Luxembourg Modernises the Custody Chain to Accommodate Blockchain Technology
On 31 December 2024, the Luxembourg law of 20 December 2024 amending the existing legislative framework on dematerialised securities (Blockchain IV Act) entered into force. As background, dematerialization of securities occurs with the move from physical stock certificates to electronic bookkeeping. When this occurs, actual stock certificates are removed and retired from circulation in exchange for the electronic recording. Securities are then transferred between securities accounts by book transfer.
While Luxembourg’s existing framework covered some preexisting technologies, the primary focus of the amendments made by the Blockchain IV Act is to integrate new technologies, particularly distributed ledger technology (DLT), into the financial sector to enhance legal security and operational efficiency.
The Blockchain IV Act introduces the concept of a “control agent”, an entity that can manage the issuance of dematerialized securities using DLT, providing an alternative to the existing (traditional) model that relies on a central account keeper and a custody chain. The control agent’s role includes maintaining the issuance account, monitoring the chain of custody of dematerialized securities (while the actual securities accounts can be held with different custodians without any custody relationship with the control agent), and ensuring the reconciliation of issued securities with those held in accounts with the relevant custodians. By contrast, the traditional central account keeper maintains the issuance account and sits at the top of the custody chain.
This new model is optional for issuers and aims to provide more flexibility, security, and transparency for both issuers and investors. The amendments also seek to strengthen Luxembourg’s position as a leading financial centre in the European Union (EU) for the use of DLT in unlisted debt and equity securities issuances. Beginning in 2019, Luxembourg has made a series of changes to the existing legal framework, making available the use of DLT in connection with financial instruments and recognising financial instruments issued using DLT in a growing number of fields as equivalent to traditional financial instruments.
Any credit institution (such as a chartered bank) or investment firm established in Luxembourg or any other EU member state, as well as operators of a Luxembourg security settlement system are eligible to serve as a control agent. The Luxembourg financial sector supervisory authority has been tasked with overseeing the compliance of control agents with the new legal requirements. Overall, the Blockchain IV Act aims to modernize the legal framework for securities in Luxembourg by leveraging DLT and other technological advancements, thereby enhancing the competitiveness and attractiveness of the financial sector while ensuring robust legal protections for market participants.
Tanner Wonnacott also contributed to this article.
OMB Memo Pauses Federal Financial Assistance: Legal Challenges and Considerations for Recipients and Subrecipients
Go-To Guide:
The Office of Management and Budget (OMB)’s Jan. 27, 2025, Memorandum M-25-13 pauses funding for financial assistance programs that “may be implicated” by President Trump’s recent Executive Orders.
The programs will be reviewed for consistency with “Administration Priorities.”
The administration may be seeking to terminate awards based on a provision in OMB’s Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) that may permit agencies to terminate financial assistance awards if they “no longer effectuate[] the program goals or agency priorities.”
The “pause” and any future terminations may violate the Congressional Budget and Impoundment Control Act of 1974 (ICA) if the president does not follow its procedures.
The pause has been challenged in U.S. District Court under the Administrative Procedure Act, and a preliminary injunction was issued on Jan. 28.
On Jan. 27, 2025, OMB issued Memorandum M-25-13, entitled “Temporary Pause of Agency Grant, Loan, and Other Financial Assistance Programs.” The Memo directs every federal agency to “temporarily pause all activities related to obligation or disbursement of all Federal financial assistance, and other relevant agency activities that may be implicated by [President Trump’s] executive orders, including, but not limited to, financial assistance for foreign aid, nongovernmental organizations, DEI, woke gender ideology, and the green new deal” effective at 5 p.m. EST on Jan. 28 (emphasis in original).
The pause applies to “(i) issuance of new awards [including all activities related to open Notices of Funding Opportunity (“NOFOs”)]; (ii) disbursement of Federal funds under all open awards; and (iii) other relevant agency actions that may be implicated by the executive orders[.]” The Memo states that OMB may grant exceptions to the pause on a “case-by-case basis.”
The Memo states that “[t]his temporary pause will provide the Administration time to review agency programs and determine the best uses of the funding for those programs consistent with the law and the President’s priorities.” It directs agencies to “submit to OMB detailed information on any programs, projects or activities subject to this pause” and to continue the “pause” “to the extent permissible by law, until OMB has reviewed and provided guidance” to the agency.
The Memo seeks to assert political control over federal assistance programs by directing agencies to assign responsibility and oversight for each federal assistance program to a senior political appointee to ensure each program “conforms to Administration priorities.” It also instructs agencies to review pending NOFOs and other assistance announcements “to ensure Administration priorities are addressed, and, subject to program statutory authority,” modify or withdraw announcements and cancel existing awards that conflict with those priorities “to the extent permissible by law.” The Memo suggests that agencies should initiate more investigations “to identify underperforming recipients.”
The Memo applies to grants, cooperative agreements, loans and loan guarantees, and insurance programs, among other types of assistance, and may impact a broad range of programs, from the CHIPS Act to federal highway funding. As originally written, the only specific exceptions were for Medicare, Social Security, and “assistance received directly by individuals.”
On Jan. 28, OMB issued a Clarification Memo stating that “the pause does not apply across-the-board. It is expressly limited to programs, projects, and activities implicated by the President’s Executive Orders, such as ending DEI, the green new deal, and funding nongovernmental organizations that undermine the national interest.” However, it does not explain how agencies would determine which programs are implicated. The only guidance it provides is that “mandatory programs like Medicaid and SNAP” and “[f]unds for small businesses, farmers, Pell grants, Head Start, rental assistance, and other similar programs will not be paused,” and that if agencies are concerned that specifically exempted programs “may implicate the President’s Executive Orders, they should consult OMB to begin to unwind these objectionable policies without a pause in the payments.” The Clarification Memo also attempts to assuage concerns about the disruption, claiming that a pause might be for as little as one day or less.
The Memo appears to be laying the groundwork for a legal basis to terminate awards the administration disfavors. Its repeated references to “Administration Priorities” allude to a provision in 2 C.F.R. § 200.340 (the termination provision of OMB’s Uniform Guidance for federal financial assistance) that permits agencies to terminate an award if it no longer effectuates “program goals or agency priorities” “to the extent authorized by law.”
Awards issued after the revised Uniform Guidance’s Oct. 1, 2024, effective date may be better protected from this than awards issued before that date, depending on agency-specific implementation dates of the Guidance. When OMB amended the Uniform Guidance last year, it clarified that, if agencies want the option of terminating awards on this basis, it “must clearly and unambiguously specify” that in the award’s terms and conditions. That was not as clear under the prior version, which still applies to most awards made before Oct. 1, 2024. Prior to the 2024 changes, 2 C.F.R. § 200.211 required agencies to “make recipients aware, in a clear and unambiguous manner, of the termination provisions in § 200.340, including the applicable termination provisions in the Federal awarding agency’s regulations or in each Federal award.” But previous § 200.340(b) stated that “[a] Federal awarding agency should clearly and unambiguously specify termination provisions applicable to each Federal award, in applicable regulations or in the award” (emphasis added), suggesting that an agency may terminate an award for no longer effectuating program goals or agency priorities even if the award agreement does not expressly contemplate such a termination.
