraw, or otherwise deal in such blocked property. Consistent with OFAC guidance with respect to numerous sanctions programs, SSR § 542.411 clarifies that if a person whose assets are blocked under Section 542.201 owns, directly or indirectly, a 50 percent or greater interest in an entity, that entity’s assets are also blocked even if that entity is not added to the SDN List.

The SSR also now contain certain other trade restrictions originally imposed by

Executive Order 13582 (effective August 18, 2011), which we discussed in our e-alert of August 19, 2011. These restrictions prohibit:

U.S. persons, wherever located, from making new investments in Syria (§ 542.206) ;
The export, reexport, sale, or supply, directly or indirectly, by a U.S. person or from the United States of any services to Syria (§ 542.207);
The importation into the United States of Syrian-origin petroleum or petroleum products (§ 542.208);
U.S. persons from engaging in any transaction or dealing related to Syrian-origin petroleum or petroleum products (§ 542.209); and
U.S. persons from approving, financing, facilitating, or guaranteeing a transaction by a foreign person that would be prohibited if performed by a U.S. person or within the United States (§ 542.210).

General LIcenses and Statements of Licensing Policy

In addition to incorporating prior executive orders, the reissued SSR incorporate (at Sections 542.509 through 542.520 and 542.523) a number of general licenses that were previously posted on OFAC’s website, and add six new general licenses and three new statements of licensing policy. The new general licenses authorize the following transactions:

With certain limitations, the receipt of payment of professional fees and reimbursement of incurred expenses for the provision of authorized legal services to or on behalf of the Government of Syria and other blocked parties (§ 542.508);
All transactions in the United States between U.S. persons and persons who have been granted certain categories of U.S. visas; services in connection with the filing of applications for such visas; and services provided by accredited U.S. graduate and undergraduate degree-granting institutions for the filing and processing of applications to enroll in the institutions, and the acceptance of payments for submitted applications to enroll and tuition from persons ordinarily resident in Syria (§ 542.521);
Otherwise prohibited transactions between blocked SDNs and employees, grantees, or contractors of the U.S. federal government that are for official government business (§ 542.522);
The following services provided in the United States to non-Syrian carriers transporting passengers or goods to or from Syria (but not the Government of Syria or blocked parties): bunkers and bunkering services, services supplied or performed in the course of emergency repairs, and services supplied or performed under circumstances which could not be anticipated prior to the carrier’s departure for the United States (§ 542.524);
The provision by a U.S. person or from the United States of services ordinarily incident to the supply to Syria of non-U.S.-origin food, medicine, and medical devices that would be classified EAR99 if subject to the EAR (§ 542.525); and
Certain services related to conferences, performances, exhibitions, or similar events in the United States or a third country attended by persons who are ordinarily resident in Syria, other than the Government of Syria or blocked parties (§ 542.526).

The new general license found at Section 542.525 is a particularly noteworthy development, as it eliminates an anomaly in the prior sanctions regime’s licensing requirements. Under the general license now found at Section 542.510, U.S. persons are authorized to be involved in and facilitate the supply to Syria of food, medicines and medical devices authorized for supply to Syria by the U.S. Commerce Department. However, because the Commerce Department regulations do not apply to exports to Syria of most non-U.S.-origin items that contain 10 percent or less U.S. content by value, U.S. persons were not permitted by the OFAC general license to facilitate the supply of such non-U.S.-origin items to Syria; rather, a specific OFAC license was required. The new general license authorizes the provision of services by a U.S. person or from the United States related to the export and reexport to Syria of non-U.S.-origin food, medicines, and medical devices that would be classified EAR99 if subject to the EAR.

In addition, three new statements of licensing policy contained in the SSR clarify that specific licenses may be issued by OFAC on a case-by-case basis authorizing: (1) certain transactions involving Syria’s telecommunications sector that are otherwise prohibited by the SSR, in order to enable private persons in Syria to better and more securely access the Internet (§ 542.527); (2) certain transactions involving Syria’s agricultural sector that are otherwise prohibited by the SSR, in order to strengthen that sector in light of Syria’s food “insecur[ity]” (§ 542.528); and (3) certain transactions that are otherwise prohibited by Sections 542.206 through 542.210 of the SSR, including new investment related to Syrian petroleum and petroleum products for the benefit of the National Coalition of Syrian Revolutionary and Opposition Forces (§ 542.529).

