ESMA Releases Final Draft RTS and Guidelines on Liquidity Management
ESMA Guidelines and Final Draft RTS on Liquidity Management Tools of UCITS and Open-Ended AIFs
Pursuant to the revised Directive 2011/61/EU (AIFMD) and Directive 2009/65/EC (UCITS Directive), the European Securities and Markets Authority (ESMA) was tasked with developing guidelines on the selection and calibration of liquidity management tools (LMTs) and developing regulatory technical standards (RTS) to determine the characteristics of LMTs available to managers of alternative investment funds (AIFs) (AIFMs) and of undertakings for collective investment in transferable securities (UCITS) (UCITS ManCos). On the back of this mandate, ESMA published a consultation paper (CP) on the draft guidelines and RTS.
The consultation period closed on 8 October 2024, with ESMA receiving 33 responses. Taking into account this stakeholder feedback, on 15 April 2025, ESMA published (i) its final report on the Guidelines on LMTs of UCITS and open-ended AIFs (the Guidelines) and (ii) its final report on the draft Regulatory Technical Standards on Liquidity Management Tools under the AIFMD and UCITS Directive.
Final Report on Guidelines on LMTs of UCITS and Open-Ended AIFs
On the back of feedback received during the consultation, ESMA made a number of changes to the Guidelines, deleting several sections that were previously included in the CP and amending other sections to provide more flexibility to AIFMs and UCITS ManCos. The Guidelines were also streamlined to avoid any overlaps with the RTS and the text contained in the AIFMD and UCITS Directive. Notable deletions from the Guidelines include:
The guideline on governance principles, which previously stated that fund managers should develop an LMT policy which should document the conditions for the selection, activation and calibration of LMTs, and an LMT plan.
ESMA noted that the majority of stakeholder feedback highlighted that the LMT policy should be kept as an internal guidance document, and on the basis that the AIFMD and UCITS Directive already contain provisions mandating the implementation of policies and procedures for the activation and deactivation of LMTs and operational and administrative arrangements, ESMA deleted the sections of the Guidelines dedicated to the governance principles.
The guideline on disclosure to investors, which mandated managers to provide disclosure to investors on the selection, activation and calibration of LMTs in the fund documentation, rules or instruments of incorporation, prospectus or periodic reports.
ESMA noted that notwithstanding the fact that the majority of stakeholders supported the principle of improving transparency to investors, they stressed the importance to strike the balance between appropriate disclosure, investor protection and unintended consequences. On the back of this, ESMA decided not to retain these sections of the Guidelines, but noted that managers should nonetheless be cognisant of the LMT disclosure obligations set down in the AIFMD and UCITS Directive for example, that a description of the AIF’s liquidity risk management shall be made available to investors by the AIFM.
Certain other restrictive guidelines, including those that imposed more restrictive obligations on the selection, activation and calibration of LMTs, as it was noted that these guidelines limited the sole responsibility of the manager as prescribed by the AIFMD and UCITS Directive.
In contrast, ESMA retained certain guidelines that had previously been pushed back on by stakeholders including the guideline whereby managers should consider, where appropriate, the merit of selecting at least one quantitative LMT and at least one anti-dilution tool. While retaining this guideline, ESMA stressed that it is without prejudice to the ultimate responsibility of the manager for the selection of LMTs, including, where appropriate, redemptions in kind.
In light of the consultation feedback, ESMA noted that it has opted against a restrictive approach in the final Guidelines, instead emphasising the manager’s sole responsibility for selecting and implementing LMTs.
Draft Regulatory Technical Standards on Liquidity Management Tools Under the AIFMD and UCITS Directive
As was the case with ESMA’s final report on the Guidelines, ESMA, on the back of feedback received from stakeholders, made a number of updates to the draft RTS, in particular to make several changes and clarifications with regard to redemption gates, and also to remove the requirement to apply the same rules to all share classes.
Taking into account feedback from stakeholders, ESMA introduced flexibility in the way in which the activation threshold for redemption gates of AIFs can be expressed. The RTS for AIFs now stipulate that the thresholds can be expressed: (i) as a percentage of the net asset value (NAV) of the AIF, (ii) in a monetary value (or a combination of both), or (iii) as a percentage of liquid assets. For UCITS however, ESMA retained the existing language regarding activation thresholds in that they shall only be expressed as a percentage of the NAV of the UCITS. In addition to this, ESMA introduced an alternative method for the application of redemption gates for AIFs and UCITS under which redemption orders below or equal to a pre-determined redemption amount can be fully executed while redemption orders above this amount are subject to the redemption gate. This mechanism, ESMA explained, should serve to avoid small redemption orders being affected by large orders that drive the amount of redemptions above the activation threshold.
In addition, the draft RTS previously included provisions requiring the same level of LMTs to be applied to all share classes, however, given that the mandate of the RTS did not support the development of specific and comprehensive application of LMTs to share classes, these provisions have been removed.
Finally, stakeholder feedback alerted ESMA of the unintended consequences of the rules on redemption in kind for the functioning of the primary market of exchange-traded funds (ETFs). On the back of this, ESMA included a new provision in the UCITS RTS clarifying that the rule on pro-rata approach in the case of redemption in kind did not apply to authorised participants and market makers operating on the primary market of ETFs.
What Comes Next?
In terms of next steps, the final draft RTS have been submitted to the European Commission (the EC) for adoption and the EC have three months (which can be extended by one further month), to make a decision. The Guidelines shall start to apply on the date of entry into force of the RTS. Funds that existed before the entry into force of the RTS shall have 12 months to comply with the Guidelines.
Central Bank Fitness & Probity Consultation and Updates – April 2025
Following the 2024 independent review by Mr Andrea Enria (former Chair of the European Central Bank Supervisory Board) of the Central Bank of Ireland’s Fitness & Probity (F&P) assessment process, the Central Bank has published a report outlining the progress made on implementing Mr. Enria’s 12 recommendations and launched a consultation on proposed revisions it its F&P regime.
Report on Implementation of Recommendations
The report details the actions taken to date by the Central Bank to implement Mr. Enria’s recommendations across the review’s three areas of focus – (1) clarity of supervisory expectations; (2) internal governance of the process; and (3) fairness, efficiency and transparency of the process.
In response to the review’s finding that the Central Bank’s F&P standards were “fragmented across different documents and not user-friendly”, the Central Bank has proposed to update and consolidate the Central Bank’s guidance on the F&P standards into a single document.
