FinCEN issues “pig butchering” alert
The Financial Crimes Enforcement Network (FinCEN) issued an alert to highlight a prominent virtual currency investment scam known as “pig butchering, whereby victims invest in supposedly legitimate virtual currency investment opportunities before they are conned out of their money.
As well as covering the methodology of pig butchering and a case study, the alert includes a number of red flags firms should be looking out for to ensure that clients and customers do not become victims.
The red flags are as follows:
Behavioral red flags:
- A client with no virtual currency history attempts a large fiat-to-virtual currency exchange.
- A client expresses interest in high-return virtual currency investments from unsolicited online contacts.
- A client is instructed to exchange fiat currency for virtual currency at a kiosk by an unknown individual.
- A client appears distressed to access funds quickly for a virtual currency investment opportunity.
Financial red flags
- A client liquidates savings accounts and wires funds to Virtual Asset Service Providers (VASPs) or for virtual currency exchange.
- A client obtains a home equity loan or second mortgage to purchase virtual currency or wires funds to a VASP.
- A client receives a deposit of virtual currency, then makes significantly larger outgoing transfers.
- Inactive or low-activity accounts suddenly experience frequent and significant withdrawals for VASP transfers.
- A client sends multiple EFTs or wire transfers to VASPs for purposes like “taxes,” “fees,” or “penalties.”
- A client switches from small-value EFTs to high-value wire transfers to unfamiliar entities, indicative of a scam.
- Unusual access patterns to a client’s account, with logins from unique IP addresses, device IDs, or geographies.
- A client mentions using a virtual currency service with a poorly designed website, spelling errors, or dubious testimonials.
- A client visits a suspicious website resembling a legitimate VASP, with misspelled domains, lack of physical address, or chat/email-only contact.
- A client downloads a virtual currency application from a third-party website rather than an official app store.
- A client receives a large amount of virtual currency, converts it to one with lower transaction fees, and quickly sends it out of the exchange.
These red flags are not definitive indicators of fraud, but they can be a helpful tool to identify suspicious activity. Any of these red flags should certainly merit further investigation.
IRS announces focus shift to wealthy in major policy shift
Capitalizing on the significant funding provided by the Inflation Reduction Act (IRA), the US Internal Revenue Service (IRS) has announced a number of plans to enhance tax compliance, with a focus on high-income earners, partnerships, large corporations, and promoters who abuse tax laws. The press release notes the following key points
- Focus on high-income earners and partnerships: The IRS aims to increase audit rates for high-income earners, partnerships, and other high earners who have seen a decline in audit rates over the past decade.
- Technology and AI: The IRS plans to leverage improved technology and Artificial Intelligence (AI) to enhance its compliance efforts. AI will help detect tax cheating, identify emerging compliance threats, and improve case selection to avoid unnecessary audits.
- Fairness safeguards: Audit rates for individuals earning less than $400,000 a year will not increase, and fairness safeguards will be introduced for those claiming the Earned Income Tax Credit (EITC).
- High-wealth and partnership compliance: The IRS will prioritize high-income cases and expand its efforts to collect taxes from high-wealth individuals and partnerships.
- AI in partnership compliance: The IRS is using AI to identify compliance risks in large partnerships, with examinations planned for some of the largest and most complex partnership returns.
- Balance sheet discrepancies: The IRS will focus on high-risk large partnerships that have discrepancies in balance sheets, with discrepancies in the millions of dollars.
- Priority areas for compliance work: The IRS will focus on areas such as digital assets, FBAR violations, and issues related to labor brokers in its compliance efforts.
- Protecting taxpayers: The IRS will work to protect taxpayers from scams and schemes, particularly those targeting average taxpayers with more modest incomes.
- Equity in audits: Efforts will be made to improve equity in audits, especially concerning Earned Income Tax Credits.
- Emerging scams: The IRS will continue to warn taxpayers about emerging scams and schemes that fraudsters use to exploit recent tax law changes.
- Identity theft protection: The IRS will continue its efforts to protect taxpayers from identity theft, collaborating with various stakeholders to enhance security.
The announcement notes these plans will be an expansive effort with more details to be announced in the weeks and months ahead.
FCA writes to wholesale banks
The Financial Conduct Authority (FCA) has written to CEOs of wholesale banks to outline the regulator’s supervisory work program for the next two years.
The letter states that the work program will focus on three key areas:
- Risk management: The FCA is concerned that the external environment may affect the management of risks at wholesale banks, such as cuts in the control framework, prioritizing short-term commercial interests over regulatory obligations, and employees not following procedures and processes. To address these risks, the FCA will be ramping up its testing program to look at how banks are controlling these risks, including more in-person supervisory assessments. The FCA will also be sharing good practice and holding firms accountable for their own operational resilience.
- Maintaining high standards of control: The FCA is also concerned about the potential for conduct standards to be reduced when the external environment is challenging. To address this, the FCA will be looking for signs of similar behavior, such as banks using their lending relationship to exert pressure on corporate clients to secure roles on equity mandates. The FCA will also be assessing how banks manage conflicts of interest and ensuring that there is clarity of responsibilities between the first and second lines of defense.
- Operational resilience: The FCA expects wholesale banks to be operationally resilient to preserve the safety and soundness of markets. This includes understanding their dependence on third-party providers and taking steps to mitigate the potential impact on business continuity that the loss of service may have. The FCA will also be expecting prompt notification from firms where either they, or a third party they are relying on, have been subject to a cyber-attack.
In addition to the above, the letter covers a number of other areas:
- Organizational changes: It discusses the need for oversight of business activities booked in the UK and expects firms to promptly notify changes that are inconsistent with regulatory objectives.
- LIBOR transition: The transition away from LIBOR is commended, but firms are reminded to actively transition remaining contracts referencing USD LIBOR.
- Consumer duty and ESG: Implementation of the Consumer Duty and alignment with ESG goals are highlighted as important areas of focus.
- Artificial intelligence: The letter mentions the potential of artificial intelligence and machine learning in financial services and expresses the intention to engage with wholesale banks on these technologies.
- Diversity, equity, and inclusion: The importance of diversity, equity, and inclusion in firm cultures is emphasized, with plans to consult on proposals in 2023.
- Non-financial misconduct: Firms are expected to have effective systems to address non-financial misconduct, and allegations should be taken seriously. The FCA may assess the effectiveness of these controls.
- Responsibility: CEOs are reminded of their responsibility under the Senior Managers and Certification Regime to ensure compliance with rules and principles and to report breaches.
ASIC monthly update
The Australian Securities & Investments Commission (ASIC) has published its latest InFocus newseletter summarizing recent activity.
September’s issue reminds firms that the deadline to submit industry funding annual returns is 27th September and similarly that firms with a financial year end of 30th June are required to submit their financial reports by the end of September (disclosing entities or registered schemes) or October (all other firms).
The update also stresses ASIC’s focus on market misconduct, reminding firms that targeted enforcement against firms violating market integrity will continue: to the end of June ASIC had fined firms nearly AUS$110 million.
A selected summary of key developments for regulated financial institutions
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