The “pause” and any future terminations may run afoul of the Congressional Budget and Impoundment Control Act of 1974 (ICA) if the administration does not follow its procedures. An “impoundment” is any action or inaction by a federal government officer or employee that precludes obligation or expenditure of budget authority. The Constitution delegates the power of the purse to Congress, and the president cannot unilaterally withhold funds from obligation. Funds are obligated when the agency has created a definite liability for the associated amount.
The ICA permits the president to temporarily withhold funds from obligation—but not beyond the end of the fiscal year—by proposing a “deferral.” Deferrals cannot be used because a president does not agree with the program. The president may also seek the permanent cancellation of funds for fiscal policy or other reasons, including the termination of programs for which Congress has provided budget authority, by proposing a “rescission” in a “special message” that explains the rationale for the recission. If Congress enacts the proposal, the funds would no longer be available. But if Congress does not enact the rescission within 45 calendar days of continuous session after the special message’s receipt, any withheld funds must be reapportioned and made available for obligation and expenditure. Only discretionary (not mandatory) funds can be subject to recissions and deferrals.
In anticipation of challenges under the ICA, OMB’s Jan. 28, 2025, Clarification Memo declares that the pause “is not an impoundment under the Impoundment Control Act.” It claims that “[t]emporary pauses are a necessary part of program implementation that have been ordered by past presidents to ensure that programs are being executed and funds spent in accordance with a new President’s policies and do not constitute impoundments.”
The pause has been challenged in court—advocacy groups representing non-profits and small businesses filed a lawsuit in U.S. District Court for the District of Columbia on Jan. 28 challenging the pause under the Administrative Procedure Act, and the judge granted their request for a preliminary injunction the same day. A group of State Attorneys General also announced that they will seek injunctive relief.
Affected recipients and subrecipients should look closely at the terms and conditions of their award agreements, agency-specific implementations of the Uniform Guidance (including appeal procedures for grant disputes, to the extent the agency has them), and the authorizing statute and any implementing regulations for the programs they are working on to evaluate their options if the government suspends or terminates their awards. To the extent possible, recipients and subrecipients should also try to avoid incurring costs that were not foreseeable prior to the “pause,” as agencies may later assert these costs are unallowable.
The temporary injunction expires Feb. 3, 2025, at 5 p.m. EST.
Funding Freeze for Health Care Providers – What You Need to Know
Last night, the Office of Management and Budget (“OMB”) released a memo directing federal agencies to take several actions impacting federal grant programs (outlined in greater detail below) that are resulting in real money consequences for health care providers today. Providers need to be aware of these issues and the challenges ahead. We are already working with several providers to mitigate damages and develop strategies to respond to these updates in real time. Each provider is unique, and every provider will respond to and be impacted by these changes differently.
What Happened?
Late on January 27, 2025, the Trump Administration’s Office of Management and Budget (“OMB”) released a memorandum placing a moratorium on payments for almost all federal grants (the “OMB Memo”).1 OMB explained the justification for this pause as follows:
“Financial assistance should be dedicated to advancing Administration priorities, focusing taxpayer dollars to advance a stronger and safer America, eliminating the financial burden of inflation for citizens, unleashing American energy and manufacturing, ending “wokeness” and the weaponization of government, promoting efficiency in government and Making America Healthy Again. The use of Federal resources to advance Marxist equity, transgenderism and green new deal social engineering policies is a waste of taxpayer dollars that does not improve the day-to-day lives of those we serve.”
The OMB Memo directs federal agencies to undertake the following tasks:
Complete a comprehensive analysis of all existing Federal financial assistance programs to determine their alignment with Presidential orders;
During the course of this review, pause (a) the issuance of new awards and (b) the disbursement of federal funds under existing awards. Agencies must also take all other relevant agency actions to comply with this direction and Trump’s executive orders until directed by OMB to do otherwise; and
Every federal financial assistance program must be assigned to a senior political appointee who will evaluate, modify or cancel existing awards that conflict with Administration policies, and ensure adequate oversight over award distribution.
Timeline
January 27, 2025 – OMB Memo issued
January 28, 2025 (5:00 PM) – Funding freeze implemented (on hold)
February 3, 2025 (5:00 PM) – Order halting funding freeze expires
February 7, 2025 – OMB guidance deadline for agency submission of information regarding identified programs with funding or activities planned through March 15, 2025
February 10, 2025 – OMB Memo deadline for agencies to provide detailed information on review of programs
Why Does This Matter for Health Care Providers?
Providers of every type depend on federal grant funds as a key component of their operating and service budgets. Both the Medicaid and CHIP Programs are structured as “grant” programs to the states and are specifically identified by OMB on the list of grant programs to be reviewed.2 Guidance issued today by OMB suggests that Medicaid is a mandatory program that will not be paused, but we have also seen reports from several states, including Illinois, that they are unable to access federal Medicaid funding.3 Regardless of the ultimate outcome, providers can expect temporary uncertainty related to Medicaid funding status.
In addition to major sources of health care coverage, there are innumerable smaller grants that providers rely on to help make ends meet and extend services to their communities, including grants for substance use disorder treatment, provider education and training, telehealth expansion and rural health care services. Without the availability of these programs, even on a temporary basis, health care providers face a difficult operational reality resulting in loss of cash flow, failure to meet payment obligations (even payroll) and service disruption for particularly vulnerable patient populations. We are already aware of providers who have been frozen out of grant portals, and who are unable to draw down funds.
Providers who rely on federal funds should inventory each of their grant programs and determine whether they can still lawfully access funds.4 Keep watching this space – there will be rapid developments over the next several days as providers, state governments and other stakeholders respond. There is a wide array of options available to providers to respond to these changes – if you’re unsure of the best path for your organization, we’re here to help.
As of 3:30pm (MST) A D.C. Federal Judge temporarily blocked Trumps administration from freezing federal grants. More details will be available in the webinar tomorrow.
Temporary Reprieve. Late afternoon, D.C. District Court Judge Loren AliKhan temporarily halted the freeze ordered by the OMB Memo to allow additional time for consideration. Judge AliKhan’s order expires February 3 at 5:00 pm, and there will likely be many further developments over the next week.
[1] Executive Office of the President, Office of Management and Budget, M-25-13 Temporary Pause of Agency Grant, Loan, and Other Financial Assistance Programs (Jan. 27, 2025).
[2] The OMB Memo specifically exempts Social Security and Medicare, these are the only two express exemptions.
[3] Executive Office of the President, Office of Management and Budget, Untitled FAQ (Jan. 28, 2025).
[4] Executive Office of the President, Office of Management and Budget, Instructions for Federal Financial Assistance Analysis in Support of M-25-13 (Jan. 27, 2025).
CTA Update: Enforcement Remains Suspended Despite U.S. Supreme Court Granting Stay of Preliminary Injunction
Go-To Guide:
On Jan. 23, 2025, the U.S. Supreme Court granted the U.S. government’s request for a stay of the nationwide preliminary injunction of the CTA issued in Texas Top Cop Shop, Inc. v. McHenry.
