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July 9, 2019 |
The Power to Investigate: Table of Authorities of House and Senate Committees for the 116th Congress

Click for PDF For the fifth successive Congress, Gibson Dunn is pleased to release a table of authorities that summarizes the various, and, in many instances, expanding investigative authorities and powers of each House and Senate committee.  We believe that understanding the full extent of a committee’s investigative arsenal is crucial to successfully navigating a congressional investigation. Congressional committees have the power to issue subpoenas to compel witnesses to produce documents, testify at committee hearings, and, in some cases, appear for depositions.  If a subpoena recipient refuses to comply, committees may resort to contempt proceedings.  As a result, the failure to comply with a subpoena and adhere to committee rules during an investigation may have severe legal and reputational consequences.  As we explained in a client alert issued earlier this year, however, there are defenses to congressional subpoenas, including challenging a committee’s jurisdiction, asserting attorney-client privilege and work product claims, and raising constitutional challenges.[1] Committees may adopt their own procedural rules for issuing subpoenas, taking testimony, and conducting depositions, though in the House, general deposition procedures applicable to all committees are provided for in the House Rules and subject to regulations issued by the chair of the Committee on Rules.  Each committee may reissue and if it chooses alter its rules at the commencement of each Congress. House and Senate committees adopted their rules for the 116th Congress earlier this year.  We have highlighted noteworthy changes below.  It is important to remember that, in addition to the rules detailed in our table of authorities, the committees are also subject to the rules of the full House or Senate. Some items of note: House: While all House Committee chairs (except Rules) have the authority to order the taking of a deposition,[2] the following thirteen committees fully empower their chairs to unilaterally issue a subpoena. Although the Ranking Member cannot block the subpoena, he or she usually must either be consulted or given notice prior to the subpoena being issued.  Several of these committees require such notice to occur 24 to 72 hours before the subpoena is issued.[3] Agriculture Budget Education and Labor Energy and Commerce Financial Services Foreign Affairs Homeland Security House Administration Judiciary Oversight and Reform Science, Space, and Technology Select Intelligence Ways and Means In the 115th Congress, the House required (with limited exceptions) that one or more Members of Congress be present during a deposition. The House rules for the 116th Congress have eliminated this requirement, which may result in an increase in the use—or at least threatened use—of depositions as an investigative tool.[4] The House Rules Committee’s new regulations governing depositions by committee counsel now allow for immediate overruling of objections raised by a witness’s counsel and immediate instructions to answer, on pain of contempt.[5] These regulations appear to eliminate the witness’s right to appeal rulings on objections to the full committee without risking contempt (although committee members may still appeal).  This will likely speed up the deposition process, as previously the staff deposition regulations required a recess before the chair could rule on an objection.[6] The Rules Committee’s deposition regulations also now expressly allow for depositions to continue from day to day[7] and permit, with notice from the chair, questioning by members and staff of more than one committee.[8] Finally, the Rules Committee’s deposition regulations have removed a prior requirement that allowed objections only by the witness or the witness’s lawyer. This change appears to allow objections from staff or Members who object to a particular line of questioning.[9] Senate: The Permanent Subcommittee on Investigations remains the only Senate body to permit the Chair to issue a subpoena without the consent of the Ranking Member. The Committees on Agriculture, Nutrition, and Forestry; Commerce, Science, and Transportation; Homeland Security and Governmental Affairs; Small Business and Entrepreneurship; and Veterans’ Affairs permit the chair to issue a subpoena so long as the Ranking Member does not object within a specified time period. Additionally, the Committee on Health, Education, Labor, and Pensions may, by a majority vote, delegate the power to issue subpoenas to the chair, subcommittee chair, or to the chair’s designee. As in the last Congress, seven Senate bodies have received Senate authorization to take depositions: Judiciary, the Senate Committee on Homeland Security and Governmental Affairs and its Permanent Subcommittee on Investigations receive the authority to do so each Congress from the Senate’s funding resolution.[10] The Aging and Indian Affairs Committees were authorized by S. Res. 4 in 1977.  The Ethics Committee’s deposition power was authorized by S. Res. 338 in 1964, which created the committee and is incorporated into its rules each Congress.  And the Intelligence Committee was authorized to take depositions by S. Res. 400 in 1976, which it too incorporates into its rules each Congress.  Of these, staff is expressly authorized to take depositions except in the Indian Affairs and Intelligence Committees.  The Senate’s view appears to be that Senate Rules do not authorize staff depositions pursuant to subpoena.  Hence, Senate committees cannot delegate that authority to themselves through committee rules.  It is thus understood that such authority can be conferred upon a committee only through a Senate resolution.[11] The Judiciary Committee remains the only committee to require a member to be present for a deposition. This requirement may be waived by agreement of the Chair and Ranking Member. The Committees on Agriculture, Commerce, and Foreign Relations authorize depositions in their rules. However such deposition authority has not been expressly authorized by the Senate and, hence, it is not clear whether appearance at a deposition can be compelled. The Small Business and Entrepreneurship Committee rules no longer authorize depositions. Our table of authorities is meant to provide a sense of how individual committees can compel a witness to cooperate with their investigations.  But each committee conducts congressional investigations in its own particular way, and investigations vary materially even within a particular committee.  While our table provides a general overview of what rules apply in given circumstances, it is essential to look carefully at a committee’s rules to understand specifically how its authorities apply in a particular context. Gibson Dunn lawyers have extensive experience defending targets of and witnesses in congressional investigations.  They know how investigative committees operate and can anticipate strategies and moves in particular circumstances because they also ran or advised on congressional investigations when they worked on the Hill.  If you have any questions about how a committee’s rules apply in a given circumstance, please feel free to contact us for assistance.  We are available to assist should a congressional committee seek testimony, information or documents from you. Table of Authorities of House and Senate Committees: https://www.gibsondunn.com/wp-content/uploads/2019/07/Power-to-Investigate-Table-of-Authorities-House-and-Senate-Committees-116th-Congress-07.2019.pdf _________________________ [1] See Investigations in the 116th Congress A New Landscape and How to Prepare, https://www.gibsondunn.com/investigations-in-the-116th-congress-a-new-landscape-and-how-to-prepare/#_edn6. [2] See H.R. Res. 6, 116th Cong. § 103(a)(1) (2019). [3] The House Transportation and Infrastructure Committee allows for unilateral issuance of a subpoena “[i]f a specific request for a subpoena has not been previously rejected by either the Committee or subcommittee.”  Rule IV(d)(1). [4] See H.R. Res. 6, 116th Cong. § 103(a)(1) (2019). [5] See 165 Cong. Rec. H1216 (Jan. 25, 2019) (116th Congress Regulations for Use of Deposition Authority). [6] Id. [7] The regulations provide that deposition questions “shall be propounded in rounds” and that the length of each round “shall not exceed 60 minutes per side” with equal time to the majority and minority.  See supra at note 4.  The regulations, however, do not expressly limit the number of rounds of questioning.  In this manner, they differ from the Federal Rules of Civil Procedure which expressly limit the length of depositions.  See Fed. R. Civ. P. 30(d)(1) (“Unless otherwise stipulated or ordered by the court, a deposition is limited to 1 day of 7 hours.”). [8] See supra at note 4. [9] Id. [10] See S. Res. 70, § 13(e) (2019) (Judiciary); id. § 12(e)(3)(E) (Homeland Security). [11] See Jay R. Shampansky, Cong. Research Serv., 95-949 A, Staff Depositions in Congressional Investigations 8 & n.24 (1999); 6 Op. O.L.C. 503, 506 n.3 (1982).  The OLC memo relies heavily on the argument that the Senate Rules never mentioned depositions at that time and those rules still do not mention depositions today. Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work or the following lawyers in the firm’s Congressional Investigations group in Washington, D.C.: Michael D. Bopp – Chair, Congressional Investigations Group (+1 202-955-8256, mbopp@gibsondunn.com) Thomas G. Hungar (+1 202-887-3784, thungar@gibsondunn.com) Alexander W. Mooney (+1 202-887-3751, amooney@gibsondunn.com) Tommy McCormac (+1 202-887-3772, tmccormac@gibsondunn.com) © 2019 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 8, 2019 |
The SFO’s Fifth DPA – High Five or Down Low? Too Slow!

Click for PDF On July 4, 2019, the UK Serious Fraud Office (“SFO”) secured approval for its fifth Deferred Prosecution Agreement (“DPA”) before the Crown Court sitting at Southwark. The DPA is with Serco Geografix Limited (“SGL”), a security company that contracts with the UK Ministry of Justice (“MOJ”) to electronically monitor suspects and offenders. The DPA relates to three charges of fraud and two of false accounting. The facts of the case are summarised by the SFO in its official press release, which is accompanied by a copy of the judgment of the Court. In order for the SFO to obtain approval for a DPA it is required to satisfy the Court that a DPA is in the “interests of justice” and that the proposed terms of the DPA are “fair, reasonable and proportionate”. Certain features of the SFO’s arguments and the Court’s approval in this case are novel and worthy of appreciation. Interests of Justice Seriousness The conduct at issue was serious: the victim was a central government department (the MOJ) and the Judge considered the nature of the conduct to be “ingrained”. There were nonetheless countervailing factors which meant that the Court agreed with the SFO that a DPA was in the interests of justice. These included prompt self-reporting, cooperation with the SFO, absence of past misconduct, the historic nature of the conduct, the voluntary provision by SGL of compensation and SGL’s implementation of remedial compliance measures. Cooperation With respect to cooperation, as in the Tesco Stores Limited case, at the request of the SFO, SGL’s parent company Serco Group PLC (“Serco”) conducted no employee interviews as part of its internal investigation, limiting its investigation to document production. This permitted the SFO to secure “first accounts” from interviewees and avoided the creation of privileged interview records. One cannot say that such a request reflects a settled trend, as there are more recently-commenced investigations in which companies have not received a request not to conduct interviews. It is worth noting, however, that in two DPAs concluded to date, the acquiescence by the company to such a request has weighed positively in favour of a DPA being concluded. Such requests will no doubt be made in future cases, albeit likely not in all. They are most likely to be made in cases of a purely domestic nature with a small number of persons of interest. Collateral Consequences In support of the DPA being in the interests of justice, the SFO also argued that a conviction would have a disproportionate impact on the company, due to its reliance upon public sector contracts and the consequent public sector contracts debarment risk. The DPA Code of Practice (“Code”) permits the taking into account of disproportionate harm on a company of a conviction, but in a qualified fashion, in that it recognises that there is a public interest in the operation of a debarment regime.  The Code additionally permits the taking into account of the collateral harm of a conviction to blameless third parties. The judgment suggests that the SFO focussed on the former argument rather than the latter, submitting that debarment would be unfair in this case in light of the remediation steps the company had taken. The judge expressed concern that, in this respect, he was effectively being asked to make a decision as to whether the company should be debarred, and that “quasi-political” decision was not one for him to make. In order to address this issue (which appears to have arisen on the Judge’s preliminary review of the papers) the SFO adduced evidence that the MOJ and Cabinet Office, as public sector procurers, saw no reason to debar in this case, primarily on account of the remedial actions taken by Serco. As the approval of a DPA would not be determinative of the question of debarment, the judge concluded he could approve the DPA. Had the SFO focussed instead on collateral third party harm this issue may have been avoided altogether. Such an approach was approved in the DPA with Rolls-Royce PLC in 2017. It is also of interest that the Court concluded that a DPA could amount to a finding of grave professional misconduct under debarment rules and that the facts of the DPA, as admitted by SGL, must amount to such misconduct. Debarment for grave professional misconduct is, however, discretionary under the Public Procurement Rules 2015. Strength of the Evidence The Code requires the SFO to state which of two permitted evidential thresholds have been reached when applying for the DPA. In this case the lower of the two thresholds is identified. This means that, at the time of the DPA, the SFO was not of the view that there was sufficient evidence to charge SGL, but was of the view that in reasonable time that evidential standard would be reached. This may explain why individuals have not yet been charged, and why the SFO committed to making individual charging decisions within six months. Despite the evidential standard for charging having not been reached, the Judge commented in the judgment that the evidence demonstrates involvement of unspecified senior individuals in the fraudulent scheme and that there was a clear case against the company. With that weight of judicial assessment the SFO may proceed to charging decisions against the individuals sooner rather than later. Despite the company’s cooperative conduct, a striking feature of this case is the almost six years it took to resolve. No explanation is offered for why it took so long to get to this point, as the conduct was self-reported in 2013. This lack of explanation risks speculation occurring as to the cause, such as whether the company put the SFO to strict evidential proof, and if so, that begs the question whether that is an acceptable method of engagement. Alternatively, it raises the question whether a six-year time frame is to be reasonably expected for the resolution of a self-report with subsequent cooperation. It would have been helpful for the SFO to provide some explanation, so that those considering engagement in the future might have a greater understanding as to what to expect from the self-reporting process. Terms Penalty The question of the applicable penalty was addressed in a wholly conventional way. Consistent with the Judge’s opening observations regarding the seriousness of the conduct, culpability was assessed as “high level”. The harm was readily identifiable as the loss in the form of the revenue abatement not given to the MOJ. The penalty was discounted by 50% to reflect Serco’s cooperation, resulting in a saving in time as compared with a prosecution, and to encourage future self-reporting. Although, given that that DPA took almost six years to conclude it is not immediately clear what saving of time occurred. Compliance Remediation The terms of the DPA contained conditions not seen before in English DPAs. The first is that the compliance remediation obligations are assumed by Serco, the parent company of SGL, and for all of  Serco’s other subsidiaries, not just SGL. The breadth of the remediation is also wide in that it covers all forms of compliance programmes. Historically the remediation terms of UK DPAs have focussed solely on the failings exposed by the misconduct the subject of the DPA. The Court notes that this assumption of group-wide remediation responsibility by a parent is a first and describes it as “an important development in the use of DPAs.” This signals the prospect of broad remediation requirements in the future. The parent company is not however required to engage an independent compliance monitor to sign off on the suitability and implementation of the remediation. Instead, the parent company is obliged to report annually to the SFO in respect of progress. There is no requirement for SFO approval of progress and similarly no formal mechanism for addressing any SFO dissatisfaction with what is reported.  This could present a significant gap in the effectiveness of this term. Reporting of Future Misconduct The second novel condition is a duty by Serco to report to the SFO any allegation or evidence of misconduct in respect of serious and complex fraud. As with the remediation provision this term is extremely broad, as it requires reporting in respect of the entire Serco group. The breadth of the compliance remediation and reporting terms are said in the judgment to be due to the subsidiary SGL now being dormant, such that such terms in respect of it alone would be meaningless. Statement of Facts A DPA requires the publication of a Statement of Facts, either at the same time as the DPA or later in prescribed circumstances. The publication of the Statement of Facts has in this case been postponed pending charging decisions in respect of individuals before year-end. The decision to postpone publishing raises the prospect of a repeat of the scenario in a prior DPA where the statement of facts naming individuals was published after their acquittal, or alternatively publication when a decision is taken not to charge. A preferable approach may have been to publish an anonymised Statement of Facts now, as a trial of individuals will not be for at least one and a half to two years, and the court responsible for such a trial would be empowered to make appropriate directions to a jury when necessary regarding information in the public domain. Conclusion A two-year hiatus in corporate crime resolutions by the SFO has now come to an end. There is much about this DPA in common with its predecessors. Those companies considering whether to self-report and cooperate going forward will, however, want to weigh in the balance the length of time that a resolution may take, the breadth of compliance remediation and reporting terms that may be imposed upon them and the risk made plain in this judgment that DPAs do not absolve a company of debarment risk – far from it; indeed, it appears they may well heighten that risk. These final observations may make this fifth DPA less of a High Five for the SFO for encouraging more self-reporting and cooperation and more of a Down Low, Too Slow, for increasing the corporate risks, costs and burdens. This client alert was prepared by Sacha Harber-Kelly, Patrick Doris, and Steve Melrose. Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these developments.  If you would like to discuss this alert in greater detail, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following members of the firm’s disputes practice: Sacha Harber-Kelly (+44 20 7071 4205, sharber-kelly@gibsondunn.com) Patrick Doris (+44 (0)20 7071 4276, pdoris@gibsondunn.com) Philip Rocher (+44 (0)20 7071 4202, procher@gibsondunn.com) Charles Falconer (+44 (0)20 7071 4270, cfalconer@gibsondunn.com) Allan Neil (+44 (0)20 7071 4296, aneil@gibsondunn.com) Steve Melrose (+44 (0)20 7071 4219, smelrose@gibsondunn.com) Sunita Patel (+44 (0)20 7071 4289, spatel2@gibsondunn.com) © 2019 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 11, 2019 |
Webcast: Negotiating Closure of Government Investigations: NPAs, DPAs, and Beyond

Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs) are favored enforcement tools for resolving white collar investigations that have figured prominently in some of the largest and most complex multi-agency and cross-border resolutions of the past two decades. Because they are highly customizable, require a cooperative posture, and can be tailored to specific alleged crimes to achieve targeted remediation outcomes, NPAs and DPAs can be attractive alternatives to guilty pleas or trial for companies and enforcement agencies alike. This presentation addresses how the use of these agreements has evolved over time and what to expect in negotiating one, including discussion of recent Department of Justice guidance regarding evaluation of corporate compliance programs. We also will look at other countries and agencies employing similar resolution vehicles to NPAs and DPAs. Furthermore, this presentation examines new guidance from the Department of Justice regarding monitor selection, and how to successfully navigate a monitorship. Topics: Varieties of resolution structures Trends and statistics regarding the use of NPAs and DPAs from the past two decades Key negotiating terms Advocacy to avoid corporate monitors and management of monitors Due to technical difficulties, the audio was dropped during the last 15 minutes of the discussion. The below video presentation is 75 minutes long. We apologize for this inconvenience and invite you to please contact the presenters with any questions. The complete slide deck is available below. View Slides (PDF) PANELISTS: Stephanie L. Brooker is co-chair of Gibson Dunn’s Financial Institutions Practice Group. She is the former Director of the Enforcement Division at FinCEN, and previously served as the Chief of the Asset Forfeiture and Money Laundering Section in the U.S. Attorney’s Office for the District of Columbia and as a DOJ trial attorney for several years. Ms. Brooker represents financial institutions, multi-national companies, and individuals in connection with BSA/AML, sanctions, anti-corruption, securities, tax, wire fraud, whistleblower, and “me-too” internal corporate investigations and enforcement actions. Her practice also includes BSA/AML compliance counseling and due diligence and significant criminal and civil asset forfeiture matters. Ms. Brooker was named a 2018 National Law Journal “White Collar Trailblazer” and a Global Investigations Review “Top 100 Women in Investigations.” Richard W. Grime is co-chair of Gibson Dunn’s Securities Enforcement Practice Group. Mr. Grime’s practice focuses on representing companies and individuals in corruption, accounting fraud, and securities enforcement matters before the SEC and the DOJ. Prior to joining the firm, Mr. Grime was Assistant Director in the Division of Enforcement at the SEC, where he supervised the filing of over 70 enforcement actions covering a wide range of the Commission’s activities, including the first FCPA case involving SEC penalties for violations of a prior Commission order, numerous financial fraud cases, and multiple insider trading and Ponzi-scheme enforcement actions. Patrick F. Stokes is a partner in Gibson Dunn’s Washington, D.C. office, where his practice focuses on internal corporate investigations and enforcement actions regarding corruption, securities fraud, and financial institutions fraud. Prior to joining the firm, Mr. Stokes headed the DOJ’s FCPA Unit, managing the FCPA enforcement program and all criminal FCPA matters throughout the United States covering every significant business sector. Previously, he served as Co-Chief of the DOJ’s Securities and Financial Fraud Unit. F. Joseph Warin is co-chair of Gibson Dunn’s global White Collar Defense and Investigations Practice Group, and chair of the Washington, D.C. office’s nearly 200-person Litigation Department.  Mr. Warin’s group was recognized by Global Investigations Review in 2018 as the leading global investigations law firm in the world, the third time in four years to be so named.  Mr. Warin is a former Assistant United States Attorney in Washington, D.C.  He is ranked annually in the top-tier by Chambers USA, Chambers Global, and Chambers Latin America for his FCPA, fraud and corporate investigations expertise.  Among numerous accolades, he has been recognized by Benchmark Litigation as a U.S. White Collar Crime Litigator “Star” for nine consecutive years (2011–2019). MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.50 credit hours, of which 1.50 credit hours may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.25 credit hours, of which 1.25 credit hours may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.25 hours. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

May 16, 2019 |
Gibson Dunn and F. Joseph Warin recognized at the Who’s Who Legal Awards

Who’s Who Legal named Gibson Dunn as its Investigations Firm of the Year and Washington, D.C. partner F. Joseph Warin as Investigations Lawyer of the Year at its 6th annual Who’s Who Legal Awards. The Who’s Who Legal Awards celebrate the world’s leading lawyers, championing the firms and individuals that have performed exceptionally well across its global research. The awards were announced on May 16, 2019. Gibson Dunn’s White Collar Defense and Investigations Practice Group defends businesses, senior executives, public officials and other individuals in a wide range of investigations and prosecutions.  The group is composed of over 100 lawyers practicing across our U.S. and international offices and draws on the expertise of more than 75 of its members with extensive government experience. The White Collar Defense and Investigations group includes numerous former U.S. federal and state prosecutors and officials, many of whom served at high levels within the U.S. Department of Justice, the Securities and Exchange Commission and other key investigative and prosecutorial arms of the government.  Our lawyers use firsthand knowledge of how government agencies conduct investigations and prosecutions to assist our clients in navigating those processes successfully. F. Joseph Warin is chair of the nearly 200-person Litigation Department of Gibson Dunn’s Washington, D.C. office, and he is co-chair of the firm’s global White Collar Defense and Investigations Practice Group. Warin’s practice includes representation of corporations in complex civil litigation, white collar crime, and regulatory and securities enforcement – including Foreign Corrupt Practices Act investigations, False Claims Act cases, special committee representations, compliance counseling and class action civil litigation. Warin has handled cases and investigations in more than 40 states and dozens of countries. His clients include corporations, officers, directors and professionals in regulatory, investigative and trials involving federal regulatory inquiries, criminal investigations and cross-border inquiries by dozens of international enforcers, including UK’s SFO and FCA, and government regulators in Germany, Switzerland, Hong Kong, and the Middle East. His credibility at DOJ and the SEC is unsurpassed among private practitioners – a reputation based in large part on his experience as the only person ever to serve as a compliance monitor or counsel to the compliance monitor in three separate FCPA monitorships, pursuant to settlements with the SEC and DOJ. He has been hired by audit committees or special committees of public companies to conduct investigations into allegations of wrongdoing in a wide variety of industries including energy, oil services, financial services, healthcare and telecommunications.

