Financial Services Law Archives - Page 3 of 41

Death, Taxes, and Crypto Reporting – The Three Things You Cannot Escape

The IRS released a draft of Form 1099-DA “Digital Asset Proceeds from Broker Transactions” in April which will require anyone defined as a “broker” to report certain information related to the sale of digital assets. The new reporting requirements will be effective for transactions occurring in 2025 and beyond. The release of Form 1099-DA follows a change in the tax law.

In 2021, Congress amended code section 6045 to define “broker” to include any “person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” This is an expansion of the definition of a “broker.” The language ‘any service effectuating transfers of digital assets’ is oftentimes construed by many in the tax practitioner community as a catch-all term, in which the government could use to determine many people involved in digital asset platforms aa “brokers.”

The IRS proposed new regulations in August 2023 to further define and clarify the new reporting requirements. Under the proposed regulations, Form 1099-DA reporting would be required even for noncustodial transactions including facilitative services if the provider is in a “position to know” the identity of the seller and the nature of the transaction giving rise to gross proceeds. With apparently no discernible limits, facilitative services include “services that directly or indirectly effectuate a sale of digital assets.” Position to know means “the ability” to “request” a user’s identifying information and to determine whether a transaction gives rise to gross proceeds. Under these proposed regulations and the expanded definition of “broker,” a significant number of transactions that previously did not require 1099 reporting will now require reporting. There has been pushback against these proposed regulations, but the IRS appears determined to move forward with these additional reporting requirements.

Anti-Money Laundering and Sanctions Whistleblower Reward Program is a Force-Multiplier to Detect and Combat Terrorist Financing

Anti-Money Laundering and Sanctions Whistleblower Program

In a May 6, 2024 speech at the SIFMA AML Conference, the Director of the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) Andrea Gacki discussed the success of the Anti-Money Laundering Act (AMLA) in generating disclosures about money laundering and sanctions evasion:

[The whistleblower] program holds tremendous potential as an enforcement force-multiplier. Whistleblowers have submitted information relating to some of the most pressing policy objectives of the United States, from Iran- and Russia-related sanctions evasion to drug-trafficking to cyber-crimes and corruption. While efforts are underway to develop an online tip intake portal and other aspects of this important program, I want to note that even while these efforts are underway, the program is actively receiving, reviewing, and sharing tips with our enforcement partners.

We have received over 270 unique tips since the program’s inception, and many of the tips received have been highly relevant to many of Treasury’s top priorities.

The AMLA incentivizes whistleblowers to report money laundering and sanctions evasion by requiring the Department of the Treasury to pay an award where a whistleblower’s voluntary disclosure of original information leads to a successful enforcement action imposing monetary sanctions above $1,000,000. The minimum whistleblower award is ten percent of collected monetary sanctions and the maximum award is thirty percent. Awards are paid from penalties collected in successful enforcement actions stemming from whistleblower disclosures.

To determine the amount of an AMLA whistleblower award, Treasury will consider:

the significance of the information provided by the whistleblower to the success of the covered money laundering judicial or administrative action;
the degree of assistance provided by the whistleblower and any legal representative;
the programmatic interest of Treasury in deterring the particular violations that the whistleblower disclosed; and
additional relevant factors that Treasury will promulgate, which will likely echo the factors that the SEC employs to determine the amount of an SEC whistleblower award.

FinCEN Issues Advisory About Terrorist Financing

Among the violations that whistleblowers can help the government detect and combat are sanctions evasion and money laundering related to Islamic Republic of Iran-backed terrorist organizations. On May 8, 2024, FinCEN issued an Advisory to assist financial institutions in detecting potentially illicit transactions related to Islamic Republic of Iran-backed terrorist organizations. FinCEN Advisory to Financial Institutions to Counter the Financing of Iran-Backed Terrorist Organizations, FIN-2024-A001 (May 8, 2024).

The Advisory identifies the means by which certain terrorist organizations receive support from Iran and the techniques they use to illicitly access or circumvent the international financial system to raise, move, and spend funds. According to the Advisory, the sale of commodities, particularly oil, is the primary source of revenue for Iran to fund its terrorist proxies. Iran has “established large-scale global oil smuggling and money laundering networks to enable access to foreign currency and the international financial system through the illicit sale of crude oil and petroleum products in global markets.” FIN-2024-A001, at 3. In 2021, the National Iranian Oil Company sold approximately $40 billion worth of petroleum products and in 2023, Iran’s exports to the People’s Republic of China reached approximately 1.3 million barrels per day. Some of the proceeds of the sale of Iranian oil finances the activities of the IRGC-Qods Force and other terrorist groups.

Financial Institutions Can Serve as Intermediates for Terrorist Financing Transactions

Financial institutions located outside Iran become intermediaries for the IRGC-QF’s terrorist financing transactions. In particular, “third-country front companies—often incorporated as ‘trading companies’ or ‘general trading companies’—and exchange houses act as a global ‘shadow banking’ network that processes illicit commercial transactions and channels money to terrorist organizations on Iran’s behalf.” Those exchange houses and front companies rely on banks with correspondent accounts with U.S. financial institutions, especially to process dollar-denominated transactions. FIN-2024-A001, at 5.