The Supreme Court was not asked to address an injunction issued by another federal judge, which ordered preliminary relief to prevent CTA enforcement on Jan. 7, 2025 (Smith v. U.S. Department of the Treasury).
FinCEN confirmed that reporting companies under the CTA rulemaking are not currently required to file BOI reports and are not subject to liability if they fail to do so while the Smith order remains in force.
Given the rapidly changing landscape, reporting companies under the CTA rulemaking should continue to monitor CTA developments so they can be prepared to file Beneficial Ownership Information (BOI) reports if the injunction is once again stayed, lifted, or otherwise made ineffective (e.g., via FinCEN reversing its position).
On Jan. 23, 2025, the U.S. Supreme Court granted the U.S. government’s request for a stay (SCOTUS Order) of the nationwide preliminary injunction of the Corporate Transparency Act (CTA) issued by the U.S. District Court for the Eastern District of Texas in Texas Top Cop Shop, Inc. v. McHenry.1 According to the brief order, the stay remains in effect pending disposition of the appeal before the Fifth Circuit and subsequent disposition of a petition for a writ of certiorari, if any.
Oral arguments for the expedited Fifth Circuit appeal are scheduled for March 25, 2025.
Background
The status of the CTA has shifted multiple times since Dec. 3, 2024, when a Texas district court in Texas Top Cop Shop, Inc. v. McHenry (formerly Texas Top Cop Shop, Inc. v. Garland), preliminarily enjoined the CTA and its BOI reporting rule (Reporting Rule) on a nationwide basis, approximately four weeks ahead of a key Jan. 1, 2025, deadline. As we previously reported, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) appealed that ruling, and on Dec. 23, 2024, a motions panel of the U.S. Court of Appeal for the Fifth Circuit stayed the injunction, allowing the CTA to go back into effect. Three days following the stay, on Dec. 26, 2024, a different Fifth Circuit panel issued an order to vacate the motion panel’s stay, effectively reinstating the nationwide preliminary injunction against the CTA and the Reporting Rule. On Dec. 31, 2024, the U.S. government filed an emergency application with the Supreme Court to stay the preliminary injunction once again.
On Jan. 7, 2025, another federal judge of the U.S. District Court for the Eastern District of Texas ordered preliminary relief barring CTA enforcement in Smith v. U.S. Department of the Treasury.2 To date, the government has not appealed the ruling in Smith.
The SCOTUS Order
In response to the SCOTUS Order, FinCEN updated its website on Jan. 24, 2024, noting:
As a separate nationwide order issued by a different federal judge in Texas (Smith v. U.S. Department of the Treasury) still remains in place, reporting companies are not currently required to file beneficial ownership information with FinCEN despite the Supreme Court’s action in Texas Top Cop Shop [emphasis added]. Reporting companies also are not subject to liability if they fail to file this information while the Smith order remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports.
Takeaways
No filings under the CTA are currently required by law, including the initial BOI reports that reporting companies formed or registered prior to 2024 would otherwise have been required to file by Jan. 13, 2025, pursuant to an extension that FinCEN granted on Dec. 27, 2024.
While enforcement of the CTA remains suspended, reporting companies and affected individuals should continue to monitor CTA developments and consider what steps they may need to take to be prepared to file their BOI reports in short order if the injunction is once again stayed, lifted, or otherwise made ineffective.
1 McHenry v. Texas Top Cop Shop, Inc., No. 24A653, 2025 WL 272062 (U.S. Jan. 23, 2025).
2 See Smith v. United States Dep’t of the Treasury, No. 6:24-CV-336-JDK, 2025 WL 41924 (E.D. Tex. Jan. 7, 2025)
State of Play: Temporary Pause of Agency Grants, Cooperative Agreements, Loans, and Other Financial Assistance Programs
UPDATE: As of 5:00 PM EST on January 28, a federal judge has temporarily blocked the Trump administration from enforcing the freeze detailed below. This situation is ongoing and clients should still prepare accordingly.
On Monday evening, the Office of Management and Budget (OMB) ordered all federal agencies to temporarily suspend grants, cooperative agreements, and loan payments, with the exception of Social Security, Medicare, and “assistance provided directly to individuals.” In the internal memo, OMB’s Acting Director, Matthew Vaeth, calls for each agency to undertake a comprehensive analysis to ensure all financial assistance programs comply with the Administration’s Executive Orders. The pause applies to an estimated 2,600 accounts across the federal government, and details are still being worked out on federal funding that is statutorily obligated.
While intended to be temporary, the duration of the pause may vary by Department and program. Each federal department and agency are likely to interpret its scope and requirements differently and prioritize review of certain programs before others. This pause may have a profound effect on clients who were expecting to receive federal funds within the next two to six weeks. While the pause has the potential to affect any business or entity receiving federal funding, clients receiving such funds as part of programs related to DEI initiatives, foreign aid, or federal clean energy investments, specifically electric vehicles, may be most impacted.
Some of the questions agencies must answer in the report for OMB include whether or not the program supports illegal immigrants, if the program supports abortion, gender ideology or DEI initiatives, or if the program supports activities that impose an undue burden on the identification, development, or use of domestic energy resources. It is important to note that only a handful of President Trump’s cabinet secretaries and agency heads have been confirmed, making this process all the more complicated.
Key Facts
All affected federal assistance will be paused starting today, January 28, at 5:00 pm ET.
This affects ALL federal agencies.
The government-wide freeze is temporary and is intended to allow each agency to conduct a comprehensive analysis of all federal financial assistance programs to identify programs, projects, and activities that may be implicated by any of the President’s Executive Orders.
Agencies have until February 10, 2025, to submit to OMB detailed information on each program subject to this pause.
The freeze will include:
Issuance of new awards;
Disbursement of Federal funds under all open awards; and
Other relevant agency actions that may be implicated by Trump’s Executive Orders until OMB has reviewed and provided guidance based on what is received.
Could this Affect You?
Yes, if your business receives federal grants, cooperative agreements, or loans, the pause will almost certainly affect you until at least February 10th and potentially beyond. If your company is concerned about the funding pause, or you are impacted by any of the recent Executive Orders, it is critical to determine the risk posed by the pause or Executive Order and to develop a response that evaluates both their legal and political options.
Data Privacy Insights Part 1: North Carolina Ranks High in Cybercrime Complaints
With Data Privacy Awareness Week underway, there’s a renewed focus on the importance of securing data.
The FBI’s Internet Crime Complaint Center (IC3) report sheds light on the growing threat of cybercrime, both nationally and within North Carolina. The state ranks among the top 15 in the U.S. for cybercrime complaints, highlighting significant local challenges.
National Cybercrime Trends
The report paints a grim picture of the national cybercrime landscape, with over 880,000 complaints filed and a staggering $12.5 billion in reported losses in 2023. Among the most common crimes were phishing attacks, non-payment/non-delivery scams, and personal data breaches. Business Email Compromise (BEC) scams and cryptocurrency-related fraud continue to account for a large share of financial losses, highlighting the sophisticated tactics employed by cybercriminals.
