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A Contempt Fine of $50,000 a Day for “Stashing Documents” But Not Producing Them

adminAML Regulations and Enforcement Actions

Three Chinese “multi-billion dollar banks disregarding an order to produce records or a witness essential to an investigation into a state-sponsor of terrorism’s proliferation of nuclear weapons” are hit with a fine of $50,000 for every day they refuse to comply, concluded Federal District Court Justice Beryl A. Howell in a May 15, 2019 Opinion that was only recently unsealed. Judge Howell noted that “Bank Three’s stashing documents somewhere in its facilities is not responsible to the subpoena.”

In story published June 24th – Link – the Washington Post identified the three Chinese banks as Bank of Communications, China Merchant’s Bank, and Shanghai Pudong Development Bank. This writer offers no comment on the accuracy of the Post’s claims.

This will be an interesting case, or series of cases, to follow. Titles 18 and 50 are impacted and US/Chinese relations could be impacted.

 

The original (March 18, 2019) Order is available on PACER at March 18 Order to Compel

The May 15th Order is available on PACER at May 15 Contempt Order

Libra Decentralized Blockchain and Cryptocurrency … and Digital Identity?

adminCrypto & Blockchain

Facebook, PayPal, Visa, Lyft, Uber et al are launching “Libra” … and a global digital identity?

The Libra Association wants to give billions of people access to financial services through their new decentralized blockchain, Libra. And a prerequisite of this goal of financial inclusion is (apparently) the creation of an open identity standard: a decentralized and portable digital identity, or global digital identity. I found it interesting that they only mention this need for a global ID in passing and buried on the ninth page.

Below is the text of the Libra White Paper with my embedded comments. The link to the White Paper is Libra White Paper

Title: White Paper From the Libra Association Members – An Introduction to Libra

Libra’s mission is to enable a simple global currency and financial infrastructure that empowers billions of people.

This document outlines our plans for a new decentralized blockchain, a low-volatility cryptocurrency, and a smart contract platform that together aim to create a new opportunity for responsible financial services innovation.

Problem Statement

The advent of the internet and mobile broadband has empowered billions of people globally to have access to the world’s knowledge and information, high-fidelity communications, and a wide range of lower-cost, more convenient services. These services are now accessible using a $40 smartphone from almost anywhere in the world.1 This connectivity has driven economic empowerment by enabling more people to access the financial ecosystem. Working together, technology companies and financial institutions have also found solutions to help increase economic empowerment around the world. Despite this progress, large swaths of the world’s population are still left behind — 1.7 billion adults globally remain outside of the financial system with no access to a traditional bank, even though one billion have a mobile phone and nearly half a billion have internet access.2

JRR Comment: The Libra Association’s Founding Members (which include PayPal, Stripe, Visa, eBay, Facebook, Lyft, and Uber) begin with a positioning statement: the problem – notwithstanding the technology innovations of the last decade, billions of people have been left behind – is one that few can argue with. And it deserves a noble solution – Libra. The nobility of their solution is set out in the “Opportunity” paragraph, below.

For too many, parts of the financial system look like telecommunication networks pre-internet. Twenty years ago, the average price to send a text message in Europe was 16 cents per message.3 Now everyone with a smartphone can communicate across the world for free with a basic data plan. Back then, telecommunications prices were high but uniform, whereas today, access to financial services is limited or restricted for those who need it most — those impacted by cost, reliability, and the ability to seamlessly send money.

All over the world, people with less money pay more for financial services. Hard-earned income is eroded by fees, from remittances and wire costs to overdraft and ATM charges. Payday loans can charge annualized interest rates of 400 percent or more, and finance charges can be as high as $30 just to borrow $100.4 When people are asked why they remain on the fringe of the existing financial system, those who remain “unbanked” point to not having sufficient funds, high and unpredictable fees, banks being too far away, and lacking the necessary documentation.5

Blockchains and cryptocurrencies have a number of unique properties that can potentially address some of the problems of accessibility and trustworthiness. These include distributed governance, which ensures that no single entity controls the network; open access, which allows anybody with an internet connection to participate; and security through cryptography, which protects the integrity of funds.

JRR Comment: Having established the two problems to overcome – accessibility to, and trustworthiness of, the mainstream financial system – the Founding Members have set out the three main attributes needed to overcome those problems. Those attributes are (i) distributed governance, (ii) open access, and (iii) security through cryptography. But those are the same three attributes that existing blockchain systems have, and those existing blockchain systems haven’t solved those two problems. So they continue their pitch in the next paragraph …

But the existing blockchain systems have yet to reach mainstream adoption. Mass-market usage of existing blockchains and cryptocurrencies has been hindered by their volatility and lack of scalability, which have, so far, made them poor stores of value and mediums of exchange. Some projects have also aimed to disrupt the existing system and bypass regulation as opposed to innovating on compliance and regulatory fronts to improve the effectiveness of anti-money laundering. We believe that collaborating and innovating with the financial sector, including regulators and experts across a variety of industries, is the only way to ensure that a sustainable, secure, and trusted framework underpins this new system. And this approach can deliver a giant leap forward toward a lower-cost, more accessible, and more connected global financial system.

JRR Comment: Here is where the Founding Members lay out why existing blockchain systems haven’t addressed the problems of accessibility and trustworthiness: volatility, lack of scalability, and ignoring mainstream regulatory protections. So between these two paragraphs that have three solutions and three problems, the Founding Members have assembled the six attributes of Libra: distributed governance, open access, security through cryptography, stability, scalability, and adoption of mainstream regulatory protections.

What they don’t include here – but bring up for the first time on page 9 of the original paper – is (perhaps) a seventh attribute of Libra. The Libra Association wants to create an open identity standard: a decentralized and portable digital identity, which they describe as a prerequisite to overcoming the problem they are trying to solve – financial inclusion.

The Opportunity

As we embark on this journey together, we think it is important to share our beliefs to align the community and ecosystem we intend to spark around this initiative:

  • We believe that many more people should have access to financial services and to cheap capital.
  • We believe that people have an inherent right to control the fruit of their legal labor.
  • We believe that global, open, instant, and low-cost movement of money will create immense economic opportunity and more commerce across the world.
  • We believe that people will increasingly trust decentralized forms of governance.
  • We believe that a global currency and financial infrastructure should be designed and governed as a public good.
  • We believe that we all have a responsibility to help advance financial inclusion, support ethical actors, and continuously uphold the integrity of the ecosystem.

JRR Comment: This is good marketing. It begins with “as we embark on this journey together” and continues with six bullets beginning with “we believe” instead of “it is our position that …”.

Introducing Libra

The world truly needs a reliable digital currency and infrastructure that together can deliver on the promise of “the internet of money.”

JRR Comment: Does the world truly need a digital currency and infrastructure? And what is “the internet of money”? Again, this is a great marketing document.

Securing your financial assets on your mobile device should be simple and intuitive. Moving money around globally should be as easy and cost-effective as — and even more safe and secure than — sending a text message or sharing a photo, no matter where you live, what you do, or how much you earn. New product innovation and additional entrants to the ecosystem will enable the lowering of barriers to access and cost of capital for everyone and facilitate frictionless payments for more people.

Now is the time to create a new kind of digital currency built on the foundation of blockchain technology. The mission for Libra is a simple global currency and financial infrastructure that empowers billions of people. Libra is made up of three parts that will work together to create a more inclusive financial system:

  1. It is built on a secure, scalable, and reliable blockchain;
  2. It is backed by a reserve of assets designed to give it intrinsic value;
  3. It is governed by the independent Libra Association tasked with evolving the ecosystem.

The Libra currency is built on the “Libra Blockchain.” Because it is intended to address a global audience, the software that implements the Libra Blockchain is open source — designed so that anyone can build on it, and billions of people can depend on it for their financial needs. Imagine an open, interoperable ecosystem of financial services that developers and organizations will build to help people and businesses hold and transfer Libra for everyday use. With the proliferation of smartphones and wireless data, increasingly more people will be online and able to access Libra through these new services. To enable the Libra ecosystem to achieve this vision over time, the blockchain has been built from the ground up to prioritize scalability, security, efficiency in storage and throughput, and future adaptability. Keep reading for an overview of the Libra Blockchain, or read the technical paper. [the 29-page technical paper is available at  https://developers.libra.org/docs/assets/papers/the-libra-blockchain.pdf]

JRR Comment: The technical paper is the key. So far, all of this is simply puffery and marketing.

The unit of currency is called “Libra.” Libra will need to be accepted in many places and easy to access for those who want to use it. In other words, people need to have confidence that they can use Libra and that its value will remain relatively stable over time. Unlike the majority of cryptocurrencies, Libra is fully backed by a reserve of real assets. A basket of bank deposits and short-term government securities will be held in the Libra Reserve for every Libra that is created, building trust in its intrinsic value. The Libra Reserve will be administered with the objective of preserving the value of Libra over time. Keep reading for an overview of Libra and the reserve, or read more here.

JRR Comment: Although Google isn’t a Founding Member of the Libra Association, you might want to Google “stable coins”. A crypto or virtual currency tied to a fiat currency (i.e., the US dollar or Euro), is known as a “stable coin” to distinguish it from the unstable crypto currencies that drift and move through un- and under-regulated, or regulated and un- or under-supervised hype, hubris, and FOMO.

The Libra Association is an independent, not-for-profit membership organization headquartered in Geneva, Switzerland.

The association’s purpose is to coordinate and provide a framework for governance for the network and reserve and lead social impact grant-making in support of financial inclusion. This white paper is a reflection of its mission, vision, and purview. The association’s membership is formed from the network of validator nodes that operate the Libra Blockchain.

JRR Comment: On May 6, 2019, Facebook Global Holdings II, LLC registered Libra Networks in Geneva, Switzerland. The English translation of the “purpose” statement was “Provision of services in the fields of finance and technology, as well as the development and production of software and related infrastructure, in particular in connection with investment activities, the operation of payments, financing, identity management, data analysis, big data, blockchain and other technologies (see states for full purpose).” There was no mention of social impact grant-making.

Members of the Libra Association will consist of geographically distributed and diverse businesses, nonprofit and multilateral organizations, and academic institutions. The initial group of organizations that will work together on finalizing the association’s charter and become “Founding Members” upon its completion are, by industry:

JRR Comment: Notice that this paragraph speaks to the future membership of the Libra Association as including nonprofits, multilateral organizations, and academic organizations. But the current members include the planet’s biggest payments, ride-sharing, telecom companies, and venture capitalists. 