The review also highlighted critical areas for improvement within the F&P gatekeeping process, including the need for enhanced seniority and independence in the final decision making stages. To address these gaps, the Central Bank has established a new F&P unit which has ownership of: (i) F&P gatekeeping assessment work with certain key responsibilities such as conducting assessment work across all F&P gatekeeping applications, (ii) approving F&P applications, and (iii) ensuring adherence to established process and progression of decisions in a timely manner. In addition, in cases of potential refusal, the F&P unit will now refer cases to a newly established ‘Gatekeeping Decisions Committee’ which is chaired by the Deputy Governor of Financial regulation within the Central Bank.
It was further noted that the Central Bank could make improvements to ensure that appropriate standards of fairness, efficiency and transparency are consistently achieved. To acknowledge this finding, the Central Bank has published an assessment process document which aims to codify and reflect the principle that regulatory assessments must be conducted with the utmost integrity and to ensure that applications are treated equitably.
Consultation Paper on Amendments to the Fitness and Probity Regime (CP160)
In addition to the report, the Central Bank published a consultation paper (CP160) in order to address the recommendations for increased clarity and transparency of supervisory expectations in relation to the application of the Central Bank’s F&P standards.
As part of this consultation, the Central Bank has sought feedback from stakeholders on the consolidation of and proposed enhancements to its existing guidance on the F&P standards, a draft of which is available on the Central Bank’s website (the Revised Guidance). With this Revised Guidance, the Central Bank aims to ensure industry understanding of the F&P assessment process by: (a) identifying and incorporating objective measures and role summaries for certain pre-approval controlled functions (PCFs); (b) including specific provisions on identifying, managing and mitigating conflicts of interest; (c) clarifying the way in which collective suitability and diversity within board and management teams are assessed; and (d) outlining the approach to be taken in determining the relevance of past events to an individual’s application.
The Central Bank further proposes to undertake a substantive review of PCF roles with a view to ensuring that the level of Central Bank gatekeeping is appropriate however, due to the fact that the list of PCF roles is embedded in the Senior Executive Accountability Regime Regulations, which is in its early stages of introduction, the Central Bank plans to defer this review to 2027. In the meantime however, the Central Bank has proposed to remove the sector specific categorisations so that there will be one list of PCFs applying to all regulated firms (other than Credit Unions).
Submissions to the consultation can be made via [email protected] until 10/07/2025.
The Lobby Shop: Reconciliation Reckoning [Podcast]
The Lobby Shop team turns their focus on the ongoing budget reconciliation process in Congress that will shape the Trump administration’s economic agenda. Hosts Josh Zive, Paul Nathanson and Liam Donovan provide a quick update on the latest tariff developments before diving into the reconciliation process and the shifting legislative dynamics between the House and the Senate. Then, Liam does a deep dive on how economic pressures are reshaping political strategy, and what it all means for government funding timelines and the looming debt ceiling. Tune in for a Liam-style breakdown of the often confusing reconciliation process in the next couple of weeks.
The Latest OFSI Property and Related Services Threat Assessment
The United Kingdom’s Office of Financial Sanctions Implementation (OFSI) has published a report detailing suspected breaches of UK financial sanctions involving UK property and related services firms since February 2022 and ongoing threats to sanctions compliance (the Assessment).
Why Did OFSI Focus on Property and Related Services?
Under the United Kingdom’s financial sanctions regime, property is an “economic resource”. Individuals and entities designated by OFSI (DPs) are prohibited from using UK financial services to execute property transactions and may also be subject to asset freezes, which include economic resources such as property.
Property and related services firms captured in the Assessment include UK firms and sole practitioners involved in the sale, maintenance or upkeep of properties. OFSI’s Assessment is a broad cross-sector assessment that considers a range of actors including: estate agents; letting agents; landlords; tenants; property managers; property investors; property developers; UK firms dealing with overseas properties; and overseas firms dealing with UK customers.
OFSI confirmed that almost half of suspected breaches related to UK residential property owned or let by DPs. The remainder of suspected breaches were linked to UK commercial properties, investments into UK properties, the use of UK property firms by DPs to facilitate overseas business interests and client relationships, and the renewal or continuation of property-related contracts (including insurance) on behalf of or for the benefit of DPs.
OFSI’s Key Findings
The Assessment sets out five key findings relevant to UK property and related services firms from February 2022 to present.
Underreporting of Breaches
OFSI found it was almost certain that UK property and related services firms have underreported suspected breaches of financial sanctions to OFSI. OFSI also observed significant delays in the identification and reporting of suspected breaches.
Noncompliance With Licence Conditions
OFSI stated it was almost certain that DPs have breached UK financial sanctions by making or facilitating transactions for the benefit of their UK properties without or outside the scope of an OFSI licence or applicable exception (further information on OFSI licencing can be found here).
OFSI found that the vast majority of suspected breaches of licence conditions related to payments made by DPs or connected entities for the maintenance of UK properties.
Russian DPs and Their Enablers
OFSI identified the use of professional and nonprofessional “enablers” who assist DPs in concealing their beneficial ownership or control of UK properties.
OFSI reports it was highly likely that property-related breaches of sanctions have been enabled by UK property firms facilitating the payment of household staff payments, council tax, utility bills, property maintenance services, letting services and more, without an applicable licence. This is particularly the case for small-scale property or related services firms or sole practitioners with high-risk appetites and longstanding relationships with DPs.
Family and Associates
OFSI found it was highly likely that DPs have used nonprofessional enablers, such as family and close associates, to frustrate UK financial sanctions by transferring ownership or control of property assets to family/associates to disguise beneficial ownership. Key giveaways are the use of family members of associates of DPs making payments for services relating to properties owned or controlled by a DP, e.g., through direct debits to settle insurance contracts, or for the maintenance of a property, or to pay for a subscription service at an address linked to a property.
OFSI encourages all UK firms to report any suspicious changes to the ownership or control of property assets linked to a Russian DP, particularly when properties are considered super prime properties, i.e., at the top 5% end of the property market.
Professional Enablers
OFSI considered it was almost certain that UK property and related services firms have acted as professional enablers for DPs, thereby facilitating sanctions breaches. Since February 2022, most professional enabler activity includes concierge and personal security services, other property-management services, or lifestyle-management services. Without a relevant OFSI licence, these payments could breach UK financial sanctions.
OFSI recommends staying alert to changes in ownership or control of a DP’s property asset, particularly if it has been recently divested to a percentage below 50% to bypass the basic due diligence checks.
