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February 11, 2016 |
Do Not Pass Go, Do Not Collect $200: FinCEN Imposes Temporary Reporting Requirements on Title Insurance Companies for All Cash Luxury Real Estate Transactions in Manhattan and Miami

On January 13, 2016, the U.S. Treasury Department’s Financial Crimes Enforcement Network ("FinCEN") issued geographic targeting orders ("GTOs") that will temporarily require title insurance companies to identify and report the individuals behind legal entities that pay "all cash" for high-end residential real estate in the Borough of Manhattan in New York City (over $3 million) and in Miami-Dade County, Florida (over $1 million).[1]  The GTOs are designed to address concerns that corrupt officials and other transnational criminals are hiding ill-gotten gains by purchasing residential properties through opaque shell entities with cash, thereby avoiding the scrutiny imposed by financial institutions involved in lending transactions.  For purposes of the GTO, "all cash" means any purchase of high-end residential real estate that (i) is not financed by a bank loan or other external financing source and (ii) is purchased, at least in part, using currency or a cashier’s check, a certified check, a traveler’s check, or a money order.  The GTOs will be in effect beginning on March 1, 2016, and will expire on August 27, 2016 (unless renewed) and require reporting the identity of individuals who, directly or indirectly, own 25% or more of the equity interests of the purchasing entity.   This is the first time that U.S. authorities have subjected title insurance companies to any special anti-money laundering ("AML") requirements.  Although FinCEN has the authority under the Bank Secrecy Act ("BSA") to impose a range of recordkeeping, reporting and compliance program requirements on "persons involved in real estate closings and settlements," it has refrained from doing so to date.[2]  But as a nonfinancial trade or business, a title insurance company is subject to some limited reporting requirements, such as the requirement to report cash payments of more than $10,000 to the Internal Revenue Service and FinCEN.[3]  Similarly, nonfinancial trades and businesses are subject to the GTO provisions of the BSA.  A GTO is a rare and potent tool that the Treasury Department can use to require financial institutions as well as nonfinancial trades or businesses to report on transactions over a specified threshold within a certain geographic area, if only for a limited period of time to address law enforcement needs.[4]  Historically, GTOs were not made public, and until recently, only the businesses served with a GTO were made aware of its existence.  Over the last two years, however, FinCEN has issued a number of GTOs to address areas of money laundering concern across the country.  FinCEN has publicly announced the issuance of the GTOs, released copies of the GTOs, explained the terms, and set forth the money laundering risks the GTOs were designed to address.[5]  Notably, the January 2016 order was the third GTO in less than a year targeting Miami.[6] Use of Shell Companies in Luxury Real Estate Transactions Over the past several years, the global effort to combat corruption and money laundering has resulted in greater public awareness of the methods used by criminals to hide the proceeds of transnational crime.  In July 2006, the Financial Action Task Force on Money Laundering ("FATF"), a leading international AML organization, criticized the United States for failing to comply with a FATF standard on the collection of beneficial ownership information and urged the United States to correct this deficiency.[7]  In August 2014, FinCEN issued a notice of proposed rulemaking that would require banks, securities-broker dealers and certain other financial institutions to obtain beneficial ownership information, but a final rule has not been issued to date.[8]  Indeed, many U.S. states continue to use automated procedures that allow for the creation of new corporations and limited liability companies within 24 hours or less by filing an online application.[9]  Dozens of internet sites highlight the anonymity of beneficial owners allowed under applicable state laws, point to those practices as a reason to incorporate in those states, and list those states together with offshore jurisdictions as preferred locations for the formation of new corporations.[10]  In 2015, U.S. media sources reported on the growing use of shell companies to purchase domestic real estate, which can make it difficult to ascertain the ultimate or "beneficial" owner of real property.[11]  U.S. regulators emphasized the complexities involved in determining beneficial owners of shell companies–Assistant Attorney General Leslie R. Caldwell noted that it could be "very, very difficult to penetrate who is the beneficial owner of these shell companies,"[12] and FinCEN Director Jennifer Shasky Calvery acknowledged that her agency had "seen instances in which multimillion-dollar homes were being used as safe deposit boxes for ill-gotten gains, in transactions made more opaque by the use of anonymous shell agencies."[13]  The increasing use of shell entities to purchase residential real estate has further shrouded the ultimate owners of many high-end properties in major U.S. cities.  In Manhattan, where roughly $8 billion is spent each year on residential property valued at $5 million or more, the use of shell companies in real estate transactions is on the rise.[14]   In 2008, 39% of the units in buildings with residences that sold for $5 million or more were purchased with shell companies.[15]  By 2014, the figure was 54%.[16]   According to a recent series in The New York Times, neighbors at one luxury condominium complex in New York City included a former Russian senator with connections to organized crime, a Greek businessman arrested as part of a corruption sweep, a Chinese contractor who was found housing workers in hazardous conditions, and an Indian mining magnate fined for pollution in Africa.[17]  Most of the properties had been purchased through shell companies.      The prevalence of sales to shell companies is not unique to Manhattan: in Los Angeles, 51% of sales $5 million or more were made to shell companies.  For the San Francisco Bay Area and Miami, the figures were 48% and 37%, respectively. – Louise Story & Stephanie Saul, Stream of Foreign Wealth Flows to Elite New York Real Estate, N.Y. TIMES, Feb. 7, 2015 FinCEN’s Risk-Based Approach to Money Laundering in Real Estate FinCEN has adopted a "risk-based" approach to money laundering in the real estate sector, an industry still struggling to regain its footing in the wake of the financial crisis.[18]  Because most real estate transactions involve some form of financing, and are thus subject to the AML scrutiny imposed by financial institutions, FinCEN has been reluctant to impose potentially duplicative requirements on the rest of the industry.  Although the BSA includes "persons involved in real estate closings and settlements" in the definition of financial institution, regulatory action is required to enumerate the persons that would fit in this category.[19]  Under the authority granted by the USA PATRIOT Act, FinCEN exempted persons involved in real estate closings and settlements from AML requirements on April 29, 2002 and again on November 6, 2002.[20]  In 2003, FinCEN issued an Advance Notice of Proposed Rulemaking seeking comment on how to define "persons involved in real estate closings and settlements," the money laundering risks posed by such persons, and whether they should be subject to anti-money laundering program requirements, but no subsequent action was taken.[21]  As such, existing FinCEN regulations do not require real estate professionals to establish AML programs, identify customers or file suspicious activity reports ("SARs").[22]  Real estate professionals who engage in transactions with knowledge that the proceeds are derived from illegal activity still run the risk of liability under criminal anti-money laundering statutes and related civil forfeiture provisions.[23] Over the last several years, FinCEN assessed the need for further regulatory action in the real estate industry.  In 2012, FinCEN released a study of eight years’ worth of data from SAR and Form 8300 reports filed by or in relation to real estate title and escrow businesses which demonstrated significant trends in suspicious activity characterizations, notably mortgage loan fraud and money laundering.[24]  SARs filed on the real estate title and escrow-related industry characterized mortgage loan fraud as the most reported activity, followed by false statements and "BSA/structuring/money laundering."[25]  Furthermore, SARs filed by money services businesses regarding real estate title and escrow-related firms overwhelmingly (over 96 percent) listed structuring, the practice of conducting transactions in a specific pattern calculated to avoid the creation of records and reports required under the BSA, as at least one of the activity characterizations.[26] In light of these findings, FinCEN prioritized risks surrounding mortgage fraud, extending the BSA’s AML compliance program and SAR requirements to non-bank residential mortgage lenders and originators in 2012.[27]   At the time, FinCEN noted that several comments received in response to the Notice of Proposed Rulemaking expressed support for expanding the regulations to cover other businesses and professions in the real estate industry.  FinCEN deferred issuing regulations for these other businesses and professions until further research and analysis could be conducted.[28]  Three years later, in November 2015, Director Calvery announced that FinCEN had detected the frequent use of shell companies by international corrupt politicians, drug traffickers, and other criminals to purchase luxury residential real estate:  78% of real estate purchases were financed by some type of mortgage, and thus captured in the current regulatory structure, but the remaining 22% of real estate purchases were made in all-cash, effectively circumventing regulatory scrutiny.[29]  Director Calvery noted that FinCEN had engaged in productive discussions with its state regulatory counterparts in an effort to target vulnerabilities "with the least amount of burden."[30] The January 2016 GTOs:  FinCEN Takes Aim at Real Estate Transactions in Manhattan and Miami After media reports highlighted the patterns of money laundering through the real estate sector in 2015, there were more vociferous calls for greater due diligence requirements applicable to professionals in the real estate sector.[31]  In issuing the GTOs for Manhattan and Miami, FinCEN is experimenting with additional reporting requirements while continuing to study the impact and utility of such reports for the industry and law enforcement. "We are seeking to understand the risk that corrupt foreign officials, or transnational criminals, may be using premium U.S. real estate to secretly invest millions in dirty money," explained FinCEN Director Calvery when announcing the GTOs.  "Over the years, our rules have evolved to make the standard mortgage market more transparent and less hospitable to fraud and money laundering.  But cash purchases present a more complex gap that we seek to address.  These GTOs will produce valuable data that will assist law enforcement and inform our broader efforts to combat money laundering in the real estate sector."[32] The January 2016 GTOs are directed at title insurance companies and their subsidiaries and agents, and do not apply to other real estate professionals, such as brokers, appraisers or lawyers involved in real estate transactions.  FinCEN explained that it pinpointed title insurance companies for AML reporting because title insurance is "a common feature in the vast majority" of real estate transactions.[33]  Furthermore, title insurers tend to be larger and more sophisticated institutions with the capacity and experience to comply with these types of reporting requirements.  FinCEN emphasized that the GTOs did not imply any "derogatory finding" with respect to the covered entities, and expressed its appreciation for the assistance and cooperation of title insurance companies and the American Land Title Association in protecting real estate markets from abuse by illicit actors.[34]    In the short term, FinCEN’s GTOs could impact high-end residential real estate transactions in Manhattan and Miami.  According to PropertyShark, a real estate data company, 1,045 residential properties were sold for more than $3 million in the second half of 2015 in Manhattan alone, worth roughly $6.5 billion in total.[35]   The New York Times found that nearly half of homes nationwide worth at least $5 million are purchased using shell companies.[36]  In major U.S. cities, however, the figure is higher.[37] Specific Requirements of the GTOs The GTOs require certain title insurance companies and any of their subsidiaries and agents to report any transaction in which (1) a legal entity, defined as "a corporation, limited liability company, partnership or other similar business entity, whether formed under the laws of a state or of the United States or a foreign jurisdiction"; (2) purchases residential real property located in the Borough of Manhattan in New York, New York for a total purchase price greater than $3,000,000 or residential real property in Miami-Dade County, Florida for a total purchase price greater than $1,000,000; (3) such purchase is made without a bank loan or other similar form of external financing; and (4) such purchase is made, at least in part, using currency or a cashier’s check, a certified check, a traveler’s check, or a money order in any form.[38]  FinCEN has confirmed that the definition of "legal entity" does not include trusts. The transaction must be reported by electronically filing a FinCEN Form 8300 within 30 days of the closing of the transaction.[39]   The GTOs provide specific instructions on how to complete the form to comply with the GTOs.  The FinCEN Form 8300 must contain (1) information about the identity of the individual primarily responsible for representing the purchaser[40] (the title insurance company must obtain and record a copy of this individual’s driver’s license, passport, or other similar identifying documentation); (2) information about the identity of the purchaser; (3) information about the identity of the beneficial owner(s) (each individual who, directly or indirectly, owns 25% or more of the equity interests of the purchaser) of the purchaser (the title company must obtain and record a copy of the beneficial owner’s driver’s license, passport, or other similar identifying documentation); (4) information about the transaction, including the date of closing, the total amount transferred, the total purchase price, and the address of the real property; and (5) information about the title insurance company.[41] Unlike the existing Form 8300 requirements which only require title insurance companies to report receipts over $10,000 of cash and, in certain circumstances, cashier’s checks, bank drafts, travelers checks and money orders that have a face amount of $10,000 or less, these GTOs require reporting on transactions conducted in part by currency, cashier’s, certified, or traveler’s checks, or money orders, regardless of the amount of cash or the instruments involved.  Real estate transactions conducted only with checks drawn on an account and/or wire transfers are not subject to the GTO reporting requirements.  The GTOs require title insurance companies to retain all records relating to compliance with the GTOs for five years and to make the records available to FinCEN, other agencies, and law enforcement upon request.  Title insurance companies and their officers, directors, employees, and agents may be liable for civil or criminal penalties for violating the terms of the GTOs.[42] The temporary GTOs will remain in effect for 180 days beginning on March 1, 2016 and ending on August 27, 2016, unless extended.[43]  If the orders prove effective in Manhattan and Miami, and result in significant actionable information for law enforcement, they could be used as the model for similar reporting requirements in other regions.    Practice Point for Residential Real Estate Buyers Plan Ahead.  Title insurance companies usually conduct diligence in purchase transactions to verify due authorization of both the buyer and the seller and authority of the signatories.  The level of this diligence typically requires production of certain organizational documents of the legal and beneficial owners.  Purchasers now may need to produce more extensive organizational documentation and, at a minimum while the temporary GTOs are in effect, a list of the beneficial owners of the purchasing entity and any intermediate entities.  This production will supplement the searches that many title insurers already perform to confirm that the transaction parties are not prohibited individuals or entities under applicable sanctions from the Treasury Department’s Office of Foreign Assets Control ("OFAC").*   Prepare for Longer Due Diligence Periods.  Prior to signing the purchase agreement, a buyer may need to negotiate with the seller to extend the due diligence period to provide sufficient time for the title insurer to determine that it has obtained the information it is required to collect and report.  Certain unanticipated events or occurrences could require additional time for the title insurer to perform its reporting obligations; for instance, a buyer unexpectedly may have to use cash to supplement financing proceeds, or a new investor may join a buyer group late in the transaction, or for estate planning or other reasons the buyer may decide to change the actual grantee of title from a natural person to an entity.  These common occurrences may result in delay since the title insurer will need to confirm all the required information has been collected and reported.  Costs.  Finally, buyers should be aware that closing costs may increase if title insurance companies decide to charge new fees to collect this information and to provide it to FinCEN. *  As part of its enforcement efforts, OFAC publishes a list of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries. It also lists individuals, groups, and entities, such as terrorists and narcotics traffickers designated under programs that are not country-specific. Collectively, such individuals and companies are called Specially Designated Nationals; their assets are blocked and U.S. persons are generally prohibited from dealing with them.  In order to expedite this process and to close on time, buyers should have the appropriate documentation and disclosure ready to produce to title insurance companies.  Sellers should consider requiring their buyer to agree in the contract of sale to satisfy such production demands.    AML Enforcement in the Real Estate Sector FinCEN’s recent GTOs represent only one part of a broader federal effort to reduce money laundering in the real estate sector.[44]  The Treasury Department and federal law enforcement officials are investing greater resources into investigating luxury real estate sales that involve shell companies,[45] including a new 10-agent Federal Bureau of Investigation unit to focus on money laundering.[46]  Federal officials have noted that future AML investigations will be expanded to focus on professionals who assist in money laundering in the real estate sector, including real estate agents, lawyers, bankers, and corporate entity formation agents.[47]    Public scrutiny of these professionals increased precipitously on January 31, 2016, less than two weeks after FinCEN issued the GTOs, when the CBS News program 60 Minutes profiled an undercover investigation by Global Witness, a nonprofit group that has been pushing for stricter anti-money laundering rules.  A Global Witness investigator posing as the agent of a government official from a mineral-rich African country surreptitiously taped meetings with U.S. lawyers who allegedly provided advice on how to move suspect money into the United States, including through the use of shell companies.       The resulting media blitz may result in stronger reporting requirements than those imposed by FinCEN to date.  Shortly after the 60 Minutes broadcast, the U.S. House of Representatives reintroduced legislation to require states to collect beneficial ownership information for limited liability companies and other corporate entities used in real estate transactions, or to have the Treasury Department do so if states are unable to meet the requirement.[48]  Certain reporting measures, when imposed on attorneys, may conflict with the attorney-client privilege, which protects communications between clients and their lawyers for the purpose of obtaining or providing legal advice.  Notably, a client’s communication with his or her attorney may not be privileged if made in furtherance of a crime or fraud.    [1]   Press Release, U.S. Dep’t of Treas., FinCEN, FinCEN Takes Aim at Real Estate Secrecy in Manhattan and Miami (Jan. 13, 2016), available at https://www.fincen.gov/news_room/nr/html/20160113.html.  These superseded GTOs issued on January 6, 2016.    [2]   The Uniting And Strengthening America By Providing Tools Required To Intercept And Obstruct Terrorism Act of 2001 ("USA PATRIOT Act"), which imposed AML program requirements on certain financial institutions, provided a temporary exemption from the AML program requirements for "persons involved in real estate closings and settlements" until such time as FinCEN issued applicable regulations.  Pub. L. No. 107-56, 115 Stat. 272 (2001); 31 C.F.R. §103.170(b)(1)(vii) (2002) (currently codified at 31 C.F.R. § 1010.205(b)(1)(v) (2016)).      [3]   26 U.S.C. § 60501.  The Internal Revenue Code requires reporting to the IRS of cash payments over $10,000 by all trades or businesses that are not required to file similar reports on currency transactions under the BSA (i.e., non-financial institutions).  In 2001, the USA PATRIOT Act incorporated these IRS reporting requirements for nonfinancial trades and businesses into the BSA.  Treasury regulations allow a single Form 8300 to satisfy both the IRS and BSA filing requirements.  See 31 CFR 1010.330(a)(1)(ii) and (e) (formerly 103.30(a)(ii)); IRS Part 4, Ch. 26, Section 10, Form 8300 History and Law, available at https://www.irs.gov/irm/part4/irm_04-026-010.html#d0e41.     [4]   See 31 U.S.C. § 5326(a) (2015); 31 C.F.R §1010.370.  The USA PATRIOT Act extended the duration of a GTO from 60 to 180 days.     [5]   Recent GTOs have focused on shipments of cash across the border in California and Texas, on the Fashion District of Los Angeles, on exporters of electronics in South Florida, and on check cashing businesses in South Florida.  See, e.g., Press Release, FinCEN, FinCEN Issues Geographic Targeting Order Covering the Los Angeles Fashion District as Part of Crackdown on Money Laundering for Drug Cartels (Oct. 2, 2014), available at https://www.fincen.gov/news_room/nr/pdf/20141002.pdf.    [6]   See FinCEN, supra n.1; Press Release, FinCEN, FinCEN Renews Geographic Targeting Order (GTO) Requiring Enhanced Reporting and Recordkeeping for Electronics Exporters Near Miami, Florida (Oct. 23, 2015), available at https://www.fincen.gov/news_room/nr/pdf/20151023.pdf; FinCEN Combats Stolen Identity Tax Refund Fraud in South Florida with Geographic Targeting Order (July 13, 2015), available at https://www.fincen.gov/news_room/nr/pdf/20150713.pdf.    [7]   Incorporation Transparency and Law Enforcement Assistance Act, H.R. 4450, 114th Cong. (2016), available at https://www.gpo.gov/fdsys/pkg/BILLS-114hr4450ih/pdf/BILLS-114hr4450ih.pdf.      [8]   See FinCEN, Notice of Proposed Rulemaking, Customer Due Diligence Requirements for Financial Institutions, 79 Fed. Reg. 45151 (Aug. 4, 2014).    [9]   H.R. 4450, supra n.7.   [10]   Id.   [11]   See Louise Story & Stephanie Saul, Stream of Foreign Wealth Flows to Elite New York Real Estate, N.Y. Times, Feb. 7, 2015, available at http://www.nytimes.com/2015/02/08/nyregion/stream-of-foreign-wealth-flows-to-time-warner-condos.html?rref=collection%2Fnewseventcollection%2Fshell-company-towers-of-secrecy-real-estate&action=click&contentCollection=us&region=rank&module=package&version=highlights&content Placement=1&pgtype=collection.   [12]   Id.   [13]   See Louise Story, U.S. Will Track Secret Buyers of Luxury Real Estate, N.Y. Times, Jan. 13, 2016, available at http://www.nytimes.com/2016/01/14/us/us-will-track-secret-buyers-of-luxury-real-estate.html?_r=0.   [14]   See Story & Saul, supra n.11.   [15]   Id.   [16]   Id.   [17]   Id.   [18]   FinCEN, supra n.1.   [19]   Supra n.2.  31 C.F.R. §103.170(b)(1)(vii) (codified at 31 C.F.R. § 1010.205(b)(1)(v) (2016)).   [20]   See FinCEN, Anti-Money Laundering Program Requirements for Persons Involved in Real Estate Closings and Settlements, 68 Fed. Reg. 17,569 (Apr. 10, 2003).   [21]   Id.; FinCEN, Real Estate Title and Escrow Companies:  A BSA Filing Study, Assessing Suspicious Activity Reports Related to Real Estate Title and Escrow Businesses 2003-2011 (2012)  [hereinafter "FinCEN Study"], citing 69 Fed. Reg. 17,569 and noting that no further regulatory action was taken in this regard.    [22]   Id. at 2 n.3; 31 U.S.C § 5326.  As described above, nonfinancial trades or businesses are required to comply with the BSA requirements for the reporting of cash payments (and in certain instances, cash equivalents) greater than $10,000 and are subject to the Treasury Department’s GTO authority.    [23]   18 USC §1956 (laundering of monetary instruments); §1957 (engaging in monetary transactions in property derived from specified unlawful activity); § 981 (civil forfeiture).    [24]   FinCEN Study, supra n.21, at 5-6.  FinCEN observed that from 2003 through 2011, real estate title and escrow-related businesses filed over 1,000 reports of suspicious activity, primarily using Form 8300.  Notably, the ratio of SAR reports filed on the industry (which are mandatory) to those filed by the industry (which are voluntary) was about 750:1.  Fifteen distinct real estate title and escrow businesses also filed 29 SARs, including 11 SARs for money services businesses ("SAR-MSBs") and 18 SARs.  The industry was the subject of almost 22,000 SARs and SAR-MSBs during the review period.  SARs filed on the real estate title and escrow-related industry during the nine year review period reported more than $41 billion in suspicious activity amounts.  Suspicious Form 8300 filings by title and escrow-related businesses reported more than $43 million in total cash received from clients for the same period of time.   [25]   Id. at 7.  More than 93 percent of the false statement characterizations coincided with reporting of mortgage loan fraud.  Nine of the eighteen SARs filed by real estate title and escrow-related businesses described mortgage loan fraud as at least one of the reasons for filing the report.   [26]   Id.   [27]   FinCEN, Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements for Residential Mortgage Lenders and Originators, 77 Fed. Reg. 8,148 (Feb. 14, 2012) (codified at 31 C.F.R. § 1029.210 (2016)).   [28]   Id.   [29]   FinCEN, Director Jennifer Shasky Calvery Prepared Remarks for the American Bankers Association and American Bar Association Money Laundering Enforcement Conference (Nov. 16, 2015), available at https://www.fincen.gov/news_room/speech/html/20151116.html.    [30]   Id.   [31]   See Press Release, Transparency Int’l USA, Groups Call on U.S. Gov’t to Regulate the Use of Anonymous Cos. to Buy Prop. & to Require Diligence on the Sources of Money by Fin. Inst. (Mar. 11, 2015).   [32]   FinCEN, supra n.1.   [33]   Id.   [34]   Id.   [35]   Story & Saul, supra n.11.   [36]   Id.   [37]   Id.     [38]   FinCEN, Geographic Targeting Order – Miami-Dade County (Jan. 13, 2016); Geographic Targeting Order – Borough of Manhattan (Jan. 13, 2016).   [39]   Id.   [40]   Id.  Purchaser means "the Legal Entity that is purchasing residential real property as part of a Covered Transaction."    [41]   Id.     [42]   See FinCEN, supra n.38.   [43]   See FinCEN, supra n.1.   [44]   See Story, supra n.13.   [45]   Id.                       [46]   Id.   [47]   Id.   [48]   H.R. 4450, supra n.7. Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, or the authors: Andrew A. Lance – New York (+1 212-351-3871, alance@gibsondunn.com)Amy G. Rudnick – Washington, D.C. (+1 202-955-8210, arudnick@gibsondunn.com)Judith A. Lee – Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com)Linda Noonan - Washington, D.C. (+1 202 887 3595, lnoonan@gibsondunn.com)Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com)  Scott A. Sherwood – Los Angeles (+1 213-229-7320, ssherwood@gibsondunn.com)   © 2016 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