New Syria Related Designations

In addition to reissuing the SSR, on May 8, 2014, OFAC announced 10 new Syria-related designations. These designations included six Syrian government officials and two Syrian refineries. OFAC also designated a Russian Bank (Tempbank) and the Chairman of its Management Committee (Mikhail Georgievich Gagloev) pursuant to Executive Order 13582 for providing material support and services to the Government of Syria, including the Central Bank of Syria and SYTROL, Syria’s state oil marketing firm. The Treasury Department statement announcing the designations noted that Tempbank has provided millions of dollars and facilitated the provision of financial services to the Syrian regime, and that Mr. Gagloev personally travelled to Damascus to make deals with the Syrian regime on behalf of Tempbank.

As a result of these designations, U.S. persons are generally prohibited from engaging in any transactions or dealings with these parties, and the property and property interests of these parties that are or come into the United States or the possession or control of a U.S. person are blocked. Further, the sanctions apply to any entity in which any designated person owns a 50 percent or greater interest (regardless of whether such entity is itself designated).

Publication of Ukraine Related Sanction-Regulations

Also on May 8, OFAC issued new Ukraine-Related Sanctions Regulations at 31 C.F.R. Part 589 to implement executive orders issued in March 2014 (EOs 13660, 13661, and 13662, which were the subject of our prior e-alerts on March 6, 2014, March 18, 2014, and March 21, 2014).

The newly issued regulations, which were effective immediately, do not substantively change the scope of the Ukraine-related sanctions program, but do provide directions for management of blocked funds and property, definitions, interpretations, and limited general licenses. The general licenses authorize transactions such as certain transfers of property between blocked accounts in a U.S. financial institution, debits from blocked accounts by a U.S. financial institution for normal service charges, the provision of certain legal services, the receipt of certain payments for the provision of authorized legal services, and the provision of emergency medical services in the United States.

OFAC stated that these regulations were being published in abbreviated form, and that it intends to supplement them with a more comprehensive set of regulations, which may include additional definitions, interpretive guidance, general licenses, and statements of licensing policy.

Article by:

Of:

Covington & Burling LLP

Self-Directed Individual Retirement Account's (IRA): Caution Required

A number of entrepreneurial folks have created self-directed IRA, which can be traditional or Roth IRA’s, in order to make investments in real property, oil and gas interests, operating businesses, private placements and the like. Self-directed IRA’s require a custodian or trustee to manage the IRA, although the owner can direct what it invests in. The Tax Code contains a detailed and complex regime applicable to self-directed IRA’s. One of the areas where an IRA owner can find himself or herself under challenge from the IRS is with regard to “prohibited transactions” with “disqualified persons.” The list of disqualified persons includes: the IRA owner; his or her spouse and close relatives; certain fiduciaries such as a lawyer or accountant working for the IRA owner; and entities that any of the foregoing individuals control. The term “prohibited transaction” includes the sale, exchange or lease of property, furnishing goods or services, making personal use of IRA assets or pledging IRA assets to secure a loan. Therefore, when a disqualified person engages in a prohibited transaction the tax consequences to the self-directed IRA can be dire, and include causing the IRA to be immediately taxable, with the possibility of penalties and interest charges.

A recent case from the U.S. Tax Court stands as a cautionary tale: Mr. Peek and Mr. Fleck established self-directed traditional IRA’s in 2001 with rolled over cash from traditional IRA’s. They caused their self-directed IRA’s to purchase all of the stock in a new corporation which bought the assets of a company providing alarms and fire protection systems. In acquiring these assets, Peek and Fleck personally guaranteed a promissory note to the sellers for a portion of the purchase price. Several years later they converted these self-directed traditional IRA’s into self-directed Roth IRA’s and paid the tax at that time. Following several more years during which the business flourished, Peek and Fleck found a buyer for the business in 2006 and had their self-directed IRA’s sell all of the company’s stock at a significant profit. Upon audit, the IRS contended that Peek’s and Fleck’s personal guaranties of the seller financing, which still existed until the stock sale, was a prohibited transaction and all of the sale proceeds were taxable income at ordinary tax rates. The Tax Court rejected the argument of Peek and Fleck that they hadn’t engaged in a prohibited transaction because their guaranties ran to the company not to their self-directed IRA’s. The Tax Court found that these taxpayers had made an indirect extension of credit to their IRA’s. The result was that the sale proceeds which Peek and Fleck thought would be free from tax because of the Roth status were taxed immediately as ordinary income and they were made to pay accuracy-related penalties as well.

Article By:

Mark Boscoe

Of:

Ryley Carlock & Applewhite, A Professional Corporation

Blowing The Whistle On Fraud In The Banking Industry [VIDEO]

The Department of Justice very actively pursues cases involving fraud in the banking industry, and through a law known as the Financial Institutions Anti-Fraud Enforcement Act, is authorized to pay very substantial rewards to whistleblowers that provide the Department of Justice with information about such fraud.