Intermediary Jurisdictions
The Assessment also encouraged vigilance when “red flags” arise in conjunction with an intermediary jurisdiction nexus (i.e., a jurisdiction other than the United Kingdom or the jurisdiction to which UK financial sanctions apply). The Assessment found that Russian DPs structured their financial interests through a number of intermediary jurisdictions, some of which offer greater privacy in legal and financial systems. OFSI reported that since 2022, 22% of suspected breaches involved actors in intermediary jurisdictions including: Austria, Azerbaijan, the British Virgin Islands, the Republic of Cyprus, Jersey, Guernsey, Luxembourg, Switzerland, Türkiye, the United Arab Emirates and the United States.
Reporting
Property and related services are obliged to make Suspicious Activity Reports (SARs) to the National Crime Agency under Part 7 of the Proceeds of Crime Act 2002 and the Terrorism Act 2000 if money laundering or terrorist financing activities are known or suspected. Guidance on SARs is available here.
As of 14 May 2025, letting firms will join estate agents and other relevant firms in being required to report to OFSI if they know or have reasonable cause to suspect that a person is a DP or if a person has breached financial sanctions regulations, if the information or other matter on which the knowledge or cause for suspicion is based came to it in the course of carrying on its business. This applies regardless of the rental value of properties handled by letting agents and includes all forms of tenancies.
Practical Steps
To ensure compliance with your reporting obligations, the following practical steps are advised:
Monitor and identify any red flags as indicated in the Assessment.
Update client due diligence beyond basic ID checks to check beneficial owners and connected parties.
Remind yourself of your specific reporting obligations under the Sanctions and Anti-Money Laundering Act 2018 by reading the guidance published by His Majesty’s Revenue and Customs.
Complete a tailored risk assessment incorporating the above findings.
Identify and comply with any applicable licence requirements.
Conclusion
OFSI’s Assessment builds on previous and related publications issued by OFSI and UK government partners, including the Financial Services Threat Assessment published by OFSI in February 2025 (see our corresponding alert here) and the Legal Services Threat Assessment published by OFSI in April 2025 (see our corresponding alert here).
CFPB Suggests Shift In Supervision and Enforcement Priorities
On April 16, the Consumer Financial Protection Bureau (CFPB) seemingly provided its employees with a memorandum outlining its ongoing supervisory and enforcement priorities (Memo).1 Although the Memo has not been made publicly available, its contents are consistent with what many in the consumer finance industry assumed would be adopted by the agency’s new leadership.
Importantly, the Memo assists entities subject to CFPB supervision and examination by detailing the areas of interest to CFPB leadership and making clear that there is no intention among such leadership to “pursue supervision under novel legal theories,” instead relying upon the agency’s statutory authority to supervise affected entities. While not fully transparent, it appears likely that this reference to “novel legal theories” is intended to convey to CFPB employees (and the market more broadly) that the agency will not use its statutory authority to designate “larger participants” for supervisory purposes as permitted under the Dodd-Frank Wall Street Reform and Consumer Protection Act. What is wholly unclear, however, is whether industries that have already been designated as “larger participants” by the agency, such as certain consumer reporting agencies, remain subject to ongoing supervision at this time. It also appears unlikely the agency will take on sweeping initiatives to expand its reach, such as how, in recent years, it sought to designate certain consumer leasing products as “credit” despite case law to the contrary.
Five Key Takeaways and Considerations from the CFPB Supervisory and Enforcement Memo
1. Supervisory exams
According to the Memo, such exams will decrease by 50 percent and will focus on “conciliation, correction and remediation of harms subject to consumers’ complaints.” While the Memo does not go into detail as to whether such “complaint drivers” will come from internal complaint tracking or the CFPB database2 that accepts complaints, we believe the focus will be on complaints posted by consumers to the agency database (and possibly, although less likely, to larger public databases like the Better Business Bureau complaint database).
Consumer financial providers should quickly review all of their associated complaints in the CFPB complaint database to ensure that such complaints have been appropriately addressed, with root causes determined and necessary responses performed.
It is also notable that, where consumer harm is found and penalties are assessed, the Memo makes clear that it will send any funds the CFPB obtains “directly to consumers, rather than imposing penalties on companies in order to simply fill the [agency’s] penalty fund.”
2. Insured depository institutions
The Memo suggests that the CFPB will “shift [its focus] back to depository institutions.” Importantly, the Dodd-Frank Act3 provides that the CFPB has supervisory authority over insured depository institutions with more than $10B in assets in connection with such institutions’ compliance with consumer financial protection laws.
Affected banks would be wise to use this time before the appointment of a permanent director of the CFPB (who will likely staff offices consistent with this and the other priorities in the Memo) to ensure that compliance mechanisms related to the provision of consumer financial products and services are appropriate, compliant and reflective of issues identified in recent consumer complaints.
3. Specific product foci
The Memo provides that residential mortgages are a strong priority, especially where there are “identifiable victims” who have suffered “measurable consumer damages” (emphasis in original). Residential mortgages have always been a significant priority regardless of presidential administration, and most residential mortgage loan originators likely have adequate compliance programs. However, a significant unknown is how the CFPB will treat newer consumer financial products offered in the residential mortgage space, like shared appreciation mortgages and home equity investment products. In addition, the Memo notes that violations of the Fair Credit Reporting Act (as it relates to data furnishing violations) and the Fair Debt Collection Practices Act (as it relates to consumer contracts and debts) will also be priorities.
4. Specific constituent foci
The Memo notes that service members and their families, as well as veterans, are included within its priorities. This requirement reflects an understanding of the Dodd-Frank Act’s specific provisions requiring such work and is consistent with the agency’s actions since its inception.4
5. Federalism/coordinated actions with states
The Memo clarifies that the CFPB will “deprioritize” participation in multistate exams except where statutorily required. Further, the Memo provides that the agency will “deprioritize supervision” where states have “ample regulatory and supervisory authority,” unless statutorily required. Importantly, under the Dodd-Frank Act, state attorneys general may “bring a civil action in the name of such State in any district court of the United States in that State or in State court that is located in that State and that has jurisdiction over the defendant, to enforce provisions of this title [the Consumer Financial Protection Act] or regulations issued under this title, and to secure remedies under provisions of this title or remedies otherwise provided under other law.”5 Given the statement in the Memo, it is highly likely that certain consumer financial protection laws not specifically identified therein, such as the Truth in Lending Act and the Electronic Funds Transfer Act, will be of minimal interest to agency officials (unless, of course, interest is driven into these areas based upon consumer complaint volume, as described above).
What’s Next
Like many aspects of compliance that are in a state of flux with the change in presidential administrations, it is also not clear that a permanent CFPB director will share and support the same supervisory and enforcement goals. Once a permanent director is in place (which is anticipated to occur sometime before mid-June based upon recent reports from Senate Banking Committee leadership6), it is likely that the priorities listed above will require revisiting.
