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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.

January 10, 2019 |
2018 Year-End Update on Corporate Non-Prosecution Agreements and Deferred Prosecution Agreements

Click for PDF In 2018, the number of corporate non-prosecution agreements (“NPAs”) and deferred prosecution agreements (“DPAs”)[1] in the United States remained steady—2018 yielded at least 24 agreements[2]—but the monetary recoveries skyrocketed to nearly $8.1 billion.[2a]  While the comparative year over year analysis has become more difficult because of a third resolution vehicle, declination with disgorgement, the Department of Justice (“DOJ” or “Department”) continues to embrace corporate NPAs and DPAs as effective tools in resolving investigations into corporate criminal misconduct. This client alert, the twenty-first in our biannual series on NPAs and DPAs: (1) compiles statistics regarding NPAs and DPAs through 2018; (2) highlights important shifts in enforcement agency policy on corporate cooperation; (3) addresses new guidance on imposing and selecting corporate monitors; (4) identifies key provisions in NPAs and DPAs, which may vary depending on the prosecuting authority; (5) analyzes NPAs and DPAs released during the second half of the year; (6) discusses declinations to prosecute that required disgorgement in 2018; and (7) identifies developments in foreign jurisdictions’ use of DPA-style regimes. NPAs and DPAs in 2018 DOJ entered into at least 24 agreements in 2018, of which 13 are NPAs and 11 are DPAs.  The Department also entered into one NPA addendum to address additional conduct without breaching a previously entered NPA, and three declinations that required disgorgement.  In contrast, the Securities and Exchange Commission (“SEC” or “Commission”), for the second year in a row, did not enter into any NPAs or DPAs.  This year’s 24 agreements exceed the number of agreements in 2017 by two, but represent a decrease from 2016, when there were 39 agreements. Of note, 14 of the 24 agreements (and the addendum) involved financial institutions, and seven of the 24 agreements resolved allegations arising under the Foreign Corrupt Practice Act (“FCPA”).  In addition, two of the agreements executed during the second half of 2018 resolved immigration law allegations related to the employment of foreign workers.  Although the natural ebb and flow of resolutions makes broad conclusions from these agreements difficult, we know that DOJ officials continue to emphasize the Department’s commitment to pursuing alleged corporate wrongdoers. Chart 1 below shows all known corporate NPAs and DPAs from 2000 through 2018. Monetary recoveries exploded to nearly $8.1 billion, which almost matched the 2012 high of $9 billion.  A handful of high-value resolutions led to the large recovery amount. Chart 2 below illustrates the total monetary recoveries related to NPAs and DPAs from 2000 through 2018. Corporate Cooperation Redefined       Statements of U.S. Deputy Attorney General Rod J. Rosenstein On November 29, 2018, U.S. Deputy Attorney General Rod J. Rosenstein announced changes to the Department’s approach to defining corporate cooperation when identifying culpable individuals in corporate investigations.[3]   The newly articulated policy, which applies to both criminal and civil corporate cases prosecuted by DOJ, modifies the September 9, 2015 memorandum authored by former Deputy Attorney General Sally Yates (the “Yates Memorandum”).  Under the Yates Memorandum, as a prerequisite for any cooperation credit whatsoever, corporations had to identify all individuals responsible for, or involved in, the underlying misconduct and provide all facts pertaining to such misconduct.[4]  Under the revised policy, corporate criminal defendants must identify “every individual who was substantially involved in or responsible for the criminal conduct.”[5]  Although the revised policy conditions cooperation credit on corporations identifying those who were substantially involved in wrongdoing, the policy also emphasizes that DOJ will not delay resolution of an investigation to gather information on those “whose involvement was not substantial, and who are not likely to be prosecuted.”[6] The Deputy Attorney General detailed how the revised policy modifies cooperation requirements in the civil context.  In contrast to the binary approach to cooperation in criminal matters, the revised policy contemplates a range of cooperation-based outcomes in a civil case.  To qualify for maximum credit, corporate civil defendants must still identify every person who was substantially involved in, or responsible for, wrongdoing.  But “some credit” is available to corporations that fall short of this standard, provided they “meaningfully assist the government’s civil investigation,”[7] and “identify all wrongdoing by senior officials, including members of senior management or the board of directors.”[8] The revised policy better harmonizes the Yates Memorandum with directives in the Justice Manual (formerly known as the U.S. Attorney’s Manual) concerning joint-defense agreements.  Under the Justice Manual, prosecutors cannot ask corporations to refrain from entering into a joint-defense agreement.[9]  Parties to a joint-defense agreement are often prevented from sharing information derived from internal investigations.  The Justice Manual states that corporations in joint-defense agreements may nevertheless wish to tailor their agreements to allow them to provide “some relevant facts to the government” to remain eligible for cooperation credit.  But merely providing “some relevant facts” falls short of the “all relevant facts” threshold under the Yates Memorandum.  By emphasizing that corporations need only identify individuals who were substantially involved in or responsible for wrongdoing, the revised policy is congruent with the “some relevant facts” standard for cooperation credit in the Justice Manual.       The History of Prosecution Policy and DOJ’s Increasing Focus on Cooperation The new policy represents a recalibration of the Department’s approach to corporate cooperation, but it is not a wholesale reversal of the Yates Memorandum.  The policy continues to focus on identifying misconduct at the managerial levels of the corporate hierarchy.  The Deputy Attorney General emphasized in his speech announcing the policy that the “most important aspect” of the new policy in the civil context is that corporations “must identify all wrongdoing by senior officials, including members of senior management or the board of directors.”[10] A natural consequence of the Department’s focus on individual accountability has been to incentivize corporate cooperation in identifying culpable individuals.  In doing so, the Department has elevated the importance of cooperation credit in negotiating criminal and civil resolutions, while ostensibly reducing the significance of an effective, pre-existing compliance program as a mitigating factor.  This shift in emphasis is seen in DOJ’s history of prosecution policy, which we outline below. In 1991, Congress took the groundbreaking step of enacting the Federal Sentencing Guidelines for Organizations (“Organizational Guidelines”), which provide a detailed set of sentencing principles whose twin objectives are the prevention and detection of corporate crime.  Employing a “carrot and stick” approach, the Organizational Guidelines contemplate severe fines imposed on corporations that promote or show indifference toward wrongdoing while drastically reducing fines on companies that actively seek to prevent and discourage illegal activity.  The Organizational Guidelines’ “carrot” (in the form of fine reductions) to incentivize good corporate behavior could be awarded for either or both (1) “self-reporting, cooperation, or acceptance of responsibility,” or (2) “the existence of an effective compliance and ethics program.”  The Organizational Guidelines are clear that credit for an effective compliance program can be awarded separate and apart from cooperation.[11] Starting in 1999 with the Holder Memorandum authored by then-Deputy Attorney General Eric Holder, DOJ issued a series of eponymous policy memoranda attempting to guide the exercise of federal prosecutors’ considerable discretion in the pursuit of corporate actors.  Consistent with the Organizational Guidelines, the Holder Memorandum emphasized both cooperation and the effectiveness of a company’s compliance program as mitigating considerations in DOJ’s charging calculus.  These two mitigating factors are featured in the Thompson Memorandum (2003), the McNulty Memorandum (2007), the Morford Memorandum (2008), and the Filip Memorandum (2008), each of which pronounced new or revised prosecution guidelines.  They also are required considerations in the Justice Manual as part of a prosecutor’s decision to bring charges. The Yates Memorandum is the sixth iteration of namesake policy documents modifying prosecutors’ charging analysis.  The Yates Memorandum sent waves across the defense bar by affirmatively requiring prosecutors to pursue individual defendants from the inception of a corporate investigation.  Perhaps less noticed is the Yates Memorandum’s silence regarding the benefits of an effective compliance program, which was featured prominently in every preceding policy memorandum.  To be sure, the Yates Memorandum was intended to expound on what gives rise to cooperation credit, so it naturally does not address what mitigating consideration DOJ affords an effective compliance program under the Justice Manual, seemingly leaving undisturbed the mitigating credit derived from an effective compliance program.  Regardless, the Yates Memorandum marked the beginning of DOJ policy pronouncements that focus so heavily on cooperation that they appear to obscure and risk devaluing the status of an effective compliance program as a mitigating factor in DOJ’s charging calculus. This phenomenon looms large in the FCPA Pilot Program, which was adopted as the FCPA Corporate Enforcement Policy in November 2017.  The policy explicitly aims to incentivize companies’ behavior “once they learn of misconduct” by offering declinations or penalty reductions to those companies that self-disclose, cooperate, and remediate.  In other words, a company’s compliance program, as it existed before the occurrence of any wrongdoing, is not a required consideration that favors declination or penalty reductions under the FCPA Corporate Enforcement Policy.  To receive cooperation credit for voluntary self-disclosure under the policy, an organization must provide, in a fashion similar to the Yates Memorandum, “all relevant facts known to it, including all relevant facts about all individuals involved in the violation of law”—a requirement that now appears to be at odds with the Department’s recent recognition that identifying all individuals involved in wrongdoing is inefficient and needlessly delays resolutions.       Practical Implications of the Department’s Revised Policy The Department’s revised policy defining corporate cooperation will have practical implications on corporate investigations that are likely to enhance information sharing with DOJ.  Since the Filip Memorandum’s release, the Justice Manual has prohibited prosecutors from affirmatively seeking waiver of attorney-client privilege and protected work product.  Nevertheless, because companies often conduct investigations with the assistance and advice of counsel, they have not always been able to furnish “all relevant facts” to DOJ absent some form of waiver.  The revised policy, by more narrowly focusing on those with substantial involvement in wrongdoing, likely will reduce the number of instances companies will face dueling priorities of protecting privilege versus cooperating with DOJ. Developments in Corporate Monitorships A compliance monitorship is often a condition of resolving a corporate investigation or prosecution with enforcement authorities.  Because monitorships can be time consuming, costly, and intrusive, it is important for companies to understand what the government considers when evaluating the necessity of a monitor, and how the government selects the individual monitor.  In 2018, the government issued guidance addressing both of those points.       The Benczkowski Memorandum On October 12, 2018, Assistant Attorney General Brian A. Benczkowski announced the publication of new guidance on the imposition and selection of monitors in conjunction with corporate resolutions in Criminal Division matters (the “Benczkowski Memorandum”).[12]   The Department promulgated the Benczkowski Memorandum to supplement the 2008 guidance from then-Acting Deputy Attorney General Craig S. Morford (the “Morford Memorandum”),[13] and “to further refine the factors that go into the determination of whether a monitor is needed, as well as clarify and refine the monitor selection process.”[14]   Although the Benczkowski Memorandum technically applies only to the Criminal Division, its practical effect is much broader, both because the Criminal Division is almost always involved in significant corporate resolutions and because the Criminal Division’s policies tend to serve as a bellwether for wider Department efforts. Imposition of a Monitor The Benczkowski Memorandum reiterates the “foundational principle” that imposition of a corporate monitor is not meant to be punitive, but rather aims to deter future misconduct.[15]  In his speech announcing the new guidance, Benczkowski noted that for the past five years, only one in three corporate resolutions involved a corporate monitorship—the majority of corporate resolutions did not require monitors.[16]  The Benczkowski Memorandum reiterates the Morford Memorandum’s pronouncement that prosecutors, when considering the need for a monitor, should assess “(1) the potential benefits that employing a monitor may have for the corporation and the public, and (2) the cost of a monitor and its impact on the operations of a corporation.”[17] The Benczkowski Memorandum articulates the following factors for consideration when evaluating the “potential benefits” of a monitor: (1) the type of misconduct (i.e., whether it involved manipulation of corporate books and records or exploitation of an inadequate system of internal controls); (2) the pervasiveness of the misconduct, and whether it was approved or facilitated by senior management; (3) the company’s investments in, and improvements to, its corporate compliance program and internal control systems; and (4) whether remedial improvements to the compliance program and internal controls have been tested to demonstrate effective deterrence.[18]  In other words, a robust internal compliance system may move the needle toward a resolution without a monitor requirement.  The calculus of whether to impose a monitor accounts for proactive steps taken by the company to prevent or remediate wrongdoing; therefore, maintaining an effective and well-resourced compliance department and/or retaining an independent compliance consultant as soon as wrongdoing is detected may mitigate the likelihood of a monitorship. The ultimate decision of whether to require a monitor weighs the projected costs of the monitorship (both monetary costs and burden on the company’s operations) against the clear benefit derived from it.  The explicit statement that DOJ will consider financial costs signals that DOJ is receptive to concerns voiced by corporations and the white collar bar regarding the heavy financial burden caused by monitorships.  Costs of a monitor include not only professional fees, but also the operational costs of employee time devoted to working with the monitor and responding to requests for documentation.  The Benczkowski Memorandum acknowledges these costs and requires consideration of them in deciding whether a monitor is appropriate.  Within the Criminal Division, attorneys handling a matter must seek and obtain approval from their supervisors and obtain the concurrence of the Assistant Attorney General of the Criminal Division or his or her designee prior to imposing a monitor.           Selection of a Monitor In cases where a monitorship is warranted, the Benczkowski Memorandum outlines procedures for initial selection—and, if necessary, replacement—of the corporate monitor.  As an initial step, the company may recommend three qualified candidates and identify one as the top choice.  A “qualified candidate” is defined by his or her (1) general background, education, experience, and reputation; (2) substantive expertise in the particular area(s) at issue; (3) ability to be objective and independent; and (4) access to adequate resources to effectively discharge his or her responsibilities.  Within 20 days of the execution of a qualifying agreement (e.g., NPA, DPA, or plea agreement), the company should provide a written proposal outlining each candidate’s qualifications and credentials, and certifying that the proposed candidates are not employed by or affiliated with the company and will not be employed by or affiliated with the company for at least two years following the termination of the monitorship.  The written statement should also certify that the company has reviewed potential conflicts with clients of the monitor candidate and resolved conflicts where applicable.  The procedures formalize the selection process, although the practice of companies recommending monitor candidates is not new.[19] Following submission of the written statement from the company, the Criminal Division will review the candidates’ experience, credentials, and expertise in the particular matters at issue, and assess whether the candidates have sufficient resources to carry out monitorship responsibilities effectively.  The attorneys will then determine which monitor candidate(s) to recommend to the Standing Committee on the Selection of Monitors (“Standing Committee”).  Absent from the Benczkowski Memorandum is reference to DOJ’s “commitment to diversity and inclusion” in selecting a compliance monitor, which was—as we discussed in our 2018 Mid-Year Update—a stated consideration for selecting a monitor highlighted in the Panasonic Avionics Corporation (“PAC”) DPA.  PAC had agreed to pay $280 million and to a two-year monitorship in a foreign bribery settlement with DOJ and the SEC in April 2018.[20] The Standing Committee, as described in the Benczkowski Memorandum, includes the Deputy Assistant Attorney General with supervisory responsibility for the Fraud Section (or his or her designee), the Chief of the Fraud Section or other relevant section (or his or her designee), and the Deputy Designated Agency Ethics Official for the Criminal Division.[21]  The Criminal Division attorneys handling a matter where a monitor is imposed will provide the Standing Committee with a memorandum describing the case, explaining why a monitor is required, and setting forth the proposed and recommended candidates.  The Standing Committee will then review and vote on whether to accept the recommendation.  Following the vote, the Office of the Deputy Attorney General will review the recommendation of the Standing Committee and determine whether to grant final approval of the proposed monitor. The paramount goal of this robust selection process is the appointment of a highly qualified, suitable, and conflict-free monitor who will instill public confidence in the monitorship process.[22]  Since the release of the Benczkowski Memorandum, no resolutions have mandated monitorships, and it is difficult to meaningfully assess the memorandum’s impact.  Some view the Benczkowski Memorandum as “business-friendly” and restrictive to prosecutors; they assert that the Trump Administration has blunted enforcement tools like corporate monitorships.[23]  When announcing the new guidance, Benczkowski reiterated that imposition of a monitorship should be “the exception, not the rule.”[24]  Although the Benczkowski Memorandum requires weighing the potential benefits of a monitor against the financial and operational costs, the prosecutor still retains discretion when making the determination.  It remains to be seen whether the guidance will, in practice, reduce the use of monitorships in corporate settlements.  We will continue to track how the Benczkowski Memorandum impacts both the number of monitorships imposed in corporate resolutions and the selection of individuals as monitors. Corporate Resolution Extensions The conclusion and extension of corporate resolutions in 2018 highlight the challenges some corporations face even after a resolution is reached.  MoneyGram International, Inc. (“MoneyGram”) extended its DPA seven times in 2018 (and once in late 2017),[25] most recently through May 10, 2021, and agreed to forfeit an additional $125 million.[26]  MoneyGram’s DPA, originally signed in 2012, resolved allegations that MoneyGram failed to maintain an effective anti-money laundering (“AML”) program and that its agents were complicit in alleged consumer fraud schemes.  Under the DPA, MoneyGram agreed to implement significant compliance measures, including changes to executive compensation, a remediation due diligence plan related to agents, a risk-based transaction monitoring program, and the designation of at least one AML compliance officer to each high risk country.[27] Standard Chartered Bank (“Standard Chartered”) also extended its DPA, and the length of the related monitorship, four times.[28]  Standard Chartered entered a two-year DPA in 2012 to resolve allegations of facilitating payments involving Burma, Iran, Libya, and Sudan in violation of U.S. sanctions laws.[29]  Standard Chartered’s commitments in its 2012 DPA included continued “cooperation with the United States” (as defined in the agreement), as well as “full compliance” with certain AML best practices recommended by third parties.[30]  Standard Chartered noted that it continues to cooperate in an ongoing sanctions-related investigation, and the company has “taken a number of steps and made significant progress” with respect to compliance, but its sanctions compliance program “has not yet reached the standard required by the DPA.”[31]  Standard Chartered most recently extended the DPA term until March 31, 2019, noting that the “vast majority of the issues under investigation pre-date 2012,” and the company is “engaged in constructive discussions with relevant authorities to resolve the investigation as soon as practicable.”[32] These DPA extensions underscore the long resolution process that can await companies after entering into a DPA.  Particularly in complex areas, such as AML and sanctions compliance, companies must devote substantial resources and technical sophistication to implement the compliance enhancements required under their DPAs. Key Provisions in Corporate Resolutions Because DOJ has not issued a standard template for NPAs and DPAs, there is substantial variety in the salient terms of these resolution vehicles.  The variety is evident across agreements signed by different divisions of DOJ and the 93 Offices of the U.S. Attorneys—core terms may vary depending on which prosecutor’s office drafts the resolution.  For example, the U.S. Attorney’s Office for the Southern District of New York often mandates forfeiture of accounts in DPAs.  This practice is unique from NPA and DPA structures in other U.S. Attorney’s Offices, and is followed irregularly at Main Justice.  Accordingly, when negotiating terms of NPAs and DPAs, it is important to focus on the substantive elements, including the following:  (1) duration of the agreement (typically ranges from 12 to 48 months); (2) entities covered by the resolution (parents, subsidiaries, affiliates, and/or joint venture partners); (3) release language (may encompass a specific, alleged crime or all disclosed conduct by the putative defendant to DOJ); (4) what constitutes breach (material violation of law, violation of the agreement, or violation of the statute underlying the resolution); (5) cure for breach (extension of the agreement, revocation of the agreement followed by a plea of guilty, or monetary liquidated damages, as seen in the Netcracker Technology Corporation NPA discussed in our 2017 Year-End Update); and (6) post-agreement reporting obligations (monitorship, self-reporting, annual self-assessment report, or nothing).  The diversity of terms is illustrated in our discussion of recent NPAs and DPAs in the subsequent section. Recent NPAs and DPAs Since the publication of our 2018 Mid-Year Update, DOJ has announced 12 NPAs and DPAs, bringing the total to 24 agreements in 2018.  The Department also issued one NPA addendum.  In July, we discussed the six NPAs and six DPAs announced between January 1, 2018 and July 10, 2018. Those agreements resolved a wide range of allegations, which most prominently related to the FCPA, Racketeer Influenced and Corrupt Organizations Act, money laundering, and wire fraud. Most of the 12 agreements are in effect for terms of 12, 24, or 36 months, and a majority require self-reporting. You can find a summary of the agreements in the Appendix to this publication or read about them in detail in our 2018 Mid-Year Update. As noted in our statistics of this year’s NPAs and DPAs, more than half of the agreements involved financial institutions, seven of which (and the addendum) were executed during the second half of 2018.  Our Developments in the Defense of Financial Institutions publication discusses some of the larger settlements in detail and provides insight into the legal complexities of the industry.  In addition to the government’s distinct focus on financial institutions, two of the agreements announced since July 10 resolved allegations related to the employment of foreign workers.  We discuss the key provisions of each agreement announced during the second half of 2018 below.       American Media, Inc. (NPA) On December 12, 2018, the U.S. Attorney’s Office for the Southern District of New York announced that it entered into an NPA with American Media, Inc. (“AMI”) on September 20, 2018.[33]  The U.S. Attorney’s Office made the announcement in conjunction with the sentencing of Michael Cohen, who, in relevant part, violated campaign finance laws when he facilitated two payments to women to prevent the public disclosure of alleged affairs with then-presidential candidate Donald Trump.[34]  Cohen allegedly used AMI to make a $150,000 payment to one of the women.[35] In the NPA, the U.S. Attorney’s Office acknowledged AMI’s “cooperation and implementation of remedial measures” as principal factors in its decision to forgo criminal prosecution.[36]  AMI agreed to cooperate with government officials and its obligations under the NPA will continue until the later of three years or “the date on which all prosecutions arising out of the conduct described in the opening paragraph of this Agreement are final.”[37]  As part of its remedial duties, AMI agreed to provide employees with written standards covering federal election laws, conduct annual, mandatory training on the written standards, and work with “counsel knowledgeable in the field of federal election law” to advise on the written standards and ensure that “payments to acquire stories involving individuals running for office” comply with the written policies.[38]  In addition, AMI must report to the U.S. Attorney’s Office any violations of its written standards or federal election law during the term of the agreement.[39]  The NPA did not impose a monetary penalty.       Bank Lombard Odier & Co Ltd. (NPA addendum) On July 31, 2018, Bank Lombard Odier & Co Ltd. (“Bank Lombard”) entered into an addendum to the NPA it signed on December 31, 2015, with DOJ.[40]   The original NPA arose from Bank Lombard’s disclosure of its cross-border business for U.S.-related accounts as part of the Swiss Bank Program established by DOJ on August 29, 2013.[41]  This addendum to an NPA is unusual; it is likely the result of the unique nature of the NPAs associated with the Swiss Bank Program. The Swiss Bank Program provided a path for Swiss banks to resolve potential U.S. criminal liabilities related to tax evasion.[42]  To enter the program, Swiss banks were required to advise DOJ by December 31, 2013, that they had reason to believe that they had committed tax-related criminal offenses in connection with undeclared U.S.-related accounts.[43]  To be eligible, banks had to (1) make a complete disclosure of their cross-border activities; (2) provide detailed information on an account-by-account basis in which U.S. taxpayers had a direct or indirect interest; (3) cooperate in treaty requests for account information; (4) provide detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed; (5) agree to close accounts of accountholders who fail to come into compliance with U.S. reporting obligations; and (6) pay appropriate penalties.[44]  Swiss banks meeting all of these requirements were eligible for an NPA.[45]  Bank Lombard entered into an NPA under the Swiss Bank Program on December 31, 2015.[46] After entering into the original NPA—which required Bank Lombard to disclose all of its U.S.-related accounts that were open at each bank between August 1, 2008 and December 31, 2014—Bank Lombard self-disclosed that it was “aware of or should have been aware of” additional U.S.-related accounts at the time it entered into the original NPA.[47]  DOJ acknowledged Bank Lombard’s early self-disclosure of the additional accounts and its full cooperation under the Swiss Bank Program.[48]  Under the terms of the addendum, Bank Lombard agreed to pay an additional sum of $5.3 million calculated in accordance with the terms of the Swiss Bank Program.[49]  The term of Bank Lombard’s obligations under the original NPA (four years) was not extended by the addendum.[50]       Basler Kantonalbank (DPA) On August 28, 2018, Basler Kantonalbank (“BKB”), a bank headquartered in Basel, Switzerland, entered into a three-year DPA with DOJ’s Tax Division and the U.S. Attorney’s Office for the Southern District of Florida.[51]   The DPA resolved a seven-year investigation into the bank by U.S. authorities, which emerged from a U.S. crackdown on offshore tax evasion by wealthy Americans utilizing undeclared Swiss bank accounts. As part of the DPA, BKB admitted that between 2002 and 2012 it conspired with its employees, external asset managers, and clients to: (1) defraud the United States with respect to taxes; (2) commit tax evasion; and (3) file false federal tax returns.[52]   The bank assisted certain U.S. clients in concealing their offshore assets and income from U.S. tax authorities.  By 2010, when BKB’s U.S.-related business was at its peak, the bank held approximately 1,144 accounts for U.S. customers, with an aggregate value of approximately $813.2 million.  Many, but not all, of these accounts were undeclared and part of the conspiracy to defraud the United States.[53] BKB agreed to pay $60.4 million in total penalties.  First, BKB agreed to pay $17.2 million in restitution to the Internal Revenue Service (“IRS”), which represents the unpaid taxes resulting from BKB’s participation in the conspiracy.  Second, BKB agreed to forfeit $29.7 million to the United States, which represents gross fees (not profits) that the bank earned on its undeclared accounts between 2002 and 2012.  Finally, BKB agreed to pay a fine of $13.5 million.[54] DOJ explained that the penalty amount reflected BKB’s thorough internal investigation and cooperation with the United States, as well as the bank’s extensive remedial efforts.[55]  In particular, BKB demonstrated its acceptance and acknowledgment of responsibility for its conduct by, among other things: (1) advocating for a decision by the Swiss Federal Council in April 2012 to allow banks under investigation by DOJ to legally produce employee and third-party information to DOJ; (2) quickly producing such information after the Swiss Federal Council decision; (3) providing the government with the broadest scope of information permissible under Swiss law; and (4) disclosing facts, including unfavorable ones, discovered during the course of its investigation.[56]  DOJ also credited BKB for waiving any potential defense of foreign sovereign immunity, which may have protected BKB as a state-guaranteed, semi-governmental organization.       Central States Capital Markets, LLC (DPA) On December 10, 2018, Central States Capital Markets, LLC (“CSCM”) and the U.S. Attorney’s Office for the Southern District of New York entered into a DPA to resolve allegations that CSCM failed to timely file a Suspicious Activity Report in violation of the Bank Secrecy Act (“BSA”).[57]   CSCM agreed to accept responsibility for the allegations and forfeited $400,000 to the United States, which “represents a substitute res” for monies processed by CSCM[58] relating to payday lending fraud executed by a customer.[59]   CSCM agreed to cooperate with the government’s investigation, and self-disclose all criminal conduct related to violations of federal law.[60]  As part of its remediation efforts, the DPA requires CSCM to implement and maintain an effective BSA/AML compliance program, as well as “retain an independent consultant on the terms and conditions set by the SEC.”[61]  The term of the DPA is two years.[62] Of note, this is the first criminal BSA charge brought against a U.S. broker-dealer.[63]  In his announcement of the DPA, U.S. Attorney Geoffrey S. Berman stated that the charge “makes clear that all actors governed by the [BSA]—not only banks—must uphold their obligations to protect our economy from exploitation by fraudsters and thieves.”[64]       Hallman Chevrolet (DPA) On August 31, 2018, DOJ announced that the U.S. Attorney’s Office for the Western District of Pennsylvania had entered into a four-year DPA with Hallman Chevrolet, a car dealership located in Erie, Pennsylvania.[65]  The DPA resolved allegations that Hallman Chevrolet engaged in a bank fraud scheme and a conspiracy to commit bank fraud.  In particular, Hallman Chevrolet engaged in a fraudulent down payment scheme by manipulating bills of sale and bank lending contracts to hide from financial institutions the true source of customer down payments and to make customers appear more credit-worthy than they actually were.  As a result, Hallman Chevrolet led the financial institutions into making unsafe investment decisions by having under-collateralized assets and financially risky credit applicants.[66] Pursuant to the DPA, Hallman Chevrolet agreed to pay a monetary penalty of $1.4 million and more than $737,000 in restitution to various lending institutions.  In addition, “Hallman Chevrolet must engage in a substantial corporate compliance and ethics program and a vigorous monitoring and audit regime.”[67]       Health Management Associates, LLC (NPA) Health Management Associates, LLC (“HMA”) entered into an NPA with the Fraud Section on September 21, 2018, to resolve criminal and civil claims relating to “a formal and aggressive plan to improperly increase overall emergency department inpatient admissions at all HMA hospitals.”[68]  Specifically, DOJ alleged that HMA executives and hospital administrators pressured, coerced, and induced physicians and medical directors to meet mandatory admission rate benchmarks and admit patients who did not need inpatient treatment.[69]   The NPA notes that a “relevant consideration” for entering into an NPA was that the parent company of HMA—Community Health Systems (“CHS”)—acquired HMA after the relevant behavior had occurred, and at the time of acquisition HMA was facing multiple lawsuits and was the subject of criminal and civil investigations.[70]  The NPA also notes that following the acquisition of HMA, CHS “engaged in remedial measures, including (1) removing the HMA Board of Directors and senior executives; and (2) integrating the HMA hospitals into [CHS’s] compliance program and implementing certain compliance initiatives to address and remediate . . . [the] issues that were alleged in certain . . . lawsuits and were part of the criminal and civil investigations.”[71] HMA and CHS also received credit for their cooperation with the Fraud Section, which included, among other things, making regular factual presentations; collecting, analyzing, and organizing voluminous evidence and information for the Fraud Section; and providing substantial cooperation to the U.S. Attorney’s Office for the Middle District of Florida in connection with the prosecution of a former HMA executive.[72] Under the NPA, which has a term of three years, HMA agreed to cooperate with the investigation, report allegations or evidence of violations of federal health care offenses, ensure that its compliance and ethics program satisfies the requirements of an amended and extended Corporate Integrity Agreement, and report annually to the Fraud Section regarding remediation and implementation of compliance measures.[73]  HMA also agreed to pay a monetary penalty in the amount of over $35 million.[74] The NPA notes that HMA and CHS agreed to a global resolution of HMA’s civil and criminal liability.  An indirect subsidiary of HMA, Carlisle HMA, LLC, pleaded guilty to one count of conspiracy to commit health care fraud and agreed to pay a criminal fine of over $2.5 million.[75]  HMA also agreed to pay almost $75 million to resolve civil claims arising under federal and state False Claims Acts,[76] and over $148 million to settle qui tam allegations that HMA hospitals provided improper financial incentives to physicians for patient referrals.[77] Mirelis Holding S.A. (NPA) Mirelis Holding S.A. (“Mirelis”), a Swiss financial asset and management firm, entered into an NPA with DOJ’s Tax Division on July 24, 2018, to resolve allegations related to facilitating U.S.-based tax evasion.[78]  DOJ alleged that Mirelis opened, maintained, and serviced accounts for U.S. taxpayer-clients where Mirelis knew or had reason to know that the U.S. taxpayer-clients were not complying with their U.S. tax obligations.[79]  Mirelis originally submitted a Letter of Intent on December 23, 2013, to participate in DOJ’s Swiss Bank Program, but it was ultimately determined that Mirelis did not qualify due to its structure as both an asset management firm and a bank.[80]  However, the NPA entered into on July 24, 2018, requires Mirelis to fully comply with the obligations imposed under the terms of the program.[81]  Additionally, the NPA requires Mirelis to provide transaction information related to certain accounts, close as soon as practicable any U.S.-related dormant accounts, and pay a sum of $10.245 million.[82] The NPA characterized the $10.245 million as $3.245 million in restitution for the approximate pecuniary loss suffered by the United States, $5 million as disgorgement of profits for the approximate amount earned by Mirelis by servicing undeclared U.S. taxpayers, and $2 million as a penalty for Mirelis’s conduct with respect to U.S.-related accounts.[83]  In support of the agreement not to prosecute Mirelis, DOJ cited Mirelis’s voluntary disclosure of its conduct, cooperation with the Tax Division on the status and findings of its internal investigation, and retention of a qualified independent examiner who verified the information Mirelis disclosed, pursuant to the requirement under the Swiss Bank Program.[84]  The NPA has a term of four years.[85]       Neue Privat Bank AG (NPA) On July 18, 2018, the Tax Division announced an NPA with Neue Privat Bank AG (“NPB”), stemming from NPB’s cross-border business, which allegedly ran afoul of U.S. tax law.[86]  NPB, a private Swiss bank, must pay a $5 million penalty for aiding U.S. clients in concealing assets and income from the IRS.[87]   In 2009, NPB’s Board voted to allow U.S. clients to open accounts at the bank, even when the clients had been forced out of other banks.[88]  NPB’s assets under management for U.S. clients subsequently jumped to 450 million Swiss Francs from 8 million Swiss Francs the previous year.[89]  Most of NPB’s U.S. client accounts were managed by external asset managers and firms, and NPB had very little contact with many of its clients.[90]  For some of those clients, NPB did not disclose the account owner’s identity to the IRS.[91] NPB believed it could maintain its U.S. accounts, even if it knew or had reason to believe the accounts were to evade taxes, and indeed continued to service some of those accounts after knowledge that some owners had not declared their accounts to the IRS.[92]  NPB serviced accounts that employed different strategies to conceal income from the IRS, including using numbered accounts, hold mail services, and shell companies.[93]  NPB began to increase its U.S. tax compliance efforts in 2010 and 2011, requiring tax compliance evidence from external asset managers in August 2011, but it still continued to maintain undeclared accounts.[94]  NPB cooperated in the investigation by disclosing the identities of account holders and making bank executives available for interview.[95]  NPB must comply with periodic reporting if it fails to close dormant accounts.[96]  The NPA was set for a term of four years.[97] Petróleo Brasileiro S.A. – Petrobras (NPA) On September 26, 2018, the Fraud Section and the U.S. Attorney’s Office for the Eastern District of Virginia announced an NPA with Petróleo Brasileiro S.A. – Petrobras (“Petrobras”), resolving allegations arising under the FCPA.[98]   Petrobras, the Brazilian semi-public, state-run energy company, agreed to pay $170.64 million to U.S. authorities, with credit for $682.56 million paid to Brazilian authorities after Brazilian and U.S. investigations into the company’s internal controls, books and records, and financial statements.[99] As discussed in greater detail in our 2018 Year-End FCPA Update, certain former Petrobras executives engaged in a corrupt scheme with politicians and Petrobras suppliers and contractors.[101]  Petrobras reached settlements with both DOJ and the SEC.  DOJ agreed to credit payments to the SEC and the Brazilian government to the overall penalty, such that DOJ and the SEC each receive 10% of the total penalty ($85.32 million) and the Brazilian government, which has not found wrongdoing by Petrobras, will receive the remaining 80% ($682.56 million).[102]  In the related SEC settlement, the SEC will credit any amounts Petrobras pays in the shareholder derivative suit against the SEC’s order of approximately $933.473 million in disgorgement and prejudgment interest.[103] Although Petrobras did not voluntarily disclose the underlying conduct, it fully cooperated in the investigation by conducting a thorough internal investigation, sharing findings of that investigation with the government in real time, and presenting regularly to the government.[104]  Petrobras also took significant remedial measures, including replacing its Board of Directors and a number of high-level executives, completely revamping its internal governance systems, and terminating and distancing itself from any employee implicated in the alleged bribery scheme.[105]  DOJ will not require an independent compliance monitor.[106]  Petrobras will, however, be required to report to DOJ every 12 months on its remedial measures over the course of the agreement, including the implementation of its internal governance systems.[107]  The NPA has a term of three years.[108] Société Générale S.A. (DPA) On November 18, 2018, Société Générale S.A. (“SocGen”) and the U.S. Attorney’s Office for the Southern District of New York entered a DPA to resolve allegations involving the Trading with the Enemy Act (“TWEA”) and the Cuban Assets Control Regulations (“Cuban Regulations”) promulgated thereunder.[109]  The DPA term is three years, and it requires SocGen to pay over $1.34 billion, including $717.2 million in forfeiture to the United States.[110]  The remaining portion of the monetary penalty consists of payments to be made for SocGen’s concurrent settlement of related criminal and civil actions with the New York County District Attorney’s Office, the U.S.  Department of Treasury, Office of Foreign Assets Control (“OFAC”), the New York State Department of Financial Services, and the Federal Reserve Board of Governors and the Federal Reserve Bank of New York.  The $1.34 billion in penalties represents the second largest penalty ever imposed on a financial institution for violations of U.S. economic sanctions.