February 1, 2016 |
2015 Year-End United Kingdom White Collar Crime Update

Click for PDF 2015 has been a year of unprecedented white collar enforcement, both in absolute terms, and in terms of the variety and broad base of enforcement actions taken. As a result, Gibson Dunn is issuing this year end alert on white collar crime in the United Kingdom (“UK”) consistent with our alerts in other subject matters. It covers criminal and regulatory enforcement action relating to key financial and business crimes, and significant legal and legislative developments across the white collar crime field in the UK. The pace and extent of white collar and regulatory developments justifies a bespoke UK update in addition to specific alerts on key developments such as our recent alert on the UK’s first deferred prosecution agreement (“DPA”), and our continuing UK input to the firm’s Mid-Year and Year-End, FCPA, Sanctions, NPA and DPA, and Criminal Antitrust updates. This update covers developments in a number of key fields: i)      developments relevant to the white collar crime sector as a whole ii)      bribery and corruption iii)      fraud iv)      financial and trade sanctions v)      money laundering vi)      competition vii)      insider dealing and market abuse Each of these sections is broken down into sub-sections (see the hyperlinked table of contents below). In the last year, the UK’s prosecutors and regulators have imposed nearly a billion pounds worth of fines, penalties, confiscation orders, and civil recovery orders in relation to financial crimes and related activities; a total of over £933 million. The largest portion of this sum was levied as fines by the Financial Conduct Authority (“FCA”) for regulatory failings by banks, but major penalties and resolutions have also been secured by the Serious Fraud Office (“SFO”), including through the criminal courts. Looking ahead, a key question will be the impact of DPAs on enforcement following the SFO’s achievement in securing the first such agreement in late December.  In the sanctions field, 2016 will see the commencement of operations of the new Office of Financial Sanctions Implementation, which may well bring with it an uptick in the UK’s enforcement of the European Union’s (“EU”) financial and trade sanctions.  2016 is also likely to bring major prosecutions in relation to insider dealing and financial misconduct. TABLE OF CONTENTS 1.…. Developments Relevant to the White Collar Crime Sector as a Whole No new offence of failure to prevent economic crime Deferred Prosecution Agreements SFO’s approach to legal privilege and representation in internal investigations The FCA and PRA’s New Senior Managers’ Regime The FCA’s new Whistleblowing Rules FCA review of banking culture Modern Slavery Act 2015 2.…. Bribery and Corruption Enforcement: Bribery Act Enforcement: Prevention of Corruption Act 1906 Enforcement: the FCA and systems and controls Enforcement: Ongoing Foreign Bribery Prosecutions Enforcement: Ongoing Foreign Bribery Investigations Enforcement: domestic bribery and corruption Mutual Legal Assistance: the UK working with foreign governments 3.…. Fraud Enforcement 4.…. Financial and Trade Sanctions Implementation Day and the lifting of most of the EU’s Iran sanctions The Office of Financial Sanctions Implementation Further sanctions against Russian individuals Enforcement 5.…. Money Laundering Legislative Reforms Enforcement 6.…. Competition/Antitrust Violations Enforcement 7.…. Insider Dealing, Market Abuse and other Financial Sector Wrongdoing Overview of MAR/CSMAD FCA Enforcement – Insider Dealing FCA’s regulatory enforcement 1.     Developments Relevant to the White Collar Crime Sector as a Whole No new offence of failure to prevent economic crime On 28 September 2015, the Government announced, after a review, that it would not proceed with the proposed creation of a new strict liability criminal offence of failure by a commercial organisation to prevent economic crime, similar to the section 7 offence in the Bribery Act 2010. This review had been announced as part of the Government’s December 2014 Anti-Corruption Plan. The Government cited the existing legal framework, the lack of prosecutions under the section 7 offence and the fact that “there is little evidence of corporate economic wrongdoing going unpunished“. Going forward, to pursue companies for criminal offences involving requirements of mens rea, UK prosecutors will continue to have to establish the relevant mens rea on the part of senior executives in order to satisfy the existing “directing mind and will” test for corporate criminal liability. This does not, of course, apply to strict liability offences, such as the section 7 offence under the Bribery Act. Deferred Prosecution Agreements 2015 has seen the first of what prosecutors hope will be many DPAs in the UK. We provided an analysis of the first case in our client alert of December 4, 2015, Serious Fraud Office v Standard Bank Plc: Deferred Prosecution Agreement. In our 2015 Year-End Update on Corporate Non-Prosecution Agreements (NPAs) and Deferred Prosecution Agreements, we provided a comparative analysis of the Standard Bank DPA and the typical content of DPAs in the United States. SFO’s approach to legal privilege and representation in internal investigations We reported in our 2014 Year-End FPCA Update that the SFO “views a privileged company investigation as indicative of non-cooperation in its own investigation“, and has indicated that it may be prepared to challenge broad claims of privilege over investigation materials. In the context of the SFO’s ongoing investigation of GlaxoSmithKline (“GSK”), the SFO served notices under section 2 of the Criminal Justice Act 1987 (essentially the SFO’s subpoena power) on a number of individual GSK employees requiring them to attend for interview. The individuals, who were explicitly stated not to be suspects, wished to be accompanied by lawyers acting for the company. The SFO initially refused to allow any lawyers to attend the interviews, but agreed to lawyers attending on the condition that those lawyers not be from the same firm as that which was acting for GSK itself. This decision by the SFO to insist on another firm to represent the individuals was judicially reviewed in R (on the application of Jason Lord & others) v Director of the Serious Fraud Office [2015] EWHC 865 (Admin). In a February 2015 judgment, the High Court held that the SFO’s decision was lawful and proper and in line with its published policy that “it is not generally appropriate for an employer’s solicitor to be present at an employee interview“. On January 27, 2016 the High Court ruled on another case concerning the SFO and legal privilege. The case is reported as R (on the application of Colin McKenzie) v Director of the Serious Fraud Office [2016] EWHC 102 (Admin). This case arose in the context of the arrest in June 2015 of Colin McKenzie on suspicion of paying a bribe contrary to section 1 of the Bribery Act. Two mobile phones, a laptop and USB stick were seized at the same time, and further material was recovered later. The SFO subsequently requested a list of search terms to enable the isolation of material that might be subject to legal professional privilege, so that it could be reviewed by “independent counsel”. It was not contested that the actual review of potentially privileged material had to be done by lawyers independent of the SFO. Mr McKenzie refused the request on the basis that the SFO’s procedure was unlawful. The SFO’s policies require its Digital Forensics Unit (“DFU”) to first run search terms, and if material which is thought to be subject to legal professional privilege is identified it is quarantined from the investigation team. The Attorney General’s Guidelines on Digitally Stored Material require the running of such search terms to be “done by someone independent and not connected with the investigation“. It was contended against the SFO that this meant that someone outside the SFO had to conduct this first filter for privileged material. The Court held that the SFO’s procedures for running the filters and search terms internally were in compliance with the Attorney General’s Guidelines and lawful as the DFU was not part of the investigation team. The FCA and PRA’s New Senior Managers’ Regime On March 7, 2016, the first phase of the Prudential Regulation Authority’s (“PRA”) and FCA’s new regime for regulation of financial services in the UK will come into force. It comprises three parts: (i) the ‘Senior Managers’ Regime’, (ii) a ‘Certification Regime’ for individuals exercising key roles and responsibilities; and (iii) new ‘Conduct Rules’ focusing on integrity, compliance, cooperation with regulators and client care. The changes were brought in under the Financial Services (Banking Reform) Act 2013, following the recommendations of the Parliamentary Commission on Banking Standards in the wake of the LIBOR scandal. The focus of the new regime is on defining the allocation of responsibilities within the management of financial services firms and enhancing the individual accountability of senior managers. The new regime will initially apply to UK-incorporated banks, building societies, credit unions and PRA-designated investment firms and branches of foreign banks operating in the UK. There are plans to extend the regime to a broader range of financial services firms in due course. In addition the FCA has announced a consultation on the application of the regime to individuals in charge of firms’ legal function. The Senior Manager’s Regime will apply to all individuals exercising a “Senior Management Function” (“SMF”). SMF replaces the Significant Influence Function (“SIF”) under the prior regime. A person exercising an SMF is responsible for managing one or more aspects of the firm’s affairs (insofar as it relates to regulated activities) and those aspects involve, or might involve, a risk of serious consequences for the firm or the causing of harm to business or other interests in the UK SMFs include Board members including the Chairman and certain other non-executive directors (but not standard non-executive directors). Those exercising an SMF must be pre-approved. Applications for approval must include a “statement of responsibilities” setting out the aspects of the firm’s affairs that the individual will be responsible for managing. These statements must be updated and resubmitted whenever there is a significant change to the senior manager’s responsibilities. The regime includes new statutory powers to place conditions on any approvals given. Firms have to prepare a “management responsibilities map” setting out the allocation of responsibilities and reporting structures in place across the firm. In the event that the firm contravenes any regulatory requirement, the authorities will be able to take enforcement action against an individual exercising an SMF if they can show that the individual failed to take the steps that it would be reasonable for a person in that position to take in order to prevent a regulatory breach from occurring. The regime includes a duty to notify the FCA and/or PRA wherever a firm takes disciplinary action against a senior manager. Disciplinary action is widely defined and includes a formal written warning, suspension, dismissal or docking or recovery of remuneration. Firms must conduct a formal “annual review” to ensure that there are no grounds upon which the FCA or PRA might withdraw their approval of its senior managers, or notify any grounds identified. The limitation period for the regulators to bring disciplinary action against all individuals (and not just SMFs) is extended from three to six years. There is some extra-territorial application to the extent that any senior managers located overseas exercise significant influence over activity in the UK. Section 36 of the Financial Services (Banking Reform) Act introduces a new criminal offence relating to reckless decisions causing a financial institution to fail. The new offence carries a maximum penalty of 7 years imprisonment or an unlimited fine. The FCA’s new Whistleblowing Rules In October 2015 the FCA and PRA published new rules in relation to whistleblowing. These build on an existing framework of regulatory obligations applicable to whistleblowing. The rules, which take full effect from September 2016, apply to deposit-taking firms (i.e. banks, building societies and credit unions) with £250 million or more in assets, PRA-designated investment firms (i.e. large investment banks), insurance and reinsurance firms subject to the EU Solvency II directive (2009/138/EC), and to the Society of Lloyd’s and managing agents. The rules constitute non-binding guidance for any other firms regulated by the FCA/PRA. The new rules are primarily directed at internal whistleblowing procedures. They require those firms to which they apply by September 2016, to: put in place internal whistleblowing arrangements able to handle “all types of disclosure” from “all types of person“. This duty is widely worded and extends beyond employees, inter alia, to whistleblowing disclosures from third parties, such as the employees of suppliers or competitors; include in settlement agreements wording explaining that workers have a right to blow the whistle even after leaving and signing a settlement agreement; inform UK-based employees about the FCA and PRA whistleblowing services; require its appointed representatives and tied agents to tell their UK-based employees about the FCA whistleblowing service; put in place training for UK-based employees, managers of UK-based employees (including managers based abroad), and employees responsible for operating the whistleblowing procedure, as well as internal whistleblowing procedures which ensure that genuine reportable concerns are dealt with appropriately and properly escalated, including, where appropriate, to the FCA or PRA; present a report on whistleblowing to the board at least annually and inform the FCA if they lose an employment tribunal whistleblowing claim; ensure that whistleblowing procedures make arrangements for cases where the whistleblower has requested confidentiality or made an anonymous report, including reasonable measures to prevent victimisation and keeping appropriate records. From March 7, 2016, firms must appoint a “whistleblowers’ champion”, who will have responsibility for oversight of whistleblowing procedures and for whistleblowing under the new FCA Senior Managers Regime, making them individually accountable to the regulators for any failings. From March to September 2016 whistleblowers’ champions must oversee the implementation of appropriate whistleblowing procedures. Notwithstanding the absence of financial incentives for whistleblowers in the UK, whistleblowing in the UK financial sector has been increasing in recent years. The FCA has noted that its dedicated whistleblowing team processed 1,340 cases in the financial year 2014/2015, against 1040 in 2013/14 and 138 in 2007/08. FCA review of banking culture In December 2015, it was reported that the FCA would not be continuing its thematic review into banking culture in the UK. This review had been targeted at “whether culture change programmes in retail and wholesale banks are driving the right behaviour, in particular focusing on remuneration, appraisal and promotion decisions of middle management, as well as how concerns are reported and acted on“. Modern Slavery Act 2015 The UK’s Modern Slavery Act 2015 has this year revised and consolidated the offences relating to modern slavery (which includes servitude and forced or compulsory labour) and human trafficking, and also introduced a disclosure requirement for commercial organisations with an annual turnover exceeding £36 million and carrying out business or part of a business in the UK (the latter a test similar to the jurisdictional threshold for the offence under section 7 of the Bribery Act). Section 54 of the Modern Slavery Act requires such commercial organisations to publish a board-approved “slavery and human trafficking statement”, signed by a director, either setting out what the organisation has done in the last financial year to ensure that slavery and human trafficking are not taking place in its supply chains or in any part of its own business, or stating that the organisation has taken no such steps.  Section 54 does not prescribe the required content of such a statement, although it does provide an indication of the kind of content such a statement might contain. Due to the low jurisdictional threshold, many businesses with global operations will be subject to the obligation to publish a statement; many such businesses may in practice wish to coordinate the statement satisfying section 54 with any statements made under the Californian legislation from which the inspiration for section 54 was derived, the Transparency in Supply Chains Act 2012.  The section 54 requirement will apply to financial year-ends finishing after 30 March 2016, so the first statements can be expected in the weeks and months following that date.  The Government’s guidance on the publication requirement can be found here. 2.     Bribery and Corruption 2015 has seen the UK’s enforcement of its anti-corruption laws reach an unprecedented level of activity. The number of individuals convicted under the Bribery Act has now reached double figures, the first enforcement actions have successfully been brought under the section 7 corporate offence of failing to prevent bribery, including the UK’s first Deferred Prosecution Agreement (see above), and the first arrests have been made under the Bribery Act section 6 offence of bribing a foreign public official. At the same time the enforcement of the pre-Bribery Act legislation continues. Moreover, the FCA has completed two enforcement actions against regulated firms in relation to failures to manage bribery and corruption risks. The combined total of the fines, penalties, and disgorgements in the bribery and corruption sphere imposed in the UK since the beginning of 2015 is just short of £100 million. Also see our 2015 Year-End FCPA Update. Enforcement: Bribery Act                Bribery Act section 7 – the corporate offence of failing to prevent bribery After several years of waiting for the first company to be charged with the section 7 offence of a corporation failing to prevent bribery, the latter part of 2015 has seen three successful enforcement actions under this section, each with a different outcome: one a civil recovery order, one a DPA, and the third a guilty plea and conviction.                Brand-Rex Limited In September 2015, Brand-Rex Limited entered into the first ever resolution of the section 7 offence, conducted under Scotland’s amnesty program, which we described in our 2012 FCPA Year-End Update. This program allows for civil settlements for companies which self-report to the Scottish authorities. Under the resolution the Scottish Civil Recovery Unit recovered £212,800 from Brand-Rex Limited after the company accepted that it had benefited from unlawful conduct by a third party. This sum represented the company’s entire gross profit earned as a result of this conduct. Between 2008 and 2012 Brand-Rex, a cabling firm, operated a scheme which offered rewards, including free holidays, to incentivise its installers and distributors to meet or exceed sales targets. The scheme was not in itself unlawful. However, an employee of an independent installer offered his company’s tickets to an employee of a customer. This went beyond the intended scope of the scheme, as the beneficiary, the person who ultimately received the tickets, worked for an end user and had the ability to influence purchasing decisions. A noteworthy feature of this case relating to the interpretation of the Bribery Act is that an employee of an independent installer of Brand-Rex’s equipment was deemed to be an “associated person” for the purposes of the commission of the section 7 offence. Under section 8 of the Bribery Act, an “associated person” is “someone who performs services for or on behalf of” a company, and “the capacity in which” the person “performs services for or on behalf of [the company] does not matter“. This case puts an unexpectedly broad interpretation onto an “associated person”. The two other section 7 cases discussed below involved companies within the same corporate groups, and are thus uncontroversial instances of “associated persons”.                Standard Bank On November 30, 2015 judgment was handed down in Serious Fraud Office v Standard Bank plc: Deferred Prosecution Agreement. This judgment provided judicial approval for the SFO to enter into a DPA (the first in the UK) with Standard Bank in relation to an offence contrary to section 7 of the Bribery Act. We have issued a detailed Client Alert in relation to this case that deals with the issues arising from this case in relation to DPAs, expected levels of co-operation with the SFO, and also in relation to the scope of the section 7 offence, the defence of “adequate procedures”, and the quantification of the penalty under the sentencing guidelines for bribery offences. The conduct related to a bond sale for the government of Tanzania in which certain Tanzanian officials were paid a percentage commission on the transaction. The penalties imposed on Standard Bank under the DPA were: a fine of $16.8 million; payment of $6 million compensation to Tanzania plus interest of just over $1 million; disgorgement of all of Standard Bank’s profits on the transaction being $8.4 million, and the SFO’s costs of £330,000. In total, the financial resolution amounted to nearly $33 million.                Sweett Group Plc On December 9, 2015 the SFO announced that it was charging Sweett Group Plc with an offence under section 7(1) of the Bribery Act. The SFO said the offence was committed between 1 December 2012 and 1 December 2015, and involved Sweett Group Plc failing to prevent bribery committed by an associated person of Sweett Group Plc, namely Cyril Sweett International Limited (a Dubai company). On December 18, 2015 the SFO announced that Sweet Group Plc had formally pleaded guilty to the offence, and is due to be sentenced on February 12, 2016. The bribe was paid to secure and retain a contract for project management and cost consulting services in relation to the building of a hotel in Dubai. Further details of the offence have not yet been published. It is noteworthy that no attempt was made by Sweett Group to rely on the “adequate procedures” defence. The initial investigation into the Sweett Group also related to another project, reported to be for the construction of a hospital in Morocco. One factor in the decision to prosecute may have been that at least one individual at Sweett Group engaged in the destruction of evidence. On October 26, 2015 Richard Kingston appeared in court charged by the SFO with the offence of destroying evidence knowing or suspecting that it was relevant to an SFO investigation contrary to section 2(16) of the Criminal Justice Act 1987. The SFO’s press release states that this incident related to an ongoing investigation into Sweett Group’s business in Iraq. Mr Kingston’s trial is due to begin in December 2016.                Enforcement: Bribery Act section 6 – bribing a foreign public official As reported in our 2015 Mid-Year FCPA Update, the Overseas Anti-Corruption Unit of the City of London Police arrested two men–and Norwegian authorities arrested a third–in connection with $150,000 allegedly paid to a Norwegian government official to procure the sale of six decommissioned naval vessels. These are the first arrests for the section 6 offence under the Bribery Act of bribing a foreign public official. The investigation is ongoing.                Enforcement: Bribery Act sections 1-2 – giving/receiving bribes As reported in our 2015 Mid-Year FCPA Update, in April 2015 Delroy Facey and Moses Swaibu were convicted of taking bribes under section 1 of the Bribery Act. These were the ninth and tenth convictions of individuals under the Bribery Act. The offences were in the context of fixing professional soccer matches for betting purposes. The two were sentenced to 30 months and 16 months respectively. On May 11, 2015 it was reported that John Reynolds and Wesley Mezzone were each charged with eight counts of bribery (as well as nine counts of corruption under the pre-Bribery Act legislation). The offences arise out of alleged improper payments made to secure contracts from a local government official in the UK. Both have pleaded not guilty and await trial. Enforcement: Prevention of Corruption Act 1906 Because there is no statute of limitations for most criminal offences in the UK, enforcement under the pre-Bribery Act legislation has continued, and will do for some time. Indeed, the period since the introduction of the Bribery Act, while seeing, until recently, only limited enforcement action under that Act, has been marked by unprecedented levels of enforcement under the pre-existing corruption offences.                Smith & Ouzman Limited Most notably the SFO this year achieved a landmark conviction against Smith and Ouzman Limited. This was the first conviction by the SFO against a corporation for foreign bribery following a contested trial. Two of the company’s senior managers, Nicholas Smith and John Smith, were also convicted and sentenced to three years and eighteen months jail, respectively, the latter suspended for two years. The two men have also been ordered to pay costs of £75,000 each, and to satisfy respective confiscation orders of £18,693 and £4,500. On January 8, 2016, the company received its sentence ordering it to pay a fine of £1,316,799, to satisfy a confiscation order of £881,158 (constituting the profits won by Smith and Ouzman on the contracts) and defray the SFO’s legal costs of £25,000. The convictions related to corrupt payments made to foreign officials in Kenya and Mauritania. The two men made payments totalling just under £400,000 both directly to government officials and indirectly via intermediaries.                Graham Marchment In May 2015, Graham Marchment pled guilty to three counts of conspiracy to corrupt under section 1(1) of the Criminal Law Act 1977 for conspiring with four others to obtain payments for supplying confidential information on oil and gas engineering projects estimated to be of around £40 million in value in Egypt, Russia and Singapore. As featured in our 2012 FCPA Year-End Update, the four others had previously been convicted. Marchment was sentenced to 30 months imprisonment on each of the three counts, to be served concurrently.                UN Officials: Sijbrandus Scheffer and Guido Bakker In July 2015, after an eight year investigation, the Overseas Anti-Corruption Unit of the City of London Police secured the conviction of Sijbrandus Scheffer, a Danish national, for receiving bribes of nearly $1 million to rig contracts worth $43 million to supply drugs under a United Nations program to the Democratic Republic of Congo (“DRC”). Another Danish national, Guido Bakker, had pled guilty in 2012 for the same offences. The two consultants obtained contracts from a UN Development Programme to combat HIV and malaria in DRC and then leaked crucial details to Missionpharma, a Danish supplier of generic pharmaceuticals, to assist that company in winning supply contracts. The consultants charged 5 per cent of the contract price using English and Jersey companies to receive the payments, and Missionpharma overcharged the UN to recoup its costs. The consultants were convicted, inter alia, of accepting or obtaining corrupt payments under the Prevention of Corruption Act, and were sentenced to 15 and 12 months respectively.                Individuals at Swift Technical Solutions Limited acquitted As reported in our 2015 Mid-Year FCPA Update, on June 2, 2015 a jury at Southwark Crown Court acquitted Trevor Bruce, Bharat Sodha, and Nidhi Vyas of foreign bribery charges brought under the Prevention of Corruption Act 1906. The three defendants, plus a fourth – Paul Jacobs, whose charges were dismissed pre-trial due to ill health – were arrested in 2012 (as reported in our 2012 Year-End FCPA Update) on suspicion of engaging in a conspiracy to make nearly £200,000 in corrupt payments to officials of the Nigerian Boards of Revenue in 2008 and 2009.  The employer of these four individuals, UK oil and gas manpower services company Swift Technical Solutions Ltd., cooperated in the SFO’s investigation and was not charged. Enforcement: the FCA and systems and controls This year the FCA reached two settlements with firms relating to failings in relation to bribery and corruption risks. One of these settlements resulted in the largest fine the FCA has imposed on a firm for systems and controls weaknesses relating to financial crime. These settlements followed findings by the FCA in November 2014 that weaknesses persisted in some parts of the sector in relation to anti-money laundering and anti-bribery systems and controls. Neither case includes a finding that financial crime was facilitated by the control failings at the banks. However, the FCA is clearly of the view that the risk of financial crime is enough to endanger the integrity of the UK financial system, such that it will take action against firms who fail to have systems in place to address those risks and indeed against those who do have systems in place but fail to adhere to their requirements.                Bank of Beirut In March 2015 the FCA fined the Bank of Beirut (UK) Limited £2.1 million and imposed restrictions after it misled the FCA about concerns regarding its financial crime systems and controls. At the same time the FCA imposed fines of £19,600 and £9,900 on Anthony Wills and Michael Allin, respectively the bank’s former compliance officer and internal auditor for their role in the bank’s failings. According to the FCA’s Final Notice, concerns about the culture within the Bank became apparent following supervisory visits in 2010 and 2011. The FCA had observed that the culture of the Bank was one of insufficient consideration of risk and regulatory requirements with insufficient focus on governance and controls. Relevant for these purposes, the FCA was concerned about the Bank’s lack of a compliance monitoring plan designed to help ensure the Bank’s compliance with its regulatory obligations to counter the risk that it might be exploited to facilitate financial crime. The FCA identified various failings regarding due diligence and ongoing monitoring to address risks of money laundering and terrorist financing. The FCA sent the Bank a remediation plan designed to address the FCA’s concerns. The Bank failed to implement the remediation plan by the required deadline and then made inaccurate communications to the FCA about the status of its remediation work. The FCA found that in failing to deal with the FCA in an open and cooperative manner and to disclose to the FCA information of which it would reasonably expect notice, the Bank breached Principle 11 of its Principles for Businesses. In addition to the financial penalty of £2.1 million, the FCA imposed a restriction on acquiring new customers for regulated business for a period of 126 days. This penalty included a 30 per cent discount for early settlement under the FCA’s settlement procedures.                Barclays Bank Plc In November 2015 the FCA published a Final Notice fining Barclays Bank PLC £72,069,400 for breaching one of the FCA’s Principles for Businesses arising from its failures relating to the management of risks of financial crime. The failings relate to a £1.88 billion transaction that Barclays arranged in 2011 and 2012 for ultra-high net worth clients and from which Barclays generated £52.3 million in revenue. According to the FCA, the clients concerned were politically exposed persons (PEPs) and should therefore have been subject to enhanced levels of due diligence and monitoring by the bank. That, coupled with the circumstances of the transaction, indicated a higher level of risk and should have resulted in a higher level of due skill, care and diligence by Barclays. Instead, Barclays applied a lower level of due diligence than its policies required for clients with a lower risk profile. The fine imposed on Barclays comprised a disgorgement of £52.3 million – the revenue generated from the deal – and a penalty of £19,769,400. This is the largest fine that the FCA has imposed on a firm for failings in connection with systems and controls relating to financial crime. The penalty element included a 30 per cent discount for early settlement under the FCA’s settlement procedures. The FCA was at pains to point out that it made no criticism of the clients involved and that it had no evidence that Barclays was either involved in nor guilty of facilitating any financial crime, nor that the revenue that Barclays generated from the deal was derived from any financial crime. Barclays stated that they had cooperated with the FCA throughout and “to apply significant resources and training to ensure compliance with all legal and regulatory requirements”. Enforcement: Ongoing Foreign Bribery Prosecutions [Withheld]                Total Asset Limited – individuals charged with corruption On January 8, 2015 the SFO laid further charges against three individuals, Stephen Dartnell, Kerry Lloyd and Simon Mundy, for conspiracy to make corrupt payments under the Prevention of Corruption Act 1906 in relation to inflated receivables agreements by KBC Lease (UK) Ltd (“KBC”) and Barclays Asset Finance from Total Asset Limited. The relevant agreements were self-reported to the SFO by KBC.  A trial of these three individuals and three others is scheduled to begin in September 2016. Enforcement: Ongoing Foreign Bribery Investigations In addition a large number of foreign bribery investigations are currently ongoing at the Serious Fraud Office, as well as the National Crime Authority and the Overseas Anti-Corruption Unit of the City of London Police. A new foreign bribery investigation which the SFO announced in July 2015 is that against Soma Oil and Gas Limited and related companies, relating to possible improper payments being made to government officials in Somalia. Enforcement: domestic bribery and corruption The UK’s prosecuting authorities continue to enforce the UK’s anti-corruption laws in domestic contexts. Such enforcement tends to receive substantially less press but more than 30 individuals have been convicted during the course of 2015. All of these enforcement actions were in the context of public corruption such as paying/receiving bribes to win public contracts, or making payments to receive preferential treatment from public officials. Many of the defendants, however, were not charged under the Bribery Act or its antecedents. Instead, a range of offences was used including misconduct in public office, perverting the course of justice, money-laundering offences, fraud, or simply theft. The convictions in 2015 include 22 people who had paid money to Mr. Munir Patel to secure preferential treatment in relation to traffic offences. As set out in our 2011 Year-End FCPA Update Mr Patel was the first person convicted under the Bribery Act. Another nine individuals were convicted in relation to bribes paid to local council officials in Edinburgh and Exeter. In the Edinburgh case the four individuals all pled guilty to offences under the Public Bodies Corrupt Practices Act 1889. In the Exeter case the charges were all for non-corruption offences, even though the actions were the paying and receiving of improper payments to and by public officials. In R v Chapman, Gaffney and Panton; R v Sabey [2015] EWCA Crim 539, the Court of Appeal reviewed the test for the common law offence of misconduct in public office in relation to public officials accused of passing information obtained in the course of their duties to the media in return for payment, and a journalist who paid officials for news stories. The Court of Appeal held that a jury must be directed to determine whether the defendants’ conduct had the effect of harming the public interest as a step in deciding whether the conduct had been so serious as to amount to an abuse of the public’s trust, essentially articulating a “public interest” defence. As a result of this decision the Crown Prosecution Service reviewed its pending cases against UK-based journalists, against whom there were pending charges for aiding and abetting misconduct in public office, and in some cases conspiracy, and announced on April 17, 2015 that, while it would be continuing the cases against various officials who were paid money, it would be dropping future prosecutions in relation to Mr. Andy Coulson and eight other journalists who were due to face trial over leaks from public officials. This statement effectively shut down half of Operation Elveden, the investigation into payments made by newspapers in exchange for stories arising out of the disclosure of documents by News International in the context of the phone-hacking scandal. The last two journalists prosecuted as a result of Operation Elveden were cleared in October 2015. Mutual Legal Assistance: the UK working with foreign governments                Nigeria As reported in our 2015 Mid-Year FCPA Update on May 4, 2015, a Nigerian court authorised the extradition of the former head of the Nigerian Security, Minting and Printing Company, Emmanuel Okoyomon, to face corruption and money laundering charges in the UK based on his alleged receipt (through a UK bank account) of bribes from Australian company Securency International, allegedly to secure currency printing contracts in Nigeria. On October 3, 2015 it was announced that the National Crime Agency (“NCA”) had arrested five Nigerians on suspicion of bribery and money laundering. One of these individuals was Deziani Alison-Madueke, the former Nigerian Minister for Oil. Raids in relation to these arrests were conducted simultaneously in Nigeria and London. In November 2015 Dan Ete, another former Nigerian Oil Minister, brought an application to unfreeze $85 million held in English accounts pursuant to a mutual legal assistance request from the Italian authorities. The funds are alleged to be the corrupt proceeds of a deal under which a company called Malabu Oil and Gas (partly owned by Mr Ete and partly by Royal Dutch Shell and Italy’s ENI) acquired a valuable oil concession from the Nigerian government. The application was refused, and the funds remain frozen.                Macau In November 2015 it was announced that the UK would be repatriating $44 million dollars to Macau. The funds had been confiscated from a former Macau government official who had been convicted in Macau of bribery and money laundering in 2008. The government of Macau successfully applied to have the official’s UK assets frozen after his conviction.                Brazil While generally outside the scope of this alert, a recent civil fraud judgment has significant implications for international bribery clawback cases. The Privy Council (the final court of appeal for certain Commonwealth jurisdictions) confirmed that “backward tracing” (equitable tracing into an asset already held by defendant) is available where there has been “a coordination with the depletion of the trust fund and the acquisition of the asset which was the subject of the tracing claim” (see Federal Republic of Brazil v Durant International Corporation et al. (Jersey) [2015] UKPC 35). The claim was brought by the Municipality of Sao Paolo (under the name of the Federal Republic of Brazil) against two BVI companies said to have been used to launder bribes paid to the former mayor of Sao Paolo which had then been transferred to his son. The Royal Court of Jersey had found that these funds had been laundered through the defendant BVI companies, giving rise to a constructive trust over those funds to the benefit of the municipality. The defendants did not dispute the existence of the trust but disputed the value of assets that could properly be traced to it. In this case certain of the transfers into the accounts into which the claimants had sought to trace assets had been made before the final payment of bribes into the account from which these transfers had been made. The Privy Council approved the dicta of Sir Richard Scott V-C in Foskett v McKeown [1998] Ch 265, that the “The availability of equitable remedies ought, in my view, to depend upon the substance of the transaction in question and not upon the strict order in which associated events happen.” Delivering the judgment of the Privy Council Lord Toulson stated: “The development of increasingly sophisticated and elaborate methods of money laundering, often involving a web of credits and debits between intermediaries, makes it particularly important that a court should not allow a camouflage of interconnected transactions to obscure its vision of their true overall purpose and effect.” While this decision is not binding on the English courts it is strongly persuasive, and binding in all jurisdictions that continue to send appeals to the Privy Council, such as the British Virgin Islands, the Cayman Islands, the Channel Islands, Gibraltar and the Isle of Man.                Chad / United States / Canada In July 2015 the SFO secured judgment in its favour in Serious Fraud Office v Ikram Saleh [2015] EWHC 2119 (QB), successfully defending a freezing order it had obtained pursuant to a Mutual Legal Assistance request from the U.S. The assets were shares in the Canadian oil company Caracal Energy Inc., held through a UK account by Ikram Saleh. Mrs Saleh was a member of staff at Chad’s embassy in Washington, with the allegation being that she had corruptly obtained 800,000 shares in Caracal Energy as part of a corrupt scheme to improperly promote the interests of Caracal Energy in Chad. The judgment is currently subject to appeal with a hearing listed for November 2016.  As reported in our 2015 Mid-Year FCPA Update, related confiscation proceedings have been ongoing in the U.S. courts.                Republic of Guinea In late 2014 the SFO served section 2 Notices on two London law firms – Mischon de Reya and Skadden, Arps, Slate, Meagher & Flom LLP, seeking approximately 180,000 documents on behalf of the Republic of Guinea pursuant to a Mutual Legal Assistance request regarding allegations of corruption relating to mining concessions in Guinea operated by a client of the two firms. In response, the recipients of the Section 2 Notices challenged the SFO’s decision to assist Guinea’s investigation on the basis that the Guinean investigation was politically motivated, and that the English courts should not be assisting such an investigation. On April 30, 2015 the Administrative Division of the High Court rejected the application trying to block the SFO from assisting in the Guinean investigation, leaving the SFO free to enforce the Section 2 Notices against the two law firms and another party. This case is a reminder not only of the ability of the SFO to use its powers in aid of foreign investigations, but also that the SFO need not restrict its requests to the subjects of investigation and may issue requests to professional advisers. 3.     Fraud Enforcement                Magnus Peterson On January 19, 2015 Magnus Peterson, the founder of hedge fund Weavering Capital, was convicted of eight counts of fraud, forgery, false accounting and fraudulent trading following a three month trial. The SFO has stated that this is one of the first hedge fund prosecutions of its kind to arise out of the 2008 financial crisis. The charges were brought under the Theft Act 1968, the Companies Act 1985, the Companies Act 2006, the Forgery and Counterfeiting Act 1981 and the Fraud Act 2006. The SFO received assistance from authorities in the British Virgin Islands, Cayman Islands, Germany, Luxemburg, Republic of Ireland, South Africa, Sweden, and Switzerland. Over six years Mr Peterson had inflated the performance of the Weavering Macro Fund using interest rate swaps entered into with another offshore company owned by him, misleading investors into putting $780 million into the fund over this period. The fund collapsed in March 2009 when it was unable to make repayments to investors requesting the return of their funds from December 2008 onwards. At the time of its collapse the entire value of the fund was made up of the bad debt arising from the interest rate swaps with the related party. Mr Peterson was sentenced to 13 years imprisonment.                LIBOR and EURIBOR benchmarks The SFO continues to use the common law offence of conspiracy to defraud to prosecute those involved in the manipulation of the LIBOR and EURIBOR benchmarks. These are discussed further below in the Competition section. On 13 November 2015 the SFO announced that it had charged ten individuals with conspiracy to defraud in connection with its ongoing investigation into the manipulation of EURIBOR. A further individual has since also been charged.  Six of these individuals made their first appearance at Southwark Crown Court on January 11, 2016.                Bank of England Liquidity Auctions In March 2015 the SFO announced that it was investigating material provided to it by the Bank of England in connection with liquidity auctions carried out during the financial crisis in 2007 and 2008. The material was referred to the SFO by the Bank of England following the results of an independent review conducted by Lord Grabiner QC in 2014. A company cannot commit an offence under s501(1) of the Companies Act 2006 (the offence of making misleading statements to a company’s auditor) On November 10, 2015 the SFO offered no evidence in its case against Olympus Corporation and its wholly owned UK subsidiary Gyrus Group Ltd, effectively bringing to an end the prosecution in connection with alleged misleading statements made to auditors for the years 2009 and 2010. Both companies had been charged under section 501(1) of the Companies Act 2006, which makes it an offence to make misleading statements to an auditor of a company. This follows a Court of Appeal judgment made in February 2015 to the effect that the only persons who can commit an offence under section 501 are those required to provide information to an auditor under section 499 of the 2006 Act, which does not include the company itself. 4.     Financial and Trade Sanctions Implementation Day and the lifting of most of the EU’s Iran sanctions 2015 and early 2016 have seen two key developments in the sphere of financial and trade sanctions. The first is the lifting of the vast majority of the EU’s sanctions against Iran. We have provided a detailed analysis of this development in our recent Alert: Implementation Day Arrives: Substantial Easing of Iran Sanctions alongside Continued Limitations and Risks. The UK has now issued The Iran (European Union Financial Sanctions Regulations (SI 36/2016) to give effect to this and repeal much of the pre-existing network of sanctions. The Office of Financial Sanctions Implementation The other key development is the formation of a new government body to oversee sanctions enforcement in the UK – the Office of Financial Sanctions Implementation (“OFSI”). This body will form part of HM Treasury and is due to become operational in April 2016. The stated purpose of OFSI is that it “will provide a high quality service to the private sector, working closely with law enforcement to help ensure that financial sanctions are properly understood, implemented and enforced” (HM Treasury Policy paper, Summer Budget 2015, Published July 8, 2015). The creation of the OFSI was first made public in the UK’s budget in March 2015. There it was stated that this body would “review the structures within HM Treasury for the implementation of financial sanctions and its work with the law enforcement community to ensure these sanctions are fully enforced, with significant penalties for those who circumvent them. This review will take into account lessons from structures in other countries, including the US Treasury Office of Foreign Assets Control“. While it remains to be seen exactly what powers the OFSI will be granted with respect to sanctions enforcement, if OFAC is the model to be followed the intensity and aggressiveness of sanctions enforcement may be about to undergo a radical sea-change. Further sanctions against Russian individuals The publication of the report into the killing of Russian dissident Alexander Litvinenko has led to the UK Government issuing a travel ban and asset freeze against the two individuals suspected of committing the murder. The Andrey Lugovoy and Dmitri Kovtun Freezing Order 2016 (SI67/2016) came into force on January 22, 2016. Enforcement We are not aware of any criminal investigations or prosecutions in the UK arising out of sanctions violations during 2015. In November 2015, however, Standard Chartered Bank confirmed that it was the subject of an investigation by the FCA in relation to sanctions compliance. The results of this investigation are as yet unknown. In addition, the Guernsey Financial Services Commission imposed a financial penalty of £150,000 on Bordeaux Services (Guernsey) Limited and also fined its three directors Peter Radford, Neal Meader and Geoffrey Tostevin (£50,000, £30,000 and £30,000, respectively) in connection with a number of failings including a failure to have in place effective sanctions training. Bordeaux was the designated manager and administrator of Arch Guernsey ICC Limited (now known as SPL Guernsey ICC Limited) and its incorporated cells, into which two UK OIECS that were suspended by the then Financial Services Authority in 2009 had invested. The public statement notes that “the sanctions training at Bordeaux did not cover the types of considerations raised by the nature of investments invested in by Arch FP, such as a ship, which may be hired or chartered by a party subject to a sanction“. This is a reminder that training should be more than a tick box exercise, and that consideration should be given to the issues that staff may encounter in the course of their employment when designing training. 5.     Money Laundering Legislative Reforms On March 3, 2015 the Serious Crime Act 2015 (“SCA”) received Royal Assent, though a date has not yet been set for its entry into force. The SCA has made a number of amendments to the Proceeds of Crime Act 2002 (“POCA”) which forms the basis for UK money laundering legislation, made amendments to the Computer Misuse Act 1990 and introduced a new offence of participating in the activities of an organised crime group. Section 37 of the SCA amends section 338 of POCA to include an exemption from civil liability for those who make disclosures of suspicions of money laundering under POCA in good faith. This will provide protection for regulated institutions which are unable to act on client instructions while awaiting consent from the NCA to continue with a transaction about which they have made a disclosure to the NCA. This legislation is a result of cases such as Shah v HSBC Private Bank (UK) Limited [2012] EWHC 1283, in which litigants have sought damages from banks arising from suspicious activity reports filed by the banks. Section 37 will now provide immunity from such suits. POCA is also amended to strengthen the asset freezing regime, to extend investigatory powers, and to strengthen the sentencing and confiscation order regime for offences under POCA.                New Offence of participating in the activities of an organised crime group A new offence of participating in the activities of an organised crime group has been created by section 45 of the SCA, with a maximum penalty of five years’ imprisonment. The threshold for the mental element of the offence is relatively low, requiring an individual to have knowledge or reasonable suspicion only that he is participating in an activity which constitutes criminal activity of an organised crime group, or which will help an organised crime group to carry on criminal activities. The UK Government factsheet on the Serious Crime Bill  stated that an “active relationship” with the organised criminality must be proved and cites examples of delivering packages, renting warehouse space or writing contracts. The UK Government has confirmed that that the intention is for the existing offence of conspiracy to continue to be used in order to prosecute organised crime, the new offence being broader in scope and designed to capture those who “ask no questions”. Criminal activities, for the purposes of the offence, are those conducted with a view to obtaining direct or indirect benefit, and constituting an offence in England & Wales punishable by seven years’ imprisonment or more. The offence has extra-territorial scope and will encompass activities outside England and Wales where: those activities constitute an offence under the law of the jurisdiction where they are carried out; if committed in England & Wales, those activities would constitute an offence attracting a sentence of seven years’ imprisonment or more; and one of the acts or omissions comprising participation in the group’s criminal activity took place in England & Wales. Enforcement Enforcement of money-laundering offences under POCA continued unabated during 2015. Over 30 custodial sentences were handed down, varying from four months to 11 years, with 16 of these sentences forming part of a single NCA investigation. Already during 2016 there have been two further convictions. 2015 saw the first ever (although unsuccessful) criminal prosecutions in Jersey under the Proceeds of Crime (Jersey) Law 1999, the Jersey equivalent of POCA. These prosecutions were brought against Michelle Jardine and STM Fiduciaire Limited, each for failing to report to the Jersey Financial Services Commission a transaction involving a politically exposed person (PEP) from a high-risk jurisdiction that they had reasonable grounds for suspecting was money laundering.  The two were acquitted. Not to be outdone, the Guernsey Financial Services Commission (“GFSC”) has imposed penalties of £50,000 each on the executive directors of Confiànce Limited: Rudiger Falla, Richard Garrod, Leslie Hilton and Geoffrey Le Page, in connection with the significant failings in anti-money laundering and countering terrorist financing systems and controls which were identified in the course of an inspection by the Financial Crime Supervision and Policy Division in April 2015. Similar failings had been identified during a 2010 visit after which Confiànce Limited was required to undertake remedial action. An independent person was also appointed to review Confiànce Limited’s monitoring arrangements and governance following an on-site visit by the GFSC in 2013. The GFSC made orders prohibiting Messrs Falla, Garrod, Hilton and Le Page from performing the functions of director, controller, partner and money laundering reporting officer in relation to business carried on by an entity licensed under the Regulatory Laws for a period of five years. Kenneth Forman, a non-executive director of Confiànce Limited, was fined £10,000. In addition, the Guernsey authorities obtained convictions against Michael Doyle and Belinda Lanyon for money laundering offences in September 2015 following a four year investigation conducted with the assistance of agencies from the U.S. and seven other countries.  The couple had pleaded guilty to carrying out an act intended to pervert the course of public justice in relation to the disposal of evidence connected with the money laundering investigation. They were also convicted of carrying out regulated activities in the Bailiwick of Guernsey without a licence.  Doyle was sentenced to seven years and six months’ imprisonment and Lanyon was sentenced to three years and six months’ imprisonment. 6.     Competition/Antitrust Violations As discussed in more detail in our 2015 Year-End Criminal Antitrust and Competition Law Update, the second half of 2015 proved to be a relatively subdued period in terms of civil cartel decisions in the UK. While the UK Competition and Markets Authority (CMA) commenced and continued a number of horizontal enforcement investigations, there was only one instance of a concluded investigation resulting in penalties, which related to the private ophthalmology industry. On the criminal cartel front, there were several developments in court proceedings involving individuals accused of cartel activity, notably in the galvanised steel tanks industry and the banking sector. Enforcement                Steel Tanks Industry As reported in our 2015 Mid-Year Criminal Antitrust and Competition Law Update, the CMA suffered a setback in its prosecution of the criminal cartel offence in June 2015, when a jury acquitted two defendants charged in relation to an alleged cartel in the galvanized steel tanks industry. These were the first contested prosecutions brought under the criminal cartel offence in which the trial was completed and a jury verdict rendered. Subsequently, in August 2015, a sentencing judgment was handed down for a third defendant, the former Managing Director of Franklin Hodge Industries, Peter Nigel Snee, who had already pleaded guilty. The court imposed a sentence of six months’ imprisonment, suspended for 12 months, and ordered Mr. Snee to complete 120 hours of community service. The sentence took into account Mr. Snee’s early guilty plea, certain personal mitigation, and the extent of his cooperation (including his appearance as a witness for the CMA in the trial of the two other defendants). The CMA’s civil investigation into suspected cartel conduct in the galvanised steel tanks industry is continuing, with the CMA indicating there would be a further update on the investigation by the end of January 2016.                LIBOR and EURIBOR Enforcement action in the banking sector during the second half of 2015 has focused on individuals alleged to have been involved in the conduct. In August, Tom Hayes, the first individual to stand trial in the UK for conduct relating to the LIBOR benchmark, was convicted and sentenced to 14 years in prison. He was convicted of conspiracy to defraud. Mr. Hayes appealed the conviction. On December 21, his appeal against conviction was rejected, but the Court of Appeal reduced his sentence to 11 years, finding the original sentence was longer than necessary to punish Mr. Hayes and deter others. Nonetheless, lenient treatment in future cases should not be assumed. In its judgment the Court of Appeal stated that it “must make clear to all in the financial and other markets in the City of London that conduct of this type, involving fraudulent manipulation of the markets, will result in severe sentences of considerable length”. Confiscation proceedings against Mr. Hayes are ongoing. Twelve other traders and brokers have been charged with conspiracy to defraud in respect of LIBOR. One of these, as yet unnamed, pled guilty in late 2014. Over the course of January 27 and 28, 2016, and after a lengthy trial, six of those charged were found not guilty by a jury. The trial of the six former employees of Barclays, charged in connection with the manipulation of USD LIBOR in April 2014, is scheduled to begin in February 2016. In addition to these cases, in November 2015, the SFO instituted proceedings against 10 individuals formerly employed by Deutsche Bank and Barclays on charges of manipulating the EURIBOR benchmark.  A further individual formerly employed by Société Générale has also since been charged. All 11 individuals were due to make a first appearance on January 11, 2016.  Six of these individuals attended Southwark Crown Court and were bailed with Christian Bittar, a former employee of Deutsche Bank ordered to pay bail security of £1 million.   The SFO is considering its position in relation to the five individuals who declined to appear.  The trial is scheduled to begin in September 2017. In March and July 2015 the FCA issued notices excluding two former Rabobank traders, Lee Stewart and Paul Robson from employment in the UK financial services industry on the basis that they lack honesty and integrity, following their convictions for LIBOR-related fraud in the U.S.                Other enforcement actions Further to our 2015 Mid-Year Criminal Antitrust and Competition Law Update reporting on dawn raids in the clothing, fashion, and footwear sectors in early 2015, the CMA has decided to proceed with a formal investigation. The nature of the suspected conduct and the identities of the parties involved have not been made public. The CMA is expected to decide by March 2016 whether any further investigatory steps are required. In addition, the CMA has commenced several civil investigations in the second half of the year in relation to UK online sales of licensed sports and entertainment merchandise, and in the sports equipment and leisure sectors. In December 2015, as part of its investigation into online sales of licensed sports and entertainment merchandise, the CMA conducted searches of a UK company, Trod Limited, and the home of one of its directors. The CMA’s searches were coordinated with searches on behalf of the U.S. Department of Justice. 7.     Insider Dealing, Market Abuse and other Financial Sector Wrongdoing Overview of MAR/CSMAD In 2016, the European market abuse regime will undergo significant expansion in scope with the implementation of the EU’s Market Abuse Regulation 596/2014 (“MAR”). Accompanied by the Criminal Sanctions for Market Abuse Directive (2014/57/EU) (“CSMAD”), MAR will replace the 2003 Market Abuse Directive (2003/6/EC, “MAD”). The objective of MAR is to increase market integrity and investor protection, while harmonising market abuse regimes across the EU. As an EU regulation MAR will be directly applicable in the UK. It will replace the existing civil market abuse provisions in the Financial Services and Markets Act 2000 (“FSMA”). MAR will also apply across all other EU Member States and the other European Economic Area (“E.E.A.”) states of Iceland, Norway and Liechtenstein. The UK will not opt into CSMAD, but instead will introduce UK criminal sanctions for market abuse, although individuals based in the UK who are conducting cross-border trading or trading in instruments in other EU member states could incur criminal liability in those jurisdictions under domestic criminal provisions implementing CSMAD. MAR and CSMAD were developed in the wake of the financial crisis, as part of a wider range of measures aimed at regulating markets and financial instruments, extending the reach of the European regulatory regime, and specifically addressing abusive algorithmic and high-frequency trading.                Implementation in the UK The majority of the provisions under MAR will come into force on July 3, 2016 and cover insider dealing, market manipulation and the improper disclosure of inside information. Large parts of the UK civil market abuse framework will be amended or repealed to make way for the new directly applicable MAR. This includes Part VIII of FSMA, the Code of Market Conduct and the Disclosure and Transparency Rules. This EU legislation will also require substantial changes to the FCA Handbook. The FCA has launched a consultation (CP15/35) in relation to the proposed changes and implementation of MAR generally.                Key provisions The practical effect of MAR is to widen the UK’s civil market abuse regime.  MAR extends the range of instruments covered from financial instruments admitted to trading on EEA-regulated markets to those admitted to trading on multilateral trading facilities (“MTFs”) and organised trading facilities (“OTFs”), and financial instruments the price or value of which depends on or has an effect on the price or value of a financial instrument traded on a regulated market, MTF or OTF. The regulation sets out specific examples of behaviours and activities that are considered to be market manipulation under the regime such as, inter alia, acting in collaboration to secure a dominant position over the supply or demand of a financial instrument, and certain algorithmic trading strategies or high-frequency trading behaviour which disrupt the functioning of a trading venue. Investment professionals will now be required to report suspicious orders as well as suspicious transactions. Benchmarks are also brought within the scope of the European market abuse regime, although making certain false or misleading statements relating to LIBOR, or engaging in a course of conduct that creates a false or misleading impression as to the price or value of an investment or interest rate that may affect the setting of LIBOR, has been prohibited in the UK under Part VII of the Financial Services Act 2012 since April 1, 2013. As of April 1, 2015, the scope of the offence was widened by the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2015 to include seven further benchmarks used in the fixed income, commodity and currency markets. Subject to a number of new formalities and procedural conditions, MAR permits inside information to be legitimately disclosed to a potential investor in the course of market soundings before a significant securities transaction. Notably, detailed records must be taken and the recipient must consent to being made an insider and be informed of the restrictions that this will involve.  It is also now clarified that recommending or inducing another person to transact on the basis of inside information amounts to unlawful disclosure of inside information. Further, the market manipulation offence has been extended to capture attempted manipulation. The definition of inside information is, for the most part, unchanged, but has been widened to capture inside information for spot commodity contracts. The use of inside information to amend or cancel an order is now considered to be insider dealing, although the UK regime already prohibits certain behaviour that a regular user of the market would be likely to regard as a failure to observe the standards of behaviour reasonably expected of a person in his position (section 118(1) FSMA). MAR sets new E.E.A.-wide minimum standards for the investigatory and sanctioning powers of the relevant enforcement authorities, requiring that the enforcement authorities for all member states of the EU and E.E.A. countries have the power to impose fines of up to at least €5 million for an individual and €15 million or 15 per cent of annual turnover for a firm. FCA Enforcement – Insider Dealing After a number of quiet years during which it appears that the bulk of its enforcement resources were deployed in high profile benchmark manipulation investigations, the FCA pursued insider dealing prosecutions with renewed vigour in 2015.                Operation Tabernula The long-delayed high-profile prosecution of the FCA’s insider dealing investigation, ‘Operation Tabernula’, is finally being tried at Southwark Crown Court before HHJ Jeffrey Pegden QC. This case first hit the headlines more than five years ago when over 100 investigators executed dawn raids across the City of London and residential addresses, arresting six men from a number of financial institutions. In the trial, which commenced in January 2016 and is expected to last for 12 weeks, five defendants, including two senior City bankers, face a single count of conspiring together to commit insider dealing on six occasions between November 2006 and March 2010, making an alleged financial gain of £7.4 million. Martyn Dodgson, a former Managing Director banker, and Grant Harrison, who held a senior position at Panmure Gordon and previously Altium Capital, are alleged to have recruited a close friend of Mr Dodgson, Andrew Hind, a director of Deskspace Offices, as a middleman to record the trades and split the profit. It is alleged that Mr Hind in turn used two private day traders, Ben Anderson and Iraj Parvizi, to execute the trades. A further defendant, Richard Baldwin, a former business partner of Mr Hind, was removed from the indictment for health reasons in October 2015. Prosecutors, who intend to rely upon covert recordings of telephone conversations, allege that the defendants used encrypted memory sticks, pay-as-you-go mobile phones, nicknames and passwords named after luxury cars. The defendants face up to seven years in prison if convicted. In 2015, three other men pleaded guilty to insider dealing prosecutions for conspiracies investigated as part of Operation Tabernula but not linked to the ongoing trial. Julian Rifat, a former execution trader at hedge fund Moore Capital Management LLC, admitted eight instances of insider trading in March 2015, which involved profits exceeding £250,000. He was sentenced to 19 months in prison. Rifat admitted passing inside information, obtained during the course of his employment, to Graeme Shelley, a former broker at Novum Securities, who then placed heavy spread-bet and contract-for-difference trades via his brokers for their joint benefit. Rifat’s plea followed those of Shelley and Paul Milsom, a former equities trader at the investment arm of Legal & General Insurance Management Ltd who admitted to improperly disclosing inside information to Shelley leading to joint profits of £560,000. Shelley and Milsom were sentenced to two years’ suspended imprisonment and two years’ imprisonment, respectively.                Other insider dealing convictions and orders The FCA had a series of successful individual prosecutions for insider dealing during the course of 2015, all involving guilty pleas. Paul Coyle, the former Group Treasurer and Head of Tax at WM Morrison Supermarkets Plc, pleaded guilty to two counts of insider dealing between February 12 and May 17, 2013. Coyle, through his role at Morrisons, was regularly privy to confidential price sensitive information about Morrisons’ ongoing talks regarding a proposed joint venture with Ocado Group Plc. He admitted trading in Ocado shares on that information using two online accounts which were in the name of his partner. He was sentenced to 12 months imprisonment and ordered to pay £15,000 towards prosecution costs and a confiscation order in the sum of £203,234. A number of convictions arose out of market manipulation linked to the takeover of Logica Plc by CGI Group in 2012. In February 2015, Ryan Willmott, formerly Group Reporting and Financial Planning Manager for Logica Plc, pled guilty to three instances of insider dealing relating to the takeover, which was publicly announced on May 31, 2012 causing the share price to increase dramatically. Willmott set up a trading account in the name of a former girlfriend, without her knowledge, to carry out the trading.  He also admitted disclosing inside information to a family friend, who then went on to deal on behalf of Willmott and himself. Willmott was sentenced to ten months’ imprisonment and made subject to a confiscation order in the sum of approximately £23,000. The family friend, retired accountant Kenneth Carver, purchased 62,000 shares in Logica on the basis of information provided to him by Willmott, and sold all of them shortly after the announcement, making a profit of over £24,000. In light of significant co-operation with the FCA at an early stage of the investigation and evidence of serious financial hardship, Carver was fined only £35,212 for market abuse in breach of section 118(2) FSMA. In April 2015, Pardip Saini, convicted of six counts of insider dealing in 2012 as part of ‘Operation Saturn’, was sentenced to 528 days imprisonment for failing to pay a Confiscation Order in the sum of £464,564.91 made against him in September 2014. The FCA also secured a High Court judgment awarding the regulator permanent injunctions and penalties totalling £7,570,000 against Da Vinci Invest Ltd, Mineworld Ltd, Szabolcs Banya, Gyorgy Szabolcs Brad and Tamas Pornye for committing market abuse.  The defendants were found to have committed market abuse in 2010/2011 relation to 186 UK-listed shares using a manipulative trading strategy known as “layering”, which involves the entering and trading of orders in relation to shares traded on the electronic trading platform of the London Stock Exchange (“LSE”) and MTFs in such a way as to create a false or misleading impression as to the supply and demand for those shares and enabling them to trade those shares at an artificial price.                Pending prosecutions In April 2015, the FCA also charged Manjeet Singh Mohal, a business analyst at Logica Plc, with passing on inside information in 2012. There were further charges in relation to Reshim Birk and Surinder Pal Singh Sappal. A probe by the FCA into hedge fund managers at Man Group’s GLG and Lodestone Natural Resources was dropped in 2013, while another involving a former fund manager at BlackRock is ongoing. The trial of Damien Clarke, a former equities trader at Schroders, who in 2014 was charged with insider trading over a nine-year period between October 2003 and November 2012, is due to start in March 2016. FCA’s regulatory enforcement As was the case in the last few years, 2015 saw a number of very large fines imposed by the FCA. Firstly, on April 15, 2015, the FCA announced a fine of £126,000,000 against Bank of New York Mellon for failure to adequately ensure safe custody of client assets. Then, on April 23, 2015, the FCA announced a fine of £226,800,000 against Deutsche Bank for its part in  LIBOR and EURIBOR-related misconduct markets. Deutsche Bank was also fined and criticised for providing misleading and inaccurate information to the FCA, and for being tardy in responding to the FCA’s enquiries. A third very large fine was imposed by the FCA on May 20, 2015. Under this Barclays Bank Plc was fined £284,432,000 for failing to control certain practices in its London foreign exchange business. In addition to these Aviva Investor Global Services Limited was fined £17,607,000 for failing to properly manage conflicts of interest in its fund management business; Merrill Lynch International was fined £13,285,900 for poor transaction reporting; Threadneedle Asset Management Limited was fined £6,038,504 for a lack of controls, and for providing inaccurate information to the FCA; and Asia Resource Minerals Plc (formerly Bumi Plc) was fined £4,651,200 for breaching the UK’s Listing Rules through the inadequate reporting of related party transactions. 2015 also saw the largest ever retail fine of £117,430,600 imposed on Lloyds Banking Group for failing to treat customers fairly in connection with complaints regarding payment protection insurance, Clydesdale Bank Plc was also fined £29,540,000 for failings in the handling of complaints regarding payment protection insurance. It is worth noting that three of the fines imposed in 2015 include amounts for breaches of Principle 11 attributable to the conduct of the firms’ investigation and the quality of communication with, and information provided to, the FCA.                The road ahead Although the FCA can point to a growing number of individual convictions in the financial sector since 2008, Operation Tabernula is the first FCA investigation to target alleged rings of City traders, and the first contested multi-defendant prosecution for insider dealing since ‘Operation Saturn’ in 2012. Looking ahead, the demands on the FCA’s enforcement resources resulting from the large investigations into matters relating to LIBOR and forex benchmark rates should diminish. Patrick Spens, the head of the FCA’s market monitoring team, told the Financial Times in July 2015 that he expected to send a higher number of cases to the FCA’s enforcement division as resources are freed up, and that “we have not taken our eye off the ball“. The following Gibson Dunn lawyers assisted in preparing this client alert: Patrick Doris, Mark Handley, Rebecca Sambrook, Frances Smithson, Steve Melrose and Deirdre Taylor, with further assistance from Emily Beirne, Tiernan Fitzgibbon, and Ryan Whelan. Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following members of the firm’s White Collar Defense and Investigations Practice Group: London Philip Rocher (+44 (0)20 7071 4202, procher@gibsondunn.com) Patrick Doris (+44 (0)20 7071 4276, pdoris@gibsondunn.com) Charles Falconer (+44 (0)20 7071 4270, cfalconer@gibsondunn.com) Charlie Geffen (+44 (0)20 7071 4225, cgeffen@gibsondunn.com) Osma Hudda (+44 (0)20 7071 4247, ohudda@gibsondunn.com) Penny Madden (+44 (0)20 7071 4226, pmadden@gibsondunn.com) Allan Neil (+44 (0)20 7071 4296, aneil@gibsondunn.com) Ali Nikpay (+44 (0)20 7071 4273, anikpay@gibsondunn.com) Deirdre Taylor (+44 (0)20 7071 4274, dtaylor2@gibsondunn.com) Mark Handley (+44 20 7071 4277, mhandley@gibsondunn.com) Sunita Patel (+44 (0)20 7071 4289, spatel2@gibsondunn.com) Steve Melrose (+44 (0)20 7071 4219, smelrose@gibsondunn.com) Frances Smithson (+44 (0)20 7071 4265, fsmithson@gibsondunn.com) Munich Benno Schwarz (+49 89 189 33-110, bschwarz@gibsondunn.com) Mark Zimmer (+49 89 189 33-130, mzimmer@gibsondunn.com) Hong Kong Kelly Austin (+852 2214 3788, kaustin@gibsondunn.com) Oliver D. 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January 4, 2016 |
2015 Year-End FCPA Update