1 Note that the materials relied upon by Katten for purposes of this advisory do not appear publicly on the CFPB’s website. However, the materials reviewed appear on CFPB letterhead and, as described herein, are consistent with public positions agency leadership has taken with respect to the nature of future agency activities in light of the recent presidential election.
2 The CFPB complaint database is available at: https://www.consumerfinance.gov/data-research/consumer-complaints/ (last reviewed April 17, 2025).
3 H.R.4173 – 111th Congress (2009-2010).
4 The Dodd-Frank Act (Section 1013(e)) specifically provides that the “Director shall establish an Office of Service Member Affairs, which shall be responsible for developing and implementing initiatives for service members and their families.”
5 12 U.S.C. § 5552(a)(1).
6 See https://www.americanbanker.com/news/senate-eyes-may-for-cfpb-nomination-vote-scott-says which describes Sen. Scott’s prediction regarding the timing of the confirmation of Jonathan McKernan as CFPB Director.
Congress Overturns IRS Reporting Rules for DeFi Platforms
President Trump has signed into law a bill that repeals Internal Revenue Service (IRS) regulations that required decentralized finance (DeFi) platforms to be treated as brokers for purposes of reporting customer transactions. The former regulations, finalized in December 2024 under the Biden administration, expanded the definition of “digital asset brokers,” to include certain participants that operate within the DeFi industry. Digital asset brokers are subject to tax reporting obligations similar to traditional financial intermediaries. Specifically, these brokers are required to issue IRS Form 1099-DA to both the IRS and their customers, detailing gross proceeds from digital asset transactions, as well as the name and address of each customer. Had the regulations remained in effect, DeFi brokers would have been subject to information reporting requirements for digital asset sales on or after Jan. 1, 2027.
The bill invoked the Congressional Review Act (CRA), a legislative tool allowing Congress to overturn recently enacted federal regulations, particularly those implemented late in an administration’s tenure.
Advocates of the repeal argued that the former regulations were overly burdensome and misaligned with the decentralized nature of DeFi platforms. They contended that forcing DeFi protocols, which often lack a centralized entity, to comply with broker reporting standards is technically infeasible. Critics of the regulations believed it would stifle innovation and push crypto enterprises offshore, undermining U.S. competitiveness in the digital asset sector. The repeal effort was led by Sen. Ted Cruz (R-TX) and Rep. Mike Carey (R-OH).
Opponents of the repeal warned that removing these reporting requirements may create loopholes for tax evasion and illicit financial activities, including money laundering. The Congressional Budget Office, relying on estimates provided by the Joint Committee on Taxation, projected a $4.5 billion increase in the federal deficit through 2035 from passage of the resolution. Critics argued that repealing the rule may allow more cryptocurrency transactions to evade scrutiny, potentially exacerbating financial crimes.
The repeal highlights the growing political influence of the cryptocurrency industry and a broader shift in Washington’s regulatory stance toward digital assets. As the larger debate unfolds, lawmakers and industry leaders will need to navigate the challenges of fostering innovation while maintaining financial security and compliance in the evolving digital economy.
Powering The Future: The UK’s Nuclear Revolution
Introduction
Nuclear power has long been one of the cornerstones of the UK’s energy mix, providing a reliable source of low-carbon electricity. As the UK embarks on its Clean Energy Superpower mission, aiming for a clean electricity system by 2030 under the Clean Power 2030 Action Plan (CPAP) and achieving Net Zero by 2050, nuclear power, alongside renewable sources, will spearhead the transition to a sustainable energy future. Recent policy changes, regulatory adjustments, and legislative initiatives have fostered a favourable environment for both traditional and advanced nuclear technologies as the UK pursues decarbonisation. This article will explore these developments, beginning with the UK’s ambition and vision, and examining governmental support for nuclear projects. Additionally, we will offer insights into fusion and other innovative technologies, illustrating how the UK’s energy landscape is prepared to embrace the nuclear revolution.
This evolution reflects the government’s commitment to sustaining a diverse, home-grown, and resilient energy portfolio, capable of withstanding geopolitical shocks while fostering technological innovation and economic growth.
What is the UK’s ambition and vision for nuclear?
Currently, the UK has 5.9 GW of nuclear installed capacity; however, 4.7 GW are expected to come offline by 2030. In both the British Energy Security Strategy (2022) and the Powering Up Britain strategy (2023), the UK government committed to delivering up to 24 GW of nuclear by 2050 to cover a quarter of the country’s projected demand, placing the technology on equal footing with renewable energy sources. This long-term target was reconfirmed in the Civil Nuclear Roadmap to 2050 (‘Roadmap’) published in 2024, which elucidates the pathway to delivering a mix of large-scale nuclear power plants, innovative technologies such as small modular reactors (SMRs) and advanced modular reactors (ADRs), and fusion. The Roadmap details plans for the biggest expansion of nuclear energy in 70 years, including the construction of a major new nuclear power plant. This evolution reflects the government’s commitment to sustaining a diverse, home-grown, and resilient energy portfolio, capable of withstanding geopolitical shocks while fostering technological innovation and economic growth. The Roadmap’s ambition is reiterated in the latest report on the pathways to achieve Net Zero by 2050, the Future Energy Scenarios (‘FES’) 2024 produced by the new independent energy system operator and planner, the National Energy System Operator (NESO). Finally, CPAP, which is based on FES, concludes that in a renewables-based system, nuclear is essential to deliver a ‘backbone’ of vital firm low-carbon power.
How does the UK support nuclear technologies?
From traditional large-scale nuclear power plants to ground-breaking technologies, the UK has taken important policy, regulatory, financial, and legislative measures to support nuclear. These include a strategic approach to designing the energy system, improved permitting procedures, and funding mechanisms.
Strategic planning
The UK has adopted an integrated and whole-system approach in planning, managing, and operating the energy system, led by NESO. In a geographically constrained area with competing interests such as farming, biodiversity, and aerospace, project developers require more certainty regarding the optimal locations, quantities, and types of energy projects needed to achieve Net Zero. This information will be provided by the Strategic Spatial Energy Plan (SSEP), expected in 2026. The SSEP aims to accelerate and optimise Great Britain’s energy transition, outlining a pathway from 2030 to 2050. The first SSEP focuses on electricity generation and storage, including technologies like large-scale nuclear and SMRs, but excluding ADRs. These will be considered in future iterations of the SSEP.
Along with the nuclear-specific NPS, the infrastructure permitting system in the UK is undergoing a major reform through the Planning and Infrastructure Bill 2025.