The law covers both fraud on banks, but also fraud by banks. It also covers other types of unlawful conduct effecting banking, such as embezzlement of bank funds, or the payment of kickbacks to bank loan officers.

Under this banking whistleblower program, the Department of Justice can pay whistleblower awards of up to 30% of the amounts recovered by the government in banking fraud cases.

The law has a number of very unique procedures that govern how information has to be presented to the Department of Justice, which must be followed by a whistleblower who wishes to preserve his or her right to receive a reward. The whistleblower must also file a sworn statement with the Department of Justice, here in Washington, D.C. at its main headquarters, pursuant to those procedures. It is also recommended that a qui tam whistleblower under this banking fraud program submit a legal memorandum to the Department of Justice, explaining the legal theories behind the case.

If you have information concerning a potential case involving banking fraud, do not hesitate to take action. It is possible that you might be able to bring your own lawsuit under the Financial Institutions Anti-Fraud Enforcement Act, acting as a whistleblower on behalf of the US government. Before filing your lawsuit, be sure to consult with an attorney familiar with the intricacies of this law, as these attorneys are best equipped to help protect your rights and help you gain your share of any monetary reward from a potential settlement.

Article By:

Whistleblower Practice Group

Of:

Tycko & Zavareei LLP

Get the FATCA Outta Here? Not Likely. – Foreign Account Tax Compliance Act

Despite several delays, it seems almost certain that the “Foreign Account Tax Compliance Act”¹ (FATCA) will finally go into effect on July 1, 2014. FATCA is a withholding tax regime designed to prevent U.S. taxpayers from hiding income offshore and avoiding U.S. taxes. FATCA’s impact will need to be considered in most cross-border transportation finance transactions. While the FATCA rules are complex and a thorough treatment of them is beyond the scope of this article, below are some key issues relating to the impending effectiveness of FATCA that are important to keep in mind.

When Do the FATCA Rules Go Into Effect?

After several delays and extensions, the FATCA rules are currently scheduled to become effective with respect to payments of interest, dividends and rentals and other similar payments made on or after July 1, 2014. While this deadline has been extended several times, the Internal Revenue Service (IRS) has repeatedly stated that no further delays are anticipated.² Obligations outstanding on July 1, 2014 will be “grandfathered,” and the FATCA rules will not apply to payments made under these pre-existing obligations,³ unless such obligations are substantially modified after that date.4 Withholding on payments of “gross proceeds” is not set to begin until after December 31, 2016. Although FATCA withholding will not apply until July 1, 2014, parties who are currently negotiating transportation finance transactions are typically taking into account the possible application of FATCA withholding in the future and are documenting such transactions accordingly.

Overview of the Rules

In general, FATCA imposes a 30% withholding tax on “withholdable payments” to certain non-U.S. persons (foreigners). Withholdable payments broadly include any payment of: (a) U.S. source interest (including OID), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments and other fixed and determinable annual or periodical gains, profits or income, or (b) U.S. source gross proceeds from the sale or other disposition of any property of a type that can produce U.S. source interest or dividends.⁵

Since it is the payor that is obligated to withhold from payments if withholding is required under FATCA, any payor making a payment to a foreigner should confirm that such payment is either (a) related to an obligation to which FATCA does not apply (such as a grandfathered obligation or a non-U.S. source obligation), or (b) made to a foreigner who can provide proof of exemption from FATCA withholding.

Determining U.S. Source

Determining the source of interest payments is usually straight forward, as the jurisdiction of the borrower generally determines the source.⁶ However, in the complex financing structures often utilized for transportation finance transactions, a deeper analysis may be required. For instance, in certain cross-border structured finance transactions a nominal U.S. borrower is used to “own” and “lease” the aircraft to a foreign airline lessee. However, for U.S. tax purposes this borrower is merely an agent, or conduit, for the lessee and the lessee would be treated as the owner of the aircraft. In these circumstances, notwithstanding the nominal U.S. borrower, the parties take the position that, since the true borrower is the foreign airline, the interest is not U.S. source and thus not subject to the FATCA rules.

While sourcing rental payments may seem straightforward at first glance, as you generally look to the jurisdiction where the asset is used, the analysis become trickier for transportation equipment like aircraft.⁷ As aircraft may be used in many jurisdictions, the Internal Revenue Code provides special rules treating as U.S. source: (a) 100% of the income attributable to flights that begin AND end in the U.S., and (b) 50% of the income attributable to flights not described in (a) which begin OR end in the U.S.⁸ Thus, even aircraft leased to a foreign carrier could generate U.S. source rental income if, for example such foreign carrier operates flights to the U.S. or has the ability to sublease the aircraft to a U.S. carrier. For these reasons, it is prudent to include FATCA provisions in aircraft leases with foreign carriers, even where such leases do not initially seem as though they will generate U.S. source income.⁹

Avoiding Withholding Under FATCA

A payor of U.S. source income will need to ensure that its payee is exempt from FATCA withholding. Payments to U.S. entities are generally exempt from FATCA withholding and a payor should collect a Form W-9 or other appropriate evidence of U.S. status when making a payment of U.S. source income to a U.S. entity in order to confirm FATCA withholding is not required.