​As we kick off our second decade of updates on the state of play in international anti-corruption enforcement, the stakes for multinational companies have never been higher.  No longer may entities operating abroad focus their attention narrowly on the two domestic enforcers of the Foreign Corrupt Practices Act (“FCPA”)–the U.S. Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”).  Anti-corruption enforcement is now a global endeavor with regulators around the globe focusing their sights on those who seek to profit on the corruption of government officials. On the U.S. front, DOJ continues its push to demonstrate that financial penalties for FCPA violations are not simply the cost of doing business internationally by putting culpable individuals in prison.  Meanwhile, the SEC has stepped up as the predominant corporate enforcer, bringing cases founded on creative theories that ride the edges of the statute’s contours. This client update provides an overview of the FCPA as well as domestic and international anti-corruption enforcement, litigation, and policy developments from the year 2015. FCPA OVERVIEW The FCPA’s anti-bribery provisions make it illegal to corruptly offer or provide money or anything of value to officials of foreign governments, foreign political parties, or public international organizations with the intent to obtain or retain business.  These provisions apply to “issuers,” “domestic concerns,” and “agents” acting on behalf of issuers and domestic concerns, as well as to “any person” that violates the FCPA while in the territory of the United States.  The term “issuer” covers any business entity that is registered under 15 U.S.C. § 78l or that is required to file reports under 15 U.S.C. § 78o(d).  In this context, foreign issuers whose American Depository Receipts (“ADRs”) are listed on a U.S. exchange are “issuers” for purposes of the FCPA.  The term “domestic concern” is even broader and includes any U.S. citizen, national, or resident, as well as any business entity that is organized under the laws of a U.S. state or that has its principal place of business in the United States. In addition to the anti-bribery provisions, the FCPA also has “accounting provisions” that apply to issuers and their agents.  First, there is the books-and-records provision, which requires issuers to make and keep accurate books, records, and accounts, that in reasonable detail, accurately and fairly reflect the issuer’s transactions and disposition of assets.  Second, the FCPA’s internal controls provision requires that issuers devise and maintain reasonable internal accounting controls aimed at preventing and detecting FCPA violations.  Prosecutors and regulators frequently invoke these latter two sections when they cannot establish the elements for an anti-bribery prosecution or as a mechanism for compromise in settlement negotiations.  Because there is no requirement that a false record or deficient control be linked to an improper payment, even a payment that does not constitute a violation of the anti-bribery provisions can lead to prosecution under the accounting provisions if inaccurately recorded or attributable to an internal controls deficiency. FCPA ENFORCEMENT STATISTICS The following table and graph detail the number of FCPA enforcement actions initiated by the statute’s dual enforcers, DOJ and the SEC, during each of the past ten years. 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC 7 8 18 20 20 13 26 14 48 26 23 25 11 12 19 8 17 9 10 10     2015 FCPA Enforcement Trends In each of our year-end FCPA updates, we seek not only to report on the year’s FCPA enforcement actions but also to identify and synthesize the developing trends that stem from these actions.  In 2015, six key enforcement trends stand out from the rest.           DOJ Focuses on Individual Accountability On September 9, 2015, U.S. Deputy Attorney General Sally Yates issued a memorandum to all federal prosecutors announcing a policy of holding individual corporate officers accountable in investigations of corporate misconduct.  The “Yates Memorandum,” as it has become known, did not depart substantially from existing Departmental policy, but nevertheless is the latest in a series of increasingly direct statements from senior DOJ officials that demonstrates a renewed focus on the subject. The Yates Memorandum, covered in greater depth in our separate client alert DOJ’s Newest Policy Pronouncement: the Hunt for Corporate Executives, outlines the following six key steps intended to strengthen DOJ’s focus on pursuing individual wrongdoers: To qualify for any cooperation credit, companies must provide DOJ with all relevant facts relating to the individuals involved in the corporate misconduct; Criminal and civil investigations should focus on individuals from their inception; Criminal and civil DOJ attorneys handling corporate investigations should be in routine communication with one another; Absent extraordinary circumstances or approved Departmental policy, DOJ will not release individuals from civil or criminal liability when resolving a matter with a corporation; DOJ attorneys should not resolve matters with a corporation unless there is a clear path to resolve related individual cases, and they should memorialize any declinations as to individuals in such cases; and Civil DOJ attorneys consistently should focus on individuals, and should evaluate whether to bring suit against an individual based on considerations beyond ability to pay. The increased focus on individual defendants is a Department-wide phenomenon that goes well beyond FCPA enforcers, but yet it is exemplified in the year’s criminal FCPA enforcement statistics.  Not only did individuals make up 80% of DOJ’s FCPA enforcement docket in 2015, but in no case this year did DOJ bring an enforcement action against a corporation without also prosecuting officers associated with that corporation.  While the SEC has made clear that holding individuals accountable for FCPA misconduct is likewise a focus of the Commission, 2015 statistics do not bear out this prioritization in the same way that DOJ’s statistics do.  Indeed, the breakdown of FCPA enforcement actions against corporations and individuals at the SEC in 2015 was exactly the inverse of DOJ’s, with corporations constituting 80% of the SEC’s FCPA enforcement docket.  A graphic breakdown of FCPA charges by DOJ and the SEC in 2015 follows: The latest example of DOJ’s focus on individual defendants is the December 10, 2015 indictment of Roberto Enrique Rincon-Fernandez and Abraham Jose Shiera-Bastidas, respectively the president and a third-party agent of Texas-based oil services company Tradequip Services & Marine.  Charging documents unsealed after the two were arrested in Houston and Miami allege that between 2009 and 2014 they conspired together and with others to secure energy contracts from Venezuela’s state-owned energy company, Petróleos de Venezuela S.A. (“PDVSA”), via corrupt payments to PDVSA officials.  Among other things, Rincon-Fernandez and Shiera-Bastidas are alleged to have paid millions of dollars to their “aliados” (allies) on PDVSA’s contract steering committees to stack the list of companies eligible to bid on contracts with multiple companies owned or controlled by the defendants, thus giving the false appearance that the bids were competitive.  In addition to substantive and conspiracy FCPA bribery charges, Rincon-Fernandez and Shiera-Bastidas are charged with money laundering. This case demonstrates convincingly the proposition that focusing on individual defendants does not mean that DOJ is in any way “going small” or shying away from major corruption cases.  Testimony adduced at the detention hearing appears to have been even more extensive than the indictment, with U.S. Magistrate Judge Nancy K. Johnson finding that the conspiracy may involve as much as $1 billion in illicit proceeds.  This, coupled with the facts that Rincon-Fernandez is a citizen of Venezuela (which has no extradition treaty with the United States) who has revoked his legal permanent residence status in the United States, owns homes in Spain and Aruba, and is suspected to have moved at least $100 million through Swiss bank accounts, led Judge Johnson to conclude that there are no conditions of release that could outweigh the serious risk of flight that Rincon-Fernandez presents.  He was thus ordered detained pending trial.  Shiera-Bastidas is also being held in a Miami jail pending a January 2016 detention proceeding. Another recent example of DOJ’s focus on individual defendants is the FCPA guilty plea of Daren James Condrey.  Condrey, who operated a Maryland-based company specializing in the importation of uranium into the United States, was charged initially via a criminal wire fraud complaint in October 2014.  Although the substantive allegations concerned a scheme to pay approximately $2 million to an official of JSC Techsnabexport (“TENEX”)–a Russian state-owned supplier of uranium and uranium enrichment services–in return for directing $33 million in sole-source uranium transportation contracts to Condrey’s company, the initial charges did not allege violations of the FCPA.  Then, on June 16, 2015, DOJ unsealed a criminal information charging Condrey with one count of conspiracy to violate the FCPA’s anti-bribery provision and to commit wire fraud. Charged along with Condrey in 2014 were his wife, Carol, the TENEX official alleged to have received the corrupt payments, Vadim Mikerin, and a businessman alleged to have served as a middleman for the corrupt payments, Boris Rubizhevsky.  The wire fraud charges against Mrs. Condrey were dismissed in April 2015, shortly before Mr. Condrey reached a plea agreement with DOJ.  Separately, Rubizhevsky and Mikerin pleaded guilty to one count each of conspiracy to commit money laundering on June 15 and August 31, 2015, respectively.  Mikerin was sentenced on December 15 to 48 months’ imprisonment and to forfeit $2,126,622 in illicit proceeds.  Condrey and Mikerin are scheduled to be sentenced in January 2016. Another point illustrated by the Condrey case is the manner in which FCPA statistics account for but a portion of the anti-corruption enforcement efforts undertaken by DOJ.  While only Mr. Condrey’s case was ultimately resolved with an FCPA charge, three additional individuals were charged and two were convicted of related offenses.  Thus, what from a resources perspective is a four-person prosecution shows up only as a single case in the FCPA enforcement statistics. Yet another example of a case that began on non-FCPA grounds but may well trend FCPA in the near future is the recent money laundering plea of a government aviation official from Tamaulipas, one of the 31 Mexican states.  On December 9, 2015, Ernesto Hernandez-Montemayor pleaded guilty to conspiracy to commit money laundering based on allegations that between 2006 and 2010 he received more than $200,000 in bribes from two unnamed employees of an unidentified Texas aviation company.  Hernandez-Montemayor has been ordered held pending a February 2016 sentencing date.  We expect charges against additional defendants to follow. An example of DOJ prosecuting corporate executives together with their company is the July 17, 2015 resolutions with New Jersey engineering and infrastructure firm Louis Berger International, Inc. (“LBI”) and two of its former senior vice presidents, Richard Hirsch and James McClung.  In coordinated resolutions, DOJ entered into a deferred prosecution agreement with the corporation and plea agreements with the individuals on FCPA bribery and conspiracy charges alleging that between 1998 and 2010 LBI (including through Hirsch and McClung) paid nearly $4 million in bribes to government officials in India, Indonesia, Kuwait, and Vietnam. LBI agreed to pay a $17.1 million criminal penalty and to retain an independent compliance monitor for the three-year term of the deferred prosecution agreement.  Notably, LBI’s criminal fine was reduced substantially based on its voluntary disclosure of the conduct in question, even though the disclosure came after DOJ was already investigating LBI’s predecessor entity for alleged False Claims Act violations associated with its work for the U.S. military in Iraq and Afghanistan.  (The November 2010 False Claims Act resolution is covered in our 2010 Year-End False Claims Act Update.)  LBI’s parent company also entered into a February 2015 resolution with the World Bank in which it consented to a one-year debarment from Bank-financed projects based on the alleged misconduct.  Hirsch and McClung are scheduled to be sentenced in the U.S. District Court for the District of New Jersey in February 2016. For another example of DOJ reaching coordinated corporate / individual resolutions in an FCPA case, please see our description of the IAP Worldwide Services, Inc. / James Michael Rama settlements of June 2015 in our 2015 Mid-Year FCPA Update. Finally, in an example of an individual defendant resolving FCPA charges without (and potentially in advance of) his employer, on August 12, 2015 DOJ and the SEC announced resolutions with former regional director of SAP International Inc., Vincente Eduardo Garcia.  In the only joint DOJ-SEC FCPA case of 2015, the agencies alleged that between 2009 and 2013 Garcia orchestrated a scheme to pay $145,000 in bribes to at least one Panamanian official in order to secure $3.7 million in software supply contracts for his employer.  Garcia allegedly accomplished this by authorizing discounts to a channel partner that exceeded 80%, which allowed the partner to set up a slush fund from which to make corrupt payments.  Garcia also allegedly received kickbacks from this slush fund himself. To resolve the criminal charges, Garcia pleaded guilty to a single count of conspiracy to violate the FCPA’s anti-bribery provisions and, on December 16, 2015, was sentenced to 22 months in prison, to be followed by a three-year term of supervised release.  To resolve the civil charges, Garcia consented to the filing of a settled administrative proceeding alleging violations of the FCPA’s anti-bribery, books-and-records, and internal controls provisions, and agreed to pay more than $92,000 in disgorgement and prejudgment interest.  Although both DOJ and the SEC have stated that their investigations are ongoing, there have been no announcements concerning whether charges against SAP are forthcoming.           The SEC Takes the Lead in Corporate Enforcement Actions Much as DOJ led the charge with respect to individual accountability, the SEC set the pace for corporate FCPA enforcement during 2015.  Eight of the ten corporate enforcement actions filed in 2015 were brought by the SEC.  Further, there were no joint DOJ-SEC FCPA prosecutions of companies in 2015, which is a stark departure from prior years in which it was more probable than not that a company subject to the jurisdiction of both agencies (corporate issuers) would resolve with both.  Although it is too soon to draw any trend lines, the more discerning footprint of corporate enforcement by DOJ is consistent with statements made by Assistant Attorney General Leslie R. Caldwell at the ABA White Collar Crime Conference on March 6, 2015, in which Caldwell stated that DOJ was rethinking its “over use[]” of deferred and non-prosecution agreements in the past and predicted an “uptick in [DOJ] declinations for companies” in the future.  For more on the evolving approach to deferred and non-prosecution agreements, please see our forthcoming 2015 Year-End Update on Corporate NPAs and DPAs. Select corporate enforcement brought by the SEC in 2015, not covered elsewhere in this update, include the following: Mead Johnson Nutrition Co. – On July 28, 2015, Mead Johnson Nutrition, one of the world’s largest manufacturers of infant formula, agreed to pay $12 million to the SEC, without admitting or denying the findings, to resolve allegations that it violated the accounting provisions of the FCPA in connection with certain medical marketing activities in China.  In particular, the SEC alleged that between 2008 and 2013 certain employees of the company’s Chinese subsidiary improperly compensated state-employed healthcare professionals in China to recommend Mead Johnson’s formula to new and expectant mothers.  According to the SEC’s cease-and-desist order, funding for these payments came from funds generated by discounts provided to Mead Johnson China’s network of distributors.  Under contracts between Mead Johnson China and its distributors, Mead Johnson China provided the distributors a discount for Mead Johnson’s products that was allocated for funding certain marketing and sales efforts.  Although these funds contractually belonged to the distributors, the SEC contended that certain employees of the Chinese subsidiary retained some control over how this money was spent, including providing funding for the payments to healthcare professionals.  Mead Johnson’s purported failure to record a portion of the discounts as payments to healthcare professionals and to implement internal controls to ensure that Mead Johnson China’s method of funding marketing and sales expenditures through its distributors was not used for unauthorized purposes, allegedly ran afoul of the FCPA’s accounting provisions.Without admitting or denying the allegations, Mead Johnson agreed to the entry of an administrative order and to pay disgorgement of $7.77 million, prejudgment interest of $1.26 million, and a civil penalty of $3 million (for a total of just over $12 million).  Gibson Dunn represented Mead Johnson in its settlement with the SEC. Bristol-Myers Squibb Co. – On October 5, 2015, the SEC announced another settled FCPA cease-and-desist proceeding arising out China, this time against pharmaceutical company BMS.  The SEC alleged that, between 2009 and 2014, certain sales representatives at a joint venture in which BMS was a majority owner made improper payments to healthcare professionals–in the form of cash, gifts, meals, travel, entertainment, and sponsorships for conferences and meetings–in exchange for prescribing BMS products.  According to the SEC, the company did not respond adequately to “red flags,” including claims by certain terminated employees that it was an “open secret” that healthcare professionals in China rely upon “gray income” to maintain their livelihood and that providing various benefits to the doctors was the only way to meet sales quotas.Without admitting or denying the allegations, BMS consented to the entry of a cease-and-desist order and agreed to pay disgorgement of $11,442,000, prejudgment interest of $500,000, and a $2.75 million civil penalty (for a total of just under $14.7 million).  The SEC acknowledged in its order BMS’s “significant measures” to improve upon its compliance program, including a 100% pre-reimbursement review of all expense claims, termination of more than 90 employees, and a revised compensation structure.  BMS agreed to report to the SEC regarding its compliance efforts for a two-year period.  Gibson Dunn represented BMS in its settlement with the SEC. For summaries and insights concerning the SEC’s corporate FCPA enforcement actions from the first half of 2015, including settlements with PBSJ Corporation, Goodyear Tire & Rubber Company, FLIR Systems Inc., and BHP Billiton Ltd. / Plc., please see our 2015 Mid-Year FCPA Update. The breadth of talent across the SEC’s FCPA Unit was also showcased prominently in 2015.  In addition to the Home Office in Washington, D.C., the FCPA Unit has members in six regional offices:  Boston, Fort Worth, Los Angeles, Miami, Salt Lake City, and San Francisco.  Each of these seven offices was responsible for at least one of the SEC’s 10 FCPA enforcement actions in 2015.  DOJ’s FCPA Unit is based entirely in Washington, D.C., although certain members have been known to operate remotely from other cities as their caseloads dictate and DOJ’s FCPA Unit routinely partners with U.S. Attorney’s Offices from around the country on their matters.  DOJ also recently added 10 new prosecutors to focus on FCPA enforcement. The First Financial Services / Sovereign Wealth Fund FCPA Enforcement Action It was October 2008 when the then-head of DOJ’s Fraud Section announced at a SIFMA conference that DOJ and the SEC were focused on interactions between financial services firms and foreign sovereign wealth funds.  Nearly seven years later, the SEC announced the first FCPA charges arising out of this highly publicized industry sweep. On August 18, 2015, the SEC brought a settled cease-and-desist proceeding for alleged FCPA violations by The Bank of New York Mellon Corporation.  The SEC’s allegations were that the bank corruptly provided internships to relatives of foreign officials overseeing the sovereign wealth fund of an unnamed Middle Eastern country that BNY Mellon had serviced since 2000.  In February 2010, two of the officials allegedly requested internships for their relatives, including the officials’ sons and one of the official’s nephews.  These prospective interns purportedly did not meet BNY Mellon’s “rigorous criteria” for its internship program, but BNY nevertheless hired them outside of the normal process “before even meeting or interviewing them.”  The SEC further alleged that the experiences given to these interns were “customized one-of-a-kind training programs,” including above-scale salaries, coordination of visa services, and a “bespoke” experience that included longer-than-normal terms.  The SEC’s allegations cite twice to a BNY Mellon employee’s e-mail referring to the internships an “expensive favor.”  In return for these internships, the SEC alleges that that BNY Mellon was allocated $689,000 in additional funds under management, a rather paltry difference in the $55 billion in funds managed by the bank over the course of its relationship with the sovereign wealth fund. For these allegedly improper internships, BNY Mellon agreed to pay $8.3 million in disgorgement, prejudgment interest of $1.5 million, and a $5 million civil penalty (for a total of $14.8 million).  BNY Mellon consented to the entry of a cease-and-desist order without admitting or denying the allegations, which included violations of the FCPA’s anti-bribery and internal controls provisions. SEC Director of Enforcement Andrew J. Ceresney emphasized in announcing the settlement that “The FCPA prohibits companies from improperly influencing foreign officials with ‘anything of value,’ and therefore cash payments, gifts, internships, or anything else used in corrupt attempts to win business can expose companies to an SEC enforcement action.”  The SEC’s cease-and-desist order found that although BNY Mellon had a compliance program and a FCPA-specific policy at the time of the alleged misconduct, the bank “maintained few specific controls around the hiring of customers and relatives of customers, including foreign government officials.”  Specifically, the SEC alleged that “human resources personnel were not trained to flag potentially problematic hires” and that there was “no mechanism for review [of these prospective hires] by legal or compliance staff.”  The SEC did note, however, that BNY Mellon had already begun the process of enhancing its control processes before being approached in connection with this investigation. Reminders that the FCPA’s Contours Reach Beyond Government Officials The focal point of most FCPA compliance discussions is rightly corrupt payments to officials of foreign government entities (including state-owned entities).  But a point that Gibson Dunn always seeks to deliver to its clients is that the anti-bribery provisions also proscribe corrupt payments to foreign political parties and officials thereof, candidates for public office, and employees of “public international organizations.”  Further, the FCPA’s accounting provisions can be employed to cover even purely commercial corruption if the improper payments are inaccurately recorded in the company’s ledger or attributable to an internal controls deficiency.  This year in FCPA enforcement provided a good reminder of these important points. On September 28, 2015, the SEC brought a rare FCPA enforcement action concerning allegedly corrupt payments to a foreign political party.  The SEC alleged that Japanese conglomerate and foreign issuer Hitachi Ltd. sold a 25% stake in its South African subsidiary to a “front company” for the African National Congress (“ANC”), South Africa’s ruling political party since the end of Apartheid in 1994.  This arrangement allegedly allowed the ANC–via this front company, Chancellor House Holdings (Pty) Ltd.–to share in the profits generated from two multi-billion dollar power station contracts awarded to Hitachi’s South African subsidiary by an entity owned and operated by the South African government and whose chairman simultaneously served as a member of the ANC’s National Executive Committee.  Chancellor paid less than $191,000 for this 25% share, in return for which it ultimately received more than $10.5 million in “dividends,” “success fees,” and the repurchased value of the shares–a more than 5,000% return on investment over the course of 19 months. Of interest from the Hitachi case is the level of knowledge ascribed to Hitachi concerning the allegation that Chancellor was actually a front for the ANC.  The SEC alleged that “Hitachi knew or could have learned”–a departure from the “knew or should have known” standard more frequently espoused by the SEC–about the political connections of Chancellor’s executives and the fact that the partner “lacked any engineering or operational capabilities.”  Among other sources, the SEC cited press reports linking Chancellor to the ANC that were published at around the time the two power station contracts were awarded to Hitachi’s South African subsidiary. To resolve the charges, and without admitting or denying the charges, Hitachi consented to the filing of a settled civil enforcement action alleging violations of the FCPA’s books-and-records and internal controls provisions.  Hitachi did not disgorge profits, which is significant given that the face value of the power plant contracts exceeded $5.5 billion.  Instead, Hitachi agreed only to pay a $19 million civil penalty. The FCPA’s prohibition of corrupt payments to employees of non-governmental “public international organizations” is evidenced by the January 2015 indictment of Dmitrij Harder, the former owner and president of a Pennsylvania-based consulting company.  As described in our 2015 Mid-Year FCPA Update, the indictment alleges that Harder made “consulting” payments totaling more than $3.5 million to the sister of an official of the European Bank for Reconstruction and Development to corruptly influence contract awards to Harder’s clients.  The European Bank for Reconstruction and Development, a multilateral development bank based in London and owned by more than 60 sovereign nations, has been designated by Executive Order as a “public international organization” such that its employees qualify as “foreign officials” for purposes of the FCPA’s anti-bribery provisions.  The current status of Harder’s case, including a challenge to the constitutionality of this “public international organization” provision, is covered below. The reach of the FCPA’s accounting provisions to cover even commercial corruption is evidenced, in part, by the SEC’s February 2015 settlement with Goodyear Tire & Rubber Company.  As described in our 2015 Mid-Year FCPA Update, the SEC alleged that Goodyear violated the FCPA’s books-and-records and internal controls provisions by making approximately $3.2 million in corrupt payments to obtain contracts from both state- and privately-owned companies in Angola and Kenya.           DOJ Hires Compliance Expert It is not uncommon for companies caught in the snares of an FCPA investigation–particularly those entering the negotiation phase of a potential FCPA resolution–to make a comprehensive presentation to DOJ and/or the SEC describing their FCPA compliance program.  In particular, these presentations typically focus on the extent that the company’s anti-corruption policies, procedures, diligence, and training programs have been remediated since the conduct at issue such that recurrence of the conduct is less likely.  Over the years, DOJ and SEC FCPA Unit attorneys have become increasingly sophisticated in these matters, and so too have their expectations for the presenters. In November 2015, DOJ upped the ante even further by hiring Hui Chen as a dedicated compliance expert to assist its FCPA attorneys in evaluating these and other compliance issues.  Chen comes to this role with significant experience in government and industry, having served as a federal prosecutor in the Criminal Division and the U.S. Attorney’s Office for the Eastern District of New York as well as more recently in high-level in-house legal and compliance positions in the financial (Standard Chartered Bank), healthcare (Pfizer), and technology (Microsoft) sectors, including posts in Beijing and Munich.  Assistant Attorney General Caldwell described Chen’s main responsibilities in a recent speech as bringing an “expert eye” to helping prosecutors assess the effectiveness of companies’ compliance programs, including what remedial compliance measures should be required as part of a corporate resolution.  DOJ Fraud Section Chief Andrew Weissmann also has suggested that Chen will play a key role in overseeing compliance monitorships and other corporate post-resolution reporting relationships. The SEC’s New Threshold Requirement for Alternative Resolution Vehicles Since announcing its Cooperative Initiative in 2010, which among other things allows for the use of deferred and non-prosecution agreements as an alternative to administrative or civil enforcement actions, the SEC has resolved only nine corporate cases by means of one of these alternative resolution vehicles.  Fully one-third of these, however, have been in FCPA cases, including Tenaris S.A. (2011 deferred prosecution agreement covered in our 2011 Mid-Year FCPA Update), Ralph Lauren Corporation (2013 non-prosecution agreement covered in our 2013 Mid-Year FCPA Update), and PBSJ Corporation (2015 deferred prosecution agreement covered in our 2015 Mid-Year FCPA Update). In November 2015, SEC Enforcement Director Ceresney announced a new threshold requirement for companies hoping to secure a deferred or non-prosecution agreement with the SEC in the future.  At the ACI’s annual FCPA Conference, Ceresney stated that only those companies who self-report the misconduct in question will be eligible for these alternative resolution vehicles.  But even then, self-reporting does not guarantee a deferred or non-prosecution agreement, as the ultimate decision will continue to be based upon the factors set forth in the SEC’s 2001 “Seaboard Report.”  Indeed, as noted in our 2015 Mid-Year FCPA Update, FLIR Systems Inc. self-disclosed corrupt payments resulting in a 2015 FCPA resolution with the SEC and still was subjected to a cease-and-desist proceeding. 2015 FCPA ENFORCEMENT LITIGATION           Lawrence Hoskins On August 13, 2015, the Honorable Janet Bond Arterton of the U.S. District Court for the District of Connecticut issued an important decision interpreting the scope of the FCPA’s anti-bribery provisions.  The ruling came in response to former Alstom S.A. executive Lawrence Hoskins’s motion to dismiss certain charges pending against him, but its well-reasoned conclusions should have ramifications beyond this case. As reported in our 2015 Mid-Year FCPA Update, Hoskins–the only one of four former Alstom executives to challenge DOJ’s charges–moved in June 2015 to dismiss the lead conspiracy charge in the third superseding indictment.  Hoskins argued that because he was not himself an “issuer” or “domestic concern,” and is not alleged to have acted corruptly “while the territory of the United States,” the only avenue for DOJ to sustain a conviction would be prove that he is an “agent” of a “domestic concern” (here, Alstom’s U.S. subsidiary).  Hoskins in fact worked for an Alstom entity in Europe during the relevant period, and the degree to which he was involved in the U.S. entity’s operations is a key point of contention.  DOJ responded by filing its own motion to preclude Hoskins from raising this argument at trial, contending that even if it is unable to prove Hoskins was an agent of Alstom’s U.S. subsidiary, it is enough to establish that Hoskins conspired with or aided and abetted a domestic concern. The court sided with Hoskins, holding that a non-resident foreign national cannot be subject to criminal liability under the FCPA where he is not an agent of a domestic concern and does not act within the United States under aiding and abetting or conspiracy theories of liability.  In a comprehensive, 21-page opinion analyzing the FCPA’s text and legislative history, Judge Arterton concluded that Congress had “carefully delineated the class of persons covered” under the FCPA “to address concerns of overreaching,” and thus “did not intend to impose accomplice liability on non-resident foreign nationals who were not subject to direct liability.”  As a result, the court held that conspiracy / aiding and abetting liability on these facts could not withstand the Gebardi principle, which holds “that where Congress chooses to exclude a class of individuals from liability under a statute, [DOJ] may not override the Congressional intent not to prosecute that party by charging it with conspiring to violate a statute that it could not directly violate.”  Importantly as to the potential scope of this decision, Judge Arterton also held that non-resident foreign nationals who do not physically enter the United States cannot be held to have conspired “while in the territory of the United States.”  The court did not dismiss the count in its entirety, however, reasoning that if the government establishes that Hoskins was an agent of a domestic concern and, therefore, subject to direct FCPA liability, the Gebardi principle would not preclude his prosecution for conspiracy to violate the FCPA.  DOJ has filed a motion for reconsideration, which Judge Arterton has taken under advisement. On August 14, 2015, Judge Arterton ruled on several outstanding pre-trial and discovery motions related to Hoskins’s central defense that he was not an agent of Alstom’s U.S. subsidiary.  Each party had filed motions to compel the production (Hoskins) or preclude the introduction (DOJ) of evidence relating to the general course of Hoskins’s interactions with Alstom’s U.S. subsidiary, as opposed to his interaction narrowly in the context of the project in which corrupt payments were allegedly made.  The court granted in part and denied in part each side’s motions, reasoning that Hoskins’s overall “course of dealings” with the U.S. subsidiary “could provide context and be circumstantially relevant” to whether Hoskins acted as the subsidiary’s agent in the context of the specific transaction at issue.  However, Judge Arterton significantly narrowed Hoskins’s requests for broad categories of documents generally related to Alstom’s corporate structure and Hoskins’s role and responsibilities with respect to all Alstom entities. The balance of 2015 was dominated by disputes among Hoskins, DOJ, and Alstom regarding the production of Alstom documents located in France that are required to be produced pursuant to the court’s August 14, 2015 ruling.  Alstom claims that producing these documents directly to Hoskins would violate France’s blocking statute.  DOJ thus has issued a supplemental mutual legal assistance treaty (“MLAT”) request to the French government for these documents.  Trial is currently scheduled for April 2016.           Dmitrij Harder We reported in our 2015 Mid-Year FCPA Update on the January 2015 indictment of Dmitrij Harder on FCPA, Travel Act, and international money laundering charges for allegedly corrupt payments made to the sister of a European Bank for Reconstruction and Development (“EBRD”) official.  Since then, the parties have been active briefing numerous pre-trial motions. Harder has filed two separate motions to dismiss all 14 counts of the indictment, as well as a motion to suppress statements that he made to federal agents during what he claims was a three-hour, custodial interrogation undertaken without Miranda warnings after Harder landed at JFK International Airport following a flight from Moscow.  In the motions to dismiss, Harder argues that:  (1) DOJ has failed to allege facts demonstrating that he made the payments to the EBRD official’s sister with knowledge that the payments would be passed along to her brother, the foreign official; (2) the provision of the FCPA that renders employees of “public international organizations” “foreign officials” is unconstitutional; and (3) the money laundering charges–which are premised upon the same alleged payments charged as FCPA violations–violate the merger doctrine.  With respect to the first motion, DOJ obtained a superseding indictment on December 15, 2015 with new language that may address, in part, Harder’s claims that DOJ has failed to allege an FCPA violation.  With respect to the second motion, the President is empowered to designate, by Executive Order, entities as “public international organizations” and whose employees, therefore, are “foreign officials” within the meaning of the FCPA.  President George H.W. Bush designated the EBRD as a public international organization by Executive Order on June 18, 1991.  Harder challenges this grant of authority to the President as unconstitutional under the non-delegation doctrine, and also argues that the term “public international organization” is unconstitutionally vague. For its part, DOJ has among other things moved to preclude Harder from making arguments at trial that could result in jury nullification.  In particular, the Government claims that there is evidence that unless restrained Harder may attempt to argue that paying bribes is a “necessary evil” for U.S. companies hoping to compete in certain foreign countries, a premise DOJ disputes as untrue and more importantly irrelevant as a matter of law. The Honorable Paul S. Diamond of the U.S. District Court for the Eastern District of Pennsylvania held a hearing on Harder’s suppression motion on December 10, 2015, but no ruling is yet shown on the public docket sheet.  Trial currently is scheduled for May 2016.           Magyar Telkom Defendants The SEC’s long-running FCPA civil enforcement action against three former senior executives of Magyar Telekom, Plc.‑‑Andras Balogh, Tamas Morvai, and Elek Straub–continued to move forward in 2015.  Now four years into the case, the parties have completed fact and expert discovery and filed cross-motions for summary judgment on three main issues:  (1) whether the Court has personal jurisdiction over the defendants; (2) whether the applicable five-year statute of limitations has run on the conduct; and (3) whether the defendants used “the mails or any means or instrumentality of interstate commerce” through e-mails that were sent in connection with the alleged bribery scheme.  These motions substantially revive arguments rejected at the motion-to-dismiss stage by the Honorable Richard J. Sullivan of the U.S. District Court for the Southern District of New York, as described in our 2013 Mid-Year FCPA Update.  The motions are now fully briefed and awaiting disposition.           Haiti Teleco Defendants We discussed in our 2015 Mid-Year FCPA Update the Eleventh Circuit’s February 2015 affirmation of former Director of International Relations for Télécommunications d’Haiti S.A.M. (“Haiti Teleco”) Jean Rene Duperval’s money laundering convictions and nine-year sentence.  Duperval’s petition for rehearing en banc was denied on August 20, 2015, after which Duperval petitioned the Supreme Court for writ of certiorari.  The Supreme Court is expected to rule on the petition in January 2016. Another 2015 development in the long-running Haiti Teleco prosecutions is the denial of former Terra Telecommunications vice president Carlos Rodriguez’s Rule 33 motion for a new trial.  As reported in our 2015 Mid-Year FCPA Update, Rodriguez presented a declaration from Terra Telecommunications’ former general counsel contradicting evidence presented at trial that both individuals were present during a meeting that discussed bribes to Haiti Teleco officials.  The general counsel reportedly did not testify at Rodriguez’s trial based on the advice of counsel.  On September 2, 2015, Judge Jose E. Martinez of the U.S. District Court for the Southern District of Florida denied Rodriguez’s motion, finding that Rodriguez’s motion was time-barred and that Rodriguez’s newly discovered evidence was solely impeachment evidence.  On September 18, 2015, Rodriguez filed a motion for reconsideration based on “actual innocence,” contending that his lack of knowledge of a conspiracy to defraud permits a motion that is otherwise time-barred.  This motion also was denied on December 4, 2015, and Rodriguez is appealing this decision to the U.S. Court of Appeals for the Eleventh Circuit.           Andres Truppel We originally covered the December 2011 indictment of eight former Siemens AG executives and third-party agents in our 2011 Year-End FCPA Update.  For years, these charges remained stagnant on the docket as all of the defendants are foreign citizens located abroad.  That changed for at least one of the defendants on September 30, 2015, when former Siemens Argentina CFO Andres Truppel appeared before the U.S. District Court for the Southern District of New York and pleaded guilty to one count of conspiracy to violate the FCPA’s anti-bribery and accounting provisions.  As reported in our 2014 Mid-Year FCPA Update, Truppel agreed to cooperate with DOJ’s ongoing investigation and pay restitution in a previous settlement with the SEC.    Sentencing before the Honorable Denise L. Cote has yet to be scheduled.  Criminal charges against the remaining Siemens defendants remain pending. 2015 SENTENCING DOCKET FOR FCPA AND FCPA-RELATED CHARGES Twelve defendants were sentenced on criminal FCPA and FCPA-related charges in 2015.  Prison sentences ranged from probationary, non-custodial sentences to four years in prison.  Interestingly, the data shows that one of the most pertinent factors in the sentencing of a defendant involved in an FCPA prosecution is not the FCPA charge, but rather whether the defendant additionally (or instead) faces a money laundering charge.  Whereas the FCPA carries a statutory maximum of five years per violation, the statutory maximum for money laundering is four times greater, or 20 years.  Further, the way in which sentences for money laundering offenses are calculated pursuant to the U.S. Sentencing Guidelines generally leads to higher advisory prison terms presented to the Court.  Indeed, the longest sentence ever handed down in an FCPA case (15 years imposed upon Joel Esquenazi in 2011) involved more money laundering than FCPA counts of conviction. The sentences imposed in FCPA and FCPA-related cases (including foreign official bribe recipients charged only with money laundering offenses) in 2015 follows.  Although sentences in each category vary by a wide degree depending upon the unique facts of the given case, the average sentence for FCPA convictions not including a money laundering count was 17.5 months, while the average of those including a money laundering count was twice as long, at 35 months. Defendant Sentence Date Court (Judge) $ Laundering Conviction? Asem Elgawhary 42 months 03/23/15 D. Md. (Chasanow) Yes (no FCPA charge) Benito Chinea 48 months 03/27/15 S.D.N.Y. (Cote) No Joseph DeMeneses 48 months 03/27/15 S.D.N.Y. (Cote) No Joseph Sigelman 0 months 06/16/15 D. N.J. (Irenas) No Knut Hammarskjold Time served (0.5 months) 09/14/15 D. N.J. (Irenas) No Gregory Weisman 0 months 09/10/15 D. N.J. (Irenas) No James Rama 4 months 10/09/15 E.D. Va. (Lee) No Ernesto Lujan 24 months 12/4/2015 S.D.N.Y. (Cote) Yes Tomas Clarke 24 months 12/08/15 S.D.N.Y. (Cote) Yes Jose Hurtado 36 months 12/15/15 S.D.N.Y. (Cote) Yes Vadim Mikerin 48 months 12/15/15 D. Md. (Chuang) Yes (no FCPA charge) Vicente Garcia 22 months 12/16/15 N.D. Cal. (Breyer) No [WHERE WE NORMALLLY DISCUSS] FCPA OPINION PROCEDURE RELEASES But in 2015, for the first time in 10 years, there were no FCPA opinion procedure releases.  By statute, DOJ must provide a written opinion at the request of an issuer or domestic concern stating whether DOJ would prosecute the requestor under the anti-bribery provisions for prospective (not hypothetical) conduct it is considering.  Published on DOJ’s FCPA website, these releases provide valuable insights into how DOJ interprets the statute, although only parties who join in the requests may rely upon them authoritatively. Whether the absence of any opinion procedure releases in 2015 marks a trend of diminished use of this tool remains to be seen.  From our perspective, the robust library of 61 opinion procedure releases over the past 35 years, coupled with the 100-plus page FCPA Resource Guide published jointly by DOJ and the SEC in 2012, not to mention the copious detail provided in many DOJ and SEC settlement documents and speeches, provide abundant guidance on how the authorities interpret the FCPA.  Simultaneously, the uptick in FCPA litigation derivative of DOJ’s increased focus on individual defendants is providing a growing body of independent, judicial case law defining the statute’s contours.  Finally, much more so than when the statute was passed, there is a substantial industry of experienced private-sector practitioners able to provide companies with opinions well-sourced in DOJ and SEC authorities, even if they do not carry the official imperator of DOJ. Ultimately, we do expect that the usage of FCPA opinion procedure releases–which have averaged fewer than two per year in any event–will decline.  Nevertheless, the process remains available for when the right situation presents itself, which makes the FCPA unique amongst criminal statutes. NOT QUITE FCPA ENFORCEMENT ACTIONS – PART II Periodically there is debate within the FCPA community about whether a particular case should be categorized as an FCPA enforcement action.  As last discussed in our 2013 Mid-Year FCPA Update, because the FCPA’s books-and-records and internal controls provisions apply broadly to a wide variety of accounting misconduct that has no connection to foreign bribery, categorization of these cases can break out into shades of gray. One case from 2015 that we do not count as an FCPA enforcement action is that involving Houston-based oil and gas exploration company Hyperdynamics Corporation.  On September 29, 2015, the SEC brought a settled cease-and-desist proceeding to resolve allegations concerning the company’s operations in the Republic of Guinea.  In a five-page order, the SEC alleged that between 2007 and 2008 Hyperdynamics paid $130,000 to two entities for public relations and lobbying services, only to find out later that the two entities not only were related to one another, but were controlled by one of its employees in Guinea.  The company agreed to pay a $75,000 civil penalty for the alleged accounting violations, even though there was no allegation of corrupt payments to a government official and, from the public documents, it would appear just as (if not more) likely that the payments were embezzled by the employee. The SEC’s November 30, 2015 action against Standard Bank Plc is another example.  As described below, on that same day the London-based bank reached a settlement with the U.K. Serious Fraud Office to resolve U.K. Bribery Act 2010 charges arising from alleged corruption in Tanzania.  Standard Bank acted as a lead manager for a $600 million sovereign debt offering by the Tanzanian government.  In this offering, Standard Bank allegedly failed to disclose that its affiliate was to pay $6 million of the proceeds to an entity with an undefined role in the transaction and for which “red flags” suggested the payment was to induce Tanzanian officials to select Standard Bank as manager for the offering.  Standard Bank is not a U.S. issuer, and thus not subject to the SEC’s FCPA jurisdiction.  Instead, the SEC charged the bank with obtaining money in a securities offering by means of materially untrue statements or omissions.  Standard Bank agreed to pay a $4.2 million civil penalty and to disgorge $8.4 million in profits, although the latter sum was deemed satisfied by the bank’s payment to the Serious Fraud Office in connection with the U.K. settlement. OTHER U.S. TRANSNATIONAL ANTI-CORRUPTION PROSECUTIONS           Further Charges in FIFA Corruption Investigation As promised in our 2015 Mid-Year FCPA Update, we have continued to follow developments in the unfolding corruption scandal involving Fédération Internationale de Football Association, commonly known as “FIFA.”  On December 3, 2015, there was yet another pre-dawn raid on a luxury Zurich hotel that resulted in the arrests of the current presidents of the regional confederations of North America, Central America, and the Caribbean (“CONCACAF”) and South America (“CONMEBOL”).  Fourteen hours later, the U.S. Attorney’s Office for the Eastern District of New York unsealed a 92-count superseding indictment, charging 16 additional defendants (on top of 20 charged earlier in the investigation) for their role in a decades-long kickback scheme in which sports marketing companies allegedly bribed certain FIFA officials in exchange for marketing rights for the World Cup and other prestigious tournaments, such as the Copa America and Gold Cup.  The newly charged defendants include seven current or former officials from the CONCACAF region and nine current or former officials from the CONMEBOL region.  Of the 16 individuals charged, five are either current or former members of FIFA’s Executive Committee.  In addition, DOJ unsealed guilty pleas for eight individuals, including three of the defendants indicted in May 2015 and most notably former CONCACAF President Jeffrey Webb. The second half of 2015 also saw significant movement on the extradition front, as Switzerland’s Federal Office of Justice has approved DOJ’s extradition requests for five foreign nationals arrested in Switzerland during the May 2015 sweep.  Swiss authorities also have continued their own, parallel criminal investigation into the awarding of the 2018 and 2022 World Cups to Russia and Qatar respectively.  Perhaps one of the more significant developments to emerge from the Swiss investigation is the opening of criminal proceedings against departing FIFA President Joseph “Sepp” Blatter for criminal mismanagement of FIFA funds.  The charges stem in part from a multi-million dollar television rights deal with former FIFA Executive Committee member Jack Warner, who was charged by U.S. authorities in May. Clearly this is an investigation that will be making headlines in the international anti-corruption space, even if not FCPA, for some time to come.  We will continue to monitor and report on developments.           Arrests in U.N. Corruption Investigation On October 6, 2015 the U.S. Attorney’s Office for the Southern District of New York announced bribery and related charges against John Ashe, the former U.N. Ambassador for Antigua and Barbuda, and President of the U.N. General Assembly; Frances Lorenzo, the former U.N. Deputy Ambassador for the Dominican Republic; and four businessmen from whom Ashe and Lorenzo allegedly accepted bribes.  The indictment alleges that between 2011 and 2015, Ashe (with the assistance of Lorenzo) received $1.3 million in bribes from Chinese businesspersons Ng Lap Seng, Jeff C. Yin, Shiwei Yan, and Heidi Hong Piao to advance the interests of these businesspersons’ clients before the United Nations and in Antigua, including most notably a plan to build a U.N.-sponsored conference center in Macau.  The allegedly corrupt payments to Ashe took the form of cash, a family vacation, the construction of a private basketball court at Ashe’s home, and a monthly salary for his wife. Ashe currently is charged only with tax offenses related to his failure to report the illicit income on his personal income tax returns.  The other five defendants are charged with bribery involving federal programs and conspiracy to commit the same, and Yan and Piao additionally are charged with money laundering.  No trial date has yet been set. 2015 KLEPTOCRACY FORFEITURE ACTIONS Another prong of DOJ’s transnational anti-corruption strategy–one of increasing importance in recent years–is its Kleptocracy Asset Recovery Initiative.  This initiative utilizes civil forfeiture actions to freeze and ultimately recover the proceeds of foreign corruption, typically from the foreign officials believed to have personally enriched themselves through bribes or embezzlement.  In some recent cases, DOJ has repatriated the funds seized in these actions to the countries from which they were stolen. In addition to the activity described in our 2015 Mid-Year FCPA Update, DOJ brought the following kleptocracy-related actions in 2015: On July 14, 2015, DOJ filed a civil forfeiture complaint in the U.S. District Court for the Central District of California seeking the forfeiture of assets worth approximately $12.5 million connected to Philippine businesswoman Janet Napoles, including several properties, a stake in a consulting company, and a Porsche Boxster.  DOJ alleges that Napoles paid tens of millions of dollars in bribes and kickbacks to Philippine politicians and officials in connection with government contracts awarded to Napoles’s NGOs for development assistance and disaster relief.  Naples’s NGOs allegedly failed to provide or under-delivered on the promised support, and Napoles took the government funds for her own personal use. On November 9, 2015, DOJ returned to the Republic of Korea approximately $1.1 million in forfeited assets associated with former president Chun Doo Hwan’s graft schemes.  Hwan was convicted by a Korean court in 1997 of accepting more than $200 million in bribes from Korean businesses. In our 2015 Mid-Year FCPA Update, we reported on a civil forfeiture action DOJ filed in the U.S. District Court for the Southern District of New York seeking the forfeiture of approximately $300 million in assets allegedly traceable to corrupt payments by two Russian telecommunications companies to a close relative of the President of Uzbekistan in return for access to the Uzbek telecommunications market.  On November 23, 2015, the Honorable Andrew L. Carter, Jr. issued an order to show cause why a default judgment should not be granted.  No response was filed prior to the December 21 deadline set by the Court, meaning that a forfeiture may issue (although as of the date of this publication, it has not).  Meanwhile, U.S. authorities have reportedly enlisted the assistance of Swedish and Swiss authorities to seize another $670 million, bringing the total potential asset forfeiture close to $1 billion. On December 9, 2015, DOJ filed a motion to dismiss a forfeiture action against approximately $115 million involved in alleged bribe payments and money laundering by former FCPA defendants James H. Giffen and his company Mercator Corporation.  As reported in our 2010 Year-End FCPA Update, Giffen was indicted in 2004 on 65 counts stemming from an alleged scheme to funnel more than $78 million to high-level government officials in Kazakhstan to secure oilfield drilling rights.  But the prosecution unraveled after he raised an “act of state” defense, claiming that he was acting at the behest of the Central Intelligence Agency.  Giffen ultimately pleaded guilty to a misdemeanor tax offense and was sentenced to time served and a $25 assessment.  Mercator was sentenced to a $32,000 fine on a single FCPA count associated with the gifting of two snowmobiles.  Pursuant to a settlement agreement, the $115 million previously seized in connection with the matter was released to an independent Kazakh foundation targeting the needs of poor youth in Kazakhstan. 2015 YEAR-END FCPA-RELATED PRIVATE CIVIL LITIGATION Our consistent refrain in these semi-annual updates is that the FCPA provides for no private right of action.  Nevertheless, there are a variety of causes of action that can and have been used–with varying degrees of success–to pursue private redress in the United States for public corruption committed abroad.  Indeed, the second half of 2015 saw a continued uptick in private, collateral lawsuits arising from the announcement of FCPA investigations and resolutions, further underscoring that the risks of corruption extend beyond negotiations with the U.S. government. Shareholder Lawsuits A frequent collateral effect of the announcement of an FCPA enforcement action, or even investigation, is shareholder litigation.  Indeed, it is now commonplace for a company’s announcement of an FCPA event to be followed immediately by a plaintiff firm’s solicitation for plaintiffs to bring a private lawsuit.  Historically, this has meant either a class action lawsuit brought on behalf of shareholders whose stock value has dropped allegedly as a result of the misconduct or a shareholder derivative lawsuit brought against the company’s directors for allegedly violating their fiduciary duties to run the business in a compliant manner.  Sometimes, companies even find themselves the unfortunate targets of both types of lawsuits, in addition to the underlying government investigation.           Avon Products, Inc. As outlined in our 2014 Year-End FCPA Update, on October 24, 2014 Avon shareholders filed a second amended complaint in a securities fraud “stock drop” lawsuit pending in the U.S. District Court for the Southern District of New York alleging that Avon falsely inflated its stock price by concealing the FCPA violations that ultimately resulted in the company’s December 2014 settlement with DOJ and the SEC.  According to the complaint, Avon falsely implied that its success in the Americas and China was a result of growth in direct sales when, in fact, its success was due to illegal bribes.  Following mediation before the Honorable Layn R. Phillips, the parties entered into a $62 million settlement agreement on August 18, 2015.  The settlement agreement contemplates certification of a class of all persons and entities who purchased or otherwise acquired Avon’s common stock from July 31, 2006 through and including October 26, 2011–the day before Avon disclosed in its Form 10-Q that it had received an SEC subpoena.  A motion for final approval of the settlement and plan of allocation remains pending as of the date of this publication.           Net1 UEPS Technologies, Inc. On September 16, 2015, telecommunications company Net1 secured a victory in the 2013 securities-fraud class action that alleged that the company misled investors by failing to disclose that a significant contract with the South African government might be invalidated because of corruption concerns.  U.S. District Judge Edgardo Ramos of the Southern District of New York dismissed the claims against Net1, its CEO, and CFO, finding that the plaintiffs failed to allege adequately that Net1 made material misrepresentations about the risk, or that the CEO or CFO had the requisite intent to defraud investors when they failed to disclose the events in question.  The dismissal came just a few months after the SEC concluded its FCPA investigation of Net1, declining to bring an enforcement action.  A DOJ investigation reportedly remains open.           Petróleo Brasileiro S.A. Between December 2014 and December 2015, Petrobras was named as a defendant in one putative class action and 28 individual securities-fraud actions filed in the U.S. District Court for the Southern District of New York.  The suits allege that Petrobras, the Brazilian state-owned energy company that has ADRs and ADSs traded on the New York Stock Exchange, misrepresented facts and failed to disclose a multi-year, multi-billion dollar money-laundering and bribery scheme. The suits have been consolidated before the Honorable Jed S. Rakoff.  Judge Rakoff promptly trimmed the complaints by dismissing certain Exchange Act and Securities Act claims concerning debt securities purchased on the international markets (thus lacking a domestic connection) and purchased before 2010 (thus barred by the statute of repose), as well as certain state law claims barred by the Securities Litigation Uniform Standards Act. RICO Actions One of the most interesting and developing areas of FCPA-related private civil litigation involves claims brought pursuant to the Racketeer Influenced and Corrupt Organizations (“RICO”) Act.  Passed into law in 1970, principally as a tool to combat organized crime families, the RICO statute permits a private litigant who has been “damaged in his business or property” by a “pattern” of “racketeering activity” to bring a suit for up to three times his loss. More and more frequently, we have seen foreign government entities, whose own officials solicited bribes, bring RICO lawsuits against the U.S. companies that allegedly paid them (leading to some ironic allegations as to which entity is truly the “corrupt organization”).           PEMEX v. Hewlett-Packard Co. In our 2015 Mid-Year FCPA Update, we noted that on June 25, 2015 the Honorable Beth Labson Freeman of the U.S. District Court for the Northern District of California heard arguments regarding Hewlett-Packard Co.’s (“HP’s”) motion to dismiss Petróleos Mexicanos’s (“PEMEX”) civil RICO lawsuit on jurisdictional and other grounds.  PEMEX sued HP on December 2, 2014, alleging that HP engaged in a bribery scheme to win government contracts in Mexico.  The suit followed HP’s resolution of FCPA charges with DOJ and the SEC arising, in part, out of PEMEX contracts. On July, 13, 2015, Judge Freeman granted, in part, HP’s motion to dismiss, but allowed PEMEX leave to amend various deficiencies in the complaint.  PEMEX did so, after which HP immediately moved to dismiss the complaint yet again, this time alleging that PEMEX’s own recent SEC filing barred its continued maintenance of this suit.  In the SEC filing PEMEX asserted that it had conducted an internal investigation into the conduct alleged in the DOJ and SEC settlement documents and found no evidence that improper payments occurred in connection with the contracts at issue.  Subsequently, the parties submitted a joint stipulation to dismiss the suit with prejudice on November 4, 2015.  No additional details pertaining to an agreement between HP and PEMEX are publicly available.           Yulia Tymoshenko v. Dmytro Firtash As reported in our 2014 Year-End FCPA Update, Judge Kimba M. Wood of the U.S. District Court for the Southern District of New York dismissed a RICO lawsuit brought by former Ukrainian Prime Minister Yulia Tymoshenko and others against Ukrainian natural gas oligarch Dmytro Firtash with leave to amend the complaint.  Plaintiffs thereafter filed an amended complaint alleging that Firtash and his co-defendants laundered money through fraudulent real estate transactions to help fund an unfounded and malicious prosecution that resulted in Tymoshenko’s imprisonment. On September 18, 2015, Judge Wood granted a motion to dismiss this amended pleading because it did “not plead a predicate act of racketeering that proximately caused Plaintiffs’ injuries.”  Judge Wood dismissed the amended complaint with prejudice “[g]iven that this is now Plaintiff’s fourth unsuccessful attempt to plead RICO claims.”           Orthofix International N.V. In our 2014 Year-End FCPA Update, we reported on the RICO action brought against Orthofix International N.V. by the Mexican government agency Instituto Mexicano del Seguro Social (“IMSS”).  The lawsuit was filed after Orthofix resolved an FCPA enforcement action with U.S. authorities that arose from corrupt payments that its Mexican subsidiary allegedly made to IMSS officials in exchange for healthcare device contracts. On February 10, 2015, Orthofix moved to dismiss the complaint, arguing that the U.S. District Court for the Eastern District of Texas lacked subject matter jurisdiction over Orthofix’s extraterritorial conduct, and that IMSS failed to plead a viable RICO claim.  Following the initial motion to dismiss, IMSS amended its complaint twice, and each time, Orthofix subsequently moved to dismiss on the grounds that RICO does not apply extraterritorially.  Then, on November 19, 2015, the Court granted the parties’ joint motion to stay the litigation until February 1, 2016, as the parties reportedly have entered into a settlement agreement, which currently is pending approval by Orthofix’s board of directors and confirmation that the settlement is permissible under Mexican law.           Rio Tinto PLC We reported in our 2014 Year-End FCPA Update on Judge Richard M. Berman’s December 17, 2014 order rejecting defendant Vale, S.A.’s and BSG Resources’forum non conveniens motion to dismiss the RICO lawsuit brought by Rio Tinto PLC in the Southern District of New York.  In its suit, Rio Tinto alleges that the defendants and their representatives conspired to steal Rio Tinto’s trade secrets and then utilized them to corruptly procure Guinean iron-ore mining concessions that had previously belonged to Rio Tinto. But on November 20, 2015, Judge Berman dismissed the suit with prejudice, finding that Rio Tinto failed to file its complaint within the four-year statute of limitations.  The Court found that Rio Tinto’s injury became known in December 2008, when the Guinean Government informed Rio Tinto that it had lost its mining rights and announced that it was awarding the rights to BSG Resources.  Rio Tinto unsuccessfully argued that the statute of limitation should be tolled to 2010, when the defendants announced their joint venture.  In his opinion, Judge Berman noted that “[t]he statute of limitations begins to run on the date that the plaintiff learned of his or her injury, not on the date that the plaintiff learned that his or her injury may have resulted from racketeering activity,” and that Rio Tinto had “failed to demonstrate that it exercised due diligence in pursuing discovery of its claim during the period it seeks to have tolled.” Other Civil Litigation           Bio-Rad Whistleblower Lawsuit As we reported in our 2015 Mid-Year FCPA Update, the former general counsel for Bio-Rad Laboratories, Inc., Sanford S. Wadler, filed a whistleblower lawsuit against the company and numerous company officers and directors in the U.S. District Court for the Northern District of California, alleging violations of the anti-retaliation provisions of both the Sarbanes-Oxley Act (“SOX”) and Dodd-Frank.  Wadler claims that he was terminated unlawfully, after nearly 25 years with the company, when he continued to pursue what he believed was evidence of corruption associated with the company’s operations in China even after an internal investigation undertaken by outside counsel found no such evidence. The Bio-Rad defendants moved to dismiss, but in a ruling dated October 23, 2015 Chief Magistrate Judge Joseph C. Spero allowed the majority of claims to proceed to trial.  Significantly, Judge Spero held that individual board members may be held personally liable for allegedly retaliatory activity they engage in as part of their corporate duties under both SOX and Dodd-Frank, although the SOX claims he found were untimely as against the director defendants.  The Court further waded into the hotly contested debate as to whether one such as Wadler who reports suspected misconduct internally within the company but not externally to the SEC is a “whistleblower” protected by Dodd-Frank’s anti-retaliation provisions, finding that he was.  (For more on the circuit split on this issue, please see our recent webcast, Navigating the Minefield of Dodd-Frank’s Whistleblower Provisions and the FCPA).  When the smoke cleared, Judge Spero allowed the anti-retaliation claims under one or both statutes to proceed against the company, its directors, and its CEO.  Bio-Rad sought a certificate for an interlocutory appeal, but this was denied by the Court on December 15, 2015.           Viktor Kozeny Served On December 3, 2015, businessman Viktor Kozeny was finally located and served with a summons to appear in the Supreme Court of New York County and defend against investors who claim he defrauded them during a 1990s Czech voucher privatization scheme.  Kozeny was tried for the alleged fraud in a municipal criminal court in Prague, but fled to the Bahamas.  In 2010, he was convicted in absentia and ordered to pay $410 million in restitution to his investors.  The investors then sought to enforce the Czech judgment against him in New York Supreme Court, but it was not until this year that he was located at his condominium in the Bahamas and served with a summons and the complaint, in addition to the Czech judgment against him. If he elects to return to the United States to defend this lawsuit, Kozeny would likely face other legal challenges.  As we reported most recently in our 2012 Mid-Year FCPA Update, Kozeny was indicted by a federal grand jury in the Southern District of New York in 2005 on FCPA charges associated with an allegedly fraudulent privatization scheme in Azerbaijan.  Kozeny was arrested in the Bahamas and spent 19 months in an island prison, but was released after the U.K. Privy Council blocked his extradition on jurisdictional grounds and also because, even if true, the transnational bribery allegations would not have constituted an offense against the law of the Bahamas had they taken place within the Bahamas.  Kozeny’s three co-defendants have since been convicted of FCPA violations, and it seems unlikely that he would tempt fate and return to the United States to defend a civil lawsuit.           Siemens AG FOIA Lawsuit As reported in our 2014 Year-End FCPA Update, non-profit media organization 100Reporters LLC has filed a Freedom of Information Act (“FOIA”) lawsuit against DOJ challenging its refusal to turn over records relating to its 2008 FCPA resolution with Siemens AG, as well as the compliance monitorship that followed.  Siemens and its former compliance monitor, Dr. Theo Waigel, have been permitted to intervene in the lawsuit and assert their interests. In 2015, DOJ produced its Vaughn Index justifying the FOIA bases for withholding the documents in question.  Summary judgment briefing has been set for the first half of 2016.  Gibson Dunn represents Dr. Waigel in this matter, as it did during the monitorship itself. 2015 INTERNATIONAL ANTI-CORRUPTION DEVELOPMENTS 2015 witnessed a surge in international anti-corruption prosecutions brought by foreign regulators.  Indeed, this may be the year where the center of gravity in transnational bribery prosecutions shifted eastward to London, or perhaps southbound to São Paulo.  Long gone are the days where general counsel could reliably count on one hand the number of regulators with whom they will need to interact in a wide-ranging anti-corruption investigation. Europe           United Kingdom Anti-corruption enforcement in the United Kingdom reached new heights in 2015.  The number of individuals convicted under the Bribery Act 2010 hit double digits, the first foreign corruption charges under the new statute were levied, including for violations of the much-discussed Section 7, and the Serious Fraud Office (“SFO”) entered into its first-ever deferred prosecution agreement. The year began with the first foreign-bribery cases brought under the Bribery Act, with three individuals arrested for $150,000 in allegedly corrupt payments to a Norwegian government official for the sale of decommissioned naval vessels, as described in our 2015 Mid-Year FCPA Update.  Not to coast on this milestone, the SFO followed up with its first-ever deferred prosecution agreement for its first-ever Section 7 foreign bribery offense, reached with Standard Bank Plc on November 30, 2015, as mentioned above.  The alleged conduct related to a bond sale for the government of Tanzania in which Tanzanian officials were paid a percentage commission on the transaction.  Penalties imposed on Standard Bank under the deferred prosecution agreement included a fine of $16.8 million; payment of $6 million compensation to Tanzania plus interest of just over $1 million; disgorgement of all of Standard Bank’s profits on the transaction amounting to $8.4 million, and the SFO’s costs of £330,000.  Further, as noted above Standard Bank reached a parallel resolution with the U.S. SEC.  For more information on the Standard Bank resolution, please see Gibson Dunn’s analysis, Serious Fraud Office v Standard Bank Plc: Deferred Prosecution Agreement. On December 18, 2015, the construction company Sweet Group PLC admitted guilt to a Section 7 offense for allegedly failing to prevent its subsidiary from paying bribes to win a hotel construction contract in Dubai.  It is unclear why Sweet Group admitted guilt at this stage, although we did note in our 2014 Year-End FCPA Update that tensions had developed between the SFO and Sweet Group regarding the appropriate observation of legal privilege covering the company’s internal investigation.  In announcing the company’s decision to plead guilty, Sweet Group’s CEO simultaneously stated that the company is pulling out of the Middle East altogether. This year also saw the U.K. Financial Conduct Authority (“FCA”) impose its highest-ever fine on a firm for alleged failings in preventing financial crime risks.  On November 26, 2015, Barclays Bank PLC was ordered to pay more than £72 million to disgorge all profits and pay a penalty in connection with a £1.88 billion transaction that the bank allegedly arranged for high net-worth, politically exposed clients in 2011 and 2012.  The FCA found that Barclays “went to unacceptable lengths to accommodate” certain of these clients and “did not obtain information that it was required to obtain to comply with financial crime requirements.”  Notably, there was no finding that any actual financial crime was facilitated by the alleged control lapse.  However, the FCA is clearly of the view that the risk of financial crime is enough to endanger the integrity of the U.K. financial system and necessitate strong enforcement measures. In October 2015 the U.K.’s National Crime Agency arrested five Nigerian nationals, including former Oil Minister Deziani Alison-Madueke, on suspicion of bribery and money laundering.  Raids in relation to these arrests were conducted simultaneously in Nigeria and London.  The following month, another former Nigerian Oil Minister, Dan Ete, brought an application to unfreeze $85 million held in English accounts pursuant to a mutual legal assistance request from Italian authorities.  The funds are alleged to be the corrupt proceeds of a deal under which a company partially owned by Ete acquired a valuable oil concession from the Nigerian government.  Judgment is currently pending.  Finally, in July 2015 the SFO won a judgment upholding an order to freeze assets that it had obtained pursuant to a mutual legal assistance request from the United States.  The assets were shares in the Canadian oil company Caracal Energy Inc., held through a U.K. account by Ikram Saleh, a former a staff member at Chad’s embassy in Washington D.C.  Saleh allegedly obtained the shares as part of a corrupt scheme to promote the interests of Caracal in Chad.  As reported in our 2015 Mid-Year FCPA Update, related confiscation proceedings are ongoing in U.S. courts.           France We covered in our 2013 Year-End FCPA Update the July 2013 decision of a Paris regional criminal court acquitting Total S.A., Vitol Group, and numerous individual defendants of foreign corruption charges arising out of the U.N. Oil-For-Food Program in Iraq.  Among other things, the three-judge panel held that the allegedly corrupt payments in question were made to the Government of Iraq rather than to any particular Iraqi official, and thus did not fall within the definition of a bribe under French law.  Further, with respect to the oil companies, the court noted that each had resolved charges arising from the same conduct in the United States, and for the first time applied the principle of double jeopardy in the international setting.  After more than two years of waiting, the case was finally argued in the appellate courts in November 2015.  There is no word yet on when a decision may come down. On the legislative front, in July 2015 Finance Minister Michel Sapin proposed legislation that would establish a new anti-corruption agency, create a legal basis for the imposition of independent monitors akin to those imposed by U.S. enforcement authorities in numerous corporate settlements, and for the first time impose a legal requirement that French businesses adopt internal anti-corruption controls.  The proposed new agency would replace the existing Service Central de Prévention de la Corruption, which has limited abilities to enforce anti-corruption laws.  The legislation has yet to be finalized, so we will continue to follow this development for our clients.           Italy In October 2015, a judge in Milan ordered Italian oil and gas services firm SaipemS.p.A. and three of its former senior executives, as well as two third-party agents, to stand trial for allegedly paying more than $220 million in bribes to the Algerian state-owned hydrocarbon firm Sonatrach in exchange for $9 billion in contracts.  Saipem’s parent company and several of its top executives were cleared of wrongdoing by the court.  Trial is now set to begin on January 25, 2016, with Saipem stating that it is “confident that it will be able to demonstrate that there are no grounds for the company to be held liable.”  On a related note, Saipem has publicly acknowledged that prosecutors in Milan are also probing a 2011 contract awarded to Saipem by Brazilian state-owned multinational energy corporation Petrobras. On July 9, 2015, the Corporate Governance Committee of Italian-listed companies (Comitato per la Corporate Governance) approved several amendments to Italy’s Corporate Governance Code, including recommendations that boards of directors give increased attention to anti-corruption risks.  While adherence to its principles is voluntary, the Code serves as the primary source of guidance regarding corporate governance for Italian-listed companies, and has inspired several legislative reforms of Italian corporate law.           Norway On November 5, 2015, Jo Lunder–the former CEO of U.S.-listed telecommunications company VimpelCom–was arrested by Norwegian officials on suspicions of corruption relating to business in Uzbekistan.  Lunder was released from custody a week later after a Norwegian court concluded that authorities lacked probable cause to suspect him of corruption, but Lunder and VimpelCom reportedly remain under investigation by Norway’s National Authority for Investigation and Prosecution of Economic and Environmental Crime (Økokrim), as well as Dutch and U.S. authorities. We reported in our 2014 Year-End FCPA Update on the corruption settlement of fertilizer manufacturer Yara International ASA, in which the company admitted that it had agreed to pay approximately $12 million in bribes to government officials in India, Libya, and Russia between 2004 and 2009.  Yara paid nearly $48 million to resolve the matter–the largest corporate fine levied in Norwegian history.  In July 2015, four former Yara executives were sentenced for their role in the alleged misconduct in India and Libya.  Former CEO Thorleif Enger was sentenced to three years in prison, former CLO Kendrick Wallace was sentenced to two-and-a-half years in prison, and former Deputy CEO Daniel Clauw and former Head of Upstream Activities Tor Holba were each given two-year prison terms.           Romania An unprecedented corruption investigation reaching the highest levels of the Romanian government caused Prime Minister Victor Ponta to resign his post in November 2015 following a July indictment on fraud and corruption charges.  These charges–the first ever levied against a sitting Romanian head of state–stem from alleged conduct that predates Ponta’s ascension to office, when he was a lawyer who purportedly forged expense claims to pay for luxury apartments and a car.  A separate investigation into an alleged conflict of interest during his time in office was stymied when Romania’s parliament–where Porta’s Social Democrat Party holds a comfortable majority–refused to lift his immunity from prosecution.  Porta denies all charges. In another high-profile matter, Mayor of Bucharest Sorin Oprescu has been detained on charges that he accepted bribes from city contractors.  According to the allegations, between 2013 and 2015 city officials required contractors with city contracts to kickback as much as 70% of their gross profits to city employees, with 10% going to Mayor Oprescu.  Oprescu is currently being held under house arrest.           Russia The Investigative Committee of the Russian Federation recently released a report on investigative activities during the first nine months of 2015, detailing that there were more than 30,000 corruption-related tips, resulting in more than 20,000 investigations, including nearly 10,000 related to the payment of bribes.  According to Prosecutor-General Yury Chaika, the charges brought against government officials over this period resulted in the imposition of 30 billion rubles ($460 million) in fines and forfeitures, of which 6 billion rubles ($92 million) was recouped.  This sum far exceeds prosecuting agencies’ achievements in 2014, when the claims pursued brought in 1.5 billion rubles ($23 million). Demonstrating the extreme challenges of the Russian corruption environment, however, Chaika has himself become embroiled in a scandal following a private investigation finding that Chaika’s sons and former wife engaged in various illicit activities and high-value offshore enterprises.  Presently, none of these revelations have prompted official inquiries and at least one Russian media outlet recently reported that the allegations against Chaika’s family members will not hinder his reassignment to the Prosecutor-General post in 2016.           Ukraine After the enactment of a series of anti-corruption laws in 2014, covered in our 2014 Year-End FCPA Update, the Ukrainian government has sought to implement these and other measures in 2015. This pursuit has had some success, but also has encountered obstacles.  For example, the newly created National Anti-Corruption Bureau delayed opening its doors from July to November.  But, shortly after beginning operations, on December 4, 2015 the agency registered its first three criminal corruption cases relating to embezzlement of state property totaling approximately $40 million.           Belarus On July 17, 2015, Belarus President Alexander Lukashenko signed into force a law designed to combat corruption.  The law imposes strict controls over the earnings of and property held by public officials, including by requiring certain defined categories of officials to file declarations of their financial holdings.  It also precludes from high-level public service all persons who have been terminated from employment in the past under “disreputable circumstances,” as well as strips persons convicted of certain offenses from receiving government pension benefits.  Finally, this law creates an institution for societal control over and input into the process of combatting corruption, allowing citizens to participate in the development of relevant legislation and to join committees on the fight against corruption. The Americas           Brazil Brazil maintained its prominence on the international anti-corruption stage in 2015, both from a legislative and enforcement perspective. On the legislative front, as reported in our 2015 Mid-Year FCPA Update, the country is further developing the legal framework associated with Law 12.846/2013 (the “Clean Company Act”).  Under Decree 8.420/2015, implemented March 18, 2015, Brazil’s Comptroller-General’s Office (“CGU”) has exclusive jurisdiction over allegations of foreign public corruption and–in certain situations–concurrent jurisdiction over allegations of corruption involving Brazilian officials.  In September 2015, the CGU provided a new benchmark for compliance programs in Brazil when it issued “Integrity Programs – Guidelines for Private Companies.”  The new CGU guidelines outline the five “pillars” that the CGU considers foundational to a corporate integrity program:  (1) commitment and support from senior management; (2) a compliance function with adequate authority and autonomy to implement the program; (3) the creation of a risk-based integrity program tailored to the company’s specific risk-profile according to factors such as the sectors in which it operates, its size, and its interactions with governmental officials; (4) structuring of corporate compliance rules, training, and internal investigative procedures; and (5) ongoing monitoring and testing of the compliance program.  The CGU instructs companies to treat these five elements as interdependent components that, taken together, help companies to continually improve their integrity programs. On the enforcement front, “Operation Car Wash”–so called because of the alleged use of a currency exchange and money transfer service at the Posto da Torre (Tower Gas Station) in Brasília to launder money–continues to be front-page news in Brazil.  Since opening the investigation in March 2014, authorities have indicted more than 170 defendants and obtained more than 60 convictions resulting in prison sentences totaling more than 680 years.  Additionally, more than 50 politicians are under investigation, including Delcídio do Amaral, the leader of the government coalition in the Senate and the first sitting senator to be arrested since the establishment of the 1988 Constitution, and Eduardo Cunha, the speaker of the lower house of Congress who now faces removal proceedings in the Chamber of Deputies. A number of companies under investigation have signed leniency agreements with Brazilian authorities, including the CGU, the Administrative Council of Economic Defense (“CADE”), and the Brazilian Federal Public Ministry (“MPF”).  Companies entering into these agreements provide information to the authorities in exchange for a reduction of penalties.  In August 2015, construction company Camargo Correa entered into a leniency agreement with the CADE, agreeing to pay a R$104 million fine.  In October 2015, advertising agencies Borghi/Lowe and FCB, part of the Interpublic Group, agreed to repay R$50 million as part of their leniency agreement with the MPF.  In November 2015, construction company Andrade Gutierrez agreed to pay a R$1 billion fine and admit to paying bribes in connection with its business with Petrobras and the 2014 FIFA World Cup as part of a leniency agreement with the CGU. In late December 2015, Brazilian prosecutors charged 12 former SBM Offshore NV (“SBM”) and Petrobras executives with corruption and racketeering after a new probe into alleged bribery involving both companies.  The charged individuals include former SBM Chief Compliance Officer Sietze Hepkema, a former senior partner at a major international law firm.  As discussed in our 2014 Year-End FCPA Update, Netherlands-based oil and gas industry service provider SBM paid Dutch authorities to resolve an international bribery-related enforcement action, concluding a two-and-a-half year inquiry into improper payments allegedly made by the company to sales agents and foreign officials in Angola, Brazil, and Equatorial Guinea between 2007 and 2011.  DOJ dropped its investigation of the company when the Dutch settlement was reached, but Brazilian authorities charged individuals based on allegations that at least $46 million in improper payments were made in Switzerland between 1998 and 2012 in connection with contracts for floating oil production, storage and offloading ships.  Notably, the indictment includes allegations that SBM’s internal investigation, conducted by an international law firm, covered up wrongdoing at the company’s request.  Prosecutors also alleged that Renato Duque, a former Petrobras executive in jail for other graft charges, asked for $300 million from SBM sales agents to help fund the ruling Workers’ Party’s 2010 election effort.           Canada In July 2015, Public Works and Government Services Canada (“PWGSC”), which conducts the majority of Canadian public sector procurements, made important revisions to its Integrity Regime.  The revisions address critiques that 2014 amendments to the Regime were too draconian in that they resulted in automatic 10-year debarments for all companies who themselves, or whose affiliates, had been convicted of certain offenses, including foreign bribery offenses.  With the new revisions, however, a Canadian supplier whose affiliate was convicted of a disqualifying offense may avoid debarment by establishing that it did not direct, influence, authorize, assent to, acquiesce or participate in the affiliate’s misconduct.  The revisions further reduce the period of debarment to five years for companies that cooperate with law enforcement authorities and undertake remedial actions.  This is a significant and welcome amendment for the not insubstantial number of companies with a presence in Canada who have within the past 10 years had a foreign subsidiary elsewhere in the world plead guilty to an FCPA bribery violation. Another interesting development occurred this year in the SNC-Lavalin Group Inc. prosecutions in Canada that we have been following for the past several years.  Lawyers for former employees charged with Corruption of Foreign Public Officials Act violations sought discovery from the World Bank Integrity Vice Presidency, which had provided information to Canadian prosecutors arising from its own investigation.  The Bank claimed immunity under the International Organizations Immunities Act, but the Ontario Superior Court held that the Bank waived this immunity by providing the evidence to state prosecutors.  The Supreme Court of Canada granted the Bank’s leave to appeal and a decision is pending.  In the meantime, the World Bank has announced that it is limiting its practice of sharing evidence compiled in its investigations with national authorities.           Guatemala In yet another example of a corruption investigation toppling a head of state, on September 2, 2015 Guatemalan President Otto Pérez Molina resigned from office and the following day was charged and arrested for his participation in an alleged customs kickback scheme dubbed La Linea (“The Line”), so called because importers would call a “hotline” to contact the government officials with whom they colluded.  The investigation was conducted by the International Commission Against Impunity in Guatemala (known by its Spanish acronym “CICIG”), an independent, international prosecutorial body under the authority of the United Nations, which found that Pérez Molina had knowledge of and profited from a scheme in which companies importing goods into Guatemala bribed customs officials in exchange for receiving reduced customs duty rates.  Congress voted unanimously (132-0) to strip Pérez Molina of immunity on September 1, 2015. CICIG’s investigation found that several other high-ranking political officials also were involved in the scheme.  More than 20 other officials have been charged and arrested, including former Vice President Roxana Baldetti and the President of Guatemala’s Central Bank, Julio Suárez.           Honduras The anti-corruption enforcement developments in Guatemala prompted the Honduran government to establish its own anti-corruption commission, the Mission to Support the Fight against Corruption and Impunity in Honduras (“MACCIH”), sponsored by the Organization of American States (“OAS”).  According to the OAS, MACCIH will be chaired by a legal expert and will establish “an international panel of judges and prosecutors to supervise, advise and support Honduran authorities investigating corruption.”  Unlike CICIG, it does not have investigatory powers of its own and will merely supervise the work of Honduran prosecutors.  Opposition parties have proposed bills in the Honduran legislature calling for an internationally backed prosecutorial body like CICIG. Asia           China Three years into President Xi Jinping’s anti-corruption campaign, domestic corruption prosecutions show no signs of abating, and if anything have expanded into legislative reforms, high-profile arrests, and international outreach. On the legislative side, effective from November 1, 2015, China’s Ninth Criminal Law Amendment of the People’s Republic of China introduced key changes into law demonstrating the intent to prosecute the supply side of bribery.  First, the amendments add a new crime of offering bribes to current and former state functionaries as well as those persons closely related to them, thereby closing a loophole in the preexisting version of the Criminal Law under which criminal punishments for bribe-payers were limited to those who offered bribes to current state functionaries.  Second, the new amendments impose monetary fines upon individual defendants whereas prior law allowed only for corporate fines.  Third, the amendments make it more difficult for bribe-payers to receive mitigated punishment or be exempted from punishment by voluntarily confessing to the crime.  Separately, a trial implementation of new rules governing donations made to state-run hospitals and other healthcare and social welfare organizations may indicate a growing experimentalism in using industry-wide legislative reforms to combat corruption risk. Industry leaders reportedly claim that the continuing anti-corruption campaign is fundamentally affecting how state-owned enterprises conduct business in China.  Business executives and government officials alike should be alert to the outsized risk of whistleblower reports, with four out of five anti-corruption investigations by Chinese authorities reportedly being initiated by whistleblowers.  Anti-corruption complaints–legitimate and otherwise–can be lodged directly with the authorities via telephone hotlines, online platforms, and mobile applications.  The Chinese government also has incrementally expanded channels for obtaining relevant information, including establishing databases tracking bribery convictions and enhancing reporting and disclosure requirements for commercial enterprises. President Xi’s sustained anti-corruption campaign has had wide-ranging consequences, including the continuing perception that enforcement actions have inexorably consolidated his power base.  To date, at least 80 officials from provincial levels or higher in every province of the country have been sacked, and the Central Commission for Discipline Inspection’s supervisory scope continues to expand.  This crackdown has had unintended effects, with reports that $47 billion in funds earmarked for public investment remain untouched by government officials wary of anti-corruption scrutiny.           India Underscoring the increasing risk of dual U.S. and foreign enforcement activity, in August 2015 police in Goa arrested Satyakam Mohanty, the former vice president of Louis Berger International Inc., for his alleged role in the conduct at issue in the company’s above-described settlement with DOJ.  The arrest revealed a wider probe by Indian authorities into the actions of the company, and additional enforcement actions may be forthcoming. On the legislative side, the debate over key amendments to India’s historic Lokpal and Lokayutkas Act (2013) drags on, with lawmakers divided over how to select members of the Lokpal, a body empowered to commence corruption inquiries against certain public officers.  Among other changes, Parliament is considering amending the law to require the pooling of resources between the Lokpal, the Central Bureau of Investigation, the federal police, and other enforcement agencies in an effort to reduce duplicity in graft investigations.  Meanwhile, a bill to amend the Prevention of Corruption Act, as discussed in our 2015 Mid-Year FCPA Update, remains under debate in Parliament’s upper house.           Indonesia In another example of foreign authorities prosecuting individual bribe payers and recipients following corporate FCPA resolutions with U.S. authorities, in 2015 Indonesian prosecutors announced the conviction of two individuals for bribery offenses as part of the global investigation into chemical maker Innospec Inc.  In October 2015, Suroso Atmomartoyo, a former director of state-owned petroleum refinery Pertamina, was found guilty of accepting $190,000 in bribes as well as hospitality benefits whilst on a visit to London and sentenced to five years in prison.  In July 2015, Willy Sebastien Lim, the former owner of Innospec’s third-party agent, PT Soegih Interjaya, was sentenced to three years in prison for paying the bribes.           Korea Corruption scandals continue to engulf the political landscape in Korea.  In August 2015, President Park Geun-Hye announced criminal pardons of over 6,000 individuals, including controversially Chey Tae-Won, the head of SK Group, the country’s third largest chaebol–business conglomerates that have dominated the Korean economy for decades.  Several leaders of chaebol companies have been found guilty of corruption-related offenses in recent years only to be pardoned or released on parole.  These pardons are typically justified as economic measures, and the same held true for Chey–Justice Minister Kim Hyun-Woong indicated that Chey and others were pardoned “to help bolster the economy by giving them chances to contribute to the country’s economy.”  President Park’s decision generated immediate criticism, and was seen as a betrayal of a campaign promise to end the practice of pardoning chaebol leaders. Pardons notwithstanding, Korean authorities have continued to bring corruption prosecutions.  In November 2015, prosecutors announced the indictment of Chung Joon-Yang, the former chairman of Korean steelmaker POSCO Group, and 30 others in connection with a long-running commercial corruption investigation.  Further, two former members of parliament, Song Kwang-Ho and Kim Jae-Yun, were recently stripped of their seats following bribery convictions. As reported in our 2015 Mid-Year FCPA Update, Korea’s new anti-corruption law is set to go into effect in October 2016, bringing with it increased penalties for corrupt public officials as well as corporate liability for the payment of bribes.  The lengthy implementation period, however, has given way to constitutional challenges, the latest coming from the Korean Bar Association, which argues that several key aspects of the law are unconstitutional.           Thailand Since Thailand’s military junta took over the country’s government in May 2014, it has pledged to clamp down on graft and clean up Thai politics.  As part of the ongoing crackdown, Thailand has enacted significant amendments to its anti-corruption law, which took effect on July 9, 2015. The amendments impose harsher penalties on corrupt state officials and extend a maximum penalty of capital punishment to foreigners found guilty of corruption.  The ruling junta’s anti-graft drive has also been challenged by a series of high-profile scandals and investigations in connection with two nationwide cycling events and the financing of a public park, initiatives aimed at celebrating Thailand’s royals.  Thai media and opposition groups have raised accusations of kickbacks, inflated costs, and irregular funding practices in connection with the initiatives, most of which have been denied by the junta.  Investigations are ongoing. Africa           Kenya In September 2015, two senior executives of the China Road and Bridge Construction Company were arrested in Kenya on suspicion of bribery and corruption in relation to alleged kickbacks paid to highway authority officials.  The Kenyan Ethics and Anti-Corruption Commission alleged that Kenyan highway officials had been bribed in order to cover up instances of overloaded trucks delivering materials to be used on the Mombasa to Nairobi standard gauge railway project. Australia Despite repeated promises for a ramp-up in the pace of foreign bribery enforcement actions, Australian authorities have successfully brought only two prosecutions in recent years.  Following criticism from international anti-corruption advocacy groups, the Senate Standing Committee on Economics convened an inquiry into the country’s compliance with its obligations under various international anti-corruption treaty obligations, including the OECD Anti-Bribery Convention and U.N. Convention against Corruption.  The Standing Committee has received dozens of written submissions from a variety of government departments, multinational corporations, industry groups, and legal scholars, and is due to conclude its inquiry and issue a report by July 2016. On a related note, in November 2015 the Minister of Justice introduced to Parliament the Crimes Legislation Amendment (Proceeds of Crime and Other Measures) Bill 2015, in order to implement Australia’s obligation under the OECD Convention to criminalize the use of false accounting records to conceal or enable the bribery of foreign officials.  The Bill proposes that two new offenses be added to the Criminal Code:  intentional false dealing with accounting documents, and reckless false dealing with accounting documents.  The provisions would apply both within Australia and extraterritorially, to the extent permitted by the Australian constitution, and with the consent of the Attorney-General.  Maximum penalties for individuals would include ten years’ imprisonment and a fine of AUS$1.8 million, and for corporations a penalty equal to the greater of AUS$18 million, three times the value of the benefit obtained through the offense, or 10% of the corporation’s annual turnover during the 12 months preceding the offense. CONCLUSION For more analysis on the year in anti-corruption enforcement, please join us for our upcoming webcast presentation:  FCPA Trends in the Emerging Markets of China, India, Russia and Latin Americaon January 12 (to register, click here).  And as has become our semi-annual tradition, over the following two weeks Gibson Dunn will be publishing a series of enforcement updates for the benefit of our clients and friends as follows: Tuesday, January 5:  2015 Year-End Update on Corporate NPAs and DPAs; Wednesday, January 6:  2015 Year-End False Claims Act Update; Thursday, January 7:  2015 Year-End Criminal Antitrust and Competition Law Update; Friday, January 8:  2015 Year-End German Law Update; Monday, January 11:  2015 Year-End Securities Enforcement Update; Wednesday, January 13:  2015 Year-End E-Discovery Update; Thursday, January 14:  2015 Year-End FDA and Health Care Compliance and Enforcement Update – Drugs and Devices; Friday, January 15:  2015 Year-End Health Care Compliance and Enforcement Update – Providers; Monday, January 18:  2015 Year-End French Law Update; Wednesday, January 20: 2015 Year-End Government Contracts Litigation Update; and Thursday, January 21:  2015 Year-End Securities Litigation Update. The following Gibson Dunn lawyers assisted in preparing this client update:  F. Joseph Warin, John Chesley, Stephanie Connor, Elissa Noel Hanson Baur, Emily Beirne, Liang Cai, Hanna Chalhoub, Sarah Collett, Christina Dahlman, Tiernan Fitzgibbon, Caitlin Forsyth, Tzung-Lin Fu, Alex Grossbaum, Mark Handley, Daniel Harris, William Hart, Leesa Haspel, Patricia Herold, Martin Hewett, Joseph La Perla, Andrei Malikov, Coreen Mao, Mike Marron, Jesse Melman, Steve Melrose, Laura Mumm, Laura Musselman, Jacki Neely, John Partridge, Rebecca Sambrook, Elizabeth Silver, Suzanne Siu, Francis Annika Smithson, Laura Sturges, Micah Sucherman, Christopher Sullivan, Eric Veres, Anthony (“TJ”) Vita, Oleh Vretsona, Oliver Welch, Ryan Whelan, and Adam Wolf. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues.  We have more than 110 attorneys with FCPA experience, including a number of former federal prosecutors, spread throughout the firm’s domestic and international offices.  Please contact the Gibson Dunn attorney with whom you work, or any of the following: Washington, D.C. F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Richard W. Grime (+1 202-955-8219, rgrime@gibsondunn.com) Judith A. Lee (+1 202-887-3591, jalee@gibsondunn.com) David P. Burns (+1 202-887-3786, dburns@gibsondunn.com) David Debold (+1 202-955-8551, ddebold@gibsondunn.com) Michael S. Diamant (+1 202-887-3604, mdiamant@gibsondunn.com) John W.F. Chesley (+1 202-887-3788, jchesley@gibsondunn.com) Daniel P. Chung (+1 202-887-3729, dchung@gibsondunn.com)  Adam M. Smith (+1 202-887-3547, asmith@gibsondunn.com) Oleh Vretsona (+1 202-887-3779, ovretsona@gibsondunn.com) Christopher W.H. 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Chan (+1 415-393-8362, wchan@gibsondunn.com) London Patrick Doris (+44 20 7071 4276, pdoris@gibsondunn.com) Charlie Falconer (+44 20 7071 4270, cfalconer@gibsondunn.com) Philip Rocher (+44 20 7071 4202, procher@gibsondunn.com) Mark Handley (+44 20 7071 4277, bmhandley@gibsondunn.com) Paris  Benoît Fleury (+33 1 56 43 13 00, bfleury@gibsondunn.com)   Bernard Grinspan (+33 1 56 43 13 00, bgrinspan@gibsondunn.com) Jean-Philippe Robé (+33 1 56 43 13 00, jrobe@gibsondunn.com) Audrey Obadia-Zerbib (+33 1 56 43 13 00, aobadia-zerbib@gibsondunn.com) Munich Benno Schwarz (+49 89 189 33-110, bschwarz@gibsondunn.com) Michael Walther (+49 89 189 33-180, mwalther@gibsondunn.com) Mark Zimmer (+49 89 189 33-130, mzimmer@gibsondunn.com) Hong Kong Kelly Austin (+852 2214 3788, kaustin@gibsondunn.com) Oliver D. Welch (+852 2214 3716, owelch@gibsondunn.com) © 2016 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