Challenges in North Carolina
In North Carolina, the top-reported crimes align with national trends, including phishing, identity theft, and BEC scams. However, the state’s financial losses underscore the disproportionate impact of these crimes on businesses and individuals alike. Notable figures from the report include:
12,282 Complaints Filed: North Carolina accounted for nearly 2% of all complaints nationwide.
$234 Million in Financial Losses: The state ranks 13th in the nation for total losses, reflecting the high stakes of these attacks.
These statistics highlight a pressing issue that demands urgent action from both private and public sectors to address vulnerabilities and reduce risks.
Who Is Being Targeted?
Certain industries and sectors have become prime targets for cyberattacks due to the sensitive data they handle or their operational vulnerabilities. According to the report, these include:
Healthcare: This sector faced a surge in ransomware and database leaks in early 2024, causing disruptions in patient care and financial loss.
Legal Services: Organizations such as law firms and courthouses are targeted for their sensitive client and case data, making them lucrative targets for cybercriminals.
Supply Chains: The interconnected nature of supply chains makes them attractive for disruption and data theft, with downstream effects on multiple businesses.
Engineering and Construction: These industries remained consistent targets through 2023 and 2024, particularly due to their involvement in critical infrastructure projects.
Financial Institutions: Banks and other financial entities are frequent targets due to the valuable financial information they manage, including payment systems and client records.
Governments: Local and state governments face ongoing threats due to their extensive networks and sensitive information, ranging from personal data to national security concerns.
Education: Schools and universities often face cyberattacks aimed at accessing student and faculty data, leading to significant breaches that disrupt learning environments.
Looking Ahead
As cybercrime continues to evolve, it is essential for businesses, individuals, and government agencies to collaborate to enhance their defenses. The IC3 report calls for North Carolina to bolster its security measures to shield its residents and businesses from the growing financial and emotional impacts of cybercrime. Stay tuned for part two, where we’ll explore common types of data breaches and strategies to protect your business.
New President Offers Opportunities for Local and Foreign Investors
On January 13th, 2025, President Sheinbaum presented the Mexico Plan (MP), which details tax incentives, provides for greater efficiency in administrative processes, and outlines investment goals for infrastructure related to energy, urban mobility, and housing, among others.
Nearshoring
Under the MP, the Mexican government intends to incentivize new investments that promote organizational training as well as innovation by encouraging relocation of companies and restructuring of supply chains related to manufacturing.
The MP enables accelerated depreciation of new investments in fixed assets (41% – 91%) as well as additional deductibility of expenses related to training and innovation (25% of the increase in expenses over the average of the last three fiscal years).
These new tax incentives will be subject to assessment by an Evaluation Committee that will certify compliance of investment milestones. The referred Committee will annually set the cap of incentives that compliant taxpayers may benefit from. The referred benefits will be available beginning January 22, 2025, and will apply to fixed assets acquired up to September 30, 2030, and to training and innovation expenses incurred up to and including tax year 2030.
Investment Zones
The MP promotes 12 new geographical investment areas (Tamaulipas, Puebla, AIFA-Tula, Bajío, Piedras Negras, Nuevo Laredo, Hermosillo, Puerto Lázaro Cárdenas, among others), in addition to those implemented by former President Lopez Obrador, by providing tax incentives to investors operating in Strategic Sectors (semiconductors, electronics, energy, logistics, tourism, agroindustry, infrastructure, IT, electromobility and automotive, medical devices, and pharmaceuticals), who relocate or open operations in these areas. Tax incentives available to qualifying companies include:
100% tax credit on income tax generated during the first three years.
A tax credit of 50% to 90% of the income tax generated during the following three fiscal years, which will be granted if the employment levels, to be determined in accordance with guidelines to be issued by the Ministry of Finance, are met.
Immediate 100% deduction of investments made during the first six years in new fixed assets used for production, excluding furniture, office equipment, automobiles, armored vehicles, and unidentifiable fixed assets.
100% tax credit of the VAT resulting from the sale of assets, rendering of services, or lease of assets between companies located within the investment areas.
These tax incentives are not applicable to taxpayers under the maquila regime; the optional regime for controlled groups; Real Estate Investment Trusts; or companies participating in cinematographic or theater production or distribution, music, dance, visual arts, or research and development of technology related to high performance sports.
Government Banks
To further incentivize companies operating in the outlined Strategic Sectors, the MP provides for Government banks to provide: (A) preferential loans (with competitive interest rates) to companies within the Strategic Sectors. The specific fund for these loans will be announced on February 7, 2025; (B) preferential long-term loan rates for small- and medium-sized companies to increase their working capital, technology, and exportation capabilities, enabling reverse factoring (supply chain finance) at an annual rate of 3.5%; (C) dedicated loans to incentivize acquisition of new technologies and machinery; (D) subsidies and loans to include Mexican incorporated companies (no limit on whether they are foreign owned) into international supply chains (e.g., automobile, aerospace, and electronics); and (E) preferential loan rates for long-term infrastructure projects (e.g., highways, airports, and telecommunications networks) in underserved areas.
IMMEX 4.0
The MP provides for the implementation of the IMMEX 4.0 Program to consolidate, within the Ministry of Economy, application processes to obtain authorization to operate under an IMMEX program (deferral of import duties on temporary imports) and VAT Certificate (100% credit of VAT on temporary imports). The referred consolidation is intended to significantly reduce application times (currently fluctuating for up to two years) and ease compliance with requirements.
Public Investment
Additionally, the MP creates a public investment project that prioritizes five specific sectors: Energy, PEMEX (State-Owned Petroleum Company), Water, Transportation and Mobility, and Public Housing.
Energy: US$23.4 billion will be allocated for electricity generation, transmission, and distribution; US$12.3 billion for new power plants; US$7.5 billion to strengthen the transmission network; and US$3.6 billion for the distribution network.
PEMEX:MX$2.07 trillion with an annual average of MX$345.5 billion will be allocated to strengthen exploration, production, and oil & gas.
Water: MX$20 billion will be invested in water projects in 2025, which will focus on cleaning up key rivers and modernizing irrigation systems covering 200,000 hectares of land. The primary watershed area includes the Lerma-Santiago, Atoyac, and Tula rivers. This section also includes the implementation of 16 infrastructure projects under the Mexican National Agreement for the Human Right to Water and Sustainability (as published on December 12th, 2024) that will include more than MX$16.4 billion of private investment.
Transportation and Mobility: To improve urban mobility and infrastructure, an investment in more than 3,000 km of railroads for passenger and cargo transportation is planned.
Public Housing: The plan contemplates the construction of one million homes (CONAVI and INFONAVIT) for which MX$513 billion will be allocated.
Additionally, the development of a National Technical Certification Program for 150,000 professionals and technicians per year is also being proposed as part of public investment in strategic sectors.
This entire investment plan, along with the adjustments in government budgets, represents a unique opportunity for foreign suppliers that engage in these strategic areas, to be considered by the Mexican Government for public procurement. Therefore, in addition to the benefits that this investment model offers suppliers eligible for public/state-banking funding and other incentives, this investment scheme results into an attractive option for both parties.