  • Payments: Mastercard, PayPal, PayU (Naspers’ fintech arm), Stripe, Visa
  • Technology and marketplaces: Booking Holdings, eBay, Facebook/Calibra, Farfetch, Lyft, Mercado Pago, Spotify AB, Uber Technologies, Inc.
  • Telecommunications: Iliad, Vodafone Group
  • Blockchain: Anchorage, Bison Trails, Coinbase, Inc., Xapo Holdings Limited
  • Venture Capital: Andreessen Horowitz, Breakthrough Initiatives, Ribbit Capital, Thrive Capital, Union Square Ventures
  • Nonprofit and multilateral organizations, and academic institutions: Creative Destruction Lab, Kiva, Mercy Corps, Women’s World Banking

We hope to have approximately 100 members of the Libra Association by the target launch in the first half of 2020.

Facebook teams played a key role in the creation of the Libra Association and the Libra Blockchain, working with the other Founding Members. While final decision-making authority rests with the association, Facebook is expected to maintain a leadership role through 2019. Facebook created Calibra, a regulated subsidiary, to ensure separation between social and financial data and to build and operate services on its behalf on top of the Libra network.

Once the Libra network launches, Facebook, and its affiliates, will have the same commitments, privileges, and financial obligations as any other Founding Member. As one member among many, Facebook’s role in governance of the association will be equal to that of its peers.

JRR Comment: This suggests that the twenty-seven Founding Members will have different commitments, privileges, and financial obligations than the next (approximately) seventy-three other members. We do know from a paragraph below that one of those privileges is that the members of the Libra Association are going to receive dividends for providing capital to “jumpstart the ecosystem”.

Blockchains are described as either permissioned or permissionless in relation to the ability to participate as a validator node. In a “permissioned blockchain,” access is granted to run a validator node. In a “permissionless blockchain,” anyone who meets the technical requirements can run a validator node. In that sense, Libra will start as a permissioned blockchain.

To ensure that Libra is truly open and always operates in the best interest of its users, our ambition is for the Libra network to become permissionless. The challenge is that as of today we do not believe that there is a proven solution that can deliver the scale, stability, and security needed to support billions of people and transactions across the globe through a permissionless network.

JRR Comment: This is a key statement. Bitcoin is a permissionless blockchain: anyone or any entity can participate as a “validator node”. But as the Founding Members note, permissionless blockchains like Bitcoin are not scalable, stable, nor secure, so Libra will launch as a permissioned blockchain, with the direction and promise that it will consider going permissionless … if the problems of scalability, stability, and security of a permissionless system can be overcome.

One of the association’s directives will be to work with the community to research and implement this transition, which will begin within five years of the public launch of the Libra Blockchain and ecosystem.

Essential to the spirit of Libra, in both its permissioned and permissionless state, the Libra Blockchain will be open to everyone: any consumer, developer, or business can use the Libra network, build products on top of it, and add value through their services. Open access ensures low barriers to entry and innovation and encourages healthy competition that benefits consumers. This is foundational to the goal of building more inclusive financial options for the world.

JRR Comment: “Open to everyone” could be the sales pitch of the current mainstream financial sector, where with APIs, any consumer, developer, or business – fettered somewhat by regulators’ insistence that the financial sector have some rules of the road – can access and use the financial system.

The goal of the Libra Blockchain is to serve as a solid foundation for financial services, including a new global currency, which could meet the daily financial needs of billions of people. Through the process of evaluating existing options, we decided to build a new blockchain based on these three requirements:

  • Able to scale to billions of accounts, which requires high transaction throughput, low latency, and an efficient, high-capacity storage system.
  • Highly secure, to ensure safety of funds and financial data.
  • Flexible, so it can power the Libra ecosystem’s governance as well as future innovation in financial services.

The Libra Blockchain is designed from the ground up to holistically address these requirements and build on the learnings from existing projects and research — a combination of innovative approaches and well understood techniques. This next section will highlight three decisions regarding the Libra Blockchain:

  1. Designing and using the Move programming language.
  2. Using a Byzantine Fault Tolerant (BFT) consensus approach.
  3. Adopting and iterating on widely adopted blockchain data structures.

JRR Comment: Here is where the Founding Members will lose 99% of their readers. The following paragraphs on a new programming language, a play on the age-old Byzantine General’s Problem (once again, Google it), pseudonymity, and the LibraBFT consensus protocol, will be lost on most readers.

“Move” is a new programming language for implementing custom transaction logic and “smart contracts” on the Libra Blockchain. Because of Libra’s goal to one day serve billions of people, Move is designed with safety and security as the highest priorities. Move takes insights from security incidents that have happened with smart contracts to date and creates a language that makes it inherently easier to write code that fulfills the author’s intent, thereby lessening the risk of unintended bugs or security incidents. Specifically, Move is designed to prevent assets from being cloned. It enables “resource types” that constrain digital assets to the same properties as physical assets: a resource has a single owner, it can only be spent once, and the creation of new resources is restricted. The Move language also facilitates automatic proofs that transactions satisfy certain properties, such as payment transactions only changing the account balances of the payer and receiver. By prioritizing these features, Move will help keep the Libra Blockchain secure. By making the development of critical transaction code easier, Move enables the secure implementation of the Libra ecosystem’s governance policies, such as the management of the Libra currency and the network of validator nodes. Move will accelerate the evolution of the Libra Blockchain protocol and any financial innovations built on top of it. We anticipate that the ability for developers to create contracts will be opened up over time in order to support the evolution and validation of Move.

JRR Comment: I’ve read the technical paper once, and didn’t fully understand it (and never will). But it appears that Move appears focused on, or at least addresses, smart contracts perhaps more elegantly than other blockchain-based applications.

To facilitate agreement among all validator nodes on the transactions to be executed and the order in which they are executed, the Libra Blockchain adopted the BFT approach by using the LibraBFT consensus protocol. This approach builds trust in the network because BFT consensus protocols are designed to function correctly even if some validator nodes — up to one-third of the network — are compromised or fail. This class of consensus protocols also enables high transaction throughput, low latency, and a more energy-efficient approach to consensus than “proof of work” used in some other blockchains.

In order to securely store transactions, data on the Libra Blockchain is protected by Merkle trees, a data structure used by other blockchains that enables the detection of any changes to existing data. Unlike previous blockchains, which view the blockchain as a collection of blocks of transactions, the Libra Blockchain is a single data structure that records the history of transactions and states over time. This implementation simplifies the work of applications accessing the blockchain, allowing them to read any data from any point in time and verify the integrity of that data using a unified framework.

The Libra Blockchain is pseudonymous and allows users to hold one or more addresses that are not linked to their real-world identity. This approach is familiar to many users, developers, and regulators. The Libra Association will oversee the evolution of the Libra Blockchain protocol and network, and it will continue to evaluate new techniques that enhance privacy in the blockchain while considering concerns of practicality, scalability, and regulatory impact.

JRR Comment: First, note that those using various blockchains to conduct transactions are not anonymous at all – their names are masked (like a pseudonym), but traceable (therefore, pseudonymous). Transactors are very trackable and the immutability of the blockchain makes those tracks permanent.

For more details, read the technical paper on the Libra Blockchain. Detailed information is also available on the Move programming language and the LibraBFT consensus protocol. We’ve open sourced an early preview of the Libra testnet, with accompanying documentation. The testnet is still under development, and APIs are subject to change. Our commitment is to work in the open with the community and hope you will read, build, and provide feedback.

The Libra Currency and Reserve

We believe that the world needs a global, digitally native currency that brings together the attributes of the world’s best currencies: stability, low inflation, wide global acceptance, and fungibility. The Libra currency is designed to help with these global needs, aiming to expand how money works for more people around the world.

Libra is designed to be a stable digital cryptocurrency that will be fully backed by a reserve of real assets — the Libra Reserve — and supported by a competitive network of exchanges buying and selling Libra. That means anyone with Libra has a high degree of assurance they can convert their digital currency into local fiat currency based on an exchange rate, just like exchanging one currency for another when traveling.

JRR Comment: Note what the Founding Members are not writing. The term “such as”, and the descriptors “stable” and “reputable” are little more than suggestions. They are not writing that Libra will be backed by Federal Reserve bank deposits and short-term US- and UK-government currencies. And, who is going to hold these guarantees? See below …

This approach is similar to how other currencies were introduced in the past: to help instill trust in a new currency and gain widespread adoption during its infancy, it was guaranteed that a country’s notes could be traded in for real assets, such as gold. Instead of backing Libra with gold, though, it will be backed by a collection of low-volatility assets, such as bank deposits and short-term government securities in currencies from stable and reputable central banks.

It is important to highlight that this means one Libra will not always be able to convert into the same amount of a given local currency (i.e., Libra is not a “peg” to a single currency). Rather, as the value of the underlying assets moves, the value of one Libra in any local currency may fluctuate. However, the reserve assets are being chosen to minimize volatility, so holders of Libra can trust the currency’s ability to preserve value over time.

The assets in the Libra Reserve will be held by a geographically distributed network of custodians with investment-grade credit rating to provide both security and decentralization of the assets. The assets behind Libra are the major difference between it and many existing cryptocurrencies that lack such intrinsic value and hence have prices that fluctuate significantly based on expectations.

JRR Comment: Just as we don’t know what “low-volatility assets” are backing Libra, we don’t who will be holding those assets.

Libra is indeed a cryptocurrency, though, and by virtue of that, it inherits several attractive properties of these new digital currencies: the ability to send money quickly, the security of cryptography, and the freedom to easily transmit funds across borders. Just as people can use their phones to message friends anywhere in the world today, with Libra, the same can be done with money — instantly, securely, and at low cost.

JRR Comment: Let’s see how instant and cheap it is to quickly send money once 200+ countries’ regulatory bodies apply their regulatory standards.

Interest on the reserve assets will be used to cover the costs of the system, ensure low transaction fees, pay dividends to investors who provided capital to jumpstart the ecosystem (read “The Libra Association” here), and support further growth and adoption. The rules for allocating interest on the reserve will be set in advance and will be overseen by the Libra Association. Users of Libra do not receive a return from the reserve. For more on the reserve policy and the details of the Libra currency, please read here.