December 7, 2015 |
Personal Liability for Senior Compliance Officers Under New York’s Proposed Anti-Money Laundering and Anti-Terrorism Regulation

(Updated January 5, 2016) On December 1, 2015, New York Governor Andrew M. Cuomo announced that the New York State Department of Financial Services ("DFS") had proposed a new anti-money laundering ("AML") and anti-terrorist financing rule applicable to DFS-regulated institutions, to be set forth in Part 504 of the DFS Superintendent’s Regulations.  The proposed rule was published in the New York State Register on December 16, 2015.[1]  As proposed, the rule would continue an aggressive enforcement strategy initiated by former DFS Superintendent Benjamin Lawsky.  Under Superintendent Lawsky, financial institutions, mostly non-U.S. banks with New York-regulated branches, were threatened with the loss of their New York banking licenses.  Since 2011, DFS has imposed nearly $8.5 billion in penalties on financial institutions.[2] Under the proposed rule, DFS-regulated institutions would be required to maintain a transaction monitoring program to detect potential violations of the Bank Secrecy Act ("BSA") and other AML laws and to identify and report suspicious activity.  In addition, regulated institutions would be required to maintain a watch list filtering program to identify and interdict transactions prohibited by applicable sanctions and terrorist financing rules, including those promulgated by the U.S. Department of the Treasury’s Office of Foreign Assets Control ("OFAC"), politically exposed person ("PEP") lists, and other internal watch lists.  The proposed rule would require an annual certification by the Chief Compliance Officer, or functional equivalent, of covered institutions.  This certification would state that, to the best of the officer’s knowledge, the institution’s "Transaction Monitoring and Filtering Program complies with all the requirements" of the rule.  The proposed rule states that an "incorrect or false" certification could lead to criminal penalties for the officers making the certification, citing Section 672 of the New York Banking Law.  As discussed in the commentary below, the proposed certification is the most controversial aspect of the proposal. Former Superintendent Lawsky previewed the proposed rule in a February 2015 speech,[3] when he suggested that DFS was considering measures to improve monitoring and filtering systems and hold more financial industry executives responsible for compliance failures.  Superintendent Lawsky described state bank supervisors as important counterparts to federal financial regulators, suggesting that state governments could "serve as incubators for new approaches to vexing policy problems," which could subsequently be adopted by other states or the federal government.  In this regard, he pointed to New York’s efforts to "move towards individual accountability" in the resolution of settlements with financial institutions,[4] an approach that also has been taken by federal regulators and enforcement agencies. The proposed rule would apply broadly to "Regulated Institutions," including banks, trust companies, Article IV private bankers, savings banks, savings and loan associations, money transmitters, check cashers, and non-U.S. bank branch and agency offices, in each case chartered or licensed under the New York Banking Law.  The intended purpose of the proposed rule, including its specific requirements for transaction monitoring and watch list filter programs, is to address serious shortcomings revealed during recent investigations. Comments must be received by February 1, 2016. Transaction Monitoring Program  The proposed rule would require regulated institutions to maintain a transaction monitoring program for potential violations of BSA/AML laws and suspicious activity reporting, which should at a minimum: be based on a comprehensive risk assessment of the institution; reflect all current BSA/AML laws, regulations and alerts, as well as any relevant information available from the institution’s related programs and initiatives, such as "know your customer due diligence," "enhanced customer due diligence" or other relevant areas, such as security, investigations and fraud prevention; map BSA/AML risks to the institution’s businesses, products, services, and customers/counterparties; utilize BSA/AML detection scenarios that are based on the institution’s risk assessment with threshold values and amounts set to detect potential money laundering or other suspicious activities; include an end-to-end, pre- and post-implementation testing of the transaction monitoring program, including governance, data mapping, transaction coding, detection scenario logic, model validation, data input and program output, as well as periodic testing; include easily understandable documentation that articulates the institution’s current detection scenarios and the underlying assumptions, parameters, and thresholds; include investigative protocols detailing how alerts generated by the transaction monitoring program will be investigated, the process for deciding which alerts will result in a filing or other action, who is responsible for making such a decision, and how investigative and decision-making process will be documented; and be subject to an ongoing analysis to assess the continued relevancy of the detection scenarios, the underlying rules, threshold values, parameters, and assumptions. Most components of the rule proposed by DFS are consistent with U.S. federal regulatory requirements and guidance as well as industry best practices.  Nevertheless, certain DFS requirements would present challenges, particularly with respect to model validation, where the regulators’ expectations are not necessarily clear or well understood by the industry.  Some requirements subject to certification may present additional challenges or may not be reasonable for smaller banking institutions and foreign bank operations, money transmitters, and check cashers; one may contrast the certification proposal with the certification requirement under the Volcker Rule, which applies only to sizeable institutions. Watch List Filtering Program  Under the proposed DFS rule, regulated institutions must also maintain a watch list filtering program for the purpose of interdicting transactions, before their execution, that are prohibited by applicable sanctions, including those administered by OFAC.  The proposal would go further by requiring that the programs identify and interdict transactions with PEPs and persons on internal watch lists.  The requirement to interdict all PEPs presents additional compliance challenges for regulated institutions given the significant volume of individuals who may fall in this category and may not be reasonable for smaller financial institutions.  This system may be manual or automated, and must: be based on the risk assessment of the institution; be based on technology or tools for matching names and accounts, in each case based on the institution’s particular risks, transaction and product profiles; include an end-to-end, pre- and post-implementation testing of the watch list filtering program, including data mapping, an evaluation of whether the watch lists and threshold settings map to the risks of the institution, the logic of matching technology or tools, model validation, and data input and watch list filtering program output; utilize watch lists that reflect current legal or regulatory requirements; be subject to ongoing analysis to assess the logic and performance of the technology or tools for matching names and accounts, as well as the watch lists and the threshold settings to see if they continue to map to the risks of the institution; and include easily understandable documentation that articulates the intent and the design of the program tools or technology. Additional Requirements  The proposed rule would require each transaction monitoring and filtering program to include the following attributes: identification of all data sources that contain relevant data; validation of the integrity, accuracy and quality of data to ensure that accurate and complete data flows through the transaction monitoring and filtering program; data extraction and loading processes to ensure a complete and accurate transfer of data from its source to automated monitoring and filtering systems, if automated systems are used; governance and management oversight, including policies and procedures governing changes to the transaction monitoring and filtering program to ensure that changes are defined, managed, controlled, reported, and audited; vendor selection process if a third-party vendor is used to acquire, install, implement, or test the transaction monitoring and filtering program or any aspect of it; funding to design, implement and maintain a transaction monitoring and filtering program that complies with the requirements of this Part; qualified personnel or outside consultant responsible for the design, planning, implementation, operation, testing, validation, and ongoing analysis, of the transaction monitoring and filtering program, including automated systems if applicable, as well as case management, review and decision making with respect to generated alerts and potential filings; and periodic training of all stakeholders with respect to the transaction monitoring and filtering program. No regulated institution may make changes or alterations to the transaction monitoring and filtering program to avoid or minimize filing suspicious activity reports, or because the institution does not have the resources to review the number of alerts, or otherwise avoid complying with regulatory requirements. Certification Requirement Under the proposed rule, each subject institution would be required to submit to the DFS by April 15th of each year a certification duly executed by its chief compliance officer or functional equivalent that, to the best of his or her knowledge, the institution’s transaction monitoring and filtering program complied with all the requirements of the regulation.  This certification requirement is reminiscent of those under the Sarbanes-Oxley Act and the Volcker Rule.  Unlike the Volcker Rule, however, the proposed DFS certification goes to actual compliance with the regulation’s requirements, not the existence of a program that is "reasonably designed" to achieve compliance.  The "reasonably designed" formulation in the final Volcker regulations responded to industry concerns about the collateral effects of requiring certification that compliance had actually been achieved, given the breadth of the Volcker Rule’s requirements – a breadth that is certainly analogous to New York’s proposal. In addition, DFS states that "false or incorrect" certifications could lead to criminal penalties.  Although the proposed rule is silent on the state of mind necessary for such criminal penalties, Section 672 of the Banking Law, which is cited as legal authority for aspects of the proposed rule, and which imposes criminal penalties for the making of false entries in bank books, requires an intent to deceive.  Presumably, the DFS would see itself acting within the authority of Section 672 and therefore imposing a state of mind requirement, but that is not clear on the face of the proposal. Commentary If the overall objective of the proposed DFS rule is for regulated institutions to develop and implement effective risk-based measures that are reasonably designed to detect and prevent money laundering and terrorist financing, the certification component could prove to be counterproductive.  As many recent high-profile BSA/AML/OFAC enforcement actions demonstrate, compliance officers do not operate in a vacuum and do not have unfettered control over the resources (personnel and technology) that support the institution’s program or the customer risk assumed by the business.  Instead of helping compliance officers do a better job, the certification requirement proposed by DFS could drive many dedicated and competent compliance professionals away from New York financial institutions or to non-compliance positions.  In the current regulatory environment, the rewards are small for compliance officers in comparison to the pressures and risks.  Tension is already running very high among compliance professionals in the wake of the assessment of a civil money penalty by the Financial Crimes Enforcement Network against the former compliance officer of MoneyGram, the FINRA penalties assessed against BSA/AML officers of securities broker-dealers, and the September 2015 memorandum issued by Deputy Attorney General Sally Yates regarding individual accountability in cases of corporate wrongdoing.   [1]  New York Register, Department of Financial Services, Proposed Rule Making, Regulating Transaction Monitoring and Filtering Systems Maintained by Banks, Check Cashers and Money Transmitters, I.D. No. DFS-50-15-00004-P (Dec. 16, 2015), at 9. [2] Press Release, Governor Cuomo Announces Anti-Terrorism Regulation Requiring Senior Financial Executives To Certify Effectiveness of Anti-Money Laundering Systems, New York Department of Financial Services (Dec. 1, 2015), available at http://www.dfs.ny.gov/about/press/pr1512011.htm; New York Department of Financial Services Superintendent’s Regulations, Banking Division Transaction Monitoring and Filtering Program Requirements and Certifications (Dec. 1, 2015), available at: http://www.dfs.ny.gov/legal/regulations/proposed/rp504t.pdf. [3] Superintendent Benjamin M. Lawsky’s Remarks at Columbia Law School, Financial Federalism: The Catalytic Role of State Regulators in a Post-Financial Crisis World (Feb. 25, 2015), available at http://www.dfs.ny.gov/about/speeches/sp150225.htm.   [4] DFS has for some time placed significance on individual responsibility, including its June 2014 settlement with the French bank BNP Paribas, which required the bank’s Chief Operating Officer, Senior Advisor and Head of Compliance, and Head of Ethics and Compliance for North America, among others, to step down.  Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, or the authors: Amy G. Rudnick – Washington, D.C. (+1 202-955-8210, arudnick@gibsondunn.com)Judith A. Lee – Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com)Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com)Linda Noonan - Washington, D.C. (+1 202 887 3595, lnoonan@gibsondunn.com)Adam M. Smith – Washington, D.C. (+1 202-887-3547, asmith@gibsondunn.com)David A. Wolber – Washington, D.C. (+1 202-887-3727, dwolber@gibsondunn.com)Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com)   © 2015 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

September 1, 2015 |
FinCEN Proposes Regulations That Would Require AML Programs and Suspicious Activity Reporting for SEC Registered Investment Advisers

​On September 1, 2015, the Department of the Treasury, Financial Crimes Enforcement Network (“FinCEN”) published a long-awaited Notice of Proposed Rulemaking (“NPRM”) with new rules that would require registered investment advisers to implement Anti-Money Laundering (“AML”) programs and to file Suspicious Activity Reports (“SARs”) under the Bank Secrecy Act (“BSA”).  80 Fed. Reg. 52680 (Sept. 1, 2015).  This appears to be just the first round of BSA rulemakings for investment advisers.  Public comments are due by November 2, 2015, i.e., sixty days from the date of publication in the Federal Register.  The NPRM includes a number of specific issues on which FinCEN is seeking comment. The proposed requirements are generally consistent with parallel BSA requirements for banks, broker-dealers in securities, and other BSA financial institutions.  The requirements would apply across the board to all registered investment advisers whatever their services or relationship with their clients.  The NPRM gives little insight into specific government expectations for compliance beyond that investment advisers are expected to implement the requirements on a risk-basis. Background This proposed BSA regulation has been many years in the making.  In 2002 and 2003, FinCEN issued two NPRMs proposing AML program requirements for unregistered investment companies and certain investment advisers, respectively.  In 2007, FinCEN announced that it would further review the issue of applying BSA requirements to funds and investment advisers and develop another proposal for public comment.  FinCEN formally withdrew both proposals in November 2008.  Despite periodic Congressional pressure based on concerns that illegal source funds were being invested in hedge funds, FinCEN waited eight years to publish this new regulatory proposal. The Proposed Regulations As proposed, the AML program and SAR requirements would apply to all investment advisers that are registered with the Securities and Exchange Commission (“SEC”) or required to be registered with the SEC under Section 203 of the Investment Advisors Act of 1940, generally investment advisers with assets under management of $100 million or more as calculated under the SEC regulations.  This would include advisers and subadvisers.  FinCEN states that it may include other types of smaller investment advisers (state registered or exempt under SEC requirements) in future rulemakings because they, too, may be vulnerable to money laundering. FinCEN does not cite any particular examples of money laundering by investment advisers or the clients of investment advisers, e.g., hedge funds or private equity funds.  FinCEN states a general concern that:  “As long as investment advisers are not subject to AML program and suspicious activity requirements money launderers may see them as a low risk way to enter the financial system.” According to FinCEN, an investment adviser’s view into its client activities may help detect illegal activities. Under the NPRM, registered investment advisers, like banks and broker-dealers, would be designated as financial institutions under the BSA.  FinCEN intends to delegate examination authority for compliance with the proposed requirements to the SEC.  As discussed below, this is the opening volley for proposed BSA requirements for investment advisers.  Additional NPRMs covering other requirements may follow. Financial institution under the BSA is defined as a person doing business “in the United States.”  Nevertheless, the registered investment advisers may include foreign investment advisers.  Moreover, FinCEN is seeking comments on whether foreign SEC registered and private advisers should be covered by the requirements.  Coverage of foreign advisers needs to be clarified. AML Program Requirements The proposed AML program requirements for investment advisers are comparable to the requirements for banks, broker-dealers, mutual funds, and other financial institutions under the BSA, and they are consistent with the BSA statutory authority for AML programs, 31 U.S.C. § 5318(h).  Under the proposal, a registered investment adviser would be required to develop and implement a written, risk-based program that is reasonably-designed to prevent the investment adviser from being used to facilitate money laundering and the financing of terrorism and to comply with applicable BSA requirements.  The minimum requirements would include what are sometimes referred to as the four AML program pillars required in Section 5318(h): Establishing and implementing risk-based and reasonable written policies, procedures, and internal controls; Providing for periodic independent testing of the Program; Designating a person or persons responsible for monitoring the operations and internal controls of the program; and Providing ongoing training for appropriate personnel. The program would be required to be approved by the Board of Directors or trustees of the investment adviser or, if none, by the investment adviser’s sole proprietor, general partner, trustee or other persons that have “functions similar to a board of directors.”             Coverage FinCEN recognized that registered investment advisers with all types of clients and that provide all types of services would be caught up in the definition of investment adviser, including investment advisers with clients that are mutual funds and “publicly or privately offered real estate funds,”[1] registered investment advisers that provide advisory services but that do not manage assets or conduct transactions, pension consultants, financial planners, and investment advisers that only provide research or newsletters.  Comments are sought on whether there should be categories of registered investment advisers excluded from the definition because of the low money laundering risk of their services or clients.  All registered investment advisers would be required to establish risk-based AML programs.  FinCEN states the burden of establishing an AML program would be reduced based on the risk-based nature of the program and the types of advisory services these entities provide. Investment advisers that are dually registered with the SEC as a securities broker and as an investment adviser, and investment advisers that are affiliated with financial institutions already subject to BSA AML program requirements, would not be required to develop separate AML programs so long as the AML programs of these entities already cover all of the entity’s broker-dealer and investment adviser activities and businesses and address the money laundering risks posed by all aspects of the business.             Risk Assessment Registered investment advisers will be expected to develop a risk assessment based on an analysis of the money laundering and terrorist financing risks posed by their clients, based on such factors as the nature of the services provided, the client types, the clients’ geographic locations (including the jurisdiction’s regulatory regime), the Investment Adviser’s experience with the clients, and references from other financial institutions, for instance.  Policies, procedures, and internal controls, including for monitoring transactions to identify potentially suspicious activity, would be developed consistent with this risk assessment.  Clearly, the program for a registered investment adviser whose clients are U.S. pension funds would not be expected to resemble the program for a hedge fund with investors who are high net worth individual clients from jurisdictions which are considered to pose a high risk for money laundering. The preamble to the NPRM includes a discussion of the relevant risks of non-pooled investment vehicle clients; registered open-end fund clients, i.e., mutual funds (considered lower risk); registered closed-end fund clients, and private fund clients/unrestricted pooled investment vehicles.  FinCEN notes that certain private funds and unregistered pooled investment vehicles may present lower risk than others. FinCEN expects registered investment advisers to apply the same AML policies and procedures to services to non-U.S. private funds or unregistered pooled investment vehicles organized in a foreign jurisdiction as it does to U.S. clients.             Proposed Effective Date FinCEN has proposed a six-month delayed effective date from the date of the issuance of the final rulemaking. Suspicious Activity Reporting The proposed requirement for investment advisers to file SARs with FinCEN also is comparable to the SAR requirement for other financial institutions that are subject to SAR reporting requirements.  Accordingly, investment advisers would be required to report transactions aggregating to $5,000 or more in funds or other assets conducted or attempted “by, through or at” the registered investment adviser if the investment adviser knows, suspects or has reason to suspect that the transactions involve money laundering or BSA violations (including structuring to evade any BSA reporting or recordkeeping requirement), have no business or apparent lawful purpose or are not the sort of transactions in which a particular customer normally would be engaged, or involve the use of the registered investment adviser to facilitate criminal activity.  It would appear that the SAR requirement would not apply to advisory services because there would be no transactions “by, through or at” the registered investment adviser. Like other financial institutions, registered investment advisers will be expected to identify suspicious activity on the front-end (when an employee identifies potential suspicious activity at the time of the transaction) and through risk-based processes for identifying and investigating potentially suspicious activity on the back-end after transactions are concluded through reports or monitoring systems.             Red Flags The preamble to the NPRM includes a non-exhaustive list of red flags for suspicious activity.  FinCEN suggests that monitoring to identify potentially suspicious activity could include, for example, monitoring for fraud, the use of negotiable instruments used in money laundering schemes, such as money orders and travelers checks, and payments for an investment with multiple wire transfers from different financial institutions.             Joint SARs If a registered investment adviser and another financial institution subject to SAR reporting were involved in the same transaction, a joint SAR could be filed so long as the SAR included all relevant facts and each financial institution maintained a copy of the SAR and the supporting documentation.             Delegation of SAR Responsibilities The preamble to the NPRM states that the proposed SAR regulation would permit a registered investment adviser to delegate its SAR responsibilities to an agent or third party processor.  In these circumstances, however, FinCEN advises that the registered investment adviser would remain responsible for compliance with the SAR requirements and would be liable for any violations of the SAR regulation by the third party.             Sharing of SARs As proposed, the rule would not permit registered investment advisers to share SARs within their corporate organizational structures in the absence of further guidance from FinCEN.  This is inconsistent with FinCEN’s guidance for banks, broker-dealers, mutual funds, and futures commodity merchants and their introducing brokers, which permit the sharing of SARs and the existence of SARs within their organizational structures subject to certain limitations.  Given FinCEN’s recognition that registered  investment advisers may delegate certain of their BSA functions to others within their organization (and even outside their organization to an agent or third party service provider), it does not make sense for FinCEN not to issue guidance at the same time that it promulgates a final rule.  FinCEN is soliciting comments on this issue.             Other SAR Provisions Other SAR proposed provisions are comparable to the SAR provisions applicable to other financial institutions, e.g., the timing of the filing of SARs (30 calendar days after the initial detection by the registered investment adviser of facts that may constitute a basis for filing a SAR); record retention (five years from the date of filing the SAR); the SAR confidentiality requirement and the prohibition on disclosing a SAR or any information that would disclose the existence of a SAR; the need to call law enforcement in cases of activity requiring immediate attention; and the civil safe harbor from liability based on the filing of a SAR.             Proposed Effective Date The proposed effective date for the SAR requirement would be the same as for the AML program requirement, i.e., six months from the date the final rule is issued.  Registered investment advisers, however, are “encouraged” by FinCEN to begin filing SARs on a voluntary basis when the rule is issued. What is not Covered – Future NPRMs Applicable to Investment Advisers FinCEN states that it is not requiring registered investment advisers to implement customer identification program (“CIP”) and customer due diligence (“CDD”) requirements under this NPRM, but that further proposals requiring CIP and CDD are contemplated.  A CIP rulemaking would be issued jointly with the SEC (like the CIP requirements for broker-dealers). Future rulemakings applicable to registered investment advisers also will deal with the application of the requirements under USA PATRIOT Act Section 311 (special measures applicable to foreign jurisdictions, financial institutions, transactions or accounts of primary money laundering concern); Section 312 (enhanced due diligence for correspondent accounts for foreign financial institutions and private banking clients, i.e., high net worth non-U.S. persons); Section 313 (prohibition on providing correspondent accounts to foreign shell banks); and Section 319(b) (requirement to maintain ownership records for foreign correspondent banks, identify a U.S. agent for service of process for foreign correspondent banks, and provide access to foreign correspondent bank records through U.S. financial institution respondents). Nevertheless, to conduct a risk assessment and to comply with the AML program and SAR requirements, some risk-based CDD measures would appear to be necessary for registered investment advisers unless they have a low risk client base.  CDD requirements (and enhanced due diligence or EDD requirements for higher risk customers) would include obtaining an understanding of who a customer (natural or legal) is, the nature of the person’s wealth and sources of funds, and whether public information about the person raises money laundering red flags that the person’s funds for investment could be from an illegal source.  FinCEN and the financial institution regulators often describe CDD/EDD as part of the requirement to have a risk-based AML program and the SAR obligation, i.e., a financial institution must have enough knowledge about a customer to identify what is suspicious or unusual for that customer. Other Requirements That Would be Applied Through This Rulemaking Certain other BSA requirements apply to all BSA financial institutions and also would apply to registered investment advisers by virtue of their designation as BSA financial institutions.             Currency Transaction Reports To the extent that a transaction in currency over $10,000 ever was conducted by or on behalf of the same person on the same day by, to or through a registered investment adviser, the investment adviser would be required to file a Currency Transaction Report (“CTR”) with FinCEN. 31 C.F.R. § 1010.311.  Once subject to the CTR requirement, investment advisers no longer would be required to file Forms 8300 on cash and certain negotiable instruments received over $10,000.  The Form 8300 requirement is applicable to non-financial institution trades and businesses under the BSA regulations, 31 C.F.R. § 1010.330, and parallel requirements under the IRS Code. It seems unlikely that registered investment advisers would engage in any reportable currency transactions.  Moreover, a fundamental component of any AML program for a registered investment adviser should include prohibitions or restrictions on forms of payment that figure in money laundering schemes, such as currency, money orders, travelers checks, multiple cashier’s checks or third party payments.             Fund Transfer Recordkeeping and Travel Rule Requirements With respect to transmittals of funds of $3,000 or more sent or received by a registered investment adviser (as the transmittor’s (sender’s) or recipient’s financial institution), investment advisers would have to comply with the funds transfer recordkeeping and Travel Rule requirements of the BSA. 31 C.F.R. § 1031.410.  This would mean creating and maintaining records of the transfers with specified information and making sure that certain of the information “travels” to the next financial institution in the payment chain.[2]             Information Sharing Registered investment advisers would be subject to the information sharing provisions of the BSA based on Sections 314(a) and 314(b) of the USA PATRIOT Act, as implemented by BSA regulations.  Under Section 314(a), as implemented in the BSA regulations, 31 C.F.R. § 1010.520, and FinCEN guidance, financial institutions must review lists provided periodically by FinCEN of persons suspected of being involved in money laundering or terrorist financing and must respond via a secured network to FinCEN whether they have (or had) an account for the listed person or have conducted certain transactions with the listed person. Under Section 314(b), as implemented in the BSA regulations, 31 C.F.R. § 1010.540, a registered investment adviser could  register with FinCEN annually on a voluntary basis and participate in the sharing of information with other financial institutions subject to an AML program requirement, such as banks, broker-dealers and mutual funds.  Financial institutions that choose to participate in Section 314(b) sharing may make and receive information requests to exchange information on a limited basis for the purpose of determining whether to file a SAR.  Financial institutions that submit Section 314(b) notices are provided with a safe harbor from civil liability to a customer based on the information sharing. Observations and Conclusion According to FinCEN, additional NPRMs expanding the BSA requirements applicable to registered investment advisers will follow.  The public discussion of this NPRM and the subsequent NPRMs should provide additional insight into FinCEN and the SEC’s regulatory expectations for investment advisers and further frame the issues that need clarification.  Ultimately, based on the experience of most BSA financial institutions, government expectations will evolve and  increase, and the specific expectations often will be revealed through the examination process. Many registered investment advisers already have put into place AML programs voluntarily.  Some have done so because they are part of a financial group that includes businesses that are financial institutions under the BSA, and the group has put in place an enterprise-wide AML program.  Moreover, hedge funds and other investment funds are expected by  banks and broker-dealers to have AML programs to obtain services and so that their broker-dealers can rely on SEC registered investment advisers to conduct CIP on customers, as allowed by a no action letter issued by the SEC if certain conditions are met.  See Request for No-Action Relief Under Broker-Dealer Customer Identification Rule (31 C.F.R. § 1023.220) (Jan. 9, 2015).  Investment advisers also have implemented programs to protect themselves from liability for the crime of money laundering and the related forfeiture risk and, most importantly, to guard against the reputational risk of being associated with money launderers or facilitating terrorist financing. Some registered investment advisers will need to re-evaluate their current AML programs to determine whether they meet the proposed regulatory requirements.  Investment advisers for funds will need to review the agreements with fund investors to make sure that the investors will provide any information to the investment adviser necessary to meet the current and future regulatory requirements applicable to the investment adviser. Clearly, many registered investment advisers will not have previously developed an AML program because of the low risk nature of their clients and services.  A case should be made that many of the registered investment advisers provide services to clients that pose little or no money laundering risk and that these investment advisers should be excluded from the final rule, such as investment advisers to pension funds or which provide only research services.  Investment advisers also should be excluded with respect to mutual funds, which themselves are subject to the full range of BSA requirements.  This should be a major focus of comments on the proposal.  FinCEN could consider including reasonable exemptions in the regulation based on the services offered and the client types and/or include an exemption process in the final rule whereby individual registered investment advisers could seek an exemption. Further, guidance is needed on the intended extraterritorial impacts of the BSA requirements applicable to registered investment advisers.  As proposed, the AML program would apply to U.S. registered investment advisers that provide services to clients outside the United States, e.g.,  funds and other investment vehicles organized under foreign law, and to the extent transactions are directed by  investment adviser outside the United States, it would appear the SAR requirement would apply.  This could raise conflicts with foreign laws that apply to funds rather than the advisers and that could put U.S. advisers at a competitive disadvantage or subject funds and other investment vehicles to multiple regulatory requirements and examinations.  Similar issues are raised with respect to foreign investment advisers that are registered with the SEC. The case made by FinCEN for the law enforcement need for this regulation appears to be theoretical and the cost benefit analysis is not convincing.  Nevertheless, this proposal is moving forward.  Consequently, registered investment advisers and other investment advisers should take advantage of the comment opportunity to ensure that the final regulation is as clear as possible to minimize future regulatory risk and to make suggestions to reduce the compliance burden and to frame the issues that FinCEN should consider in future rulemakings. [1]   The real estate fund itself would not be required to implement an AML program.    [2]   For instance, if a registered investment adviser sent a transmittal order for an established customer, the investment adviser would be required to record the name and address of the transmitter; the amount of the transmittal order; any payment instructions received from the transmittor with the transmittal order; the identity of the recipient’s financial institution; and information received from the transmittor about the recipient. That information (and any account number) would then have to be included in the transmittal order sent to the next financial institution in the payment chain. Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work, or the authors: Amy G. Rudnick – Washington, D.C. (+1 202-955-8210, arudnick@gibsondunn.com) Linda Noonan – Washington, D.C. (+1 202 887 3595, lnoonan@gibsondunn.com) Please also feel free to contact any of the following leaders and members of the firm’s Financial Institutions or Investment Funds practice groups: Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com) Edward D. Sopher – New York (+1 212-351-3918, esopher@gibsondunn.com) Jennifer Bellah Maguire – Los Angeles (+1 213-229-7986, jbellah@gibsondunn.com) Y. Shukie Grossman – New York (+1 212-351-2369, sgrossman@gibsondunn.com) Edward D. Nelson – New York (+1 212-351-2666, enelson@gibsondunn.com) C. William Thomas, Jr. – Washington, D.C. (+1 202-887-3735, wthomas@gibsondunn.com) Gregory Merz – Washington, D.C. (+1 202-887-3637, gmerz@gibsondunn.com) © 2015 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 20, 2013 |
Through the Looking Glass: The Disclosure of Ultimate Ownership and the G8 Action Plan