Digitalization and Efficiency in Administrative Processes
The MP proposes a complete digitalization and on-line channel for administrative applications to promote efficiency in obtaining authorizations for participation in commercial programs and investment projects. A launch date for this has not been announced yet. Our Firm has the team and capabilities to assist our clients in the design and implementation of strategies that allow them to benefit from the development of the proposed measures under the Mexico Plan.
UK FCA Letter Expresses Concerns About Fund Service Providers
Go-To Guide:
UK Financial Conduct Authority (FCA) highlights concerns about fund service providers in “Dear CEO” letter.
FCA identifies seven main risk areas, including operational resilience, cyber security, third-party management, and client asset protection.
Fund managers to review the FCA’s risk areas when conducting due diligence on potential service providers.
FCA plans to assess fund service providers’ compliance and may use formal intervention powers if necessary.
In late 2024, the United Kingdom’s Financial Conduct Authority (FCA) published a “Dear CEO” letter related to the FCA’s “Custody and Fund Services Supervision Strategy.” The letter shares the FCA’s expectations of UK FCA-authorised firms that act as custodians, depositories, and administrators in the funds sector. Importantly the letter also highlights some of the regulatory risks and topics fund managers should be reviewing as part of their due diligence before selecting service providers for their funds, irrespective of whether the service provider is an FCA-authorised firm in the UK or is domiciled offshore.
The overwhelming message from the FCA, is that fund service providers must have processes and procedures in place to identify risks and implement rules related to the areas of concern detailed below. The FCA will use its powers where necessary and conduct assessments on “a selection of firms” to ensure that firms comply with the requests made in the FCA’s letter. The FCA has also provided a reminder to in-scope firms that they must have performed mapping and testing to provide assurance that they are able to remain within impact tolerances by 31 March 2025.
The FCA has focussed on the following risks in the funds sector, which service providers must be identifying and mitigating.
1.
Operational Resilience
In the Dear CEO letter, the FCA state that they will focus on monitoring funds service providers’ compliance with, and implementation of, existing rules and guidance on building operational resilience. According to existing FCA requirements, authorised fund service providers must have performed mapping and testing by 31 March 2025 to provide assurance that they can remain within impact tolerances for each important business service in severe but plausible scenarios.
Within authorised fund service providers, the FCA is looking for evidence of prompt deployment of incident management plans; prioritisation of important business services to reduce operational and client impact; detailed mapping of delegation by fund service providers in order to understand underlying exposures to the same providers; and processes in place for clear communication with the FCA where required.
2.
Cyber Resilience
The FCA states that some funds service provider’s sub-optimal cyber resilience and security measures pose risks in the funds sector. The FCA notes that that it will continue to focus on this as a threat, including (i) how effectively firms manage critical vulnerabilities; (ii) threat detection; (iii) business recovery; (iv) stakeholder communication; and (v) remediation efforts to build resilience.
The letter is clear that fund service providers should ensure that their governing bodies are provided not only with a report of effectiveness of controls, but also with an assessment of the cyber risks present.
3.
Third Party Management
Fund service providers naturally (due to the levels of relevant expertise required) delegate specific roles to third parties. In its letter, the FCA has expressed concern that operational incidents involving third parties remain frequent. Where there is inadequate oversight, the likelihood of such incidents increases.
The FCA plans to assess fund service providers’ oversight, not only of their delegates, but also of those delegates’ delegates, including key material supplier relationships and management.
The FCA expects firms to have effective processes in place to identify, manage, monitor, and report third-party risks, and to perform an assessment on, and mapping of, third-party providers.
4.
Change Management
In its letter, the FCA has noted that with advances in technology (such as automation, artificial intelligence, and distributed ledger technology) and regulatory developments (such as settlement cycle changes), fund service providers must ensure that they are managing changes appropriately in order to maintain market integrity.
The FCA will assess a selection of fund service providers to review their change management frameworks, which involves looking at their overall approach and methodology, including testing, to understand how client and consumer outcomes have been considered.
The FCA has published guidance detailing key areas that contribute to successful change management. In addition, if any major firm initiatives or strategy changes are contemplated, fund service providers are encouraged to engage in early dialogue with the FCA.
5.
Market Integrity
In light of the increased use of sanctions and related complexity, the FCA has stated that it will review the effectiveness of select fund service providers’ systems and controls, governance processes, and resource sufficiency in connection with sanctions regime compliance.
The FCA expects that fund services providers should have effective procedures in place to detect, prevent, and deter financial crime, which should be appropriate and proportionate. Senior management at providers should take clear responsibility for managing and addressing these risks. Firms should have robust internal audit and compliance processes that test the firm’s defences against specific financial crime threats.
6.
Depositary Oversight
The FCA has identified a gap in expectations over the role of depositaries and has noted that, in its view, depositaries “have often demonstrated a less than proactive approach” to their oversight, risk identification, and escalation processes in relation to funds and AIFMs. The FCA will be clarifying its rules for, and expectations of, depositaries.
In its letter, the FCA notes that it expects depositaries to act more proactively in the interests of fund investors. They should provide effective, independent oversight of AIFMs’ operations and funds’ adherence to FCA rules. The FCA also reminds depositaries that they are expected to have processes in place to ensure that they receive the information needed to perform their duties.
7.
Protection of Client Assets
Protection of client assets is a regulatory priority set out in the FCA’s 2024/5 Business Plan. The FCA has identified weaknesses in important areas within fund service providers, including books and records and dependency on legacy IT infrastructure, which is at its end of life and includes high levels of manual processing and controls. The FCA has noted that it will continue to identify weaknesses and use formal intervention powers if necessary.
Takeaways
The FCA’s “Dear CEO” letter to fund service providers is both a warning and a plea for fund service providers to do all that they can to mitigate the risks identified by the FCA.FCA authorised fund service providers must expect the FCA to write to them later in 2025 seeking their own evaluation of their progress in mitigating the risks identified by the FCA in the FCA’s letter.
Importantly, fund managers should, as part of their due diligence in relation to the appointment of fund service providers (irrespective of whether the service provider is in the UK or is based offshore), be exploring how the risks identified by the FCA are being mitigated.
Brussels Regulatory Brief: Winter 2024-2025
Antitrust and Competition
European Commission Imposes a Total Fine of €5.7 Million for Restricting Cross-Border Sales
On 28 November 2024, the European Commission imposed a total fine of €5,737,000 million on a company active in the fashion industry and its largest licensee for breaching Article 101(1) of the Treaty on the Functioning of the European Union by restricting cross-border sales of the fashion brand’s products, as well as sales of such products to specific customer.
Sanctions
Additional Clarity on Obligation to Ensure Sanctions Compliance of Subsidiaries
The European Commission has published clarifications on EU companies’ obligation to undertake best efforts to ensure that also their non-EU subsidiaries do not participate in activities that undermine EU sanctions.
Financial Affairs
European Supervisory Authorities (ESAs) Release Joint Report on Principal Adverse Impact Under Sustainable Finance Disclosures Regulation (SFDR)
The three EU financial supervisory authorities issued their annual report on the functioning of SFDR and the disclosure of principal adverse impacts by financial market participants.