Faster, streamlined, effective, and cost-efficient permitting
The UK government has recently announced important changes in consenting nuclear technologies, easing the permitting procedure. First, they plan to replace the National Policy Statement (NPS) for Nuclear Energy Generation (EN-6), the statutory document that sets out the government’s policy to permit applications for nuclear nationally significant infrastructure projects (NSIPs – projects that exceed a specific power capacity threshold), with a new NPS called EN-7. The new regime will apply to all nuclear – heat and electricity – developments that exceed 50 MW. The NPS removes two restrictions:
A geographical restriction of building nuclear plants in a set list of eight sites. Nuclear sites will be built anywhere in England and Wales on a criteria-based approach, including high standards of safety, security, and environmental protection.
A time-limit restriction to deploy new projects in the eight sites by 2025, providing developers with more certainty and flexibility to build new plants.
EN-7 also extends the scope of technologies covered and supports cutting-edge technologies, such as SMRs and AMRs, alongside gigawatt-scale plants. Additionally, a Nuclear Regulatory Taskforce will accelerate regulatory reforms and project delivery, including investment incentives. The consultation on EN-7 proposals has recently concluded, with the final version expected to be laid before Parliament in autumn 2025.
Along with the nuclear-specific NPS, the infrastructure permitting system in the UK is undergoing a major reform through the Planning and Infrastructure Bill 2025. The purpose of the Bill is to accelerate consenting for NSIPs, including through alternative routes of permitting on a case-by-case basis, streamlined and shorter consultation requirements, and a stricter judicial review system to limit meritless challenges against decisions that approve major infrastructure. These changes, when finalised, possibly in late 2025, are expected to apply to nuclear projects.
Furthermore, in March 2024, the Office for Nuclear Regulation (ONR), the Environment Agency (EA), and Natural Resources Wales (NRW) developed voluntary guidance for early regulatory engagement for those deploying nuclear projects in Great Britain. This guidance is intended for project developers, technology vendors, and permit holders.
Funding and derisking investment in nuclear
Nuclear projects are expensive to build. The recent examples of billions of budget overruns for the two new large-scale power plants, Sizewell C and Hinkley Point C (each having a capacity of approximately 3.2 GW), underscore the critical need for diverse and robust funding options to ensure the viability of these projects. We examine below some of the options including a new finance model and support from public bodies.
…, the main issue with CfD is that project developers bear the entire construction risk, whereas under the RAB model, this risk is shared with consumers.
A new finance model: the Nuclear Energy (Financing) Act 2022 (NEFA 2022)NEFA 2022 introduces the use of the regulated asset base (RAB) model to finance new nuclear projects. This model is commonly used for major infrastructure projects such as airports, water, and energy networks because it helps to de-risk private investment. Under the nuclear RAB model, an eligible nuclear company will receive a guaranteed return on investment throughout the lifetime of the nuclear asset, which is reflected in the licence conditions. The RAB model is now preferred for large scale projects and possibly for SMRs, over other financing options, such as the bespoke Contract for Difference (CfD) deal used for financing Hinkley Point C in 2016. The CfD is a subsidy scheme that covers the entire construction costs of the project through a fixed price for electricity output once the plant becomes operational. However, the main issue with CfD is that project developers bear the entire construction risk, whereas under the RAB model, this risk is shared with consumers. Sizewell C has sought support through the RAB model, with the final version of the RAB licence conditions expected to be issued by Ofgem soon.
The role of Great British Nuclear, Great British Energy, and National Wealth FundWith the Energy Act 2023, the UK government has established a new publicly owned company, Great British Nuclear (GBN). GBN is the expert vehicle responsible for driving the delivery of new nuclear projects through each stage of project development, co-funding selected technologies, and ensuring the right financing and site arrangements to meet the 24 GW nuclear target by 2050. GBN’s first priority is to run a competitive process to select the best SMR technologies. This selection process has reached its final stage, with the decision expected this Spring.
The new UK government has created two more new bodies to support investment and provide funding for clean energy projects: Great British Energy (GBE) and National Wealth Fund (NWF). With a capital of £7.3 billion, GBE’s purpose is to develop, invest in, build, and operate clean, home-grown energy projects. GBE aims to accelerate Great Britain’s pathway to energy independence and security by working closely with industry, local authorities, communities, and other public sector organisations. According to GBE’s founding statement, the UK government will explore how GBE and GBN can best work together on delivering the nuclear programme. GBE will be officially established once the Great British Energy Bill becomes an Act.
The National Wealth Fund (NWF), previously known as the UK Infrastructure Bank, has been allocated £27.8 billion to stimulate investment in clean energy projects, including nuclear, and to support the implementation of the new industrial strategy. GBN, GBE, and NWF play crucial roles in nuclear investment, financing, and de-risking. However, the future of nuclear development will also be influenced by the upcoming Industrial Strategy and the Spending Review.
Invest in 2025 and Spending ReviewIn October, the UK government launched a consultation on the green paper ‘Invest 2035: the UK’s modern industrial strategy’. This strategy aims to remove barriers to growth and foster a pro-business environment in eight key sectors, including clean energy industries. Although nuclear projects are typically included under the ‘clean energy’ category, some stakeholders have requested through their responses a specific mention of nuclear technology to avoid any ambiguity. The final industrial strategy will be announced in June, alongside the second phase of the Spending Review.The Spending Review is the government’s process for setting departmental budgets for future years. The first phase of the review, announced in the Autumn Budget 2024, confirmed departmental budgets for 2024-25 and set budgets for 2025-26. The crucial second phase, also known as ‘the envelope,’ will establish spending plans for the next three years over a five-year period to achieve the government’s objectives, including the growth and Clean Energy Superpower missions. As emphasised by various stakeholders, the Spending Review will play a pivotal role in supporting nuclear projects.
The UK is leading the way in fusion energy development and innovation.
Fusion, the ‘holy grail’ of nuclear
The UK is leading the way in fusion energy development and innovation. Starting with the UK’s fusion strategy in 2021, updated in 2023, the UK became one of the first countries to enact specific fusion legislation through the Energy Act 2023. This new legislation separates the regulations governing fusion energy from those that apply to traditional nuclear technologies by amending the Nuclear Installations Act 1965 to exclude fusion energy projects. As a result, fusion projects will not require licences from or be regulated by ONR, streamlining the path to commercial fusion energy deployment.
In May 2024, the UK government published a proposal for a new fusion-specific National Policy Statement (NPS), EN-8, to support an open-sited and technology-inclusive approach to siting new fusion energy facilities. Similar to EN-7, the fusion-specific NPS will use strategic criteria when identifying and assessing new sites for fusion facilities. The proposal also recommends designating all fusion plants as Nationally Significant Infrastructure Projects (NSIPs). The government has not yet published its final decision on EN-8.