At the recently concluded G8 Summit at Lough Erne, Northern Ireland, leaders of the G8 economies agreed new measures to clamp down on money-laundering, tax evasion and tax avoidance, including the G8 Action Plan to prevent the misuse of companies and legal arrangements[1] (the "Action Plan"). The Action Plan The agreed Action Plan sets out eight core principles designed to ensure the integrity of beneficial ownership and basic company information and the timely access to that information by law enforcement and tax authorities. Those core principles are that: 1.         companies should know who ultimately owns and controls them and that information should be adequate, accurate, and current; 2.         beneficial ownership information should be accessible onshore to law enforcement and tax authorities; 3.         trustees of express trusts should understand the beneficial ownership of the trust; 4.         authorities should understand the risks to which their anti-money laundering and anti-terrorism financing regimes are exposed and implement effective and proportionate measures to target those risks; 5.         the misuse of financial instruments and of certain shareholding structures which may obstruct transparency, such as bearer shares and nominee shareholders and directors, should be prevented;  6.         financial institutions and designated non-financial businesses and professions should be subject to effective anti-money laundering and anti-terrorist financing obligations and be required to identify and verify the beneficial ownership of their customers; 7.         effective, proportionate and dissuasive sanctions should be available for companies, financial institutions and other regulated businesses that do not comply with their respective obligations, including those regarding customer due diligence; and 8.         national authorities should cooperate effectively to combat the abuse of companies and legal arrangements for illicit activity. Comment Many of the principles repeat measures or initiatives already in force or under way, particularly in Europe under the Money Laundering Directives. Principles 1, 3 and 5 are however of particular note: if implemented, aspects of these may result in new and material changes to the way corporate structures are administered in many jurisdictions. The first principle requires that the beneficial ownership information held by companies is "adequate, accurate, and current". This is in line with a draft of a 4th European Anti-Money Laundering Directive. Indeed, European companies are already familiar with the requirement to demonstrate beneficial ownership in the context of existing anti money-laundering (AML) checks required when opening bank accounts or engaging professionals. In addition, listed companies in developed markets will typically have a program to ascertain beneficial ownership so as to be engaged with their owners for corporate governance reasons. However the requirement that the information be kept "current" will impose practical difficulties (and entail perhaps considerable expense). Regulators will also have to decide how hard companies must press if they reach an entity organized in a jurisdiction where the information is not available and what the consequences for shareholders will be for non-disclosure. The third principle requires that trustees of express trusts should understand the beneficial ownership of the trust. This sounds simple in practice but difficulties may arise where there are sub-trusts. Changes in the law may be required to compel disclosure by beneficiaries of such arrangements. The fifth principle appears on its face to say that the use of nominee shareholders and nominee directors should be prevented. It is common, and indeed necessary for ease of transferability of widely held equity and debt issues (both in the US and Europe), for listed companies to have large numbers of nominee shareholders on their registers. Retail holdings in particular are often held this way to reduce the costs of investment through pooled registered shareholdings. If all personal and corporate shareholdings (of whatever size) are required to be individually registered there are obvious implications both in terms of the administrative burden placed on companies, the likely increased cost to shareholders and the efficient operation of securities markets and timely completion of market transactions. The experience of the UK government with the tax disclosure treaties with Lichtenstein and Switzerland suggests that substantial amounts of money have been hidden from tax authorities through complex "offshore" arrangements (tax evasion), and some of that money may have been "earned" illicitly (money-laundering). The issue is whether the measures announced by the G8 will be any more effective in countering either tax evasion or money-laundering than the existing FATF arrangements against money-laundering, and the existing exchange of tax information treaties. Questions also arise as to the interaction between the G8 measures and the legitimate rights of citizens to privacy (for example under the European Convention on Human Rights), particularly if the information on the registers of beneficial ownerships are to become publically available. Implementation  Building on the agreed principles, the UK Government has announced[2] that it intends to introduce new rules requiring UK companies to obtain and hold information on who ultimately owns and controls them. This information is to be held in a central registry maintained by Companies House, where it will be accessible to law enforcement agencies and tax authorities. A consultation on the detailed scope and implementation of the new rules, including whether the ultimate beneficial ownership information should be publicly available, will be published by the UK Department for Business, Innovation and Skills later in the summer.  In advance of the G8 agreement the UK secured agreement from the British Overseas Territories and Crown Dependencies (including Jersey, Guernsey, the Isle of Man; and Anguilla, Bermuda, the British Virgin Islands, Montserrat and the Turks and Caicos Islands)[3] to action plans of their own. U.S. implementation will be difficult given the inconsistent and often very limited state standards for requiring and verifying beneficial ownership at incorporation. State secretaries of state and other authorities responsible for the process of corporate and other business organization formation have limited budgets and resources and generally accept filings that meet the facial requirements of short, standard forms. The lack of reliable, accessible beneficial ownership information has been an obstacle to finalizing the pending U.S. Treasury AML regulatory initiative to require banks and certain other financial institutions to obtain beneficial ownership information for legal entity customers as part of the customer due diligence process.  Legislation to require consistent state standards and access to beneficial ownership information by government authorities has been introduced in the U.S. Congress by Senator Levin and others as early as 2008 in response to money-laundering enforcement concerns. While supported by the Administration, this legislation has not progressed beyond the committee hearing stage because of opposition from various quarters, including the United States Chamber of Commerce, the American Bar Association, participants in the securities markets and state secretaries of state and other state governmental officials. It has been argued that detailed beneficial ownership determination and reporting requirements would deter new business organization and capital formation and market efficiency in the United States and would represent an intrusion by the federal government on the long tradition of state government primacy with respect to the regulation of business organization formation and governance. On June 18, 2013, the White House issued its G-8 Action Plan for Transparency of Company Ownership and Control. Key to the plan are advocacy of comprehensive legislation to require "identification and verification of beneficial ownership information at the time a company is formed" and finalizing the Treasury regulations that clarify and strengthen the customer due diligence obligations for U.S. financial institutions and will include the requirement "to identify beneficial owners." Enacting legislation is likely to continue to be an uphill battle, and even if legislation were enacted, it is anticipated that it would be several years before consistent standards were implemented by the states and systems were in place to access the information.  France and Germany were signatories to the Action Plan but no specifics have yet been published on how the principles will be implemented. It is worth noting that both French and German law already includes a number of provisions aimed at identifying ultimate beneficial owners; in France including a national register of French trusts, which identifies beneficial owners and is accessible to tax authorities.      [1]   https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/207644/Common_Principles.pdf.    [2]   https://www.gov.uk/government/news/g8-2013-new-rules-to-bring-unprecedented-transparency-on-company-ownership.    [3]   https://www.gov.uk/government/news/chancellor-welcomes-huge-step-forward-in-global-fight-against-tax-evasion.   We will continue to monitor these and other related developments and keep you updated as both regulation and market practice unfolds. Gibson, Dunn & Crutcher’s lawyers are available to assist with any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following: In France:Benoit Fleury (+33 156 43 1315, bfleury@gibsondunn.com)Jean-Philippe Robé (+33 156 43 1316, jrobe@gibsondunn.com) In Germany:Markus A. Nauheim (+49 89 189 33 122, mnauheim@gibsondunn.com)Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) In the UK:Nicholas Aleksander (+44 20 7071 4232, naleksander@gibsondunn.com)James Barabas (+44 20 7071 4253, jbarabas@gibsondunn.com)Jeffery Roberts (+44 20 7071 4291, jroberts@gibsondunn.com) Selina S. Sagayam (+44 20 7071 4263, ssagayam@gibsondunn.com) In the US:Michael D. Bopp – Washington, D.C. (+1 202 955 8256, mbopp@gibsondunn.com)Lee G. Dunst - New York (+1 212 351 3824, ldunst@gibsondunn.com)Amy L. Goodman – Washington, D.C.  (+1 202 955 8653, agoodman@gibsondunn.com)John F. Olson – Washington, D.C. (+1 202 955 8522, jolson@gibsondunn.com)Benjamin H. Rippeon – Washington, D.C. (+1 202 955 8265, brippeon@gibsondunn.com)Amy G. Rudnick – Washington, D.C. (+1 202 955 8210, arudnick@gibsondunn.com)Linda Noonan - Washington, D.C. (+1 202 887 3595, lnoonan@gibsondunn.com) © 2013 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 5, 2013 |
The Consumer Financial Protection Bureau: Its Foundation, Authorities, and First Year of Enforcement

