WazirX Parent Zettai Pte. Ltd. Court Proceedings Update: Moratorium Hearing Scheduled for 25 September 2024
On 3 September 2024, the Singapore High Court held a case conference concerning Zettai Pte. Ltd., the parent entity of WazirX, which had filed for a six-month moratorium due to financial difficulties following a USD 234 million cyberattack on WazirX.
- The moratorium seeks to halt all legal proceedings and enforcement actions against Zettai, giving the company crucial time to restructure its operations and address its financial issues without facing immediate legal challenges from creditors or other parties.
- The purpose of the moratorium is to provide Zettai with a period of protection that will enable it to reorganize its business affairs, engage in negotiations with creditors, and implement a plan to recover from the financial impact of the cyberattack.
- During the case conference, the Singapore High Court scheduled the moratorium hearing for 25 September 2024. At this hearing, Zettai will present arguments in favor of the moratorium, detailing how it plans to address its financial difficulties.
- If granted, the moratorium will temporarily freeze all legal claims and enforcement actions against Zettai, allowing the company to focus on its restructuring efforts without immediate pressure from creditors.
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United Texas Bank Issued Cease and Desist Order by Federal Reserve U.S.A.
On 4 September 2024, the United States Board of Governors of the Federal Reserve System, along with the Texas Department of Banking, issued a Cease and Desist Order against United Texas Bank, headquartered in Dallas, Texas. This enforcement action followed a thorough examination, which revealed non-compliance in key areas such as corporate governance, risk management, and adherence to federal anti-money laundering (AML) laws, as well as the US Bank Secrecy Act (BSA).
- An examination conducted on 22 May 2023 found that United Texas Bank had failed to comply with US AML and BSA regulations. The review revealed that the bank’s governance structure was inadequate, and the board of directors and senior management did not provide sufficient oversight. This lack of oversight allowed compliance issues to persist, especially in risk management and the maintenance of internal controls, which are essential for preventing financial crimes.
- United Texas Bank was found in violation of several federal and state regulations, including Section 31 of the US BSA, which requires financial institutions to maintain effective programs to detect and prevent money laundering. The bank also violated Federal Reserve Regulation/12 C.F.R. sections 208.62 and 208.63, which mandate strict compliance with AML regulations and proper risk management controls.
- The Cease and Desist Order required United Texas Bank to take key actions to address compliance issues. Within 90 days, the board must enhance oversight of AML/BSA and OFAC compliance, ensuring senior management actively addresses any concerns.
- In 60 days, the bank must submit a revised corporate governance plan to fix board deficiencies and outline senior executive succession. This will strengthen leadership and governance and implement a revised BSA/AML compliance program, with stronger internal controls, risk assessments, and regular testing, ensuring the compliance officer has sufficient authority and resources.
- The bank is also required to revise its customer due diligence procedures within the same timeframe. This includes improving the collection of customer information, assigning appropriate risk ratings, and conducting regular account reviews.
- United Texas Bank must establish a program for monitoring and reporting suspicious activities to ensure that all suspicious transactions are promptly reported to the relevant authorities. Enhanced compliance procedures for OFAC regulations are also required, with improved screening processes, staff training, and a risk-based approach to managing OFAC-related risks.
- United Texas Bank is required to submit quarterly progress reports to the Federal Reserve and the Texas Department of Banking, to ensure ongoing compliance.
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FCA’s New Listing Rules and Digital Securities Sandbox: Insights from Sarah Pritchard’s Speech
On 6 September 2024, Sarah Pritchard, Executive Director at the UK Financial Conduct Authority (FCA), discussed key reforms aimed at strengthening the UK’s role in global markets, focusing on changes to listing rules. The updated listing rules, effective from 29 July 2024, upgrade the listing process, reduce regulatory burdens, and maintain high standards of corporate governance, making it easier for companies to access UK capital markets and to empower investors by providing relevant information for informed decision-making, without enforcing a rigid regulatory approach.
- UK FCA is working to simplify public offer processes and reduce operational burdens for asset managers, allowing more flexibility in investment research payments.
- UK FCA also introduced the Digital Securities Sandbox for companies to test new technologies like tokenized securities in a controlled environment.
- The sandbox supports innovation by allowing companies to explore benefits like faster transactions, reduced costs, and increased transparency, while the UK FCA monitors regulatory implications.
- The UK FCA’s goal is to maintain the UK’s competitiveness in global financial markets, fostering innovation while ensuring market integrity and investor protection.
- Alongside this, the Private Intermittent Capital Exchange System (PISCES) enables private companies to raise funds without a full public listing, offering a flexible investment option while supporting growth.