In parallel, the UK government continues to advance fusion-specific projects and funding arrangements. Some of these initiatives include:
The pioneering Spherical Tokamak for Energy Production (STEP) programme, supported by £410 million funding from the UK government, aims to commercialise the technology and develop the first viable fusion power plant by 2040.
The landmark UK and US joint project, LEAPS, in partnership with Tokamak Energy.
A new joint private and UK government fusion investment fund, ‘Starmaker One,’ to assist fusion businesses and start-ups in commercialising the technology. The government has invested £20 million in the fund, which has the potential to raise between £100 million and £150 million overall investment.
…, the UK wants to lead innovation and commercialise the use of alternative nuclear technologies, particularly as these technologies can be cheaper than traditional nuclear…
AMRs, SMRs and the AI twist
AMRs, also known as Generation IV reactors, have the potential to support a variety of applications beyond electricity generation. These include hydrogen production, industrial and domestic heating, and nuclear waste management solutions. To support these technologies, the UK government awarded £196 million last year to build a commercial facility for the production of high-assay low enriched uranium (HALEU), a fuel necessary for powering AMRs.
SMRs also show promising applications. The technology is expected to contribute significantly to the UK’s ambition to become a global leader in the Artificial Intelligence (AI) sector. The AI Opportunities Action Plan (‘AI Plan’) aims to establish ‘AI Growth Zones’ (AIGZs) to facilitate and expedite the deployment of advanced AI data centres. The first AIGZ could be located in Culham, adjacent to the UK Atomic Energy Authority. An AI Energy Council has been launched to identify clean and sustainable energy solutions to meet the considerable power requirements of these AI data centres. SMRs are among the technologies anticipated to fulfil the energy needs of these centres.
Similar to fusion, the UK wants to lead innovation and commercialise the use of alternative nuclear technologies, particularly as these technologies can be cheaper than traditional nuclear due to their size, modularity, and replicability. In a consultation launched in 2024, the UK government explores alternative routes to market for these technologies beyond GBN, HALEU, and the Advanced Nuclear Fund (ANF) that offer support to both SMRs and AMRs. For example, the RAB model might be more suitable for financing cutting-edge nuclear technologies than CfDs. The alternative routes to market proposals, when finalized and taken forward, will be a game changer for the deployment of SMRs and AMRs.
Conclusion
The UK’s nuclear policy is a dynamic and evolving framework that continuously reflects its commitment to a secure, low-carbon, and innovative energy future. This policy also leverages nuclear technology to support other critical sectors such as AI. By promoting a diverse range of nuclear technologies—from large-scale power plants to cutting-edge fusion research—the UK aims to meet its ambitious climate goals, drive innovation, and stimulate substantial economic growth. The opportunities presented by the UK’s nuclear revolution are vast, with new supportive planning frameworks making it easier to capitalise on them.
Ninth Circuit Upholds DFPI’s Commercial Financing Disclosure Rules
On September 30, 2018, California enacted SB 1235, codified at California Financial Codes sections 22800–22805. See California Will Soon Require Novel Disclosure Requirements Providers Of Commercial Financings. SB 1235 requires that an offer of commercial financing for $500,000 or less be accompanied by disclosures of: (1) the amount of funds provided, (2) the total dollar cost of financing, (3) the term or estimated term, (4) the method, frequency, and amount of payments, (5) a description of prepayment policies, and (6) the total cost of financing expressed as an annualized rate. Cal. Fin. Code §§ 22802(b) & 22803(a). Four years after SB 1235 was enacted, the Office of Administrative Law approved regulations implementing the disclosure requirements, 10 CCR § 900 et seq. See OAL Approves DFPI Commercial Financing Disclosure Rules – But Who Got Stuck With The Check? A few months later, , the Small Business Finance Association filed a Complaint a challenging the validity of those regulations as unconstitutional compelled commercial speech. Small Bus. Finance Ass’n v. Hewlett, 2023 WL 8711078 (C.D. Cal. Dec. 4, 2024).
Last December, U.S. District Court Judge R. Gary Klausner granted the Department of Financial Protection & Innovation’s motion for summary judgment, finding that the regulations do not violate the First Amendment under the Supreme Court’s test for compelled commercial speech established in Zauderer v. Office of Disciplinary Counsel of Supreme Court of Ohio, 417 U.S. 626 (1985). In an unpublished decision last week, the Ninth Circuit Court of Appeals affirmed Judge Klausner’s ruling. Small Bus. Finance Ass’n. v. Mohseni, 2025 WL 1111493 (9th Cir. Apr. 15, 2025).
A New Playbook: What the CFTC’s Operating Divisions Will Consider When Making Enforcement Referrals
The three operating divisions of the CFTC (Division of Market Oversight, Market Participants Division, and the Division of Clearing and Risk, together the Operating Divisions) issued an advisory on April 17, explaining the materiality criteria they will use when determining whether to make a formal referral to the agency’s Division of Enforcement (DOE) for self-reported violations, supervision violations, or other non-compliance issues (the Referral Advisory).
The Referral Advisory comes off the heels of DOE’s February 25 advisory (the DOE advisory) regarding self-reporting, cooperation and remediation by a CFTC registered entity or registrant when recommending an investigation or enforcement action to the Commission, including the factors DOE will consider when evaluating whether to reduce the proposed civil monetary penalties in enforcement actions. Under the DOE Advisory, a registered entity or registrant may receive CMP credit for self-reporting a potential violation to the appropriate CFTC Operating Division. Under older DOE staff guidance (which has since been vacated), DOE would not provide such credit when a registered entity or registrant self-reported a potential violation to the appropriate Operating Division.
Read Katten’s summary of the DOE Advisory.
The Referral Advisory notes that the Operating Divisions may refer potential violations that are material to DOE, such as those that involve:
Harm to clients, counterparties or customers, or members or participants;
Harm to market integrity; or
Significant financial losses.
In circumstances where a material violation involves fraud, manipulation or abuse, the Referral Advisory recommends making a referral directly to DOE rather than to the Operating Divisions.
The Operating Divisions will address supervision or noncompliance issues that are not material. In other words, the Operating Divisions will no longer make referrals of these nonmaterial noncompliance issues. This guidance is consistent with the Acting Chairman Caroline Pham’s push to have the Commission treat technical, noncompliance violations in the same way that exam deficiencies are addressed. While a commissioner, she commented that “enforcement actions for one-off, non-material operational or technical issues is shooting fish in a barrel.” Acting Chairman Pham also suggested that, instead, the agency should “take an approach to operational and technical issues that is consistent with the requirements and intent of CFTC rules 3.3 and 23.602.”