[111] DOJ charged SocGen with violations of the TWEA and the Cuban Regulations, alleging that SocGen participated in a conspiracy, which lasted from about 2004 to 2010, to make transfers of credit and payments between, by, and through banking institutions with respect to property in which Cuba had an interest.[112]  Specifically, DOJ alleged that SocGen structured U.S. dollar transactions and operated 21 credit facilities that provided significant money flow to Cuban banks, entities controlled by Cuba, and Cuban and foreign corporations for business conducted in Cuba.[113]  In total, SocGen allegedly engaged in more than 2,500 transactions through U.S. financial institutions that caused those institutions to process close to $13 billion in transactions that otherwise should have been blocked for investigation pursuant to OFAC regulations.[114] DOJ alleges that SocGen’s management and Group Compliance failed to disclose the discovered conduct to OFAC promptly.[115]  Demonstrating good faith and cooperation, SocGen agreed, as part of the DPA, to implement remedial measures required by various state and federal regulators.[116]  Specifically, SocGen agreed to implement or enhance its BSA/AML compliance programs and internal controls to prevent the occurrence of similar criminal conduct going forward.[117] Waste Management of Texas (NPA) On August 29, 2018, the U.S. Attorney’s Office for the Southern District of Texas entered into an NPA with Waste Management of Texas (“Waste Management”).[118]  Between 2003 and April 2012, managers at Waste Management’s Afton, Texas, location allegedly hired individuals to work at the facility without inquiring into their work status in the United States.[119]  In January 2012, after firing ten employees because they were undocumented, the managers provided the fired individuals with identification documents of other, documented people so that they could return to work at Waste Management.[120]  The three managers were indicted in May 2014 for the above conduct, and Waste Management both cooperated in the criminal investigation and conducted its own internal investigation.[121]  As part of the NPA, Waste Management agreed to continue its already enhanced immigration compliance procedures and forfeit over $5.5 million, which amounts to the estimated proceeds from employing undocumented workers at the Afton facility from 2003 to 2012.[122] Wright State University (NPA) On November 16, 2018, Wright State University (“WSU”), a public university, and the U.S. Attorney’s Office for the Southern District of Ohio entered into an NPA in connection with WSU’s admission that it engaged in a conspiracy to commit H-1B visa fraud.[123]   The H-1B visa program allows companies in the United States to temporarily employ foreign workers in occupations that require highly specialized knowledge and a bachelor’s or higher degree in a specific specialty.  There is a numerical cap on the number of H-1B visas that can be issued per year, but, as an institute of higher learning, WSU is “cap exempt,” unlike other types of organizations.[124] According to the agreement, WSU employed 24 foreign employees—pursuant to sponsored research contracts with Webyoga, Inc. (“Webyoga”), a privately held software company—through H-1B visas.[125]  WSU used its “cap exempt” status to apply for the visas.[126]  In doing so, WSU submitted a signed employment offer letter from the university indicating each visa employee would be working for the university and under the supervision of university employees.[127] In fact, the visa employees worked as consultants on behalf of Webyoga in various cities throughout the country, including Atlanta, Orlando, and New York City.[128]  Moreover, WSU invoiced Webyoga for more than $1.8 million in fees associated with the employees’ visas, the employees’ salaries and benefits, and administrative costs for the university.[129]  Between 2010 and 2015, WSU also entered into similar arrangements with other companies wherein it would apply for H-1B visas for individuals, the individuals would work on a routine basis for another company, and that company would reimburse the school.[130]  WSU acknowledged that the placement of H-1B visa employees with other companies violated the terms of their visa applications, and, as a result, companies who were subject to the numerical H-1B visa limitation were able to use excess H-1B employees through their contracts with WSU.[131] As part of the NPA, WSU will pay the federal government a $1 million fine in three installments.  The NPA will remain in effect for a term of two years or until the date upon which the full monetary payment is made, whichever is later. Zürcher Kantonalbank  (DPA) On August 7, 2018, Zürcher Kantonalbank (“ZKB”) and the U.S. Attorney’s Office for the Southern District of New York entered a DPA.[132]  The U.S. Attorney’s Office announced the filing of charges against ZKB in a press release along with the DOJ Tax Division and the IRS.[133]  As part of the DPA, ZKB consented to the filing of a one-count Information charging ZKB with conspiring with others, including U.S. taxpayers, in violation of 18 U.S.C. § 371 to (1) defraud the United States and the IRS; (2) file false federal income tax returns; and (3) evade federal income taxes.[134] The DPA resolves allegations that from roughly 2002 through 2009, numerous U.S. taxpayer-clients conspired with ZKB to conceal from the IRS the existence of bank accounts held by the U.S. taxpayer-clients at ZKB and the income earned in these accounts in order to evade U.S. taxes on income generated in the undeclared accounts.[135]  ZKB allegedly permitted U.S. taxpayer-clients to engage in a number of practices that helped the U.S. taxpayer-clients avoid reporting income to the IRS, including allowing U.S. taxpayer-clients to open undeclared accounts using code names, place assets in undeclared accounts held in the name of sham entities, and make structured withdrawals by checks from undeclared accounts in amounts less than $10,000.[136]  DOJ asserts that these practices helped U.S. taxpayers avoid reporting to the IRS accounts and income earned therefrom by ensuring that taxpayer-clients’ names would appear on the fewest possible documents relating to their accounts, concealing the taxpayer-clients’ beneficial ownership of assets in the accounts, and minimizing the size of withdrawal transactions in order to conceal their occurrence from the U.S. authorities.[137] As a result of this conduct, the DPA requires ZKB to make payments of over $98.5 million to the United States, of which (1) $39.142 million constitutes restitution; (2) over $24.266 million constitutes forfeiture; and (3) over $35.125 million constitutes a penalty.[138]  The restitution amount represents the approximate unpaid pecuniary loss to the United States as a result of the concealment of the ZKB taxpayer-clients’ accounts and income earned therefrom.  The DPA is set for a term of three years.[139] Recent Declinations with Disgorgement In 2018, DOJ agreed to three declinations that require disgorgement under the Department’s FCPA Corporate Enforcement Policy, which it adopted in November 2017.  Companies that would otherwise receive NPAs are now entering into declination with disgorgement letters if they meet certain disclosure, cooperation, and remediation criteria.  We summarize below the three declination with disgorgement letters from 2018.  The agreements notably reiterate the Department’s continued commitment to hold individuals accountable for misconduct.       The Dun & Bradstreet Corporation On April 23, 2018, the Fraud Section and the U.S. Attorney’s Office for the District of New Jersey declined to prosecute The Dun & Bradstreet Corporation (“Dun & Bradstreet”), a business data and analytics company, for alleged violations of the FCPA bribery provisions committed by the company’s subsidiaries in China.[140]   DOJ declined to prosecute due to several factors, including the company’s (1) identification and voluntary disclosure of misconduct; (2) thorough investigation; (3) full cooperation, including the identification of culpable individuals, sharing all related facts, facilitating interviews of current and former employees, and translation of foreign documents; (4) enhancement of internal controls and its compliance program; (5) full remediation, including terminating and disciplining employees; and (6) disgorgement of monies to the SEC.[141] In its parallel administrative order, the Commission ordered Dun & Bradstreet to pay more than $9 million in disgorged profits, prejudgment interest, and a civil penalty.[142]  The order states that the two Chinese subsidiaries allegedly used third parties to make improper payments to obtain non-public financial and personal information in violation of Chinese law.[143]   In violation of the FCPA accounting provisions, Dun & Bradstreet allegedly “failed to devise and maintain sufficient internal accounting controls to detect or prevent the improper payments,” and failed to accurately reflect the transactions in its consolidated books and records.[144]       Insurance Corporation of Barbados Limited On August 23, 2018, the Fraud Section and the U.S. Attorney’s Office for the Eastern District of New York declined to prosecute Insurance Corporation of Barbados Limited (“ICBL”), an insurance company based in Barbados, for alleged violations of the FCPA.[145]  The Fraud Section’s investigation determined that ICBL made approximately $36,000 in bribe payments to Barbadian government officials in exchange for insurance contracts.[146]  The government official who received the bribes laundered the money through U.S. bank accounts.[147]  DOJ declined to prosecute due to several factors, including ICBL’s (1) timely and voluntary disclosure; (2) thorough investigation; (3) cooperation, including the provision of all known, relevant facts and continued cooperation in ongoing DOJ matters; (4) disgorgement of profits related to the misconduct; (5) improvements to its compliance program and internal controls; (6) remedial actions, including termination of involved employees; and (7) DOJ’s ability to identify and charge culpable individuals.[148] ICBL agreed to disgorge almost $94,000, which represents the profit from the illegally obtained insurance contracts.[149]  The company agreed to pay the disgorgement amount to the Treasury Department.[150]  The letter states that it does not protect any individuals against prosecution.[151]       Polycom, Inc. On December 20, 2018, the Fraud Section declined to prosecute Polycom, Inc. (“Polycom”), a communications solutions provider, for alleged violations of the FCPA bribery and accounting provisions caused by the company’s subsidiaries in China.[152]   Polycom’s subsidiaries allegedly used local channel partners to make improper payments via a discount scheme in exchange for business contracts.[153]  DOJ declined to prosecute after considering several factors, including Polycom’s (1) identification of misconduct; (2) prompt and voluntary disclosure of wrongdoing; (3) thorough investigation; (4) full cooperation, including the provision of all related facts, facilitation of current and former employee interviews, translation of documents, identification of unrelated wrongdoing, and continued cooperation with DOJ’s ongoing investigations or prosecutions; and (5) remedial actions, including enhanced internal controls and compliance programs, employee terminations and discipline, and cutting ties with a channel partner.[154] As part of the agreement, Polycom agreed to disgorge $30.978 million, which reflects the profit from the illegally obtained contracts.[155]  The company will pay the disgorged profits to the SEC, the Treasury Department, and the Postal Inspection Service Consumer Fraud Fund.[156]  The declination letter explicitly notes that the agreement does not preclude prosecution of any individuals.[157] On December 26, 2018, the Commission issued an administrative order to resolve alleged violations of the FCPA accounting provisions by Polycom.[158]  As part of the resolution, Polycom agreed to pay over $16 million in disgorged profits ($10,672,926), prejudgment interest ($1,833,410), and a civil penalty ($3,800,000).[159]  The Commission settled with Polycom after considering the company’s self-disclosure, cooperation, and remediation.[160]  Polycom’s resolutions with DOJ and the Commission bring the total monetary penalty to approximately $36 million. International DPA Developments We continue to observe a global trend of adopting and developing DPA frameworks.  As we discussed in our 2018 Mid-Year Update, some jurisdictions—for example, the United Kingdom and France—have already executed DPA-like resolutions.  Other countries—like Canada and Singapore—have fledgling programs that have yet to be utilized.  And still others— for example, Switzerland, Australia, and Poland—are considering proposals to institute similar regimes.  These DPA frameworks have all been discussed at length in our 2018 Mid-Year Update.  The section below updates this prior analysis with new developments from the United Kingdom, which continues to refine its approach to corporate resolutions and completed the term of its first DPA, and Ireland, which is considering the adoption of a DPA model.       United Kingdom The U.K. Serious Fraud Office (“SFO”) did not enter into any DPAs in 2018, keeping the total number at four since the United Kingdom established a DPA program in February 2014.  Nevertheless, agency officials have made clear that they “are open for business,”[161] with a recent increase in core funding,[162] approximately seventy active investigations as of October 2018,[163] and the completion of the United Kingdom’s first DPA. Remarks of SFO Officials In June 2018, the U.K. Attorney General’s Office named a new Director of the SFO, Lisa Osofsky, who officially assumed the role on August 28, 2018.[164]  During her first week on the job, Osofsky delivered remarks at the Cambridge International Symposium on Economic Crime, where she highlighted the importance of “multijurisdictional . . . cooperation to achieve global settlements like Rolls-Royce,”[165] which involved coordination among authorities in the United States, Brazil, and the United Kingdom before reaching a resolution in January 2017.  Osofsky has committed to “[w]orking with the newcomers to DPAs,” including France, Argentina, Canada, and Australia, to strengthen the SFO’s international relationships in anticipation of future complex, global resolutions.[166] Osofsky underscored the importance of remediation in determining whether to offer a DPA to a company under investigation.[167]  In addition to evaluating whether “the company engaged in proactive efforts to clean house and to reform” (including implementing “the right controls”), the SFO also assesses a company’s tone at the top, ensuring that the remediation efforts are “backed by demonstrable commitment at the appropriate level.”[168] Recent remarks from Matthew Wagstaff, Joint Head of Bribery and Corruption at the SFO, echo Osofsky’s emphasis on remediation, while also highlighting the critical importance of cooperation for a company seeking a DPA: “no co-operation means no agreement.”[169]  Notably, during a subsequent speech, Wagstaff stated that the SFO may ask companies that wish to cooperate to waive privilege over first-hand, factual accounts.[170]  Wagstaff asserted that the SFO will not mandate waiver, but “‘the refusal to do so may well be incompatible with an assertion of a desire to cooperate.'”[171]  This statement is significant when coupled with a speech made by Osofsky in which she emphasized “the importance of giving ‘first witness accounts’ to individuals who are later charged with crimes.”[172]  She stated that those accounts “are sometimes the very interviews that you do in the course of your internal investigations,” and warned that investigations may result in tension between the assertion of privilege and “what a court believes MUST be provided to a criminal defendant to ensure a fair trial.”[173]  She concluded that it “is not cooperation” to “blunder into this and then be distressed and offended if we seek those interviews because a court wants us . . . to provide this material to a defendant in the dock.”[174]  Although the SFO does not provide formal guidance to assist companies that are looking to cooperate or self-report—and former Director David Green famously said that the SFO does not “do guidance”[175]—Osofsky has signaled that such guidance may be forthcoming to assist companies that “want to understand what cooperation would look like in the context of [the SFO’s] assessment for a DPA.”[176] Expiration of the Standard Bank PLC DPA On November 30, 2018, the SFO announced that Standard Bank PLC (now ICBC Standard Bank PLC) (“Standard Bank”) had fully complied with the terms of its DPA, marking the successful completion of the SFO’s first-ever DPA.[177]   The SFO entered into a DPA with Standard Bank in November 2015 to resolve allegations of an approximately $6 million payment made by a former subsidiary of Standard Bank to a local entity controlled by Tanzanian government officials.[178]  Standard Bank uncovered evidence of potential wrongdoing and self-reported to the SFO in April 2013.[179]  The press release announcing the end of the DPA states that the SFO will publish (on its website) a “‘Details of Compliance’ outlining how Standard Bank” met the terms of the DPA.[180] Review of the U.K. Bribery Act In addition to the work conducted by the SFO, the House of Lords appointed an ad hoc Select Committee to review and report on the effectiveness of the United Kingdom’s 2010 Bribery Act (“Bribery Act Committee”), with a focus on the impact of DPAs on corporate conduct.[181]  Over the last several months, a number of prominent U.K. enforcement officials have appeared before the Bribery Act Committee, including Osofsky; Max Hill QC, Director of Public Prosecutions at the Crown Prosecution Service; and Hannah von Dadelszen, Head of Fraud at the SFO.[182] During a Bribery Act Committee session last fall, von Dadelszen provided insight into the SFO’s decision-making process behind whether to offer a DPA.  Von Dadelszen reiterated the requirement of cooperation, and emphasized the importance of personnel “housekeeping” at a company looking to secure a DPA.[183]  Von Dadelszen explained the necessity of “maintain[ing] the integrity of the DPA brand,” which “should not be watered down and given to companies run by those who are not truly good corporate citizens.”[184]       Ireland On October 23, 2018, the Law Reform Commission (“LRC”) of Ireland published a report recommending that Ireland adopt a DPA regime largely resembling the U.K. DPA model.[185]   Though the report is currently no more than a proposal, it invites the Irish legislature to pass a comprehensive statute to institute the recommended regime.[186] The LRC’s recommendation draws largely on the U.K. DPA model; therefore, the proposed Irish DPA system would differ from the U.S. DPA framework in a number of key ways.  For example, the LRC recommends that the Irish DPA regime be instituted by statute and be operated by the Office of the Director of Public Prosecutions (“DPP”).[187]  The decision of whether to seek a DPA would remain entirely within the discretion of the DPP, but unlike DPAs in the United States, the DPP would have to obtain judicial approval in order to initiate the DPA process, to finalize a DPA, and to modify an existing DPA.[188]  The DPP would need to present the terms of any proposed DPA to the High Court, which is an intermediate court that hears the most serious criminal and civil cases, as well as appeals from lower courts, for approval.[189]  The LRC’s report outlines the test that the High Court would use when deciding whether to approve a DPA, recommending that the court ask whether the DPA is “in the interests of justice,” and whether its terms are “fair, reasonable, and proportionate.”[190]  The LRC further recommends that the DPP only use DPAs if the company admits wrongdoing and the proposal requires that DPA terms be published, which is also distinct from DPAs in the United States.[191] The LRC’s recommended DPA regime includes several features that would limit the availability of DPAs in Ireland.  For example, the LRC recommends that DPAs only be made available to corporations and other unincorporated entities like partnerships, but not to individuals.[192]  The LRC also recommends that DPAs only be made available in cases involving certain enumerated economic crimes, including conspiracy to defraud, theft, fraud, bribery, corruption, Companies Act and Competition Act offenses, revenue offenses, and market abuse offenses.[193]  Both of these aspects of the Irish model also set it apart from the U.S. DPA system. ________________________________ APPENDIX:  2018 NPAs, DPAs, and Declinations with Disgorgement The charts below summarize the agreements concluded in 2018.  The complete text of each publicly available agreement is hyperlinked in the chart.  If the agreement is not publicly available, the text of the DOJ press release is hyperlinked in the chart. The figures for “Monetary Recoveries” may include amounts not strictly limited to an NPA, DPA, or declination with disgorgement, such as fines, penalties, forfeitures, and restitution requirements imposed by other regulators and enforcement agencies, as well as amounts from related settlement agreements, all of which may be part of a global resolution in connection with the agreement, paid by the named entity and/or subsidiaries.  The term “Monitoring & Reporting” includes traditional compliance monitors, self-reporting arrangements, and other monitorship arrangements found in settlement agreements. U.S. Non-Prosecution and Deferred Prosecution Agreements in 2018 Company Agency Alleged Violation Type Monetary Recoveries Monitoring & Reporting Term of DPA/ NPA (months) American Media, Inc. S.D.N.Y. Campaign Finance NPA N/A Yes 36 Bank Lombard Odier & Co Ltd. DOJ Tax Swiss Bank Program NPA Addendum $5,300,000 No N/A Basler Kantonalbank DOJ Tax; S.D. Fla. Tax Evasion; Fraud (Tax) DPA $60,400,000 Yes 36 Central States Capital Markets, LLC S.D.N.Y. BSA DPA $400,000 Yes 24 Credit Suisse (Hong Kong) Limited DOJ Fraud; E.D.N.Y. FCPA NPA $47,029,916 Yes 36 Cultural Resource Analysts, Inc. M.D. Tenn. Archaeological Resources Protection Act DPA $15,024 No Indefinite Hallman Chevrolet W.D. Pa. Fraud (Bank Loan) DPA $2,137,000 Yes 48 Health Management Associates, LLC DOJ Fraud Fraud (Health Care); FCA NPA $261,026,648 Yes 36 HSBC Holdings plc DOJ Fraud Fraud (Wire Fraud) DPA $109,579,000 Yes 36 Imagina Media Audiovisual SL E.D.N.Y. FCPA NPA $12,883,320 Yes 36 Legg Mason, Inc. E.D.N.Y. FCPA NPA $64,242,000 Yes 36 Mirelis Holding S.A. DOJ Tax Tax and Money-Transaction Violations NPA $10,245,000 No[194] 48 Neue Privat Bank AG DOJ Tax Tax and Money-Transaction Violations NPA $5,000,000 No[195] 48 Panasonic Avionics Corporation DOJ Fraud FCPA DPA $280,602,831 Yes 36 Petróleo Brasileiro S.A. – Petrobras DOJ Fraud; E.D. Va. FCPA NPA $170,640,000 (U.S.) $853,200,000 (Brazil/U.S.) Yes 36 Red Cedar Services, Inc. S.D.N.Y. RICO Act; Fraud (Wire Fraud); AML NPA $2,000,000 No 12 Rite Aid Corporation S.D. W. Va. Controlled Substances Act NPA $4,000,000 No 24 Santee Financial Services, Inc. S.D.N.Y. RICO Act; Fraud (Wire Fraud); AML NPA $1,000,000 No 12 Société Générale S.A. DOJ Fraud; E.D.N.Y. FCPA; Transmitting false commodities reports DPA $1,335,552,888 Yes 36 Société Générale S.A. S.D.N.Y. Trading with the Enemy Act; Cuban Assets Control Regulations DPA $1,340,165,000 Yes 36 Transport Logistics International, Inc. DOJ Fraud; D. Md. FCPA DPA $2,000,000 Yes 36 U.S. Bancorp S.D.N.Y. BSA DPA $613,000,000 Yes 24 Waste Management Texas S.D. Tex. Immigration Violations NPA $5,527,091.55 No Indefinite Wright State University S.D. Ohio Fraud (Visa) NPA $1,000,000 Yes 24 Zürcher Kantonalbank S.D.N.Y.; DOJ Tax Tax Evasion; Fraud (Tax) DPA $98,533,560 Yes 36   FCPA Pilot Program Declination with Disgorgement Letters in 2018 Company Agency Alleged Violation Type Monetary Recoveries Monitoring & Reporting Term of DPA/ NPA (months) The Dun & Bradstreet Corporation DOJ Fraud; D.N.J. FCPA Declination $9,221,484 No N/A Insurance Corporation of Barbados Limited DOJ Fraud; E.D.N.Y. FCPA Declination $93,940.19 No N/A Polycom, Inc. DOJ Fraud FCPA Declination $36,611,410 No N/A   [1] NPAs and DPAs are two kinds of voluntary, pre-trial agreements between a corporation and the government, most commonly DOJ.  They are standard methods to resolve investigations into corporate criminal misconduct and are designed to avoid the severe consequences, both direct and collateral, that conviction would have on a company, its shareholders, and its employees.  Though NPAs and DPAs differ procedurally—a DPA, unlike an NPA, is formally filed with a court along with charging documents—both usually require an admission of wrongdoing, payment of fines and penalties, cooperation with the government during the pendency of the agreement, and remedial efforts, such as enhancing compliance programs and—on occasion—a corporate monitorship.  Although multiple agencies use NPAs and DPAs, since Gibson Dunn began tracking corporate NPAs and DPAs in 2000, we have identified approximately 509 agreements initiated by DOJ and 10 initiated by the SEC. [2] We strive to provide the most up-to-date, accurate information; however, the government shutdown has affected the press functions of the federal government, limiting our access to agreements executed or announced in December 2018. [2a] This amount may include amounts not strictly limited to an NPA or DPA, such as fines, penalties, forfeitures, and restitution requirements imposed by other regulators and enforcement agencies, as well as amounts from related settlement agreements, all of which may be part of a global resolution in connection with the agreement, paid by the named entity and/or subsidiaries. [3] See Rod J. Rosenstein, Deputy Attorney General, U.S. Dep’t of Justice, Remarks at the American [3] See Rod J. Rosenstein, Deputy Attorney General, U.S. Dep’t of Justice, Remarks at the American Conference Institute’s 35th International Conference on the Foreign Corrupt Practices Act (Nov. 29, 2018), https://www.justice.gov/opa/speech/deputy-attorney-general-rod-j-rosenstein-delivers-remarks-american-conference-institute-0 [hereinafter Rosenstein Speech]. [4] Memorandum from Sally Q. Yates, Deputy Attorney General, U.S. Dep’t of Justice, to Assistant Attorney General, Antitrust Division, et al., Individual Accountability for Corporate Wrongdoing (Sept. 9, 2015), https://www.justice.gov/archives/dag/file/769036/download. [5] Rosenstein Speech, supra note 3. [6] Id. [7] Id. [8] Id. [9] U.S. Dep’t of Justice, Justice Manual, § 9-28 Principles of Federal Prosecution of Business Organizations, https://www.justice.gov/jm/jm-9-28000-principles-federal-prosecution-business-organizations. [10] Rosenstein Speech, supra note 3. [11] U.S. Sentencing Comm’n, Guidelines Manual, § 8C2.5(f), https://www.ussc.gov/sites/default/files/pdf/guidelines-manual/2018/GLMFull.pdf. [12] Memorandum from Brian A. Benczkowski, Assistant Attorney General, U.S. Dep’t of Justice, to All Criminal Division Personnel, Selection of Monitors in Criminal Division Matters (Oct. 11, 2018), https://www.justice.gov/opa/speech/file/1100531/download  [hereinafter Benczkowski Memorandum]. [13] Memorandum from Craig S. Morford, Acting Deputy Attorney General, U.S. Dep’t of Justice, to Heads of Department Components and United States Attorneys, Selection and Use of Monitors in Deferred Prosecution Agreements and Non-Prosecution Agreements with Corporations (Mar. 7, 2008), https://www.justice.gov/sites/default/files/dag/legacy/2008/03/20/morford-useofmonitorsmemo-03072008.pdf  [hereinafter Morford Memorandum]. [14] See Brian A. Benczkowski, Assistant Attorney General, U.S. Dep’t of Justice, Remarks at NYU School of Law Program on Corporate Compliance and Enforcement Conference on Achieving Effective Compliance (Oct. 12, 2018), https://www.justice.gov/opa/speech/assistant-attorney-general-brian-benczkowski-delivers-remarks-nyu-school-law-program [hereinafter Benczkowski Speech]. [15] Id. [16] Id. [17] Morford Memorandum, supra note 13, see also Benczkowski Memorandum, supra note 12, at 2. [18] Benczkowski Memorandum, supra note 12, at 2. [19] See C. Ryan Barber, DOJ’s New Compliance Monitor Guidance Accounts for ‘Burdens’ on Companies, The National Law Journal (Oct. 12, 2018), https://www.law.com/nationallawjournal/2018/10/12/dojs-new-compliance-monitor-guidance-accounts-for-burdens-on-companies/. [20] Deferred Prosecution Agreement, United States v. Panasonic Avionics Corp. (D.D.C. Apr. 30, 2018). [21] Id. [22] Id. [23] Barber, supra note 19. [24] Benczkowski Speech, supra note 14. [25] See United States. v. MoneyGram International, Inc., 12-cr-00291 (M.D. Pa.), Dkt. 21 (extension from Nov. 8, 2017 to Feb. 6, 2018); Dkt. 23 (to Mar. 23, 2018); Dkt. 25 (to May 7, 2018); Dkt. 27 (to June 21, 2018); Dkt. 29 (to Sept. 18, 2018); Dkt. 31 (to Nov. 6, 2018); Dkt. 33 (to Nov. 9, 2018); Dkt. 34 (to May 10, 2021). [26] Press Release, U.S. Dep’t of Justice, MoneyGram Int’l Inc. Agrees To Extend Deferred Prosecution Agreement, Forfeits $125 Million In Settlement With Justice Department And Federal Trade Commission (Nov. 9, 2018), https://www.justice.gov/usao-mdpa/pr/moneygram-international-inc-agrees-extend-deferred-prosecution-agreement-forfeits-125. [27] Please see our 2012 Year-End Update for more details. [28] Press Release, Standard Chartered, Extension of the U.S. Deferred Prosecution Agreements (July 27, 2018), https://www.sc.com/en/media/press-release/extension-of-the-u-s-deferred-prosecution-agreements/. [29] Press Release, U.S. Dep’t of Justice, Standard Chartered Bank Agrees to Forfeit $227 Million for Illegal Transactions with Iran, Sudan, Libya, and Burma (Dec. 10, 2012), https://www.justice.gov/opa/pr/standard-chartered-bank-agrees-forfeit-227-million-illegal-transactions-iran-sudan-libya-and; Press Release, Standard Chartered, We Have Extended our Deferred Prosecution Agreements (Nov. 9, 2017), https://www.sc.com/en/media/press-release/we-have-extended-our-deferred-prosecution-agreements/. [30] Deferred Prosecution Agreement, United States v. Standard Chartered, Case No. 11-cr-262, Dkt. 2 ¶ 4 (D.D.C. Dec. 10, 2012). [31] Id. [32] Press Release, Standard Chartered, Extension of the U.S. Deferred Prosecution Agreements (Dec. 22, 2018), https://www.sc.com/en/media/press-release/extension-of-the-us-deferred-prosecution-agreements/. [33] Press Release, U.S. Dep’t of Justice, Michael Cohen Sentenced to 3 Years in Prison (Dec. 12, 2018), https://www.justice.gov/usao-sdny/pr/michael-cohen-sentenced-3-years-prison. [34] Id. [35] Id. [36] Non-Prosecution Agreement, American Media, Inc. (Sept. 20, 2018), at 1. [37] Id. at 2. [38] Id. [39] Id. [40] Addendum to Non-Prosecution Agreement, Bank Lombard Odier & Co Ltd. (July 13, 2018), at 1 [hereinafter Bank Lombard Addendum]. [41] Id. [42] U.S. Dep’t of Justice, Swiss Bank Program, available at https://www.justice.gov/tax/swiss-bank-program. [43] Id. [44] Id. [45] Id. [46] Bank Lombard Addendum, supra note 40, at 1. [47] Press Release, U.S. Dep’t of Justice, Justice Department Announces Addendum to Swiss Bank Program Category 2 Non-Prosecution Agreement, Bank Lombard Odier & Co Ltd. (July 31, 2018), https://www.justice.gov/opa/pr/justice-department-announces-addendum-swiss-bank-program-category-2-non-prosecution-agreement. [48] Bank Lombard Addendum, supra note 40, at 1. [49] Id. [50] Id. [51] Deferred Prosecution Agreement, United States v. Basler Kantonalbank, No. 18-CR-60228-Bloom (Aug. 29, 2018) [hereinafter BKB DPA]. [52] Press Release, U.S. Dep’t of Justice, Justice Department Announces Deferred Prosecution Agreement With Basler Kantonalbank (Aug. 28, 2018), https://www.justice.gov/opa/pr/justice-department-announces-deferred-prosecution-agreement-basler-kantonalbank [hereinafter BKB Press Release]. [53] BKB DPA, supra note 51, at 29. [54] Id. at 16–17. [55] BKB Press Release, supra note 52. [56] BKB DPA, supra note 51, at 10. [57] Deferred Prosecution Agreement, Central States Capital Markets, LLC (Dec. 10, 2018), at 1 [hereinafter CSCM DPA]. [58] Id. at 1–2. [59] Press Release, U.S. Dep’t of Justice, Manhattan U.S. Attorney Announces Bank Secrecy Act Charges Against Kansas Broker Dealer (Dec. 19, 2018), https://www.justice.gov/usao-sdny/pr/manhattan-us-attorney-announces-bank-secrecy-act-charges-against-kansas-broker-dealer [hereinafter CSCM Press Release]. [60] CSCM DPA, supra note 57, at 2-3. [61] Id. at 6. [62] Id. at 3. [63] CSCM Press Release, supra note 59. [64] Id. [65] Press Release, U.S. Dep’t of Justice, Auto Dealership Agrees to Pay Penalty of $1.4 Million and Restitution of More than $730K in Bank Loan Fraud Scheme (Aug. 31, 2018), https://www.justice.gov/usao-wdpa/pr/auto-dealership-agrees-pay-penalty-14-million-and-restitution-more-730k-bank-loan-fraud. [66] Id. [67] Id. [68] Press Release, U.S. Dep’t of Justice, Hospital Chain Will Pay Over $260 Million to Resolve False Billing and Kickback Allegations; One Subsidiary Agrees to Please Guilty (Sept. 25, 2018), https://www.justice.gov/opa/pr/hospital-chain-will-pay-over-260-million-resolve-false-billing-and-kickback-allegations-one [hereinafter HMA Press Release]. [69] Id. [70] Non-Prosecution Agreement, Health Management Associates, LLC (Sept. 21, 2018), at 1 [hereinafter HMA NPA]. [71] Id. [72] Id. at 1–2. [73] Id. at 4. [74] Id. [75] Id. at 2. [76] Id. [77] Settlement Agreement, U.S. Dep’t of Justice and Health Management Associates, LLC (Sept. 2018), https://www.justice.gov/opa/press-release/file/1096401/download. [78] Press Release, U.S. Dep’t of Justice, Justice Department Announces Resolution With Swiss Financial and Asset Management Firm Mirelis Holding S.A. (July 27, 2018), https://www.justice.gov/opa/pr/justice-department-announces-resolution-swiss-financial-and-asset-management-firm-mirelis. [79] Id. [80] Id. [81] Id. [82] Non-Prosecution Agreement, Mirelis Holding S.A. (July 24, 2018), at 5. [83] Id. at 2. [84] Id. at 4. [85] Id. at 6. [86] Press Release, U.S. Dep’t of Justice, Justice Department Announces Resolution with NPB Neue Privat Bank AG (July 18, 2018), https://www.justice.gov/opa/pr/justice-department-announces-resolution-npb-neue-privat-bank-ag. [87] Non-Prosecution Agreement, NPB Neue Privat Bank AG (June 22, 2018), at 2 [hereinafter NPB NPA]. [88] Press Release, U.S. Dep’t of Justice, Justice Department Announces Resolution with NPB Neue Privat Bank AG (July 18, 2018), https://www.justice.gov/opa/pr/justice-department-announces-resolution-npb-neue-privat-bank-ag. [89] Id. [90] Id. [91] Id. [92] Id. [93] Id. [94] Id. [95] NPB NPA, supra note 87, at 2–3. [96] Id. at 4. [97] Id. [98] Press Release, U.S. Dep’t of Justice, Petróleo Brasileiro S.A. – Petrobras Agrees to Pay More Than $850 Million for FCPA Violations (Sept. 27, 2018), https://www.justice.gov/opa/pr/petr-leo-brasileiro-sa-petrobras-agrees-pay-more-850-million-fcpa-violations. [99] Id. [101] Id. [102] Id. [103] Id. [104] Id. [105] Id. [106] Non-Prosecution Agreement, Petróleo Brasileiro S.A. – Petrobras (Sept. 26, 2018), at 3. [107] Id. at 5. [108] Id. at 4. [109] See 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 [hereinafter SocGen Press Release]. [110] See Deferred Prosecution Agreement, Société Générale (Nov. 18, 2018) [hereinafter SocGen DPA]. [111] See SocGen Press Release, supra note 109. [112] See SocGen DPA, supra note 110. [113] See id. [114] See SocGen Press Release, supra note 109. [115] See id. [116] See id. [117] See id. [118] Press Release, U.S. Dep’t of Justice, Waste Management to Forfeit $5.5 Million for Hiring Illegal Aliens (Aug. 29, 2018), https://www.justice.gov/usao-sdtx/pr/waste-management-forfeit-55-million-hiring-illegal-aliens. [119] Id. [120] Id. [121] Id. [122] Id. [123] Non-Prosecution Agreement, Wright State University (Nov. 16, 2018) [hereinafter WSU NPA]. [124] Press Release, U.S. Dep’t of Justice, Wright State University Agrees to Pay Government $1 Million for Visa Fraud (Nov. 16, 2018), https://www.justice.gov/usao-sdoh/pr/wright-state-university-agrees-pay-government-1-million-visa-fraud. [125] WSU NPA, supra note 123, at 5. [126] Id. [127] Id. [128] Id. at 6. [129] Id. [130] Id. [131] Id. [132]See Press Release, U.S. Dep’t of Justice, Manhattan U.S. Attorney Announces Criminal Charges Against Zürcher Kantonalbank of Switzerland, With Deferred Prosecution Agreement Requiring Payment Of $98.5 Million, As Well As Guilty Pleas of Two Zürcher Kantonalbank Bankers (Aug. 13, 2018), https://www.justice.gov/usao-sdny/pr/manhattan-us-attorney-announces-criminal-charges-against-z-rcher-kantonalbank [hereinafter ZKB Press Release]. [133] Id. [134] Id. [135] See Deferred Prosecution Agreement, Zürcher Kantonalbank (Aug. 7, 2018) [hereinafter ZKB DPA]. [136] See id. [137] See ZKB Press Release, supra note 132. [138] See ZKB DPA, supra note 135. [139] See id. [140] U.S. Dep’t of Justice, Declination Letter for The Dun & Bradstreet Corporation (Apr. 23, 2018), at 1. [141] Id. [142] The Dun & Bradstreet Corp., U.S. Sec. & Exch. Comm’n Admin. Order, File No. 3-18446 (Apr. 23, 2018), at 8. [143] Id. at 2, 4–6. [144] Id. at 2. [145] U.S. Dep’t of Justice, Declination Letter for Insurance Corporation of Barbados Limited (Aug. 23, 2018), at 1. [146] Id. [147] Id. [148] Id. at 2. [149] Id. [150] Id. [151] Id. [152] U.S. Dep’t of Justice, Declination Letter for Polycom, Inc. (Dec. 20, 2018), at 1 [hereinafter Polycom Declination]. [153] Press Release, U.S. Sec. & Exch. Comm’n, SEC Charges Polycom, Inc. with FCPA Violation, Admin. Proceeding, File No. 3-18964 (Dec. 26, 2018), https://www.sec.gov/enforce/34-84978-s. [154] Polycom Declination, supra note 152, at 1. [155] Id. at 2. [156] Id. [157] Id. [158] Polycom, Inc., U.S. Sec. & Exch. Comm’n, Admin. Proceeding, File No. 3-18964 (Dec. 26, 2018), at 1. [159] Id. at 6. [160] Id. at 5. [161] Camilla de Silva, Address at ABC Minds Financial Services Conferences (Mar. 16, 2018), https://www.sfo.gov.uk/2018/03/16/camilla-de-silva-at-abc-minds-financial-services. [162] Remarks of Lisa Osofsky, Transcript of House of Lords 2010 Bribery Act Committee Oral Evidence 5 (Nov. 13, 2018), http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/bribery-act-2010-committee/bribery-act-2010/oral/92752.pdf. [163] Remarks of Hannah von Dadelszen, Transcript of House of Lords 2010 Bribery Act Committee Oral Evidence (Oct. 23, 2018), http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/bribery-act-2010-committee/bribery-act-2010/oral/92103.html. [164] Press Release, SFO, Lisa Osofsky Begins Tenure as SFO Director (Aug. 28, 2018), https://www.sfo.gov.uk/2018/08/28/lisa-osofsky-begins-tenure-as-sfo-director/. [165] Lisa Osofsky, Director, SFO, Ensuring Our Country is a High Risk Place for the World’s Most Sophisticated Criminals to Operate (Sept. 3, 2018), https://www.sfo.gov.uk/2018/09/03/lisa-osofsky-making-the-uk-a-high-risk-country-for-fraud-bribery-and-corruption/. [166] Id. [167] Id. [168] Id. [169] Matthew Wagstaff, Joint Head of Bribery and Corruption, SFO, Current Priorities and Future Directions (Nov. 21, 2018), https://www.sfo.gov.uk/2018/11/21/current-priorities-and-future-directions/. [170] Waithera Junghae, Waiving Privilege Shows Willingness to Cooperate, SFO Official Says, Global Investigations rev. (Dec. 6, 2018), https://globalinvestigationsreview.com/article/1177673/waiving-privilege-shows-willingness-to-cooperate-sfo-official-says. [171] Id. [172] Lisa Osofsky, Director, SFO, Keynote Address at the 35th International Conference on the Foreign Corrupt Practices Act in Washington, D.C. (Nov. 28, 2018), https://www.sfo.gov.uk/2018/12/04/keynote-address-fcpa-conference-washington-dc/. [173] Id. [174] Id. [175] Michael Griffiths, SFO Director: We Don’t Do Guidance, Global Investigations rev. (Nov. 1, 2017), https://globalinvestigationsreview.com/article/1149586/sfo-director-we-dont-do-guidance. [176] Waithera Junghae, Lisa Osofsky: “Tell Us Something We Don’t Know”, Global Investigations rev. (Nov. 8, 2018), https://globalinvestigationsreview.com/article/1176629/lisa-osofsky-%E2%80%9Ctell-us-something-we-don%E2%80%99t-know%E2%80%9D. [177] Press Release, SFO, UK’s First Deferred Prosecution Agreement, Between the SFO and Standard Bank, Successfully Ends (Nov. 30, 2018), https://www.sfo.gov.uk/2018/11/30/uks-first-deferred-prosecution-agreement-between-the-sfo-and-standard-bank-successfully-ends/. [178] We addressed the Standard Bank DPA in detail in a client alert on December 3, 2015. [179] Joanne Faulkner, SFO Wraps Up First Deferred Prosecution Agreement, Law360 (Nov. 30, 2018), https://www.law360.com/articles/1106556/sfo-wraps-up-first-deferred-prosecution-agreement. [180] Id. [181] Mara Lemos Stein, U.K. Bribery Act Review Puts Deferred Prosecution Agreements Under Scrutiny, Wall St. J. (Aug. 27, 2018), https://www.wsj.com/articles/u-k-bribery-act-review-puts-deferred-prosecution-agreements-under-scrutiny-1535362200. [182] Caroline Doherty de Novoa, Some of the UK’s most senior prosecutors and judges on the Bribery Act, DPAs and the future of economic crime enforcement, Freshfields Bruckhas Deringer (Nov. 15, 2018), https://risk.freshfields.com/post/102f5vh/some-of-the-uks-most-senior-prosecutors-and-judges-on-the-bribery-act-dpas-and; Remarks of Hannah von Dadelszen, supra note 163. [183] Remarks of Hannah von Dadelszen, supra note 163. [184] Id. [185] Colm Keena, The DPA Regime Recommended for Ireland Does Not Allow Deals Which Give Immunity to Particular Individuals, Irish Times (Oct. 26, 2018), https://www.irishtimes.com/news/crime-and-law/the-dpa-regime-recommended-for-ireland-does-not-allow-deals-which-give-immunity-to-particular-individuals-1.3675677. [186] Law Reform Commission of Ireland, Regulatory Powers and Corporate Offences 266 (2018), https://www.lawreform.ie/_fileupload/Completed%20Projects/LRC%20119-2018%20Regulatory%20Powers%20and%20Corporate%20Offences%20Volume%201.pdf. [187] Id. [188] Id. at 266-67, 275. [189] Id. at 267. [190] Id. [191] Keena, supra note 185. [192] Law Reform Commission of Ireland, supra note 186, at 267. [193] Id. at 269. [194] If Mirelis fails to close any and all U.S.-related accounts classified as “dormant” within the specified time period, it must provide periodic reporting at the request of the Tax Division. [195] If NPB fails to close any and all U.S.-related accounts classified as “dormant” within the specified time period, it must provide periodic reporting at the request of the Tax Division. The following Gibson Dunn lawyers assisted in preparing this client update:  F. Joseph Warin, M. Kendall Day, Sacha Harber-Kelly, Courtney Brown, Melissa Farrar, Chelsea Ferguson, Ben Belair, Abbey Bush, Laura Cole, Brittany Garmyn, Patricia Herold, Jillian Katterhagen Mills, Katie King, William Lawrence, Dan Nadratowski, Susanna Schuemann, and Jason Smith. Gibson Dunn’s White Collar Defense and Investigations Practice Group successfully defends corporations and senior corporate executives in a wide range of federal and state investigations and prosecutions, and conducts sensitive internal investigations for leading companies and their boards of directors in almost every business sector.  The Group has members in every domestic office of the Firm and draws on more than 125 attorneys with deep government experience, including more than 50 former federal and state prosecutors and officials, many of whom served at high levels within the Department of Justice and the Securities and Exchange Commission.  Joe Warin, a former federal prosecutor, served as the U.S. counsel for the compliance monitor for Siemens and as the FCPA compliance monitor for Alliance One International.  He previously served as the monitor for Statoil pursuant to a DOJ and SEC enforcement action.  He co-authored the seminal law review article on NPAs and DPAs in 2007.  Debra Wong Yang is the former United States Attorney for the Central District of California, and has served as independent monitor to a leading orthopedic implant manufacturer to oversee its compliance with a DPA.  In the United Kingdom, Sacha Harber-Kelly is a former Prosecutor and Case Controller at the Serious Fraud Office. 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January 9, 2019 |
2018 Year-End False Claims Act Update