The Libra Association

To make the mission of Libra a reality — a simple global currency and financial infrastructure that empowers billions of people — the Libra Blockchain and Libra Reserve need a governing entity that is comprised of diverse and independent members. This governing entity is the Libra Association, an independent, not-for-profit membership organization, headquartered in Geneva, Switzerland.

JRR Comment: So the investors who provided capital to jumpstart the Libra ecosystem, described as “the Libra Association”, will receive dividends from the interest on the reserve assets. And the Libra Association is a not-for-profit membership organization. Lawyers will need to figure this out because I can’t: receiving dividends sounds like for-profit to me …

Switzerland has a history of global neutrality and openness to blockchain technology, and the association strives to be a neutral, international institution, hence the choice to be registered there. The association is designed to facilitate the operation of the Libra Blockchain; to coordinate the agreement among its stakeholders — the network’s validator nodes — in their pursuit to promote, develop, and expand the network, and to manage the reserve.

The association is governed by the Libra Association Council, which is comprised of one representative per validator node. Together, they make decisions on the governance of the network and reserve. Initially, this group consists of the Founding Members: businesses, nonprofit and multilateral organizations, and academic institutions from around the world.

JRR Comment: I didn’t see any academic institutions listed as Founding Members.

All decisions are brought to the council, and major policy or technical decisions require the consent of two-thirds of the votes, the same supermajority of the network required in the BFT consensus protocol.

Through the association, the validator nodes align on the network’s technical roadmap and development goals. In that sense, it is similar to other not-for-profit entities, often in the form of foundations, which govern open-source projects. As Libra relies on a growing distributed community of open-source contributors to further itself, the association is a necessary vehicle to establish guidance as to which protocols or specifications to develop and to adopt. The Libra Association also serves as the entity through which the Libra Reserve is managed, and hence the stability and growth of the Libra economy are achieved. The association is the only party able to create (mint) and destroy (burn) Libra. Coins are only minted when authorized resellers have purchased those coins from the association with fiat assets to fully back the new coins. Coins are only burned when the authorized resellers sell Libra coin to the association in exchange for the underlying assets. Since authorized resellers will always be able to sell Libra coins to the reserve at a price equal to the value of the basket, the Libra Reserve acts as a “buyer of last resort.” These activities of the association are governed and constrained by a Reserve Management Policy that can only be changed by a supermajority of the association members.

JRR Comment: Here is another difference with Bitcoin: the ability to destroy (burn) Libra. This reads a lot like what a central bank does in controlling the money supply. And it will be interesting to see how regulators across the globe classify and regulate the Libra Association.

In these early years of the network, there are additional roles that need to be performed on behalf of the association: the recruitment of Founding Members to serve as validator nodes; the fundraising to jumpstart the ecosystem; the design and implementation of incentive programs to propel the adoption of Libra, including the distribution of such incentives to Founding Members; and the establishment of the association’s social impact grant-making program.

An additional goal of the association is to develop and promote an open identity standard. We believe that decentralized and portable digital identity is a prerequisite to financial inclusion and competition.

JRR Comment: This appears on page 9 of the original paper. This is a big deal. The Libra Association wants to create an open identity standard: a decentralized and portable digital identity. It is odd that they didn’t write in the opening paragraphs that a prerequisite of financial inclusion – the singular problem that they are trying to overcome with Libra – is a common, open, and decentralized digital identity.

An important objective of the Libra Association is to move toward increasing decentralization over time. This decentralization ensures that there are low barriers to entry for both building on and using the network and improves the Libra ecosystem’s resilience over the long term. As discussed above, the association will develop a path toward permissionless governance and consensus on the Libra network. The association’s objective will be to start this transition within five years, and in so doing will gradually reduce the reliance on the Founding Members. In the same spirit, the association aspires to minimize the reliance on itself as the administrator of the Libra Reserve.

For more on the Libra Association, please read here.

What’s Next for Libra?

Today we are publishing this document outlining our goals for Libra and launching libra.org as a home for the association and all things Libra. It will continue to be updated over the coming months. We are also opensourcing the code for the Libra Blockchain and launching Libra’s initial testnet for developers to experiment with and build upon.

There is much left to do before the target launch in the first half of 2020.

  • The Libra Blockchain: Over the coming months, the association will work with the community to gather feedback on the Libra Blockchain prototype and bring it to a production-ready state. In particular, this work will focus on ensuring the security, performance, and scalability of the protocol and implementation.
  • The Libra Association will construct well-documented APIs and libraries to enable users to interact with the Libra Blockchain.
  • The Libra Association will create a framework for the collaborative development of the technology behind the Libra Blockchain using the open-source methodology. Procedures will be created for discussing and reviewing changes to the protocol and software that support the blockchain.
  • The association will perform extensive testing of the blockchain, which range from tests of the protocol to constructing a full-scale test of the network in collaboration with entities such as wallet services and exchanges to ensure the system is working before launch.
  • The association will work to foster the development of the Move language and determine a path for third parties to create smart contracts once language development has stabilized — after the launch of the Libra ecosystem.

Together with the community, the association will research the technological challenges on the path to a permissionless ecosystem so that we can meet the objective to begin the transition within five years of the launch.

  • The Reserve:
  • The association will work to establish a geographically distributed and regulated group of global institutional custodians for the reserve.
  • The association will establish operational procedures for the reserve to interact with authorized resellers and ensure high-transparency and auditability.
  • The association will establish policies and procedures that establish how the association can change the composition of the reserve basket.
  • The Libra Association:
  • We will work to grow the Libra Association Council to around 100 geographically distributed and diverse members, all serving as the initial validator nodes of the Libra Blockchain.
  • The association will develop and adopt a comprehensive charter and set of bylaws for the association on the basis of the currently proposed governance structure.
  • We will recruit a Managing Director for the association and work with her/him to continue hiring for the association’s executive team.
  • We will identify social impact partners aligned with our joint mission and will work with them to establish a Social Impact Advisory Board and a social impact program.

The association envisions a vibrant ecosyste

How to Get Involved

m of developers building apps and services to spur the global use of Libra. The association defines success as enabling any person or business globally to have fair, affordable, and instant access to their money. For example, success will mean that a person working abroad has a fast and simple way to send money to family back home, and a college student can pay their rent as easily as they can buy a coffee.

Our journey is just beginning, and we are asking the community to help. If you believe in what Libra could do for billions of people around the world, share your perspective and join in. Your feedback is needed to make financial inclusion a reality for people everywhere.

  • If you are a researcher or protocol developer, an early preview of the Libra testnet is available under the Apache 2.0 Open Source License, with accompanying documentation. This is just the start of the process, and the testnet is still an early prototype under development, but you can read, build, and provide feedback right away. Since the current focus is on stabilizing the prototype, the project may initially be slower to take community contributions. However, we are committed to building a community-oriented development process and opening the platform to developers — starting with pull requests — as soon as possible.
  • If you want to learn about the Libra Association, read more here.
  • If your organization is interested in becoming a Founding Member or applying for social impact grants from the Libra Association, read more here. The association will work with the global community in the coming months and continue to partner with policymakers worldwide to further the mission.

Conclusion

This is the goal for Libra: A stable currency built on a secure and stable open-source blockchain, backed by a reserve of real assets, and governed by an independent association. Our hope is to create more access to better, cheaper, and open financial services — no matter who you are, where you live, what you do, or how much you have. We recognize that the road to delivering this will be long, arduous, and won’t be achieved in isolation — it will take coming together and forming a real movement around this pursuit. We hope you’ll join us and help turn this dream into a reality for billions of people around the world.

JRR Comment: Notwithstanding some of my comment, this is an exciting and positive development. Moving blockchain technology, whether permissioned or not, distributed or not, pegged cryptocurrency or not, out to known, accountable people from large companies, associations, nonprofits, and academic institutions has to be a good thing. Giddy up!

End Notes
1 Best Buy. “AT&T prepaid Alcatel CAMEOX device purchase.” Bestbuy.com. Available: https://www.bestbuy.com/site/at-t-prepaid-alcatel-cameox-4g-lte-with16gb-memory-cell-phone-arctic-white/6008102.p?skuId=6008102 (Accessed: May 15, 2019).
2 A. Demirgüç-Kunt, L. Klapper, D. Singer, S. Ansar, and J. Hess. The Global Findex database 2017: Measuring financial inclusion and the fintech revolution. World Bank Group, 2018. Accessed: May 15 2019. Globalfindex.worldbank.org. [Online]. Available: https://globalfindex.worldbank.org/sites/globalfindex/ files/2018-04/2017%20Findex%20full%20report_0.pdf
3 OECD. Mobile phones: Pricing structures and trends. Paris, France: OECD Publishing, 2000, p. 67. [Online]. Available: https://books.google.com/books?id=pcP84M_GBeoC&pg=PA6&lpg=PA6&dq=1999+price+SMS+europe&source=bl&ots=TIbwgZWCmj&sig=ACfU3U2Z_yRawxW78qVSVO_wHCtRupoqoA&hl=en&sa=X- &ved=2ahUKEwjOmeG9tMHiAhVVFzQIHU8eBEMQ6AEwD3oECAkQAQ#v=onepage&q=SMS&f=false
4 Consumer Federation of America. “How payday loans work.” Payday Loan Consumer Information. Available: https://paydayloaninfo.org/facts (Accessed: May 19, 2019).
5 A. Demirgüç-Kunt, L. Klapper, D. Singer, S. Ansar, and J. Hess. The Global Findex database 2017: Measuring financial inclusion and the fintech revolution. World Bank Group, 2018. Accessed: May 15 2019. Globalfindex.worldbank.org. [Online]. Available: https://globalfindex.worldbank.org/sites/globalfindex/ files/2018-04/2017%20Findex%20full%20report_0.pdf

REAL ID Act of 2005 … REAL Beneficial Owners Act of 2019?

adminAML Regulations and Enforcement Actions, Beneficial Ownership & Customer Due Diligence

Can something like the REAL ID Act of 2005 be used to solve the beneficial ownership issue?

Without a national registry of beneficial ownership (BO) information, banks can collect BO information, but have no way to verify it

The REAL ID Act of 2005 compelled the 50 states to have their citizens’ state-issued identification documents meet certain minimum requirements and issuance standards … could a similar thing be done to compel the 50 states to have their state-created legal entities meet certain minimum requirements for beneficial ownership information?