In determining the materiality of a supervision or noncompliance issue, the Referral Advisory provides that the appropriate Operating Division will apply a reasonableness standard to the following criteria:
Especially egregious or prolonged systematic deficiencies or material weakness of the supervisory system or controls, or program;
Knowing and willful misconduct by management, such as conduct evidencing an intent to conceal a potential violation, or supervision or noncompliance issue; or
Lack of substantial progress towards completion of a remediation plan for an unreasonably lengthy period of time, such as several years, particularly after a sustained and continuous process with the appropriate Operating Division regarding the lack of substantial progress.
The Referral Advisory makes clear, however, that the failure to meet a deadline for corrective action or remediation plan on its own will not be sufficient for a referral to DOE.
San Francisco Holds Hearing on Proposed New Sourcing Regulations Under Proposition M
On the heels of Proposition M—which mandates that the San Francisco Tax Collector adopt sourcing rules for determining the location of gross receipts—the San Francisco Office of the Treasurer & Tax Collector released proposed sourcing regulations, holding a hearing to discuss the matter on April 8, 2025.
Overview of the Proposed Regulations
The proposed regulations generally align with the California Franchise Tax Board (FTB)’s market-based sourcing rules, but diverge in certain areas:
1. Waterfall Approach to Sourcing: The regulations implement a waterfall (tiered) approach to sourcing gross receipts from:
Services and intangible property, including the use of customer-related data, books and records, or reasonable approximation; and
Financial instruments, which also follow a waterfall structure due to limitations on mirroring FTB’s treatment via regulation.
2. Industry-Specific Rules Excluded: The proposed regulations do not adopt some of the FTB’s special industry sourcing rules (e.g., rules applicable to partnerships, banks, and construction contractors).
3.Clarification on Apportionment: The Tax Collector’s Office explicitly notes that the proposed sourcing rules do not modify the apportionment rules and are solely intended to guide the sourcing of gross receipts within the apportionment formula.
Procedural Background and Public Hearing
On April 8, 2025, the Tax Collector’s Office held a public hearing to discuss the proposed regulations and solicit feedback. Highlights from the hearing include:
1.Comparative Reviews: Tax Collector Office Staff conducted comparative reviews of sourcing frameworks from the FTB and other jurisdictions.
2.Written Comments: Hearing officials confirmed that written comments were due by close of business on April 18, 2025. They specified that comments identifying specific clients will be treated as confidential, whereas general submissions will be public.
3.Oral Comments: There were also oral comments provided by industry representatives.
One private practice tax representative raised concerns over ambiguity in the treatment of asset management service providers.
A San Francisco Chamber of Commerce representative expressed support for consistency with FTB rules but requested clarity regarding the applicability of certain industry-specific rules. The Chamber representative also suggested the addition of a presumption of correctness in favor of taxpayers who follow the regulations.
Takeaways
The Tax Collector’s Office collected public comments on the proposed sourcing regulations on April 18, 2025. Based on these comments, additional hearings may be held to discuss the concerns raised by the public in response to the proposed sourcing regulations.
Spring Fever for Private Company Investors: Avoid Investing When Red Flags Are Discovered in the Company’s Garden
We have been enjoying a nice spring in Dallas – moderate temperatures, not too much rain and mostly sunny skies. In the investing world, these conditions signal that the time is ripe for a private company investment. But just as gardeners inspect the soil, check on the sunlight, and consider the available water sources before planting, investors need to be careful that their spring enthusiasm does not blind them to warning signs regarding a private company investment. This post considers key aspects of a target company’s ownership and management to determine if red flags are present, which suggest that the investment is high risk and may be better to avoid.
Red Flag No. 1: Decision-Making Paralysis
Decision-making can be a red flag if the company’s leadership makes decisions in a haphazard way. Lack of decision-making creates conflicts or indecisiveness that can lead to missed opportunities and the failure to deploy the company’s capital and resources effectively. This is a problem for any business striving for robust growth, but a flawed decision-making structure is not always easy to discern by a potential investor during due diligence.
Sussing out the effectiveness of the company’s decision-making (or problems in this area) takes effort and the willingness to ask good questions. To get to the heart of this issue, investors should (1) request a list of the top strategic decisions that the company’s management has made over the past three to five years, (2) meet with current investors, and (3) also meet with current managers or board members. These meetings will be critical to discuss how the decisions were made, how long it took for decisions to be made, and how the company’s management dealt with challenges when some of their decisions did not work out as planned.
A well-managed company should be able to demonstrate how its management makes effective decisions, and indeed, a company that cannot explain how its decision-making process works productively is showing evidence of a red flag.
Red Flag No. 2: Investors Treated as Mushrooms
Minority investors appreciate they will not be running the show and that they will take a back seat to the company’s majority owners, who control the business. But substantial investors expect to be able to express their views to management about the company’s major decisions, to be kept informed about developments that impact the business, and to avoid surprises in the form of negative results regarding the company’s performance. Stated more simply, it is a red flag if a sizable number of the company’s current investors feel they are marginalized and unappreciated by the company’s management.
To evaluate the transparency of company management and the opportunities for minority investors to participate to some extent in decision-making, investors need to consider engaging in at least two different approaches. First, investors need to review the company’s governance documents to determine the extent to which (i) the company is required to conduct meetings on a consistent basis with investors, (ii) the company regularly issues management reports to investors regarding the company’s financial performance and operations, and (iii) the company holds votes on important measures. Potential investors will want to confirm that the required meetings are held, that the management reports are issued, and votes are held. If the company fails to conduct regular meetings with investors, lacks a consistent reporting system, and operates without any formal structure, the absence of good “corporate hygiene” poses a serious concern.
The second track for investors is to consider the experience of the company’s current investors. If they are disgruntled at how they are being treated, it will be hard for them to mask their frustration with how management conducts business. It is also a red flag if the company refuses to permit a potential investor from meeting/speaking with current investors or designates just one owner as the sole person for investors to speak with during the due diligence process. If the company tries to “hide the ball” regarding the views held by current investors, this lack of transparency is a notable red flag.
Red Flag No 3: Distracted/Conflicted Management
Majority owners who manage the business and have their fingers in many pies can also pose a significant concern. The ideal private company investment is one where the ownership (and managers) maintains a laser focus on guiding the business to success. By contrast, when the members of management split their time between different companies and/or engage in deals with other companies in which they also own an interest, this may create a serious problem for the business. When managers have dual responsibilities or their loyalties are divided among a number of different companies, this situation can result in distraction for the target company’s operations, as well as conflicts of interest that make investment less desirable.