European Commission Adopted Delegated Regulation Postponing Basel III Implementation
The European Commission adopted a delegated regulation postponing the applicability of Basel III funds requirements to 1 January 2026.
ANTITRUST AND COMPETITION
European Commission Imposes a Total Fine of €5.7 Million for Restricting Cross-Border Sales
On 28 November 2024, the European Commission (Commission) imposed a total fine of €5,737,000 million on a company active in the fashion industry (Company), which received a fine of €2,237,000, and to its largest licensee (Licensee), which received a fine of €3,500,000, for breaching Article 101(1) of the Treaty on the Functioning of the European Union (TFEU).
Article 101(1) TFEU prohibits agreements and concerted practices that may affect trade and prevent or restrict competition within the European Union Single Market (EU Single Market). The Commission decision follows its investigation launched in January 2022 into alleged sales restrictions under licensing agreements for the production and distribution of the Company’s products. The Commission’s investigation was initiated following unannounced inspections (also known as “dawn raids”) conducted on 22 June 2021, at the premises of the Licensee.
The Commission found that, for more than 10 years, the Company and the Licensee entered into anticompetitive agreements and concerted practices in order to prevent other licensees from selling the Company’s branded clothing both offline and online: (i) outside their licensed territories; or (ii) to low-price retailers (e.g., discounters) that offered the clothing to consumers at lower prices. The Commission stated that these practices prevented retailers from being able to freely source products in EU Member States with lower prices and artificially partitioned the EU Single Market. It also found that the ultimate objective of such coordination was to ensure that the Licensee benefited from absolute territorial protection in the countries covered by its licensing agreements. The Commission calculated the fine according to various factors, such as the serious nature of the infringement, its geographic scope, and its duration. Moreover, the Commission stated that, further to a claim for inability to pay the fine, it granted a reduction of the fine to one of the companies involved. This may explain why the Licensee’s fine was higher than the Company’s fine.
This investigation is in line with two other investigations into the fashion industry that the Commission launched with unannounced inspections in May 2022 and April 2023. Due to priority reasons, the 2022 investigation was closed in 2024 whereas the other investigation is still ongoing. The Commission’s decision in the present case is consistent with its recent enforcement trends regarding price differences and territorial supply constraints impacting the EU Single Market. On 23 May 2024, the Commission imposed a fine on one of the leading manufacturers of chocolate, biscuits, and coffee products of €337.5 million for restricting cross-border trade within the EU Single Market. In addition, shortly after this decision, the Commission announced that it will launch an EU fact-finding investigation to assess perceived territorial supply constraints that could impact cross-border trade between the EU Member States. As it was the case with the energy and pharmaceutical EU sector inquiries, the Commission’s sector inquiry into territorial supply restraints is expected to lead to enforcement actions and legislative measures aimed at tackling the identified barriers.
SANCTIONS
Additional Clarity on Obligation to Ensure Sanctions Compliance of non-EU Subsidiaries
On 24 June 2024, the European Union adopted its 14th package of sanctions against Russia. A notable addition was made to Article 8a of Council Regulation (EU) No 833/2014, which introduced the requirement that EU operators “undertake their best efforts to ensure that any legal person, entity, or body established outside the [European] Union that they own or control does not participate in activities that undermine the restrictive measures provided for in [the] Regulation.” A similar clause has been included also in the Belarus sanctions framework.
On 22 November 2024, the Commission published frequently asked questions (FAQs) to clarify the “best efforts” obligation. The Commission explained that EU operators will in principle be liable if they are aware of, and accept, that any non-EU entities that they own or control are undermining EU sanctions, since they cannot be considered as having undertaken their “best efforts” in ensuring compliance, i.e., undertaking all necessary, suitable, and feasible actions to prevent such undermining. However, the efforts requested should only be those that are considered “feasible”, depending on the “nature… size and the relevant factual circumstances” of the EU operator, particularly the extent of “effective control over the legal person, entity or body.” EU operators will not be expected to exercise control over their subsidiaries when they do not have a power to effectively influence the subsidiary’s behavior. However, this will not apply if the loss of control was caused by the EU operator itself, such as due to inadequate risk assessments or unnecessary risk-prone decisions.
EU operators may be able to show they undertook their “best efforts” for example by establishing and operating internal compliance programs, regular sharing of compliance standards and adopting mandatory training and reporting requirements for all their subsidiaries.
The FAQs reaffirm the European Union’s determination to broaden and strengthen the application of sanctions in order to hinder Russia’s military action in Ukraine. Whilst the FAQs do not represent binding obligations, they are reflective of the Commission’s intentions and could be relied upon by EU enforcement agencies. Operators are, therefore, encouraged to take a proactive approach to ensure adherence to compliance measures also by their non-EU subsidiaries.
FINANCIAL AFFAIRS
ESAs Release Joint Report on Principal Adverse Impact under SFDR
On 30 October 2024, the European Supervisory Authorities (ESAs) comprising the European Securities and Markets Authority, the European Banking Authority, and the European Insurance and Occupational Pensions Authority, published a joint report on principal adverse impact (PAI) disclosures under the Sustainable Finance Disclosure Regulation (SFDR).
The report examines the quality and compliance of disclosures provided by financial market participants, highlighting significant improvements in this area. Many firms have adopted clearer templates and methodologies for reporting adverse sustainability impacts, making their disclosures more accessible to investors. Best practices include the use of dedicated sustainability sections on company websites, explicit descriptions of actions taken to mitigate adverse impacts and detailed methodologies for data collection and indicator calculations.
However, the ESAs underline that smaller firms, which can voluntarily disclose PAI information, continue to lack full alignment with SFDR requirements. Common issues include vague or incomplete information, unclear methodologies, and a lack of quantifiable targets. The ESAs also identified several challenges in implementing and supervising PAI disclosures. Disparities in data availability, inconsistent methodologies, and resource constraints among smaller financial market participants limit the comparability and reliability of their disclosures.
To address these issues, the authorities have proposed several recommendations for both the Commission and national competent authorities, including reducing the frequency of ESAs’ reports from annual to biennial or triennial frequency to allow more in-depth analysis, refining proportionality thresholds for mandatory disclosures to better reflect the size and impact of investments rather than employee counts, and enhancing supervisory tools such as technology-driven data analysis and targeted outreach programs.
In a related development, on 1 December 2024 the new Commissioner for Financial Stability, Financial Services and Capital Markets Union, Maria Luís Albuquerque, took office. President von der Leyen specifically tasked her to explore ways to promote a transparent categorization of financial products and services with sustainability features. During her mandate, she will therefore lead the review of SFDR, for which a public consultation was conducted in September 2023.
Commission Adopted Delegated Regulation Postponing Basel III Implementation
On 31 October 2024, the Commission adopted a delegated regulation amending the Capital Requirements Regulation and delaying the implementation of the Basel III reforms in the Fundamental Review of the Trading Book (FRTB) standards for calculating own funds requirements by one year.
