CEO and Co-Founder of Compliance.ai, a RegTech company transforming the way highly regulated organizations address compliance risk.
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After a year and a quarter, the SEC's new priorities under the Biden administration are coming into focus through enforcement patterns. The SEC filed 697 total enforcement actions in fiscal year 2021. This included 434 new actions, which was a 7% increase from 2020.
The new actions spanned the entire spectrum of securities activities, including against emerging threats such as cryptocurrency fraud, overseas corruption and pump-and-dump schemes.
For instance, the SEC suspended trading in the securities of 15 companies because of questionable trading and social media activity. This followed the suspensions of the securities of numerous other issuers, many of which were also targets of apparent social media attempts to artificially inflate their stock price.
Are cryptocurrency risks a national security matter?
The SEC closely scrutinized cryptocurrencies in 2021, which led to several enforcement actions. The SEC charged Poloniex for operating an unregistered online digital asset exchange. Poloniex agreed to a cease-and-desist order and will pay more than $10 million to settle the charges.
The SEC also filed an action against crypto lending platform BitConnect, its founder, its top U.S. promoter and his affiliated company. The SEC alleges "that they defrauded retail investors out of $2 billion through a global fraudulent and unregistered offering of investments into a program involving digital assets." The press release continues, "The complaint seeks injunctive relief, disgorgement plus interest and civil penalties."
The SEC's initial actions against crypto platforms are likely the first salvos in a larger campaign, especially in light of the fact that both the Biden administration and global regulators believe that cryptocurrencies pose national security risks.
In March, President Biden signed an executive order that directs regulators to examine cryptocurrencies for risks, including risks to consumers, financial institutions and national security.
National security risks were also a factor in an enforcement action involving a SPAC. In July, the SEC filed charges against Stable Road Acquisition Company; its sponsor, SRC-NI, and its CEO, Brian Kabot; the SPAC's proposed merger target, Momentus Inc.; and Momentus' founder and former CEO Mikhail Kokorich. The companies and CEOs were charged "for misleading claims about Momentus' propulsion technology and for obscuring the national security risks associated with Kokorich, a Russian entrepreneur."
The SEC's litigation is proceeding against Kokorich. All other parties settled for more than $8 million.
SEC Whistleblower Program Broke Records In 2021
The SEC said that its whistleblower program broke several records in FY 2021. According to the report, "Since the inception of the program, the SEC has awarded more than $1.1 billion to 214 individuals." The SEC gave out more whistleblower awards in FY 2021 than in all prior years combined, and it also received a record number of whistleblower tips.
Major awards include over $50 million given to joint whistleblowers whose information alerted SEC staff to violations involving highly complex transactions that would have been difficult to detect without their information (as with many whistleblower cases, specific details were not disclosed); approximately $40 million awarded to two whistleblowers whose information and assistance contributed to a successful SEC enforcement action; and approximately $36 million awarded to a whistleblower whose information and assistance significantly contributed to the success of an unspecified SEC enforcement action, as well as helping with actions by another unnamed federal agency.
Crackdown On Overseas Corruption
The SEC targeted businesses involved with overseas corruption in 2021. The SEC in June announced charges against Amec Foster Wheeler Limited for "violations of the Foreign Corrupt Practices Act (FCPA) arising out of a bribery scheme that took place in Brazil."
In September, the SEC settled with London-based WPP plc, which has "agreed to pay more than $19 million to resolve charges that it violated the anti-bribery, books and records and internal accounting controls provisions of the FCPA."
In October, Credit Suisse Group AG "agreed to pay nearly $475 million to U.S. and U.K authorities, including nearly $100 million to the SEC, for fraudulently misleading investors and violating the Foreign Corrupt Practices Act (FCPA) in a scheme involving two bond offerings and a syndicated loan that raised funds on behalf of state-owned entities in Mozambique." In addition, according to the press release, "A London-based subsidiary of Russian bank VTB separately agreed to pay more than $6 million to settle SEC charges related to its role in misleading investors in a second 2016 bond offering."
How Businesses Can Limit Risks In 2022
SEC enforcement actions in 2021 show an agency transitioning to focus on emerging risks, overseas corruption and a record number of whistleblowers' tips. The past year also showed that the SEC under the Biden administration will pursue a larger volume of cases than in previous years. 2021 was a year of rapid change, but enforcement patterns give businesses clear signals on how to adjust in 2022.
First, businesses should be wary of emerging, complex investment vehicles that pose new risks. Similarly, a regulatory environment with a higher volume of risks indicates that 2022 might be a good time to invest in compliance change management tools that help monitor enforcement actions not just from the SEC, but across all regulatory agencies that impact their businesses.
Considering the volume and pace of regulatory changes and enforcement actions, businesses should consider automating manual or legacy approaches to monitoring and managing regulatory changes, as such methods can no longer keep up with today's pace of change in a timely, reliable and cost-effective manner.
To jump-start those efforts, smart businesses should roll compliance transformation into existing digital transformation efforts, focusing on extending such capabilities as AI, ML and automation across the organization.
Finally, with whistleblower tips at an all-time high, businesses should review internal controls and escalation policies, ensuring that internal critics have an established way to address problems internally before they draw the attention of regulators.
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