The Advisory lists red flags of illicit or suspicious activity that financial institutions should consider in determining if a behavior or transaction is indicative of terrorist finance or is otherwise suspicious and therefore may warrant the filing of a Suspicious Activity Report:

A customer or a customer’s counterparty conducts transactions with Office of Foreign Assets Control (OFAC)-designated entities and individuals, or transactions that contain a nexus to identifiers listed for OFAC-designated entities and individuals, to include email addresses, physical addresses, phone numbers, passport numbers, or CVC addresses.
Information included in a transaction between customers or in a note accompanying a peer-to-peer transfer include key terms known to be associated with terrorism or terrorist organizations.
A customer conducts transactions with a money services business (MSB) or other financial institution, including a VASP, that operates in jurisdictions known for, or at high risk for, terrorist activity and is reasonably believed to have lax customer identification and verification processes, opaque ownership, or otherwise fails to comply with AML/CFT best practices.
A customer conducts transactions that originate with, are directed to, or otherwise involve entities that are front companies, general “trading companies” with unclear business purposes, or other companies whose beneficial ownership information indicates that they may have a nexus with Iran or other Iran-supported terrorist groups. Indicators of possible front companies include opaque ownership structures, individuals and/or entities with obscure names that direct the company, or business addresses that are residential or co-located with other companies.
A customer that is or purports to be a charitable organization or NPO84 solicits donations but does not appear to provide any charitable services or openly supports terrorist activity or operations. In some cases, these organizations may post on social media platforms or encrypted messaging apps to solicit donations, including in CVC.
A customer receives numerous small CVC payments from many wallets, then transfers the funds to another wallet, particularly if the customer logs in using an Internet Protocol (IP) based in a jurisdiction known for, or at high risk for, terrorist activity. In such cases, financial institutions may also be able to provide associated technical details such as IP addresses with time stamps and device identifiers that can provide helpful information to authorities.
A customer makes money transfers to a jurisdiction known for, or at high risk for, terrorist activity that are inconsistent with their stated occupation or business purpose with vague stated purposes such as “travel expenses,” “charity,” “aid,” or “gifts.
A customer account receives large payouts from social media fundraisers or crowdfunding platforms and is then accessed from an IP address in a jurisdiction known for, or at high risk for, terrorist activity, particularly if the social media accounts that contribute to the fundraisers contain content supportive of terrorist campaigns.
A customer company is incorporated in the United States or a third-country jurisdiction, but its activities occur solely in jurisdictions known for, or at high risk for, terrorist activity and show no relationship to the company’s stated business purpose.

FIN-2024-A001, at 12-13.

CFTC Releases Artificial Intelligence Report

On 2 May 2024, the Commodity Futures Trading Commission’s (CFTC) Technology Advisory Committee (Committee) released a report entitled Responsible AI in Financial Markets: Opportunities, Risks & Recommendations. The report discusses the impact and future implications of artificial intelligence (AI) on financial markets and further illustrates the CFTC’s desire to oversee the AI space.

In the accompanying press release, Commissioner Goldsmith Romero highlighted the significance of the Committee’s recommendations, acknowledging decades of AI use in financial markets and proposing that new challenges will arise with the development of generative AI. Importantly, the report proposes that the CFTC develop a sector-specific AI Risk Management Framework addressing AI-associated risks.

The Committee opined that, without proper industry engagement and regulatory guardrails, the use of AI could “erode public trust in financial markets.” The report outlines potential risks associated with AI in financial markets such as the lack of transparency in AI decision processes, data handling errors, and the potential reinforcement of existing biases.

The report recommends that the CFTC host public roundtable discussions to foster a deeper understanding of AI’s role in financial markets and develop an AI Risk Management Framework for CTFC-registered entities aligned with the National Institute of Standards and Technology’s AI Risk Management Framework. This approach aims to enhance the transparency and reliability of AI systems in financial settings.

The report also calls for continued collaboration across federal agencies and stresses the importance of developing internal AI expertise within the CFTC. It advocates for responsible and transparent AI usage that adheres to ethical standards to ensure the stability and integrity of financial markets.

Business Taxation of Hedging Transactions Part IV: Tax Timing

What are the tax accounting rules for hedges?

Whether or not a qualified tax hedge is properly identified, it must be tax accounted for under a method that clearly reflects income.[1] The timing of gains and losses on hedges must match the timing of income and loss reporting on the hedged items. Aggregate tax hedgers must provide in their Aggregate Programs robust descriptions of the tax accounting methods used for each type of hedge that is part of its Aggregate Program. In addition, the Aggregate Program’s documentation must contain enough detail to sufficiently demonstrate how the clear reflection of income requirement is met.

Which transactions must be tax accounted in a way that clearly reflects income?

As a general matter, a taxpayer must compute all of its taxable income in a way that clearly reflects income. This requirement also applies to qualified tax hedges. Under Treas. Reg. § 1.446-4, a taxpayer must clearly reflect income, regardless of whether the taxpayer properly identified the hedging transaction.[2] A taxpayer cannot avoid the requirement to clearly reflect income by simply failing to identify as a hedge.

Can more than one method of tax accounting clearly reflect income?

Yes. As long as a taxpayer’s hedge accounting method meets the matching requirement to clearly reflect income, the taxpayer has flexibility to adopt an appropriate tax accounting method[3] provided it meets Treas. Reg. § 1.446-4(c).

Do generally accepted accounting principles (GAAP) clearly reflect income for purposes of tax hedge accounting?

No. Although GAAP might clearly reflect taxable income, it might not reasonably match taxable gain and loss on the hedge with that of the hedged item. Regardless of GAAP, a taxpayer must follow the clear reflection of income requirements set out in Treas. Reg. § 1.446-4.

Must all hedges be tax accounted for on the same method?