Click for PDF One hundred and fifty-five years after Congress enacted the False Claims Act (FCA), it remains the government’s primary tool to combat fraud with respect to government programs, a source of noteworthy Supreme Court jurisprudence, and a window into the government’s enforcement priorities and policy efforts.  Especially during the last decade, few areas of law have generated so much attention among the courts, and so much in damages and penalties paid to the government by private industry.  This year was no exception. In fiscal year 2018, the Department of Justice (DOJ) recovered almost $2.9 billion from companies that do business with the government.  This total marks a slight downturn from recent years, but is still one of the top ten totals of all time (all ten of which have occurred since 2006).  There were also more than 760 new FCA matters initiated during 2018, marking the ninth year in a row that companies were hit with more than 700 new matters.  By all measures, therefore, the breakneck pace of FCA investigations and litigation set during the last decade is not slowing. It is perhaps no surprise then, that key legal questions underpinning FCA litigation also continued to garner significant attention from the federal courts.  For their part, the lower courts continued to deal with a wide range of thorny legal issues, including threshold jurisdictional issues, pleading requirements under the FCA, and standards of liability and proof under the Supreme Court’s seminal 2016 decision in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016).  The Supreme Court, meanwhile, agreed to hear an important case concerning the statute of limitations in whistleblower suits brought under the FCA, marking the fourth time in as many years that the Supreme Court has opted to interpret the FCA (and the eighth time in the last decade).[1] Not to be outdone by developments on the enforcement and case law fronts, there were also several important legislative and policy developments.  Most notably, DOJ leadership announced significant policy changes in the first half of 2018 that guide how and when the government will pursue FCA actions.  And in the second half of 2018, even though they are still in their early stages, we started to see those changes put into effect.  Indeed, DOJ sought to pull the plug on a dozen FCA cases. We address all of these and other developments in greater depth below.  We first provide an overview of enforcement activity at the federal and state levels during fiscal year 2018 and summarize the most notable FCA settlements that were announced in the second half of 2018 (settlements from the first half of the year were covered in our 2018 Mid-Year Update).  We turn next to the noteworthy developments on the legislative and policy fronts, and then conclude with an analysis of significant cases from the past six months. As always, Gibson Dunn’s recent publications on the FCA may be found on our website, including industry-specific articles, webcasts, presentations, and practical guidance to help companies avoid or limit liability under the FCA.  And, of course, we would be happy to discuss these developments—and their implications for your business—with you. I.   FCA ENFORCEMENT ACTIVITY A.   Total Recovery Amounts: 2018 Recoveries Reach Almost $2.9 Billion The federal government recovered almost $2.9 billion in civil settlements and judgments under the FCA during the 2018 fiscal year.  This number, while sizable, marks the first time since 2009 that recoveries failed to crack the $3 billion threshold.[2]  Still, this total is the tenth highest one-year total in history, a sign of just how historic the past decade has been. The health care industry, as in most years, was the primary FCA target in the 2018 fiscal year, as companies and individuals in that industry agreed to pay $2.5 billion to DOJ in 2018 in FCA matters.  There were 767 new FCA cases filed in 2018, more than 500 of them in the health care space. B.   Qui Tam Activity Of the nearly $2.9 billion that the government recovered in 2018, $2.1 billion came from qui tam cases—the lowest number for recoveries from qui tam cases since 2009.[3]  Of that total, the vast majority came in cases where the government intervened, while qui tam cases where the government declined intervention accounted for just $119 million of the $2.1 billion in qui tam recoveries, a sharp decline from last year’s figures. Even as qui tam recoveries decreased, the proportion of all cases initiated by a whistleblower remained in tune with historical averages at 84% (645 of 767) in 2018—a figure that has vacillated between 77% and 88% every year since 2009.  Going back farther in time, however, it is important to recall that the amount and proportion of qui tam cases has increased substantially since Congress amended the FCA in 1986: from 1987 to 1991, only about one-quarter of FCA cases were qui tam cases, but whistleblowers have now brought over 12,000 qui tam cases since then—71% of the total. Of course, qui tam cases are not the only way FCA cases begin.  This year also saw far more than the usual amount of recoveries in cases originally filed by the government.  This was true even as DOJ seemingly took steps to rein in FCA enforcement activity in certain areas.  Indeed, recoveries in such cases leapt to $767 million in 2018—more than double the amount of last year—and above the total in many other recent years (although still lower than in 2012, 2014, and 2016—all of which saw non-qui tam recoveries north of $1.5 billion). The chart below demonstrates both the increase in overall FCA litigation activity since 1986 and the distinct shift from largely government-driven investigations and enforcement to qui tam-initiated lawsuits.  Although there was a slight decline compared to the prior two years, the total number of FCA cases remains far north of where it was in the first decade of the new millennium, when an average of 476 cases were brought per year. Number of FCA New Matters, Including Qui Tam Actions  Source: DOJ “Fraud Statistics – Overview” (Dec. 21, 2018) The government opts to intervene in FCA cases filed by qui tam relators about 20% of the time.[4]  Even if the government declines to intervene, 70% of any recovery still goes to the government.  In fiscal year 2017, the large majority of cases where the government declined to intervene accounted for 17% of all federal recoveries—only the second time such recoveries exceeded 9%.  That figure dropped to just 4% in fiscal year 2018, however, marking a return to levels more typically seen in past years. Settlement or Judgments in Cases where the Government Declined Intervention as a Percentage of Total FCA Recoveries Source: DOJ “Fraud Statistics – Overview” (Dec. 21, 2018) C.   Trump Administration Enforcement Policy DOJ began the year by issuing a series of internal guidance memoranda and public speeches in an apparent attempt to shift FCA enforcement policy.  In our 2018 Mid-Year Update, we addressed a memorandum from Michael Granston, the Director of the Fraud Section of DOJ’s Civil Division, (the “Granston Memo”) and a memorandum from then-Associate Attorney General Rachel Brand (the “Brand Memo”), which appeared to take at least some initial steps towards addressing potential costs of unbridled FCA enforcement. As detailed further in our 2018 Mid-Year Update, the Granston Memo directs government lawyers evaluating whether to decline intervention in a qui tam FCA action also to “consider whether the government’s interests are served” by seeking dismissal of the underlying qui tam claims pursuant to 31 U.S.C. § 3730(c)(2)(A).[5]  Outlining seven factors for prosecutors to consider when evaluating dismissal of a declined qui tam action, the Granston Memo emphasizes DOJ’s “important gatekeeper role in protecting the [FCA]” and the role that dismissal can play in “preserv[ing] limited resources” and “avoid[ing] adverse precedent.”  In addition, the Brand Memo prohibits DOJ from basing its theories of liability in affirmative civil enforcement cases on noncompliance with other agencies’ guidance documents and from using “its enforcement authority to effectively convert agency guidance documents into binding rules.”[6]  We also addressed a June 14 speech from Acting Associate Attorney General Jesse Panuccio describing these memos and other policy initiatives, including efforts to formalize Department practices around cooperation credit, compliance program credit, and “piling on” by other agencies and regulatory bodies in settlement discussions. Although these actions signaled some potentially significant shifts in the FCA enforcement space, it has been less clear how these changes would be put into practice.  Several additional announcements by the Trump Administration in the latter half of the year have now set those wheels in motion. Most notably, on September 25, DOJ announced the rollout of an updated United States Attorneys’ Manual—now titled the Justice Manual.[7]  Twenty years’ coming, the Justice Manual appears to incorporate the recommendations set forth in the Granston Memo.  Although it does not adopt the Granston Memo wholesale, the Justice Manual does encourage the Department to evaluate a non-exhaustive list of factors, any one of which may be sufficient to support dismissal.[8]  In addition to preserving government resources, these factors include “[c]urbing meritless qui tam claims that facially lack merit (either because the relator’s legal theory is inherently defective, or the relator’s factual allegations are frivolous),” “[p]reventing parasitic or opportunistic qui tam actions” that add “no useful information to a pre-existing government investigation,” and “[p]reventing interference with an agency’s policies or the administration of its programs.”  The enumerated factors also include controlling litigation brought on behalf of the government “to protect the Department’s litigation prerogatives,” “[s]afeguarding classified information and national security interests,” and “[a]ddressing egregious procedural efforts that could frustrate the government’s efforts to conduct a proper investigation.” That the Justice Manual made official substantial portions of the Granston Memo (which was not officially released publicly) may reinforce a trend towards more judicious FCA enforcement by DOJ.  Other data points also show that trend.  In November, DOJ notified the U.S. Supreme Court via an amicus brief that it would move to dismiss the high-profile FCA case against Gilead Sciences (Gilead Sciences., Inc. v. United States ex rel. Campie, 138 S. Ct. 1585 (2018) (discussed in greater detail infra)), should that matter be remanded to the district court in accordance with the Ninth Circuit’s ruling.[9]  Then in December, DOJ moved to dismiss 11 qui tam FCA actions brought by Health Choice Group, LLC against multiple pharmaceutical companies.[10]  In rejecting allegations that the defendants violated the Anti-Kickback Statute (AKS) by providing assistance with prior authorizations and arranging for nurses to educate patients on proper administration of newly-prescribed medicines, among other items, the government stated that the relators’ allegations “lack[ed] sufficient factual and legal support” and would be contrary to previous guidance issued by the Department of Health and Human Services Office of Inspector General (HHS OIG).[11]  Emphasizing that the right for a qui tam plaintiff to proceed with an action without government intervention “is not absolute,” the government moved for dismissal given the need to “preserv[e] scarce government resources and protect[] important policy prerogatives of the federal government’s healthcare programs.”[12]  Specifically, the government emphasized that the “relators should not be permitted to indiscriminately advance claims on behalf of the government against an entire industry that would undermine common industry practices the federal government has determined are . . . appropriate and beneficial to federal healthcare programs and their beneficiaries.”[13] Building on DOJ’s promises to solidify its practices around providing cooperation credit, Deputy Attorney General Rod Rosenstein also announced in November a set of policy changes to “restore” discretion to DOJ attorneys.  Most notably, DOJ now will give cooperation credit to companies that identify every individual who was “substantially involved in or responsible for the criminal conduct” under investigation in white collar investigations.[14]  This shift recalibrates DOJ policy after the so-called “Yates Memo,” issued by then-Deputy Attorney General Sally Yates, which required corporations to provide “all relevant facts” about individuals involved in misconduct and appeared to apply regardless of the significance of those individuals’ involvement.  As such, this policy shift may allow companies to tailor their investigations and advocacy efforts more closely to those individuals most likely to face criminal prosecution.  In addition, Deputy Attorney General Rosenstein announced that DOJ attorneys will be “permitted to negotiate civil releases for individuals who do not warrant additional investigation in corporate civil settlement agreements.”[15]  Although focused primarily on the Foreign Corrupt Practices Act, Deputy Attorney General Rosenstein also remarked on the impact the new standard could have on companies facing civil FCA liability. In September, HHS OIG unveiled a “Fraud Risk Indicator,” designed to increase transparency for health care organizations and their counsel.[16]  According to the HHS OIG website, the Indicator is designed to assess “the future risk posed by persons who have allegedly engaged in civil healthcare fraud”—in other words, parties who have entered into settlement agreements in which the government alleges fraudulent conduct and the settling parties neither admit liability nor enter into a corporate integrity agreement (CIA).  Using published criteria for potential exclusion from federal health care programs, the Indicator assigns the settling party to one of five risk categories, ranging from “High Risk – Exclusion” to “Low Risk – Self-Disclosure.”  Although intended to better inform “various stakeholders, including patients, family members, and healthcare industry professionals,” the Indicator may well give rise to more questions than answers.  For example, it is unclear whether there is a designated process for disputing HHS OIG’s risk assessment (and, if so, how transparent the process will be).  HHS OIG also has not shared how it will use the risk classifications when evaluating whether the company must enter a CIA as part of an FCA resolution. Lastly, there has also been speculation about what approach William Barr, President Trump’s nominee for Attorney General, would bring to FCA enforcement.  In the past, Barr has made comments calling the FCA unconstitutional and an “abomination.”[17]  While serving at DOJ during the administration of President George H.W. Bush, Barr authored a memorandum questioning the constitutionality of the FCA’s qui tam provisions based on separation of powers concerns.  The Supreme Court (and lower courts) have since rejected such arguments.  See, e.g., Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765 (2000).  Even if that issue is settled, however—and there have been reports that Barr will back-off such positions during his confirmation hearing—we will be watching carefully to see how Attorney General Barr (if confirmed) influences enforcement of a statute he has so strongly criticized in the past. D.   Industry Breakdown The distribution of recoveries by industry skewed more heavily towards health care than in prior years.  This largely reflects the steep drop in recoveries from the financial industry now that ten years have passed since the financial crisis.[18] Settlement or Judgments by Industry in 2018 1.   Health Care and Life Sciences Industries 2018 was a record setting year in that the health care industry paid nearly 90% of all sums owed to the government in connection with FCA resolutions or cases, eclipsing the total percentage in years past.  Even while the percentage share increased, the total amount, approximately $2.5 billion in 2018, recovered from health care companies remained in line with past figures.  Since 2010, the government has recovered between $2.4 billion and $2.7 billion from health care companies in each year but two. As in years past, a handful of large settlements drove the ten-figure sum—with just five settlements accounting for well over $1.5 billion of the total recovery in the health care sector.  Nearly a billion dollars came from just two settlements—one in which a California-based pharmaceutical company agreed to pay $360 million to settle allegations that it used a non-profit foundation as a conduit to fund copays of Medicare patients in alleged violation of the AKS,[19] and another in which a wholesale drug manufacturer and its subsidiaries agreed to pay $625 million to resolve allegations that they improperly distributed overfill oncology-supportive drugs and paid kickbacks to induce use of the drugs.[20]  Meanwhile, just three other settlements of $150 million,[21] more than $260 million,[22] and $270 million[23] accounted for an additional nearly three quarters of a billion dollars. DOJ’s and HHS OIG’s enforcement activities once again focused heavily on compliance with the AKS and the Stark Law.  The AKS prohibits giving or offering—and requesting or receiving—any form of payment in exchange for referring a product or a service that is covered by federally funded health care programs—and claims resulting from a violation of the AKS are deemed “false” for purposes of the FCA.  The Stark Law, or so-called “self-referral” law, prohibits physicians from referring patients to a provider with which the physician has a financial relationship. While FCA recoveries continued to center on pharmaceutical companies, medical device companies, outpatient clinics, and others, some notable settlements involved hospitals and hospital systems.  For instance, a large hospital chain agreed to pay over $260 million to resolve criminal and civil charges premised on allegations that it inflated fees, such as billing for inpatient services that should have been billed as outpatient services, and remunerated physicians for referrals.[24]  Further, a regional based hospital chain agreed to pay $84.5 million to resolve allegations that it billed for services provided to patients illegally referred in violation of the AKS and Stark Law.[25] 2.   Government and Defense Contracting, Financial, and Other Industries After an increase to $220 million in 2017, recoveries from government contracting firms fell in 2018 to approximately $100 million.  Defense contractors comprised the bulk of government contracting enforcement actions in 2018, in contrast to the prior year, when contractors who provide more routine government services were more of a focus of FCA cases. Ten years out from the 2008 financial crisis, 2018 saw FCA recoveries from financial services companies trickle to their lowest amount ever, with only a pair of notable settlements (involving two mortgage companies) exceeding $10 million. II.   NOTEWORTHY SETTLEMENTS AND JUDGMENTS ANNOUNCED DURING THE SECOND HALF OF 2018 We summarize below a number of the notable FCA settlements announced during the past six months (we covered notable settlements and judgments from the first half of the year in our 2018 Mid-Year Update).  These summaries provide insight into not only the industries that the government has targeted, but also the specific theories of liability that the government and relators have advanced. A.   Settlements 1.   Health Care and Life Sciences Industries On July 9, 2018, a New York-based family of integrated hospitals and two of its subsidiaries agreed to pay over $14.7 million to settle allegations that they submitted inflated or otherwise ineligible claims for payment.  As part of the settlement, the hospital system admitted to, inter alia, submitting claims without sufficient documentation to support the level of services billed; submitting claims for home health services without sufficient medical records to support the claims; and billing Medicare for services referred by physicians with whom the system had a direct financial relationship, in violation of the Stark Law and AKS.  The hospital system agreed to pay an additional $895,427 to the State of New York and entered into a CIA with HHS OIG.  In total, the four whistleblowers will receive approximately $2.8 million of the recovered funds.[26] On July 18, 2018, a New York-based medical device manufacturer agreed to pay $12.5 million to settle allegations that it caused health care providers to submit false claims for procedures involving two unapproved devices that it marketed with purportedly false and misleading statements.  The whistleblower, who formerly worked in the manufacturer’s marketing department, will receive approximately $2.3 million of the settlement.[27] On July 18, 2018, two consulting companies and nine affiliated skilled nursing facilities in Florida and Alabama agreed to pay $10 million to settle allegations that they submitted, or caused the submission of, claims for unnecessary rehabilitation therapy services.  The three whistleblowers, former employees of one of the nursing facilities, will receive $2 million of the recovery.[28] On August 2, 2018, a Detroit-based regional hospital system agreed to pay $84.5 million to resolve allegations that it maintained improper relationships with eight referring physicians, submitted claims for services provided to illegally referred patients in violation of the AKS and Stark Law, and misrepresented the qualifications of a radiology center to federal programs.  The hospital system has also entered into a five-year CIA with HHS OIG.  The four whistleblowers will receive 15% to 25% of the recovery.[29] On August 2, 2018, a South Carolina behavioral-therapy provider for children with autism paid approximately $8.8 million to resolve allegations that it billed for services either misrepresented in the claims or not provided at all.  As part of the settlement, the provider and its parent company entered into a CIA with HHS OIG.  The whistleblower, a former employee, will receive $435,000.[30] On August 3, 2018, a national hospital system, as well as its founder and chief executive officer, agreed to pay $65 million to settle allegations that 14 of its California hospitals admitted Medicare patients for unnecessary inpatient treatment and up-coded claims by falsifying information about patient diagnoses.  As part of the settlement, the system entered a five-year CIA with HHS OIG.  The whistleblower, a former director of improvement at one of the California hospitals, will receive over $17.2 million of the recovery.[31] On August 8, 2018, a pharmaceutical company agreed to pay at least $150 million to resolve allegations that it improperly paid medical practitioners to prescribe its opioid medication, in violation of the AKS.[32]  The company’s founder and five other former executives face criminal charges, including a potential January 2019 trial for conspiracy to commit racketeering, mail and wire fraud, and conspiracy to violate the AKS, and at least two of the defendants have agreed to plead guilty already, including the ex-CEO.[33] On August 15, 2018, a Pennsylvania-based operator of long-term care and rehabilitation hospitals agreed to pay more than $13 million to resolve allegations that they knowingly submitted claims for services referred and provided in violation of the AKS and Stark Law.  Pursuant to the settlement, the operator will pay additional monies to Texas and Louisiana, and has entered a five-year CIA with HHS OIG.  The whistleblower will receive approximately $2.3 million of the recovered funds.[34] On August 16, 2018, a Florida-based nationwide provider of oxygen and home respiratory-therapy services paid $5.25 million to settle allegations that it offered illegal price reductions to Medicare beneficiaries, in violation of the AKS.  The whistleblower, a former billing supervisor for the company, will receive $918,750 of the recovery.[35] On August 23, 2018, a Texas-based national provider of rehabilitation-therapy services agreed to pay $6.1 million to resolve allegations that it offered improper inducements to skilled nursing facilities and physicians in relation to services provided to Medicare beneficiaries.  The whistleblower will receive approximately $915,000 of the recovery.[36] On August 27, 2018, seven ambulance industry defendants agreed to pay more than $21 million to settle allegations that they offered kickbacks to several municipal entities to secure business.  The whistleblower will receive over $4.9 million of the recovery.[37] On September 25, 2018, a Florida-based hospital chain, and a Pennsylvania-based subsidiary, agreed to pay over $260 million to resolve criminal and civil charges for allegedly billing for inpatient services that should have been billed as outpatient services, remunerating physicians for referrals, and inflating claims for emergency department fees, as well as allegations Hospital administrators and executives set mandatory admission-rate benchmarks and pressured physicians to meet them by admitting patients in non-medically necessary cases.  A portion of the recovery will go to participating state programs.  The allegations resolved by the settlement were originally brought in eight whistleblower law suits.  Two whistleblowers will receive $15 million and $12.4 million of the recovery; the other whistleblowers’ shares have not yet been determined.[38] On September 28, 2018, a Montana-based regional health care system and six subsidiaries agreed to pay $24 million to settle allegations that they submitted claims to Medicare for services referred in violation of the Stark Law and AKS.  The health care system allegedly paid excessive compensation to more than 60 physicians, paid excessive compensation to induce referrals, and provided administrative services at below fair market value.  The whistleblower, a former chief financial officer for the system’s physician network, will receive approximately $5.4 million of the recovery.[39] On October 1, 2018, a wholesale drug manufacturer and its subsidiaries agreed to pay $625 million to resolve allegations that they improperly repackaged and distributed overfill oncology drugs.  Last year, one of the subsidiaries pled guilty to illegally distributing misbranded drugs that were not registered with the FDA, and agreed to pay $260 million to resolve criminal charges.  This year’s settlement resolves the parent’s civil liability for submitting purportedly false claims for the allegedly illegally repackaged drugs and allegedly providing kickbacks to induce physicians to purchase the repackaged drugs.  The whistleblower will receive approximately $93 million of the civil settlement.[40] On October 1, 2018, a Medicare Advantage provider agreed to pay $270 million to resolve allegations that it provided inaccurate information that resulted in Medicare Advantage Plans receiving inflated Medicare payments.  The whistleblower will receive approximately $10.1 million of the settlement.[41] On November 6, 2018, an Indiana-based dental care firm agreed to pay approximately $5.1 million to resolve allegations that it submitted false claims by up-coding dental procedures, billing for unperformed or medically unnecessary procedures, and that it allegedly violated state law prohibiting rewarding, disciplining, or otherwise directing personnel in a manner that compromises clinical judgment.  The firm will pay approximately $3.4 million to the United States and $1.8 million to Indiana.  Notably, the firm declined to agree to a proposed CIA, and as a result, is considered by the government a “continuing high risk” to health care programs and beneficiaries.[42] On December 4, 2018, the world’s largest medical device maker agreed to pay $50.9 million to settle allegations relating to conduct by two of its subsidiaries.  The total settlement included $17.9 million in connection with its pleading guilty to a misdemeanor for allegedly distributing an adulterated neurovascular device in violation of the Federal Food, Drug, and Cosmetic Act; $13 million to resolve civil liability for allegedly paying kickbacks to hospitals and institutions to induce the use of a medical device for stroke patients;[43] and an additional $20 million to resolve a DOJ investigation into its subsidiaries’ market-development and physician-engagement activities.[44] On December 6, 2018, a California-based pharmaceutical company agreed to pay $360 million to settle claims that it used a non-profit foundation as an illegal conduit to pay copays of Medicare patients taking its drug, in violation of the AKS, based on allegations that, rather than allowing financially needy Medicare patients to participate in the company’s free drug program, it referred them to the foundation, which paid their copays, resulting in claims to Medicare for the remaining cost.[45] On December 11, 2018, an integrated health care system located in Wisconsin, Illinois, and Michigan agreed to pay $12 million to settle allegations that it entered into improper compensation arrangements with two physicians in violation of the Stark Law.[46] On December 11, 2018, a Pennsylvania-based health system and its chief executive officer agreed to pay $12.5 million to settle allegations that the health system submitted inflated claims for orthopedic surgeries by unbundling and separately billing for services that were part of the same surgery.  The system entered a five-year CIA with HHS OIG as part of the settlement.[47] 2.   Government Contracting and Defense/Procurement On July 6, 2018, a Colorado-based energy industry services company and its owner agreed to pay $14.4 million to resolve allegations that they submitted fraudulent claims for reimbursement to the Department of Energy.  A week earlier, the company’s owner was sentenced to 18 months in prison after pleading guilty to a felony count of intentional submission of false claims.  The government alleged that company’s owner submitted fake invoices for work by contractors and engineers that was never performed, as well as that the owner funneled award money to pay for legal fees, jewelry, car payments, and international travel.[48] On July 26, 2018, a Minnesota-based consumer goods and health care conglomerate agreed to pay $9.1 million to settle whistleblower claims alleging that it knowingly sold defective earplugs to the U.S. military.[49]  The whistleblower was awarded $1.9 million of the settlement. On November 14, 2018, three South Korea-based oil refiners and logistics companies agreed to pay a total of $236 million in criminal fines and civil damages to resolve allegations of a bid-rigging conspiracy.  The settlements consisted of $82 million in criminal fines and $154 million for alleged civil antitrust and FCA violations.  The FCA civil investigation arose from a whistleblower lawsuit involving allegations of false statements made to the government in connection with the companies’ decade-long conspiracy to rig bids on Department of Defense contracts to supply fuel to Army, Navy, Marine Corps, and Air Force bases in South Korea.[50] 3.   Financial Services On October 19, 2018, a Florida-based mortgage company agreed to pay $13.2 million to resolve claims that it had falsely certified compliance with Federal Housing Administration (FHA) mortgage insurance requirements.  The company had participated as a direct endorsement lender (DEL) in the Department of Housing and Urban Development’s FHA insurance program.  Under the program, if a DEL approves a loan for FHA insurance and the loan later defaults, the holder of the loan can submit an insurance claim to HUD for the losses.  Because the FHA does not review a loan for compliance before it endorses the loan, DELs are required to follow certain program rules to ensure that they are properly underwriting and certifying mortgages.  The government alleged that the company knowingly submitted loans for FHA Insurance that did not qualify, improperly incentivized underwriters, and knowingly failed to perform quality control reviews.  The whistleblower, a former employee of the company’s related entity, will receive almost $2 million of the settlement.[51] On December 12, 2018, a Pennsylvania-based mortgage company agreed to pay $14.5 million to resolve similar claims regarding compliance with FHA insurance requirements.  A business that the company acquired in 2015 had participated as a DEL in the FHA insurance program.  The government alleged that the business had misrepresented that its loans met certain origination, underwriting, and quality control requirements.  The investigation was triggered by a whistleblower qui tam suit filed by one of the business’s former employees, who will receive about $2.4 million of the settlement.[52] 4.   Other On November 13, 2018, two international airlines agreed to pay $5.8 million to resolve claims that they falsely reported mail delivery times under contracts with the United States Postal Service (USPS).  USPS had contracted with the commercial airlines to deliver mail to domestic and international locations, and the government alleged that the airlines had submitted false scans reporting the time of delivery.[53] On December 4, 2018, a New York-based law firm agreed to pay a total of more than $4.6 million to resolve allegations that it submitted false and inflated bills to Fannie Mae and the Department of Veterans Affairs for legal work in connection with foreclosures and evictions.  The case arose from a whistleblower lawsuit, in which the law firm agreed to pay the United States an additional $1.5 million, for a total recovery to the United States of more than $6.1 million arising out of these claims.[54] III.   LEGISLATIVE ACTIVITY A.   Federal Legislation FCA-related federal legislative activity remained quiet through the end of 2018.  As lawmakers’ attention turned to election-year campaigning, House and Senate Republicans chose not to renew their attempts to repeal and replace the Affordable Care Act (ACA), which could have impacted the ACA’s amendments to the FCA as discussed in our 2017 Mid-Year Update.  That said, a recent decision by a district court in Texas striking down the ACA in its entirety could, if it withstands appellate scrutiny, negate the ACA’s amendments to the FCA.  See Texas v. United States, 340 F. Supp. 3d 579 (N.D. Tex. 2018).  We will be watching that case carefully. Legislators did not ignore the FCA entirely in the latter half of the year.  In August, Senator Chuck Grassley (R-IA), a longtime champion of the FCA, penned an op-ed highlighting the importance of whistleblowers in protecting taxpayer dollars and arguing for greater congressional oversight of federal health care programs.  Specifically, Senator Grassley lobbied for support for bipartisan legislation cosponsored by Senator Richard Blumenthal (D-CT) that would strengthen the Physician Payment Sunshine Act (PPSA).  Enacted as part of the ACA, the PPSA requires drug and medical device manufacturers to report transfers of value to physicians or teaching hospitals to the Centers for Medicare and Medicaid Services, which become public after a 30-day review period.  The Senators’ bill would expand the PPSA to include transfers of value to nurse practitioners and physicians assistants as well.[55]  The Senate has not yet moved on this legislation, but we will track any progress in our 2019 Mid-Year Update. We also are watching closely as the Trump Administration and the new House majority push forward with various policy initiatives, including those targeted at drug pricing.  FCA cases premised on drug-pricing theories have been common in recent years, including cases based on reporting of drug prices to the government and alleged AKS violations connected to drug prices.  See, e.g., United States ex rel. Derrick v. Roche Diagnostics Corp., 2018 WL 2735090 (N.D. Ill. June 7, 2018) (denying a motion to dismiss an FCA case alleging that Roche Diagnostics violated the AKS by forgiving a disputed drug rebate amount owed to it by a Medicare Advantage plan).  Any legislation (or regulations or guidance) that changes the rules for drug pricing could therefore have significant effects on potential FCA liability. B.   State Legislation As detailed in our 2018 Mid-Year Update and elsewhere, Congress created financial incentives in 2005 for states to enact their own false claims statutes that are as effective as the federal FCA in facilitating qui tam lawsuits.  States passing review by HHS OIG may be eligible to “receive a 10-percentage-point increase in [their] share of any amounts recovered under such laws” in actions filed under state FCAs.[56]  As of mid-2018, HHS OIG approved laws in 12 states (Colorado, Connecticut, Illinois, Indiana, Iowa, Massachusetts, Montana, Nevada, Oklahoma, Tennessee, Texas, and Vermont), while 17 states are still working towards FCA statutes that meet the federal standard (California, Delaware, Florida, Georgia, Hawaii, Louisiana, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Rhode Island, Virginia, Washington, and Wisconsin). HHS OIG previously issued an end-of-2018 deadline for states to bring their FCA statutes into compliance or risk losing the 10-percentage-point increase.  As predicted in our 2018 Mid-Year Update, this deadline has spurred some action, and FCAs in three additional states—North Carolina, Virginia, and Washington—have since received HHS OIG’s stamp of approval. Apart from those three states, however, other states with FCA statutes not yet meeting the federal standard have made little progress in amending those statutes.  For example, a Michigan bill that would expand the state’s current False Claims Act beyond the Medicaid context has stalled in the state’s Senate Committee on the Judiciary since January 2017,[57] and another Michigan bill that would amend the civil penalties in the Act to mirror those allowed under the federal FCA has been stuck in the same committee since November 2017.[58]  Similarly, a Pennsylvania bill to create the state’s False Claims Act has languished in the state’s House Judiciary Committee since March 2017,[59] and a New York bill that would increase civil penalties for violations of the state’s FCA was returned to the General Assembly after dying in the state Senate in January 2018.[60] Although HHS OIG’s “grace period” for states to receive the 10-percentage point incentive is expiring, we will notify you of any additional state-level FCA developments in our next Mid-Year Update. IV.   NOTABLE CASE LAW DEVELOPMENTS A.   The Supreme Court Grants Certiorari in One Case and Considers Two Others The Supreme Court has considered issues under the FCA four times in the last four years, and 12 times in the last eighteen years.  Yet again in 2018, the Court has indicated its intent to scrutinize lower courts’ interpretation of the FCA. The Supreme Court granted certiorari in a case that presents issues related to the FCA’s statute of limitations, United States ex rel. Hunt v. Cochise Consultancy, Inc., 887 F.3d 1081, 1083 (11th Cir. 2018).  The FCA has a default six-year statute of limitations, which can be extended up to 10 years when information relevant to the claim does not become known to the relevant government official until later in time.  Circuit courts have split on whether a qui tam relator may take advantage of that longer, ten-year period in cases where the government has declined to intervene.  The questions presented by petitioners’ writ of certiorari are “whether a relator in a False Claims Act qui tam action may rely on the statute of limitations in 31 U.S.C. § 3731(b)(2) in a suit in which the United States has declined to intervene and, if so, whether the relator constitutes an ‘official of the United States’ for purposes of Section 3731(b)(2).”  Gibson Dunn represents the petitioners in the case, and we will be sure to report back in these pages when the Court decides the case. As we reported in our 2018 Mid-Year Update, the Court asked for the Solicitor General’s input in a case involving Gilead Sciences Inc.  Many Court observers thought the case had a good chance of being heard because it raised important issues about, among other things, application of the Court’s landmark 2016 decision in Escobar.[61]  But the Solicitor General’s response argued strongly that the Court should not grant certiorari.[62]  Further, the government indicated it would move to dismiss the case if it were sent back to the district court, contending that the case is “not in the public interest.”[63]  DOJ explained that its decision was based on a “thorough investigation” of the merits of the case, but also concerns about the “burdensome” discovery requests that the parties would make of the FDA if the case is allowed to continue.[64]  The about-face by the government, after years of permitting the case to move forward through the lower courts, may indicate heightened concern within DOJ about adverse rulings under Escobar (and, of course, the burden of discovery into government knowledge, which Escobar explained is a key factor in assessing materiality).  As noted above, it also marks a high-profile exercise of the DOJ’s avowed rededication to dismissing at least some unmeritorious cases under the analysis set forth in the Justice Manual and the Granston Memo.  On January 7, 2019, the Supreme Court heeded the Solicitor General’s views and denied certiorari. Finally, as we’ve reported in these pages before, parties in recent years have frequently asked the Court to resolve a circuit split on the pleading standard for FCA claims under Rule 9(b).  The key question that recurs in lower courts is how much specificity a relator must provide under the FCA, and, in particular, whether the relator must provide examples of actual false claims, or just information alleged to be sufficient to infer that such claims were likely submitted.  Almost every year, some plaintiff or defendant petitions for certiorari on this issue.  But despite showing some initial interest back in 2014, when the Court requested the view of the Solicitor General on these issues before ultimately denying certiorari,[65] the Court has since steadfastly rejected these cases.  This year was no exception, with the Court denying certiorari in another case raising pleading questions under the FCA.[66]  Absent further divisions in the courts of appeal, it is unlikely that this issue will make it to the Supreme Court anytime soon. B.   Courts Continue to Grapple with Escobar Since it was decided in 2016, Escobar has become a focal point of FCA litigation at both the appellate and trial court levels.  Indeed, a number of courts have issued opinions interpreting Escobar as it pertains to the implied false certification theory and more generally to the Court’s direction that “rigorous” enforcement of the materiality and scienter elements will protect against “concerns about fair notice and open-ended liability” in FCA matters.  Escobar, 136 S. Ct. at 2002.  As recent decisions demonstrate, Escobar continues to have a wide-ranging impact on FCA jurisprudence. 1.   The Ninth Circuit Addresses the Impact of Escobar on Its Prior Precedents In United States ex rel. Rose v. Stephens Institute, 909 F. 3d 1012 (9th Cir. 2018), amending and superseding 901 F.3d 1124 (9th Cir. 2018), the Ninth Circuit addressed the impact of Escobar on two of its prior precedents. First, the Ninth Circuit explicitly, albeit reluctantly, acknowledged that Escobar changed the landscape of FCA liability in the Ninth Circuit and overruled its prior holding in Ebeid ex rel. United States v. Lungwitz, 616 F.3d 993 (9th Cir. 2010).  In Ebeid, the Ninth Circuit held that a relator could plead an implied false certification claim merely by alleging that a defendant submitted a claim for payment while in noncompliance with a “law, rule, or regulation” that “is implicated in” submitting such a claim.  Id. at 998.  In Escobar, however, the Supreme Court held that FCA liability can exist under an implied false certification theory under two conditions: “First, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.”  136 S.Ct. at 2001. Revisiting Ebeid, the Ninth Circuit observed in Rose that Escobar, if analyzed “anew,” would not necessarily require Ebeid to be overruled because Escobar “did not state that its two conditions were the only way to establish liability under an implied false certification theory.”  Id. at 1018 (emphasis in original).  Regardless, the Rose court conceded that other Ninth Circuit cases since Escobar have gone the opposite direction.  The Ninth Circuit’s prior holdings in United States ex rel. Kelly v. Serco, Inc., 846 F.3d 325 (9th Cir. 2017) and United States ex rel. Campie v. Gilead Sciences, Inc., 862 F.3d 890, 901 (9th Cir. 2017)—”without discussing whether Ebeid has been fatally undermined—appeared to require Escobar’s two conditions nonetheless.”  Id. (emphasis in original). Second, the Rose court also considered whether Escobar had any impact on the Ninth Circuit’s decision in United States ex rel. Hendow v. University of Phoenix, 461 F.3d 1166 (9th Cir. 2006).  The Hendow court held at the pleading stage that the relevant question for materiality “is merely whether the false certification . . . was relevant to the government’s decision to confer a benefit.”  Id. at 1173.  Accordingly, the Ninth Circuit determined that a failure to comply with a regulatory requirement that allegedly was a condition of payment was material to government payment.  Id. at 1177.  In Escobar, however, the Supreme Court concluded that whether the government has made compliance with a statutory or regulatory provision a “condition of payment is relevant, but not automatically dispositive” of materiality.  136 S.Ct at 2003. Nevertheless, the Rose court found no basis for overruling Hendow on this point because Hendow “did not state that noncompliance [with a statute, regulation, or contract] is material in all cases.”  Id. at 1019 (emphasis in original) (citation omitted).  The court went on to clarify its view that Escobar provides a “‘gloss’ on the analysis of materiality”; although “it is clear that noncompliance with the incentive compensation ban is not material per se” after Escobar, nonetheless “the four basic elements of a False Claims Act claim, set out in Hendow, remain valid.”  Id. at 1020.  In applying the Escobar materiality factors, the majority noted that conditioning payment on compliance with the incentive compensation ban “may not be sufficient, without more, to prove materiality, but it is certainly probative evidence of materiality.”  Id. In a dissenting opinion, Judge Smith argued that Hendow‘s reasoning—which gave no weight to whether the government had prosecuted violations of the incentive compensation ban and found materiality based solely on statutory, regulatory, and contractual provisions conditioning payment on compliance with the ban—had been explicitly overruled by Escobar, which focuses the materiality inquiry on whether the government “would truly find . . . noncompliance material to a payment decision.”  Id. at 1024. 2.   The Sixth Circuit Addresses Pleading Requirements for Materiality Post-Escobar In Escobar, the Supreme Court identified factors that can bear on the materiality evaluation, including, but not limited to, whether “the defendant knows that the Government consistently refuses to pay claims in the mine run of cases based on non-compliance,” whether “the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated,” and whether the noncompliance was “minor or insubstantial.”  136 S.Ct. at 2003-04.  In United States ex rel. Prather v. Brookdale Senior Living Communities, Inc., 892 F.3d 822 (6th Cir. 2018) (Prather II), the Sixth Circuit weighed in on the specific application of some of these factors at the motion to dismiss stage.  The relator asserted that the defendants fraudulently sought reimbursements from Medicare for home health services without first obtaining a certification of need from a physician as required by the applicable federal regulations. Reversing the district court opinion dismissing the allegations, the Prather II court held that Escobar does not require FCA plaintiffs to allege in their pleadings that the government has previously brought enforcement actions under similar circumstances in order to establish materiality.  Prather II, 892 F.3d at 833-34.  The court further noted that Escobar itself held that none of the materiality factors is dispositive, that information about prior government action may be particularly difficult for relators to obtain at the pleading stage, and that on a motion to dismiss the complaint must be construed in the plaintiff’s favor.  Id. at 834. Additionally, the Prather II court also held that the government’s decision not to intervene was irrelevant to the materiality inquiry.  Id. at 836.  Specifically, it noted that the government had declined to intervene in Escobar itself, but that this had gone unmentioned in Escobar‘s materiality analysis.  Id.  Moreover, the Sixth Circuit held that a contrary finding would undermine the purpose of the FCA, which is “designed to allow relators to proceed with a qui tam action even after the United States has declined to intervene.”  Id. 3.   The Third, Sixth, and Seventh Circuits Strictly Construe the FCA’s Scienter Requirement Three recent circuit court decisions address the “strict enforcement” of the scienter requirement mandated by Escobar. In United States ex rel. Streck v. Allergan, No. 17-1014, 2018 WL 3949031 (3d Cir. 2018), the Third Circuit held that a relator fails to plead scienter where the defendant acted based on a reasonable, if incorrect, interpretation of relevant statutory and regulatory guidance.  In so doing, the court relied on the three-part analysis set forth by the D.C. Circuit in United States ex rel. Purcell v. MWI Corp., 807 F.3d 281, 287-88 (D.C. Cir. 2015), which built on the Supreme Court’s decision in Safeco Insurance Co. v. Burr, 551 U.S. 47 (2007).  The relator in Streck had alleged that pharmaceutical companies violated the FCA by failing to account for “price-appreciation credits” in submitting Average Manufacturing Prices (AMP) for certain drugs for the purposes of calculating rebated owed by those companies to Medicaid under the Medicaid Drug Rebate Program.  2018 WL 3949031 at *1. In affirming the district court’s rejection of relator’s claims, the court first considered “whether the relevant statute was ambiguous.”  Id. at *3.  Second, the court evaluated “whether [the] defendant’s interpretation of that ambiguity was objectively reasonable.”  Id.  And finally, the court assessed “whether [the] defendant was ‘warned away’ from that interpretation by available administrative and judicial guidance.”  Id.  The court held that the statutory definition of “price paid to the manufacturer” for AMP purposes was unclear because it did not specify “initial” price (which would have excluded subsequent price-appreciation credits) or “cumulative” price (which would have included them).  Id. at *4-5.  Although the court acknowledged that defendants’ interpretation excluding price-appreciation credits may not be the “best interpretation of the statute,” it nonetheless held that “this reasonable interpretation of an ambiguous statute was inconsistent with the reckless disregard [relator] was required to allege at this stage of the litigation” and that there was not any guidance “warn[ing] away” from that interpretation.  Id. at *6.  Accordingly, the relator failed to properly allege scienter.  Id. In United States ex rel. Harper v. Muskingum Watershed Conservancy District, 739 Fed. App’x 330 (6th Cir. 2018), the Sixth Circuit made clear that while pleading scienter is not subject to Federal Rule of Civil Procedure 9(b)’s heightened fraud pleading standard, “a complaint that shows no more than ‘the mere possibility of misconduct . . . is insufficient.'”  Id. at 334 (quoting Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009)).  The relator alleged that the defendant “fail[ed] to transfer certain property interests to the United States after determining those interests were no longer necessary to perform its charter provisions” as required under a 1939 agreement with the federal government.  Id. at 331-33.  The relator asserted that board minutes from 1939 demonstrated that the defendant was aware of this obligation.  Id. at 333.  The court recognized that the minutes “could mean that [the defendant] believed more than seventy years later that [its behavior] violated that obligation,” but held that “[a] complaint that requires [a court] to make[] inference[s] upon inferences to supply missing facts does not satisfy Rule 8’s pleading requirements.”  Id. at 334 (emphasis in original) (internal quotations omitted). In United States ex rel. Berkowitz v. Automation Aids, Inc., 896 F.3d 834 (7th Cir. 2018), the Seventh Circuit emphasized that to plead scienter a plaintiff must make factual allegations specific to the allegedly false claims for payment, rather than general allegations of an existing duty that was violated.  The relator asserted an implied false certification claim, alleging that the defendants, who had contracted with the government to provide office and IT supplies, violated the FCA by submitting bills for products made in countries that were not on an approved list.  Id. at 838.  The court found that the relator had failed to allege “any specific facts demonstrating what occurred at the individualized transactional level for each defendant,” including “what particular information any sales orders submitted by the defendants contained.”  Id. at 841.  Accordingly, the court held that the complaint only established that “the defendants may have sold non-compliant products during a certain time period,” which “does not equate to the defendants making a knowingly false statement in order to receive money from the government.”  Id. at 841–42.  Thus, given Escobar‘s guidance that the “scienter requirement[]” should be “strict[ly] enforce[d],” the relator had “[a]t most” alleged that “defendants made mistakes or were negligent,” which “is insufficient to infer fraud under the FCA.”  Id. at 842. C.   The Ninth and Tenth Circuits Clarify the FCA’s Falsity Requirement The FCA prohibits presentation of “false or fraudulent claim[s]” for payment, but does not specifically define what it means for a claim to be false or fraudulent.  31 U.S.C. § 3729.  Two recent circuit court decisions have sought to clarify the falsity element. In United States ex rel. Polukoff v. St. Mark’s Hospital, 895 F.3d 730 (10th Cir. 2018), the relator alleged that a cardiologist with whom he had worked performed numerous medically unnecessary heart surgeries billed to Medicare.  Id. at 737–38.  The district court granted defendant’s motion to dismiss, holding that a medical judgment—such as a physician’s judgment as to the medical necessity of a procedure—”‘cannot be false’ for purposes of an FCA claim” absent regulations specifically restricting that judgment.  Id. at 741–42.  The Tenth Circuit reversed, rejecting “a bright-line rule that medical judgment can never serve as a basis for an FCA claim.”  Id. at 742.  Rather, the court held that “[i]t is possible for a medical judgment to be ‘false or fraudulent’ as proscribed by the FCA,” noting that the Medicare Program Integrity Manual states that a claim is not reimbursable unless it meets the government’s definition of “reasonable and necessary.”  Id.  Accordingly, the court concluded that a doctor’s certification of medical necessity “is ‘false’ under the FCA if the procedure was not reasonable and necessary under the government’s definition of the phrase,” id. at 743, which the court found to be adequately alleged in the case before it. In United States ex rel. Berg v. Honeywell International, Inc., 740 Fed. App’x 535 (9th Cir. 2018), the Ninth Circuit affirmed a district court opinion holding that where calculations underlying cost estimates submitted in connection with a government contract are sufficiently disclosed, those estimates are not false for FCA purposes even where they were incorrect under the relevant statutory and regulatory framework.  The relator in Berg alleged that Honeywell had submitted false estimates of energy savings relating to improvements to Army buildings.  Berg, 740 Fed. App’x at 537.  The district court granted summary judgment in Honeywell’s favor, finding that because Honeywell “disclosed the assumptions and math underlying its estimates” those estimates were not false for FCA purposes.  Id.  The Ninth Circuit affirmed, noting that “the scope of Honeywell’s statements and the qualifications upon them were sufficiently clear, so that the statements—as qualified—were not objectively false or fraudulent.”  Id.  The court further clarified that even if Honeywell’s estimates were incorrect under the statutory and regulatory framework governing the kinds of contracts at issue, “the statutory phrase ‘known to be false’ does not mean incorrect as a matter of proper accounting methods, it means a lie.”  Id. at 538. D.   Courts Further Elaborate on the Application of Rule 9(b)’s Particularity Requirement to FCA Claims In last year’s year-end update, we took note of the “varying approaches” circuit courts have taken to applying Rule 9(b)’s heightened pleading standards to FCA claims.  Rule 9(b) requires a party “alleging fraud or mistake . . . [to] state with particularity the circumstances constituting fraud or mistake.”  Once again, this year, several circuits addressed how that standard applies in FCA cases, even while, as noted above, the Supreme Court declined once again to enter the fray. 1.   The Ninth Circuit Addresses Rule 9(b) Pleading Standards in the Context of Alleged Group Fraud In United States ex rel. Silingo v. WellPoint, Inc., 904 F.3d 667 (9th Cir. 2018), the Ninth Circuit addressed Rule 9(b)’s heightened pleading standard as applied to an FCA suit filed against multiple defendants in a case of so-called “group fraud.”  In Silingo, the relator worked for a company that provided in-home health assessments of Medicare beneficiaries for Medicare Advantage organizations.  Id. at 674.  The relator alleged not only that her company, but also the organizations who contracted with her company, submitted fraudulent Medicare Advantage reimbursement claims based on inadequate or false health documentation provided by her company.  Id. at 674–75.  The organizations moved to dismiss the complaint on the grounds that it failed to plead fraud with sufficient particularity as to any individual organization.  Id. at 676.  The district court agreed, and dismissed the claims.  Id. The Ninth Circuit reversed, holding that when defendants have “the exact same role in a fraud,” a complaint does not need to distinguish between them in order to satisfy the particularity requirement of Rule 9(b).  Id. at 677.  In other words, “[t]here is no flaw in a pleading . . . where collective allegations are used to describe the actions of multiple defendants who are alleged to have engaged in precisely the same conduct.”  Id. (quoting United States ex rel. Swoben v. United Healthcare Ins. Co., 848 F.3d 1161, 1184 (9th Cir. 2016)).  The court analogized this type of fraud to a “wheel conspiracy” in which a single party (the wheel) separately agrees with two or more other parties (the spokes)—whose “parallel actions . . . can be addressed by collective allegations.”  Id. at 678. 2.   The Eleventh Circuit Requires Relators to Plead at Least One False Claim with Specificity In Carrell v. AIDS Healthcare Foundation, Inc., 898 F.3d 1267 (11th Cir. 2018), the Eleventh Circuit considered the adequacy of pleadings that alleged fraudulent activity was the basis for claims made to the government, but otherwise failed to explicitly link any such activity to a single purportedly false claim.  The relators alleged generally that the defendant had unlawfully incentivized employees to register patients for medical treatment, and that the treatment had then been submitted for reimbursement through federal health care programs.  Id. at 1270.  The district court dismissed all but two of the relators’ claims for lack of particularity pursuant to Rule 9(b).  Id. at 1271. The Eleventh Circuit upheld the dismissal of these claims on the pleadings, holding that Rule 9(b)’s particularity requirement necessitated a “specific allegation of the ‘presentment of [a false] claim.'”[67]  Id. at 1278 (quoting United States ex rel. Clausen v. Lab. Corp. of Am., 290 F.3d 1301, 1311 (11th Cir. 2002)).  Thus, even if the “mosaic of circumstances” alleged by the relators—”that the Foundation provided incentives to certain patients and employees, that the Foundation frequently requested reimbursement from federal health care programs, and that Foundation policies focused on aggressive patient recruitment”—was assumed to be true, the relators’ claims must be dismissed for “fail[ure] to allege with particularity that these background factors ever converged and produced an actual false claim[.]”  Id. at 1277. E.   The Second Circuit Expands A Circuit Split Regarding the First-to-File Bar The FCA’s so-called “first-to-file bar” limits the ability of qui tam relators to bring “a related action based on the [same] facts” as a “pending action.”  31 U.S.C. § 3730(b)(5).  As discussed in last year’s update, there is a developing circuit split regarding whether a relator may escape the first-to-file bar by filing an amended complaint once the earlier, “pending action” has been dismissed.  In the First Circuit, such an amendment has been deemed by the court in at least some circumstances to cure the first-to-file failure.  United States ex rel. Gadbois v. PharMerica Corp., 809 F.3d 1, 4–5 (1st Cir. 2015).  But in the D.C. Circuit a relator is not permitted to proceed based on an amended complaint if the same relator’s original complaint was otherwise prohibited by the first-to-file bar.  United States ex rel. Shea v. Cellco P’ship, 863 F.3d 923, 926 (D.C. Cir. 2017).  The difference in approach is potentially significant for relators; if they are forced to re-file their complaint, it may be time-barred, whereas they can contend that the date of an amended complaint relates back to the original complaint for statute-of-limitations purposes. In United States ex rel. Wood v. Allergan, Inc., 899 F.3d 163 (2d Cir. 2018), the Second Circuit sided with the D.C. Circuit on this disagreement.  Relying on the plain language of the statute—which mandates dismissal when a relator “brings” an action while a related action is pending—the Wood court held that amendment could not cure a first-to-file defect because “a claim is barred by the first-to-file bar if at the time the lawsuit was brought a related action was pending.”  Id. at 172.  The court did confirm, however, that dismissal based on the first-to-file bar should be without prejudice, id. at 175, and that “absent a statute of limitations issue, the relator will be able to re-file her action, without violating the first-to-file bar,” id. at 174. Additionally, the Wood court further expanded a different circuit split regarding whether a complaint that fails to allege fraud with sufficient particularity pursuant to Rule 9(b) can bar a later-filed complaint under the first-to-file rule.  The Sixth Circuit has held that a complaint that was “legally infirm under Rule 9(b)” cannot “preempt [a] later-filed action” even though the allegations of the first-filed complaint “‘encompass’ the specific allegations of fraud made” in the later-filed action.  Walburn v. Lockheed Martin Corp., 431 F.3d 966, 973 (6th Cir. 2005).  However, the Second Circuit declined to adopt that standard, but instead followed the D.C. Circuit’s decision in United States ex rel. Batiste v. SLM Corp., 659 F.3d 1204 (D.C. Cir. 2011) by holding that there was no basis to incorporate Rule 9(b)’s particularity requirement into the statute.  Wood, 899 F.3d at 169–70.  Accordingly, the fact that a subsequent complaint might be “more detailed” had no bearing on the application of the first-to-file bar.  Id. at 169. As more courts provide their insights on these issues, they may need to be resolved by the Supreme Court. F.   The Third Circuit Clarifies Application of Public Disclosure Bar The FCA’s public disclosure bar mandates the dismissal of a FCA action “if substantially the same allegations or transactions” forming the basis of the action have been publicly disclosed and the relator is not an “original source.”  31 U.S.C. § 3730(e)(4). In United States v. Omnicare, Inc., 903 F.3d 78 (3d Cir. 2018), the Third Circuit addressed the situation where a relator uses publicly available information to shed light on certain non-public information known to the relator.  The relator alleged that one of the defendants, PharMerica—an owner and operator of institutional pharmacies serving nursing homes—”unlawfully discounted prices for nursing homes’ Medicare Part A patients . . . in order to secure contracts to supply services to patients covered by Medicare Part D and Medicaid.”  Id. at 81.  The district court determined that “various reports cumulatively disclosed the alleged fraudulent transactions,” including guidance from the Department of Health and Human Services, publicly available reports discussing the institutional pharmacy market generally, and PharMerica’s 10-k financial disclosures, which the relator admitted provided the “information needed to deduce the fraud.”  Id. at 85, 93 (emphasis in original). The Third Circuit held that the key question is whether “a relator’s non-public information permits an inference of fraud that could not have been supported by the public disclosures alone.”  Id. at 86.  In the context at issue, the court held that a general report on fraud within a particular industry, standing alone is inadequate to trigger the public disclosure bar because it “merely indicate[s] the possibility that such a fraud could be perpetrated” in that industry.  Id.  The court elaborated that “the FCA’s public disclosure bar is not triggered when a relator relies upon non-public information to make sense of publicly available information where the public information—standing alone—could not have reasonably or plausibly supported an inference that the fraud was in fact occurring.”  Id. at 89. The court clarified that it is the responsibility of the court to “determine whether the publicly available documents in fact disclosed information sufficient to raise the inference of fraud.”  Id. at 93 (emphasis in original).  “[A] relator’s subjective belief that he relied upon certain information is immaterial to the court’s decision [on whether there was a prior public disclosure], which must be based on an independent assessment of the scope of the information disclosed by the public documents.”  Id.  Thus, a relator’s admission that “he relied upon certain public documents to deduce [the alleged] fraud” has no bearing on the analysis of whether public documents “disclose the fraud in sufficient detail.”  Id. at 92–93. G.   Several Circuits Narrow Scope of Liability for FCA Retaliation Claims Several circuits this year tightened the range of circumstances under which an employee or former employee may successfully recover under the FCA’s anti-retaliation provision, which entitles employees, contractors, and agents of an employer to relief if they are “discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment because of lawful acts done by the employee” in furtherance of the FCA.  31 U.S.C. § 3730(h)(1). 1.   The Tenth Circuit Addresses “Constructive Knowledge” and “Cat’s Paw” Theories of Liability, and Limits Retaliation Claims to Retaliation that Occurs During Employment Two recent Tenth Circuit decisions have placed significant limitations on retaliation claims.  In Armstrong v. The Arcanum Group, Inc., 897 F.3d 1283 (10th Cir. 2018), the court rejected a former employee’s retaliation claim against a government contractor on summary judgment because there was insufficient circumstantial evidence to prove that the employee’s supervisor either directly knew of her complaints, id. at 1288–89, or had “constructive knowledge” of her complaints.  Id. at 1289.  Notably, the court explained that constructive knowledge could not be imputed based on a theory of deliberate ignorance because the supervisor actively tried to learn why the client agency was unhappy with the employee’s performance, but was “rebuffed.”  Id. at 1289.  The court also rejected the plaintiff’s argument that another “management-level” employee’s knowledge of the relator’s complaint should be imputed to her supervisor, holding that “the knowledge of someone who had no role in the [termination] decision is irrelevant to the motive for the decision.”  Id. at 1290. Finally, the court rejected the employee’s attempt to import a “cat’s paw” theory of liability from other discrimination jurisprudence—which would establish liability on the part of an employer who “uncritically relies on [a] biased subordinate’s reports and recommendations in deciding to take adverse employment action.”  Id. at 1290 (internal citation omitted).  While the Tenth Circuit held that the facts of the case did not support such a theory, it left open the question of whether such a theory could support a retaliation claim under the FCA under a different set of facts.  Id. at 1291. In Potts v. Center for Excellence in Higher Education, Inc., 908 F.3d 610 (10th Cir. 2018), the Tenth Circuit affirmed a dismissal for failure to state a claim and held that a former employee does not have a cause of action against an employer for “retaliation” that allegedly occurs after the employee is no longer employed.  The court held that the term “employee,” as it is used in the FCA, “includes only persons who were current employees when their employers retaliated against them.”  Id. at 614.  As such, the FCA’s anti-retaliation provision “unambiguously excludes relief for retaliatory acts occurring after the employee has left employment.”  Id. at 618. 2.   The Fourth Circuit Joins Majority of Circuits in Adopting “But For” Causation Standard A growing number of circuits that have held that whatever their respective approaches might have been previously, the Supreme Court’s decisions in Gross v. FBL Financial Services., Inc. 557 U.S. 167 (2009) and University of Texas Southwest. Medical Center. v. Nassar, 570 U.S. 338 (2013) mandate a “but for” standard of causation in FCA retaliation cases—meaning a plaintiff must show that he would not have faced adverse employment action “but for” his alleged protected activity.  See, e.g., DiFiore v. CSL Behring, LLC, 879 F.3d 71, 77–78 (3d Cir. 2018); United States ex rel. King v. Solvay Pharm., Inc., 871 F.3d 318, 333 (5th Cir. 2017); United States ex rel. Marshall v. Woodward, Inc., 812 F.3d 556, 564 (7th Cir. 2015). In United States ex rel. Cody v. ManTech International, Corp., No. 17-1722, 2018 WL 3770141 (4th Cir. Aug. 8, 2018), the Fourth Circuit followed suit by relying on Gross and Nassar to adopt—albeit in an unpublished decision—a “but for” causation standard for retaliation claims under the FCA.  Prior to Cody, it was an “open question” in the Fourth Circuit whether retaliation claims proceeded under a “but for” standard of causation or under the more lenient “contributing factor” standard.  Id. at *7.  Moving forward, however, there is little reason to believe the “but for” standard announced in Cody will not prevail. V.   CONCLUSION As always, Gibson Dunn will continue to monitor developments in the ever-changing and high-stakes FCA space and stands ready to answer any question you may have.  We will report back to you on the latest news mid-year, in early July. [1] State Farm Fire & Cas. Co. v. United States ex rel. Rigsby, 137 S. Ct. 436 (2016); Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016); Kellogg Brown & Root Servs., Inc. v. United States ex rel. Carter, 135 S. Ct. 1970 (2015); Schindler Elevator Corp. v. United States ex rel. Kirk, 563 U.S. 401 (2011); Graham Cnty. Soil & Water Conservation Dist. v. United States ex rel. Wilson, 559 U.S. 280 (2010); United States ex rel. Eisenstein v. City of New York, New York, 556 U.S. 928 (2009); Allison Engine Co. v. United States ex rel. Sanders, 553 U.S. 662 (2008). [2] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Justice Department Recovers Over $2.8 Billion from False Claims Act Cases in Fiscal Year 2018 (Dec. 21, 2018), https://www.justice.gov/opa/pr/justice-department-recovers-over-28-billion-false- claims-act-cases-fiscal-year-2018 [hereinafter DOJ FY 2018 Recoveries Press Release]. [3] See U.S. Dep’t of Justice, Fraud Statistics Overview (Dec. 21, 2018), https://www.justice.gov/civil/page/file/1080696/download?utm_medium=email& utm_source=govdelivery [hereinafter DOJ FY 2018 Stats]. [4] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Acting Assistant Attorney General Stuart F. Delery Speaks at the American Bar Association’s Ninth National Institute on the Civil False Claims Act and Qui Tam Enforcement (June 7, 2012), http://www.justice.gov/iso/opa/civil/speeches/2012/civ-speech-1206071.html. [5] See Memorandum, U.S. Dep’t of Justice, Factors for Evaluating Dismissal Pursuant to 31 U.S.C. 3730(c)(2)(A) (Jan. 10, 2018), https://assets.documentcloud.org/documents/4358602/Memo-for- Evaluating-Dismissal-Pursuant-to-31-U-S.pdf. [6] See Memorandum, U.S. Dep’t of Justice, Limiting Use of Agency Guidance Documents In Affirmative Civil Enforcement Cases (Jan. 25, 2018), https://www.justice.gov/file/1028756/download. [7] See Press Release, U.S. Dep’t of Justice, Department of Justice Announces the Rollout of an Updated United States Attorneys’ Manual (September 25, 2018), https://www.justice.gov/opa/pr/department-justice-announces-rollout-updated-united- states-attorneys-manual [8] U.S. Dep’t of Justice, Justice Manual, Section 4-4.111, U.S. Dep’t of Justice, https://www.justice.gov/jm/jm-4-4000-commercial-litigation#4-4.111. [9] Brief for the United States as Amicus Curiae at 15, Gilead Sciences., Inc. v. United States ex rel. Campie, No. 17-936, 2018 WL 6305459 (U.S. Sup. Ct. Nov. 30, 2018). [10] See United States’ Mot. to Dismiss Relator’s Second Am. Compl., United States ex rel. Health Choice Grp., LLC v. Bayer Corp., Onyx Pharm., Inc., Amerisourcebergen Corp., & Lash Grp., No. 5:17-CV-126-RWS-CMC (E.D. Tex. Dec. 17, 2018). [11] Id. at 3, 14. [12] Id. at 8, 14. [13] Id. at 16. [14] See Rod J. Rosenstein, U.S. Deputy Attorney General, Remarks at the American Conference Institute’s 35th International Conference on the Foreign Corrupt Practices Act (November 29, 2018), https://www.justice.gov/opa/speech/deputy-attorney-general-rod-j-rosenstein- delivers-remarks-american-conference-institute-0 (emphasis added). [15] Id. [16] U.S. Dep’t of Health & Human Servs.—Office of Inspector Gen., Fraud Risk Indicator, https://oig.hhs.gov/compliance/corporate-integrity-agreements/risk.asp. [17] Alison Frankel, AG nominee Barr to back off previous attack on antifraud law: source, Reuters, https://www.reuters.com/article/us-usa-trump-barr/ag-nominee-barr-to-back-off-previous-attack-on-antifraud-law-source-idUSKCN1OW1TJ. [18] See DOJ FY 2018 Recoveries Press Release. [19] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Drug Maker Actelion Agrees to Pay $360 Million to Resolve False Claims Act Liability for Paying Kickbacks (Dec. 6, 2018), https://www.justice.gov/opa/pr/drug-maker-actelion-agrees-pay-360-million -resolve-false-claims-act-liability-paying. [20] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, AmerisourceBergen Corporation Agrees to Pay $625 Million to Resolve Allegations That it Illegally Repackaged Cancer-Supportive Injectable Drugs to Profit from Overfill (Oct. 1, 2018), https://www.justice.gov/opa/pr/amerisourcebergen-corporation-agrees-pay-625-million- resolve-allegations-it-illegally. [21] See Nate Raymond & Andy Thibault, Insys to pay $150 million to settle U.S. opioid kickback probe, Reuters (Aug. 8, 2018), https://www.reuters.com/article/us-insys-opioids/insys-to-pay-150- million-to-settle-u-s-opioid-kickback-probe-idUSKBN1KT1G5. [22] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Hospital Chain Will Pay Over $260 Million to Resolve False Billing and Kickback Allegations; One Subsidiary Agrees to Plead Guilty (Sept. 25, 2018), https://www.justice.gov/opa/pr/hospital-chain-will-pay-over-260-million- resolve-false-billing-and-kickback-allegations-one. [23] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Medicare Advantage Provider to Pay $270 Million to Settle False Claims Act Liabilities (Oct. 1, 2018), https://www.justice.gov/opa/pr/medicare-advantage-provider-pay-270-million-settle-false- claims-act-liabilities. [24] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Hospital Chain Will Pay Over $260 Million to Resolve False Billing and Kickback Allegations; One Subsidiary Agrees to Plead Guilty (Sept. 25, 2018), https://www.justice.gov/opa/pr/hospital-chain-will-pay-over-260- million-resolve-false-billing-and-kickback-allegations-one. [25] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Detroit Area Hospital System to Pay $84.5 Million to Settle False Claims Act Allegations Arising From Improper Payments to Referring Physicians (Aug. 2, 2018), https://www.justice.gov/opa/pr/detroit-area-hospital-system- pay-845-million-settle-false-claims-act-allegations-arising. [26] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Health Quest and Putnam Hospital Center to Pay $14.7 Million to Resolve False Claims Act Allegations (July 9, 2018), https://www.justice.gov/opa/pr/health-quest-and-putnam-hospital-center-pay-147-million- resolve-false-claims-act-allegations. [27] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Medical Device Maker AngioDynamics Agrees to Pay $12.5 Million to Resolve False Claims Act Allegations (July 18, 2018), https://www.justice.gov/opa/pr/medical-device-maker-angiodynamics-agrees-pay- 125-million-resolve-false-claims-act. [28] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Two Consulting Companies and Nine Affiliated Skilled Nursing Facilities to Pay $10 Million to Resolve False Claims Act Allegations Relating to Medically Unnecessary Rehabilitation Therapy Services (July 18, 2018), https://www.justice.gov/opa/pr/two-consulting-companies-and-nine-affiliated-skilled-nursing-facilities-pay-10-million. [29] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Detroit Area Hospital System to Pay $84.5 Million to Settle False Claims Act Allegations Arising From Improper Payments to Referring Physicians (Aug. 2, 2018), https://www.justice.gov/opa/pr/detroit-area-hospital-system-pay-845-million-settle-false-claims-act-allegations-arising; Danielle Nichole Smith, Hospital System Will Pay $84.5 Million To End FCA Kickback Claims, Law360 (Aug. 2, 2018), https://www.law360.com/governmentcontracts/articles/1069818/hospital-system-will- pay-84-5m-to-end-fca-kickback-claims?nl_pk=a3467962-dd33-4efa-a9fc- bff3c03255e8&utm_source=newsletter&utm_medium=email&utm_campaign=governmentcontracts. [30] See Press Release, U.S. Atty’s Office for the Dist. of S.C., Early Autism Project, Inc., South Carolina’s Largest Provider of Behavioral Therapy for Children with Autism, Pays the United States $8.8 Million to Settle Allegations of Fraud (Aug. 2, 2018), https://www.justice.gov/usao-sc/pr/early-autism-project-inc-south-carolinas-largest-provider- behavioral-therapy-children. [31] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Prime Healthcare Services and CEO to Pay $65 Million to Settle False Claims Act Allegations (Aug. 3, 2018), https://www.justice.gov/opa/pr/prime-healthcare-services-and-ceo-pay-65- million-settle-false-claims-act-allegations. [32] See Nate Raymond & Andy Thibault, Insys to pay $150 million to settle U.S. opioid kickback probe, Reuters (Aug. 8, 2018), https://www.reuters.com/article/us-insys-opioids/insys-to-pay-150- million-to-settle-u-s-opioid-kickback-probe-idUSKBN1KT1G5. [33] See U.S. Atty’s Office for the Dist. of Mass., United States v. Michael Babich, Alec Burlakoff, Richard Simon, Sunrise Lee, Joseph Rowan, and Michael Gurry, John Kapoor (Nov. 29, 2018), https://www.justice.gov/usao-ma/victim-and-witness-assistance-program/ united-states-v-michael-babich-alec-burlakoff-richard-simon-sunrise-lee-joseph-rowan-and. [34] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Post Acute Medical Agrees to Pay More Than $13 Million to Settle Allegations of Kickbacks and Improper Physician Relationships (Aug. 15, 2018), https://www.justice.gov/opa/pr/post-acute-medical-agrees-pay-more-13-million- settle-allegations-kickbacks-and-improper. [35] See Press Release, U.S. Atty’s Office for the S. Dist. of Ill., Durable Medical Equipment Provider Lincare Pays $5.25 Million to Resolve False Claims Act Allegations (Aug. 16, 2018), https://www.justice.gov/usao-sdil/pr/durable-medical-equipment-provider-lincare-pays-525-million-resolve-false-claims-act. [36] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Reliant to Pay $6.1 Million to Settle False Claims Act Allegations That it Paid Kickbacks to Nursing Homes for Rehabilitation Therapy Business (Aug. 23, 2018), https://www.justice.gov/opa/pr/reliant-pay-61-million-settle-false-claims-act-allegations-it-paid-kickbacks-nursing-homes. [37] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Ambulance Company and its Municipal Clients Agree to Pay Over $21 Million to Settle Allegations of Unlawful Kickbacks and Improper Financial Relationships (Aug. 27, 2018), https://www.justice.gov/opa/pr/ambulance-company-and-its-municipal-clients-agree-pay-over-21- million-settle-allegations. [38] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Hospital Chain Will Pay Over $260 Million to Resolve False Billing and Kickback Allegations; One Subsidiary Agrees to Plead Guilty (Sept. 25, 2018), https://www.justice.gov/opa/pr/hospital-chain-will-pay-over-260-million-resolve-false-billing-and- kickback-allegations-one. [39] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Kalispell Regional Healthcare System to Pay $24 Million to Settle False Claims Act Allegations (Sept. 28, 2018), https://www.justice.gov/opa/pr/kalispell-regional- healthcare-system-pay-24-million-settle-false-claims-act-allegations. [40] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, AmerisourceBergen Corporation Agrees to Pay $625 Million to Resolve Allegations That it Illegally Repackaged Cancer-Supportive Injectable Drugs to Profit from Overfill (Oct. 1, 2018), https://www.justice.gov/opa/pr/amerisourcebergen-corporation-agrees-pay-625-million -resolve-allegations-it-illegally. [41] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Medicare Advantage Provider to Pay $270 Million to Settle False Claims Act Liabilities (Oct. 1, 2018), https://www.justice.gov/opa/pr/medicare-advantage-provider-pay- 270-million-settle-false-claims-act-liabilities. [42] See U.S. Atty’s Office for the W. Dist. of Ky., $5.1 Million Dollar Settlement Reached With Indiana Dental Firm To Resolve False Claims Allegations (Nov. 6, 2018), https://www.justice.gov/usao-wdky/pr/51-million-dollar-settlement-reached -indiana-dental-firm-resolve-false-claims. [43] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Medical Device Maker ev3 to Plead Guilty and Pay $17.9 Million for Distributing Adulterated Device; Covidien Paid $13 Million to Resolve Civil Liability for Second Device (Dec. 4, 2018), https://www.justice.gov/opa/pr/medical-device-maker-ev3-plead-guilty-and-pay- 179-million-distributing-adulterated-device. [44] See Press Release, Medtronic, Medtronic Statement Regarding Recent DOJ Announcement, (Dec. 4, 2018), https://www.medtronic.com/us-en/about/news/media-resources/medtronic- statement-regarding-doj.html. [45] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Drug Maker Actelion Agrees to Pay $360 Million to Resolve False Claims Act Liability for Paying Kickbacks (Dec. 6, 2018), https://www.justice.gov/opa/pr/drug-maker-actelion- agrees-pay-360-million-resolve-false-claims-act-liability-paying. [46] See Press Release, U.S. Atty’s Office for the Eastern Dist. of Wis., Aurora Health Care, Inc. Agrees to Pay $12 Million to Settle Allegations Under the False Claims Act and the Stark Law (Dec. 11, 2018), https://www.justice.gov/usao-edwi/pr/aurora-health-care-inc-agrees-pay- 12-million-settle-allegations-under-false-claims-act. [47] See Press Release, U.S. Atty’s Office for the Eastern Dist. of Pa., Coordinated Health and CEO Pay $12.5 Million to Resolve False Claims Act Liability for Fraudulent Billing (Dec. 11, 2018), https://www.justice.gov/usao-edpa/pr/coordinated-health-and-ceo-pay- 125-million-resolve-false-claims-act-liability. [48] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, North American Power Group Ltd and its Owner Agree to Pay $14.4 Million to Resolve Alleged False Claims for Department of Energy Cooperative Agreement Funds (July 6, 2018), https://www.justice.gov/opa/pr/north-american-power-group-ltd-and-its-owner- agree-pay-144-million-resolve-alleged-false. [49] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, 3M Company Agrees to Pay $9.1 Million to Resolve Allegations That it Supplied the United States with Defective Dual-Ended Combat Arms Earplugs (July 26, 2018), https://www.justice.gov/opa/pr/3m-company-agrees-pay-91-million-resolve- allegations-it-supplied-united-states-defective-dual. [50] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Three South Korean Companies Agree to Plead Guilty and to Enter Into Civil Settlements for Rigging Bids on United States Department of Defense Fuel Supply Contracts (Nov. 14, 2018), https://www.justice.gov/opa/pr/three-south-korean-companies-agree- plead-guilty-and-enter-civil-settlements-rigging-bids. [51] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Universal American Mortgage Company LLC (UAMC) Agrees to Pay $13.2 Million to Resolve False Claims Act Allegations Related to Loan Guarantees (Oct. 19, 2018), https://www.justice.gov/opa/pr/universal-american- mortgage-company-llc-uamc-agrees-pay-132-million-resolve-false-claims-act. [52] See Press Release, U.S. Atty’s Office for the Northern Dist. of N.Y., Finance of America Mortgage to Pay $14.5 Million to Resolve False Claims Act Liability Involving FHA Mortgage Lending (Dec. 12, 2018), https://www.justice.gov/usao-ndny/pr/finance-america-mortgage-pay- 145-million-resolve-false-claims-act-liability-involving. [53] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, British Airways and Iberia Airlines Agree to Pay $5.8 Million to Settle False Claims Act Allegations for Falsely Reporting Delivery Times of U.S. Mail Transported Internationally (Nov. 13, 2018), https://www.justice.gov/opa/pr/ british-airways-and-iberia-airlines-agree-pay-58-million-settle-false-claims-act-allegations. [54] See Press Release, U.S. Atty’s Office for the Southern Dist. of NY, Manhattan U.S. Attorney Announces Settlement of Civil Fraud Claims Against Law Firm Rosicki, Rosicki & Associates, P.C., and Two Affiliates for Inflating Foreclosure- and Eviction-Related Expenses (Dec. 4, 2018), https://www.justice.gov/usao-sdny/pr/manhattan-us-attorney- announces-settlement-civil-fraud-claims-against-law-firm-rosicki. [55] Senator Chuck Grassley, The Critical Importance of Congressional Oversight, Real Clear Policy (Aug. 21, 2018), https://www.realclearpolicy.com/articles/2018/08/21/the_critical_ importance_of_congressional_oversight_110768.html. [56]  State False Claims Act Reviews, Dep’t of Health & Human Servs.—Office of Inspector Gen., https://oig.hhs.gov/fraud/state-false-claims-act-reviews/index.asp. [57]  S.B. 0065, 2017 Reg. Sess. (Mich. 2017), http://www.legislature.mi.gov/(S(2eethmzh3ynmq4revoals1xd))/ mileg.aspx?page=GetObject&objectname=2017-SB-0065. [58]  S.B. 0669, 2017 Reg. Sess. (Mich. 2017), http://www.legislature.mi.gov/(S(y01pr1bmjos4hv4bgw5wcuid))/ mileg.aspx?page=getobject&objectname=2017-SB-0669&query=on. [59]  H.B. 1027, 2017-2018 Reg. Sess. (Penn. 2017), http://www.legis.state.pa.us/cfdocs/billInfo/billInfo.cfm?sYear= 2017&sInd=0&body=H&type=B&bn=1027. [60]  A.B. A07989, 2017-2018 Leg. Sess. (N.Y. 2017), http://nyassembly.gov/leg/?default_fld=&leg_video=&bn=A07989&term=2017&Summary=Y&Actions=Y. [61] See Petition for Writ of Certiorari (No. 17-936), United States ex rel. Campie v. Gilead Sciences, Inc., 862 F.3d 890 (9th Circ. 2017). [62] Br. for the United States as Amicus Curiae, Gilead Sciences, Inc. v. United States ex rel. Campie, No. 17-936 (U.S. Nov. 30, 2018) [63] Id. [64] Id. [65] See 81 U.S.L.W. 3650 (U.S. Mar. 31, 2014) (No. 12-1349). [66] Order Denying Pet. for Cert., United States ex rel. Chase v. Chapters Health System Inc., No. 17-1477 (Oct. 1, 2018). [67] The two remaining claims were subsequently dismissed on summary judgment on the grounds that the activity alleged was lawful—a decision that was also upheld by the Eleventh Circuit.  Id. at 1275. The following Gibson Dunn lawyers assisted in preparing this client update: F. Joseph Warin, Charles Stevens, Stephen Payne, Stuart Delery, Benjamin Wagner, Timothy Hatch, Joseph West, Robert Walters, Robert Blume, Andrew Tulumello, Karen Manos, Monica Loseman, Geoffrey Sigler, Alexander Southwell, Reed Brodsky, Winston Chan, John Partridge, James Zelenay, Jonathan Phillips, Ryan Bergsieker, Jeremy Ochsenbein, Sean Twomey, Reid Rector, Allison Chapin, Nicholas Scheiner, Jacob Rierson, Jessica Wright, Jessica Pearigen and Peter Baumann. Gibson Dunn’s lawyers have handled hundreds of FCA investigations and have a long track record of litigation success.  From U.S. Supreme Court victories, to appellate court wins, to complete success in district courts around the United States, Gibson Dunn believes it is the premier firm in FCA defense.  Among other notable recent victories, Gibson Dunn successfully overturned one of the largest FCA judgments in history in United States ex rel. Harman v. Trinity Indus. Inc., 872 F.3d 645 (5th Cir. 2017), and the Daily Journal recognized Gibson Dunn’s work in U.S. ex rel. Winter v. Gardens Regional Hospital and Medical Center Inc. as a Top Defense Verdict in its annual feature on the top verdicts for 2017.  Our win rate and immersion in FCA issues gives us the ability to frame strategies to quickly dispose of FCA cases.  The firm has dozens of attorneys with substantive FCA experience, including nearly 30 Assistant U.S. Attorneys and DOJ attorneys.  For more information, please feel free to contact the Gibson Dunn attorney with whom you work or the following attorneys. 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.