FATCA is directed primarily at “foreign financial institutions” (FFIs), but also covers “non-financial foreign entities” (NFFEs). While there are various methods for FFIs and NFFEs to be exempt, several of the most common ones are discussed below.

An FFI may be exempt either by reason of the government of its home jurisdictions having entered into an intergovernmental agreement (IGA) with the U.S. or by entering into an agreement with the IRS to report U.S. account holders. There are two types of IGAs: (a) Model 1 IGAs, whereby the FFIs report to their local government, which shares the relevant information with the IRS, and (b) Model 2 IGAs, whereby the FFIs report directly to the IRS. The U.S. and numerous foreign jurisdictions have concluded IGAs¹⁰ and FFIs in a country with an IGA can obtain a “global intermediary identification number” (GIIN), which can be supplied to payees to evidence exemption.

NFFEs can obtain exemption from FATCA by confirming they are the beneficial owner of the payment and reporting their substantial (10% or more) U.S. owners, if any. Reporting information includes name, address and U.S. taxpayer identification number (TIN) of U.S. owners. Under certain circumstances the NFFE can report its ownership information to the IRS rather than the payee. In addition, certain classes of NFFEs are exempt, such as publicly traded companies or companies predominantly engaged in an active business. It remains to be seen whether a leasing company will be considered to be engaged in an active trade or business (and what tests will be applicable to qualify for this status).

When making a payment of U.S. source income to a foreigner, a payor should collect a Form W-8BEN-E to confirm the payee’s FATCA exemption status.¹¹

Negotiating and Documenting FATCA Provisions

Bad news – you will probably need to get tax lawyers involved. Many, if not most, parties seem to be taking a cautious approach and are inserting FATCA provisions where there is any possibility that the payments could be U.S. source currently or in the future. The Loan Market Association has drafted a variety of “standard” provisions but cautions that there are no simple drafting solutions.

Approaches to the allocation of risk vary from a shared approach to an allocation of all of the risk to either the borrower or the lender, in the case of a secured financing, or the lessee or the lessor, in the case of a lease. Borrowers and lessees often make the argument their lender or lessor, as the case may be, should “come to the table” as FATCA compliant and be able to demonstrate such compliance or suffer withholding if they cannot. Lessors and lenders, on the other hand, often make the argument that they should not be at risk for changes in U.S. law. However, these perspectives should not be over emphasized as each transaction needs to be examined in the light of the particular parties and circumstances. In the short run, the negotiation and documentation of these provisions will continue to require time and effort. In the long run, the terms and allocations of risk will likely standardize in a manner similar to how U.S. withholding tax provisions have standardized over the years.

¹ I.R.C. §§ 1471-1474.

²“Final” FATCA regulations were published in the Federal Register on March 6, 2014 (Fed Reg Vol 79 No 44 p. 12812).

³ Technically the obligation needs to be issued before July 1, 2014 and outstanding on July 1, 2014 in order to be grandfathered, and an obligation issued on July 1, 2014 does not qualify for the exception.

⁴ A substantial modification may be triggered by, among other things, a change in interest rate, maturity or obligor.

⁵ Unlike traditional withholding rules, the FATCA regime will eventually apply to proceeds from the sale or other disposition of instruments producing U.S. source interest or dividends. The rules are broad enough to include principal payments on debt instruments.

⁶ I.R.C. § 861(a)(1).

⁷ I.R.C. § 861(a)(4) covering rentals generally.

⁸ I.R.C. § 863(c) covering transportation income which includes aircraft rentals (I.R.C. § 863(c)(3)(A)).

⁹ Where there is a foreign lessee with no other U.S. payor connection, it remains to be seen how the IRS will enforce the FATCA withholding obligation against the foreign lessee with minimal U.S. contacts (e.g., such as merely flying back and forth to and from the U.S.).