No. A taxpayer can adopt different methods of tax accounting for different types of hedges if they clearly reflect income and meet two additional conditions.[4] First, once an accounting method is adopted, it must be consistently applied; and second, an accounting method can only be changed with IRS consent.[5]

When is a tax accounting method assumed to have been adopted for hedges?

A taxpayer has adopted a tax accounting method when it has accounted for a “material item” in the same way on two or more consecutively filed tax returns. In this situation, the item “represents consistent treatment of that item” for purposes of satisfying Treas. Reg. § 1.446-1(e)(2)(ii)(a).[6] If a hedge is correctly accounted for in the first year, however, a taxpayer is treated as having adopted an accounting method after the first year.[7] Once a method is adopted, it must be consistently applied and can only be changed with IRS consent.[8]

What happens if the IRS determines that a taxpayer’s method of tax accounting does not clearly reflect income?

If a taxpayer’s accounting method does not clearly reflect income, the IRS can recompute taxable income in a manner that clearly reflects income. Unless the taxpayer can successfully contest this treatment at audit, on appeal, or in subsequent litigation, it must use the IRS’s method to tax account for its hedging gain or loss. To change the method of tax accounting the taxpayer uses for its hedges, it must first obtain IRS consent.[9]

Can a taxpayer change from an impermissible method of tax accounting to a permissible method without first obtaining IRS consent?

No. The taxpayer must obtain consent from the IRS consent in advance of making any tax accounting changes.[10]

What tax timing rules apply to hedges of aggregate risks?

A taxpayer that hedges its risks on an aggregate basis must adopt a tax accounting method that clearly reflects income.[11] As a result, the timing of income, deduction, gain, or loss with respect to hedges must reasonably match that of the items being hedged.[12]

What are the tax timing requirements for hedges of debt instruments?

Hedges of debt instruments, whether held or to be held by the taxpayer, are tax accounted by reference to the period or periods to which the hedge relates.[13] For a debt instrument that provides interest at a fixed or qualified floating rate, constant yield principles generally clearly reflect income.[14] This means that hedging gain or loss is taken into account as if the gain or loss “adjusted the yield of the instrument over the term to which it relates.”[15] For a hedge of an anticipated fixed rate borrowing, gain (loss) is taken into account as if it increased (reduced) the issue price for the debt instrument.[16] It is treated as an adjustment to the debt instrument’s issue price, and it is taken into account over the term of the hedge. If the hedge is entered into but the anticipated debt issuance or obligation is not consummated, the taxpayer will take into account gain or loss from the hedge on a “when realized” basis.[17]

What tax accounting methods are provided in the Treasury Regulations for hedges of inventory?

Four accounting methods are provided in the Treasury Regulations for inventory hedges—the general method, mark-and-spread, and two simplified methods:

(1) General method Gain or loss on hedges of inventory purchases can be taken into account in the same time period as income or loss on the hedged item as if the gain or loss were an element of the cost of the inventory.[18] Gain or loss on hedges of inventory sales can be taken into account as if the gain or loss were an element of the sales proceeds.[19] For specifically identified hedges, this method is easy to comply with because it allows for hedging gain or loss to be taken into account as if it were an element of the cost incurred in (or sales proceeds from) that particular transaction. An aggregate hedger, on the other hand, might not be able to take hedging gains or losses into account directly as part of the cost incurred in (or sales proceeds with respect to) an inventory transaction (an aggregate hedger might not be able to match the hedge with a particular inventory purchase or sale).[20]

(2) Mark-and-spread method To match an inventory hedge to the timing of aggregate hedged items, a taxpayer may account for the hedge under the mark-and-spread method. Mark-and-spread is permissible for an aggregate inventory hedger. With mark-and-spread, a taxpayer periodically marks the hedge to market no less frequently than quarterly, taking the resulting gain or loss into account over the period in which the hedge is intended to reduce the taxpayer’s risk exposure to the hedged item.[21] Gain or loss from marking the hedge to market is then spread over the period that such gain or loss would have been taken into account as if it had been an increase or decrease to inventory cost or gross sales proceeds in that period.

(3) Simplified inventory method Inventory hedgers that do not use the last-in-first-out (LIFO) method of accounting for inventory take into account realized gains or losses on hedges of inventory purchases and sales when they would be taken into account as if the gains or losses were elements of inventory cost during the period realized.[22]

(4) Simplified mark-to-market method Marking hedges to market to take gain or loss into account immediately might clearly reflect income even if the hedged inventory is not on mark-to-market. Mark-to-market hedge accounting might only be appropriate if inventory is not accounted for under the LIFO method or the lower-of-cost-or-market method, and only if the inventory items are held for a short period of time.[23]

[1] Treas. Reg. § 1.446-4.

[2] Rev. Rul. 2003-127.

[3] Treas. Reg. § 1.446-4(c).

[4] Rev. Rul. 2003-127.

[5] Rev. Rul. 2003-127.

[6] Rev. Rul. 2003-127 citing Rev. Rul. 90-38, 1990-1 C.B. 5-7.

[7] Rev. Rul. 2003-127.

[8] Rev. Rul. 2003-127.

[9] Treas. Reg. § 1.446-1(b)(1).

[10] See Rev. Proc. 97-27, 1997-1 C.B. 680 for the procedure to obtain consent.

[11] Treas. Reg. § 1.446-4(b).

[12] Treas. Reg. § 1.446-4(e)(1).

[13] Treas. Reg. § 1.446-4(e)(4).

[14] Id.

[15] Id.

[16] Id.

[17] Treas. Reg. § 1.446-4(e)(8)(i).

[18] Treas. Reg. § 1.446-4(e)(3)(i).