May 14, 2019 |
Cooperation Credit in False Claims Act Cases: Opportunities and Limitations in DOJ’s New Guidance

Click for PDF On May 7, 2019, the U.S. Department of Justice (“DOJ”) released long-awaited guidance on when DOJ will award cooperation credit to targets of False Claims Act (“FCA”) enforcement.  But those familiar with FCA enforcement are unlikely to find any big surprises in the guidance.  Instead, the guidance echoes longstanding DOJ expectations with respect to cooperation and remediation and reaffirms recent DOJ pronouncements regarding how companies may secure credit by identifying individual wrongdoers.  Further, DOJ emphasizes, yet again, that entities seeking maximum cooperation credit should voluntarily self-disclose misconduct.  As to the value of cooperation to defendants, DOJ’s new guidance caps the credit a defendant may receive: under the guidance, the credit may not result in a defendant paying less than single damages.  But DOJ offers little detail on the quantum of cooperation necessary to secure single damages, and the award of cooperation credit remains discretionary.  This discretion creates uncertainty, but may also present FCA defendants with the opportunity to argue for lower settlement payments during settlement negotiations with DOJ.  It remains to be seen which way this discretion cuts in practice. Background DOJ’s guidance results from a long-running effort, started after the issuance of the 2015 Yates Memorandum, to describe in more detail the bases for cooperation credit in a variety of civil and criminal enforcement contexts.  As discussed in a previous Gibson Dunn alert, DOJ announced in June 2018 that it was working to promote more fair and consistent enforcement activities under the FCA, and it pledged to promulgate new and potentially expanded policies on cooperation credit.  In November 2018, Deputy Attorney General Rod Rosenstein likewise signaled a retreat from the “all or nothing” approach to cooperation set forth in the Yates Memorandum, announcing, for example, that partial cooperation credit might be available in civil fraud cases, and that companies need not identify all individuals involved in the misconduct at issue, just those “substantially involved.” Forms of Cooperation The FCA guidance released on Tuesday, which is codified in Section 4-4.112 of DOJ’s Justice Manual, follows those announcements by allowing more flexibility in terms of what defendants can provide to the government in exchange for cooperation credit. Self-Disclosure.  In a press release issued along with the new guidance, Assistant Attorney General Jody Hunt made clear that voluntary self-disclosure—i.e., proactively approaching the government to report potential violations—is still “the most valuable form of cooperation.”  Under the new guidance, such disclosure should be both “proactive” and “timely”—characteristics the guidance leaves open to interpretation.  Disclosure of misconduct going beyond the scope of concerns known to DOJ will further qualify a defendant for credit. Other Forms of Cooperation.  The new DOJ guidance also includes an illustrative, non-exhaustive list of ten forms of cooperation that may earn a defendant “some cooperation credit.”  In addition to voluntary disclosure, defendants may also earn credit for taking other actions that “meaningfully assist[]” DOJ in its FCA investigation.  Such actions include: identifying individuals “substantially involved in or responsible for” misconduct; disclosing facts or evidence relevant to potential misconduct by third parties (or facts or evidence not already known to the government); preserving and disclosing relevant information beyond existing business practices or legal requirements; identifying and making available individuals with relevant information; attributing facts to specific sources and providing updates on any internal investigation; admitting liability or accepting responsibility for the relevant conduct; and assisting in the determination or recovery of losses. The guidance emphasizes that defendants are not required to waive attorney-client privilege or work product protection to be eligible for credit. Not surprisingly, actions that do not qualify for cooperation credit under the guidance include disclosure of information that is required by law or is under “imminent threat” of discovery or investigation, as well as “merely” responding to a subpoena or demand for information.  The guidance does not define terms such as “imminent threat,” potentially opening the door to significant DOJ discretion. The Value of Cooperation Under the new guidance, the “value” of any cooperation also will impact DOJ’s calculus regarding cooperation credit.  To assess value, DOJ will consider four factors relating to the assistance or information provided by a defendant:  (1) timeliness and voluntariness; (2) truthfulness, completeness, and reliability; (3) nature and extent; and (4) significance and usefulness to the government.  In the new guidance, DOJ also emphasizes the importance of remedial measures, such as implementing or improving a compliance program and acknowledging and accepting responsibility. Benefits of Cooperation As noted, one aspect of the new guidance that may be met with disappointment is the general lack of clarification or concrete details regarding the benefits of cooperation. The guidance sets a ceiling for the credit a defendant may receive.  Specifically, cooperation credit may not result in the government receiving less than “full compensation for the losses caused by the defendant’s misconduct,” including damages, interest, the costs of investigation, and any relator’s share.  Further, the guidance lists some non-monetary ways in which DOJ might recognize cooperation, such as notifying another agency of, or publicly acknowledging, the cooperation, or assisting the defendant in qui tam litigation. As members of the FCA defense bar know, double damages are the frequent result when negotiating resolutions of FCA investigations—so the promise of single damages in return for full cooperation has some value.  But the guidance provides no specific information about how much of a benefit defendants might expect for cooperation, nor does it offer a means by which a defendant might quantify, calculate, or estimate the benefit.  This lack of specific information, while contributing to ongoing uncertainty, may also create an opportunity for defendants to advocate for cooperation credit and lower settlement amounts without any fixed set of limitations on what DOJ may agree to provide, aside from the floor of single damages.  Yet, even in the case of single damages, the guidance is silent as to how those single damages must be calculated and whether litigation risk may factor into the calculation.  All of these factors combined create the possibility of robust negotiations over cooperation credit, even under this new framework. DOJ’s silence on the precise benefits of cooperation in the FCA context stands in contrast to cooperation frameworks in other contexts.  For example, under the FCPA Corporate Enforcement Policy (“FCPA Policy”), it is clear that companies that (1) voluntarily disclose, (2) fully cooperate, and (3) timely and appropriately remediate misconduct “will receive a declination” absent aggravating circumstances.  The FCPA Policy defines each of the three elements of cooperation—which are similar in substance to those set out in the new guidance—providing a clearer, albeit not ambiguity-free, roadmap to receiving credit.  Notably, the FCPA Policy also quantifies the value of cooperation, stating, for example, that a defendant that did not initially disclose misconduct but later does can expect to receive “up to a 25% reduction” off the low end of the sentencing guidelines.  DOJ’s guidance in the FCA context is not so explicit. Cooperation Versus “Outsourced” Investigations Although DOJ’s new guidance is unabashed in its solicitation of “meaningful[]” investigative assistance, just how prescriptive DOJ may be without risking exclusion of some evidence it gathers remains an open question. Just over a week ago, Chief Judge McMahon of the U.S. District Court for the Southern District of New York issued an opinion (in a criminal, non-FCA case) stating that she was “deeply troubled” by the government in effect “outsourcing” its investigation to its target, which was seeking to cooperate.  See Mem. Decision and Order Den. Def. Gavin Black’s Mot. for Kastigar Relief, United States v. Connolly, No. 16 Cr. 0370 (CM) (S.D.N.Y. May 2, 2019).  Judge McMahon concluded that the target’s lawyers appeared to have done “everything that the Government could, should, and would have done had the Government been doing its own work,” id. at 24, and that the internal investigation was therefore fairly attributable to the government, id. at 29.  As a result, Judge McMahon held that the individual defendant’s statements to a law firm conducting an investigation on behalf the individual’s corporate employer were effectively compelled statements to the government (under the line of cases beginning with Garrity v. New Jersey, 385 U.S. 493 (1967)).  See Connolly, No. 16 Cr. 0370 (CM), at 21, 28–29. As a criminal case, Connolly involves different considerations (and constitutional protections).  Nevertheless, it suggests that courts may play—and potentially embrace—a role in distinguishing “cooperation” from compulsion in future cases (particularly FCA matters with parallel civil and criminal components). * * * * * Time will tell whether DOJ’s lack of specificity with respect to the benefits of cooperation will limit the impact of the new guidance on cooperation credit in FCA enforcement.  But, at the very least, defendants will have factors to consider—and single damages to hope for—based on DOJ’s latest addition to the Justice Manual. The following Gibson Dunn lawyers assisted in preparing this client update:  F. Joseph Warin, Stuart Delery, John Partridge, Jonathan Phillips, Julie Hamilton and Reid Rector. Gibson Dunn’s lawyers have handled hundreds of FCA investigations and have a long track record of litigation success. Our lawyers are available to assist in addressing any questions you may have regarding the above developments. For more information, please feel free to contact the Gibson Dunn attorney with whom you work or the any of the following. Washington, D.C. F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Joseph D. West (+1 202-955-8658, jwest@gibsondunn.com) Andrew S. Tulumello (+1 202-955-8657, atulumello@gibsondunn.com) Karen L. Manos (+1 202-955-8536, kmanos@gibsondunn.com) Stephen C. Payne (+1 202-887-3693, spayne@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) New York Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Monica K. Loseman (+1 303-298-5784, mloseman@gibsondunn.com) John D.W. Partridge (+1 303-298-5931, jpartridge@gibsondunn.com) Ryan T. Bergsieker (+1 303-298-5774, rbergsieker@gibsondunn.com) Dallas Robert C. Walters (+1 214-698-3114, rwalters@gibsondunn.com) Los Angeles Timothy J. Hatch (+1 213-229-7368, thatch@gibsondunn.com) James L. Zelenay Jr. (+1 213-229-7449, jzelenay@gibsondunn.com) Palo Alto Benjamin Wagner (+1 650-849-5395, bwagner@gibsondunn.com) San Francisco Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com)Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 3, 2019 |
Updated DOJ Criminal Division Guidance on the “Evaluation of Corporate Compliance Programs”

Click for PDF On April 30, 2019, the U.S. Department of Justice (“DOJ”), Criminal Division, released updated guidance to DOJ prosecutors on how to assess corporate compliance programs when conducting an investigation, in making charging decisions, and in negotiating resolutions.  The pronouncement, “Evaluation of Corporate Compliance Programs,” updates earlier guidance that DOJ’s Fraud Section issued in February 2017 (covered in our 2017 Mid-Year FCPA Update).  This guidance emphasizes DOJ’s laser focus on compliance programs, requiring companies under investigation to carefully evaluate, test, and likely upgrade their programs well before the investigation is over. The updated Evaluation document has been restructured around the three “fundamental questions” from the Justice Manual that DOJ prosecutors should assess: Is the corporation’s compliance program well designed? Is the program being applied earnestly and in good faith?  In other words, is the program being implemented effectively? Does the corporation’s compliance program work in practice? Under these three categories, the updated Evaluation groups 12 topics and sample questions that DOJ considers relevant in evaluating a corporate compliance program.  Much like the earlier Evaluation articulation, these topics relate to common elements of effective compliance programs, including policies and procedures, training, reporting mechanisms and investigations, third-party due diligence, tone at the top, compliance independence and resources, incentives and disciplinary measures, and periodic testing and review.  Several of these core standards can be found in other compliance program guidance materials, such as the Resource Guide to the U.S. Foreign Corrupt Practices Act and, very recently, the “Framework for OFAC Compliance Commitments” issued by OFAC on May 2, 2019, pursuant to the Agency’s promise to provide more guidance on its expectations for sanctions compliance programs. The following chart captures how the 12 compliance topics in the updated Evaluation are grouped under DOJ’s three core questions. Core Questions Compliance Topic (Core Focus) Is the Program Well Designed? Risk Assessment  DOJ will assess whether the program is appropriately tailored to the company’s business model and the particularized risks that accompany it, considering factors like the company’s locations, industry sectors, and interactions with government officials. Policies and Procedures DOJ will assess whether the company has established appropriate policies and procedures, the processes for doing so and disseminating them to the workforce, and the guidance and training provided to “key gatekeepers in the control processes.” Training and Communications DOJ will assess the compliance training provided to directors, officers, employees, and third parties, as well as efforts to communicate to the workforce about the company’s response to misconduct, and the availability of resources to provide compliance guidance to employees. Confidential Reporting Structure and Investigation Process DOJ will assess the company’s reporting channels and investigative mechanism. Third-Party Management DOJ will examine whether the company’s third-party due diligence process is risk-based and includes controls and monitoring related to the qualifications and work of its third parties. Mergers and Acquisitions DOJ will examine the company’s M&A pre-acquisition due diligence and post-acquisition integration processes. Is the Program Implemented Effectively? Commitment by Senior and Middle Management DOJ will evaluate the commitment by company leadership to a culture of compliance, including management’s messaging and promotion of compliance and the board’s role in overseeing compliance.  The OFAC Compliance Framework similarly emphasizes the importance of management’s commitment to, and support of, a company’s compliance program. Compliance Autonomy and Resources DOJ will assess whether the compliance function has sufficient seniority, resources, and autonomy commensurate with the company’s size and risk profile.  Notably, DOJ will ask whether the company outsourced all or parts of its compliance function to an external firm or consultant.  If so, DOJ will probe the level of access that the external firm or consultant has to company information. Incentives and Disciplinary Measures DOJ will assess whether the company has clear disciplinary procedures that are enforced consistently, as well as whether and how the company incentivizes ethical behavior. Does the Program Work in Practice? Continuous Improvement, Periodic Testing, and Review DOJ will consider how the company has reviewed and evaluated its compliance program to ensure it is current, including changes made to the program in light of lessons learned.  DOJ also will assess the internal audit function and how the company measures its culture of compliance.  Effective training also is called out specifically in the OFAC Compliance Framework. Investigation of Misconduct DOJ will assess the effectiveness and resources of the company’s investigative function.  Notably, this is the second instance in the updated Evaluation calling for DOJ to assess a company’s investigative function. Analysis and Remediation of Any Underlying Misconduct DOJ will consider whether the company conducts root-cause analyses of misconduct and takes timely and appropriate remedial action against violators.  Under the heading “Accountability,” the updated Evaluation includes a question about whether disciplinary actions for failures in supervision have been considered by the company. KEY TAKEAWAYS The updated Evaluation covers many of the same topics as the prior version, yet the addition of certain questions signals added emphasis or expectations compared to the prior guidance.  Although non-exhaustive, the following list outlines key takeaways from the updated Evaluation that companies should consider in building, maintaining, and enhancing their compliance programs. Starting with a Risk Assessment and Building on “Lessons Learned”:  The updated Evaluation calls for tailoring a company’s compliance program based on its risk assessment, and ensuring that the criteria for the risk assessment are “periodically updated.”  Commentators suggest risk assessments annually or every two years.  DOJ does not prescribe the timing of risk assessments.  Going forward, “‘revisions to corporate compliance programs [should be made] in light of lessons learned.’”  This means that a company’s risk assessment should be an ongoing and iterative process, and that a company should reexamine and revise its compliance program from time to time based on the risk assessment results.  Reexamining and revising the compliance program is necessary to address DOJ’s particular emphasis on making enhancements in response to specific instances of misconduct.  When companies conduct internal investigations, especially where there is a prospect of a government-facing inquiry, they should give serious consideration to taking prompt remedial steps to address the components highlighted by the updated Evaluation document.  This will better position companies to advocate that they have effectively and timely remediated root-cause issues and should receive remediation credit. Importance of Compliance Personnel:  In evaluating whether a company has sufficient staffing for compliance personnel, the updated Evaluation presents a number of related queries, such as where within the company the compliance function is housed (but without dictating a particular reporting structure) and how the compliance function compares with other functions within the company in terms of stature, compensation, rank/title, reporting lines, resources, and access to key decision-makers. Responsibility for Third Parties:  The updated Evaluation indicates an increased focus on a company’s oversight of third parties, which historically have factored into the vast majority of Foreign Corrupt Practices Act enforcement actions.  Among other things, DOJ will consider whether a company has “appropriate business rationale[s]” for the use of third parties and whether it has considered “the compensation and incentive structures” for third parties against the compliance risks posed.  In addition, in assessing a company’s remediation of misconduct involving suppliers, DOJ will consider the company’s process for supplier selection.  Termination of a supplier or business partner upon a company’s finding of misconduct, and steps to ensure that such third parties cannot be re-engaged without appropriate authorization, is a sign of a mature compliance program expected by DOJ. Cascading Tone from the Top:  The updated Evaluation emphasizes “culture of compliance.”  Crucially, messaging at the “top” alone will not equate to an adequate tone of compliance.  Rather, DOJ will focus on how the compliance tone cascades downward in the organization and to counterparties.  DOJ will examine not only the standards set by the board of directors and senior executives, but also the tone and actions of middle management to reinforce those standards.  The focus on the cultural leadership by mid-level management has been a constant theme from DOJ for more than a decade.  In addition, in assessing a company’s remediation, DOJ will consider whether managers were held accountable for misconduct that occurred under their supervision and whether the company considered disciplinary actions for failures in supervision. Like its predecessor, the updated Evaluation guidance is an important resource for companies both for reactively defending their compliance programs in the context of a DOJ investigation and for proactively benchmarking or enhancing their programs.  Clearly, this refined prism will provide the template for DOJ Filip Factor presentations. The following Gibson Dunn lawyers assisted in preparing this client update:  F. Joseph Warin, Richard Grime, Patrick Stokes, Christopher Sullivan, Oleh Vretsona, Abbey Bush, and Alexander Moss. 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 and SEC officials, 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) Patrick F. Stokes (+1 202-955-8504, pstokes@gibsondunn.com) Judith A. Lee (+1 202-887-3591, jalee@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) Stephanie Brooker (+1 202-887-3502, sbrooker@gibsondunn.com) M. Kendall Day (+1 202-955-8220, kday@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Adam M. Smith (+1 202-887-3547, asmith@gibsondunn.com) Christopher W.H. Sullivan (+1 202-887-3625, csullivan@gibsondunn.com) Oleh Vretsona (+1 202-887-3779, ovretsona@gibsondunn.com) Courtney M. Brown (+1 202-955-8685, cmbrown@gibsondunn.com) Jason H. Smith (+1 202-887-3576, jsmith@gibsondunn.com) Ella Alves Capone (+1 202-887-3511, ecapone@gibsondunn.com) Pedro G. Soto (+1 202-955-8661, psoto@gibsondunn.com) New York Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Joel M. Cohen (+1 212-351-2664, jcohen@gibsondunn.com) Lee G. Dunst (+1 212-351-3824, ldunst@gibsondunn.com) Mark A. Kirsch (+1 212-351-2662, mkirsch@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Lawrence J. Zweifach (+1 212-351-2625, lzweifach@gibsondunn.com) Daniel P. Harris (+1 212-351-2632, dpharris@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) John D.W. Partridge (+1 303-298-5931, jpartridge@gibsondunn.com) Ryan T. Bergsieker (+1 303-298-5774, rbergsieker@gibsondunn.com) Laura M. Sturges (+1 303-298-5929, lsturges@gibsondunn.com) Los Angeles Debra Wong Yang (+1 213-229-7472, dwongyang@gibsondunn.com) Marcellus McRae (+1 213-229-7675, mmcrae@gibsondunn.com) Michael M. Farhang (+1 213-229-7005, mfarhang@gibsondunn.com) Douglas Fuchs (+1 213-229-7605, dfuchs@gibsondunn.com) San Francisco Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) Thad A. Davis (+1 415-393-8251, tadavis@gibsondunn.com) Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com) Michael Li-Ming Wong (+1 415-393-8333, mwong@gibsondunn.com) Palo Alto Benjamin Wagner (+1 650-849-5395, bwagner@gibsondunn.com) London Patrick Doris (+44 20 7071 4276, pdoris@gibsondunn.com) Charlie Falconer (+44 20 7071 4270, cfalconer@gibsondunn.com) Sacha Harber-Kelly (+44 20 7071 4205, sharber-kelly@gibsondunn.com) Philip Rocher (+44 20 7071 4202, procher@gibsondunn.com) Steve Melrose (+44 (0)20 7071 4219, smelrose@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) 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) São Paulo Lisa A. Alfaro (+5511 3521-7160, lalfaro@gibsondunn.com) Fernando Almeida (+5511 3521-7093, falmeida@gibsondunn.com) Singapore Grace Chow (+65 6507.3632, gchow@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 2, 2019 |
Kelly Austin Named Hong Kong Star in Benchmark Litigation Asia-Pacific

The 2019 edition of Benchmark Litigation Asia-Pacific has recognized partner Kelly Austin as a Hong Kong Star in the area of White Collar Crime and ranked the Firm in Tier 2 in its Hong Kong White Collar Crime – International Firms category. Benchmark Litigation Asia-Pacific conducts extensive interviews with litigators and their clients to identify the leading dispute resolution firms and lawyers in the region. The rankings were published on May 2, 2019. Kelly Austin’s practice focuses on government investigations, regulatory compliance and international disputes.  She has extensive expertise in government and corporate internal investigations, including those involving the Foreign Corrupt Practices Act and other anti-corruption laws, and anti-money laundering, securities, and trade control laws.  She also regularly guides companies on creating and implementing effective compliance programs.

April 25, 2019 |
Gibson Dunn Earns 79 Top-Tier Rankings in Chambers USA 2019

In its 2019 edition, Chambers USA: America’s Leading Lawyers for Business awarded Gibson Dunn 79 first-tier rankings, of which 27 were firm practice group rankings and 52 were individual lawyer rankings. Overall, the firm earned 276 rankings – 80 firm practice group rankings and 196 individual lawyer rankings. Gibson Dunn earned top-tier rankings in the following practice group categories: National – Antitrust National – Antitrust: Cartel National – Appellate Law National – Corporate Crime & Investigations National – FCPA National – Outsourcing National – Real Estate National – Retail National – Securities: Regulation CA – Antitrust CA – Environment CA – IT & Outsourcing CA – Litigation: Appellate CA – Litigation: General Commercial CA – Litigation: Securities CA – Litigation: White-Collar Crime & Government Investigations CA – Real Estate: Southern California CO – Litigation: White-Collar Crime & Government Investigations CO – Natural Resources & Energy DC – Corporate/M&A & Private Equity DC – Labor & Employment DC – Litigation: General Commercial DC – Litigation: White-Collar Crime & Government Investigations NY – Litigation: General Commercial: The Elite NY – Media & Entertainment: Litigation NY – Technology & Outsourcing TX – Antitrust This year, 155 Gibson Dunn attorneys were identified as leading lawyers in their respective practice areas, with some ranked in more than one category. The following lawyers achieved top-tier rankings:  D. Jarrett Arp, Theodore Boutrous, Jessica Brown, Jeffrey Chapman, Linda Curtis, Michael Darden, William Dawson, Patrick Dennis, Mark Director, Scott Edelman, Miguel Estrada, Stephen Fackler, Sean Feller, Eric Feuerstein, Amy Forbes, Stephen Glover, Richard Grime, Daniel Kolkey, Brian Lane, Jonathan Layne, Karen Manos, Randy Mastro, Cromwell Montgomery, Daniel Mummery, Stephen Nordahl, Theodore Olson, Richard Parker, William Peters, Tomer Pinkusiewicz, Sean Royall, Eugene Scalia, Jesse Sharf, Orin Snyder, George Stamas, Beau Stark, Charles Stevens, Daniel Swanson, Steven Talley, Helgi Walker, Robert Walters, F. Joseph Warin and Debra Wong Yang.

April 8, 2019 |
Gibson Dunn and Benno Schwarz Ranked as Top Law Firm and Top Lawyer in Compliance

German publication WirtschaftsWoche has recognized Gibson Dunn as a Top Law Firm and Munich partner Benno Schwarz as a Top Lawyer in Compliance among its list of the most renowned law firms and lawyers.  The list was published on April 8, 2019. Gibson Dunn’s White Collar Defense and Investigations Practice Group defends businesses, senior executives, public officials and other individuals in a wide range of investigations and prosecutions.  The group is composed of over 100 lawyers practicing across our U.S. and international offices and draws on the expertise of more than 75 of its members with extensive government experience. Benno Schwarz focuses on corporate transactions as well as on white collar defense and compliance investigations.  Schwarz has many years of experience in the area of corporate anti-bribery compliance, especially issues surrounding the enforcement of German anti-corruption laws, the U.S. Foreign Corrupt Practices Act, the UK Bribery Act, as well as applicable Russian law.

March 22, 2019 |
Twelve Gibson Dunn partners recognized by Who’s Who Legal Investigations

Twelve Gibson Dunn partners were recognized by Who’s Who Legal Investigations 2019. The guide covers investigations, white-collar crime, corporate compliance and regulatory enforcement. Hong Kong partner Kelly Austin; Los Angeles partner Debra Wong Yang; New York partners Reed Brodsky and Alexander Southwell; San Francisco partners Winston Chan and Charles Stevens; Washington, D.C. partners John Chesley, Daniel Chung, Michael Diamant, Richard Grime, Patrick Stokes and F. Joseph Warin were recognized. The list was published in March 2019.

March 8, 2019 |
Gibson Dunn Ranked in Chambers Europe 2019

Gibson Dunn received 30 rankings in Chambers Europe 2019: 22 individual rankings and eight firm rankings. The firm was recommended in the following categories: Competition/European Law – Belgium; Corporate Investigations – Europe-wide; Corporate/M&A: High-End Capability – France; Restructuring/Insolvency – France; TMT: Information Technology – France; Compliance – Germany; Corporate/M&A: High-End Capability – Germany; Dispute Resolution: White-Collar Crime: Corporate Advisory – Germany. The following Gibson Dunn partners were recognized as leaders in their fields: Peter Alexiadis, Ahmed Baladi, Sandy Bhogal, Jérôme Delaurière, Jean-Pierre Farges, Benoît Fleury, Charlie Geffen, Ariel Harroch, Chris Haynes, Ali Nikpay, Dirk Oberbracht, Wilhelm Reinhardt, Sebastian Schoon, Benno Schwarz, Steve Thierbach, David Wood, and Finn Zeidler.