The REAL ID Act of 2005 established minimum security standards for state-issued driver’s licenses and identification cards by prohibiting Federal agencies from accepting non-compliant state-issued driver’s licenses and identification cards that do not meet the Act’s minimum standards. The REAL ID Act was a way for the Federal Government to compel (sort of) the fifty states to meet certain standards for their drivers’ licenses. The Federal Government essentially told the fifty states “you have the power to issue state drivers’ licenses, and you can do what you’d like, but if you want those licenses to be used for any federal purposes, such as accessing Federal facilities, entering nuclear power plants, and, notably, boarding federally regulated commercial aircraft, then they have to meet our standards.”

The REAL ID Act’s genesis was the attacks of 9/11. It enacted recommendations from the July 2002 National Strategy for Homeland Security and the July 2004 9/11 Commission Report that the Federal Government “set standards for the issuance of sources of identification, such as driver’s licenses.” The REAL ID Act was included in the Emergency Supplemental Appropriation for Defense, the Global War on Terror, and Tsunami Relief Act of 2005 (PL 109-13, 119 Stat. 231 at 302), and the actual ID provisions are in Title II, Improved Security for Drivers’ Licenses and Personal Identification Cards, section 202, “minimum document requirements and issuance standards for federal recognition.” (Section 204 provides for grants to states to implement the document requirements and issuance standards).

The main part of section 202 provides:

REAL ID Act regulations weren’t finalized until January 2008, at which time it was clear that it would take billions of dollars and many years to get states into compliance. States were originally required to be compliant by May 2008 (the regulations weren’t published until January 2008). That deadline was extended multiple times to 2009, then 2011, then 2013, then 2015, and extended again to January 22, 2018. As of April 2018, only thirty states were compliant and the remaining twenty had obtained extensions. For those with non-compliant driver’s licenses issued by compliant states, they have until October 1, 2020 to get a compliant driver’s license.

To find out more about the REAL ID Act requirements, California’s DMV site has a good section: CA DMV on REAL ID Act

Can’t Board an Airplane … Can’t Bid on Federal Contracts

How could something like the REAL ID Act help banks with the beneficial ownership issue? Like driver’s licenses, creation of legal entities is left to each state, and (anecdotally) only three states currently require the collection and verification of beneficial ownership information.

Like they did to effectively compel the fifty states to issue individuals’ driver’s licenses that met federal standards, the federal government could pass a law that would prevent entities created in states that do not meet certain Beneficial Ownership standards from bidding on and winning federal government contracts. In other words, those states would not be compelled to collect, verify, and maintain accurate beneficial ownership information on state-incorporated legal entities, but would need to have an incorporation regime that did so if it wanted those legal entities to be able to bid on federal government contracts.

This might be a radical idea, full of legal and regulatory pitfalls. There might be dozens of reasons why it can’t work. But it might work. Or something similar could work (it doesn’t have to be about bidding on federal contracts).  But there must be something that could work. As Arthur C. Clarke wrote, “new ideas pass through three phases: it can’t be done; it probably can be done, but it’s not worth doing; I knew it was a good idea all along!”

One word of further caution. It will have taken fifteen years for all states to comply with the REAL ID Act of 2005 requirements. Hopefully it wouldn’t take states fifteen years to comply with the REAL Beneficial Owners Act of 2019.

BSA Reports and Federal Criminal Cases – What’s the Connection?

adminFinTech, Financial Crimes, and Risk Management

54,000 Federal Criminal Cases … and 20,000,000 BSA Reports

If the question is “how many BSA reports are used in federal criminal cases?”, the answer may be “we don’t know.” But in fact, somebody knows whether and which BSA reports were used in, or led to, or somehow contributed to each and every criminal case filed in federal district courts across America. But having a way to obtain that information from the thousands of somebodies across 93 US Attorneys’ offices and dozens of federal law enforcement agencies has proven to be elusive.

If Only We Knew What We Know …

… is the title of a book written by C. Jackson Grayson and Carla O’dell (Simon and Schuster, 1998) that goes through the problems associated with the transfer of knowledge and best practices within an organization. Those problems are amplified when the transfers occur across organizations, and amplified again when the transfers occur between the public and private sectors.  If only the financial services community – the producers and filers of more than 20 million BSA reports every year – knew how many, and which of those filings were of tactical or strategic value to law enforcement as they bring over 50,000 new federal criminal cases every year.

US Attorneys Annual Statistical Reports

The Department of Justice publishes annual statistical reports that provide some insight into the numbers and types of criminal and civil cases filed across the 93 US Attorneys’ offices and 94 judicial districts in the United States. They are available at DOJ Annual Statistical Reports

The most recent report covers fiscal year 2017 (October 1, 2016 through September 30, 2017). It shows that there were 53,899 new criminal cases brought in FY2017 and 53,416 were closed. Notably, about 94% of federal criminal cases end in a guilty plea or guilty finding. And what law enforcement agencies are bringing those cases? About 43% of new federal criminal cases originated with either Customs & Border Patrol or Immigration & Customs Enforcement.

And what kinds of cases are being opened? The DOJ classifies its cases under “programs”, which is the primary or leading charge if there are multiple charges in a case or against a defendant. According to the FY2017 data, the leading programs are:

A few observations on this data. First, in FY2017 the 93 US Attorney’s offices brought only 132 federal drug possession cases charging 163 defendants. A subset of those involve marijuana possession charges. Separate data from prior years suggests that almost all of these are cases along the southwest border or on military bases.

Second, and as noted in the comment box above, data from FinCEN indicates that in the three fiscal years prior to FY2017, there was an average of just over 2.1 million SARs filed per year and about 19.2 million BSA reports in total (including SARs) filed per year. With about 54,000 criminal cases, that means that there are over 350 BSA reports filed for every federal criminal case brought.

But currently there is no means to determine how many of those criminal cases involved BSA reports, or how many of those BSA reports contributed to federal criminal cases.

See my previous article “FinCEN’s FY2020 Report to Congress Reveals its Priorities and Performance: FinCEN Needs More Resources – and a TSV SAR Feedback Loop – To Really Make a Difference in the Fight Against Crime & Corruption” at TSV SAR Feedback Loop

Google’s PageRank Algorithm: September 4, 2001 – June 4, 2019

adminGeneral Business, Risk, and Life

Google’s PageRank Algorithm – from the time it was patented in 2001 to when it expired in June 2019, we’ve gone from doing 30 million searches a day against 55 gigabytes of data, to doing 5.6 billion searches a day against 2 trillion gigabytes of data!

It appears that Google’s PageRank algorithm has expired: https://patents.google.com/patent/US6285999B1/en

Lawrence Page, one of the co-founders (with Sergei Brin) of Google, developed the PageRank algorithm in 1997. On January 9, 1998 Brin filed a patent application, and on September 4, 2001 the patent was granted. Notably, the patent expired on June 4, 2019.

The patent is available at https://patentimages.storage.googleapis.com/37/a9/18/d7c46ea42c4b05/US6285999.pdf

The Abstract provided as follows:

A method assigns importance ranks to nodes in a linked database, such as any database of documents containing citations, the World wide web or any other hypermedia database. The rank assigned to a document is calculated from the ranks of documents citing it. In addition, the rank of a document is calculated from a constant representing the probability that a browser through the database will randomly jump to the document. The method is particularly useful in enhancing the performance of Search engine results for hypermedia databases, such as the World wide web, whose documents have a large variation in quality.

The patent also included the following interesting paragraph:

Currently, a popular search engine might execute over 30 million searches per day of the indexable part of the web, which has a size in excess of 500 Gigabytes. Information retrieval systems are traditionally judged by their precision and recall. What is often neglected, however, is the quality of the results produced by these search engines. Large databases of documents such as the web contain many low quality documents. As a result, searches typically return hundreds of irrelevant or unwanted documents which camouflage the few relevant ones. In order to improve the selectivity of the results, common techniques allow the user to constrain the scope of the search to a specified subset of the database, or to provide additional search terms.

This was from September 2001. As of June 2019, according to … Google (!) there are about 63,000 searches per second or 5.6 billion searches per day. And how big is the indexable part of the web? In 2001 it was 500 gigabytes. According to Cisco, as of June 2019 the indexable part of the Web is about 2 zettabytes, which is 2,000 exabytes, which is 2 million petabytes, which is 2 billion terabytes, which is 2 trillion gigabytes.

So … from the time Google’s PageRank algorithm was patented in 2001 to when it expired in June 2019, we’ve gone from doing 30 million searches a day against 55 gigabytes of data, to doing 5.6 billion searches a day against 2 trillion gigabytes of data. If only our mobile devices were as resilient as Google’s algorithms!

FinCEN’s FY2020 Report to Congress Reveals its Priorities and Performance

adminMoney Laundering & Terrorist Financing - General, RegTech

FinCEN Needs More Resources – and a TSV SAR Feedback Loop – To Really Make a Difference in the Fight Against Crime & Corruption

Every year each US federal government department and agency submits its Congressional budget justification and annual performance report and plan: essentially a document that says to Congress “here’s our mission, here’s how we did last year, here’s what we need for next year.” FinCEN’s fiscal year 2020 (October 1, 2019 through September 30, 2020) Congressional Budget Justification and Annual Performance Report and Plan is available at

https://home.treasury.gov/system/files/266/12.-FINCEN-FY-2020-CJ.pdf

My notes on the 14-page document summarize some of the key aspects of the report.

First is a summary of what FinCEN does: its areas of responsibility. Of note is the seventh area – “bringing together the disparate interests of law enforcement, [158 foreign] FIUs, regulatory partners, and industry”. This is also an admission that the interests of the various public and private sector participants are, in fact, disparate. Which begs the questions “should there be disparate interests?” and “what can we do to bring all these participants together and forge a single, unified interest of safeguarding the financial system from illicit use, combating money laundering, and promoting national security through the strategic use of financial authorities and the collection, analysis, and dissemination of financial intelligence?” (quoting FinCEN’s mission statement).  When it comes to fighting human trafficking, drug trafficking, etc., different perspectives are healthy and expected … competing or disparate interests are counterproductive.