[19] Id.

[20] Treas. Reg. § 1.446-4(e)(1)(i).

[21] Treas. Reg. § 1.446-4(e)(1)(ii).

[22] Treas. Reg. § 1.446-4(e)(3)(ii)(A).

[23] Treas. Reg. § 1.446-4(e)(3)(ii)(B).

Read Part 1

Read Part 2

Read Part 3

States Sue the Biden Administration to Stop Loan Relief Plan

On April 9, 2024, seven states filed suit against the Biden administration in an attempt to block its new “SAVE” plan, an income-driven repayment plan that leads to eventual loan forgiveness. The case is pending in the U.S. District Court for the Eastern District of Missouri.

Plaintiff states claim that the plan is unlawful because it evades limits Congress imposed for income-based repayment plans and sets arbitrarily high thresholds that would effectively create a grant program for student borrowers. Plaintiffs allege that the US Supreme Court struck down a similar plan last year proposed by the Biden administration which would have cost taxpayers $430 billion. See Biden v. Nebraska, 143 S. Ct. 2355, 2362 (2023). The states allege that the plan violates the Higher Education Act of 1965 and subsequent amendments, which allows student-loan cancelation to occur only after a borrower pays 15% of their disposable income (which is defined as 150% above the poverty line) after 25 years.

The states further allege that the disposable income threshold would increase from 150% to 225% above the poverty line and that the plan would only require borrowers to pay 5% of their income for 10 years before loans are cancelled, “gut[ting] the statutory purpose of providing loans.”

Plaintiffs seek a declaratory judgment that the relief plan is unlawful and injunctive relief.

Putting It Into Practice: State attorneys general continue to challenge Biden regulatory actions through litigation (previously discussed here and here). Given the success they have achieved thus far, it will be interesting to see how this litigation develops. We will continue to monitor the case for developments.

Regulation Round Up March 2024

Welcome to the UK Regulation Round Up, a regular bulletin highlighting the latest developments in UK and EU financial services regulation.

Key developments in March 2024:

28 March

FCA Regulation Round-up: The FCA published its regulation round-up for March 2024.

26 March

AIFMD II: Directive (EU) 2024/927 amending the Alternative Investment Fund Managers Directive (2011/61/EU) (“AIFMD”) and the UCITS Directive (2009/65/EC) (“UCITS Directive”) relating to delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services, and loan origination by alternative investment funds has been published in the Official Journal of the European Union (“EU”). Please refer to our dedicated article on this topic here.

ELTIFs: The European Commission published a Communication to the Commission explaining that it intends to adopt, with amendments, ESMA’s proposed regulatory technical standards (“RTS”) under Regulations 9(3), 18(6), 19(5), 21(3) and 25(3) of the Regulation on European Long-Term Investment Funds ((EU) 2015/760) as amended by Regulation (EU) 2023/606.

Financial Promotions: The FCA published finalised guidance (FG24/1) on financial promotions on social media.

Cryptoassets: The Investment Association (“IA”) published its second report on UK fund tokenisation written by the technology working group to HM Treasury’s asset management taskforce.

25 March

Cryptoassets: ESMA published a final report (ESMA75-453128700-949) on draft technical standards specifying requirements for co-operation, exchange of information and notification between competent authorities, European Supervisory Authorities and third countries under the Regulation on markets in cryptoassets ((EU) 2023/1114) (“MiCA”).PRIIPS Regulation: the European Parliament’s Economic and Monetary Affairs Committee (“ECON”) published the report (PE753.665v02-00) it has adopted on the European Commission’s legislative proposal for a Regulation making amendments to the Regulation on key information documents (“KIDs”) for packaged retail and insurance-based investment products (1286/2014) (“PRIIPs Regulation”) (2023/0166(COD)).

Alternative Investment Funds: The FCA published the findings from a review it carried out in 2023 of alternative investment fund managers that use the host model to manage alternative investment funds.

AIFMD: Four Delegated and Implementing Regulations concerning cross-border marketing and management notifications relating to the UCITS Directive and the AIFMD have been published in the Official Journal of the European Union (here, here, here, and here).

22 March

Smarter Regulatory Framework: HM Treasury published a document on the next phase of the Smarter Regulatory Framework, its project to replace assimilated law relating to financial services.

21 March

Market Transparency: ESMA published a communication on the transition to the new rules under the Markets in Financial Instruments Regulation (600/2014) (“MiFIR”) to improve market access and transparency.

Retail Investment Package: ECON published a press release announcing it had adopted its draft report on the proposed Directive on retail investment protection (2023/0167(COD)). The proposed Directive will amend the MiFID II Directive (2014/65/EU) (“MiFID II”), the Insurance Distribution Directive ((EU) 2016/97), the Solvency II Directive (2009/138/EC), the UCITS Directive and the AIFMD.

19 March

ESG: The Council of the EU proposed a new compromise text for the Corporate Sustainability Due Diligence Directive, on which political agreement had previously been reached in December 2023.

FCA Business Plan: The FCA published its 2024/25 Business Plan, which sets out its business priorities for the year ahead.

15 March

Customer Duty: The FCA announced that it is to conduct a review into firms’ treatment of customers in vulnerable circumstances.

PRIIPS Regulation: The Joint Committee of the European Supervisory Authorities published an updated version of its Q&As (JC 2023 22) on the key information document requirements for packaged retail and insurance-based investment products (“PRIIPs”), as laid down in Commission Delegated Regulation (EU) 2017/653.