January 8, 2019 |
Webcast: FCPA Trends in the Emerging Markets of Asia, Russia, Latin America, and Africa

In 2018, anti-corruption movements in several regions picked up steam, maturing from grassroots, street-level protests to electoral mobilization, far-reaching anti-corruption legislation, and renewed focus from local law enforcement. The constant drumbeat of scandals, impeachments, prosecutions and new legislative efforts highlights the extent to which corruption remains deeply rooted in many regions. As companies increasingly look to compete in emerging markets, the ever-present threat of corruption creates an environment fraught with commercial, legal and reputation risk. Join our team of experienced international anti-corruption attorneys to learn more about how to do business in key markets in Asia (with a focus on China, India, and South Korea), Russia, Latin America, and Africa without running afoul of anti-corruption laws, including the FCPA. Topics to be discussed: An overview of FCPA enforcement and trends for 2018; The corruption landscape in key emerging markets, including recent headlines and scandals; Lessons learned from local anti-corruption enforcement in key markets in Asia, Russia, Latin America, and Africa; Key anti-corruption legislative changes in major markets in Asia, Russia, Latin America, and Africa; and Mitigation strategies for businesses operating in high-risk markets. View Slides (PDF) PANELISTS: Kelly Austin Partner-in-Charge of Gibson Dunn’s Hong Kong office. Ms. Austin focuses her practice in government and internal investigations, regulatory compliance, and international disputes. Ms. Austin has extensive experience in government and corporate internal investigations, including those involving the FCPA, anti-money laundering, securities, and trade control laws. Ms. Austin also regularly guides companies on creating and implementing effective compliance programs. Joel Cohen Co-Chair of the firm’s White Collar Defense and Investigations practice and a member of its Securities Litigation, Class Actions and Antitrust practice groups, Mr. Cohen is a partner in Gibson Dunn’s New York office. He is a former federal prosecutor and has been lead or co-lead counsel in 24 civil and criminal trials in federal and state courts. Mr. Cohen’s experience includes all aspects of FCPA/anticorruption issues, in addition to financial institution litigation and other international disputes and discovery, and he is equally comfortable leading confidential investigations, managing crises or advocating in court proceedings. Sacha Harber-Kelly Partner in Gibson Dunn’s London office and a member of the firm’s White Collar Defense and Investigations practice group. Mr. Harber-Kelly focuses his practice in global white-collar investigations, representing clients in criminal and regulatory investigations as well as cross-border enforcement inquiries. He was a Prosecutor from 2007 to 2017 with the U.K.’s Serious Fraud Office (SFO) in the Anti-Corruption and Bribery Division, where he handled some of the largest and most complex cases brought by the SFO, and he was centrally involved in the U.K.’s development of a Deferred Prosecution Agreement (DPA) regime. He also has worked extensively with a range of other enforcement authorities in the U.K., U.S. and beyond. Benno Schwarz German-qualified partner in Gibson Dunn’s Munich office, Mr. Schwarz is a member of the firm’s International Corporate Transactions and White Collar Defense and Investigations practice groups. Mr. Schwarz has many years of experience in corporate anti-bribery compliance, especially issues surrounding the enforcement of the FCPA and the U.K. Bribery Act as well as Russian law, including the planning and implementation of internal corporate investigations both nationally and internationally, advising on the structuring, implementation and assessment of compliance management systems, and representing companies before domestic and foreign authorities during associated criminal and administrative proceedings. He speaks and conducts transactions and internal investigations in German, English and Russian. F. Joseph Warin Partner in Gibson Dunn’s Washington, D.C. office, Chair of the office’s Litigation Department, and Co-Chair of the firm’s White Collar Defense and Investigations practice group. Mr. Warin is consistently regarded as a top lawyer in FCPA investigations, False Claims Act (FCA) matters, fraud and corporate investigations, and special committee representations. He has handled cases and investigations in more than 40 states and dozens of countries in matters involving federal regulatory inquiries, criminal investigations and cross-border inquiries by dozens of international enforcers, including the U.K.’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. Oliver Welch Associate in Gibson Dunn’s Hong Kong office and a member of the firm’s Litigation and White Collar Defense and Investigations practice groups. Mr. Welch has extensive experience representing clients throughout the Asia region on a wide variety of compliance and anti-corruption issues. His practice focuses on internal and regulatory investigations, including the FCPA, and he regularly counsels multi-national corporations regarding their anti-corruption compliance programs and controls, and assists clients in drafting policies, procedures, and training materials designed to foster compliance with global anti-corruption laws. He also advises on anti-corruption due diligence in connection with corporate acquisitions, private equity investments, and other business transactions. 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  2.50 credit hours, of which 2.50 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 2.00 credit hours, of which 2.00 credit hour 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 2.00 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 7, 2019 |
2018 Year-End FCPA Update