March 1, 2019 |
Webcast: New Authorities/New Priorities: Congressional Investigations in the 116th Congress

This ABA and Gibson Dunn webcast takes a close look at how the 116th Congress is approaching congressional investigations.  A panel consisting of three seasoned Hill investigators and the Chair of Gibson Dunn’s Congressional Investigations specialty group discuss the nuts and bolts of congressional investigations, including the unprecedented new authorities that House committee chairs will work with over the next two years.  The panel also will discuss where the investigative committees are focused or are likely to focus their attention. View Slides (PDF) PANELISTS: Jennifer Barblan, Chief Republican Counsel, Oversight and Investigations, Committee on Energy and Commerce David Brewer, Deputy Republican Staff Director, House Oversight and Reform Committee Douglas Pasternak, Democratic Staff Director of Investigations & Oversight for the House Committee on Transportation & Infrastructure Michael Bopp, Partner and Chair, Gibson Dunn’s Congressional Investigations Group

February 20, 2019 |
Supreme Court Holds That Eighth Amendment’s Prohibition Of Excessive Fines And Related Forfeitures Applies To The States

Click for PDF Decided February 20, 2019 Timbs v. Indiana, No. 17-1091  The Supreme Court held 9-0 that the Eighth Amendment’s prohibition of excessive fines applies to the States. Background: After Tyson Timbs pled guilty to dealing in a controlled substance and conspiracy to commit theft, an Indiana state trial court considered Indiana’s request for civil forfeiture of his Land Rover, which he used to transport heroin.  The trial court denied the request, reasoning that forfeiture of the vehicle would be grossly disproportionate to Timbs’s offense, and thus impermissible under the Eighth Amendment’s Excessive Fines Clause, because Timbs had recently purchased the vehicle for $42,000—far more than the maximum $10,000 fine assessable against him for the drug conviction.  The Indiana Supreme Court reversed, concluding that the Excessive Fines Clause applies to only the federal government, not the States. Issue: Does the Eighth Amendment’s Excessive Fines Clause apply to the States? Court’s Holding: Yes.  The Excessive Fines Clause is “fundamental to our scheme of ordered liberty” or “deeply rooted in this Nation’s history and tradition,” McDonald v. Chicago, 561 U.S. 742, 767 (2010), and therefore applies to the States under the Fourteenth Amendment’s Due Process Clause. “[T]he historical and logical case for concluding that the Fourteenth Amendment incorporates the Excessive Fines Clause is overwhelming.” Justice Ginsburg, writing for the unanimous Court What It Means: The Court ruled that the Constitution’s prohibition of excessive fines applies to state and local governments, limiting their abilities to impose fines and seize property for forfeiture. The opinion imposes a new constitutional constraint on more than thirty States that have not already incorporated the Excessive Fines Clause (e.g., Michigan, New York, and Virginia), limiting their ability to levy fines and forfeitures, which are often key sources of revenue for state and local governments. The Court did not address when a fine is impermissibly “excessive” under the Eighth Amendment.  It noted, however, that the lineage of the Excessive Fines Clause traces back to the Magna Carta, which generally required economic sanctions to be proportionate to the underlying wrong. The opinion gives defendants in suits brought by state and local governments a potential new defense to excessive fines and penalties. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Caitlin J. Halligan +1 212.351.3909 challigan@gibsondunn.com Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Related Practices: Anti-Money Laundering, Forfeiture, White Collar Defense, and Investigations Joel M. Cohen +1 212.351.2664 jcohen@gibsondunn.com Charles J. Stevens +1 415.393.8391 cstevens@gibsondunn.com F. Joseph Warin +1 202.887.3609 fwarin@gibsondunn.com Stephanie Brooker +1 202.887.3502 sbrooker@gibsondunn.com M. Kendall Day +1 202.955.8220 kday@gibsondunn.com

February 14, 2019 |
Looking back and ahead at the False Claims Act

Los Angeles partners Debra Wong Yang, Michael Farhang and James Zelenay, and associate Sean Twomey are the authors of “Looking back and ahead at the False Claims Act” [PDF] published by The Daily Journal on February 14, 2019.

January 29, 2019 |
Webcast: Challenges in Compliance and Corporate Governance

Every year brings new compliance challenges, and 2018 has been no exception. Join our panelists as they discuss key changes in the 2018 regulatory landscape and look forward to 2019 with insight on how to effectively navigate risks in the new year. Topics discussed include: Global Enforcement and Regulatory Developments Board Oversight of Cyber Threats and Governance Allocation How to Effectively Identify and Address Key Compliance Risks Practical Tips for Improving Corporate Compliance DOJ and SEC Priorities, Policies, and Penalties Update on Core Governance Issues and Regulatory Requirements Legislative Developments Impacting Board Governance View Slides (PDF) PANELISTS: Kendall Day, a partner in Washington, D.C., was an Acting Deputy Assistant Attorney General, the highest level of career official in the Criminal Division at DOJ. He represents financial institutions, multi-national companies, and individuals in connection with criminal, regulatory, and civil enforcement actions involving anti-money laundering (AML)/Bank Secrecy Act (BSA), sanctions, FCPA and other anti-corruption, securities, tax, wire and mail fraud, unlicensed money transmitter, and sensitive employee matters. Mr. Day’s practice also includes BSA/AML compliance counseling and due diligence, and the defense of forfeiture matters. Sacha Harber-Kelly, a partner in London, focuses his practice in global white-collar investigations. He was a Prosecutor and Case Controller at the United Kingdom’s Serious Fraud Office (SFO) where he was involved in the investigation and prosecution of international corporate corruption cases since 2007. He has worked extensively with a range of other enforcement authorities in the U.K., U.S. and beyond, including the DOJ, SEC, OFAC, the U.K. National Crime Agency, HM Revenue Commissioners, and the Financial Conduct Authority. He was awarded a Member of the Order of the British Empire (MBE) for services to the SFO. In private practice, he represents clients in criminal and regulatory investigations as well as cross-border enforcement inquiries. Stuart Delery, a partner in Washington, D.C., was the Acting Associate Attorney General, the No. 3 position in the Justice Department, where he oversaw the civil and criminal work of five litigating divisions — Antitrust, Civil, Tax, Civil Rights, and Environment and Natural Resources — as well as other components. His practice focuses on representing corporations and individuals in high-stakes litigation and investigations that involve the federal government across the spectrum of regulatory litigation and enforcement. Adam M. Smith, a partner in Washington, D.C., was the Senior Advisor to the Director of the U.S. Treasury Department’s OFAC and the Director for Multilateral Affairs on the National Security Council. His practice focuses on international trade compliance and white collar investigations, including with respect to federal and state economic sanctions enforcement, the FCPA, embargoes, and export controls. He routinely advises multi-national corporations regarding regulatory aspects of international business. Lori Zyskowski, a partner in New York, is Co-Chair of the firm’s Securities Regulation and Corporate Governance practice. She was previously Executive Counsel, Corporate, Securities & Finance at GE.  She advises clients, including public companies and their boards of directors, on a wide variety of corporate governance and securities disclosure issues, and provides a unique perspective gained from over 12 years working in-house at S&P 500 corporations. F. Joseph Warin, a partner in Washington, D.C., is Co-Chair of the firm’s White Collar Defense and Investigations practice and former Assistant U.S. Attorney in Washington, D.C. Mr. Warin is consistently recognized annually in the top-tier by Chambers USA, Chambers Global, and Chambers Latin America for his FCPA, fraud and corporate investigations acumen.  In 2018 Mr. Warin was selected by Chambers USAas a “Star” in FCPA, and “a “Leading Lawyer” in the nation in Securities Regulation: Enforcement.  Global Investigations Review reported that Mr. Warin has now advised on more FCPA resolutions than any other lawyer since 2008.  Who’s Who Legal and Global Investigations Review named Mr. Warin to their 2016 list of World’s Ten-Most Highly Regarded Investigations Lawyers based on a survey of clients and peers, noting that he was one of the “most highly nominated practitioners,” and a “’favourite’ of audit and special committees of public companies.”  Mr. Warin has handled cases and investigations in more than 40 states and dozens of countries.  His credibility at DOJ and the SEC is unsurpassed among private practitioners — a reputation based in large part on his experience as the only person ever to serve as a compliance monitor or counsel to the compliance monitor in three separate FCPA monitorships, pursuant to settlements with the SEC and DOJ: Statoil ASA (2007-2009); Siemens AG (2009-2012); and Alliance One International (2011-2013). MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of  3.0 credit hours, of which 3.0 credit hours may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 2.50 credit hours, of which 2.50 credit hours may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 2.50 hours. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

January 29, 2019 |
Trends In DOJ Nonprosecution, Deferred Prosecution Deals

Washington, D.C. partners F. Joseph Warin and M. Kendall Day and associate Melissa Farrar are the authors of “Trends In DOJ Nonprosecution, Deferred Prosecution Deals” [PDF] published by Law360 on January 29, 2019.

January 29, 2019 |
Investigations in the 116th Congress: A New Landscape and How to Prepare

Click for PDF With Democrats regaining the majority in the House of Representatives for the first time in nearly a decade, the investigative priorities of the lower chamber will shift—and corporations should expect (and prepare) to find themselves more frequently the subjects of investigations.  Moreover, the investigative powers of several committees have expanded in significant ways since House Democrats last held committee gavels in 2010.  And, while Republicans remain in charge of the Senate, new and returning chairs of a number of key investigative committees are likely to focus on issues that implicate several industries and private sector entities. Unlike receiving a civil complaint or compulsory process in an Executive Branch investigation, when a congressional letter or subpoena arrives, targeted organizations may only have a matter of days to consider their response and devise a strategy, and often must do so amid significant media scrutiny and public attention.  Congressional investigations often involve public attacks on a company’s reputation, which can imperil the goodwill upon which the company has built its business and maintains its competitive advantages.  It is therefore crucial that potential targets evaluate their exposure to likely investigations in the 116th Congress, familiarize themselves with how such inquiries unfold—including the rules and procedures that govern them—and consider potential responses. To assist possible targets and interested parties in assessing their readiness for responding to a potential congressional investigation, Gibson Dunn presents this brief overview of how such investigations are often conducted, Congress’ underlying legal authorities to investigate, various defenses that can be raised in response, and the changing political and investigative landscape of the 116th Congress.  We also note missteps that subjects of investigations sometimes make when receiving an inquiry and best practices for how to respond. I.    What is a Congressional Investigation? Congressional investigations present a number of unique challenges not found in the familiar arenas of civil litigation and Executive Branch investigations.  Unlike the relatively controlled environment of a courtroom, congressional investigations often unfold in a hearing room in front of television cameras and on the front pages of major newspapers and social media feeds. The first thing to know about congressional investigations is that Congress’ power to investigate is broad—as broad as its legislative authority.  The “power of inquiry” is inherent in Congress’ authority to “enact and appropriate under the Constitution.”[1]  And while Congress’ investigatory power is not a general power to probe any private affair or to conduct law enforcement investigations, but rather must further a valid legislative purpose,[2] the term “legislative purpose” is understood broadly to include not only gathering information for the purpose of legislating, but also for overseeing governmental matters and informing the public about the workings of government.[3] As a practical matter, numerous motivations (not always legitimate) often drive a congressional inquiry, including: advancing a chair’s political agenda or public profile, exposing criminal wrongdoing, pressuring a company to take certain actions, and responding to public outcry.  Recognizing the presence of these underlying objectives and evaluating the political context surrounding an inquiry can therefore be a key component of developing an effective response strategy. II.    Investigatory Tools of Congressional Committees Congress has many investigatory tools at its disposal, including: (1) requests for information; (2) interviews; (3) depositions; (4) hearings; (5) referrals to the Executive Branch for prosecution; and (6) subpoenas.  If these methods fail, Congress can use its contempt power in an effort to punish individuals or entities who refuse to comply with subpoenas.  It is imperative that targets are familiar with the powers (and limits) of each of the following tools to best chart an effective response: Requests for Information:  Any member of Congress may issue a request for information to an individual or entity, which may seek documents or other information.[4]  Absent the issuance of a subpoena, responding to such requests is entirely voluntary.  As such, recipients of such requests should carefully consider the pros and cons of different degrees of responding. Interviews:  Interviews also are voluntary, led by committee staff, and occur in private (in person or over the phone).  They tend to be less formal than depositions and are sometimes transcribed.  Committee staff may take copious notes and rely on interview testimony in subsequent hearings or public reports. Depositions:  Depositions can be compulsory, are transcribed, and are taken under oath.  As such, depositions are more formal than interviews and are similar to those in traditional litigation.  The number of committees with authority to conduct staff depositions has increased significantly over the last few years.  In the last Congress, the House required (with limited exceptions) that one or more Members of Congress be present during a deposition.  Importantly, the House rules for the 116th Congress have eliminated this requirement (see infra, Section IV), which will likely result in an increase in the use—or at least threatened use—of depositions as an investigative tool.[5]  It is expected that the House Rules Committee soon will issue guidance on how staff depositions are to be conducted.  In the Senate, only the Judiciary Committee requires a member present, unless waived by agreement of the Chair and Ranking Member.[6] On January 25, 2019, the House Rules Committee issued new regulations governing depositions by committee counsel.  Significantly, the regulations now allow for immediate overruling of objections raised by a witness’s counsel and immediate instructions to answer, on pain of contempt, and appear to eliminate the witness’s right to appeal rulings on objections to the full committee (although committee members may still appeal).  This will likely speed up the deposition process, as previously the staff deposition regulations required a recess before the chair could rule on an objection.  Additionally, the regulations now expressly allow for depositions to continue from day to day and permit, with notice from the chair, questioning by members and staff of more than one committee.   Finally, the regulations have removed a prior requirement that allowed objections only by the witness or the witness’s lawyer.  This change appears to allow objections from staff or Members who object to a particular line of questioning.[7] Hearings:  While both depositions and interviews allow committees to acquire information quickly and (at least in many circumstances) confidentially,[8] testimony at hearings, unless on a sensitive topic, is conducted in a public session led by the Members themselves (or, on occasion, committee counsel).[9]  Hearings can either occur at the end of a lengthy staff investigation or more rapidly, often in response to an event that has garnered public and congressional concern.  Most akin to a trial in litigation (though without many procedural or evidentiary rules), hearings are often high profile and require significant preparation to navigate successfully. Executive Branch Referral:  Congress also has the power to refer its investigatory findings to the Executive Branch for criminal prosecution.  After a referral from Congress, the Department of Justice may charge an individual or entity with making false statements to Congress, obstruction of justice, or destruction of evidence.  Importantly, while Congress may make a referral, the Executive Branch retains the discretion to prosecute, or not. Subpoena Power As noted above, Congress will usually seek voluntary compliance with its requests for information or testimony.  However, it may compel disclosure of information or testimony through the issuance of a congressional subpoena.[10]  Like Congress’ power of inquiry, there is no explicit constitutional provision granting Congress the right to issue subpoenas.[11]  But the Supreme Court has recognized that the issuance of subpoenas is “a legitimate use by Congress of its power to investigate” and its use is protected from judicial interference by the Speech or Debate Clause.[12]  Congressional subpoenas are also subject to few legal challenges.[12]  And “there is virtually no pre-enforcement review of a congressional subpoena.”[13] The authority to issue subpoenas is initially governed by the rules of the House and Senate, which delegate further rulemaking to each committee.[15]  While nearly every standing committee in the House and Senate has the authority to issue subpoenas, the specific requirements for issuing a subpoena vary by committee.  These rules are still being developed by the committees of the 116th Congress, and can take many forms.[16]  For example, several House committees authorize the committee chair to issue a subpoena unilaterally and only require that notice be provided to the ranking member.  Others, however, require approval of the chair and ranking member, or upon the ranking member’s objection, require approval by a majority of the committee. Contempt of Congress Failure to comply with a subpoena can result in contempt of Congress.  Although Congress does not frequently resort to its contempt power to enforce its subpoenas, it has three potential avenues for seeking to implement its contempt authority. Inherent Contempt Power:  The first, and least relied upon, is Congress’ inherent contempt power.  Much like the subpoena power itself, the inherent contempt power is not specifically authorized in the Constitution, but the Supreme Court has recognized its existence and legitimacy.[17]  To exercise this power, the House or Senate must pass a resolution and then a full trial or evidentiary proceeding must occur, followed by debate and (if contempt is found to have been committed) imposition of punishment.[18]  As is apparent in this description, the inherent contempt authority is cumbersome and inefficient, and potentially fraught with political peril for legislators.  It is therefore unsurprising that Congress has not used it since 1934.[19] Statutory Criminal Contempt Power:  Congress also possesses a statutory criminal contempt power.  In 1857, Congress enacted this criminal contempt statute as a supplement to its inherent authority.[20]  Under the statute, a person who refuses to comply with a subpoena is guilty of a misdemeanor and subject to a fine and imprisonment.[21]  “Importantly, while Congress initiates an action under the criminal contempt statute, the Executive Branch prosecutes it.”[22]  This relieves Congress of the burdens associated with its inherent contempt authority.  The statute simply requires the House or Senate to approve a contempt citation.  Thereafter, the statute provides that it is the “duty” of the “appropriate United States attorney” to prosecute the matter, although the Department of Justice maintains that it always retains discretion not to prosecute.[23]  Although utilized as recently as the 1980s, the criminal contempt power has largely fallen into disuse.[24] Civil Contempt Power:  Finally, Congress may exercise its civil contempt power.  The Senate’s civil contempt power is expressly codified.[25]  This statute expressly authorizes the Senate to seek enforcement of legislative subpoenas in a U.S. District Court.  In contrast, the House does not have a civil contempt statute, but it may pursue a civil contempt action “by passing a resolution creating a special investigatory panel with the power to seek judicial orders or by granting the power to seek such orders to a standing committee.”[26]  In the past, the full House has “adopt[ed] a resolution finding the individual in contempt and authorizing a committee or the House General Counsel to file suit against a noncompliant witness in federal court.”[27]  It remains to be seen whether that process will be followed in the 116th Congress; the incoming Chairman of the House Rules Committee has taken the position that the current House rules empower the Bipartisan Legal Advisory Group (consisting of the Speaker, the Majority and Minority Leaders, and the Majority and Minority Whips) to authorize a civil enforcement action without the need for a House vote.[28] III.    Defenses to Congressional Inquiries While potential defenses to congressional investigations are limited, they are important to understand—likely more so now with Democrats taking control of the House.  The principal defenses are as follows: Jurisdiction As discussed above, a congressional investigation is required generally to relate to a legislative purpose, and must also fall within the scope of legislative matters assigned to the particular committee at issue.  In a challenge to a committee’s jurisdiction, the party subject to the investigation must argue that the inquiry does not have a proper legislative purpose, that the investigation has not been properly authorized, or that a specific line of inquiry is not pertinent to an otherwise proper purpose within the committee’s jurisdiction.  Because courts generally interpret “legislative purpose” broadly, these challenges can be an uphill battle.  Nevertheless, this defense should be considered when a committee is pushing the boundaries of its jurisdiction. Constitutional Defenses Constitutional defenses under the First and Fifth Amendments may be available in certain circumstances.  While few of these challenges are ever litigated, these defenses should be carefully evaluated by the subject of a congressional investigation. When a First Amendment challenge is invoked, a court must engage in a “balancing” of “competing private and public interests at stake in the particular circumstances shown.”[29]  The “critical element” in the balancing test is the “existence of, and the weight to be ascribed to, the interest of the Congress in demanding disclosures from an unwilling witness.”[30]  Though the Supreme Court has never relied on the First Amendment to reverse a criminal conviction for contempt of Congress, it has recognized that the Amendment may restrict Congress in conducting investigations.[31]  Courts have also recognized that the First Amendment constrains judicially compelled production of information in certain circumstances.[32]  Accordingly, it would be reasonable to contend that the First Amendment limits congressional subpoenas at least to the same extent. The Fifth Amendment’s privilege against self-incrimination is available to witnesses—but not entities—who appear before Congress.[33]  The right generally applies only to testimony, and not to the production of documents,[34] unless those documents satisfy a limited exception for “testimonial communications.”[35]  Congress can circumvent this defense by granting transactional immunity to an individual invoking the Fifth Amendment privilege.[36]  This allows a witness to testify without the threat of a subsequent criminal prosecution based on the testimony provided. Attorney-Client Privilege & Work Product Defenses Although committees in the House and Senate have taken the position that they are not required to recognize the attorney-client privilege, in practice, the committees generally acknowledge the privilege as a valid protection.  Moreover, no court has ruled that the attorney-client privilege does not apply to congressional investigations.  Committees often require that claims of privilege be logged as they would in a civil litigation setting.  In assessing a claim of privilege, committees balance the harm to the witness of disclosure against legislative need, public policy, and congressional duty. The work product doctrine protects documents prepared in anticipation of litigation.  Accordingly, it is not clear whether or in what circumstances the doctrine applies to congressional investigations, as committees may argue that their investigations are not necessarily the type of “adversarial proceeding” required to satisfy the “anticipation of litigation” requirement.[37] IV.    Lay of the Land in the 116th Congress House of Representatives With Democrats taking charge of the House for the first time since 2010, the chamber’s investigative priorities are likely to shift significantly to a number of issues Democrats have previously attempted to probe while they were in the minority.  The investigative tools available to committee chairs also have significantly strengthened since Democrats were last in the majority. For example, nearly all House committees now have authority that permits staff counsel to conduct depositions.  And, as noted above, Democrats recently have removed the requirement that a Member must be present during the taking of a deposition[38] and have adopted new regulations that will permit staff investigators to adopt a more aggressive posture.[39]  Such broad authority could make it more difficult for minority members to affect, influence, or otherwise hinder investigations to which they are opposed.  The Democrats’ investigative arsenal is further bolstered by the fact that approximately a dozen committee chairs are empowered to issue subpoenas without consent of the ranking member.  Democrats have thus gained command of a considerably more powerful investigative apparatus than existed in previous Congresses. Many committees are likely to focus on oversight of the Trump administration; however, several members have signaled their intention to examine numerous topics affecting the private sector as well. Industries and entities expected to face considerable scrutiny include: The pharmaceutical industry; Drug manufacturers, distributors, and pharmacy benefit managers; Health insurers and health care providers; Consumer-facing financial institutions; Student loan lenders; Credit agencies; E-cigarette manufacturers; Technology and social media companies; Entities responsible for safeguarding data privacy; Industries disproportionally serving elderly populations; and Private entities connected to the Trump Organization or high-level administration figures. We have also catalogued the publicly stated priorities of certain incoming chairs and other key Democratic members. House Oversight and Reform:  Chairman Elijah Cummings (D-MD) has said on several occasions that investigating prescription drug pricing and health insurance practices with respect to pre-existing conditions will be a primary focus of his committee.  On January 14, 2019, Chairman Cummings launched his first major investigation of the 116th Congress—into prescription drug pricing. House Energy and Commerce:  Chairman Frank Pallone (D-NJ) has already announced a hearing related to the Affordable Care Act, an indication that that the health care industry is likely to be a top issue.  Pallone has also announced a hearing on issues related to climate change, a topic of inquiry that could envelop numerous industries.  Meanwhile, in the prior Congress, Democratic members of the committee called for investigations related to prescription drug pricing, pharmaceutical tax breaks, and issues related to nursing home management, topics they are likely to press forward with now that they hold the gavel.  In the prior Congress, Chairman Pallone also issued information requests to social media companies related to election interference, to online retailers related to counterfeit merchandise, and to media companies related to industry consolidation. House Financial Services:  Chairwoman Maxine Waters (D-CA) has made clear that numerous financial institutions, particularly the country’s largest banks, will face scrutiny on a variety of issues affecting consumers and small businesses, as well as financial institutions’ ongoing compliance with safeguards designed to prevent another financial crisis.  She has also indicated her intention to focus on minority hiring practices in senior corporate positions.  In the prior Congress, Congresswoman Waters also sought to target payday lending practices.  It also has been reported that she will hold a hearing in February focused on credit reporting companies. House Ways and Means:  Chairman Richard Neal (D-MA) has stated he will take aim at issues related to the health care insurance industry and rising health care costs. House Science, Space, and Technology:  Chairwoman Eddie Bernice Johnson (D-TX) has indicated an intention of focus on climate change.  Additionally, in the prior Congress, Chairwoman Johnson sought to investigate certain private institutions and universities in relation to sexual harassment allegations.  She also targeted the automotive and oil and gas industries in relation to relaxed EPA regulations. In their recently passed rules package, Democrats also re-established the House Select Committee on the Climate Crisis,[40] which is mandated with examining issues related to climate change and will be chaired by Congresswoman Kathy Castor (D-FL).[41]  While the committee lacks subpoena power, a broad range of industry actors may find themselves on the receiving end of inquiries, particularly in light of the fact that several new House Democrats made climate change a top issue in their election campaigns.  And the Select Committee can recommend that other committees issue subpoenas, which provides an added incentive to cooperate with its inquiries. Senate On the Senate side, while Republicans remain in control of the chamber, committee chairs have signaled that they are likely to investigate business sectors such as technology, health care, and pharmaceuticals.  And unlike their Democratic counterparts in the House, Republican chairs are unlikely to divert significant committee resources to oversight of the Trump administration. Below, we have catalogued areas in which certain committees may focus in the 116th Congress: Permanent Subcommittee on Investigations:  Majority and Minority staffs recently completed a two-year investigation regarding the price of drug treatments to combat Opioid overdosing and are expected to continue to pursue the subject of drug pricing generally. Senate Finance:  Chairman Chuck Grassley (R-IA), who moved to Finance from Judiciary, has stated that he plans to use his new post to investigate rising health care costs.  Chairman Grassley has also said he will investigate the effect of trade and tax policies. Health, Education, Labor, and Pensions:  Chairman Lamar Alexander (R-TN), who plans to retire in 2020, has long made issues related to health care a primary focus and held hearings during the previous Congress related to drug pricing.  We expect Chairman Alexander to continue to pursue these subject matters. Commerce, Science, and Transportation:  Chairman John Thune (R-SD) has previously made drug pricing issues a committee priority and we expect that focus to continue.  Issues related to technology and data privacy are also expected to be on Chairman Thune’s agenda. Special Committee on Aging: We expect Chairwoman Susan Collins (R-ME) will continue her prior inquiries into rising health care costs for seniors, and particularly rising prices of prescription drugs that disproportionately serve senior populations. Senate Judiciary: Incoming Chairman Lindsay Graham (R-SC) previously spearheaded a Judiciary subcommittee inquiry into various social media companies on the issue of election interference.  He is likely to pursue that topic, as well as larger issues of data privacy, on a broader scale now that he is chair of the full committee.  The committee has also previously investigated social media companies for alleged bias against the dissemination of conservative opinions, work that may continue this Congress. Additionally, Senate Democrats are expected to pursue numerous inquiries that they initiated in the previous Congress, some of which overlap with GOP priorities, including on issues related to data privacy concerns, social media company practices, e-cigarettes, banking regulations, and health care costs.  And of course, Senate Democrats will remain focused on issues related to the Mueller investigation and, inevitably, private sector entities that may be tangentially related. V.    Top Mistakes and How to Prepare Successfully navigating a congressional investigation requires a multifaceted mastery of the facts at issue, careful consideration of collateral political events, and crisis communications. Here are some of the more common mistakes we have observed: Facts:  Failure to identify and verify the key facts at issue; Message:  Failure to communicate a clear and compelling narrative; Context:  Failure to understand and adapt to underlying dynamics driving the investigation; Concern:  Failure to timely recognize the attention and resources required to respond; Legal:  Failure to preserve privilege and assess collateral consequences; Rules:  Failure to understand the rules of each committee, which can vary significantly; and Big Picture:  Failure to consider how an adverse outcome can negatively impact numerous other legal and business objectives. The consequences of inadequate preparation can be disastrous on numerous fronts.  A keen understanding of how congressional investigations differ from traditional litigation and even Executive Branch or state agency investigations is therefore vital to effective preparation.  The most successful subjects of investigations are those that both seek advice from experienced counsel and employ multidisciplinary teams with expertise in government affairs, media relations, e-discovery, and the key legal and procedural issues. Gibson Dunn lawyers have extensive experience in both running congressional investigations and defending targets of and witnesses in such investigations.  If you or your company become the subject of a congressional inquiry, or if you are concerned that such an inquiry may be imminent, please feel free to contact us for assistance. [1]   Barenblatt v. United States, 360 U.S. 178, 187 (1957). [2]   See Wilkinson v. United States, 365 U.S. 399, 408-409 (1961); Watkins v. United States, 354 U.S. 178, 199‑201 (1957). [3]   Michael D. Bopp, Gustav W. Eyler, & Scott M. Richardson, Trouble Ahead, Trouble Behind: Executive Branch Enforcement of Congressional Investigations, 25 Corn. J. of Law & Pub. Policy 453, 456 (2015). [4]   Id. at 456. [5]   See H.R. Res. 6, 116th Cong. § 103(a)(1) (2019). [6]   Consistent with past practice, Gibson Dunn will release a client alert outlining the specific subpoena rules for each committee as soon as they become available.  See, e.g., Michael D. Bopp, F. Joseph Warin, Trent J. Benishek, & Alexander W. Mooney, The Power to Investigate: Table of Authorities of House and Senate Committees for the 115th Congress, https://www.gibsondunn.com/the-power-to-investigate-table-of-authorities-of-house-and-senate-committees-for-the-115th-congress/. [7]   See 165 Cong. Rec. H1216 (Jan. 25, 2019) (statement of Rep. McGovern). [8]   Bopp, supra note 3, at 457. [9]   Id. at 456-57. [10]   Id. at 457. [11]   Id. [12]   Eastland v. U.S. Servicemen’s Fund, 421 U.S. 491, 504-05 (1975). [13]   Bopp, supra note 3, at 458. [14]   Id. at 459. [15]   Id. at 458. [16]   Gibson Dunn will detail these rules when they are finalized in an upcoming publication.  See supra note 6. [17]   Bopp, supra note 3, at 460 (citing Anderson v. Dunn, 19 U.S. 204, 228 (1821)). [18]   Id. [18]   Id. at 466. [20]   Id. at 461. [21]   See 2 U.S.C. §§ 192 and 194. [22]   Bopp, supra note 3, at 462. [23]   See 2 U.S.C. § 194. [24]   Bopp, supra note 3, at 467. [25]   See 2 U.S.C. §§ 288b(b) and 288d. [26]   Bopp, supra note 3, at 465. [27]   Id. [28]   See 165 Cong. Rec. H30 (Jan. 3, 2019) (“If a Committee determines that one or more of its duly issued subpoenas has not been complied with and that civil enforcement is necessary, the BLAG, pursuant to House Rule II(8)(b), may authorize the House Office of General Counsel to initiate civil litigation on behalf of this Committee to enforce the Committee’s subpoena(s) in federal district court.”) (statement of Rep. McGovern). [29]   Barenblatt, 360 U.S. 109, 126 (1959). [30]   Watkins, 354 U.S. at 198. [31]   See id. at 197–98. [32]   See, e.g., Perry v. Schwarzenegger, 91 F.3d 1147, 1163 (9th Cir. 2009). [33]   See Quinn v. United States, 349 U.S. 155, 163 (1955). [34]   See Fisher v. United States, 425 U.S. 391, 409 (1976). [35]   See United States v. Doe, 465 U.S. 605, 611 (1984). [36]   See 18 U.S.C. § 6002; Kastigar v. United States, 406 U.S. 441 (1972). [37]   See In re Grand Jury Subpoena Duces Tecum, 112 F.3d 910, 924 (8th Cir. 1997). [38]   See H.R. Res. 6, 116th Cong. § 103(a)(1) (2019). [39]   Cong. Rec., supra note 7. [40]   See H.R. Res. 6, 116th Cong. § 104(f)(1)(A) (2019). [41]   This committee was previously named the House Select Committee on Energy Independence and Global Warming.  Republicans disbanded the committee when they regained control of the House in 2011. Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work or the following lawyers in the firm’s Congressional Investigations group in Washington, D.C.: Michael D. Bopp – Chair, Congressional Investigations Group (+1 202-955-8256, mbopp@gibsondunn.com) F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Thomas G. Hungar (+1 202-887-3784, thungar@gibsondunn.com) Alexander W. Mooney (+1 202-887-3751, amooney@gibsondunn.com) Tommy McCormac* (+1 202-887-3772, tmccormac@gibsondunn.com) * Not yet admitted to practice in the District of Columbia and currently practicing under the supervision of the Principals of the Firm. © 2019 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 28, 2019 |
Co-operating with the Authorities: The US Perspective