Second, many people will be surprised at just how small FinCEN is – from the number of people to its overall budget – given the importance of its mission. The FY2019 budget called for 332 people and a budget of $115 million. The FY2020 budget proposes an increase to 359 people and a budget of $124.7 million, with the increase in people split between two priority programs: 13 for cybercrime, and 14 for “special measures”, which includes the actual special measures section (section 311) of the Patriot Act, requests to financial institutions for data on foreign financial institution wire transfers, and Geographic Targeting Orders.  As a “participant” for 20+ years, I would like to see what FinCEN could do if it had 659 people and a budget of $224.7 million: perhaps the $100 million to fund FinCEN’s efforts to combat human trafficking, narcotics trafficking, and foreign corruption could come from a 2.8% reduction in the “new drone procurement” budget request of the Department of Defense …

Third, the data on SARs filed, total BSA reports filed, and BSA Database Users is interesting. From FY2014 through FY2018 (actuals) and through FY2020 (estimates), the number of SARs filed has gone from 1.9 million to 2.7 million, an increase of 41.5%. But in the same period, the total number of BSA reports filed – including SARs – has gone from 19.2 million to 20.9 million, an increase of only 9.2%. That tells us two things: SARs are estimated to make up about 1 out of every 8 BSA reports filed in FY2020 compared to 1 out of every 10 BSA reports filed in FY2014 (a positive trend); and the total number of non-SAR BSA filings has essentially been the same for the last 7 years. In other words, the number of CTRs, CMIRs, and FBARs is not going up.

Fourth, there is the axiomatic, reflexive gripe that the SAR database is a black-hole: that financial institutions file SARs then never hear anything back from FinCEN or law enforcement as to whether those SARs are meaningful, effective, useful.  But look at the following from page 12:

FinCEN monitors the percentage of domestic law enforcement and regulators who assert queried BSA data led to detection and deterrence of illicit activity. This performance measure looks at the value of BSA data, such as whether the data provided unknown information, supplemented or expanded known information, verified information, helped identify new leads, opened a new investigation or examination, supported an existing investigation or examination, or provided information for an investigative or examination report. In FY 2018, FinCEN narrowly missed its target of 86 percent with 85 percent of users finding value from the data. FinCEN will work toward increasing its FinCEN Portal/FinCEN Query training efforts to provide more users with the knowledge needed in order to better utilize both FinCEN Portal and FinCEN Query. In FY 2019, the target is set at 86 percent and 87 percent in FY 2020.

Looking at this in a positive light, there appears to be a feedback loop between the users of BSA data – law enforcement and the regulators – and FinCEN, where law enforcement and regulators can assert – therefore they can determine – whether BSA data (mostly SARs and CTRs) led to detection and deterrence of illicit activity: whether the data provided unknown information, supplemented or expanded known information, verified information, helped identify new leads, opened a new investigation or examination, supported an existing investigation or examination, or provided information for an investigative or examination report.

The feedback loop between the users of BSA data (law enforcement, regulators, and FinCEN) must be expanded to include the producers (financial institutions) of BSA data

I have written previously about the need to provide financial institutions with more feedback on the 20 million+ BSA reports they produce every year. See, for example: https://regtechconsulting.net/uncategorized/rules-based-monitoring-alert-to-sar-ratios-and-false-positive-rates-are-we-having-the-right-conversations/

In that article, I introduced something I call the “TSV” SAR, or “Tactical or Strategic Value” SAR. I wrote:

How do you determine whether a SAR provides value to Law Enforcement? One way would be to ask Law Enforcement, and hope you get an answer. That could prove to be difficult.  Can you somehow measure Law Enforcement interest in a SAR?  Many banks do that by tracking grand jury subpoenas received to prior SAR suspects, Law Enforcement requests for supporting documentation, and other formal and informal requests for SARs and SAR-related information. As I write above, an Alert-to-SAR rate may not be a good measure of whether an alert is, in fact, “positive”. What may be relevant is an Alert-to-TSV SAR rate.  What is a “TSV SAR”? A SAR that has Tactical or Strategic Value to Law Enforcement, where the value is determined by Law Enforcement providing a response or feedback to the filing financial institution within five years of the filing of the SAR that the SAR provided tactical (it led to or supported a particular case) or strategic (it contributed to or confirmed a typology) value. If the filing financial institution does not receive a TSV SAR response or feedback from law enforcement or FinCEN within five years of filing a SAR, it can conclude that the SAR had no tactical or strategic value to law enforcement or FinCEN, and may factor that into decisions whether to change or maintain the underlying alerting methodology. Over time, the financial institution could eliminate those alerts that were not providing timely, actionable intelligence to law enforcement, and when that information is shared across the industry, others could also reduce their false positive rates.

Tactical or Strategic Value (TSV) SAR Feedback Loop

It appears that there are already mechanisms in place for law enforcement and the regulators to determine whether the 20 million CTRs and SARs that are being filed every year provide unknown information, supplement or expand known information, verify information, help identify new leads, open a new investigation or examination, support an existing investigation or examination, or provide information for an investigative or examination report. There is a way – there is always a way if there is the will – to provide that information to the private sector filers of the CTRs and SARs. Perhaps there is a member of Congress out there that could tweak FinCEN’s Fiscal Year 2020 budget request a little bit to give it the people power and monetary resources to begin developing a TSV SAR Feedback loop. We’d all benefit.

Cannabis Reform in America: “This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning”

adminCannabis/Marijuana

 

Winston Churchill – https://www.youtube.com/watch?v=pdRH5wzCQQw

Any Fast and Clean Solutions Will Be Slow and Sloppy to Implement

Advocates on both (all?) sides of the cannabis, marijuana, and hemp debates are looking for fast and sure solutions to whatever problems they feel are most pressing, whether decriminalization, descheduling cannabis, rescheduling cannabis, righting past societal and racial wrongs, etc. Whether it is the proposed STATES Act or the SAFE Banking Act, some advocates suggest that Congressional action will quickly and easily solve many of the issues around accessibility, safety, access to banking, etc.

But is it that simple?

Today, the cannabis and financial services industries, local, county and state governments, and law enforcement agencies and prosecutors, are all in limbo, waiting for Congress to pass, and the President to enact, federal legislation that will pave the way for regulations and regulatory guidance that will truly open up banking services to cannabis related businesses. But it will take time, as there is always “regulatory lag” between new legislation being passed, regulations being written, and regulatory guidance being published. And then it takes even longer for financial institutions to implement those regulatory changes: to build programs, write policies, implement new technologies, etc. So even if Congress acted today, all of the cannabis industry actors won’t have a clear path forward for (at least) a couple of years. Until then, many of those actors – notably financial institutions looking to provide safe and effective banking services to the industry – will manage the risks through luck and chance, not knowing whether, how, or when financial regulators or prosecutors could pounce on them for failing to do perfectly that which they didn’t know they had to do.

What must be done? Until there are legislative changes, the federal banking regulators need to provide more current, clearer guidance for banks and credit unions.  It has been more than five years since FinCEN issued its Valentine’s Day 2014 guidance, and none of the banking and credit union regulators have formally opined on it or provided written guidance. What has been said about the Guidance?

  • The Courts: I’m aware of one federal court judge who has commented on the FinCEN guidance. In a December 28, 2015 hearing in the Fourth Corner Credit Union v Federal Reserve Bank of Kansas City case (District Court of Colorado, 15CV01633), Judge Brooke Jackson responded to a statement by the credit union’s lawyer that the FinCEN guidance “authorized financial institutions to serve marijuana related businesses” by saying: “No, it didn’t do that, did it? … It seems to me that the DOJ and guideline people are just saying, well, maybe we can put our head in the sand and this will go away.” (Transcript of hearing, page 3). And later in the same hearing, Judge Jackson stated: “But in [the credit union’s] brief, in black and white, you say the FinCEN guidance authorizes banks to serve marijuana related businesses. I don’t agree with you. I don’t think it does.” (Transcript, page 63).
  • Federal Reserve: in a June 17, 2018 press conference, Federal Reserve Chairman Jerome Powell is reported (by MarketWatch) to have said: “This is a very difficult area, because many state laws permit the use of marijuana and federal law still doesn’t. So it puts federally-chartered banks in a very difficult situation … it puts the supervisor in a very, very difficult position. Of course, our mandate has nothing to do with marijuana … We just would love to see it clarified, I think.”
  • OCC: on January 17, 2019, OCC Comptroller Joseph Otting told reporters that Congress has “to act at the national level to legalize marijuana if they want those entities involved in that business to utilize the US banking system” and that he “hopes for resolution to marijuana banking issues in 2020” (quoting a PoliticoPro tweet).

Unless and until the financial services industry gets clear, unequivocal, consistent, written laws, regulations, and guidance from Congress, Treasury, and Justice to provide banking services to marijuana-related businesses, it will and should do what it is currently doing – balancing the undue risks against the insufficient rewards – and continue to stand on the sidelines while our communities, veterans, patients, doctors, caregivers, and others suffer. 

History tells us that changes take place over many years

An abbreviated timeline of cannabis in America makes us appreciate that any changes do, in fact, take many years to come about. I’ve broken this timeline or history into six periods.