The potential dual or divided loyalty question can be challenging for investors to evaluate because current management typically does not volunteer this information, and managers may be blind to the problem. The investor needs to seek disclosure of financial information from the company that details outside business activities by the company owners and managers, including related party transactions. Specifically, the investor will want to understand what role the target company’s managers have in other businesses and what level of ownership they have in other affiliated companies. More generally, the investor should assess how focused the management team is on the business in which the investor is considering an investment.
Evaluating this issue will require pointed discussions with current management about their bandwidth, the existence of divided loyalties, and potential conflicts with other companies. The bottom line is that managers who have their fingers in multiple pies can create unwelcome distractions for the business and also become subject to direct conflicts of interest that will be a drag on the company’s performance.
Red Flag No. 4: Uncertain Partner Exit Rights
We have covered in other posts the importance for investors to secure an exit right in the form of a buy-sell agreement at the time of their investment. This is a “put right” that authorizes minority partners to trigger a buyout of their interest requiring a purchase by the company or the majority owner. The specific process for valuing the minority interest will be set forth in the agreement as well, after the minority partner triggers the buyout.
Before investing, the potential investor therefore needs to carefully scrutinize the terms of the buy-sell agreement, whether it is contained in the company’s governance documents or set forth in a separate owners agreement. Some buy-sell agreements are so poorly drafted they cause the buyout process to become protracted or, worse, they are so complicated the buyout right almost becomes illusory. The investor should seek the following in the buy-sell agreement: (1) a clear statement as to when and how the investor can trigger the buyout, (2) the elimination of all discounts that reduce the value of the minority interest based on lack of marketability or lack of control, (3) a requirement for valuation disputes to be subject to a prompt arbitration hearing that avoids a lengthy, expensive court battle, and (4) the obligation for the company to reimburse the investor’s legal fees if the investor prevails in the valuation dispute.
The buyout right protects the minority investor when conflicts arise with management, and it ensures that the investor will not be required to continue indefinitely holding an illiquid interest in the company. This exit right is therefore critical for the minority investor to obtain at the time the investment is made. A company that refuses to provide this exit right is presenting a red flag right from the outset. There is a caveat here, however, that involves timing. It is not uncommon for a company to provide a buyout right to the minority investor, but to preclude the investor from exercising that right for some period of time after investing. A buyout right that the investor cannot trigger for two to three years is much less of a red flag as the company is seeking to avoid the duty to return funds to the investor in a short time after receiving the invested capital.
Conclusion
Spring sunshine will not make plants grow from infertile soil and in the absence of water, and similarly, a business needs more than a promising product or service to achieve success. The most successful businesses avoid becoming mired in dysfunctional management conflicts that cause companies to languish or fail regardless of the benefits of their products or services. These successful businesses also promote a good, transparent relationship with their investors.
For the potential investor, it is crucial to inspect the garden closely before planting any seeds of capital. Investors should be cautious about investing in companies that lack a clear decision-making process, that do not provide transparency to their investors, and that do not stay focused on the goals of the business. And securing an exit “put right” on the way into the investment is the wisest course regardless of the attractiveness of the garden.
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Navigating New Compliance Challenges for Financial Institutions and Payment Processors: The U.S. Treasury’s Enhanced Terrorist Finance Tracking Program
In a significant move to combat illicit financial activities focused on cartels, the U.S. government has intensified its scrutiny of cross-border payments, particularly those linked to Mexico. This development follows the designation of several Mexican cartels as Foreign Terrorist Organizations (“FTOs”) and Specially Designated Global Terrorists (“SDGTs”). These actions, coupled with the expanded use of the U.S. Treasury’s Terrorist Finance Tracking Program (“TFTP”), signal a new era of regulatory oversight for financial institutions and payment processors.
Key Developments
Cartel Designations and Legal Implications: On February 20, 2025, the U.S. Department of State designated eight cartels, including six based in Mexico, as FTOs and SDGTs. These designations expand criminal liability for knowingly providing material support to these organizations and authorize the U.S. Treasury to block financial transactions involving designated entities and their affiliates.
Southwest Border Geographic Targeting Order (“GTO”): The Financial Crimes Enforcement Network (“FinCEN”) has issued a Southwest Border GTO, requiring money services businesses (“MSBs”) in 30 ZIP codes across California and Texas to report cash transactions exceeding $200 but not more than $10,000 within 15 days effective from April 14 through September 9, 2025. This measure increases recordkeeping or reporting requirements and aims to enhance monitoring of financial flows near the United States-Mexico border. FinCEN also encourages the filing of SARs to report transactions conducted to evade the $200 threshold despite the SAR regulation dollar threshold (i.e., transactions that involve or aggregate to at least $2,000).
Enhanced Role of TFTP: The TFTP will play a pivotal role in monitoring and enforcing these new sanctions. By leveraging financial intelligence tools, U.S. regulators aim to identify potential sanctions violations, even in routine business transactions.
Penalties for Failing to Report: If a business or its representatives willfully violate a GTO as of March 14, 2025, they may face: (1) Civil Penalties: The higher of $71,545 or the transaction amount, up to $286,184, with separate penalties for each violation; or (2) Criminal Penalties: Fines up to $250,000 and/or up to five years of imprisonment.
FinCEN released FAQ’s on the GTO on April 16, 2025.
Implications for Financial Services and Payment Processors
Increased Recordkeeping or Reporting Requirements: Financial institutions are now required to block funds in which a designated cartel or its agents have an interest. This will test already existing compliance frameworks, including enhanced due diligence and transaction monitoring systems. The Southwest Border GTO further intensifies these requirements by mandating Currency Transaction Reports for cash transactions exceeding $200 in designated regions. Institutions also face strict liability for sanctions breaches under the SDGT designations.
Regulatory Risks: Companies engaged in cross-border transactions, particularly with Mexico, may face greater regulatory scrutiny. This includes industries or entities directly or indirectly linked to designated organizations. The TFTP enables regulators to flag routine transactions for additional review, increasing the risk of enforcement actions.
Technology: Payment processors and MSBs must adapt to new reporting requirements and should consider implementing advanced analytics to detect potential sanctions violations. This includes leveraging financial intelligence tools to identify suspicious patterns and mitigate risks.
Data Privacy and Security: The TFTP’s reliance on financial transaction data raises questions about data privacy and security. Institutions should balance compliance with privacy regulations while ensuring the integrity of their systems.
To navigate the evolving regulatory landscape shaped by the U.S. Treasury’s Terrorist Finance Tracking Program (TFTP) and related measures, financial services and payment processing companies should take proactive steps to monitor and react to these changes.