Washington, D.C. partner F. Joseph Warin, San Francisco partner Winston Chan, Washington, D.C. associate Pedro Soto and San Francisco associate Kevin Yeh are the authors of “Co-operating with the Authorities: The US Perspective,” [PDF] published in Global Investigations Review’s Practitioner’s Guide to Global Investigations Volume I: Global Investigations in the United Kingdom and the United States in January 2019.

January 18, 2019 |
Developments in the Defense of Financial Institutions – Calculating the Financial Exposure

Click for PDF Our financial institution clients frequently inquire about how best to address their regulatory and financial exposure in inquiries by the U.S. Department of Justice (“DOJ”) and regulators in the United States.[1]  With corporate entities[2] being held criminally liable under the U.S. legal doctrine of respondeat superior for the actions of even non-executive relationship managers and other employees, it is essential for boards of directors and senior management to have a clear understanding of the ways in which U.S. enforcers determine penalties for organizations, particularly regulated financial institutions. This alert is part of a series of regular analyses of the unique impact of white collar issues on financial institutions.  In this edition, we examine the frameworks that DOJ and other U.S. enforcers have used in their corporate penalty calculations involving financial institutions.[3]  We begin in Section 1 by providing a general overview of the potential components of financial penalties imposed by DOJ and other U.S. enforcers.  Section 2 includes an analysis of DOJ resolutions involving financial institutions over a 10-year period and outliers within that same 10-year period.  Section 3 reviews the enforcement resolutions of certain other U.S. enforcers in order to highlight differences in the imposition of financial penalties (as discussed below) between those enforcers and DOJ.  Section 4 analyzes recent guidance and public statements for a preview of how corporate penalties may be calculated in the near future.  The alert concludes by presenting a series of key observations, which a financial institution should bear in mind if it finds itself forced to negotiate with DOJ or other U.S. enforcers in connection with a criminal or civil enforcement action. 1.      Potential Components of Financial Penalties Financial penalties generally consist of some combination of the following three potential components:  monetary fines; restitution; and disgorgement.[4]  In calculating financial exposure, it is useful to understand the policy objectives and legal underpinnings of each component.  This section discusses those objectives and legal underpinnings, and details how DOJ calculates the first component (i.e., monetary fines) as part of a criminal resolution. a.       Fines Many federal statutes contain their own fine provisions, including a maximum fine amount.  For example, the Bank Fraud statute provides for fines of up to $1 million per violation.[5]  Similarly, the mail and wire fraud statutes provide for a $1 million fine per occurrence.[6] It would be a mistake, however, to focus solely on the upper bounds contained in a specific federal statute in determining potential financial exposure, as those ranges often bear little resemblance to the penalty amount being sought in an enforcement action.  That is because federal law allows DOJ to calculate maximum fines as a multiple of the total amount of gross gain or loss attributable to an offense.[7]  Even relying on the statutory penalties, an aggressive U.S. enforcer may be able to augment a specific statutory range or cap by asserting that there are multiple discrete violations and aggregating those individual instances together to increase the potential penalty. The practical reality is that U.S. enforcers have broad discretion in assessing the ultimate fine amount.  That discretion is generally guided by a set of factors these enforcers consider when settling on a monetary penalty.  Each U.S. enforcer has its own set of factors, the application of which is sometimes difficult to discern in individual enforcement actions. DOJ’s determination of an appropriate fine or monetary penalty in a federal criminal investigation is driven by the concepts and principles codified in the U.S. Sentencing Guidelines (“Guidelines”), the most recent edition of which took effect on November 1, 2018.[8]  Chapter 8 of the Guidelines describes the principles used in calculating appropriate criminal fines for organizational or corporate defendants, which may be imposed instead of, or in addition to, restitution and/or disgorgement.  As described in further detail below, Chapter 8 of the Guidelines includes a number of aggravating or mitigating factors that can have a significant impact on the final fine amount. A number of U.S. enforcers also publish policies applicable to violations of particular statutory provisions.  These policies often offer reductions in the amount of a penalty if and when a corporate entity fulfills certain specific criteria. One recently promulgated policy is DOJ’s FCPA Corporate Enforcement Policy (the “FCPA Policy”), which was established as a pilot program in 2016 and formalized in DOJ’s Justice Manual in November 2017.[9]  The FCPA Policy incentivizes organizations to voluntarily self-disclose FCPA violations to DOJ.[10]  Under the FCPA Policy’s terms, a company’s voluntary self-disclosure, full cooperation, and timely efforts to remediate alleged misconduct are factors considered when determining whether the company qualifies for a mitigated penalty, which can range from a declination (i.e., a decision not to impose a fine at all), to a flat 50-percent reduction off the low end of the potential fines imposed where “aggravating factors” are present (e.g., the involvement of executive management).[11]  Not all factors need be present for a company to qualify for mitigation of the ultimate penalty.  For example, a company that fails to self-disclose, but which otherwise cooperates fully and makes remediation efforts, may still qualify to receive a fine reduction of up to 25 percent.  The FCPA Policy includes a set of detailed standards that specifically set forth what constitutes voluntary self-disclosure and full cooperation, and describe the basic requirements for a company to receive full credit for timely and appropriate remediation.  We discussed voluntary self-disclosure by financial institutions in greater detail in our July 2018 Defense of Financial Institutions Client Alert. b.      Restitution Restitution is an equitable remedy in criminal actions brought by U.S. enforcers.  Restitution is intended to compensate alleged victims based on the amount of their loss.[12]  In civil and administrative actions, restitution is available when a defendant is alleged to have violated a statute that provides for equitable remedies.  In these types of actions, a court looks to the statutory system under which a remedy is sought and determines its authority to order equitable relief.  Many state and federal statutes—such as the 1933 Securities Act and the 1934 Exchange Act—expressly confer equity jurisdiction on the courts.  Even when a statute is unclear regarding the scope of the grant of authority to issue equitable relief, courts have taken an expansive view of their implied powers to provide equitable relief.[13] As discussed in greater detail below, in the criminal context, DOJ will use the Guidelines to calculate restitution amounts.  The Guidelines mandate restitution for all federal offenses, except under certain circumstances. c.       Disgorgement Disgorgement is also an equitable remedy, but, unlike restitution, disgorgement focuses on the defendant (not the alleged victim) in an enforcement action.[14]  Specifically, disgorgement is intended to deprive the defendant of its profits or other gain associated with the alleged conduct that is the subject of the enforcement action. As with restitution, in the criminal context, the Guidelines expressly address disgorgement as a component of the sentencing process.[15]  Generally, however, restitution takes precedence over disgorgement, such that disgorgement may appropriately be viewed as a supplemental penalty imposed if and when a defendant retains any gains after restitution has been imposed.[16] Although disgorgement has traditionally been secondary to restitution in criminal proceedings, DOJ recently has sought disgorgement through its FCPA Policy as a primary remedy in FCPA enforcement actions.  In particular, DOJ has taken this novel approach by issuing resolutions involving declinations with disgorgement.[17] DOJ appears poised to extend this new approach in seeking declination-with-disgorgement resolutions beyond the FCPA context, potentially increasing the number of DOJ resolutions seeking disgorgement as the sole remedy.  In September 2018, DOJ reached a declination-with-disgorgement resolution with Barclays Bank PLC after an investigation involving fraud and market manipulation allegations.  In publicly discussing this resolution, the Principal Deputy Assistant Attorney General of the DOJ’s Criminal Division and the then Chief of DOJ’s Securities and Financial Fraud Unit stated that DOJ would consider declination-with-disgorgement resolutions in cases involving federal laws other than the FCPA, including the False Claims Act, the Dodd-Frank Act, and the Sarbanes-Oxley Act.[18] d.      Calculating the Fine under the Guidelines The Guidelines contain aggravating and mitigating factors that are used to determine a fine range.  These factors present opportunities for principled advocacy to explain why a particular enhancement is not warranted or, conversely, why a mitigating factor should be applied that would decrease the fine. In advocating for how specific factors contribute to a given fine calculation, financial institutions can rely on a number of sources, including: the text of the Guidelines themselves and the interpretive guidance contained in their application notes; case law, which is fairly limited given how infrequently organizations choose to litigate criminal cases; and the precedent established by prior criminal resolutions. Of these, prior resolutions can be very significant.  For that reason, financial institutions should seek to demonstrate that the application of relevant factors within the Guidelines is consistent with how similarly-situated organizations have been treated by DOJ.  Alternatively, financial institutions should seek to demonstrate that the result sought by the U.S. enforcer is inconsistent with prior cases, particularly when negotiating with government attorneys responsible for a wider range of enforcement matters, such as with one of the U.S. Attorney’s Offices most active in the corporate enforcement arena. We begin with an overview of the framework for calculating organizational fines under Chapter 8 of the Guidelines and then include a more detailed analysis of three of the most commonly used variables—prior history, the role of management, and placement within the resulting Guidelines range—that feed into the final fine calculation.  The overview and detailed analysis of each variable concludes with a discussion of potential advocacy points that financial institutions can utilize in negotiating DOJ resolutions.  i.      Overview of Criminal Fine Calculations under Chapter 8 of the Guidelines The determination of an appropriate criminal fine begins with the calculation of the base fine.  The base fine represents the greatest of: the amount correlating to the offense level calculated under the relevant section the Guidelines;[19] the pecuniary gain to the organization; or the pecuniary loss caused by the organization, to the extent it was caused intentionally, knowingly, or recklessly.[20] Section 8C2.4(d) contains a fine table with base fines ranging from $8,500 to $150,000,000 depending on the offense level calculated under the Chapter 2 of the Guidelines.  However, the pecuniary gain or loss involved in the alleged misconduct at hand often will exceed that number and will therefore serve as the base fine. To determine the applicable fine range, the base fine will be multiplied by a figure determined based on the “culpability score.”  The culpability score begins at a base level of five,[21] and can be increased or decreased based on certain “aggravating” or “mitigating” factors.[22]  The resulting culpability score determines the multiplier applicable to the base fine in order to determine the fine range, which can vary from as low as a multiplier of 0.05 for a culpability score of zero or below, to as high as a multiplier of 4.0 for a culpability score of 10 or above.[23] As the broad range of available multipliers suggests, even a modest change in culpability score can drastically affect the resulting penalty amount.  For example, in a matter with a $100 million base fine, a single point culpability score increase from five to six raises the top-end fine by $40 million, from $200 million to $240 million.  This fine amount is independent of the restitution, disgorgement, and any other financial components of the contemplated resolution.  Given the significant effect of the culpability score on the resulting penalty, financial institutions should arm themselves with principled arguments to explain why a particular culpability score factor should (or should not) be applied. There are three aspects of the fine calculation that often are relevant to financial institutions:  the organization’s prior history of allegedly similar misconduct; the extent to which a sentence can be enhanced or reduced based on the role of management; and the placement of the fine amount within the applicable fine range.     ii.      Prior History Enhancement Chapter 8 of the Guidelines provides a two-point enhancement in culpability score if “the organization (or a separately managed line of business) committed any part of the instant offense less than 5 years after (A) a criminal adjudication based on similar misconduct; or (B) civil or administrative adjudication(s) based on two or more separate instances of similar misconduct.”[24]  An organization can be subject to a one-point enhancement if either of these conditions occurred within the last 10 years prior to the alleged misconduct.[25] As financial institutions—particularly large, diversified organizations with several different business lines—may be subject to a wide range of regulatory or enforcement actions, it is important to understand the nuances of this enhancement to make arguments against its imposition.  The most salient aspects of this enhancement and the advocacy points most relevant for each are as follows: Policy Justification:  The organizational Guidelines do not specify the rationale for the prior history enhancement, but the guidance underlying analogous sections of the individual Guidelines roots this enhancement in the principles that recidivists are more culpable than first offenders and that stronger enforcement for repeat offenses acts as a general deterrent.[26]  Based on this yardstick, financial institutions can argue that recidivism concerns are misplaced if the government is relying on prior regulatory actions or findings—those regulatory actions serve different purposes than enforcement actions and should not properly be considered prior criminal history. “Adjudication:”  The Guidelines do not define what types of regulatory actions qualify as a prior “civil or administrative adjudication.”[27]  Other sources suggest the most salient characteristic of an adjudication is its adversarial nature.[28]  Based on this principle, financial institutions can potentially argue that administrative consent decrees (in which a party negotiates with the enforcer on how it will address a prior compliance deficiency or potential violation) and regulatory audits (which by their nature identify areas of improvement) should not serve as the basis of a sentencing enhancement, particularly where the organization has complied with the terms of the consent order or remediated the issues identified in the audit.  The specific and nuanced wording of individual consent decrees and audits can often aid with advancing this argument. Timing of Prior History:  Given the lengthy time span and multi-agency aspect of many enforcement inquiries involving financial institutions, any regulatory action involving similar misconduct must be issued prior to the instant alleged misconduct to justify the imposition of this enhancement.[29]  As such, the conduct underlying a prior regulatory adjudication should not both be part of the alleged misconduct forming the basis for the resolution and the basis for a prior history enhancement. Similar Misconduct:  For the prior history enhancement to be applied, the prior criminal, civil, and/or administrative adjudication(s) must be based on “similar misconduct” to the alleged misconduct in the instant case.[30]  The Guidelines define “similar misconduct” broadly to mean “prior conduct that is similar in nature to the conduct underlying the instant offense,” giving the example of Medicare fraud and another type of fraud,[31] and case law supports this broad interpretation.[32]  Nonetheless, organizations should be prepared to substantively distinguish the alleged misconduct from the conduct forming the basis of the alleged “prior adjudication(s).” “Separately Managed Lines of Business:”  The prior history enhancement applies if “an organization (or separately managed line of business)” was subject to a prior adjudication based on similar misconduct.[33]  The Guidelines indicate that a “separately managed line of business” may include a corporate subsidiary or division,[34] and that in determining the prior history of a separately managed line of business, the enforcer should only consider the history of that separately managed line of business.[35]  Thus, financial institutions could seek to demonstrate that a prior action involved a different subsidiary or unit than the component(s) involved in the current matter. In addition to the specific terms of this provision of the Guidelines, organizations may advocate against the application of the prior history enhancement based on its infrequent historical application in prior corporate criminal resolutions.  According to aggregate annual statistics published by the U.S. Sentencing Commission, the prior history enhancement has been applied in a mere 1.39 percent (12 of 865) cases involving detailed organizational sentencing calculations between 2006 and 2017.[36]  To go beyond data available at sentencing, we have reviewed 119 major corporate resolutions (including guilty pleas, deferred prosecution agreements (“DPAs”), and non-prosecution agreements (“NPAs”)) since the beginning of 2008,[37] and have identified only four resolutions in which a one- or two-point enhancement for prior history was applied.[38]  The circumstances of these resolutions suggest that DOJ will generally apply this enhancement only for cases involving clear instances of recidivism in breach of a prior resolution arising from the same type of misconduct. iii.      Sentencing Enhancements or Reductions Based on Management’s Role In recent years, U.S. enforcers have emphasized the importance of “corporate culture,” particularly as it relates to the “tone at the top” set by an organization’s senior management.  In the compliance context, the theory is that if an organization’s top management demonstrates a firm commitment to ensuring that the company complies with its legal and regulatory obligations—which must go beyond simply establishing written policies and procedures on paper—this emphasis will filter down to rank-and-file employees, ensuring a higher level of overall compliance.  Conversely, DOJ takes the view that if management fails to adequately invest in compliance and emphasizes profitability above all else, line employees throughout the organization will see compliance as an obstacle rather than as a point of emphasis. The alleged role of management is one of the largest drivers of an organization’s culpability score.  Organizations may be subject to a culpability score enhancement of up to five points if either “(i) high-level personnel of the organization [or unit] participated in, condoned, or was willfully ignorant of the offense; or (ii) tolerance of the offense by substantial authority personnel was pervasive throughout the organization [or organizational unit].”[39]  According to the Guidelines, the magnitude of the enhancement is based on the total headcount of the culpable organization (or unit) because the larger the organization, the more significant the consequences of management’s complicity or willful ignorance of misconduct, and the more substantial the risk that misconduct in one area will spread to the rest of the organization.[40]  Based on the significant impact that the role of management can play in the calculation of a monetary fine, financial institutions should consider the following advocacy points. Determining the Relevant Organization or Unit:  The biggest driver of the culpability score enhancement for management involvement is the size of the organization or unit implicated in the alleged misconduct.  Therefore, financial institutions should seek to precisely define what unit(s) or division(s) were implicated in the conduct at issue and which were not, and consequently should argue for an enhancement based on that more limited scope (if it is appropriate to impose one at all).  Recent corporate criminal resolutions involving only specific units or subsidiaries of large, multinational companies suggest that DOJ is receptive to these arguments and will resolve a matter with only the culpable unit(s) if doing so is warranted by the facts.[41] “Willful Ignorance:”  This enhancement may be applied if a high-level manager “participated in, condoned, or was willfully ignorant of the offense.”[42]  The Guidelines definition indicates that an individual is willfully ignorant if “the individual did not investigate the possible occurrence of unlawful conduct despite knowledge of circumstances that would lead a reasonable person to investigate whether unlawful conduct had occurred.”[43]  This fairly flexible definition—suggesting that mere failure to investigate the reasonable possibility of unlawful conduct will suffice—is in tension with recent Supreme Court precedent defining willful ignorance as characterized by employees’ efforts to “deliberately shield[] themselves from clear evidence of critical facts that are strongly suggested by the circumstances.”[44]  Given the non-mandatory nature of the Guidelines following the Supreme Court’s decision in United States v. Booker,[45] organizations should advocate that the Supreme Court’s more exacting standard be applied. Definition of an “Effective Compliance and Ethics Program:”  The Guidelines call for a three-point reduction in an organization’s culpability score if the organization had an “effective compliance and ethics program” in place at the time the offense occurred.[46]  This is a credit that is generally unavailable to organizations subject to the enhancement for management involvement.[47]  The Guidelines define this program by reference to seven “minimal” features needed to show that the organization “exercise[s] due diligence to prevent and detect criminal conduct” and “promote[s] an organizational culture that encourages ethical conduct and a commitment to compliance with the law.”[48]  The Guidelines further indicate that an ethics and compliance program must be “generally effective” at detecting and preventing criminal conduct, based on applicable industry and regulatory standards, the size and sophistication of the organization, and the organization’s history of prior misconduct.[49] Precedential Application of the Compliance and Ethics Program Reduction:  A review of all corporate sentencings between 2006 and 2017 indicates that a mere 5 of 860 (0.58 percent) of corporate defendants received this three-point credit.[50]  Given the emphasis over the last twenty years on corporate compliance, the paucity of companies qualifying for an effective compliance program is discouraging.  The infrequency with which organizations receive this credit at sentencing should not, however, prevent financial institutions from advocating for this credit in a pre-charge resolution, particularly since arguments about the state of a company’s compliance controls are relevant to placement in the fine range and may have implications for other civil or administrative proceedings.    iv.      Placement of the Penalty Within the Fine Range Even after DOJ calculates and establishes the key inputs of a financial penalty under the Guidelines (i.e., the base fine and culpability score), DOJ retains a potentially significant degree of discretion in situating a penalty within the resulting fine range. The Guidelines identify 11 factors that DOJ should consider in determining the appropriate placement of a penalty in the fine range.