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US Court Partially Grants Coinbase’s Motion in Legal Battle with US SEC
On 5 September 2024, U.S. District Judge Katherine Polk Failla issued a ruling in 23 Civ. 4738 (KPF) the legal case between the U.S. Securities and Exchange Commission (US SEC) and cryptocurrency exchange Coinbase.
- The court partially granted and partially denied Coinbase’s motion to compel the production of documents from the US SEC. This ruling is part of a broader lawsuit in which the US SEC alleges that Coinbase operated as an unregistered securities exchange, broker, and clearing agency, in violation of federal securities laws.
- Judge Failla allowed Coinbase access to some documents related to the classification of certain digital assets as securities, which is central to the US SEC’s complaint. However, Coinbase’s request to subpoena internal communications, including those involving US SEC Chair Gary Gensler, was denied.
- The court also ruled in favor of US SEC’s motion to permanently seal specific redacted documents, meaning these documents will only be accessible to the court and the involved parties, not the public.
- The court granted Coinbase access to documents related to token classification, which could help determine whether certain digital assets fall outside the scope of assets as securities. However the subpoena of Gary Gensler and internal US SEC communications, were denied.
- Coinbase gained access to some documents that could help its defense, it did not receive the broader internal communications it sought. The court also upheld the US SEC’s request to permanently seal certain information.
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U.S. District Court Issues Permanent Injunction and $7 Million Disgorgement Against Yakov Cohen in Binary Options Fraud Case
On 5 September 2024, the U.S. District Court for the Northern District of Illinois issued a Consent Order for Permanent Injunction and Other Equitable Relief against Yakov Cohen for his involvement in a fraudulent binary options trading scheme operated through Yukom Communications Ltd. and its affiliates.
- Cohen was permanently barred from participating in commodity trading and related activities and was ordered to disgorge $7 million in profits unlawfully obtained from the scheme, as part of a settlement with the U.S. Commodity Futures Trading Commission (US CFTC).
- The US CFTC enforcement action alleged that Cohen and his co-defendants defrauded investors of over $165 million by manipulating binary options trades through platforms such as BinaryBook, BigOption, and BinaryOnline.
- The fraudulent scheme ran from March 2014 to September 2017, during which the defendants solicited investments from individuals, including U.S. residents, under the guise of legitimate trading. In reality, the defendants controlled trade outcomes to ensure client losses, with 95% of investors losing money.
- Cohen personally profited by at least $7 million from the scheme. The defendants misrepresented the nature of the binary options, falsified the security of customer funds, and commingled client assets with their own.
- The court determined that Cohen and his co-defendants violated multiple provisions of the U.S. Commodity Exchange Act (US CEA) and US CFTC regulations, including engaging in illegal off-exchange commodity option transactions, and operating as an unregistered Futures Commission Merchant (FCM).
- The Consent Order put permanent injunction against Cohen from engaging in any future commodity-related activities and required him to pay $7 million in disgorgement. The court retains jurisdiction to enforce the terms of the Consent Order.
- Cohen agreed to the terms of the Consent Order, which imposed the financial penalty and required his cooperation in future investigations related to Yukom Communications.
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US PCAOB Publishes New QC 1000 Guidelines to Strengthen Audit Quality, Effective January 2025
On 9 September 2024, the U.S. Public Company Accounting Oversight Board (PCAOB), with approval from the U.S. Securities and Exchange Commission (US SEC), published the QC 1000 guidelines, aimed at improving audit quality standards for public accounting firms.
- The QC 1000 guidelines, effective 1 January 2025, implement a risk-based framework that covers governance, ethics, engagement performance, human resources, technology, and firm monitoring. This is expected to improve the transparency, reliability, and overall quality of audit reports, thereby reinforcing investor confidence.
- Firms are required to enhance leadership and governance structures, ensuring audit quality is prioritized and adequate resources are allocated. Clear accountability for those overseeing quality control is a critical part of this framework.
- Ethical guidelines emphasize maintaining independence from clients, preventing conflicts of interest, and ensuring compliance with confidentiality and objectivity standards. Firms must conduct regular independence assessments and provide continuous ethical training.
- Engagement performance requires strict adherence to audit standards, with regular reviews during key audit stages to identify risks and implement corrective actions. Additional oversight is necessary for high-risk or complex audits.
- Human resource requirements focus on hiring and developing professionals capable of maintaining high-quality audits, with performance evaluations and compensation linked to quality and ethical behavior.
- Firms must employ up-to-date technology to support audit execution and ensure security, with regular evaluations of the reliability of their technological infrastructure. Staff must be trained in the latest tools and emerging technologies.