¹⁰ The U.S. has concluded Model 1 IGAs with: Canada (2-5-2014), Cayman Islands (11-29-2013), Costa Rica (11-26-2013), Denmark (11-19-2012), Finland (3-5-2014), France (11-14-2013), Germany (5-31-2013), Guernsey (12-13-2013), Hungary (2-4-2014), Ireland (1-23-2013), Isle of Man (12-13-2013), Italy (1-10-2014), Jersey (12-13-2013), Malta (12-16-2013), Mauritius (12-27-2013), Mexico (11-19-2012), Netherlands (12-18-2013), Norway (4-15-2013), Spain (5-14-2013) and the United Kingdom (9-12-2012); and Model 2 IGAs with: Bermuda (12-19-2013), Chile (3-5-2014), Japan (6-11-2013) and Switzerland (2-14-2013).

¹¹ A new W-8BEN-E form will be used for foreign entities and will include the appropriate information to demonstrate FATCA compliance or an exemption from FATCA withholding. Note that a proper exemption from “regular” U.S. withholding will also need to be documented. It is possible that a payee may be exempt from FATCA withholding but not regular withholding.

Article By:

Jonathan H. Bogaard

Michael E. Draz

Of:

Vedder Price

Digital Currency Identified as an “Emerging Risk” in the Canadian Federal Government’s 2014 Budget

On February 11, 2014, the Canadian Federal Government released its 2014 Budget. In the 2014 Budget, the Federal Government pledged to introduce legislative amendments to strengthen Canada’s anti-money laundering and terrorist financing regime in the area of virtual (digital) currency.

2013: Year of Bitcoin?

At the beginning of 2013, one bitcoin could be purchased for $12. For a brief period in November 2013, one bitcoin was worth more than one ounce of gold ($1242 to $1240, respectively). Forbes and MarketWatch wrote articles proclaiming 2013 as the year of bitcoin, and “bitcoin” was chosen as the word of the year by the Australian National Dictionary Centre (beating out worthy candidates, including “selfie” and “twerk”).

This increased popularity of digital currency has brought increased scrutiny from regulators and law enforcement. Last year in the United States, the Financial Crimes Enforcement Network issued guidance with respect to whether activities by individuals and companies related to virtual currencies are subject to registration, reporting, and recordkeeping requirements, and the FBI arrested the “mastermind” of Silk Road (a marketplace selling illegal items and accepting payment in virtual currency). In early 2014, a prominent member of the bitcoin community was indicted on money laundering charges.

Canada Revenue Agency (“CRA”) Release Its Position on Bitcoin

Prior to the release of the 2014 Budget, the main Canadian government references to digital currency were from the CRA. The first notable CRA acknowledgment of bitcoin was in April 2013 in the form of a CRA communication to the Canadian Broadcasting Corporation (“CBC”). The communication stated that transactions involving bitcoin are barter transactions and that gains resulting from bitcoin transactions could be income or capital depending on the specific facts.

On November 5, 2013, the CRA issued its first release on the taxation of digital currency. This release reinforced the CRA’s earlier position on bitcoin that was set out in its April 2013 e-mail to the CBC. On December 23, 2013, in CRA Document No. 2013-0514701|7, subject “Bitcoins,” the CRA further clarified its position with respect to bitcoin “in response to a summary of comments that were provided in response to a recent media enquiry describing the income tax consequences of various transactions involving digital currency.”

Accordingly, the CRA considers bitcoin to be a commodity, not a currency. Therefore, using bitcoins to purchase goods or services is considered a barter transaction. The sale of bitcoins at a profit is treated as either income or capital depending on a particular taxpayer’s circumstances.

Virtual Currency in the 2014 Budget

Virtual currency is identified in the 2014 Budget as an “emerging risk” that threatens Canada’s international leadership in the fight against money laundering and terrorist financing. Bitcoin is cited in the 2014 Budget as an example of such virtual currency.

In the 2014 Budget, the Federal Government proposed to introduce anti-money laundering and anti-terrorist financing regulations for virtual currencies, such as bitcoin.

The Federal Government noted in the 2014 Budget that this proposal was based on a report by the Standing Senate Committee on Banking, Trade and Commerce entitled Follow the Money: Is Canada Making Progress in Combatting Money Laundering and Terrorist Financing? Not Really (the “Report”). The Report is a five-year review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the “Act”) and was issued in March 2013. However, the only reference in the Report to digital currency is a brief note that the development of electronic methods to launder money must be addressed through timely amendments to the Act and its regulations.

2014: Year of Bitcoin Regulation

The Federal Government has identified digital currency as an “emerging risk” in the fight against money laundering and terrorist financing. Accordingly, the regulation of digital currency in Canada is imminent, and individuals and businesses dealing in bitcoin will soon be subject to certain registration, reporting, and recordkeeping requirements.

Article by:

Michael D. Lipton, Q.C.