[51]  The Guidelines further indicate that DOJ may consider “the relative importance of any factor used to determine the range,” including the amount of pecuniary loss or gain, specific offense characteristics, or the aggravating or mitigating factors used to calculate the culpability score.[52]  Thus, DOJ has significant latitude in advocating for the placement of the fine relative to the range. Despite the seeming flexibility DOJ has in setting an appropriate fine relative to the applicable range, in practice, most fines are situated at or in some cases substantially below the lower end of the fine range.[53]  In some cases, companies were fined at or below the low end of the range as part of an articulated enforcement program that leads to different results than those suggested by Guidelines § 8C2.8. For one example, the DPA for the DOJ Tax Division’s recent Swiss Bank Program $98 million resolution with Zürcher Kantonalbank (“ZKB”), filed in August 2018, highlighted that the bank’s cooperation credit was reduced because it discouraged two indicted, separately represented bankers from cooperating with U.S. authorities, contributing to the employees’ decision to resist cooperating with the government’s investigation for about two years.[54]  Notwithstanding this seemingly imperfect cooperation, ZKB’s $35 million penalty represented a 50 percent discount below the bottom of the applicable fine range in recognition of its “substantial cooperation” with the investigation.[55]  For that reason, advocacy regarding the fine calculation should focus on the underlying basis for the base fine and the principles that feed into the culpability score, since those inputs will determine the range, and there will be ample precedent supporting a bottom-range or below-range fine. 2.      How DOJ Utilizes the Financial Penalty Components in Practice To understand how the three potential components—fine, restitution, and disgorgement—play out in practice, we analyzed 10-years’ worth of DOJ resolutions involving financial institutions.  In addition, we make reference to DOJ’s most notable resolutions in 2018 involving financial institutions.  Finally, to illuminate how DOJ can exercise complete discretion in calculating the penalties for a particular case in a manner that is either higher or lower than those penalties imposed in similar cases, we review DOJ resolutions where the financial penalties assessed were outliers in comparison to the majority of DOJ resolutions over the last 10 years. a.       10-Year Review of DOJ Resolutions Involving Financial Institutions We have identified 143 resolutions where DOJ assessed a penalty to a financial institution between 2008 to 2018.[56]  The findings below relate only to the penalties assessed by DOJ—not other U.S. enforcers.  It is not uncommon, however, particularly in larger resolutions, for financial institutions to enter into a global structure that includes resolutions with multiple U.S. agencies—both at the federal and state levels—and even foreign regulatory enforcement agencies.  The data and analysis in this subsection is limited to the penalty assessed by DOJ itself since that amount tends to be the largest single driver of financial exposure. Chart 1 below illustrates how frequently DOJ uses restitution, disgorgement/forfeiture, fines, or a mix of these penalties in resolutions with financial institutions. Chart 1 Chart 1 illustrates that approximately 68 percent of the resolutions that DOJ has entered into with financial institutions in the past decade have involved only a fine, without any disgorgement or restitution component.  Part of the explanation for this high percentage is that there were approximately 80 NPAs between DOJ and certain Swiss banks as part of a special DOJ program.  These resolutions only involved a fine.  However, fine-only resolutions are not limited to the Swiss bank context.  Resolutions between DOJ and financial institutions in matters resolving allegations of fraud or manipulation of the London Inter-bank Offered Rate (“LIBOR”), for instance, often involve only a fine component.  As such, resolutions involving only a fine are quite common. By contrast, resolutions involving only restitution are incredibly rare, occurring just 1.4 percent of the time.  Meanwhile, resolutions involving only disgorgement—which occur 14 percent of the time—are somewhat more common but still relatively rare.  The data also demonstrates that it is not uncommon for DOJ resolutions with financial institutions to involve multiple penalty components.  Approximately 16 percent of DOJ resolutions involve more than one penalty component.[57] If we analyze the amount of the penalties that DOJ assessed using each of these components, the importance of disgorgement and forfeiture as a penalty component becomes clearer.  Chart 2 illustrates the total amount of financial penalties DOJ has assessed to financial institutions using each penalty component between 2008 and 2018. Chart 2 As the data in Chart 2 shows, forfeiture and disgorgement account for nearly 61 percent of the dollars DOJ has assessed in penalties to financial institutions in the past decade, nearly twice as much as through fines alone.  A key factor that helps explain this data is that forfeiture has been the only, if not the predominant, penalty component in many of the largest resolutions between DOJ and financial institutions in the past decade.  Indeed, of the seven largest resolutions with DOJ in the past 10 years, disgorgement or forfeiture accounted for the majority of the financial penalty amounts.  For example, forfeiture comprised $8,833,600,000 of the $8,973,600,000 penalty in BNP Paribas’ 2014 sanctions resolution, and the entire penalty in HSBC’s $1.256 billion 2012 sanctions resolution, JP Morgan’s 2014 $1.7 billion BSA resolution, and Société Générale S.A.’s 2018 $717 million sanctions resolution. b.      Notable 2018 Resolutions In 2018, there were 13 resolutions between DOJ and financial institutions in which the overall financial penalty was more than $5 million.[58]  Five of the 13 involved penalties over $100 million, including the second largest penalty ever imposed on a financial institution for alleged violations of U.S. economic sanctions.  Gibson  Dunn’s 2018 Year-End NPA/DPA update offers a detailed analysis of these resolutions. c.       Outlier Resolutions When assessing how U.S. enforcers might assess penalties in a particular case, it is worth analyzing penalties that fall outside of the norm in order to understand whether the conduct at issue in a particular matter might carry significantly more or less financial exposure.  This subsection discusses two notable outliers, which illuminate how U.S. enforcers can exercise discretion in calculating the penalties for a particular case in a manner that is either higher or lower than those penalties imposed in similar cases.  At the high end, DOJ’s $8.9 billion resolution with BNP Paribas remains the largest criminal penalty assessed to date against a financial institution.  This DOJ resolution was notable not only in terms of the overall size of the penalty, but also in the way that it was calculated.  At the low end, DOJ resolutions with “Category Two” banks as part of DOJ’s Swiss Bank Program (as further discussed in the subsection below) were significantly less aggressive in terms of the way in which DOJ calculated financial penalties.     i.      On the High End – BNP Paribas In June 2014, BNP Paribas pled guilty to violating U.S. sanctions laws, agreeing to pay total financial penalties of $8.9 billion.[59]  This remains the largest criminal penalty that the United States has ever imposed on a financial institution or any other organization.  Of that $8.9 billion, BNP Paribas agreed to forfeit $8.8336 billion and pay a fine of $140 million.[60]  In addition to the sheer magnitude of the penalty, the way in which DOJ calculated the penalty was notable in two respects.  First, the forfeiture amount represented “the amount of proceeds traceable to the violations” set forth in the charging document.[61]  In other words, BNP Paribas was required to forfeit one dollar for every dollar that it cleared in a transaction violating U.S. sanctions laws, even though the bank only received a very small commission for clearing that dollar.  Second, the $140 million fine that DOJ assessed against BNP Paribas represented “twice the amount of pecuniary gain to [BNP Paribas] as a result of the offense conduct.”[62]  Thus, BNP Paribas’s fine was two times the amount of profits it received from this activity. It is quite rare for a penalty to include both a one-to-one forfeiture ratio (particularly in cases involving the violation of economic sanctions) and a two-to-one disgorgement ratio.  This extreme penalty may have reflected DOJ’s perception of the egregiousness of BNP Paribas’s alleged conduct and its level of cooperation.  Regarding its conduct, the bank cleared over $8.8 billion through the U.S. financial system that allegedly violated U.S. sanctions laws.[63]  It also continued to clear U.S. dollar transactions allegedly in violation of the Cuba embargo, according to DOJ, “long after it was clear that such business was illegal.”[64]  Moreover, the bank continued clearing transactions allegedly in violation of U.S. sanctions on Iran “nearly two years after the bank had commenced an internal investigation into its sanctions compliance and pledged to cooperate with the [g]overnment.”[65]  Ultimately, as the Assistant Attorney General for DOJ’s Criminal Division explained, “BNP Paribas flouted U.S. sanctions laws to an unprecedented extreme, concealed its tracks, and then chose not to fully cooperate with U.S. law enforcement, leading to a criminal guilty plea and nearly $9 billion penalty.”[66]     ii.      On the Low End – Swiss Bank Program In contrast to the BNP Paribas resolution, the total penalties that DOJ assessed in enforcement resolutions under its Swiss Bank Program with “Category Two” banks were on average less than five percent of the undeclared U.S. assets that these banks maintained. As noted above, DOJ’s Swiss Bank Program allowed Swiss banks to resolve potential criminal liabilities in the United States by voluntarily disclosing undeclared U.S. accounts held at their banks.[67]  There were four categories of banks covered under the Swiss Bank Program.  Category One banks were under active criminal investigation and thus ineligible for the program.[68]  Category Two banks were those that had “reason to believe” that they may have committed tax-related offenses under U.S. law.[69] Since the program began, DOJ has entered into 81 NPAs with Swiss banks.[70]  The vast majority of these NPAs were with Category Two banks.  In NPAs with Category Two banks, DOJ agreed to significantly more modest penalty calculations.  The NPAs generally disclose in the statement of facts the aggregate value of the U.S.-related accounts that the bank maintained and did not disclose.  The average penalty assessed in NPAs with Category Two banks was approximately three percent of the aggregate value of the undisclosed accounts. 3.      Other U.S. Enforcers In addition to DOJ, other U.S. enforcers impose monetary fines against financial institutions and other organizations for violations of relevant federal laws and regulations.  These other U.S. enforcers’ frameworks for calculating financial penalties, however, are not as well-defined as DOJ’s framework under the Guidelines.  In the subsections below, we highlight 2018 resolutions imposed by the OCC and the FRB.  What becomes most apparent in analyzing these resolutions is that certain U.S. enforcers only impose fines (and not restitution or disgorgement penalties). a.       2018 OCC Resolutions In 2018, the OCC entered into seven resolutions with financial institutions where involving a settlement amount of $10 million or greater.  In addition to the penalties that the OCC assessed to U.S. Bank (discussed in the 2018 DPA/NPA mid-year alert) and Rabobank NA, it also assessed two other notable penalties over $50 million in 2018.  First, Wells Fargo, National Association, entered into an order with the OCC, which included a $500 million in civil money penalties to resolve matters regarding the bank’s compliance risk management program and past practices.[71]  This penalty matched the largest penalty that the OCC has ever issued.  In addition, the bank submitted a plan for the management of remediation activities conducted by the bank.  Second, in October 2018, the OCC issued a consent order against Capital One Bank (U.S.A.), N.A., in which it assessed a $100 million civil penalty.[72]  This consent order was issued for BSA/AML violations, including violating a 2015 Consent Order.[73]  The fines in these OCC resolutions only included fines (i.e., the OCC did not include restitution or disgorgement). b.      2018 Federal Reserve Board Resolutions In 2018, the FRB issued five cease-and-desist orders, 12 civil monetary penalties, and three resolutions that included both a cease-and-desist order and a civil monetary penalty to financial institutions.  These three resolutions were the SocGen sanctions resolution, the U.S. Bank BSA/AML resolution (both referenced above), and a $54.75 million settlement with The Goldman Sachs Group, Inc. resolving allegations surrounding the bank’s foreign exchange trading business.[74]  All of these financial penalties were composed entirely of fines. 4.      Forward-Looking Guidance from Enforcers Recent guidance by U.S. enforcers provides helpful clues as to how they will approach financial penalties for corporations.  In particular, enforcers have been focused on enhancing inter-agency coordination in order to avoid imposing duplicative penalties. a.       Recent Guidance One example of a written policy is DOJ’s Justice Manual, which contains guidance with respect to the bringing of criminal actions against organizations and penalties associated with those actions.  The Justice Manual lists factors DOJ should consider in determining whether and how to charge a corporate entity, such as the nature of the offense, the “pervasiveness of the wrongdoing,” the “history of similar misconduct,” the “adequacy and effectiveness of the corporation’s compliance program,” among others.[75]  The Justice Manual also specifically outlines how voluntary self-disclosure and cooperation may affect the outcome of a criminal action against a legal entity, much like we discussed earlier in the context of the FCPA Policy.[76] In another example, the OCC issues written policies and guidance with respect to civil monetary penalties in its Policies and Procedures Manual (“PPM”), most recently updated on November 13, 2018.[77]  In the PPM, the OCC lays out the factors it considers in determining penalty amounts, including:  “(1) the size of financial resources and good faith of the institution . . .  charged; (2) the gravity of the violation; (3) the history of previous violations; and (4) such other matters as justice may require,” as well as 13 additional factors set forth in an Interagency Policy issued by the Federal Financial Institutions Examination Council (“FFIEC”) in 1998.[78]  The OCC includes matrices as appendices to the PPM, which apply “factor scores” to the different factors considered in determining an appropriate penalty.  Although these matrices “are only guidance” and “do not reduce the [penalty] process to a mathematical equation and are not a substitute for sound supervisory judgment,” they provide guidance and may give financial institutions a sense of how the factors are weighed when the OCC considers a monetary penalty.[79] The FDIC publishes a similar matrix and issues guidance on the factors it considers when imposing penalties.  These factors are essentially the same as those considered by the OCC, which is unsurprising due to the coordination of the federal banking regulators through the FFIEC.[80] Further guidance—although nonbinding—regularly comes in the form of speeches at conferences and events by DOJ and other officials.  Given the flexibility and judgment calls involved in each decision, however, any review or estimate of financial exposure must include a review of the enforcement actions brought by these agencies in order to glean which factors will be applied and how they will be weighted. b.      Recent Guidance Focused on Inter-Agency Coordination Although many different U.S. enforcers have the authority to impose financial penalties, there have been efforts to coordinate resolutions between these agencies and, in some cases, to attempt to avoid duplicative fines.  For example, in May 2018, Deputy Attorney General Rod Rosenstein announced a new DOJ Policy on Coordination of Corporate Resolution Penalties, which was then incorporated into the Justice Manual.[81]  This policy—commonly referred to as the “Anti-Piling On Policy”—seeks to avoid the unnecessary “piling on” of duplicative criminal and civil penalties and to encourage cooperation among enforcement agencies both within DOJ as well as between DOJ and other domestic and foreign enforcers.  The new Anti-Piling On Policy encourages DOJ to coordinate with other enforcers when considering appropriate penalties, listing specific factors that may lead to the imposition of multiple penalties, including:  (1) “the egregiousness of a company’s misconduct;” (2) “statutory mandates regarding penalties, fines, and/or forfeitures;” (3) “the risk of unwarranted delay in achieving a final resolution;” and (4) “the timeliness of a company’s disclosures and its cooperation” with DOJ.[82] In Rosenstein’s May 9, 2018 speech announcing the policy, he explicitly referred to coordination with the SEC, the CFTC, the FRB, the FDIC, the OCC, and OFAC, and stressed that “[b]y working with other agencies . . . our Department is better able to detect sophisticated financial fraud schemes and deploy adequate penalties and remedies to ensure market integrity.”[83]  In practice, the Anti-Piling On Policy does not reflect a major shift in DOJ’s approach, as DOJ had already been coordinating with other U.S. enforcers on many matters.  However, this new official policy does formalize and reduce to writing DOJ’s commitment to coordination. We have seen DOJ’s new Anti-Piling On Policy play out in a number of resolutions over the past year.  For example, in recent resolutions involving U.S. Bank and Rabobank NA (both referenced above), the various U.S. enforcers acknowledged and credited fines imposed by others.  While the Rabobank NA and U.S. Bank resolutions occurred before the official announcement of the Anti-Piling On Policy, they reflect the same coordination principles and appeared consistent with Rosenstein’s November 2017 remarks indicating that DOJ had intended to apply those principles going forward.  More recently, in the June 2018 SocGen FCPA and LIBOR DPA discussed above, DOJ credited the penalty paid to a foreign regulator—the Parquet National Financier—reducing its imposed fine by 50 percent on that basis.[84] Other U.S. enforcers have not yet officially announced parallel policies but many have demonstrated the same crediting of fines imposed by other agencies.  For example, the SEC in recent speeches has addressed its desire to work with other enforcers and to take into consideration other enforcement actions.  On May 11, 2018, just two days after the announcement of DOJ’s Anti-Piling On Policy, SEC Commissioner Hester Peirce remarked at a conference that “[a]nother way to conserve resources for matters most in need of our enforcement attention is to work with other regulators and the criminal authorities” and that “[i]n deciding whether to pursue a matter, the Enforcement Division . . . can take into consideration whether other regulatory or criminal authorities are looking at the same conduct.”[85]  This plays out in the amount of penalties imposed in addition to the decision to bring an action in the first place.  For example, in a July 2018 FCPA resolution with CSHK (discussed above), the SEC imposed disgorgement and accrued interest amounts totaling approximately $30 million, but did not require a separate fine, crediting the $47 million criminal penalty paid to DOJ.[86] Along the same lines, in June 2018, the FFIEC rescinded a previous policy statement from 1997 and replaced it with a new inter-agency policy reflecting coordination in enforcement actions against financial institutions by the OCC, the FRB, and the FDIC.[87]  This new policy reflects the same goal of coordinating actions and resolutions in order to avoid the piling on of duplicative monetary fines. Despite the efforts of agencies to coordinate and credit penalties imposed by others, the SocGen sanctions-related enforcement action discussed above does not appear to have involved credits by the settling agencies for fines paid to others.  In reaching the global resolution of $1.4 billion, DOJ did not credit payments to other U.S. enforcers and in fact referred to “separate agreements” under which SocGen “shall pay additional penalties.”[88]  Similarly, the OFAC Enforcement Information referred to the global settlement involving resolutions with DOJ, the FRB, the New York County District Attorney’s Office, the U.S. Attorney’s Office for the Southern District of New York, and the New York Department of Financial Services, but did not credit any of the other fines in assessing its penalty of nearly $54 million.[89]  OFAC has not publicly stated whether it is moving away from the crediting of payment to other enforcers or whether the SocGen resolution is an outlier.[90]  In any event, it is still too soon to know whether the trends toward cooperation and the avoiding of duplicative penalties will reduce the total penalty paid by an organization facing a multi-agency enforcement action. 5.      Conclusion Although most financial penalties in civil and criminal matters may contain the same potential components (i.e., fines, restitution, and/or disgorgement) as seen in the majority of DOJ corporate resolutions over a 10-year period, there can be significant variance in how these components are calculated. Additionally, although the determination of any base fine or penalty is driven by specific principles and elements for the sentencing of organizations in the Guidelines, these principles and elements will be informed by the facts that are the subject of any government investigation.  Often conduct can be viewed as implicating different statutes and violations.  For example, most alleged violations can be viewed according to the underlying problem (e.g., sanctions) as well as AML.  When negotiating with U.S. enforcers, financial institutions, and their counsel should consider how best to shape the narrative around the scope of the alleged misconduct and how those enforcers view different statutory violations.  By advocating effectively in this regard, a financial institution can position itself to reduce its potential financial penalty or even take advantage of a program designed to encourage cooperation (e.g., FCPA Policy). Financial institutions should also consider that fine calculations can be adjusted up or down based on culpability scores, prior history enhancements, and the role of management in the alleged misconduct.  Financial institutions should accordingly be prepared to make principled arguments rooted in the facts of the instant case and be familiar with the outcomes of other analogous cases in order to appeal to relevant organizational precedent.  Nonetheless, although the Guidelines’ principles are helpful in determining an organization’s exposure to a potential criminal penalty, financial institutions should be mindful of the significant discretion prosecutors wield in determining whether to apply a given enhancement or reduction and in situating the penalty amount within the applicable fine range. Finally, financial institutions should also keep in mind these criminal sentencing principles when negotiating civil or administrative resolutions.  For example, by negotiating for language explicitly disclaiming that a cease-and-desist order or consent decree should be regarded as a “civil or administrative adjudication,” a financial institution may limit its exposure to the prior history aggravating factor in potential future criminal actions. We believe that it is essential for our financial institution clients to understand their potential financial exposure when assessing matters involving DOJ or other U.S. enforcers.  We hope this publication serves as a helpful primer on this issue, and look forward to addressing other topics that raise unique issues for financial institutions in this rapidly-evolving area in future editions. [1]      Throughout this alert, we generally use the term “U.S. enforcers” to refer to U.S. regulatory agencies and departments, which bring criminal or civil enforcement against persons for violations of federal law. [2]      We use the terms “corporate entity” and “organization” to refer to non-individual persons subject to investigation by enforcers, regardless of the specific legal structure of a given organization.  