1600s – 1919 – Hemp is part of the culture

  • Hemp farming
  • 1914 Harrison Narcotics Tax Act re opiates, coca

1919 – 1933 – Prohibition

  • 1919 – 18th Amendment brought in Prohibition – exception for 200 gallons of house-made wine, and physicians could prescribe whiskey. Note the parallels with cannabis, where many states allow home grows and medicinal cannabis.
  • 1930 – creation of the Federal Bureau of Narcotics (became the DEA in July 1973). First Commissioner Harry Anslinger (Commissioner 1930 – 1962), then US Representative to the UN Narcotics Commission 1962-1964. Anslinger wrote “The Protectors” in 1964 which included: “marijuana is taken by musicians. And I’m not speaking about good musicians, but the jazz type.”
  • By 1931, 29 states outlawed marijuana use
  • 1933 – 21st Amendment ended Prohibition

1933 – 1970 – Criminalizing of Cannabis

  • 1937 – Marihuana Tax Act (note the spelling of marihuana: this is the way it has been spelled in all federal laws and the US Sentencing Guidelines. The act was overturned in 1969 in a US Supreme Court case (Timothy) Leary v US as a violation of the 5th Amendment because in order to get a tax stamp you had to incriminate yourself; repealed in 1970 by the Controlled Substances Act
  • 1952 – Boggs Act: mandatory sentences for drug possession, and for marihuana, 2 years
  • 1961 – UN Single Convention on Narcotic Drugs (one of three UN treaties on narcotics, the others in 1971 and 1988). US is a signatory. Cannabis must be either a Schedule I or II drug per 21 USC 811(d)(1). Affirmed in NORML v DEA, 559 F3d 735, 751 (DC Cir 1977)
  • 1970 – Foreign Bank Secrecy Act of 1970, PL 91-508 (October 26, 1970)
  • 1970 – Comprehensive Drug Abuse Prevention & Control Act of 1970, PL 91-513 (October 27, 1970). Title II is the Controlled Substances Act. Five schedules of drugs based on potential for abuse, accepted medical use, and safety and potential for psychological or physical addiction:

Schedule  Potential for Abuse  Accepted Medical Use  Potential for Addiction

       I                      High                               None                              High

      II                      High                               Yes                                 High

      III                     Potential                       Yes                          Moderate/Low

      IV                     Low                                Yes                                 Low

      V                       Low/Little                     Yes                            Little/None

1970 – 1996 – The War on Drugs

  • 1970 – National Commission on Marihuana & Drug Abuse (Schafer Commission) created by President Nixon (actually, it was created by PL 91-513 Title II, section 601). Nixon’s intent was to get support for the temporary scheduling of marijuana onto Schedule I by AG John Mitchell.
  • 1972 – Schafer Commission Report released, arguing for decriminalization of marijuana possession and removal of marijuana from Schedule I. Title of report: “Marihuana, A Signal of Misunderstanding”
  • 1972 – NORML petitioned the Bureau of Narcotics & Dangerous Drugs to reschedule marijuana. BNDD, then the DEA, didn’t hear the petition until 1986, and rejected the request in 1989.
  • 1973 – Oregon became the first state to decriminalize possession (< 1 ounce). Between 1973 and 1978, 13 more states followed
  • 1982 – Tax Equity & Fiscal Responsibility Act of 1982 added section 280E to the Internal Revenue Code. Prior to this, criminals could write off normal business expenses in determining the federal income tax on illegal proceeds. Section 280E restricted what a person or business could write off to only cost of goods sold, not operating or other expenses.
  • 1984 – Reagan’s War on Drugs – included the passage of the Comprehensive Crime Control Act of 1984
  • 1986 – Anti-Drug Abuse Act of 1986, PL 99-570 (October 27, 1986). Brought in sentencing guidelines, mandatory minimums, 3 strikes. Total of 15 titles, including Title I, the Anti-Drug Enforcement Act, which had 15 sub-titles, including sub-title H, the Money Laundering Control Act (MLCA), which criminalized money laundering.

1996 – 2012 – The Beginning of  Decriminalization and Medicinal Use

  • 1996 – California Proposition 215 led to the Compassionate Use Act – first state to adopt medical marijuana law
  • 2000 – Conant v Walters, 309 F3d 629 (9th Circuit) affirmed a physician’s right to recommend, but not prescribe, marijuana
  • 2001 – US v Oakland Cannabis Buyers’ Cooperative, 532 US 483 – US Supreme Court rejected the medical necessity defense to CSA crimes notwithstanding the medical marijuana possession was legal under state law
  • 2001 – Congress petitioned the DEA to reschedule marijuana to Schedule II. Fifteen years later, in August 2016, the petition was denied by the US Department of Health & Human Services re “more research is needed”
  • 2005 – Gonzales v Raich, 545 US 1 – US Supreme Court held that the Commerce Clause grants the federal government jurisdiction over intrastate marijuana production, distribution, and use
  • 2009 – Ogden Memo (October 19) Subject: “Investigations and Prosecutions in States Authorizing the Medical Use of Marijuana”. By this time, 13 states had medical marijuana regimes. The memo mentioned patients and caregivers, warned against for-profit, commercial enterprises. Listed seven indicators of “federal interest” including firearms, violence, minors, money laundering, and organized crime.
  • 2011 – Cole Memo (June). Subject: “Guidance Regarding the Ogden Memo in Jurisdictions Seeking to Authorize Marijuana for Medical Use”. Repeated the Ogden language and warned against large-scale cultivation.

2012 – Present – Adult-Use Begins

  • 2012 – November: Washington and Colorado voter propositions approve adult-use marijuana (states 1 and 2)
  • 2013 – Cole Memo (Cole II – August 23). Press release specifically called out Washington and Colorado. Subject: “Guidance Regarding Marijuana Enforcement”. The accompanying press release specifically mentioned Colorado and Washington, which had passed the first adult-use laws. Set out 8 priorities: Preventing distribution to minors; Preventing revenue from marijuana going to criminal enterprises, gangs, cartels; Preventing interstate diversion; Preventing marijuana businesses from being covers for other illegal activities; Preventing violence, use of firearms, in cultivation and distribution; Preventing drugged driving and exacerbation of other public health consequences; Preventing growing of marijuana on public lands; and Preventing marijuana possession or use on federal property.
  • 2014 – Cole Memo (Cole III – February 14) and FinCEN Guidance, also February 14th. Cole III Subject: “Guidance Regarding Marijuana Related Financial Crimes”. Repeated Cole II, but noted that Cole II “did not specifically address what, if any, impact it would have on certain financial crimes for which marijuana-related conduct is a predicate.”The FinCEN (Treasury) Guidance had a Subject: “BSA Expectations Regarding Marijuana-Related Businesses” and “clarifies how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations.” Repeated 8 priorities from Cole III. Set out 23 red flags. Required FIs to file three types of marijuana Suspicious Activity Reports: Marijuana Limited for all activity that doesn’t violate state law of any of the priorities; Marijuana Priority for all activity that either violates state law or one or more of the priorities; and Marijuana Termination for all activity that either violates state law or one or more of the priorities and the FI is going to or has exited the MRB relationship.
  • 2014 – November: Washington, DC, Alaska, and Oregon approve adult-use marijuana (States 3 and 4, DC)
  • 2014 – Rohrabacher-Farr Amendment to the Omnibus Federal Spending Bill, prohibiting the DOJ from using appropriated funds to target state legal medical marijuana programs (similar amendments in every federal spending bill since)
  • 2016 – November: California, Massachusetts, Nevada, Maine (states 5 to 8) approve adult-use marijuana
  • 2018 – January 4th AG Sessions memo.  Subject: “Marijuana Enforcement”. Three paragraphs and one page. Paragraph 1 indicated that the CSA carries significant penalties and can form the basis for other crimes including money laundering and BSA violations. Paragraph 2 provided that prosecutorial direction and discretion is set out in the US Attorney’s Manual. Paragraph 3 provided that specific memos on marijuana were unnecessary and therefore rescinded.

    Bottom Line: Treasury’s 2014 Guidance has resulted in ~50 banks and credit unions, out of more than 11,000, knowingly and actively banking marijuana related businesses. And former AG Jeff Sessions didn’t really rescind anything. Marijuana businesses and those financial institutions that provide banking services to them, do so at their own peril.

  • 2018 – November: Vermont and Michigan approve adult-use marijuana (states 9 and 10 plus DC)
  • 2019 – January: SAFE Banking Act introduced in Congress
  • 2019 – January: STATES Act introduced in Congress

But even with Congressional action, what issues could remain that need to be dealt with? Below are some observations on some issues to consider as these debates continue and, to some degree, are resolved.

Eleven Things to Consider in the Cannabis Debate

  1. Lotteries, casinos, and liquor stores are all examples of legalized vices that have been found to disproportionally harm, or at least not appropriately benefit, lower income and communities of color. Despite efforts to prefer local, minority, and women-run businesses, most local, county, and state regimes are becoming dominated by large, interstate (international) corporations financed by (white) male-dominated venture capitalists and private equity. More action needs to be taken to understand the problems that have arisen with lotteries, casinos, and liquor stores (and pawnshops) to understand whether and how cannabis production, manufacturing, processing, and distribution can result in similar problems, and then to prevent those problems. Let’s learn from what we know and be better for it.
  2. Cannabis and cannabis products are sold as either medicinal products or non-medicinal. Other products that are sold both as a “medicine” and as a non-medicine include toothpaste and tooth whiteners, deodorant and antiperspirant, and suntan lotion and sunscreen. But all of those products are first approved as either foods, drugs, or cosmetics. Currently, the same or similar products (cannabis flower, tinctures, edibles, lotions) are sold as non-approved adult-use products (and are taxed accordingly) or as non-approved medicinal products (and generally not taxed at all or as much). That creates confusion and opportunities for mischief.
  3. The medicinal cannabis industry does not appear to uniformly adhere to the “under the care of a physician” or “legitimate or bona fide physician/patient relationship” standards in all states’ medical/medicinal marijuana regimes. A simple review of online applications for, and customer reviews of, medicinal cannabis cards suggests that an online form and quick video chat “in ten minutes or less!” without any true follow-up isn’t a true physician patient relationship. And it has always seemed odd to me that a physician would recommend a medicine to a patient by telling them “here’s approval to buy as much of this medicine as you want, in whatever amount and strength you want, in any form you want, for a year.”  And then that patient gets his advice from a 20-something year old budtender, not an educated and licensed pharmacist. That’s essentially what a recommendation for medicinal cannabis is. It just doesn’t seem responsible to me. Some enhancements to this process are overdue.
  4. The 6-plant personal grow is a legacy of the California cooperative environment and may not be appropriate in a go-forward regime (apparently Illinois has recognized this, and its pending bill only allows limited home grows for medicinal cannabis patients). Six plants – up to 99 for Colorado and California medicinal cannabis – can produce as many as 30 joints a day (or up to 1,800 for 99 plants). Some argue that is excessive and goes against all the other strict production, labeling, and distribution laws and regulations otherwise in place. Home grows are a major concern of the DEA.
  5. Ownership and control of marijuana-related businesses: there are too many definitions, no central database (such as the Nationwide Multistate Licensing System for money transmitters and other state-licensed businesses). Those drafting cannabis laws and regulations should look at what the federal government did with money services businesses (MSBs) in Title IV of the Riegle Community Development and Consumer Protection Act of 1994. Title IV, known as the Money Laundering Suppression Act of 1994, called for uniform state licensing and regulation of MSBs, and a national registry of MSBs, while leaving authority over MSBs to those states with effective regulation and enforcement regimes. Not a bad model for marijuana related businesses (MRBs).
  6. Has there been a balanced look at whether the license fees and taxes actually cover the direct and indirect governmental costs, let alone any societal harms, that are a result of the cannabis regime?
  7. Everyone is focused on federal criminal laws around narcotics, but there have been virtually almost no convictions for true marijuana possession in the last ten years at the federal level (90%+ of the few thousand federal marijuana possession convictions are along the southern border, and the average weight of marijuana for those possession cases is over 40 pounds). It is a state issue. Solving criminal law issues (including the expungement of past convictions) at the federal level doesn’t address the real criminal law issues.
  8. The current production FAR exceeds demand in some states. Oregon’s supply of recreational marijuana is estimated to be 6.5 years (per the OLCC’s 2019 Recreational Marijuana Supply and Demand Legislative Report), and California has reported that as much as 11 million of the 13 million pounds of cannabis produced in California is diverted and not taxed. The states’ failure to address over-production (notably California and Oregon) could result in a federal crackdown.
  9. The last four Surgeons General have all said that there needs to be more clinical trials. Clinical trials take time.
  10. Continuing noncompliance is occurring in the industry. For example, the Oregon Liquor & Cannabis Commission reported on April 18, 2019 of “significant noncompliance by marijuana licensees failing to abide by the state’s laws and rules”.
  11. The current FinCEN guidance is not sustainable. Read literally – which is how any guidance or regulation is read when it is being used to sanction a bank – the guidance is impossible to follow in a commercially reasonable manner when the risks of noncompliance are unknown. I have advocated that any Marijuana Related Business (MRB) regulations and guidance should mirror the Money Services Business (MSB) regulations and guidance.