The FRTB standards, developed by the Basel Committee on Banking Supervision, were introduced to improve the risk sensitivity and robustness of market risk frameworks for banks. These standards were transformed into binding calculation requirements for banks in 2024, however, with several global jurisdictions delaying their implementation, the EU faced competitive disadvantage risks for its financial institutions. The delegated regulation thus postpones the FRTB’s application to 1 January 2026, while requiring institutions to continue reporting market risk exposures under pre-FRTB approaches until then.
The postponement also aligns related disclosure requirements, ensuring consistency while maintaining market discipline. Institutions will continue to disclose pre-FRTB market risk metrics during the transitional period to support transparency and investor confidence. The postponement underlines the Commission’s strategic approach to balance prudential stability with global regulatory alignment.
Kathleen Keating, Covadonga Corell Perez de Rada, Simas Gerdvila, and Nikolaos Peristerakis contributed to this article.
Massachusetts Expands FCA Liability To Owners and Private Equity Investors
Under a new 2025 law, Massachusetts is one of the first in the nation to broaden its state False Claims Act (FCA) to require disclosures by investors and owners of health care entities. On January 8, 2025, Governor Maura Healey signed into law H.5159, An Act enhancing the market review process (the Act), significantly changing Massachusetts’s regulatory and enforcement landscape. As discussed in further detail here, the law imposes FCA liability against investors and focuses on private equity and corporate ownership in health care. While this Act appears to be the first direct codification of FCA liability, it is consistent with the Department of Justice (DOJ) and Office of the Inspector General, U.S. Department of Health and Human Services’ (HHS-OIG) recent focus on private equity and the impact on health care.[1] While the DOJ has focused on private equity firms that allegedly knew of misconduct at portfolio companies and failed to stop it through their involvement in the operations of those companies, the MA FCA goes further by imposing liability on health care investors for merely being aware of misconduct and failing to report it to the state. H. 5159 expands the scope of the MA FCA enforced by the Commonwealth’s Attorney General[2] to apply to any person who has an “ownership or investment interest” and any person who violates the false claim statute that “knowingly” or “knows” about the violation[3] and fails to disclose the violation to the government within 60 days of identifying the violation. This is a significant expansion of the traditional protections afforded by the corporate veil and appears to be designed to hold private equity and other owners liable if they become aware of any MA FCA violations and fail to take action.
As part of the expansion, the Act defines “ownership or investment interest” as any: (1) direct or indirect possession of equity in the capital, stock, or profits totaling more than ten percent of an entity; (2) interest held by an investor or group of investors who engages in the raising or returning of capital and who invests, develops, or disposes of specified assets; or (3) interest held by a pool of funds by investors, including a pool of funds managed or controlled by private limited partnerships, if those investors or the management of that pool or private limited partnership employ investment strategies of any kind to earn a return on that pool of funds. This amendment clearly expands MA FCA liability to private equity investors and appears to codify the Massachusetts Attorney General’s approach in an October 2021 settlement with a private equity firm and former executives of South Bay Mental Health Center, Inc. for allegedly causing the submission of false claims submitted to MA’s Medicaid program.[1]
Additional enforcement mechanisms codified in the Act include expanding the Attorney General’s authority to obtain information as part of a civil investigative demand from significant equity investors, health care real estate investment trusts, or management services organizations.[2]
We will continue to monitor this activity and any resulting litigation and its possible impact on organizations transacting business in Massachusetts.
[1] https://www.mass.gov/news/private-equity-firm-and-former-mental-health-center-executives-pay-25-million-over-alleged-false-claims-submitted-for-unlicensed-and-unsupervised-patient-care.
[2] To be codified at MGL 12, s. 11N.
[1] For example, see Justice Department, Federal Trade Commission and Department of Health and Human Services Issue Request for Public Input as Part of Inquiry into Impacts of Corporate Ownership Trend in Health Care, available at https://www.justice.gov/opa/pr/justice-department-federal-trade-commission-and-department-health-and-human-services-issue; see also, https://www.hhs.gov/about/news/2025/01/15/hhs-releases-report-consolidation-private-equity-health-care-markets.html
[2] To be codified at MGL 12, §§ 5A and 5B.
[3] The Act clarifies that “knowing,” “knowingly,” or “knows” all mean “possessing actual knowledge of relevant information, acting with deliberate ignorance of the truth or falsity of the information or acting in reckless disregard of the truth or falsity of the information; provided, however, that no proof of specific intent to defraud shall be required.”
ALERT: Trump Administration Issues “Pause” on Federal Grant Spending Effective January 28
On January 27, 2025, the White House Office of Management and Budget (“OMB”) released a memorandum regarding “Temporary Pause of Agency Grant, Loan, and Other Financial Assistance Programs” (OMB Memorandum M-25-13; hereinafter the “OMB Memo”)). The OMB Memo directs Federal agencies, inter alia, to: (1) identify and review all Federal financial assistance programs consistent with President Trump’s recent policies and Executive Orders (“EO”); and (2) “temporarily pause all activities related to obligation or disbursement of all Federal financial assistance, and other relevant agency activities that may be implicated by the executive orders” cited in the OMB Memo. The OMB Memo is effective January 28, 2025, at 5:00PM EST – though the breadth of its reach remains to be seen.
The OMB Memo’s first mandate undoubtedly applies to all Federal financial assistance and grant programs currently being managed by the Federal Government. This includes everything from NTIA’s Broadband Equity Access and Deployment Program (“BEAD”), to Commerce’s/NIST’s CHIPS for America Programs, and the billions of dollars Congress has appropriated under the Infrastructure Investment and Jobs Act (“IIJA”) and the Inflation Reduction Act (“IRA”) to numerous other federally funded programs. All programs will be reviewed to ensure they align with President Trump’s various Executive Orders, including those on foreign aid, DEI, and energy.
The real question, though, is the ultimate scope of the OMB Memo’s second mandate, to pause all obligations and disbursements of Federal grant funding. As written, the OMB Memo suggests the pause relates only to Federal programs “that may be impacted by the executive orders,”[1] included in the OMB Memo. Therefore, absent additional guidance to the contrary, we do not read the OMB Memo as expanding beyond this limitation to technically cover all Federal programs, such as semiconductor manufacturing, that may not be directly impacted or covered by the listed EOs.
We recognize though that different interpretations may result from reviewing OMB’s direction. For example, OMB also directs agencies to “complete a comprehensive analysis of all of their Federal financial assistance programs,” to “pause all activities associated with open NOFOs, such as conducting merit review panels,” and suggests the disbursement pause is to allow the Administration time to “review agency programs and determine the best uses of the funding for those programs consistent with the law and the President’s priorities.” Particularly where almost every Federal program will be impacted in some way by President Trump’s EO on “Ending Radical and Wasteful Government DEI Programs and Preferencing,” we can see where the OMB Memo could result in a pause to all Federal grant programs as agencies review their agreements to ensure they align with the Administration’s new policies.
We expect additional guidance and announcement from agencies imminently – and are aware that some grant recipients have already received written notice of “pause” from their Federal Awarding Agencies.
In the meantime, if you are a federal grant recipient or subrecipient, absent a challenge on constitutional bases, the Federal government likely will not be paying your invoices after today, and significant changes to the terms of your agreements (possibly even termination) may be on the horizon.