Throughout this client alert, we use the two terms interchangeably.  For example, in several places, we refer to a penalty imposed against a financial institution or other organization simply as a “corporate penalty” for ease of reference. [3]      This alert also discusses other U.S. enforcers and regulatory agencies, including the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”), the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”), the Office of the Comptroller of the Currency (“OCC”), the U.S. Securities and Exchange Commission (“SEC”), the U.S. Commodity Futures Trading Commission (“CFTC”), and the Board of Governors of the Federal Reserve System (“FRB”). [4]      For the purposes of this client alert, forfeiture is considered as a form of disgorgement.  As noted below, forfeiture is a unique driver of financial institution liability, and the complexities it presents will be the focus of a future Developments in the Defense of Financial Institutions client alert. [5]      18 U.S.C. § 1344. [6]      18 U.S.C. §§ 1341, 1343. [7]      See, e.g., 18 U.S.C. § 3571(d), which provides that a defendant may be fined up to twice the gross gain or gross loss attributable to an offense. [8]      This citation to the Guidelines in this client alert is drawn from the 2018 edition of the U.S. Sentencing Guidelines Manual, a publication of the United States Sentencing Commission, available at https://www.ussc.gov/sites/default/files/pdf/guidelines-manual/2018/GLMFull.pdf. [9]      U.S. Dep’t of Justice, Justice Manual §  9-47.120 (2017), available at https://www.justice.gov/jm/jm-9-47000-foreign-corrupt-practices-act-1977#9-47.120.  We discussed the FCPA Policy in greater detail in our 2017 Year-End FCPA Update. [10]    Id.; see also Rod J. Rosenstein, Deputy Att’y Gen., Deputy Attorney General Rosenstein Delivers Remarks at the 34th International Conference on the Foreign Corrupt Practices Act (Nov. 29, 2017), https://www.justice.gov/opa/speech/deputy-attorney-general-rosenstein-delivers-remarks-34th-international-conference-foreign/. [11]    U.S. Dep’t of Justice, Justice Manual §  9-47.120. [12]    See, e.g., United States v. Boccagna, 450 F.3d 107, 115 (2d Cir. 2006) (“[T]he purpose of restitution is essentially compensatory:  to restore a victim, to the extent money can do so, to the position he occupied before sustaining injury.”). [13]   See, e.g., FTC v. WV Universal Mgmt., LLC, 877 F.3d 1234, 1239 (11th Cir. 2017) (quoting FTC v. General Merch. Corp., 87 F.3d 466, 468 (11th Cir. 1996)) (noting that even though the Federal Trade Commission Act did not expressly provide for monetary equitable relief, Congress’s “unqualified grant of statutory authority to issue an injunction . . . carries with it the full range of equitable remedies”). [14]    See, e.g.,  SEC v. Contorinis, 743 F.3d 296, 301 (2d Cir. 2014); see also SEC v. Tome, 833 F.2d 1086, 1096 (2d Cir. 1987) (“The paramount purpose of enforcing the prohibition against insider trading by ordering disgorgement is to make sure that wrongdoers will not profit from their wrongdoing.”). [15]    See U.S. Sentencing Guidelines Manual [hereinafter, the “Guidelines”] §§  5E1.1, 8B1.1, 8C2.9. [16]    Guidelines § 8B1.1(c). [17]    DOJ’s resolutions with NCH Corporation, HMT LLC, CDM Smith Inc., and Linde North America Inc. are examples of this approach.  See Letter to Paul E. Coggins & Kiprian Mendrygal, Locke Lord LLP, Counsel for NCH Corporation (Sept. 29, 2016), available at https://www.justice.gov/criminal-fraud/file/899121/download; Letter to Steven A. Tyrell, Weil, Gotshal & Manges LLP, Counsel for HMT LLC (Sept. 29, 2016), available at https://www.justice.gov/criminal-fraud/file/899116/download; Letter to Nathaniel B. Edmonds, Paul Hastings LLP, Counsel for CDM Smith Inc. (June 21, 2017), available at https://www.justice.gov/criminal-fraud/page/file/976976/download; Letter  to Lucina Low & Thomas Best, Steptoe & Johnson LLP, Counsel for Linde North America Inc. (June 16, 2017), available at https://www.justice.gov/criminal-fraud/file/974516/download. [18]   See Jody Godoy, DOJ Expands Leniency Beyond FCPA, Lets Barclays Off, Law360 (Mar. 1, 2018), https://www.law360.com/articles/1017798/doj-expands-leniency-beyond-fcpa-lets-barclays-off. [19]     Common chapters of the Guidelines potentially applicable to financial institutions include 2B (fraud and embezzlement), 2C (bribery and gratuities), 2S (money laundering), and 2T (tax violations). [20]    Guidelines § 8C2.4(a).  “Pecuniary gain” and “pecuniary loss” are defined with reference to the definitions at § 8A1.2 cmt. n.3(H), and (I), respectively.  “Pecuniary gain” refers to “the additional before-tax profit to the defendant resulting from the relevant conduct of the offense,” and “pecuniary loss” refers to the greater of the reasonably foreseeable actual loss or intended loss from the offense conduct, as defined at § 2B1.1 cmt. n.3(A). [21]    Id. § 8C2.5(a). [22]     Aggravating factors, which increase the culpability score, include the size of the organization, involvement of high-level management, history of prior enforcement resolutions for similar misconduct, violations of an existing judicial or administrative order and conduct alleged to be indicative of obstruction of justice.  Id. § 8C2.5(b)-(e). Mitigating factors, which decrease the culpability score, include the existence of an effective compliance and ethics program at the time of the alleged misconduct, prompt, voluntary self-disclosure of the conduct, full cooperation in the government’s investigation, and clearly demonstrated acceptance of responsibility for the conduct at issue.  Id. § 8C2.5(f)-(g). [23]    Id. § 8C2.6. [24]   Id. § 8C2.5(c)(2). [25]   Id. § 8C2.5(c)(1). [26]   See id. Ch. 4, pt. A, Introductory Commentary (“A defendant with a record of prior criminal behavior is more culpable than a first offender and thus deserving of greater punishment. General deterrence of criminal conduct dictates that a clear message be sent to society that repeated criminal behavior will aggravate the need for punishment with each recurrence.”). [27]   Id. § 8A1.2 cmt. n.3(G) (defining “prior criminal adjudication” as “conviction by trial, plea of guilty . . . or plea of nolo contendere“). [28]   See, e.g., Black’s Law Dictionary (10th ed. 2014) (defining “adjudication” as “[t]he legal process of resolving a dispute” or “the process of judicially deciding a case,” and “administrative adjudication” as “[t]he process used by an administrative agency to issue regulations through an adversary proceeding”).  In the context of administrative adjudications, the Administrative Procedures Act sets forth a series of basic requirements for so-called “formal” agency adjudications, including the presentation of evidence before a presiding official, the opportunity to present rebuttal evidence or cross-examine witnesses, and a written decision on the record.  See 5 U.S.C. § 554 et seq. [29]   Guidelines § 8C2.5(c) indicates that the prior adjudication(s) must occur within five to ten years before the organization committed any part of the “instant offense.”  Chapter 8 of the Guidelines defines “instant,” when applied to modify the term “offense,” as used “to distinguish the violation for which the defendant is being sentenced from a prior or subsequent offense.”  Guidelines § 8A1.2 cmt. n.3(A). [30]   § 8C2.5(c). [31]   § 8A1.2 cmt. n.3(F). [32]   See, e.g., United States v. Hernandez, 160 F.3d 661, 669–70 (11th Cir. 1998) (failure to pay employees minimum wage is similar to committing bankruptcy fraud); United States v. Starr, 971 F.2d 357, 361–62 (9th Cir. 1992) (possession of stolen property and embezzlement are similar to bank robbery); United States v. Cota-Guerrero, 907 F.2d 87, 89 (9th Cir. 1990) (illegal possession of firearm is similar to assault with a deadly weapon). [33]   Guidelines § 8C2.5(c) (emphasis added). [34]   Id. cmt. n.5 (defining “separately managed line of business” as “a subpart of a for-profit organization that has its own management, has a high degree of autonomy from higher managerial authority, and maintains its own separate books of account”). [35]   Id. [36]   This figure was calculated using the statistics contained in Table 54 of the U.S. Sentencing Commission’s Annual Sourcebooks of Federal Sentencing Statistics for the years 2006 to 2017, which are available at https://www.ussc.gov/research/sourcebook/archive/. [37]   For this analysis, we reviewed all corporate criminal resolutions based on alleged violations relating to the FCPA, AML statutes, LIBOR, and foreign exchange issues, sanctions, and tax fraud, as identified by running searches using the Corporate Prosecution Registry available at http://lib.law.virginia.edu/Garrett/corporate-prosecution-registry/browse/browse.html. [38]   See Plea Agreement, United States v. Rabobank, Nat’l Ass’n, No. 18-cr-00614 (S.D. Cal. Feb. 7, 2018), available at https://www.justice.gov/opa/press-release/file/1032101/download; Deferred Prosecution Agreement, United States v. Zimmer Biomet Holdings, No. 12-cr-00080 (D.D.C. Jan. 12, 2017), available at https://www.justice.gov/opa/press-release/file/925171/download; Plea Agreement, United States v. ABB Inc., No. 4:10-cr-00664 (S.D. Tex. Sept. 29, 2010), available at https://www.justice.gov/sites/default/files/criminal-fraud/legacy/2015/03/05/09-29-10abbinc-plea.pdf; Deferred Prosecution Agreement, United States v. ABB Ltd., No. 4:10-cr-00665 (S.D. Tex. Sept. 29, 2010), available at https://www.justice.gov/sites/default/files/criminal-fraud/legacy/2011/02/16/09-29-10abbjordan-dpa.pdf. [39]   Guidelines § 8C2.5(b). “High-level personnel” are defined as those who have substantial control or policy-making responsibility within the organization or unit (such as directors, executives officers, or the heads of significant units or divisions).  Guidelines § 8A1.2 cmt. n.3(B).  “Substantial authority personnel” are those who “exercise a substantial measure of discretion,” which encompasses “high-level personnel,” individuals who exercise substantial supervisory authority, or non-managerial personnel with a significant degree of discretionary authority, such as those who can negotiate prices or approve significant contracts.  Id. § 8A1.2 cmt. n.3(C).  “Pervasiveness” is described as a sliding scale based on “the number, and degree of responsibility of individuals within substantial authority personnel who participated in, condoned, or were willfully ignorant of the offense.”  Id. § 8C2.5 cmt. n.4. [40]   Id. § 8C2.5, Background note. [41]   See, e.g., Plea Agreement at 8, United States v. Tyco Valves & Controls Middle East, Inc., No. 1:12-cr-00418 (E.D. Va. Sept. 24, 2012), available at https://www.justice.gov/sites/default/files/criminal-fraud/legacy/2012/09/27/2012-09-24-plea-agreement.pdf (one-point enhancement applied for the regional subsidiary of organization, which had only a fraction of the entire organization’s approximate 70,000 employees according to 2012 annual report, available at http://www.tyco.com/uploads/files/tyco_annual-report_2012.pdf); Deferred Prosecution Agreement at 8, United States v. Shell Nigeria Exploration and Prod. Co., No. 4:10-cr-00767 (S.D. Tex. Nov. 4, 2010), ), available at https://www.justice.gov/sites/default/files/criminal-fraud/legacy/2011/02/16/11-04-10snepco-dpa.pdf (three-point enhancement applied for the Nigerian subsidiary of organization, which had only a fraction of the entire organization’s approximate 90,000 employees according to 2011 annual report, available at https://reports.shell.com/annual-report/2011/servicepages/filelibrary/files/collection.php). [42]   Guidelines § 8C2.5(b) (emphasis added). [43]   Guidelines § 8A1.2 cmt. n.3(J). [44]   Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754, 766 & 767 n.7 (2011) (approving “willful ignorance” jury instruction). [45]   543 U.S. 220, 245 (2005) (Breyer, J.) (modifying the federal sentencing statutes so as to render the Guidelines “effectively advisory,” by requiring a sentencing court to consider sentencing ranges, while permitting it to tailor a given sentence in light of other statutory considerations). [46]   Guidelines § 8C2.5(f)(1). [47]   An organization is not eligible for this mitigating factor if it was subject to an enhancement under § 8C2.5(b) based on the involvement, condonation, or willful ignorance of high-level personnel within a unit of 200 or more employees, id. § 8C2.5(f)(3)(A), and is presumptively ineligible if the relevant unit(s) had less than 200 employees or if only substantial authority personnel were implicated, id. § 8C2.5(f)(3)(B).  However, a limited exception is available if non-culpable compliance and ethics personnel identified the problem before it was discovered by outside parties and promptly reported it to the appropriate governmental authorities.  See id. § 8C2.5(f)(3)(C)(iii). [48]   Id. § 8B2.1(a), (b).  These factors are:  (1) established standards and procedures to prevent and detect criminal conduct; (2) the organization’s governing authority must be knowledgeable about the content and function of the program and exercise reasonable oversight, and specific high-level individuals must be assigned responsibility for oversight; (3) reasonable efforts not to give substantial authority to personnel the organization knew or should have known has engaged in illegal or non-compliant activities; (4) reasonable steps to periodically communicate compliance and ethics standards to all staff through training and other forms of dissemination; (5) reasonable monitoring and auditing programs to ensure the compliance and ethics program is followed; (6) consistent promotion and enforcement at all levels of the organization through appropriate incentives and disciplinary measures; and (7) reasonable steps to respond to identified criminal conduct and prevent further such conduct, including by modifying the compliance and ethics program as necessary. [49]   Id. § 8B2.1(a) cmt. n.2. [50]   See note 36 supra. [51]   These factors are: (1) policy considerations, such as the severity of the offense, need to promote respect for the rule of law, deterrence, and the protection of the public from future crimes; (2) the organization’s role in the offense; (3) the potential collateral consequences of a conviction; (4) non-pecuniary losses caused or threatened by the offense; (5) whether the offense involved a vulnerable victim; (6) the prior criminal records of individuals within the high-level personnel of the organization or applicable unit who were involved in the criminal conduct; (7) prior civil or criminal conduct not covered by the prior history enhancement under § 8C2.5(c); (8) if the culpability score is higher than 10 or lower than 0 (meaning the minimum or maximum multiplier is applicable); (9) partial but incomplete satisfaction of the aggravating or mitigating factors under § 8C2.5 which feed into the culpability score; (10) the factors listed at 18 U.S.C. § 3572(a) (which include the defendant’s income and capacity to pay, the burden of the fine on the defendant, the degree of pecuniary loss inflicted on others, the need for restitution or the deprivation of ill-gotten gains, the extent to which the cost of the fine can or will be passed onto consumers or other persons, or the steps taken to discipline culpable employees); and (11) if the organization lacked an effective compliance program at the time of the offense conduct.  Guidelines § 8C2.8(a). [52]   Id. § 8C2.8(b). [53]   As discussed in section 2 below, our review of 119 corporate resolutions involving bribery, AML, sanctions, criminal tax, and currency violations in the past 10 years has determined that of the 82 DPAs and guilty pleas explicitly referencing the placement of the penalty relative to the applicable fine range, 16 (19.5 percent) were placed near or at the bottom of the fine range, and 60 (73.2 percent) received a discount below the low end of the fine range.  Thus, based on our analysis, for nearly 93 percent of all resolutions involving these types of violations, the fine was placed near, or even below, the bottom of the fine range. [54]   Deferred Prosecution Agreement ¶ 9, Ex. C at 7–8, Zürcher Kantonalbank (S.D.N.Y. Aug. 7, 2018), available at https://www.justice.gov/usao-sdny/press-release/file/1086876/download. [55]   Id. at ¶ 9. [56]   This number does not include resolutions where DOJ did not assess a penalty but instead deemed the financial institution’s payment to other regulators sufficient to satisfy any monetary penalty.  This was the structure, for instance of the resolutions in 2011 between DOJ and a number of financial institutions regarding alleged antitrust violations in the municipal reinvestment industry. [57]   It is important to note that other U.S. regulators may order disgorgement or restitution as part of a global settlement even if DOJ does not. [58]   DOJ also entered into NPAs with Red Cedar Services, Inc. and Santee Financial Services for $2,000,000 and $1,000,000, respectively.  See Non-Prosecution Agreement with Red Cedar Services at 2, April 25, 2018, available at https://www.gibsondunn.com/wp-content/uploads/2018/07/Red-Cedar-Services-NPA-2018.pdf; Non-Prosecution Agreement with Santee Financial Services at 2, April 13, 2018, available at  https://www.gibsondunn.com/wp-content/uploads/2018/07/Santee-Financial-Services-NPA-2018.pdf. [59]    Press Release, U.S. Dep’t of Justice, BNP Paribas Agrees to Plead Guilty and to Pay $8.9 Billion for Illegally Processing Financial Transactions for Countries Subject to U.S. Economic Sanctions (June 30, 2014), https://www.justice.gov/opa/pr/bnp-paribas-agrees-plead-guilty-and-pay-89-billion-illegally-processing-financial. [60]    Id. [61]    Plea Agreement at 1, United States v. BNP Paribas S.A., No. 14-cr-00460 (S.D.N.Y. June 27, 2014), BNP Paribas Plea Agreement at 1, June 27, 2014, available at  https://www.justice.gov/sites/default/files/opa/legacy/2014/06/30/plea-agreement.pdf (“BNP Paribas Plea Agreement”). [62]    Id. at 4. [63]     BNP Paribas Agrees to Plead Guilty and to Pay $8.9 Billion for Illegally Processing Financial Transactions for Countries Subject to U.S. Economic Sanctions, U.S. Dep’t of Justice (June 30, 2014), available at https://www.justice.gov/opa/pr/bnp-paribas-agrees-plead-guilty-and-pay-89-billion-illegally-processing-financial. [64]     Id. [65]     Id. [66]     Press Release, U.S. Dep’t of Justice, BNP Paribas Sentenced for Conspiring to Violate the International Emergency Economic Powers Act and the Trading with the Enemy Act (May 1, 2015), https://www.justice.gov/opa/pr/bnp-paribas-sentenced-conspiring-violate-international-emergency-economic-powers-act-and. [67]    Swiss Bank Program, U.S. Dep’t of Justice, available at https://www.justice.gov/tax/swiss-bank-program  (last visited Jan. 8, 2019). [68]   U.S. Dep’t of Justice, Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks, available at https://www.justice.gov/iso/opa/resources/7532013829164644664074.pdf. [69] Id. The Program also included two additional categories.  Categories Three and Four, however, are not relevant for the purposes of this discussion. [70]   Swiss Bank Program, U.S. Dep’t of Justice, available at https://www.justice.gov/tax/swiss-bank-program (last visited Jan. 8, 2019). [71]    Consent Order for a Civil Monetary Penalty, OCC, In re Wells Fargo Bank, N.A. (Apr. 20, 2018), available at https://www.occ.gov/static/enforcement-actions/ea2018-026.pdf. [72]   Consent Order, OCC, In re Capital One, N.A. and Capital One Bank (U.S.A.), N.A. (Oct. 23, 2018), available at https://www.occ.gov/static/enforcement-actions/ea2018-080.pdf. [73]   Id. [74]     Press Release, FRB, Federal Reserve Board Fines Goldman Sachs Group, Inc., $54.75 Million for Unsafe and Unsound Practices in Firm’s Foreign Exchange (FX) Trading Business, (May 8, 2018), https://www.federalreserve.gov/newsevents/pressreleases/enforcement20180501b.htm. [75]   U.S. Dep’t of Justice, Justice Manual §§ 9-28.200, 9-28.300, available at https://www.justice.gov/jm/jm-9-28000-principles-federal-prosecution-business-organizations#9-28.200. [76]   Id. §§ 9-28.700, 9-28.900, available at https://www.justice.gov/jm/jm-9-28000-principles-federal-prosecution-business-organizations#9-28.700. [77]   OCC, Policies and Procedures Manual 5000-7 (Nov. 13, 2018), https://www.occ.gov/publications/publications-by-type/other-publications-reports/ppms/ppm-5000-7.pdf. [78]   Id. at 4. [79]   Id. at 5.   [80]   FDIC, DSC Risk Management Manual of Examination Policies § 14.1, Civil Money Penalties, available at https://www.fdic.gov/regulations/safety/manual/section14-1.pdf. [81]   Justice Manual § 1-12.100, available at https://www.justice.gov/jm/jm-1-12000-coordination-parallel-criminal-civil-regulatory-and-administrative-proceedings#1-12.100.  Although this policy was officially implemented in May 2018, Rosenstein had also already announced DOJ’s efforts to improve coordination in a November 2017 speech.  Rod Rosenstein, Deputy Att’y Gen., Deputy Attorney General Rosenstein Delivers Remarks at the Clearing House’s 2017 Annual Conference (Nov. 8, 2017), https://www.justice.gov/opa/speech/deputy-attorney-general-rosenstein-delivers-remarks-clearing-house-s-2017-annual (announcing DOJ’s efforts to “consider[] proposals to improve coordination” and “help avoid duplicative and unwarranted payments”). [82]   Justice Manual § 1-12.100, available at https://www.justice.gov/jm/jm-1-12000-coordination-parallel-criminal-civil-regulatory-and-administrative-proceedings#1-12.100. [83]   Rod Rosenstein, Deputy Att’y Gen., Deputy Attorney General Rod Rosenstein Delivers Remarks to the New York City Bar White Collar Crime Institute (May 9, 2018), https://www.justice.gov/opa/speech/deputy-attorney-general-rod-rosenstein-delivers-remarks-new-york-city-bar-white-collar. [84]   Press Release, U.S. Dep’t of Justice, Société Générale S.A. Agrees to Pay $860 Million in Criminal Penalties for Bribing Gaddafi-Era Libyan Officials and Manipulating LIBOR Rate (June 4, 2018), https://www.justice.gov/opa/pr/soci-t-g-n-rale-sa-agrees-pay-860-million-criminal-penalties-bribing-gaddafi-era-libyan. [85]   Commissioner Hester M. Peirce, The Why Behind the No: Remarks at the 50th Annual Rocky Mountain Securities Conference (May 11, 2018), https://www.sec.gov/news/speech/peirce-why-behind-no-051118. [86]   Press Release, SEC, SEC Charges Credit Suisse With FCPA Violations (Jul. 5, 2018), https://www.sec.gov/news/press-release/2018-128. [87]   Interagency Coordination of Formal Corrective Action by the Federal Bank Regulatory Agencies, 83 Fed. Reg. 113, 27329 (June 12, 2018), https://www.govinfo.gov/content/pkg/FR-2018-06-12/pdf/2018-12557.pdf. [88]   Press Release, U.S. Dep’t of Justice, Manhattan U.S. Attorney Announces Criminal Charges Against Société Générale S.A. For Violations Of The Trading With The Enemy Act (Nov. 19, 2018), https://www.justice.gov/usao-sdny/pr/manhattan-us-attorney-announces-criminal-charges-against-soci-t-g-n-rale-sa-violations. [89]   OFAC Enforcement Information, Société Générale S.A. Settles Potential Civil Liability for Apparent Violations of Multiple Sanctions Programs (Nov. 19, 2018), https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20181119_socgen_web.pdf. [90]   In previous OFAC resolutions involving other enforcers, OFAC resolution documents had explicitly noted that penalties (or portions of penalties) were deemed “satisfied” by payments or conditions in agreements with other agencies.  See, e.g.,  OFAC Enforcement Information, National Oilwell Varco, Inc. Settles Potential Civil Liability for Apparent Violations of the Cuban Assets Control Regulations, the Iranian Transactions and Sanctions Regulations, and the Sudanese Sanctions Regulations (Nov. 14, 2016), https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20161114_varco.pdf.OFAC Enforcement Information, Alcon Laboratories, Inc., Alcon Pharmaceuticals Ltd., and Alcon Management, SA, Settle Potential Civil Liability for Apparent Violations of the Iranian Transactions and Sanctions Regulations and the Sudanese Sanctions Regulations (Jul. 5, 2016),  https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20160705_alcon.pdf. The following Gibson Dunn attorneys assisted in preparing this client update:  M. Kendall Day, Stephanie L. Brooker, F. Joseph Warin, Carl Kennedy, Chris Jones, Jaclyn Neely, Chantalle Carles Schropp, and Alexander Moss. Gibson Dunn has deep experience with issues relating to the defense of financial institutions, and we have recently increased our financial institutions defense and AML capabilities with the addition to our partnership of M. Kendall Day. Kendall joined Gibson Dunn in May 2018, having spent 15 years as a white collar prosecutor, most recently as an Acting Deputy Assistant Attorney General, the highest level of career official in DOJ’s Criminal Division. For his last three years at DOJ, Kendall exercised nationwide supervisory authority over every BSA and money-laundering charge, DPA and NPA involving every type of financial institution. 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January 11, 2019 |
2018 Year-End German Law Update