Since the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, (Dodd-Frank Act), Gibson Dunn has been monitoring regulatory developments that affect our clients, including developments at the Consumer Financial Protection Bureau (CFPB or the Bureau).  In this alert, we provide an in-depth analysis of the CFPB’s enforcement actions to date in order to offer insight into how companies should approach CFPB investigations and enforcement actions.  To supply context for this discussion, we have provided a summary of the CFPB’s establishment, its duties, and key regulations it has proposed thus far regarding its supervision and enforcement processes.  We hope that this alert will offer companies a helpful overview of the CFPB’s history and actions to date, as well as perspectives about how to respond to a CFPB investigation with an eye toward effective litigation strategies.  For ease of reference, we have included hyperlinks to each Part of the alert in this Executive Summary. Part I  discusses the Bureau’s creation and its expansive mission to “implement and . . . enforce Federal consumer financial law” to protect consumers from “unfair, deceptive, or abusive acts and practices and from discrimination”[1]­–terms that, notably, are not statutorily defined and that allow the CFPB to exercise tremendous discretion in bringing enforcement actions.  Part I details the Bureau’s functions, the entities over which it has oversight and enforcement authority, and the laws Congress has charged the Bureau with enforcing.  It also provides the history of the ongoing controversy surrounding the recess appointment of the CFPB’s first director, Richard Cordray, and an analysis of the legal issues his appointment has raised regarding the viability of the regulations the CFPB has issued over the last year. Part II describes the CFPB’s complaint and data collection authority and activities thus far.  The Dodd-Frank Act requires the CFPB to offer means through which consumers can submit complaints about financial products.  The CFPB has created an enormous downloadable, sortable database of consumer complaints regarding bank accounts and services, credit cards, mortgages, student loans, and other consumer loans.  Although the consumer information published on the CFPB website is anonymous, the complaints name specific financial institutions.  The CFPB has acknowledged in a policy statement that it “does not provide for across the board verification of claims made in complaints” and “does not validate the factual allegations of complaints”­–although it does “maintain controls to authenticate claims.”  Although the complaints are not verified, the CFPB says that it “believes that the information has value to the public and that the marketplace of ideas will determine what the data show.”[2] Part III discusses the CFPB’s supervisory authority over insured depository institutions and credit unions with assets of more than $10 billion (large depository institutions) and non-depository consumer financial service companies.  It describes the CFPB’s examination process, which Congress intended to be coordinated with prudential and state regulators’ examinations–but which involve additional areas of oversight, as well.  It also details the appeals process companies may use should they be dissatisfied with the results of a CFPB examination. Part IV details the Bureau’s wide array of enforcement authorities, ranging from the use of investigations to administrative adjudications to cease-and-desist proceedings to civil lawsuits in federal court, as well as its ability to refer cases to other government agencies.  The section on investigations discusses the CFPB’s use of civil investigative demands (CIDs) thus far and analyzes the case studies of PHH Corporation and Next Generation Debt Settlement–case studies that demonstrate the heavy burdens that the CFPB’s CID process can impose. Finally, Part V reviews the CFPB’s ongoing and upcoming investigations.  Industries that already have faced or currently are facing CFPB scrutiny include:  credit card companies, debt relief service providers, mortgage lenders and brokers, mortgage insurers, consumer credit reporting agencies, lenders and servicers of student loans, and debt collectors.  We anticipate that the CFPB will continue to pursue an aggressive enforcement agenda in the second half of 2013 and that this list will expand quickly. I.   What is the Consumer Financial Protection Bureau?           A.   General Functions The CFPB was established as an independent bureau in the Federal Reserve System with a mandate to supervise consumer financial services companies and large depository institutions and their affiliates for consumer protection purposes.[3]  The Bureau’s purpose is to “seek to implement and, where applicable, enforce Federal consumer financial law consistently for the purpose of ensuring that all consumers have access to markets for consumer financial products and services and that markets for consumer financial products and services are fair, transparent, and competitive.”[4]  The CFPB assumed oversight of consumer compliance rules from seven different federal agencies, including:  the Federal Reserve Board (the Board); the Office of the Comptroller of the Currency (OCC); the Federal Deposit Insurance Corporation (FDIC); the Office of Thrift Supervision (OTS); the National Credit Union Administration (NCUA); the Federal Trade Commission (FTC); and the Department of Housing and Urban Development (HUD). The CFPB is mandated to exercise its authorities under federal consumer financial law for the purposes of ensuring that, with respect to consumer financial products and services:  (1) consumers are provided with timely and understandable information to make responsible decisions about financial transactions; (2) consumers are protected from unfair, deceptive, or abusive acts and practices and from discrimination; (3) outdated, unnecessary, or unduly burdensome regulations are regularly identified and addressed in order to reduce unwarranted regulatory burdens; (4) federal consumer financial law is enforced consistently, without regard to the status of a person as a depository institution, in order to promote fair competition; and (5) markets for consumer financial products and services operate transparently and efficiently to facilitate access and innovation.[5] The primary functions of the CFPB are to:  (1) conduct financial education programs; (2) collect, investigate, and respond to consumer complaints; (3) collect, research, monitor, and publish “information relevant to the functioning of markets for consumer financial products and services to identify risks to consumers and the proper functioning of such markets”; (4) supervise “covered persons for compliance with Federal consumer financial law” and take “appropriate enforcement action to address violations of Federal consumer financial law”; (5) issue rules, orders, and guidance “implementing Federal consumer financial law”; and (6) perform “such support activities as may be necessary or useful to facilitate the other functions of the Bureau.”[6]           B.   Persons Subject to CFPB Regulation and Oversight The CFPB has authority to regulate any “covered person,” defined as anyone who engages in offering or providing a consumer financial product or service.[7]  A “consumer financial product or service” is a financial product or service offered or provided for use by consumers primarily for personal, family, or household purposes, or delivered, offered, or provided in connection with such a consumer financial product or service.[8]   Financial products and services include:  extensions of credit and loan services; real estate settlement services and property appraisals; taking deposits, transmitting or exchanging funds, or acting as a custodian of funds or any financial instrument for use by or on behalf of a consumer; sale, provision, or issuance of a payment instrument or a stored value instrument over which the seller exercises substantial control; check cashing, collection, or guaranty services; financial data processing products or services; financial advisory services; and collection and provision of consumer report and credit history information.[9] The CFPB has exclusive supervisory authority over large depository institutions, their affiliates (including subsidiaries), and the service providers for such entities.[10]   The CFPB is the primary rulemaker and enforcer of consumer protection laws over those entities.[11]  By contrast, “prudential regulators”–the Board,  the FDIC, the NCUA, and the OCC[12]–have consumer compliance examination authority for smaller depository institutions–that is, those having $10 billion or less in total assets.[13]  However, the Bureau has supervisory authority over service providers to a substantial number of smaller depository institutions.[14]  Moreover, the Bureau may send its examiners “on a sampling basis” to examinations of smaller depositories performed by prudential regulators in order to “assess compliance with the requirements of Federal consumer financial law.”[15] Under section 1024, the CFPB is also authorized to supervise certain other entities and individuals that offer or provide a consumer financial product or service and their service providers.  Section 1024 applies to those entities and individuals that offer or provide mortgage-related products or services and payday and private student loans, as well as larger participants of other consumer financial service or product markets as defined by a CFPB rule, plus their service providers.[16]  Moreover, under rules promulgated by the CFPB, as of January 2, 2013, any party with greater than $10 million in annual receipts from consumer debt collection activities will be subject to the Bureau’s supervisory authority.[17]  The consumer debt collection market covered by the rule includes three main types of debt collection:  (1) firms that buy defaulted debt and collect the proceeds for themselves; (2) firms that collect defaulted debt owned by another company in return for a fee; and (3) debt collection attorneys that collect through litigation.  The rule marks the first time that attorneys will be subject to direct federal supervision.[18]  As a result, the CFPB will begin to oversee approximately 175 debt collection agencies, representing over 60 percent of the debt collection industry’s annual receipts.           C.   Rulemaking Authority The CFPB Director has the authority to prescribe rules and issue orders and guidance to enable the Bureau to administer federal consumer financial laws.[19] The CFPB also has primary rulemaking and enforcement authority under numerous existing federal consumer protection laws, detailed in the sidebar.[20]  With this authority, the CFPB can prescribe rules applicable to a covered person or service provider identifying as unlawful any unfair, deceptive, or abusive acts or practices in connection with consumer financial products or services, as well as prescribe disclosure rules and mandate model disclosure forms.[21] In prescribing rules, the CFPB is required to consider the potential costs and benefits to consumers and covered persons, including any potential reduction of consumer access to financial products or services.[22]  The CFPB’s rulemaking authority is limited by the requirement that it must consult with the prudential regulators and other appropriate federal agencies before proposing a rule and during the comment process.  If a prudential regulator provides a written exception to the proposed rule, the CFPB must include the objection in its adopting release.[23]  The Financial Stability Oversight Council (Council or FSOC) can set aside final CFPB regulations if they would put the safety and soundness of the U.S. banking system or the stability of the U.S. financial system at risk.[24] D.   Funding     The CFPB’s funding derives from the Federal Reserve System rather than congressional appropriations.  From the combined earnings of the Federal Reserve System, the Board of Governors gives the Bureau an amount “determined by the Director to be reasonably necessary to carry out the authorities of the Bureau” under federal consumer financial law.[25]  However, annual funding transferred to the CFPB from the Federal Reserve System is capped at a fixed percentage of the total 2009 operating expenses of the Federal Reserve System, equal to 12% of these expenses (or approximately $597.6 million) in fiscal year 2013 and each year thereafter, subject to annual adjustments.[26]  As of December 31, 2012, the CFPB had requested transfers from the Federal Reserve totaling $136.2 million to fund CFPB operations and activities for the first quarter of fiscal year 2013.[27]           E.   Director The President’s appointment of CFPB Director Richard Cordray has embroiled the Bureau in a major political and legal controversy for the last year.  The Dodd-Frank Act provides that the President must nominate a CFPB Director, with the advice and consent of the U.S. Senate, for a term of five years.[28]  The Director may serve after the expiration of that term until a successor has been appointed and qualified.[29]   The President may remove the Director only for cause–that is, “for inefficiency, neglect of duty, or malfeasance in office.”[30]  Although the Dodd-Frank Act gave the Secretary of the Treasury interim authority to perform certain Bureau functions before a Director was confirmed, the Act provides that the Bureau could not write new rules or supervise financial companies other than banks without a director.[31] On January 4, 2012, President Obama appointed Richard Cordray as the first CFPB Director, and the Bureau began to move forward with its regulatory and rule-writing agenda, focusing primarily on nonbank financial companies, such as money transfer agencies, credit bureaus, and private mortgage lenders.   The process by which President Obama appointed Mr. Cordray, however, drew immediate criticism.[32]  In what is known as the “Recess Appointments Clause,” the U.S. Constitution provides that “[t]he President shall have Power to fill up all Vacancies that may happen during the Recess of the Senate, by granting Commissions which shall expire at the End of their next Session.”[33]  President Obama initially installed Mr. Cordray through a purported recess appointment when the Senate was on a 20-day holiday, but holding pro forma sessions every three days to block presidential action.  The President’s appointment of Mr. Cordray during this time allowed the President to bypass Republican opposition to Mr. Cordray’s nomination and install Mr. Cordray as the CFPB Director until the end of 2013. On January 25, 2013, however, the U.S. Court of Appeals for the District of Columbia Circuit held that President Obama’s appointments of three members of the National Labor Relations Board (NLRB)–whom he appointed the same day as Mr. Cordray–were “constitutionally invalid.”[34]  The court interpreted the Recess Appointments Clause to mean that the President only may use his recess appointments authority during the recess that occurs between sessions of Congress, not during intrasession adjournments.[35]  Because the invalidation of the appointments meant that the Board did not have a quorum for votes in which the three members participated, the court held that the challenged enforcement action at issue in the case must be vacated.[36]  The NLRB has filed a petition for a writ of certiorari to the U.S. Supreme Court .[37] Although the this decision does not affect Mr. Cordray’s initial appointment directly, his appointment has been challenged on the same grounds in a case pending before the federal district court for the District of Columbia.[38]  The defendants in that case have moved to dismiss the case on procedural grounds, but if the court reaches the merits, the D.C. Circuit’s decision will bind it unless the Supreme Court overturns the decision.  Such a scenario would call into question many of the actions Mr. Cordray and the CFPB have taken thus far–particularly the promulgation and implementation of rules because, by statute, only a lawfully-appointed director “may prescribe rules and issue orders and guidance, as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and . . . prevent evasions thereof.”[39] In the meantime, President Obama has re-nominated Mr. Cordray to a full five-year term at the CFPB.  The Senate Committee on Banking, Housing, and Urban Development approved the nomination on a 12-10 party-line vote.  Senate Majority Leader Harry Reid (D-NV) recently announced that he would push a full Senate vote on Mr. Cordray to July.  To bring the nomination to a vote, a sixty-senator majority will have to vote to invoke cloture, but 43 Republican senators already have sent a letter to President Obama promising to oppose the nomination. House Financial Services Committee Chairman Jeb Hensarling (R-TX) sent a letter to Meredith Fuchs, the CFPB Associate Director and General Counsel, stating that he would not allow Mr. Cordray to give the CFPB’s mandatory semi-annual report to the Committee because he “does not meet the statutory requirements of a validly-serving Director of the CFPB, and cannot be recognized as such.”[40]  Chairman Hensarling also said, however, that the Committee “intends to continue to conduct rigorous oversight of the CFPB’s activities, and will expect the CFPB’s cooperation in those efforts.”[41] Gibson Dunn will be monitoring developments with regard to Mr. Cordray’s appointment closely and plans to provide timely updates regarding the nomination process as events unfold. II.   CFPB Complaint and Data Collection In its first year of operations, the CFPB has established itself as a massive clearinghouse of consumer financial data and complaints.  Several sections of the Dodd-Frank Act require the CFPB to collect data and help consumers.  For instance, the Act directs the CFPB to establish a “community affairs” unit to provide information, guidance, and technical assistance regarding the offering and provision of consumer financial products to “traditionally underserved consumers and communities.”[42]  It also requires the CFPB to establish a consumer complaint unit to collect consumer complaints and direct them to the appropriate federal or state agencies for action.[43] The CFPB has acted on these requirements quickly–and on a scale that has caught many by surprise.   The CFPB has begun collecting complaint data through a Consumer Complaint Database that lists customer complaints about specific, named companies.[44]  The database can be downloaded, sorted, and graphed.  The CFPB has explained:  “We don’t verify all the facts alleged in these complaints but we do take steps to confirm a commercial relationship between the consumer and company.  Complaints are listed here after the company responds or after they have had the complaint for 15 calendar days, whichever comes first.  We remove complaints if they don’t meet all of the publication criteria.”  The publication criteria are contained in a policy statement issued March 25, 2013.[45]  The statement explains that the database will include complaints about credit cards, mortgages, bank accounts and services, private student loans, and other consumer loans.[46]  Although the CFPB does not validate the facts of the complaints, it has asserted that it believes that the data are useful and that the “marketplace of ideas will determine what the data show.”[47] Between July 21, 2011 and February 28, 2013, the CFPB received approximately 131,300 consumer complaints.[48]  The complaints included approximately 30,000 credit card complaints, 63,700 mortgage complaints, 19,800 bank account and service complaints, 4,600 student loan complaints, 4,100 consumer loan complaints, and 6,700 credit reporting complaints.[49] In addition to its collection of consumer complaints, the CFPB also has undertaken a tremendous data collection effort.  Bloomberg News reported on April 18, 2013, that the CFPB will spend $20 million to purchase anonymous consumer data regarding 10 million consumers from national service providers.  The CFPB also is ordering banks and mortgage companies to provide consumer records.[50]   The CFPB may share these data and individual complaints with state and federal law enforcement agencies, and it reports to Congress each year about the complaints it receives.[51]  In an oversight hearing before the Senate Banking Committee on April 23, 2013, several senators, including Ranking Member Mike Crapo (R-ID) and Senator Mike Johanns (R-NE), expressed concern about the level and detail of the CFPB’s data collection. In addition to its enormous database, the CFPB has created other resources for consumers to share their experiences with consumer financial products.  For instance, on its website, the CFPB has established a page for consumers to tell both positive and negative stories about their experiences with consumer financial products to “help inform how [the CFPB] work[s] to protect consumers and create a fairer market place.”[52]  The page asks for a narrative account and for the consumer’s contact information, although it also allows consumers to submit their stories anonymously.  The page includes a checkbox for consumers to mark if they are reporting something they saw while working for a financial company. The CFPB website also includes pages directed toward traditionally underserved communities, including students, the elderly, service members, and veterans under its “Get Assistance” link.  On each of those pages, the CFPB addresses topics relevant to the specific community, such as repaying student debt or how to handle scam artists targeting the elderly. The CFPB complaint unit has established a toll-free consumer help hotline, as well as an extensive online tool for submitting complaints about financial companies.[53]  Once a consumer submits a complaint, the CFPB either forwards the complaint to the company or sends the complaint to a more appropriate federal agency.  The company must review the complaint and report back to the consumer and to the CFPB.  In addition to its main complaint website, the CFPB also has established webpages for specific types of complaints, such as complaints about student loans[54] and credit reporting[55].  The CFPB has taken to Twitter and Facebook to advertise these specific complaint websites and encourage people to report their problems.[56]  It also has been updating followers on Twitter about the number of complaints it has received and provides links to published consumer complaints and their resolution, omitting the names of the companies involved.[57] III.   Supervisory Authority The CFPB has a broad supervisory and enforcement mandate.  The CFPB is tasked with assessing compliance with federal consumer financial laws, obtaining information about activities and compliance systems or procedures, and detecting and assessing risks to consumers and to markets for consumer financial products and services.[58]  The CFPB supervises large depository institutions that offer a wide variety of consumer financial products and services, such as banks and credit unions,[59] as well as non-depository consumer financial services companies that offer one or more such products, such as schools offering private student loans.[60] The Dodd-Frank Act established parallel frameworks to govern the CFPB’s supervisory authority over large depository institutions and their affiliates and over non-depository consumer financial services companies.[61]  The frameworks state that the purpose of CFPB supervision, including examination, is to assess supervised entities’ compliance with Federal consumer financial laws, obtain information about supervised entities’ activities and compliance systems or procedures, and detect and assess risks to consumers and to markets for consumer financial products and services.[62]  The frameworks also require the CFPB to coordinate with other federal and state regulators and the requirement to use, where possible, publicly available information and existing reports to federal or state regulators pertaining to supervised entities.[63]           A.   Examination Process[64] The CFPB targets non-depository consumer financial services companies for examination based on the potential risk the companies pose to consumers, including consideration of a company’s asset size, volume of consumer financial transactions, extent of other federal and state oversight, and any other factor the CFPB deems relevant.[65]  The CFPB is required to coordinate examinations of non-depository consumer financial services companies with state and prudential regulators.[66] The CFPB sets regular examination schedules for large depository institutions and their affiliates depending on two considerations:  (1) an assessment of potential risks to consumers, and (2) statutory requirements that the Bureau and prudential regulators coordinate their examination scheduling and conduct “simultaneous” examinations of depository institutions, as well as coordinate such examinations with state regulators.[67] The Bureau’s specific examination procedures are similar to those of prudential and many state regulators.[68]  During the course of an examination, CFPB examiners collect and review information available from within the CFPB, from other federal and state agencies, and from public sources.[69]  To the extent possible, the Bureau is required to use reports that the supervised entity has provided to federal or state regulators and information that the entity has publicly reported.[70]  However, the Bureau’s examiners also are authorized to request and review supplementary documents and information from the supervised entity.[71]  After completing an examination, CFPB examiners develop and obtain internal approval for a preliminary risk focus and scope for the onsite portion of the examination.[72] During the examination process, CFPB examiners go onsite to observe employees, conduct interviews, and review additional documents and information.[73]  Firms should note that CFPB enforcement attorneys have been attending examinations, which has raised concerns for a number of supervised entities regarding the attorney-client privilege and whether information discovered during examinations could be used in later enforcement proceedings.  The CFPB’s 2012 Ombudsman Report recommended that the CFPB review implementation of that policy and clarify the role of enforcement attorneys at examinations.[74]  The Federal Reserve Board’s Office of Inspector General has announced that it will evaluate the integration of enforcement attorneys into examinations to assess the risks associated with this approach and the effectiveness of safeguards the CFPB has established to mitigate those risks.[75] After the examination concludes, the CFPB examiners consult internally if the examination indicates potential unfair, deceptive, or abusive acts or practices, discrimination, or other violations of law.[76]  The CFPB examiners also draw preliminary conclusions about the entity’s compliance management and its statutory and regulatory compliance, and, if warranted, will consider imposing corrective actions on the institution, whether through informal agreement or a formal enforcement action.[77]  At the close of the examination, the CFPB examiners draft an examination report and share the draft report with the prudential regulators.[78]  The CFPB examiners may consider any comments the prudential regulators offer regarding the draft report.[79]  After final internal clearance, the CFPB examiners finalize and transmit the report to the supervised entity.[80] During the examination, the Examiner in Charge communicates with appropriate supervised entity personnel about preliminary findings and conclusions.[81]  The CFPB seeks cooperation from the supervised entity to correct any problems identified.[82]  The CFPB states that it considers all supervisory information, including examination reports and ratings, to be highly confidential,[83] although regulated entities have been concerned about the CFPB’s ability to share such information with state regulators. The CFPB addresses negative examination findings based on the individual facts and circumstances at issue in each examination.  If the examination process results in negative findings, the type of problems found and the severity of harm to consumers dictate whether informal supervisory measures or formal enforcement action is taken.[84]  According to the Supervision and Examination Manual, the CFPB encourages self-correction, but some circumstances may nevertheless be sufficiently serious to warrant a public enforcement action.[85]  For large depository institutions and their affiliates, the CFPB shares draft examination reports and consults with prudential regulators regarding  whether supervisory or enforcement action should be taken.[86]           B.   Target and Horizontal Reviews In addition to regularly scheduled examinations, the CFPB is authorized to conduct target and horizontal reviews.  Target reviews focus on a single problem at a single entity, such as a significant volume of customer complaints or a specific concern that has come to the Bureau’s attention.  Horizontal reviews look across multiple entities to examine issues arising from particular products or practices to determine whether supervisory measures or enforcement actions are needed.[87]           C.   Supervision Process The CFPB takes different approaches to supervising depository institutions versus non-depository consumer financial services companies.  The Nonbank Supervision Risk Analytics and Monitoring team (RAM) provides risk-based analysis of consumer financial markets and market participants to support the examination program surrounding non-depository consumer financial services companies.[88]  This team is authorized to acquire and analyze qualitative and quantitative information and data pertaining to consumer financial product and service markets to determine what industries and institutions pose the greatest risk to consumers.[89]  These data are then used to schedule individual examinations based on a risk ranking of entities.[90]  Once a particular examination is scheduled, the examination team is to follow the same general examination process used for all supervised entities.[91]  Conversely, each large depository institution is assigned a lead examiner who regularly monitors information about the entity and its affiliates.[92]  That information is collected in an institution profile and used as the basis for a risk assessment and supervision plan, which determines the frequency and depth of monitoring.[93]           D.   Supervisory Appeals Process[94] On October 31, 2012, the CFPB announced its appeals policy for supervised entities.  Financial service providers under the CFPB’s jurisdiction, including depository institutions, may request a review of a less than satisfactory compliance rating (a rating of 3, 4, or 5) or any underlying adverse finding set forth in the relevant examination report, or adverse findings conveyed in a supervisory letter.[95]  The reviewing committee includes the CFPB Associate Director for Supervision, Enforcement, and Fair Lending who chairs the committee; one or more representatives from CFPB Headquarters Supervision management in Washington, D.C.; and at least two representatives of regional offices who were not involved in the matter under review.  The committee initially will review the supervised entity’s written appeal, the examination report or supervisory letter at issue, and supporting documentation for both.  If applicable, the committee will send a copy of the appeal to the prudential regulator of the appealing entity and solicit its views.  The committee also will solicit input from other CFPB personnel, such as examination staff and CFPB Headquarters staff, including those involved in the specific matter under appeal.  If requested, the committee will hear a presentation from the appealing entity.  Upon conclusion of the review, the committee will summarize its findings in a written decision, which is then reviewed by the Associate Director.  The decision of the Associate Director is final; the Bureau will not accept any further attempts to appeal the matter.[96] IV.   Enforcement Powers           A.   Investigations The Dodd-Frank Act authorizes the CFPB to conduct investigations to determine whether any person has violated federal consumer financial law (such as those listed earlier in a sidebar)[97] before initiating any judicial or administrative adjudicatory proceedings.[98]   Investigations may be initiated by the Assistant Director and the Deputy Assistant Directors of the Office of Enforcement.[99]  The CFPB may conduct these investigations jointly with other regulators.                     1.   Subpoenas The Dodd-Frank Act provides that the CFPB, or, “where appropriate,” its investigators, may issue subpoenas for witness testimony and documentary evidence in relation to any CFPB hearing.  Should a witness fail to comply with a subpoena, the CFPB or its investigator can petition the federal district court where the witness is found, resides, or conducts business to issue an order requiring the witness to appear to give testimony or to produce documents.  Should the witness violate that order, the court may hold the witness in contempt.[100]                     2.   Civil Investigative Demands The Dodd-Frank Act also grants the CFPB broad authority to issue civil investigative demands “[w]henever the Bureau has reason to believe that any person may be in possession, custody, or control of any documentary material or tangible things, or may have any information, relevant to a violation . . . .”[101]  The CFPB Director, the Assistant Director of the Office of Enforcement, and the Deputy Assistant Directors of the Office of Enforcement are authorized to issue CIDs.[102]   Should an investigation lead the CFPB to conclude that an enforcement action is warranted, the CFPB may institute proceedings in federal or state court or pursuant to the Bureau’s administrative adjudicatory process.  It also may refer investigations to appropriate federal, state, or foreign governmental agencies.[103]                               a.   Civil Investigative Demand Procedures The CFPB’s civil investigative demand procedures place a CID recipient under extraordinarily tight deadlines to review the CID, develop a response, meet with CFPB staff, and comply with or challenge the CID’s terms.  It is imperative for CID recipients to respond to a CID promptly according to a well-reasoned strategy. The CFPB may issue a CID “before the institution of any proceedings under the Federal consumer financial law.”[104]  The CID can require a person to produce documents, submit tangible items, file written reports or answers to questions, and give oral testimony,[105] but it must give the recipient a “reasonable period of time” to collect documents and make them available for inspection.[106]  It is the Bureau’s policy to keep the issuance of a CID confidential,[107] although a company may have to disclose the investigation in other public regulatory filings.  Significantly, although the Dodd-Frank Act requires the CFPB to treat produced documents and tangible items confidentially, the materials always are subject to disclosure to Congress or congressional committees.[108]  A CID recipient must assert all claims of privilege no later than the date set for the production of material, and, if directed by the CID, must produce a privilege log detailing the specific grounds for claiming privilege with regard to each item.[109]   If a person fails to comply with a CID, the Bureau may file a petition for an enforcement order in federal district court.[110] Once a party is served with a CID, the party must meet either in person or over the telephone with a Bureau investigator within ten calendar days to resolve any issues regarding compliance with the CID.[111]  During that meeting, a party can negotiate the terms of the CID with the Assistant Director or Deputy Assistant Directors of the Office of Enforcement.  The CFPB’s final Rules Relating to Investigations provides that “[t]he Assistant Director of the Office of Enforcement and the Deputy Assistant Directors of the Office of Enforcement are authorized to negotiate and approve the terms of satisfactory compliance with civil investigative demands, and, for good cause shown, may extend the time prescribed for compliance.”[112] After that mandatory meeting, a party served with a CID has three options: First, the recipient can comply with the CID within the time prescribed by the demand. Second, a party may petition the CFPB for an order to modify or set aside the demand.[113]   If a party chooses this option, it must file its petition by the shorter of 20 days after service of the CID or before the return date specified by the demand.[114]  The CFPB only will consider such a petition if the party has “meaningfully engaged” in the meet-and-confer process, and it only will consider issues raised during that process.[115]  A timely petition to modify or set aside the demand stays the time permitted for compliance with regard to the portion of the CID that the recipient is challenging.  If the CFPB denies the petition, the ruling will specify a new return date.[116]  Unless a party can show good cause why it should not, the CFPB will make both the petition and its ruling public.[117] Third, a party may request an extension of time to file a petition to modify or set aside the CID–but such requests are “disfavored” under the CFPB’s regulations.[118]                               b.   Oral Testimony and Investigational Hearings Pursuant to CIDs The CFPB may conduct investigational hearings– distinguished from adjudicative hearings–pursuant to a CID for oral testimony.[119]  Such hearings may be employed in the course of any investigation, “including inquiries initiated for the purpose of determining whether or not a respondent is complying with an order of the Bureau.”[120]  Civil investigative demands requiring the recipient to give oral testimony must prescribe a date, time, and place for the testimony and identify the Bureau investigator who will conduct the investigation.[121]  They also must “describe with reasonable particularity the matters for examination.”[122]  Any party required to give oral testimony may be represented by counsel,[123] but counsel only may raise objections related to issues of privilege.[124]                               c.   CFPB Use of Civil Investigative Demands Thus Far Thus far, the CFPB only has issued two public orders in response to petitions to set aside or modify CIDs, one to PHH Corporation and one to Next Generation Debt Settlement.  Both orders, discussed below, suggest that the meet-and-confer process will be key to negotiating the terms of a CID.                                         i.   PHH Corporation The most informative case study is that of PHH Corporation, a mortgage lender.  Because the Order represented the Bureau’s first determination regarding a petition to modify or set aside a CID, the Bureau provided a more extensive discussion than it expects to be typical of such orders.[125]  PHH’s petition also includes an exchange of letters with the CFPB that provides insight into the negotiation process with the CFPB. The Bureau’s enforcement team sent a letter to PHH on January 3, 2012 to announce that it had opened an investigation “to determine whether the practice of ceding premiums from private mortgage insurance companies to captive reinsurance subsidiaries of certain mortgage lenders has violated Section 8 of the Real Estate Settlement Procedures Act (RESPA).”[126]  The Bureau’s Order states that the initial letter requested “limited data” from the company.[127]  PHH and the CFPB engaged in discussions, which resulted in a written agreement executed on January 25, 2012 tolling any applicable statutes of limitations.[128] On May 22, 2012, the Bureau issued a CID to PHH consisting of 21 interrogatories and 33 document requests–many with multiple subparts–relating to the investigation.   PHH’s counsel and the CFPB initially engaged in a series of telephone calls and letters to address PHH’s concerns regarding the demand.[129]  In a letter dated June 4, 2012, PHH asserted that it believed that the specifications were overbroad.  In particular, it noted that the requests dated back to 2001 in some instances, and to 1995 in others, but that the statute of limitations for any RESPA action was three years, making the only relevant time period January 25, 2009 to the present.  PHH proposed specific modifications to almost every interrogatory and request for documents.[130] On June 7, 2012, Kent Markus, the CFPB Chief of Enforcement, sent PHH a letter stating that it had received the company’s request for a limited extension of the deadline to produce documents responsive to the CID.  The letter granted an extension for an initial production to be made on June 29, 2012, and all other documents to be produced on July 15, 2012, as well as stated terms that PHH and the CFPB apparently had previously negotiated for compliance with the CID.  The letter also denied PHH’s request to toll the deadline for filing a petition to modify or set aside the CID.[131] On June 8, 2012, the CFPB sent PHH another letter stating that it was “willing to work with the list of custodians that [PHH] provided as a starting point to narrow the scope of electronic mail searches,” and requested additional information to develop a more complete list of custodians.[132]  In the June 8 letter, the CFPB also responded to what it characterized as PHH’s “general rote objections” that the CID’s requests were overly broad and burdensome–and, in that process, signaled its expansive view of its investigative authority.  The letter states: “As you are no doubt aware, the Bureau has extensive authority to request information, data, and documents from [PHH] . . . particularly with respect to the enforcement of RESPA.”  It cites Supreme Court precedent for the proposition that an administrative procedure “is sufficient if the inquiry is within the authority of the agency, the demand is not too indefinite, and the information is reasonably relevant.”[133]  The letter characterizes the CID as “narrowly tailored to a particular practice and potential violation of law,” but then immediately asserts that “[t]he Bureau has ‘no obligation to establish precisely the relevance of the material it seeks’ or to reveal the internal deliberations of our investigation.'”[134]  The letter explains:  “[w]ith respect to an administrative CID, ‘it is essentially the respondent’s burden to show that the information is irrelevant.’ . . . We do not believe that any of your objections meet this threshold.”[135] Specifically addressing PHH’s concern about the time period of the requests, the CFPB stated that PHH “[had] not offered any legally cognizable basis to challenge the relevance of the requests set forth in the CID.”  The letter asserts that “the law is clear that a possible statute of limitations defense does not limit an agency’s authority to investigate and cannot be used as a defense to a demand for documents. . . . To the extent older information is unavailable or not reasonably accessible, we will consider those issues as a matter of burden, not relevance.”[136]  But, the letter continues, PHH did not cite any specific factual basis to explain why the requests would impose an undue burden on the company.[137] On June 12, 2012, PHH filed its 36-page petition to modify or set aside the CID asserting that the CID failed to “state the nature of the conduct constituting the violation which is under investigation,” as it must under Section 1052(c)(2) of the Dodd-Frank Act;[138] the document requests were overbroad because documents dating back 11 or 17 years could not be relevant to claims with a statute of limitation dating back only three years;[139] and that the requests sought documents that were not relevant to any asserted violation, thus making the requests unreasonable.[140]  PHH also argued that compliance would be unduly burdensome to the company because it would take months of attorney efforts to review all the documents requested.[141]  Further, PHH noted that the CFPB had not yet provided search terms to use in connection with the e-mail production, but still expected PHH to meet the production deadlines.[142] On September 20, 2012, the CFPB issued its Order denying PHH’s petition.  It cited many of the same reasons it discussed in its June 8 letter, and, in the process, made clear several important points– First, the CFPB views its investigative authority broadly.  It analogized its power to the investigative authority of the FTC, which the Supreme Court in the Morton Salt case likened to that of a grand jury which “‘can investigate merely on suspicion that the law is being violated, or even just because it wants assurance that it is not.'”[143]  The CFPB again cited Morton Salt for the proposition that an administrative subpoena “‘is sufficient if the inquiry is within the authority of the agency, the demand is not too indefinite and the information sought is reasonably relevant.'”[144] Second, the meet-and-confer process will be essential to limiting the Bureau’s demands.  The Bureau responded to PHH’s argument that the CID amounted to a “fishing expedition” by explaining that at the outset, the enforcement team presents a “thorough and comprehensive” request for information, and that “[t]he meet-and-confer session is intended as an opportunity to narrow the scope of the requests . . . .”[145]  Although PHH participated in a telephonic meet-and-confer, PHH did not make its information technology personnel available as the CFPB had requested.[146]  The CFPB also asserted that PHH did not cite specific burdens the requests would impose on the company.[147]  It will be imperative for any CID recipient who wishes to negotiate the terms of the demand with the CFPB to present detailed information regarding the costs of and time required to produce the documents the CFPB demands. Third, the CFPB likely will not be receptive to requests to limit the time periods covered by demands based on statute of limitations arguments.   PHH reasserted its argument that the CID requested information that could not be relevant because it sought information beyond the applicable three-year statute of limitations established in Title X, going back as far as 1995 for some requests.  As it did in its June 8 letter, the CFPB rejected that argument, again citing EEOC v. American Express Centurion Bank, 758 F. Supp. 217, 222 (D. Del. 1991), for the proposition that a possible statute of limitations defense does not limit an agency’s authority to investigate and cannot be used as a defense to a demand for documents. It appears that the CFPB’s demands for information may extend over many years, and based on the CFPB’s Order and June 8 letter in this case, that the CFPB only will consider those undue burden arguments that assert very specific burdens a document production could impose on the respondent.                                         ii.   Next Generation Debt Settlement On August 3, 2012, the Bureau issued a CID to Next Generation “in connection with an investigation regarding . . . whether certain companies engaged in unlawful acts or practices in the advertising, marketing or sale of debt settlement services.”[148]   According to the Bureau’s Order, CFPB attorneys spoke with a Next Generation employee on August 20 to confirm the company’s attendance at the investigational hearing, and, nine days later, also sent a letter to the company to confirm its attendance and notify the company that it had failed to meet and confer with Bureau staff.[149]  On September 4, 2012, the company’s chief executive officer sent a brief e-mail to the CFPB asking the Bureau to set aside the CID for eight reasons,[150] all of which the CFPB characterized as “focused on potential defenses to claims the Bureau might bring against Next Generation.”[151] The CFPB denied Next Generation’s e-mail petition “because it was not filed within the time permitted under the Bureau’s rules regarding investigations, and because Next Generation failed to meet and confer with Bureau staff before filing the petition.” [152]  The Order notes that the Bureau may waive the timing and meet-and-confer requirements “in appropriate circumstances,” but Next Generation did not request a waiver.[153] The Order adds that “even if the petition comported with the Bureau’s rules, it has no merit,”[154]  explaining that “facts relating to whether Next Generation is covered by or has violated a federal consumer financial law are not defenses to the enforcement of a CID, even if they might eventually be defenses to legal claims contemplated in the CID.”  The Bureau emphasized that it has authority to “conduct an investigation ‘to discover and procure evidence, not to prove a pending charge or complaint, but upon which to make one if, in the [Bureau’s] judgment, the facts thus discovered should justify doing so.'”[155] Although much more abbreviated than its response to PHH, the Bureau’s response to Next Generation’s petition again indicates that it will take the timing and meet-and-confer requirements seriously.           B.   Hearings and Adjudications The CFPB can conduct hearings and adjudication proceedings, including cease-and-desist proceedings, to enforce compliance with Title X, regulations the CFPB issues, and the other federal laws the CFPB is authorized to enforce (set forth in the earlier sidebar).[156]  In an administrative proceeding or in a civil action brought under federal consumer financial law, the court or the CFPB “shall have jurisdiction to grant any appropriate legal or equitable relief,” which “may include, without limitation: rescission or reformation of contracts; refund of money or return of real property; restitution; disgorgement or compensation for unjust enrichment; payment of damages or other monetary relief; public notification regarding the violation; and limits on the activities or functions of the person against whom the action is brought.[157]  The Dodd-Frank Act, however, does not authorize the imposition of exemplary or punitive damages, but it does allow state or federal regulators to recover their costs if they prevail in the action.[158] The Dodd-Frank Act also provides that “[a]ny person that violates, through any act or omission, any provision of Federal consumer financial law shall forfeit and pay a civil penalty.”   The statute provides for three tiers of penalties.  The first tier applies to “any violation of a law, rule, or final order or condition imposed in writing by the Bureau” and sets a penalty of not more than $5,000 per day that the violation occurred or the party continues to fail to pay the penalty.  The second tier provides that “for any person that recklessly engages in a violation of a Federal consumer financial law, a civil penalty may not exceed $25,000 for each day during which such violation continues.”  And the third tier provides that “for any person that knowingly violates a Federal consumer financial law, a civil penalty may not exceed $1,000,000 for each day during which such violation continues.”[159]  The statute requires, however, that the CFPB or court consider “the appropriateness of the penalty” in light of mitigating factors, including “the size of financial resources and good faith of the person charged”; “the gravity of the violation or failure to pay”; “the severity of the risks to or losses of the consumer, which may take into account the number of products or services sold or provided”; “the history of previous violations”; and “such other matters as justice may require.”  The funds collected by the CFPB may be used either for consumer victims or for financial education.[160] The CFPB already has proven that it will pursue these awards aggressively:  In its recent Semi-Annual Report to Congress, the Bureau announced that it has obtained $425 million in refunds for credit card company customers.[161]                     1.   Hearing and Adjudication Procedures Section 1053 of the Dodd-Frank Act authorizes the CFPB to conduct administrative adjudications following the standard course for such proceedings set out in the Administrative Procedure Act to “ensure or enforce compliance with” Title X of the Dodd-Frank Act, including rules prescribed by the Bureau under Title X, and any other Federal law the Bureau is authorized to enforce, unless a law specifically limits the Board from conducting such a proceeding.[162]   The CFPB issued a final rule on June 29, 2012, establishing the rules of practice for adjudication proceedings.[163]  The rule explains that initial proceedings will take place before a hearing officer.[164]  Typically, the CFPB will commence the proceeding by filing a notice of charges, but the parties can agree to a settlement prior to that filing, in which case, the proceeding will be commenced by filing a stipulation and a consent order.[165]  The rule also provides that a respondent may propose a settlement offer at any time during the proceedings.[166]  Unless the parties enter a consent order, however, the respondent must file an answer within 14 days of service of the notice of charges specifically addressing each allegation of fact in the notice of charges.[167]  Throughout the proceeding, the hearing officer may certify any matter upon his own motion or motion by a respondent for review by the CFPB Director.[168]  If a hearing officer denies a respondent’s motion for certification, the respondent may petition the Director directly for review–but such review is disfavored.  The Director has discretion whether to consider any matter, whether it comes to him by certification or petition.[169] Under the rule, the hearing officer must file a recommended decision no later than 90 days after the deadline for filing post-hearing responsive briefs, and no later than 300 days after the CFPB files the notice of charges, unless the Director grants an extension.[170]  Unless the respondent timely files and perfects a notice of appeal of the recommended decision, the Director may adopt it as the final decision and order of the Bureau, or he may order further briefing.[171]  To appeal a recommended decision, a party must file a notice of appeal with the Office of Administrative Adjudication within ten days after service of the recommended decision and then perfect the appeal by filing its opening appeal brief within thirty days of service of the recommended decision.  A party must perfect an appeal to the Director before seeking judicial review of a final decision and order.[172]                     2.   Judicial Review Except for review of cease-and-desist orders, judicial review is conducted pursuant to the Administrative Procedure Act (APA).[173]  Parties may seek review of final agency actions[174] in a “court of competent jurisdiction”[175]­–typically a federal district court.  The APA mandates that reviewing courts give agencies a significant amount of deference, providing for agency decisions to be set aside only if the decisions are “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,” contrary to a party’s constitutional rights, in excess of the agency’s statutory jurisdiction or limitations, or without observance of required legal procedures, or unwarranted by the facts.[176]                     3.   Cease-and-Desist Order Procedures The Dodd-Frank Act establishes a special set of procedures for cease-and-desist proceedings brought by the CFPB.[177]  In its notice of charges, the Bureau must set a time and place to hold a hearing to determine whether a cease-and-desist order should be issued against the covered person between thirty and sixty days after the notice of charges has been served.  All administrative hearings regarding cease-and-desist orders are required to take place in the federal district court where the covered person has its principal place of business, unless the person consents to another location, and are to be conducted according to the APA.  If a party consents by failing to appear at the hearing or the Bureau finds on the record that a violation has been established, the Bureau may issue an order to cease and desist from the violating practice, which will become effective thirty days after service.  A party may petition for judicial review in the U.S. Court of Appeals of its principal place of business or the U.S. Court of Appeals for the D.C. Circuit within thirty days after the date the CFPB serves the order.           C.   Civil Actions In addition to its adjudication proceedings, the CFPB can bring a civil action in federal district court or seek civil penalties and equitable relief for violations of Title X, related regulations, or other consumer financial protection laws.  When commencing a civil action, the Bureau must notify the Attorney General.[178]  The CFPB announced last year that in some cases, it would send an early warning–called a Notice and Opportunity to Respond and Advise (NORA)­–to a party before commencing enforcement proceedings.  A party that receives such a notice then has the chance to send a NORA letter to the CFPB presenting legal and policy arguments relevant to the potential enforcement proceedings.  A NORA letter can be supported by facts verified in a sworn written statement.  The CFPB emphasized, however, that it will not send early warnings in all cases, especially in instances when it suspects ongoing fraud.[179]           D.   Referrals to Other Federal Agencies Although the CFPB does not have criminal enforcement authority,[180] it is required to refer findings of federal criminal violations to the Department of Justice (DOJ) for further review and action.[181]  Director Cordray announced on May 7, 2013, that the CFPB had made its first criminal referral of several debt relief service providers to the U.S. Attorney for the Southern District of New York.  After investigating Mission Settlement Agency and Premier Consultant Group, the Law Office of Michael Levitis, and the Law Office of Michael Lupolover for a year, the CFPB determined that the companies provided little or no debt relief to their customers and charged unlawful advance fees to their customers.[182]  Director Cordray concluded his remarks by noting that the CFPB and the U.S. Attorney’s Office “will be looking for more such occasions to coordinate and collaborate.” The CFPB also is required to refer information identifying possible tax law noncompliance to the Internal Revenue Service (IRS).[183]  Additionally, the Equal Credit Opportunity Act (ECOA) requires the CFPB to refer matters to DOJ whenever the CFPB “has reason to believe that one or more creditors has engaged in a pattern or practice of discouraging or denying applications for credit in violation of Section 1691(a)” of ECOA, which states ECOA’s basic prohibitions against discrimination.[184]  In matters that do not involve a pattern or practice of discouragement or denial, the CFPB may refer the matter to the DOJ whenever the agency has reason to believe that one or more creditors has violated Section 1691(a).  Furthermore, when examiners find information that may indicate violations of law that are not within the CFPB’s authority, the information will be passed on to the appropriate federal or state regulator. V.   Ongoing and Upcoming Investigations During its first year of operation, the Bureau’s Office of Enforcement has launched several high profile investigations which have resulted in companies paying hefty fines and customer refunds.  Many more such investigations are ongoing or are likely to be commenced in 2013.           A.   Credit Card Companies Credit card companies have been one of the Bureau’s first enforcement targets.  The CFPB announced its first public enforcement action on July 18, 2012, against Capital One Bank (U.S.A.), N.A.   The CFPB ordered Capital One to “cease and desist . . .  from engaging in violations of law or regulation in the marketing” of certain financial products, develop a detailed compliance plan, and submit a remediation plan to the CFPB that “[p]rovide[s] for Remediation to Eligible Cardmembers that shall consist of Restitution or Monetary Relief, whichever component is greater.”[185]  The allegations included in the consent order focused primarily on marketing conducted by third-party call centers.[186]  According to the consent order, the customer refund totaled $140 million to two million customers.[187]   The consent order also required Capital One to pay a $25 million civil penalty to the Consumer Financial Civil Penalty Fund.[188]  The Bureau’s action against Capital One was taken in coordination with the OCC, which separately ordered restitution of approximately $150 million from Capital One, including the aforementioned $140 million customer refund.[189] After Capital One entered the consent agreements with the OCC and CFPB, shareholders filed derivative actions against Capital One and its directors and officers.[190]  The plaintiffs’ allegations draw heavily from the OCC and CFPB consent orders.[191]  Capital One has moved to dismiss the case on the grounds that the plaintiffs have failed to plead facts that would support their claims against Capital One.[192] The Bureau followed its Capital One action with similar enforcement actions against Discover Bank on September 24 and against American Express on October 1.  The FDIC and CFPB pursued a joint enforcement action against Discover.  In a consent order, the FDIC and CFPB announced that they had “determined that Discover has engaged in deceptive acts and practices in or affecting commerce, in violation of section 5 of the Federal Trade Commission Act . . . 15 U.S.C. § 45(a)(1), and in deceptive acts and practices in violation of sections 1031 and 1036 of the CFP Act . . . 12 U.S.C. §§ 5531, 5536, in connection with the marketing, sales, and operation of Discover’s Payment Protection, Identity Theft Protection, Wallet Protection and Credit Score Tracker products . . . .”[193]  Further, the FDIC “determined that Discover has engaged in unsafe or unsound banking practices.”  The FDIC and CFPB ordered Discover to refund approximately $200 million to more than 3.5 million customers and to pay a $14 million civil monetary penalty. [194] Similarly, the CFPB took over an investigation of American Express begun by the FDIC and the Utah Department of Financial Institutions that resulted in three consent orders in which the CFPB ordered three American Express subsidiaries to refund approximately $85 million to 250,000 customers.[195]  The CFPB also required the subsidiaries to pay a civil monetary penalty of $27.5 million to several federal government agencies.[196]           B.   Debt Relief Service Providers In conjunction with Attorneys General from New Mexico, North Carolina, North Dakota, and Wisconsin, and the Hawaii Office of Consumer Protection, the CFPB sued a Miami-based debt relief service provider, Payday Loan Debt Solution, Inc., and its principal, Sanjeet Parvani, in the federal district court for the Southern District of Florida.  The complaint alleged that the defendants charged customers advance fees before they actually provided the debt-relief services in violation of the Telemarketing Sales Rule, 16 C.F.R. § 310, the Consumer Financial Protection Act of 2010, 12 U.S.C. §§ 5481, and various state laws.[197]   Mr. Parvani cooperated with the investigation and agreed to the entry of the Stipulated Final Order and Judgment enjoining him from committing future violations and ordering him to pay $100,000 in restitution to affected consumers.[198] In its press release, the CFPB noted that “[t]his action is part of the CFPB’s comprehensive effort to prevent consumer harm in the debt-relief industry.”[199]  It seems likely, then, that future actions against debt relief service providers might be in store for 2013.  The action also sets a strong precedent for the CFPB’s coordinated action with state regulators and attorneys general. In addition to the criminal charges brought by the U.S. Attorney’s Office working with the CFPB discussed above, the CFPB also filed a civil complaint against Mission Settlement Agency, Premier Consulting Group, the Law Office of Michael Levitis, and the Law Office of Michael Lupolover based on allegations similar to those made against Payday Loan Debt Solution.[200]           C.   Mortgage Lenders and Brokers The CFPB also is focusing on the mortgage industry.  On December 11, 2012, the CFPB announced that it had initiated two actions against companies it alleges have engaged in loan modification scams.[201]  Two federal district court judges in California have ordered the Gordon Law Firm and the National Legal Help Center to suspend their operations and have frozen their assets.  The Special Inspector General for the Troubled Asset Relief Program (SIGTARP) referred the National Legal Help Center case to the CFPB, and the two entities plan to continue working closely on similar cases.  In both cases, the CFPB has alleged that the firms charged illegal fees, attempted to deceive consumers by claiming to be affiliated with government agencies, misrepresented that they would secure the consumers’ loan modifications, and instructed the consumers to stop paying their mortgages and contacting their lenders. The CFPB also has launched an investigation of mortgage lenders and brokers regarding allegations of misleading advertisements targeting the elderly and veterans, as well as other advertising violations.[202]  The Bureau has targeted companies it identified through a review of Internet, newspaper, and mail advertisements, as well as through consumer complaints.  The Bureau appears particularly concerned with misrepresentations regarding a company’s affiliation with the government, interest rates, the cost of mortgages and reverse mortgages, and the amount of cash or credit available to consumers.  The Federal Trade Commission also is participating in the investigation, focusing on home builders, realtors, and lead generators.           D.   Mortgage Insurers In the reshuffling of duties under the Dodd-Frank Act, the CFPB took over enforcement of the Real Estate Settlement Procedures Act, 12 U.S.C. § 2601 et seq., and, along with it, HUD’s investigation into mortgage insurers’ compliance with the statute.  In addition to PHH Corp., discussed above, the CFPB issued civil investigation demands to several other mortgage insurers.  The CFPB announced in April that it had entered into Consent Orders with Genworth Mortgage Insurance Corporation, Mortgage Guaranty Insurance Corporation, Radian Guaranty, Inc., and United Guaranty Corporation.  The companies agreed to pay more than $15 million in penalties to the CFPB to settle the enforcement actions.[203]           E.   Consumer Credit Reporting Agencies On November 29, 2012, the CFPB released a bulletin to nationwide specialty consumer reporting agencies emphasizing their legal requirement to provide a streamlined process for consumers to obtain a free credit report under the Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq. (FCRA).[204]  The CFPB also issued warning letters[205] to specialty consumer reporting agencies that the Bureau believed could be in violation of the requirements of FCRA, such as by failing to provide a toll-free phone number or by making it difficult for consumers to obtain a credit report. The CFPB has warned that companies in violation of these requirements could be subject to enforcement actions and that it will continue to monitor the companies to ensure compliance.  The Bureau has announced that it has started accepting consumer complaints regarding specialty reporting agencies.[206] Congress also has turned its attention to consumer credit reports.  On December 19, 2012, the Financial Institutions and Consumer Protection Subcommittee of the Senate Banking Committee held a hearing entitled “Making Sense of Consumer Credit Reports,” at which Corey Stone, the CFPB’s Assistant Director for Deposits, Cash, Collections, and Reporting Markets testified.  At the hearing, Mr. Stone emphasized that its oversight of consumer reporting companies and the banks that provide the companies with consumers’ credit information is a priority for the CFPB.  He noted that more than half of the information given to the credit bureaus comes from the credit card industry, which means that consumers’ use of credit cards is accorded considerable weight when determining a consumer’s credit score.  During questioning from Senator Corker, Mr. Stone commented that one area of CFPB focus is whether consumer financial products such as loans that are more difficult to repay create bad “repayers,” which then lead to negative credit reports for those consumers.           F.   Lenders and Services of Student Loans Lenders and servicers of student loans are another likely target of CFPB enforcement.  The agency has issued press releases, as well as a report to Congress,[207] critical of student loan servicing practices.[208]  The CFPB has identified members of the military and their families as particularly vulnerable populations.  Its criticisms are wide-ranging, alleging that, on the front end, lenders have employed misleading marketing practices to draw students into debt, and that once students have taken out a loan, servicers have used aggressive debt collection practices and have failed to provide flexibility with regard to loan modifications.  The CFPB has established a system for receiving complaints regarding student loans.[209]           G.   Debt Collectors Last year, the CFPB issued a rule regarding supervision of consumer debt collectors that have more than $10 million in annual receipts from consumer debt collection.[210]  Starting on January 2, 2013, the agency began overseeing debt collectors who purchase debts and collect the proceeds for themselves, firms that collect debts on behalf of others for a fee, and firms that collect debts through litigation.  The agency primarily will focus on the completeness and accuracy of debt collectors’ disclosures to consumers, their complaint and dispute resolution processes, and the tone of communications with consumers.[211]  The CFPB has yet to open its complaint database to include consumer debt collectors, so the agency pulls from the complaint database at the FTC.[212]  This marks the first time many nonbank debt collectors will undergo regular examinations.[213] Conclusion The CFPB is no longer an agency working through its formative stage; it has quickly become one of the most active oversight and enforcement agencies in the Federal government.  The Bureau has established many of its procedural rules and is pursuing its supervisory and enforcement mandates, and it is widely anticipated that the CFPB will launch numerous and broad-reaching investigations this year and in years to come.  These investigations place regulated firms under intense scrutiny and require a prompt and careful response that takes into account the potential for civil litigation as well as the firm’s long-term strategies and goals. We will continue to monitor the Bureau as it develops and enforces its regulations and to update our clients on issues important to them.  Gibson Dunn lawyers are prepared to help clients comply with CFPB regulations and defend against enforcement actions.  Should you have questions regarding such activity, please contact our team at the information listed below.    [1]   Dodd-Frank Act §§ 1021(a), (b)(2).    [2]   Disclosure of Consumer Complaint Data, Docket No. CFPB-2012-0023, at 9 (March 25, 2013), available at http://files.consumerfinance.gov/f/201303_cfpb_Final-Policy-Statement-Disclosure-of-Consumer-Complaint-Data.pdf.    [3]   Dodd-Frank Act § 1011(a) (codified at 12 U.S.C. § 5491); CFPB, Supervision and Examination Manual – Version 2, Overview 1 (Oct. 31, 2012) (CFPB Supervision and Examination Manual), available at http://www.consumerfinance.gov/guidance/supervision/manual/.    [4]   Dodd-Frank Act § 1021(a) (codified at 12 U.S.C. § 5511).    [5]   Dodd-Frank Act § 1021(b) (codified at 12 U.S.C. § 5511).    [6]   Dodd-Frank Act § 1021(c) (codified at 12 U.S.C. § 5511).    [7]   Dodd-Frank Act § 1002(6) (codified at 12 U.S.C. § 5481(6)).    [8]   Dodd-Frank Act § 1002(5) (codified at 12 U.S.C. § 5481(5)).    [9]   Dodd-Frank Act § 1002(15) (codified at 12 U.S.C. § 5481(15)).   [10]   Dodd-Frank Act § 1025 (codified at 12 U.S.C. § 5515).   [11]   Dodd-Frank Act § 1025 (codified at 12 U.S.C. § 5515).   [12]   CFPB Supervision and Examination Manual, Overview 5 n.13.   [13]   Dodd-Frank Act § 1026 (codified 12 U.S.C. § 5516).   [14]   Dodd-Frank Act § 1026 (codified at 12 U.S.C. § 5516).  A service provider is defined as “any person that provides a material service to a covered person in connection with the offering or provision by such covered person of a consumer financial product or service.”  Dodd-Frank Act § 1002(26)(A) (codified at 12 U.S.C. § 5481).  This includes a person that “(i) participates in designing, operating, or maintaining the consumer financial product or service; or (ii) processes transactions relating to the consumer financial product or service.”  Id.   [15]   Dodd-Frank Act § 1026 (codified at 12 U.S.C. § 5516).   [16]   Dodd-Frank Act § 1024 (codified at 12 U.S.C. § 5514).   [17]   Defining Larger Participants of the Consumer Debt Collection Market, 12 C.F.R. pt. 1090 (Oct. 24, 2012).   [18]   The Bureau does not have authority to regulate how attorneys practice law, but it does have authority over attorneys when they offer or provide  a consumer financial product or service that is “not offered or provided as part of, or incidental to, the practice of law, occurring exclusively within the scope of the attorney-client relationship,” or that is “otherwise offered or provided by the attorney in question with respect to any consumer who is not receiving legal advice or services from the attorney in connection with such financial product or service.”  Dodd-Frank Act §§ 1027(e)(1)–(2) (codified at 12 U.S.C. § 5517).   [19]   Dodd-Frank Act § 1022(b) (codified at 12 U.S.C. § 5512).   [20]   Dodd-Frank Act § 1061 (codified at 12 U.S.C. § 5581).   [21]   Dodd-Frank Act§ 1031 (codified at 12 U.S.C. § 5531).   [22]   The Court of Appeals for the D.C. Circuit has demonstrated that it takes similar cost-benefit analysis requirements seriously by vacating agency rules that fail to perform adequate analyses.  See Business Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir. 2011), available at http://www.cadc.uscourts.gov/internet/opinions.nsf/89BE4D084BA5EBDA852578D5004FBBBE/$file/10-1305-1320103.pdf (vacating the SEC’s proxy-access rule because the SEC “failed adequately to consider the rule’s effect upon efficiency, competition, and capital formation.”).   [23]   Dodd-Frank Act § 1022(b)(2) (codified at 12 U.S.C. § 5512).   [24]   Dodd-Frank Act § 1023(a) (codified at 12 U.S.C. § 5513).   [25]   Dodd-Frank Act § 1017(a)(1) (codified at 12 U.S.C. § 5497).   [26]   Semi-Annual Report of the Consumer Financial Protection Bureau, March 2013, at 76–77, available at http://files.consumerfinance.gov/f/201303_CFPB_SemiAnnualReport_March2013.pdf; Dodd-Frank Act § 1017(a)(2) (codified at 12 U.S.C. § 5497.)   [27]   Semi-Annual Report of the Consumer Financial Protection Bureau, March 2013, at 77, available at http://files.consumerfinance.gov/f/201303_CFPB_SemiAnnualReport_March2013.pdf;   [28]   Dodd-Frank Act § 1011(b)-(c) (codified at 12 U.S.C. § 5491(b)-(c)).   [29]   Dodd-Frank Act §§ 1011(c)(1)–(2) (codified at 12 U.S.C. § 5491).   [30]   Dodd-Frank Act § 1011(c)(3) (codified at 12 U.S.C. § 5491(c)(3)).   [31]   See Dodd-Frank Act § 1066(a) (codified at 12 U.S.C. § 5586); cf. Dodd-Frank Act §§ 1022, 1024, Subtitle C (codified at 12 U.S.C.§§ 5512, 5514, 5531 et seq.).   [32]   See, e.g., Joseph Williams, Richard Cordray says recess appointment is legitimate, Politico, Jan. 5, 2012, available at http://www.politico.com/news/stories/0112/71128.html.   [33]   U.S. Constitution, Art. II, Section 2.   [34]   Noel Canning v. NLRB, No. 12-115, Slip Op. at 15 (D.C. Circuit Jan. 25, 2013).   [35]   Slip Op. at 30.   [36]   Slip Op. at 15.   [37]   NLRB Petition for Writ of Certiorari available at http://sblog.s3.amazonaws.com/wp-content/uploads/2013/04/NLRBvNoelCanningPet.pdf.   [38]   State National Bank of Big Spring v. Wolin, Case No. 1:12-cv-01032 (D.D.C.).   [39]   Dodd-Frank Act § 1022 (codified at 12 U.S.C. § 5512).   [40]   Letter from House Financial Services Committee Chairman Jeb Hensarling to Meredith Fuchs, CFPB Associate Director and General Counsel, April 22, 2013, available at http://financialservices.house.gov/uploadedfiles/4-22-13_jh_to_fuchs.pdf.   [41]   Id.   [42]   Dodd-Frank Act § 1013(b)(2) (codified at 12 U.S.C. § 5493(b)(2)).   [43]   Dodd-Frank Act § 1013(b)(3) (codified at 12 U.S.C. § 5493(b)(3)).   [44]   http://www.consumerfinance.gov/complaintdatabase/.   [45]   CFPB Final Policy Statement, Disclosure of Consumer Complaint Data, Docket No. CFPB-2012-0023, available at http://files.consumerfinance.gov/f/201303_cfpb_Final-Policy-Statement-Disclosure-of-Consumer-Complaint-Data.pdf.   [46]   Id. at 2 n.6.   [47]   Id. at 9.   [48]   Consumer Response:  A Snapshot of Complaints Received, at 6 (March 2013), http://files.consumerfinance.gov/f/201303_cfpb_Snapshot-March-2013.pdf   [49]   Semi-Annual Report of the Consumer Financial Protection Bureau, March 2013, at 20–31, available at http://files.consumerfinance.gov/f/201303_CFPB_SemiAnnualReport_March2013.pdf.   [50]   Carter Dougherty, U.S. Amasses Data on 10 Million Consumers as Banks Object, Bloomberg, April 17, 2013, available at http://www.bloomberg.com/news/2013-04-17/u-s-amasses-data-on-10-million-consumers-as-banks-object.html.   [51]   http://www.consumerfinance.gov/complaint/.   [52]   https://help.consumerfinance.gov/app/tellyourstory.   [53]   http://www.consumerfinance.gov/contact-us/; http://www.consumerfinance.gov/complaint/.   [54]   https://www.consumerfinance.gov/ask-cfpb/category-student-loans/.   [55]   https://www.consumerfinance.gov/ask-cfpb/category-credit-reporting/.   [56]   See, e.g., CFPB Twitter feed October 22, 2012 (consumer credit report complaint site established), October 24, 2012 (seeking stories regarding debt collection); https://www.facebook.com/#!/CFPB?fref=ts.   [57]   See, e.g., CFPB Twitter feed July 27, 2012 linking to “Meet Greg From Michigan” about a man who had problems with his credit report, http://www.consumerfinance.gov/blog/meet-greg-from-michigan/.   [58]   Dodd-Frank Act §§ 1024(b), 1025(b) (codified at 12 U.S.C. §§ 5514, 5515).   [59]   Dodd-Frank Act §§ 1025, 1026 (codified at 12 U.S.C. §§ 5515, 5516).   [60]   Dodd-Frank Act § 1024 (codified at 12 U.S.C. § 5514).   [61]   CFPB Supervision and Examination Manual, Overview 3.   [62]   Dodd-Frank Act §§ 1024(b)(1), 1025(b)(1) (codified at 12 U.S.C. §§ 5514, 5515).   [63]   Dodd-Frank Act §§ 1024(b)(3)–(4), 1025(b)(2)–(3) (codified at 12(U.S.C. §§ 5514, 5515).   [64]   On October 31, 2012, the CFPB released the second version of the CFPB Supervision and Examination Manual, which provides guidance to examiners in their oversight of companies that provide consumer financial products and services.  The manual details how the CFPB supervises and examines providers of consumer financial products and services, and directs CFPB examiners on how to determine if companies are complying with consumer financial protection laws.  For more information, see Consumer Fin. Prot. Bureau, Supervision and Examination Manual – Version 2 (Oct. 31, 2012) (CFPB Supervision and Examination Manual), available at http://www.consumerfinance.gov/guidance/supervision/manual/.   [65]   Dodd-Frank Act § 1024(b)(2) (codified at 12 U.S.C. § 5514).   [66]   Dodd-Frank Act § 1024(b)(3) (codified at 12 U.S.C. § 5514).   [67]   Dodd-Frank Act § 1025(e).   [68]   CFPB Supervision and Examination Manual, Overview 5.   [69]   Id.   [70]   Dodd-Frank Act §§ 1024(b)(4), 1025(b)(3) (codified at 12 U.S.C. §§ 5514, 5515).   [71]   CFPB Supervision and Examination Manual, Overview 5.   [72]   Id.   [73]   Id.   [74]   CFPB Ombudsman’s Office, FY2012 Annual Report to the Director, available at http://files.consumerfinance.gov/f/201211_Ombuds_Office_Annual_Report.pdf.   [75]   Board of Governors of the Federal Reserve System Office of Inspector General Work Plan at 14, May 10, 2013, available at http://www.federalreserve.gov/oig/files/OIG_Work_Plan.pdf.   [76]   CFPB Supervision and Examination Manual, Overview 6.   [77]   Id.   [78]   Id.   [79]   Id.   [80]   Id.   [81]   Id.   [82]   Id.   [83]   Id.  The CFPB has established procedures for protecting the confidentiality of information it receives and generates in a rulemaking, Disclosure of Records and Information, 12 C.F.R. Part 1070 (76 F.R. 45372) (July 28, 2011).   [84]   Id.   [85]   Id.   [86]   Dodd-Frank Act § 1025(e) (codified at 12 U.S.C. § 5515); CFPB Supervision and Examination Manual, Overview 6.   [87]   CFPB Supervision and Examination Manual, Overview 7.   [88]   Id. at 11.   [89]   Id.   [90]   Id.   [91]   Id.   [92]   Id.   [93]   Id.   [94]   For a detailed discussion of the supervisory appeals process, see CFPB Bulletin 2012-07, Appeals of Supervisory Matters, Oct. 31, 2012, available at http://files.consumerfinance.gov/f/201210_cfpb_bulletin_supervisory-appeals-process.pdf.   [95]   An entity may not appeal the following through this supervisory appeals process: preliminary supervisory matters (including preliminary findings); CFPB decisions to initiate supervisory measures, such as requiring memoranda of understanding; enforcement actions, such as cease-and-desist orders; or referrals of information to other regulatory agencies.  CFPB Bulletin 2012-07, Appeals of Supervisory Matters, Oct. 31, 2012, at 3, available at http://files.consumerfinance.gov/f/201210_cfpb_bulletin_supervisory-appeals-process.pdf.   [96]   CFPB Bulletin 2012-07, Appeals of Supervisory Matters, Oct. 31, 2012, at 4–5, available at http://files.consumerfinance.gov/f/201210_cfpb_bulletin_supervisory-appeals-process.pdf.   [97]   Dodd-Frank Act § 1052(a) (codified at 12 U.S.C. § 5562).   [98]   See 77 Fed. Reg. 39101, 39102 (June 29, 2012).   [99]   77 Fed. Reg. 39101, 39108 (June 29, 2012). [100]   Dodd-Frank Act § 1052(b) (codified at 12 U.S.C. § 5562); see also Rules Relating to Investigations, 77 Fed. Reg. 39101, 39111 (June 29, 2012). [101]   Dodd-Frank Act § 1052(c)(codified at 12 U.S.C. § 5562). [102]   77 Fed. Reg. 39101, 39109 (June 29, 2012). [103]   Rules Relating to Investigations, 77 Fed. Reg. 39101, 39111 (June 29, 2012). [104]   Id. [105]   Dodd-Frank Act § 1052(c)(codified at 12 U.S.C. § 5562). [106]   77 Fed. Reg. 39101, 39109 (June 29, 2012). [107]   Rules Relating to Investigations, 77 Fed. Reg. 39101, 39112 (June 29, 2012). [108]   Dodd-Frank Act § 1052(d) (codified at 12 U.S.C. § 5562). [109]   Rules Relating to Investigations, 77 Fed. Reg. 39101, 39110 (June 29, 2012). [110]   Dodd-Frank Act § 1052(e)(codified at 12 U.S.C. § 5562). [111]   Rules Relating to Investigations, 77 Fed. Reg. 39101, 39109–39110 (June 29, 2012). [112]   Id. [113]   Dodd-Frank Act § 1052(f) (codified at 12 U.S.C. § 5562). [114]   Dodd-Frank Act § 1052(f)(1) (codified at 12 U.S.C. § 5562). [115]   Rules Relating to Investigations, 77 Fed. Reg. 39101, 39109 (June 29, 2012). [116]   Rules Relating to Investigations, 77 Fed. Reg. 39101, 39110 (June 29, 2012). [117]   Id. [118]   Id. [119]   Id. [120]   Id. [121]   Id. [122]   Id. [123]   Dodd-Frank Act § 1052(c)(13)(D) (codified at 12 U.S.C. § 5562). [124]   Rules Relating to Investigations, 77 Fed. Reg. 39101, 39111 (June 29, 2012). [125]   CFPB, Decision and Order on PHH Corporation’s Petition to Modify or Set Aside Civil Investigative Demand at 4-5 (Sept. 20, 2012), available at http://files.consumerfinance.gov/f/201209_cfpb_setaside_phhcorp_0001.pdf. [126]   Id. at 1 (citing 12 U.S.C. § 2607). [127]   Id. [128]   Id. [129]   See PHH Corporation’s Petition to Modify or Set Aside Civil Investigative Demand, Attachments A-D (June 12, 2012), available at http://files.consumerfinance.gov/f/201209_cfpb_phhcorp_petition_0001.pdf. [130]   Id. (Attachment A). [131]   Id.  (Attachment B). [132]   Id. (Attachment C). [133]   Id. (Attachment C) (citing United States v. Morton Salt Co., 338 U.S. 632, 652 (1950)). [134]   Id. (Attachment C) (quoting  FTC v. Invention Submission Corp., 965 F.2d 1086, 1090 (D.C. Cir. 1992)). [135]   Id. (Attachment C) (quoting  FTC v. Invention Submission Corp., 965 F.2d 1086, 1090 (D.C. Cir. 1992)). [136]   Id. (citing EEOC v. Am. Express Centurion Bank, 758 F. Supp. 217, 222 (D. Del. 1991)). [137]   Id. [138]   Id. at 2. [139]   Id. at 4. [140]   Id. at 6-7 (citing inter alia, United States v. Morton Salt Co., 338 U.S. 632 (1950); SEC v. Arthur Young & Co., 584 F.2d at 1030 (“The gist of the protection is in the requirement . . . that the disclosure sought shall not be unreasonable.”)). [141]   Id. at 8-9. [142]   Id. at 9. [143]   CFPB, Decision and Order on PHH Corporation’s Petition to Modify or Set Aside Civil Investigative Demand at 4-5 (Sept. 20, 2012) (quoting United States v. Morton Salt Co., 338 U.S. 632, 642–43 (1950)), available at http://files.consumerfinance.gov/f/201209_cfpb_setaside_phhcorp_0001.pdf. [144]   Id. at 5 (quoting Morton Salt Co., 338 U.S. at 652). [145]   Id. at 6. [146]   Id. at 2. [147]   Id. [148]   Decision and Order on Next Generation Debt Settlement, Inc.’s Petition to Modify or Set Aside Civil Investigative Demand, CFPB (Oct. 5, 2012), available at http://files.consumerfinance.gov/f/201210_cfpb_2012-MISC-Next-Generation-Debt-Settlement-0001-Order.pdf. [149]   Id. [150]   Next Generation Petition to Modify CID (Sept. 4, 2012), available at http://files.consumerfinance.gov/f/201210_cfpb_2012-MISC-Next-Generation-Debt-Settlement-Inc-0001-3_Redacted.pdf. [151]   Decision and Order on Next Generation Debt Settlement, Inc.’s Petition to Modify or Set Aside Civil Investigative Demand, CFPB (Oct. 5, 2012), available at http://files.consumerfinance.gov/f/201210_cfpb_2012-MISC-Next-Generation-Debt-Settlement-0001-Order.pdf. [152]   Id. [153]   Id. (citing 12 C.F.R. § 1080.6(c)). [154]   Id. [155]   Id. (quoting Oklahoma Press Publishing Co. v. Walling, 327 U.S. 186, 201 (1946)). [156]   Dodd-Frank Act § 1053 (codified at 12 U.S.C. § 5563). [157]   Dodd-Frank Act § 1055(a). [158]   Dodd-Frank Act § 1055(a)(3), (b). [159]   Dodd-Frank Act § 1055(c)(1)-(2). [160]   CFPB Supervision and Examination Manual, Overview 7 [161]   Semi-Annual Report of the Consumer Financial Protection Bureau, July 1, 2012-December 31, 2012, available at http://files.consumerfinance.gov/f/201303_CFPB_SemiAnnualReport_March2013.pdf. [162]   Dodd-Frank Act § 1053(a). [163]   77 Fed. Reg. 39058 (June 29, 2012). [164]   Id. at 39084. [165]   Id. at 39090. [166]   Id. at 39089. [167]   Id. [168]   Id. at 39095-39096. [169]   Id. at 39096. [170]   Id. at 39099. [171]   Id. at 39099-39100. [172]   Id. at 39100 (citing 5 U.S.C. § 704). [173]   Under 5 U.S.C. § 703, “[a] person suffering legal wrong because of agency action, or adversely affected or aggrieved by agency action within the meaning of a relevant statute, is entitled to judicial review thereof.”  Chapter 7 of Title V of the U.S. Code applies to agency actions unless statutes preclude judicial review or agency action is committed to agency discretion by law.  5 U.S.C. § 701. [174]   5 U.S.C. § 704. [175]   5 U.S.C. § 703. [176]   5 U.S.C. § 706. [177]   Dodd-Frank Act § 1053(c) (codified at 12 U.S.C. § 5563). The CFPB has noted that its Rules of Practice for Adjudication Proceedings do not govern the issuance of temporary cease-and-desist orders based on Dodd-Frank Act Section 1053(c), but the Bureau plans to address those procedures in a separate rulemaking.  77 Fed. Reg. 39058 (June 29, 2012). [178]   Dodd-Frank Act § 1054 (codified at 12 U.S.C. § 5564). [179]   CFPB Bulletin 2011-04 (Enforcement) (updated January 18, 2012), available at http://files.consumerfinance.gov/f/2012/01/Bulletin10.pdf. [180]   CFPB Supervision and Examination Manual, Overview 7. [181]   Dodd-Frank Act § 1056 (codified at 12 U.S.C. § 5566). [182]   Prepared remarks of CFPB Director Richard Cordray at the SDNY enforcement press conference, May 7, 2013, available at http://www.consumerfinance.gov/speeches/prepared-remarks-of-cfpb-director-richard-cordray-at-the-sdny-enforcement-press-conference/. [183]   Dodd-Frank Act §§ 1024(b)(6), 1025(b)(5) (codified at 12 U.S.C. §§ 5514, 5515). [184]   15 U.S.C. § 1691(a). [185]   CFPB Stipulation and Consent Order at 8, 14, In the matter of: Capital One Bank, (USA) N.A. (July 18, 2012), available at http://files.consumerfinance.gov/f/201209_cfpb_0001_001_Consent_Order_and_Stipulation.pdf (hereinafter “Capital One Consent Order”). [186]   See id. at 3. [187]   CFPB probe into Capital One credit card marketing results in $140 million consumer refund, CFPB Press Release (July 18, 2012), available at http://www.consumerfinance.gov/pressreleases/cfpb-capital-one-probe/. [188]   Capital One Consent Order at 20-21. [189]   CFPB Press Release, CFPB Probe into Capital One Credit Card Marketing Results in $140 Million Consumer Refund  (July 18, 2012), available at http://www.consumerfinance.gov/pressreleases/cfpb-capital-one-probe/. [190]   See In re Capital One Derivative Shareholder Litig., No. 1:12-cv-01100, 2012 WL 6725613, at *1-2 (E.D. Va. Dec. 21, 2012) (memorandum opinion declining to remand the case to state court). [191]   Id. at *3. [192]   See Nominal Defendant Capital One Financial Corporation’s Memorandum of Points and Authorities In Support of Motion to Dismiss Plaintiff’s Shareholder Derivative Complaint, Iron Workers Mid-South Pension Fund v. Fairbank, No. 1:12-cv-01100-TSE-TCB (E.D. Va. filed Nov. 5, 2012). [193]   CFPB and FDIC Joint Consent Order, Order for Restitution, and Order to Pay Civil Monetary Penalty, In the Matter of Discover Bank, at 1-2 (Sept. 24, 2012), available at http://files.consumerfinance.gov/f/201209_cfpb_0005_001_Consent_Order.pdf. [194]   CFPB Press Release, Federal Deposit Insurance Corporation and Consumer Financial Protection Bureau Order Discover to Pay $200 Million Consumer Refund for Deceptive Marketing (Sept. 24, 2012), available at http://www.consumerfinance.gov/pressreleases/discover-consent-order/. [195]   CFPB and FDIC Joint Consent Order, Order for Restitution, and Order to Pay Civil Monetary Penalty, In the Matter of American Express Centurion Bank (Oct. 1, 2012), available at http://files.consumerfinance.gov/f/201210_cfpb_001_Amex_Consent_Order.pdf; CFPB Consent Order, Order for Restitution, and Order to Pay Civil Monetary Penalty, In the Matter of American Express Bank, FSB (Oct. 1, 2012), available at http://files.consumerfinance.gov/f/201210_cfpb_001_Amex_Express_Bank_Consent_Order.pdf; CFPB Consent Order, Order for Restitution, and Order to Pay Civil Monetary Penalty, In the Matter of American Express Travel Related Services Company, Inc. (Oct. 1, 2012), available at http://files.consumerfinance.gov/f/201210_cfpb_001_Amex_Express_Travel_Consent_Order.pdf. [196]   CFPB Press Release, CFPB orders American Express to Pay $85 Million Refund to Consumers Harmed by Illegal Credit Card Practices (Oct. 1, 2012), available at http://www.consumerfinance.gov/pressreleases/cfpb-orders-american-express-to-pay-85-million-refund-to-consumers-harmed-by-illegal-credit-card-practices/; [197]   CFPB v. Payday Loan Debt Solution Inc.. No. 1:12-cv-24410, Stipulated Final Order and Judgment at 7 (S.D. Fl., entered Dec. 21, 2012), available at http://files.consumerfinance.gov/f/201212_cfpb_plds-final-judgment.pdf. [198]   Id. at 9-12. [199]   http://www.consumerfinance.gov/pressreleases/consumer-financial-protection-bureau-and-state-partners-obtain-refunds-for-consumers-charged-illegal-debt-relief-fees/. [200]   Complaint, CFPB v. Mission Settlement Agency, Case No. 1:13-cv-­­­__(S.D.N.Y. May 7, 2013), available at http://files.consumerfinance.gov/f/201305_cfpb_complaint_mission-settlement.pdf. [201]   http://www.consumerfinance.gov/pressreleases/consumer-financial-protection-bureau-halts-alleged-nationwide-mortgage-loan-modification-scams/; CFPB v. Jalan, No. 8:2012cv01088 (C.D. Cal.) (filed Dec. 3, 2012); CFPB v. Gordon, No. CV 12-6147 (C.D. Cal.) (filed July 18, 2012). [202]   CFPB Press Release, Consumer Financial Protection Bureau Warns Companies Against Misleading Consumers with False Mortgage Advertisements (Nov. 19, 2012), available at http://www.consumerfinance.gov/pressreleases/consumer-financial-protection-bureau-warns-companies-against-misleading-consumers-with-false-mortgage-advertisements/. [203]   CFPB Press Release, The CFPB Takes Action Against Mortgage Insurers to End Kickbacks to Lenders (April 4, 2013), available at http://www.consumerfinance.gov/pressreleases/the-cfpb-takes-action-against-mortgage-insurers-to-end-kickbacks-to-lenders/. [204]   CFPB Press Release, Consumer Financial Protection Bureau issues warning to nationwide specialty consumer reporting agencies (Nov. 29, 2012), available at http://www.consumerfinance.gov/pressreleases/consumer-financial-protection-bureau-issues-warning-to-nationwide-specialty-consumer-reporting-agencies/. [205]   A sample warning letter can be found here:  http://files.consumerfinance.gov/f/201211_cfpb_NSCRA_warning_letter.pdf. [206]   CFPB Press Release, Consumer Financial Protection Bureau Now Taking Complaints on Credit Reporting (Oct. 22, 2012), available at http://www.consumerfinance.gov/pressreleases/consumer-financial-protection-bureau-now-taking-complaints-on-credit-reporting. [207]   Annual Report of the CFPB Student Loan Ombudsman (Oct. 16, 2012), available at http://files.consumerfinance.gov/f/201210_cfpb_Student-Loan-Ombudsman-Annual-Report.pdf. [208]   CFPB Press Release, Debt Déjà Vu for Students (Oct. 25, 2012), available at http://www.consumerfinance.gov/opeds/debt-deja-vu-for-students/; CFPB Press Release, Consumer Financial Protection Bureau Report Finds Servicemembers Face Hurdles in Accessing Student Loan Benefits (Oct. 18, 2012),  available at http://www.consumerfinance.gov/pressreleases/consumer-financial-protection-bureau-report-finds-servicemembers-face-hurdles-in-accessing-student-loan-benefits/; CFPB Press Release, Consumer Financial Protection Bureau Report Finds Private Student Loan Borrowers Face Roadblocks to Repayment (Oct. 16, 2012), available at http://www.consumerfinance.gov/pressreleases/consumer-financial-protection-bureau-report-finds-private-student-loan-borrowers-face-roadblocks-to-repayment/. [209]   CFPB Press Release, Consumer Financial Protection Bureau Now Taking Private Student Loan Complaints (Mar. 5, 2012), available at http://www.consumerfinance.gov/pressreleases/consumer-financial-protection-bureau-now-taking-private-student-loan-complaints/. [210]   12 C.F.R. Part 1090 (Oct. 24, 2012), available at http://files.consumerfinance.gov/f/201210_cfpb_debt-collection-final-rule.pdf; see also CFPB Press Release, Consumer Financial Protection Bureau to Oversee Debt Collectors (Oct. 24, 2012), available at http://www.consumerfinance.gov/pressreleases/consumer-financial-protection-bureau-to-oversee-debt-collectors/. [211]   The CFPB has published a field guide to its debt collection examination procedures here:  http://files.consumerfinance.gov/f/201210_cfpb_debt-collection-examination-procedures.pdf. [212]   Rachel Witkowski, How CFPB Exams Will Alter Debt Collection, American Banker, Apr. 3, 2013, at 4. [213]   Id. at 1. 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April 11, 2012 |
Department of the Treasury Issues Bank Secrecy Act Advance Notice of Proposed Rulemaking Relating to Customer Due Diligence Requirements for Financial Institutions