Click for PDF 2018 was an extraordinary year in the U.S. government’s efforts to combat foreign corruption.  The 38 combined FCPA enforcement actions, resulting in $1 billion in corporate fines, alone provide much to discuss.  But this is only a part of the story of the year in anti-corruption enforcement, as we also saw an explosion in the pursuit of FCPA-related offenses, continued multi-national enforcement, and a rare appellate decision on the jurisdictional reach of the FCPA, among many other developments. This client update provides an overview of the FCPA and other domestic and international anti-corruption enforcement, litigation, and policy developments from the year 2018, as well as the trends we see from this activity.  For more analysis on the year in anti-corruption enforcement as well as challenges in compliance and corporate governance, please join us for one or both of our upcoming complimentary webcast presentations:  FCPA Trends in the Emerging Markets of Asia, Russia, Latin America, and Africa on January 8 (to register, click here) and Challenges in Compliance and Corporate Governance on January 29 (to register, click here). FCPA OVERVIEW The FCPA’s anti-bribery provisions make it illegal to corruptly offer or provide money or anything else of value to officials of foreign governments, foreign political parties, or public international organizations with the intent to obtain or retain business.  These provisions apply to “issuers,” “domestic concerns,” and those acting on behalf of issuers and domestic concerns, as well as to “any person” who acts while in the territory of the United States.  The term “issuer” covers any business entity that is registered under 15 U.S.C. § 78l or that is required to file reports under 15 U.S.C. § 78o(d).  In this context, foreign issuers whose American Depository Receipts (“ADRs”) or American Depository Shares (“ADSs”) are listed on a U.S. exchange are “issuers” for purposes of the FCPA.  The term “domestic concern” is even broader and includes any U.S. citizen, national, or resident, as well as any business entity that is organized under the laws of a U.S. state or that has its principal place of business in the United States. In addition to the anti-bribery provisions, the FCPA also has “accounting provisions” that apply to issuers and those acting on their behalf.  First, there is the books-and-records provision, which requires issuers to make and keep accurate books, records, and accounts that, in reasonable detail, accurately and fairly reflect the issuer’s transactions and disposition of assets.  Second, the FCPA’s internal controls provision requires that issuers devise and maintain reasonable internal accounting controls aimed at preventing and detecting FCPA violations.  Prosecutors and regulators frequently invoke these latter two sections when they cannot establish the elements for an anti-bribery prosecution or as a mechanism for compromise in settlement negotiations.  Because there is no requirement that a false record or deficient control be linked to an improper payment, even a payment that does not constitute a violation of the anti-bribery provisions can lead to prosecution under the accounting provisions if inaccurately recorded or attributable to an internal controls deficiency. International corruption also may implicate other U.S. criminal laws.  Increasingly in recent years, prosecutors from the FCPA Unit of the U.S. Department of Justice (“DOJ”) have begun charging non-FCPA crimes such as money laundering, mail and wire fraud, Travel Act violations, tax violations, and even false statements, in addition to or instead of FCPA charges.  Perhaps most prevalent amongst these “FCPA-related” charges is money laundering—a generic term used as shorthand for several statutory provisions that together criminalize the concealment or transfer of proceeds from certain “specified unlawful activities,” including corruption under the laws of foreign nations, through the U.S. banking system.  DOJ frequently deploys the money laundering statutes to charge “foreign officials” who are not themselves subject to the FCPA.  It is thus increasingly commonplace for DOJ to charge the alleged giver of a corrupt payment with FCPA violations and the alleged recipient with money laundering violations. FCPA AND FCPA-RELATED ENFORCEMENT STATISTICS The below table and graph detail the number of FCPA enforcement actions initiated by DOJ and the Securities and Exchange Commission (“SEC”), the statute’s dual enforcers, during the past 10 years. 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC 26 14 48 26 23 25 11 12 19 8 17 9 10 10 21 32 29 10 21 17 Viewed from this perspective, 2018 was undoubtedly a productive year, and enforcement trends must have a multi-year lens.  When we see our counterparts in the hallways of the Bond Building, we see plenty of evidence of a continued frenetic pace of activity within the FCPA Unit.  To illustrate this further, one need only look at a slightly different set of statistics that captures the activity of DOJ’s FCPA Unit rather than the number of cases it brings under a particular statute.  As can be seen from the below table and graph, which includes non-FCPA charges brought by the FCPA Unit in international corruption investigations, 2018 was the second most prolific year in the history of foreign anti-corruption enforcement by the U.S. government. 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC DOJ SEC 28 14 51 26 24 25 12 12 21 8 19 9 12 10 27 32 36 10 47 17 2018 FCPA + FCPA-RELATED ENFORCEMENT TRENDS In each of our year-end FCPA updates, we seek not only to report on the year’s FCPA enforcement actions but also to identify and synthesize the trends that stem from these actions.  For 2018, seven key enforcement trends stand out from the rest: 1.      DOJ brings “FCPA-related” charges against individuals at an unprecedented pace; 2.      Venezuela in the spotlight; 3.      Continuing scrutiny of the financial services industry; 4.      Continuing reverberations from Brazil’s “Operation Car Wash”; 5.      Public company executives, don’t forget about the SEC . . . ; 6.      The SEC continues to assert aggressive theories in non-precedential settlements; and 7.      DOJ issues four declinations under the FCPA Corporate Enforcement Policy.             DOJ Brings “FCPA-Related” Charges at an Unprecedented Pace As discussed above, DOJ has in the past several years fundamentally changed its approach to international corruption cases.  A phenomenon we first reported in our 2009 Year-End FCPA Update, when it was but a trickle, has now become a full-fledged river.  In 2018, DOJ’s FCPA Unit brought 26 non-FCPA criminal cases on top of 21 FCPA enforcement actions.  This is a dramatic upswing in non-FCPA prosecutions brought by the FCPA Unit, on par with the output of the prior decade combined.  Accounting most significantly for this trend is DOJ’s aggressive deployment of the money laundering statute, in particular against officials of foreign governments. For decades, it has been established law that “foreign officials”—a necessary participant in at least completed FCPA bribery schemes—are nonetheless not covered by the anti-bribery provisions.  And for many years that meant that DOJ focused its criminal enforcement efforts on the “supply side” of bribery.  But starting several years ago, and then exploding in the numbers shown this year, DOJ has attacked the “demand side” every bit as aggressively, principally by charging foreign official bribe recipients (though not sitting, high-level officials) with money laundering.  The most prolific example would be those charged in connection with the Venezuelan bribery schemes described in the following section, although by no means is this the only example. In addition to turning the officials of foreign sovereigns into U.S. defendants, another significant characteristic of DOJ’s money laundering explosion is the potential for theories of U.S. jurisdiction that exceed even the FCPA in their aggressiveness.  For an FCPA bribery charge, the defendant should be a U.S. national, a U.S. company, an employee or agent of an issuer or U.S. company, or a foreign party alleged to have taken an action on U.S. soil.  But for money laundering jurisdiction, DOJ has for some time taken the position that the mere use of U.S. correspondent bank accounts—through which the vast majority of U.S. dollar transactions worldwide are routed—is sufficient to vest the United States with jurisdiction to prosecute.  Thus, if a wire for a corrupt payment in U.S. dollars is made from an account in Foreign Country A to an account in Foreign Country B, but routes instantaneously through a bank account in a U.S. dollar-denominated account in New York, DOJ may assert it has jurisdiction over that transaction even if the parties and business at issue are wholly foreign.  Examples of this aggressive theory on display in 2018 can be seen in the Chi Ping Patrick Ho and Azat Martirossian prosecutions discussed below, among others.  The law on this issue is at this point unclear and subject to multiple statutory and due process defenses—we expect this aggressive assertion of extra-U.S. jurisdiction to be a frequent source of litigation in the years to come. One final point of note with respect to the DOJ FCPA Unit’s focus on money laundering charges is that increasingly FCPA Unit attorneys are teaming up with attorneys from the Money Laundering and Asset Recovery Section (“MLARS”).  We have been covering in these updates the work of MLARS for years now, including through their “Kleptocracy Asset Recovery Initiative,” which uses civil forfeiture actions to freeze, recover, and, in some cases, repatriate the proceeds of foreign corruption.  Several significant FCPA investigations of the recent past began as MLARS forfeiture actions, including prominently those involving “1MDB” in Malaysia and Gulnara Karimova in Uzbekistan as discussed herein, years before they became criminal FCPA cases.  Further, although this update captures developments through 2018, in early January 2019 MLARS and FCPA Unit prosecutors teamed up once again in a big way with the unsealing of criminal charges against several individuals in connection with an alleged bribery and kickback scheme in Mozambique.  We will continue to monitor this and other enforcement activity in future updates. To help our clients meet these developing challenges, Gibson Dunn has on its team the former chiefs of both the DOJ FCPA Unit (Patrick F. Stokes) and MLARS (M. Kendall Day)—not to mention also the former key member of what is now the SEC’s FCPA Unit (Richard W. Grime) and former head of the Enforcement Division at the U.S. Department of Treasury’s Financial Crimes Enforcement Network, aka FinCEN (Stephanie Brooker).  Few if any firms can match the depth of our bench in this area.             Venezuela in the Spotlight                         PDVSA “pay-to-play” procurement scheme For three years now, we have been covering the steady expansion of charges brought by DOJ in connection with an alleged “pay-to-play” corruption scheme involving procurement processes at Venezuelan state-owned energy company Petróleos de Venezuela S.A. (“PDVSA”).  As we first reported in our 2015 Year-End FCPA Update, DOJ alleges that between 2009 and 2014 U.S. businesspersons paid millions of dollars in bribes to PDVSA officials to influence the award of competitive energy contract procurements, as well as to secure preferential treatment in the payment of outstanding debts owed by PDVSA. During the second half of 2018, DOJ unsealed charges against five new defendants in the PDVSA procurement investigation.  On July 31, Jose Manuel Gonzalez-Testino was arrested at Miami International Airport based on a criminal complaint filed in the U.S. District Court for the Southern District of Texas alleging substantive and conspiracy FCPA charges for the payment of at least $629,000 in bribes to an official of PDVSA’s purchasing arm, which based on the allegations appears to be Cesar David Rincon-Godoy, who pleaded guilty to one count of money laundering earlier in the year.  In another pairing of charges against bribe payer and bribe recipient, on September 13, DOJ announced guilty pleas by Juan Carlos Castillo Rincon and Jose Orlando Camacho, respectively a former manager for a Houston-based logistics and freight forwarding company and a former PDVSA procurement official.  Castillo Rincon pleaded guilty to FCPA conspiracy for making corrupt payments to Orlando Camacho, who himself pleaded guilty to money laundering conspiracy for receiving the payments.  On October 30, another former PDVSA procurement official, Ivan Alexis Guedez, pleaded guilty to a money laundering conspiracy charge in connection with his receipt of corrupt payments.  Finally, on December 10, former PDVSA official Alfonzo Eliezer Gravina Munoz pleaded guilty for the second time in connection with the PDVSA investigation.  As previously reported in our 2016 Mid-Year FCPA Update, Gravina Munoz pleaded guilty in 2016 to money laundering conspiracy and tax charges associated with his alleged receipt of bribes.  Gravina Munoz agreed to cooperate with U.S. investigators as part of the original guilty plea, yet according to his 2018 guilty plea to obstruction of justice, he concealed information about a co-conspirator and tipped that person off about the investigation, leading the co-conspirator to destroy evidence and attempt to flee the United States (based on the timing of his arrest at the airport in July 2018, some have reported that the co-conspirator is Gonzalez-Testino). In total, DOJ has (publicly) brought 20 cases of FCPA and FCPA-related charges against 19 individuals associated with the PDVSA procurement corruption investigation.  Fifteen of these defendants have pleaded guilty in connection with 16 of these cases, all awaiting a 2019 sentencing date before the Honorable Gray H. Miller of the U.S. District Court for the Southern District of Texas.  Three of the remaining four defendants are listed as fugitives and have yet to be brought within the jurisdiction of the court, while the fourth (Gonzalez-Testino) awaits a trial date.             Venezuelan currency exchange schemes There can be no question that the above-described PDVSA procurement case is significant.  But developments in 2018 in separate corruption-related cases out of Venezuela may ultimately prove to be even more substantial. According to a July 23 affidavit in support of multiple arrest warrants, a confidential witness approached federal agents in 2016, confessed to his or her involvement in a corrupt currency conversion / embezzlement scheme involving PDVSA funds, and agreed to cooperate in a surreptitious manner.  Two years and more than 100 recorded conversations later, “Operation Money Flight” has yielded (public) charges against nine individuals for $1.2 billion in alleged money laundering. Although complex in operation, the genesis of the scheme relates simply to a substantial difference between the official and unofficial rates at which Venezuelan bolivars could be exchanged for U.S. dollars.  Co-conspirators allegedly entered into contracts to convert PDVSA bolivars into dollars at the unofficial rate (e.g., 60:1) and then, with the assistance of corrupt payments to government officials, allegedly converted the purchased bolivars back into dollars at the official rate (e.g., 6:1).  In so doing, co-conspirators allegedly were able to receive as much as 10 times their investment by effectively embezzling money from PDVSA. The first charges were announced on July 25, 2018, with the arrest of Matthias Krull, a German national resident in Panama working for a European bank, and Gustavo Adolfo Hernandez Frieri, a naturalized U.S. citizen who operated financial services firms out of Florida.  Also charged in connection with the money laundering scheme are businesspersons Francisco Convit Guruceaga, Jose Vincente Amparan Croquer, Hugo Andre Ramalho Gois, Marcelo Federico Gutierrez Acosta y Lara, and Mario Enrique Bonilla Vallera, former legal counsel for the Venezuelan Ministry of Oil and Mining Carmelo Urdaneta Aqui, and former PDVSA Finance Director Abraham Edgardo Ortega.  Only weeks after his arrest in Miami, Krull pleaded guilty to a single money laundering conspiracy count and was sentenced on October 29, 2018 to 10 years in prison.  Ortega, who was arrested in September and pleaded guilty to a single money laundering conspiracy count on October 31, 2018, awaits an April 2019 sentencing date.  Frieri, who was arrested in Italy reportedly while on vacation with his family, is still undergoing extradition proceedings.  The remaining defendants have yet to make an appearance in the U.S. District Court for the Southern District of Florida and are designated as fugitives. A second set of charges connected to alleged currency conversion corruption in Venezuela (though not specific to PDVSA) was announced on November 19, 2018, when DOJ unsealed an indictment against Raul Gorrin Belisario, the billionaire owner of the Globovision news network, charging him with conspiracy to violate the FCPA and numerous money laundering counts.  On the same day, DOJ unsealed money laundering guilty pleas by former Venezuelan National Treasurer Alejandro Andrade Cedeno and former bank owner Gabriel Arturo Jimenez Aray.  According to the charging documents, Gorrin Belisario bribed two successive Venezuelan National Treasurers, including Andrade Cedeno, to enter into contracts for foreign exchange transactions at favorable rates.  Gorrin Belisario and Jimenez Aray allegedly laundered the bribes and proceeds of the scheme through a Dominican bank owned by the latter.  Jimenez Aray was sentenced to three years in prison, while Andrade Cedeno was sentenced to 10 years in prison and agreed to forfeit a staggering $1 billion in cash and luxury assets that he allegedly received as bribes.  Gorrin Belisario has yet to make an appearance in the U.S. District Court for the Southern District of Florida and is designated a fugitive.             Continuing Scrutiny of the Financial Services Industry                         1MDB We have been tracking for several years now investigative activity related to Malaysian sovereign wealth fund 1Malaysia Development Berhad (“1MDB”).  As covered in our 2016 Year-End FCPA Update, the investigations first surfaced with a massive civil forfeiture action filed by MLARS in the U.S. District Court for the Central District of California seeking to recover funds allegedly misappropriated from 1MDB.  On November 1, 2018, the investigation took a turn with prosecutors from the FCPA Unit and MLARS unsealing criminal FCPA charges in the U.S. District Court for the Eastern District of New York against Malaysian businessperson Low Taek Jho and two former bankers, Tim Leissner and Ng Chong Hwa.  Collectively, the three are alleged to have participated in the diversion of more than $2.7 billion from 1MDB, between 2009 and 2014 and in connection with three separate bond offerings, for the illicit purposes of making payments to officials of state-owned investment funds of Malaysia and the UAE and embezzlement for their own personal benefit. Leissner has pleaded guilty to a two-count information charging him with a dual FCPA conspiracy—both to violate the anti-bribery provisions and to circumvent his former issuer-employer’s internal controls—as well as money laundering conspiracy.  Sentencing is currently set for January 2019, although of note Leissner already has agreed to forfeit more than $40 million in connection with the scheme.  Ng and Low were each indicted on FCPA bribery and money laundering charges, with Ng additionally being charged with FCPA internal controls violations.  Ng has been arrested in Malaysia and is awaiting extradition proceedings, while Low remains at large.                         Legg Mason Inc. We covered DOJ’s June 2018 non-prosecution agreement with Maryland-based investment firm Legg Mason in our 2018 Mid-Year FCPA Update.  As anticipated therein, the SEC followed with its own FCPA charges, announcing on August 27, 2018 a settled cease-and-desist proceeding associated with the alleged scheme to bribe Libyan officials to secure investment opportunities.  To resolve the SEC’s FCPA internal controls charge, Legg Mason agreed to pay $34.5 million in disgorgement and prejudgment interest.  This resolution is unusual because typically the SEC and DOJ resolve investigations on the same day and not months apart, but the cases were coordinated in that the investment firm received credit in the DOJ resolution for disgorgement ultimately paid to the SEC and the SEC’s order does not include a separate civil penalty in recognition of Legg Mason’s $32,625,000 criminal fine.                         Joo Hyun Bahn After pleading guilty earlier this year to criminal FCPA charges in connection with the feigned Vietnamese skyscraper plot covered in our 2017 Year-End and 2018 Mid-Year FCPA updates, on September 6, 2018, former real estate broker Joo Hyun Bahn consented to an administrative cease-and-desist order with the SEC based on the same conduct.  To resolve civil FCPA anti-bribery, books-and-records, and internal controls allegations, Bahn agreed to pay $225,000 in disgorgement, which was deemed satisfied by the forfeiture and restitution payments that Bahn was ordered to pay in the criminal proceeding.  On the same day that the SEC resolution was announced, the Honorable Edgardo Ramos of the U.S. District Court for the Southern District of New York sentenced Bahn to six months in prison, to forfeit $225,000, and pay to $500,000 in restitution. Notably, there have been no reports of a pending resolution involving Bahn’s former employer, real estate firm Colliers International.  If this continues to the case, it may reflect a judgment that charges are not appropriate given Bahn’s alleged deceit toward his former employer coupled with the fact that the deal in question was never consummated.             Continuing Reverberations from Brazil’s “Operation Car Wash” Our readership is well aware that the long-running “Operation Car Wash” investigation has resulted in significant corruption-related enforcement activity both within and without Brazil.  To say nothing of its seismic domestic impact, where it is credited with toppling a presidential administration, viewed strictly from a U.S. FCPA perspective Operation Car Wash has become one of the most significant “clusters” of FCPA enforcement activity ever.  Prior FCPA enforcement actions with connections to this investigation against Braskem S.A., Keppel Offshore & Marine Ltd., Odebrecht S.A., Rolls-Royce plc, and SBM Offshore N.V. are covered in our 2016 and 2017 year-end FCPA updates.  Said Principal Deputy Assistant Attorney General John P. Cronan at the recent Latin Lawyer / Global Investigations Review Anti-Corruption and Investigations Conference in São Paulo, “our close relationship with Brazil has borne fruit with some of the Department of Justice’s most significant FCPA resolutions over the past 12 months.” On September 27, 2018, DOJ and the SEC added to the “Operation Car Wash” numbers by announcing a joint FCPA resolution with Petróleo Brasileiro S.A. – Petrobras (“Petrobras”), Brazil’s state-owned oil company.  Petrobras entered into a non-prosecution agreement with DOJ to resolve FCPA accounting allegations based on the conduct of certain former executives who already have been convicted in Brazil for concealing their engagement in a scheme of embezzlement and political payoffs that harmed and caused severe loss to Petrobras.  The SEC likewise alleged that Petrobras violated the FCPA’s accounting provisions, as well as certain non-scienter-based provisions of the Securities Act and the Exchange Act through allegedly misleading statements to U.S. investors in connection with a stock offering completed in 2010.  In moves illustrative of the unusual nature of the resolution, DOJ explicitly recognized that Petrobras was a victim of its former employees’ embezzlement, and the SEC acknowledged the company’s “significant cooperation” with the SEC’s investigation and its status as an Assistant to the Prosecution in 51 proceedings in Brazil. Although some have reported the financial resolution reached by Petrobras as high as $1.78 billion, the amount to be paid by the company in connection with the FCPA resolutions is far more modest.  To resolve the criminal case, Petrobras agreed to a fine of $853.2 million, but will pay only $85.3 million (10%) of that to DOJ, with an 80% offsetting credit applied against $682.56 million to be paid to fund social responsibility programs in Brazil as part of an agreement with the Brazilian Federal Prosecutor’s Office and a 10% offsetting credit applied against a civil penalty imposed by the SEC.  Similarly, the SEC imposed $933.5 million in disgorgement and prejudgment interest and an $853.2 million penalty, but takes only $85.3 million of that after crediting the Brazilian resolution against the penalty and, in a first-of-its kind for FCPA resolutions, crediting the entire disgorgement amount against the shareholders’ class action settlement described in our 2018 Mid-Year FCPA Update.  Said SEC FCPA Unit Chief Charles E. Cain of this latter credit while speaking at the Securities Enforcement Forum on November 1, 2018:  “It made sense for this case,” and other companies should not expect the same result moving forward.  Thus Petrobras will in effect pay just over $170 million to resolve its FCPA resolutions with DOJ and the SEC. In another Operation Car Wash-related FCPA enforcement action, Houston-based offshore drilling company Vantage Drilling International resolved SEC allegations that it lacked adequate internal controls over payments to its supplier of drilling assets—a Taiwanese shipping magnate who was the company’s largest shareholder and sat on its board—and the engagement of a third-party agent without due diligence to assist in marketing the company to Petrobras.  According to the SEC, Vantage Drilling failed to respond to red flags indicating a risk that the director and the agent would bribe Petrobras officials in connection with obtaining a $1.8 billion contract that benefitted the company.  Vantage Drilling previously has identified the Taiwanese director as Hsin-Chi Su, one of several people who along with former Vantage Drilling CEO Paul Bragg have been charged by Brazilian prosecutors. Without admitting or denying the allegations, Vantage Drilling consented to the cease-and-desist proceeding and agreed to pay $5 million in disgorgement.  The SEC did not impose additional penalties in light of Vantage’s financial condition.  The company initiated bankruptcy proceedings after Petrobras terminated its drilling services contract in 2015 in reaction to the corruption allegations.  DOJ closed its investigation into the company in 2017 without taking action.             Public Company Executives, Don’t Forget about the SEC . . . It is a frequent and misguided critique of FCPA enforcement that executives in high-profile positions are not held to account for the misdeeds that occur on their watch.  Although frequently there are legitimate jurisdictional, prudential, or other explanations for this purported phenomenon, DOJ and the SEC have each made a point in recent years of underscoring their commitment to holding individuals accountable for corporate misconduct.  For example, SEC FCPA Enforcement Chief Charles E. Cain said recently, “Corporate culture starts at the top, and when misconduct is directed by the highest level of management it is critical that they are held accountable for their conduct.”  Two examples of the SEC charging public company executives in 2018 FCPA enforcement actions in the wake of corporate resolutions follow. On September 25, 2018, the SEC announced a settled cease-and-desist proceeding against Patricio Contesse González, the former longtime CEO of Chilean chemical and mining company and ADR-issuer Sociedad Química y Minera de Chile, S.A. (“SQM”), which 20 months earlier paid more than $30 million to resolve DOJ / SEC FCPA enforcement actions as covered in our 2017 Mid-Year FCPA Update.  The SEC’s order alleges that González used a discretionary “CEO account” to funnel $15 million to Chilean politicians and then failed to disclose these payments to SQM’s internal and external auditors.  To resolve the SEC’s allegations that he caused SQM to violate and himself violated the FCPA books-and-records and internal controls provisions, as well as signed misleading management representation letters to SQM’s external auditor and signed false certifications in SQM’s filings, González agreed to pay a civil penalty of $125,000. Similarly, on December 18, 2018, the SEC announced a settled cease-and-desist proceeding with Paul A. Margis, the former CEO of Panasonic Avionics Corporation (“PAC”), a U.S. subsidiary of Japanese electronics company and former American Depositary Share-issuer Panasonic, which together with PAC paid more than $280 million in an April 2018 DOJ / SEC FCPA resolution as covered in our 2018 Mid-Year FCPA Update.  The SEC alleged that Margis authorized $1.76 million in payments to three third parties, one of whom was a government official actively negotiating with PAC for a post-retirement position as he simultaneously negotiated with PAC for a major contract extension on behalf of his state-owned airline employer, even though these third parties provided little-to-no work on behalf of PAC.  To resolve the charges that he circumvented PAC’s internal controls, falsified PAC’s books and records, caused Panasonic to violate the FCPA’s accounting provisions, and misled external auditors in certifications and representation letters, Margis agreed to pay a civil penalty of $75,000.  While not an FCPA resolution, PAC’s former CFO Takeshi Uonaga agreed in a parallel resolution to pay a $50,000 civil penalty to resolve allegations that he backdated a contract to allow for untimely recognition of revenue in connection with a contract with the same state-owned airline. The SEC Continues to Assert Aggressive Theories in Non-Precedential Settlements In 2018, the SEC resolved 10 corporate FCPA enforcement actions that did not have a corresponding DOJ resolution.  In several of these SEC-only resolutions, the SEC leveraged the accounting provisions to bring cases predicated upon aggressive theories of FCPA liability that, at least on the face of the charging documents, bore a tenuous (or non-existent) connection to foreign bribery.  In another case, the SEC seemed to stretch (if not break) the boundaries of the anti-bribery provision.  Thus continues a trend we have observed periodically over the years, including most recently in our 2017 Year-End FCPA Update.  Although settlements are clearly non-binding in the legal sense, any FCPA practitioner knows that they are frequently bandied about as precedent in settlement discussions and thus become a very real part of the body of FCPA enforcement that must be contended with. In our 2018 Mid-Year FCPA Update, we reported on two cases involving aggressive interpretations of the accounting provisions:  (1) the SEC’s cease-and-desist proceeding against Elbit Imaging Ltd., where the violation alleged by the SEC concerned the use of third parties on whom due diligence was not performed and no evidence of work performed; and (2) the SEC’s cease-and-desist proceeding against Kinross Gold, where the alleged violations related to the slow implementation of compliance controls at two acquired subsidiaries, failure to respond to internal audits flagging the inadequate controls, and inadequate efforts to ensure that payments to vendors and consultants were used appropriately.  In neither case did the SEC directly allege specific corrupt payments. More recently, on September 28, 2018, the SEC announced a settled cease-and-desist proceeding against Michigan-based medical technology company Stryker Corporation, related to alleged violations of the FCPA’s accounting provisions.  The allegations relate to the company’s internal controls purportedly being insufficient to detect the risk of improper payments in India, China, and Kuwait.  Specifically, the SEC alleged that an internal forensic review of Stryker’s Indian subsidiary identified no supporting documentation for 27% of higher-risk transactions tested, as well as inflated invoices in connection with third-party sales to private hospitals.  The SEC further alleged that Stryker’s Chinese subsidiary used at least 21 sub-distributors that were not vetted, approved, or trained as required by company policy, which increased the risk of improper payments, and that Stryker did not test or otherwise assess compliance with its policies by a distributor in Kuwait that made over $32,000 in duplicative per diem payments to health care professionals over the course of three years.  To resolve these FCPA accounting allegations, and without admitting or denying the SEC’s findings, Stryker consented to the entry of a cease-and-desist order and agreed to pay a $7.8 million civil penalty.  Stryker also was required to retain an independent compliance consultant, narrowly focused on reviewing Stryker’s anti-corruption policies and procedures and internal controls applicable to third parties, for an 18-month term.  It is likely that the compliance monitor was imposed, at least in part, because this was Stryker’s second FCPA resolution, having resolved a prior FCPA enforcement action with the SEC in October 2013 as detailed in our 2013 Year-End FCPA Update. Employing a different sort of aggressive FCPA theory, on September 12, 2018, the SEC announced a settled cease-and-desist proceeding against a multinational conglomerate for alleged violations of the FCPA’s anti-bribery, books-and-records, and internal controls provisions.  The company was alleged among other things to have made improper payments with respect to public housing officials in Azerbaijan to retain sales.  What makes this case stand out as aggressive in its charging theory is the Section 30A bribery charge relating to the conduct in Azerbaijan.  The only clear allegation of involvement by the parent in its Russian subsidiary’s alleged conduct is that the parent “failed to detect the conduct”—seemingly an inadequate internal controls theory, if that.  Further, there is a prominent allegation of U.S. jurisdictional nexus via the fact that the payments made on behalf of the Russian subsidiary “were [made] in U.S. dollar denominations and involved U.S. correspondent banks.”  To resolve the allegations, the company agreed to pay $13.9 million, consisting of nearly $10 million in disgorgement and prejudgment interest and a $4 million penalty.  DOJ closed its investigation in March 2018 without bringing its own enforcement action. Finally, on December 26, 2018, the SEC brought an FCPA enforcement action unlike any other of which we are aware.  The SEC charged Brazilian state-owned power company and issuer Centrais Elétricas Brasileiras S.A. (“Eletrobras”) with violations of the FCPA’s books-and-records and internal controls provisions based entirely on the alleged self-dealing of its now-former executives, which had no apparent benefit to the company.  Specifically, the SEC alleged that executives of an Eletrobras subsidiary managing a massive nuclear power plant construction project received kickbacks from private Brazilian construction companies in exchange for paying inflated or sham invoices on behalf of the company.  Payments also were allegedly made to Brazilian political party and government officials, which is why we count this as an FCPA enforcement action; however, the payments were made on behalf of the Brazilian construction companies and only funded, in part, out of the alleged sham invoices and inflated contract prices paid by the Eletrobras subsidiary.  There is no allegation that Eletrobras received an improper benefit via these payments, and indeed it would seem that the company was a victim in this course of conduct.  Nonetheless, the SEC alleged that Eletrobras maintained deficient internal controls and had inaccurate books and records as a result of this scheme.  To resolve the SEC proceedings, without admitting or denying the findings, Eletrobras consented to the entry of a cease-and-desist order and agreed to pay a $2.5 million civil penalty.  There was no disgorgement as there was no benefit to Eletrobras alleged.  The company previously announced that DOJ closed its investigation without taking enforcement action.             DOJ Issues Four Declinations under the FCPA Corporate Enforcement Policy DOJ issued four public declination letters in 2018 pursuant to the FCPA Corporate Enforcement Policy.  Two of these coincided with parallel SEC FCPA enforcement actions, one anticipates a future foreign regulatory action, and the fourth stands alone as a corporate action (but follows an individual enforcement action).  All of the letters followed decisions by the named companies to make voluntary disclosures, which is a threshold requirement under the FCPA Corporate Enforcement Policy. The first declination letter of 2018 concerned Dun & Bradstreet as we covered in our 2018 Mid-Year FCPA Update.  Descriptions of the three declination letters from the second half of 2018 follow: Güralp Systems Limited – On August 20, 2018, DOJ issued a public declination letter to UK seismology company Güralp Systems in connection with the same set of events leading to the U.S. money laundering conviction of Heon-Cheol Chi, former Director of the Korea Institute of Geoscience and Mineral Resources (“KIGAM”) Earthquake Research Center, described in our 2017 Year-End FCPA Update.  DOJ stated in the letter that it was closing its investigation without charges against Güralp Systems, despite evidence of corrupt payments to Chi, based on a variety of factors, including most prominently that Güralp Systems, “a U.K. company with its principal place of business in the U.K., is the subject of an ongoing parallel investigation by the U.K.’s Serious Fraud Office for violations of law relating to the same conduct and has committed to accepting responsibility for that conduct with the SFO.”  As described below, several former Güralp Systems executives have been charged in the UK, but the UK investigation of Güralp Systems remains ongoing. Insurance Corporation of Barbados Limited – Three days later, on August 23, 2018, DOJ issued a public declination letter to Barbadian insurance company ICBL.  This letter came several weeks after DOJ unsealed a March 2018 indictment charging Donville Inniss, a former Minister of Industry and member of Parliament of Barbados, with money laundering in connection with his alleged receipt of $36,000 from ICBL in exchange for agreeing to award government contracts to the insurer.  Pursuant to the declination letter, which is countersigned by ICBL’s Board Chair, ICBL agreed to the letter’s brief recitation of facts and to disgorge nearly $94,000 in profits received from the tainted contracts, making it the first so-called “declination with disgorgement” agreement under the official FCPA Corporate Enforcement Policy (although prior such agreements were reached under the predecessor FCPA Pilot Program).  Inniss’s trial is scheduled for June 2019 before the Honorable Kiyo A. Matsumoto of the U.S. District Court for the Eastern District of New York.  Interestingly, a redacted superseding indictment filed by DOJ in the case makes clear that money laundering charges have been filed under seal against the former CEO and a senior vice president of ICBL. Polycom, Inc. – The year’s final FCPA enforcement event, announced on December 26, 2018, involved a coordinated SEC cease-and-desist order entered against, and DOJ declination letter issued to, California telecommunications provider Polycom.  The allegations set forth in the SEC order, which charge violations of the FCPA’s books-and-records and internal controls provisions, assert that between 2006 and 2014 employees of Polycom’s Chinese subsidiary provided discounts to distributors or resellers while knowing that those discounts would be used to fund improper payments to government end customers.  To resolve these allegations, Polycom agreed to pay $12.5 million in disgorgement and prejudgment interest plus a $3.8 million civil penalty.  DOJ then issued a letter declining to prosecute Polycom for the China conduct, prominently noting the company’s voluntary disclosure, cooperation, and agreement to enter into the SEC resolution.  What is perhaps most noteworthy about the Polycom settlement is that whereas the SEC explicitly limited its disgorgement to illicit profits earned on or after September 27, 2012—clearly in recognition of the five-year statute of limitations imposed by 28 U.S.C. § 2462 and Kokesh v. SEC, 137 S. Ct. 1635 (2017)—DOJ made a condition of its declination letter that Polycom disgorge an additional $20.3 million representing profits earned outside “the time limits prescribed by 28 U.S.C. § 2462.”             Rounding Out the 2018 FCPA Enforcement Docket Additional 2018 FCPA enforcement actions not covered above or in our 2018 Mid-Year FCPA Update are as follows: Roger Richard Boncy – On October 30, 2018, DOJ filed a superseding indictment in the case against retired U.S. Army colonel and Haitian non-profit founder Joseph Baptiste, covered in our 2017 Year-End FCPA Update, to add Boncy as a defendant on the FCPA conspiracy, Travel Act, and money laundering conspiracy charges.  Boncy is a former lawyer of dual U.S.-Haitian citizenship who once served as Haiti’s Ambassador-at-Large.  According to the indictment, Boncy and Baptiste solicited bribe money from two undercover FBI agents who were posing as prospective investors for a multi-million dollar port development project in Haiti.  But instead of funneling the bribe money to Haitian officials, Baptiste allegedly pocketed it.  Although the trial of Baptiste nearly went forward in late 2018, in light of the superseding indictment, a joint trial for Baptiste and Boncy is now scheduled for June 2019. Sanofi – On September 4, 2018, the SEC announced a settled FCPA accounting resolution with Paris-headquartered and U.S.-listed pharmaceutical manufacturer Sanofi, pursuant to which the company agreed to pay $25.2 million in disgorgement, prejudgment interest, and penalties to resolve allegations regarding corrupt payments to government procurement officials and healthcare providers in Kazakhstan and the Middle East.  Sanofi also agreed as part of the resolution to self-report about anti-corruption compliance to the SEC for a two-year period. Juan Andres Baquerizo Escobar – On July 11, 2018, DOJ filed a criminal money laundering charge against another defendant involved in the ongoing investigation of corruption at Ecuador’s state-owned oil company, Petroecuador.  Baquerizo Escobar, an Ecuadorian businessperson, pleaded guilty two months later to facilitating the transfer of $1.72 million in bribes to Petroecuador officials between 2012 and 2016.  He awaits a January 2019 sentencing date.  As discussed in our 2017 Year-End and 2018 Mid-Year FCPA updates, charges have been brought against four other defendants in this investigation—money laundering charges against former Petroecuador officials Arturo Escobar Dominguez and Marcelo Reyes Lopez, money laundering charges against Ecuadorian businessperson Jose Larrea, and FCPA and money laundering charges against Ecuadorian businessperson Frank Roberto Chatburn Ripalda.  The first three have all now pleaded guilty, including Larrea on September 11, 2018, and been sentenced to prison terms of 53 months (Reyes Lopez), 48 months (Escobar Dominguez), and 27 months (Larrea), respectively.  Chatburn Ripalda was scheduled to go to trial in February 2019, but a superseding indictment charging him with additional alleged bribes to Petroecuador officials was filed on December 13, 2018.  A hearing on the superseding indictment and likely a new trial date is set for January 2019. 2018 FCPA-RELATED ENFORCEMENT LITIGATION             Second Circuit Issues Important FCPA Jurisdictional Decision in Hoskins On August 24, 2018, the U.S. Court of Appeals for the Second Circuit issued a long-awaited decision in the criminal FCPA case filed against former Alstom executive Lawrence Hoskins.  As we reported in our 2015 Year-End and 2016 Mid-Year FCPA updates, the Honorable Janet Bond Arterton of the U.S. District Court for the District of Connecticut ruled below that Hoskins, a UK national working for a UK subsidiary of a French company, could not be held liable under the FCPA pursuant to a theory of conspiring with or aiding-and-abetting a person who was subject to the statute where it could not be shown that Hoskins was himself subject to the statute.  In an unusual move underscoring the programmatic importance of this issue, DOJ took an interlocutory appeal to the Second Circuit. The Second Circuit largely affirmed the judgment of the district court, in an opinion authored by the Honorable Rosemary S. Pooler.  Specifically, the Second Circuit affirmed the lower court’s ruling that the government may not charge a defendant under the FCPA based on conspiracy or aiding-and-abetting theories if that defendant does not himself fall within one of the “three clear categories of persons who are covered by [the FCPA’s anti-bribery] provisions.”  The Court’s opinion extensively reviews the FCPA’s legislative history and concludes that the text of the statute reflected “surgical precision” on its drafters’ part in clearly establishing its jurisdictional reach to specifically exclude foreign persons who are neither agents of U.S. companies and who did not act within the territory of the United States.  Thus, under the interpretive principle established in the Supreme Court’s landmark Gebardi decision, such persons likewise cannot be charged with FCPA conspiracy or aiding-and-abetting offenses.  The Second Circuit went on to observe that the general presumption against the extraterritorial application of statutes provided an independent basis to preclude the government from charging Hoskins with FCPA conspiracy given an absence of clearly expressed congressional intent to allow conspiracy and aiding-and-abetting liability to broaden the FCPA’s extraterritorial reach.  The Court did, however, hold that the government should be permitted to make a showing that Hoskins acted as an agent of a domestic concern (namely, Alstom’s U.S. subsidiary), in which case he could be held liable for conspiring with Alstom’s U.S. employees or other foreign nationals who did act within the territory of the United States. Given the paucity of appellate decisions interpreting and construing the FCPA, this decision is a significant precedent limiting the government’s ability to prosecute non-resident, foreign defendants who do not act within U.S. territory and are not agents of a U.S. issuer or domestic concern.  Of course, DOJ may well respond by attempting to rely on an expanded view of agency liability to reach non-resident defendants who did not act within U.S. territory.  Further, as set forth in other portions of this Update, DOJ is increasingly relying upon the money laundering statute as an alternative basis for criminal liability where corrupt transactions pass through the U.S. banking system.  As for Hoskins’s case, it has been returned to the District of Connecticut with a March 2019 trial date.             DOJ Secures FCPA Trial Conviction We reported in our 2018 Mid-Year FCPA Update on the then-pending motion to dismiss of Chi Ping Patrick Ho, the head of a China and Virginia-based NGO who was indicted in December 2017 on FCPA and money laundering charges associated with his alleged role in separate corruption schemes in Chad and Uganda.  Following oral argument on July 19, 2018, the Honorable Loretta A. Preska of the U.S. District Court for the Southern District of New York denied Ho’s motion to dismiss the indictment making two separate findings:  (1) it is not inconsistent to charge Ho both as a foreign national acting within the territory of the United States pursuant to 18 U.S.C. § 78dd-3 and at the same time as an agent of a domestic concern subject to 18 U.S.C. § 78dd-2—these are factual questions to be addressed by the jury; and (2) that wire transfers from one foreign jurisdiction to another foreign jurisdiction, passing through the United States via a correspondent banking account transfer as most U.S. dollar transactions do, may survive a facial challenge to a money laundering charge.  The Court deferred Ho’s due process challenge to the latter charge pending the evidence to be submitted at trial. Motion to dismiss denied, Ho proceeded to trial.  The evidence presented at the seven-day trial included that Ho offered gift boxes containing $2 million in cash to the President of Chad, who rejected the offer and provided no illicit benefit to Ho or his employer.  Ho then turned his attention to the second corruption scheme in Uganda, whereby he allegedly paid $500,000 via wire transfer to a purported charitable foundation designated by the Foreign Minister and a $500,000 cash “campaign donation” to the President.  On December 5, 2018, after only three hours of deliberation, the federal jury in Manhattan returned a guilty verdict on seven of the eight counts set forth in the indictment, including FCPA and money laundering charges.  A key witness for the government at Ho’s trial was Cheikh Gadio, the former Foreign Minister of Senegal alleged to have been Ho’s co-conspirator.  Gadio himself had been charged with money laundering, as reported in our 2017 Year-End FCPA Update, but on September 14, 2018 DOJ dismissed that charge.  On December 18, 2018, Ho filed a one-paragraph motion to set aside the verdict pursuant to Rule 29(c), which was denied by Judge Preska in a one-word order dated December 19.  Ho is scheduled to be sentenced in March 2019.             Court Dismisses Civil FCPA Charges against Former Och-Ziff Executives In our 2017 Mid-Year FCPA Update, we discussed the SEC’s civil FCPA charges against two executives of New York-based hedge fund Och-Ziff Capital Management Group LLC, Michael L. Cohen and Vanja Baros, arising out of an alleged corruption scheme in various African countries.  Cohen and Baros filed separate motions to dismiss the SEC’s charges based on the Kokesh decision, in which the Supreme Court unanimously held that disgorgement is a “penalty” as defined in 28 U.S.C. § 2462 and therefore subject to the five-year statute of limitations.  The defendants argued that the conduct alleged in the SEC’s complaint, which occurred between 2007 and 2012, was time-barred. On July 12, 2018, the Honorable Nicholas G. Garaufis of the U.S. District Court for the Eastern District of New York agreed with the defendants and dismissed the SEC’s charges.  In a 32-page memorandum opinion, Judge Garaufis held that:  (1) the Court can and should consider a statute-of-limitations defense on a motion to dismiss, determining whether the relief sought by the SEC operates as a penalty based on the allegations set forth in the complaint; (2) the SEC may not allege conduct that is untimely in the complaint only then to seek discovery of whether there are additional violations within the statute-of-limitations period; (3) a tolling agreement executed by Cohen, which would have made timely certain of the SEC’s claims concerning alleged conduct in sub-Saharan Africa, was limited by its express language to the SEC’s initial investigation in Libya and therefore did not encompass investigations that arose from the initial investigation; and (4) the SEC’s claim began to accrue at the time of the alleged violations of law, not when the defendants allegedly received illicit benefits from that misconduct, and in any event the SEC did not specifically allege that the defendants received illicit benefits within the applicable statute-of-limitations period. Although the Court’s decision is undoubtedly significant for the growing body of FCPA case law, it represents only a partial victory for defendant Cohen.  As reported in our 2018 Mid-Year FCPA Update, Cohen has been charged by criminal indictment with FCPA-related offenses arising from his alleged failure to disclose his interest in an African mining operation to a charitable foundation client and subsequent acts to cover up the transaction after the SEC opened an investigation.  The criminal case also is before Judge Garaufis, but the allegations, timing, and theory of that case are different and it is unclear whether the statute of limitations will be a viable defense for Cohen.  Discovery in that matter is ongoing, with the next status hearing set for February 2019.             Court Dismisses FCPA-Related Charges against Former Military Contractor In an FCPA-related case that has largely flown under the radar of the FCPA community, in December 2017 DOJ charged former military contractor Charley Dean Hill with making false statements to FBI agents investigating payments by Hill’s employer—a security and infrastructure provider—to obtain government licenses and permits from Iraqi officials.  Specifically, DOJ alleged that in a 2010 interview Hill stated falsely that he had never sent cash from Iraq to the United States. The single-count false statements charge was initially filed by way of criminal information, pursuant to a plea agreement, but then Hill backed out of the plea agreement and was charged by indictment in February 2018.  Hill filed a motion to dismiss the indictment on the grounds that it was untimely to charge him nearly eight years after the alleged false statement.  DOJ defended on the grounds that it timely sought and received a tolling order pursuant to 18 U.S.C. § 3292, which permits DOJ to toll the statute of limitations for up to three years while it seeks foreign-located evidence from a foreign government pursuant to a Mutual Legal Assistance Treaty.  But following a lengthy and spirited oral argument on the motion before the U.S. District Court for the District of South Carolina, the Honorable Henry M. Herlong, Jr. determined that because DOJ did not enumerate the false statements statute (18 U.S.C. § 1001) as one of the crimes under investigation in its § 3292 tolling application, the tolling order did not cover the crime ultimately charged and DOJ’s indictment was untimely.  The Court therefore granted Hill’s motion to dismiss.             Defendant Sentenced in HISS Case As we first reported in our 2015 Mid-Year FCPA Update, in January 2015 DOJ filed a civil action in the U.S. District Court for the Eastern District of Louisiana to forfeit nine New Orleans properties allegedly purchased with the proceeds of corruption involving the former Executive Director of the Honduran Institute of Social Security (“HISS”).  Several years later, as discussed in our 2018 Mid-Year FCPA Update, a grand jury returned an indictment charging Carlos Alberto Zelaya Rojas, the nominal owner of the properties, with 12 counts of money laundering and other offenses.  The indictment alleged that Zelaya Rojas assisted his brother, the former HISS Executive Director, who was himself criminally charged in Honduras with taking millions of dollars in bribes from two Honduran businessmen, with laundering at least $1.3 million in bribe payments, including through the purchase of the nine New Orleans properties.  