Compliance November 27, 2023

Crypto Remains Massive Compliance Risk for Retirement Fiduciaries

Last week, Binance, a crypto exchange, was hit with a record-breaking Treasury settlement.

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Wagner Law Group, an ERISA law firm, has previously cautioned retirement plan fiduciaries on the risks of using cryptocurrency investments in their plans, in large part because of the industry’s frequent compliance issues.

On November 20, the Securities and Exchange Commission charged Kraken, a crypto exchange, for operating as an unregistered securities exchange. This prompted Wagner Law Group partner Kimberly Shaw Elliott to caution fiduciaries of the risks of crypto assets, given their compliance issues:

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“The SEC’s new enforcement activity should be a clear warning to not only unregistered crypto providers and the advisers who recommend crypto investments, but also to retirement plan fiduciaries who approve those investments,” she wrote. “Is it prudent to place faith in the seller or holder of crypto who does not go through the rigors of registration?”

The Department of the Treasury issued a record-breaking multi-billion dollar fine against Binance the next day, further compounding the fiduciary risks of crypto assets.

The fines totaled approximately $4.3 billion against Binance Holdings Ltd., a crypto exchange, among other penalties. The SEC had, in June, charged Binance with operating as an unregistered securities exchange, and those allegations have not yet been resolved.

Of the Binance fine, Marcia Wagner, the founder and managing partner of Wagner Law Group, says, “I do not believe that the amount of the fine, per se, will have an effect upon a plan fiduciary’s decision whether to include or possibly remove or reduce the level of crypto assets in some form on its investment platform, but the fact of the SEC action against Binance, as well as other recent events such as the fraudulent activities of FTX, would clearly be a factor a plan fiduciary would need to take into account as part of its due diligence in determining the prudence of such an investment.”

She added that, “since the Department of Labor guidance regarding cryptocurrency, in my experience, clients have not shown an interest in including crypto assets on their investment platform, if for no other reason than the litigation risk if a crypto asset fund on a plan’s investment platform went sideways. That litigation risk is now obviously heightened.”

According to the Department of Justice, Binance pleaded guilty to a wide range of money laundering, sanctions and unlicensed money transmitting as part of its settlement.

The fines break down into two parts: one for about $3.4 billion, issued by the U.S. Financial Crimes Enforcement Network for money-laundering violations, and another for $969 million, issued by the Office of Foreign Asset Control, for more than 1.5 million individual violations of U.S. sanctions policy.

According to the settlement reached with the OFAC, though Binance was fined $968 million, the maximum statutory penalty for its alleged sanctions-related offenses was actually $592 billion. OFAC found that Binance’s violations “were egregious and were not voluntarily self-disclosed.” These violations took place from August 2017 through October 2022.

Most of the trading volume, or about $600 million, involved transactions with Iranian persons. The rest of the volume included people in Syria, North Korea, Cuba and Russian-occupied territories of Ukraine, including Crimea, according to the OFAC.

The OFAC found that Binance encouraged U.S. users to use virtual private networks or to provide foreign passports, if they were multinationals, as a way to maintain the appearance of compliance with U.S. law. This practice, according to the OFAC, was endorsed and pushed by Binance’s then-chief compliance officer.

According to FinCEN’s order, the CCO wrote once to another employee at Binance, “We try to ask our US users to use VPN / or ask them to provide (if [they] are an entity) non-US documents / On the surface we cannot be seen to have US users but in reality, we should get them through other creative means.”

Binance consented to the appointment of an independent compliance monitor from the OFAC for five years. The Treasury Department also imposed a $150 million suspended fine against Binance that will be levied if Binance does not comply with the Treasury Department’s compliance program.

A Treasury Department release stated that “Binance was required to report suspicious transactions to FinCEN through suspicious activity reports (SARs). FinCEN’s investigation revealed that Binance’s former Chief Compliance Officer told personnel that the CEO’s policy was to not report such activity, and Binance never filed a single SAR with FinCEN.”

The statement continued, “Binance willfully failed to report well over 100,000 suspicious transactions that it processed as a result of its deficient controls, including transactions involving terrorist organizations, ransomware, child sexual exploitation material, frauds, and scams.”

The OFAC noted in its order that one employee of Binance noted in business communications that effectively blocking IPs for high-risk jurisdictions would be necessary to work with institutional and other large investors.

 

Deals & People November 27, 2023

UAW Members Ratify Big 3 Automakers Deal

The contracts with General Motors, Ford and Stellantis could prompt nonunion companies to establish more competitive benefits.

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Under the agreements the United Auto Workers Union members ratified with Detroit’s Big Three automakers last week, workers will gain significant retirement benefits, wage increases, the reinstatement of cost-of-living adjustments and the elimination of wage tiers.

Across the three companies, 64% of voting members voted in favor of the agreements, according to the union. According to the UAW’s ratification trackers, 70% of employees at Stellantis and 69.3% at Ford voted for the new contracts. However, GM’s vote was much closer, with just 54.7% of voting members approving. The trackers showed that 102,679 workers voted out of about 146,000 UAW members employed by the Big Three.

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The new contract will give union workers an immediate pay increase of 11%, and union members will get a total pay increase of 25% over the course of the 4 1/2-year deal. The raises and benefits cumulatively boost the top wage to more than $40 per hour, including an increase of 68% for starting wages to more than $28 an hour.

While the automakers did not agree to restore the workers’ defined benefit pension plan, which was shut down in 2007, current employees will see a 10% boost in their employer’s contribution to their 401(k)s, which will more than double many members’ annual 401(k) contributions over the life of the contract.

Current retirees will also receive annual bonuses for the first time in 15 years—a cumulative $1.25 billion boost in total benefits.

Marick Masters, a professor of management at Wayne State University’s school of business in Detroit, says via email that anecdotal evidence suggests that more senior workers at GM voiced opposition because they did not benefit as much relative to other workers, including temporary workers. However, he says the UAW membership has divisions across major caucuses and ideological perspectives.

“Contested elections over ratification speak to the democratic orientation of the union,” Masters says. “Rather than a sign of weakness, it represents new-found strength in the reformed UAW.”

Overall, Masters says the ratification votes revealed that a “sizable majority of the UAW members approve the basic terms of the pattern agreements.”

“This support for the union’s bargaining achievements positions the union to carry its message to nonunion workers in the auto industry that they can gain appreciably from joining the UAW,” Masters says. “The thesis behind that view is that if the UAW can win substantial gains in an industry that has become increasingly nonunion through the growth of so-called foreign transplants and the emergence of nonunion domestic electric vehicle producers, then imagine the strength it would have if the nonunion workers joined ranks.”

Masters adds that several nonunion companies, such as Toyota, Hyundai, Nissan and Subaru, have already announced significant wage increases and other steps to increase pay, including shortening the time-in-progression to the highest wage rate.

“These actions mirror the agreements ratified by the UAW workers with the Big Three,” Masters says. “Each of the nonunion companies keep an eye on the labor markets and understand what they have to pay workers to remain competitive and nonunion. I would expect these companies to be very proactive in addressing compensation, health and safety, and other human resource management issues, such as benefits and scheduling, to keep the union at bay.”

The new contracts run through April 30, 2028. UAW President Shawn Fain has said he plans to expand the union’s battle from the Detroit automakers to Tesla, Toyota and other nonunionized automakers in the U.S.

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