- Ongoing monitoring of quality control systems is mandated, requiring firms to conduct regular internal reviews, annual evaluations, and report findings to the PCAOB. Firms with more than 100 issuers are required to establish an external quality control function for independent oversight.
- The QC 1000 guidelines include a risk assessment process where firms are expected to identify and address risks that may affect the quality of their audits, allowing for proactive detection and mitigation of potential problems.
- Continuous monitoring and remediation processes are also required, ensuring that any deficiencies in audit practices are quickly addressed and corrective measures are taken to prevent recurrence.
- An annual evaluation of a firm’s quality control system is mandatory, with results submitted to the PCAOB. Firms auditing over 100 issuers must implement an external quality control function to provide an independent review of their adherence to PCAOB standards.
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WazirX Moratorium Proceedings Update: Second Affidavit and Subsequent Findings
On 10 September 2024, the Singapore High Court reviewed a second affidavit submitted by Nischal Shetty, the authorized representative for Zettai Pte. Ltd., parent company of WazirX, regarding the ongoing moratorium application. The affidavit clarified details related to the company’s restructuring following a July 2024 cyberattack.
- The affidavit addressed key points, including Zettai’s restructuring process and its ongoing communication with creditors, with 431 creditors supporting the moratorium. Errors from the initial filing were corrected, including the number of users and total claims, providing a more accurate representation of Zettai’s liabilities.
- It also clarified that Zettai maintains control over cryptocurrency assets transferred from Binance, and that Zanmai India does not control or hold any of the cryptocurrency, addressing any confusion over asset management between the two entities.
- The affidavit confirmed that several non-disclosure agreements have been signed, and Zettai has shared a draft restructuring proposal with creditors. This proposal includes recovery options such as potential cash injections and revenue-sharing models.
- The affidavit ensured that Zettai has complied with all court-mandated procedural requirements, including publishing notices and maintaining transparent communication with creditors, reflecting the company’s commitment to a fair and transparent restructuring process.
- In response to the affidavit, the Singapore High Court revised its earlier directive, rescheduling the hearing for the moratorium application to 25 September 2024. The hearing, to be conducted via Zoom, will be overseen by Judicial Commissioner Kristy Tan. Deadlines for filing supplemental affidavits, objections, and written submissions were outlined to streamline the proceedings.
- The court’s correspondence to Zettai’s legal representatives at Rajah & Tann Singapore LLP included clear instructions for Zoom registration and guidelines, including restrictions on addressing the court or activating cameras unless approved. Watermarking technology will be used during the session, and unauthorized recording or dissemination of the proceedings will be prohibited, with civil or criminal penalties for violations.
- The court also confirmed that all previous directions from the 5 September 2024 correspondence remain in effect, except for the updated hearing schedule. Zettai’s legal team was further instructed to circulate an information note explaining Section 64 of Singapore’s Insolvency, Restructuring, and Dissolution Act to all potentially affected parties. This note is intended to help parties understand the proceedings, though it does not serve as legal advice.
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UK FCA Files First Charges Against Individual for Operating Illegal Crypto ATMs
On 10 September 2024, the UK Financial Conduct Authority (UK FCA) charged Olumide Osunkoya, a 45-year-old London resident, with operating multiple unregistered crypto ATMs. Between 29 December 2021 and 8 September 2023, these ATMs processed approximately £2.6 million in transactions without proper FCA registration. This marks the first criminal prosecution of its kind under the UK’s Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs).
- Under UK law, firms or individuals providing cryptoasset services, including crypto ATMs, must register with the FCA and comply with anti-money laundering (AML) and counter-terrorist financing (CTF) standards. Osunkoya allegedly violated these requirements, specifically Regulation 86 and Regulation 92 of the MLRs.
- Additional charges include violations of the UK Forgery and Counterfeiting Act 1981 for creating false documents to support his illegal operations, and the UK Proceeds of Crime Act 2002 for possession of criminal property resulting from the unregistered ATMs.
- Firms offering cryptoasset services must implement AML and CTF policies, conduct customer due diligence (CDD), maintain records for at least five years, and report suspicious activity. The UK FCA also provides pre-application meetings to guide firms through registration and regulatory compliance.
- The UK FCA’s investigation was conducted in collaboration with law enforcement agencies, including the South West Regional Organised Crime Unit, Kent Police, and Bedfordshire Police. In 2023, the UK FCA disrupted 26 illegal crypto ATMs and inspected 34 locations suspected of hosting unregistered machines.
- Osunkoya is scheduled to appear before Westminster Magistrates’ Court on 30 September 2024 for a hearing. The UK FCA has consistently warned the public about the risks of unregulated crypto investments, emphasizing that no legal crypto ATMs are currently operating in the UK.
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