Following his June 2018 guilty plea to a single count of money laundering conspiracy, on October 3, 2018, Zelaya Rojas was sentenced by the Honorable Martin L.C. Feldman to 46 months in prison, in addition to the forfeiture of the nine properties. Court Refuses to Consider Motion to Dismiss on Fugitive Disentitlement Grounds The U.S. District Court for the Southern District of Ohio recently issued a decision in the ongoing prosecution of Azat Martirossian on an important and recurring issue in FCPA and FCPA-related prosecutions.  As readers of our updates well know, FCPA and FCPA-related indictments are frequently filed under seal where they wait months or even years for an internationally located defendant to cross a border subject to the long-arm of U.S. law enforcement.  But, for a variety of reasons, DOJ will frequently unseal an indictment with one or more defendants still outside of their jurisdictional reach.  The oft-recurring question in these cases is whether the international defendant may challenge the basis for their indictment without coming to the United States and physically submitting him or herself to the jurisdiction of the court. In the instant case, on May 24, 2018, Martirossian—an Armenian citizen and Chinese resident “who has never set foot in the United States”—was added to the Rolls-Royce related indictment most recently described in our 2018 Mid-Year FCPA Update.  Weeks later, on June 22, 2018, counsel for Martirossian filed a motion to dismiss the money laundering charges even as Martirossian himself remained outside the United States.  DOJ responded by invoking the “fugitive disentitlement doctrine” and asking the Court to hold the motion in abeyance.  On October 9, 2018, the Court granted the government’s motion, and stayed Martirossian’s motion “until or unless he submits to the jurisdiction of this Court.”  Martirossian has since filed both an interlocutory appeal and a writ of mandamus with the U.S. Court of Appeals for the Sixth Circuit, which both remain pending as of publication.             FCPA-Related Charges Unsealed 10 Years Later We have been reporting for some time now on the unusual case of Lebanese businessman Samir Khoury.  Khoury has long suspected that he was the so-called “LNG Consultant” described in public charging documents arising from the Bonny Island, Nigeria corruption cases of a decade ago, and further that there was an indictment against him filed under seal, just waiting for him to travel to the United States or a country with an extradition treaty.  In a remarkably aggressive strategy, Khoury filed multiple civil suits in the U.S. District Court for the Southern District of Texas seeking to unseal the indictment if, as he suspected, it exists.  Khoury has gotten his wish. On July 9, 2018, the Honorable Keith P. Ellison granted Khoury’s motion to unseal a November 2008 indictment charging him with mail and wire fraud offenses arising out of the Bonny Island, Nigeria scheme, as discussed in our 2009 Mid-Year FCPA Update, among others.  Within days of the indictment being unsealed, Khoury filed a motion to dismiss the indictment for violation of his rights under the Speedy Trial Act, or, alternatively, as time-barred under the applicable statute of limitations.  DOJ responded by arguing that Khoury’s motion should not be considered, under the fugitive disentitlement doctrine, until he appears before the court to answer the charges.  A hearing on the motion was held on November 29, 2018, at which Judge Ellison declined for a second time to apply the fugitive disentitlement doctrine.  Khoury has moved to compel the government to produce certain additional evidence necessary to file a revised motion to dismiss and a hearing on this motion is scheduled for January 2019.             Third Circuit Affirms FCPA Sentence We reported in our 2016 Mid-Year FCPA Update on the April 2016 guilty plea of Dmitrij Harder, former owner and president of a Pennsylvania-based consulting company, based on FCPA bribery charges that he made more than $3.5 million in “consulting” payments to the sister of an official of the European Bank for Reconstruction and Development to corruptly influence the award of contracts to clients of Harder’s.  As noted in our 2017 Year-End FCPA Update, Harder was sentenced in July 2017 to 60 months in prison by the U.S. District Court for the Eastern District of Pennsylvania. Harder appealed his sentence to the U.S. Court of Appeals for the Third Circuit, claiming that the District Court failed to meaningfully consider his arguments concerning sentencing disparity and mitigation, including a chart prepared by a law professor concluding that the average sentence for FCPA defendants is only 13 months, as well as a novel argument that Harder deserved a reduced sentence because the Russian energy projects promoted by his bribes had delivered “exceptionally positive economic results” in Eastern Siberia.  On November 8, 2018, the Third Circuit affirmed the District Court’s sentence.  The Honorable Eugene E. Siler, sitting by designation from the Sixth Circuit, authored the unanimous, unpublished panel opinion finding that the district court had properly considered all of Harder’s arguments for a lower sentence. 2018 FCPA-RELATED POLICY DEVELOPMENTS DOJ Revises Standard Non-Waiver Agreement Following Fourth Circuit Decision Non-waiver agreements between companies and DOJ historically have been used as an imperfect truce between companies attempting to preserve privilege protections and DOJ seeking to obtain the benefits of information identified during internal investigations.  Pursuant to these agreements, companies agreed to share the work product fruits of their investigations with DOJ and DOJ agreed not to assert that this disclosure constituted a waiver of various privileges.  On June 27, 2018, the U.S. Court of Appeals for the Fourth Circuit upset the metaphorical applecart with a significant (though unpublished) decision, In re Grand Jury 16-3817 (16-4), enforcing a non-waiver provision against DOJ.  Already its impacts are being seen by all who practice in FCPA matters before DOJ. To facilitate cooperation with a DOJ investigation, “X Corp.” (whose identity is under seal) executed agreements allowing employees, including a former in-house attorney, to share privileged material in interviews with DOJ while expressly disclaiming waiver.  Years later, DOJ subpoenaed the attorney to testify before a grand jury about the same statements made during the interview.  X Corp. intervened and sought a protective order. On appeal from the district court’s denial of the protective order, the U.S. Court of Appeals for the Fourth Circuit reversed.  The Court held that the plain language of the agreement with DOJ showed that X Corp. expressly reserved its privileges as to DOJ.  Accordingly, X Corp. could assert privilege over the information before the grand jury as if the prior interview never occurred. In response to the Fourth Circuit’s decision, DOJ has adopted a new form agreement that is significantly less protective of company interests.  How this will impact DOJ’s ability to obtain cooperation in corporate FCPA investigations—which is a very complicated issue influenced by many factors beyond privilege—remains to be seen. Does the “China Initiative” Signal Enhanced FCPA Scrutiny of Chinese Companies? On November 1, 2018, in the context of announcing criminal and civil enforcement proceedings against a Chinese company, a Taiwanese company, and three Taiwanese nationals in connection with the alleged theft of trade secrets from a U.S. company, then-Attorney General Jeff Sessions declared a “China Initiative” to be led by DOJ’s National Security Division, with participation from other DOJ offices, including the Criminal Division (which houses the Fraud Section / FCPA Unit).  While the primary focus of the so-called “China Initiative” seems to on countering economic espionage, lurking among the initiative’s 10 stated goals is to “[i]dentify [FCPA] cases involving Chinese companies that compete with American businesses.” Although we have been reporting for years on the risks of doing business in China, and our studies have demonstrated that China is the most frequent situs of conduct charged in FCPA enforcement actions, we have seen nothing in the public sphere or our confidential caseload to suggest that DOJ’s FCPA Unit will be departing from its historical focus on conduct rather than nationality.  For example, when asked about the China Initiative several weeks later at the ACI FCPA Conference, Unit Chief Daniel S. Kahn responded, “We are prosecutors, and we follow evidence, and that’s what we have always done.”  It is noteworthy that although many FCPA cases involve Chinese conduct, far fewer involve Chinese nationals or companies.  No doubt this is in significant part due to the jurisdictional challenges of DOJ bringing such an action.  All of this is to say, time will tell whether and if so how the China Initiative’s FCPA goal will be operationalized by DOJ’s FCPA Unit, which is led by dedicated, career civil servant prosecutors, many layers removed from those who announced the policy. Of course, if the Chinese Initiative is perceived as leveraging the FCPA to achieve political objectives, the Chinese government may counter with steps to frustrate DOJ investigations.  As we note below, in October 2018, China enacted a new blocking statute, the International Criminal Judicial Assistance Law, that could be used to prevent Chinese companies from providing evidence or assistance to foreign authorities like DOJ.             DOJ Provides Additional Guidance Concerning Criminal Division Monitors Speaking at the New York University School of Law on October 12, 2018, Assistant Attorney General Brian A. Benczkowski announced a new namesake memorandum (the “Benczkowski Memorandum”) providing additional guidance for the selection of compliance monitors.  The memorandum reaffirms prior guidance on this issue from the “Morford Memorandum” of March 2008, while elaborating on considerations Criminal Division attorneys should take into account when deciding whether to require a monitor.  These considerations include the potential costs of a monitor, not only in monetary terms but also with respect to “whether the proposed scope of a monitor’s role is appropriately tailored to avoid unnecessary burdens to the business’s operations.” Benczkowski’s remarks also are of interest in another respect.  Monitors have tremendous power and discretion in their activities and, in some situations, the power dynamic leads companies facing what they believe are unreasonable demands to feel that they have little practical recourse.  Rejecting the notion that companies should suffer in silence and emphasizing the active role that DOJ should play in policing monitors, Benczkowski remarked that “it is incumbent on our prosecutors to ensure that monitors are operating within the appropriate scope of their mandate” and that “we absolutely want to know of any legitimate concerns regarding the authorized scope of the monitorship, cost or team size.”  These are welcome remarks for companies undergoing or facing the prospect of an FCPA monitorship. Of final note, Benczkowski broke from the recent movement to centralize corporate compliance expertise within a single “compliance counsel” position, and declared a renewed focus on “a workforce better steeped in compliance issues across the board.”  To that end, he announced as a priority the hiring of attorneys not only with courtroom prosecutorial experience, but with experience evaluating corporate compliance programs to supplement the already talented and experienced DOJ workforce.             DOJ Extends FCPA Corporate Enforcement Policy to M&A In a July 25, 2018 speech before ACI’s Global Forum on Anti-Corruption Compliance in High Risk Markets, Deputy Assistant Attorney General Matthew S. Miner announced important guidance for companies that identify FCPA issues in pre-acquisition due diligence or post-acquisition compliance integration.  Specifically, acknowledging that DOJ wishes to encourage M&A activity by companies with strong compliance programs and not to have “the specter of enforcement . . . be a risk factor that impedes such activity by good actors,” Miner announced that “we intend to apply the principles contained in the FCPA Corporate Enforcement Policy to successor companies that uncover wrongdoing in connection with mergers and acquisitions and thereafter disclose that wrongdoing and provide cooperation, consistent with the terms of the Policy.”  One month later, at a GIR Live event, Miner expanded his comments to make clear that they apply to “other types of potential wrongdoing, not just FCPA violations,” unearthed in connection with an acquisition and disclosed to DOJ. These announcements make good policy sense given the number of FCPA enforcement matters that arise from acquisitions, including notably in 2018 the Polycom matter described above. 2018 FCPA-RELATED PRIVATE CIVIL LITIGATION The FCPA does not provide a private right of action, but as we often note, civil litigants long have pursued a variety of causes of action against companies in connection with FCPA-related conduct, with varying success.  The second half of 2018 certainly was no exception.  Examples of matters with material developments over the past six months include:             Shareholder Lawsuits Freeport-McMoRan Inc. – As covered in our 2016 Mid-Year FCPA Update, on January 26, 2016, shareholders filed a securities fraud class-action alleging that the international mining company failed to disclose bribery in Indonesia.  The suit followed reports that the Indonesian House of Representatives was investigating payments by a senior executive of Freeport Indonesia to the speaker of the House.  On August 3, 2018, the Honorable Diane J. Humetewa of the U.S. District Court for the District of Arizona granted Freeport’s motion to dismiss.  The Court found, among other things, that plaintiffs failed to plead sufficient facts to plausibly claim that the executive attempted to bribe Indonesian officials.  Rather, the pleadings only left open this possibility and suggested that Freeport Indonesia may have been solicited for a bribe and not itself committed any wrongdoing. General Cable Corp. – On July 23, 2018, the Honorable William O. Bertelsman of the U.S. District Court for the Eastern District of Kentucky granted General Cable’s motion to dismiss a putative class action, which contended that the company inflated its stock value by failing to disclose that employees of its foreign subsidiaries had violated the FCPA in connection with the conduct ultimately leading to General Cable’s December 2016 resolutions with DOJ and the SEC described in our 2016 Year-End FCPA Update.  In dismissing the suit, the Court concluded that plaintiffs had not met the stringent pleading standard for breach-of-prudence claims based on non-public information and that their breach of loyalty and duty to monitor claims were similarly deficient.  The plaintiffs have noticed an appeal to the U.S. Court of Appeals for the Sixth Circuit. Grupo Televisa S.A.B. – On August 6, 2018, shareholders filed an amended complaint against ADR-issuer and Mexican media giant Grupo Televisa in the U.S. District Court for the Southern District of New York, alleging that it failed to disclose the payment of millions of dollars in bribes to secure broadcast rights for the FIFA World Cup.  The action came after the former CEO of Argentine sports marketing company Torneos y Competencias (which, as covered in our 2016 Year-End FCPA Update, entered into a $113 million, four-year deferred prosecution agreement) testified at the corruption trial of three former FIFA officials that Grupo Televisa had participated in the scheme.  This witness previously pleaded guilty in November 2015 to wire fraud and other charges and agreed to testify on the government’s behalf.  Grupo Televisa moved to dismiss the complaint on October 15, and the plaintiffs filed their opposition on November 16, 2018. KBR Inc. – On August 31, 2018, the Honorable Ewing Werlein, Jr. of the U.S. District Court for the Southern District of Texas dismissed an investor class action lawsuit filed soon after the Serious Fraud Office announced in April 2017 that it was investigating KBR in connection with its ongoing Unaoil investigation.  In dismissing the case, the Court noted that the “Plaintiffs act as if the opening of an investigation is all they need to make wholesale allegations of bribery against KBR.”  Although the Court granted leave to file an amended complaint, none was filed, and the case was terminated on September 24, 2018. Rio Tinto plc – On August 31, 2018, the Honorable Andrew L. Carter of the U.S. District Court for the Southern District of New York dismissed an investor lawsuit alleging that former executives of the mining company bribed an acquaintance of Guinea’s then-President to maintain mining contracts in the country and misled investors by failing to disclose the alleged bribery.  The suit came on the heels of Rio Tinto notifying authorities in the United States, the United Kingdom, and Australia that it was investigating a payment to the third party.  Rio Tinto moved to dismiss for, among other reasons, failure to state a claim, arguing that the payment was not made to a “foreign official” and therefore did not violate the FCPA.  In granting the motion to dismiss, Judge Carter agreed that plaintiffs failed adequately to allege that the recipient of the payments in question was a “foreign official,” and likewise rejected that the recipient could be an “instrumentality,” a term he found covers entities, not individuals.             Civil Fraud / RICO Actions The multi-billion-dollar resolution between Odebrecht S.A. and authorities in Brazil, Switzerland, and the United States discussed in our 2016 Year-End FCPA Update has spurred civil litigation in federal court with the Brazilian construction conglomerate.  In June 2017, investment funds filed a civil fraud suit in the U.S. District Court for the Southern District of New York, alleging that the Odebrecht bonds they purchased lost value when the scandal broke.  On August 8, 2018, the U.S. District Court for the Southern District of New York allowed certain federal and state law claims to proceed. This is not the only suit against Odebrecht stemming from the resolution discussed above.  On June 12, 2018, Ecuadorian manufacturer Plastiquim and its owner initiated a suit in Florida state court against Odebrecht and others alleging fraud, RICO violations, conspiracy, and unfair business practices.  According to the filings, Odebrecht failed to disclose that a business loan Plastiquim obtained through an Odebrecht affiliate was a vehicle for laundering money tied to Odebrecht’s bribery scheme.  On December 18, 2018, Odebrecht filed a motion to dismiss the complaint. 2018 INTERNATIONAL ANTI-CORRUPTION DEVELOPMENTS             World Bank Enforcement The World Bank Group continued its active role in global anti-corruption enforcement.  In its most-recent fiscal year, the World Bank debarred 78 firms and individuals, recognized 73 cross-debarments from other multilateral development banks, and referred 43 matters to national authorities.             Europe                         United Kingdom             Alstom Executives On December 19, 2018, a global sales manager for Alstom Power Ltd.’s Boiler Retrofits unit, Nicholas Reynolds, was found guilty of conspiracy to corrupt by a jury at Blackfriars Crown Court.  Two days later, he was sentenced to 4.5 years in prison and made to pay costs of £50,000.  As a result of Reynolds’ conviction, the Serious Fraud Office (“SFO”) lifted reporting restrictions and revealed additional details of the investigation dating back several years. Reynolds was charged at the same time as John Venskus, the former Business Development Manager at Alstom Power Ltd., who pleaded guilty in October 2017 and was sentenced to 3.5 years in prison.  Göran Wikström, the former Regional Sales Director at Alstom Power Sweden AB, also pleaded guilty in June 2018 and was sentenced to 31 months in prison and made to pay £40,000 in costs. Reynolds, Venskus, and Wikstom allegedly were part of a conspiracy to bribe officials and politicians to secure contracts for a Lithuanian power station.  The SFO alleged that they falsified records to circumvent bribery and corruption controls, causing Alstom companies to pay more than €5 million to secure contracts worth €240 million.  Alstom Power Ltd. pleaded guilty to conspiracy to make corrupt payments in May 2016 and paid a fine of £6.3 million, compensation to the Lithuanian government of nearly £11 million, and prosecution costs of £700,000. The SFO further reported that, on April 10, 2018, Alstom Network UK Limited was found guilty of one count of conspiracy to corrupt in relation to bribes allegedly paid to win a Tunisian tram and infrastructure contract.  The company and two former executives were acquitted of other charges relating to Indian and Polish transport contracts.             Güralp Systems Executives Earlier in this Update we discuss the declination letter received by UK seismology company Güralp Systems Limited for alleged payments to Heon-Cheol Chi, Director of the KIGAM Earthquake Research Center in Korea.  As noted above, one of the principal reasons asserted by DOJ in support of its declination was Güralp’s commitment to accepting responsibility in connection with an ongoing SFO investigation.  Although no corporate resolution has yet been reached with Güralp, three of its former executives—founder Cansun Güralp, former managing director Andrew Bell, and former head of sales Natalie Pearce—have been charged by the SFO with conspiracy to make corrupt payments in violation of Section 1 of the Criminal Law Act 1977 and Section 1 of the Prevention of Corruption Act 1906.  Trial dates have not yet been set.             Gulnara Karimova Asset Seizure We reported in our 2016 Mid-Year and 2017 Year-End FCPA updates on the foreign bribery resolutions involving alleged bribes to Gulnara Karimova, daughter of the late Uzbek President, to influence telecommunications matters in Uzbekistan.  On October 3, 2018, the SFO issued a claim in the High Court in London against Karimova and acquaintance Rustam Madumarov, pursuant to the Proceeds of Crime Act 2002, to recover assets that were allegedly obtained using the bribes.  A hearing on the matter has yet to be scheduled.  For her part, Karimova is reportedly serving a sentence of house arrest in Uzbekistan.             ENRC Ruling On September 5, 2018, the English Court of Appeal issued judgment in The Director of the Serious Fraud Office and Eurasian Natural Resources Corporation Limited, reversing a highly criticized High Court judgment, finding that interviews conducted by outside lawyers and work conducted by forensic accounts in an internal investigation is covered by legal privilege.  For more on this important decision, please see our Client Alert, “Court of Appeal in London Overturns Widely Criticised High Court Judgment in SFO v ENRC.” Look for much, much more on UK white collar developments in our forthcoming 2018 Year-End United Kingdom White Collar Crime Update, to be released on January 22, 2019.                         Greece More than two years after trial began in the so-called cash-for-contracts scandal, Prodromos Mavridis—a former telecommunications manager for Siemens’ Greek affiliate—testified in October 2018 that he did not pay politicians from a slush fund to secure state contracts.  Mavridis, whose testimony centered on a contract for Siemens to digitize the network of OTE, Greece’s primary telecommunications provider, testified that Siemens’ Managing Board had unfairly pinned on him responsibility for the slush fund.  The trial, which has been postponed repeatedly, continues more than a decade after authorities first launched a probe into Siemens’ activities. Greek anti-corruption authorities in October 2018 ordered former defense minister Yiannos Papantoniou and his wife detained pending trial on charges that he accepted and laundered kickbacks in connection with a Greek navy contract.  Papantoniou has denied wrongdoing, citing an earlier Greek Parliamentary probe that was closed based on insufficient evidence.                         Italy In September 2018, an Italian court handed down a split decision in a long-running corruption trial concerning oil and gas industry-related bribes in Algeria.  The court found oil services group Saipem and its former CEO Pietro Tali guilty on corruption charges relating to nearly €198 million in payments Saipem made to Algerian intermediaries to secure €8 billion worth of contracts with Algeria’s state-owned energy firm Sonatrach.  The court seized €198 million from Saipem, which was also fined €400,000, and then sentenced Tali to nearly five years in prison.  The court also convicted former Saipem executives Pietro Varone and Alessandro Bernini and sentenced each of them to more than four years in prison. At the same time, the court acquitted oil and gas giant Eni, as well as former Eni CEO Paolo Scaroni and current Eni Chief Upstream Officer Antonio Vella, of similar charges.  Prosecutors had alleged that Eni—which jointly controls Saipem—sought to use the payments to win approval from Algeria’s energy ministry of Eni’s plan to acquire a Canadian oil and gas company that held rights to a large Algerian gas field. Separately, Italy’s governing coalition moved in September 2018 to bar those convicted of serious corruption crimes from working with the state through a so-called “bribe destroyer” bill.  The bill would impose a lifetime ban on holding public office or seeking state contracts on people sentenced to more than two years in prison for corruption-related offenses.  For those sentenced to fewer than two years for corruption-related crimes, the bill would impose a five-to-seven-year ban.  The bill now goes to Parliament, where the ruling coalition has a majority in both houses.                         The Netherlands On September 4, 2018, global financial institution ING Group NV agreed to pay authorities in the Netherlands €775 million to settle allegations that it violated Dutch anti-money laundering and counter-terrorism financing laws.  Allegations in the settlement concern millions of dollars that passed through ING accounts, allegedly without sufficient scrutiny, between 2010 and 2016.  These payments allegedly included $55 million to Gulnara Karimova, daughter of the then-President of Uzbekistan who has been implicated in several recent enforcement actions in multiple countries.  The resolution included €100 million in disgorgement and a fine of €675 million, the largest ever imposed by the Dutch Public Prosecution Service.  ING issued a press release the next day announcing that the U.S. SEC had closed a related investigation.                         Switzerland On August 28, 2018, Pascal Collard, a former Geneva-based oil trader with global commodity trading company Gunvor Group, received an 18-month suspended sentence from the Swiss Federal Criminal Court for bribing officials to secure oil shipments from the Republic of Congo and the Ivory Coast.  In September 2017, the Swiss Attorney General’s office opened an investigation into Gunvor and its Dutch subsidiary charging the companies with organizational failings that allowed their employees to violate bribery laws.                         Russia The Russian State Duma recently enacted new anti-corruption legislation, which entered into force in August 2018.  The new legislation has two key components.  First, if a company doing business in Russia is suspected of bribery, Russian prosecutors may petition for and obtain a court-ordered freeze of company assets.  The value of the frozen assets may not exceed the maximum potential penalty, which can range from a minimum of 1 million rubles to a maximum of 100 times the sum of the bribe.  Second, companies operating in Russia can exempt themselves from corporate liability for bribery by self-reporting the wrongdoing.  Specifically, a company that uncovers and discloses to authorities illicit conduct committed by itself or its employees (or enables a government investigation to identify such conduct) may automatically receive a full release from the statutory penalty for bribery.                         Ukraine In anticipation of the upcoming annual EU-Ukraine Association Council, the EU published its Association Implementation Report on Ukraine.  Regarding anti-corruption, the report recognized Ukraine’s progress on the legislative front and in establishing anti-corruption institutions, but at the same time noted ongoing difficulties with implementing such measures and their limited effect to date. For example, as of September 2018, the National Anticorruption Bureau of Ukraine (“NABU”) and the Specialized Anticorruption Prosecutor’s Office had initiated 644 investigations of high-level corruption.  But only 21 of these investigations have resulted in convictions.  The vast majority (including the highest-profile investigations) have been stymied by Ukraine’s courts.  Further, the new High Anti-Corruption Court (“HACC”), a judicial body designed to grant a panel of nominated, independent judges jurisdiction over cases pursued by the NABU, was established in June 2018.  Its nominating committee has yet to be selected, however, and as a result no judges have been appointed.  Likewise, although the National Agency for Prevention of Corruption (“NAPC”) has set up an automatic verification system for electronic asset declarations submitted by Ukrainian government officials, the NAPC had verified only 400 out of 2.7 million submitted declarations by October 2018.             The Americas                         Argentina In the second half of 2018, Argentina was captivated by a corruption scandal implicating dozens of politicians and businesspeople.  The aptly named “Notebooks” scandal concerns notebooks belonging to the chauffeur of Roberto Baratta, a high-ranking official in the administration of former President Cristina Fernández de Kirchner.  Covering more than a decade, the notebooks allegedly describe tens of millions of dollars in bribes from public works contractors and others seeking favorable treatment that the chauffeur delivered to Fernández, her husband and former President Néstor Kirchner, and other high-level officials. Fernández was indicted on September 17, 2018, but her status as a sitting senator in Argentina’s legislature grants her immunity from arrest.  The federal judge presiding over many of the criminal cases stemming from the Notebooks scandal asked the legislature to impeach Fernández, but the effort failed in the face of strong political support.  Fernández’s former planning minister, Julio De Vido—who was sentenced in October 2018 to almost six years in prison on separate graft charges—also is under investigation in the Notebooks scandal.  While Fernández’s administration is the focus of the investigation, current President Macri’s cousin, the former head of an Argentinian construction company, also is implicated, and in November, authorities indicted the president of Techint Group, Paolo Rocca.  Dozens of businesspeople seeking to avoid prison time have entered into plea deals. On the legislative front, in October 2018, the Argentine Anti-Corruption Office adopted “Integrity Guidelines” pursuant to Argentina’s Law on Criminal Liability of Legal Persons, which as covered in our 2018 Mid-Year FCPA Update came into effect in March 2018.  Modeled on similar guidance from the United States, the United Kingdom, and Brazil, the guidelines are designed to aid in complying with Articles 22 and 23 of the law, which outline requirements for corporate compliance programs.                         Brazil In the wake of a tumultuous presidential election, the fight against corruption remains at the forefront of Brazilian life.  The late 2018 election was widely viewed as a repudiation of the Workers’ Party, which was at the epicenter of Brazil’s massive anti-corruption investigation, Operation Car Wash.  President-elect Jair Messias Bolsonaro has taken a hard line against corruption in his speeches and named leading anti-corruption figures to his administration.  For example, Bolsonaro retained Wagner de Campos Rosário, who played a critical role in negotiating corporate leniency agreements in connection with Operation Car Wash, as the Minister of Transparency and Chief of the Comptroller General of the Federal Union.  Bolsonaro also appointed Judge Sérgio Moro, the federal judge who has presided over Operation Car Wash since 2014, to serve as Minister of Justice and Public Security. Independent of these political developments, Brazilian enforcement authorities have continued to investigate and prosecute corruption at high levels.  In 2018, the Operation Car Wash Task Force launched 10 new phases, bringing the total to 57.  Most recently, enforcement authorities have focused on allegations of corrupt payments by commodity traders.  Since 2014, the investigation has resulted in more than 1,000 search and seizure orders, more than 250 arrest warrants, approximately 550 international cooperation requests, approximately 180 individual plea bargain agreements, more than 10 leniency agreements, more than 200 convictions, and recovery of approximately $3 billion (R$12.3 billion) via plea deals.  Five of the six living Brazilian ex-presidents—Fernando Collor de Mello, Luiz Inácio Lula da Silva, Dilma Rousseff, José Sarney, and Michel Temer—have been implicated.  Collor, Lula, and Rousseff are currently defendants in criminal cases, while Sarney’s and Temer’s cases await further analysis by the Supreme Court.  Lula, currently serving a prison sentence for money laundering and corruption related to Operation Car Wash, recently was also charged with money laundering in connection with a bribery scheme involving Equatorial Guinea. In another Operation Car Wash-related development, Dutch oil and gas services provider SBM Offshore N.V. announced two agreements in July and September 2018 to pay a total of $347 million to Brazilian authorities and Petrobras to resolve allegations of paying bribes to secure contracts with the state-owned oil company.  As we reported in our 2017 Year-End FCPA Update, SBM previously reached an FCPA resolution with DOJ in November 2017.  In a seeming nod to these Brazilian resolutions, the $238 million fine in the DOJ FCPA settlement credited a to-be-paid amount to Brazilian authorities. Plea bargains have remained an essential tool for Brazilian authorities to expose systemic corruption, in Operation Car Wash and in other investigations.  Nonetheless, there are uncertainties about the use of this tool, including with respect to the use of plea bargain evidence by other agencies and the consequences of breaching an agreement.  For example, the Attorney General’s Office has requested the rescission of plea bargain agreements with Joesley and Wesley Batista, whose corruption cases were reported in our 2017 Year-End and 2018 Mid-Year FCPA updates.  To provide greater legal certainty around the negotiation of plea bargains, the Brazilian Prosecutor’s Office recently published guidance on the procedures necessary to enter into a plea bargain.  Other Brazilian agencies likewise have engaged in efforts to incentivize whistleblowing and to enhance transparency and accountability.  These efforts, combined with the new Ministry of Justice and Public Security’s vow to tackle corruption, look to make 2019 a key year in Brazil’s ongoing fight against corruption.                         Costa Rica As 2018 drew to a close, Costa Rica’s judiciary faced a crisis, as various members of the Costa Rican Supreme Court have been suspended or impeached for alleged links to a corruption scandal known as the “Cementazo.”  The scandal revolves around businessman Juan Carlos Bolaños and his cement importation company, Grupo JCB.  Bolaños was arrested, convicted, and sentenced to serve prison in 2017.  In April 2018, the legislature impeached Judge Celso Gamboa for allegedly alerting Bolaños to developments in the case against him.  And in July 2018, the Costa Rican judiciary reprimanded four judges accused of stifling investigations by ignoring evidence of influence peddling on the part of two congressmen linked to Bolaños’s scheme.  Days later, the president of Costa Rica’s Supreme Court, Carlos Chinchilla, announced his immediate retirement at age 55.  The Costa Rican Attorney General’s Office has filed a criminal action against the five judges.                         El Salvador In a groundbreaking stand against corruption in this Central American nation, former President Elías Antonio “Tony” Saca González was sentenced in September 2018 to 10 years in prison and ordered to return $260 million after pleading guilty to charges of embezzlement and money laundering.  Saca, who served as president between 2004 and 2009, detailed an elaborate $300 million corruption scheme in a lengthy confession during an August 2018 court hearing.  Saca implicated other public officials, including then-First Lady Ana Ligia de Saca, who he said received, among other things, all-expense paid trips overseas and a $10,000 monthly stipend.  She now faces her own criminal case for money laundering and other crimes.  In a move that mirrors her husband’s, she recently offered to plead guilty in exchange for receiving the shortest possible sentence.  El Salvador’s District Attorney’s Office currently is evaluating whether to accept the former first lady’s offer. Former President Saca is the first president in Salvadoran history to stand trial for corruption.  This case could serve as a model for the prosecution of other leaders accused of corruption.  In June 2018, for example, the District Attorney’s Office ordered the arrest of 30 close friends and family of former President Mauricio Funes, Saca’s successor, for their alleged participation in a multi-million dollar embezzlement scheme.  Although Funes received asylum in Nicaragua in 2016, claiming political persecution shortly after prosecutors opened a civil unlawful enrichment action against him, he and his son were ordered to return hundreds of thousands of dollars to El Salvador.                         Guatemala Anti-corruption efforts in Guatemala suffered a significant setback as President Jimmy Morales announced that the U.N.-sponsored International Commission Against Impunity in Guatemala (known by its Spanish acronym “CICIG”) would be shut down and replaced by local Guatemalan institutions.  As detailed in our 2018 Mid-Year FCPA Update, CICIG is an anti-corruption commission that has conducted investigations against top Guatemalan leaders and businesspeople.  CICIG currently is conducting a probe against President Morales for illicit campaign financing.  In a move denounced as an attack on judicial independence, Morales attempted to expel CICIG chief Iván Velásquez Gómez in 2017, shortly after Guatemala’s attorney general announced she would seek to remove Morales’s immunity from prosecution.  The Supreme Court of Justice of Guatemala swiftly halted Morales’s efforts.  The Court has thrice received requests to prompt Congress to deliberate whether Morales should be stripped of immunity for unlawful acts committed during his tenure as his political party’s secretary general.  It permitted the last of these requests to proceed to Congress in mid-2018. In August 2018, Morales announced that he would transfer CICIG’s authority to Guatemalan hands due to CICIG’s alleged selective prosecution, intimidation of the citizenry, and erosion of due process and the presumption of innocence.  The decision was met with intense disapproval from human rights organizations and advocates, although it received only mild criticism from the U.S. embassy in Guatemala.  Morales has since revoked or denied visas to dozens of CICIG personnel probing his potential wrongdoing, including Velásquez Gómez.                         Haiti A recent corruption scandal has led to public unrest.  A Haitian Senate probe has accused more than a dozen former government officials—including former Prime Ministers Jean-Max Bellerive and Laurent Lamothe—and businesspeople of embezzling $2 billion from a Venezuelan oil discount program.  Anti-corruption protests arising from the probe turned violent in October and November 2018, with protestors demanding an accounting of the funds.  After the protests, two top government officials and 15 advisers were fired, in accordance with recommendations from an August 2018 report from the Haitian Senate.                         Mexico With the July 2018 election of Andres Manuel López Obrador, Mexico’s anti-corruption movement received another boost.  Campaigning largely on the fight against corruption, President López Obrador is expected to complete the implementation of the National Anti-corruption System (“NAS”), as well as other reform efforts.  Although it was approved in 2016, the NAS faced significant roadblocks under former President Peña Nieto, who stalled the appointment of a national general prosecutor, national anti-corruption chief prosecutor, and judges on the new Federal Administrative Court. In the meantime, Mexico continues to pursue existing corruption cases.  After announcing earlier this year that it would impose a nearly $60 million penalty on Odebrecht for bribery violations, Mexico’s main anti-corruption auditor has expressed the government’s intention to recover this fine through seizure of balances owed to Odebrecht by state-owned Pemex, in the face of legal resistance from Odebrecht.  Moreover, in addition to debarring Odebrecht bids from public tenders until 2020, officials from the López Obrador administration have signaled that future bids from Odebrecht and other companies will be shut out throughout President López Obrador’s tenure. Yet arguably the biggest development in anti-corruption enforcement for Mexico this year is the adoption of the United States-Mexico-Canada Agreement (“USMCA”), an agreement among the three nations that will replace the 25-year-old NAFTA.  In the USMCA, the three countries have included a chapter dedicated solely to anti-corruption.  In Chapter 27, titled “Anticorruption,” the parties agree to adopt and enforce anti-corruption measures, protect whistleblowers, and promote the participation of the private sector in fighting corruption, among other things.  Mexico reportedly made the primary efforts to include Chapter 27 in the hopes of promoting and maintaining foreign investment.                         Venezuela Venezuela’s Attorney General, Tarek William Saab, continued his office’s anti-corruption campaign this year.  Saab revealed that, during his first year in office, the Public Prosecutor’s Office convicted 616 individuals, including many former government officials, on charges of corruption.  The Public Prosecutor’s Office also uncovered 18 different corruption schemes within the oil industry.  One of these schemes involved Venezuela’s state-owned energy company, PDVSA.  In September 2018, Saab announced arrest warrants for nine officials involved in the fraudulent purchase of aluminum tanks for transporting fuel.  PDVSA had paid millions of dollars for 234 tanks, only 168 of which were delivered and not according to the appropriate technical specifications.  Saab estimates this resulted in a loss of approximately $19 million. The country’s president has not escaped allegations of corruption.  In November 2018, Venezuela’s exiled Supreme Tribunal of Justice requested that Interpol issue an international arrest warrant for President Nicolás Maduro for accepting money from illegal activities.  According to Venezuela’s former Attorney General, President Maduro accepted millions of dollars in bribes from Odebrecht. Asia                         China China grabbed the attention of the global legal community in October 2018 with its International Criminal Judicial Assistance Law (“ICJA”).  Although guidance relating to its implementation and enforcement remains to be seen, the ICJA would appear to act as a blocking statute and prohibit entities and persons in China from cooperating with or providing evidence to foreign investigators absent the authorization of Chinese authorities.  Much remains to be written about the ICJA, but we will continue to monitor this development that could substantially impact many FCPA investigations. On the enforcement front, the sixth year of President Xi Jinping’s anti-corruption campaign brought a number of significant structural changes to China’s anti-corruption regime and a steady stream of high-profile investigations and prosecutions.  In addition to the changes discussed in our 2018 Mid-Year FCPA Update, the Chinese government established the State Administration for Market Regulation (“SAMR”), which is empowered to investigate commercial bribery and unfair competition, among other things, and centralizes and consolidates functions previously assigned to several regulatory bodies, including the State Administration for Industry and Commerce.  In total, nearly 350,000 officials, including 25 at the provincial or ministerial level, have been punished for violating austerity rules since late 2012.  And on November 30, 2018, China for the first time extradited a former Chinese official accused of taking bribes from the European Union.                         India In July 2018, long-awaited amendments to India’s Prevention of Corruption Act (Amendment) Act, 2018 came into force.  In the works for several years, the amendments contain a number of significant changes to the anti-corruption law in India which we have detailed in our Client Alert, “Amendments to the Prevention of Corruption Act, 1988: Implications for Commercial Organizations Doing Business in India.” On the enforcement front, India’s Central Bureau of Investigation (“CBI”) in May registered a case under the Indian Penal Code and Prevention of Corruption Act alleging that officers linked to AirAsia India conspired with Indian officials to expedite approvals and change Indian aviation policies to benefit the airline.  CBI’s investigation is ongoing.                         Japan In July 2018, Japanese prosecutors indicted three executives of Yokohama-based power plant manufacturer Mitsubishi Hitachi Power Systems Ltd (“MHPS”)—Satoshi Uchida, Fuyuhiko Nishikida, and Yoshiki Tsuji—for allegedly bribing a Thai official in 2015.  Nishikida and Tsuji admitted to the charges in December 2018, while Uchida’s first hearing is set for January 11.  This scheme came to the attention of prosecutors after a self-report by MHPS.  MHPS became the first company to enter into a plea agreement in Japan for organized crime and bribery, and in recognition of its cooperation, MHPS was not prosecuted for the scheme.  Japan’s plea bargain system for organized crime and bribery cases was only introduced in June 2018, just one month before MHPS’s plea agreement.                         Korea Two former Korean presidents received substantial terms of imprisonment in 2018 for corruption-related offenses. In August 2018, Park Geun-Hye, who as reported in our 2018 Mid-Year FCPA Update was convicted of 16 corruption-related offenses in April 2018, saw her prison sentence and fine increased to 25 years and KRW 20 billion (~$18 million) for accepting more improper payments than previously thought.  Earlier in the summer, Park received an eight-year sentence on separate charges of interfering with the 2016 elections and illegally diverting millions of dollars from the National Intelligence Service.  Park is currently serving her terms consecutively. In October 2018, Lee Myung-Bak was sentenced to 15 years and a fine of KRW 13 billion (~ $11.5 million) for bribery and embezzlement.  The Seoul Central District Court concluded that he received more than KRW 11 billion (~ $10 million) in bribes before and during his presidency.                         Malaysia In April 2018, Malaysia passed the Malaysian Anti-Corruption Commission (Amendment) Act 2018, which introduces a new section creating liability for commercial organizations if a person associated with the organization engages in corruption.  Directors, controllers, officers, partners, and members of the company management can face a jail term of up to 20 years and a fine of the higher of 10 times the value of the bribe or RM 1 million (~ $240,000).  Modeled after the UK Bribery Act, a defense is available for companies that “had in place adequate procedures to prevent persons associated with the commercial organization from undertaking such conduct.”  While the Act officially came into force on October 1, 2018, the provisions relating to corporate liability will not be operative for another two years to provide companies with time to enhance their internal controls. On the enforcement front, on December 17, 2018, Malaysian prosecutors brought charges against three units of a prominent New York-headquartered investment bank and issuer for allegedly false and misleading statements in materials prepared in connection with the 1MDB bond offerings.  Other charges filed by Malaysian authorities have targeted former Prime Minister Najib Razak, his wife Rosmah Mansor, and several former Malaysian foreign intelligence agents.                         Thailand On July 22, 2018, Thailand’s new anti-corruption law—the Act Supplementing the Constitution Relating to the Prevention and Suppression of Corruption B.E. 2561 (2018)—came into force.  The new law expands the scope of persons covered by the law.  Previously, only individuals and entities registered in Thailand could be liable for bribery, but the new law applies to legal entities registered abroad if they have Thai operations.  Much like the UK Bribery Act, under the Thai law a company can be liable for bribes paid by “associated persons” for the company’s benefit unless the company can demonstrate that it had in place adequate internal controls.             Middle East and Africa                         Israel On December 2, 2018, Israeli police recommended that Prime Minister Benjamin Netanyahu be indicted on bribery and fraud charges, among others, marking the third time in 2018 that the police recommended indicting Netanyahu.  The most-recent recommendation stems from allegations that Netanyahu awarded contracts to Israeli telecom company Bezeq in exchange for favorable news coverage.  Netanyahu has denied the allegations, and the decision whether to indict him in any of the three cases, which would be unprecedented, is with Attorney General Avichai Mandelblit.                         Saudi Arabia On September 25, 2018, Saudi Arabia amended its anti-corruption law to remove the 60-day statute of limitations applicable to anti-corruption investigations into current and former Saudi ministers.  The amendment follows the large-scale anti-corruption probe, initiated in November 2017 by Crown Prince Mohammed bin Salman, that involved detaining and questioning of hundreds of influential Saudis as covered in our 2017 Year-End and 2018 Mid-Year FCPA updates.  That effort has resulted in the Saudi government seizing more than $100 billion.                         South Africa In September 2018, the son of former South African President Jacob Zuma (who was ousted in February in connection with corruption allegations as reported in our 2018 Mid-Year FCPA Update) reportedly agreed to testify at a judicial inquiry into allegations that the wealthy Gupta brothers—Ajay, Atul, and Rajesh—illegally influenced cabinet appointments and the award of state contracts during Zuma’s administration.  Former deputy finance minister Mcebisi Jonas reportedly told investigators in August 2018 that Zuma’s son helped arrange a meeting between him and the Guptas at which he was offered his post and a nearly $40 million bribe.  The son denied that any bribe was offered.  The group handling the investigation, the South African Commission of Inquiry into State Capture, Corruption and Fraud in the Public Sector, reportedly has been given until March 2020 to investigate.  The Guptas reportedly are in the UAE, but an extradition treaty recently signed between the two countries may signal that additional developments are on the horizon. CONCLUSION As is Gibson Dunn’s semi-annual tradition, over the next several weeks we will be publishing a series of enforcement updates for the benefit of our clients and friends as follows: Tuesday, January 8:  2018 Year-End Update on Corporate NPAs and DPAs; Wednesday, January 9:  2018 Year-End False Claims Act Update; Thursday, January 10:  2018 Year-End Developments in the Defense of Financial Institutions; Friday, January 11:  2018 Year-End German Law Update; Monday, January 14:  2018 Year-End Trade Secrets Update; Tuesday, January 15:  2018 Year-End Securities Enforcement Update; Wednesday, January 16:  2018 Year-End Securities Litigation Update; Thursday, January 17:  2018 Year-End UK Labor & Employment Update; Friday, January 18:  2018 Year-End Class Actions Update; Monday, January 21:  2018 Year-End FDA and Health Care Compliance and Enforcement Update – Drugs and Devices; Tuesday, January 22:  2018 Year-End UK White Collar Crime Update; Wednesday, January 23:  2018 Year-End Activism Update; Monday, January 28:  2018 Year-End Cybersecurity Update (United States); Tuesday, January 29:  2018 Year-End Cybersecurity Update (European Union); Wednesday, January 30:  2018 Year-End Health Care Compliance and Enforcement Update – Providers; Thursday, January 31:  2018 Year-End Government Contracts Litigation Update; Friday, February 1: 2018 Year-End Media and Entertainment Update; Monday, February 4:  2018 Year-End Transnational Litigation Update; Tuesday, February 5:  2018 Year-End AI & Related Technologies Update; Wednesday, February 6:  2018 Year-End Sanctions Update; and Thursday, February 7:  2018 Year-End China Antitrust Update. The following Gibson Dunn lawyers assisted in preparing this client update:  F. Joseph Warin, John Chesley, Christopher Sullivan, Richard Grime, Patrick Stokes, Wendy Cai, Ella Alves Capone, Claire Chapla, Winson Chu, Timothy Deal, Austin Duenas, Daniel Harris, Patricia Herold, Korina Holmes, Derek Kraft, Nicole Lee, Vinay Limbachia, Lora MacDonald, Michael Marron, Jesse Melman, Steve Melrose, Katie Mills, Erin Morgan, Alexander Moss, Jaclyn Neely, Jonathan Newmark, Nick Parker, Arturo Pena Miranda, Anna Luiza Ramos, Emily Riff, Katie Salvaggio, Liesel Schapira, Emily Seo, Jason Smith, Pedro Soto, Ian Sprague, Laura Sturges, Karthik Ashwin Thiagarajan, Bonnie Tong, Jeffrey Vides, Milagros Villalobos, Caitlin Walgamuth, Alina Wattenberg, Oliver Welch, Carissa Yuk, and Caroline Ziser Smith. 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. 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Welch (+852 2214 3716, owelch@gibsondunn.com) São Paulo Lisa A. Alfaro (+55 (11) 3521-7160, lalfaro@gibsondunn.com) Fernando Almeida (+55 (11) 3521-7095, 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.