Seven Observations on the Proposed “Quick Fix” Solutions

Some advocates for Congressional action are suggesting that rescheduling or descheduling cannabis and passing a SAFE Banking Act or STATES Act will resolve many of the issues currently facing the cannabis industry. These suggestions are probably accurate, but certainly incomplete. It will take years, and many more steps, before the major issues are known and addressed. Some observations:

  1. Rescheduling Cannabis – if cannabis is rescheduled, to which schedule? If moved to Schedule III or lower, what about the US treaty commitments enshrined in law? Do doctor “recommendations” become “prescriptions” and require specific and DEA/FDA-approved dosage, duration, means of delivery, and FAERS-like reporting? And if rescheduled, what about DEA registration, inspection, Suspicious Order Reporting, etc., for growers, manufacturers, and distributors?
  2. Descheduling Cannabis – if descheduled, FDA approval would still be required (as for hemp), whether for medicinal use or as an additive to food. Also, the same foreign treaty issues (three UN conventions or treaties) apply as for rescheduling.
  3. Other Federal Laws – in addition to changes to the Controlled Substances Act in Title 21 of the US Code, many other laws would also need to be amended or rescinded, including those in Title 8 (Aliens and Immigration), Title 12 (Banks and Banking), Title 18 (Crimes and Criminal Procedure), Title 21 (Food and Drugs), Title 26 (Income Tax), Title 31 (Money and Finance), and Title 50 (War, for sanctions-related laws).
  4. Once federal legislation is enacted, it will take months/years for federal regulations, and years for regulatory guidelines, guidance, policy manuals to be revised. Also, for medical cannabis, it will take years for clinical studies then FDA/DEA approvals of new drugs.
  5. Federal Legalization brings federal taxation – like alcohol and tobacco. Depending on tax rates, the black market will thrive and survive.
  6. Interstate distribution – another area that hasn’t had much attention, but will require thoughtful and collaborative solutions. Which leads to:
  7. Amazon, Big Pharma and Big Tobacco – or combinations of them. Is there any way to stop them from taking over the production, manufacturing, and distribution of cannabis?

Conclusion and Path Forward

First and foremost, there has to be a change in the level of discourse. Like in the political arena, there appears to be a polarization of opinion so that neither side in the cannabis debate is prepared to even listen to, let alone compromise with, the other. I’ve seen examples of advocates for expunging all marijuana possession convictions employ ad hominin attacks on anyone who suggests that not all marijuana convictions are the same, and each should be looked at carefully. I’ve seen examples of advocates for preventing any medicinal uses of marijuana until full FDA approvals are in hand employ those same ad hominin attacks on anyone who suggests that, even without FDA approval, there are situations where compassion and common sense dictate medicinal uses of marijuana.  Even my list of eighteen things to consider and observations will no doubt elicit scorn, ridicule, condemnation, and name-calling. So be it.

Those most passionate are often the most vocal, and grab the most headlines, and those most passionate are sometimes the ones that aren’t listening to anyone who doesn’t share their passion. But there are also many – probably most – of the people along the spectrum of opinion that are not only willing to listen to all sides of an issue, but recognize there are many sides to an issue, and that solutions aren’t simple, and consequences are many. There are many strong advocates on both sides of the various marijuana/cannabis debates: let’s have those debates. Let’s put all of the possible issues on the table. Let’s have the courage to listen to those that present those issues and try to understand their perspectives and concerns. And let’s have the courage to compromise to get to solutions that at least do the least harm.

© 2019 – All rights reserved. No further distribution or use of this article is permitted without the express written approval of James Richards

“Get off the Pot on Pot!” – A Panel of (Two of) Three Judges of the 2nd Circuit Court of Appeals Suggests the Administration Needs to Act on Marijuana Rescheduling

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Patients, Veterans, and African‐American businessman Challenge the DOJ and DEA on Marijuana Scheduling

“This is the latest in a series of cases that stretch back decades and which have long sought to strike down the federal government’s classification of
marijuana as a Schedule I drug under the Controlled Substances Act (CSA) … The current case is, however, unusual in one significant respect: among the Plaintiffs are individuals who plausibly allege that the current scheduling of marijuana poses a serious, life‐or‐death threat to exhaust their administrative remedies before seeking relief from us, but we are troubled by the Drug Enforcement Administration (DEA)’s history of dilatory proceedings. Accordingly, while we concur with the District Court’s ruling, we do not dismiss the case, but rather hold it in abeyance and retain jurisdiction in this panel to take whatever action might become appropriate if the DEA does not act with adequate dispatch.”

The case is available at http://www.ca2.uscourts.gov/:

Court of Appeals Docket #: 18-859 Docketed: 03/29/2018
Nature of Suit: 2440 CIVIL RIGHTS-Other
Washington v. Barr
Appeal From: SDNY (NEW YORK CITY)
Fee Status: Paid
Case Type Information:
     1) Civil
     2) United States
     3) –
Originating Court Information:
     District: 0208-1 : 17-cv-5625
     Trial Judge: Alvin Hellerstein, U.S. District Judge

As the Court indicates, the plaintiffs all have compelling reasons to have the Government act. The plaintiffs are:

  1. An African‐American businessman working in the medical marijuana space. He would like to expand his business into whole‐plant cannabis products and take advantage of the federal Minority Business Enterprise Program, but, he alleges, he is impeded from so doing by the drug’s scheduling.
  2. The Cannabis Cultural Association, Inc. (CCA) is a not‐for‐profit organization dedicated to assisting people of color develop a presence in the cannabis industry. CCA is particularly focused on the way past convictions for possession, cultivation, distribution, and use of marijuana have disproportionately affected people of color and prevented minorities from participating in the new state‐legal marijuana industry.
  3. Two children with dreadful medical problems. [One] suffers from chronic and intractable seizures; [the other] from Leigh’s disease. They allege that they exhausted traditional treatment options before finding success medicating with cannabis. They claim that marijuana has saved their lives. Because of its Schedule I classification, however, they cannot bring their life‐saving medicine with them when they travel onto federal lands or into states where marijuana is illegal. For [one], these travel limitations also mean that she cannot take full advantage of the veteran’s benefits to which she is entitled through her father. In addition, both live in constant fear that their parents might be subject to arrest and prosecution for their involvement in their children’s medical treatment.
  4. One is a veteran of the war in Iraq and suffers from post‐traumatic stress disorder. After his honorable discharge, he became suicidal and was adjudged 70% disabled. He alleges that he pursued conventional therapies unsuccessfully. In despair, he turned to medical marijuana. This, he claims, has allowed him to manage his symptoms. He further asserts, like [another plaintiff], that marijuana’s Schedule I classification restricts his ability to travel and to take full advantage of his veteran’s benefits.
  5. Defendants are the United States, the Attorney General, the Department of Justice, the Acting Administrator of the DEA, and the DEA itself. They are
    responsible for implementing the CSA and, more particularly, for updating the classification of controlled substances.
The CSA Scheduling Process

The Court describes the process used to schedule, reschedule, or deschedule drugs in footnote 3 on page 8 of its May 30th order:

The CSA places in the Attorney General the power to schedule, reschedule, or deschedule drugs. See 21 U.S.C. § 811(a). The Attorney General has promulgated rules delegating this power to the head of the DEA. See 28 C.F.R. § 0.100(b). The CSA further requires that, before scheduling, rescheduling, or descheduling a drug, the Attorney General “shall . . . request from the Secretary [of Health and Human Services] a scientific and medical evaluation[ of the drug], and [the Secretary’s] recommendations, as to whether such drug or other substance should be so controlled or removed,” which “shall be binding on the Attorney General as to such scientific and medical matters.” 21 U.S.C. § 811(b). The process for reviewing a drug’s scheduling can be initiated by the Attorney General, the Secretary of Health and Human Services, or “on the petition of any interested party.” Id. § 811(a).

And then at page 13:

When Congress enacted the CSA, it put, by legislative fiat, certain drugs directly into schedules. See Controlled Substances Act, Pub. L. No. 91‐513, § 202, 84 Stat. 1236, 1247‐52 (1970) (codified at 21 U.S.C. § 812); see also Gonzales v. Raich, 545 U.S. 1, 14 (2005). But the statute contemplated that these initial lists would be regularly revised and updated by the Attorney General, in consultation with the Secretary of Health and Human Services, and that this would be done according to a specific procedure and set of standards.

It is Health & Human Services, not the DOJ or the DEA, that will decide whether to reschedule marijuana

The Court considered the plaintiffs’ arguments that the former Attorney General and Administrator of the DEA were biased against marijuana, and thus would not act appropriately. But the Court concludes that any bias by the AG or DEA is not relevant, because “on the medical and scientific claims central to Plaintiffs’ argument, it is the opinion of the Secretary of Health and Human Services that matters, not the judgment of the Attorney General or the head of the DEA.”

How long does it take to decide petitions to reschedule drugs? Nine years.