Click for PDF Looking back at the past year’s cacophony of voices in a world trying to negotiate a new balance of powers, it appeared that Germany was disturbingly silent, on both the global and European stage. Instead of helping shape the new global agenda that is in the making, German politics focused on sorting out the vacuum created by a Federal election result which left no clear winner other than a newly formed right wing nationalist populist party mostly comprised of so called Wutbürger (the new prong for “citizens in anger”) that managed to attract 12.6 % of the vote to become the third strongest party in the German Federal Parliament. The relaunching of the Grand-Coalition in March after months of agonizing coalition talks was followed by a bumpy start leading into another session of federal state elections in Bavaria and Hesse that created more distraction. When normal business was finally resumed in November, a year had passed by with few meaningful initiatives formed or significant business accomplished. In short, while the world was spinning, Germany allowed itself a year’s time-out from international affairs. The result is reflected in this year’s update, where the most meaningful legal developments were either triggered by European initiatives, such as the General Data Protection Regulation (“GDPR”) (see below section 4.1) or the New Transparency Rules for Listed German Companies (see below section 1.2), or as a result of landmark rulings of German or international higher and supreme courts (see below Corporate M&A sections 1.1 and 1.4; Tax – sections 2.1 and 2.2 and Labor and Employment – section 4.2). In fairness, shortly before the winter break at least a few other legal statutes have been rushed through parliament that are also covered by this update. Of the changes that are likely to have the most profound impact on the corporate world, as well as on the individual lives of the currently more than 500 million inhabitants of the EU-28, the GDPR, in our view, walks away with the first prize. The GDPR has created a unified legal system with bold concepts and strong mechanisms to protect individual rights to one’s personal data, combined with hefty fines in case of the violation of its rules. As such, the GDPR stands out as a glowing example for the EU’s aspiration to protect the civic rights of its citizens, but also has the potential to create a major exposure for EU-based companies processing and handling data globally, as well as for non EU-based companies doing business in Europe. On a more strategic scale, the GDPR also creates a challenge for Europe in the global race for supremacy in a AI-driven world fueled by unrestricted access to data – the gold of the digital age. The German government could not resist infection with the virus called protectionism, this time around coming in the form of greater scrutiny imposed on foreign direct investments into German companies being considered as “strategic” or “sensitive” (see below section 1.3 – Germany Tightens Rules on Foreign Takeovers Even Further). Protecting sensitive industries from “unwanted” foreign investors, at first glance, sounds like a laudable cause. However, for a country like Germany that derives most of its wealth and success from exporting its ideas, products and services, a more liberal approach to foreign investments would seem to be more appropriate, and it remains to be seen how the new rules will be enforced in practice going forward. The remarkable success of the German economy over the last twenty five years had its foundation in the abandoning of protectionism, the creation of an almost global market place for German products, and an increasing global adoption of the rule of law. All these building blocks of the recent German economic success have been under severe attack in the last year. This is definitely not the time for Germany to let another year go by idly. We use this opportunity to thank you for your trust and confidence in our ability to support you in your most complicated and important business decisions and to help you form your views and strategies to deal with sophisticated German legal issues. Without our daily interaction with your real-world questions and tasks, our expertise would be missing the focus and color to draw an accurate picture of the multifaceted world we are living in. In this respect, we thank you for making us better lawyers – every day. ________________________ TABLE OF CONTENTS 1.      Corporate, M&A 2.      Tax 3.      Financing and Restructuring 4.      Labor and Employment 5.      Real Estate 6.      Compliance 7.      Antitrust and Merger Control 8.      Litigation 9.      IP & Technology 10.    International Trade, Sanctions and Export Controls ________________________ 1.       Corporate, M&A 1.1       Further Development regarding D&O Liability of the Supervisory Board in a German Stock Corporation In its famous “ARAG/Garmenbeck”-decision in 1997, the German Federal Supreme Court (Bundesgerichtshof – BGH) first established the obligation of the supervisory board of a German Stock Corporation (Aktiengesellschaft) to pursue the company’s D&O liability claims in the name of the company against its own management board after having examined the existence and enforceability of such claims. Given the very limited discretion the court has granted to the supervisory board not to bring such a claim and the supervisory board’s own liability arising from inactivity, the number of claims brought by companies against their (former) management board members has risen significantly since this decision. In its recent decision dated September 18, 2018, the BGH ruled on the related follow-up question about when the statute of limitations should start to run with respect to compensation claims brought by the company against a supervisory board member who has failed to pursue the company’s D&O liability claims against the board of management within the statutory limitation period. The BGH clarified that the statute of limitation applicable to the company’s compensation claims against the inactive supervisory board member (namely ten years in case of a publicly listed company, otherwise five years) should not begin to run until the company’s compensation claims against the management board member have become time-barred themselves. With that decision, the court adopts the view that in cases of inactivity, the period of limitations should not start to run until the last chance for the filing of an underlying claim has passed. In addition, the BGH in its decision confirmed the supervisory board’s obligation to also pursue the company’s claims against the board of management in cases where the management board member’s misconduct is linked to the supervisory board’s own misconduct (e.g. through a violation of supervisory duties). Even in cases where the pursuit of claims against the board of management would force the supervisory board to disclose its own misconduct, such “self-incrimination” does not release the supervisory board from its duty to pursue the claims given the preponderance of the company’s interests in an effective supervisory board, the court reasoned. In practice, the recent decision will result in a significant extension of the D&O liability of supervisory board members. Against that backdrop, supervisory board members are well advised to examine the existence of the company’s compensation claims against the board of management in a timely fashion and to pursue the filing of such claims, if any, as soon as possible. If the board of management’s misconduct is linked to parallel misconduct of the supervisory board itself, the relevant supervisory board member – if not exceptionally released from pursuing such claim and depending on the relevant facts and circumstances – often finds her- or himself in a conflict of interest arising from such self-incrimination in connection with the pursuit of the claims. In such a situation, the supervisory board member might consider resigning from office in order to avoid a conflict of interest arising from such self-incrimination in connection with the pursuit of the claims. Back to Top 1.2       Upcoming New Transparency Rules for Listed German Companies as well as Institutional Investors, Asset Managers and Proxy Advisors In mid-October 2018, the German Federal Ministry of Justice finally presented the long-awaited draft for an act implementing the revised European Shareholders’ Rights Directive (Directive (EU) 2017/828). The Directive aims to encourage long-term shareholder engagement by facilitating the communication between shareholders and companies, in particular across borders, and will need to be implemented into German law by June 10, 2019 at the latest. The new rules primarily target listed German companies and provide some major changes with respect to the “say on pay” provisions, as well as additional approval and disclosure requirements for related party transactions, the transmission of information between a stock corporation and its shareholders and additional transparency and reporting requirements for institutional investors, asset managers and proxy advisors. “Say on pay” on directors’ remuneration: remuneration policy and remuneration report Under the current law, the shareholders determine the remuneration of the supervisory board members at a shareholder meeting, whereas the remuneration of the management board members is decided by the supervisory board. The law only provides for the possibility of an additional shareholder vote on the management board members’ remuneration if such vote is put on the agenda by the management and supervisory boards in their sole discretion. Even then, such vote has no legal effects whatsoever (“voluntary say on pay”). In the future, shareholders of German listed companies will have two options. First, the supervisory board will have to prepare a detailed remuneration policy for the management board, which must be submitted to the shareholders if there are major changes to the remuneration, and in any event at least once every four years (“mandatory say on pay”). That said, the result of the vote on the policy will continue to remain only advisory. However, if the supervisory board adopts a remuneration policy that has been rejected by the shareholders, it will then be required to submit a reviewed (not necessarily revised) remuneration policy to the shareholders at the next shareholders’ meeting. With respect to the remuneration of supervisory board members, the new rules require a shareholders vote at least once every four years. Second, at the annual shareholders’ meeting the shareholders will vote ex post on the remuneration report (which is also reviewed by the statutory auditor) which contains the remuneration granted to the present and former members of the management board and the supervisory board in the past financial year. Again, the shareholders’ vote, however, will only be advisory. Both the remuneration report including the audit report, as well as the remuneration policy will have to be made public on the company’s website for at least ten years. Related party transactions German stock corporation law already provides for various safeguard mechanisms to protect minority shareholders in cases of transactions with major shareholders or other related parties (e.g. the capital maintenance rules and the laws relating to groups of companies). In the future, in the case of listed companies, these mechanisms will be supplemented by a detailed set of approval and transparency requirements for transactions between the company and related parties. Material transactions exceeding certain thresholds will require prior supervisory board approval. A rejection by the supervisory board can be overcome by shareholder vote. Furthermore, a listed company must publicly disclose any such material related party transaction, without undue delay over media providing for a Europe-wide distribution. Identification of shareholders and facilitation of the exercise of shareholders’ rights Listed companies will have the right to request information on the identity of their shareholders, including the name and both a postal and electronic address, from depositary banks, thus allowing for a direct communication line, also with respect to bearer shares (“know-your-shareholder”). Furthermore, depositary banks and other intermediaries will be required to pass on important information from the company to the shareholders and vice versa, e.g. with respect to voting in shareholders’ meetings and the exercise of subscription rights. Where there is more than one intermediary in a chain, the intermediaries are required to pass on the respective information within the chain. In addition, companies will be required to confirm the votes cast at the request of the shareholders thus enabling them to be certain that their votes have been effectively cast, including in particular across borders. Transparency requirements for institutional investors, asset managers and proxy advisors German domestic institutional investors and asset managers with Germany as their home member state (as defined in the applicable sector-specific EU law) will be required (i) to disclose their engagement policy, including how they monitor, influence and communicate with the investee companies, exercise shareholders’ rights and manage actual and potential conflicts of interests, and (ii) to report annually on the implementation of their engagement policy and disclose how they have cast their votes in the general meetings of material investee companies. Institutional investors will further have to disclose (iii) consistency between the key elements of their investment strategy with the profile and duration of their liabilities and how they contribute to the medium to long-term performance of their assets, and, (iv) if asset managers are involved, to disclose the main aspects of their arrangement with the asset manager. The new disclosure and reporting requirements, however, only apply on a “comply or explain” basis. Thus, investors and asset managers may choose not to make the above disclosures, provided they give an explanation as to why this is the case. Proxy advisors will have to publicly disclose on an annual basis (i) whether and how they have applied their code of conduct based again on the “comply or explain” principle, and (ii) information on the essential features, methodologies and models they apply, their main information sources, the qualification of their staff, their voting policies for the different markets they operate in, their interaction with the companies and the stakeholders as well as how they manage conflicts of interests. These rules, however, do not apply to proxy advisors operating from a non-EEA state with no establishment in Germany. The present legislative draft is still under discussion and it is to be expected that there will still be some changes with respect to details before the act becomes effective in mid-2019. Due to transitional provisions, the new rules on “say on pay” will have no effect for the majority of listed companies in this year’s meeting season. Whether the new rules will actually promote a long-term engagement of shareholders and have the desired effect on the directors’ remuneration of listed companies will have to be seen. In any event, both listed companies as well as the other addressees of the new transparency rules should make sure that they are prepared for the new reporting and disclosure requirements. Back to Top 1.3       Germany Tightens Rules on Foreign Takeovers Even Further After the German government had imposed stricter rules on foreign direct investment in 2017 (see 2017 Year-End German Law Update under 1.5), it has now even further tightened its rules with respect to takeovers of German companies by foreign investors. The latest amendment of the rules under the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung, “AWV“) enacted in 2018 was triggered, among other things, by the German government’s first-ever veto in August 2018 regarding the proposed acquisition of Leifeld Metal Spinning, a German manufacturer of metal forming machines used in the automotive, aerospace and nuclear industries, by Yantai Taihai Corporation, a privately-owned industry group from China, on the grounds of national security. Ultimately, Yantai withdrew its bid shortly after the German government had signaled that it would block the takeover. On December 29, 2018, the latest amendment of the Foreign Trade and Payments Ordinance came into force. The new rules provide for greater scrutiny of foreign direct investments by lowering the threshold for review of takeovers of German companies by foreign investors from the acquisition of 25% of the voting rights down to 10% in circumstances where the target operates a critical infrastructure or in sensitive security areas (defense and IT security industry). In addition, the amendment also expands the scope of the Foreign Trade and Payments Ordinance to also apply to certain media companies that contribute to shaping the public opinion by way of broadcasting, teleservices or printed materials and stand out due to their special relevance and broad impact. While the lowering of the review threshold as such will lead to an expansion of the existing reporting requirements, the broader scope is also aimed at preventing German mass media from being manipulated with disinformation by foreign investors or governments. There are no specific guidelines published by the German government as it wants the relevant parties to contact, and enter into a dialog with, the authorities about these matters. While the German government used to be rather liberal when it came to foreign investments in the past, the recent veto in the case of Leifeld as well as the new rules show that in certain circumstances, it will become more cumbersome for dealmakers to get a deal done. Finally, it is likely that the rules on foreign investment control will be tightened even further going forward in light of the contemplated EU legislative framework for screening foreign direct investment on a pan-European level. Back to Top 1.4       US Landmark Decision on MAE Clauses – Consequences for German M&A Deals Fresenius wrote legal history in the US with potential consequences also for German M&A deals in which “material adverse effect” (MAE) clauses are used. In December 2018, for the first time ever, the Supreme Court of Delaware allowed a purchaser to invoke the occurrence of an MAE and to terminate the affected merger agreement. The agreement included an MAE clause, which allocated certain business risks concerning the target (Akorn) for the time period between signing and closing to Akorn. Against the resistance of Akorn, Fresenius terminated the merger agreement based on the alleged MAE, arguing that the target’s EBITDA declined by 86%. The decision includes a very detailed analysis of an MAE clause by the Delaware courts and reaffirms that under Delaware law there is a very high bar to establishing an MAE. Such bar is based both on quantitative and qualitative parameters. The effects of any material adverse event need to be substantial as well as lasting. In most German deals, the parties agree to arbitrate. For this reason, there have been no German court rulings published on MAE clauses so far. Hence, all parties to an M&A deal face uncertainty about how German courts or arbitration tribunals would define “materiality” in the context of an MAE clause. In potential M&A litigation, sellers may use this ruling to support the argument that the bar for the exercise of the MAE right is in fact very high in line with the Delaware standard. It remains to be seen whether German judges will adopt the Delaware decision to interpret MAE clauses in German deals. Purchasers, who seek more certainty, may consider defining materiality in the MAE clause more concretely (e.g., by reference to the estimated impact of the event on the EBITDA of the company or any other financial parameter). Back to Top 1.5       Equivalence of Swiss Notarizations? The question whether the notarization of various German corporate matters may only be validly performed by German notaries or whether some or all of these measures may also be notarized validly by Swiss notaries has long since been the topic of legal debate. Since the last major reform of the German Limited Liability Companies Act (Gesetz betreffend Gesellschaften mit beschränkter Haftung – GmbHG) in 2008 the number of Swiss notarizations of German corporate measures has significantly decreased. A number of the newly introduced changes and provisions seemed to cast doubt on the equivalence and capacity of Swiss notaries to validly perform the duties of a German notary public who are not legally bound by the mandatory, non-negotiable German fee regime on notarial fees. As a consequence and a matter of prudence, German companies mostly stopped using Swiss notaries despite the potential for freely negotiated fee arrangements and the resulting significant costs savings in particular in high value matters. However, since 2008 there has been an increasing number of test cases that reach the higher German courts in which the permissibility of a Swiss notarization is the decisive issue. While the German Federal Supreme Court (Bundesgerichtshof – BGH) still has not had the opportunity to decide this question, in 2018 two such cases were decided by the Kammergericht (Higher District Court) in Berlin. In those cases, the court held that both the incorporation of a German limited liability company in the Swiss Canton of Berne (KG Berlin, 22 W 25/16 – January 24, 2018 = ZIP 2018, 323) and the notarization of a merger between two German GmbHs before a notary in the Swiss Canton of Basle (KG Berlin, 22 W 2/18 – July 26, 2018 = ZIP 2018, 1878) were valid notarizations under German law, because Swiss notaries were deemed to be generally equivalent to the qualifications and professional standards of German-based notaries. The reasons given in these decisions are reminiscent of the case law that existed prior to the 2008 corporate law reform and can be interpreted as indicative of a certain tendency by the courts to look favorably on Swiss notarizations as an alternative to German-based notarizations. Having said that and absent a determinative decision by the BGH, using German-based notaries remains the cautious default approach for German companies to take. This is definitely the case in any context where financing banks are involved (e.g. either where share pledges as loan security are concerned or in an acquisition financing context of GmbH share sales and transfers). On the other hand, in regions where such court precedents exist, the use of Swiss notaries for straightforward intercompany share transfers, mergers or conversions might be considered as an alternative on a case by case basis. Back to Top 1.6       Re-Enactment of the DCGK: Focus on Relevance, Function, Management Board’s Remuneration and Independence of Supervisory Board Members Sixteen years after it has first been enacted, the German Corporate Governance Code (Deutscher Corporate Governance Kodex, DCGK), which contains standards for good and responsible governance for German listed companies, is facing a major makeover. In November 2018, the competent German government commission published a first draft for a radically revised DCGK. While vast parts of the proposed changes are merely editorial and technical in nature, the draft contains a number of new recommendations, in particular with respect to the topics of management remuneration and independence of supervisory board members. With respect to the latter, the draft now provides a catalogue of criteria that shall act as guidance for the supervisory board as to when a shareholder representative shall no longer be regarded as independent. Furthermore, the draft also provides for more detailed specifications aiming for an increased transparency of the supervisory board’s work, including the recommendation to individually disclose the members’ attendance of meetings, and further tightens the recommendations regarding the maximum number of simultaneous mandates for supervisory board members. Moreover, in addition to the previous concept of “comply or explain”, the draft DCGK introduces a new “apply and explain” concept, recommending that listed companies also explain how they apply certain fundamental principles set forth in the DCGK as a new third category in addition to the previous two categories of recommendations and suggestions. The draft DCGK is currently under consultation and the interested public is invited to comment upon the proposed amendments until the end of January 2019. Since some of the proposed amendments provide for a rather fundamentally new approach to the current regime and would introduce additional administrative burdens, it remains to be seen whether all of the proposed amendments will actually come into force. According to the current plan, following a final consultancy of the Government Commission, the revised version of the DCGK shall be submitted for publication in April 2019 and would take effect shortly thereafter. Back to Top 2.         Tax On November 23, 2018, the German Federal Council (Bundesrat) approved the German Tax Reform Act 2018 (Jahressteuergesetz 2018, the “Act”), which had passed the German Federal Parliament (Bundestag) on November 8, 2018. Highlights of the Act are (i) the exemption of restructuring gains from German income tax, (ii) the partial abolition of and a restructuring exemption from the loss forfeiture rules in share transactions and (iii) the extension of the scope of taxation for non-German real estate investors investing in Germany. 2.1       Exemption of Restructuring Gains The Act puts an end to a long period of uncertainty – which has significantly impaired restructuring efforts – with respect to the tax implications resulting from debt waivers in restructuring scenarios (please see in this regard our 2017 Year-End German Law Update under 3.2). Under German tax law, the waiver of worthless creditor claims creates a balance sheet profit for the debtor in the amount of the nominal value of the payable. Such balance sheet profit is taxable and would – without any tax privileges for such profit – often outweigh the restructuring effect of the waiver. The Act now reinstates the tax exemption of debt waivers with retroactive effect for debt waivers after February 8, 2017; upon application debt waivers prior to February 8, 2017 can also be covered. Prior to this legislative change, a tax exemption of restructuring gains was based on a restructuring decree of the Federal Ministry of Finance, which has been applied by the tax authorities since 2003. In 2016, the German Federal Fiscal Court (Bundesfinanzgerichtshof) held that the restructuring decree by the Federal Ministry of Finance violates constitutional law since a tax exemption must be legislated by statute and cannot be based on an administrative decree. Legislation was then on hold pending confirmation from the EU Commission that a legislative tax exemption does not constitute illegal state aid under EU law. The EU Commission finally gave such confirmation by way of a comfort letter in August 2018. The Act is largely based on the conditions imposed by a restructuring decree issued by the Federal Ministry of Finance on the tax exemption of a restructuring gain. Under the Act, gains at the level of the debtor resulting from a full or partial debt relief are exempt from German income tax if the relief is granted to recapitalize and restructure an ailing business. The tax exemption only applies if at the time of the debt waiver (i) the business is in need of restructuring and (ii) capable of being restructured, (iii) the waiver results in a going-concern of the restructured business and (iv) the creditor waives the debt with the intention to restructure the business. The rules apply to German corporate income and trade tax and benefit individuals, partnerships and corporations alike. Any gains from the relief must first be reduced by all existing loss-offsetting potentials before the taxpayer can benefit from tax exemptions on restructuring measures. Back to Top 2.2       Partial Abolition of Loss Forfeiture Rules/Restructuring Exception Under the current Loss Forfeiture Rules, losses of a German corporation will be forfeited on a pro rata basis if within a period of five years more than 25% but not more than 50% of the shares in the German loss-making corporation are transferred (directly or indirectly) to a new shareholder or group of shareholders with aligned interests. If more than 50% are transferred, losses will be forfeited in total. There are exceptions to this rule for certain intragroup restructurings, built-in gains and business continuations, especially in the venture capital industry. On March 29, 2017, the German Federal Constitutional Court (Bundesverfassungsgericht – BVerfG) ruled that the pro rata forfeiture of losses (a share transfer of more than 25% but not more than 50%) is incompatible with the constitution. The court has asked the German legislator to amend the Loss Forfeiture Rules retroactively for the period from January 1, 2008 until December 31, 2015 to bring them in line with the constitution. Somewhat surprisingly, the legislator has now decided to fully cancel the pro rata forfeiture of losses with retroactive effect and with no reference to a specific tax period. Currently pending before the German Federal Constitutional Court is the question whether the full forfeiture of losses is constitutional. A decision by the Federal Constitutional Court is expected for early 2019, which may then result in another legislative amendment of the Loss Forfeiture Rules. The Act has also reinstated a restructuring exception from the forfeiture rules – if the share transfer occurs in order to restructure the business of an ailing corporation. Similar to the exemption of restructuring gains, this legislation was on hold until the ECJ’s decision (European Court of Justice) on June 28, 2018 that the restructuring exception does not violate EU law. Existing losses will not cease to exist following a share transfer if the restructuring measures are appropriate to avoid or eliminate the illiquidity or the over-indebtedness of the corporation and to maintain its basic operational structure. The restructuring exception applies to share transfers after December 31, 2007. Back to Top 2.3       Investments in German Real Estate by Non-German Investors So far, capital gains from the disposal of shares in a non-German corporation holding German real estate were not subject to German tax. In a typical structure, in which German real estate is held via a Luxembourg or Dutch entity, a value appreciation in the asset could be realized by a share deal of the holding company without triggering German income taxes. Under the Act, the sale of shares in a non-German corporation is now taxable if, at some point within a period of one year prior to the sale of shares, 50 percent of the book value of the assets of the company consisted of German real estate and the seller held at least 1 percent of the shares within the last five years prior to the sale. The Act is now in line with many double tax treaties concluded by Germany, which allow Germany to tax capital gains in these cases. The new law applies for share transfers after December 31, 2018. Capital gains are only subject to German tax to the extent the value has been increased after December 31, 2018. Until 2018, a change in the value of assets and liabilities, which are economically connected to German real estate, was not subject to German tax. Therefore, for example, profits from a waiver of debt that was used to finance German real estate was not taxable in Germany whereas the interest paid on the debt was deductible for German tax purposes. That law has now changed and allows Germany to tax such profit from a debt waiver if the loan was used to finance German real estate. However, only the change in value that occurred after December 31, 2018 is taxable. Back to Top 3.         Financing and Restructuring – Test for Liquidity Status Tightened On December 19, 2017, the German Federal Supreme Court (Bundesgerichtshof – BGH) handed down an important ruling which clarifies the debt and payable items that should be taken into account when determining the “liquidity” status of companies. According to the Court, the liquidity test now requires managing directors and (executive) board members to determine whether a liquidity gap exceeding 10% can be overcome by incoming liquidity within a period of three weeks taking into account all payables which will become due in those three weeks. Prior to the ruling, managing directors had often argued successfully that only those payables that were due at the time when the test is applied needed be taken into account while expected incoming payments within a three week term could be considered. This mismatch in favor of the managing directors has now been rectified by the Court to the disadvantage of the managing directors. If, for example, on June 1 the company liquidity status shows due payables amounting to EUR 100 and plausible incoming receivables in the three weeks thereafter amounting to EUR 101, no illiquidity existed under the old test. Under the new test confirmed by the Court, payables of EUR 50 becoming due in the three week period now also have to be taken into account and the company would be considered illiquid. For companies and their managing directors following a cautious approach, the implications of this ruling are minor. Going forward, however, even those willing to take higher risks will need to follow the court determined principles. Otherwise, delayed insolvency filings could ensue. This not only involves a managing directors and executive board members’ personal liability for payments made on behalf of the company while illiquid but also potential criminal liability for a delayed insolvency filing. Managing directors are thus well advised to properly undertake and also document the required test in order to avoid liability issues. Back to Top 4.         