Kevin J. Weber

Jack I. Tadman

Of:

Dickinson Wright PLLC

UK Financial Conduct Authority (FCA) Issues First Fine Under New Anti-Money Laundering Regime

Financial Conduct Authority fines Standard Bank £7.6 million for failures in its anti-money laundering controls, underlining the importance of both having and implementing adequate policies in relation to money laundering.

On 22 January, the UK Financial Conduct Authority (FCA) published a decision notice^[1] imposing a £7.6 million fine on Standard Bank PLC, the UK subsidiary of South Africa’s Standard Bank Group.^[2] The fine was issued for failures relating to Standard Bank’s anti-money laundering (AML) policies and procedures for corporate customers connected to politically exposed persons (PEPs).^[3] This is the first AML fine issued under the FCA’s new penalty regime and the first such fine by the FCA—or its predecessor, the Financial Services Authority—in relation to commercial banking activity.

Under Regulation 20(1) of the Money Laundering Regulations 2007, regulated institutions, such as banks, must establish and maintain “appropriate risk-sensitive policies and procedures” on customer due diligence measures and ongoing monitoring of business relationships, amongst others. The policies must be aimed at preventing money laundering and terrorist financing. Guidance issued by the Joint Money Laundering Steering Group states that enhanced due diligence (EDD) should be applied where a corporate customer is linked to a PEP, such as through a directorship or shareholding, as it is likely that this will put the customer at higher risk of being involved in bribery and corruption.

As part of its investigation into Standard Bank, the FCA reviewed a sample of 48 corporate customer files, which all had a connection with a PEP, and discovered “serious weaknesses” in the application of the bank’s AML policies and procedures. The FCA found that, from 15 December 2007 to 20 July 2011, Standard Bank breached the Money Laundering Regulations 2007 by failing to take reasonable care to ensure that all aspects of its AML policies were applied appropriately and consistently to its corporate customers connected to PEPs. In particular, the FCA found that Standard Bank did not consistently carry out adequate EDD measures before establishing business relationships with corporate customers linked to PEPs and did not conduct the appropriate level of ongoing monitoring for existing business relationships by updating its due diligence. The FCA noted the failings were particularly serious because the bank dealt with corporate customers from jurisdictions regarded as posing a higher risk of money laundering and because the FCA had previously stressed the importance of AML compliance to the industry.^[4] The gravity of the failings was underlined by the FCA’s director of enforcement and financial crime, who stated that “[if banks] accept business from high risk customers they must have effective systems, controls and practices in place to manage that risk. Standard Bank clearly failed in this respect”.

This is the first AML case to use the FCA’s new penalty regime, which applies to breaches committed from 6 March 2010 and under which larger fines are expected. The FCA’s decision notice sets out how it determined the level of the fine, by reference to a five-step framework (as outlined in the Decision Procedure and Penalties Manual).^[5] The FCA considered the fact that the bank and its senior management cooperated in the investigation and took significant steps to remediate the problems, including seeking advice from external consultants, to be a mitigating factor. In addition, Standard Bank’s decision to settle the matter at an early stage of the investigation resulted in a 30% discount on the fine. The original penalty was £10.9 million.

The FCA’s action against Standard Bank illustrates the increasingly tough approach taken by the UK authorities against financial crime and shows that the FCA is willing and able to enforce AML legislation. Banks and regulated firms are encouraged to ensure that they have effective policies and procedures against money laundering in place and that these are being adhered to.

_{[1]. View the FCA’s notice here.}

_{[2]. The sale of Standard Bank to the Industrial and Commercial Bank of China has been agreed to and is likely to be completed during the fourth quarter of 2014.}

_{[3]. A “PEP” is defined in the Money Laundering Regulations 2007 as “an individual who is, or has, at any time in the preceding year, been entrusted with a prominent public function”, or immediate family members and known close associates of such individuals.}

_{[4]. The FSA published a Consultation Paper on 22 June 2011, availablehere, focusing on how banks manage money laundering risk in higher risk situations. It also published a Policy Statement on 9 December 2011, available here, providing guidance on the steps firms can take to reduce their financial crime risk.}

_{[5]. View the manual here.}

Article by:

Kevin Robinson

Nicholas “Nick” Greenwood

Richard Ellison

Of:

Morgan, Lewis & Bockius LLP

JPMorgan Chase Pays $614 Million for Submitting False Claims in Mortgage Loans Case

The Department of Justice (DOJ) announced last week that JPMorgan Chase, the largest bank and financial institution in the country, will pay a $614 million settlement to the US government to resolve allegations that it approved thousands of unqualified home mortgage loans for government insurance and refinancing. According to the DOJ, JPMorgan knowingly created and guaranteed non-compliant mortgage loans submitted for insurance coverage by the Department of Housing and Urban Development’sFederal Housing Administration (FHA), and the Department of Veterans Affairs (VA), which cost the government millions of dollars when the loans defaulted.