14 March

FCA Regulatory Approach: The FCA published a speech given by Nikhil Rathi, FCA Chief Executive, on its regulatory approach to deliver for consumers, markets and competitiveness and its shift to outcomes-focused regulation.

11 March

AML: HM Treasury launched a consultation on improving the effectiveness of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692). The consultation runs until 9 June 2024 and covers four distinct areas.

08 March

ESG: The IA published a report on insights and suggested actions for asset managers following the commencement of reporting obligations of climate-related disclosures under the ESG sourcebook.

ESG: The House of Commons Treasury Committee published a report on the findings from its “Sexism in the City” inquiry.

Cryptoassets: The EBA published a consultation paper (EBA/CP/2024/09) on draft guidelines on redemption plans under Articles 47 and 55 of the MiCA.

05 March

Financial Sanctions: The Foreign, Commonwealth and Development Office published Post-Legislative Scrutiny Memorandum: Sanctions and Anti-Money Laundering Act 2018.

AML: The FCA published a Dear CEO letter sent to Annex I financial institutions concerning common control failings identified in anti-money laundering (AML) frameworks.

ESG: The European Commission adopted a delegated regulation supplementing the Securitisation Regulation ((EU) 2017/2402) with regard to regulatory technical standards specifying, for simple, transparent and standardised non-ABCP traditional securitisation, and for simple, transparent and standardised on-balance-sheet securitisation, the content, methodologies and presentation of information related to the principal adverse impacts of the assets financed by the underlying exposures on sustainability factors.

CRD IV: The European Commission adopted a Commission Implementing Regulation that amends Commission Implementing Regulation (EU) 650/2014 containing ITS on supervisory disclosure under the CRD IV Directive (2013/36/EU) (“CRD IV”).

01 March

Alternative Investment Funds: The FCA published a portfolio letter providing an interim update on its supervisory strategy for the asset management and alternatives portfolios.

Corporate Transparency: The Economic Crime and Corporate Transparency Act 2023 (Commencement No. 2 and Transitional Provision) Regulations 2024 (SI 2024/269) have been made and published.

Financial Sanctions: The Treasury Committee launched an inquiry into the effectiveness of financial sanctions on Russia.

EMIR: The FCA published a consultation paperin which it, together with the Bank of England, seeks feedback on draft guidance in the form of Q&As on the revised reporting requirements under Article 9 of UK EMIR (648/2012).

FCA Handbook: The FCA published Handbook Notice 116 (dated February 2024), which sets out changes to the FCA Handbook made by the FCA board on 29 February 2024.

FCA Handbook: the FCA published its 43rd quarterly consultation paper (CP24/3), inviting comments on proposed changes to a number of FCA Handbook provisions.

Amar Unadkat, Sulaiman Malik & Michael Singh also contributed to this article.

Federal Court Confirms Case Challenging Bank of America’s Fraudulent COVID Relief Program Can Proceed

In a significant step forward for consumer protection, the Northern District of California confirmed that claims that Bank of America’s (“BofA”) misled its customers with false promises to provide overdraft fee relief during the COVID-19 pandemic could proceed.

The litigation centers on allegations that BofA widely advertised a COVID-19 bank fee relief program to garner publicity and goodwill but, instead of honoring its promises, the Bank abruptly and quietly ended any relief just a few months into the raging pandemic. Instead of announcing the shutdown, BofA kept promoting the program when none existed. Plaintiffs and other Americans across the country, who were suffering significant financial hardship as a result of the pandemic, trusted the bank’s marketing, and incurred significant fees that the bank refused to waive.

Plaintiffs Anthony Ramirez, Mynor Villatoro Aldana, and Janet Hobson have lodged claims on behalf of a putative nationwide class and state subclasses. The Court’s denial of BofA’s motion to dismiss supports plaintiffs’ allegations that the bank’s continued advertisement of the defunct relief program was deceptive and unlawful, depriving consumers across the country of millions of dollars in promised fee refunds.

This decision bolsters consumer protection rights and reinforces the judiciary’s role in ensuring that big banks like BofA make good on their promises to financially struggling customers.

The case is Ramirez, et al. v. Bank of America, N.A., Case No.: 4:22-cv-00859-YGR in the United States District Court for the Northern District of California.

A copy of the order is available here.

Unlocking India’s Space Potential: India Liberalizes Foreign Direct Investment Regime

The foreign investment policy was ambiguous about space activities beyond satellites, leading to different interpretations.
Some companies made investments basis the view that investments in the activities not listed under the FDI policy in this sector could be made up to 100% without prior government approval.
The proposed FDI Space Policy addresses these concerns and allows 100% foreign investments under the automatic and governmental approval route.
Formal notification is awaited which will make this policy effective as law.

Background

India currently is home to more than 200 space start-ups, and the space sector in India has attracted USD 124.7 million investment in the year 2023. The existing foreign investment policy of India (“FDI Policy”) requires foreign investors to obtain prior government approvals for investing in the space sector, particularly for the establishment of satellites.

Considering the growth of this sector, the Indian government has been periodically releasing policies / notifications, establishing organizations, etc. with the intent to allow more private participation in this sector. This has led to the establishment of an organization to promote the sector called the Indian National Space Promotion and Authorization Centre in 2020, as well as the introduction of the National Geospatial Policy, 2022 followed by the Indian Space Policy, 2023.

On February 21, 2024, the Union Cabinet approved amendments to the Foreign Direct Investment (“FDI”) policy and communicated it in a press release (“FDI Space Policy”) which proposes to liberalize investments in the space sector. However, a formal notification from the relevant authorities is still awaited for the amendments to become enforceable as law.