Labor and Employment 4.1       GDPR Has Tightened Workplace Privacy Rules The EU General Data Protection Regulation (“GDPR”) started to apply on May 25, 2018. It has introduced a number of stricter rules for EU countries with regard to data protection which also apply to employee personal data and employment relationships. In addition to higher sanctions, the regulation provides for extensive information, notification, deletion, and documentation obligations. While many of these data privacy rules had already been part of the previous German workplace privacy regime under the German Federal Data Protection Act (Bundesdatenschutzgesetz – BDSG), the latter has also been amended and provides for specific rules applicable to employee data protection in Germany (e.g. in the context of internal investigations or with respect to employee co-determination). However, the most salient novelty is the enormous increase in potential sanctions under the GDPR. Fines for GDPR violations can reach up to the higher of EUR 20 million or 4% of the group’s worldwide turnover. Against this backdrop, employers are well-advised to handle employee personnel data particularly careful. This is also particularly noteworthy as the employer is under an obligation to prove compliance with the GDPR – which may result in a reversal of the burden of proof e.g. in employment-related litigation matters involving alleged GDPR violations. Back to Top 4.2       Job Adverts with Third Gender Following a landmark decision by the German Federal Constitutional Court in 2017, employers are gradually inserting a third gender into their job advertisements. The Federal Constitutional Court (Bundesverfassungsgericht – BVerfG) decided on October 10, 2017 that citizens who do not identify as either male or female were to be registered as “diverse” in the birth register (1 BvR 2019/16). As a consequence of this court decision, many employers in Germany have broadened gender notations in job advertisements from previously “m/f” to “m/f/d”. While there is no compelling legal obligation to do so, employers tend to signal their open-mindedness by this step, but also mitigate the potential risk of liability for a discrimination claim. Currently, such liability risk does not appear alarming due to the relative rarity of persons identifying as neither male nor female and the lack of a statutory stipulation for such adverts. However, employers might be well-advised to follow this trend, particularly after Parliament confirmed the existence of a third gender option in birth registers in mid-December. Back to Top 4.3       Can Disclosure Obligation Reduce Gender Pay-Gap? In an attempt to weed out gender pay gaps, the German lawmaker has introduced the so-called Compensation Transparency Act in 2017. It obliges employers, inter alia, to disclose the median compensation of comparable colleagues of the opposite gender with comparable jobs within the company. The purpose is to give a potential claimant (usually a female employee) an impression of how much her comparable male colleagues earn in order for her to consider further steps, e.g. a claim for more money. However, the new law is widely perceived as pointless. First, the law itself and its processes are unduly complex. Second, even after making use of the law, the respective employee would still have to sue the company separately in order to achieve an increase in her compensation, bearing the burden of proof that the opposite-gender employee with higher compensation is comparable to her. Against this background, the law has hardly been used in practice and will likely have only minimal impact. Back to Top 4.4       Employers to Contribute 15% to Deferred Compensation Schemes In order to promote company pension schemes, employers are now obliged to financially support deferred compensation arrangements. So far, employer contributions to any company pension scheme had been voluntary. In the case of deferred compensation schemes, companies save money as a result of less social security charges. The flipside of this saving was a financial detriment to the employee’s statutory pension, as the latter depends on the salary actually paid to the employee (which is reduced as a result of the deferred compensation). To compensate the employee for this gap, the employer is now obliged to contribute up to 15% of the respective deferred compensation. The actual impact of this new rule should be limited, as many employers already actively support deferred compensation schemes. As such, the new obligatory contribution can be set off against existing employer contributions to the same pension scheme. Back to Top 5.         Real Estate – Notarization Requirement for Amendments to Real Estate Purchase Agreements Purchase agreements concerning German real estate require notarization in order to be effective. This notarization requirement relates not only to the purchase agreement as such but to all closely related (side) agreements. The transfer of title to the purchaser additionally requires an agreement in rem between the seller and the purchaser on the transfer (conveyance) and the subsequent registration of the transfer in the land register. To avoid additional notarial fees, parties usually include the conveyance in the notarial real estate purchase agreement. Amendment agreements to real estate purchase agreements are quite common (e.g., the parties subsequently agree on a purchase price adjustment or the purchaser has special requests in a real estate development scenario). Various Higher District Courts (Oberlandesgerichte), together with the prevailing opinion in literature, have held in the past that any amendments to real estate purchase agreements also require notarization unless such an amendment is designed to remove unforeseeable difficulties with the implementation of the agreement without significantly changing the parties’ mutual obligations. Any amendment agreement that does not meet the notarization requirement may render the entire purchase agreement (and not only the amendment agreement) null and void. With its decision on September 14, 2018, the German Federal Supreme Court (Bundesgerichtshof – BGH) added another exception to the notarization requirement and ruled that notarization of an amendment agreement is not required once the conveyance has become binding and the amendment does not change the existing real estate transfer obligations or create new ones. A conveyance becomes binding once it has been validly notarized. Before this new decision of the BGH, amendments to real estate purchase agreements were often notarized for the sake of precaution because it was difficult to determine whether the conditions for an exemption from the notarization requirement had been met. This new decision of the BGH gives the parties clear guidance as to when amendments to real estate purchase agreements require notarization. It should, however, be borne in mind that notarization is still required if the amendment provides for new transfer obligations concerning the real property or the conveyance has not become effective yet (e.g., because third party approval is still outstanding). Back to Top 6.         Compliance 6.1       Government Plans to Introduce Corporate Criminal Liability and Internal Investigations Act Plans of the Federal Government to introduce a new statute concerning corporate criminal liability and internal investigations are taking shape. Although a draft bill had already been announced for the end of 2018, pressure to respond to recent corporate scandals seems to be rising. With regard to the role and protection of work product generated during internal investigations, the highly disputed decisions of the Federal Constitutional Court (Bundesverfassungsgericht – BVerfG) in June 2018 (BVerfG, 2 BvR 1405/17, 2 BvR 1780/17 – June 27, 2018) (see 2017 Year-End German Law Update under 7.3) call for clearer statutory rules concerning the search of law firm premises and the seizure of documents collected in the course of an internal investigation. In its dismissal of complaints brought by Volkswagen and its lawyers from Jones Day, the Federal Constitutional Court made remarkable obiter dicta statements in which it emphasized the following: (1) the legal privilege enjoyed for the communication between the individual defendant (Beschuldigter) and its criminal defense counsel is limited to their communication only; (2) being considered a foreign corporate body, the court denied Jones Day standing in the proceedings, because the German constitution only grants rights to corporate bodies domiciled in Germany; and (3) a search of the offices of a law firm does not affect individual constitutional rights of the lawyers practicing in that office, because the office does not belong to the lawyers’ personal sphere, but only to their law firm. The decision and the additional exposure caused by it by making attorney work product created in the course of an internal investigation accessible was a major blow to German corporations’ efforts to foster internal investigations as a means to efficiently and effectively investigate serious compliance concerns. Because it does not appear likely that an entirely new statute concerning corporate criminal liability will materialize in the near future, the legal press expects the Federal Ministry of Justice to consider an approach in which the statutes dealing with questions around internal investigations and the protection of work product created in the course thereof will be clarified separately. In the meantime, the following measures are recommended to maximize the legal privilege for defense counsel (Verteidigerprivileg): (1) Establish clear instructions to an individual criminal defense lawyer setting forth the scope and purpose of the defense; (2) mark work product and communications that have been created in the course of the defense clearly as confidential correspondence with defense counsel (“Vertrauliche Verteidigerkorrespondenz”); and (3) clearly separate such correspondence from other correspondence with the same client in matters that are not clearly attributable to the criminal defense mandate. While none of these measures will guarantee that state prosecutors and courts will abstain from a search and seizure of such material, at least there are good and valid arguments to defend the legal privilege in any appeals process. However, with the guidance provided to courts by the recent constitutional decision, until new statutory provisions provide for clearer guidance, companies can expect this to become an up-hill battle. Back to Top 6.2       Update on the European Public Prosecutor’s Office and Proposed Cross-Border Electronic Evidence Rules Recently the European Union has started tightening its cooperation in the field of criminal procedure, which was previously viewed as a matter of national law under the sovereignty of the 28 EU member states. Two recent developments stand out that illustrate that remarkable new trend: (1) The introduction of the European Public Prosecutor’s Office (“EPPO”) that was given jurisdiction to conduct EU-wide investigations for certain matters independent of the prosecution of these matters under the national laws of the member states, and (2) the proposed EU-wide framework for cross-border access to electronically stored data (“e-evidence”) which has recently been introduced to the European Parliament. As reported previously (see 2017 Year-End German Law Update under 7.4), the European Prosecutor’s Office’s task is to independently investigate and prosecute severe crimes against the EU’s financial interests such as fraud against the EU budget or crimes related to EU subsidies. Corporations receiving funds from the EU may therefore be the first to be scrutinized by this new EU body. In 2018 two additional EU member states, the Netherlands and Malta, decided to join this initiative, extending the number of participating member states to 22. The EPPO will presumably begin its work by the end of 2020, because the start date may not be earlier than three years after the regulation’s entry into force. As a further measure to leverage multi-jurisdictional enforcement activities, in April 2018 the European Commission proposed a directive and a regulation that will significantly facilitate expedited cross-border access to e-evidence such as texts, emails or messaging apps by enforcement agencies and judicial authorities. The proposed framework would allow national enforcement authorities in accordance with their domestic procedure to request e-evidence directly from a service provider located in the jurisdiction of another EU member state. That other state’s authorities would not have the right to object to or to review the decision to search and seize the e-evidence sought by the national enforcement authority of the requesting EU member state. Companies refusing delivery risk a fine of up to 2% of their worldwide annual turnover. In addition, providers from a third country which operate in the EU are obliged to appoint a legal representative in the EU. The proposal has reached a majority vote in the Council of the EU and will now be negotiated in the European Parliament. Further controversial discussions between the European Parliament and the Commission took place on December 10, 2018. The Council of the EU aims at reaching an agreement between the three institutions by the end of term of the European Parliament in May 2019. Back to Top 7.         Antitrust and Merger Control 7.1       Antitrust and Merger Control Overview 2018 In 2018, Germany celebrated the 60th anniversary of both the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen -GWB) as well as the German federal cartel office (Bundeskartellamt) which were both established in 1958 and have since played a leading role in competition enforcement worldwide. The celebrations notwithstanding, the German antitrust watchdog has had a very active year in substantially all of its areas of competence. On the enforcement side, the Bundeskartellamt concluded a number of important cartel investigations. According to its annual review, the Bundeskartellamt carried out dawn raids at 51 companies and imposed fines totaling EUR 376 million against 22 companies or associations and 20 individuals from various industries including the steel, potato manufacturing, newspapers and rolled asphalt industries. Leniency applications remained an important source for the Bundeskartellamt‘s antitrust enforcement activities with a total of 21 leniency applications received in 2018 filling the pipeline for the next few months and years. On the merger control side, the Bundeskartellamt reviewed approximately 1,300 merger cases in 2018 – only 1% of which (i.e. 13 merger filings) required an in-depth phase 2 review. No mergers were prohibited but in one case only conditional clearance was granted and three filings were withdrawn in phase 2. In addition, the Bundeskartellamt had its first full year of additional responsibilities in the area of consumer protection, concluded a sector inquiry into internet comparison portals, and started a sector inquiry into the online marketing business as well as a joint project with the French competition authority CNIL regarding algorithms in the digital economy and their competitive effects. Back to Top 7.2       Cartel Damages Over the past few years, antitrust damages law has advanced in Germany and the European Union. One major legislative development was the EU Directive on actions for damages for infringements of competition law, which was implemented in Germany as part of the 9th amendment to the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen -GWB). In addition, there has also been some noteworthy case law concerning antitrust damages. To begin with, the German Federal Supreme Court (Bundesgerichtshof, BGH) strengthened the position of plaintiffs suing for antitrust damages in its decision Grauzementkartell II in 2018. The decision brought to an end an ongoing dispute between several Higher District Courts and District Courts, which had disagreed over whether a recently added provision of the GWB that suspends the statute of limitations in cases where antitrust authorities initiate investigations would also apply to claims that arose before the amendment entered into force (July 1, 2015). The Federal Supreme Court affirmed the suspension of the statute of limitations, basing its ruling on a well-established principle of German law regarding the intertemporal application of statutes of limitation. The decision concerns numerous antitrust damage suits, including several pending cases concerning trucks, rails tracks, and sugar cartels. Furthermore, recent case law shows that European domestic courts interpret arbitration agreements very broadly and also enforce them in cases involving antitrust damages. In 2017, the England and Wales High Court and the District Court Dortmund (Landgericht Dortmund) were presented with two antitrust disputes where the parties had agreed on an arbitration clause. Both courts denied jurisdiction because the antitrust damage claims were also covered by the arbitration agreements. They argued that the parties could have asserted claims for contractual damages instead, which would have been covered by the arbitration agreement. In the courts’ view, it would be unreasonable, however, if the choice between asserting a contractual or an antitrust claim would give the parties the opportunity to influence the jurisdiction of a court. As a consequence, the use of arbitration clauses (in particular if inconsistently used by suppliers or purchasers) may add significant complexity to antitrust damages litigation going forward. Thus, companies are well advised to examine their international supply agreements to determine whether included arbitration agreements will also apply to disputes about antitrust damages. Back to Top 7.3       Appeals against Fines Risky? In German antitrust proceedings, there is increasing pressure for enterprises to settle. Earlier this year, Radeberger, a producer of lager beer, withdrew its appeal against a significant fine of EUR 338 million, which the Bundeskartellamt had imposed on the company for its alleged participation in the so-called “beer cartel”. With this dramatic step, Radeberger paid heed to a worrisome development in German competition law. Repeatedly, enterprises have seen their cartel fines increased by staggering amounts on appeal (despite such appeals sometimes succeeding on some substantive legal issues). The reason for these “appeals for the worse” – as seen in the liquefied gas cartel (increase of fine from EUR 180 million to EUR 244 million), the sweets cartel (average increase of approx. 50%) and the wallpaper cartel (average increase of approx. 35%) – is the different approach taken by the Bundeskartellamt and the courts to calculating fines. As courts are not bound by the administrative practice of the Bundeskartellamt, many practitioners are calling for the legislator to step in and address the issue. Back to Top 7.4       Luxury Products on Amazon – The Coty Case In July 2018, the Frankfurt Higher District Court (Oberlandesgericht Frankfurt) delivered its judgement in the case Coty / Parfümerie Akzente, ruling that Coty, a luxury perfume producer, did not violate competition rules by imposing an obligation on its selected distributors to not sell on third-party platforms such as Amazon. The judgment followed an earlier decision of the Court of Justice of the European Union (ECJ) of December 2017, by which the ECJ had replied to the Frankfurt court’s referral. The ECJ had held that a vertical distribution agreement (such as the one in place between Coty and its distributor Parfümerie Akzente) did not as such violate Art. 101 of the Treaty on the Functioning of the European Union (TFEU) as long as the so-called Metro criteria were fulfilled. These criteria stipulate that distributors must be chosen on the basis of objective and qualitative criteria that are applied in a non-discriminatory fashion; that the characteristics of the product necessitate the use of a selective distribution network in order to preserve their quality; and, finally, that the criteria laid down do not go beyond what is necessary. Regarding the platform ban in question, the ECJ held that it was not disproportionate. Based on the ECJ’s interpretation of the law, the Frankfurt Higher District Court confirmed that the character of certain products may indeed necessitate a selective distribution system in order to preserve their prestigious reputation, which allowed consumers to distinguish them from similar goods, and that gaps in a selective distribution system (e.g. when products are sold by non-selected distributors) did not per se make the distribution system discriminatory. The Higher District Court also concluded that the platform ban in question was proportional. However, interestingly, it did not do so based on its own reasoning but based on the fact that the ECJ’s detailed analysis did not leave any scope for its own interpretation and, hence, precluded the Higher District Court from applying its own reasoning. Pointing to the European Commission’s E-Commerce Sector Inquiry, according to which sales platforms play a more important role in Germany than in other EU Member States, the Higher District Court, in fact, voiced doubts whether Coty’s sales ban could not have been imposed in a less interfering manner. Back to Top 8.         Litigation 8.1       The New German “Class Action” On November 1, 2018, a long anticipated amendment to the German Code of Civil Procedure (Zivilprozessordnung, ZPO) entered into force, introducing a new procedural remedy for consumers to enforce their rights in German courts: a collective action for declaratory relief. Although sometimes referred to as the new German “class action,” this new German action reveals distinct differences to the U.S.-American remedy. Foremost, the right to bring the collective action is limited to consumer protection organizations or other “qualified institutions” (qualifizierte Einrichtung) who can only represent “consumers” within the meaning of the German Code of Civil Procedure. In addition, affected consumers are not automatically included in the action as part of a class but must actively opt-in by registering their claims in a “claim index” (Klageregister). Furthermore, the collective action for declaratory relief does not grant any monetary relief to the plaintiffs which means that each consumer still has to enforce its claim in an individual suit to receive compensation from the defendant. Despite these differences, the essential and comparable element of the new legal remedy is its binding effect. Any other court which has to decide an individual dispute between the defendant and a registered consumer that is based on the same facts as the collective action is bound by the declaratory decision of the initial court. At the same time, any settlement reached by the parties has a binding effect on all registered consumers who did not decide to specifically opt-out. As a result, companies must be aware of the increased litigation risks arising from the introduction of the new collective action for declaratory relief. Even though its reach is not as extensive as the American class action, consumer protection organizations have already filed two proceedings against companies from the automotive and financial industry since the amendment has entered into force in November 2018, and will most likely continue to make comprehensive use of the new remedy in the future. Back to Top 8.2       The New 2018 DIS Arbitration Rules On March 1, 2018, the new 2018 DIS Arbitration Rules of the German Arbitration Institute (DIS) entered into force. The update aims to make Germany more attractive as a place for arbitration by adjusting the rules to international standards, promoting efficiency and thereby ensuring higher quality for arbitration proceedings. The majority of the updated provisions and rules are designed to accelerate the proceedings and thereby make arbitration more attractive and cost-effective for the parties. There are several new rules on time limitations and measures to enhance procedural efficiency, i.e. the possibility of expedited proceedings or the introduction of case management conferences. Furthermore, the rules now also allow for consolidation of several arbitrations and cover multi-party and multi-contract arbitration. Another major change is the introduction of the DIS Arbitration Council which, similar to the Arbitration Council of the ICC (International Chamber of Commerce), may decide upon challenges of an arbitrator and review arbitral awards for formal defects. This amendment shows that the influence of DIS on their arbitration proceedings has grown significantly. All in all, the modernized 2018 DIS Arbitration Rules resolve the deficiencies of their predecessor and strengthen the position of the German Institution of Arbitration among competing arbitration institutions. Back to Top 9.         IP & Technology – Draft Bill of German Trade Secret Act The EU Trade Secrets Directive (2016/943/EU) on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure has already been in effect since July 5, 2016. Even though it was supposed to be implemented into national law by June 9, 2018 to harmonize the protection of trade secrets in the EU, the German legislator has so far only prepared and published a draft of the proposed German Trade Secret Act. Arguably, the most important change in the draft bill to the existing rules on trade secrets in Germany will be a new and EU-wide definition of trade secrets. This proposed definition requires the holder of a trade secret to take reasonable measures to keep a trade secret confidential in order to benefit from its protection – e.g. by implementing technical, contractual and organizational measures that ensure secrecy. This requirement goes beyond the current standard pursuant to which a manifest interest in keeping an information secret may be sufficient. Furthermore, the draft bill provides for additional protection of trade secrets in litigation matters. Last but not least, the draft bill also provides for increased protection of whistleblowers by reducing the barriers for the disclosure of trade secrets in the public interest and to the media. As a consequence, companies would be advised to review their internal procedures and policies regarding the protection of trade secrets at this stage, and may want to adapt their existing whistleblowing and compliance-management-systems as appropriate. Back to Top 10.       International Trade, Sanctions and Export Controls – The Conflict between Complying with the Re-Imposed U.S. Iran Sanctions and the EU Blocking Statute On May 8, 2018, President Donald Trump announced his decision to withdraw from the Joint Comprehensive Plan of Action (JCPOA) and re-impose U.S. nuclear-related sanctions. Under the JCPOA, General License H had permitted U.S.-owned or -controlled non-U.S. entities to engage in business with Iran. But with the end of the wind-down periods provided for in President Trump’s decision on November 5, 2018, such non-U.S. entities are now no longer broadly permitted to provide goods, services, or financing to Iranian counterparties, not even under agreements executed before the U.S. withdrawal from the JCPOA. In response to the May 8, 2018 decision, the EU amended the EU Blocking Statute on August 6, 2018. The effect of the amended EU Blocking Statute is to prohibit compliance by so-called EU operators with the re-imposed U.S. sanctions on Iran. Comparable and more generally drafted anti-blocking statutes had already existed in the EU and several of its member states which prohibited EU domiciled companies to commit to compliance with foreign boycott regulations. These competing obligations under EU and U.S. laws are a concern for U.S. companies that own or seek to acquire German companies that have a history of engagement with Iran – as well as for the German company itself and its management and the employees. But what does the EU prohibition against compliance with the re-imposed U.S. sanctions on Iran mean in practice? Most importantly, it must be noted that the EU Blocking Statute does not oblige EU operators to start or continue Iran related business. If, for example, an EU operator voluntarily decides, e.g. due to lack of profitability, to cease business operations in Iran and not to demonstrate compliance with the U.S. sanctions, the EU Blocking Statute does not apply. Obviously, such voluntary decision must be properly documented. Procedural aspects also remain challenging for companies: In the event a Germany subsidiary of a U.S. company were to decide to start or continue business with Iran, it would usually be required to reach out to the U.S. authorities to request a specific license for a particular transaction with Iran. Before doing so, however, EU operators must first contact the EU Commission directly (not the EU member state authorities) to request authorization to apply for such a U.S. special license. Likewise, if a Germany subsidiary were to decide not to start or to cease business with Iran for the sole reason of being compliant with the re-imposed U.S. Iran sanctions, it would have to apply for an exception from the EU Blocking Statute and would have to provide sufficient evidence that non-compliance would cause serious damage to at least one protected interest. The hurdles for an exception are high and difficult to predict. The EU Commission will e.g. consider, “(…) whether the applicant would face significant economic losses, which could for example threaten its viability or pose a serious risk of bankruptcy, or the security of supply of strategic goods or services within or to the Union or a Member State and the impact of any shortage or disruption therein.” As such, any company caught up in this conflict of interests between the re-imposed U.S. sanctions and the EU Blocking Statute should be aware of a heightened risk of litigation. Third parties, such as Iranian counterparties, might successfully sue for breach of contract with the support of the EU Blocking Regulation in cases of non-performance of contracts as a result of the re-imposed U.S. nuclear sanctions. Finally, EU operators are required to inform the EU Commission within 30 days from the date on which information is obtained that the economic and/or financial interests of the EU operator are affected, directly or indirectly, by the re-imposed U.S. Iran sanctions. If the EU operator is a legal person, this obligation is incumbent on its directors, managers and other persons with management responsibilities of such legal person. Back to Top The following Gibson Dunn lawyers assisted in preparing this client update:  Birgit Friedl, Marcus Geiss, Silke Beiter, Lutz Englisch, Daniel Gebauer, Kai Gesing, Maximilian Hoffmann, Philipp Mangini-Guidano, Jens-Olrik Murach, Markus Nauheim, Dirk Oberbracht, Richard Roeder, Martin Schmid, Annekatrin Schmoll, Jan Schubert, Benno Schwarz, Balthasar Strunz, Michael Walther, Finn Zeidler, Mark Zimmer, Stefanie Zirkel and Caroline Ziser Smith. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. The two German offices of Gibson Dunn in Munich and Frankfurt bring together lawyers with extensive knowledge of corporate, tax, labor, real estate, antitrust, intellectual property law and extensive compliance / white collar crime experience. The German offices are comprised of seasoned lawyers with a breadth of experience who have assisted clients in various industries and in jurisdictions around the world. Our German lawyers work closely with the firm’s practice groups in other jurisdictions to provide cutting-edge legal advice and guidance in the most complex transactions and legal matters. For further information, please contact the Gibson Dunn lawyer with whom you work or any of the following members of the German offices: General Corporate, Corporate Transactions and Capital Markets Lutz Englisch (+49 89 189 33 150), lenglisch@gibsondunn.com) Markus Nauheim (+49 89 189 33 122, mnauheim@gibsondunn.com) Ferdinand Fromholzer (+49 89 189 33 121, ffromholzer@gibsondunn.com) Dirk Oberbracht (+49 69 247 411 510, doberbracht@gibsondunn.com) Wilhelm Reinhardt (+49 69 247 411 520, wreinhardt@gibsondunn.com) Birgit Friedl (+49 89 189 33 180, bfriedl@gibsondunn.com) Silke Beiter (+49 89 189 33 121, sbeiter@gibsondunn.com) Marcus Geiss (+49 89 189 33 122, mgeiss@gibsondunn.com) Annekatrin Pelster (+49 69 247 411 521, apelster@gibsondunn.com Finance, Restructuring and Insolvency Sebastian Schoon (+49 89 189 33 160, sschoon@gibsondunn.com) Birgit Friedl (+49 89 189 33 180, bfriedl@gibsondunn.com) Alexander Klein (+49 69 247 411 518, aklein@gibsondunn.com) Marcus Geiss (+49 89 189 33 122, mgeiss@gibsondunn.com) Tax Hans Martin Schmid (+49 89 189 33 110, mschmid@gibsondunn.com) Labor Law Mark Zimmer (+49 89 189 33 130, mzimmer@gibsondunn.com) Real Estate Peter Decker (+49 89 189 33 115, pdecker@gibsondunn.com) Daniel Gebauer (+49 89 189 33 115, dgebauer@gibsondunn.com) Technology Transactions / Intellectual Property / Data Privacy Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) Corporate Compliance / White Collar Matters 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) Finn Zeidler (+49 69 247 411 530, fzeidler@gibsondunn.com) Antitrust Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Jens-Olrik Murach (+32 2 554 7240, jmurach@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) Litigation Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Mark Zimmer (+49 89 189 33 130, mzimmer@gibsondunn.com) Finn Zeidler (+49 69 247 411 530, fzeidler@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) International Trade, Sanctions and Export Control Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Richard Roeder (+49 89 189 33 218, rroeder@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.