November 29, 2018 |
Five Gibson Dunn Attorneys Named Among Washingtonian Magazine’s 2018 Top Lawyers

Washingtonian magazine named five DC partners to its 2018 Top Lawyers, featuring “[t]he area’s star legal talent” in their respective practice areas: Karen Manos was named a Top Lawyer in Government Contracts – Karen is Chair of the firm’s Government Contracts Practice Group.  She has nearly 30 years’ experience on a broad range of government contracts issues, including civil and criminal fraud investigations and litigation, complex claims preparation and litigation, bid protests, qui tam suits under the False Claims Act, defective pricing, cost allowability, the Cost Accounting Standards, and corporate compliance programs Eugene Scalia was named a Top Lawyer in Employment Defense – Co-Chair of the Administrative Law and Regulatory Practice Group, Gene has a national practice handling a broad range of labor, employment, appellate, and regulatory matters. His success bringing legal challenges to federal agency actions has been widely reported in the legal and business press Jason Schwartz was recognized as a Top Lawyer in Employment Defense – Jason’s practice includes sensitive workplace investigations, high-profile trade secret and non-compete matters, wage-hour and discrimination class actions, Sarbanes-Oxley and other whistleblower protection claims, executive and other significant employment disputes, labor union controversies, and workplace safety litigation F. Joseph Warin is a Top Lawyer in Criminal Defense, White Collar – Co-chair of the firm’s global White Collar Defense and Investigations Practice Group. His practice includes 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 Joseph West was named a Top Lawyer in Government Contracts – Joe concentrates his practice on contract counseling, compliance/enforcement, and dispute resolution.  He has represented both contractors and government agencies, and has been involved in cases before various United States Courts of Appeals and District Courts, the United States Court of Federal Claims, numerous Federal Government Boards of Contract Appeals, and both the United States Government Accountability Office and Small Business Administration The list was published in the December 2018 issue.

November 29, 2018 |
Gibson Dunn Ranked in 2019 Chambers Asia Pacific

Gibson Dunn earned 12 firm rankings and 21 individual rankings in the 2019 edition of Chambers Asia-Pacific. The firm was recognized in the Asia-Pacific Region-wide category for Investment Funds: Private Equity as well as the following International Firms categories: China Banking & Finance: Leveraged & Acquisition Finance; China Competition/Antitrust; China Corporate Investigations/Anti-Corruption; China Corporate/M&A: Highly Regarded; China Investment Funds: Private Equity; China Private Equity: Buyouts & Venture Capital Investment; India Corporate/M&A; Indonesia Corporate & Finance; Philippines Projects, Infrastructure & Energy; Singapore Corporate/M&A; and Singapore Energy & Natural Resources. The following lawyers were ranked individually in their respective categories: Kelly Austin – China Corporate Investigations/Anti-Corruption Albert Cho – China Investment Funds Troy Doyle – Singapore Restructuring/Insolvency Sébastien Evrard – China Competition/Antitrust John Fadely – China Investment Funds Scott Jalowayski – China Private Equity: Buyouts & Venture Capital Investment Michael Nicklin –  China Banking & Finance: Leveraged & Acquisition Finance Jai Pathak – India Corporate/M&A, and Singapore Corporate/M&A Brad Roach – Indonesia Projects & Energy, Singapore Energy & Natural Resources, and Singapore Energy & Natural Resources: Oil & Gas Saptak Santra – Singapore Energy & Natural Resources Brian Schwarzwalder – China Private Equity: Buyouts & Venture Capital Patricia Tan Openshaw – China Projects & Infrastructure, and Philippines Projects, Infrastructure & Energy Jamie Thomas – India Banking & Finance, Indonesia Banking & Finance, and Singapore Banking & Finance Graham Winter – China Corporate/M&A: Hong Kong-based Yi Zhang – China Corporate/M&A: Hong Kong-based The rankings were published on November 29, 2018.

November 21, 2018 |
Gibson Dunn Ranked in the 2019 UK Legal 500

The UK Legal 500 2019 ranked Gibson Dunn in 13 practice areas and named six partners as Leading Lawyers. The firm was recognized in the following categories: Corporate and Commercial: Equity Capital Markets Corporate and Commercial: M&A – Upper Mid-Market and Premium Deals, £250m+ Corporate and Commercial: Private Equity – High-value Deals Dispute Resolution: Commercial Litigation Dispute Resolution: International Arbitration Finance: Acquisition Finance Finance: Bank Lending: Investment Grade Debt and Syndicated Loans Human Resources: Employment – Employers Public Sector: Administrative and Public Law Real Estate: Commercial Property – Hotels and Leisure Real Estate: Commercial Property – Investment Real Estate: Property Finance Risk Advisory: Regulatory Investigations and Corporate Crime The partners named as Leading Lawyers are Sandy Bhogal – Corporate and Commercial: Corporate Tax; Steve Thierbach – Corporate and Commercial: Equity Capital Markets; Philip Rocher – Dispute Resolution: Commercial Litigation; Cyrus Benson – Dispute Resolution: International Arbitration; Jeffrey Sullivan – Dispute Resolution: International Arbitration; and Alan Samson – Real Estate: Commercial Property and Real Estate: Property Finance. Claibourne Harrison has also been named as a Next Generation Lawyer for Real Estate: Commercial Property.

November 21, 2018 |
Three Gibson Dunn partners recognized by Who’s Who Legal

Three Gibson Dunn partners were recognized by Who’s Who Legal Thought Leaders: Global Elite 2019 in their respective practice areas. Brussels partner Peter Alexiadis and Washington, D.C. partner Richard Parker were recognized in Competition, and Washington, D.C.  F. Joseph Warin was recognized in Business Crime Defence – Corporates and in Investigations. The list was published in November 2018.

November 6, 2018 |
Recent Developments Related to Regulation and Litigation Involving the Education Sector

Click for PDF This is the latest update of significant developments related to regulatory, administrative, and legal actions involving schools.  This quarter saw the Ninth Circuit issue its long-awaited decision in United States ex rel. Rose v. Stephens Institute, a number of other interesting developments related to the False Claims Act (“FCA”), a flurry of activity from the Department of Education and other federal agencies, and more. A.   Strict Rules in Name Only? On August 24, 2018, the United States Court of Appeals for the Ninth Circuit issued its opinion in United States ex rel. Rose v. Stephens Institute, No. 17-1511, 901 F.3d 1124 (9th Cir. 2018).  As discussed in the February alert, the three judges on the panel appeared to be struggling at oral argument with what the Supreme Court held in Universal Health Services v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016); how the Ninth Circuit had previously interpreted the FCA and Escobar; and how that might apply to the situation of a for-profit school.  That struggle carried over to the opinion. All three judges agreed that a relator in the Ninth Circuit could only establish liability under the so-called implied certification theory—whereby FCA liability can exist for claims for payment that falsely, implicitly represent compliance with a law—if “‘first, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.'”  Rose, 901 F.3d at 1129–30 (quoting Escobar, 136 S. Ct. at 2001).  The court explained, however, that it did not believe these “two conditions” were actually required by Escobar and instead followed that rule only because the Ninth Circuit’s “post-Escobar cases … appear to require Escobar’s two conditions.”  Id.  The three judges even went so far as to indirectly call for en banc (11-judge) review.  Id. The three judges also agreed, however, that the relator had met both of those requirements.  The Ninth Circuit reasoned that the Federal Stafford Loan Certification form contained the required representation about goods or services provided:  “Defendant specifically represented that the student applying for federal financial aid is an ‘eligible borrower’ and is ‘accepted for enrollment in an eligible program.'”  Id. at 1130.  And the Ninth Circuit believed “those representations could be considered ‘misleading half-truths'” because “Defendant failed to disclose its [alleged] noncompliance with the incentive compensation ban.”  Id.  This aspect of the decision is troubling.  Compliance with the incentive compensation provision is nowhere in the Federal Stafford Loan Certification form, but the panel found that the representations in the form that the student was an “eligible borrower” and would be attending an “eligible program” were sufficient to impliedly certify compliance with the incentive compensation provision, as such is a condition of participation in the Title IV program. The Ninth Circuit also reached a troubling conclusion on the second issue in the case:  whether the alleged violations of the incentive compensation provision were material—and therefore actionable—under the FCA.  Relying on a pre-Escobar decision on the pleadings in United States ex rel. Hendow v. University of Phoenix, 461 F.3d 1166 (9th Cir. 2006), the Ninth Circuit held that, even on the more demanding summary judgment standard and even after Escobar, the relator in Rose had met the materiality standard because of: (1) the “triple-conditioning of Title IV funds on compliance with the incentive compensation ban” in the statute, regulations, and program participation agreement; (2) “evidence … that [ED] did care about violations of the incentive compensation ban,” including evidence it issued fines or corrective actions for such alleged violations; and (3) the “magnitude” of the alleged violation in the case was purportedly “substantial” because the “large monetary awards” for enrollments were in the tens of thousands of dollars.  Id. at 1132–34. Judge Smith dissented on this aspect of the decision, explaining that “caring is not enough to make it material under the Escobar standard.”  Id. at 1137.  What is needed, and was missing according to Judge Smith, was evidence “about what the Government would actually do in this case (or even in a similar case)”—i.e., would the alleged improper payments to employees have affected the Government’s “payment decision” of financial aid.  Id. at 1137 & n.3. What was perhaps most shocking about the majority’s opinion, claiming to enforce the “rigorous” materiality standard from Escobar, is that the panel did not even mention—let alone discuss—the Department of Education’s 2002 memorandum from the then Deputy Secretary of Education (William D. Hansen), in which Mr. Hansen explained that the incentive compensation provision generally should not provide the basis for a loss of institutional or student eligibility and should instead be handled by a fine.  That memorandum is strong evidence that the Department did not condition eligibility—including student or institution eligibility—or payment decisions on the incentive compensation provision.  But it was ignored by the Ninth Circuit. Stephens Institute is seeking en banc review. B.   Other False Claims Act Developments While the case law on the FCA may not have been particularly positive for schools in the last quarter, the Department of Justice (“DOJ”) continued to show a more considered approach to FCA enforcement.  Specifically, on June 14, 2018, acting Associate Attorney General Jesse Panuccio gave a speech about the DOJ’s ongoing efforts to promote a fair application of the FCA.  As discussed in our February report, the DOJ issued two memoranda in January that: (i) outlined factors for when the Government should intervene and voluntarily dismiss qui tam FCA lawsuits; and (ii) clarified that the “Department may not use its enforcement authority to effectively convert agency guidance documents into binding rules.”  In his speech, Mr. Panuccio discussed those two initiatives and also (1) formalizing cooperation credits, (2) rewarding “companies that invest in strong compliance measures,” and (3) promoting coordination within the agency and with other regulatory bodies to prevent “piling on.” On the FCA front, a few other developments: The U.S. District Court for the Western District of Pennsylvania ordered the Government to produce to a law clinic at Harvard Law School documents the Government obtained from a 2007 FCA case filed against Education Management Corp. The qui tam lawsuit filed against EduTrek and a number of schools in the United States District Court for the District of Utah was voluntarily dismissed. The U.S. District Court for the District of Utah ordered supplemental briefing in U.S. ex rel. Brooks v. Stevens-Henagar College about whether a relator and the United States are entitled to separately pursue different claims in the same FCA case. C.   Activity by the Department of Education As readers of this alert likely know, the Department of Education (ED) has had a busy quarter: Borrower Defense:  On July 31, ED released a notice of proposed rulemaking on the Borrower Defense to Repayment (BDR) regulations.  The proposed regulations are intended to supplant the BDR rule promulgated by the Obama Administration in November 2016.  Some of the proposed changes include (1) establishing a federal standard for review of BDR claims; (2) limiting the basis of a claim to misrepresentation by a school; (3) requiring that such misrepresentation be (i) false, misleading, or deceptive, and (ii) made with knowledge of its false, misleading, or deceptive nature or with a reckless disregard for the truth, (iii) clearly related to the making of the loan or provision of educational services; and (iv) requiring the borrower to establish reasonable reliance on the misrepresentation and resulting financial harm. After the notice of rulemaking was published, ED received a large number of comments and has announced that the earliest implementation date would be July 2020. In the meantime, at least for the time being, the old 2016 BDR regulations will remain in effect.  That is because 19 states and the District of Columbia previously sued Secretary DeVos for wrongly delaying implementation of the 2016 BDR regulations.  On September 12, the judge ruled that ED’s postponement measures of the 2016 BDR regulations were procedurally improper.  Instead of ordering ED to immediately implement the 2016 BDR rule, the judge issued a temporary suspension to permit ED to remedy deficiencies with the procedures it had followed.  However, ED did not do so before the deadline of October 16, and the 2016 version of the BDR rule is now in effect.  Secretary DeVos has indicated she will implement the 2016 rule, even as she works to rescind it. ED also suffered setbacks in another lawsuit involving the BDR rules.  As reported in our last alert, former Corinthian College students filed a class action lawsuit for declaratory and injunctive relief against Secretary DeVos and ED in December 2017, alleging that after Corinthian closed, ED promised the students complete loan forgiveness but then, in December 2017, announced a plan to award only partial relief using a formula based on students’ earnings.  On May 25, a magistrate judge issued a preliminary injunction, blocking enforcement of ED’s partial loan relief program.  In June, the magistrate clarified that ED did not presently need to provide the full debt relief the students claimed but that ED must stop collecting loan payments from all former Corinthian students who applied for debt relief—not just the four named plaintiffs in the case.  And on October 15, the judge certified a nationwide class of approximately 110,000 students. Gainful Employment:  On August 14, ED filed a notice of proposed rulemaking that proposed rescinding the Gainful Employment regulations.  Instead of these regulations, ED plans to update the College Scorecard, or a similar web-based tool, to provide program-level outcomes for all higher education programs at all institutions that participate in programs authorized by Title IV.  The public comment period closed on September 13. State Authorization:  On July 3, ED further delayed the effective date of four provisions of the State Authorization rules that had been published in December 2016 and were scheduled to go into effect on July 1, 2018.  The new effective date is now July 1, 2020.  The State Authorization rules would have required institutions that offer distance education to students in states where the institution is not physically located to either meet those states’ requirements for offering postsecondary education or to participate in a state authorization reciprocity agreement and then document that there is a state process for review and action on student complaints.  In response to this delay, the National Student Legal Defense Network filed a lawsuit on August 23 in the U.S. District Court for the Northern District of California, arguing that the methods ED used to delay implementation of the rules violated both the Higher Education Act and the Administrative Procedure Act.  The case has been assigned to a magistrate judge. Accreditation:  On July 31, ED announced a new round of rulemaking related to accreditation and proposed negotiation of the following topics:  requirements for accrediting agencies in their oversight of member institutions; requirements for accrediting agencies to honor institutional mission; criteria used by the Secretary to recognize accrediting agencies, emphasizing criteria that focus on educational quality; developing a single definition for purposes of measuring and reporting job placement rates; and simplifying ED’s process for recognition and review of accrediting agencies.  Negotiations are expected to begin in January 2019. Speaking of accreditors, in late September, after having tentatively restored its accrediting status in April, ED sent a letter to the Accrediting Council for Independent Colleges and Schools (ACICS), stating that the accreditor was in compliance with all but two of the necessary standards for recognition and that it has 12 months to meet the final two criteria. To round out the news about ED, on June 21, the White House unveiled a plan to merge the Education and Labor departments into a single Cabinet agency:  the Department of Education and the Workforce.  The change would require congressional approval.  The merger reflects the Administration’s desire to streamline government and focus on career technical education and skill-building. D.   Activity by Other Federal Agencies ED is not the only federal body that has kept busy. The SEC settled its case against two executives of ITT Educational Services, Inc., days before trial was to begin.  The two executives were alleged to have hidden ITT’s financial condition from investors.  The settlements include penalties of $200,000 and $100,000 and temporary suspensions from serving on boards of publicly-traded companies.  In the meantime, the bankruptcy trustee representing ITT’s debtors filed suit against one of the executives and eight former board directors, alleging that they breached their fiduciary duties by not taking steps that might have kept the company out of bankruptcy.  In September, the bankruptcy trustee also filed suit against ED and lenders who backed ITT’s private loan program, alleging that ED failed to adequately protect students. On the CFPB front, CFPB has accused ED of blocking Navient from producing student borrower documents to CFPB in its lawsuit against Navient.  On August 10, the court held that Navient must produce the documents if they are in Navient’s possession, regardless of whether they are “owned” by ED. The FTC reached settlements of over $60 million with eight separate parties accused of scamming consumers out of millions of dollars by promising to reduce or eliminate their loan debt.  The settlements are part of a coordinated federal-state law enforcement initiative targeting deceptive student loan debt relief scams announced by the FTC in October 2017, called Operation Game of Loans. Finally, in July, the FBI concluded an investigation into an alleged “bait-and-switch” scheme that purportedly affected more than 2,500 student veterans.  A company called Ed4Mil allegedly recruited service members and veterans for what they thought were classes taught by a private liberal arts school, but were actually unaccredited correspondence classes.  Ed4Mil allegedly charged the government the university tuition rates and pocketed the difference.  Ed4Mil’s founder pleaded guilty to conspiracy to commit wire fraud and was sentenced to five years in prison.  He was also ordered to pay $24 million in restitution.  Two co-conspirators pleaded guilty to conspiracy to commit wire fraud and were sentenced to probation. E.   State Attorney General Activity As we’ve reported, state attorneys general also remain busy in their policing of the education sector. 1.   California Attorney General Gets Mixed Results. California, one of the busiest state AG offices, has seen mixed results in recent months.  In one win, Attorney General Javier Becerra settled with Balboa Student Loan Trust for $67 million in debt relief for former students of Corinthian College.  The settlement calls for Balboa to immediately halt debt collection, forgive 100 percent of the balances on over 30,000 private student loans, and to refund past payments. The Attorney General next announced a suit against student loan servicer, Navient, alleging Navient violated California’s unfair competition and false advertising laws by failing to sufficiently disclose how borrowers could be considered for income-driven repayment plans, thus steering borrowers to more expensive plans.  Navient has stated that the allegations are baseless and that it will “vigorously defend” the suit. In August, a magistrate judge in the U.S. District Court for Northern District of California dismissed California’s complaint against ED and Secretary DeVos alleging ED had improperly halted debt relief claims of former Corinthian Colleges students.  The court held that California lacked standing to challenge the Trump administration’s actions.  California has filed an amended complaint that seeks to remedy the deficiencies identified by the court. California also suffered another defeat in August when a court issued a temporary restraining order, halting the practice by the California State Approving Agency for Veterans Education (CSAAVE)—which certifies colleges to award federal education aid to veterans—of suspending the eligibility of colleges from other states based on its interpretation of a rule to require “extension” campuses to be operationally dependent on a campus in California.  The college plaintiffs alleged that CSAAVE’s interpretation has no basis in governing law and that its implementation of this interpretation violated the California Administrative Procedures Act.  The Agency stated its decisions were based on the inadequacy of the colleges’ locations in California, but the colleges’ lawsuit alleged that the Agency’s own documentation demonstrated that the colleges were compliant with all rules. 2.   Massachusetts Attorney General Sues New England Institute of Art for Fraud. In July, Massachusetts Attorney General Maura Healy sued the New England Institute of Art (NEIA) and Education Management Corporation (EDMC) for fraud.  Massachusetts’s lawsuit alleges NEIA and EDMC targeted and aggressively recruited students by misrepresenting job placement rates, NEIA’s job search assistance resources, and the availability of financial aid.  NEIA closed in 2017, and EDMC filed for bankruptcy in June.  Nevertheless, it appears Massachusetts is pursuing its claims. 3.   New York City Department of Consumer Affairs Alleges Berkeley College Violated Consumer and Local Debt Protection Laws. In New York, it appears other agencies are participating in enforcement as well.  After a two-year investigation of Berkeley College, the New York City Department of Consumer Affairs has sued the for-profit institution, alleging that it employed “predatory marketing tactics,” made misrepresentations about financial aid and employment prospects, and attempted to collect debts not actually owed.  The investigation reportedly included undercover investigators who communicated with recruiters and students and the review of over 50,000 pages of documents produced by the college. 4.   Investigations and Press Reports Demonstrate Vulnerability of Schools Beyond the For-Profit Sector. In July, Pennsylvania Attorney General Josh Shapiro announced his office would investigate claims that Temple University knowingly provided false data to U.S. News & World Reports to boost the rankings of its online MBA program.  And in August, the Commission on Institutions of Higher Education at the New England Association of Schools and Colleges voted to place on probation two independent nonprofit schools—College of St. Joseph and Newbury College.  The accreditor reports that the two schools, both facing declining enrollment, failed to meet a standard on institutional financial resources. Further, at least one news outlet recently reported on alleged disgruntled customers of Woz U, the coding boot camp started by Apple co-founder Steve Wozniak.  In the report, Woz U’s President acknowledged errors in the program and stated that a quality control system has been adopted. F.   Corporate Transactions and For-Profit to Nonprofit Status Changes There were several notable developments in the area of sales and mergers. Strayer Education, Inc. finalized its merger with Capella Education Company in August.  The new combined entity, called Strategic Education, Inc. (SEI) will continue to operate Strayer University and Capella University as separately accredited institutions. ED has given primary approval to Adtalem Global Education’s proposed transfer of DeVry University to Cogswell Capital LLC.  The transfer will still need approval from the Higher Learning Commission.  (Unrelated to the transfer but also notable is a recent class action lawsuit against DeVry, filed by former students who say DeVry falsely advertised employment and graduation rates to induce them to enroll.) Adtalem also finalized a deal to transfer ownership of Carrington College to San Joaquin Valley College, Inc.  The deal will need regulatory and creditor approval and is expected to be finalized in mid-2019. Bridgepoint Education announced in July that its accreditor has given initial approval for a merger of two of Bridgepoint’s subsidiary institutions, Ashford University and University of the Rockies.  Ashford University will be the surviving entity of the merger, which will now seek approval from state regulators and ED. This quarter also saw more examples of a trend we’ve reported previously:  for-profit institutions seeking to become nonprofit entities.  In July, National University System, a nonprofit network of universities, announced it will acquire for-profit Northcentral University to expand its online graduate and doctoral program offerings.  Grand Canyon University, which had tried for several years to convert back to a nonprofit, sold off assets necessary to complete the status change.  This trend has gained so much steam that the National Advisory Committee on Institutional Quality and Integrity (NACIQI) recently held an event on it, hosting 22 panelists to weigh in on the topic of for-profit to nonprofit conversions in higher education.  Most of the panelists cited regulatory and public scrutiny as the major factor driving these conversions. Not all of these deals have been successful.  The proposed acquisition of 31 Art Institute schools by nonprofit Dream Center Education Holdings faces a new hurdle.  The Higher Learning Commission temporarily suspended accreditation of four Art Institute schools.  Senator Dick Durbin (D-Ill.) has called for an investigation of Dream Center, in part because Dream Center’s websites allegedly continued to list the schools as accredited. G.   Other News The American Bar Association (ABA) has revoked the accreditation of Arizona Summit Law School.  The revocation follows a year-long probation period for allegedly failing to meet academic and admissions standards.  Arizona Summit plans to appeal the decision. During the probationary period, InfiLaw Corp., which owns Arizona Summit, fought back by suing the ABA, alleging it discriminated against for-profit law schools.  In August, the ABA had a setback in that lawsuit when the U.S. Judicial Panel on Multidistrict Litigation rejected the ABA’s argument that that three separate lawsuits brought by InfiLaw schools should be consolidated.  The Panel reasoned that the number of suits was small and discovery would be minimal given that the suit would likely turn on questions of law.  The three cases will now proceed independently. *   *   * As always, we will continue to monitor all of these developments, and you can look forward to updates in our next report. Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding the issues discussed above.  Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following: Los Angeles Timothy Hatch (+1 213-229-7368, thatch@gibsondunn.com) Marcellus McRae (+1 213-229-7675, mmcrae@gibsondunn.com) Julian W. Poon (+1 213-229-7758, jpoon@gibsondunn.com) Eric D. Vandevelde (+1 213-229-7186, evandevelde@gibsondunn.com) James Zelenay (+1 213-229-7449, jzelenay@gibsondunn.com) Jeremy S. Smith (+1 213-229-7973, jssmith@gibsondunn.com) Denver Jeremy S. Ochsenbein (+1 303-298-5773, jochsenbein@gibsondunn.com) San Francisco Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com) Washington, D.C. Douglas Cox (+1 202-887-3531, dcox@gibsondunn.com) Michael Bopp (+1 202-955-8256, mbopp@gibsondunn.com) Jason J. Mendro (+1 202-887-3726, jmendro@gibsondunn.com) Amir C. Tayrani (+1 202-887-3692, atayrani@gibsondunn.com) Lucas C. Townsend (+1 202-887-3731, ltownsend@gibsondunn.com)

November 1, 2018 |
U.S. News – Best Lawyers® Awards Gibson Dunn 132 Top-Tier Rankings

U.S. News – Best Lawyers® awarded Gibson Dunn Tier 1 rankings in 132 practice area categories in its 2019 “Best Law Firms” [PDF] survey. Overall, the firm earned 169 rankings in nine metropolitan areas and nationally. Additionally, Gibson Dunn was recognized as “Law Firm of the Year” for Litigation – Antitrust and Litigation – Securities. Firms are recognized for “professional excellence with persistently impressive ratings from clients and peers.” The recognition was announced on November 1, 2018.

October 30, 2018 |
Who’s Who Legal Recognizes Twelve Gibson Dunn Partners

Twelve Gibson Dunn partners were recognized by Who’s Who Legal in their respective fields. In Who’s Who Legal Private Funds 2019, Dubai partner Chézard Ameer, Hong Kong partner John Fadely, Los Angeles partner Jennifer Bellah Maguire, New York partners Shukie Grossman, Edward Nelson and Edward Sopher, and Washington, D.C. partner C. William Thomas, Jr. were recognized. In Who’s Who Legal Business Crime Defense 2019, Hong Kong partner Kelly Austin, Los Angeles partner Debra Wong Yang, San Francisco partner Charles Stevens, and Washington, D.C. partners Richard Grime and F. Joseph Warin were recognized. The lists were published in October 2018.

October 26, 2018 |
Gibson Dunn Ranked No. 1 by Global Investigations Review

Global Investigations Review ranked Gibson Dunn No. 1 in the GIR 30 [PDF], its annual guide to the world’s top 30 investigations practices. GIR noted, “Gibson Dunn has extensive experience across the white-collar spectrum, in matters ranging from sanctions violations to benchmark manipulation and money laundering. But it’s in the foreign bribery space that the firm has really pushed ahead of its competitors.” The list was published on October 26, 2018.