On March 5, 2012, the United States Department of the Treasury (“Treasury”), Financial Crimes Enforcement Network (“FinCEN”), published an Advance Notice of Proposed Rulemaking (“ANPR”) seeking comments on the concept of prescriptive rules for customer due diligence (“CDD”) for certain financial institutions (and potentially all financial institutions) under the Bank Secrecy Act (“BSA”).  The rules would include “a categorical requirement” for financial institutions to obtain beneficial ownership information on all customers.  (77 Fed. Reg. 13046).  Comments are due to FinCEN by May 4, 2012. The proposal is potentially extremely burdensome and is expected to elicit comments from many affected financial institutions and their professional associations.  If the proposal goes forward, the ANPR would be followed by a Notice of Proposed Rulemaking (“NPR”) addressing the comments received in response to the ANPR.  The NPR would include the full text of the proposed regulatory language and provide another opportunity for public comment.  It is notable that, while Treasury states that it consulted with the Federal financial institution supervisory authorities, none of the regulators joined in sponsoring the issuance of the ANPR. Background Under the BSA and its implementing regulations, and, with respect to banks, parallel requirements of the Federal bank regulators, banks, securities broker-dealers, and certain other “financial institutions” are required to implement risk-based anti-money laundering (“AML”) programs to prevent and detect money laundering and terrorist financing and to comply with a labyrinth of BSA/AML laws, regulations, and regulatory guidance.  The number and complexity of these requirements and the regulatory expectations for comprehensive AML programs has grown exponentially over the last 20 years, especially since the implementation of the BSA amendments of the USA PATRIOT Act.  Financial institutions have engaged legions of compliance professionals and invested in sophisticated systems to support their AML programs, including CDD systems. Clearly, there have been positive, significant results from this attention by the financial industry to BSA/AML compliance:  Financial institutions have increased their ability to prevent and detect money laundering within their institutions and to manage their money laundering legal and reputational risks.  Banks and other financial institutions have become active partners with the government in the fight against money laundering.  There are countless examples in which alert financial institutions complying with the suspicious activity reporting (“SAR”) requirements have been helpful to law enforcement in opening or furthering investigations and/or laying the groundwork for the seizure and forfeiture of assets. Nevertheless, while financial institutions have made money laundering more difficult for criminals, there is no evidence that the overall level of money laundering and financial crime in the United States has decreased.  Despite the burgeoning requirements and costs, there appears to have never been what would be considered a systematic effort by the U.S. government to assess the costs of BSA/AML compliance by financial institutions and to weight those coasts against the benefits to law enforcement.  There is a question whether additional AML burdens on financial institutions are justified and whether, given the current risk-based CDD programs of financial institutions, this particular proposal is warranted. Current CDD Programs of Financial Institutions Key to effective AML efforts is the need for financial institutions to know their customers.  Consequently, a core component of an effective AML program are policies, procedures, and internal controls for CDD and enhanced due diligence (“EDD”) for higher risk customers.  CDD and EDD build upon the BSA Customer Identification Program (“CIP”) requirements and address the EDD regulatory requirements for foreign financial institution correspondent accounts and private banking accounts for non-U.S. persons under Section 312 of the USA PATRIOT Act.  Beyond compliance with the CIP and Section 312 requirements, financial institutions have been allowed to fashion risk-based CDD/EDD programs to address the money laundering risks of their particular customers, products and services, and geographic locations and markets. Most banks and securities broker-dealers have developed systematic risk rating methods for customers and obtain CDD/EDD information and documentation, refresh account information periodically, and monitor accounts in accordance with the money laundering risk of their customers.  Obtaining beneficial ownership of legal entity clients is approached differently by different financial institutions.  The extent to which beneficial ownership information is obtained and verified (and at what levels of ownership) is keyed to the type of customer and the customer risk.  The CDD/EDD programs are reviewed rigorously by the Federal functional regulators with respect to their effectiveness, compliance with regulatory requirements and guidance, and consistency in application. Overview of the Proposal As stated in the ANPR, Treasury is considering implementing comprehensive CDD regulatory requirements for all customers, including a requirement to obtain beneficial ownership information for all customers and to verify beneficial ownership on a risk basis.  The current risk-based approach to CDD would be subject to, if not replaced by, regulatory requirements that would “codify, clarify, consolidate, and strengthen existing CDD regulatory requirements and supervisory expectations.”  Initially, the requirements would be imposed on banks, securities broker-dealers, mutual funds, futures commission merchants, and introducing brokers in commodities, i.e., on financial institutions currently subject to CIP requirements.  Treasury suggests that, in the future, the requirements could apply to other financial institutions under the BSA, e.g. money services businesses and insurance companies with respect to certain insurance products.  Treasury is considering whether existing accounts would be grandfathered in from the requirements, similar to the grandfathering of existing accounts when the CIP regulations were implemented. Concerns about the Proposal Specific CDD regulatory requirements, including the requirement to obtain beneficial ownership information “categorically,” arguably are not necessary.  The case made in the ANPR that consistent requirements would enhance efforts to combat money laundering, tax evasion, and other crimes is not convincing, and the potential burdens are minimized.  The proposal appears to be at least partially driven by a desire to comply with the revised recommendations of the Financial Action Task Force and to be able to provide foreign tax authorities with beneficial ownership information for the accounts of their citizens in the United States through tax information exchange agreements and other means of mutual legal assistance. The ANPR points out that that there have been BSA enforcement actions where CDD deficiencies have been cited.  Nevertheless, in public pronouncements, the Federal financial institution functional regulators and FinCEN appear to be of the view that financial institutions generally are doing a good job in managing their AML risk — including knowing their customers, filtering out problematic customers, and reporting suspicious activity.  Moreover, in the most serious BSA/AML cases, where AML program deficiencies have been coupled with serious criminal activity, the problems appear to have been rooted in a failure to appreciate the money laundering risk of certain customers or products, e.g., Mexican casas de cambio, third party payment processors, or remote deposit capture activities, or to take appropriate action in the face of suspicious activity.  It is questionable whether specific CDD requirements and obtaining and verifying beneficial ownership information would have prevented the problematic financial activity. Implementation of the changes would be expensive and entail major changes in financial institution procedures and systems and current practices.  There also are numerous practical concerns with the proposal, including the difficulty of obtaining reliable and verifiable beneficial ownership information; the problem of explaining the complex ownership definition to customers; the difficulty of complying with beneficial ownership and verification of beneficial ownership requirements in certain account opening situations, e.g., opening bank-issued credit cards for business customers on the spot at retail establishments; and the problem of conducting CDD on the “owners of assets,” as discussed below. Another consideration with respect to the beneficial ownership requirement is whether the government is putting the cart before the horse.  In the United States, unlike certain other countries, reliable public sources for legal entity ownership information (other than for public companies) do not exist and, even if Federal legislation under consideration were passed requiring state action to maintain reliable ownership information, it would be many years before the information would be available for all states.  Arguably, Treasury’s efforts should be focused on promoting legislative solutions to encourage or require states to develop reliable corporate registries and take more responsibility for determining the beneficial owners of legal entities they charter.  Once there is a reliable corporate registry, determining and verifying beneficial ownership would be far less burdensome for financial institutions and potentially more useful to the government. Components of the Regulations Under Consideration The specific components of the regulations under consideration are: A requirement to identify all beneficial owners of legal entity customers.  Possible exceptions would apply to entities exempt from CIP requirements, e.g., U.S. publicly-traded companies, financial institutions with Federal functional regulators, and Federal, state, and local government entities and instrumentalities.  Generally, a financial institution would be able to rely on information provided by the person opening an account, which of course, would not necessarily be reliable. How beneficial ownership would be defined is under consideration.  The ANPR sets forth a proposed definition of beneficial owner which either would be either an individual owner with more than a 25% equity interest in the entity or, in the alternative, if no person has more than a 25% interest, the beneficial owner would be the person with at least as great an interest as any other person and who has a greater responsibility than other individuals for directing or managing the affairs of the entity.  It is unclear how the difficult task of identifying and verifying beneficial owners of entities owned by other entities would be treated or how beneficial ownership would be defined for legal entities where no one has an equity interest.  (It should be noted that currently, many financial institutions identify the beneficial ownership of high risk customers at a lower threshold than 25%.) Financial institutions would be required to verify beneficial owners on a risk-basis.  There may be a requirement to verify the identity of beneficial owners in the sense of verifying that the named individual owner is who the person says he or she is, e.g., by obtaining a copy of a driver’s license or passport, and/or verification that the person has the purported beneficial ownership interest in the legal entity, e.g., proof that a person is a more than 25% beneficial ownership.  The challenge in the latter case is obtaining reliable information. Treasury suggests that, for accounts opened by agents or held by financial intermediaries for their customers, e.g., brokered deposited or omnibus accounts, CDD and beneficial ownership information may be required on the “owner of the assets.”  This is a major reversal of the current regulatory guidance and industry approach.  Generally, for omnibus accounts, due diligence is conducted on the intermediary and not on the intermediary’s customers or “the owners of the assets,” which could change from day-to-day.  It also is difficult to contemplate how CDD on the owners of the assets could be conducted.  This potential requirement and the verification requirement potentially appear to be the most onerous aspects of the proposal. There may be a requirement to ask customers when opening accounts whether they are opening accounts on their own behalf, e.g., to determine if there are other parties for whom CDD should be conducted and for whom beneficial ownership information should be obtained. The regulation would specify that there must be ongoing monitoring of customers and additional CDD conducted, as appropriate, as a result of that monitoring.  This aspect of the regulation would seem to codify what has become standard practice and regulatory expectation currently as integral part of SAR compliance. Areas for Comment FinCEN is soliciting comments on nine specific areas: 1.  What changes would be required in a financial institution’s CDD program if the rule described were adopted? 2.  What changes would be required in a financial institution’s CDD processes as a result of a requirement to obtain and verify beneficial ownership information?  Are the proposed alternative definitions of beneficial ownership clear or are there suggestions for a better definition?   How are financial institutions addressing the beneficial ownership issue currently relating to ownership of assets in an account of a financial intermediary?  Should any beneficial ownership requirement for accounts of intermediaries be risk-based? 3.  Under what circumstances does a financial institution currently obtain beneficial ownership? 4.  How do financial institutions obtain beneficial ownership? 5.  Is the current risk-based approach to CDD resulting in varied approaches across and within industries? 6.  Are there other elements of CDD that would be more effective in facilitating compliance with AML requirements? 7.  What information should be required to identify and verify the identity of beneficial owners on a risk-basis? 8.  Are their products and services that should be exempted from the beneficial ownership requirement? 9.  What types of financial institutions should not be covered by the rule? 10.  What would be the impact on “consumers or other customers” of the CDD program outlined in the ANPR? Conclusion Given the current economic strains and regulatory burdens on financial institutions and the level of their AML compliance efforts, before going further with the concept of these regulations and adding new BSA AML requirements, it seems incumbent for the government to conduct any additional cost-benefit analysis of the costs to financial institutions of compliance with existing BSA/AML requirements and the proposed new BSA requirements compared to the benefits to the government.  At a minimum, before proceeding further, a stronger case needs to be made that the current risk-based approach to CDD, as it is being implemented by financial institutions under the watchful eyes of their regulators, is inadequate.  There is a danger that the financial industry is being asked to bear a disproportionate share of the cost of the fight against money laundering and that what they are being asked to do in this proposal will ultimately have little salient effect on the problem. Gibson, Dunn & Crutcher’s lawyers are available to assist with any questions you may have regarding these issues.  For further information please contact the Gibson Dunn lawyer with whom you work or the following lawyers in the firm’s Washington, D.C. office: Amy G. Rudnick (202-955-8210, arudnick@gibsondunn.com) Linda Noonan (202-887-3595, lnoonan@gibsondunn.com) © 2012 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

November 1, 2011 |
FinCEN Issues Final Rule Implementing New CISADA Regulations to Require U.S. Banks to Seek Information from Foreign Correspondent Banks Regarding Financial Ties to Iran

On October 11, 2011, the United States Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN)” published in the Federal Register the final version of new regulations implementing section 104(e) of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”)[1].  These regulations, effective October 11, 2011, require that a U.S. bank[2], upon a request from FinCEN, provide the following information within 45 calendar days[3] with regard to specified foreign bank(s) with which the U.S. bank maintains a correspondent account: 1.   whether the specified foreign bank maintains a correspondent account for an Iranian-linked financial institution designated under the International Emergency Economic Powers Act (“IEEPA”)[4]; 2.   whether the specified foreign bank has processed one or more transfers of funds within the preceding 90 calendar days for or on behalf of, directly or indirectly, an Iranian-linked financial institution designated under IEEPA, other than through a correspondent account[5]; or 3.   whether the specified foreign bank has processed one or more transfers of funds within the preceding 90 calendar days for or on behalf of, directly or indirectly, Iran’s Islamic Revolutionary Guard Corps (“IRGC”) or any of its agents or affiliates designated under IEEPA. The U.S. bank would be required to ask the named foreign correspondent to certify this information using a certification form being published by FinCEN with the final regulation.  The form would be required to be filed with FinCEN within 45 calendar days of the receipt of the request regarding the foreign correspondent bank.  When making its inquiry to the specified foreign bank, the regulations also require the  U.S. bank to request that the foreign bank agree to notify the U.S. bank if it subsequently establishes a new correspondent account for an Iranian-linked financial institution designated under IEEPA at any time within 365 calendar days from the date of the foreign bank’s initial response, and to report such information to the U.S. bank  within 30 days of the establishment of the new correspondent account.[6]  The U.S. bank would have to provide this new information to FinCEN within 10 days of receipt of the information. The respondent U.S. bank also must  report instances in which the U.S. bank does not maintain a correspondent account for the specified foreign bank.[7]   The U.S. bank also will be in compliance with the reporting regulations if it timely reports (i.e., within 45 calendar days of FinCEN’s request) instances in which: 1.   it did not receive a response from the specified foreign bank (e.g., if a foreign bank cites privacy legislation and refuses to provide information or does not respond at all to the U.S. bank’s queries); 2.   it cannot determine that the foreign bank does not maintain a relevant account or has not processed relevant transfers of funds, along with the reasons for this (e.g., failure of the foreign bank to certify its response; if the U.S. bank has information inconsistent with the foreign bank’s certification; if the foreign bank does not respond to the U.S. bank’s queries). These new reporting requirements are limited to those U.S. banks to which FinCEN directly sends its requests for foreign correspondent bank information   U.S. banks will also not need to independently verify the information provided by the specified foreign bank.  The U.S. bank will be required to certify on the form that to the best of its “knowledge” it has no information that is inconsistent with the information being provided by the foreign bank.  FinCEN states in the preamble that knowledge means knowledge obtained based on OFAC monitoring and Bank Secrecy Act due diligence. If the U.S. bank possesses information that is inconsistent with the foreign bank’s certification, it must report the discrepancy to FinCEN (e.g., the U.S. bank’s transaction monitoring software blocked a transaction on behalf of the foreign bank, but that foreign bank does not include information regarding the blocked transaction in the report provided to the U.S. bank).[8] In addition, U.S. banks would not need to take any specific actions based on the information they do or do not receive in response to their queries of the specified foreign bank(s) listed in FinCEN requests for information.  They would also not need to take any specific actions to terminate the correspondent relationship based solely on the fact that they had received a request for information under these regulations.[9]  As a practical matter, many U.S. banks may treat a receipt of a request as a red flag which will generate an account review and lead to possible termination of their relationship with the foreign correspondent bank.  U.S. banks will be required to comply with any restrictions that the U.S. Government chooses to impose on foreign correspondent banks based on the information that FinCEN receives from the responses to its issued requests for information.[10] In the Final Rule, FinCEN also stated that it reserved the right to expand the reporting regulations to require that U.S. banks request information as to whether their foreign correspondent banks had facilitated the activities of a non-IEEPA-designated person subject to financial sanctions pursuant to U.N. Security Council Resolutions regarding Iran.  The regulations as published do not require reporting regarding foreign correspondent banks’ activities with respect to non-IEEPA-designated sanctioned persons at this time, however.[11] If a foreign correspondent bank conducts legitimate business with an Iranian-linked financial institution designated under IEEPA, through licensed transactions and clearing authorized by the competent authority in the foreign bank’s jurisdiction, the foreign bank may provide further information concerning the licensed/cleared activity in the certification form it provides to the inquiring U.S. bank.  Such explanatory information may be taken into account when the foreign bank’s certification is reviewed by FinCEN and it is determined what further action, if any, is appropriate under section 104(c) of CISADA.[12]   [1]   Comprehensive Iran Sanctions: Final Rule, 76 Fed. Reg. 62,607 (Oct. 11, 2011) (to be codified at 31 C.F.R. part 1060), available at http://www.gpo.gov/fdsys/pkg/FR-2011-10-11/pdf/2011-26204.pdf (“Final Rule”).   [2]   A U.S. bank is defined in 31 C.F.R. § 1010.100(d), and includes each agent, agency, branch, or office within the United States of persons doing business in one or more of the following capacities: commercial banks or trust companies, private banks, savings and loan associations, national banks, thrift institutions, credit unions, other organizations chartered under banking laws and supervised by banking supervisors of any State, and banks organized under foreign law.  The Final Rule does not apply to any other type of non-bank financial institution that may fall within the same bank holding company structure.  In addition, U.S. branches of foreign banks are included within the definition of a U.S. bank in 31 C.F.R. § 1010.100(d).  A foreign bank is defined in 31 C.F.R. § 1010.100(u) and means a bank organized under foreign law (except for U.S. branches of such banks), or an agency, branch, or office of a U.S. bank located outside the United States.  See Final Rule at 62,616-17.   [3]   Should the respondent U.S. bank receive information from the specified foreign bank outside of the 45 calendar day period, the U.S. bank is required to report such information to FinCEN within 10 calendar days of receipt. See Final Rule at 62,614-15.   [4]   A list of the twenty-one Iranian-linked financial institutions designated under IEEPA can be found on the U.S. Treasury Department’s website at http://www.treasury.gov/resource-center/sanctions/Programs/Documents/irgc_ifsr.pdf.   [5]   “[O]ther than through a correspondent account” includes those circumstances in which financial institutions are part of a common payments or clearing mechanism that provides for transfers of funds among participants without requiring bilateral correspondent account relationships.  See Final Rule at 62,612.  “[F]or or on behalf of, directly or indirectly” include situations where a foreign bank has knowledge that a transfer of funds it is processing is for or on behalf of an IEEPA-designated Iranian-linked financial institution or an IEEPA-designated IRGC-linked person, but where the designated entity or individual does not appear on the face of the transaction.  Thus, the U.S. bank must also request that the specified foreign bank include information regarding transfers in which the processing is being done with knowledge based on a relationship that exists through a third party such as a money exchange or trading house.  See id. at 62,613.   [6]   This does not require the foreign bank to report the transfers of funds processed for a relevant IEEPA-designated entity or individual following its initial response, only the establishment of a new correspondent account for an IEEPA-designated, Iranian-linked financial institution.  See id. at 62,613.   [7]   Id. at 62,619.   [8]   Id. at 62,615   [9]   Id. at 62,612. [10]   CISADA, Sec. 104(e)(2). [11]   Final Rule at 62,611. [12]   Id. Gibson, Dunn & Crutcher’s lawyers are available to assist with any questions you may have regarding these issues.  For further information please contact the Gibson Dunn lawyer with whom you work or the following lawyers in the firm’s Washington, D.C. office: Judith Alison Lee (202-887-3591, jalee@gibsondunn.com) Amy G. Rudnick (202-955-8210, arudnick@gibsondunn.com) Daniel J. Plaine (202-955-8286, dplaine@gibsondunn.com) John J. Sullivan (202-955-8565, jsullivan@gibsondunn.com) Linda Noonan (202-887-3595, lnoonan@gibsondunn.com) © 2011 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

February 17, 2011 |
U.S. SEC Extends the Customer Identification Program No-Action Letter for Broker-Dealers and Changes the Terms

On January 11, 2011, the U.S. Securities and Exchange Commission ("SEC"), in consultation with the Department of the Treasury, Financial Crimes Enforcement Network ("FinCEN"), again extended the Bank Secrecy Act ("BSA") Customer Identification Program ("CIP") no-action letter (initially issued in 2004) relating to broker-dealer reliance on SEC registered investment advisers ("RIAs").  As previously, the extension was granted at the request of the Securities Industry and Financial Markets Association ("SIFMA"). Under the terms of the no-action letter, if certain criteria are met, the SEC will not take an enforcement action against a broker-dealer who reasonably relies on an RIA to perform the broker-dealer’s CIP obligations with respect to the RIA’s customers who have accounts with the broker-dealer.  Under the CIP requirements for broker-dealers, broker-dealers are protected from liability for CIP violations if they enter into a reliance agreement that meets the regulatory criteria with another financial institution that is regulated by a federal functional regulator and subject to the BSA Anti-Money Laundering ("AML") Program requirements.  31 C.F.R. § 103.22(b)(6).  Because RIAs themselves are not yet subject to AML Program requirements under the BSA, the no-action letter is necessary to afford the same protection from liability for reliance agreements with RIAs. Action Required and Timing It is important to note that the SEC has made the terms of CIP reliance agreements with RIAs that qualify for application of the no-action letter more extensive and restrictive.  These new provisions will require broker-dealers to amend the terms of their current CIP reliance agreements with RIAs.  In the no-action letter, the SEC provides that broker-dealers have until May 11, 2011 (120 days) to become compliant with the new terms.  Until that time, reliance agreements meeting the terms of the previous CIP no-action letter (January 11, 2010) may remain in force.  If RIAs do not become subject to AML Program requirements by January 11, 2012, the SEC would need to extend the no-action letter again next year. Old Terms v. New Terms As before, a U.S. investment adviser must be registered with the SEC; reliance on the particular RIA must be reasonable under the circumstances; the RIA must enter a contract with the broker-dealer requiring it to certify annually to the broker-dealer that the RIA has implemented an AML Program consistent with 31 U.S.C. §5318(h); and the RIA (or its agent) must agree to perform the specified requirements of the broker-dealer’s CIP. Under the revised no-action letter, there are additional requirements that broker-dealers must meet in order for the protection of the no-action letter to apply: The RIA must not only certify that it has implemented an AML Program consistent with 31 U.S.C. §5318(h),  but that it will update its AML Program to implement changes to applicable laws or guidance. The RIA must certify that it will perform CIP consistent with Section 326 of the USA Patriot Act (the BSA statutory authority for the CIP requirements for broker-dealers and other financial institutions). The RIA must agree to disclose promptly to the broker-dealer potentially suspicious or unusual activity detected as part of the CIP being performed so that the broker-dealer can file a Suspicious Activity Report ("SAR"), "as appropriate," based on the broker-dealer’s judgment. The RIA must agree to disclose its books and records related to its CIP performance to the SEC, the SRO, and/or authorized law enforcement agencies, either directly or through the broker-dealer, at the request of the broker-dealer, the SEC, the SRO and/or an authorized law enforcement agency. The RIA must certify annually that the representations in the reliance agreement remain accurate and that it is in compliance with the representations. Notably, while implicit in the concept of reasonable reliance, the SEC stated explicitly that reasonable reliance is predicated on a broker-dealer’s undertaking appropriate risk-based due diligence on the RIA commensurate with the money laundering risk of the RIA and the RIA’s customer base. The SEC acknowledges that the new terms may cause some broker-dealers not to renew their CIP reliance agreements with RIAs, i.e., to conduct CIP on the RIA clients themselves. No Need for Extension by CFTC In 2005, the Commodities Futures Trading Association issued a CIP no-action letter which has similar terms to the 2010 SEC no-action letter, with respect to reliance by Futures Commission Merchants on registered Commodities Trading Advisers.  That letter remains in effect. Gibson, Dunn & Crutcher’s lawyers are available to assist with any questions you may have regarding these issues.  For further information please contact the Gibson Dunn lawyer with whom you work or the following lawyers in the firm’s Washington, D.C. office: Amy G. Rudnick (202-955-8210, arudnick@gibsondunn.com)Linda Noonan (202-887-3595, lnoonan@gibsondunn.com)K. Susan Grafton (202-887-3554, sgrafton@gibsondunn.com) © 2011 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 26, 2011 |
U.S. Financial Crimes Enforcement Network Issues Guidance Regarding Recent Events in Tunisia

Printable PDF A popular uprising ended the 23-year old regime of former Tunisian president Zine El Abidine Ben Ali, who recently fled to Saudi Arabia.  It is estimated that he and his family may have amassed a fortune in excess of $5 billion as a result of the misappropriation of state assets and public corruption.  Many of these assets are believed to have been secreted abroad. In response, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued guidance to financial institutions on January 20, 2011.  FinCEN’s guidance reminds U.S. financial institutions to take reasonable steps to guard against the potential flow of funds that could potentially represent misappropriated or diverted state assets and the proceeds of bribery, public corruption, and other illegal payments originating or diverted from Tunisia.  The guidance encourages consideration of current events, including the possible impact of the political and social arrest in Tunisia, on patterns of financial activity when assessing customer and transaction risks in the region, and reminds U.S. financial institutions of the requirements under the Bank Secrecy Act to conduct enhanced due diligence for foreign private banking accounts and to monitor transactions to identify and report suspicious activity, including: i)  Conducting enhanced scrutiny for private banking accounts held by or on behalf of current or former senior foreign political figures; ii)  monitoring transactions that could potentially represent misappropriated or diverted state assets, proceeds of bribery or other illegal payments, or other public corruption proceeds originating in or diverted from Tunisia; and iii)  filing Suspicious Activity Reports, where required, e.g., 31 C.F.R.103.19 (for banks). In particular, FinCEN calls attention to the regulations implementing section 312 of the USA PATRIOT Act.  The regulations, in 31 C.F.R. 103.178, require certain financial institutions to maintain written due diligence programs for private banking accounts held for non-U.S. persons, including conducting enhanced scrutiny for senior foreign political figures, designed to detect and report any known or suspected money laundering or other suspicious activity.  Financial institutions also may want to consider conducting enhanced scrutiny of other accounts for senior foreign political figures that pose heightened money laundering risks, including accounts for former president Zine El Abidine Ben Ali and members of his family, and monitoring of transactions in the region.  The Tunisia guidance refers to FinCEN’s April 2008 guidance highlighting potential indicators of suspicious activity associated with transactions relating to foreign corruption. Gibson, Dunn & Crutcher’s lawyers are available to assist with any questions you may have regarding these issues.  For further information please contact the Gibson Dunn lawyer with whom you work or any of the following lawyers in the firm’s Washington, D.C. office: Judith A. Lee (202-887-3591, jalee@gibsondunn.com) Amy G. Rudnick (202-955-8210, arudnick@gibsondunn.com) Daniel J. Plaine (202-955-8286, dplaine@gibsondunn.com) John J. Sullivan (202-955-8565, jsullivan@gibsondunn.com) Jim Slear (202-955-8578, jslear@gibsondunn.com) Linda Noonan (202-887-3595, lnoonan@gibsondunn.com) © 2011 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

October 12, 2010 |
FinCEN Proposes Reporting of Cross-Border Electronic Transmittals of Funds

On September 30, 2010, the United States Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) published in the Federal Register its long-awaited notice of proposed rulemaking (NPRM) that would require certain banks and money transmitters to report to FinCEN transmittal orders associated with certain cross-border electronic transmittals of funds (CBETFs).  75 Fed. Reg. 60,377 (Sept. 30, 2010).  The NPRM also requires an annual filing with FinCEN by all banks of a list of accounts numbers where an account was credited or debited to originate or receive a CBETF and of the accountholders’ taxpayer identification numbers (TINs). FinCEN issued this proposal pursuant to Section 6302 of the Intelligence Reform and Terrorism Prevention Act of 2004 (IRTPA), which amended the Bank Secrecy Act (BSA) to require the Secretary of the Treasury to issue regulations “requiring such financial institutions as the Secretary determines to be appropriate to report to the Financial Crimes Enforcement Network certain cross-border electronic transmittals of funds, if the Secretary determines that reporting of such transmittals is reasonably necessary to conduct the efforts of the Secretary against money laundering and terrorist financing.”  31 U.S.C. 5318(n).  In response, FinCEN issued an extensive report on the feasibility of the proposal in early 2007, Feasibility of a Cross Border Electronic Funds Transfer System under the Bank Secrecy Act (Oct. 2006), and continued to work on refining a specific regulatory proposal. The idea of requiring the reporting of CBETFs was not new in 2004.  Similar requirements had been in place in Canada and Australia for many years, and the idea has been discussed over the years within the U.S. government.  The BSA always included adequate authority to require this reporting if Treasury could support the case that the cost of imposing the requirement was justified by the law enforcement utility.  The IRTPA sets the standard to justify the proposal as that the information must be “reasonably necessary” to combat terrorist financing and money laundering. The NPRM applies to financial institutions in the United States that are either the first U.S. financial institution to receive an incoming reportable CBETF or the last U.S. financial institution to process an outgoing CBETF.  Bank-to-bank, non-third party transactions and transfers between branches of a single bank using a proprietary system would be exempt from reporting.  For banks, there is no threshold on the amount of a CBETF that must be reported to FinCEN.  For money transmitters, CBETFs of $1,000 or more must be reported to FinCEN (the level when many money transmitters voluntarily require more detailed information about senders and receivers).  For transactions of $3,000 or more, money transmitters also must include the TIN, if available. Banks and money transmitters and certain other financial institutions currently are required under the BSA to maintain records relating to domestic and foreign funds transfers.  These records would be available to the Government in response to legal process, but they are not reported routinely to the Government.  Under the NPRM, these banks and money transmitters would be required for the first time to report international funds transfers routinely to the Government.  There is concern about how the Government is going to maintain and review such a massive amount of information and the cost and technical issues surrounding the submission of the information.  There also is concern whether FinCEN is adequately using all the information that currently is being reported under the BSA, including the annual reports that must be filed on foreign bank and other foreign financial accounts.  In addition, in the past, FinCEN has experienced technical difficulties with new methods of reporting information on a far smaller scale. There are significant privacy concerns about the wholesale downloading of financial data to the Government.  Notably, there are no specific constraints on the use of the information in the proposed regulations.  The information could be used, as all records and reports required under the BSA, for a range of law-enforcement purposes, including tax enforcement and, in accordance with established criteria and certain agreements, would be available to state and foreign law enforcement.  While the impetus for the 2004 Congressional push for FinCEN to pursue this was terrorism, use of the information is not restricted to the investigation of terrorist financing and money laundering. In fact, given the recent trends in terrorist financing, which include local funding of terrorist activities and the use of alternative financial institution such as hawalas, the utility of this information to identify terrorist financing may be less than its utility in other areas, such as tax enforcement. FinCEN is soliciting comments on the NPRM, which much be submitted by December 28, 2010.  FinCEN is particularly interested in receiving comments in the following areas: the effects on customer privacy; the cost and burdens  on affected financial institutions; the use of  potential third-party carriers other than SWIFT to provide information on behalf of banks; the ability to evade these requirements by migrating to  alternative payment or settlement systems or by conducting non-U.S. dollar transactions; the costs and utility of reporting CBETFs processed solely through bank proprietary systems; the potential for duplicate message reporting; the effect on cross-border remittances (e.g., the cost to the retail remittance customer); possible reporting formats; report frequency; how money transmitters will perform currency exchanges; the effect of TIN reporting on the banking and money-transmitter industries; whether money transmitters would prefer a single $1,000 threshold for reporting; and TIN reporting. The NPRM states the FinCEN “does not anticipate issuing a final rule until after January 1, 2012” because FinCEN first must have in place appropriate information technology systems.  That timeframe is probably optimistic given the complexity of the issues and the anticipated outpouring of comments. Any final rulemaking may have a very protracted effective date. Gibson, Dunn & Crutcher’s lawyers are available to assist with any questions you may have regarding these issues.  For further information please contact the Gibson Dunn lawyer with whom you work or any of the following lawyers in the firm’s Washington, D.C. office: Judith A. Lee (202-887-3591, jalee@gibsondunn.com) Amy G. Rudnick (202-955-8210, arudnick@gibsondunn.com) Daniel J. Plaine (202-955-8286, dplaine@gibsondunn.com) John J. Sullivan (202-955-8565, jsullivan@gibsondunn.com) Jim Slear (202-955-8578, jslear@gibsondunn.com) Linda Noonan (202-887-3595, lnoonan@gibsondunn.com) © 2010 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 28, 2010 |
Iran Sanctions Legislation: New Controls and Penalties for U.S. Financial Institutions

On July 1, 2010, President Obama signed the Comprehensive Iran Sanctions Accountability and Divestment Act of 2010 (“CISADA”), which amends and extends sanctions imposed under the Iran Refined Petroleum Sanctions Act of 2009 and the Iran Sanctions Act of 1996 (formerly the Iran and Libya Sanctions Act of 1996).  Congress passed CISADA after the United Nations Security Council voted on June 9, 2010 to impose sanctions on Iran for its ongoing violation of the Nuclear Non-Proliferation Treaty (UN Security Council Resolution 1929).  CISADA affects domestic financial institutions in three significant ways. First, CISADA section 104(c) requires the Secretary of the Treasury, not later than 90 days after the date of enactment of the Act (i.e., September 29, 2010), to issue regulations to prohibit, or impose strict conditions on, the opening or maintenance in the United States of a correspondent or payable-through account by a foreign financial institution that the Treasury Department finds “knowingly” engages in facilitating any of the following (hereinafter “prohibited activities”): (1)  Iran or Iran’s Revolutionary Guard Corps (“RGC”) efforts to acquire or develop weapons of mass destruction (“WMD”) or WMD delivery systems; (2)  Iran or RGC efforts to provide support for organizations designated as foreign terrorist organizations or for acts of international terrorism; (3)  the activities of a person subject to UN Security Council financial sanctions; (4)  money laundering in support of the above activities; (5)  the efforts of Iranian financial institutions to carry out the above activities; (6)  “a significant transaction or transactions” or “provides significant financial services” for RGC or a party or financial institution whose property is blocked because of Iran’s WMD proliferation or support for international terrorism. A financial institution that opens or maintains an account prohibited by CISADA section 104(c) is subject to civil penalties up to the greater of $250,000 or twice the amount of “the transaction that is the basis of the violation,” arguably the value of the account.  Criminal penalties can also be imposed up to $1,000,000, and individuals can be imprisoned for up to 20 years.  Importantly, CISADA provides that these penalties can be assessed not only on the financial institution that opens or maintains the prohibited account, but also “to the same extent” against any person who “attempts,” “conspires” or “causes” a proscribed account to be opened or maintained, allowing enforcement of the Act extraterritorially to foreign financial institutions. Second, under CISADA section 104(d), within 90 days after the enactment of the statute (again, by September 29, 2010), the Secretary of the Treasury must issue regulations to prohibit any subsidiary or affiliate, owned or controlled by a domestic financial institution, from “knowingly engaging in transactions with or benefiting” RGC or any of its agents or affiliates whose property is blocked.  Although the prohibition relates to the activities of foreign subsidiaries or affiliates, penalties will be imposed upon the U.S. financial institution parent if the U.S. financial institution “knew or should have known” that the controlled subsidiary or affiliate violated, attempted to violate, conspired to violate, or caused a violation of the Treasury regulations implementing section 104(d).  Under this section, only civil penalties are authorized, up to the greater of $250,000 or twice the amount of “the transaction that is the basis of the violation.” Third, under CISADA section 104(e), the Treasury Department must issue regulations to require U.S. financial institutions that maintain correspondent or payable-through accounts in the United States for foreign financial institutions to take one or more of the following measures to ensure that the foreign financial institutions are not using the accounts to engage in prohibited activities: (1)  audit the activities of the foreign financial institution to determine whether it is engaged in any of the prohibited activities; (2)  report to the Department of the Treasury any transactions or financial services related to any prohibited activities; (3)  certify that, to the best of the knowledge of the U.S. financial institution, a foreign financial institution is not knowingly engaging in prohibited activities; and/or (4)  establish due diligence policies, procedures, and controls that are similar to those required under Section 312 of the USA PATRIOT Act for foreign financial institution correspondent accounts and that are reasonably designed to detect whether the Secretary of the Treasury has found the foreign financial institution to have knowingly engaged in such activities. Civil and criminal penalties for violations of CISADA section 104(e) regulations are based on the penalties assessed by the Treasury Department’s Financial Crimes Enforcement Network relating to records and reports on monetary instruments transactions (31 U.S.C. sections 5321(a) and 5322).  The precise scope of such penalties for these particular types of violations, however, is not clearly provided in the statute. Unlike CISADA sections 104(c) and (d), section 104(e) does not require the Treasury Department to issue implementing regulations within a particular time.  Consequently, these regulations could be issued after the other regulations are finalized. Gibson, Dunn & Crutcher’s lawyers are available to assist with any questions you may have regarding these issues.  For further information please contact the Gibson Dunn lawyer with whom you work or any of the following lawyers in the firm’s Washington, D.C. office: Judith A. Lee (202-887-3591, jalee@gibsondunn.com) Amy G. Rudnick (202-955-8210, arudnick@gibsondunn.com) Daniel J. Plaine (202-955-8286, dplaine@gibsondunn.com) John J. Sullivan (202-955-8565, jsullivan@gibsondunn.com) Jim Slear (202-955-8578, jslear@gibsondunn.com) © 2010 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

August 7, 2009 |
IRS Further Extends FBAR Filing Deadline to June 30, 2010 for Certain U.S. Persons

Today, the Internal Revenue Service (“IRS”) announced that it was further extending the deadline for filing Reports of Foreign Bank and Financial Accounts (“FBARs”) for calendar year 2008 and prior years for certain U.S. persons. IRS Notice 2009-62.  The IRS is providing this relief for (i) persons with signature authority over, but no financial interest in, a foreign financial account, and (ii) persons with a financial interest in, or signature authority over, a foreign commingled fund. The IRS issued Notice 2009-62 to provide the Department of the Treasury with more time to address issues pertaining to the FBAR filing requirements that were raised as a result of changes to the new FBAR form and instructions. The current instructions, with certain exceptions, require U.S. persons who have signature authority over, but no financial interest in, a foreign account, to file an FBAR, even it an FBAR is filed by the owner of the account (or another person that has a financial interest in the account). The new form instructions also have caused confusion about the FBAR filing requirements for interests in foreign hedge funds and private equity funds. This is based on the additional definition in the new instructions, which indicates that a “financial account” generally includes “any accounts in which the assets are held in a commingled fund, and the account holder holds an equity interest in the fund (including mutual funds).” The Notice requests public comments on these and other FBAR issues by October 6, 2009. Given the confusion that has arisen concerning the FBAR requirements, this partial moratorium is a welcome development. It will provide the IRS with time to resolve some of the most contentious issues and to consider comments before the June 30, 2010 extended deadline. Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues.  If you have questions about the requirements, concerns about failure to file FBARs in the past, or potential tax issues coupled with a failure to file FBARs, please contact the Gibson Dunn attorney with whom you work or any of the following: Financial Institutions Practice Group Amy G. Rudnick – Washington, D.C. (202-955-8210, arudnick@gibsondunn.com) Linda Noonan – Washington, D.C. (202-887-3595, lnoonan@gibsondunn.com) Tax Practice Group Arthur D. Pasternak – Washington, D.C. (202-955-8582, apasternak@gibsondunn.com) Jeffrey M. Trinklein – New York (212-351-2344, jtrinklein@gibsondunn.com) Romina Weiss – New York (212-351-3929, rweiss@gibsondunn.com) Benjamin H. Rippeon – Washington, D.C. (202-955-8265, brippeon@gibsondunn.com) Investment Fund Practice Group Edward D. Nelson – New York (212-351-2666, enelson@gibsondunn.com) Edward Sopher – New York (212-351-3918, esopher@gibsondunn.com) C. William Thomas, Jr. – Washington, D.C. (202-887-3735, wthomas@gibsondunn.com) © 2009 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 29, 2009 |
IRS Confirms That Investors in Foreign Hedge Funds and Private Equity Funds Must File Reports of Foreign Financial Accounts; Filing Deadline Extended to 9/23/09 for Certain Taxpayers

On June 24, 2009, the Internal Revenue Service ("IRS") announced that it was extending the June 30, 2009 deadline for filing Reports of Foreign Bank and Financial Accounts ("FBAR"), TD F 90-22.1[1], to September 23, 2009, for certain taxpayers, i.e., taxpayers that properly report and pay tax on 2008 income, but that only recently learned that they have FBAR filing obligations and do not have sufficient time to gather the information necessary to complete the form.[2]  The extension follows remarks made in mid-June by IRS representatives and confirmed on Friday, June 26, by an IRS spokesperson that, based on the instructions to the revised FBAR form that was issued in October 2008, foreign hedge funds and private equity funds are included in the definition of foreign "financial account" subject to the FBAR requirements. As described below, specific filing procedures apply to FBARs filed pursuant to this extension.  According to the IRS, it will not impose civil penalties for not filing FBARs timely if taxpayers comply with these procedures.[3]    Background The new FBAR instructions have been causing considerable confusion about the filing requirements.  While the IRS has responded to some concerns, questions remain.  In April 2009, the IRS relaxed some of the revised FBAR form completion requirements for U.S. persons with signature or other authority over 25 or more foreign financial accounts but who do not have any financial interest in the accounts, although the instructions on the form remain unchanged.[4]  Earlier this month, the IRS suspended FBAR filings for persons who are not U.S. citizens, residents, or domestic entities that were not subject to reporting requirements under the prior FBAR.  At the same time, the IRS invited interested persons to submit comments on the revised form and instructions.  Comments are due by August 31, 2009.[5]   The FBAR requirement also has received widespread press attention because of the IRS voluntary disclosure program relating to U.S. taxpayers who have undisclosed foreign private banking accounts and the recent deferred prosecution agreement and summons enforcement action involving UBS relating to some of these taxpayers.[6]   FBAR Reporting Requirements FBARs must be filed annually by persons who have (i) a financial interest in, or (ii) signature or other authority over, one or more financial accounts in a foreign country that total over $10,000 in value at any time during the previous calendar year. The term "financial account" includes bank, securities, securities derivatives and other financial instrument accounts.  FBARs must be filed even if the accounts are not interest bearing or otherwise do not generate income.  The recent confusion in the FBAR filing requirements for interests in hedge funds and private equity funds arises from the additional definition in the new instructions, which states that "[s]uch accounts generally also encompass any accounts in which the assets are held in a commingled fund, and the account holder holds an equity interest in the fund (including mutual funds)."  As noted above, the IRS has confirmed that an interest in a hedge fund or private equity fund will be considered a "financial account" for purposes of FBAR reporting. A U.S. person will be considered to have a "financial interest" in a foreign account if such person is the owner of record or has legal title to a financial account.  Accordingly, investors in offshore hedge funds or private equity funds will be considered to have a FBAR filing obligation with respect to interests in hedge funds or private equity funds.  U.S. persons also may have financial interests in foreign accounts held through corporations, partnerships, trusts or nominees. In addition, with certain exceptions, FBARs must be filed by U.S. persons with signatory authority or other authority over a foreign financial account.  However, persons who are officers and employees of U.S. public companies generally are not required to file an FBAR if they are only signatories on the company’s foreign accounts and have no personal interest in the accounts.  Officers and employees of a bank that is subject to the supervision of a federal bank supervisory agency also are not required to file reports if they do not have a personal interest in the account. "U.S. person" means a U.S. citizen or resident of the United States anywhere in the world and a U.S. legal person, including a partnership, corporation, association, estate, trust, and non-profit organization.  While the revised FBAR filing obligation extends the definition of U.S. person to foreign persons "doing business in the United States," on June 5, 2009, the IRS announced the temporary suspension of that requirement for FBARs filed for 2008.   Extended September 23, 2009 Deadlines for Filing 2008 FBARs For Late Filings Where Taxpayers Have Reported and Paid or Will Report and Pay 2008 Taxable Income Taxpayers who reported and paid tax on all their taxable income for 2008, but only recently learned of their FBAR filing obligation and have insufficient time to gather the necessary information to complete the form, should file the late FBAR reports according to the instructions on the form and attach a statement explaining why the report is filed late. In addition, a copy of the late-filed FBAR, together with a copy of the taxpayer’s 2008 tax return, should be filed by September 23, 2009, with the Philadelphia Offshore Identification Unit, at the following address: Internal Revenue Service11501 Roosevelt Blvd.South Bldg., Room 2002Philadelphia, PA 19154Attn: Charlie Judge, Offshore Unit, DP S-611. Furthermore, if all 2008 taxable income is timely reported (including pursuant to an extension) by a U.S. person who only recently learned of their FBAR filing obligation, then such person may follow the preceding procedures and no penalty will be imposed; provided that, for 2008 tax returns that are due after September 23, 2009, the tax return does not need to accompany the 2008 FBAR filing. For Late Filings Where Taxpayers Have Unreported Income If a taxpayer has undisclosed foreign accounts and unreported income related to those accounts, the taxpayer may be eligible for a special IRS voluntary disclosure program that may reduce liability if timely formal disclosure is made before September 23, 2009. In these cases, different disclosure rules and filing requirements apply. To take advantage of this program, the taxpayer must follow the special instructions issued by the IRS for this category of FBAR filing.[7]  __________________   [1]  See Report of Foreign Bank and Financial Accounts,  http://www.fincen.gov/forms/files/f9022-1_fbar.pdf [2]  See IRS Announcement posted June 24, 2009, regarding September 23 Deadline for Some FBAR, Filers, http://www.irs.gov/newsroom/article/0,,id=210174,00.html [3]  The FBAR requirement arises under the authority of the Bank Secrecy Act ("BSA") statute and regulations, 31 U.S.C. § 5314 and 31 C.F.R. § 103.24, and is not a tax reporting requirement.  Unlike other BSA reporting requirements, the Department of the Treasury, Financial Crimes Enforcement Network ("FinCEN"), has delegated to the IRS the authority to administer FBARs, including the authority to impose civil penalties for failure to file and to issue guidance.  A range of civil and criminal penalties could apply to failures to file FBARs, depending on the reason for the non-filing and whether income attributable to the foreign account has been accurately reported.  A failure to file based on a good faith misunderstanding of the requirement without tax consequences and provided that the taxpayer follows the IRS’ instructions for filing should not result in any action by the IRS. [4]  See IRS Announcement, Headliner Volume 265, FBAR Reporting by Persons with Only Signature Authority or Other Comparable Authority,   http://www.irs.gov/businesses/small/selfemployed/article/0,,id=206219,00.html [5]  See IR-2009-58 and Announcement 2009-51, http://www.irs.gov/newsroom/article/0,,id=209418,00.html [6]  See Voluntary Disclosure Announcement,  http://www.irs.gov/newsroom/article/0,,id=206012,00.html, and Frequently Asked Questions (June 24, 2009), http://www.irs.gov/newsroom/article/0,,id=210027,00.html  [7]  See Frequently Asked Questions–Revised June 24, 2009.  Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues.  If you have questions about the requirements, concerns about failure to file FBARs in the past, or have potential tax issues coupled with a failure to file FBARs, please contact the Gibson Dunn attorney with whom you work or any of the following: Financial Institutions Practice GroupAmy G. Rudnick – Washington, D.C. (202-955-8210, arudnick@gibsondunn.com)Linda Noonan – Washington, D.C. (202-887-3595, lnoonan@gibsondunn.com) Tax Practice GroupArthur D. Pasternak – Washington, D.C. (202-955-8582, apasternak@gibsondunn.com)Jeffrey M. Trinklein - New York (212-351-2344, jtrinklein@gibsondunn.com)Romina Weiss – New York (212-351-3929, rweiss@gibsondunn.com)Benjamin H. Rippeon – Washington, D.C. (202-955-8265, brippeon@gibsondunn.com) Investment Fund Practice GroupEdward D. Nelson – New York (212-351-2666, enelson@gibsondunn.com)Edward Sopher – New York (212-351-3918, esopher@gibsondunn.com)C. William Thomas, Jr. – Washington, D.C. (202-887-3735, wthomas@gibsondunn.com) © 2009 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 6, 2009 |
Congressional Investigation, Bill Focus on Offshore Tax Havens