Update: On January 28, 2025, a group of nonprofit organizations filed suit against the OMB in the U.S. District Court for the District of Columbia requesting a temporary restraining order against the OMB Memo. The Complaint alleges the OMB Memo violates the Administrative Procedures Act in several regards, including that the Memo is arbitrary and capricious, contrary to the First Amendment, and in excess of Statutory authority. National Council of Nonprofits et al v. Office of Management and Budget et al, No. 1:25-cv-00239 (D.D.C.).
Additionally, a document titled “Instructions for Federal Financial Assistance Program Analysis in Support of M-25-13,” was released, providing Federal agencies with guidance on the review each listed Federal grant program must undergo pursuant to OMB’s directive.
FOOTNOTES
[1] Protecting the American People Against Invasion (Jan. 20, 2025), Reevaluating and Realigning United States Foreign Aid (Jan. 20, 2025), Putting America First in International Environmental Agreements (Jan. 20, 2025), Unleashing American Energy (Jan. 20, 2025), Ending Radical and Wasteful Government DEI Programs and Preferencing (Jan. 20, 2025), Defending Women from Gender Ideology Extremism and Restoring Biological Truth to the Federal Government (Jan. 20, 2025), and Enforcing the Hyde Amendment (Jan. 24, 2025).
How to Report Crypto Fraud and Qualify for a CFTC Whistleblower Award
CFTC Whistleblower Program Rewards Whistleblowers for Providing Original Information About Crypto Fraud
Crypto fraud schemes have caused investors to lose more than one billion dollars and undermine public confidence in the digital asset and cryptocurrency ecosystem. Indeed, the implosion of FTX led to a crypto winter in which the value of digital assets plummeted and several crypto lending firms went bankrupt. Whistleblowers can help the CFTC identify and combat crypto fraud schemes by promptly providing specific and credible information.
Crypto fraud whistleblowers are eligible to receive between 10% and 30% of the monetary sanctions collected in successful enforcement actions. The CFTC has issued more than $390 million in awards to whistleblowers. The largest CFTC whistleblower awards to date are $200 million, $45 million, $30 million, and $10 million. Whistleblower disclosures have enabled the CFTC to bring successful enforcement actions against wrongdoers with orders for more than $3.2 billion in monetary relief.
Whistleblowers that voluntarily provide the CFTC with original information about violations of the CEA that leads the CFTC to bring a successful enforcement action resulting in the imposition of monetary sanctions exceeding $1 million can qualify for a CFTC whistleblower award from CFTC collected monetary sanctions and from related actions brought by other governmental entities.
Crypto Fraud Schemes that the CFTC Combats
Wash trading of digital currencies or swaps or futures contracts. For example, CLS Global recently plead guilty to a fraudulent “wash trading” scheme whereby it attempted to manipulate the crypto market by inflating the value of various cryptocurrencies through wash trading – repeatedly buying and selling tokens to make them appear more valuable to investors. In particular, CLS Global used an algorithm that executed self-trades from multiple wallets to appear as organic buying and selling.
Pump and sump schemes, such as the CFTC’s action against Adam Todd and four companies he controlled for attempting to manipulate Digitex’s native utility token, DGTX, by allegedly pumping the token’s price through the use of a computerized bot on third-party exchanges he designed to be “always buying more than it was selling” and by filling large over-the-counter orders to purchase DGTX on third-party exchanges.
Pig butchering or relationship confidence schemes in which fraudsters build online relationships with unsuspecting individuals before convincing them to trade crypto assets or foreign currency on fake trading platforms. According to the FBI’s 2023 Cryptocurrency Report, losses from cryptocurrency-related investment fraud schemes reported to the FBI Internet Crime Complaint totaled $3.96 billion in 2023.
Crypto Ponzi schemes, such as Ikkurty Capital, LLC soliciting more than $40 million from investors by promising to invest the funds in a crypto hedge fund or a carbon offset bond and instead using the funds to pay off previous investors in another crypto hedge fund and investing a small portion in volatile digital tokens. The final order of judgment in that matter imposed over $209 million in monetary sanctions.
Violating rules that protect customers funds and require custodians to segregate and separately account for customer funds. For example, FTX and Alameda Research were required to pay $8.7 billion in restitution and $4 billion in disgorgement for commingling of customer funds, using customer funds to extend a line of credit to an affiliate, investing customer funds in non-permitted investments through an affiliate, and appropriating customer funds for luxury real estate purchases, political contributions, and high-risk, illiquid digital asset industry investments.
Operating an illegal commodity pool. For example, the CFTC obtained an order against Mirror Trading International Proprietary Limited (MTI) requiring it to pay $1.7 billion in restitution and a $1.7 billion civil penalty for failure to comply with commodity pool operator regulations. MTI solicited Bitcoin from investors for participation in an unregistered commodity pool that purportedly traded off-exchange, retail forex through a proprietary “bot” or software program, but in fact MTI misappropriated the Bitcoin that they accepted from the pool participants.
CFTC Whistleblower Reward Program
Under the CFTC Whistleblower Reward Program, the CFTC will issue rewards to whistleblowers who provide original information that leads to CFTC enforcement actions with total civil penalties in excess of $1 million (see how the CFTC calculates monetary sanctions). A whistleblower may receive an award of between 10% and 30% of the total monetary sanctions collected. Monetary sanctions includes restitution, disgorgement, and civil monetary penalties,
Reporting original information about cryptocurrency fraud “leads to” a successful enforcement action if either:
The original information caused the staff to open an investigation, reopen an investigation, or inquire into different conduct as part of a current investigation, and the Commission brought a successful action based in whole or in part on conduct that was the subject of the original information; or
The conduct was already under examination or investigation, and the original information significantly contributed to the success of the action.
In determining a reward percentage, the CFTC considers the particular facts and circumstances of each case. For example, positive factors may include the significance of the information, the level of assistance provided by the whistleblower and the whistleblower’s attorney, and the law enforcement interests at stake.
Awards are paid from the CFTC Customer Protection Fund, which is financed through monetary collected by the CFTC in any covered judicial or administrative action that is not otherwise distributed, or ordered to be distributed, to victims of a violation of the CEA underlying such action.
Crypto Fraud Whistleblowers Can Report Anonymously to the CFTC
If represented by counsel, a crypto fraud whistleblower may submit a tip anonymously to the CFTC. In certain circumstances, a whistleblower may remain anonymous, even to the CFTC, until an award determination. However, even at the time of a reward, a whistleblower’s identity is not made available to the public.
The confidentiality protections of the CEA require the CFTC not to disclose information that “could reasonably be expected to reveal the identity of the whistleblower.” According to a recent report of the CFTC Whistleblower Office, the Office takes steps to protect whistleblower confidentiality. For example, in a recent fiscal year the Office considered 267 requests to produce documents from the investigation and litigation files of the Enforcement Division and found 16 requests to implicate whistleblower-identifying information. The Office worked with the Enforcement Division to remove whistleblower-identifying information or otherwise take steps to preserve whistleblower confidentiality.