October 17, 2018 |
SEC Warns Public Companies on Cyber-Fraud Controls

Click for PDF On October 16, 2018, the Securities and Exchange Commission issued a report warning public companies about the importance of internal controls to prevent cyber fraud.  The report described the SEC Division of Enforcement’s investigation of multiple public companies which had collectively lost nearly $100 million in a range of cyber-scams typically involving phony emails requesting payments to vendors or corporate executives.[1] Although these types of cyber-crimes are common, the Enforcement Division notably investigated whether the failure of the companies’ internal accounting controls to prevent unauthorized payments violated the federal securities laws.  The SEC ultimately declined to pursue enforcement actions, but nonetheless issued a report cautioning public companies about the importance of devising and maintaining a system of internal accounting controls sufficient to protect company assets. While the SEC has previously addressed the need for public companies to promptly disclose cybersecurity incidents, the new report sees the agency wading into corporate controls designed to mitigate such risks.  The report encourages companies to calibrate existing internal controls, and related personnel training, to ensure they are responsive to emerging cyber threats.  The report (issued to coincide with National Cybersecurity Awareness Month) clearly intends to warn public companies that future investigations may result in enforcement action. The Report of Investigation Section 21(a) of the Securities Exchange Act of 1934 empowers the SEC to issue a public Report of Investigation where deemed appropriate.  While SEC investigations are confidential unless and until the SEC files an enforcement action alleging that an individual or entity has violated the federal securities laws, Section 21(a) reports provide a vehicle to publicize investigative findings even where no enforcement action is pursued.  Such reports are used sparingly, perhaps every few years, typically to address emerging issues where the interpretation of the federal securities laws may be uncertain.  (For instance, recent Section 21(a) reports have addressed the treatment of digital tokens as securities and the use of social media to disseminate material corporate information.) The October 16 report details the Enforcement Division’s investigations into the internal accounting controls of nine issuers, across multiple industries, that were victims of cyber-scams. The Division identified two specific types of cyber-fraud – typically referred to as business email compromises or “BECs” – that had been perpetrated.  The first involved emails from persons claiming to be unaffiliated corporate executives, typically sent to finance personnel directing them to wire large sums of money to a foreign bank account for time-sensitive deals. These were often unsophisticated operations, textbook fakes that included urgent, secret requests, unusual foreign transactions, and spelling and grammatical errors. The second type of business email compromises were harder to detect. Perpetrators hacked real vendors’ accounts and sent invoices and requests for payments that appeared to be for otherwise legitimate transactions. As a result, issuers made payments on outstanding invoices to foreign accounts controlled by impersonators rather than their real vendors, often learning of the scam only when the legitimate vendor inquired into delinquent bills. According to the SEC, both types of frauds often succeeded, at least in part, because responsible personnel failed to understand their company’s existing cybersecurity controls or to appropriately question the veracity of the emails.  The SEC explained that the frauds themselves were not sophisticated in design or in their use of technology; rather, they relied on “weaknesses in policies and procedures and human vulnerabilities that rendered the control environment ineffective.” SEC Cyber-Fraud Guidance Cybersecurity has been a high priority for the SEC dating back several years. The SEC has pursued a number of enforcement actions against registered securities firms arising out of data breaches or deficient controls.  For example, just last month the SEC brought a settled action against a broker-dealer/investment-adviser which suffered a cyber-intrusion that had allegedly compromised the personal information of thousands of customers.  The SEC alleged that the firm had failed to comply with securities regulations governing the safeguarding of customer information, including the Identity Theft Red Flags Rule.[2] The SEC has been less aggressive in pursuing cybersecurity-related actions against public companies.  However, earlier this year, the SEC brought its first enforcement action against a public company for alleged delays in its disclosure of a large-scale data breach.[3] But such enforcement actions put the SEC in the difficult position of weighing charges against companies which are themselves victims of a crime.  The SEC has thus tried to be measured in its approach to such actions, turning to speeches and public guidance rather than a large number of enforcement actions.  (Indeed, the SEC has had to make the embarrassing disclosure that its own EDGAR online filing system had been hacked and sensitive information compromised.[4]) Hence, in February 2018, the SEC issued interpretive guidance for public companies regarding the disclosure of cybersecurity risks and incidents.[5]  Among other things, the guidance counseled the timely public disclosure of material data breaches, recognizing that such disclosures need not compromise the company’s cybersecurity efforts.  The guidance further discussed the need to maintain effective disclosure controls and procedures.  However, the February guidance did not address specific controls to prevent cyber incidents in the first place. The new Report of Investigation takes the additional step of addressing not just corporate disclosures of cyber incidents, but the procedures companies are expected to maintain in order to prevent these breaches from occurring.  The SEC noted that the internal controls provisions of the federal securities laws are not new, and based its report largely on the controls set forth in Section 13(b)(2)(B) of the Exchange Act.  But the SEC emphasized that such controls must be “attuned to this kind of cyber-related fraud, as well as the critical role training plays in implementing controls that serve their purpose and protect assets in compliance with the federal securities laws.”  The report noted that the issuers under investigation had procedures in place to authorize and process payment requests, yet were still victimized, at least in part “because the responsible personnel did not sufficiently understand the company’s existing controls or did not recognize indications in the emailed instructions that those communications lacked reliability.” The SEC concluded that public companies’ “internal accounting controls may need to be reassessed in light of emerging risks, including risks arising from cyber-related frauds” and “must calibrate their internal accounting controls to the current risk environment.” Unfortunately, the vagueness of such guidance leaves the burden on companies to determine how best to address emerging risks.  Whether a company’s controls are adequate may be judged in hindsight by the Enforcement Division; not surprisingly, companies and individuals under investigation often find the staff asserting that, if the controls did not prevent the misconduct, they were by definition inadequate.  Here, the SEC took a cautious approach in issuing a Section 21(a) report highlighting the risk rather than publicly identifying and penalizing the companies which had already been victimized by these scams. However, companies and their advisors should assume that, with this warning shot across the bow, the next investigation of a similar incident may result in more serious action.  Persons responsible for designing and maintaining the company’s internal controls should consider whether improvements (such as enhanced trainings) are warranted; having now spoken on the issue, the Enforcement Division is likely to view corporate inaction as a factor in how it assesses the company’s liability for future data breaches and cyber-frauds.    [1]   SEC Press Release (Oct. 16, 2018), available at www.sec.gov/news/press-release/2018-236; the underlying report may be found at www.sec.gov/litigation/investreport/34-84429.pdf.    [2]   SEC Press Release (Sept. 16, 2018), available at www.sec.gov/news/press-release/2018-213.  This enforcement action was particularly notable as the first occasion the SEC relied upon the rules requiring financial advisory firms to maintain a robust program for preventing identify theft, thus emphasizing the significance of those rules.    [3]   SEC Press Release (Apr. 24, 2018), available at www.sec.gov/news/press-release/2018-71.    [4]   SEC Press Release (Oct. 2, 2017), available at www.sec.gov/news/press-release/2017-186.    [5]   SEC Press Release (Feb. 21, 2018), available at www.sec.gov/news/press-release/2018-22; the guidance itself can be found at www.sec.gov/rules/interp/2018/33-10459.pdf.  The SEC provided in-depth guidance in this release on disclosure processes and considerations related to cybersecurity risks and incidents, and complements some of the points highlighted in the Section 21A report. Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Securities Enforcement or Privacy, Cybersecurity and Consumer Protection practice groups, or the following authors: Marc J. Fagel – San Francisco (+1 415-393-8332, mfagel@gibsondunn.com) Alexander H. Southwell – New York (+1 212-351-3981, asouthwell@gibsondunn.com) Please also feel free to contact the following practice leaders and members: Securities Enforcement Group: New York Barry R. Goldsmith – Co-Chair (+1 212-351-2440, bgoldsmith@gibsondunn.com) Mark K. Schonfeld – Co-Chair (+1 212-351-2433, mschonfeld@gibsondunn.com) 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) Laura Kathryn O’Boyle (+1 212-351-2304, loboyle@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Avi Weitzman (+1 212-351-2465, aweitzman@gibsondunn.com) Lawrence J. Zweifach (+1 212-351-2625, lzweifach@gibsondunn.com) Washington, D.C. Richard W. Grime – Co-Chair (+1 202-955-8219, rgrime@gibsondunn.com) Stephanie L. Brooker  (+1 202-887-3502, sbrooker@gibsondunn.com) Daniel P. Chung (+1 202-887-3729, dchung@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Patrick F. Stokes (+1 202-955-8504, pstokes@gibsondunn.com) F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) San Francisco Marc J. Fagel – Co-Chair (+1 415-393-8332, mfagel@gibsondunn.com) Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) Thad A. Davis (+1 415-393-8251, tdavis@gibsondunn.com) Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com) Michael Li-Ming Wong (+1 415-393-8234, mwong@gibsondunn.com) Palo Alto Paul J. Collins (+1 650-849-5309, pcollins@gibsondunn.com) Benjamin B. Wagner (+1 650-849-5395, bwagner@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) Monica K. Loseman (+1 303-298-5784, mloseman@gibsondunn.com) Los Angeles Michael M. Farhang (+1 213-229-7005, mfarhang@gibsondunn.com) Douglas M. Fuchs (+1 213-229-7605, dfuchs@gibsondunn.com) Privacy, Cybersecurity and Consumer Protection Group: Alexander H. Southwell – Co-Chair, New York (+1 212-351-3981, asouthwell@gibsondunn.com) M. Sean Royall – Dallas (+1 214-698-3256, sroyall@gibsondunn.com) Debra Wong Yang – Los Angeles (+1 213-229-7472, dwongyang@gibsondunn.com) Christopher Chorba – Los Angeles (+1 213-229-7396, cchorba@gibsondunn.com) Richard H. Cunningham – Denver (+1 303-298-5752, rhcunningham@gibsondunn.com) Howard S. Hogan – Washington, D.C. (+1 202-887-3640, hhogan@gibsondunn.com) Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, jjessen@gibsondunn.com) Kristin A. Linsley – San Francisco (+1 415-393-8395, klinsley@gibsondunn.com) H. Mark Lyon – Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com) Shaalu Mehra – Palo Alto (+1 650-849-5282, smehra@gibsondunn.com) Karl G. Nelson – Dallas (+1 214-698-3203, knelson@gibsondunn.com) Eric D. Vandevelde – Los Angeles (+1 213-229-7186, evandevelde@gibsondunn.com) Benjamin B. Wagner – Palo Alto (+1 650-849-5395, bwagner@gibsondunn.com) Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, mwong@gibsondunn.com) Ryan T. Bergsieker – Denver (+1 303-298-5774, rbergsieker@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

September 17, 2018 |
Webcast: Ten Years After Siemens: The Evolving Landscape of Global Anti-Corruption Enforcement

Ten years have passed since the watershed Siemens resolution with the DOJ, SEC, Munich Public Prosecutor and World Bank in December 2008. Over the last decade, global anti-corruption enforcement and multinational cooperation has taken off. Numerous jurisdictions have developed internal frameworks to facilitate anti-corruption enforcement. Governments routinely share information during investigations, and there is an emerging trend of credits, discounts and multi-jurisdictional settlements. The road to such resolutions however is neither easy nor settled. This webcast will discuss the many issues that arise during these complex multijurisdictional investigations and offer some strategic guidance for avoiding pitfalls and challenges that can occur. Listen and interact with questions to five Gibson Dunn partners who have held central international roles in either enforcement agencies or private practice and have significantly contributed to the shape of that landscape and the writing of its history. Topics to be covered: Anti-corruption enforcement in the United States Key multinational enforcement efforts, anti-corruption frameworks and global cooperation approaches Mitigation strategies to avoid duplicative investigations and resolutions Expectations for the future View Slides [PDF] PANELISTS: Richard Grime is a partner in Gibson Dunn’s Washington, D.C. office and Co-Chair of the firm’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. Sacha Harber-Kelly is a partner in the Dispute Resolution Group of Gibson Dunn’s London office, where he specializes in global white-collar investigations. Prior to joining the firm in January 2018, Mr. Harber-Kelly was a prosecutor in the Anti-Corruption and Bribery Division at the U.K.’s Serious Fraud Office. He had central involvement in each of the U.K.’s simultaneous global corporate corruption resolutions whether by prosecution, civil asset recovery or Deferred Prosecution Agreement (DPA). He was equally involved in the U.K.’s development of its DPA regime, writing its governing Code of Practice and prosecuting both the first such resolution and latterly the largest and most complex. Benno Schwarz is a German-qualified partner in Gibson Dunn’s Munich office and a member of the firm’s International Corporate Transactions and White Collar Defense and Investigations Practice Groups. Mr. Schwarz has many years of experience in the area of corporate anti-bribery compliance, especially issues surrounding the enforcement of the US FCPA and the UK Bribery Act as well as applicable Russian law. Mr. Schwarz was a member of the international team from Gibson Dunn advising the Siemens compliance monitor, the first non-U.S. compliance monitor in conjunction with the world’s largest FCPA settlement to date. Patrick 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 a partner in Gibson Dunn’s Washington, D.C. office, Chair of the office’s Litigation Department, and Co-Chair of the firm’s White Collar Defense and Investigations Practice Group. Mr. Warin is regarded as a top lawyer in FCPA investigations, FCA cases, and special committee representations. He has handled cases in dozens of countries in matters 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. 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 1.50 credit hours, of which 1.50 credit hour 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 1.50 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.

September 10, 2018 |
Webcast: The False Claims Act: 2018 Mid-Year Update for Government Contracting

The False Claims Act (FCA) is well-known as one of the most powerful tools in the government’s arsenal to combat fraud, waste and abuse anywhere government funds are implicated. While the U.S. Department of Justice has recently issued statements indicating some new thinking about FCA enforcement, newly filed cases remain at historical peak levels and the DOJ has enjoyed seven straight years of more than $3 billion in annual FCA recoveries. As much as ever, any company that deals in government funds—especially in the health care and life sciences, government contracting and financial services sectors—needs to stay abreast of how the government and private whistleblowers alike are wielding this tool, and how they can prepare and defend themselves. Please join Gibson Dunn for a 90-minute discussion of the latest developments in FCA, including: The latest trends in FCA enforcement actions and associated litigation involving your industry sector; Updates on the Trump Administration’s approach to FCA enforcement; Notable legislative and administrative developments affecting the FCA’s statutory framework and application; and The latest developments in FCA case law, including the continued evolution of how lower courts are interpreting the Supreme Court’s Escobar decision. View Slides [PDF] PANELISTS: John Chesley is a partner in the Washington, D.C. office. He represents corporations, audit committees, and executives in internal investigations and before government agencies in matters involving the FCPA, procurement fraud, environmental crimes, securities violations, antitrust violations, and whistleblower claims. He also litigates government contracts disputes in federal courts and administrative tribunals. Jim Zelenay is a partner in the Los Angeles office where he practices in the firm’s Litigation Department. He is experienced in defending clients involved in white collar investigations, assisting clients in responding to government subpoenas, and in government civil fraud litigation. He also has substantial experience with the federal and state False Claims Acts and whistleblower litigation, in which he has represented a breadth of industries and clients, and has written extensively on the False Claims Act. Jonathan Phillips is a partner in the Washington, D.C. office where he focuses on compliance, enforcement, and litigation in the health care and government contracting fields, as well as other white collar enforcement matters and related litigation. A former Trial Attorney in DOJ’s Civil Fraud section, he has particular experience representing clients in enforcement actions by the DOJ, Department of Health and Human Services, and Department of Defense brought under the False Claims Act and related statutes. Erin Rankin is an associate in the Washington, D.C. office, where she is a member of the firm’s Litigation Department. She represents clients on government contracts matters relating to contract claims and terminations, suspension and debarment proceedings, internal investigations, and due diligence. 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 1.50 credit hours, of which 1.50 credit hour 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 1.50 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.

September 11, 2018 |
SFO Successfully Defends Challenge over the Territorial Scope of Compulsory Document Requests

Click for PDF Last week the High Court in London handed down its decision following a challenge by KBR, Inc. against the issuing of compulsory document requests that required the production of documents held by the company outside of the UK. KBR, Inc. is a U.S. engineering and construction company and ultimate parent company of the KBR Group. It does not have a physical presence in the UK, but has a subsidiary, KBR Ltd, that does. KBR Ltd is under investigation by the SFO for suspected bribery. At the heart of the proceedings was a notice issued to KBR, Inc. by the Serious Fraud Office (“SFO“) under section 2(3) of the Criminal Justice Act 1987 (“CJA“) (the “July Section 2 Notice“) compelling the production of documents held outside the UK.  The SFO issued the July Section 2 Notice to a representative of KBR, Inc. who had attended a meeting with the SFO in the UK to discuss its investigation into KBR Ltd. The Challenge KBR, Inc. challenged the July Section 2 Notice on three grounds: Jurisdiction:  the July Section 2 Notice was ultra vires the CJA, as it requested material held outside of the UK from a company incorporated outside of the UK. Discretion:  the Director of the SFO made an error of law in issuing the July Section 2 Notice instead of using its power to seek Mutual Legal Assistance (“MLA“) from the US authorities under the UK’s 1994 bilateral MLA Treaty with the US. Service:  the July Section 2 Notice was not properly served on KBR, Inc. under the CJA. Jurisdiction The Court held that in relation to UK companies with documents outside of the UK, that section 2(3) of the CJA must have “an element of extraterritorial application” otherwise “a UK company could resist an otherwise lawful s.2(3) notice on the ground that the documents in question were held on a server out of the jurisdiction“. The extraterritorial reach would minimize the risk of the SFO’s investigations being frustrated by companies moving their documents out of the jurisdiction. As regards documents held by foreign companies outside of the UK, the court held that section 2(3) will extend to some foreign companies in respect of documents held abroad, when there is a “sufficient connection” between the foreign company and the jurisdiction (the UK). This test is fact specific in order to allow for “practical justice in the individual case“. In KBR, Inc.’s case, the Court found that certain following factors were not sufficient on their own to satisfy the “sufficient connection” test, including: the fact that KBR, Inc. was the parent company of KBR Ltd, as it would ensnare parent companies of multinational groups without justification. the fact that KBR, Inc. cooperated to a degree with the SFO’s request for documents and remained willing to do so voluntarily, on terms that it would apply SFO search terms across data held in the US.  Cooperation is to be encouraged but it should not give rise to a risk of being held to imply acceptance of jurisdiction. the fact that a KBR, Inc. representative agreed to, and did, attend a meeting with the SFO.  This is for similar reasons as those set out above. However, the Court went on to find that there was a sufficient connection between KBR, Inc. and the UK in this case, based on the fact that some suspected corrupt payments made by KBR to Unaoil required the express approval of KBR, Inc. and were processed by KBR, Inc.’s treasury function, and for a period approval was also required from KBR, Inc.’s compliance function before payment could be released.  The Court also observed that a corporate officer of KBR, Inc. was based in the Group’s UK office. Discretion KBR, Inc. argued that even if the CJA did confer jurisdiction on the SFO to compel the production of materials abroad, the Director of the SFO should not have exercised his power under section 2(3) of the CJA, which is discretionary, and should have first considered using the MLA route.  KBR, Inc.’s position was that in failing to do this amounted to an error of law. This argument was rejected. The High Court held that the MLA option was an additional power available to the SFO: “The availability of MLA gives the Director additional options; it does not curtail his discretion to use the separate power of issuing s.2(3) notices… It follows that KBR [Inc] has failed to demonstrate any error of law on the part of the Director in the exercise of his discretion to issue the July Notice.” The High Court noted additionally in the SFO’s favour that there are “good practical reasons” for the Director to use a section 2 notice instead of MLA. Such reasons included delays, the risk that a request is ignored, and the burden on the requested state of having to deal with a request when it would be simpler to obtain the materially directly. KBR, Inc. had neither shown nor suggested that compliance with the July Section 2 Notice would have raised any complexities or issues of local U.S. law, or conflict with duties owed by KBR, Inc. to third parties. Service KBR, Inc. argued that simply giving the July Notice to KBR, Inc.’s representative during an SFO meeting was not enough to “serve” KBR, Inc. with the July Section 2 Notice, and that the fact that KBR, Inc. ‘s representative was in the UK did not signify that KBR, Inc. was present in the UK. The court rejected this challenge, noting in particular that section 2(3) required no additional formality beyond the giving of the notice. The Court held that KBR, Inc. was “plainly present” in the jurisdiction when the SFO gave the July Section 2 Notice to its representative. The SFO made the meeting in question conditional on the attendance of “the clients” (i.e., KBR, Inc.). As such, it was clear that KRB Inc’s representatives were in the jurisdiction in their capacity as representatives and not “coincidentally or on some personal frolic“. The High Court, however, noted that the SFO’s plan to give the July Notice to KBR, Inc.’s representative during the course of the meeting had “unappealing features“. However, those features did not invalidate the July Notice; rather they serve as a warning to others who may attend similar meetings with the SFO in the future. Implications The decision has helped to clarify the scope of the SFO’s section 2 notice power, which to-date has not been considered comprehensively by the courts. The SFO will no doubt be satisfied with the result. Foreign companies that hold documents outside of the UK will not be immune from the SFO’s section 2 power, provided that the SFO can illustrate a “sufficient connection” between the company in question and the UK.  A parent / subsidiary relationship alone will not suffice, but where there are links between a UK subsidiary and its foreign parent, for example if they share accounting or compliance functions, this will likely suffice.  In this case, another connection was the presence of a KBR, Inc. employee in KBR Ltd’s office. This seems a rather tenuous connection. Whether that factor alone would have been enough is difficult to assess. The High Court, however, obviously thought it was sufficiently material to identify and take into account. This decision is likely to embolden the SFO in serving section 2 notices on foreign companies involved in their investigations. The Crime (Overseas Production Orders) Bill, which is currently before Parliament, may soon render the decision less relevant, at least as far as documents are stored electronically and in states where reciprocal arrangements are made for recognition of production orders.  The Bill has received little press attention to date but it may have significant implications.  If enacted, the SFO (amongst other authorities) will be able to make an application to the Crown Court for an order requiring an overseas person to produce electronic data in connection with an investigation, where there is an international cooperation agreement in place with the jurisdiction in question.  We note that the U.S. has passed the CLOUD Act (Clarifying Lawful Use of Overseas Data Act), which the UK Government has stated was passed “in anticipation and preparation” for a bilateral UK-US data access agreement.  If the Bill becomes law and agreements are put in place, it may become much easier for the SFO to obtain electronic data from overseas to aid its investigations. This client alert was prepared by Patrick Doris, Sacha Harber-Kelly, Steve Melrose and Rose Naing. Gibson Dunn 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: Philip Rocher (+44 (0)20 7071 4202, procher@gibsondunn.com) Patrick Doris (+44 (0)20 7071 4276, pdoris@gibsondunn.com) Sacha Harber-Kelly (+44 20 7071 4205, sharber-kelly@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) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

September 5, 2018 |
Court of Appeal in London Overturns Widely Criticised High Court Judgment in SFO v ENRC

Click for PDF I.   Introduction Today the Court of Appeal of England and Wales issued its judgment in The Director of the Serious Fraud Office and Eurasian Natural Resources Corporation Limited[1] regarding the privileged nature of documents created in the context of an internal investigation. The Court of Appeal reversed the High Court’s decision and found that all of the interviews conducted by ENRC’s external lawyers were covered by litigation privilege, and so too was the work conducted by the forensic accountancy advisors for the books and records review. The Court of Appeal found that ENRC did in fact reasonably contemplate prosecution when the documents were created.  Moreover, while determining that it did not have to decide the issue, the Court of Appeal also stated that it may also have departed from the existing narrow definition of “client” for legal advice privilege purposes in the context of corporate investigations. In the April 2017 High Court decision, Mrs Justice Andrews ruled in favour of the SFO, finding that certain documents (for example, interview memoranda created by external lawyers and work product of third party forensic accountancy advisors for ENRC) were not protected from disclosure to the SFO on the basis of litigation privilege or, in the case of the interview memoranda and other documents, legal advice privilege.  The decision was the subject of considerable criticism from the UK legal profession.  ENRC appealed the decision and the matter was heard in the Court of Appeal in July 2018.  Given the implications of the decision for legal professional privilege generally, the Law Society for England and Wales intervened in the hearing. Today’s judgment, overturning Mrs Justice Andrews’ decision, substantially clarifies English law regarding litigation privilege in connection with internal investigations, particularly where companies are on notice of an investigation or fear enforcement action or prosecution. II.   Legal professional privilege in English law By way of reminder, the English law of privilege has two distinct heads: 1)   legal advice privilege applies to confidential communications between a client and its lawyers, acting in their professional capacity, in connection with the provision of legal advice.  Privilege attaches to all communications that form part of the continuum of the lawyer/client communication, even if they do not contain a request for legal advice or advice itself. In a corporate context, the “client” is limited to those individuals authorised to obtain legal advice on the company’s behalf.[2]  In this respect, English privilege law diverges from its equivalents in many other common law jurisdictions.  It was one of the points considered by the Court of Appeal, and on which we comment below; and 2)   litigation privilege attaches to communications between parties or their solicitors and third parties for the purpose of obtaining information or advice in connection with existing or contemplated litigation, but only where: a)   litigation is in progress or in reasonable contemplation; b)   the communications have been made for the sole or dominant purpose of conducting that litigation; c)   the litigation is adversarial, not investigative or inquisitorial. III.   Background and the Judgment under Appeal In December 2010, ENRC received an email from someone claiming to be a whistle-blower, alleging bribery and corruption in relation to its Kazakh subsidiary. ENRC instructed external lawyers to carry out an investigation. The SFO became involved in August 2011, sending a letter to ENRC notifying it that it was not under formal investigation but that it should consider its position in light of the SFO’s then-in-force Self Reporting Guidelines.  ENRC’s external lawyers conducted interviews with current and former employees, and a forensic accountancy firm carried out a “books and records” review to consider the company’s financial crime systems and controls.  The SFO did not formally open an investigation into ENRC until April 2013.  That investigation remains open today and is focused on allegations of fraud, bribery and corruption. As part of its investigation, the SFO sought the compulsory production of certain documents under its formal information gathering powers in section 2 of the Criminal Justice Act 1987. A person in receipt of a section 2 notice is not obliged to produce to the SFO material that is subject to legal professional privilege, and ENRC refused to provide certain categories of documents to the SFO, on the basis that they were subject to either or both legal advice privilege or litigation privilege. The documents ENRC sought to withhold included: interview notes taken by ENRC’s external counsel of over one hundred witness interviews with current and former employees or officers of ENRC and its subsidiaries; materials generated by the forensic accountancy firm as part of its books and records review; documents created by ENRC’s external solicitors that contain accounts of factual events and which were used to give updates to ENRC’s corporate governance committee and Board; and a smaller category of miscellaneous other documents. The SFO brought proceedings against ENRC in the High Court, seeking a declaration that the documents ENRC sought to withhold were not properly protected by privilege. Mrs Justice Andrews ruled in favour of the SFO, rejecting ENRC’s claim to litigation privilege. Having considered all of the evidence, she reached the view that at the time the documents were created, ENRC did not reasonably contemplate criminal prosecution, and even if she were wrong in that finding, she found that ENRC did not create the documents in question for the dominant purpose of defending such prosecution, but instead for compliance and governance reasons. She also took the view that legal advice privilege did not apply to the interview memoranda drafted by external counsel because the interviewees were not individuals properly authorised to give or receive legal advice (i.e. they were not within the narrow definition of “client” in Three Rivers (No. 5)). ENRC appealed the High Court decision. IV.   Today’s Court of Appeal judgment The Court of Appeal today unanimously overturned Mrs Justice Andrews’ decision regarding litigation privilege. Having reached that decision, the Court of Appeal determined that it was not required to decide the points of law relating to legal advice privilege, most notably on the narrow definition of “client”.  The Court of Appeal indicated that this would need to be a matter to be decided by the Supreme Court in due course.  That being said, the Court of Appeal said it saw “much force” in the submissions made by ENRC and the Law Society, and had it been required to decide the point it would have departed from the narrow definition of “client” in Three Rivers (No. 1`5). Litigation Privilege The Court of Appeal decided the following key questions regarding litigation privilege: Was the judge right to determine that, at no stage before all the documents that ENRC sought to withhold had been created, criminal legal proceedings against ENRC or its subsidiaries or their employees were reasonably in contemplation? This case, while raising points of law of great significance, is one in which the courts’ assessment of the facts has weighed heavily on the outcome, and the Court of Appeal took a very different view of the facts to Mrs Justice Andrews. It found that she was wrong to conclude that a criminal prosecution was not reasonably in contemplation by the time the documents that ENRC sought to withhold were created.   Mrs Justice Andrews found that ENRC’s claim to litigation privilege failed “at the first hurdle” of showing that in August 2011 it was aware of circumstances that rendered litigation between itself and the SFO a real likelihood rather than a mere possibility.  The Court of Appeal found that the factual record demonstrated the opposite, listing a number of factors to support its position, including: In December 2010, ENRC received the whistle-blower email alleging corruption and financial wrongdoing and appointed external lawyers to investigate the allegations. By March 2011, ENRC’s General Counsel had made clear that he thought that ENRC was “firmly on the SFO’s radar” and that he expected a formal investigation in due course, which was why he had “upgraded [ENRC’s] dawn raid procedures“. In April 2011, ENRC’s Head of Compliance predicted an “SFO dawn raid … before summer’s over“; In April 2011, ENRC’s external legal counsel wrote to ENRC’s then General Counsel indicating that the internal investigation related to conduct which was potentially criminal in nature, that adversarial proceedings might occur as a result of the internal investigation and that both criminal and civil proceedings can be reasonably said to be in contemplation. When the SFO wrote to ENRC on 10 August 2011, it said that the SFO was not carrying out a criminal investigation at that stage, but asked that ENRC consider the SFO’s Self-Reporting Guidelines carefully. Those Guidelines expressly stated: “no prosecutor can ever give an unconditional guarantee that there will not be a prosecution“; “professional advisers will have a key role“; any information received by the SFO would be for the purposes of its powers under the Criminal Justice Act 1987; wherever possible, the investigation would be carried out by the “corporate’s” own professional advisers; and participation in the self-reporting process would increase “the prospect (in appropriate cases) of a civil rather than a criminal outcome” by reducing the likelihood that the SFO would discover corruption itself . Rejecting Mrs Justice Andrews’ findings, the Court of Appeal agreed with ENRC that criminal legal proceedings were in reasonable contemplation when it initiated its internal investigation in April 2011, and certainly by the time of the SFO’s 10 August 2011 letter (regarding the Self-Reporting Guidelines).     Among the more notable passages in today’s judgment is the Court of Appeal’s observation that “the whole sub-text of the relationship between ENRC and the SFO was the possibility, if not the likelihood, of prosecution if the self-reporting process did not result in a civil settlement“. The Court of Appeal made a number of further observations, that will help companies subject to possible investigation with the assessment of whether litigation is in reasonable contemplation: First, the Court of Appeal noted that not every SFO “manifestation of concern” will be enough to satisfy the test for litigation privilege.  However, when the SFO specifically makes clear to a company the prospect of its criminal prosecution and legal advisors are instructed to assist with the situation, as in this case, there will be a clear basis for asserting that a criminal prosecution is in reasonable contemplation. Second, the Court of Appeal noted that it cannot necessarily be concluded that once an SFO investigation is reasonably in contemplation, so too is a criminal prosecution.  However, in this case, the facts pointed towards the contemplation of a prosecution if the company’s self-reporting process did not succeed in averting it. Third, the Court of Appeal stated that the fact that a company needs to conduct further enquiries before it can say with certainty that it will be prosecuted does not prevent proceedings being in reasonable contemplation.  The Court of Appeal observed that: “An individual suspected of a crime will, of course, know whether he has committed it. An international corporation will be in a different position, but the fact that there is uncertainty does not mean that, in colloquial terms, the writing may not be clearly written on the wall.” Was the judge right to determine that none of the documents that ENRC sought to withhold was brought into existence for the dominant purpose of resisting contemplated criminal proceedings against ENRC or its subsidiaries or their employees? The Court of Appeal took the view that Mrs Justice Andrews began her analysis of this issue from the wrong starting point. The Court of Appeal decided that, in both the civil and criminal context, legal advice given so as to head off, avoid or even settle reasonably contemplated proceedings is as much protected by litigation privilege as advice given for the purpose of resisting or defending such contemplated proceedings. Having already decided that ENRC reasonably contemplated criminal proceedings, the Court of Appeal next considered whether it would have been reasonable to regard ENRC’s dominant purpose as being to investigate the facts to see what had happened and deal with compliance and governance (which is what the SFO’s August 2011 letter urged) or to defend those contemplated criminal proceedings. The Court of Appeal observed that, although a reputable company will wish to ensure high ethical standards in the conduct of its business for its own sake, the ‘stick’ used to enforce appropriate standards is the criminal law (and, in some measure, the civil law also). Where there is a clear threat of a criminal investigation the dominant purpose for the investigation of whistle-blower allegations may be to prevent or address the possible litigation. The Court of Appeal also identified the important public policy imperative that companies should be able to investigate allegations prior to prosecution involvement, without losing the benefit of legal professional privilege.  Otherwise, the temptation might well be to not investigate at all. The Court of Appeal also dismissed Mrs Justice Andrews’ finding of fact that there was overwhelming evidence that ENRC created the interview memoranda for the specific purpose of showing them to the SFO, finding that ENRC never actually committed to producing its interview memoranda and associated documentation to the SFO. In the circumstances, which if any of the documents that ENRC sought to withhold are protected by litigation privilege? The Court of Appeal found that all of the interviews conducted by ENRC’s external lawyers were covered by litigation privilege (which reasoning, it must be assumed, extends to the oral interviews themselves, the memoranda prepared by external counsel memorialising those interviews, as well as external counsel’s underlying notes), as was the work conducted by the forensic accountants in connection with the books and records review. These were all fact finding exercises conducted at a time when criminal prosecution was in reasonable contemplation and undertaken for the dominant purpose of resisting or avoiding prosecution. Legal Advice Privilege Having overturned the first instance judgment on the litigation privilege issue, the Court of Appeal determined that it did not have to decide whether the documents ENRC sought to withhold were covered by legal advice privilege.  However, it did explain how it would have decided that issue. The Court of Appeal would, it stated, have considered itself bound by the narrow interpretation of “client” in Three Rivers (No. 5) – which was the basis on which Mrs Justice Andrews rejected part of ENRC’s arguments that the interview memoranda were protected by legal advice privilege. However, the Court of Appeal saw “much force” in the arguments made by ENRC and the Law Society that a narrow interpretation is wrong. This following passage is worth quoting at length: “…[L]arge corporations need, as much as small corporations and individuals, to seek and obtain legal advice without fear of intrusion. If legal advice privilege is confined to communications passing between the lawyer and the “client” (in the sense of the instructing individual or those employees of a company authorised to seek and receive legal advice on its behalf), this presents no problem for individuals and many small businesses, since the information about the case will normally be obtained by the lawyer from the individual or board members of the small corporation. That was the position in most of the 19th century cases. In the modern world, however, we have to cater for legal advice sought by large national corporations and indeed multinational ones. In such cases, the information upon which legal advice is sought is unlikely to be in the hands of the main board or those it appoints to seek and receive legal advice. If a multi-national corporation cannot ask its lawyers to obtain the information it needs to advise that corporation from the corporation’s employees with relevant first-hand knowledge under the protection of legal advice privilege, that corporation will be in a less advantageous position than a smaller entity seeking such advice.  In our view, at least, whatever the rule is, it should be equally applicable to all clients, whatever their size or reach….” Adding further force to its view that the matter needs prompt attention, the Court of Appeal acknowledged the submissions made by the Law Society that this aspect of legal advice privilege places English law out of step with other leading common law jurisdictions on this issue.  The Court concluded that, had it been open to it to depart from Three Rivers (No. 5), it would have done so.  While the narrow definition of “client” remains the law until it is considered by the Supreme Court, the Court of Appeal has recognised the point long argued by large corporations and their lawyers that the narrow definition of “client” in corporate investigations is uncomfortable.  This judgment would seem to signal judicial receptiveness to an attempt to have the effect of Three Rivers (No. 5) in such contexts distinguished. Given the Court of Appeal’s reasoning in this respect, a company faced with a document production demand from the SFO that is not able to rely on litigation privilege as a basis for withholding the documents may feel emboldened to assert legal advice privilege.  The SFO would have a number of options open in the face of a refusal to produce.  Least attractive is a prosecution for failing to produce. It is a blunt instrument and an authoritative, reasoned judgment is not going to be received in the context of a trial for summary conviction. Although an appeal might well reach the High Court (or higher), the criminal conviction of a company or individual in order to access those appeal mechanisms would be draconian, given the way today’s judgment could be said to put a dent in the strength of legal advice privilege in the context of global corporate investigations. It is as much in the SFO’s interest to see the issue resolved as it is for companies and individual employees who receive production demands. In these circumstances, our view is that a company in this position would have good prospects of agreeing with the SFO a process for properly and fairly adjudicating a claim to privilege in such a context, with the interests of justice being the guiding principle. The routes to judicial clarity would be an application by the company for judicial review of a production demand, an on-notice application by the SFO for a search warrant in the Crown Court (where a High Court or Appeal Court judge could sit) with attendant appellate processes available, or as in the ENRC case, an application by the SFO to the High Court for declaratory relief. V.   Key Implications for Companies conducting Investigations into Potential Wrongdoing This judgment is lengthy and detailed, and will be the subject of intense discussion in the coming months.  Key initial takeaways for our clients and friends considering investigations into serious potential wrongdoing are the following: The precise factual background is critical to the assessment of whether litigation is in reasonable contemplation, and whether any given communication is for the dominant purpose of such litigation.  Here, two senior courts have reached diametrically opposed views on the facts.  In each investigation, careful consideration should be given to the underlying evidence relating to any allegations (if known), the realistic likelihood of proceedings, and the company’s strategy regarding information gathering, interviews and document creation determined accordingly.  This consideration should be undertaken at the earliest stage possible, in consultation with legal counsel. It should then be kept under review, and refreshed as the company’s appreciation of the underlying facts evolves, and as the posture of the investigating authority emerges. A company should ensure that it keeps a record of its decision-making in this respect, so as to be able to support subsequent assertions of litigation privilege, should it be necessary to do so.  Again, the record-keeping strategy in this respect should be determined at an early stage of the investigation, in consultation with legal counsel. It is not strictly necessary, on the Court of Appeal’s reasoning, for an enforcement authority even to be involved in order for litigation to be in reasonable contemplation.  When determining its communications and investigation strategy in relation to whistle-blower or other self-identified allegations, a company should carefully consider which authority or authorities might investigate and/or prosecute any wrongdoing identified, and factor this into its litigation privilege assessment.  Conversely, the fact that an enforcement agency has expressed an interest in a matter does not necessarily herald litigation, and may not necessarily extend the protection of litigation privilege to communications as part of the investigation.  Indeed, even reasonable contemplation of an investigation by an enforcement authority will not on its own satisfy the test of reasonable contemplation of litigation. Uncertainty as to whether litigation will arise is not itself an obstacle to the reasonable contemplation of litigation, and therefore, the protection of litigation privilege.  It is open to a company to conduct further enquiries to get greater clarity regarding the likelihood of prosecution.  Again, the precise facts will be critical to the determination. Where litigation is in reasonable prospect, interviews with current and former employees may be conducted by legal counsel, and memorialised in interview notes, under protection of litigation privilege; moreover, requests from authorities for the production of such notes may be resisted on the basis of privilege.  An interesting question will arise where privileged notes have been shared with authorities to date in reliance on Mrs Justice Andrews’ judgment, as to whether they may legitimately be clawed back from the authorities. The narrow definition of “client” for legal advice privilege purposes has been substantially weakened by this judgment.  However, it remains the prevailing law until overturned by the Supreme Court.  Companies should continue to be wary of potential loss of privilege due to communications going beyond the group of persons instructing legal advisers.  However, companies may consider that the prospect of successfully challenging a rejection of a claim to legal advice privilege by an investigating authority have been substantially improved by today’s judgment. VI.   Further discussion The impact of today’s judgment will be amongst the issues considered in detail by our partner, Sacha Harber-Kelly (formerly of the SFO) and other Gibson Dunn partners on 17 September 2018, in our forthcoming webcast: “Ten Years After Siemens: The Evolving Landscape of Global Anti-Corruption Enforcement”.  To register please click here. [1]   [2018] EWCA Civ 2006 [2]   Three Rivers District Council and Others v. Governor and Company of the Bank of England (No. 5) [2003] QB 1556 (“Three Rivers (No. 5)”). This client alert was prepared by Patrick Doris, Sacha Harber-Kelly, Richard Grime and Steve Melrose. Gibson Dunn 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: Philip Rocher (+44 (0)20 7071 4202, procher@gibsondunn.com) Patrick Doris (+44 (0)20 7071 4276, pdoris@gibsondunn.com) Sacha Harber-Kelly (+44 20 7071 4205, sharber-kelly@gibsondunn.com) Charles Falconer (+44 (0)20 7071 4270, cfalconer@gibsondunn.com) Richard W. Grime (+1 202-955-8219, rgrime@gibsondunn.com) Osma Hudda (+44 (0)20 7071 4247, ohudda@gibsondunn.com) Penny Madden (+44 (0)20 7071 4226, pmadden@gibsondunn.com) Allan Neil (+44 (0)20 7071 4296, aneil@gibsondunn.com) Doug Watson (+44 (0)20 7071 4217, dwatson@gibsondunn.com) Steve Melrose (+44 (0)20 7071 4219, smelrose@gibsondunn.com) Sunita Patel (+44 (0)20 7071 4289, spatel2@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

August 29, 2018 |
Webcast: The False Claims Act – 2018 Mid-Year Update: Three Industry-Specific Programs

The False Claims Act (FCA) is well-known as one of the most powerful tools in the government’s arsenal to combat fraud, waste and abuse anywhere government funds are implicated. While the U.S. Department of Justice has recently issued statements indicating some new thinking about FCA enforcement, newly filed cases remain at historical peak levels and the DOJ has enjoyed seven straight years of more than $3 billion in annual FCA recoveries. As much as ever, any company that deals in government funds—especially in the health care and life sciences, government contracting and financial services sectors—needs to stay abreast of how the government and private whistleblowers alike are wielding this tool, and how they can prepare and defend themselves. Please join Gibson Dunn for a 90-minute discussion of the latest developments in FCA, including: The latest trends in FCA enforcement actions and associated litigation involving your industry sector; Updates on the Trump Administration’s approach to FCA enforcement; Notable legislative and administrative developments affecting the FCA’s statutory framework and application; and The latest developments in FCA case law, including the continued evolution of how lower courts are interpreting the Supreme Court’s Escobar decision. View Slides [PDF] PANELISTS: Joseph Warin is a partner in the Washington, D.C. office, chair of the office’s Litigation Department, and co-chair of the firm’s White Collar Defense and Investigations practice group. His practice focuses on 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. Stuart Delery is a partner in the Washington, D.C. office. He represents corporations and individuals in high-stakes litigation and investigations that involve the federal government across the spectrum of regulatory litigation and enforcement. Previously, as the Acting Associate Attorney General of the United States (the third-ranking position at the Department of Justice) and as Assistant Attorney General for the Civil Division, he supervised the DOJ’s enforcement efforts under the FCA, FIRREA and the Food, Drug and Cosmetic Act. Jim Zelenay is a partner in the Los Angeles office where he practices in the firm’s Litigation Department. He is experienced in defending clients involved in white collar investigations, assisting clients in responding to government subpoenas, and in government civil fraud litigation. He also has substantial experience with the federal and state False Claims Acts and whistleblower litigation, in which he has represented a breadth of industries and clients, and has written extensively on the False Claims Act. 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 1.50 credit hours, of which 1.50 credit hour 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 1.50 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.