According to the lawsuit, beginning in 2002, JPMorgan falsely claimed that loans it had created and guaranteed were qualified for FHA and VA insurance and coverage. As a consequence of JPMorgan’s falsifications, both the FHA and the VA incurred huge monetary losses when the unqualified loans failed, due to the fact that the FHA and VA had to cover the associated losses of the loans.

The FHA’s program allows lower income borrowers to purchase homes by insuring qualified loans made by participating lenders, such as JPMorgan, against losses if the loans later default. However, a participating lender may only submit creditworthy loans to the FHA if they meet certain requirements and they must maintain a quality control program that can prevent and correct any deficiencies in the lender’s financing practices. The VA’s program is similar in this regard—it provides similar assistance to veterans, service members and spouses.

JPMorgan allegedly approved thousands of loans for government insurance or refinancing that did not meet the requirements of the FHA and VA, and also failed to report hundreds of loans it identified as having been affected by fraud or other defects. The government also alleged that the bank regularly submitted loan data that lacked reliability, due to the fact that they were not based on actual documents or other information the bank should have possessed when its employees submitted the data to the government.

As part of the settlement, JPMorgan admitted that it approved thousands of FHA loans and hundreds of VA loans that were not supposed to be eligible for FHA or VA insurance because they did not meet the applicable agency financing requirements, and that it had been doing so for over a decade. The bank further admitted that it failed to inform the FHA and the VA when its own internal reviews discovered more than 500 unreliable loans that never should have been submitted for FHA and VA insurance.

This settlement resolves allegations in a complaint filed by a private whistleblower.

Article by:

Whistleblower Practice Group

Of:

Tycko & Zavareei LLP

Supreme Court Affirms Contractually Reduced Limitations Periods for Employee Retirement Income Security Act (ERISA) Benefit Claims Date

A contractual limitations period in an ERISA disability benefits plan that required participants to bring suit within three years after “proof of loss is due” is enforceable, theU.S. Supreme Court has ruled unanimously. Heimeshoff v. Hartford Life & Accident Ins. Co. et al., 134 S.Ct. 604, 187 L. Ed. 2d 529 (2013).

Whether and under what circumstances an otherwise applicable statute of limitations can be contractually shortened where a claim for benefits is made under a plan subject to the Employee Retirement Income Security Act of 1974 has divided the courts of appeals for years. A participant in an employee benefit plan covered by ERISA may bring a civil action under §502(a)(1)(B) to recover benefits. Courts have generally required participants to exhaust the plan’s administrative remedies before filing these suits. ERISA, however, does not specify a statute of limitations for filing such a suit.

Heimeshoff is significant for three reasons. First, implicit in the Court’s decision is the recognition that “reasonable” contractual limitations periods are generally enforceable for ERISA claims. According to the Court, “in the absence of a controlling statute to the contrary, a provision in a contract may validly limit, between the parties, the time for bringing an action on such contract to a period less than that prescribed in the general statute of limitations, provided that the shorter period itself shall be a reasonable period” (quoting Order of United Commercial Travelers of America v. Wolfe, 331 U.S. 586, 608 (1947)).

Second, the decision also appears to assume, if not specifically hold, that contractual limitations periods for insured ERISA plans (at least where the limitations period is in the insurance policy) are subject to state laws that expressly prohibit contractual limitations periods shorter than a defined period (as opposed to state laws that merely set a default minimum statute of limitations that applies only in the absence of a contractual limitations period).

Finally, the decision overturns the law in certain circuits holding a contractual limitations period cannot begin to run until available administrative remedies have been exhausted. Heimeshoff should not have any application to claims of breach of fiduciary duty under ERISA; it is limited to ERISA benefits claim matters. It is certainly possible that the limitations Heimeshoff applies will have the effect of increasing ERISA fiduciary claims actions, although the federal courts are wary of benefits claim cases denominated as ERISA fiduciary breach matters.

The Court, referring to state insurance statutes, pointed out that “the vast majority of States require certain insurance policies to include 3-year limitations periods that run from the date proof of loss is due.” On the theory that federal law determines when an ERISA cause of action accrues, some circuits previously held the time for bringing the action does not begin to run until the administrative review process has been completed. In Heimeshoff, the Supreme Court held that such a hard and fast rule is inappropriate. Absent unreasonable limitations barring a participant’s ability to assert a claim, it said, the terms of the written plan are paramount and should be enforced. The new rule is more fact-specific. The contractual limitations period, including its commencement date as specified in the policy, should be enforced unless the claimant is left with an unreasonably short period to file suit after the administrative review process ends. The Court recognized that starting the limitations period at the point “proof of loss is due,” which necessarily is before the completion of the administrative review process, “will, in practice, shorten the contractual limitations period.” But the Court nevertheless held that such a requirement is enforceable, provided the claimant is left with a “reasonable” period of time to file suit.