Existing FDI Policy

Existing foreign investment limits in the space sector are provided under the Schedule I of Foreign Exchange Management Act (Non-Debt Instrument) Rules, 2019 (“NDI Rules”). The current norms do not recognize “space” as a sector in itself. Instead, the space related activities are primarily captured under the head – “satellites – establishment and operation”. 100% foreign investment is allowed in this sector but the same is subject to approval from the government along with compliance of sectoral guidelines from Department of Space / Indian Space Research Organisation. In essence, all foreign investments in companies undertaking the activities of satellites-establishment and operations require government approval.

Reforms – New FDI Space Policy

The proposed FDI Space Policy allows 100% foreign investment in the space sector and has also created sub-categories, entry route and investment thresholds for various space related activities, which are as follows:

S.no.	Activity	FDI Thresholds
1.	Satellites-manufacturing & operation, satellite data products and ground segment & user segment	Up to 74% under automatic route and beyond 74% (up to 100%) under government route
2.	Launch vehicles and associated systems or subsystems, creation of spaceports for launching and receiving spacecraft	Up to 49% under automatic route and beyond 49% (up to 100%) under government route
3.	Manufacturing of components and systems/ sub-systems for satellites, ground segment and user segment	Up to 100% under automatic route

Analysis

(i) Status of existing investments

The existing FDI policy did not include space sector related activities (other than satellites-establishment and operation) such as launch vehicle business, ground segment, user segment, sub-component / sub-systems manufacturing, data products etc.

Various stakeholders argued that since the existing FDI policy did not specify certain activities such as launch vehicles, data sets, manufacturing of space systems / components etc. under the head of “satellites-establishment and operation”, foreign investments in such cases should be permitted up to 100% under the automatic route. This was based on the interpretation under the FDI policy that sectors / activities not specifically listed or prohibited, are permissible for foreign investment up to 100% under the automatic route, subject to sectoral conditionalities. Relying on the same, foreign investors made investments in space start-ups whose activities were not explicitly listed or regulated under the current FDI regime without obtaining government approval.

Some stakeholders interpreted “satellites” very broadly and took a more conservative view that all space related activities required government approval. Similarly, there were overlaps in activities / interpretation of the FDI policy under the sectors of defence, telecom and manufacturing.

The space liberalization norms under the proposed FDI Space Policy may have actually de-liberalized this sector for certain companies who received investments in allied space activities based on the understanding that sectors / activities not specifically listed or prohibited, should be eligible for foreign investments up to 100% under the automatic route. In such cases where the investment thresholds under the proposed FDI Space Policy may be breached, it would be interesting to see the government’s approach including granting approvals on a post-facto basis.

(ii) Sub- categorizations of activities within the Space Sector

While the government has acknowledged the sub-categories of activities within the space sector, it hasn’t clarified its rationale for providing different foreign investment thresholds for such activities. Relaxed thresholds for satellites (i.e., 74% under the automatic route (up to 100% under government route)) and its sub-components (i.e., 100% under the automatic route) encourage foreign participation in commercial aspects of space activities. In contrast, the 49% cap on foreign investments under the automatic route (up to 100% under government route) on launch vehicles acknowledge their dual-use potential for both civilian and defence purposes. This sensitivity, combined with the launching state’s heightened liability under Article II of the Convention on International Liability for Damage Caused by Space Objects (“Liability Convention”), may be viewed as necessitating greater government oversight.

However, industry players have also criticized the differential treatment provided to launch vehicles vis-a-vis satellites. They believe, in essence, both industries have similar sensitivity issues and hence should be treated at par from a foreign investment perspective. Hence, the difference in foreign investment thresholds require more explanation from the government.

(iii) Satellite Data Products

The term ‘satellite data products’ has not been defined under the proposed FDI Space Policy but investments in such activities would be permitted up to 74% under the automatic route (up to 100% under government route). This may lead to some conflict from a satellite imagery / data perspective read along with the liberalized Geospatial Guidelines, 2021. (“Geospatial Guidelines”).

The Geospatial Guidelines largely permit foreign investments up to 100% under the automatic route with limited foreign investment restrictions especially if the activity is for (i) creation / ownership / storage of geospatial data of a certain accuracy (as defined under the Geospatial Guidelines); (ii) terrestrial mobile survey, street view survey and surveying activities in Indian territorial waters. There seems to be no specific restriction on satellite generated data (other than the above) under the Geospatial Guidelines. Thus, the proposed FDI Space Policy may end up limiting foreign investments for activities relating to Satellite Data Products (which would include geo-spatial data) in which otherwise is viewed to be permissible up to 100% under the automatic route.

The government should also define what constitutes satellite data products and to the extent possible it would be recommended that foreign investment up to 100% should be permitted under the automatic route.

Additionally, the rationale for capping investments for satellite data products under the proposed FDI Space Policy seems unclear as these are data sets which could be regulated under the Geospatial Guidelines and the new Indian privacy law.

(iv) Where are sub-components for launch vehicles covered?

The proposed FDI Space Policy explicitly covers the manufacturing of components and systems / sub-systems for the satellite sector, ground & user segment, and permits 100% FDI under automatic route for the same. With the absence of similar language for components in launch vehicles, it could imply its inclusion under the broader launch vehicle category, hence falling under the 49% automatic route (up to 100% under government route). Alternatively, it could also be argued since it is not expressly specified, the same could be covered under the 100% automatic route category. However, considering the critical role of such components in the sector’s development, clarification from the government would provide much-needed comfort especially if the components are dual use (satellite and launch vehicle usage).