A key Senate investigative body this week continued its series of investigative hearings on offshore tax havens and tax abuse, focusing on the strict secrecy in which U.S. clients’ accounts and activities are maintained by Swiss financial institutions.  As part of this far-reaching investigation into alleged tax abuse, which is in its seventh year, the Senate Permanent Subcommittee on Investigations ("PSI") has focused on prominent offshore tax havens, dividend tax abuse, and a network of legal and financial advice that has allegedly allowed U.S. taxpayers to "hide" their assets offshore.  For a recap of earlier investigations by the subcommittee into alleged tax abuses, see our September 22, 2008 client alert.  This most recent inquiry demonstrates that those businesses providing financial services to an international mix of clients can expect to come under the watchful eye of Congress. As a result of his investigation, Senator Carl M. Levin (D-Mich.) has introduced legislation, the Stop Tax Haven Abuse Act (S. 506), which would make important changes to federal tax and anti-money laundering provisions.  Rep. Lloyd Doggett (D-Tex.) has introduced companion legislation in the House. It is also clear that the seven-year investigation will continue.  In introducing S. 506, Senator Levin referenced a Government Accountability Office report on the subsidiaries of the 100 largest U.S. publicly-traded corporations that are located in tax haven countries.[1]  Levin noted that PSI "is currently engaged in an effort to understand why so many of these corporations have so many tax haven affiliates."[2] March 4th Hearing The subcommittee’s latest hearing, which was held on March 4, 2009, focused on recent developments with respect to bank secrecy.[3]  Of particular interest to the subcommittee is whether foreign financial institutions may be assisting U.S. clients in avoiding their tax obligations.  Switzerland’s largest bank, UBS AG, was the latest target of PSI’s investigators, which previously focused on both UBS and Lichtenstein bank LGT as part of a July 2008 report.  In February, UBS admitted its role in helping U.S. citizens avoid their tax obligations, agreed to pay $780 million in fines to the U.S., and entered into a deferred prosecution agreement with the Department of Justice.  As part of that agreement, UBS agreed to reveal the names of approximately 250 U.S. clients.  Swiss law draws a distinction between actively engaging in tax fraud, which is prohibited, and the simple failure of U.S. clients to include a Swiss bank account as part of their U.S. tax returns, which is not a Swiss crime.  The identities of the 250 clients that UBS revealed to the U.S. government fell in the former category, and the Swiss government therefore permitted the disclosure.  Swiss law, however, does not permit the disclosure—and UBS refused to reveal—the identities of clients who may have simply omitted their Swiss bank accounts from U.S. tax returns.  On the day after the deferred prosecution agreement was signed, the Internal Revenue Service filed suit against UBS in federal district court to enforce "John Doe" summonses related to this latter category of accounts.  A hearing is scheduled in Miami for July 13, 2009.  Under the deferred prosecution agreement, UBS has preserved its right to challenge disclosure of customer identities relating to the "John Doe" summonses.  The agreement provides, however, that if UBS loses this case on appeal, it must either turn over additional information for the accounts or else the U.S. prosecution of UBS may resume.  During this week’s hearing, Senator Levin and the subcommittee explored the extent of UBS’s cooperation with U.S. officials.  The subcommittee was principally focused on the fact that UBS has relied on Swiss law to resist complying with the "John Doe" summonses, reasoning that revealing their additional U.S. clients would violate the Swiss banking law and could subject their employees to criminal prosecution in Switzerland.  Much of Senator Levin’s criticism in this respect was directed at the standstill in negotiations between the U.S. and Switzerland regarding bank secrecy.  Pressure on Switzerland is coming from other quarters than the U.S.  When the G-20 meets in London on April 2, 2009, the issuance of an expanded "blacklist" of uncooperative tax havens is on the agenda.  This measure is reported to have the backing of France, Germany, and the United Kingdom.  In recent remarks, President Sarkozy did not rule out that Switzerland met the criteria to be included on the OECD’s list of Uncooperative Tax Havens.[4]  Nevertheless, given that Swiss authorities refused to participate in this week’s hearing,[5] it is likely that firms such as UBS will continue to bear the brunt of PSI’s investigative oversight.  Moreover, it would be impossible to overstate the role played by the subcommittee in bringing the allegations against UBS to light.  As noted by Senator Levin, UBS’s first public admission that it had helped U.S. clients open Swiss accounts without disclosing their existence to the IRS came as part of the subcommittee’s July 2008 hearing.  Throughout the investigation, the subcommittee has uncovered and made public thousands of pages of internal UBS documents and UBS officials have been called to testify under oath before the subcommittee.  We fully expect similar investigations to continue in the months ahead as Senator Levin seeks to shore up support for the legislation he has introduced that targets international tax havens.  Senator Levin has indicated that the subcommittee will continue to focus on corporations and firms with operations in offshore tax havens.  Legislation Introduced Senator Levin, along with Senators Claire McCaskill (D-Mo.), Sheldon Whitehouse (D-R.I.), Bill Nelson (D-Fla.), and Jeanne Shaheen (D-N.H.), recently introduced the Stop Tax Haven Abuse Act of 2009.  This bill is an updated version of legislation originally introduced in 2007 and which was co-sponsored by then-Senator Obama; a companion bill has been introduced in the House by Rep. Lloyd Doggett (D-Tex.).[6]  During the March 4th hearing, Senator Levin referenced the support of both President Obama and Treasury Secretary Tim Geithner for his new bill.  Then-Senator Obama was a co-sponsor of the Levin bill in the 110th Congress and Secretary Geithner expressed explicit support for the measure in response to a question from Rep. Doggett during a House Ways and Means hearing earlier this week. Senator Levin’s bill, which "offers powerful new tools to detect and stop offshore tax offenders," would make significant changes to federal tax and anti-money laundering ("AML") provisions.[7]  Significantly, Section 101 of the bill would provide an initial list of 34 "Offshore Secrecy Jurisdictions," including Switzerland, which the Secretary of the Treasury would have the discretion to add to or subtract from in light of criteria specified in the bill.  Senator Levin has also targeted the use of what he has referred to as "phony offshore shell corporations," referring recently to the large number of publicly traded U.S. corporations with subsidiaries in tax haven jurisdictions.  In that regard, Section 101 of the bill creates a number of rebuttable legal presumptions that would apply to non-publicly traded entities in "Offshore Secrecy Jurisdictions."  These presumptions would govern in tax and securities proceedings related to the control, transfer, and beneficial ownership of assets in Offshore Secrecy Jurisdictions.  In addition, section 102 would amend the so-called "Special Measures" provision that was added to the Bank Secrecy Act by the USA PATRIOT Act.[8]  This provision, which authorizes the Secretary of the Treasury to designate certain foreign jurisdictions, financial institutions, or financial transactions to be of "primary money laundering concern,"  would be amended to permit the Secretary to designate jurisdictions, financial institutions, and transactions that "impede United States tax enforcement."  The range of special measures that could be imposed upon a finding of primary money laundering concern or a finding of impeding tax enforcement would also be expanded.  Potential special measures would include prohibiting approval or use in the U.S. of credit and debit cards by U.S. financial institutions or credit card companies if the card involved a designated jurisdiction, financial institution, or prohibited type of transaction conducted using the card.  For example, a special measure could prohibit the use of credit cards issued by banks in tax haven jurisdictions that cater to U.S. tax evaders.  Indeed, issuing credit cards to U.S. cardholders who fund their credit card purchases with untaxed funds has previously been identified as a tax abuse. Tax-Related Provisions There are a variety of tax provisions in the bill that broadly target foreign activities of U.S. persons.  The provisions generally fall into three categories: expanding the tax reach of the U.S. over such foreign activities; increasing reporting obligations; and imposing additional restrictions on the provision of tax advice.  Most of these proposals carry over from a similar bill Levin introduced in 2007, but a few new items have been added to the current version.  At this point, it is unclear whether any of the proposals would be included in other legislation if this bill does not move forward. Most of the substantive tax provisions appear to be very targeted responses to specific arrangements that have been viewed as abusing "loopholes" in the Code. Among the more notable provisions is a provision that would treat certain large foreign corporations as domestic corporations if they are managed from within the U.S. This provision would target U.S. public companies that have reincorporated offshore while retaining their management in the U.S., and  would likely affect a number of offshore investment vehicles, such as hedge fund or private equity fund entities. Another provision would impose a tax on certain payments made pursuant to derivatives designed to mimic dividend payments. The bill would also effectively subject certain foreign trusts to U.S. taxation. A number of the proposals have received significant criticism in the past.  The attempt to codify the "economic substance doctrine," for example, has been proposed numerous times over the past decade and is included again here.  However, it has had difficulty gaining any traction, as it has been almost universally panned by the tax bar, as well as the IRS, as having a chilling effect on legitimate transactions and having the potential of becoming a source of further abuse.  Some commentators see proposals such as the one to tax certain foreign corporations as domestic corporations as likely to be ineffective or deter foreign investment in the U.S.  Likewise, prior legislation and regulations imposing reporting obligations and sanctions on advisors have been viewed by practitioners as interfering with traditional attorney-client relationships, hindering the provision of tax advice, and greatly increasing the costs of obtaining tax counsel.  Indeed, several previous attempts to target "abusive" tax advice were met with such strong resistance that the rules were quickly liberalized by subsequent legislation or rulemaking. Provisions Relating to Money Laundering Section 105 of the bill would expand the reporting obligations of U.S. persons and other "withholding agents" to include certain situations in which the withholding agent has custody or control of an amount constituting U.S. source income of a foreign entity (other than a publicly traded entity) and the agent determines that a U.S. person is a beneficial owner of the foreign entity.   Further, it would require financial institutions directly or indirectly opening accounts or forming or acquiring entities (other than publicly traded entities) in the specified tax haven jurisdictions to report such activities if done at the direction of, on behalf of, or for the benefit of a U.S. person.  In introducing the bill, Senator Levin noted that as part of its anti-money laundering due diligence, a financial institution should know if a customer that is a foreign legal entity is owned by a U.S. person, but that the financial institution may currently not be required to file a Form 1099 on the foreign legal entity which may not be considered a US taxpayer.  The bill would also require financial institutions to file an information return when they open accounts or form legal entities in "an offshore secrecy jurisdiction" at the direction of, on behalf of, or for the benefit of a U.S. person.   Section 202 sets a deadline for the Department of the Treasury, in consultation with the SEC, to promulgate regulations under the Bank Secrecy Act requiring unregistered investment funds, including hedge funds and private equity funds, to implement AML programs and to file suspicious activity reports with Treasury.  Senator Levin was highly critical of the withdrawal last fall by the Department of the Treasury’s Financial Crimes Enforcement Network ("FinCEN") of a 2002 notice of proposed rulemaking which would have required AML programs for certain unregistered investment companies.  Under section 202, Treasury would be required to propose these regulations within 90 days of enactment of the bill and publish a final rule with 180 days.  There is no deadline for the effective date of the final rule, however.[9]   Section 202 also amends the list of businesses defined as "financial institutions" under the Bank Secrecy Act[10] to include company formation agents, i.e., "persons involved in forming new corporations, limited liability companies, partnerships, trusts or other legal entities."  In addition, Treasury is required, after consultation with the Department of Justice, IRS, and the SEC, to promulgate regulations requiring AML programs under the same deadlines as for unregistered investment company regulations.  On its face, the definition does not exclude lawyers.  In his remarks, Senator Levin said that the regulatory requirements would reach  company formation agents outside the U.S.  The authority to apply the BSA extraterritorially is questionable.   Conclusion We will continue to monitor these legislative developments closely. In the meantime, we expect Senator Levin and the subcommittee to continue to investigate firms with operations in offshore tax havens as part of the process of building public support for his bill. Notwithstanding the bill’s endorsement by the Administration and the Administration’s inclusion of a placeholder for "international enforcement" in its budget submission, the measure’s chances of passage are uncertain. At this point, the Senate bill does not have any Republican co-sponsors. Nor, to our knowledge, has it been scored by the Joint Committee on Taxation, so it is not possible to determine how attractive an offset it could be for tax relief or mandatory spending increases. Finally, Senator Levin introduced a similar measure in the 110th Congress and it was not taken up by the Finance Committee.  Senator Levin’s bill bears watching, as does the future direction of PSI’s tax haven investigation. As with all Congressional investigations, firms facing investigation by Congress should adequately prepare by appreciating the unique nature of a Congressional inquiry. Firms should also know that the subcommittee’s investigation into tax abuse is a long-standing pursuit, and one in which the subcommittee has not hesitated to use its subpoena power. Firms that are subject to the subcommittee’s investigative jurisdiction should anticipate that they may be called to account for their business practices, marketing literature, and internal documents. Moreover, representatives of firms targeted by PSI can expect to be called to testify as part of a public hearing. The powerful investigative reach of congressional committees can have significant legal and business consequences for the companies that are targeted.     [1]   GAO, "Large U.S. Corporations and Federal Contractors with Subsidiaries in Jurisdictions Listed as Tax Havens or Financial Privacy Jurisdictions" (Dec. 2008), http://www.gao.gov/new.items/d09157.pdf.    [2]   155 Cong. Rec. S2626 (daily ed. Mar. 2, 2009) (statement of Sen. Levin).   [3]   For a video of the subcommittee’s hearing and other materials, see  http://hsgac.senate.gov/public/index.cfm?Fuseaction=Hearings.Detail&HearingID=01ed16a9-f099-44ca-ae81-0e291a147efc.   [4]   The OECD list, which contained 35 names at its inception in 2000, is down to Andorra, Monaco, and Lichtenstein.  Switzerland, as an OECD member, was never on the list.   [5]   "Swiss Bank Miss,” Wall Street Journal (Feb. 27, 2009), http://online.wsj.com/article/SB123552750424466041.html.   [6]   See Senator Carl M. Levin, Summary of Stop Tax Haven Abuse Act (Mar. 2, 2009), http://levin.senate.gov/newsroom/release.cfm?id=308949.    [7]   Statement of Senator Carl Levin on Tax Haven Banks and U.S. Tax Compliance (Mar. 4, 2009), http://hsgac.senate.gov/public/_files/OPENINGCARLLEVINMarch409Hrg.pdf.    [8]   31 U.S.C. § 5318A.    [9]   A provision setting a deadline for unregistered investment company AML programs and suspicious activity reporting regulations also is contained in the Hedge Funds Transparency Act of 2009, which is pending in the Senate. [10]   31 U.S.C. § 5312(a)(2). Gibson Dunn has assembled a team of experts who are prepared to meet client needs as they arise in conjunction with the issues discussed above.  Please contact Michael Bopp (202-955-8256, mbopp@gibsondunn.com) in the firm’s Washington, D.C. office or any of the following members of the Financial Markets Crisis Group: Public Policy ExpertiseMel Levine – Century City (310-557-8098, mlevine@gibsondunn.com)John F. Olson – Washington, D.C. (202-955-8522, jolson@gibsondunn.com)Amy L. Goodman – Washington, D.C. (202-955-8653, agoodman@gibsondunn.com)Alan Platt – Washington, D.C. (202- 887-3660, aplatt@gibsondunn.com)Michael Bopp – Washington, D.C. (202-955-8256, mbopp@gibsondunn.com) Securities Law and Corporate Governance ExpertiseRonald O. Mueller – Washington, D.C. (202-955-8671, rmueller@gibsondunn.com)K. Susan Grafton – Washington, D.C. (202- 887-3554, sgrafton@gibsondunn.com)Brian Lane – Washington, D.C. (202-887-3646, blane@gibsondunn.com)Lewis Ferguson – Washington, D.C. (202- 955-8249, lferguson@gibsondunn.com)Barry Goldsmith – Washington, D.C. (202- 955-8580, bgoldsmith@gibsondunn.com)John H. Sturc – Washington, D.C. (202-955-8243, jsturc@gibsondunn.com)Dorothee Fischer-Appelt – London (+44 20 7071 4224, dfischerappelt@gibsondunn.com)Alan Bannister – New York (212-351-2310, abannister@gibsondunn.com)Adam H. Offenhartz – New York (212-351-3808, aoffenhartz@gibsondunn.com)Mark K. Schonfeld – New York (212-351-2433, mschonfeld@gibsondunn.com) Financial Institutions Law ExpertiseChuck Muckenfuss – Washington, D.C. (202- 955-8514, cmuckenfuss@gibsondunn.com)Christopher Bellini – Washington, D.C. (202- 887-3693, cbellini@gibsondunn.com)Amy Rudnick – Washington, D.C. (202-955-8210, arudnick@gibsondunn.com)Linda Noonan – Washington, D.C. (202-887-3595, lnoonan@gibsondunn.com) Dhiya El-Saden – Los Angeles (213-229-7196, delsaden@gibsondunn.com)Rachel Couter – London (+44 20 7071 4217, rcouter@gibsondunn.com) Corporate ExpertiseHoward Adler – Washington, D.C. (202- 955-8589, hadler@gibsondunn.com)Richard Russo – Denver (303- 298-5715, rrusso@gibsondunn.com)Dennis Friedman – New York (212- 351-3900, dfriedman@gibsondunn.com)Stephanie Tsacoumis – Washington, D.C. (202-955-8277, stsacoumis@gibsondunn.com)Robert Cunningham – New York (212-351-2308, rcunningham@gibsondunn.com)Joerg Esdorn – New York (212-351-3851, jesdorn@gibsondunn.com)Wayne P.J. McArdle – London (+44 20 7071 4237, wmcardle@gibsondunn.com)Stewart McDowell – San Francisco (415-393-8322, smcdowell@gibsondunn.com)C. William Thomas, Jr. – Washington, D.C. (202-887-3735, wthomas@gibsondunn.com) Private Equity ExpertiseE. Michael Greaney – New York (212-351-4065, mgreaney@gibsondunn.com) Private Investment Funds ExpertiseEdward Sopher – New York (212-351-3918, esopher@gibsondunn.com)Jennifer Bellah Maguire – Los Angeles (213-229-7986, jbellah@gibsondunn.com) Real Estate ExpertiseJesse Sharf – Century City (310-552-8512, jsharf@gibsondunn.com)Alan Samson – London (+44 20 7071 4222, asamson@gibsondunn.com)Andrew Levy – New York (212-351-4037, alevy@gibsondunn.com)Fred Pillon – San Francisco (415-393-8241, fpillon@gibsondunn.com)Dennis Arnold – Los Angeles (213-229-7864, darnold@gibsondunn.com)Michael F. Sfregola – Los Angeles (213-229-7558, msfregola@gibsondunn.com)Andrew Lance – New York (212-351-3871, alance@gibsondunn.com)Eric M. Feuerstein – New York (212-351-2323, efeuerstein@gibsondunn.com)David J. Furman – New York (212-351-3992, dfurman@gibsondunn.com) Crisis Management ExpertiseTheodore J. Boutrous, Jr. – Los Angeles (213-229-7804, tboutrous@gibsondunn.com) Bankruptcy Law ExpertiseMichael Rosenthal – New York (212-351-3969, mrosenthal@gibsondunn.com)David M. Feldman – New York (212-351-2366, dfeldman@gibsondunn.com) Oscar Garza – Orange County (949-451-3849, ogarza@gibsondunn.com)Craig H. Millet – Orange County (949-451-3986, cmillet@gibsondunn.com)Thomas M. Budd – London (+44 20 7071 4234, tbudd@gibsondunn.com)Gregory A. Campbell – London (+44 20 7071 4236, gcampbell@gibsondunn.com)Janet M. Weiss – New York (212-351-3988, jweiss@gibsondunn.com)Matthew J. Williams – New York (212-351-2322, mjwilliams@gibsondunn.com) J. Eric Wise – New York (212-351-2620, ewise@gibsondunn.com) Tax Law ExpertiseArthur D. Pasternak – Washington, D.C. (202-955-8582, apasternak@gibsondunn.com)Paul Issler – Los Angeles (213-229-7763, pissler@gibsondunn.com) Executive and Incentive Compensation ExpertiseStephen W. Fackler – Palo Alto (650-849-5385, sfackler@gibsondunn.com)Charles F. Feldman – New York (212-351-3908, cfeldman@gibsondunn.com) Michael J. Collins – Washington, D.C. (202-887-3551, mcollins@gibsondunn.com)Sean C. Feller – Los Angeles (213-229-7579, sfeller@gibsondunn.com)Amber Busuttil Mullen – Los Angeles (213-229-7023, amullen@gibsondunn.com)  IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any matters addressed herein. © 2009 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 30, 2009 |
Senators Grassley and Levin Introduce Hedge Fund Transparency Act

Yesterday, Senators Charles Grassley (R-IA) and Carl Levin (D-MI) introduced the Hedge Fund Transparency Act (“HFTA”), which would require hedge funds, private equity and other private funds with $50 million or more in assets, or assets under management, to register with the Securities and Exchange Commission (“SEC”), notwithstanding the availability of exemptions from registration for privately offered funds under Sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 (“1940 Act”), as renumbered. The senators said their legislation is needed because of the 2006 decision by the D.C. Circuit Court of Appeals that overturned Rule 203(b)(3)-2 under the Investment Advisers Act of 1940 (“Advisers Act”).  Goldstein v. Securities and Exchange Commission, 451 F.3d 873 (D.C. Cir. 2006).  Rule 203(b)(3)-2 would have required hedge fund managers to register as investment advisers. Unlike Rule 203(b)(3)-2 under the Advisers Act, the HFTA would require funds, rather than the managers, to register with the SEC.  HFTA also diverges from S. 1402, the Hedge Fund Registration Act of 2007, which Senator Grassley introduced to the Senate in May 2007, and which similarly would have required hedge fund managers to register as investment advisers. Conditions for Exemption from Investment Company Registration for Hedge Funds Under HFTA, new Sections 6(a)(6) and 6(a)(7) of the 1940 Act would replace current Sections 3(c)(1) and 3(c)(7) without substantive change, except that those subsections would now be exemptions from registration, rather than exceptions to the definition of “investment company.” Notwithstanding the availability of the investment company registration exemptions of new Sections 6(a)(6) and 6(a)(7), investment funds with assets, or assets under management, of not less than $50 million would be exempt from registration as investment companies only if they register with the SEC pursuant to new Section 6(g)(1) of the 1940 Act and comply with certain reporting requirements. In particular, funds claiming the Section 6(g)(1) exemption from investment company registration would be required to: Register with the SEC; Maintain books and records as the SEC would require; Cooperate with any request by the SEC for information or examination; and File an annual information form with the SEC electronically, in which the fund would be required to disclose:   The name and current address of each individual who is a beneficial owner of the investment company; The name and current address of any company with an ownership interest in the investment company; An explanation of the structure of ownership interests in the investment company; Information on any affiliation with another financial institution; The name and current address of the investment company”s primary accountant and primary broker; A statement of any minimum investment commitment required of a limited partner, member, or investor; The total number of any limited partners, members, or other investors; and The current value of the assets of the company and the assets under management by the company. Notably, the SEC would be required to make the filed information form available to the public at no cost and in an electronically searchable format.  The SEC would be required to issue forms and guidance to implement the HFTA within 180 days after its enactment. Anti-Money Laundering (“AML”) Requirements In addition to the registration requirements, the HFTA includes provisions, added by Senator Levin, requiring investment funds that are exempt from registration under new Sections 6(a)(6) or 6(a)(7) to establish AML programs and report suspicious transactions under the Bank Secrecy Act (“BSA”). 31 U.S.C. 5318(g) and (h).  Currently, only registered investment companies are subject to BSA requirements.  In October 2008, the U.S. Treasury withdrew proposed rules that would have required unregistered investment companies to implement AML programs. Within 180 days of the enactment of the HFTA, the Treasury Secretary, in consultation with the SEC and Commodity Futures Trading Commission would be required to issue a final rule setting forth minimum requirements for the AML program and reporting of suspicious transactions.  Unlike the rules for registered investment companies, the rule would require exempted investment companies to “use risk-based due diligence policies, procedures, and controls that are reasonably designed to ascertain the identity of and evaluate any foreign person (including, where appropriate the nominal beneficial owner or beneficiary of a foreign corporation, partnership, trust or other foreign entity) that supplies funds or plans to supply funds to be invested with the advice or assistance of such investment company.”  The rule would also require exempted investment companies to produce account records related to AML compliance requested by a federal banking regulator under 31 U.S.C. 5318(k)(2).  If a final rule were not issued, the requirements would take effect one year after the date of enactment of the HFTA. The AML obligations in the Act are similar to provisions that were included in the “Stop Tax Haven Abuse Act,” S.681, available at http://www.govtrack.us/congress/bill.xpd?bill=s110-681, introduced by Senator Carl Levin, Senator Norm Coleman, and then-Senator Barack Obama in February of 2007 following the issuance in August of 2006 by the U.S. Senate Permanent Subcommittee on Investigations of a report into the use of tax havens and offshore entities by U.S. taxpayers to avoid U.S. taxes and creditors.  A copy of the report is available on the Senate website. Observations It is not clear whether and when this legislation will be taken up by the Senate Banking Committee.  On one hand, the seniority and importance of the Senators sponsoring the legislation, and the high profile subject matter, cause us to believe that it will be given serious consideration.  On the other hand, neither Senator is a member of the committee of jurisdiction, which already has a full agenda.  While it is unlikely that HFTA would move as a standalone measure, pieces of the legislation may well become part of the larger regulatory reform bill that the committee will take up at some point during this Congress. Another variable is the approach taken in the legislation that would require hedge funds rather than their managers to register with the SEC.  Presumably, an intent of the legislation is to answer the call for greater transparency about hedge funds in order to enable a regulator to monitor systemic risk.  The legislation, however, focuses on providing greater transparency about hedge funds’ owners, and not about their investments, leverage or counterparty exposure. In addition to the uncertainty about whether (and why) the bill would require fund rather than investment adviser registration, other points of note are: Although denominated as addressing “Hedge Fund” transparency, “hedge fund” is not defined, and the bill would apply to all investment vehicles that were previously relying on Section 3(c)(1) or 3(c)(7) of the 1940 Act.  This includes many types of pooled investment vehicles such as private equity funds, venture capital funds, distressed debt funds and certain financial product vehicles, in addition to funds that are commonly referred to as hedge funds. The annual reporting of names and addresses purports to apply to require disclosure of all owners of the investment company.  No other provision of the federal securities laws requires disclosure of the names of persons who make insignificant, passive investments in an investment vehicle.  Moreover, it is difficult to see how public disclosure of this information advances the governmental interest in improving oversight by a regulatory agency of systemic risk.  We expect this provision to receive significant opposition. The jurisdictional reach of the bill, namely its application to non-US funds with US investors, is unclear. Investment managers who are registered advisers under the Advisers Act are already subject to books and records requirements and SEC examination pursuant to the Advisers Act.  It is unclear how the books and records and SEC examination requirements of HFTA – that would be imposed on the funds themselves – would interact with the Advisers Act”s requirements applicable to registered investment managers. The bill leaves open the question of whether the Financial Industry Regulatory Authority (FINRA) or some other “self-regulatory organization” will have examination responsibilities with respect to managers or hedge funds.  However, unlike the statutory framework for broker-dealers, there is no provision for self-regulation in either the 1940 Act or the Advisers Act. Unlike most AML requirements, the AML obligations would become self-executing and enforceable one year after the effective date of the Act even if Treasury does not issue a final rule.  This new provision may have been included in response to Treasury”s suggestion, when withdrawing its proposed AML program rule, that it may not impose BSA requirements on unregistered investment companies. We continue to monitor legislative and regulatory developments related to hedge fund registration and regulation and will issue further updates as these significant events unfold. Gibson, Dunn & Crutcher attorneys are available to assist with any questions you may have regarding these issues.  Please contact the attorney with whom you work or any of the following: Washington, D.C.  Michael Bopp (202-955-8256, mbopp@gibsondunn.com) Barry R. Goldsmith (202-955-8580, bgoldsmith@gibsondunn.com) Amy L. Goodman (202-955-8653, agoodman@gibsondunn.com) K. Susan Grafton (202-887-3554, sgrafton@gibsondunn.com) Brian Lane (202-887-3646, blane@gibsondunn.com) Amy Rudnick (202-955-8210, arudnick@gibsondunn.com) C. William Thomas, Jr. (202-887-3735, wthomas@gibsondunn.com) New York Edward D. Nelson (212-351-2666, enelson@gibsondunn.com) Mark K. Schonfeld (212-351-2433, mschonfeld@gibsondunn.com) Edward D. Sopher (212-351-3918, esopher@gibsondunn.com)   Los Angeles Jennifer Bellah Maguire (213-229-7986, jbellah@gibsondunn.com)   © 2009 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 20, 2009 |
Joint Justice Department and Manhattan District Attorney Investigation Results in Record $350 Million Payment for OFAC Violations

On January 9, 2009, the U.S. Department of Justice (see press release) and the New York County District Attorney’s Office  ("NYDA") (see press release) announced that Lloyds TSB Bank plc ("Lloyds") agreed to forfeit $350 million and take other actions to resolve its liability for violating the International Emergency Economic Powers Act ("IEEPA") and U.S. economic sanctions regulations administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control ("OFAC") and for causing New York financial institutions to falsify records.  According to the Factual Statement accompanying the Deferred Prosecution Agreements (DOJ and NYDA) ("DPAs"), from 1995 until January 2007, Lloyds in the United Kingdom and Dubai removed or "stripped" information from outgoing U.S. dollar ("USD") wire transfer payment messages that would have disclosed that the transactions involved countries, banks or persons that were sanctioned parties under Iranian or, to a much lesser extent, Sudanese and (former) Libyan sanctions.  Lloyds’ penalty for its UK Iranian Bank correspondent customers appears to be limited to those transactions that were intended for the United States or for U.S. banks located outside the United States, i.e., Lloyds does not appear to have been penalized for so-called U-turn transactions which were permitted at the time.[1] Interestingly, none of Lloyds’ USD transactions was processed by Lloyds’ branches in the United States; rather, they were processed through other U.S. correspondent banks whose automated OFAC-filtering systems were unable to detect the OFAC-sanctioned parties because of the removal of the information.  Consequently, Lloyds’ U.S. correspondent banks could not comply with OFAC requirements to reject or block the transactions, as appropriate. Other Investigations Lloyds does not appear to be the only bank that may have removed customer or bank information from payment messages.  According to the NYDA’s press release, joint investigations into stripping by other banks are continuing.  Press reports have referred to possible criminal investigations involving as many as eight other banks, including ABN AMRO Bank N.V. and other European banks.  In December 2005, ABN AMRO paid a total of $80 million in civil money penalties to settle similar allegations by OFAC, the Federal Reserve, and state banking regulators in Illinois and New York.  In that case, one of ABN AMRO’s overseas branches had developed "special procedures" for certain funds transfers, check clearing operations, and letter of credit transactions that prevented ABN AMRO’s New York and Chicago branches from complying with OFAC regulations. DPA Terms Under the DPAs, Lloyds agreed (1) to the filing of a one-count Criminal Information charging it with violating the Iranian Transactions Regulations, 31 CFR 560.203 and 560.204, issued under IEEPA; (2) to accept and acknowledge responsibility for its conduct; (3) to cooperate with the Justice Department and NYDA in their investigations; (4) to pay $175 million to the United States and $175 million to the NYDA; and (5) while not required to do so by applicable law or regulation, to comply with international Anti-Money Laundering and Combating Financing of Terrorism best practices and the Wolfsberg Anti-Money Laundering Principles for Correspondent Banking ("Wolfsberg Principles").  The Bank also agreed to conduct, within 270 days, an historical transaction review or a "lookback" with the assistance of an outside consultant of all available incoming and outgoing SWIFT MT 100 and MT 200 series USD payment messages from April 2002 through December 2007 that were processed through its UK processing centers and Dubai branch, something that could be viewed as an additional penalty because of the substantial cost generally involved. In consideration of  Lloyds’ willingness to acknowledge its responsibility, voluntary termination of its conduct with its Iranian Bank clients in 2004 and the Sudanese banks in 2007 prior to being contacted by the government, commitment of substantial resources to its prompt and thorough internal investigation and cooperation, demonstration of future good faith and compliance with the Wolfsberg Principles, and willingness to settle all civil and criminal claims for any act within the scope or related to the Factual Statement, the Justice Department and  NYDA agreed to defer prosecution for 24 months or less, at their discretion. and DOJ agreed that, if Lloyds is in full compliance with the DPAs at that time, it will move to dismiss with prejudice the Criminal Information. Use of DPAs and Other Criminal Dispositions Against Financial Institutions in OFAC Cases Possible In recent years, the Justice Department has increasingly used DPAs to resolve federal criminal investigations against corporations.  See Gibson, Dunn & Crutcher LLP 2008 Year-End Update on Corporate Deferred Prosecution and Non-Prosecution Agreements.  This appears to be the first time, however, that a DPA has been used to resolve criminally a bank’s potential OFAC liability.  According to Acting Assistant Attorney General Matthew Friedrich, "The Department will continue to use criminal enforcement measures against the knowing and intentional evasion of U.S. sanctions laws, particularly where such conduct has the potential to finance terrorist activities." Possible Civil Money Penalties? In addition to potential criminal penalties, banks and other persons that violate OFAC sanctions can be subject to significant civil money penalties.  Maximum civil penalties under IEEPA recently were raised to $250,000 per violation.  It is unclear whether OFAC will or can take further action in this matter.  Unlike in the ABN AMRO case, it is unlikely that U.S. bank regulators would bring an enforcement action against Lloyds given the absence of any transactions involving OFAC-sanctioned parties that were processed by Lloyds’ U.S. branches. How to Protect Your Institution Given the ongoing OFAC investigations by the Justice Department and the NYDA and the very substantial criminal and civil penalties that can be exacted for OFAC violations, foreign banks and U.S. banks with foreign branches and affiliates may want to consider reviewing carefully their practices, procedures and operations to ensure that they comply with OFAC regulations and that there are not isolated pockets of compliance problems that could put the institution at risk. To reduce the likelihood of running afoul of U.S. law, financial institutions should review the adequacy of their written policies and procedures, internal controls to prevent unauthorized stripping, transaction monitoring and filtering systems, and employee training programs.  To ensure compliance with and the effectiveness of these measures, financial institutions also should consider conducting periodic risk-based independent testing of USD transactions. Finally, as part of a U.S. bank’s risk-based due diligence of its foreign correspondent bank clients, U.S. banks may want to consider risk-based measures to reduce the likelihood that a foreign bank client could be stripping payment messages, including requiring a foreign bank to agree not to remove information from payment messages.     [1]   A U-turn transaction is a transaction where a U.S. depository institution acts only as an intermediary bank in clearing USD payments between non-U.S., non-Iranian banks.  On November 10, 2008, OFAC amended Section 560.516 of the Iranian Transaction Regulations,  to prohibit specifically U-turn transactions.  See Final Rule, 73 Fed. Reg. 66541 (Nov. 10, 2008) Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or any of the following: Washington, D.C.Amy G. Rudnick (202-955-8210, arudnick@gibsondunn.com) Linda Noonan (202-887-3595, lnoonan@gibsondunn.com) Daniel J. Plaine (202-955-8286, dplaine@gibsondunn.com)Judith A. Lee (202-887-3591, jalee@gibsondunn.com)F. Joseph Warin (202-887-3609, fwarin@gibsondunn.com)David P. Burns (202-887-3786, dburns@gibsondunn.com)  New YorkJames A. Walden (212-351-2300, jwalden@gibsondunn.com) Lee G. Dunst (212-351-3824, ldunst@gibsondunn.com)Alexander H. Southwell (212-351-3981, asouthwell@gibsondunn.com) Orange CountyNicola T. Hanna (949-451-4270, nhanna@gibsondunn.com) DenverRobert C. Blume (303-298-5758, rblume@gibsondunn.com) © 2009 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

December 23, 2008 |
New Bank Secrecy Act/Anti-Money Laundering Examination Manual for Money Services Businesses

On December 9, 2008, as anticipated, the Department  of the Treasury’s Financial Crimes Enforcement Network ("FinCEN") issued the Bank Secrecy Act/Anti-Money Laundering Examination Manual for Money Services Businesses (the "Examination Manual" or "the Manual").  This 153-page document sets forth a road map for examinations by the Internal Revenue Service ("IRS"), to which FinCEN has delegated examination authority for Money Services Businesses ("MSBs") and other businesses that do not have a federal regulator but that have been designated as financial institutions under the Bank Secrecy Act and its implementing regulations (collectively, the "BSA").[1]  The Manual is available from the FinCEN website, www.fincen.gov. In addition to providing detailed examination procedures for IRS examiners, the Manual serves as guidance for the MSB industry.  It provides useful information to MSBs about the government’s expectations for BSA/Anti-Money Laundering ("BSA/AML") compliance and for identifying and controlling money laundering and terrorist financing risks.  MSB BSA Officers and management can benchmark their BSA/AML Programs against the Manual.  MSB internal audit departments and outside auditors will be able to refer to the Manual in developing or refining independent testing programs for reviewing the BSA/AML Programs of MSBs.  A risk-based audit program that matches the applicable examination procedures point-by-point should assist an MSB in identifying issues and deficiencies before they would be identified by the government. The Examination Manual was developed by FinCEN in collaboration with the IRS, the State agencies responsible for MSB regulation, and the Money Transmitter Regulators Association, an association of state regulators.  The goal was to ensure consistency in the application of BSA requirements and expectations and to "facilitate the effective allocation of examination resources between federal and state BSA regulators."  Examination resources are of critical concern to the government in that the IRS only has some 400-plus dedicated BSA examiners nationwide who are responsible for thousands of MSBs and other financial institutions. The Manual is modeled on the BSA/AML examination manual for federal bank examiners, the Federal Financial Institutions Examination, Council Bank Secrecy Act/Anti-Money Laundering Examination Manual ("FFIEC Manual"), which was first issued in 2005.  As in the FFIEC Manual, the examination approach is risk-based.  Unlike the FFIEC Manual, the MSB Manual does not address compliance with the economic and trade sanctions administered by the Treasury Department’s Office of Foreign Assets Control.  Similar manuals are expected to be issued for the casino and insurance industries at some point in the future.  In the meantime, while the BSA requirements differ for the various types of entities examined by the IRS, the MSB Manual should be a helpful reference in understanding the approach that the IRS will take in BSA/AML examinations. There is very little in the Manual that should come as a surprise to MSBs that have experienced IRS examinations and that have been following FinCEN guidance and enforcement actions in recent years.  The overall impression from the Manual is that the government’s BSA/AML compliance standards for MSBs are very high, as are the government’s standards for the IRS examiners conducting the MSB examinations. Some highlights and notable points: The Manual addresses all types of businesses that are considered MSBs under the BSA except issuers, sellers and redeemers of stored value.  Issuers and sellers of stored value (if they ever sell more than $1,000 to one person in one day with currency or monetary instruments) are required to maintain BSA/AML Programs but are not subject to other MSB requirements, such as suspicious activity reporting and FinCEN registration.  FinCEN has been considering how best to refine the requirements applicable to stored value issuers and sellers for some time.  The fact that there is no discussion of stored value in the Manual may be reflective of this ongoing process and that the main examination focus of the IRS is on more traditional types of MSBs — money transmitters; issuers, redeemers, and sellers of money orders and travelers checks; currency exchangers; and check cashers. The starting point for the IRS examiners in scoping the course and extent of the examination is the MSB’s risk assessment, which should take into account the MSB’s products and services, types of customers, risks associated with the geographic locations where the MSB offers services and processes and facilitates transactions, and operational (compliance) risk.  While a risk assessment is not a regulatory requirement for MSBs, it is clearly a regulatory expectation.  If a business has not conducted a risk assessment or an adequate risk assessment, the examiners are instructed to complete one. Before getting started, examiners also are to review a sample of the MSB’s BSA filings and the Suspicious Activity Reports ("SARs") filed by other financial institutions on the MSB and to request documents from the MSB.  Appendix D to the Manual lists the documents that generally should be requested.  The examiners also are to conduct preliminary interviews with appropriate MSB employees and managers and the BSA Officer.  Appendix G suggests an extensive list of questions that may be raised in interviews.  A transaction testing plan is to be developed based on the MSB’s risk profile, which may be adjusted over the course of the examination. It is interesting to note that the Manual uses the term "principal" and agent to describe MSBs that provide their products and services through independently-owned sales outlets.  The use of the term principal may be used just for convenience and should not be read necessarily as new FinCEN thinking on the legal liability of MSBs for the acts of their agents.  In the Manual, FinCEN states, as it has in the past, that MSBs and their agents may allocate BSA compliance responsibilities, but that each remains independently responsible for implementation of BSA requirements, including BSA/AML Program and currency transaction and SAR reporting requirements.  This can be contrasted with the approach of the Department of Justice on MSB/agent liability.  In the Statement of Facts that accompanied the Deferred Prosecution Agreement earlier this year with Sigue Corporation, a money transmitter, the Justice Department stated that Sigue could be held criminally liable for the illegal acts of its agents, i.e., that the knowledge of an MSB’s agents could be imputed to the MSB.  United States v. Sigue Corporation, 4:18 CRI 0054 RWS (E.D. Mo., Jan. 8, 2008). Some of the procedures contained in the Manual apply only to principals, e.g., agent selection, monitoring and termination, due diligence on agents, including foreign agents or counterparties, and currency transaction aggregation across locations, whereas others apply to agents or to both.  Very little specific information is provided about examining MSBs with multiple branches that are agents of MSBs, e.g., large grocery store chains that sell money orders of a certain issuer at every store. In the Manual, FinCEN has articulated the long-understood expectation that domestic and foreign agent management should be a component of the BSA/AML Program of an MSB with agents.  The Manual requires examination of policies, procedures, and internal controls of an MSB’s agent management program for both U.S. agents and foreign agents, which would include agent due diligence, risk-based agent monitoring, standards for agent discipline, and agent training.  Previously, guidance only had been provided for due diligence on foreign agents. There are several references in the Manual to the fact that MSB management must be knowledgeable about and committed to the MSB’s BSA/AML Program and receive periodic updates on BSA compliance by the MSB.  Examiners are directed to interview "upper management" and to understand the level of knowledge of MSB owners and board members, where appropriate.  The lack of involvement of senior management would be considered an element of operational risk.  With respect to the BSA Officer’s authority, the Manual states that the examiner should check whether the BSA Officer has adequate involvement in the development of new products and services. Examiners are told not to second guess whether a particular decision to file a SAR was correct unless the failure to file is significant or accompanied by evidence of bad faith. In the discussion on reviewing SAR compliance by money orders and travelers check issuers, examiners are directed to review clearance records to identify potential suspicious patterns of activity of $5,000 or greater (which is the threshold for suspicious activity identified by issuers of money orders and travelers checks for instruments in the clearing process).  Then, the examiner presumably would check to see if a SAR had been filed on the transaction.  One example of a potential suspicious pattern is of ten consecutively-numbered money orders, each with a face amount of $500, clearing together through the same bank account.  As FinCEN and the IRS are aware and appear to have accepted in the past, money order and travelers check issuers are monitoring groups of apparently related cleared items at a higher threshold than $5,000 through their automated systems.  If the expectation is that a SAR should have been filed by the issuer in the example, as opposed to the selling agent (i.e., because the group of money orders clearing together totaled $5,000), this could mean a major overhaul of the issuers’ current processes and a significant additional compliance burden.  This point requires some clarification. Another matter that requires clarification is whether FinCEN expects issuers of money orders and travelers checks to collect and review monetary instrument sales records (required for cash sales between $3,000 and $10,000, inclusive, on the same day) to identify suspicious activity.  In this context, the Manual does not specify the relative responsibilities of principals and agents.  The examiner is supposed to identify where there may have been sales between $3,000 and $10,000 from clearance records (records maintained by the issuer) and then compare them to $3,000 or $10,000 sales records (records generally only maintained by the selling agent). FinCEN plans to hold conference calls on January 27, 2009, to discuss the Manual.  MSBs will be able to call-in to hear FinCEN’s presentation and will be able to submit questions to FinCEN.  FinCEN has not yet determined how the questions will be handled, e.g., by email during or before the call.  Details about the call will be posted on FinCEN’s website, www.fincen.gov.   [1]   In addition to MSBs, the IRS has been delegated examination authority for casinos and card clubs, insurance companies with respect to certain covered products, operators of credit card systems, and dealers in precious metals, stones, or jewels.  Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, Amy G. Rudnick (202-955-8210, arudnick@gibsondunn.com) orLinda Noonan (202-887-3595, lnoonan@gibsondunn.com) in the firm’s Washington, D.C. office.  © 2008 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

December 9, 2008 |
OFAC Issues Guidance to the Securities and Futures Industry

On November 5, 2008, the Department of the Treasury, Office of Foreign Assets Control ("OFAC") issued guidance, Opening Securities and Futures Accounts from an OFAC Perspective, to make it clear that guidance or actions by its sister Treasury bureau, the Financial Crimes Enforcement Network ("FinCEN"), under the Bank Secrecy Act ("BSA") do not affect the responsibilities of the securities and futures industry to comply with the economic and trade sanctions administered and enforced by OFAC.  This OFAC issuance follows the announcement by FinCEN on October 30, 2008, that FinCEN was withdrawing proposed rulemakings issued in 2002 and 2003 which would have required anti-money laundering ("AML") programs for unregistered investment companies, investment advisers, and commodity trading advisers.  The guidance reminds these persons that they remain subject to the OFAC requirements, even if they are not subject to AML program requirements under the BSA.  The OFAC guidance also discusses past FinCEN guidance on the application of the BSA Customer Identification Program ("CIP") requirements to introducing and clearing brokers and the application of CIP and certain BSA due diligence requirements relating to omnibus accounts. In its guidance, OFAC reinforces that securities and futures firms, such as investment advisers, broker-dealers, futures commission merchants, introducing brokers in commodities, commodity pool operators, and commodity trading advisers, like all U.S. persons, are subject to OFAC requirements and recommends that they establish and maintain effective risk-based OFAC compliance programs.  According to OFAC, at account opening, firms should screen the new client’s "identification information" and proposed transactions against the OFAC list of Specially Designated Nationals and Blocked Persons ("SDN List") and applicable OFAC sanctions programs.  The SDN List is available from the Department of Treasury website.  OFAC adds that periodic OFAC checks on non-accountholders, e.g., "beneficiaries, guarantors, or principals" also may be necessary.  OFAC states that a strong OFAC compliance program includes procedures similar to a brokerage firm’s customer identification and risk-based customer due diligence programs required under the BSA. The OFAC guidance describes how OFAC’s views on compliance with the OFAC requirements with respect to omnibus accounts and introducing/clearing relationships differ from FinCEN’s views on BSA obligations.  With respect to omnibus accounts maintained for foreign financial institutions, FinCEN’s position has been that a U.S. broker dealer or futures commission merchant generally does not need to "look through" an omnibus account to perform CIP or due diligence on the underlying accountholders, i.e., the customers of the foreign financial institution or intermediary that maintains the omnibus account.  See Application of the Regulations Requiring Special Due Diligence Programs for Certain Foreign Accounts to the Securities and Entities Industry, FIN-2006-G009 (May 10, 2006). OFAC emphasizes, however, that OFAC requirements apply to all property or interests of a sanctions target within the possession or control of a U.S. person, including shares held in an omnibus account.  While OFAC stops short of saying that information must be obtained on all customers whose transactions pass through every omnibus account and their names screened against the SDN List, it states that, in some cases, such as where an omnibus account is opened by a non-U.S. person or in a high risk jurisdiction, "it may be prudent for a firm to obtain beneficial ownership information for certain types of accounts."  In addition, based on the risk, OFAC advises that, if a foreign financial institution is seeking to establish a new omnibus account, the foreign financial institution may warrant additional OFAC due diligence, including conducting a risk-based assessment of the foreign financial institution’s business, the markets it serves, and the nature of its customer base. With respect to introducing and clearing brokers, FinCEN issued guidance earlier this year that provided that when there is an introducing and clearing broker relationship, generally only the introducing broker must comply with the CIP rule with respect to its customers introduced to the clearing broker on a fully disclosed basis.  No Action Position Respecting Broker-Dealers Operating Under Fully Disclosed Clearing Agreements According to Certain Functional Allocations, FIN-2008-G002 (March 4, 2008).  OFAC reminds introducing and clearing brokers that OFAC generally does not allow reallocation of legal liability to a third party, and that there is strict liability for OFAC violations.  In other words, however an introducing broker and a clearing broker allocate OFAC screening responsibilities, both would remain liable for any OFAC violations caused by one broker conducting the OFAC screening (often the clearing broker). The guidance ends on a somewhat softer note suggesting that, notwithstanding the strict liability nature of the OFAC regulations, the existence of a robust OFAC compliance program with risk-based policies and procedures that properly monitor and mitigate sanction risk is a factor in determining OFAC’s enforcement response to an OFAC apparent violation. Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, Amy G. Rudnick (202-955-8210, arudnick@gibsondunn.com) Linda Noonan (202-887-3595, lnoonan@gibsondunn.com) Judith A. Lee (202-887-3591, jalee@gibsondunn.com)Daniel J. Plaine (202-955-8286, dplaine@gibsondunn.com)Jim Slear (202-955-8578, jslear@gibsondunn.com) in the firm’s Washington, D.C. office.  © 2008 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.