The Court did not indicate what remaining period of time might be unreasonable. Because the plaintiff in Heimeshoff had about one year left to file a complaint following the completion of the review of her claim, 12 months presumably is not “too short” in the run of cases. Relying upon Heimeshoff, a federal District Court in New Jersey dismissed an ERISA benefits claim as untimely, finding a nine-month residual period for filing suit after exhaustion of administrative remedies provided the plaintiff with “ample opportunity to seek judicial review.” Barriero v. NJ BAC Health Fund, 2013 U.S. Dist. LEXIS 181277 at *12-*13 (D.N.J. Dec. 27, 2013).

In Heimeshoff, the Supreme Court recognized that the district courts retain the discretion to use appropriate traditional doctrines to free claimants from a contractual limitations provision “in the rare cases where internal review prevents participants from bringing §502(a)(1)(B) actions within the contractual period.” The Court observed, “[i]f the administrator’s conduct causes a participant to miss the deadline for judicial review, waiver or estoppel may prevent the administrator from invoking the limitations provision as a defense.” The Court also suggested that the doctrine of “equitable tolling” may apply “[t]o the extent the participant has diligently pursued both internal review and judicial review but was prevented from filing suit by extraordinary circumstances.” (Emphasis added.) These cases often include allegations of fraud and other extraordinary facts and are likely to define the limits of Heimeshoff.

Article by:

Ashley B. Abel

David R. Johanson

Robert M. Wood

Of:

Jackson Lewis P.C.

One Day Left to Share Your Comments about the Closing Process with the Consumer Financial Protection Bureau (CFPB)!

On January 3, the Consumer Financial Protection Bureau (“CFPB”) issued a notice and request for information in the Federal Register regarding the real estate closing process. Specifically, the CFPB is interested in knowing the consumer “pain points” associated with mortgage closing and how those pain points might be addressed by market innovations and technology.

The bureau wants input from consumers, mortgage lenders, housing attorneys, settlement closing agents, real estate agents, fair lending and consumer advocates – basically anyone and everyone with closing experience. This is your chance to share your perspective, whether good or bad, and help the closing process to be a smoother and more consumer friendly one for your future purchase, sale or refinance. The information collected during the comment period will be used to help the CFPB come up with future improvement initiatives. This is part of the larger “Know Before You Owe” project, which is intended to help consumers understand and navigate the home-buying process.

The CFPB has made it easy to share information by listing seventeen specific questions they would like responses to, including:

1. What are common problems or issues consumers face at closing? What parts of the closing process do consumers find confusing or overwhelming?

2. Are there specific parts of the closing process that borrowers find particularly helpful?

3. What do consumers remember about closing as related to the overall mortgage/home-buying process? What do consumers remember about closing?

4. How long does the closing process usually take? Do borrowers feel that the time at the closing table was an appropriate amount of time? Is it too long? Too short? Just right?

5. How empowered do consumers seem to feel at closing? Did they come to closing with questions? Did they review the forms beforehand? Did they know that they can request their documents in advance? Did they negotiate?

6. What, if anything, have you found helps consumers understand the terms of the loan?

7. What are some common errors you have seen at closing? How are these errors detected, if at all? Tell us about errors that were detected after closing.

8. What changes, diverging from what was originally presented at closing, often surprise consumers at closing? How do consumers react to changes at closing?

9. How, if at all, do consumers typically seek advice during closing? In person? By phone? Online?

10. Where and to whom do consumers turn for advice during closing? Whom do they typically trust?

11. What documents do borrowers usually remember seeing? What documents they remember signing?

12. What documents do consumers find particularly confusing?

13. What resources do borrowers use to define unfamiliar terms of the loan?

14. What, if anything, would you change about the closing process to make it a better experience for consumers?

15. What questions should consumers ask at closing? What are the most important pieces of information/documents for them to review?

16. What is the single most important question a consumer should ask at closing?

17. What is the single most important thing a consumer should do before coming to the closing table?

You can submit answers to these questions, along with your own additional comments, online by visiting this webpage: http://www.regulations.gov. But time is of the essence! The comment period closes tomorrow, February 7^th. Hurry and let your opinions be known!

Article by:

Brittany C. MacGregor

Of:

McBrayer, McGinnis, Leslie and Kirkland, PLLC

Category: Financial Services Law

Curbing Greenhouse Gas (GHG) Emissions – Good for the Environment, Bad for Investors?

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