(v) What about ground segment and user segment for launch vehicles?

Following the pattern observed with the satellite and ground segment categories, the absence of specific mention for the “ground segment & user segment” in the launch vehicle section raises further questions. This omission could be an oversight or intentional, but the lack of clarity hinders transparency and predictability for potential investors. Further clarity on the inclusion from an industry perspective in the official amendment notification would ensure a comprehensive and consistent policy framework for the entire launch vehicle sector.

(vi) Were any sub-categories / activities missed?

As space activities may expand to include space mining, exploration, international space station construction, space tourism etc., India needs to proactively address these areas. Especially, if these should be interpreted for foreign investments up to 100% under the automatic route, as this would have a bearing on India’s ability to attract foreign investment while safeguarding national interests, technological competitiveness, and responsible stewardship of India in space.

Conclusion

While the proposed FDI Space Policy provides substantial liberalization, further clarity is awaited based on the formal notification which will make this effective as law. Ideally, the Government should provide definitions / explanations for the proposed categorization and sub-categorizations, and further clarity on the inclusions and omissions of activities which may be related to most space sector functions such as user and ground segments.

While the move towards liberalization significantly reduces government control over the space sector, its inherent interconnectedness with other regulated domains like telecommunications / geospatial cannot be ignored. Despite these challenges, the government’s willingness to open the space sector to foreign investments is a positive step offering greater confidence to foreign investors. Relaxation in the existing norms also signifies a supportive stance towards the industry, encouraging both domestic and international participation. Notably, India successfully attracted substantial foreign investment even during the era of full government control. Therefore, with the current reforms, a significant increase in foreign investments is expected.

Footnotes
[1] Rajya Sabha Questions, Department of Space, available at
https://sansad.in/getFile/annex/262/AU621.pdf?source=pqars
[2] Notification, Department of Space, available at https://pib.gov.in/PressReleasePage.aspx?PRID=1988864
[3] Notification, Ministry of Commerce & Industry, available at
https://pib.gov.in/PressReleaseIframePage.aspx?PRID=2007876
[4] Article II of the Liability Convention provides that a launching State shall be absolutely liable to pay compensation for damage caused by its space object on the surface of the earth or to aircraft flight.

FinCEN’s Proposed Streamlined SAR — The Real Estate Report

On February 16, 2024, the Financial Crimes Enforcement Network (“FinCEN”) issued a proposed rule addressing “Anti-Money Laundering Regulations for Residential Real Estate Transfers.” The proposed rule would, among other things, require certain persons involved in real estate closings to maintain records regarding non-financed residential real estate transfers and to submit “streamlined SARs” (suspicious activity reports), called Real Estate Reports, to FinCEN. “The persons subject to these reporting and recordkeeping requirements would be deemed reporting persons for purposes of the proposed rule and . . . [t]he information required to be reported in the Real Estate Report would identify the reporting person, the legal entity or trust to which the residential real property is transferred, the beneficial owners of that transferee entity or transferee trust, the person that transfers the residential real property, and the property being transferred, along with certain transactional information about the transfer.”

As FinCEN describes in the Federal Register notice including the proposed rule, the Bank Secrecy Act has generally required that real estate transaction information falls within the categories of transactions that are subject to appropriate money laundering controls since 1970. However, “for many years, FinCEN has exempted such persons from comprehensive regulation under the BSA and has issued a series of time-limited and geographically focused ‘geographic targeting orders’ (“GTOs”) to the real estate sector in lieu of more comprehensive regulation.” In particular, in 2016, FinCEN specifically extended a Residential Real Estate GTO to “require title insurance companies to file reports and maintain records concerning non-financed purchases of residential real estate above a certain price threshold by certain legal entities in select metropolitan areas.” As a result of that 2016 GTO, the information received has indicated to FinCEN that more comprehensive regulation is necessary, when it comes to non-financed real estate transactions. The goal of this permanent rule would be to “connect non-financed residential real property purchases by certain legal entities with the true beneficial owners making the purchases, thereby decreasing the ability of criminals to hide their identities while laundering money through real estate.”

Effectively, the proposed rule would require that at least one person involved in the real estate transaction would have to submit the Real Estate Report. And, that one person would not need to exercise any discretion regarding whether to file the Real Estate Report (unlike when traditional SARs are filed) and the proposed rule would not require confidentiality to be maintained by any of the persons involved in the filing of the Real Estate Report (again, unlike the confidentiality covered institutions must maintain regarding whether they have filed a SAR). While there is a hierarchy in terms of which person would, under the rule, be obligated to submit the Real Estate Report, the parties may also sign a “designation agreement” that would designate a particular person identified in the hierarchy as being the reporting person. Primarily, that person should be “the person listed as the closing or settlement agent on a settlement (or closing) statement.” If there is no agent on the closing statement, then the person that has prepared the closing statement should submit the Real Estate Report. If there is no closing statement, then the person that underwrites the title policy should submit the Real Estate Report. And, if there is no title policy underwritten, then reporting should be done by the “person that disburses the greatest amount of funds in connection with residential real property transfer”, meaning disbursement from an escrow account, a trust account or from a lawyer’s trust account, but excluding direct transfers between transferees. If there is no person disbursing on behalf of the transferees, then the person who prepares an evaluation of the title should submit the Real Estate Report. And, if all else fails, then the person that prepares the deed for the transaction should submit the Real Estate Report. This so-called “reporting cascade” is designed to “capture both sales of residential real estate and non-sale transfers of residential real estate . . . to ensure uniform coverage of non-financed transfers and to ensure that nominees do not purchase homes for criminal actors and then transfer the title on free of charge to a legal entity or trust.”