“Plaintiffs argue that the administrative process will prolong their ordeal intolerably. And their argument is not without force. Plaintiffs document that the average delay in deciding petitions to reclassify drugs under the CSA is approximately nine years.”

Rescheduling marijuana requires action by the Administration

At page 16:

A sensible response to our evolving understanding about the effects of marijuana might require creating new policies just as much as changing old ones. This kind of constructive governmental work, mixing adjudication and program‐design, creating policy through the balancing of competing legitimate interests, is not generally best accomplished by federal courts on their own; it is, however, the stock‐in‐trade of administration. See, e.g., James M. Landis, The Administrative Process (1938). Assuming, of course, that one can get the administrative agency to act.

It is this last sentence – assuming, of course, that one can get the administrative agency to act – that is the key aspect of this decision, and how the Court left it.

Conclusion: The Court warns the Administration to get off the pot on pot, or it will step in

At pages 25-26:

Unless the Plaintiffs seek agency review and so inform us within six months, we will affirm the District Court’s judgment dismissing this case. (And if only some Plaintiffs seek agency review, we will dismiss the complaint as to those who do not.) But if Plaintiffs do seek agency review, and the agency fails to act with alacrity, Plaintiffs may return directly to us, under our retained jurisdiction. To be clear, we repeat that this case remains in our purview only to the extent that the agency does not respond to Plaintiffs with adequate, if deliberate, speed. In other words, we retain jurisdiction exclusively for the purpose of inducing the agency to act promptly.

Online Scams – One Chicago Area Crime Ring Offered a Full Suite of Online Fraud Schemes

adminMoney Laundering & Terrorist Financing - General
The Big 4 Online Scams: Romance, Business Email Compromise, Job Offers, and Mystery Shopper

The US Attorney’s Office for the Northern District of Illinois (Chicago) has indicted ten Nigerians – eight living in the Chicago area – for operating a full-service online scam crime ring. What’s interesting about this crime ring is the breadth of “offerings” it had: romance scams, business e-mail compromise (BEC) scams, employment scams, and mystery shopper scams.

The indictment – available at https://www.justice.gov/usao-ndil/press-release/file/1166631/download  – provides explanations for how all four of the online scams work, and examples of each. Notably, the ten defendants had eleven accounts eight different banks: they were smart enough to spread their banking activity between multiple banks, including the five largest US banks.

And there’s not much you can do if a crime ring operates across multiple banks … unless all of those banks are on Verafin’s cloud-based, cross-institutional financial crime management platform used by more than 2,600 financial institutions across the US and Canada. Verafin’s ability to detect crime rings operating across multiple institutions when any one of those institutions may not see its piece of the ring is unique in the industry.

https://verafin.com/

Artificial Intelligence – Who Is On The Hook When Things Go Wrong With Your AI System? You Are!

adminFinTech, Financial Crimes, and Risk Management, RegTech

“Organisations and individuals developing, deploying or operating AI systems should be held accountable for their proper functioning”

For all the upstart fintechs out there that are trumpeting their innovative Artificial Intelligence-based solutions that can solve a financial institution’s financial crimes problems! … note that you may be held accountable when that AI system doesn’t quite turn out like your marketing materials suggested. Legal responsibility for something you design, build, and deploy is not a new concept, but how that “something” – in this case, the AI system you developed and installed at a client bank – actually works, and reacts, and adapts, over time could very be new ground that hasn’t been explored before. But many smart people are thinking about AI developers’ accountability, and other AI-related issues, and many of those have produced some principles to guide us as we develop and implement AI-based systems.

On May 22, 2019 the OECD published a Council Recommendation on Artificial Intelligence. At its core, the recommendation is for the adoption of five complimentary “value-based principles for responsible stewardship of trustworthy artificial intelligence. The link is Artificial intelligence and the actual recommendation is https://legalinstruments.oecd.org/en/instruments/OECD-LEGAL-0449#_ga=2.200835047.853048335.1559167756-681244095.1559167756

What’s the big deal about artificial intelligence?

The OECD recognized a number of things about AI that are worth including:

  • AI has pervasive, far-reaching and global implications that are transforming societies, economic sectors and the world of work, and are likely to increasingly do so in the future;
  • AI has the potential to improve the welfare and well-being of people, to contribute to positive sustainable global economic activity, to increase innovation and productivity, and to help respond to key global challenges;
  • At the same time, these transformations may have disparate effects within, and between societies and economies, notably regarding economic shifts, competition, transitions in the labour market, inequalities, and implications for democracy and human rights, privacy and data protection, and digital security;
  • Trust is a key enabler of digital transformation; that, although the nature of future AI applications and their implications may be hard to foresee, the trustworthiness of AI systems is a key factor for the diffusion and adoption of AI; and that a well-informed whole-of-society public debate is necessary for capturing the beneficial potential of the technology, while limiting the risks associated with it;
  • Given the rapid development and implementation of AI, there is a need for a stable policy environment that promotes a human-centric approach to trustworthy AI, that fosters research, preserves economic incentives to innovate, and that applies to all stakeholders according to their role and the context;
  • certain existing national and international legal, regulatory and policy frameworks already have relevance to AI, including those related to human rights, consumer and personal data protection, intellectual property rights, responsible business conduct, and competition, while noting that the appropriateness of some frameworks may need to be assessed and new approaches developed; and
  • Embracing the opportunities offered, and addressing the challenges raised, by AI applications, and empowering stakeholders to engage is essential to fostering adoption of trustworthy AI in society, and to turning AI trustworthiness into a competitive parameter in the global marketplace.

What is “Artificial Intelligence”?

The recommendation includes some helpful definitions of the major terms:

Artificial Intelligence System: a machine-based system that can, for a given set of human-defined objectives, make predictions, recommendations, or decisions influencing real or virtual environments. AI systems are designed to operate with varying levels of autonomy.

Artificial Intelligence System Lifecycle: four phases which can be sequential but may be iterative:

(i) design, data and models – a context-dependent sequence encompassing planning and design, data collection and processing, as well as model building;

(ii) verification and validation;

(iii) deployment; and

(iv) operation and monitoring

Artificial Intelligence Actors: AI actors are those who play an active role in the AI system lifecycle, including organisations and individuals that deploy or operate AI.

Is an OECD Recommendation binding on a country that has adopted it?

OECD Recommendations are not legally binding but they are highly influential and have many times formed the basis of international standards and helped governments design national legislation. For example, the OECD Privacy Guidelines adopted in 1980 and stating that there should be limits to the collection of personal data underlie many privacy laws and frameworks in the United States, Europe and Asia.

So the AI Principles are not binding, but the OECD provided five recommendations to governments:

  1. Facilitate public and private investment in research & development to spur innovation in trustworthy AI.
  2. Foster accessible AI ecosystems with digital infrastructure and technologies and mechanisms to share data and knowledge.
  3. Ensure a policy environment that will open the way to deployment of trustworthy AI systems.
  4. Empower people with the skills for AI and support workers for a fair transition.
  5. Co-operate across borders and sectors to progress on responsible stewardship of trustworthy AI.

Who developed the OECD AI Principles?

The OECD set up a 70+ member expert group on AI to scope a set of principles. The group consisted of representatives of 20 governments as well as leaders from the business (Google, Facebook, Microsoft, Apple, but not any financial institutions), labor, civil society, academic and science communities. The experts’ proposals were taken on by the OECD and developed into the OECD AI Principles.

What is the Purpose of the OECD Principles on AI?

The OECD Principles on Artificial Intelligence promote artificial intelligence (AI) that is innovative and trustworthy and that respects human rights and democratic values. The OECD AI Principles set standards for AI that are practical and flexible enough to stand the test of time in a rapidly evolving field. They complement existing OECD standards in areas such as privacy, digital security risk management and responsible business conduct.

What are the OECD AI Principles?

The Recommendation identifies five complementary values-based principles for the responsible stewardship of trustworthy AI:

1. Inclusive growth, sustainable development and well-being – AI systems should be designed in a way that respects the rule of law, human rights, democratic values and diversity, and they should include appropriate safeguards – for example, enabling human intervention where necessary – to ensure a fair and just society. And AI should benefit people and the planet by driving inclusive growth, sustainable development and well-being.

The actual text reads: “Stakeholders should proactively engage in responsible stewardship of trustworthy AI in pursuit of beneficial outcomes for people and the planet, such as augmenting human capabilities and enhancing creativity, advancing inclusion of underrepresented populations, reducing economic, social, gender and other inequalities, and protecting natural environments, thus invigorating inclusive growth, sustainable development and well-being.

2. Human-centred values and fairness – AI actors should respect the rule of law, human rights and democratic values, throughout the AI system lifecycle. These include freedom, dignity and autonomy, privacy and data protection, non-discrimination and equality, diversity, fairness, social justice, and internationally recognized labor rights. To this end, AI actors should implement mechanisms and safeguards, such as capacity for human determination, that are appropriate to the context and consistent with the state of art.

3. Transparency and explainability – AI Actors should commit to transparency and responsible disclosure regarding AI systems. To this end, they should provide meaningful information, appropriate to the context, and consistent with the state of art to foster a general understanding of AI systems, to make stakeholders aware of their interactions with AI systems, including in the workplace, to enable those affected by an AI system to understand the outcome, and, to enable those adversely affected by an AI system to challenge its outcome based on plain and easy-to-understand information on the factors, and the logic that served as the basis for the prediction, recommendation or decision.

4. Robustness, security and safety – AI systems should be robust, secure and safe throughout their entire lifecycle so that, in conditions of normal use, foreseeable use or misuse, or other adverse conditions, they function appropriately and do not pose unreasonable safety risk. To this end, AI actors should ensure traceability, including in relation to datasets, processes and decisions made during the AI system lifecycle, to enable analysis of the AI system’s outcomes and responses to inquiry, appropriate to the context and consistent with the state of art. And AI actors should, based on their roles, the context, and their ability to act, apply a systematic risk management approach to each phase of the AI system lifecycle on a continuous basis to address risks related to AI systems, including privacy, digital security, safety and bias.

5. Accountability – AI actors should be accountable for the proper functioning of AI systems and for the respect of the above principles, based on their roles, the context, and consistent with the state of art. Organisations and individuals developing, deploying or operating AI systems should be held accountable for their proper functioning in line with the above principles.

What countries belong to the OECD?

Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States