There are three elements that determine whether a transaction is a “reportable transaction”:

1) Is the kind of property involved in the transaction covered by the rule?

2) Is any transferee considered a “transferee entity” or “transferee trust”?

3) Is the transaction not covered by any of the following exceptions?

Transaction is financed;
Transaction is low-risk because it involves an easement, death, divorce or bankruptcy; or
Transaction involves transfer directly to an individual person.

In terms of the transactions that would be subject to being reported through the Real Estate Report, FinCEN cast an intentionally broad net. “The proposed rule is meant to broadly capture residential real property such as single-family houses, townhouses, condominiums, and cooperatives, as well as apartment buildings designed for one to four families. These properties would be captured even if there is also a commercial element to the property, such as a single-family residence that is located above a commercial enterprise.” Further, many kinds of land-only transactions would be reportable.

In terms of the types of transferees involved, as mentioned, any transfer directly to an individual, even if that transfer was not financed and was not deemed to be low-risk, would not result in a reportable transaction. But, if the transferee is any person other than an individual and that transfer is not financed or is not low-risk, then the transfer would most likely be deemed a reportable transaction. The definition of “transferee entity” generally means “any person other than a transferee trust or an individual.” The definition of “transferee trust” generally means “any legal arrangement created when a person . . . places assets under the control of a trustee for the benefit of one or more persons . . . or for a specified purpose, as well as any legal arrangement similar in structure or function[,] whether formed under the laws of the United States or a foreign jurisdiction.” There are specific exemptions to both of these transferee definitions, including statutory trusts and trusts that are securities reporting issuers, and for the most part, FinCEN points to protocols described in its rules under the Corporate Transparency Act (“CTA”), especially its Beneficial Ownership Reporting Rule, as being applicable to defining which entities and trusts may or may not be exempt from these transferee definitions. Having said that, the inclusion of most trusts involved in non-financed transactions is especially interesting.

In addition to the proposed rule provisions, FinCEN lists no less than 50 questions for comment from interested parties. These questions include everything from how likely “designation agreements” are likely to be used to concerns that may arise in transactions that are partially non-financed to whether concerns relating to non-financed real estate transactions extend to commercial real estate, as well. Comments are due to FinCEN on or before April 16, 2024.

Compliance Update — Insights and Highlights January 2024

On December 7, 2023, the Consumer Financial Protection Bureau (CFPB) ordered Atlantic Union Bank, an approximately $20 billion bank headquartered in Richmond, Virginia, to pay $6.2 million for “illegal overdraft fee harvesting” and “illegally enrolling thousands of customers in checking account overdraft programs.” The bank was ordered to pay $5 million in refunds and $1.2 million to a victims’ relief fund.

Regulation E provides that a bank may not charge a fee for an ATM or one-time debit card transaction unless it completes four steps. First, the bank must provide the customer with a notice describing the bank’s overdraft services in writing. Then, the bank must provide the customer with a “reasonable opportunity” for that customer to “affirmatively consent” to the payment of the ATM or one-time debit card transaction fee. Third, the customer must provide that “affirmative consent” or opt-in to the bank. And finally, the bank must provide the customer with written confirmation of their consent, including a statement of the right to revoke the consent at any time.

The CFPB alleged that Atlantic Union Bank failed to obtain proper consent when an account was opened in person at a branch. Bank employees orally provided customers with options for opting in to the payment of one-time debit card and ATM transaction fees pursuant to Regulation E. Bank employees asked customers to opt in orallyand then input the option into the bank’s account-opening computer system before printing the written consent form. The consent form was printed at the end of the account-opening process and was pre-populated with the customer’s oral opt-in choice.

In instances in which a customer was given options for opting in to the payment of one-time debit card and ATM transaction fees over the phone, bank employees did not have a script and allegedly provided misinformation and misleading statements about the benefits, costs, and other aspects of opting in to the payment of one-time debit card and ATM transaction fees pursuant to Regulation E.

The CFPB has taken the logical approach that a bank must provide the customer with a written disclosure of its overdraft practices prior to having them opt in. Additionally, without providing the customer with a prior written disclosure, a bank should not pre-populate its Regulation E opt-in form. Now is the time to review the consent order and your bank’s Regulation E opt-in processes and procedures.

Share this:

Like this:

Anti-Money Laundering and Sanctions Whistleblower Program

FinCEN Issues Advisory About Terrorist Financing

Financial Institutions Can Serve as Intermediates for Terrorist Financing Transactions

Share this:

Like this:

Share this:

Like this:

What are the tax accounting rules for hedges?

Which transactions must be tax accounted in a way that clearly reflects income?

Can more than one method of tax accounting clearly reflect income?

Do generally accepted accounting principles (GAAP) clearly reflect income for purposes of tax hedge accounting?

Must all hedges be tax accounted for on the same method?

When is a tax accounting method assumed to have been adopted for hedges?

What happens if the IRS determines that a taxpayer’s method of tax accounting does not clearly reflect income?

Can a taxpayer change from an impermissible method of tax accounting to a permissible method without first obtaining IRS consent?

What tax timing rules apply to hedges of aggregate risks?

What are the tax timing requirements for hedges of debt instruments?

What tax accounting methods are provided in the Treasury Regulations for hedges of inventory?

Share this:

Like this:

Share this:

Like this:

28 March

26 March

25 March

22 March

21 March

19 March

15 March

14 March

11 March

08 March

05 March

01 March

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this:

Share this:

Like this: