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June 14, 2018 |
Revisions to the FFIEC BSA/AML Manual to Include the New CDD Regulation

Click for PDF On May 11, 2018, the federal bank regulators and the Financial Crimes Enforcement Network (“FinCEN”) published two new chapters of the Federal Financial Institution Examination Council Bank Secrecy Act/Anti-Money Laundering Examination Manual (“BSA/AML Manual”) to reflect changes made by FinCEN to the CDD regulation.[1]  One of the chapters replaces the current chapter “Customer Due Diligence – Overview and Examination Procedures” (“CDD Chapter”), and the other chapter is entirely new and contains an overview of and examination procedures for “Beneficial Ownership for Legal Entity Customers” to reflect the beneficial ownership requirements of the CDD regulation (“Beneficial Ownership Chapter”).[2] The new CDD Chapter builds upon the previous chapter, adds the requirements of the CDD regulation, and otherwise updates the chapter, which had not been revised since 2007.  The Beneficial Ownership Chapter largely repeats what is in the CDD Rule.  Both new chapters reference the regulatory guidance and clarifications from the Frequently Asked Questions issued by FinCEN on April 3, 2018 (the “FAQs”).[3]   Other Refinements to the CDD Regulation May Impact the BSA/AML Manual Implementation of the CDD regulation is a dynamic process and may require further refinement of these chapters as FinCEN issues further guidance.  For instance, in response to concerns of the banking industry, on May 16, 2018, FinCEN issued an administrative ruling imposing a 90-day moratorium on the requirement to recertify CDD information when certificates of deposit (“CDs”) are rolled over or loans renewed (if the CDs or loans were opened before May 11, 2018).  FinCEN will have further discussions with the banking industry and will make a decision whether to make this temporary exception permanent within this 90-day period (before August 9, 2018).[4] In his May 16, 2018, testimony at a House Financial Services Committee hearing on “Implementation of FinCEN’s Customer Due Diligence Rule,” FinCEN Director Kenneth Blanco suggested that FinCEN may be receptive to refinements as compliance experience is gained with the regulation.  Director Blanco also indicated that there will be a period of adjustment for compliance with the regulation and that FinCEN and the regulators will not engage in “gotcha” enforcement, but are seeking “good faith compliance.” Highlights from the New Chapters Periodic Reviews:  The BSA/AML Manual no longer expressly requires periodic CDD reviews, but suggests that regulators may still expect periodic reviews for higher risk customers.  The language in the previous CDD Chapter requiring periodic CDD refresh reviews has been eliminated.[5]Consistent with FAQ 14, the new CDD Chapter states that updating CDD information will be event driven and provides a list of possible event triggers, such as red flags identified through suspicious activity monitoring or receipt of a criminal subpoena.  Nevertheless, the CDD Chapter does not completely eliminate the expectation of periodic reviews for higher risk clients, stating:  “Information provided by higher profile customers and their transactions should be reviewed . . . more frequently throughout the term of the relationship with the bank.”Although this appears to be a relaxation of the expectation to conduct periodic reviews, we expect many banks will not change their current practices.  For a number of years, in addition to event driven reviews, many banks have conducted periodic CDD reviews at risk based intervals because they have understood periodic reviews to be a regulatory expectation. Lower Beneficial Ownership Thresholds:  Somewhat surprisingly, there is no expression in the new chapters that consideration should be given to obtaining beneficial ownership at a lower threshold than 25% for certain high risk business lines or customer types.  The new Beneficial Ownership Chapter simply repeats the regulatory requirement stating that:  “The beneficial ownership rule requires banks to collect beneficial ownership information at the 25 percent ownership threshold regardless of the customer’s risk profile.”  The FAQs (FAQ 6 and 7) refer to the fact that a financial institution may “choose” to apply a lower threshold and “there may be circumstances where a financial institution may determine a lower threshold may be warranted.”  We understand that specifying an expectation that there should be lower beneficial thresholds for certain higher risk customers was an issue that was debated among FinCEN and the bank regulators.For a number of years, many banks have obtained beneficial ownership at lower than 25% thresholds for high risk business lines and customers (e.g., private banking for non-resident aliens).  Banks that have previously applied a lower threshold, however, should carefully evaluate any decision to raise thresholds to the 25% level in the regulation.  If a bank currently applies a lower threshold, raising the threshold may attract regulatory scrutiny about whether the move was justified from a risk standpoint.  Moreover, a risk-based program should address not only regulatory risk, but also money laundering risk.  Therefore, banks should consider reviewing beneficial ownership at lower thresholds for certain customers and business lines and when a legal entity customer has an unusually complex or opaque ownership structure for the type of customer regardless of the business line or risk rating of the customer. New Accounts:  The new chapters do not discuss one of the most controversial and challenging requirements of the CDD rule, the requirement to verify CDD information when a customer previously subject to CDD opens a new account, including when CDs are rolled over or loans renewed.  This most likely may be because application of the requirement to CD rollovers and loan renewals is still under consideration by FinCEN, as discussed above. Enhanced Due Diligence:  The requirement to maintain enhanced due diligence (“EDD”) policies, procedures, and processes for higher risk customers remains with no new suggested categories of customers that should be subject to EDD. Risk Rating:  The new CDD Chapter seems to articulate an expectation to risk rate customers:  “The bank should have an understanding of the money laundering and terrorist financing risk of its customers, referred to in the rule as the customer risk profile.  This concept is also commonly referred to as the customer risk rating.”  The CDD Chapter, therefore, could be read as expressing for banks an expectation that goes beyond FinCEN’s expectation for all covered financial institutions in FAQ 35, which states that a customer profile “may, but need not, include a system of risk ratings or categories of customers.”  It appears that banks that do not currently risk rate customers should consider doing so.  Since the CDD section was first drafted in 2006 and amended in 2007, customer risk rating based on an established method with weighted risk factors has become a best and almost universal practice for banks to facilitate the AML risk assessment, CDD/EDD, and the identification of suspicious activity. Enterprise-Wide CDD:  The new CDD Chapter recognizes the CDD approach of many complex organizations that have CDD requirements and functions that cross financial institution legal entities and the general enterprise-wide approach to BSA/AML long referenced in the BSA/AML Manual.  See BSA/AML Manual, BSA/AML Compliance Program Structures Overview, at p. 155.  The CDD Chapter states that a bank “may choose to implement CDD policies, procedures and processes on an enterprise-wide basis to the extent permitted by law sharing across business lines, legal entities, and with affiliate support units.” Conclusion Despite the CDD regulation, at its core CDD compliance is still risk based and regulatory risk remains a concern.  Every bank must carefully and continually review its CDD program against the regulatory requirements and expectations articulated in the BSA/AML Manual, as well as recent regulatory enforcement actions, the institution’s past examination and independent and compliance testing issues, and best practices of peer institutions.  This review will help anticipate whether there are aspects of its CDD/EDD program that could be subject to criticism in the examination process.  As the U.S. Court of Appeals for the Ninth Circuit recently recognized, detailed manuals issued by agencies with enforcement authority like the BSA/AML Manual “can put regulated banks on notice of expected conduct.”  California Pacific Bank v. Federal Deposit Insurance Corporation, 885 F.3d 560, 572 (9th Cir. 2018).  The BSA/AML Manual is an important and welcome roadmap although not always as up to date, clear or detailed as banks would like it to be. These were the first revisions to the BSA/AML Manual since 2014.  We understand that additional revisions to other chapters are under consideration.    [1]   May 11, 2018 also was the compliance date for the CDD regulations.  The Notice of Final Rulemaking for the CDD regulation, which was published on May 11, 2016, provided a two-year implementation period.  81 Fed. Reg. 29,398 (May 11, 2016).  https://www.gpo.gov/fdsys/pkg/FR-2016-05-11/pdf/2016-10567.pdf. For banks, the new regulation is set forth in the BSA regulations at 31 C.F.R. § 1010.230 (beneficial ownership requirements) and 31 C.F.R. § 1020.210(a)(5).    [2]   The new chapters can be found at: https://www.ffiec.gov/press/pdf/Customer%20Due%20Diligence%20-%20Overview%20and%20Exam%20Procedures-FINAL.pdfw  (CDD Chapter) and https://www.ffiec.gov/press/pdf/Beneficial%20Ownership%20Requirements%20for %20Legal%20Entity%20CustomersOverview-FINAL.pdf (Beneficial Ownership Chapter).    [3]   Frequently Asked Questions Regarding Customer Due Diligence Requirements for Financial Institutions, FIN-2018-G001.  https://www.fincen.gov/resources/statutes-regulations/guidance/frequently-asked-questions-regarding-customer-due-0.  On April 23, 2018, Gibson Dunn published a client alert on these FAQs.  FinCEN Issues FAQs on Customer Due Diligence Regulation.  https://www.gibsondunn.com/fincen-issues-faqs-on-customer-due-diligence-regulation/. FinCEN also issued FAQs on the regulation on September 29, 2017. https://www.fincen.gov/sites/default/files/2016-09/FAQs_for_CDD_Final_Rule_%287_15_16%29.pdf.    [4]   Beneficial Ownership Requirements for Legal Entity Customers of Certain Financial Products and Services with Automatic Rollovers or Renewals, FIN-2018-R002.  https://www.fincen.gov/sites/default/files/2018-05/FinCEN%20Ruling%20CD%20and%20Loan%20Rollover%20Relief_FINAL%20508-revised.pdf    [5]   The BSA/AML Manual previously stated at p. 57:  “CDD processes should include periodic risk-based monitoring of the customer relationship to determine if there are substantive changes to the original CDD information. . . .” Gibson Dunn’s lawyers  are available to assist in addressing any questions you may have regarding these developments.  Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work in the firm’s Financial Institutions practice group, or the authors: Stephanie L. Brooker – Washington, D.C. (+1 202-887-3502, sbrooker@gibsondunn.com) M. Kendall Day – Washington, D.C. (+1 202-955-8220, kday@gibsondunn.com) Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com) Linda Noonan – Washington, D.C. (+1 202-887-3595, lnoonan@gibsondunn.com) © 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.

May 30, 2018 |
Recent Developments Related to Regulation and Litigation Involving the Education Sector (May 2018)

Click for PDF This is the latest update of significant developments relating to regulatory, administrative, and legal actions involving schools.  This quarter saw the reinstatement of the Accrediting Council for Independent Colleges and Schools (ACICS), as well as three for-profit law schools turning the tables on their schools’ accreditor, the American Bar Association.  There were also significant developments on the political and regulatory fronts, not to mention a shifting landscape in federal enforcement.  Let’s jump into it. A.   ACICS Ruling and Reinstatement On March 23, 2018, a federal district court ordered the Department of Education (ED) to reconsider its decision terminating recognition of ACICS.  ACICS had submitted a petition for continued recognition to ED in January 2016.  In December 2016, President Obama’s ED Secretary terminated ACICS’s recognition, and ACICS challenged the decision in court.  In an April 29, 2017 filing, the Trump Administration supported the previous Administration’s termination decision. However, on March 23, the United States District Court for the District of Columbia found that ED failed to consider supplemental responses and additional evidence ACICS provided to ED in May 2016 at ED’s request.  The court held that in doing so, ED violated the Higher Education Act and its implementing regulations’ requirement that the ED Secretary consider all available relevant information, as well as the Administrative Procedure Act’s requirement that an agency must examine all relevant data.  ACICS v. DeVos, No. 16-2448 (RBW), 2018 WL 1461958, at *13, 17 (D.D.C. Mar. 23, 2018).  The court concluded that ED acted arbitrarily and capriciously by failing to consider this information.  Id. at *17. On remand, ED must reconsider the recognition petition ACICS submitted in January 2016 and must consider in the first instance the supplemental materials ACICS submitted in May 2016.  In the interim, Secretary DeVos restored ACICS’s status as a federally recognized accrediting agency effective December 12, 2016.  ACICS may file a written submission explaining the relevance of the May 2016 materials and include additional relevant evidence.  Secretary DeVos ordered that any written submission and exhibits should be filed with ED no later than May 30, 2018.  Because the court did not reach the merits of ACICS’s case, it is hard to know how ACICS will fare under this new review.  But it is fair to say that just the opportunity for a new review shows a seismic shift in the landscape from one Administration to the next. B.    Change in Enforcement Focus, Per the New York Times Two recent New York Times articles further highlight the differences in approach between the current and previous Administrations when it comes to enforcement relating to the sector.  In an article dated May 9, 2018, the Times reports that Mick Mulvaney, the interim director of the Consumer Financial Protection Bureau (CFPB), will move the agency’s student loan division into its consumer information unit.  A CFPB spokesman described the change as a “very modest organizational chart change,” but some officials believe it may dampen the agency’s zeal for an enforcement case it has been pursuing against the nation’s largest student loan collector, Navient.  Further signaling its desire to move away from examining student-lending issues, the CFPB also removed the topic “student loan servicing” from its bi-annual long-term regulatory agenda. In the second article dated May 13, 2018, the Times reports that a unit within ED that was tasked with investigating for-profit colleges, which previously included a dozen or so lawyers and investigators at the end of the Obama Administration, is now made up of three employees.  Its mandate has also shrunk.  Whereas the unit used to investigate such issues as advertising, recruitment practices, and job placement claims, the three-person team now focuses on processing student loan forgiveness applications and smaller compliance cases. C.    Litigation Outside of the political arena, there was activity this past quarter in both federal and state courts. 1.    InfiLaw Scores a Win in Florida and Sets Its Sights on the ABA InfiLaw was involved in a variety of litigation this past quarter, fighting back a False Claims Act case and filing multiple suits against the American Bar Association. First, on April 23, 2018, the United States District Court for the Middle District of Florida dismissed for a second time a False Claims Act lawsuit filed against InfiLaw Corp. and its now-closed law school, Charlotte School of Law.  U.S. ex rel. Bernier v. Infilaw Corp., No. 6:16-cv-970-Orl-37TBS, 2018 WL 1905342, at *8 (M.D. Fla. Apr. 23, 2018).  A former law professor turned qui tam relator, Barbara Bernier, “adopted the kitchen-sink approach” to pleading after the United States declined to intervene, according to the court.  She alleged the school had made improper “incentive payments to recruitment staff,” “admitted academically unqualified students,” “altered students grades,” “juked its employment stats” and “failed to implement a written plan to combat misuse of copyrighted works,” among other allegations.  Id. at *6, *8. The court held that the majority of these claims had been “publicly disclosed” online and elsewhere and therefore the relator could not proceed because she was not an “original source” of the allegations—i.e., she didn’t voluntary disclose this information to the Government before the public disclosures or demonstrate knowledge that materially adds to the public disclosures.  Id. at *7-8.  On the remaining claims, the court held that the relator had not provided sufficient specificity; she provided “just vague allegations that these incidents occurred and Defendants were responsible.”  Id. at *8. However, the court did give the relator leave to amend, and she filed an amended complaint on May 7, 2018.  We would not be surprised to see InfiLaw move to dismiss the complaint again. Second, Charlotte School of Law and its two sister schools, Florida Coastal School of Law and Arizona Summit Law School, turned to offense and filed three separate suits against their accreditor, the American Bar Association, alleging that the ABA’s findings of noncompliance with its accreditation standards “were arbitrary, capricious, unreasonable, [and] an abuse of discretion.”  In the accompanying press release for the Florida Coastal lawsuit, the school highlighted its diverse student body, and the president of Florida Coastal lamented that “[t]he ABA’s decisions in regard to accreditation seem to be calculated efforts to win political points, without regard for due process, or how students will be adversely affected.”  The ABA is yet to respond to these complaints. 2.    Two Lawsuits Relating to For-Profit Schools Two additional lawsuits were unsealed or filed this past quarter relating to for-profit schools.  First, in the United States District Court for the District of Utah, an ex-employee of lead generator EduTrek filed a lawsuit under the False Claims Act against his former employer and a host of schools.  At its core, the lawsuit alleges that EduTrek and its clients violated ED’s incentive compensation ban.  The United States declined to intervene on February 16, 2018. Second, two former students filed a purported class action lawsuit against Capella University in the United States District Court for the District of Minnesota, alleging the school “misled prospective and current students … about the time to completion and cost of their mostly student-loan financed doctoral degrees.”  Compl. ¶ 2, Wright v. Capella Education Co., No. 18-cv-1062 (D. Min. April 20, 2018).  The school has until July 9, 2018 to respond to the allegations. 3.    Don’t Forget About the Non-Profit Schools As has been the case for a while, and particularly this past quarter, there were a number of prominent investigations opened and lawsuits filed against traditional non-profit schools.  The Department of Justice (DOJ) garnered national news coverage of its decision to investigate at least seven elite colleges—Amherst College, Grinnell College, Middlebury College, Pomona College, Wellesley College, Wesleyan University, and Williams College—for possible antitrust issues.  The investigation reportedly seems to center on whether the schools improperly shared information among them to enforce the terms of their early-admissions programs. There was also a notable False Claims Act settlement with the University of North Texas.  According to DOJ’s press release, the school “agreed to pay the United States $13,073,000.00 to settle claims that it inaccurately measured, tracked and paid researchers for effort spent on certain NIH-sponsored research grants.” On top of those announcements, DOJ also announced on March 2, 2018 that it had indicted six former employees of the Chicago campus of the Center for Employment Training, a non-profit school, for an alleged “scheme[] to enroll fake students in classes as part of a conspiracy to swindle federal financial aid programs out of millions of dollars.” Twelve graduates of the landscape architecture program at Colorado State University have also sued their alma mater, alleging that the university should refund their tuition because the school failed to secure proper accreditation for the master’s degree program. Finally, Howard University confirmed on March 29, 2018 that the school had conducted an internal investigation and discovered that several employees of the university’s financial aid department awarded themselves grants, even though they had tuition remission, and thus received more money than “the total cost of attendance.” As we have been saying for some time, traditional schools are just as susceptible to the claims that have been made, particularly by the prior Administration, against the for-profit education sector.  We are continuing to see that proven true. 4.    Federal Actions Against Individuals The past quarter also saw two notable developments in cases brought by the federal government against individuals involved in the sector.  First, on April 16, 2018, DOJ announced that the owner of “a privately owned, non-accredited school” called Atius Technology Institute, which specialized “in information technology courses, pleaded guilty … to bribing a public official at the U.S. Department of Veterans Affairs (VA) in exchange for the public official’s facilitation of over $2 million in payments that were supposed to be dedicated to providing vocational training for military veterans with service-connected disabilities.” Second, the case brought by the Securities and Exchange Commission against two executives of ITT Educational Services, Inc., appears headed to trial.  On March 23, 2018, the United States District Court for the Southern District of Indiana largely denied the dueling summary judgment motions filed by the executives and the SEC.  The court set trial for July 9, 2018. 5.    State Level Litigation and Disputes On the state level, there continue to be battles about the proper scope of state authority.  On March 12, 2018, Secretary DeVos set forth the Trump Administration’s stance in an interpretive guidance, stating that the federal government has the exclusive power to regulate and oversee federal student loan servicers, and therefore any state regulations on the topic are preempted. Meanwhile, in Massachusetts, a superior court judge rejected a motion to dismiss filed by the Pennsylvania Higher Education Assistance Agency (PHEAA), one of the nation’s largest student loan servicers, in a case brought by the Massachusetts Attorney General, on the grounds that PHEAA is not protected by sovereign immunity, even though formed under the Commonwealth of Pennsylvania.  In that same case, DOJ had filed a statement of interest arguing that the Massachusetts Attorney General is precluded from suing PHEAA on preemption grounds.  Although this argument was not addressed in the court’s decision, the court stated during oral argument on the motion:  “[T]he preemption issue is not going to make the whole case go away.”  This stands seemingly in contrast to the guidance from Secretary DeVos. In California, Corinthian College students have seemingly taken the baton previously held by state attorneys general and filed a class action lawsuit for declaratory and injunctive relief against Secretary DeVos and ED.  The students filed suit in the Northern District of California in December 2017 and filed a first amended complaint on March 17, 2018.  The students allege that after Corinthian closed, ED promised the students complete loan forgiveness but then in December 2017 announced a plan to award only partial relief of student loan debt to borrowers using a formula based on students’ earnings.  The students argue that ED’s use of an earnings formula is “arbitrary and capricious” rulemaking that violates the Administrative Procedure Act.  On May 25, 2018, a magistrate judge issued a preliminary injunction, blocking enforcement of ED’s partial loan relief program, finding that by using records from the Social Security Administration to obtain students’ earnings, ED violated the federal Privacy Act.  A hearing to consider next steps, including the process for loan forgiveness, is scheduled for June 4. Finally, Ashford University and its holding company, Bridgepoint Education, scored a victory in Iowa.  The state’s approval agency had attempted to strike Ashford’s eligibility to receive post-9/11 GI Bill benefits after Ashford closed its physical location in Iowa.  Ashford sued to block the loss of eligibility, and the state court dismissed Ashford’s suit.  However, on April 26, 2018, the Iowa Supreme Court vacated the lower court’s decision, holding that the lower court judge should have disclosed that she has family ties to the state office of the attorney general.  Ashford can now resume its legal challenge to Iowa’s attempt to withdraw Ashford’s GI Bill eligibility. D.    Regulatory Activity There has been a lot of activity on the regulatory front.  On May 9, 2018, ED published its Spring 2018 Agency Rule List, including the following in its list of topics in the “Prerule” and “Proposed Rule” stages:  state authorization of distance education providers, accreditation, borrower defense, gainful employment, and eligibility of faith-based entities and activities. Rules related to state authorization that had been published in December 2016 were scheduled to go into effect on July 1, 2018, but ED has published a notice of proposed rulemaking that proposes a two-year delay in the effective date.  The public has 15 days to comment on the proposed delay.  The regulations 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. ED previously sent two other Obama-era consumer protection regulations to negotiated rulemaking sessions.  After three months of negotiations, the sessions regarding borrower defense to repayment concluded in February without consensus.  Sticking points included which evidentiary standard should be used and whether to include or how long a statute of limitations should be.  The sessions regarding gainful employment similarly ended without consensus in April after four days of negotiations.  Since no consensus was reached in either session, ED can draft its own language, presumably keeping in mind the information gathered during the negotiated rulemaking sessions.  ED will need to publish a Notice of Proposed Rulemaking for each rule, which will be followed by a period of public comment.  Final regulations will be published by November 1, 2018, to take effect on July 1, 2019. E.    Corporate Activity Finally, there were some notable developments in the trend of schools seeking nonprofit status, as well as a noteworthy sale.  First, the Higher Learning Commission approved Purdue University’s acquisition of Kaplan University.  This was the final hurdle for the deal.  Second, Grand Canyon University also received good news from the Higher Learning Commission.  The accreditor approved its request to revert back to nonprofit status.  Third, Ashford University announced it is joining the trend, too, and is seeking to become a nonprofit.  It is expected to seek approval from its accreditor, the WASC Senior College and University Commission.  Finally, Laureate Education Inc. announced a deal to sell the University of St. Augustine for Health Sciences to a private equity firm, Altas Partners, for $400 million. *    *    * 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) © 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.

May 3, 2018 |
Webcast: Anti-Money Laundering and Sanctions Enforcement and Compliance in 2018 and Beyond

Gibson Dunn partners provide an overview of significant trends and key issues in Bank Secrecy Act (BSA)/Anti-Money Laundering (AML) and sanctions enforcement and compliance. Topics covered: BSA/AML Overview Recent trends in BSA/AML enforcement Recent trends in BSA/AML compliance BSA/AML Reform Efforts Sanctions Overview Key OFAC sanctions program developments Recent trends in sanctions enforcement The future of sanctions under the Trump Administration (and beyond) View Slides [PDF] PANELISTS M. Kendall Day was a white collar prosecutor for 15 years, serving most recently as an Acting Deputy Assistant Attorney General with the U.S. Department of Justice’s Criminal Division, where he supervised Bank Secrecy Act investigations, enforcement of anti-money laundering and sanctions laws, deferred prosecution agreements and non-prosecution agreements involving all types of financial institutions. He previously served in a variety of leadership and line attorney roles, including as Chief of the DOJ Money Laundering and Asset Recovery Section. Mr. Day will join Gibson Dunn’s Washington, D.C. office as a partner effective May 1, 2018. Stephanie L. Brooker is co-chair of Gibson Dunn’s Financial Institutions Practice Group. She is former Director of the Enforcement Division at the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), and previously served as the Chief of the Asset Forfeiture and Money Laundering Section in the U.S. Attorney’s Office for the District of Columbia and as a trial attorney for several years. Stephanie represents financial institutions, multi-national companies, and individuals in connection with criminal, regulatory, and civil enforcement actions involving BSA/AML, sanctions, anti-corruption, securities, tax, wire fraud, and sensitive employee matters. Her practice also includes BSA/AML compliance counseling and due diligence and significant criminal and civil asset forfeiture matters. Adam M. Smith is an experienced international trade lawyer who previously served in the Obama Administration as the Senior Advisor to the Director of OFAC and as the Director for Multilateral Affairs on the National Security Council. Adam focuses on international trade compliance and white collar investigations, including with respect to federal and state economic sanctions enforcement, the FCPA, embargoes, and export controls. F. Joseph Warin is co-chair of Gibson Dunn’s White Collar Defense and Investigations Practice Group, and chair of the Washington, D.C. office’s Litigation Department.  He is a former Assistant United States Attorney in Washington, D.C., one of only ten lawyers in the United States with Chambers rankings in five categories, was named by Best Lawyers® as 2016 Lawyer of the Year for White Collar Criminal Defense in the District of Columbia, and recognized by Benchmark Litigation as a U.S. White Collar Crime Litigator Star for seven consecutive years (2011–2017). In 2017, Chambers honored Mr. Warin with the Outstanding Contribution to the Legal Profession Award. 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. 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.

May 1, 2018 |
Stephanie Brooker Named a White Collar Trailblazer

The National Law Journal named Washington, D.C. partner Stephanie Brooker a 2018 White Collar Trailblazer.  Brooker is recognized for her career in government service as former Director of the Enforcement Division at the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) and former Chief of the Asset Forfeiture and Money Laundering Section and trial attorney at the U.S. Attorney’s Office for the District of Columbia.  Brooker represents financial institutions, multi-national companies, and individuals in connection with criminal, regulatory, and civil enforcement actions involving anti-money laundering (AML)/Bank Secrecy Act (BSA), sanctions, anti-corruption, securities, tax, wire fraud, and sensitive employee matters.  Brooker’s practice also includes BSA/AML compliance counseling and due diligence and significant criminal and civil asset forfeiture matters.  The list ran on May 1, 2018.

April 23, 2018 |
FinCEN Issues FAQs on Customer Due Diligence Regulation

Click for PDF On April 3, 2018, FinCEN issued its long-awaited Frequently Asked Questions Regarding Customer Due Diligence Requirements for Financial Institutions, FIN-2018-G001. https://www.fincen.gov/resources/statutes-regulations/guidance/frequently-asked-questions-regarding-customer-due-0.[1]  The timing of this guidance is very controversial, issued five weeks before the new Customer Due Diligence (“CDD”) regulation goes into effect on May 11, 2018.[2]  Most covered financial institutions (banks, broker-dealers, mutual funds, and futures commission merchants and introducing brokers in commodities) already have drafted policies, procedures, and internal controls and made IT systems changes to comply with the new regulation.  Covered financial institutions will need to review these FAQs carefully to ensure that their proposed CDD rule compliance measures are consistent with FinCEN’s guidance. The guidance is set forth in 37 questions.  As discussed below, some of the information is helpful, allaying financial institutions’ most significant concerns.  Other FAQs confirm what FinCEN has said in recent months informally to industry groups and at conferences.  A few FAQs raise additional questions, and others, particularly the FAQ on rollovers of certifications of deposit and loan renewals, are not responsive to industry concerns and may raise significant compliance burdens for covered financial institutions.  The guidance reflects FinCEN’s regulatory interpretations based on discussions within the government and with financial institutions and their trade associations.  The need for such extensive guidance on so many issues in the regulation illustrates the complexity of compliance and suggests that FinCEN should consider whether clarifications and technical corrections to the regulation should be made.  We provide below discussion of highlights from the FAQs, including areas of continued ambiguity and uncertainty in the regulation and FAQs. Highlights from the FAQs FAQ 1 and 2 discuss the threshold for obtaining and verifying beneficial ownership.  FinCEN states that financial institutions can “choose” to collect beneficial ownership information at a lower threshold than required under the regulation (25%), but does not acknowledge that financial institution regulators may expect a lower threshold for certain business lines or customer types or that there may be regulatory concerns if financial institutions adjust thresholds upward to meet the BSA regulatory threshold.  A covered financial institution may be in compliance with the regulatory threshold, but fall short of regulatory expectations. FAQ 7 states that a financial institution need not re-verify the identity of a beneficial owner of a legal entity customer if that beneficial owner is an existing customer of the financial institution on whom CIP has been conducted previously provided that the existing information is “up-to-date, accurate, and the legal entity’s customer’s representative certifies or confirms (verbally or in writing) the accuracy of the pre-existing CIP information.”  The example given suggests that no steps are expected to verify that the information is up-to-date and accurate beyond the representative’s confirmation or certification.  The beneficial ownership records must cross reference the individual’s CIP record. FAQs 9-12 address one of the most controversial aspects of the regulation, about which there has been much confusion: the requirement that, when an existing customer opens a new account, a financial institution must identify and verify beneficial ownership information.  FinCEN provides further clarity on what must be updated and how:Under FAQ 10, if a legal entity customer, for which the required beneficial ownership information has been obtained for an existing account, opens a new account, the financial institution can rely on the information obtained and verified previously “provided the customer certifies or confirms (verbally or in writing) that such information is up-to-date and accurate at the time each subsequent new account is opened,” and the financial institution has no knowledge that would “reasonably call into question” the reliability of the information.  The financial institution also would need to maintain a record of the certification or confirmation by the customer.There is no grace period.  If an account is opened on Tuesday, and a new account is opened on Thursday, the certification or confirmation is still required.  In advance planning for compliance, many financial institutions had included a grace period in their procedures. FAQ 11 provides that, when the financial institution opens a new account or subaccount for an existing legal entity customer whose beneficial ownership has been verified for the institution’s own recordkeeping and operational purposes and not at the customer’s request, there is no requirement to update the beneficial ownership information for the new account.  This is because the account would be considered opened by the financial institution and the requirement to update only applies to each new account opened by a customer.  This is consistent with what FinCEN representatives have said at recent conferences.The FAQ specifies that this would not apply to (1) accounts or subaccounts set up to accommodate a trading strategy of a different legal entity, e.g., a subsidiary of the customer, or (2) accounts of a customer of the existing legal entity customer, “i.e., accounts (or subaccounts) through which a customer of a financial institution’s existing legal entity carries out trading activity through the financial institution without intermediation from the existing legal entity customer.”  We believe the FAQ may fall far short of addressing all the concerns expressed to FinCEN on this issue by the securities industry. FAQ 12 addresses an issue which has been a major concern to the banking industry:  whether beneficial ownership information must be updated when a certificate of deposit (“CD”) is rolled over or a loan is renewed.  These actions are generally not considered opening of new accounts by banks.FinCEN continues to maintain that CD rollovers or loan renewals are openings of new accounts for purposes of the CDD regulation.  Therefore, the first time a CD or loan renewal for a legal entity customer occurs after May 11, 2018, the effective date of the CDD regulation, beneficial ownership information must be obtained and verified, and at each subsequent rollover or renewal, there must be confirmation that the information is current and accurate (consistent with FAQ 10) as for any other new account for an existing customer.  There is an exception or alternative approach authorized in FAQ 12 “because the risk of money laundering is very low”:  If, at the time of the rollover or renewal, the customer certifies its beneficial ownership information, and also agrees to notify the financial institution of any change in information in the future, no action will be required at subsequent renewals or rollovers.The response in FAQ 12 is not responsive to the concerns that have been expressed by the banking industry and will be burdensome for banks to administer.  Obtaining a certification in time, without disrupting the rollover or renewal, will be challenging, and it appears that if it the certification or promise to update is not obtained in time, the account may have to be closed. FAQs 13 through 17 address another aspect of the regulation that has generated extensive discussion: When (1) must beneficial ownership be obtained for an account opened before the effective date of the regulation, or (2) beneficial ownership information updated on existing accounts whose beneficial ownership has been obtained and verified.Following closely what was said in the preamble to the final rule, FAQ 13 states that the obligation is triggered when a financial institution “becomes aware of information about the customer during the course of normal monitoring relevant to assessing or reassessing the risk posed by the customer, and such information indicates a possible change in beneficial ownership.”FAQ 14 clarifies somewhat what is considered normal monitoring but is not perfectly clear what triggers obtaining and verifying beneficial ownership.  It is clear that there is no obligation to obtain or update beneficial ownership information in routine periodic CDD reviews (CDD refresh reviews) “absent specific risk-based concerns.” We would assume that means, following FAQ 13, concerns about the ownership of the customer.  Beyond that FAQ 14  is less clear.  It states that the obligation is triggered “when, in the course of normal monitoring a financial institution becomes aware of information about a customer or an account, including a possible change of beneficial ownership information, relevant to assessing or reassessing the customer’s overall risk profile.  Absent such a risk-related trigger or event, collecting or updating of beneficial ownership information is at the discretion of the covered financial institution.”The trigger or event may mean in the course of SAR monitoring or when conducting event-driven CDD reviews, e.g., when a subpoena is received or material negative news is identified – something that may change a risk profile.  Does the obligation then arise only if the risk profile change includes a concern about whether the financial institution has accurate ownership information?  That may be the intent, but is not clearly stated.  If the account is being considered for closure because of the change in risk profile, would the financial institution be released from the obligation to obtain beneficial ownership?   That would make sense, but is not stated.  This FAQ is in need of clarification and examples would be helpful.On another note, the language in FAQ 14 also is of interest because it may suggest, in FinCEN’s view, that periodic CDD reviews should be conducted on a risk basis, and CDD refresh reviews may not be expected for lower risk customers, as is the practice for some banks. FAQ 18 seems to address at least partially a technical issue with the regulation that arises because SEC-registered investment advisers are excluded from the definition of legal entity customer in the regulation, but U.S. pooled investment vehicles advised by them are not excluded.[3]  FAQ 18 states that, if the operator or adviser of a pooled investment vehicle is not excluded from the definition of legal entity customer, under the regulation, e.g., like a foreign bank, no beneficial ownership information is required to be obtained on the pooled investment vehicle under the ownership prong, but there must be compliance with beneficial ownership control party prong, i.e., verification of identity of a control party.  A control party could be a “portfolio manager” in these situations.FinCEN describes why no ownership information is required as follows:  “Because of the way the ownership of a pooled investment vehicle fluctuates, it would be impractical for covered financial institutions to collect and verify ownership identity for this type of entity.”  Thus, in the case where the operator or adviser of the pooled investment vehicle is excluded from the definition of legal entity, like an SEC-registered investment adviser, it would seem not to be an expectation to obtain beneficial ownership information under the ownership prong.  Nevertheless, the question of whether you need to obtain and verify the identity of a control party for a pooled investment vehicle advised by a SEC registered investment adviser is not squarely answered in the FAQ.  A technical correction to the regulation is still needed, but it is unlikely there would be regulatory or audit criticism for following the FAQ guidance at least with respect to the ownership prong. FAQ 19 clarifies that, when a beneficial owner is a trust (where the legal entity customer is owned more than 25% by a trust), the financial institution is only required to verify the identity of one trustee if there are multiple trustees. FAQ 20 deals with what to do if a trust holds more than a 25% beneficial interest in a legal entity customers and the trustee is not an individual, but a legal entity, like a bank or law firm.  Under the regulation, if a trust holds more than 25% beneficial ownership of a legal entity customer, the financial institution must verify the identity of the trustee to satisfy the ownership prong of the beneficial ownership requirement.  The ownership prong references identification of “individuals.”  Consequently, the language of the regulation does not seem to contemplate the situation where the trustee was a legal entity.FAQ 20 seems to suggest that, despite this issue with the regulation, CIP should be conducted on the legal entity trustee, but apparently, on a risk basis, not in every case:  “In circumstances where a natural person does not exist for purposes of the ownership/equity prong, a natural person would not be identified.  However, a covered financial institution should collect identification information on the legal entity trustee as part of its CIP, consistent with the covered institution’s risk assessment and customer risk profile.”  (Emphasis added.)More clarification is needed on this issue, and perhaps an amendment to the regulation to address this specific situation.  Pending additional guidance, the safest course appears to be to verify the identity of legal entity trustee consistent with CIP requirements, which may pose practical difficulties, e.g., will a law firm trustee easily provide its TIN?  Presumably, CIP would not be required on any legal entity trustee that is excepted from the definition of legal entity under 31 C.F.R. § 1010.230(e)(2). FAQ 21 addresses the question of how does a financial institution verify that a legal entity comes within one of the regulatory exceptions to the definition of legal entity customer in 31 C.F.R. § 1010.230(e)(2).  The answer is that the financial institution generally can rely on information provided by the customer if it has no knowledge of facts that would reasonably call into question the reliability of the information.  Nevertheless, that is not the end of the story.  The FAQ provides that the financial institution also must have risk-based policies and procedures that specify the type of information they will obtain and reasonably rely on to determine eligibility for exclusions. FAQ 24 may resolve another technical issue in the regulation.  The exceptions to the definition of legal entity in the regulation refer back to the BSA CIP exemption provisions, which in turn, cross reference the Currency Transaction Reporting (CTR) exemption for banks when granting so-called Tier One exemptions.  One category for the CTR exemption is “listed” entities, which includes NASDAQ listed entities, but excludes NASDAQ Capital Markets Companies, i.e., this category of NASDAQ listed entity is not subject to CIP or CTR Tier One exemptions.  31 C.F.R. § 1020.315(b)(4).  This carve out was not discussed in the preamble to the CDD final regulation or in FAQ 24.The FAQ simply states:  “[A]ny company (other than a bank) whose common stock or analogous equity interests are listed on the New York Stock Exchange, the American Stock Exchange (currently known as the NYSE American), or NASDAQ stock exchange” is excepted from the definition of legal entity.  In any event, as with the FAQ 18 issue, it would appear that a technical correction is needed on this point, but, given the FAQ, it is unlikely that a financial institution would be criticized if it treated NASDAQ Capital Markets Companies as excepted legal entities. FAQs 32 and 33 end the speculation that the CDD regulation impacts CTR compliance.  Consistent with FinCEN CTR guidance, under FAQ 32, the rule remains that, for purposes of CTR aggregation, the fact that two businesses share a common owner does not mean that a financial institution must aggregate the currency transactions of the two businesses for CTR reporting, except in the narrow situation where there is a reason to believe businesses are not being operated separately. Conclusion Financial institutions and their industry groups will likely continue to seek further guidance on the most problematic issues in the CDD regulation.  It is our understanding that FinCEN and the bank regulators also will address compliance with the CDD regulation in the upcoming update to the FFIEC Bank Secrecy Act/Anti-Money Laundering Examination Manual. Covered financial institutions already have spent, and will continue to spend, significant time and resources to meet the complex regulatory requirements and anticipated regulatory expectations.  In this flurry of activity to address regulatory risk, it is essential for financial institutions to continue to consider any money laundering risk of legal entity clients and that CDD not become simply mechanical.  It is not only a matter of documenting and updating all of the right information about beneficial ownership and control, but financial institutions should continue to assess whether the ownership structure makes sense for the business or whether it is overly complex for the business type and purposely opaque.  Also, it is important to consider whether it makes sense for a particular legal entity to be seeking a relationship with your financial institution and whether the legal entity is changing financial institutions voluntarily.  CDD measures to address regulatory risk and money laundering risk overlap but are not equivalent.    [1]   FinCEN also issued FAQs on the regulation on July 19, 2016. https://www.fincen.gov/sites/default/files/2016-09/FAQs_for_CDD_Final_Rule_%287_15_16%29.pdf.   FINRA issued guidance on the CDD regulation in FINRA Notice to Members 17-40 (Nov. 21, 2017). http://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-17-40.pdf.    [2]   The Notice of Final Rulemaking was published on May 11, 2016 and provided a two-year implementation period.  81 Fed. Reg. 29,398 (May 11, 2016). https://www.gpo.gov/fdsys/pkg/FR-2016-05-11/pdf/2016-10567.pdf.  FinCEN made some slight amendments to the rule on September 29, 2017.  https://www.fincen.gov/sites/default/files/federal_register_notices/2017-09-29/CDD_Technical_Amendement_17-20777.pdf The new regulations are set forth in the BSA regulations at 31 C.F.R. § 1010.230 (beneficial ownership requirements); 31 C.F.R. § 1020.210(a)(5) (banks); 31 C.F.R. § 1023.210(b)(5) (broker-dealers); 31 C.F.R. § 1024.210(b)(4) (mutual funds); and 31 C.F.R. § 1026.210(b)(5) (future commission merchants and introducing brokers in commodities).    [3]   The regulation does not clearly address the beneficial ownership requirements for a U.S. pooled investment vehicle operated or controlled by a registered SEC investment adviser.  Pooled investment vehicles operated or advised by a “financial institution” regulated by a Federal functional regulator are not considered legal entities under the regulation.  31 C.F.R. § 1010.230(e)(2)(xi).  An SEC registered investment adviser, however, is not yet a financial institution under the BSA.  Under 31 C.F.R. § 1010.230(e)(3), a pooled investment vehicle that is operated or advised by a “financial institution” not excluded from the definition of legal entity is subject to the beneficial ownership control party prong. Gibson Dunn’s lawyers  are available to assist in addressing any questions you may have regarding these developments.  Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work in the firm’s Financial Institutions practice group, or the authors: Stephanie L. Brooker – Washington, D.C. (+1 202-887-3502, sbrooker@gibsondunn.com) Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com) Linda Noonan – Washington, D.C. (+1 202-887-3595, lnoonan@gibsondunn.com) © 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.

April 17, 2018 |
Supreme Court Holds That Recent Legislation Moots Dispute Over Emails Stored Overseas

Click for PDF United States v. Microsoft Corp., No. 17-2 Decided April 17, 2018 Today, the Supreme Court held that Microsoft’s dispute with the federal government over the government’s attempts to access email stored oversees is moot. Background: The Stored Communications Act, 18 U.S.C. § 2701 et seq., authorizes the government to require an email provider to disclose the contents of emails (and certain other electronic data) within its control if the government obtains a warrant based on probable cause. In this case, the federal government obtained a warrant to obtain emails from an email account used in drug trafficking. The drug trafficking allegedly occurred in the United States, but the emails were stored on a data server in Ireland. Microsoft refused to provide the emails on the ground that the Stored Communications Act does not apply to emails stored overseas. Issue: Whether the Stored Communications Act requires an email provider to disclose to the government emails stored abroad. Court’s Holding: The case is moot. On March 23, 2018, the President signed the Clarifying Lawful Overseas Use of Data Act (CLOUD Act), which amended the Stored Communications Act so that it now applies to emails stored abroad. The parties’ dispute under the old version of the law therefore was moot. “No live dispute remains between the parties over the issue with respect to which certiorari was granted.” Per Curiam What It Means: Given passage of the CLOUD Act, there was no longer any need for the Supreme Court to interpret the prior version of the Stored Communications Act. The CLOUD Act requires an email provider to disclose emails, so long as the statute’s procedures have been followed, regardless of whether those emails are “located within or outside of the United States.” CLOUD Act § 103(a)(1) (to be codified at 18 U.S.C. § 2713). But the CLOUD Act permits courts to exempt providers from disclosing emails of customers who are not U.S. Citizens or residents, if disclosure would risk violating the laws of certain foreign governments. CLOUD Act § 103(b) (to be codified at 18 U.S.C. § 2703(h)).   Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court.  Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Caitlin J. Halligan +1 212.351.3909 challigan@gibsondunn.com Mark A. Perry +1 202.887.3667 mperry@gibsondunn.com Nicole A. Saharsky +1 202.887.3669 nsaharsky@gibsondunn.com Related Practice: White Collar Defense and Investigations Joel M. Cohen +1 212.351.2664 jcohen@gibsondunn.com Charles J. Stevens +1 415.393.8391 cstevens@gibsondunn.com F. Joseph Warin +1 202.887.3609 fwarin@gibsondunn.com Related Practice: Privacy, Cybersecurity and Consumer Protection Alexander H. Southwell +1 212.351.3981 asouthwell@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.

March 15, 2018 |
Key 2017 Developments in Latin American Anti-Corruption Enforcement

Click for PDF In 2017, several Latin American countries stepped up enforcement and legislative efforts to address corruption in the region.  Enforcement activity regarding alleged bribery schemes involving construction conglomerate Odebrecht rippled across Latin America’s business and political environments during the year, with allegations stemming from Brazil’s ongoing Operation Car Wash investigation leading to prosecutions in neighboring countries.  Simultaneously, governments in Latin America have made efforts to strengthen legislative regimes to combat corruption, including expanding liability provisions targeting foreign companies and private individuals.  This update focuses on five Latin American countries (Mexico, Brazil, Argentina, Colombia, and Peru) that have ramped up anti-corruption enforcement or passed legislation expanding anti-corruption legal regimes.[1]  New laws in the region, coupled with potentially renewed prosecutorial vigor to enforce them, make it imperative for companies operating in Latin America to have robust compliance programs, as well as vigilance regarding enforcement trends impacting their industries. 1.    Mexico Notable Enforcement Actions and Investigations In 2017, Petróleos Mexicanos (“Pemex”) disclosed that Mexico’s Ministry of the Public Function (SFP) initiated eight administrative sanctions proceedings in connection with contract irregularities involving Odebrecht affiliates.[2]  The inquiries stem from a 2016 Odebrecht deferred prosecution agreement (“DPA”) with the U.S. Department of Justice (“DOJ”).[3]  According to the DPA, Odebrecht made corrupt payments totaling $10.5 million USD to Mexican government officials between 2010 and 2014 to secure public contracts.[4]  In September 2017, Mexico’s SFP released a statement noting the agency had identified $119 million pesos (approx. $6.7 million USD) in administrative irregularities involving a Pemex public servant and a contract with an Odebrecht subsidiary.[5] In December 2017, Mexican law enforcement authorities arrested a former high-level official in the political party of Mexican President Enrique Peña Nieto.[6]  The former official, Alejandro Gutiérrez, allegedly participated in a broad scheme to funnel public funds to political parties.[7]  While the inquiry has not yet enveloped the private sector like Brazil’s Operation Car Wash investigation, the prosecution could signal a new willingness from Mexican authorities to take on large-scale corruption cases.  The allegations are also notable due to their similarity to the allegations in Brazil’s Car Wash investigation.  In both inquiries, funds were allegedly embezzled from state coffers for the benefit of political party campaigns. Legislative Update Mexico’s General Law of Administrative Responsibility (“GLAR”)—an anti-corruption law that provides for administrative liability for corporate misconduct—took effect on July 19, 2017.  The GLAR establishes administrative penalties for improper payments to government officials, bid rigging in public procurement processes, the use of undue influence, and other corrupt acts.[8]  The law reinforces a series of Mexican legal reforms from 2016 that expanded the scope of the country’s existing anti-corruption laws and created a new anti-corruption enforcement regime encompassing federal, state, and municipal levels of government.  Among the GLAR’s most significant changes are provisions that target corrupt activities by corporate entities and create incentives for companies to implement compliance programs to avoid or minimize corporate liability. The GLAR applies to all Mexican public officials who commit what the law calls “non-serious” and “serious” administrative offenses.[9]  Non-serious administrative offenses include the failure to uphold certain responsibilities of public officials, as defined by the GLAR (e.g., cooperating with judicial and administrative proceedings, reporting misconduct, etc.).[10]  Serious administrative offenses include accepting (or demanding) bribes, embezzling public funds, and committing other corrupt acts, as defined by the GLAR.[11]  The GLAR also applies to private persons (companies and individuals) who commit acts considered to be “linked to serious administrative offenses.”[12]  These offenses include the following: Bribery of a public official (directly or through third parties)[13]; Participation in any federal, state, or municipal administrative proceedings from which the person has been banned for past misconduct[14]; The use of economic or political power (be it actual or apparent) over any public servant to obtain a benefit or advantage, or to cause injury to any other person or public official[15]; The use of false information to obtain an approval, benefit, or advantage, or to cause damage to another person or public servant[16]; Misuse and misappropriation of public resources, including material, human, and financial resources[17]; The hiring of former public officials who were in office the prior year, acquired confidential information through their prior employment, and give the contractor a benefit in the market and an advantage against competitors[18]; and Collusion with one or more private parties in connection with obtaining improper benefits or advantages in federal, state, or municipal public contracting processes.[19]  Notably, the collusion provisions apply extraterritorially and ban coordination in “international commercial transactions” involving federal, state, or municipal public contracting processes abroad.[20] The GLAR provides administrative penalties for violations committed by both physical persons and legal entities.  Physical persons who violate the GLAR can be subjected to: (1) economic sanctions (up to two times the benefit obtained, or up to approximately $597,000 USD)[21]; (2) preclusion from participating in public procurements and projects (for a maximum of eight years)[22]; and/or (3) liability for any damages incurred by any affected public entities or governments.[23] Legal entities, on the other hand, can be fined up to twice the benefit obtained, or up to approximately $5,970,000 USD, precluded from participating in public procurements for up to ten years, and held liable for damages.[24]  The GLAR also creates two additional penalties for legal entities:  suspension of activities within the country for up to three years, and dissolution.[25]  Article 81 limits the ability to enforce these two stiffer penalties to situations where (1) there was an economic benefit and the administration, compliance department, or partners were involved, or (2) the company committed the prohibited conduct in a systemic fashion.[26]  The GLAR’s penalties for physical and legal persons are administrative, rather than criminal. Under Article 25 of the GLAR, Mexican authorities can take into account a company’s robust compliance “Integrity Program” in determining and potentially mitigating corporate liability under the GLAR.[27]  The law requires the Integrity Program to have several elements, including clearly written policies and adequate review, training, and reporting systems.[28] The GLAR contains a self-reporting incentive that provides for up to a seventy percent reduction of penalties for those who report past or ongoing misconduct to an investigative authority.[29]  As previously noted, the GLAR’s non-monetary sanctions include preclusion from participating in public procurements and projects for up to eight years (for physical persons) or ten years (for companies).[30]  If a person subject to a preclusion sanction self-reports GLAR violations, the preclusion sanction can be reduced or completely lifted by the Mexican authorities.[31]  Requirements for obtaining a reduction of penalties through self-reporting include: (1) involvement in an alleged GLAR infraction and being the first to contribute information that proves the existence of misconduct and who committed the violations; (2) refraining from notifying other suspects that an administrative responsibility action has been initiated; (3) full and ongoing cooperation with the investigative authorities; and (4) suspension of any further participation in the alleged infraction.[32] Notably, other participants in the alleged misconduct who might be the second (or later) to disclose information could receive up to a fifty percent penalty reduction, provided that they also comply with the above requirements.[33]  If a party confesses information to the investigative authorities after an administrative action has already begun, that party could potentially receive a thirty percent reduction of penalties.[34] For a full analysis of the GLAR, see http://www.gibsondunn.com/publications/Pages/Mexico-General-Law-of-Administrative-Responsibility-Targets-Corrupt-Activities-by-Corporate-Entities.aspx. 2.    Brazil Following the success of the massive Operation Car Wash investigation into corruption involving the country’s energy sector, Brazilian regulators launched or advanced inquiries in 2017 impacting companies in the healthcare, meatpacking, and financial industries, among others.  Brazilian authorities have also continued to garner international accolades for their anti-corruption work, with Brazil’s federal prosecution service (“Ministério Público Federal” or “MPF”) winning Global Investigation Review’s “Enforcement Agency or Prosecutor of the Year” award for its 2017 Operation Car Wash efforts.[35]  This award follows a 2016 recognition of the Car Wash Taskforce by Transparency International.[36]  The robust enforcement environment in Brazil is also reflected in this year’s public company disclosures.  In 2017, thirty-four companies disclosed information regarding new or ongoing inquiries involving Brazil, while disclosures regarding other Latin American nations numbered in the single digits.[37] Notable Enforcement Actions and Investigations A.    Operation Car Wash (Operação Lava Jato) Operation Car Wash, the multi-year investigation into allegations of corruption related to contracts with state-owned oil company Petrobras, has remained a focus area for the Brazilian authorities.  The investigation opened four new phases in 2017.  Notably, in October 2017, Judge Sergio Moro—the lead jurist for the investigation—stated at a public event that the Car Wash inquiry was “moving toward the final phase.”[38]  Judge Moro did not, however, provide a potential date for closing the investigation, stating, “a good part of the work is done, but this does not mean that work does not remain.”[39]  To date, Brazilian authorities investigating the Car Wash allegations have obtained 177 convictions, with sentences totaling more than 1,750 years in prison.[40] B.    Operation Zealots (Operação Zelotes) In 2017, Brazilian authorities launched new phases of Operation Zealots, a multi-year investigation into alleged payments to members of Brazil’s Administrative Board of Tax Appeals.[41]  The investigation began as an inquiry into one of the largest alleged tax evasion schemes in the country’s history.  Large companies and banks, including Bradesco, Santander, and Safra, allegedly paid bribes to members of the appeals board in exchange for a reduction or waiver of taxes owed.[42]  Operation Zealots was launched in 2015 and initially implicated companies in the financial sector.  The scope of the investigation has expanded in the last two years to also reach companies in the automobile sector and a Brazilian steel distributor.[43]  Notably, in 2017, a criminal complaint was filed against former Brazilian President Luiz Inácio Lula da Silva alleging that he received payments in exchange for securing tax benefits for automobile companies.[44]  The total amount of evaded taxes through various alleged Operation Zealots schemes is estimated to reach nearly $19 billion BRL (approx. $5.8 billion USD).[45] C.    Operation Weak Flesh (Operação Carne Fraca) In early 2017, the Brazilian Federal Police launched an investigation into the alleged bribery of government food sanitation inspectors called Operation Weak Flesh.[46]  The operation was reported to be one of the largest in the history of the Federal Police, with Brazilian authorities executing 194 search-and-seizure warrants.[47]  Dozens of inspectors are accused of taking bribes in exchange for allowing the sale of rancid products, falsifying export documents, overlooking illicit additives, and failing to inspect meatpacking plants.[48]  Authorities are investigating more than thirty meatprocessing companies, including giants such as JBS S.A. and BRF S.A. D.    Operation Bullish (Operação Bullish) On May 12, 2017, the Federal Police launched Operation Bullish, an investigation into fraud and irregularities in the manner by which Brazil’s National Bank for Economic and Social Development approved investments of over $8 billion BRL (approx. $2.4 billion USD) for the expansion of the Brazilian meatpacking company JBS.[49]  While JBS claims that it did not receive any favors from the bank’s investment arm (“BNDESPar”), Brazil’s Federal Court of Accounts (“TCU”) claims that the bank approved “risky” investments for JBS with inadequate time for analysis.[50]  The Federal Police further claim that although BNDESPar approved funds for a JBS acquisition of a foreign company, the acquisition never occurred and the investment funds were never returned.[51] E.    Operation Mister Hyde (Operação Mister Hyde) Brazilian authorities also continued inquiries in the healthcare space as part of a multi-year investigation into an alleged “Prosthetics Mafia” of doctors and medical instrument suppliers that rigged the bidding process for surgical supplies.  Investigators alleged that in exchange for payments, doctors would identify patients for unnecessary surgeries and ensure that the surgical instruments used in the operations came from a specified provider.[52]  The inquiry stems from a 2015 congressional investigation.  In February 2017, it was reported that three employees from one of the companies under investigation, TM Medical, agreed to plea bargains with the federal authorities.[53] Settlements and Leniency Agreements UTC Engenharia.  In July 2017, UTC Engenharia signed a leniency agreement with the Brazilian government and agreed to pay $574 million BRL (approx. $175 million USD), including a fine, damages, and unjust enrichment.[54]  UTC signed the agreement with Brazil’s Comptroller General of the Union (“CGU”) and Brazil’s Federal Attorney General’s Office.[55]  Under the agreement, UTC must adopt an integrity program and pay its fine within twenty-two years.[56] According to the Brazilian government, the agreement reflects “the basic pillars enumerated by the two federal agencies in the negotiations, that is, speed in obtaining evidence, identification of others involved in the crimes, cooperation with investigations, and commitment to the implementation of effective integrity mechanisms.”[57]  Notably, according to the press release, the implementation of UTC’s integrity program “will be monitored by the CGU, which can perform inspections at the company and request access to any documents and information necessary.”[58] Rolls-Royce plc.  In January 2017, Rolls-Royce settled allegations that the company offered, paid, or failed to prevent bribes involving the sale of engines, energy systems, and related services in Brazil and five other foreign jurisdictions.[59]  According to charging documents, between 2003 and 2013, Rolls-Royce allegedly made commission payments to an intermediary while knowing that portions of the payments would be paid to officials at Brazil’s state-owned oil company Petrobras.[60]  Rolls-Royce’s intermediary allegedly made more than $1.6 million BRL (approx. $485,700 USD) in corrupt payments to obtain contracts for supplying equipment and long-term service agreements.[61]  As a part of a global settlement with DOJ, Britain’s Serious Fraud Office, and Brazil’s Ministério Público Federal, Rolls-Royce agreed to pay $800 million USD total, with $25.5 million USD of that settlement being paid to the Brazilian authorities.[62] SBM Offshore N.V.  In November 2017, SBM settled allegations with DOJ that the company made payments to foreign officials in Brazil, Angola, Equatorial Guinea, Kazakhstan, and Iraq.[63]  According to the DPA, SBM used a sales agent to provide payments and hospitalities to Petrobras executives to secure an improper advantage in business with the state-owned company.[64]  SBM agreed to pay a $238 million USD criminal fine.[65]  DOJ took into account overlapping conduct prosecuted by other jurisdictions when calculating SBM’s fine, including the company’s ongoing negotiations with the MPF and a $240 million USD settlement with the Dutch authorities.[66]  The government’s press release also stated that DOJ was “grateful to Brazil’s MPF” and authorities in the Netherlands and Switzerland “for providing substantial assistance in gathering evidence during [the] investigation.”[67] Braskem/Odebrecht.  In December 2016, Brazilian construction conglomerate Odebrecht and its petrochemical production subsidiary, Braskem, resolved bribery charges with authorities in Brazil, Switzerland, and the United States.[68]  At the time of the 2016 settlement, the DOJ/SEC segment of the multibillion-dollar resolution was $419 million USD.  The settlement agreement did note, however, that Odebrecht represented it could pay no more than $2.6 billion USD in penalties.[69]  The agreement further noted that the Brazilian and U.S. authorities would conduct an independent analysis of Odebrecht’s representation.[70]  According to an April 2017 sentencing memorandum filed with the court, the U.S. and Brazilian authorities analyzed Odebrecht’s ability to pay the proposed penalty and determined that Odebrecht was indeed unable to pay a total criminal penalty in excess of $2.6 billion USD.[71]  The sentencing memorandum noted the parties agreed that Odebrecht would therefore pay a reduced fine of $93 million USD to the U.S. government.[72] Legislative Updates and Agency Guidance State-Level Anti-Corruption Law.  In late 2017, the state of Rio de Janeiro passed an anti-corruption law requiring companies contracting with the state to have compliance programs.[73]  The law applies to companies and individuals, including foreign companies with “headquarters, subsidiaries, or representation in Brazil.”[74]  While the Clean Company Act takes a company’s compliance program into consideration in the application of sanctions, Rio de Janeiro’s law goes one step further and requires companies to have programs in place before contracting with the state.[75] Ten Measures Against Corruption.  An initiative from Brazil’s Ministério Público Federal to strengthen anti-corruption laws has yet to pass both houses of Brazil’s legislative branch.  The initiative—called the “Ten Measures Against Corruption”—was first announced by the MPF in 2015.[76]  The proposal was introduced to Congress as a public initiative in 2016 after it received more than 1.7 million signatures of support from the public.[77]  The measures propose changes in corruption laws and criminal proceedings that would make the judiciary and prosecutor’s office more transparent, criminalize unjust enrichment of civil servants, hold political parties liable for accepting undeclared donations, and increase penalties for corrupt acts.[78]  Consideration of the proposal was halted in the Senate in 2017 after public outrage in response to the lower Congress’s addition of a provision that would impose harsh penalties on the judiciary and federal prosecutors for “abuse of authority.”[79]  Operation Car Wash prosecutor Deltan Dallagnol claimed that the House’s amendments “favored” white collar crimes and undermined the proposal’s purpose.[80] Ministério Público Federal Leniency Agreement Guidance.  In August 2017, the Ministério Público Federal issued guidance for prosecutors negotiating leniency agreements.[81]  The guidance provides insights into the process Brazil’s prosecutors use for negotiating such agreements and the expectations for collaborators.  One section of the guidance, for example, states that negotiations should be conducted by “more than one member of the MPF” and preferably by a criminal and administrative prosecutor for the agency.[82]  The guidance also notes the possibility that the negotiations could take place together with other Brazilian authorities, including the CGU [the chief regulator of the Clean Company Act], the Federal Attorney General’s Office (“AGU”), the chief anti-trust regulator, and the TCU.[83]  The guidance also notably details obligations of collaborators in leniency agreements, including: Communicating relevant information and proof (time frames, locations, etc.); Ceasing illicit conduct; Implementing a compliance program and submitting to external audit, at the company’s expense; Collaborating fully with the investigations during the life of the agreement and always acting with honesty, loyalty, and good faith, without reservation; Paying applicable fines and damages; and Declaring that all information supplied is correct and accurate, under the penalty of rescission of the leniency agreement.[84] 3.    Argentina Notable Enforcement Actions and Investigations A.    Investigation into President Mauricio Macri Beginning in 2016 and continuing throughout 2017, federal prosecutors in Argentina launched investigations concerning current President Mauricio Macri.[85]  While Macri was elected on promises to combat corruption in Argentina,[86] his family’s extensive business holdings have been scrutinized by Argentine authorities in connection with various influence trafficking and money laundering probes.[87]  An investigation opened in April 2017, for example, focuses on the grant of airline routes to a company connected to Macri’s father.[88]  Argentine prosecutors are also probing allegations that a government official received payments from construction conglomerate Odebrecht in connection with renewing a public contract.[89]  At the time of the alleged payments, Odebrecht was a participant in a consortium with a company connected to Macri’s cousin.[90] B.    Investigation into Former President Cristina Fernández de Kirchner In April 2017, former President Cristina Fernández de Kirchner was indicted in connection with allegations that she led a scheme to launder funds misappropriated from public coffers through a family-owned business.[91]  The charges represent the second indictment filed against Kirchner since she left office more than two years ago.[92]  In December 2016, charges were brought against Kirchner alleging that she led a criminal organization that attempted to illegally benefit its members by awarding public contracts to construction company Austral Construcciones.[93]  In a separate investigation, a judge ordered Kirchner’s arrest in connection with allegations that she covered up possible Iranian involvement in the 1994 bombing of a Jewish community center in Buenos Aires in exchange for a potentially lucrative trade deal.[94]  Other former high-level employees in Kirchner’s government have been arrested for unjust enrichment, including Vice President Amado Boudou and former planning minister Julio de Vido.[95] Legislative Update In November 2017, Argentina’s Congress passed new legislation imposing criminal liability on corporations for bribery (national and transnational), influence peddling, unjust enrichment of public officials, falsifying balance sheets and reports, and other designated offenses.[96]  The bill, called the Law on Corporate Criminal Liability, applies to both Argentine and multinational companies domiciled in the country.[97]  The law went into effect on March 1, 2018.[98] Under the bill, legal entities can be held liable for bribery and other misconduct carried out directly or indirectly, with the company’s intervention, or in the company’s name, interest, or benefit.[99]  Legal entities can also be held liable if the company ratifies the initially unauthorized actions of a third party.[100]  The bill states that legal entities are not held liable, however, if the physical person who committed the misconduct acted “for his exclusive benefit, and without providing any advantage” for the company.[101]  The bill also imposes successor liability on parent companies in mergers, acquisitions, and other corporate restructurings.[102]  The bill applies to transnational bribery for acts committed by Argentine citizens and entities that are domiciled in Argentina.[103] The bill imposes monetary and non-monetary sanctions, including: Monetary fines from two to five times the benefit that was (or could have been) obtained by the company,[104] Complete or partial suspension of activities for up to ten years,[105] Suspension for up to ten years from participating in public bids, contracts, or any other activity linked to the state,[106] and Dissolution and liquidation of the corporate person when the entity was created solely for the purposes of committing misconduct, or when misconduct constituted the principal activities of the entity.[107] Legal entities can be exempted from criminal liability where the company (1) self-reported misconduct detected through its own efforts and internal investigation, (2) implemented an adequate internal control and compliance system before the misconduct occurred, and (3) returned undue benefits obtained through the misconduct.[108]  The bill also contains provisions allowing for Argentina’s public prosecutor’s office, the Ministério Público Fiscal, to enter into collaboration agreements with legal entities.[109]  The agreements require legal entities to provide information regarding the misconduct, pay the equivalent of half the minimum monetary fine imposed under the law, and comply with other conditions of the agreement (including, but not limited to, implementing a compliance program).[110] Minimal requirements for compliance programs consistent with the bill include: A code of ethics or conduct, or the existence of integrity policies and procedures applicable to all directors, administrators, and employees that prevent the commission of the crimes contemplated by the law,[111] Specific rules and procedures to prevent wrongdoing in the context of tenders and bidding processes in the execution of administrative contracts, or in any other interaction with the public sector,[112] and Periodic trainings on the compliance program for directors, administrators, and employees.[113] The law also notes that a compliance program may include additional elements, including, among others: Periodic risk assessments,[114] Visible and unequivocal support of the program from upper management,[115] Misconduct-reporting channels that are open to third parties and adequately defined,[116] Anti-retaliation policies,[117] Internal investigation systems,[118] Due diligence processes for M&A transactions,[119] Monitoring and evaluation of the effectiveness of the compliance program,[120] and Designation of an employee responsible for the coordination and implementation of the program.[121] The compliance program components listed in the law are notably similar to elements of effective compliance programs delineated by DOJ, the SEC, and Mexico’s General Law of Administrative Responsibility.[122] 4.    Colombia Notable Enforcement Actions and Investigations A.    Odebrecht Fallout According to a December 2016 deferred prosecution agreement with DOJ, Odebrecht made more than $11 million USD in corrupt payments to government officials in Colombia to secure public works contracts.[123]  In the wake of this settlement with U.S. authorities and Brazil’s multi-year investigation into Odebrecht’s dealings, Colombian prosecutors have announced inquiries into congressional involvement in the allegations and have arrested former Colombian senator Otto Bula for allegedly taking $4.6 million USD in bribes from the company.[124]  Odebrecht allegedly paid Bula to ensure that a contract for the construction of the Ocaña-Gamarra highway included higher-priced tolls that would benefit the company.[125]  Odebrecht also allegedly made $6.5 million USD in payments to former Vice Minister of Transportation Gabriel García Morales in exchange for a contract to construct a section of the Ruta del Sol highway.[126] B.    Reficar Oil Refinery In 2017, Colombian authorities brought corruption charges against executives from an American engineering firm, Chicago Bridge & Iron Company (“CB&I”), in connection with the Refineria de Cartagena (“Reficar”) oil refinery.[127]  The Reficar oil refinery is a subsidiary of Colombia’s state-owned oil company, Ecopetrol.  Colombian authorities charged CB&I and Reficar executives with various corruption charges, including unjust enrichment, misappropriation of funds, and embezzlement.[128]  According to the Colombian authorities, Reficar executives directed contracts to CB&I without abiding by legal requirements for public bidding.[129]  The Colombian authorities also claimed to have discovered irregularities with payments CB&I received in connection with Reficar contracts, including payments for work that was not performed, reimbursements for extravagant expenses unrelated to the refinery project, and double billing.[130] C.    Conviction of Former Anti-Corruption Chief Luis Gustavo Moreno On June 27, 2017, former anti-corruption chief Luis Gustavo Moreno was arrested in his office by the CTI (the Technical Investigation Team, a division of the Colombian Attorney General).  They charged him with soliciting bribes in return for interfering with anti-corruption investigations into Alejandro Lyons Muskus, ex-governor of Córdoba, with the possibility of ending such investigations.  After his arrest, Moreno turned into a key collaborator with various officials, shedding light on a massive corruption scandal in the judiciary and congressional branch.  According to Moreno, the scandal involved state politicians such as Musa Besaile Fayad and Bernardo “Ñoño” Elías, while also accusing judges such as Gustavo Malo Fernández, Francisco José Ricaurte, and Leónidas Bustos of accepting bribes in order to corrupt judicial proceedings.[131]  President Juan Manuel Santos signed extradition orders for Moreno and extradited him to Florida, where DOJ officials charged him with conspiracy to launder money with the intent to promote foreign bribery.[132] Legislative Update In 2017, Colombian President Juan Manuel Santos announced a series of measures to address corruption issues in the country.[133]  The announcement followed Colombia’s 2016 passage of its first foreign bribery statute, the Transnational Corruption Act (“TCA”).[134]  The TCA notably has extraterritorial effect and holds legal entities administratively liable for improper payments to foreign government officials made by the entity’s employees, officers, directors, subsidiaries, contractors, or associates.[135]  The new anti-corruption measures announced by President Santos, among others, include passing new laws that would provide labor protections and economic incentives for whistleblowers, require that companies disclose information regarding “the persons who in reality profit from a business or company,” and eliminate the use of house arrest for corruption cases.[136]  The President also proposed creating a group of judges who specialize in anti-corruption cases.[137]  Other corruption reforms considered by Colombia’s Congress in 2017 include requiring lobbyists to disclose meetings with public officials and the creation of a registry of beneficiaries of public contracts.[138] Transnational Cooperation In 2017, Colombia’s Superintendence of Corporations and the Peruvian Ministry entered into a Memorandum of Understanding (“MOU”) to prosecute international corruption.[139]  The goal of the MOU is to help investigate corruption in Peru and Colombia by focusing on a bilateral exchange of evidence between the two countries.[140]  Colombia signed a similar agreement with Spain in 2017.[141]  These new efforts are meant to assist partnering states in overcoming the difficulties of cross-border investigations, including the need to acquire evidence in foreign territories. 5.    Peru Notable Enforcement Actions and Investigations The Odebrecht scandal has significantly impacted the political and anti-corruption landscape in Peru.  In its settlement with Odebrecht, DOJ disclosed that Odebrecht executives admitted to funneling around $29 million USD in bribes to Peruvian government officials between 2004 and 2015.[142]  Government officials announced that Odebrecht and other companies involved in corruption would no longer be able to bid on public work contracts.[143]  This marked the end of Odebrecht’s four-decade run as a successful bidder on public work projects in Peru.[144]  The government will now decide on a case-by-case basis what to do with the remaining contracts awarded to Odebrecht.[145] Three of Peru’s recent former presidents have been arrested and/or accused of crimes related to corruption, all with some alleged connection to Odebrecht.[146]  In July 2017, a Peruvian judge ordered the arrest of former President Ollanta Humala and his wife on charges of money laundering and conspiracy related to the alleged receipt of a $3 million USD bribe from Odebrecht.[147]  Humala, who has continued to maintain his innocence, became the first former head of state detained in connection with the Odebrecht scandal.[148]  Prosecutors are also investigating former President Alan Garcia, who allegedly facilitated irregular bidding on the subway in Lima.[149] Another former president, Alejandro Toledo, was ordered arrested by a Peruvian judge in February, pursuant to accusations that he had received $20 million USD in bribes from Odebrecht in connection with bidding on the Interoceanic Highway between Brazil and Peru.  Toledo has remained in the United States and denied any wrongdoing.[150]  A formal extradition request to the United States for Toledo to return to Peru and face charges for the alleged bribe is near approval on the Peruvian side.[151] Even Peru’s current president, Pedro Pablo Kuczynski, has been unable to evade implication in the ever-expanding Odebrecht probe.  Earlier in 2017, he had to testify as a witness in the same investigation implicating former President Toledo in the alleged irregular bidding process to build the Interoceanic Highway.[152]  In November 2017, former Odebrecht CEO Marcelo Odebrecht told Brazilian prosecutors that Odebrecht hired Kuczynski as a consultant after he had opposed highway contracts granted to the company.[153]  Kuczynski denied the allegations, but subsequently documents showed Kuczynski may have received $782,000 in payments from Odebrecht through his investment banking firm, Westfield Capital.[154]  Kuczynski narrowly survived an impeachment vote based on the corruption allegations in late December 2017.[155]  Recent additional testimony from an Odebrecht official purporting to confirm impropriety in Kuczynski’s relationship with Odebrecht has renewed calls for Kuczynski to step down or be impeached.[156] On a regional and local level in Peru, several governors have been under investigation or accused of corruption.[157]  Remarkably, a May 2014 study by Peru’s office of the anti-corruption solicitor reported that a significant majority of mayors in office between 2011 and 2014 in Peru had been investigated for criminal activity.[158] Legislative Update The most significant development in anti-corruption legislation in Peru over the last year was Legislative Decree No. 1352, enacted on January 6, 2017.  This decree modifies Law No. 30424 (Law Regulating Administrative Liability of Legal Entities for the Commission of Active Transnational Bribery),[159] which was enacted in 2016 to declare that legal entities, including corporations, would be autonomously and administratively liable for active transnational bribery when it was committed in their name or for them and on their behalf.[160]  Decree No. 1352 extended the administrative and autonomous liability of legal entities to include those guilty of active bribery of public officials.[161]  The liability provided for in Decree No. 1352 is termed “autonomous” because a natural person does not have to be found liable first; the Decree’s charges now create independent liability, and an independent entity like a corporation can be charged separately.[162]  The law provides for autonomous liability for certain crimes of bribery and money laundering.[163] Parent companies are not liable for penalties under the autonomous liability provisions of Decree No. 1352 unless the employees who engaged in corruption or money laundering did so with specific consent or authorization from the parent company.[164]  Additionally, companies that acquire entities found guilty of corruption under the autonomous liability provision may not be separately penalized if the acquiring company used proper due diligence, defined as taking reasonable actions to verify that no autonomous liability crimes had been committed.[165]  Finally, entities can avoid autonomous liability by implementing a sufficient criminal law compliance program designed to prevent such crimes of corruption from being committed on behalf of the company.[166] Elements of a properly designed program include: an autonomous person in charge of the compliance program, proper implementation of complaint procedures, continuous monitoring of the program, and training for those involved.[167]  The Peruvian securities regulator had promised additional guidance before January 1, 2018—when the Decree took effect—but, as of the date of this publication, no such guidance has been issued.[168] The Peruvian government has also modified the procurement laws via Decree 1341 to ban any company with representatives who have been convicted of corruption from securing government contracts.[169]  The ban applies even if the crimes are admitted as part of a plea bargain agreement for a reduced sentence.[170] Peru has also enacted harsher penalties for public officials found guilty of corruption and prohibitions on such officials from being able to work in the public sector post-conviction.  Legislative Decree No. 1243 (the “civil death” law) was enacted in late 2016 to establish harsher sentences for corruption-related offenses and to increase the “civil disqualification” period to five to twenty years for corruption crimes like extortion, simple and aggravated collusion, embezzlement, and bribery.[171]  That said, this disqualification only applies to crimes committed as part of a “criminal organization,” and because of the practicalities involved in these types of crimes, it is unlikely that many officials will be found to have been part of a “criminal organization” and thus barred from public service.[172] Legislative Decree No. 1295 was also enacted on December 30, 2016 with provisions to improve government integrity.[173]  The decree created the National Registry of Sanctions against Civil Servants (Registro Nacional de Sanciones contra Servidores Civiles).[174] This online registry will be updated monthly by the National Authority of Civil Service (Autoridad Nacional del Servicio Civil) and will consolidate all the information relevant to disciplinary actions and/or sanctions against public officials (including corruption charges).[175]  Anyone listed in the registry is prohibited from government employment for the duration of their registry.[176] [1] This article is intended to review key developments in the five enumerated countries.  Changes to the compliance environment continue throughout Central and South America, though they are not covered in this particular update. [2] Petróleos Mexicanos – Pemex, Report of Foreign Private Issuer (Form 6-K) (Nov. 11, 2017), at 8. [3] Petróleos Mexicanos – Pemex, Report of Foreign Private Issuer (Form 6-K) (Sept. 29, 2017), at 21. [4] See Plea Agreement, Attach. B ¶¶ 59-60, United States v. Odebrecht S.A., Cr. No. 16-643 (RJD) (E.D.N.Y. Dec. 21, 2016). [5] See Secretaría de la Función Pública, Abre SFP nuevos procedimientos administrativos en contra de filial de Odebrecht (Sep. 11, 2017), https://www.gob.mx/sfp/articulos/abre-sfp-nuevos-procedimientos-administrativos-en-contra-de-filial-de-odebrecht-126170?idiom=es. [6] Azam Ahmed and J. Jesus Esquivel, Mexico Graft Inquiry Deepens with Arrest of a Presidential Ally, N.Y. Times, Dec. 20, 2017, https://www.nytimes.com/2017/12/20/world/americas/mexico-corruption-pri.html. [7] Id.; Detienen a extesorero del PRI por presunto desvío de recursos en 2016, El Financiero, Dec. 20, 2017, http://www.elfinanciero.com.mx/nacional/detienen-a-extesorero-del-pri-por-presunto-desvio-de-recursos-en-2016.html. [8] Ley General de Responsabilidades Administrativas, Artículos 2, 52, 66, 70 (July 18, 2016) (Mex.) [hereinafter “GLAR”]. [9] GLAR at Artículos 49, 51. [10] Id. at Artículo 49. [11] Id. at Artículos 51-64. [12] Id. at Artículos 3, 4, 65. [13] Bribery includes promising, offering, or giving any benefit, whether it be through money, valuables, property, services well below market value, donations, or any other benefit, to a public servant or their spouse in return for the public servant performing or refraining from performing any act related to their duties, or using their influence in their position, for the purpose of obtaining or maintaining a benefit or advantage, irrespective of the benefit actually being achieved.  Id. at Artículos 52, 66. [14] Id. at Artículo 67. [15] Id. at Artículo 68. [16] Id. at Artículo 69. [17] Id. at Artículo 71. [18] Id. at Artículo 72. [19] Id. at Artículo 70. [20] Id. [21] Under Article 81 of the GLAR, if no benefit is obtained through the corrupt act, the financial penalty is calculated by multiplying a statutorily defined value by the daily tenor of a Mexican government economic reference rate called the Unidad de Medida y Actualización (“UMA”).  While the UMA is a variable rate that changes over time, the statutory multiple is static and defined by the GLAR.  For physical persons—if no benefit was obtained—the penalty can be up to 150,000 times the UMA (approximately $597,000 USD as of May 2017).  GLAR, Artículo 81. [22] Id. [23] Id. [24] Id. [25] Id. [26] Id. [27] Id. at Artículo 25. [28] The seven required elements of the integrity program are delineated in the statute and discussed more fully in Gibson Dunn’s review of the GLAR, found at http://www.gibsondunn.com/publications/Pages/Mexico-General-Law-of-Administrative-Responsibility-Targets-Corrupt-Activities-by-Corporate-Entities.aspx. [29] GLAR at Artículos 88-89. [30] Id. at Artículo 81. [31] Id. at Artículos 88-89. [32] Id. at Artículo 89. [33]Id. [34]Id. [35] Ministério Público Federal, MPF recebe prêmio internacional por trabalho no combate à corrupção (Nov. 6, 2017), http://www.mpf.mp.br/rj/sala-de-imprensa/noticias-rj/mpf-recebe-premio-internacional-pelo-combate-a-corrupcao. [36] Press Release, Transparency Int’l Secretariat, Brazil’s Carwash Task Force Wins Transparency Int’l Anti-Corruption Award (Dec. 6, 2016). [37] See generally FCPA Tracker, https://fcpatracker.com/. [38] See Felipe Gutierrez, Moro se diz ‘cansado’ e que trabalho da Lav Jato em Curitiba esta no fim, Folha de Sao Paulo, Aug. 15, 2017, http://www1.folha.uol.com.br/poder/2017/10/1923633-moro-diz-que-trabalho-da-lava-jato-em-curitiba-esta-acabando.shtml. [39] Id. [40] See Ministério Público Federal, A Lava Jato em numeros – STF (Jan. 12, 2018), http://www.mpf.mp.br/para-o-cidadao/caso-lava-jato/atuacao-no-stj-e-no-stf/resultados-stf/a-lava-jato-em-numeros-stf. [41] Entenda a Operação Zelotes da Polícia Federal, Folha de São Paulo, Apr. 1, 2015, http://www1.folha.uol.com.br/mercado/2015/04/1611246-entenda-a-operacao-zelotes-da-policia-federal.shtml. [42] Id. [43] Mateus Rodrigues, MPF denuncia executivos da Gerdau na Zelotes por corrupcão e lavagem de dinheiro, Oglobo, Aug. 24, 2017, https://g1.globo.com/distrito-federal/noticia/mpf-denuncia-executivos-da-gerdau-na-zelotes-por-corrupcao-e-lavagem-de-dinheiro.ghtml; MPF denuncia Lula e Gilberto Carvalho por corrupcao passive na Operacoes Zelotes, Oglobo, Sept. 11, 2017, https://g1.globo.com/politica/noticia/mpf-denuncia-lula-por-corrupcao-passiva-na-operacao-zelotes.ghtml. [44] MPF denuncia Lula e Gilberto Carvalho por corrupcao passive na Operacoes Zelotes, supra note 43. [45] Entenda a Operação Zelotes da Polícia Federal, supra note 41. [46] Estelita H. Carazzai, Bela Megale, & Camila Mattoso, Operação contra frigoríficos prende 37 e descobre até carne podre à venda, Folha de S. Paulo, Mar. 17, 2017, http://www1.folha.uol.com.br/mercado/2017/03/1867309-pf-faz-operacao-contra-frigorificos-e-cumpre-quase-40-prisoes.shtml. [47] Id. [48] Id. [49] Operação Bullish investiga fraudes em empréstimos no BNDES, Agência de Notícias de Polícia Federal, May 12, 2017, http://www.pf.gov.br/agencia/noticias/2017/05/operacao-bullish-investiga-fraudes-em-emprestimos-no-bndes; Bela Megale, Camila Mattoso, & Raquel Landim, Operação policial põe sob suspeita apoio do BNDES à expansão da JBS, Folha de S. Paulo, May 12, 2017, http://www1.folha.uol.com.br/mercado/2017/05/1883367-pf-deflagra-operacao-que-investiga-fraudes-em-emprestimos-no-bndes.shtml. [50] Megale et al., supra note 49. [51] Id. [52] Graziele Frederico and Gabriela Lapa, Grupo de acusados na ‘máfia de próteses’ do DF fecha acordo de delação premiada, Oglobo, Feb. 9, 2017, http://g1.globo.com/distrito-federal/noticia/grupo-de-acusados-na-mafia-das-proteses-do-df-fecha-acordo-de-delacao-premiada.ghtml. [53] Id. [54] Ministério da Transparência e Controladoria-Geral da União, CGU e AGU assinam acordo de leniência com UTC Engenharia, July 10, 2017, http://www.cgu.gov.br/noticias/2017/07/cgu-e-agu-assinam-acordo-de-leniencia-com-o-utc-engenharia. [55] Id. [56] Id. [57] Id. [58] Id. [59] Press Release, U.S. Dep’t of Justice, Rolls-Royce plc Agrees to Pay $170 Million Criminal Penalty to Resolve Foreign Corrupt Practices Act Case (Jan. 17, 2017), https://www.justice.gov/opa/pr/rolls-royce-plc-agrees-pay-170-million-criminal-penalty-resolve-foreign-corrupt-practices-act. [60] Deferred Prosecution Agreement, Attach. A ¶ 20, United States v. Rolls-Royce plc, No. 2:16-CR-00247-EAS (S.D. Ohio. Dec. 20, 2016). [61] Id. [62] Press Release, U.S. Dep’t of Justice, supra note 59. [63] Press Release, U.S. Dep’t of Justice, SBM Offshore N.V. and United States-Based Subsidiary Resolve Foreign Corrupt Practices Act Case Involving Bribes in Five Countries (Nov. 29, 2017), https://www.justice.gov/opa/pr/sbm-offshore-nv-and-united-states-based-subsidiary-resolve-foreign-corrupt-practices-act-case. [64] Deferred Prosecution Agreement, Attach. A ¶¶ 27, 35, United States v. SBM Offshore N.V., No. 17-686 (S.D. Tex. Nov. 29, 2017). [65] Press Release, U.S. Dep’t of Justice, supra note 63. [66] Id. [67] Id. [68] Press Release, U.S. Dep’t of Justice, Odebrecht and Braskem Plead Guilty and Agree to Pay at Least $3.5 Billion in Global Penalties to Resolve Largest Foreign Bribery Case in History (Dec. 21, 2016), https://www.justice.gov/opa/pr/odebrecht-and-braskem-plead-guilty-and-agree-pay-least-35-billion-global-penalties-resolve. [69] Plea Agreement ¶ 21(b), United States v. Odebrecht, No. 16-643 (RJD) (Dec. 21, 2016). [70] Id. at ¶ 21(c). [71] Sentencing Memorandum at 4, United States v. Odebrecht S.A., No. 13-643 (RJD) (Apr. 11, 2017). [72] Id. [73] Lei No. 7753 de 17 de outubro de 2017, do Rio de Janeiro. [74] Id. at Artigo 1. [75] Id.; Lei No. 12.846 de 2013, at Artigo 7. [76] Fausto Macedo, Quais são e o Que propõem as ’10 Medidas contra a corrupção’ do Ministério Público, Estadão, Sept. 16, 2015, http://politica.estadao.com.br/blogs/fausto-macedo/quais-sao-e-o-que-propoem-as-10-medidas-contra-a-corrupcao-do-ministerio-publico/. [77] Marcello Larcher, CCJ valida assinaturas do projeto das dez medidas contra a corrupção, Agência Câmara Notícias, Mar. 28, 2017, http://www2.camara.leg.br/camaranoticias/noticias/POLITICA/527029-CCJ-VALIDA-ASSINATURAS-DO-PROJETO-DAS-DEZ-MEDIDAS-CONTRA-A-CORRUPCAO.html. [78] Renan Ramalho, MP apresenta dez propostas para reforçar combate à corrupção no país, Oglobo, Mar. 20, 2015, http://g1.globo.com/politica/noticia/2015/03/mp-apresenta-dez-propostas-para-reforcar-combate-corrupcao-no-pais.html. [79] Felipe Gelani, Lei de abuso de autoridade divide opinões entre juristas, Jornal do Brasil, Dec. 4, 2016, http://m.jb.com.br/pais/noticias/2016/12/04/lei-de-abuso-de-autoridade-divide-opinioes-entre-juristas/; Projeto com medidas contra a corrupção aguarda relator na CCJ, Senado Notícias (Apr. 17, 2017), https://www12.senado.leg.br/noticias/materias/2017/04/17/projeto-com-medidas-contra-a-corrupcao-aguarda-relator-na-ccj. [80] Ricardo Brandt, ‘Congresso destruiu’ as 10 Medidas contra Corrupção, diz procurador da Lava Jato, Estadão, Dec. 3, 2016, http://politica.estadao.com.br/blogs/fausto-macedo/congresso-destruiu-as-10-medidas-contra-corrupcao-diz-procurador-da-lava-jato/. [81] Ministério Público Federal, Orientation No. 07/2017 – Leniency Agreements (Aug. 24, 2017), http://www.mpf.mp.br/pgr/documentos/ORIENTAO7_2017.pdf. [82] Id. [83] Id. [84] Id. [85] Almudena Calatrava, Argentine Clean-up President Macri Finds Scandals of His Own, U.S. News, Mar. 3, 2017 https://www.usnews.com/news/world/articles/2017-03-03/argentine-clean-up-president-macri-finds-scandals-of-his-own; Abren investigación contra presidente de Argentina por presunta asociación ilícita y tráfico de influencias, CNN Español, Mar. 1, 2017, http://cnnespanol.cnn.com/2017/03/01/abren-investigacion-al-presidente-de-argentina-mauricio-macri-por-entrega-de-rutas-aereas-a-avianca/. [86] Lucia de Dominicis, 10 promesas incumplidas de Macri en sus 2 años de gobierno, La Primera Piedra, Dec. 10, 2017, http://www.laprimerapiedra.com.ar/2017/12/10-promesas-incumplidas-de-macri/. [87] Calatrava, supra note 85; Fiscal argentino abre investigación a Mauricio Macri por firmas ‘offshore,’ La Prensa, Apr. 7, 2016, https://www.prensa.com/mundo/Fiscal-argentino-investigacion-Mauricio-Macri_0_4455304547.html. [88] Abren investigación contra presidente de Argentina por presunta asociación ilícita y tráfico de influencias, supra note 85. [89] Hugo Alconada Mon, Un Operador de Odebrecht le giro US$ 600.00 al jefe de inteligencia argentine, La Nacion, Jan. 11, 2017, http://www.lanacion.com.ar/1974791-un-operador-de-odebrecht-le-giro-us-600000-al-jefe-de-inteligencia-argentino; AFP, Argentina: fiscal abre causa contra jefe de espias por giro de Odebrecht, La Prensa, Jan. 24, 2017, https://www.prensa.com/mundo/Argentina-fiscal-causa-espias-Odebrecht_0_4674282545.html. [90] Mon, supra note 89. [91] Frederico Rivas Molina, Cristina Fernández de Kirchner suma otro procesamiento por corrupción, El Pais, Apr. 4, 2017, https://elpais.com/internacional/2017/04/04/argentina/1491322535_840466.html. [92] Id. [93] Id. [94] Max Radwin and Anthony Faiola, Argentine Ex-president Cristina Fernández de Kirchner Charged with Treason, Wash. Post, Dec. 7, 2017, https://www.washingtonpost.com/world/the_americas/argentine-ex-president-cristina-fernandez-charged-with-treason/2017/12/07/e3e326e0-db80-11e7-a241-0848315642d0_story.html?utm_term=.37df90a6bf06. [95] Argentina Former Vice-President Amado Boudou Arrested, BBC News, Nov. 3, 2017, http://www.bbc.com/news/world-latin-america-41867239. [96] Argentina Congress Passes Law to Fight Corporate Corruption, Reuters, Nov. 8 2017, https://www.reuters.com/article/us-argentina-corruption/argentina-congress-passes-law-to-fight-corporate-corruption-idUSKBN1D83AX; La Ley de Responsabilidad Penal de las Personas Jurídicas, Law No. 27401 (Nov. 8, 2017), Artículo 1 (Arg.) [hereinafter Ley de Responsabilidad Penal]. [97] La Ley de Responsabilidad Penal de las Personas Jurídicas, at Artículo 1, supra note 96. [98] Paula Urien, Cómo reaccionan las compañías ante la ley penal empresaria, La Nacion, March 4, 2018, https://www.lanacion.com.ar/2113848-como-reaccionan-las-companias-ante-la-ley-penal-empresaria. [99]  Ley de Responsibilidad Penal, at Artículo 2, supra note 97. [100] Id. at Artículo 1. [101] Id. at Artículo 2. [102] Id. at Artículo 3. [103] Id. at Artículo 29. [104] Id. at Artículo 7. [105] Id. [106] Id. [107] Id. [108] Id. at Artículo 9. [109] Id. at Artículo 16. [110] Id. at Artículos 16, 18. [111] Id. at Artículo 23. [112] Id. [113] Id. [114] Id. [115] Id. [116] Id. [117] Id. [118] Id. [119] Id. [120] Id. [121] Id. [122] DOJ and SEC, A Resource Guide to the U.S. Foreign Corrupt Practices Act, at 57 (Nov. 14, 2012); GLAR at  Artículo 25. [123] See Plea Agreement, Attach. B ¶ 51, United States v. Odebrecht S.A., Cr. No. 13-643 (RJD) (E.D.N.Y. Dec. 21, 2016). [124] ¿Pueden las leyes acabar con la corrupción?, Política, July 29, 2017, http://www.semana.com/nacion/articulo/corrupcion-10-proyectos-de-ley-se-tramitan-en-el-congreso-sirven/534225; Julia Symmes Cobb & Guillermo Parra-Bernal, Colombia Arrests Ex-Senator Linked to Odebrecht Graft Scandal, Reuters, Jan. 15, 2017, https://www.reuters.com/article/brazil-corruption-odebrecht-colombia/colombia-arrests-ex-senator-linked-to-odebrecht-graft-scandal-idUSL1N1F5073. [125] Cobb & Parra-Bernal, supra note 124. [126] Jose Maria Irujo & Joaquin Girl, La policía investiga la conexión Colombia-Miami en los pagos al Exviceministro García Morales, El Pais, Nov. 9, 2017, https://elpais.com/internacional/2017/11/06/actualidad/1509965659_671036.html. [127] Fiscalía General de la Nación, Imputados empresarios extranjeros y colombianos por corrupción en la construcción de Reficar (July 26, 2017), https://www.fiscalia.gov.co/colombia/bolsillos-de-cristal/imputados-empresarios-extranjeros-y-colombianos-por-corrupcion-en-la-construccion-de-reficar/. [128] Id. [129] Id. [130] Fiscalía General de la Nación, Refineria de Cartagena (2017), https://www.fiscalia.gov.co/colombia/wp-content/uploads/Presentacion-REFICAR270417.pdf. Santos ratificó extradición del exfiscal Luis Gustavo Moreno, RCN Radio, Mar. 12, 2018, https://www.rcnradio.com/judicial/santos-ratifico-extradicion-del-exfiscal-luis-gustavo-moreno. [132] Id. [133] Presidencia de la República, Gobierno presenta paquete de iniciativas para combatir la corrupción (Aug. 18, 2017), http://es.presidencia.gov.co/noticia/170818-Gobierno-presenta-paquete-de-iniciativas-para-combatir-la-corrupcion. [134] Ley. 1778 de 2016 (Feb. 2, 2016) Diario Oficial 49.774 (Colo). [135] Id. at Artículo 2. [136] Presidente anuncia nuevas medidas para seguir enfrentando el desafío de la corrupción y a los corruptos, El Observatario, Apr. 19, 2017, http://www.anticorrupcion.gov.co/Paginas/Presidente-anuncia-nuevas-medidas-para-seguir-enfrentando-el-desafio-de-la-corrupcion-y-a-los-corruptos.aspx. [137] Colombia tendrá jueces especializados en casos de corrupción, El Observatario, Dec. 7, 2017,     http://www.anticorrupcion.gov.co/Paginas/Colombia-tendra-jueces-especializados-en-casos-de-corrupcion.aspx. [138] Leyes en Contra de la Corrupción, la Apuesta del Gobierno Nacional, Actualicese, July 13, 2017, http://actualicese.com/actualidad/2017/07/13/leyes-en-contra-de-la-corrupcion-la-apuesta-del-gobierno-nacional/. [139] Colombia y Peru contra soborno transnacional, El Nuevo Siglo, Sep. 23, 2017, http://www.elnuevosiglo.com.co/articulos/09-2017-colombia-y-peru-combatiran-soborno-transnacional. [140] Id. [141] See Juan Cruz Peña, Colombia investiga a tres empresas españolas por sobornos e irregularidades, El Confidencial, May 17, 2017, https://www.elconfidencial.com/empresas/2017-05-17/colombia-investiga-empresas-espanolas-sobornos-desfalco_1379311/. [142] United States v. Odebrecht S.A., Docket No. 16-CR-643 (RJD) (E.D.N.Y. 2016). [143] Odebrecht Banned from Signing Contracts with Peru State, Andina, Jan. 9, 2017, http://www.andina.com.pe/Ingles/noticia-odebrecht-banned-from-signing-contracts-with-peru-state-648542.aspx. [144] Mitra Taj, Peru to Bar Odebrecht from Public Bids with New Anti-graft Rules, Reuters, Dec. 28, 2016,  http://www.reuters.com/article/peru-corruption-odebrecht-idUSL1N1EO00K. [145] Id. [146] Lucas Perelló, Pablo Kuczynski Loses Another Battle to the Fujimorista Opposition, Global Americans, Sept. 28, 2017, https://theglobalamericans.org/2017/09/perus-pedro-pablo-kuczynski-loses-another-battle-fujimorista-opposition/. [147] Simeon Tegel, Latin America’s Mega-Corruption Scandal Just Claimed its Two Biggest Names, Wash. Post, July 15, 2017, https://www.washingtonpost.com/news/worldviews/wp/2017/07/15/latin-americas-mega-corruption-scandal-just-claimed-its-two-biggest-names/?utm_term=.6c05e8a6bb8c; Jimena De La Quintana, Ordenan prisión preventive para Ollanta Humala y Nadine Heredia, CNN en Espanol, July 13, 2017, http://cnnespanol.cnn.com/2017/07/13/ordenan-prision-para-ollanta-humala-y-nadine-heredia/. [148] Id. [149] ¿Cuál es la relación de Alan García con el caso Odebrecht y Lava Jato?, Radio Programas del Perú, Aug. 7, 2017, http://rpp.pe/politica/judiciales/la-relacion-de-alan-garcia-con-los-casos-odebrecht-y-lava-jato-noticia-1049631. [150] Ryan Dube, Judge Orders Arrest of Former Peruvian President Alejandro Toledo in Odebrecht Bribery Case, Wall Street J., Feb. 9, 2017, https://www.wsj.com/articles/judge-orders-arrest-of-former-peruvian-president-alejandro-toledo-in-odebrecht-bribery-case-1486698137; U.S. State Department Office of Investment Affairs, Peru Country Commercial Guide – Investment Climate Statement (Sept. 20, 2017), https://www.export.gov/article?id=Peru-Corruption. [151] Peru court approves Toledo extradition request, Yahoo News, Mar. 13, 2018, https://au.news.yahoo.com/world/a/39499741/peru-court-approves-toledo-extradition-request/. [152] Lucas Perelló, Pablo Kuczynski Loses Another Battle to the Fujimorista Opposition, Global Americans, Sept. 28, 2017, https://theglobalamericans.org/2017/09/perus-pedro-pablo-kuczynski-loses-another-battle-fujimorista-opposition/; PPK declarará el Viernes por Caso Odebrecht ante fiscalía, El Comercio, Mar. 29, 2017, https://elcomercio.pe/politica/justicia/ppk-declarara-viernes-caso-odebrecht-fiscalia-420928. [153] Ex-Odebrecht CEO Says Hired Peru President as Consultant – Reports, Reuters, Nov. 14, 2017, https://www.reuters.com/article/peru-politics/ex-odebrecht-ceo-says-hired-peru-president-as-consultant-reports-idUSL1N1NK1H4. [154] Peru: President Kuczynski Denies Odebrecht Bribe Allegations, BBC News, Nov. 16, 2017, http://www.bbc.com/news/world-latin-america-42006558; Andrea Zarate & Nicholas Casey, Peru Leader Could Be Biggest to Fall in Latin America Graft Scandal, N.Y. Times, Dec. 19, 2017, https://www.nytimes.com/2017/12/19/world/americas/peru-kuczynski-impeachment.html. [155] Simeon Tegel, Peru’s President Survives Impeachment Vote Over Corruption Charges, Wash. Post, Dec. 22, 2017, https://www.washingtonpost.com/world/the_americas/perus-president-faces-impeachment-over-corruption-allegations/2017/12/20/61b2b624-e4d9-11e7-927a-e72eac1e73b6_story.html?utm_term=.e542fa1216da. Sonia Goldenberg, ‘Game of Thrones’, Inca Style, N.Y. Times, Dec. 28, 2017,  https://www.nytimes.com/2017/12/28/opinion/peru-kuczynski-fujimori-pardon-odebrecht.html. [156] Jacqueline Fowks, El fantasma de Odebrecht arrecia en Perú, El País, Mar. 8, 2018, https://elpais.com/internacional/2018/03/08/america/1520467389_977266.html. [157] U.S. State Department Office of Investment Affairs, supra note 150. [158] Id. [159] Decreto Legislativo No. 1352, Artículo 1 (Jan. 2017) (Peru). [160] Id. at Artículo 3. [161] Id. at Artículo 1. [162] Id. at Artículo 4. [163] Id. at Artículos 3-4; New Criminal Liability System for Corporate involved in Corrupt Practices and/or Money Laundering, http://www.estudiorodrigo.com/en/new-criminal-liability-system-for-corporate-involved-in-corrupt-practices-andor-money-laundering/. [164] Decreto Legislativo No. 1352, Artículo 3. [165] Id. at Artículo 17. [166] Id. [167] Id. [168] Omar Manrique, Todas las empresas deberán tomar medidas para prevenir corrupción, Gestión, Dec. 27, 2017, https://gestion.pe/economia/empresas-deberan-medidas-prevenir-corrupcion-223626. [169] Decreto Legislativo No. 1341, Artículo 11 (Jan. 2017) (Peru); José Antonio Payet & Payet Rey Cauvi Pérez, PERUVIAN UPDATE – The Impact of “Lava Jato” on M&A in Peru, International Institute for the Study of Cross-Border Investment and M&A, May 30, 2017, http://xbma.org/forum/peruvian-update-the-impact-of-lava-jato-on-ma-in-peru/. [170] Decreto Legislativo No. 1341, supra note 169. [171] Ejecutivo oficializó ley de muerte civil para corruptos, El Comercio, Oct. 22, 2016, http://elcomercio.pe/politica/gobierno/ejecutivo-oficializo-ley-muerte-civil-corruptos-273517; Decreto Legislativo No. 1243, Artículo 38 (Oct. 2016) (Peru). [172] Comentarios a la “Muerte Civil,” Decreto Legislativo 1243, Parthenon, Nov. 1, 2016, http://www.parthenon.pe/editorial/comentarios-a-la-muerte-civil-decreto-legislativo-1243/. [173] Decreto Legislativo No. 1295 (Dec. 2016) (Peru). [174] Id. at Artículo 1. [175] Id. at Artículo 4. [176] Id. The following Gibson Dunn lawyers assisted in preparing this client update: F. Joseph Warin, Michael Farhang, Lisa Alfaro, Tafari Lumumba, Michael Galas, Abiel Garcia, Renee Lizarraga, John Sandoval and Sydney Sherman. 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 prosecutors and SEC officials, spread throughout the firm’s domestic and international offices.  Please contact the Gibson Dunn attorney with whom you usually work in the firm’s FCPA group, or the authors: F. Joseph Warin – Washington, D.C. (+1 202-887-3609, fwarin@gibsondunn.com) Michael M. Farhang – Los Angeles (+1 213-229-7005, mfarhang@gibsondunn.com) Please also feel free to contact the following Latin America practice group leaders: Lisa A. Alfaro – São Paulo (+55 (11) 3521-7160, lalfaro@gibsondunn.com) Kevin W. Kelley – New York (+1 212-351-4022, kkelley@gibsondunn.com) Tomer Pinkusiewicz – New York (+1 212-351-2630, tpinkusiewicz@gibsondunn.com) Jose W. Fernandez – New York (+1 212-351-2376, jfernandez@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.

March 1, 2018 |
Corporate NPA and DPA: All in the Nuance

Washington, D.C. partners F. Joseph Warin and Michael Diamant and Washington, D.C. associate Melissa Farrar are the authors of “Corporate NPA and DPA: All in the Nuance,” [PDF] published in International Financial Law Review in March 2018.

March 1, 2018 |
Co-operating with the Authorities: The US Perspective

Washington, D.C. partner F. Joseph Warin, San Francisco partner Winston Chan, Washington, D.C. associate Pedro Soto and San Francisco associate Kevin Yeh are the authors of “Co-operating with the Authorities: The US Perspective,” [PDF] published in Global Investigations Review’s Practitioner’s Guide to Global Investigations in March 2018.  

February 20, 2018 |
Latin America’s Wave of Anticorruption Laws

Los Angeles partner Michael Farhang is the author of “Latin America’s Wave of Anticorruption Laws,” [PDF] published by the Daily Journal on February 20, 2018.

February 20, 2018 |
Recent Developments Related to Regulation and Litigation Involving the Education Sector (February 2018)

Click for PDF This is the latest update of significant developments relating to regulatory, administrative, and legal actions involving schools, especially private-sector schools.  Since our last update, we saw oral argument in the Ninth Circuit Court of Appeals in a False Claims Act (FCA) case against Stephens Institute, two helpful Court of Appeals decisions, and two memos from the Department of Justice (DOJ) that will affect enforcement actions against schools.  We also continued to see an uptick in activity from the state Attorneys General and the trend of school consolidations and reorganizations.  Without further ado. A.     The False Claims Act                1.     Oral Argument in United States ex rel. Rose v. Stephens Institute On December 3, 2017, the Ninth Circuit heard oral argument in the FCA case of United States ex rel. Rose v. Stephens Institute, which presents two issues of importance to schools:  (1) whether the so-called “implied certification” theory of FCA liability is viable outside of there being “specific [mis]representations about the goods and services” in claims for payment (of which there are very few, if any, in financial aid requests); and (2) whether the Department of Education’s (ED) long history of not cutting off federal funds despite knowing about violations of the incentive compensation provision means a violation of that provision cannot be considered material—and therefore actionable—under the FCA.  See Br. of Appellant at 2-3, U.S. ex rel. Rose v. Stephens Inst., No. 17-15111 (9th Cir. May 30, 2017). The three-judge panel of Judges Susan P. Graber, N. Randy Smith, and U.S. District Judge Jennifer G. Zipps struggled over these issues, with the litigants sparring over exactly what the Supreme Court held in Universal Health Services v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016) and how the Ninth Circuit had previously interpreted the FCA and Escobar. Arguing as an amicus curiae, the United States argued that Escobar did not adopt a test that required proof of “specific representations about the goods or services” to assert an implied certification claim.  But as counsel for Stephens Institute explained, the Ninth Circuit has previously indicated that this is a requirement in both United States ex rel. Campie v. Gilead Sciences, Inc., 862 F.3d 890 (9th Cir. 2017) and United States ex rel. Kelly v. Serco, Inc., 846 F.3d 325 (9th Cir. 2017).  This led Judge Smith at one point to ask whether the Ninth Circuit should take the case higher up and hear it en banc (i.e., with 11 judges). Escobar‘s materiality standard also was hotly debated.  The panel seemed particularly concerned about how to reconcile Escobar with the Ninth Circuit’s decision in United States ex rel. Hendow v. University of Phoenix, 461 F.3d 1166 (9th Cir. 2006).  Hendow held on a motion to dismiss that the incentive compensation provision was material, at least for purposes of the pleading stage, based on the language of the statute, the regulation, and a school’s program participation agreement.  Id. at 1175–76.  But Escobar indicated that what “label the Government attaches to a requirement”—which is effectively what the court relied upon in Hendow—does not matter.  Escobar, 136 S. Ct. at 1996.  And as counsel for the school argued, an alleged violation of the incentive compensation provision should not be considered “material” following Escobar, particularly considering ED effectively conceded the provision was not a condition of funding in the so-called Hansen Memorandum.  The Government and the relator, meanwhile, while both arguing for a lax materiality standard, took different views.  The United States argued that the case (and perhaps all cases involving incentive compensation allegations) presented a factual dispute about materiality that could not be resolved short of trial.  The relator’s counsel, in contrast, argued that Hendow was binding law and determined materiality in the plaintiff’s favor at every stage in legal proceedings. The entire oral argument is available to view on YouTube at  https://www.youtube.com/watch?v=hANGuY9tyQ8.  We will keep an eye on this case, as it may result in a published opinion or even an unusual call for en banc review (the first time such would have occurred in a case involving a school to our knowledge).                2.     Other Important FCA Developments There were a number of other important FCA developments.  First, the Seventh Circuit issued an important decision on causation and damages in United States v. Luce, 873 F.3d 999 (7th Cir. 2017).  The court held that a relator or the Government can only recover for damages “proximately caused”—i.e., that were the foreseeable consequence—of the allegedly false statement or fraudulent conduct.  Id. at 1001.  This is in contrast to the “but for” analysis the Government and relators often argue for—contending that, for instance, all funds received under a program participation agreement constitute damages on the premise that no funds would have been received had the Government been aware of the alleged violation.  Now, at least in the Seventh, Third, Fifth, Tenth, and D.C. Circuits, the relator or the Government must show more; they must show some closer connection between the alleged damages and the alleged misconduct—that the damages were “proximately caused” by the misconduct.  In situations in which the Government or the relator is pursuing a claim of misconduct far removed from funding for schools and the reasons students default on government loans, this will provide a tough standard for relators and the Government to meet. Second, in United States ex rel. Bennett v. Biotronik, Inc., the Ninth Circuit held that if the Government intervenes in an FCA case, the government-action bar, 31 U.S.C. § 3730(e)(3), bars any later suit on the same topics of the earlier FCA case, even if the Government did not intervene on these particular claims and instead dismissed them.  876 F.3d 1011 (9th Cir. 2017).  This too has direct implications for schools.  Imagine, for example, that a relator sues a school for allegedly violating the incentive compensation provision and the 90/10 rule.  The Government then intervenes only as to the incentive compensation claims, settles with the school, and in the process dismisses the claim related to 90/10.  Under Bennett, the government-action bar precludes not only future claims against the school for violations of the incentive compensation provision, but also allegations related to a 90/10 violation.  This is an important reminder to schools when faced with FCA litigation to review prior litigation and settlements—and review all aspects of the prior litigation and settlements—with a learned eye; there are likely some good potential dismissal arguments lurking within. Third, two memoranda from the Department of Justice were made public in January.  On January 24, we learned of a memo that outlines factors for when the Government should take affirmative steps of intervening in and voluntarily dismissing qui tam FCA lawsuits.  The Government outlined a series of factors it should consider, including curbing meritless suits and preventing interference with agency policies and programs.  We have long argued that the DOJ should take a more active role in voluntarily intervening in and dismissing meritless cases that waste schools’ and the courts’ time.  This memorandum should provide DOJ attorneys with the guidance and incentive to do so more often. On January 25, just a day later, the DOJ released a second memo.  This memo “prohibits the Department from using” agency guidance documents “to coerce regulated parties into taking any action or refraining from taking any action beyond what is required by the terms of the applicable statute or lawful regulation.”  In short, the memo explained that the “Department may not use its enforcement authority to effectively convert agency guidance documents into binding rules,” which are found in statute and regulations.  This too could have a significant impact on FCA cases against schools, which are often brought based upon sub-regulatory guidance or interpretations.  The DOJ has now put its foot down, saying this is something that should not occur.  Combined with the January 24 memo, this may provide another avenue for arguing that the DOJ should intervene in and voluntarily dismiss certain meritless FCA actions. Finally, in a decade-old FCA case, a federal jury in Virginia unanimously ruled in favor of a student loan provider, the Pennsylvania Higher Education Assistance Agency.  The case, United States ex rel. Oberg v. Pennsylvania Higher Education Assistance Agency, No. 1:07-cv-00960 (E.D. Va. Sept. 21, 2007), centered on whether the loan provider was appropriately taking advantage of the special allowance interest payments.  This case, like so many others, illustrates that, although the road can be a long, tough one, defendants who are willing to persevere in FCA litigation often come out victorious in the end. B.     State Attorney General Activity In keeping with the trend we’ve reported on, state Attorneys General continue to “pick up the slack” for what they perceive as lax enforcement of the for-profit sector by the Trump Administration.                1.     State Attorneys General Continue to Challenge Suspension of Obama-Era Regulations As we reported in our August 2017 update, the Attorneys General of 18 states and the District of Columbia sued Education Secretary Betsy DeVos in July over ED’s suspension of the Obama-era borrower defense rules.  Eighteen Attorneys General have now sued DeVos over ED’s delay of the gainful employment rules.  The suit, filed in October in the United States District Court for the District of Columbia, alleges ED’s delay in enforcing the gainful employment rule violated the Administrative Procedure Act by failing to engage in notice and comment rule making, failing to provide a justification for the action, and “acting arbitrarily and capriciously and in excess of statutory jurisdiction.”  Maryland v. United States Dep’t of Educ., No. 1:17-cv-02139, Dkt. No. 1 (D.D.C. Oct. 17, 2017).  A spokesperson for ED called the suit a “frivolous” “stunt” designed to “score quick political points.” In December, California Attorney General Xavier Becerra filed a separate lawsuit in the Northern District of California, alleging that ED’s delay in approving claims filed by former students of now-defunct Corinthian Colleges also violated the Administrative Procedures Act.  The suit alleges that because ED already notified the students that they were entitled to discharge of their loans under the borrower defense regulations, the current delay while ED reconsiders regulations violates the Act’s bar on applying rules retroactively.  People v. United States Dep’t of Educ., No. 17-7106, Dkt. No. 1 (N.D. Cal. Dec. 14, 2017).                 2.     Other State Attorney General Lawsuits There were also developments outside of the Obama-era regulations.  First, California sued Ashford University and its parent company, Bridgepoint Education, alleging that the school made misrepresentations about financial aid, credit transfer policies, and employment statistics to induce students to enroll.  People v. Ashford Univ., LLC, No. RG17883963, Dkt. No. 1 (Cal. Super. Ct. Nov. 29, 2017).  Ashford and Bridgepoint have denied the allegations and stated they will vigorously defend against the suit. Second, the United States has filed a statement of interest in a case brought by Massachusetts Attorney General Maura Healey against Pennsylvania Higher Education Assistance Agency (PHEAA).  Healey’s case alleges that PHEAA violated state and federal law by engaging in deceptive student loan-servicing practices on loans owned or subsidized by the Federal Government.  In an interesting turn, the United States has argued the suit should be dismissed as preempted by federal law.  That motion is awaiting decision. C.     Other News                 1.     Schools in the Courts Outside of the FCA and state-Government realms, there were other interesting developments. First, the Ninth Circuit held in Benjamin v. B&H Education, Inc., 877 F.3d 1139 (9th Cir. 2017), that cosmetology students are not employees of their schools.  The plaintiffs in the case were cosmetology students, who alleged they should have been paid wages for the time they spent practicing their skills by interacting with paying customers at their school.  In affirming summary judgment in favor of B&H Education, the Ninth Circuit adopted the “primary beneficiary test” and held that the students were not employees because they—and not the school—were the primary beneficiaries of the educational program and the school had not “subordinated the educational function of its clinics to its own profit-making purposes.”  Id. at 1143.  The students had not expected to be paid when they enrolled, had received training and academic credits, had no expectation of employment with the school after graduation, and “did not routinely displace the work of paid employees.”  Id. at 1147. Second, the former students who filed a lawsuit against ITT Educational Services, Inc. in the Southern District of Indiana last year received court approval for a settlement that will allow them to participate in bankruptcy proceedings and pursue $1.5 billion in claims.  The settlement will also cancel $600 million in debts for students who attended ITT between 2006 and 2016. Third, the Government appears close to wrapping up its pursuit of FastTrain College owner, Alejandro Amor.  As you may recall, in 2016, Amor was sentenced to eight years in federal prison for his role in falsifying records and enrolling ineligible students to obtain Title IV funding.  Now the Government has seized Amor’s Florida home and boat to help satisfy the $1.9 million restitution Amor owes.  FastTrain must also pay more than $20 million in damages and penalties, pursuant to a February 2017 district court judgment. Finally, Florida Technical College reached a $600,000 settlement with the DOJ last month to settle a case alleging that employees at the school’s Cutler Bay campus submitted financial aid paperwork that falsely stated that 27 students had high school diplomas or GEDs.                2.     Consolidations, Sales, and Reorganization This quarter, several institutions continued the trend of consolidations and reorganizations.  Minneapolis-based Capella University and Virginia-based Strayer University will merge.  The schools will continue to operate as separate institutions but will have a common parent company called Strategic Education, Inc.  The parent company of DeVry University plans to transfer DeVry, along with Keller Graduate School of Management, to Cogswell Education, LLC, which owns Cogswell College, a small for-profit school with about 600 students.  For-profit law school chain InfiLaw reportedly is looking to sell its two remaining law schools, Arizona Summit Law School and Florida Costal School of Law.  Education Corporation of America, which owns and operates Virginia College and Brightwood College, announced that it will buy Vatterott Educational Centers.  Finally, Grand Canyon University will make a second attempt to change its status from for-profit to nonprofit.  The school previously applied in 2014, but its accreditor rejected the plan.  It will be interesting to see how ED, under the new Administration, approaches these requests.                3.     Increased Activity Beyond the For-Profit Sector The past scrutiny of the for-profit education sector continues to turn more and more to the traditional educational sector.  In December, for instance, the Better Government Association, a private, nonpartisan watchdog group, released a report claiming that City Colleges of Chicago’s Kennedy-King College misreported graduation numbers in order to improve its chances of winning national recognition for improving performance. The California Department of Education is facing allegations it inflated graduation rates.  According to the results of a federal audit announced in January by ED, California inflated the state’s 2014 high school graduation rate by 2 percentage points. And finally, the DOJ has announced an investigation into whether the ethics code of the National Association for College Admission Counseling (NACAC) violates federal antitrust law.  The ethics code, called the Statement of Principles of Good Practice, encourages ethical admissions practices, such as not tying faster acceptance of admission offers to better housing assignments.  The DOJ has sent information requests to NACAC and to a number of professionals who helped draft the ethics code. * * * 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) © 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.

February 6, 2018 |
DOJ Policy Statements Signal Changes in False Claims Act Enforcement

Click for PDF The Department of Justice issued two internal memoranda in January that, taken together, reflect the Trump Administration’s first significant policy statements on False Claims Act (FCA) enforcement.  The first memorandum directs government attorneys evaluating a recommendation to decline intervention in a qui tam FCA suit to consider in addition whether to exercise DOJ’s authority to seek dismissal of the case outright.  The second prohibits DOJ from relying on a defendant’s failure to comply with other agencies’ guidance documents as a basis for proving violations of applicable law in affirmative civil enforcement actions.  The practical effects of these statements on FCA enforcement will only be clear when we see how – and how often – they are applied in actual cases.  But particularly when coupled with the Supreme Court’s landmark decision on scienter and materiality in Universal Health Services v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), these DOJ memoranda provide substantial arguments for FCA defendants in seeking to defeat FCA claims. Exercise of DOJ’s Dismissal Authority On January 10, 2018, Michael Granston, the Director of the Fraud Section of DOJ’s Civil Division, issued a memorandum directing government lawyers evaluating a recommendation to decline intervention in a qui tam FCA action to “consider whether the government’s interests are served . . . by seeking dismissal pursuant to 31 U.S.C. § 3730(c)(2)(A).”  DOJ did not publicly release the memorandum at the time, but it has now been widely reported and is available here. DOJ has authority under section 3730(c)(2)(A) to seek dismissal of qui tam FCA suits.  Traditionally, the government has exercised this authority only sparingly.  But, as we discussed in our year-end FCA update (found here), Mr. Granston hinted previously at a change in policy with respect to dismissal of meritless qui tam suits.  Despite DOJ’s denial at the time that any policy changes had been implemented, the memorandum appears to confirm a policy shift in favor of more actively seeking dismissal of certain qui tam FCA actions. The memorandum notes that DOJ “has seen record increases in qui tam actions” filed under the FCA, and while the “number of filings has increased substantially over time,” DOJ’s “rate of intervention has remained relatively static.”  Emphasizing that DOJ “plays an important gatekeeper role in protecting the False Claims Act,” the memorandum identifies dismissal as “an important tool to advance the government’s interests, preserve limited resources, and avoid adverse precedent.” Under the memorandum, DOJ attorneys should consider dismissal: Where “a qui tam complaint is facially lacking in merit,” or where, after completing an investigation, the government concludes that the relator’s allegations lack merit. Where a qui tam action “duplicates a pre-existing government investigation and adds no useful information to the investigation.” Where “an agency has determined that a qui tam action threatens to interfere with an agency’s policies or the administration of its programs and has recommended dismissal to avoid these effects.” Where “necessary to protect the Department’s litigation prerogatives,” such as “to avoid interference with pending Federal Torts Claim Act action” or “to avoid the risk of unfavorable precedent.” When necessary “to safeguard classified information,” particularly in cases “involving intelligence agencies or military procurement contracts.” To preserve government resources “when the government’s expected costs are likely to exceed any expected gain,” (e.g., in situations where the government will incur the costs of  “monitor[ing] or participat[ing] in ongoing litigation, including responding to discovery requests”). Where there are “problems with the relator’s action that frustrate the government’s efforts to conduct a proper investigation.” The memorandum cites cases illustrating each factor.  This list, the memorandum observes, is not exhaustive, and the seven factors are not mutually exclusive.  Further, “there may be other reasons for concluding that the government’s interests are best served by the dismissal of a qui tam action.”  The memorandum also notes that “there may be alternative grounds for seeking dismissal,” such as under “the first to file bar, the public disclosure bar, the tax bar, the bar on pro se relators, or Federal Rule of Civil Procedure 9(b).” The federal courts have split on the extent of DOJ’s authority to dismiss qui tam actions under section 3730(c)(2)(A).  While DOJ takes the position that it has “unfettered” discretion to dismiss qui tam FCA suits, the memorandum advises attorneys to argue in jurisdictions that adopt a “rational basis” standard that the standard was intended to be “highly deferential.”  In jurisdictions where the standard of review is not settled, the memorandum instructs DOJ attorneys “to identify the government’s basis for dismissal and to argue that it satisfies any potential standard for dismissal under section 3730(c)(2)(A).” Reliance on Agency Guidance in Affirmative Civil Enforcement Cases Associate Attorney General Rachel Brand, the Department’s third-ranking official, issued a memorandum on January 25, 2018, that prohibits DOJ from using noncompliance with other agencies’ “guidance documents as a basis for proving violations of applicable law in” affirmative civil enforcement cases (ACE cases), and from using “its enforcement authority to effectively convert agency guidance documents into binding rules.”  The memorandum is available here. Agencies commonly issue guidance documents interpreting legislation and regulations, and the government has sometimes employed evidence that a defendant violated such guidance to prove a violation of the underlying statute or regulation.   The memorandum explicitly prohibits DOJ attorneys from engaging in this practice.  Under the new policy, DOJ “may continue to use agency guidance documents for proper purposes.”  For instance, where a guidance document “simply explain[s] or paraphrase[s] legal mandates from existing statutes or regulations,” DOJ “may use evidence that a party read such a guidance document to help prove that the party had requisite knowledge of the mandate.”  Notably, the memorandum applies to both “future ACE actions brought by the Department, as well as (wherever practicable) to those matters pending as of the date of this memorandum.” The Brand memorandum carries forward to ACE actions a policy established by Attorney General Jeff Sessions in a November 16, 2017, memorandum.  In that memorandum, Attorney General Sessions prohibited Department components from issuing guidance documents that purport to create rights or obligations binding on persons “without undergoing the rulemaking process,” and from “using its guidance documents to coerce regulated parties into taking any action or refraining from taking any action beyond what is required by the terms of the applicable statute or lawful regulation.”  The Brand memorandum provides that the principles articulated by Attorney General Sessions “should guide Department litigators in determining the legal relevance of other agencies’ guidance documents.” While the policy articulated in the Brand memorandum applies to more than just FCA suits, the memorandum specifically emphasizes that it “applies when the Department is enforcing the False Claims Act, alleging that a party knowingly submitted a false claim for payment by falsely certifying compliance with material statutory or regulatory requirements.”  That the memorandum uses FCA enforcement suits as its only illustrative example could suggest that the Department is particularly focused on the policy’s application to FCA cases. Analysis The Granston and Brand memoranda reflect the most significant policy statements on FCA enforcement from DOJ under Attorney General Sessions.  As our year-end update explained, FCA enforcement remained robust in the first year of the Trump Administration, and on several occasions the new DOJ leadership expressed public support for continued strong enforcement of the law.  The policy statements  signal a shift in approach, at least in some cases.  The full effect of these policy statements will be determined over time as they are applied in actual cases, but a few observations are warranted now.  First, although the Granston memorandum may have some salutary effects for FCA defendants (as noted below), the Brand memorandum is likely to be the more significant development, especially in the wake of Escobar.  Recently, courts have relied on Escobar to set aside judgments on the ground that alleged misrepresentations were not material to the government’s payment decision.In a 2017 decision, for example, the Fifth Circuit overturned a $663 million judgment—the largest judgment in FCA history—on the ground that a purported misrepresentation was not material because the government knew of the misrepresentation and yet continued to pay.  United States ex rel. Harman v. Trinity Industries, 872 F.3d 645, 663 (5th Cir. 2017).  In assessing materiality, the Fifth Circuit also relied on the fact that DOJ declined to intervene in the suit.  Likewise, in January 2018, a district court vacated a $350 million jury verdict after concluding that the relator failed to offer any evidence that the misrepresentation was material.  There, again, the government was aware of the alleged regulatory noncompliance underlying the suit but nevertheless continued to pay the defendants’ claims.  The court recognized this as “strong” and uncontroverted evidence that noncompliance with the requirement was immaterial.  United States ex rel. Ruckh v. GMC II LLC et al., 2018 WL 375720, at *10 (M.D. Fla. Jan. 11, 2008).The Brand memorandum, coupled with courts taking Escobar‘s materiality discussion seriously, has the potential to be a strong pro-defendant development.  Historically, agency guidance documents appeared frequently in FCA cases.  Before the Brand memorandum, it looked likely that, as the government contended with heightened materiality requirements under Escobar, it would routinely invoke such guidance documents to establish the importance of a misrepresentation to a payment decision.  Now, where a defendant can show that the guidance document does more than merely restate the underlying law, DOJ will not be able to make such arguments. This may have important ramifications for FCA defendants from several industries.  For example, a significant number of Medicare-based FCA cases could be affected if the Medicare Benefit Policy Manual is considered an “agency guidance document.”  Moreover, many anti-kickback cases rely on guidance documents issued by the Office of Inspector General (OIG) of the Department of Health and Human Services.  By eliminating agency guidance documents as a means to establish liability, the Brand memorandum could significantly reduce the range and scope of conduct that can give rise to FCA liability. The Brand memorandum also dovetails with the Granston memorandum.  Suppose that a relator asserts a claim under the FCA that is based on a theory that a defendant falsely certified compliance with a requirement, but that requirement is found only in an agency guidance document.  FCA defendants can rely on materiality arguments at the motion to dismiss or summary judgment stages, but could also rely on the Granston memorandum to advocate that DOJ recommend dismissal at the point of declination, on the grounds that dismissal is “necessary to protect the Department’s litigation prerogatives” (namely, DOJ’s policy of not using noncompliance with other agencies’ guidance documents as a basis for proving violations of applicable law). Finally, the Brand memorandum is part of a broader trend that has reduced the ways in which a claim can be “false.”  A growing number of courts have declined to find false claims where there is no evidence of an “objective falsehood,” such as in cases where a claim is premised on battling expert interpretations of an ambiguous statute or regulation, or where based on competing medical opinions.  The Brand memorandum will make it harder than ever for DOJ to prove, for example, that a claim was “false” because it sought payment for services that were not “medically necessary.”  First, in line with recent court decisions, DOJ cannot, in attempting to prove falsity, rely solely on its own expert’s disagreement with the treating provider about what was “necessary.”  Second, under the Brand memorandum, DOJ cannot rely on agency guidance documents construing what is “medically necessary” to prove liability.  While this prohibition could eliminate the Medical Benefit Policy Manual as a source for proving falsity, it will also presumably rule out national and local coverage determinations issued by program contractors, determinations that DOJ attorneys previously claimed were binding. Second, nothing in the Brand memorandum suggests that the government will be able to use this policy decision to limit a defendant’s use of guidance documents to defend itself.  To the contrary, the courts have been clear that all evidence that impacts a defendant’s state of mind, including government statements, is admissible on the FCA’s scienter element.  See, e.g., United States ex rel. Walker v. R&F Props. Of Lake Cnty, Inc., 433 F.3d 1349, 1356–58 (11th Cir. 2005) (deeming Medicare manuals and expert testimony relevant to show “the reasonableness of [defendant’s] claimed understanding of that language,” and rejecting the district court’s holding that such evidence was “irrelevant . . . because none of it held the force of law.”).And although it has been reported that DOJ criminal attorneys have emphasized that they are not bound by the Brand memorandum, the underlying legal principle applies equally to criminal cases: the executive branch should not, through agency documents, define the substantive scope of penal laws.  Cf., e.g., Carter v. Welles-Bowen Realty, Inc., 736 F.3d 722, 730 (6th Cir. 2013) (Sutton, J., concurring) (“[T]he rule of lenity forbids deference to the executive branch’s interpretation of a crime-creating law.”). Third, DOJ’s commitment to exercise its authority to dismiss qui tam actions is welcome news to FCA defendants given that relators have pursued cases more frequently even when DOJ has declined to intervene.  Historically, declined cases rarely led to significant recoveries, a sign of the relative weakness of such cases overall.  In 2017, the government recovered nearly $426 million in cases where it declined to intervene, the second-highest amount on record.  Although that amount accounted for just 11% of all federal recoveries in 2017, the promise of significant recoveries in declined cases might tempt relators to pursue weak cases.  To the extent that DOJ attorneys employ the Granston memorandum’s factors to terminate such cases before defendants incur further litigation costs, defendants may enjoy some relief from the active relators’ bar.On the other hand, the memorandum also observes that declination decisions frequently cause relators to dismiss their claims, and that that the number of voluntarily dismissed actions “has significantly reduced the number of cases where the government might otherwise have considered seeking dismissal pursuant to section 3730(c)(2)(A).”  This point could reflect DOJ’s view that the pool of cases in which dismissal is appropriate is small.  Further, the Granston memorandum does not apply to FCA retaliation claims, or to claims brought under state FCA statutes.  The memorandum could encourage qui tam plaintiffs to assert these sorts of claims in order to prevent their suits from being dismissed outright.  These dynamics may limit the practical benefits of the memorandum for some FCA defendants. Fourth, the Granston memorandum equips qui tam defendants with an arsenal of relevant arguments supporting dismissal.  In the past, FCA defendants have been forced to guess what arguments DOJ might find persuasive in deciding whether to invoke its authority under section 3730(c)(2)(A).  By specifying key factors and articulating the overall standard, the memorandum provides FCA defendants an analytical structure for advocating to DOJ that a relator’s case is meritless and should be dismissed before litigation (i.e., before incurring the expenses associated with motion to dismiss briefing, discovery, and summary judgment briefing).  The Granston memorandum also cites cases illustrating each dismissal factor.  Qui tam defendants should consider whether their case is factually similar to these illustrative cases.  DOJ will likely hesitate to move for dismissal of a qui tam suit unless they are confident the motion will be granted.  FCA defendants who are able to show that precedent supports dismissal of their case have an increased likelihood of persuading DOJ to seek dismissal.Relatedly, the memorandum also will spur increased internal scrutiny within DOJ of dismissal questions.  The assigned DOJ case team will internally review whether dismissal is appropriate at every declination decision, and the case team’s dismissal decision will be reviewed by component supervisors and tracked as a statistic by DOJ.  In other circumstances, just by tracking statistics on a policy shift of this nature, DOJ has nudged its attorneys toward the intended result.  Here, internal attention and tracking should increase the likelihood that DOJ attorneys recommend dismissing qui tam FCA suits. * * * * * In sum, there is reason to be optimistic that these two DOJ memoranda will have the effect of scaling back FCA enforcement.  Moreover, because the Brand memorandum applies to cases currently pending as of its issuance “wherever practicable,” companies currently facing FCA liability should carefully consider whether the enforcement theory is rooted in the underlying statute or regulation, or is only supported by a guidance document. The following Gibson Dunn lawyers assisted in preparing this client update: Stuart Delery, Winston Chan, John Partridge, Stephen Payne, Jonathan Phillips, Charles Stevens and Justin Epner. Gibson Dunn’s lawyers have handled hundreds of FCA investigations and have a long track record of litigation success.  Among other significant victories, Gibson Dunn successfully argued the landmark Allison Engine case in the Supreme Court, a unanimous decision that prompted Congressional action.  See Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008).  Our win rate and immersion in FCA issues gives us the ability to frame strategies to quickly dispose of FCA cases.  The firm has more than 30 attorneys with substantive FCA expertise and more than 30 former Assistant U.S. Attorneys and DOJ attorneys. As always, Gibson Dunn’s lawyers are available to assist in addressing any questions you may have about these developments.  To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following. Washington, D.C. F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Joseph D. West (+1 202-955-8658, jwest@gibsondunn.com) Andrew S. Tulumello (+1 202-955-8657, atulumello@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Caroline Krass (+1 202-887-3784, ckrass@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) © 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.

February 1, 2018 |
2017 Year-End United Kingdom White Collar Crime Update

Click for PDF Those with operations in the United Kingdom, especially in the financial services or regulated sectors, will have been very aware during the course of this year of the flood of new legislation imposing significant and varied compliance obligations: the Policing and Crime Act 2017 (the “PCA”) changing the nature of financial sanctions enforcement; the Criminal Finances Act 2017 (the “CFA”), introducing new offences of failing to prevent the facilitation of tax evasion, and changing the suspicious activity report regime; the European Union Financial Sanctions (Amendment of Information Provisions) Regulations 2017 (“IPR 2017”) imposing a reporting obligation on lawyers, accountants, tax advisers, casinos, estate agents and others regarding breaches of financial sanctions; the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the “2017 AML Regulations”) implementing the EU’s Fourth Money Laundering Directive and significantly changing the face of anti-money laundering compliance for those in the regulated sector. Coupled with this new wave of regulation has been another year of substantial enforcement by a range of regulators and prosecutors, for a wide variety of offences. These enforcement actions are discussed below in the relevant sections. The year has also seen significant developments from the courts. Most notably this can be seen in the High Court decision on privilege in SFO v ENRC which is discussed below and will, unless overturned, have significant implications for the conduct of internal investigations relating to the UK. In addition, given the large number of offences which require the prosecution to prove dishonesty, the fundamental change to the test for dishonesty in the Supreme Court decision of Ivey v Genting Casinos (UK) Limited [2017] UKSC 67 will have repercussions for a vast number of prosecutions in years to come. A U.S. decision from this year is also likely to have repercussions in the UK. In the case of United States v Allen et al., No. 16-898 (2nd Circuit, July 19, 2017) , it was held that evidence constituting compelled testimony from a FCA compelled interview in the UK could not be used by the prosecution. This judgment is likely to have significant impact on the cross-border co-operation between the U.S. and UK authorities. __________________________________ Table of Contents 1.…. Developments Relating to Financial Crime Generally New Economic Crime Unit for the UK The 2017 money laundering and terrorist financing National Risk Assessment (“NRA”) Privilege The Regulators and Prosecutors Continued use of DPAs Modern Slavery Act Paradise Papers Brexit 2.… Bribery and Corruption UK anti-corruption strategy for 2017 to 2022 Enforcement: concluded bribery/corruption enforcement against corporations Enforcement: concluded bribery/corruption prosecutions of individuals Enforcement: ongoing investigations and prosecutions SFO: expected trial dates International co-operation 3.… Fraud Enforcement: SFO Enforcement: FCA City of London Police and Crown Prosecution Service Ivey v Genting Casinos SFO: expected trial dates 4.… Tax Criminal Finances Act: new failure to prevent the facilitation of tax evasion offences European Union tax haven Black List and Grey List Enforcement: concluded prosecutions relating to tax fraud 5.… Financial and Trade Sanctions Legislative developments New and revised sanctions regimes Trade and export controls Export Control Order: amendments Case law Enforcement 6.… Anti-Money Laundering New economic crime centre Criminal Finances Act 2017 2017 AML Regulations enter into force Sanctions and Anti-Money Laundering Bill FCA final guidance on treatment of PEPs for AML purposes FCA anti-money laundering annual report for 2016/17 Bitcoin and cryptocurrencies Case law Enforcement Offshore enforcement 7.…. Competition / Antitrust Enforcement Litigation Brexit – House of Lords competition inquiry 8.… Market abuse and Insider Trading and other Financial Sector Wrongdoing FCA Enforcement: insider dealing Civil enforcement for market abuse EU developments   __________________________________ 1.     Developments Relating to Financial Crime Generally New Economic Crime Unit for the UK In December 2017, the Home Secretary, the Hon. Amber Rudd, announced the creation of a new national economic crime centre within the National Crime Agency (the “NCA“). According to the Home Secretary the new centre will be tasked with coordinating the national response to economic crime “backed by greater intelligence and analytical capabilities“. This is part of a wider package of measures which are designed to “ensure the UK is a hostile environment for cases of fraud, bribery, corruption and money laundering“. The Home Secretary also announced that the Government will introduce legislation that will enable the NCA to directly the task the Serious Fraud Office (“SFO”) to “target the worst offenders“. This may be unnecessary, as section 5(5) of the Crime and Courts Act 2013 already permits the Director General of the NCA to direct the performance of tasks by the police force, although this power has never been used. Other than the idea that it would be at the NCA’s direction, rather than just the Director General, it is unclear how this new legislation is a change from the current position where the SFO is already the primary investigating and prosecuting agency for the most serious financial crime. The Government claims that the SFO will continue to act as an independent organisation, supporting the multi-agency response led by the NCA, but there is room to question how the SFO can be expected maintain its independence when acting under the direction of the NCA. The 2017 money laundering and terrorist financing National Risk Assessment (“NRA”) In October 2017, the UK published its second risk assessment setting out the threats posed to the UK by money laundering and terrorist financing. The first NRA was published in 2015 and set out the areas where action was needed to combat money laundering and terrorist financing. In response, in 2016, the Government released an action plan which set out planned reforms to the AML regime: reform given effect by the CFA and 2017 AML Regulations which change both the suspicious activity report regime and the compliance regime. The key findings of the 2017 assessment are that: high-end and cash-based money laundering remain the greatest areas of money laundering risk to the UK; professional services remain vulnerable as money launderers look to disguise the origin of their funds; and cash remains the favoured method for terrorists to move funds out of the UK. As regards the financial services sector, the 2017 NRA found that overall the sector remained at high risk of money laundering. The report provides separate assessments for retail banking, wholesale banking, capital markets, and wealth management. In summary, retail banking was identified as being at a high risk of money laundering due to the increasing speed and volume of transactions together with a widespread criminal intent to exploit retail banking products, although the NRA noted that controls are more developed in retail banking than other areas. In wholesale banking and capital markets, the risk of money laundering was found to be high due to the risks of large sums being laundered through capital markets and the relative lack of controls. Wealth management was also found to be high risk due to its exposure to the proceeds of political corruption and tax evasion and regulatory concerns. Privilege As reported in our last update, regulators continue to take an aggressive stance on privilege and two important judgments over the past year demonstrate this. The judgments of Hildyard J in the RBS Rights Issue Litigation [2016] EWHC 3161 (Ch) (“RBS“) and Andrews J in Serious Fraud Office v Eurasian Natural Resources Corporation Limited [2017] EWHC 1017 (QB) (“SFO v ENRC“) have cast doubt over the scope of litigation privilege and in particular its availability in the context of criminal and regulatory investigations. SFO v ENRC The SFO v ENRC judgment is one of the most notable cases of 2017 as it is likely to have wide repercussions on how companies conduct investigations and argue privilege. The case involved an investigation by the SFO into the activities of Kazakh mining company ENRC, now owned by Eurasian Resources Group. The opening of the investigation followed a period of dialogue between the SFO and ENRC, during which ENRC was reporting to the SFO. The investigation focused on allegations of fraud, bribery and corruption. As part of its investigation, the SFO sought to compel the production of documents (including interview notes and factual updates) that had been prepared by ENRC’s lawyers during the course of an internal investigation. Assertions of both legal advice privilege and litigation privilege were made in respect of the documents sought by the SFO. All assertions of privilege, save for a limited legal advice claim in respect of a narrow group of documents, failed. We reported on this decision and its implications in our 2017 UK White Collar Crime Mid-Year Alert. Since then there have been two further developments. In October 2017, the High Court granted ENRC leave to appeal and on November 21, 2017 the Law Society applied for permission to intervene in the appeal. The Law Society has expressed concern throughout the case over the impact of the case on privilege. Joe Egan, president of the Law Society, made a statement that the decision has “profound implications for when and how companies and their employees are protected by privilege” and believed that it may discourage companies from self-reporting. RBS Rights Issue In RBS, the claimants sought disclosure of notes recording interviews with current and former employees of RBS. The interviews were conducted by in-house and outside counsel as part of two internal investigations carried out by the bank. RBS sought to withhold disclosure of the interview notes on different bases, including that they were subject to legal advice privilege, that they were “lawyers’ privileged working papers”, or that the English Court should apply U.S. law which recognises the notes as privileged. The High Court rejected these arguments and held that the notes of interviews were not privileged. The Regulators and Prosecutors Serious Fraud Office In the May 2017 Conservative election manifesto, it was pledged to integrate the SFO into the NCA and Crown Prosecution Service (“CPS”). Following that party failing to maintain its Parliamentary majority (albeit remaining in government), there have been no further statements since then and this pledge appears to have been quietly dropped and replaced with the above-mentioned plan from the Home office for the Economic Crime Unit. The SFO has faced criticism this year particularly over LIBOR-related prosecutions. These include the collapse of the trial against two ex-traders, Stylianos Contogoulas and Ryan Michael Reich, who were accused of rigging the LIBOR rate. As discussed in more detail in the Fraud section below, the SFO has also faced criticism over Saul Haydon Rowe, the SFO’s expert witness who provided evidence in many LIBOR trials, and who admitted to texting friends during the trials to ask for help understanding some of the banking terms. At least one former trader is currently requesting permission to appeal a 2016 conviction for manipulating the LIBOR rate with the argument that the evidence of Mr Rowe as the SFO’s expert witness was unreliable. The other key development for the SFO is that David Green QC is shortly to end his term as Director. Applications from those wishing to replace him close on February 5, 2018, and it is expected that the new Director will be in office in April. Financial Conduct Authority (“FCA”) This year the FCA has collected significantly more in fines than it did in 2016. In 2017, the cumulative value of fines imposed was more than £225 million in comparison with £22 million in 2016. The figure for 2017 is, however, smaller than the total fines collected in each of 2013, 2014 and 2015. An enforcement action by the FCA since our last update resulted in a £34.5 million fine levied in October 2017 against Merrill Lynch International in relation to exchange traded derivative transactions. This was the first enforcement action based on allegations of the non-reporting of details of trading instruments since the European Markets Infrastructure Regulation reporting requirements were introduced in 2008 to help improve transparency and help regulators understand the risks banks faced. Merrill Lynch cooperated with the FCA. In the same month, the FCA also fined Rio Tinto PLC £27 million under the Disclosure and Transparency Rules (see further below). As noted in our 2017 Mid-Year UK White Collar Crime Alert, in January 2017 the FCA fined Deutsche Bank £163 million over AML controls (see further below). Prudential Regulation Authority (“PRA”) In 2017 the PRA imposed just one fine. On February 9, 2017 the PRA fined a global investment bank £17.85 million and its related company £8.925 million for “failing to be open with the PRA“. This lack of openness lay in the fact that the companies involved “did not inform the PRA” about an enforcement actions being taken by the New York Department of Financial Services “until after the DFS’ public announcement“. It is important to stress that this was the only misconduct complained of and which generated this significant fine. As stated by the PRA “Where a firm operates across multiple jurisdictions, the PRA expects it to be organised such that, when issues arise concerning its operations in one jurisdiction which may impact on other jurisdictions, the regulatory responsibilities of the firm as a whole are appropriately considered“. The lessons for companies with multiple regulators are clear; the PRA (and the same applies to the FCA) expects to be told in advance about any regulatory enforcement against a company taking place around the world. Continued use of DPAs As reported in our 2017 Mid Year UK White Collar Crime Alert, the SFO secured one DPA in 2015, one in 2016, and two in the first half of 2017: Rolls Royce PLC in January 2017 and then Tesco PLC in April 2017. The agreement with Rolls Royce PLC is especially notable as under the terms of the DPA, Rolls Royce agreed to pay £497.25 million. See also our 2017 Year-End DPA and NPA Alert. The SFO’s General Counsel has said in a published speech that the SFO will only use DPAs if it believes a company is unlikely to reoffend and has been proactive in cooperating. The continued use and promotion of DPAs is an indication that the SFO and other government bodies are using and intend to continue to use the new powers made available by recent legislation. As discussed below in relation to sanctions offences under the PCA, and the new failure to prevent tax evasion offences under the CFA, the DPA regime is being extended to other offences as and when they are enacted. Modern Slavery Act As reported in the 2016 Year End UK White Collar Crime Update, the UK government published its Modern Slavery Act Review in July 2016, covering the first 12 months of the Modern Slavery Act 2015. The government did not publish a further review in 2017. However, in October 2017, the Home Office issued updated guidance on compliance with the 2015 Act. Under the Act, a commercial organization carrying on a business, or part of a business, in the UK and having a minimum £36 million annual global turnover was already required to publish on its website an annual statement explaining the steps taken to ensure that slavery and human trafficking are not taking place in any of its supply chains or in any part of its business. The October 2017 guidance now encourages smaller organizations to produce the statements voluntarily. The new guidance also recommends that the statements should cover the organization’s internal anti-trafficking policy, due diligence measures in monitoring supply chains, and anti-trafficking training for staff, among other items. The guidance requests that organizations keep public archives of their annual statements to allow the public to compare statements between years and monitor the progress of the organization over time. On December 15, 2017, the National Audit Office published a report analyzing the government’s strategy to tackle modern slavery, noting that the Home Office had limited means of tracking the strategy’s progress and highlighting shortcomings in the national referral mechanism used for identifying victims. The report found that there had been 80 prosecutions for 155 offences in 2016. Paradise Papers In November 2017, over 13 million documents were leaked, mostly related to the law firm Appleby. These documents revealed the tax and other arrangements of a large number of individuals and corporations. Although there has been media criticism of some of the high-profile individuals involved and calls for legislation on offshore arrangements to be reformed, one of the most notable aspects of the leak is that the response within the UK has been reasonably muted, especially in comparison to the reaction to the Panama Papers leak which we reported in our 2016 Year-End UK White Collar Crime Alert. The Panama Papers leak resulted in a Panama Papers Taskforce being set up and the FCA contacting 64 firms to establish their links with the Panama law firm at the centre of the controversy. In contrast, the UK’s response to the Paradise Papers has been so muted that in November 2017, more than 30 Members of the European Parliament issued a letter which criticized the British government for failing to take any action against the offshore tax industry following the disclosures in the Paradise Papers. One possible reason why public reaction to the Paradise Papers has been so limited is that most of the schemes revealed were lawful. In addition, it appears many of the public figures named were not directly involved in organising these arrangements and the public may simply be losing interest following coverage of Lux Leaks in 2014, and Swiss Leaks and the Panama Papers both in 2015. Nonetheless, companies will continue to be conscious of how aggressive tax avoidance schemes and use of offshore tax jurisdictions, even if legal, can cause adverse headlines. It is, however, likely that the Paradise Papers provided significant impetus to the EU’s publication of its black and grey lists of tax havens, as discussed in the Tax section below. Brexit The Sanctions and Anti-Money Laundering Bill (the “Sanctions Bill”) is the first piece of Brexit legislation to be brought before the House of Lords. The Bill aims to allow the UK government to continue to comply with the current UN sanctions regime post Brexit, as well as imposing and enforcing sanctions. The Bill was introduced to the House of Lords on October 18, 2017, had its second reading on November 1, 2017 and is currently at the committee stage. For more information, please see the Sanctions section below. 2.     Bribery and Corruption Without question the key development for 2017 was the DPA entered into with Rolls-Royce. The company was required to pay over £500 million in fine, disgorgement and costs. Underneath that headline story two other companies have been found guilty of corruption and 27 individuals have been convicted of bribery or corruption offences. Moreover, press reports indicate that DPA negotiations between the SFO and Airbus on another substantial resolution are currently in progress. UK anti-corruption strategy for 2017 to 2022 On December 11, 2017, the Department for International Development and the Home Office published the UK anti-corruption strategy for 2017 to 2022. The cross-government anti-corruption strategy provides a framework to guide UK government action to tackle corruption. The strategy lists six priorities and goals focused on reducing the threat to the UK’s national security including instability caused by corruption overseas; increasing the UK’s prosperity at home and abroad; and enhancing public confidence in domestic and international institutions. The six priorities are as follows: 1. Reduce the insider threat in high-risk domestic sectors 2. Strengthen the integrity of the UK as an international financial centre 3. Promote integrity across the public and private sectors 4. Reduce corruption in public procurement and grants 5. Improve the business environment globally 6. Work with other countries to combat corruption The strategy notes that in the present Parliamentary session, a draft bill will be published for the establishment of a public register of beneficial ownership of overseas legal entities where they own or purchase property in the UK, or participate in central government contracts. With this strategy the government intends to strengthen the dialogue between law enforcement agencies and Companies House as well as the central registers of UK Overseas Territories and Crown Dependencies to ensure that law enforcement can more effectively use information contained in PSC (people with significant control) registers, registers of taxable relevant trusts and registers of company beneficial ownership information. In respect of goal 2, the government will consider the findings of its Call for Evidence of corporate criminal liability made in January 13, 2017 and consult, if appropriate, although this commitment is lacklustre. The UK Government also made a commitment to establish a new Ministerial Economic Crime Strategic Board chaired by the Home Secretary. The new Minister for Economic Crime will have oversight of anti-corruption. Enforcement: concluded bribery/corruption enforcement against corporations F.H. Bertling Limited In our 2016 Year-End UK White Collar Crime Alert, we reported that the SFO had announced charges against F.H. Bertling Limited, and seven individuals (Peter Ferdinand, Marc Schweiger, Stephen Emler, Joerg Blumberg, Dirk Jürgensen, Giuseppe Morreale, and Ralf Peterson) relating to an alleged conspiracy to “bribe an agent of the Angolan state oil company, Sonangol, to further F.H. Bertling’s business operations in that country“. On September 26, 2017 the SFO announced that it had secured convictions against F.H. Bertling Limited and six of the individuals for conspiracy to make corrupt payments, contrary to section 1 of the Criminal law Act 1977 and section 1 of the Prevention of Corruption Act 1906. Mr Ferdinand was acquitted by a jury at Southwark Crown Court on September 21, 2017. Of those convicted, Mr Morreale and Mr Emler pleaded guilty to the charges on September 1, 2016 and Mr Blumberg, Mr Petersen (now deceased), Mr Jürgensen and Mr Schweiger pleaded guilty on March 17, 2017. On August 1, 2017, F.H. Bertling Limited also pleaded guilty. One of the individual defendants, Mr Ferdinand was acquitted on September 21, 2017. The conduct complained of was stated by the SFO as being a payment of $250,000 to secure a contract. Unusually, F.H. Bertling has issued its own press release disputing this, stating that “the payment was made to a third party in Angola to enable release of a payment for work contractually done by the former subsidiary and to protect the livelihoods of its employees in the country“. To the extent that F.H. Bertling’s account is correct, then these convictions are all for the making of facilitation payments. This would be the first such conviction, and would underline the oft-stressed point that English law does not allow any exception for facilitation payments. On October 20, 2017 three of the individuals were sentenced, fined and disqualified as company directors. Mr Blumberg, Mr Jürgensen and Mr Schweiger were each given 20-month sentences, suspended for 2 years, a £20,000 fine, payable within 3 months and disqualification from being company directors for 5 years. F.H. Bertling Limited, Mr Morreale and Mr Emler will be sentenced following the conclusion of connected proceedings against F.H. Bertling relating to alleged improper payments relating to North Sea oilfields (as reported in our 2017 Mid-Year UK White Collar Crime Alert) for which the trial is scheduled in September 2018. Rolls-Royce As we reported in detail in our 2017 Mid-Year UK White Collar Crime Alert, on January, 17 2017 Rolls-Royce PLC (“Rolls-Royce”) entered into the UK’s most significant deferred prosecution agreement (“DPA”) to date, following its approval by Lord Justice Leveson. The resolution represents the largest ever criminal enforcement action against a company in the UK following an extensive four-year investigation by the SFO. The investigation concerning the conduct of individuals remains ongoing. Under the terms of the DPA, Rolls-Royce agreed to pay £497.25 million (comprising disgorgement of profits of £258.17 million and a financial penalty of £239.08 million) plus interest, as well as the SFO’s costs of the investigation amounting to approximately £13 million. In November 2017, three ex-employees of Rolls-Royce’s former Energy division, James Finley, Keith Barnett and Louis Zuurhout pleaded guilty to bribery and corruption offences in the United States District Court for the Southern District of Ohio Eastern Division. Andreas Kohler, who worked for an international engineering consulting firm instructed by Rolls-Royce’s former customer in Kazakhstan also entered a guilty plea. A further individual, Petros Contoguris, who worked as an intermediary for Rolls-Royce was indicted. In its November press release, the SFO stated that it provided significant assistance to the U.S. authorities throughout the course of their investigation. The individuals involved all held significant roles within Roll-Royce or firms connected with the company: Mr Finley was a Vice President and Global Head of Sales of Rolls-Royce’s Energy Division. Mr Barnett was a Regional Director of Rolls-Royce’s Energy Division. Mr Zuurhout was a Sales Manager of Rolls-Royce’s Energy Division. Mr Kohler was a Director of an international engineering consulting firm which worked for Rolls-Royce’s former customer in Kazakhstan. Mr Contoguris acted as an intermediary of Rolls-Royce in Kazakhstan. Alandale Rail On July 24, 2017, Alandale Rail Limited (“Alandale”) was convicted of one count of making corrupt payments contrary to section 1 of the Prevention of Corruption Act 1906. The case was not prosecuted by the SFO, but by the Specialist Fraud Division of the CPS, following an investigation by the British Transport Police. The scheme involved two directors, Kevin McKee and John Zayya of Alandale making corrupt payments to the senior manager of a joint venture (Innocent Obiekwe) that oversaw the award of contracts in relation to the upgrade of Farringdon railway station in London. After improperly obtaining the contract, the three then colluded in manufacturing false invoices to enable Alandale to recover the cost of its bribes. When the scheme started to be uncovered, the bribes continued to be paid through an intermediary (William Waring). Nobody involved self-reported and the conduct was only uncovered after a whistleblower came forward from within Alandale. The two directors of Alandale, the recipient of the bribes, and the intermediary all pleaded guilty and were sentenced. The bribe-paying directors received 12 months and 2 years respectively. Following a trial at Blackfriars Crown Court the bribe recipient was sentenced to 12 months in jail, and the intermediary was sentenced to 2 years. Alandale itself was convicted and fined £25,000. These sentences appear more lenient than might have been expected based on the usual application of the sentencing guidelines, which require that the base number used for calculating the fine for a corporation guilty of bribery or corruption is the gross profit from the contract obtained as a result of the offending. The application of this guideline would appear to have suggested a the base figure for Alandale’s fine of £5.2 million. This would then be increased or decreased depending on the presence of aggravating or mitigating circumstances, with a lowest fine available of 20 percent of the base figure. As Alandale did not plead guilty, the availability of maximum mitigation is unlikely to have been available. In addition, the Sentencing Guidelines also require a convicted company to have its profits disgorged from an improperly obtained contract. No such order was made in respect of Alandale. It is unclear why the Sentencing Guidelines, which should be binding, may not have been followed in this case, or why the prosecution do not seem to have sought permission to appeal the sentence. In any event, it would be wrong for companies to assume that this case is anything other than a notable outlier. Enforcement: concluded bribery/corruption prosecutions of individuals There were 27 individuals convicted of bribery or corruption offences in 2017. This is more than in any other year in the last decade. These were all prosecuted by the Crown Prosecution Service, but investigated by different parties. Eight of these convictions were investigated by the SFO, seven by the City of London Police, and the rest investigated by a mixture of the British Transport Police, Thames Valley Police, the Crown Prosecution Service, Leicestershire Police, and Avon and Somerset Police. Ten of the convictions have been discussed above, and a further nine were discussed in detail in our 2017 Mid-Year UK White Collar Crime Alert. With custodial sentences ranging up to 15 years, 2017 has also seen the longest ever custodial sentence for bribery and corruption offences. World Bank tenders As reported in our 2017 Mid-Year United Kingdom Alert, the trial of health equipment consultant Wassim Tappuni took place on July 13, 2017, and was sentenced to six years’ imprisonment at Southwark Crown Court on September 22, 2017. Mr Tappuni received £1.7 million in bribes from 12 medical supply companies that had submitted tenders for projects with World Bank, which had engaged Mr Tappuni as an independent medical procurement consultant. The value of these contracts is estimated at £43 million. Buckingham Palace works contracts Bernard Gackowski pleaded guilty to conspiracy to make corrupt payments in relation to the Buckingham Palace works bribery scandal which we reported on in our 2016 Year End United Kingdom White Collar Crime Alert. He was given a 10-month sentence suspended for two years and ordered to do 200 hours of unpaid work. In sentencing the judge accepted he was a “broken man” who assisted in, but did not benefit from, the wrongdoing. Payments for confidential information On June 6, 2017 Androulla Farr was given a suspended custodial sentence for taking a corrupt benefit valued at £2000. The benefit was a holiday and it was in return for Farr providing confidential information relating to an adoption. Other than an example of the appetite of the UK authorities to prosecute low-value bribery, the case is only otherwise noteworthy as being a rare instance of a prosecution under the Public Bodies Corrupt Practices Act 1889. Five individuals were all convicted under the Bribery Act in relation to payments for confidential insurance information. Underhill, Clarke, and Bowen all worked for an insurance company and were bribed with £7,000 by Sajaad Nawaz and Shaiad Nawaz to release over 700 pieces of confidential information. The investigation was carried out by the City of London Police Insurance Fraud Enforcement Department. All but Shaiad Nawaz pleaded guilty. All five were sentenced on August 25, 2017 and were given suspended custodial sentences ranging from 6 months to 12 months. “Right to Buy” Bribery Scheme Recently, valuations officer Desmond Tough, who worked for the Valuation Office Agency in Aberdeen admitted eight counts of bribery at Aberdeen Sheriff Court on November 23. Mr Tough told people looking to buy a home under the ‘Right to Buy’ legislation that in return for a sum of cash, he would lower the price. A sentencing  hearing is awaited, although the Sheriff has warned that a custodial sentence is likely. Mr Tough was the twenty-third individual convicted under the Bribery Act. Enforcement: ongoing investigations and prosecutions The UK prosecuting agencies are conducting a large number of ongoing bribery and corruption investigations. We will not list all of those here, but only those where there have been significant developments during the course of 2017. Alstom Trials of Alstom Network UK Limited and of Alstom Power Limited, along with individuals are currently ongoing at Southwark Crown Court. A further trial of Alstom Network UK Limited is due to commence in January 2018. ENRC As demonstrated by the SFO v ENRC judgement, the investigation into ENRC is continuing, but as yet no charging decision has been made. Unaoil – Other Companies Involved The SFO is continuing its investigation into Unaoil for suspected bribery, corruption and money laundering offences after allegations of bid-rigging in the oil and gas industry were made against Unaoil and its directors, employees and agents. The investigation, which has been ongoing since March 2016, now includes a number of other companies involved with Unaoil. As we reported in our 2017 Mid-Year UK White Collar Crime Alert, the SFO commenced related investigations in ABB Limited and Amec Foster Wheeler in February and July respectively. Additionally, British oil services company John Wood Group confirmed in their prospectus of May 23, 2017 that they have been conducting their own investigation into their past dealings with Unaoil. Unaoil – KBR Engineering company KBR Inc, is also under SFO investigation in relation to Unaoil’s activities. The investigation, which was announced on April 28, 2017, sparked a federal securities class action suit against KBR in the Texas Federal Court. Unaoil – Petrofac The SFO announced on May 12, 2017 that it was also investigating Petrofac PLC for bribery and corruption offences connected with Unaoil. Petrofac suspended its Chief Operating Officer, Marwan Chedid, almost immediately on May 25, 2017, and saw its Chairman Rijnhard van Tets announce on December 14, 2017 his intention to resign at Petrofac’s May 2018 annual meeting. Unaoil – SBM Offshore and Individuals Charged As reported in our 2017 Year-End FCPA Update SBM Offshore recently settled its FCPA enforcement matter, in which the FCPA were investigating allegations against SBM Offshore of bribery offences in Iraq, amongst other countries. The alleged bribery in Iraq involved the use of Unaoil as an intermediary to pay bribes to foreign officials in Iraq to secure contracts. To this end, four individuals have been charged in relation to the investigation into Unaoil. The SFO announced on November 16, 2017 that Ziad Akle and Basil Al Jarah were both charged with conspiracy to make corrupt payments, contrary to section 1(1) of the Criminal Law Act 1977 and section 1 of the Prevention of Corruption Act 1906. Akle, Unaoil’s territory manager for Iraq, and Al Jarah, Unaoil’s Iraq partner, conspired to make corrupt payments to secure the award of contracts in Iraq to SBM Offshore. Saman Ahsani, Unaoil’s commercial director and son of the head of Unaoil, Ata Ahsani, will also be charged, subject to an extradition request to Monaco. On November 30, 2017 the SFO announced that it had charged two further individuals, both executives at SBM Offshore, for their role in the alleged corrupt dealings between Unaoil and SBM Offshore between June 2005 and August 2011. Paul Bond, former SBM Offshore senior sales manager, and Stephen Whiteley, former vice president with SBM Offshore and Unaoil’s general territories manager for Iraq, Kazakhstahn and Angola, were charged with conspiracy to make corrupt payments contrary to section 1(1) of the Criminal Law Act 1977 and section 1 of the Prevention of Corruption Act 1906. Unaoil – Judicial Review Unaoil also brought judicial review proceedings against the SFO, arguing that the steps taken by the SFO to raid Unaoil’s premises in Monaco were unlawful. As we reported in our 2017 Mid-Year UK White Collar Crime Alert, the High Court rejected this claim in  R (on the application of) Unaenergy Gropup Holding Pte Limited & others v The Director of the Serious Fraud Office [2017] EWHC 600. This is consistent with the British courts’ long-standing circumspection regarding judicial review proceedings challenging decisions taken by prosecutors in the course of their prosecutions. British American Tobacco On August 1, 2017, the SFO confirmed that it is investigating British American Tobacco PLC (“BAT”), its subsidiaries and associated persons in connection with allegations it has paid bribes in several African states in attempts to influence regulation of the tobacco industry in the region. Rio Tinto group The SFO announced on July 24, 2017 that it was launching an investigation into the Rio Tinto group, its employees and anyone associated with its conduct of business in the Republic of Guinea. Tower Hamlets Planning Permission Bribery Allegations Allegations of bribery have been made this December against Tower Hamlets based businessman Abdul Shukur Khalisadar. Khalisadar was recorded demanding a £2 million “premium” from property developers in exchange for guaranteeing planning permission for a £500 million project to build two skyscrapers on the Isle of Dogs. The allegations, first made in 2016 were passed on to the Serious Fraud Office and National Crime Agency after an independent external investigation. Chemring Group PLC and Chemring Technology Solutions Limited On January 19, 2018, the SFO announced it was opening a criminal investigation into Chemring Group PLC and its subsidiary Chemring Technology Solutions Limited. The SFO further stated that this followed a self-report by Chemring and that the investigation was “into bribery, corruption and money laundering“. Chemring’s own press release notes that the investigation concerns two contracts, the most recent of which was obtained in 2011. SFO: expected trial dates The SFO has recently published its court dates. Court dates of note include: the confiscation hearing taking place on March 19, 2018 for Peter Chapman, sentenced to 30 months’ imprisonment for corrupt payments to a Nigerian official to secure contracts for polymer for Securrency PTY Ltd. the trial of Michael Sorby and Adrian Leek, former director and sales manager of Sarclad Limited, a technology products company, is due to take place on April 3, 2018. The second trial of F.H. Bertling and individual defendants is scheduled to commence on September 10, 2018. More about each of these enforcements can be found in our 2017 Mid-Year United Kingdom White Collar Crime Alert, and, for Jolan Saunders, Spencer Steinberg and Michael Strubel, our 2016 Year-End United Kingdom White Collar Crime Alert. International co-operation Chad – Caracal Energy On January 23, 2017, the Court of Appeal found in favour of the SFO in an appeal brought by Ikram Mahamat Saleh against a property freezing order relating to the proceeds from the sale of shares in Caracal Energy Inc (formerly Griffiths Energy), a Canadian oil and gas company, totalling over £4.4 million. In the run up to Griffith’s flotation on the London Stock Exchange, due diligence exercises revealed that the company had paid bribes to Chadian government officials in order to gain access rights to two of the country’s oil blocks. With knowledge of the impending deal, Saleh, the wife of former Deputy Chief of Mission for Chad in Washington DC, bought shares in Griffith’s for a nominal amount. In 2013, Griffiths Energy pleaded guilty to corruption charges in Canada. The property freezing order was granted in the UK in July 2014 by Mr Justice Mostyn in respect of the proceeds from the sale of 800,000 Caracal shares. Saleh first challenged the order in the High Court in July 2015, arguing that an order made by a Canadian Court in 2014 precluded the SFO from claiming that the money in question was recoverable under the UK’s Proceeds of Crime Act 2002 (“POCA”), because the order stipulated that the proceeds from the sale were not criminal and the order was in rem. Mrs Justice Andrews found that the order of the Canadian Court did not have this effect and upheld the property freezing order. Saleh appealed against the decision to the Court of Appeal, maintaining the argument that the SFO was not able to enforce the property freezing order without contravening the order of the Canadian Court. The SFO’s case for upholding the freezing order was based on the argument that Saleh, had acquired the shares as a part of a series of corrupt transactions involving companies and personnel linked to the Chadian Embassy in Washington DC. The Court of Appeal ruled that the order of the Canadian Court did not bind the SFO. If the order was to preclude the SFO from pursuing a property freezing order in the UK, this would be “inconsistent with the statutory regime established by POCA”. Furthermore, the Court of Appeal observed that “the Canadian Order was plainly not the product of a decision-making process, in which the relevant facts were considered and weighed, in which the relevant principles of law were set out and applied to the facts found, and from which a conclusion was reached.” Thus, although the wording of the order gave the impression that it was made on the assessment of the merits of the case and an order in rem, “on a proper analysis it was neither.” Accordingly, the Court of Appeal upheld the confiscation order against Saleh. Angola – NCA investigation It has been reported that the NCA is investigating, and has frozen, some $500m transferred from the Angolan Central Bank to a London bank account in the last days of the presidency of José Eduardo dos Santos in late 2017. An NCA spokesperson is quoted as confirming an investigation “a case of potential fraud against the Angolan government”. Cas-Global and former Norwegian official As reported in our 2017 Mid-Year United Kingdom White Collar Crime Alert, the City of London police is co-operating with anti-corruption investigators in the U.S., Nigeria and Norway in relation to an investigation into the UK company Cas-Global. The investigation is in relation to an alleged bribe paid by Cas-Global to a Norwegian official, Bjorn Stavrum, as part of the sale of seven decommissioned naval vessels from 2012 onwards. It is alleged that Mr Stavrum was paid to assist Cas-Global to disguise the real destination of the vessels from the Norwegian authorities. The vessels were being sold to a former Nigerian guerilla, Government Ekpemupolo. The joint investigation with the Norwegian authorities has led to the arrest of Mr Stavrum and three British nationals. On May 16, 2017 Mr Stavrum was convicted by a Norwegian court, and sentenced to four years and eight months jail. Antigua’s Minister of Tourism arrested in the UK On October 23, 2017, Asot Michael, Antigua’s Minister of Tourism, was arrested in the UK upon disembarking a British Airways flight. The NCA has stated that Mr Michael was questioned in connection with an NCA investigation into bribes paid by a U.K. national for business contracts in the Caribbean. Mr Michael was released under investigation with no conditions imposed, however, the NCA stated that they cannot rule out the possibility of criminal charges in due course. Croatia – Ivica Todoric On November 7, 2017, the Metropolitan Police Extradition Unit arrested Ivica Todoric under a Euriopean Arrest Warrant raised by Croatia. Mr Todoric’s extradition is for him to face charges of fraud and corruption in Croatia. France – Alexandre Djouhri Alexandre Djouhri was arrested at Heathrow Airport on January 7, 2017 and remanded in custody after a hearing at Westminster Magistrates’ Court. The French-Algerian businessman was arrested by officers from the Metropolitan Police acting on a European arrest warrant issued by French authorities for fraud and money laundering offences. Djouhri was allegedly the “middleman” money broker in a multi-million pound corruption scandal with ex-French president Nicolas Sarkozy and late Libyan dictator Colonel Gaddafi. Arrests in the UK re cricket corruption/spot-fixing The NCA arrested three men in February 2017 for bribery offences related to the ongoing investigation into spot-fixing in international cricket. As reported in our 2017 Mid-Year United Kingdom White Collar Crime Alert the men were released on bail pending further enquiries from the NCA, with one man having his passport confiscated until the NCA concludes its enquiries. These arrests followed from reports on February 10, 2017 that two cricketers from the Pakistan Super League had been provisionally suspended by the Pakistan Cricket Board’s anti-corruption unit for spot-fixing. Since the arrests a further six players have been suspended from the Pakistan Super League. 3.     Fraud As we reported in our 2017 Mid-Year United Kingdom White Collar Crime Alert, the first half of 2017 saw the SFO engaged in high profile investigations against Tesco and Airbus.  The second half of the year has seen the trial of former directors of Tesco, significant charges against former board members of an ex-FTSE 250 company and a significant fine brought by the FCA for breach of the disclosure and transparency rules.  The English courts have also re-considered the jury instruction to be given in criminal cases in which dishonesty must be proved.  The new test simplifies the law and is likely to make it easier for prosecutors to successfully prosecute these offences. Enforcement: SFO Afren PLC Following an investigation launched in June 2015, on September 27, 2017 the SFO brought money laundering and fraud charges against the former CEO and CFO of Afren PLC (“Afren”), Osman Shahenshah, and Shahid Ullah, an oil and gas exploration company. It was reported that the defendants set up a fraudulent scheme whereby an offshore company they controlled distributed “excessive payments” received from $400 million worth of business deals with a Nigerian partner of Afren. Shahenshah and Ullah were charged with two counts of fraud by abuse of position and two counts of money laundering. Afren had been a FTSE 250-listed company prior to its collapse in 2015. The company’s administrators have also brought civil damages claim of over $500 million against Shahenshah and Ullah, alleging that their fraudulent activities assisted in the collapse of the company. LIBOR There have been no further trials in connection with LIBOR since our 2017 Mid-Year United Kingdom White Collar Crime Alert. However, as we reported in that update, lawyers for convicted traders Jonathan Mathew and Alex Pabon challenged the evidence of Saul Haydon Rowe, an expert prosecution witness whose expertise was called into question during Mr. Reich’s re-trial. Rowe was a key witness for the SFO; he testified in four of the Libor trials, giving evidence on trading concepts such as short-term interest rates, and assisted with decoding the heavily jargon-filled and abbreviated communications between traders. On November 13, 2017, The Telegraph reported that the families of three convicted Libor traders had requested the Justice Select Committee (a standing Committee of the House of Commons) to investigate the SFO’s selection of Mr. Rowe as an expert. Complaints are now also being raised in relation to a psychiatric expert used by the SFO. On November 24, 2017, Pabon sought permission in a hearing before the Court of Appeal to appeal his conviction on the basis of Rowe’s credibility which his lawyers argued was compromised when he texted friends during breaks in his testimony for help to understand some of the banking terms referred at the trial. At the hearing, Lord Justice Gross described himself as being “deeply troubled” by this matter. The SFO acknowledged that Rowe – who received £400,000 to appear as an expert witness for SFO during the Libor trial – had failed to act with integrity. Mr. Pabon’s appeal will likely impact on the other Libor-related trials in which Rowe also acted as expert witness. Tesco Three former directors of Tesco Stores Limited (“Tesco”) were each charged on August 3, 2017 with one count of fraud by false accounting and one count of fraud by abuse of position. Christopher Bush (former UK managing director), Carl Rogberg (former UK finance director), and John Scoulter (former UK commercial director) pleaded not guilty to the charges on the same day. The trial of these three former Tesco executives began on 25 September 2017 at the Southwark Crown Court. This follows Tesco entering into a DPA in principle with the SFO in March 2017 (see our 2017 Mid-Year United Kingdom White Collar Crime Alert for more information). At trial, the SFO’s lawyer alleged that the Tesco directors had knowingly tried to conceal the real profits of Tesco by way of “conniving and manipulating figures“. The charges against the former Tesco directors can carry prison sentences of up to 10 years. Enforcement: FCA Tom Hayes On November 8, 2017, the FCA published a statement about  the Decision Notice it issued on October 28, 2016 banning Tom Hayes, the former trader convicted in connection with LIBOR manipulation, from performing any regulated activity in the financial services industry. The FCA reached the view that Hayes is not “a fit and proper person as a result of his conviction for conspiracy to commit fraud.” Hayes, who is currently serving an 11 year prison sentence for LIBOR rigging, subsequently appealed the Decision Notice to the Upper Tribunal, which heard the matter on September 25, 2017. The Upper Tribunal decided to grant a stay in favour of Hayes while his case is reviewed by the Criminal Cases Review Commission (“CCRC”).  The CCRC accepted his application earlier in 2017, and Hayes is expected to argue that he was deprived of a fair trial due to his Asperger’s Syndrome, and to dispute evidence given by the expert witness Saul Rowe. Neil Danziger and Arif Hussein On January 8, 2017, the FCA fined Neil Danziger, a former trader, £250,000 in relation to Yen LIBOR manipulation between 2007 and 2010, and banned him for performing any function in relation to regulated financial activity. Mr Danziger disputes the findings, and may seek to challenge the Final Notice. Another trader, Arif Hussein, banned for over allegations of LIBOR manipulation is currently challenging the FCA’s decision. That case is ongoing. City of London Police and Crown Prosecution Service On October 18, 2017, Robert Waterman, a businessman sentenced to six years imprisonment for a VAT fraud, was ordered to return over £3 million to the taxpayer after pleading guilty to cheating the public revenue, money laundering, furnishing false documents, operating a company while a banned director and absconding while on bail. Waterman was sentenced following an investigation conducted by HMRC which found that he had created a fake trade in computer memory sticks, whereby he claimed to be exporting memory sticks to Dubai through his company, enabling him to wrongfully claim almost £5 million in VAT repayments. However, there were in fact no memory sticks, and Waterman was merely creating fake invoices and posting empty parcels. According to the Crown Prosecution press release, Waterman is now expected to sell his assets to raise the funds to pay the £3 million. On July 21, 2017, Mohammed Muj Meah Chaudhari, Suraiya Alam and Victoria Sherrey were sentenced for conspiracy to defraud after stealing over £1.1 million from the Home Office. Through the scheme, they were able to benefit from grants from the Solidarity and Management of Migration Flows European Integration Fund by claiming that their firms were helping with the social, cultural and economic integration of foreign nationals in the UK. Chaudhari was sentenced to seven years imprisonment and disqualified as a director for 15 years, and Alam and Sherrey were sentenced to 12 months jail, disqualified for two years and each ordered to undertake 100 hours of unpaid work. Ivey v Genting Casinos As previewed in the Introduction to this alert, the key question in many criminal cases is whether the defendant was dishonest. Until recently, the jury instructions in English criminal trials asked the jury to consider the test laid down in 1982 in the case of R v Ghosh [1982] EWCA Crim 2. In that case, Ghosh was a medical consultant who falsely claimed fees for a surgical operation he did not carry out himself. He was found to have acted contrary to sections 15(1) and 20(2) of the Theft Act 1968 by attempting to execute a cheque and obtain money through deception. In its judgment, the Court of Appeal set out the following two limb test for assessing whether a person is dishonest: The first limb is objective, and asks whether the act in question is dishonest by the standards of a reasonable and honest person. If the answer is yes, the second subjective limb asks whether the defendant himself realized that his actions would be regarded as dishonest by a reasonable and honest person. The test used for dishonesty in civil proceedings follows the objective test set out in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 and Barlow Clowes International Limited v Eurotrust International Limited [2005] UKPC 37, which determines dishonest conduct by applying “the [objective] standards of ordinary decent people” to a person’s “actual state of….knowledge or belief“. Unlike in Ghosh, the civil test for dishonesty does not require a defendant to appreciate that his conduct was dishonest. On October 25, 2017, the UK Supreme Court handed down its judgement in the case of Ivey v Genting Casinos [2017] UKSC 67. Effectively the Court did away with the second limb of the Ghosh test, and thus brought the civil and criminal tests for dishonesty into line. The landmark decision marks a significant change in the law relating to dishonesty, and is likely to simplify the prosecution of acquisitive offences by applying only an objective, and therefore more easily applicable, test. The case related to Mr Phil Ivey, a gambler, who claimed to have won a total of £7.7 million playing Punto Banco (described below) at Crockford’s Casino in Mayfair, London. The casino refused to pay out these winnings because it believed that he cheated, and Ivey issued proceedings for breach of contract in order to recover his winnings. Ivey used a technique called “edge sorting”, where a person seeks to identify minor differences that appear on playing cards as a result of the manufacturing process and using this knowledge to increase the chances of success. Ivey feigned superstition and asked the dealer to arrange the cards in a certain way to help him to see the edges of the cards to enable him to identify the values. The casino denied liability essentially arguing that Ivey had cheated. Ivey denied that his conduct amounted to cheating as cheating necessarily requires an element of dishonesty, which he claims he did not fully satisfy. On October 8, 2014, following trial, the English High Court found in favour of the casino and held that Ivey’s “play on this occasion amounted in law to cheating” because he gave himself an advantage, by using the dealer as an “innocent agent” when he knew that she did not understand the consequences of her actions. Ivey subsequently appealed the decision, and his appeal was dismissed by the Court of Appeal. The question before the Supreme Court was whether Ivey had “cheated” within the meaning of section 42 of the Gambling Act 2005, and if so, whether that meant Ivey had breached an implied term of the contract with the casino that he would not cheat.  The criminal standard was applied because, following the reasoning of the Court of Appeal, the Supreme Court considered that a breach of the implied term would only occur if the statutory offence of cheating had occurred. In examining this, it considered the Ghosh test and identified a number of issues.  In particular the second limb was criticized on the grounds that it has the effect that “the more warped the defendant’s standards of honesty are, the less likely it is that he will be convicted of dishonest behavior.”  The Supreme Court found the test to be confusing and “difficult to apply”, and unnecessarily inconsistent with the objective definition of dishonesty in civil cases. On that basis, the Supreme Court effectively abolished the second limb of the test, and Ivey’s appeal was dismissed as he was found dishonest according to the objective standard and thus to have “cheated” within the meaning of section 42 of the Gambling Act. Although strictly obiter, Ivey will almost certainly be followed. This will effect crimes in which the prosecution must prove that the defendant acted dishonestly. As just one example, the offence of fraud by false representation under the Fraud Act requires that the defendant: make a false representation; dishonestly; while knowing that the representation was or might be untrue or misleading; and with the intent to make a gain for himself or another. In light of Ivey, defendants will not be able to rely on their own subjective belief in their own honesty to contest allegations of fraud by false representation. SFO: expected trial dates The SFO has recently published its court dates. Court dates of note include: the confiscation hearings on March 19, 2018 and April 19, 2018 for Jolan Saunders, Spencer Steinberg and Michael Strubel, each convicted of conspiracy to defraud, inducing wealthy individuals to invest sums into a business the trade if which was significantly below the levels portrayed to potential investors; and the trial of David Ames on 7 January 2019, chairman of the Harlequin Group, charged with fraud by abuse of position for pensions fraud (note in the 2017 Mid-Year Alert the trial date was reported as taking place on 18 September 2018.) 4.     Tax With the introduction of the new failure to prevent tax evasion offences under the CFA, we have included for the first time this year a new section in our alert dedicated to the enforcement of tax evasion offences and related legislative developments. Criminal Finances Act: new failure to prevent the facilitation of tax evasion offences The Criminal Finances Act 2017 came into force on September 30, 2017, and introduced two new corporate offences of failure to prevent the facilitation of tax evasion. The first of these offences is the UK tax evasion offence which is committed where a person acting in the capacity of someone associated with the corporate facilitates (or partnership) the fraudulent evasion of UK tax. The second offence relates to foreign tax, and is committed where a corporate’s “associated person” facilitates the fraudulent evasion of foreign tax, so long as that facilitation is an offence both in the UK and in the foreign jurisdiction.’ It is a defence to either offence for the corporate to show that it had in place reasonable prevention procedures designed to prevent the facilitation of tax evasion. The jurisdictional reach of these offences is very wide. For the UK offence the only required nexus to the UK is that it is UK tax which is evaded. Conduct committed entirely outside the UK by non-UK nationals for the benefit of a non-UK company will still be subject to the jurisdiction of the UK courts. For the foreign offence the required nexus is that the corporate is either a UK company, carries on a business or part of a business in the UK, or the facilitation in question took place wholly or partly in the UK. HMRC published guidance on September 1, 2017 on the CFA, which covers amongst other things the six guiding principles that should inform the prevention procedures put in place by corporate persons. These include:         i.            Risk assessment ii.            Proportionality of risk-based prevention procedures iii.            Top level commitment iv.            Due diligence v.            Communication (including training) vi.            Monitoring and review For more detail on the CFA and the HMRC Guidance, please refer to our detailed client alert: “UK Criminal Finances Act 2017: New Corporate Facilitation of Tax Evasion Offence: Act now to secure the reasonable prevention procedures defence“. European Union tax haven Black List and Grey List In the wake of the Panama Papers, Pierre Moscovici, the European Commissioner for Economic and Financial affairs, urged in April 2016 for more stringent EU tax laws on non-cooperative jurisdictions, and/or EU member states to draw up with a common list of tax havens to be blacklisted. Following its research, the European Commission published in September 2016 a list of 92 jurisdictions outside the European Union that would be contacted for screening. On February 1, 2017, EU member states sent a letter to those 92 jurisdictions to notify them that they would be screened for possible inclusion in a “blacklist” of tax havens. The letter emphasized that the jurisdiction had been selected “based on a set of objective indicators (such as strength of economic ties with the EU, financial activity, and stability factors)“. At the time, the list of 92 countries contacted was not made available to the public. On 21 February 2017, European Union finance ministers agreed on criteria first proposed in November 2016 to appropriately screen tax-free jurisdictions outside the European Union. The three main criteria for assessments consisted of: tax transparency, fair taxation, and a commitment to implement OECD measures on taxation. A jurisdiction was at risk of being placed on a black or grey list of non-cooperative tax regimes if it failed to meet the criteria. The EU finance ministers announced that they would publish the list of tax havens that failed to meet the criteria by the end of 2017. On December 5, 2017, the EU published its Black List which comprises the following 17 jurisdictions: American Samoa, Bahrain, Barbados, Grenada, Guam, Macao, The Marshall Islands, Mongolia, Namibia, Palau, Panama, St Lucia, Samao, South Korea, Trinidad & Tobago, Tunisia, and the United Arab Emirates. Another 47 jurisdictions were put on a grey list as a recognition of their commitment to reform their tax laws as soon as possible to meet EU standards. Since the list’s initial publication, the EU officials have now accepted assurances from Barbados, Grenada, Macao, Mongolia, Panama, South Korea, Tunisia, and the United Arab Emirates as to tax reform commitments and so these jurisdictions have been removed from the Black List and added to the Grey List. Countries can stay off the list as long as they implement common reporting standard which would require them to share banking information of individuals who are not their own citizens. While acknowledging that the list represented “substantial progress” and an “important step forward“, Moscovici warned that it remained “an insufficient response to the scale of tax evasion worldwide“. Moscovici emphasized the need to discuss appropriate sanctions for jurisdictions on the list. The EU finance ministers will convene in 2018 to adopt sanctions for non-compliant countries. Such sanctions may include prohibitions to conduct business with jurisdictions on the blacklist. In addition a decision on 8 Caribbean jurisdictions severely hit by hurricanes during 2017 has been delayed until February 2018. For more detail see our client alert: “Black and Grey: The EU publishes its lists of Tax Havens”. Enforcement: concluded prosecutions relating to tax fraud Like the Panama Papers, the Paradise Papers have attracted mass media focus on issues of offshore investments and tax avoidance. However, there has been no official UK enforcement action following the Paradise Papers leak. In response to questions to her during the annual CBI conference in London, the Prime Minister refused to commit to an introduction of a public register that would ensure greater transparency with respect to ownership in offshore companies and trusts. Theresa May also did not commit to opening a public inquiry into tax avoidance as she had been encouraged to do by various Labour shadow ministers. However, as described below, there have been a number of concluded prosecutions relating to tax fraud in 2017. Convictions over £100 million tax fraud On November 10, 2017 following a ten year investigation by HMRC, six men (Michael Richards, Robert Gold, Rodney Whiston-Dew, Evdoros Demetriou, Jonathan Anwyl, and Malcolm Gold) were jailed for their participation in an “audacious and cynical” scheme that defrauded investors of over £100 million. Mr Gold had pleaded guilty, but the other defendants were all convicted after a contested trial. Over 730 investors signed up to the scheme, believing that an initial £20,000 investment in research and reforestation projects in Brazil and China would entitle them to claim £32,000 in tax relief. The scheme was structured so that a number of companies were incorporated around the world, including in offshore jurisdictions, and each company was marketed as being independent of the other. In reality, the companies were all controlled by the defendants, who used the entities to cycle cash between them so as to give the illusion of lending. The scheme was marketed to be larger than it actually was, and the purpose of it was to deceive HMRC into granting tax relief totalling £107 million when it otherwise would not have been due. The men were found guilty of conspiracy to cheat the public revenue, and were handed custodial sentences. Mr Gold who pleaded guilty was sentenced to 20 months’ jail. The other defendants were sentenced to 11 years, 11 years, 10 years, 6 years and 5 and a half years respectively. A pensioner claiming he was a ‘spy’ stole £1.6 million in tax Raymond Thomas, a company director, told his friends and family that he was a spy working for the U.S. Department of Homeland Security and was required to work abroad, when in fact he was travelling to various properties he owned in France, Germany and Spain, which were entirely funded from the proceeds of a large-scale VAT fraud. Thomas claimed that he made key components for military drones, which he did through a company, and he complained to the Prime Minister as a “desperate measure” to obtain funds withheld by HMRC, alleging that he “worked fiercely and patriotically in the protection of the citizens of this country.” Following an investigation, the company was found to be a sham, and Thomas had created various false invoices to support fraudulent VAT refund claims. Thomas admitted to VAT fraud, money laundering and producing false documents, and was sentenced to 56 months in prison on November 1, 2017.                 Robert Waterman As discussed above in the Fraud section on October 18, 2017, Robert Waterman, a businessman, was sentenced to six years’ imprisonment for a VAT fraud, and ordered to return over £3 million to the taxpayer after pleading guilty to cheating the public revenue, amongst other offences. 5.     Financial and Trade Sanctions The year 2017 saw very significant legislative developments in the UK regarding financial and trade sanctions, but little by way of enforcement activity. We cover these developments in detail, and also the new sanctions on Venezuela and Mali, and provide a summary of the current state of the fast-moving North Korean sanctions. For the UK’s response to President Donald Trump’s de-certification of the Iran Nuclear deal, please refer to our client alert “Trump Decertifies the Iran Deal, Creating Both new Uncertainties and potentially unexpected clarity“. Legislative developments Policing and Crime Act 2017 and accompanying guidance Part 8 of the Policing and Crime Act 2017, which came into force on April 1, 2017, strengthened the UK’s sanctions enforcement by increasing the maximum custodial sentence for violating sanctions rules from two to seven years. Additionally, it expanded the list of offences amenable to a DPA, giving the NCA and Office of Financial Sanctions Implementation (“OFSI”) more scope to offer DPAs (which can still only be entered into by the SFO and CPS) and impose Serious Organised Crime Prevention Orders. Importantly, it also gives OFSI the power to impose, as an alternative to criminal prosecution and by reference to the civil standard of proof, monetary penalties for infringements of EU/UK sanctions. OFSI can impose penalties of either £1 million or 50% of the value of the breach, whichever is greater. The lower evidential burden to impose the new civil penalties means that OFSI need only be satisfied on the balance of probabilities that a person (legal or natural) acted in breach of sanctions and knew or had reasonable cause to suspect they were in breach. The Act also addresses the delay between the United Nations Security Council adopting a financial sanctions resolution and the EU adopting an implementing regulation, which can take over a month. OFSI can adopt temporary regulations to give immediate effect to the UN’s resolutions, as if the designated person were included in the EU’s consolidated list. OFSI put this power into practice in June of this year by adding a militia leader, Hissene Abdoulaye, to its consolidated list of Central African Republican sanctions targets, before the EU had done so. Businesses relying on a version of the EU’s consolidated list prepared by the European Union, or by a member state other than the United Kingdom, may miss fast-track listings done by the UK in this manner. The UK has also enacted the Policing and Crime Act (Financial Sanctions) Overseas territories) order 2017  to extend these short-term fast-track listings to its offshore financial centres of Cayman, British Virgin Islands and Turks and Caicos. In a number of interviews this year, OFSI head Rena Lalgie has given further indications of how the body will enforce sanctions compliance. According to Ms. Lalgie, “voluntary disclosure will be an important part of determining the level of any penalties that might be imposed“. OFSI has already said that companies that voluntarily come forward will see reductions in fines of up to 50% in “serious” cases and 30% in the “most serious” cases. Ms. Lalgie also made the following noteworthy comments: OFSI’s enforcement action has focused on “preventing and stopping non-compliance and ensuring compliance improves in the future“. The agency has used its information powers numerous times to “require companies which haven’t complied to tell [OFSI] how they intend to improve their systems and controls in future”. Any continuing sanctions non-compliance could lead to criminal prosecution, with fines “fill[ing] the gap between prevention and criminal prosecution“. The most important actions a company can take to avoid violating sanctions rules are to “know [its] customers and promote active awareness among relevant staff of high-risk areas“. Ms. Lalgie believes that a company also ought to know what sanctions are in place in the countries in which it does business and have appropriate, up-to-date procedures that are regularly monitored and understood by staff. In April 2017, and after a public consultation, OFSI published its final Guidance on the new financial sanctions framework providing detailed guidelines relating to the imposition of the new civil monetary penalties. For further information about the consultation, please see our 2016 Year-End United Kingdom White Collar Crime Alert. The final OFSI Guidance on monetary penalties was also published in April 2017. It provides a detailed overview of OFSI’s approach to investigating potential breaches, as well as the penalty process and procedures for review and appeal. Of note are the following key points from the guidance: Penalties can be imposed on natural or legal persons, meaning that separate penalties could be imposed on a legal entity and the officers who run it, if the officer consented to or connived in the breach, or the breach was attributable to the officer’s negligence; OFSI will regularly publish details of all monetary penalties imposed, including by reference to the name of the person or company in breach, and a summary of the case; and Under sections 147(3)-(6) of the Policing and Crime Act 2017, decisions to impose a penalty can be reviewed by a government minister and then by appeal to the Upper Tribunal. In OFSI’s “penalty matrix“, factors which may escalate the level of penalty imposed include the direct provision of funds or resources to a designated person, the circumvention of sanctions, and the actual or expected knowledge of sanctions and compliance systems of the person or business in breach. Voluntary and materially complete disclosure to OFSI is a mitigating factor that may reduce the level of penalty imposed by up to 50%. The European Union Financial Sanctions (Amendment of Information Provisions) Regulations 2017 On August 8 2017, the European Union Financial Sanctions (Amendment of Information Provisions) Regulations 2017 (the “IPR 2017”) came into force. Before the IPR 2017, financial services firms had a positive reporting obligation to notify HM Treasury of any known or suspected breach of financial sanctions, and to notify any known assets of those subject to financial sanctions. Failure to notify constituted a criminal offence. The IPR 2017 extends this reporting regime to: (a) auditors; (b) casinos; (c) dealers in precious metals or stones; (d) estate agents; (e) external accountants; (f) independent legal professionals; (g) tax advisers; and (h) trust or company service providers. OFSI has claimed in its Guidance (at 5.1.1) that all companies and individuals have a positive reporting obligation, but this is based on wording in the relevant EU regulations not implemented into English law. As such, the IPR 2017 represents a significant expansion of the scope of the financial sanctions reporting obligations in the UK. Moreover, this extension of the reporting obligation regime is specific to the UK – there is no EU equivalent. It should be noted that trade sanctions are on the whole excluded from this reporting regime, with the focus mostly on those included in the Consolidated List or the separate Ukraine List. As set out in the Explanatory Memorandum to the Regulations, this development occurred without a public consultation, impact assessment, or parliamentary scrutiny. The failings of the system as currently enacted are best seen by way of a comparison with the money laundering reporting obligations. In the field of AML: the maker of a bona fide suspicious activity report is protected by statute from liability for any loss or damage flowing from the SAR; there is a defence to any breach if the party has followed its regulator’s guidance; there is a defence of “reasonable excuse” for failing to make a SAR; there is an architecture for reporting, first within an organisation and then for an MLRO who has personal criminal liability if they fail to report; and there is an exception to the obligation to make a SAR for lawyers and accountants, auditors or tax advisers, if the information came from the client – the so-called “privileged circumstances” exception. None of the certainty that comes with a clear reporting hierarchy is found in the IPR 2017, and none of these protections are present either. Most notably this may have an unintended chilling effect on companies seeking legal assistance in the conduct of an internal investigation. As they stand the IPR 2017 would require a company’s lawyers to report to OFSI any suspected breach of sanctions, thus robbing the client of the possibility of gaining any credit by self-reporting. Given that OFSI’s own guidance stresses the benefits of self-reporting, the IPR 2017 only serve to undermine this policy objective. It remains to be seen whether the government will revise the IPR 2017 to take account of these failings. Sanctions and Anti-Money Laundering Bill 2017 On October 18, 2017 a new Sanctions and Anti-Money Laundering Bill was introduced in the House of Lords, which aims to provide a legislative framework for the imposition and enforcement of sanctions after Brexit. Currently much of the UK Government’s authority to impose and enforce sanctions flow from the European Communities Act 1972. The proposed bill would give the Government authority to impose and implement sanctions by way of secondary legislation to comply with its obligations under the United Nations Charter and to support its foreign policy and national security goals. The European Union (Withdrawal) Bill 2017-19 (the “Bill”) which will give effect to Brexit, will freeze the current sanctions regimes and underlying designations on the date of the UK’s exit from the EU. The sanctions regime in place would quickly become out of date, and absent new legislation the UK would be unable to amend or lift the existing sanctions. The Sanctions and Money Laundering Bill seeks to provide the mechanism to resolve this issue. The proposed legislation has been through two readings before the House of Lords and is currently at the Committee Stage with the Report Stage scheduled for 15 and 17 January. Part I of the Bill as originally introduced provided the power to impose sanctions, giving an appropriate Minister, defined as the Secretary of State or the Treasury, the power to make “sanctions regulations” for a variety of purposes including: compliance with a UN obligation; compliance with another international obligation; to further the prevention of terrorism in the UK or elsewhere; in the interests of national security; in the interests of international peace and security; or to further a foreign policy objective of the UK government. In the process of going through the House of Lords further bases for imposing sanctions have been added to the current draft of the Bill. These are: promote the resolution of armed conflicts or the protection of civilians in conflict zones; promote compliance with international humanitarian and human rights law; contribute to multilateral efforts to prevents the spread and use of weapons and materials of mass destruction; and promote respect for human rights, democracy, the rule of law and good governance. The absence of “misappropriation” as a basis for sanctions is notable, when that is the basis for the current EU sanctions against Egypt and Tunisia and some of those against Ukraine. Another absence is an express reference to cyber sanctions. As discussed in our 2017 Mid Year United Kingdom White Collar Crime Update, earlier in 2017 the EU proposed sanctions as one of a panoply of responses to organised cyber attacks. In the case of human trafficking, as mentioned further below, there have been a number of recent proposals to impose such sanctions. It is possible that some of the broad rubrics such as “protection of civilians in conflict zones” or “human rights law” or “international peace and security” will be extended to cover such sanctions. “Sanctions regulations” are defined as regulations which impose financial, immigration, trade, aircraft, or shipping sanctions, and expanded upon in clauses 2 to 6 of the Bill. In its comments on the Bill the House of Lords’ Constitution Committee has raised concerns in relation to the breadth of powers afforded to Ministers under the sanctions provisions, including in particular the power to create new forms of sanctions. The Bill is currently the subject of significant debate and it is not yet clear what final form it will take. The sanctions authorised by the Bill take a variety of forms. Financial sanctions can be imposed by way of asset freezes, and by the placement of restrictions on the provision of financial services, funds, or economic resources in relation to designated persons, persons connected with a prescribed country, or persons meeting a particular description. A person who is the subject of a travel ban may be refused leave to enter or to remain in the UK. Trade sanctions can prevent activities relating to target countries or to target specific sectors within those countries. Aircraft and shipping sanctions can have a variety of impacts, including preventing particular craft from entering the UK’s airspace or waters. Designated persons can include individuals, corporations, and organisations and can be identified by name or by description. The Bill enables Ministers to set out in regulations how designation powers are to be exercised. The Bill also includes provision for Ministers to create exceptions to any prohibition or requirement imposed by the regulations, or to issue licences for prohibitions imposed by the regulations not to apply. Clause 16 is worthy of mention for, as explained in the accompanying Explanatory Notes, it provides a mechanism for a yet-further expansion of the obligatory reporting regime to all individuals and companies. Whether this provision survives parliamentary scrutiny, and the requirement to protect the right to a fair trial, will remain to be seen. Chapter 2 sets out the Bill’s provisions on revocation, variation and review of designations of persons under the Bill. The Bill provides that a designation may be varied or revoked by the Minister who made it at any time, and that at any time a designated person may request that the Minister vary or revoke the designation. However, after such a request, no further request may be made unless it relies on new grounds or raises a significant matter which has not previously been considered by the Minister.  The Bill also requires periodic review of designations by the appropriate Minister every three years. Where a designated person has been identified by a UN Security Council Resolution, they may ask the Secretary of State to use his or her best endeavours to have their name removed from the UN list. These provisions have attracted criticism, as they would appear to detract from the existing procedural safeguards available in relation to EU sanctions, which include an entitlement to challenge before the Courts. Similarly, the existing EU regime allows for review of designations every six to twelve months. Although the Bill adopts certain definitions from EU Sanctions measures, it also provides that new sanctions regulations may make provision as to the meaning of other concepts.  This may give rise to a divergence in the interpretation of sanctions legislation between the UK and the EU, which could increase uncertainty and the burden of those charged with compliance with multiple sanctions regimes. Criminal Finances Act 2017 – “Magnitsky sanctions” The CFA amended POCA to include a “Magnitsky amendment”. This expands the definition of “unlawful conduct” for the purposes of civil recovery orders under Part 5 of POCA to include human rights abuses and applies to those who profited from or materially assisted in the abuses. The amendment is modelled on the U.S. Magnitsky Act. These amendments to the CFA came into effect on January, 31 2018. EU cyber security sanctions The possibility of cyber sanctions has already been mentioned. The Council of the European Union announced in late June that it would be prepared to impose sanctions against “state and non-state actors” as part of a broader policy response to malicious cyber activity. The imposition of sanctions is one element within what the EU is describing as its “cyber diplomacy toolbox“. The Council has published Conclusions on a Framework for a Joint EU Diplomatic Response to Malicious Cyber Activities, which clarifies the policy objectives behind this development: “The EU affirms that measures within the Common Foreign and Security Policy, including, if necessary, restrictive measures, adopted under the relevant provisions of the Treaties, are suitable for a Framework for a joint EU diplomatic response to malicious cyber activities and should encourage cooperation, facilitate mitigation of immediate and long-term threats, and influence the behavior of potential aggressors in a long term“. As yet no such sanctions have been imposed. Human Trafficking Sanctions At the recent G20 meeting in Germany, the EU tabled a proposal for the United Nations to designate people and entities for human trafficking. This proposal was rejected by both the Russians and the Chinese. As two permanent members of the UN Security Council there appears little prospect for the time being of UN sanctions in this sphere. Nonetheless, in late November 2017, France’s ambassador  to the UN, François Delattre, called for the UN Security Council to impose sanctions on persons implicated in the slave trade of African refugees and migrants crossing through Libya. An emergency Security Council session was held to discuss the possibility of such sanctions, but no resolution resulted. We will continue to watch for developments in this area. New and revised sanctions regimes A number of new sanctions regimes have been imposed by the EU and its member states during 2017. Mali On September 28, 2017, Council Decision (CFSP) 2017/1775 implemented UN Resolution 2374 (2017), which imposes travel bans and assets freezes on persons who are engaged in activities that threaten Mali’s peace, security or stability. Interestingly, the imposition of this regime was requested by the Malian Government, due to repeated ceasefire violations by militias in the north of the country. Affected persons will be determined by a new Security Council committee, which has been set up to implement and monitor the operation of this new regime, and will be assisted by a panel of five experts appointed for an initial 13-month period. As yet no one has been designated under the Mali sanctions. Venezuela On November 13, 2017, in the wake of severe political turmoil in Venezuela, most notably gubernatorial elections plagued by electoral irregularities, the EU imposed an arms embargo on the country, as well as introducing a legal framework for the imposition of travel bans and asset freezes against persons involved in the non-respect of democratic principles or the rule of law and human rights violations (Council Regulation (EU) 2017/2063 and Council Decision (CFSP) 2017/2074). In its conclusions on Venezuela, the Council noted that these measures would be implemented in a “gradual and flexible manner and can be expanded”, but can also be reversed “depending on the evolution of the situation in the country“. On January 22, 2018 through Regulation 2018/88, the EU designated seven Venezuelan officials as the first, but perhaps not the last, to be sanctioned under these measures. On November 15, 2017, the UK passed the Venezuela (European Union Financial Sanctions) Regulations 2017, which came into force on December 6, 2017, to implement these new measures. North Korea 2017 was an eventful year in the Korean peninsula. Given the ballistic missile and nuclear testing it is unsurprising that sanctions regimes against North Korea have been steadily strengthened over the past 12 months. The relevant UK/EU/UN developments are set out below. On June 2, the UN Security Council designated a further four entities and 14 officials subject to travel bans and asset freezes, including Cho Il U, believed to be the Director of North Korea’s overseas espionage operations and foreign intelligence collection. In early August, the UN Security Council unanimously passed Resolution 2371 (2017), which introduced fresh sanctions against North Korea, including: (i) a full ban on coal, iron and iron ore (which, at $1 billion, is estimated to represent about a third of North Korea’s export economy); (ii) the addition of lead and lead ore to the banned commodities subject to sectoral sanctions; (iii) a ban on seafood exports from North Korea; and (iv) the expansion of financial sanctions by prohibiting new or expanded joint ventures and cooperative commercial entities with the DPRK. Demonstrating the significant developments seen to North Korean sanctions in 2017, in August the EU consolidated its existing North Korean sanctions into Council Regulation 2017/1509, a move deemed necessary in view of the numerous amendments that had been made to the previous Council Regulation 329/2007. It also issued an updated decision, Council Decision (CFSP) 2017/1512, amending Council Decision (CFSP) 2016/849, to reflect these changes. The UN Security Council duly imposed Resolution 2375 (2017) on September 11, 2017, which includes: (i) a ban on textile exports (North Korea’s second-biggest export at over $700m per year); (ii) limits on imports of crude oil and oil products to the amount imported by the exporting country in the preceding year; (iii) a prohibition against all joint ventures or cooperative entities or the expansion of existing joint ventures with North Korean entities or individuals; and (iv) a ban on new visas for North Korean overseas workers. These measures were watered down from the original restrictions called for by the U.S., so as to ensure that Russia and China would not veto the proposals. The U.S. had initially sought a total prohibition on exports of oil into North Korea, stricter restrictions on North Koreans working in foreign countries, enforced inspections of ships suspected of carrying UN sanctioned cargo, and a complete asset freeze against Kim Jong-Un. In November, the EU further imposed additional restrictions via Council Regulation (EU) 2017/2062, which: (i) broadened the ban on investment of EU funds in or with North Korea to all economic sectors; (ii) reduced the permissible amount of personnel remittances to North Korea from €15,000 to €5,000; and (iii) at the Council’s invitation to review the existing list of luxury goods subject to import/export bans, published a new list, which covers everything from caviar, cigars and horses to artwork, musical instruments and vehicles. Finally, rounding off the year, the UN imposed Resolution 2397 (2017) on December 22, which inter alia: (i) strengthens the measures regarding the supply, sale or transfer to North Korea of all refined petroleum products, including diesel and kerosene, and reduced to 500 million barrels per 12-month period the permitted maximum aggregate of refined petroleum product exports to North Korea; (ii) limits the supply, sale or transfer of crude oil by Member States to the DPRK to 4 million barrels or 525,000 tons per 12-month period; (iii) expands sectoral sanctions by introducing a ban on North Korean exports of food and agricultural products, machinery, electrical equipment, earth and stone, wood and vessels, as well as a prohibition against the sale of North Korean fishing rights; (iv) introduces a ban on the supply, sale or transfer to North Korea of all industrial machinery, transportation vehicles, iron, steel and other metals; (v) strengthens the ban on providing work authorizations for North Korean nationals by requiring Member States to repatriate all income-earning North Koreans and all North Korean government safety oversight attachés monitoring North Korean workers abroad by 22 December 2019; and (vi) strengthens maritime measures by requiring Member States to seize, inspect and freeze any vessel in their ports and territorial waters for involvement in banned activities. As North Korea’s missile and nuclear programmes show no signs of being halted, we expect that the international community will continue to expand the restrictive measures imposed against North Korea in the coming year. Indeed already in 2018, the EU has designated a further 17 North Korean individuals through Regulation 2018/87. Trade and export controls Judicial reviews: boycotts and arms exports Two judicial reviews concerning trade and sanctions have made their way to the High Court this year. These were discussed in detail in our 2017 Mid-Year United Kingdom White Collar Crime Alert, and we refer readers to the discussion there. Export Control Order: amendments The Export Control Organisation (“ECO”) has twice amended the Export Control Order 2008 this year, as set out in one notice to exporters in February and another in July. The amending orders make a number of changes to both the main order itself and Schedule 2, which sets out the military goods, software and technology that are subject to export controls. These updates reflect changes made to the EU Common Military List that must be incorporated into UK export control rules to honour its commitment to the international non-proliferation regime. The main changes made in February are to the definitions of “library“, “spacecraft” and “software“, changes to ML1 (note on deactivation) and text revisions to ML9, ML13, ML17 and ML21. The national control (PL5017) within this schedule has also been deleted (on equipment and test models). The main changes made in July include amendments to the definitions of “airship“, “laser“, “lighter-than-air vehicles“, “pyrotechnics” and “software” and changes to ML1, ML8 and ML10. Amendments to the UK Strategic Export Control Lists On December 16, 2017, the Export control Joint Unit of the Department for International Trade published a revised set of UK Strategic Export Control Lists to give effect to EU Regulation 2017/2268. For detail of the changes see the EU’s notice here. Case law Bank Mellat and v HM Treasury There have been new developments in the longstanding litigation between Bank Mellat, Iran’s largest private bank, and HM Treasury. As reported in our 2014 Year-End Sanctions Alert, Bank Mellat commenced an action in 2014 against the British Government, claiming almost £2 billion (approx. $3.13 billion) in damages. This followed the UK Supreme Court’s quashing of sanctions imposed on the bank under the Financial Restrictions (Iran) Order 2009 (SI 2009/2725) in connection with allegations that it had links to the Iranian nuclear program (as detailed in our 2013 Mid-Year Sanctions Alert). This action continues to make its way through the courts; in August, Males J sitting in the Commercial Court ([2017] EWHC 2409 (Comm)) made an order regarding how disclosure of documents should be carried out. Separately, Bank Mellat has also taken numerous steps to have restrictions imposed on it under the Financial Restrictions (Iran) Order 2011 (SI 2011/2775) and the Financial Restrictions (Iran) Order 2012 (SI 2012/2904) set aside. By an application notice issued in April 2014, HM Treasury sought the court’s permission to withhold disclosure of certain closed material on which it relied in defence of the claim. In November 2014, in Bank Mellat v HM Treasury [2014] EWHC 3631 (Admin), the UK High Court held that the essence of allegations justifying designation of a person in a sanctions regime must be disclosed to that person, even where national security concerns prevent full disclosure. This was subsequently upheld by the Court of Appeal ([2015] EWCA Civ 1052). The case was then remitted to the Administrative Court to consider whether HM Treasury had met the required standard of disclosure in proceedings with Bank Mellat. On November 24, 2017, Justice Holroyde handed down a closed judgment determining that certain material may continue to be withheld, but other information must be disclosed. The open judgment considered only the relevant principles applied in determining these issues, without going into the specifics of the materials in question. Enforcement Limited enforcement activity in UK In our 2017 Mid-Year United Kingdom White Collar Crime Alert, we noted the one publicly-known instance of a company which has self-reported to OFSI, Computer Sciences Corporation (“CSC”). According to an SEC filing in February 2017 CSC submitted an initial notification of voluntary disclosure to both the U.S. Treasury’s Office of Foreign Assets Control (“OFAC”) and OFSI. The disclosure concerned possible breaches of sanctions law relating to insurance premiums and claims data by Xchanging, a company that CSC had recently acquired. There continues to be little information in the public domain regarding enforcement activity by OFSI, although in responding to a Freedom of Information request by Law360, OFSI has confirmed that it has opened 125 investigations since it commenced operations in early 2016, and that 60 of these involved financial services firms regulated by the FCA or the PRA. This should not be mistaken for a torrent of upcoming enforcement actions. At a recent event hosted by the English Law Society, a representative from OFSI confirmed that the vast majority of the breaches OFSI was investigating were very minor, and that 97% of the known breaches would not be pursued through any sort of enforcement action. It may, therefore, be some time before we are able to report on significant enforcement activity by OFSI. In stark contrast to this UK position, a significant number of EU member states have concluded or undertaken sanctions enforcement actions during 2017. This includes fines imposed by the regulator in Latvia, multiple investigations and prosecutions in Holland, as well as an insurance-sector investigation; an investigation and corporate raids regarding alleged breaches of Syrian sanctions in France and Belgium, an investigation in Lithuania regarding Crimean sanctions, and the seizure of goods of Crimean origin in Italy. The details of these enforcement actions can be found in our 2017 Year-End Sanctions Alert. 6.     Anti-Money Laundering 2017 has not been short of developments. Legislative activity continued apace against the backdrop of the UK’s withdrawal from the EU and the UK government’s Action Plan for Anti-Money Laundering and Counter-Terrorist-Finance. 2017 saw the implementation of several significant legislative developments intended to strengthen the tools available to UK authorities to detect and prosecute financial crime and substantially change the UK’s money laundering landscape: the CFA, the 2017 AML Regulations, and the Sanctions and Anti-Money Laundering Bill, which is currently under review by the House of Lords. Enforcement activity has continued with the FCA imposing the largest ever fine for anti-money laundering (“AML”) controls failings and a Solicitor’s Disciplinary Tribunal decision against Clyde & Co LLP, providing a reminder to the legal profession of the importance of AML risk controls. While 2017 has also seen setbacks in the English Courts for the NCA and the City of London Police, the “laundromat” money laundering schemes revealed by new leaks of confidential banking records, as well as other high profile investigations by the FCA, has reinforced AML enforcement as a major regulatory priority. New economic crime centre In December 2017, a new economic crime audit by the UK government suggested that £90 billion is laundered in criminal proceeds through the UK each year. In response, the Government unveiled plans to create a new national economic crime centre with a key focus to clamp down on money laundering. As a unit of the NCA, the centre will reportedly be tasked with coordinating a national response among the agencies that tackle money laundering and fraud and with increasing the confiscation of criminal proceeds. In addition, the Government published its anti-corruption strategy, which sets out the Government’s anti-corruption priorities, both domestic and international, and establishes a long-term framework for tackling corruption up to 2022. One of the government’s six priorities under the strategy is to “Strengthen the integrity of the UK as an international financial centre” (see page 35), which it says will require: i) “Greater transparency over who owns and controls companies and other legal entities“; ii) “Stronger law enforcement, prosecutorial and criminal justice action“; iii) “Further enhanced anti-money laundering and counterterrorist financing capability“; and iv) “Stronger public-private partnership, to share information and improve targeting of those who pose greatest risk”. Criminal Finances Act 2017 The CFA became law on April 27, 2017.  As outlined in our 2017 Mid-Year United Kingdom White Collar Crime Alert, the CFA amends POCA, which forms the basis for the UK’s anti-money laundering regime. Suspicious activity reporting regime Sections 10, 11 and 12 of the CFA will bring in a number of changes to the Suspicious Activity Reports (“SARs”) regime. At present, “regulated sector” entities seeking a defence to a principal money laundering offence must disclose knowledge or suspicion of money laundering to the NCA by way of a SAR. Whilst a transaction cannot proceed without risk of committing an offence under POCA if the NCA refuses consent, the NCA is deemed to have consented if it does not notify the company that consent is refused within seven working days, or if it notifies the company within seven working days that consent is refused, but takes no further action after a further 31 calendar days (the “moratorium period“). Section 10 amends POCA so as to allow the NCA to apply for an extension to the moratorium period up to a total of 186 days, so long as certain conditions as to the speedy and efficient conduct of their investigation are met. Section 11 of the CFA explicitly allows companies in the regulated sector to voluntarily share otherwise confidential client information where the disclosing company is asked to share the information by the NCA, or when one company makes a request of another for information relating to money laundering prevention.  A condition of sharing such information is that the sharing party must be satisfied that “the disclosure of the information will or may assist in determining any matter in connection with a suspicion that a person is engaged in money laundering“. That information sharing may result in a joint SAR which, if made in good faith, will be treated as satisfying any requirement to make disclosure on the part of the persons who jointly make the report. Under section 12, the NCA will now have the option of seeking a “further information order” against the entity that either filed the SAR, or which is an entity in the regulated sector, to compel the provision of further information to assist the NCA in its enquiries. The NCA can also seek such an order when giving effect to a request for mutual legal assistance from a foreign country. Unexplained Wealth Orders The CFA also introduces unexplained wealth orders (“UWOs”), which may be used to require those suspected of corruption (individuals or companies) to explain the origin of certain assets. The NCA, CPS, FCA, SFO and HMRC will all be able to apply for a UWO by making an application to the High Court. On January 30, 2018, David Green QC told an audience in London that the SFO is looking for cases to start to utilize this new power: “We have been combing through all existing case work and intelligence and have matters of interest that might transmogrify”. For more detail on the changes to the SARs regime and UWOs, please see our 2017 Mid-Year United Kingdom White Collar Crime Alert. 2017 AML Regulations enter into force As outlined in detail in our 2017 Mid-Year United Kingdom White Collar Crime Alert, the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017  (the “Regulations”) entered into force on June 26, 2017. The draft regulations were laid before Parliament on June 22, 2017 and then entered into force only one business day later, giving firms very little time to prepare for their implementation. Overall, the Regulations are more prescriptive and require a firm’s responsible person to carry out a risk assessment for potential exposure to money laundering and terrorist financing. A person is required to keep a record of the steps taken to conduct the risk assessment, unless it is told by its supervisory authority that this is not necessary. The responsible person must then establish and maintain policies, controls and procedures based on that risk assessment, and make sure that relevant employees are made aware of the law relating to money laundering and terrorist financing and regularly given training in how to recognize and deal with transactions and other activities which may give rise to such risks. The Regulations also introduced new and more prescriptive customer due diligence (“CDD”) requirements. CDD measures must be applied to new business relationships as well as existing ones where there are doubts as to the veracity or adequacy of documents previously obtained for verification purposes. Simplified due diligence is available in fewer circumstances than under the old regulations: a relevant person needs to consider both customer and geographical risk factors in deciding whether simplified due diligence is appropriate; firms can no longer automatically apply only simplified CDD requirements in certain circumstances. Enhanced CDD measures will need to be applied in relation to any transaction of business relationship with a person established in a “high risk third country“, currently Afghanistan, Bosnia and Herzegovina, Iran, Iraq, Laos, North Korea, Syria, Uganda, Vanuatu and Yemen, to which on December 13, 2017 were added Tunisia, Trinidad & Tobago and Sri Lanka. Additional situations in which Enhanced CDD measures are required include cases in which the relevant person determines that a customer or potential customer is a PEP or a family member of a known close associate of a PEP, in which the relevant person discovers that a person has provided false or stolen identification, in which a transaction is complex and unusually large, or there is an unusual pattern of transactions and the transactions have no apparent legal or economic purpose. On September 19, 2017, the Legal Sector Affinity Group published draft guidance on complying with the new 2017 AML Regulations. Legal sector regulators will take into account whether a professional has complied with this guidance when they are assessing professional conduct and acting as a supervisory authority. The Legal Sector Affinity Group are in the process of obtaining approval from HM Treasury for this guidance. Once HM Treasury approval is obtained, the court is required to consider compliance with this guidance in assessing whether a person committed an offence or took all reasonable steps and exercised all due diligence to avoid committing the offence. Sanctions and Anti-Money Laundering Bill On October 18, 2017, the UK government introduced the Sanctions and Anti-Money Laundering Bill into Parliament and published Explanatory Notes. For AML purposes, the function of the Bill is to give the UK government the power to update existing provisions on anti-money laundering and terrorist financing, upon the exit of the UK from the EU. Clause 41 of the Bill gives the appropriate Minister a legal power to introduce regulations for the purposes of detecting, investigating or preventing money laundering and terrorist financing and to implement the international standards set by the Financial Action Task Force, of which the UK is a member. Ministers may also pass secondary legislation to amend the 2017 AML Regulations once the European Communities Act 1972 no longer applies. The Bill itself does not impose any new AML-related requirements. FCA final guidance on treatment of PEPs for AML purposes On July 6, 2017, the FCA published its finalised guidance (FG17/5) on the treatment of PEPs in connection with the Regulation. The FCA notes that firms should only treat these in the UK who hold “truly prominent positions” in the UK as PEPs, and that “as such it is unlikely in practice that a large number of UK customers should be treated as PEPs“. The guidance also sets out the FCA’s view as to what will constitute an indicator that a PEP poses a “lower” or “higher” risk. For more detail, see our 2017 Mid-Year United Kingdom White Collar Crime Alert. FCA anti-money laundering annual report for 2016/17 On July 5, 2017, the FCA published its AML annual report for 2016/17. The report reiterates that financial crime and AML remains one of the FCA’s key priorities for 2017/18, and that the FCA continues to develop its AML supervision strategy. This includes the Systematic Anti-Money Laundering Programme, a programme of regular, thorough scrutiny that covers 14 major retail and investment banks operating in the UK with higher risk business models or strategic operations, and a programme of regular AML inspections for a group of other high risk firms that present higher financial crime risk. HM Treasury also announced that the FCA will become responsible for monitoring the AML supervision carried out by professional bodies such as the Institute of Chartered Accountants in England and Wales. A new Office for Professional Body AML Supervision will operate within the FCA, and will be funded by a new fee on the professional body supervisors. In October 2017, the FCA published consultation papers on how the fees for the new Office for Professional Body AML Supervision (OPBAS), which will directly oversee the 22 accountancy and legal professional body AML supervisors in the UK, should be distributed. For more detail, see our 2017 Mid-Year 2017 Mid-Year United Kingdom White Collar Crime Alert. The OPBAS regulations will take effect on January 18, 2018. Bitcoin and cryptocurrencies On December 4, 2017, it was reported that the UK Government was looking to step up regulation of bitcoin amid concerns criminals were using cryptocurrencies to launder money and avoid taxes. Stephen Barclay, economic secretary to Britain’s Treasury, told parliament in a notice dated November 3, 2017—but only later reported by media—that the proposed amendments would “bring virtual currency exchange platforms and custodian wallet providers into Anti-Money Laundering and Counter-Terrorist Financing regulation“. Case law Merida Oil Traders, Bunnvale and Ticom Management [2017] EWHC 747 (Admin) On April 11, 2017, the High Court ruled, on an application for judicial review in R (on the application of Merida Oil Traders Limited & others v Central Criminal Court & others, that City of London Police had exceeded its power under POCA in seizing U.S.$ 21 million from Merida Oil Traders, Bunnvale and Ticom Management (and Intoil SA, which was not party to the judicial review) as part of a money laundering investigation. During the course of the investigation, the City of London Police invited a broker to create cheques for closing balances payable to Merida, Bunnvale, Ticom and Intoil, then applied to the Central Criminal Court for a production order requiring the broker to produce the cheques, which they then seized. The High Court held that that the statutory requirements for making production orders were not met, in that the production of the cheques was not of substantial value to a money laundering investigation. The purpose of an investigation, whatever its subject matter, was to find out information with a view to taking some action or decision, whereas production of the cheques was sought so that they could be seized and detained as cash. The High Court held that the cheques were unlawfully seized and that the City of London Police had abused their power under POCA. Merida, Bunnvale, Ticom and Intoil did not choose to hold their money in cash, and the cheques, which were classified as cash, only existed because the City of London Police had arranged with the broker – without the claimants’ knowledge or consent – for the cheques to be created. Had the cheques not been created, they could not have been seized. Instead, they would have had to seek a restraint order or a property freezing order.  For more detail, see our 2017 Mid-Year United Kingdom White Collar Crime Alert. National Crime Agency v N and Royal Bank of Scotland PLC (“RBS”) [2017] EWCA Civ 253 As discussed in our 2017 Mid-Year United Kingdom White Collar Crime Alert, on April 7, 2017, the Court of Appeal handed down judgment in an appeal brought by the NCA against RBS and an authorised payment institution referred to only as “N”. Mr Justice Barton had made interim orders allowing RBS to continue operating the accounts of N, even after the NCA had asked for RBS to freeze the accounts and return the funds to N. This was based on the NCA’s suspicion that the balance of the account constituted criminal property. The NCA appealed against the interim orders, on the basis that the only appropriate mechanism was the statutory procedure set out in POCA. The Court of Appeal did not agree with the NCA’s submission that Mr Justice Burton had no jurisdiction to make the orders that he did. The court’s jurisdiction to grant interim relief was not ousted by the money-laundering provisions of POCA. However, it accepted the NCA’s alternative submission that the statutory procedure under POCA was highly relevant to the court’s discretion. It could not be displaced “merely on a consideration of the balance of convenience as between the interests of the private parties involved. The public interest in the prevention of money laundering as reflected in the statutory procedure has to be weighed in the balance and in most cases is likely to be decisive“. The Court of Appeal, therefore, overturned Mr Justice Burton interim orders. The judgment is a fairly extreme example of the deference the courts will have with law enforcement agencies – requiring as it did the forced closure of bank accounts outside the statutory regime. Ikram Mahamat Saleh v Director of the Serious Fraud Office [2017] EWCA Civ 18 On January 23, 2017, the Court of Appeal gave judgment in an appeal brought by Mrs Saleh against the SFO. That appeal concerned a Property Freezing Order in respect of £4.4 million is discussed above in the Bribery and Corruption section. R v Otegbola & ors [2017] EWCA Crim 1147 On July 7, 2017, the Court of Appeal denied an application for permission to appeal in R v Otegbola & others ruling, in the absence of evidence that the proceeds in question were criminal property, that the prosecution was nonetheless permitted to rely on an inference—arising out of the way that the funds were moved and transferred between the defendants’ accounts—that the funds could only have been the proceeds of crime. The applicants, Olaluwa Otegbola, Oluboukola Otegbola and Vivian Baje had been convicted of converting criminal property contrary to section 327(1) of POCA. The three defendants were convicted of having transferred £39,650 between their bank accounts between December 29, 2011 and April 6, 2012, knowing that the funds constituted criminal property. The evidence showed that the money was received into an account held by Mrs Otegbola trading as Checed Enterprise, then transferred between the applicants’ bank accounts over the course of a few days. The prosecution presented the jury with a schedule of the payments between the applicants’ bank accounts, but did not present any evidence about the transactions leading to the initial payments to Checed Enterprise. After the three defendants were arrested, they provided differing explanations for the transactions, including that the transactions had been loans to Ms Baje, but were unable to explain why the alleged loans had been repaid on the same day or into a different account. The prosecution relied on R v Anwoir [2008] 2 Cr App R 36 and argued that the Crown could prove that property had been derived from a crime either by proving that it derived from conduct of a specific kind that was unlawful, or by presenting evidence of the way in which the property was handled that gave rise to the irresistible inference that the property could only be derived from crime. The Court of Appeal agreed that the prosecution was entitled to rely on the principle set out in Anwoir, and observed that the sums transferred were substantial when compared with the income and business turnover of the accused, that the schedule of transfers established that the way the funds had been dealt with was highly unusual, and that the defendants’ explanations were inadequate. Enforcement Deutsche Bank AG As noted in our 2017 Mid-Year United Kingdom White Collar Crime Alert, on January 30, 2017, the FCA issued a final notice against Deutsche Bank AG (“Deutsche Bank”) for failing to maintain an adequate AML control framework during the period between January 1, 2012 and December 31, 2015. Deutsche Bank was fined £163,076,224. This is the largest FCA financial penalty in relation to AML controls. HSBC On February 21, 2017, it was reported that the FCA was investigating HSBC over potential breaches of money laundering rules after concerns raised in 2016 by the bank’s compliance monitor. Clyde & Co LLP On April 12, 2017, the Solicitors Disciplinary Tribunal (“SDT”) gave judgment in respect of allegations made against the international law firm Clyde & Co LLP and three of its partners, and held that both Clyde & Co and the partners in question committed breaches of accounting and money laundering rules. Two key money laundering allegations were made: (i) that the firm had become involved, as escrow agent, with a fraudulent scheme, and that by unintentionally becoming involved had lent the scheme credibility; and (ii) a number of breaches of money laundering rules, including by allowing their client account to be used as a banking facility. The Tribunal also noted that there had been a systemic failure by the firm to have proper procedures in place to ensure that residual balances on files were returned to clients in a timely manner at the end of a retainer. The SDT imposed a fine of £50,000 on Clyde & Co, and £10,000 each on the three individual partners. For more detail, see our 2017 Mid-Year United Kingdom White Collar Crime Alert. Russian Laundromat money laundering scheme In our 2017 Mid-Year United Kingdom White Collar Crime Alert, we reported that the NCA was considering whether information published by The Guardian would result in an investigation into the role of British banks in the “Russian Laundromat” money laundering scheme that moved U.S.$ 20.8 billion out of Russia between January 2011 and October 2014 using a complex global web of companies and banks. The Guardian‘s analysis of banking records suggested that 17 British banks had processed nearly U.S.$ 740 million in funds involved in the “Russian Laundromat” money laundering scheme. Each of the 17 banks has issued a statement to the effect that they had anti-money-laundering controls in place and would cooperate with law enforcement. “Azerbaijan Laundromat” money laundering scheme In early September 2017, leaked confidential banking records led to a report by the Organized Crime and Corruption Reporting Project (“OCCRP”) about the “Azerbaijan Laundromat” scheme, a U.S.$ 2.9 billion operation which ran between 2012 and 2014—with on average U.S.$ 3 million channelled by certain public figures out of Azerbaijan every day and into four offshore-managed UK companies. The scheme was reportedly designed by Azerbaijan’s ruling elite to provide a fund to bribe European politicians, launder money and fund luxury purchases. The funds are thought to have come from companies linked to Azerbaijan’s president, Ilham Aliyev, state ministries and the International Bank of Azerbaijan. The cash was transferred into four offshore-managed UK entities, and then spent in the UK, Germany, France, Turkey, Iran and Kazakhstan. The UK entities that handled the cash were Hilux Services and Polux Management, both incorporated as Scottish Limited Partnerships in Glasgow, and Metastar Invest and LCM Alliance, both Limited Liability Partnerships registered in Birmingham and Potters Bar, respectively. Some UK MPs have urged the government to open an inquiry into the scheme and the involvement of UK entities demanding “a full investigation to see that dirty money has not been used to buy influence in the UK“. Gupta family and HSBC / Standard Chartered In October 2017, the FCA announced that it was investigating financial ties between HSBC PLC and Standard Chartered PLC and the Guptas – a wealthy family accused of buying influence with South Africa’s President Jacob Zuma – after former cabinet minister Lord Hain passed a list of transactions to the chancellor warning of their “possible criminal complicity” on September 25, 2017. Lord Hain had alleged in the House of Lords that as much as £400 million of illicit funds from South Africa may have been “transnationally laundered“. The chancellor asked UK enforcement agencies the SFO, NCA and FCA to investigate the matters, and on October 12, 2017 the FCA said that it had been in contact with the two banks. The FBI has also launched an investigation with respect to U.S. links to the Guptas. On November 3, 2017 HSBC announced that it had closed bank accounts held by “front companies” associated with the Guptas. Standard Chartered was also reported to have said that it was “not able to comment on the details of client transactions but can confirm that following an internal investigation accounts were closed by us in 2014“. Lord Hain was reported to have confirmed to the House of Lords on December 12, 2017, that the FCA was being assisted directly by a whistleblower supplying information from South Africa.  During his speech to the House of Lords, Lord Hain also suggested that two other banks  “be given [a] red flag warning to check their exposure to Gupta money laundering – both direct and indirect”. Offshore enforcement Guernsey – investigation of Standard Chartered On October 5, 2017, it was reported that a U.S.$ 1.4 billion money transfer between Standard Chartered’s Guernsey and Singapore offices was under investigation by the Guernsey Financial Services Commission, in partnership with the Monetary Authority of Singapore, in connection with possible movement of assets shortly before new tax transparency rules were implemented. The bank is reported to have conducted an internal investigation and self-reported to regulators after employees raised questions in 2016 about the timing of the transactions, whether the bank had undertaken adequate “know your client” due diligence and whether the source of customers’ funds had been properly vetted. Jersey – Gisele Le Miere In February 2017, the former Managing Director and Money Laundering Reporting Officer of Jordans Trust Company Jersey was banned from any future work in any business licensed to conduct financial services business in Jersey following accusations of fraud and money laundering relating to a £200,000 film investment fund she oversaw. The Jersey Financial Services Commission concluded that Gisele Helene Le Miere had provided inaccurate information to the Jordans Board of Directors and Compliance Committee and had ignored several red flags relating to a non-Jersey incorporated company which ultimately received investor money from the fund. Bermuda – Sun Life Financial Investments (Bermuda) On February 27, 2017, the Bermuda Monetary Authority announced that it had imposed civil penalties including a U.S.$ 1.5 million fine on Sun Life Financial Investments (Bermuda) Limited (“Sun Life”), as well as restricting Sun Life’s Investment Business Licence for failing to apply appropriate CDD measures such as applying Enhanced Due Diligence when appropriate, monitoring ongoing business relationships and maintaining appropriate risk-sensitive policies and procedures. 7.     Competition / Antitrust 2017 was a significant year for enforcement, with the CMA and FCA opening new investigations into a variety of industries and finalising a number of investigations. The CMA also had success before the Competition Appeal Tribunal, with its steel tanks decision being upheld upon appeal. The UK’s class actions regime for private enforcement, on the other hand, saw the rejection of the first class action to follow on from an OFT infringement decision, casting something of a shadow over the regime. At the European level, on 23 January 2018 the EU imposed a fine of €997 million on computer chip manufacturer Qualcomm in respect of allegations of anti-competitive behavior. Qualcomm has said it intends to appeal. Please note that the CMA also took enforcement action in 2017 in the consumer protection sphere, which falls outside the scope of our review. Enforcement Cleanroom services On December 14, 2017, the CMA fined 2 suppliers of “cleanroom” laundry services for a market sharing agreement whereby they agreed not to compete for each other’s allocated territories and customers. The CMA imposed a financial penalty of £510,118 on Micronclean Limited and of £1,197,956 on Berendsen Cleanroom Services Limited. Transport Sector (airports) On December 7, 2017, the CMA launched an investigation into suspected breaches of competition law in respect of facilities at airports. At this point, no further information regarding the scope of the investigation is available. Pharmaceuticals As reported in the 2017 Mid Year UK White Collar Crime Update, in March 2017, the CMA issued a statement of objections to Concordia and Actavis UK, alleging that the companies signed agreements under which Actavis UK incentivized Concordia not to enter the market with its own competing version of hydrocortisone tablets. In a separate investigation regarding hydrocortisone tablets, the CMA had in December 2016 provisionally found that Actavis UK had breached competition law by charging excessive prices to the NHS for the tablets following a 12,000% price rise over the course of several years. On August 9, 2017, the CMA issued a statement of objections to Intas Pharmaceuticals Limited and Accord Health Limited, which acquired Actavis UK in January 2017, alleging that Actavis UK continued to charge excessive prices for the tablets and proposing to find the parent companies jointly and severally liable for the alleged infringements from their period of ownership. On November 21, 2017, the CMA also announced that it had provisionally found that Concordia had breached competition law by using its dominant position to charge excessive and unfair prices in relation to the supply of liothyronine tablets in the UK. Consumables On August 9, 2017, the CMA announced that it had closed its investigation into a suspected abuse of a dominant position of Unilever PLC in the market for single-wrapped ice cream in the UK. The CMA’s investigation considered whether the company had abused a dominant position by offering deals or prices for impulse ice cream to retailers in the UK which were likely to have an exclusionary effect, in particular by means of promotional deals under which the company supplied to retailers single-wrapped ice cream products free of charge or at a reduced price if they purchased a minimum number of single-wrapped ice cream products. The CMA found that Unilever’s promotional deals were unlikely to have had an exclusionary effect. Sports Equipment Industry As reported in our 2016 Year End UK White Collar Crime Update, in June 2016 the CMA had issued a statement of objections to Ping Europe Limited (“Ping”) alleging that it had breached competition law by operating an online sales ban in respect of golf clubs. On August 24, 2017, the CMA issued an infringement decision and imposed a £1.45 million financial penalty on Ping, directing that it bring the online sales ban to an end. An appeal against the decision was launched by Ping on October 27, 2017, and the main hearing is set to take place in May 2018. Building and Construction Industry As reported in our 2016 Mid Year UK White Collar Crime Update, the CMA confirmed in March 2016 that it had commenced criminal proceedings against Mr Barry Cooper for the criminal cartel offence, following an investigation into the supply of precast concrete drainage products. On September 15, 2017, the CMA announced that Mr Cooper had been sentenced to 2 years’ imprisonment suspended for 2 years, made the subject of a 6-month curfew order and disqualified from acting as a company director for 7 years. The CMA’s related civil investigation into whether businesses have infringed competition law is ongoing. Online price comparison websites As reported in the 2017 Mid Year UK White Collar Crime Update, in March 2017 the CMA published its interim report on its year-long market study into digital comparison tools (“DCTs”). On September 26, 2017, the CMA published its final report. Although the CMA’s study found that DCTs help consumers shop around by making it easier to compare prices, it issued the following recommendations: 1.        sites should be clear about how they make money, how many deals they display and how results are ordered; 2.       sites should be clear on how personal information is protected; and 3.       it should be made as easy as possible for consumers to make effective comparisons or use different sites. The CMA also announced that it had opened an investigation into suspected breaches of competition law on the part of one site through the use of most favored nation (“MFN”) clauses in relation to home insurance prices. The use of such clauses came to the CMA’s attention as part of its general investigation into DCTs. Live auction platform services In November 2016, the CMA launched an investigation into suspected breaches of competition law by ATG Media, the largest provider of live online auction platforms in the UK. The investigation related to suspected anti-competitive agreements or concerted practices, and suspected abuse of dominance, and in particular suspected exclusionary and restrictive pricing practices, including MFN provisions in respect of online sales. On June 29, 2017, the CMA published its decision to accept final commitments from ATG Media to refrain for five years from: 1.        obtaining exclusive deals with auction houses; 2.       preventing auction houses getting a cheaper online bidding rate with other platforms for their bidders through MFN clauses; and 3.       preventing auction houses from promoting or advertising rival live online bidding platforms in competition with ATG Media. Leisure Industry Having alleged in December last year that rules enforced by the Showmen’s Guild of Great Britain in the travelling fair sector breach competition law by protecting existing Guild showmen from competition, on October 26, 2017 the CMA announced its decision to accept binding commitments from the Guild to change certain of its rules in order to address the CMA’s competition concerns, and to therefore close the investigation. In particular, the changes address the CMA’s concerns that the Guild’s rules restrict members from competing with one another to organize or attend fairs or from setting up new fairs in competition with existing fairs. Asset Management Industry On September 14, 2017, the FCA confirmed its decision to make a Market Investigation Reference to the CMA following its market study of investment consultancy and fiduciary management services. It also confirmed that it was rejecting the package of undertakings in lieu offered by three of the largest investment consultants, as it could not be confident that it would provide a solution to the adverse effects of competition identified. This is the first time that the FCA has made such a reference to the CMA. The CMA published an issues statement on September 21, 2017 and is carrying out investigative steps. A provisional decision is expected in July 2018. On November 29, 2017, the FCA issued a statement of objections to four asset management firms, Artemis Investment Management LLP, Hargreave Hale Limited, Newton Investment Management Limited and River & Mercantile Asset Management LLP, accusing them of breaching competition law by colluding on stock market flotations in 2014 and 2015. The FCA alleged that the four firms shared information about the price they intended to pay for shares in two IPOs before prices had been officially set, when they should have been competing for the shares. The companies face a fine up to 10% of their worldwide turnover in a particular market if they are found to have breached competition rules. Insurance Industry                                                                                                                  In April 2017, the FCA launched an antitrust investigation into the aviation insurance sector with dawn raids on several of the largest firms.  In October 2017, it was confirmed that the investigation of at least three of the firms had been taken over by the European Commission. The Commission stated that the proceedings concerned the exchange of commercially sensitive information between competitors in relation to aviation insurance, as well as possible coordination between competitors. Following this, on November 8, 2017, the FCA launched a full market study into the wholesale insurance-broking market, stating concern that broker behaviour may be restricting competition, and citing a desire to ensure that the market is functioning in the interests of a diverse range of consumers.The FCA aims to publish an interim report in autumn 2018. EURIBOR As reported in the 2016 Year End UK White Collar Crime Update, the SFO issued criminal proceedings against 11 individuals accused of manipulating EURIBOR, and on January 11, 2016, they were charged with conspiracy to defraud. On May 24, 2017, the SFO announced that the trial of six of the former traders who had been charged was to be postponed until January 2018. Litigation Steel Tanks Industry As reported in the 2016 Year End UK White Collar Crime Update, in December 2016, the CMA found that Balmoral, a supplier of galvanized steel water tanks, along with three other businesses, had breached competition law by taking part in an exchange of competitively-sensitive information on prices and pricing intentions. Balmoral did not take part in the main price–fixing cartel which the CMA investigated separately, but was fined £130,000 for taking part in the unlawful information exchange which amounted to a concerted practice. In February 2017, Balmoral challenged the CMA’s finding, their decision to impose the fine, and the amount of that fine, but on October 6, 2017, the Competition Appeal Tribunal dismissed the appeal. The Tribunal unanimously determined that Balmoral’s conduct was an infringement, and that the fine was appropriate and there was no basis for criticizing its imposition or its amount. On December 13, 2017, the Competition Appeal Tribunal refused permission to appeal to the Court of Appeal on the basis that none of the appeal grounds had any real prospect of success and there was no other compelling reason for granting permission to appeal.  The Tribunal also ruled that the CMA was entitled to costs. Pharmaceuticals (Pfizer and Flynn Pharma) As reported in the 2017 Mid-Year UK White Collar Crime Update, in February 2017, Pfizer, the manufacturer of phenytoin sodium, and Flynn Pharma, its distributor, appealed a CMA decision which found that they had charged excessive and unfair prices for the drug, and which fined them £84.2 million and £5.2 million respectively. This appeal was heard by the Competition Appeal Tribunal between October 30, 2017 and November 24, 2017, and judgment has been reserved. Pay for Delay appeal (Merck KGaA v CMA) In February and March 2017, the CAT heard the appeal against the CMA’s Seroxat “pay for delay” infringement decision. That decision concerned the settlement entered into by Merck’s subsidiary, Generics (UK) Limited (“GUK”), in 2002 to end ongoing patent litigation with pharmaceutical originator company GlaxoSmithKline PLC (“GSK”) relating to paroxetine, which is supplied in the UK as Seroxat, an antidepressant medicine. The CMA found that the settlement infringed the competition rules by inducing GUK to desist, during the term of the Settlement, from continuing its efforts to enter the UK paroxetine market independently of GSK, and thereby from offering independent generic competition against GSK. Mobility Scooter class action (Dorothy Gibson v Pride Mobility Products Limited) In March 2017, the Competition Appeal Tribunal rejected the application by proposed class representative, Ms Gibson, for an opt-out collective proceedings order to combine follow-on actions for damages arising from a decision of the Office of Fair Trading in March 2014 which  had found that Pride Mobility Products and each of eight retailers selling its mobility scooters had infringed the Chapter I prohibition by entering into agreements or concerted practices whereby the retailers would not advertise certain models of Pride scooters online at prices below the recommended retail price set by Pride. The CAT gave permission for Ms Gibson to file and serve a draft amended claim form, but proceedings were abandoned in May 2017. This was followed in July 2017 by the rejection of the second class action application, an action brought on behalf of consumers against the European Commission’s infringement decision against Mastercard. Brexit – House of Lords competition inquiry On July 21, 2017, the House of Lords EU Internal Market Sub-Committee launched an inquiry into the impact of Brexit on UK competition policy. The stated focus of the inquiry was to explore: (i) opportunities and challenges in re-shaping UK competition policy post-Brexit; (ii) the implications of Brexit for the application and enforcement of competition law in the UK; (iii) whether UK authorities have the capacity and resources to cope with additional responsibilities and a greater caseload; (iv) potential state aid obligations in any UK-EU free trade agreement; and (v) future cooperation between the UK and the EU on investigations and enforcement actions. The Sub-Committee received a number of written responses to its call for evidence, including from the CMA and the CAT. Those responses addressed a number of key issues, including (i) consistency of interpretation as between UK and EU competition law; (ii) conduct of parallel competition law investigations; and (iii) cooperation between the UK authorities and the European Commission in terms of enforcement. The Sub-Committee concluded its hearing of oral evidence in November 2017, and is expected to publish its report in early 2018. 8.     Market abuse and Insider Trading and other Financial Sector Wrongdoing FCA Enforcement: insider dealing As we reported in our 2017 Mid-Year United Kingdom White Collar Crime Alert, the FCA’s 2016/17 Enforcement Performance Account, indicated that as at March 31, 2017 the FCA had 122 market abuse cases open. Despite this, the latter half of 2017 has been quiet in terms of criminal enforcement for insider dealing with the FCA bringing no new cases and securing no new convictions. Since 2008, when the FCA secured its first conviction for insider dealing the agency has secured over 30 convictions for insider dealing, a crime that had not been prosecuted by the authority prior to 2008. Prior to 2008, the FSA (the FCA’s predecessor) had relied on civil enforcement powers under Financial Services and Markets Act 2000 (“FSMA”) to sanction those accused of market abuse. Fabiana Abdel-Malek and Walid Anis Choucair In our 2017 Mid-Year United Kingdom White Collar Crime Alert, we reported that Ms Abdel-Malek and Mr Choucair had been charged with five counts of insider dealing, contrary to section 52(2)(b) and 52(1) of the Criminal Justice Act 1993 following a joint investigation between the FCA and the NCA. The alleged insider dealing took place between June 3, 2013 and June 19, 2014. In that period, it is alleged that Mr Choucair used inside information that was passed to him by Ms Abdel-Malek to trade certain stocks realising a profit of almost £1.4 million. Manjeet Mohal and Reshim Birk In our 2015 Year-End United Kingdom White Collar Crime Alert, we reported that the FCA had charged Manjeet Singh Mohal and Reshim Birk in respect of offences of insider dealing, contrary to sections 52(1) and 52(2)(b) of the Criminal Justice Act 1993. The offences related to the passing on, in 2012, of insider information relating to a takeover of Logica PLC by CGI Holdings (Europe) Limited. That information had come into Mr Mohal’s possession during his employment at Logica. Mr Mohal passed on that information to his neighbour, Reshim Birk, and another individual. Reshim Birk made a profits in excess of £100,000 by trading on the basis of that inside information. Mr Mohal and Mr Birk were sentenced on January 13, 2017. Mr Mohal was sentenced to 10 months’ imprisonment suspended for two years, together with 180 hours of community work. Mr Birk was sentenced to 16 months’ imprisonment suspended for two years, together with 200 hours of community work. Interactive Brokers (UK) On January 25, 2018, the FCA announced a fine of £1,049,412 against Interactive Brokers (UK) in relation to allegations of failings in its post trade systems and controls concerning the identification and reporting of suspicious transactions in relation to insider dealing. One Call Insurance Services Limited and John Radford On January 26, 2018, the FCA announced fines of £684,000 against Once Call Insurance Services Limited, and £468,600 against Mr Radford who was the company’s CEO and majority shareholder. In addition, the company has been prohibited from charging renewal fees to customers for 121 days which is expected to cost the company some £4.6 million. The failings alleged in the Final Notice relate to poor controls over client money with the company inadvertently using client funds for its working capital. Civil enforcement for market abuse Tesco PLC and Tesco Stores Limited We reported in detail on the final notice issued by the FCA against Tesco Stores PLC and Tesco Stores Limited for market abuse contrary to section 118(7) FSMA in our 2017 Mid-Year United Kingdom White Collar Crime Alert. As we noted, this was the first time the FCA has used its powers under section 384 of FSMA to require a listed company to pay compensation for market abuse.  The compensation scheme, administered by KPMG opened on August 23, 2017. Paul Axel Walker On November 22, 2017 the FCA issued its final notice against Paul Axel Walter for engaging in market abuse under section 118(5) of FSMA. Mr Walter, an experienced bond trader at a global investment bank, was fined £60,090 for placing misleading bids and quotes on six Dutch State Loans (“DSL”) in July and early August of 2014 on an inter-dealer platform. In 11 instances, Mr Walter had placed high bid quotes on DSLs that he had intended to sell, artificially causing others traders who were tracking his quotes to raise their bids in response to this. He would then cancel his bid and sell the loan at a higher price. On one instance Mr Walter had placed a low offer quote on a DSL that he was selling and, when other DSL sellers lowered their offer prices in response, cancelled his quote and purchased the DSLs at a lower price. Mr Walter used the anonymity offered by the platform to seek to avoid being attributed to the false bids that he had made. Although Mr Walter did not make any personal profit from his market abuse, and neither intended to commit market abuse nor foresee its consequences, the FCA stated that given his experience as a trader, his conduct constituted a serious failure to act in accordance with the standards reasonably expected of market participants. Damian Clarke In our 2017 Mid-Year United Kingdom White Collar Crime Alert we reported that Damian Clarke, a former equities trader at an international investment bank pleaded guilty to seven charges of insider trading. As previously reported, Mr Clarke was sentenced to two years in jail and barred by the FCA from performing any function related to a regulated activity. On July 24, 2017 Southwark Crown Court made a confiscation order for £350,000 against Mr Clarke, a figure which exceeded the profit generated through the insider trades he pleaded guilty to. The FCA successfully argued that Mr Clarke’s offences were such that he led a “criminal lifestyle” and had benefitted from general criminal conduct.  As a consequence the Court was entitled assume that profits made from other, non-indicted trading within a defined period were generated as a by-product of his insider trading and should be repaid.  This illustrates the draconian nature of sections 75(2) and 10 of the Proceeds of Crime Act 2002, which provide for wide ranging assumptions to be made about the origins of a defendant’s property if he is found to have benefitted from general criminal conduct.  These provisions will be engaged if specific offences have been committed, including certain money laundering offences or if the offence of which the defendant has been convicted forms part of a course of criminal conduct or was committed over a period of six months, and the defendant has benefitted by at least £5,000.  It is for the defence to disprove these assumptions. Tejoori Limited On December 14, 2017 the FCA imposed its first fine on an AIM company for late disclosure of inside information under Article 17(1) of the Market Abuse Regulation (Regulation 596/2014) (“MAR”). Tejoori Limited (“Tejoori”), a self-managed, closed-ended investment company was fined £70,000 for failing to disclose the sale of shares it held to another company for no initial consideration.  While press releases were made by both the purchaser and the company whose shares were transferred, neither made reference to Tejoori or the amount of consideration paid to Tejoori. Tejoori’s failure to disclose this information led to market speculation on the purchase price paid to Tejoori, causing Tejoori’s share price to rise by 38% over two days on August 22 and 23, 2016. When the London Stock Exchange contacted Tejoori’s nominated advisor to enquire about the sudden rise in its share price, Tejoori denied selling its shares and denied holding inside information.  Tejoori had been obliged to transfer its shares following exercise of “drag-along” rights by the majority shareholders and would only receive a payment for its shares under an earn-out provision in the share purchase agreement. Tejoori misunderstood this and believed, erroneously, that it would not be obliged to transfer its shares unless it received consideration under the earn-out. When, on August 24, 2017, Tejoori eventually released an announcement confirming the nature of the share sale, its closing share price fell 13%. Tejoori notified the FCA of its breach of Article 17(1) of MAR and cooperated with the FCA’s investigation, and therefore qualified for a 20% discount on the ultimate fine. EU developments Garlsson Real Estate SA, in liquidation, and others v Commissione Nazionale per le Società e la Borsa (Consob) (Case C-537/16) On 12 September 2017, Advocate General Campos Sanchez-Bordona (“AG”) handed down an opinion concerning the extent to which the principle of double jeopardy (“ne bis in idem“) applies when the laws of a member state permit the imposition of both administrative and criminal penalties in relation to market abuse.  The AG’s opinion confirms that when administrative sanctions under the Market Abuse Regulation (Regulation 596/2014) (“MAR”) are sufficiently onerous to be criminal in nature, a criminal prosecution for substantially the same conduct under the Directive on Criminal Sanctions for Market Abuse (2014/57/EU) (“CSMAD”) would engage Article 50 of the EU Charter, which sets out the principle of double jeopardy.  The AG opined that member states must, “establish appropriate procedural mechanisms to prevent the duplication of proceedings and ensure that a person is prosecuted and punished only once in respect of the same acts“. Although the opinion is advisory in nature, it foreshadows a potential divergence in the Court of Justice of the European Union (“CJEU”) approach to double jeopardy from that of the European Court of Human Rights (“ECtHR”).  In  A and B v Norway [2016] ECHR 987, the ECtHR found that the double jeopardy protection would not be infringed where two proceedings were integrated and sufficiently connected in time and substance. The UK is a signatory to the EU Charter, but not to Article 4 of Protocol No. 7 (the relevant provision of the ECHR).  Accordingly, the potential difference in the approaches taken by the CJEU and ECtHR will require careful monitoring. Firms should be aware that CSMAD applies to trading on an EU regulated market that is conducted from the UK.  This will remain the case following the UK’s exit from the EU. The following Gibson Dunn lawyers assisted in the preparation of this client update: Mark Handley, Steve Melrose, Sacha Harber-Kelly, Patrick Doris, Allan Neil, Deirdre Taylor, Emily Beirne, Jonathan Cockfield, Moeiz Farhan, Besma Grifat-Spackman, Yannick Hefti-Rossier, Meghan Higgins, Korina Holmes, Chris Loudon, Nooree Moola, Barbara Onuonga, Rebecca Sambrook, Frances Smithson, Caroline Ziser Smith, Syamack Afshar, Helen Elmer, Fatima Hammad, Clementine Hollyer and Rose Naing. Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following members of the firm’s White Collar Defence and Investigations Practice Group: London Philip Rocher (+44 (0)20 7071 4202, procher@gibsondunn.com) Sacha Harber-Kelly (+44 20 7071 4205, sharber-kelly@gibsondunn.com) Patrick Doris (+44 (0)20 7071 4276, pdoris@gibsondunn.com) Charles Falconer (+44 (0)20 7071 4270, cfalconer@gibsondunn.com) Charlie Geffen (+44 (0)20 7071 4225, cgeffen@gibsondunn.com) Osma Hudda (+44 (0)20 7071 4247, ohudda@gibsondunn.com) Penny Madden (+44 (0)20 7071 4226, pmadden@gibsondunn.com) Allan Neil (+44 (0)20 7071 4296, aneil@gibsondunn.com) Ali Nikpay (+44 (0)20 7071 4273, anikpay@gibsondunn.com) Deirdre Taylor (+44 (0)20 7071 4274, dtaylor2@gibsondunn.com) Mark Handley (+44 20 (0)7071 4277, mhandley@gibsondunn.com) Steve Melrose (+44 (0)20 7071 4219, smelrose@gibsondunn.com) Sunita Patel (+44 (0)20 7071 4289, spatel2@gibsondunn.com) Brussels Peter Alexiadis (+32 2 554 72 00, palexiadis@gibsondunn.com) David Wood (+32 2 554 72 10, dwood@gibsondunn.com) Attila Borsos (+32 2 554 72 10, aborsos@gibsondunn.com) Munich Benno Schwarz (+49 89 189 33-110, bschwarz@gibsondunn.com) Mark Zimmer (+49 89 189 33-130, mzimmer@gibsondunn.com) Frankfurt Finn Zeidler (+49 69 247 411-530, fzeidler@gibsondunn.com) Paris Nicolas Autet (+33 (0) 1 56 43 13 00, nautet@gibsondunn.com) Ahmed Baladi (+33 (0) 1 56 43 13 00, abaladi@gibsondunn.com) Nicolas Baverez (+33 (0) 1 56 43 13 00, nbaverez@gibsondunn.com) Eric Bouffard (+33 (0) 1 56 43 13 00, ebouffard@gibsondunn.com) Jean-Pierre Farges (+33 (0) 1 56 43 13 00, jpfarges@gibsondunn.com) Pierre-Emmanuel Fender (+33 (0) 1 56 43 13 00, pefender@gibsondunn.com) Benoît Fleury (+33 (0) 1 56 43 13 00, bfleury@gibsondunn.com) Bernard Grinspan (+33 (0)1 56 43 13 00, bgrinspan@gibsondunn.com) Dubai Graham Lovett (+971 (0) 4 318 4620, glovett@gibsondunn.com) Nooree Moola (+971 (0) 4 318 4643, nmoola@gibsondunn.com) Hong Kong Kelly Austin (+852 2214 3788, kaustin@gibsondunn.com) Oliver D. Welch (+852 2214 3716, owelch@gibsondunn.com) Rebecca Sambrook (+852 2214 3729, rsambrook@gibsondunn.com) Washington, D.C. F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Patrick F. Stokes (+1 202-955-8504, pstokes@gibsondunn.com) Richard W. Grime (+1 202-955-8219, rgrime@gibsondunn.com) Scott D. Hammond (+1 202-887-3684, shammond@gibsondunn.com) D. Jarrett Arp (+1 202-955-8678, jarp@gibsondunn.com) Stephanie L. Brooker (+1 202-887-3502, sbrooker@gibsondunn.com) David P. Burns (+1 202-887-3786, dburns@gibsondunn.com) John W.F. Chesley (+1 202-887-3788, jchesley@gibsondunn.com) Daniel P. Chung (+1 202-887-3729, dchung@gibsondunn.com) David Debold (+1 202-955-8551, ddebold@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Michael Diamant (+1 202-887-3604, mdiamant@gibsondunn.com) Caroline Krass – (+1 202-887-3784, ckrass@gibsondunn.com) Judith A. Lee (+1 202-887-3591, jalee@gibsondunn.com) Linda Noonan (+1 202-887-3595, lnoonan@gibsondunn.com) Adam M. Smith (+1 202-887-3547, asmith@gibsondunn.com) New York Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Joel M. Cohen (+1 212-351-2664, jcohen@gibsondunn.com) Mylan L. Denerstein (+1 212-351-3850, mdenerstein@gibsondunn.com) Lee G. Dunst (+1 212-351-3824, ldunst@gibsondunn.com) Jose W. Fernandez (+1 212-351-2376, jfernandez@gibsondunn.com) Barry R. Goldsmith (+1 212-351-2440, bgoldsmith@gibsondunn.com) Christopher M. Joralemon (+1 212-351-2668, cjoralemon@gibsondunn.com) Mark A. Kirsch (+1 212-351-2662, mkirsch@gibsondunn.com) Randy M. Mastro (+1 212-351-3825, rmastro@gibsondunn.com) Marc K. Schonfeld (+1 212-351-2433, mschonfeld@gibsondunn.com) Orin Snyder (+1 212-351-2400, osnyder@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Lawrence J. Zweifach (+1 212-351-2625, lzweifach@gibsondunn.com) Los Angeles Debra Wong Yang (+1 213-229-7472, dwongyang@gibsondunn.com) Marcellus McRae (+1 213-229-7675, mmcrae@gibsondunn.com) Michael M. Farhang (+1 213-229-7005, mfarhang@gibsondunn.com) Douglas Fuchs (+1 213-229-7605, dfuchs@gibsondunn.com) Eric D. Vandevelde (+1 213-229-7186, evandevelde@gibsondunn.com) Francis Smithson (+1 213-229-7914, fsmithson@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) John D.W. Partridge (+1 303-298-5931, jpartridge@gibsondunn.com) Ryan T. Bergsieker (+1 303-298-5774, rbergsieker@gibsondunn.com) Palo Alto Benjamin B. Wagner (+1 650-849-5395, bwagner@gibsondunn.com) San Francisco Thad A. Davis (+1 415-393-8251, tadavis@gibsondunn.com) Marc J. Fagel (+1 415-393-8332, mfagel@gibsondunn.com) Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com) Michael Li-Ming Wong (+1 415-393-8234, mwong@gibsondunn.com) Rachel S. Brass (+1 415-393-8293, rbrass@gibsondunn.com) Winston Y. Chan (+1 415-393-8362, wchan@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.

January 24, 2018 |
Webcast – Challenges in Compliance and Corporate Governance -14th Annual Briefing

Our constantly-evolving regulatory landscape expands existing obligations while creating new compliance risks for companies big and small. Join our panel of experts as they review key developments in 2017 and offer valuable insight on how to address challenges forecasted for 2018. Topics discussed include: Global Enforcement and Regulatory Developments Change and Continuity in the New Administration Key Tips for Identifying and Addressing Top Areas of Compliance Risk Practical Recommendations for Improving Corporate Compliance DOJ and SEC Priorities, Policies, and Penalties Update on Key Governance Issues and Regulatory Requirements View Slides [PDF] PANELISTS: This year’s presentation assembles a deep bench of experts with broad expertise. The following panelists join moderator Joe Warin for the 14th annual installment of ‘Challenges in Compliance and Corporate Governance’: Gibson Dunn partner Stephanie L. Brooker, Co-Chair of the firm’s Financial Institutions Practice Group, is former Director of the Enforcement Division at the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). As a federal prosecutor, Stephanie served as the Chief of the Asset Forfeiture and Money Laundering Section in the U.S. Attorney’s Office for the District of Columbia. She represents financial institutions, multi-national companies, and individuals in connection with criminal, regulatory, and civil enforcement actions involving anti-money laundering (AML)/Bank Secrecy Act (BSA), sanctions, anti-corruption, securities, tax, and wire fraud New Gibson Dunn partner Avi S. Garbow, the former EPA General Counsel and co-chair of Gibson Dunn’s Environmental Litigation and Mass Tort Practice Group. As General Counsel, he successfully managed one of the most active regulatory and defensive litigation dockets among large federal agencies. Avi previously held positions in EPA’s enforcement office and served as a distinguished prosecutor in DOJ’s Environmental Crimes Section New Gibson Dunn partner Caroline Krass, the former CIA General Counsel and chair of Gibson Dunn’s National Security Practice Group. As General Counsel, Caroline oversaw more than 150 attorneys and advised on complex, highly sensitive issues, including cybersecurity, foreign investment in the U.S. and export controls, government investigations and litigation, and crisis management.  Previously, Caroline served as Acting Assistant Attorney General at the Department of Justice, as Special Counsel to the President for National Security Affairs, as a federal prosecutor, at the National Security Council, and at the Treasury and State Departments. Gibson Dunn partner Stuart Delery, the former Acting Associate Attorney General, the No. 3 position in the Justice Department. In that role, Stuart was a member of DOJ’s senior management and oversaw the civil and criminal work of five litigating divisions — Antitrust, Civil, Tax, Civil Rights, and Environment and Natural Resources — as well as other components. Previously, Stuart led the Civil Division, overseeing litigation involving the False Claims Act among other matters. Gibson Dunn partner Adam M. Smith, an experienced international trade lawyer who previously served in the Obama Administration as the Senior Advisor to the Director of OFAC and as the Director for Multilateral Affairs on the National Security Council. Adam focuses on international trade compliance and white collar investigations, including with respect to federal and state economic sanctions enforcement, the FCPA, embargoes, and export controls. Gibson Dunn partner Lori Zyskowski, a member of the firm’s Securities Regulation and Corporate Governance Practice Group who was previously Executive Counsel, Corporate, Securities & Finance at GE. Lori advises clients on a wide array of securities, compliance and corporate governance issues, and provides a unique perspective gained from over 12 years working in-house at S&P 500 corporations. Gibson Dunn partner F. Joseph Warin, Co-Chair of the firm’s White Collar Defense and Investigations practice and former Assistant United States Attorney in Washington, D.C. Joe is one of only ten lawyers in the United States with Chambers rankings in five categories. Chambers recently honored him with the Outstanding Contribution to the Legal Profession Award in 2017. Chambers Global 2017 ranked Mr. Warin a “Star” in USA – FCPA “with exceptional expertise across all aspects of anti-corruption law”. Chambers USA 2017 ranked him a “Star” in Nationwide FCPA and D.C. Litigation: White Collar Crime & Government Investigations. Chambers USA 2017 also selected him as a Leading Lawyer in the nation in the areas of Securities Regulation Enforcement and Securities Litigation, as well as in D.C. Securities Litigation. From 2015–2017, he has been selected by Chambers Latin America as a top-tier lawyer in Latin America-wide, Fraud & Corporate Investigations. In 2017, Who’s Who Legal selected him as a “Thought Leader: Investigations,” including “only the best of the best” of those listed in their guides and who obtained the biggest number of nominations from peers, corporate counsel and other market sources. In 2016, Who’s Who Legal and Global Investigations Review also named Mr. Warin to their list of World’s Ten-Most Highly Regarded Investigations Lawyers. He has been listed in The Best Lawyers in America® every year from 2006 – 2017 for White Collar Criminal Defense. BTI Consulting named Mr. Warin to its 2017 BTI Client Service All-Stars list, recognizing lawyers who “truly stand out as delivering the absolute best client service.” Best Lawyers® also named Mr. Warin 2016 Lawyer of the Year for White Collar Criminal Defense in the District of Columbia. In 2016, he was named among the Lawdragon 500 Leading Lawyers in America. Mr. Warin also was recognized by Latinvex as one of its 2017 Latin America’s Top 100 Lawyers. He was selected as a 2015 Top Lawyer for Criminal Defense by Washingtonian magazine. U.S. Legal 500 has repeatedly named Mr. Warin a Leading Lawyer for White Collar Criminal Defense Litigation. Benchmark Litigation has recognized him as a U.S. White Collar Crime Litigator Star for seven consecutive years (2011–2017). MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 3.0 credit hours, of which 3.00 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. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 2.50 hours. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

January 9, 2018 |
Webcast: FCPA Trends in the Emerging Markets of China, Russia, Latin America, India and Africa

Corruption was a defining characteristic of a roller-coaster 2017, with landmark Foreign Corrupt Practices Act (“FCPA”) enforcement actions, the passage of historic anti-bribery legislation in key markets, and sustained grassroots anti-corruption movements threatening to upend established political orders. As companies increasingly look to do business 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 China, Russia, Latin America, India and Africa without running afoul of anti-corruption laws, including the FCPA. View Slides [PDF] Topics to be discussed: An overview of FCPA enforcement statistics and trends for 2017; The corruption landscape in key emerging markets, including recent headlines and scandals; Lessons learned from local anti-corruption enforcement in China, Russia, Latin America, India and Africa; Key anti-corruption legislative changes in China, Russia, Latin America, India and Africa; and Mitigation strategies for businesses operating in high-risk markets. PANELISTS: Kelly Austin Partner-in-Charge of Gibson Dunn’s Hong Kong office and a member of the firm’s Executive Committee. Ms. Austin’s practice focuses on government investigations, regulatory compliance and international disputes. She 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 Trial lawyer and former federal prosecutor, Mr. Cohen is a partner in Gibson Dunn’s New York office, Co-Chair of the firm’s White Collar Defense and Investigations Group, and a member of its Securities Litigation, Class Actions and Antitrust & Competition Practice Groups. He has been lead or co-lead counsel in 24 civil and criminal trials in federal and state courts, and he is equally comfortable in leading confidential investigations, managing crises or advocating in court proceedings. Mr. Cohen’s experience includes all aspects of FCPA/anticorruption issues, in addition to financial institution litigation and other international disputes and discovery. Sacha Harber-Kelly New Partner in Gibson Dunn’s London office and a member of the firm’s White Collar Defense and Investigations Practice Group. Mr. Harber-Kelly was a prosecutor from 2007 to 2017 with the U.K.’s Serious Fraud Office, in the Anti-Corruption and Bribery Division. 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. Benno Schwarz 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 Russian law. 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 regarded as a top lawyer in FCPA investigations, FCA cases, 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 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 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. 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, 2018 |
2017 Year-End German Law Update

Click for PDF “May you live in interesting times” goes the old Chinese proverb, which is not meant for a friend but for an enemy. Whoever expressed such wish, interesting times have certainly come to pass for the German economy. Germany is an economic giant focused on the export of its sophisticated manufactured goods to the world’s leading markets, but it is also, in some ways, a military dwarf in a third-tier role in the re-sketching of the new world order. Germany’s globally admired engineering know-how and reputation has been severely damaged by the Volkswagen scandal and is structurally challenged by disruptive technologies and regulatory changes that may be calling for the end of the era of internal combustion engines. The top item on Germany’s foreign policy agenda, the further integration of the EU-member states into a powerful economic and political union, has for some years now given rise to daily crisis management, first caused by the financial crisis and, since last year, by the uncertainties of BREXIT. As if this was not enough, internal politics is still handling the social integration of more than a million refugees that entered the country in 2015, who rightly expect fair and just treatment, education, medical care and a future. It has been best practice to address such manifold issues with a strong and hands-on government, but – unfortunately – this is also currently missing. While the acting government is doing its best to handle the day-to-day tasks, one should not expect any bold move or strategic initiative before a stable, yet to be negotiated parliamentary coalition majority has installed new leadership, likely again under Angela Merkel. All that will drag well into 2018 and will not make life any easier. In stark contrast to the difficult situation the EU is facing in light of BREXIT, the single most impacting piece of regulation that will come into effect in May 2018 will be a European Regulation, the General Data Protection Regulation, which will harmonize data protection law across the EU and start a new era of data protection. Because of its broad scope and its extensive extraterritorial reach, combined with onerous penalties for non-compliance, it will open a new chapter in the way companies world-wide have to treat and process personal data. In all other areas of the law, we observe the continuation of a drive towards ever more transparency, whether through the introduction of new transparency registers disclosing relevant ultimate beneficial owner information or misconduct, through obligatory disclosure regimes (in the field of tax law), or through the automatic exchange under the OECD’s Common Reporting Standard of Information that hitherto fell under the protection of bank secrecy laws. While all these initiatives are well intentioned, they present formidable challenges for companies to comply with the increased complexity and adequately respond to the increased availability and flow of sensitive information. Even more powerful than the regulatory push is the combination of cyber-attacks, investigative journalism, and social media: within a heartbeat, companies or individuals may find themselves exposed on a global scale to severe allegations or fundamental challenges to the way they did or do business. While this trend is not of a legal nature, but a consequence of how we now communicate and whom we trust (or distrust), for those affected it may have immediate legal implications that are often highly complex and difficult to control and deal with. Interesting times usually are good times for lawyers that are determined to solve problems and tackle issues. This is what we love doing and what Gibson Dunn has done best time and again in the last 125 years. We therefore remain optimistic, even in view of the rough waters ahead which we and our clients will have to navigate. We want to thank you for your trust in our services in Germany and your business that we enjoy here and world-wide. We do hope that you will gain valuable insights from our Year-End Alert of legal developments in Germany that will help you to successfully focus and resource your projects and investments in Germany in 2018 and beyond; and we promise to be at your side if you need a partner to help you with sound and hands-on legal advice for your business in and with Germany or to help manage challenging or forward looking issues in the upcoming exciting times. ________________________________ Table of Contents 1.  Corporate, M&A 2.  Tax 3.  Financing and Restructuring 4.  Labor and Employment 5.  Real Estate 6.  Data Protection 7.  Compliance 8.  Antitrust and Merger Control ________________________________ 1. Corporate, M&A 1.1       Corporate, M&A – Transparency Register – New Transparency Obligations on Beneficial Ownership As part of the implementation of the 4th European Money Laundering Directive into German law, Germany has created a new central electronic register for information about the beneficial owners of legal persons organized under German private law as well as registered partnerships incorporated within Germany. Under the restated German Money Laundering Act (Geldwäschegesetz – GWG) which took effect on June 26, 2017, legal persons of German private law (e.g. capital corporations like stock corporations (AG) or limited liability companies (GmbH), registered associations (eingetragener Verein – e.V.), incorporated foundations (rechtsfähige Stiftungen)) and all registered partnerships (e.g. offene Handelsgesellschaft (OHG), Kommanditgesellschaft (KG) and GmbH & Co. KG) are now obliged to “obtain, keep on record and keep up to date” certain information about their “beneficial owners” (namely: first and last name, date of birth, place of residence and details of the beneficial interest) and to file the respective information with the transparency register without undue delay (section 20 (1) GWG). A “beneficial owner“ in this sense is a natural person who directly or indirectly holds or controls more than 25% of the capital or voting rights, or exercises control in a similar way (section 3 (2) GWG). Special rules apply for registered associations, trusts, non-charitable unregulated associations and similar legal arrangements. “Obtaining” the information does not require the entities to carry out extensive investigations, potentially through multi-national and multi-level chains of companies. It suffices to diligently review the information on record and to have in place appropriate internal structures to enable it to make a required filing without undue delay. The duty to keep the information up to date generally requires that the company checks at least on an annual basis whether there have been any changes in their beneficial owners and files an update, if necessary. A filing to the transparency register, however, is not required if the relevant information on the beneficial owner(s) is already contained in certain electronic registers (e.g. the commercial register or the so-called “Unternehmensregister“). This exemption only applies if all relevant data about the beneficial owners is included in the respective documents and the respective registers are still up to date. This essentially requires the obliged entities to diligently review the information available in the respective electronic registers. Furthermore, as a matter of principle, companies listed on a regulated market in the European Union (“EU“) or the European Economic Area (“EEA“) (excluding listings on unregulated markets such as e.g. the Entry Standard of the Frankfurt Stock Exchange) or on a stock exchange with equivalent transparency obligations with respect to voting rights are never required to make any filings to the transparency register. In order to enable the relevant entity to comply with its obligations, shareholders who qualify as beneficial owners or who are directly controlled by a beneficial owner, irrespective of their place of residence, must provide the relevant entity with the relevant information. If a direct shareholder is only indirectly controlled by a beneficial owner, the beneficial owner himself (and not the direct shareholder) must inform the company and provide it with the necessary information (section 20 (3) sentence 4 GWG). Non-compliance with these filing and information obligations may result in administrative fines of up to EUR 100,000. Serious, repeated or systematic breaches may even trigger sanctions up to the higher fine threshold of EUR 1 million or twice the economic benefit of the breach. The information submitted to the transparency register is not generally freely accessible. There are staggered access rights with only certain public authorities, including the Financial Intelligence Unit, law enforcement and tax authorities, having full access rights. Persons subject to know-your-customer (“KYC“) obligations under the Money Laundering Act such as e.g. financial institutions are only given access to the extent the information is required for them to fulfil their own KYC obligations. Other persons or the general public may only gain access if they can demonstrate a legitimate interest in such information. Going forward, every entity subject to the Money Laundering Act should verify whether it is beneficially owned within the aforementioned sense, and, if so, make the respective filing to the transparency register unless the relevant information is already contained in a public electronic register. Furthermore, relevant entities should check (at least) annually whether the information on their beneficial owner(s) as filed with the transparency or other public register is still correct. Also, appropriate internal procedures need to be set up to ensure that any relevant information is received by a person in charge of making filings to the registers. Back to Top 1.2       Corporate, M&A – New CSR Disclosure Obligations for German Public Interest Companies  Effective for fiscal years commencing on or after January 1, 2017, large companies with more than 500 employees are required to include certain non-financial information regarding their management of social and environmental challenges in their annual reporting (“CSR Information“). The new corporate social responsibility reporting rules (“CSR Reporting Rules“) implement the European CSR Directive into German law and are intended to help investors, consumers, policy makers and other stakeholders to evaluate the non-financial performance of large companies and encourage companies to develop a responsible and sustainable approach to business. The CSR Reporting Rules apply to companies with a balance sheet sum in excess of EUR 20 million and an annual turnover in excess of EUR 40 million, whose securities (stock or bonds etc.) are listed on a regulated market in the EU or the EEA as well as large banks and large insurance companies. It is estimated that approximately 550 companies in Germany are covered. Exemptions apply to consolidated subsidiaries if the parent company publishes the CSR Information in the group reporting. The CSR Reporting Rules require the relevant companies to inform on the policies they implemented, the results of such policies and the business risks in relation to (i) environmental protection, (ii) treatment of employees, (iii) social responsibility, (iv) respect for human rights and (v) anti-corruption and bribery. In addition, listed stock corporations are also obliged to inform with regard to diversity on their company boards. If a company has not implemented any such policy, an explicit and justified disclosure is required (“comply or explain”). Companies must further include significant non-financial performance indicators and must also include information on the amounts reported in this respect in their financial statements. The CSR Information can either be included in the annual report or by way of a separate CSR report, to be published on the company’s website or together with its regular annual report with the German Federal Gazette (Bundesanzeiger). The CSR Reporting Rules will certainly increase the administrative burden placed on companies when preparing their annual reporting documentation. It remains to be seen if the new rules will actually meet the expectations of the European legislator and foster and create a more sustainable approach of large companies to doing business in the future . Back to Top 1.3       Corporate, M&A – Corporate Governance Code Refines Standards for Compliance, Transparency and Supervisory Board Composition Since its first publication in 2002, the German Corporate Governance Code (Deutscher Corporate Governance Kodex – DCGK) which contains standards for good and responsible governance for German listed companies, has been revised nearly annually. Even though the DCGK contains only soft law (“comply or explain”) framed in the form of recommendations and suggestions, its regular updates can serve as barometer for trends in the public discussion and sometimes are also a forerunner for more binding legislative measures in the near future. The main changes in the most recent revision of the DCGK in February 2017 deal with aspects of compliance, transparency and supervisory board composition. Compliance The general concept of “compliance” was introduced by the DCGK in 2007. In this respect, the recent revision of the DCGK brought along two noteworthy new aspects. On the one hand, the DCGK now stresses in its preamble that good governance and management does not only require compliance with the law and internal policies but also ethically sound and responsive behavior (the “reputable businessperson concept”). On the other hand, the DCGK now recommends the introduction of a compliance management system (“CMS“). In keeping with the common principle of individually tailored compliance management systems that take into account the company’s specific risk situation, the DCGK now recommends appropriate measures reflecting the company’s risk situation and disclosing the main features of the CMS publically, thus enabling investors to make an informed decision on whether the CMS meets their expectations. It is further expressly recommended to provide employees with the opportunity to blow the whistle and also suggested to open up such whistle-blowing programs to third parties. Supervisory Board In line with the ongoing international trend of focusing on supervisory board composition, the DCGK now also recommends that the supervisory board not only should determine concrete objectives for its composition, but also develop a tailored skills and expertise profile for the entire board and to disclose in the corporate governance report to which extent such benchmarks and targets have been implemented in practice. In addition, the significance of having sufficient independent members on the supervisory board is emphasized by a new recommendation pursuant to which the supervisory board should disclose the appropriate number of independent supervisory board members as well as the members which meet the “independence” criteria in the corporate governance report. In accordance with international best practice, it is now also recommended to provide CVs for candidates for the supervisory board including inter alia relevant knowledge, skills and experience and to publish this information on the company’s website. With regard to supervisory board transparency, the DCGK now also recommends that the chairman of the supervisory board should be prepared, within an appropriate framework, to discuss topics relevant to the supervisory board with investors (please see in this regard our 2016-Year-End Alert, section 1.2). These new 2017 recommendations further highlight the significance of compliance and the role of the supervisory board not only for legislators but also for investors and other stakeholders. As soon as the annual declarations of non-conformity (“comply or explain”) are published over the coming weeks and months, it will be possible to assess how well these new recommendations will be received as well as what responses there will be to the planned additional supervisory board transparency (including, in particular, by family-controlled companies with employee co-determination on the supervisory board). Back to Top 1.4       Corporate, M&A – Employee Co-Determination: No European Extension As set out in greater detail in past alerts (please see in this regard our 2016 Year-End Alert, section 1.3 with further references), the scope and geographic reach of the German co-determination rules (as set out in the German Co-Determination Act; Mitbestimmungsgesetz – MitbestG and in the One-Third-Participation Act; Drittelbeteiligungsgesetz – DrittelbG) were the subject of several ongoing court cases. This discussion has been put to rest in 2017 by a decision of the European Court of Justice (ECJ, C-566/15 – July 18, 2017) that held that German co-determination rules and their restriction to German-based employees as the numeric basis for the relevant employee thresholds and as populace entitled to vote for such co-determined supervisory boards do not infringe against EU law principles of anti-discrimination and freedom of movement. The judgment has been received positively by both German trade unions and corporate players because it preserves the existing German co-determination regime and its traditional, local values against what many commentators would have perceived to be an undue pan-Europeanization of the thresholds and the right to vote for such bodies. In particular, the judgment averts the risk that many supervisory boards would have had to be re-elected based on a pan-European rather than solely German employee base. Back to Top 1.5       Corporate, M&A – Germany Tightens Rules on Foreign Takeovers On July 18, 2017, the amended provisions on foreign direct investments under the Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung – AWV), expanding and specifying the right of the Federal Ministry for Economic Affairs and Energy (“Ministry“) to review whether the takeover of domestic companies by investors outside the EU or the European Free Trade Area poses a danger to the public order or security of the Federal Republic of Germany came into force. The amendment has the following five main effects which will have a considerable impact on the M&A practice: (i) (non-exclusive) standard categories of companies and industries which are relevant to the public order or security for cross-sector review are introduced, (ii) the stricter sector-specific rules for industries of essential security interest (such as defense and IT-security) are expanded and specified, (iii) there is a reporting requirement for all takeovers within the relevant categories, (iv) the time periods for the review process are extended, and (v) there are stricter and more specific restrictions to prevent possible circumventions. Under the new rules, a special review by the German government is possible in cases of foreign takeovers of domestic companies which operate particularly in the following sectors: (i) critical infrastructure amenities, such as the energy, IT and telecommunications, transport, health, water, food and finance/insurance sectors (to the extent they are very important for the functioning of the community), (ii) sector-specific software for the operation of these critical infrastructure amenities, (iii) telecom carriers and surveillance technology and equipment, (iv) cloud computing services and (v) telematics services and components. The stricter sector-specific rules for foreign takeovers within the defense and IT-security industry are also expanded and now also apply to the manufacturers of defense equipment for reconnaissance and support. Furthermore, the reporting requirement no longer applies only to transactions within the defense and IT-security sectors, but also to all foreign takeovers that fall within the newly introduced cross-sector standard categories described above. The time periods allowed for the Ministry to intervene have been extended throughout. In particular, if an application for a clearance certificate is filed, the clearance certificate will be deemed granted in the absence of a formal review two months following receipt of the application rather than one month as in the past, and the review periods are suspended if the Ministry conducts negotiations with the parties involved. Further, a review may be commenced until five years after the signing of the purchase agreement, which in practice will likely result in an increase of applications for a clearance certificate in order to obtain more transaction certainty. Finally, the new rules provide for stricter and more specific restrictions of possible circumventions by, for example, the use of so-called “front companies” domiciled in the EU or the European Free Trade Area and will trigger the Ministry’s right to review if there are indications that an improper structuring or evasive transaction was at least partly chosen to circumvent the review by the Ministry. Although the scope of the German government’s ability to intervene in M&A processes has been expanded where critical industries are concerned, it is not clear yet to what extent stronger interference or more prohibitions or restrictions will actually occur in practice. And even though the new law provides further guidance, there are still areas of legal uncertainty which can have an impact on valuations and third party financing unless a clearance certificate is obtained. Due to the suspension of the review period in the case of negotiations with the Ministry, the review procedure has, at least in theory, no firm time limit. As a result, the M&A advisory practice has to be prepared for a more time-consuming and onerous process for transactions in the critical industries and may thus be forced to allow for more time between signing and closing. In addition, appropriate termination clauses (and possibly break fees) must be considered for purposes of the share purchase agreement in case a prohibition or restriction of the transaction on the basis of the amended AWV cannot be excluded. Back to Top 2. Tax 2.1       Tax – Unconstitutionality of German Change-of-Control Rules Tax loss carry forwards are an important asset in every M&A transaction. Over the past ten years the German change-of-control rules, which limit the use of losses and loss carry forwards (“Losses“) of a German target company, have undergone fundamental legislative changes. The current change-of-control rules may now face another significant revision as – according to the German Federal Constitutional Court (Bundesverfassungsgericht – BVerfG) and the Lower Tax Court of Hamburg – the current tax regime of the change-of-control rules violates the constitution. Under the current change-of-control 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 – since 2016 – for business continuations, especially in the venture capital industry. On March 29, 2017, the German Federal Constitutional Court ruled that the pro rata forfeiture of Losses (share transfer of more than 25% but not more than 50%) is not in line with the constitution. The BVerfG held that the provision leads to unequal treatment of companies. The aim of avoiding legal but undesired tax optimizations does not justify the broad and general scope of the provision. The BVerfG has asked the German legislator to amend the change-of-control rules retroactively for the period from January 1, 2008 until December 31, 2015 and bring them in line with the constitution. The legislative changes need to be finalized by December 31, 2018. Furthermore, in another case on August 29, 2017, the Lower Tax Court of Hamburg held that the change-of-control rules, which result in a full forfeiture of Losses after a transfer of more than 50% of the shares in a German corporation, are also incompatible with the constitution. The ruling is based on the 2008 wording of the change-of-control rules but the wording of these rules is similar to that of the current forfeiture rules. In view of the March 2017 ruling of the Federal Constitutional Court on the pro-rata forfeiture, the Lower Tax Court referred this case also to the Federal Constitutional Court to rule on this issue as well. If the Federal Constitutional Court decides in favor of the taxpayer the German tax legislator may completely revise the current tax loss limitation regime and limit its scope to, for example, abusive cases. A decision by the Federal Constitutional Court is expected in the course of 2018. Affected market participants are therefore well advised to closely monitor further developments and consider the impact of potential changes on past and future M&A deals with German entities. Appeals against tax assessments should be filed and stays of proceedings applied for by reference to the case before the Federal Constitutional Court in order to benefit from a potential retroactive amendment of the change-of-control rules. Back to Top 2.2       Tax – New German Tax Disclosure Rules for Tax Planning Schemes In light of the Panama and Paradise leaks, the respective Finance Ministers of the German federal states (Bundesländer) created a working group in November 2017 to establish how the new EU Disclosure Rules for advisers and taxpayers as published by the European Commission (“Commission“) on July 25, 2017 can be implemented into German law. Within the member states of the EU, mandatory tax disclosure rules for tax planning schemes already exist in the UK, Ireland and Portugal. Under the new EU disclosure rules certain tax planners and advisers (intermediaries) or certain tax payers themselves must disclose potentially aggressive cross-border tax planning arrangements to the tax authorities in their jurisdiction. This new requirement is a result of the disclosure rules as proposed by the OECD in its Base Erosion and Profit Shifting (BEPS) Action 12 report, among others. The proposal requires tax authorities in the EU to automatically exchange reported information with other tax authorities in the EU. Pursuant to the Commission’s proposal, an “intermediary” is the party responsible for designing, marketing, organizing or managing the implementation of a tax payer´s reportable cross border arrangement, while also providing that taxpayer with tax related services. If there is no intermediary, the proposal requires the taxpayer to report the arrangement directly. This is, for example, the case if the taxpayer designs and implements an arrangement in-house, if the intermediary in question does not have a presence within the EU or in case the intermediary cannot disclose the information because of legal professional privilege. The proposal does not define what “arrangement” or “aggressive” tax planning means but lists characteristics (so-called “hallmarks“) of cross-border tax planning schemes that would strongly indicate whether tax avoidance or abuse occurred. These hallmarks can either be generic or specific. Generic hallmarks include arrangements where the tax payer has complied with a confidentiality provision not to disclose how the arrangement could secure a tax advantage or where the intermediary is entitled to receive a fee with reference to the amount of the tax advantage derived from the arrangement. Specific hallmarks include arrangements that create hybrid mismatches or involve deductible cross border payments between related parties with a preferential tax regime in the recipient’s tax resident jurisdiction. The information to be exchanged includes the identities of the tax payer and the intermediary, details about the hallmarks, the date of the arrangement, the value of the transactions and the EU member states involved. The implementation of such mandatory disclosure rules on tax planning schemes are heavily discussed in Germany especially among the respective bar associations. Elements of the Commission’s proposal are regarded as a disproportionate burden for intermediaries and taxpayers in relation to the objective. Further clarity is needed to align the proposal with the general principle of legal certainty. Certain elements of the proposal may contravene EU law or even the German constitution. And the interaction with the duty of professional secrecy for lawyers and tax advisors is also still unclear. Major efforts are therefore needed for the German legislator to make such a disclosure regime workable both for taxpayers/intermediaries and the tax administrations. It remains to be seen how the Commission proposal will be implemented into German law in 2018 and how tax structuring will be affected. Back to Top 2.3       Tax – Voluntary Self-Disclosure to German Tax Authorities Becomes More Challenging German tax law allows voluntary self-disclosure to correct or supplement an incorrect or incomplete tax return. Valid self-disclosure precludes criminal liability for tax evasion. Such exemption from criminal prosecution, however, does not apply if the tax evasion has already been “detected” at the time of the self-disclosure and this is at least foreseeable for the tax payer. On May 5, 2017 the German Federal Supreme Court (Bundesgerichtshof – BGH) further specified the criteria for voluntary self-disclosure to secure an exemption from criminal prosecution (BGH, 1 StR 265/16 – May 9, 2017). The BGH ruled that exemption from criminal liability might not apply if a foreign authority had already discovered the non- or underreported tax amounts prior to such self-disclosure. Underlying the decision of the BGH was the case of a German employee of a German defense company, who had received payments from a Greek business partner, but declared neither the received payments nor the resulting income in his tax declaration. The payment was a reward for his contribution in selling weapons to the Greek government. The Greek authorities learned of the payment to the German employee early in 2004 in the course of an anti-bribery investigation and obtained account statements proving the payment through intermediary companies and foreign banks. On January 6, 2014, the German employee filed a voluntary self-disclosure to the German tax authorities declaring the previously omitted payments. The respective German tax authority found that this self-disclosure was not submitted in time to exempt the employee from criminal liability. The issue in this case was by whom and at what moment in time the tax evasion needed to be detected in order to render self-disclosure invalid. The BGH ruled that the voluntary self-disclosure by the German employee was futile due to the fact that the payment at issue had already been detected by the Greek authorities at the time of the self-disclosure. In this context, the BGH emphasized that it was not necessary for the competent tax authorities to have detected the tax evasion, but it was sufficient if any other authority was aware of the tax evasion. The BGH made clear that this included foreign authorities. Thus, a prior detection is relevant if on the basis of a preliminary assessment of the facts a conviction is ultimately likely to occur. This requirement is for example met if it can be expected that the foreign authority that detected the incorrect, incomplete or omitted fact will forward this information to the German tax authorities as in the case before the BGH. In particular, there was an international assistance procedure in place between German and Greek tax authorities and the way the payments were made by using intermediaries and foreign banks made it obvious to the Greek authorities that the relevant amounts had not been declared in Germany. Due to the media coverage of the case, this was also at least foreseeable for the German employee. This case is yet another cautionary tale for tax payers not to underestimate the effects of increased international cooperation of tax authorities. Back to Top 3. Financing and Restructuring 3.1       Financing and Restructuring – Upfront Banking Fees Held Void by German Federal Supreme Court On July 4, 2017, the German Federal Supreme Court (Bundesgerichtshof – BGH) handed down two important rulings on the permissibility of upfront banking fees in German law governed loan agreements. According to the BGH, boilerplate clauses imposing handling, processing or arrangement fees on borrowers are void if included in standard terms and conditions (Allgemeine Geschäftsbedingungen). With this case, the court extended its prior rulings on consumer loans to commercial loans. The BGH argued that clauses imposing a bank’s upfront fee on a borrower fundamentally contradict the German statutory law concept that the consideration for granting a loan is the payment of interest. If ancillary pricing arrangements (Preisnebenabreden) pass further costs and expenses on to the borrower, the borrower is unreasonably disadvantaged by the user (Verwender) of standard business terms, unless the additional consideration is agreed for specific services that go beyond the mere granting of the loan and the handling, processing or arrangement thereof. In the cases at hand, the borrowers were thus awarded repayment of the relevant fee. The implications of these rulings for the German loan market are far-reaching. The rulings affect all types of upfront fees for a lender’s services which are routinely passed on to borrowers even though they would otherwise be owed by the lender pursuant to statutory law, a regulatory regime or under a contract or which are conducted in the lender’s own interest. Consequently, this covers fees imposed on the borrower for the risk assessment (Bonitätsprüfung), the valuation of collateral, expenses for the collection of information on the assessment of a borrower’s financing requirements and the like. At this stage, it is not yet certain if, for example, agency fees or syndication fees could also be covered by the decision. There are, however, good arguments to reason that services rendered in connection with a syndication are not otherwise legally or contractually owed by a lender. Upfront fees paid in the past, i.e. in 2015 or later, can be reclaimed by borrowers. The BGH applied the general statutory three year limitation period and argued that the limitation period commenced at the end of 2011 after Higher District Courts (Oberlandesgerichte) had held upfront banking fees void in deviation from previous rulings. As of such time, borrowers should have been aware that a repayment claim of such fees was possible and could have filed a court action even though the enforcement of the repayment was not risk-free. Going forward, it can be expected that lenders will need to modify their approach as a result of the rulings: Choosing a foreign (i.e. non-German) law for a separate fee agreement could be an option for lenders, at least, if either the lender or the borrower is domiciled in the relevant jurisdiction or if there is a certain other connection to the jurisdiction of the chosen law. If the loan is granted by a German lender to a German borrower, the choice of foreign law would also be generally recognized, but under EU conflict of law provisions mandatory domestic law (such as the German law on standard terms) would likely still continue to apply. In response to the ruling, lenders are also currently considering alternative fee structures: Firstly, the relevant costs and expenses underlying such fees are being factored into the calculation of the interest and the borrower is then given the option to choose an upfront fee or a (higher) margin. This may, however, not always turn out to be practical, in particular given that a loan may be refinanced prior to generating the equivalent interest income. Secondly, a fee could be agreed in a separate fee letter which specifically sets out services which go beyond the typical services a bank renders in its own interest. It may, however be difficult to determine services which actually justify a fee. Finally, a lender might charge typical upfront fees following genuine individual negotiations. This requires that the lender not only shows that it was willing to negotiate the amount of the relevant fee, but also that it was generally willing to forego the typical upfront fee entirely. However, if the borrower rejects the upfront fee, the lender still needs to rely on alternative fee arrangements. Further elaboration by the courts and market practice should be closely monitored by lenders and borrowers alike. Back to Top 3.2       Financing and Restructuring – Lingering Uncertainty about Tax Relief for Restructuring Profits Ever since the German Federal Ministry of Finance issued an administrative order in 2003 (“Restructuring Order“) the restructuring of distressed companies has benefited from tax relief for income tax on “restructuring profits”. In Germany, restructuring profits arise as a consequence of debt to equity swaps or debt waivers with regard to the portion of such debt that is unsustainable. Debtors and creditors typically ensured the application of the Restructuring Order by way of a binding advance tax ruling by the tax authorities thus providing for legal certainty in distressed debt scenarios for the parties involved. However, in November 2016, the German Federal Tax Court (Bundesfinanzhof – BFH) put an end to such preferential treatment of restructuring profits. The BFH held the Restructuring Order to be void arguing that the Federal Ministry of Finance had lacked the authority to issue the Restructuring Order. It held that such a measure would need to be adopted by the German legislator instead. The Ministry of Finance and the German restructuring market reacted with concern. As an immediate response to the ruling the Ministry of Finance issued a further order on April 27, 2017 (“Continuation Order”) to the effect that the Restructuring Order continued to apply in all cases in which creditors finally and with binding effect waived claims on or before February 8, 2017 (the date on which the ruling of the Federal Tax Court was published). But the battle continued. In August 2017, the Federal Tax Court also set aside this order for lack of authority by the Federal Ministry of Finance. In the meantime, the German Bundestag and the Bundesrat have passed legislation on tax relief for restructuring profits, but the German tax relief legislation will only enter into force once the European Commission issues a certificate of non-objection confirming the new German statutory tax relief’s compliance with EU restrictions on state aid. This leaves uncertainty as to whether the new law will enter into force in its current wording and when. Also, the new legislation will only cover debt waivers/restructuring profits arising after February 8, 2017 but at this stage does not provide for the treatment of cases before such time. In the absence of the 2003 Restructuring Order and the 2017 Continuation Order, tax relief would only be possible on the basis of equitable relief in exceptional circumstances. It appears obvious that no reliable restructuring concept can be based on potential equitable relief. Thus, it is advisable to look out for alternative structuring options in the interim: Subordination of debt: while this may eliminate an insolvency filing requirement for illiquidity or over indebtedness, the debt continues to exist. This may make it difficult for the debtor to obtain financing in the future. In certain circumstances, a carve-out of the assets together with a sustainable portion of the debt into a new vehicle while leaving behind and subordinating the remainder of the unsustainable portion of the debt, could be a feasible option. As the debt subsists, a silent liquidation of the debtor may not be possible considering the lingering tax burden on restructuring profits. Also, any such carve-out measures by which the debtor is stripped of assets may be challenged in case of a later insolvency of the debtor. A debt hive up without recourse may be a possible option, but a shareholder or its affiliates are not always willing to assume the debt. Also, as tax authorities have not issued any guidelines on the tax treatment of debt hive ups, a binding advance tax ruling from the tax authorities should be obtained before the debt hive up is executed. Still, a debt hive up could be an option if the replacement debtor is domiciled in a jurisdiction which does not impose detrimental tax consequences on the waiver of unsustainable debt. Converting the debt into a hybrid instrument which constitutes debt for German tax purposes and equity from a German GAAP perspective is no longer feasible. Pursuant to a tax decree from May 2016, the tax authorities argue that the creation of a hybrid instrument amounts to a taxable waiver of debt on the basis that tax accounting follows commercial accounting. It follows that irrespective of potential alternative structures which may suit a specific set of facts and circumstances, restructuring transactions in Germany continue to be challenging pending the entry into force of the new tax relief legislation. Back to Top 4. Labor and Employment 4.1       Labor and Employment – Defined Contribution Schemes Now Allowed In an effort to promote company pension schemes and to allow more flexible investments, the German Company Pension Act (Betriebsrentengesetz – BetrAVG) was amended considerably with effect as of January 1, 2018. The most salient novelty is the introduction of a purely defined contribution pension scheme, which had not been permitted in the past. Until now, the employer would always be ultimately liable for any kind of company pension scheme irrespective of the vehicle it was administered through. This is no longer the case with the newly introduced defined contribution scheme. The defined contribution scheme also entails considerable other easements for employers, e.g. pension adjustment obligations or the requirement of insolvency insurance no longer apply. As a consequence, a company offering a defined contribution pension scheme does not have to deal with the intricacies of providing a suitable investment to fulfil its pension promise, but will have met its duty in relation to the pension simply by paying the promised contribution (“pay and forget”). However, the introduction of such defined contribution schemes requires a legal basis either in a collective bargaining agreement (with a trade union) or in a works council agreement, if the union agreement so allows. If these requirements are met though, the new legal situation brings relief not only for employers offering company pension schemes but also for potential investors into German businesses for whom the German-specific defined benefit schemes have always been a great burden. Back to Top 4.2     Labor and Employment – Federal Labor Court Facilitates Compliance Investigations In a decision much acclaimed by the business community, the German Federal Labor Court (Bundesarbeitsgericht – BAG) held that intrusive investigative measures by companies against their employees do not necessarily require a suspicion of a criminal act by an employee; rather, less severe forms of misconduct can also trigger compliance investigations against employees (BAG, 2 AZR 597/16 – June 29, 2017). In the case at hand, an employee had taken sick leave, but during his sick leave proceeded to work for the company owned by his sons who happened to be competing against his current employer. After customers had dropped corresponding hints, the company assigned a detective to ascertain the employee’s violation of his contractual duties and subsequently fired the employee based on the detective’s findings. In the dismissal protection trial, the employee argued that German law only allowed such intrusive investigation measures if criminal acts were suspected. This restriction was, however, rejected by the BAG. This judgment ends a heated debate about the permissibility of internal investigation measures in the case of compliance violations. However, employers should always adhere to a last-resort principle when investigating possible violations. For instance, employees must not be seamlessly monitored at their workplace by way of a so-called “key logger” as the Federal Labor Court held in a different decision (BAG, 2 AZR 681/16 – July 27, 2017). Also, employers should keep in mind a recent ruling of the European Court of Human Rights of September 5, 2017 (ECHR, 61496/08). Accordingly, the workforce should be informed in advance that and how their email correspondence at the workplace can be monitored. Back to Top 5. Real Estate Real Estate – Invalidity of Written Form Remediation Clauses for Long-term Lease Agreements On September 27, 2017, the German Federal Supreme Court (Bundesgerichtshof – BGH) ruled that so-called “written form remediation clauses” (Schriftformheilungsklauseln) in lease agreements are invalid because they are incompatible with the mandatory provisions of section 550 of the German Civil Code (Bürgerliches Gesetzbuch – BGB; BGH, XII ZR 114/16 – September 27, 2017). The written form for lease agreements requires that all material agreements concerning the lease, in particular the lease term, identification of the leased premises and the rent amount, must be made in writing. If a lease agreement entered into for a period of more than one year does not comply with this written form requirement, mandatory German law allows either lease party to terminate the lease agreement with the statutory notice period irrespective of whether or not a fixed lease term was agreed upon. The statutory notice period for commercial lease agreements is six months (less three business days) to the end of any calendar quarter. To avoid the risk of termination for non-compliance with the written form requirement, German commercial lease agreements regularly contain a general written form remediation clause. Pursuant to such clause, the parties of the lease agreement undertake to remediate any defect in the written form upon request of one of the parties. While such general written form remediation clauses were upheld in several decisions by various Higher District Courts (Oberlandesgerichte) in the past, the BGH had already rejected the validity of such clauses vis-à-vis the purchasers of real property in 2014. With this new decision, the BGH has gone one step further and denied the validity of general written form remediation clauses altogether. Only in exceptional circumstances, the lease parties are not entitled to invoke the non-compliance with the written form requirement on account of a breach of the good faith principle. Such exceptional circumstances may exist, for example, if the other party faced insolvency if the lease were terminated early as a result of the non-compliance or if the lease parties had agreed in the lease agreement to remediate such specific written form defect. This new decision of the BGH forces the parties to long-term commercial lease agreements to put even greater emphasis on ensuring that their lease agreements comply with the written form requirement at all times because remediation clauses as potential second lines of defense no longer apply. Likewise, the due diligence process of German real estate transactions will have to focus even more on the compliance of lease agreements with the written form requirement. Back to Top 6.  Data Protection Data Protection – Employee Data Protection Under New EU Regulation After a two-year transition period, the EU General Data Protection Regulation (“GDPR“) will enter into force on May 25, 2018. The GDPR has several implications for data protection law covering German employees, which is already very strictly regulated. For example, under the GDPR any handling of personnel data by the employer requires a legal basis. In addition to statutory laws or collective agreements, another possible legal basis is the employee’s explicit written consent. The transfer of personnel data to a country outside of the European Union (“EU“) will have to comply with the requirements prescribed by the GDPR. If the target country has not been regarded as having an adequate data protection level by the EU Commission, additional safeguards will be required to protect the personnel data upon transfer outside of the EU. Otherwise, a data transfer is generally not permitted. The most threatening consequence of the GDPR is the introduction of a new sanctions regime. It now allows fines against companies of up to 4% of the entire group’s revenue worldwide. Consequently, these new features, especially the drastic new sanction regime, call for assessments of, and adequate changes to, existing compliance management systems with regard to data protection issues. Back to Top 7. Compliance 7.1       Compliance – Misalignment of International Sanction Regimes Requires Enhanced Attention to the EU Blocking Regulation and the German Anti-Boycott Provisions The Trump administration has been very active in broadening the scope and reach of the U.S. sanctions regime, most recently with the implementation of “Countering America’s Adversaries Through Sanctions Act (H.R. 3364) (‘CAATSA‘)” on August 2, 2017 and the guidance documents that followed. CAATSA includes significant new law codifying and expanding U.S. sanctions on Russia, North Korea, and Iran. The European Union (“EU“) has not followed suit. More so, the EU and European leaders openly stated their frustration about both a perceived lack of consultation during the process and the substance of the new U.S. sanctions. Specifically, the EU and European leaders are concerned about the fact that CAATSA authorizes secondary sanctions on any person supporting a range of activities. Among these are the development of Russian energy export pipeline projects, certain transactions with the Russian intelligence or defense sectors or investing in or otherwise facilitating privatizations of Russia’s state-owned assets that unjustly benefits Russian officials or their close associates or family members. The U.S. sanctions regime differentiates between primary sanctions that apply to U.S. persons (U.S. citizens, permanent U.S. residents and companies under U.S. jurisdiction) and U.S. origin goods, and secondary sanctions that expand the reach of U.S. sanctions by penalizing non-U.S. persons for their involvement in certain targeted activities. Secondary sanctions can take many forms but generally operate by restricting or threatening to restrict non-U.S. person access to the U.S. market, including its global financial institutions. European, especially export-heavy and internationally operating German companies are thus facing a dilemma. While they have to fear possible U.S. secondary sanctions for not complying with U.S. regulations, potential penalties also loom from European member state authorities when doing so. These problems are grounded in European and German legislation aimed at protecting from and counteracting financial and economic sanctions issued by countries outside of the EU and Germany, unless such sanctions are themselves authorized under relevant UN, European, and German sanctions legislation. On the European level, Council Regulation (EC) No 2271/96 of November, 22 1996 as amended (“EU Blocking Regulation“) is aimed at protecting European persons against the effects of the extra-territorial application of laws, such as certain U.S. sanctions directed at Cuba, Iran and Libya. Furthermore, it also aims to counteract the effects of the extra-territorial application of such sanctions by prohibiting European persons from complying with any requirement or prohibition, including requests of foreign courts, based on or resulting, directly or indirectly, from such U.S. sanctions. For companies subject to German jurisdiction, section 7 of the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung – AWV), states that “[t]he issuing of a declaration in foreign trade and payments transactions whereby a resident participates in a boycott against another country (boycott declaration) shall be prohibited” to the extent such a declaration would be contradictory to UN, EU and German policy. With the sanctions regime on the one hand and the blocking legislation at EU and German level on the other hand, committing to full compliance with U.S. sanctions whilst falling within German jurisdiction, could be deemed a violation of the AWV.  Violating the AWV can lead to fines by the German authorities and, under German civil law, might render a relevant contractual provision invalid. For companies conducting business transactions on a global scale, the developing non-alignment of U.S. and European / German sanctions requires special attention. Specifically, covenants with respect to compliance with U.S. or other non-EU sanctions should be reviewed and carefully drafted in light of the diverging developments of U.S. and other non-EU sanctions on the one hand and European / German sanctions on the other hand. Back to Top 7.2       Compliance – Restated (Anti-) Money Laundering Act – Significant New Requirements for the Non-Financial Sector and Good Traders On June 26, 2017, the restated German Money Laundering Act (Geldwäschegesetz – GWG), which transposes the 4th European Anti-Money Laundering Directive (Directive (EU 2015/849 of the European Parliament and of the Council) into German law, became effective. While the scope of businesses that are required to conduct anti-money laundering procedures remains generally unchanged, the GWG introduced a number of new requirements, in particular for non-financial businesses, and significantly increases the sanctions for non-compliance with these obligations. The GWG now extends anti money laundering (“AML“) risk management concepts previously known from the financial sector also to non-financial businesses including good traders. As a matter of principle, all obliged businesses are now required to undertake a written risk analysis for their business and have in place internal risk management procedures proportionate to the type and scope of the business and the risks involved in order to effectively mitigate and manage the risks of money laundering and terrorist financing. In case the obliged business is the parent company of a group, a group-wide risk analysis and group-wide risk management procedures are required covering subsidiaries worldwide who also engage in relevant businesses. The risk analysis must be reviewed regularly, updated if required and submitted to the supervisory authority upon request. Internal risk management procedures include, in particular, client due diligence (“know-your customer”), which requires the identification and verification of customers, persons acting on behalf of customers as well as of beneficial owners of the customer (see also section 1.1 above on the Transparency Register). In addition, staff must be monitored for their reliability and trained regularly on methods and types of money laundering and terrorist financing and the applicable legal obligations under the GWG as well as data protection law, and whistle-blowing systems must be implemented. Furthermore, businesses of the financial and insurance sector as well as providers of gambling services must appoint a money laundering officer (“MLO“) at senior management level as well as a deputy, who are responsible for ensuring compliance with AML rules. Other businesses may also be ordered by their supervisory authority to appoint a MLO and a deputy. Good traders including conventional industrial companies are subject to the AML requirements under the GWG, irrespective of the type of goods they are trading in. However, some of the requirements either do not apply or are significantly eased. Good traders must only conduct a risk analysis and have in place internal AML risk management procedures if they accept or make (!) cash payments of EUR 10,000 or more. Furthermore, client due diligence is only required with respect to transactions in which they make or accept cash payments of EUR 10,000 or more, or in case there is a suspicion of money laundering or terrorist financing. Suspicious transactions must be reported to the Financial Intelligence Unit (“FIU“) without undue delay. As a result, also low cash or cash free good traders are well advised to train their staff to enable them to detect suspicious transactions and to have in place appropriate documentation and reporting lines to make sure that suspicious transactions are filed with the FIU. Non-compliance with the GWG obligations can be punished with administrative fines of up to EUR 100,000. Serious, repeated or systematic breaches may even trigger sanctions up to the higher fine threshold of EUR 1 million or twice the economic benefit of the breach. For the financial sector, even higher fines of up to the higher of EUR 5 million or 10% of the total annual turnover are possible. Furthermore, offenders will be published with their names by relevant supervisory authorities (“naming and shaming”). Relevant non-financial businesses are thus well advised to review their existing AML compliance system in order to ensure that the new requirements are covered. For good traders prohibiting cash transactions of EUR 10,000 or more and implementing appropriate safeguards to ensure that the threshold is not circumvented by splitting a transaction into various smaller sums, is a first and vital step. Furthermore, holding companies businesses who mainly acquire and hold participations (e.g. certain private equity companies), must keep in mind that enterprises qualifying as “finance enterprise” within the meaning of section 1 (3) of the German Banking Act (Kreditwesengesetz – KWG) are subject to the GWG with no exemptions. Back to Top  7.3       Compliance – Protection of the Attorney Client Privilege in Germany Remains Unusual The constitutional complaint (Verfassungsbeschwerde) brought by Volkswagen AG’s external legal counsel requesting the return of work product prepared during the internal investigation for Volkswagen AG remains pending before the German Federal Constitutional Court (Bundesverfassungsgericht – BVerfG). The Munich public prosecutors had seized these documents in a dawn raid of the law firm’s offices. While the BVerfG has granted injunctive relief (BVerfG, 2 BvR 1287/17, 2 BvR 1583/17 – July 25, 2017) and ordered the authorities, pending a decision on the merits of the case, to refrain from reviewing the seized material, this case is a timely reminder that the concept of the attorney client privilege in Germany is very different to that in common law jurisdictions. In a nutshell: In-house lawyers do not enjoy legal privilege. Material that would otherwise be privileged can be seized on the client’s premises – with the exception of correspondence with and work product from / for criminal defense counsel. The German courts are divided on the question of whether corporate clients can already appoint criminal defense counsel as soon as they are concerned that they may be the target of a future criminal investigation, or only when they have been formally made the subject of such an investigation. Searches and seizures at a law firm, however, are a different matter. A couple of years ago, the German legislator changed the German Code of Criminal Procedure (Strafprozessordnung – StPO) to give attorneys in general, not only criminal defense counsel, more protection against investigative measures (section 160a StPO). Despite this legislation, the first and second instance judges involved in the matter decided in favor of the prosecutors. As noted above, the German Federal Constitutional Court has put an end to this, at least for now. According to the court, the complaints of the external legal counsel and its clients were not “obviously without any merits” and, therefore, needed to be considered in the proceedings on the merits of the case. In order not to moot these proceedings, the court ordered the prosecutors to desist from a review of the seized material, and put it under seal until a full decision on the merits is available. In the interim period, the interest of the external legal counsel and its clients to protect the privilege outweighed the public interest in a speedy criminal investigation. At this stage, it is unclear when and how the court will decide on the merits. Back to Top 7.4       Compliance – The European Public Prosecutor’s Office Will Be Established – Eventually After approximately four years of discussions, 20 out of the 28 EU member states agreed in June 2017 on the creation of a European Public Prosecutor’s Office (“EPPO“). In October, the relevant member states adopted the corresponding regulation (Regulation (EU) 2017/1939 – “Regulation“). The EPPO will be in charge of investigating, prosecuting and bringing to justice the perpetrators of offences against the EU’s financial interests. The EPPO is intended to be a decentralized authority, which operates via and on the basis of European Delegated Prosecutors located in each member state. The central office in Luxembourg will have a European Chief Prosecutor supported by 20 European Prosecutors, as well as technical and investigatory staff. While EU officials praise this Regulation as an “important step in European justice cooperation“, it remains to be seen whether this really is a measure which ensures that “criminals [who] act across borders […] are brought to justice and […] taxpayers’ money is recovered” (U. Reinsalu, Estonian Minister of Justice). It will take at least until 2020 until the EPPO is established, and criminals will certainly not restrict their activities to the territories of those 20 countries which will cooperate under the new authority (being: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Estonia, Germany, Greece, Finland, France, Italy, Latvia, Lithuania, Luxembourg, Portugal, Romania, Slovenia, Slovakia and Spain). In addition, as the national sovereignty of the EU member states in judicial matters remains completely intact, the EPPO will not truly investigate “on the ground”, but mainly assume a coordinating role. Last but not least, its jurisdiction will be limited to “offences against the EU’s financial interests”, in particular criminal VAT evasion, subsidy fraud and corruption involving EU officials. A strong enforcement, at least prima facie, looks different. To end on a positive note, however: the new body is certainly an improvement on the status quo in which the local prosecutors from 28 member states often lack coordination and team spirit. Back to Top 7.5       Compliance – Court Allows for Reduced Fines in Compliance Defense Case The German Federal Supreme Court (Bundesgerichtshof – BGH) handed down a decision recognizing for the first time that a company’s implementation of a compliance management system (“CMS“) constitutes a mitigating factor for the assessment of fines imposed on such company where violations committed by its employees are imputed to the company (BGH 1 StR 265/16 – May 9, 2017). According to the BGH, not only the implementation of a compliance management system at the time of the detection of the offense should be considered, but the court may also take into account subsequent efforts of a company to enhance its respective internal processes that were found deficient. The BGH held that such remediation measures can be considered as a mitigating factor when assessing the amount of fines if they are deemed suitable to “substantially prevent an equivalent violation in the future.” The BGH’s ruling has finally clarified the highest German court’s views on a long-lasting discussion about whether establishing and maintaining a CMS may limit a company’s liability for legal infringements. The recognition of a company’s efforts to establish, maintain and improve an effective CMS should encourage companies to continue working on their compliance culture, processes and systems. Similarly, management’s efforts to establish, maintain and enhance a CMS, and conduct timely remediation measures, upon becoming aware of deficiencies in the CMS, may become relevant factors when assessing potential civil liability exposure of corporate executives pursuant to section. 43 German Limited Liability Companies Act (Gesetz betreffend Gesellschaften mit beschränkter Haftung – GmbHG) and section 93 (German Stock Companies Act (Aktiengesetz – AktG). Consequently, the implications of this landmark decision are important both for corporations and their senior executives. Back to Top 8.  Antitrust and Merger Control In 2017, the German Federal Cartel Office (Bundeskartellamt – BKartA) examined about 1,300 merger filings, imposed fines in the amount of approximately EUR 60 million on companies for cartel agreements and conducted several infringement proceedings. On June 9, 2017, the ninth amendment to the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen – GWB) came into force. The most important changes concern the implementation of the European Damages Directive (Directive 2014/104/EU of the European Parliament and of the Council of November, 26 2014), but a new merger control threshold was also introduced into law. Implementation of the European Damages Directive The amendment introduced various procedural facilitations for claimants in civil cartel damage proceedings. There is now a refutable presumption in favor of cartel victims that a cartel caused damage. However, the claimant still has the burden of proof regarding the often difficult to argue fact, if it was actually affected by the cartel and the amount of damages attributable to the infringement. The implemented passing-on defense allows indirect customer claimants to prove that they suffered damages from the cartel – even if not direct customers of the cartel members – because the intermediary was presumably able to pass on the cartel overcharge to his own customers (the claimants). The underlying refutable presumption that overcharges were passed on is not available in the relationship between the cartel member and its direct customer because the passing-on defense must not benefit the cartel members. In deviation from general principles of German civil procedural law, according to which each party has to produce the relevant evidence for the facts it relies on, the GWB amendment has significantly broadened the scope for requesting disclosure of documents. The right to request disclosure from the opposing party now to a certain degree resembles discovery proceedings in Anglo-American jurisdictions and has therefore also been referred to as “discovery light”. However, the documents still need to be identified as precisely as possible and the request must be reasonable, i.e., not place an undue burden on the opposing party. Documents can also be requested from third parties. Leniency applications and settlement documents are not captured by the disclosure provisions. Furthermore, certain exceptions to the principle of joint and several liability of cartelists for damage claims in relation to (i) internal regress against small and medium-sized enterprises, (ii) leniency applicants, and (iii) settlements between cartelists and claimants were implemented. In the latter case, non-settling cartelists may not recover contribution for the remaining claim from settling cartelists. Finally, the regular limitation period for antitrust damages claims has been extended from three to five years. Cartel Enforcement and Corporate Liability Parent companies can now also be held liable for their subsidiary’s anti-competitive conduct under the GWB even if they were not party to the infringement themselves. The crucial factor – comparable to existing European practice – is the exercise of decisive control. Furthermore, legal universal successors and economic successors of the infringer can also be held liable for cartel fines. This prevents companies from escaping cartel fines by restructuring their business. Publicity The Bundeskartellamt has further been assigned the duty to inform the public about decisions on cartel fines by publishing details about such decisions on its webpage. Taking into account recent efforts to establish a competition register for public procurement procedures, companies will face increased public attention for competition law infringements, which may result in infringers being barred from public or private contracting. Whistleblower Hotline Following the example of the Bundeskartellamt and other antitrust authorities, the European Commission (“Commission“) has implemented a whistleblowing mailbox. The IT-based system operated by an external service provider allows anonymous hints to or bilateral exchanges with the Commission – in particular to strengthen its cartel enforcement activities. The hope is that the whistleblower hotline will add to the Commission’s enforcement strengths and will balance out potentially decreasing leniency applications due to companies applying for leniency increasingly facing the risk of private cartel damage litigation once the cartel has been disclosed. Merger Control Thresholds To provide for control over transactions that do not meet the current thresholds but may nevertheless have significant impact on the domestic market (in particular in the digital economy), a “size of transaction test” was implemented; mergers with a purchase price or other consideration in excess of EUR 400 million now require approval by the Bundeskartellamt if at least two parties to the transaction achieve at least EUR 25 million and EUR 5 million in domestic turnover, respectively. Likewise, in Austria a similar threshold was established (EUR 200 million consideration plus a domestic turnover of at least EUR 15 million). The concept of ministerial approval (Ministererlaubnis), i.e., an extra-judicial instrument for the Minister of Economic Affairs to exceptionally approve mergers prohibited by the Bundeskartellamt, has been reformed by accelerating and substantiating the process. In May 2017, the Bundeskartellamt published guidance on remedies in merger control making the assessment of commitments more transparent. Remedies such as the acceptance of conditions (Bedingungen) and obligations (Auflagen) can facilitate clearance of a merger even if the merger actually fulfils the requirements for a prohibition. The English version of the guidance is available at: http://www.bundeskartellamt.de/SharedDocs/Publikation/EN/Leitlinien/Guidance%20on%20Remedies%20in%20Merger%20Control.html; jsessionid=5EA81D6D85D9FD8891765A5EA9C26E68.1_cid378?nn=3600108. Case Law Finally on January 26, 2017, there has been a noteworthy decision by the Higher District Court of Düsseldorf (OLG Düsseldorf, Az. V-4 Kart 4/15 OWI – January 26, 2017; not yet final): The court confirmed a decision of the Bundeskartellamt that had imposed fines on several sweets manufacturers for exchanging competitively sensitive information and even increased the fines. This case demonstrates the different approach taken by courts in calculating cartel fines based on the group turnover instead of revenues achieved in the German market. Back to Top     The following Gibson Dunn lawyers assisted in preparing this client update:  Birgit Friedl, Marcus Geiss, Jutta Otto, Silke Beiter, Peter Decker, Ferdinand Fromholzer, Daniel Gebauer, Kai Gesing, Franziska Gruber, Johanna Hauser, Maximilian Hoffmann, Markus Nauheim, Richard Roeder, Katharina Saulich, Martin Schmid, Sebastian Schoon, Benno Schwarz, Michael Walther, Finn Zeidler, Mark Zimmer 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 / M&A, financing, restructuring and bankruptcy, 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 33 170, 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 33 170, 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) 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 and Merger Control Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) © 2018 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 5, 2018 |
2017 Year-End False Claims Act Update

Click for PDF How will the Trump Administration alter enforcement of the False Claims Act (“FCA”)?  This is a question we fielded frequently at the end of 2016.  Our answer at the time:  We do not expect there to be significant changes in FCA enforcement, and we expect that the Department of Justice (“DOJ”) and private qui tam plaintiffs will continue to brandish the FCA as a powerful weapon.  Our answer today?  Enforcement of the FCA, although slightly less active during 2017 than 2016, shows little signs of a long-term letup.  To the contrary, the FCA remains a significant source of government-facing and private-plaintiff litigation. 2017 marked the eighth straight year in which the federal government has recovered more than $3 billion in FCA cases and in which more than 700 new FCA cases were filed.  To put that in historical context, each of those marks had been reached only once before this most-recent eight-year stretch.  Although federal recoveries dipped from 2016, this past year also marked the fourth-highest yearly haul ever for the federal government.  And despite hints from isolated elements of the Trump Administration that there may be some interest in reigning in perceived overreach with the FCA, top DOJ officials have reaffirmed their dedication to stringent enforcement of the statute. On the case law front, the U.S. Supreme Court’s 2016 landmark decision in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), continued to reverberate through the lower courts.  Some courts have implemented the Escobar Court’s intent, barring FCA cases—at the summary judgment or even the pleading stage—when prior government actions demonstrate that the alleged misconduct at issue was not material to government payment.  But other courts have imposed different standards, parsing Escobar in plaintiff-friendly fashions.  Meanwhile, in Escobar‘s shadow, the lower federal courts have grappled with numerous other complex issues involving the FCA, including pleading standards, the public disclosure bar, the first-to-file bar, and more.  In fact, this last six months saw more than a dozen  significant circuit court decisions on issues relating to the FCA. Finally, on the legislative front, there is little to report.  As recently as mid-2016, legislative reform to reign in the FCA was the subject of Congressional hearings and murmurings by commentators.[1]  But today it seems no legislator—let alone a voting bloc—is eager to scale back a law intended to prevent “waste, fraud, and abuse.”  In the current political climate, it is perhaps hard to find blame in that decision. We address all of these and other developments in greater depth below.  We focus first on enforcement activity at the federal and state levels, turn to important FCA settlements and judgments that were announced in the second half of 2017, discuss the limited activity on the legislative front, 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 in-depth discussions of the FCA’s framework and operation, industry-specific 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. II.     FCA ENFORCEMENT ACTIVITY A.     Total Recovery Amounts: 2017 Recoveries Exceed $3.7 Billion The federal government recovered more than $3.7 billion in civil settlements and judgments under the FCA during the 2017 fiscal year, the fourth-highest amount on record.[2]  There were also 799 new FCA cases filed in 2017, the fourth-highest number in any single year.  Of the more than $3.7 billion that the government recovered, almost $426 million—the second-highest amount ever—came from suits where the federal government declined to intervene and that were driven by private qui tam “whistleblower” plaintiffs.[3]  All in all, 2017 was the eighth consecutive year in which the government recovered more than $3 billion and where there were at least 700 new FCA matters. B.     Qui Tam Activity Last year, we suggested that the government’s record 2015 recovery in qui tam suits where the government declined to intervene may have been an aberration.[4]  But 2015 looks less like an anomaly, at least after this past year.  In 2017, the government recovered nearly $426 million in cases where it declined to intervene, the second-highest amount on record.  That amount, which quadrupled 2016’s haul in such cases, constituted 11% of all recoveries last year. The proportion of cases in 2017 initiated by a whistleblower (84% (674 of 799)) remained in line with historical averages; that proportion has vacillated between 77% and 88% every year since 2009.  Going back farther in time, however, it is important to recall that the total number, and proportion, of qui tam cases has increased substantially since Congress amended the FCA in 1986: from 1987 through 1991, only about a quarter of FCA cases were qui tam cases, but whistleblowers have now brought just shy of 12,000 qui tam cases since then (71% of the total). The chart below demonstrates both the increase in overall FCA litigation activity since 1986 and the distinct shift from government-driven investigations and enforcement to qui tam-initiated lawsuits.  Although there was a slight decline compared to 2016, the total number of FCA cases remains far higher than in the first decade of the new millennium, when approximately 470 cases (on average) were initiated each year. Number of FCA New Matters, Including Qui Tam Actions  Source: DOJ “Fraud Statistics – Overview” (Dec. 21, 2017)   When a whistleblower brings an FCA action, the government may choose to intervene, which it does about 20% of the time.[5]  Even if the government declines to intervene, at least 70% of any recovery still goes to the government.  In fiscal year 2017, that large majority of cases where the government declined to intervene accounted for 11% of all federal recoveries.  This may not seem like much, but it was just the second time that such recoveries exceeded 9%, as shown below. Settlement or Judgments in Cases Where the Government Declined Intervention as a Percentage of Total FCA Recoveries Source: DOJ “Fraud Statistics – Overview” (Dec. 21, 2017)    C.     The Trump Administration’s Statements on the FCA As we reported in our 2017 Mid-Year update, Trump Administration officials have publicly announced their intent to enforce the FCA vigorously, beginning with a January pledge by U.S. Attorney General Jeff Sessions to “make it a high priority of the [D]epartment [of Justice] to root out and prosecute fraud in federal programs and to recover any monies lost due to fraud or false claim[s].”  He also voiced support for whistleblower-driven FCA suits as a “healthy” and “effective” method of rooting out fraud.  Deputy Attorney General Rod Rosenstein also committed, in connection with his January nomination, to continue robust enforcement of the FCA and to ensure that DOJ attorneys work collaboratively with relators. This messaging from DOJ has continued on.  For example, in his remarks announcing that DOJ’s 2017 Health Care Fraud Takedown operation would be the largest ever in the program’s eight-year history, Attorney General Sessions pledged to “use every tool we have to stop criminals from exploiting vulnerable people and stealing our hard-earned tax dollars” and to “develop even more techniques to identify and prosecute wrongdoers.”[6]  Attorney General Sessions added that the takedown program—a coordinated nationwide effort between DOJ, the U.S. Department of Health and Human Services (“HHS”), and law enforcement—had charged 412 defendants, nearly 300 of which were in the process of being suspended or banned from participation in federal programs, as of July 2017. This is not to say that all statements from the Administration have been aligned.  For instance, while addressing criticism levied during a House Financial Services Committee meeting in October—specifically, that the government’s use of the FCA against Federal Housing Administration (“FHA”) lenders was driving lenders away from the program and increasing costs to borrowers—U.S. Department of Housing and Urban Development Secretary Ben Carson pledged to address the “ridiculous” rise of FCA actions against FHA lenders.[7]  Secretary Carson’s comments, which included a statement that the Administration was “already addressing that problem” with DOJ’s staff, suggests a potential check on FCA actions. Similarly, in October, the Director of the Fraud Section of DOJ’s Civil Division gave a speech that left some industry-watchers wondering if DOJ intended to revisit its practices with respect to seeking dismissal of qui tam FCA suits that it determined to be meritless.  By statute, DOJ has always had the authority to intervene and seek dismissal of qui tam cases.  Historically, however, DOJ has used this authority sparingly.  Acknowledging that “clearly meritless cases can serve only to increase the costs for the government and health care providers alike,” the DOJ official cautioned that “[w]hile qui tam cases will always remain a significant staple of the government’s False Claims Act efforts, we are mindful of the need to maximize the use of the government’s limited resources.”[8]  Initial press reports viewed these remarks as an indication that DOJ had updated its longstanding policy of intervening to seek dismissal of meritless FCA actions only infrequently.  But DOJ later clarified that the remarks had merely been commentary on DOJ’s authority to seek dismissal and did not reflect any actual changes to its enforcement policy.[9] The year also saw staffing changes at DOJ that could impact the government’s FCA enforcement practices.  In July, Attorney General Jeff Sessions downsized the Health Care Corporate Fraud Strike Force, which was created in 2015 to focus on pursuing complex cases involving corporate health care fraud.[10]  The personnel changes—apparently reflecting the Administration’s shift in favor of high-priority issues like the opioid epidemic—were swiftly reported in the media as significantly weakening the Corporate Fraud Strike Force.  But this change should not be seen as an end to corporate health care fraud prosecutions.  DOJ publicly disavowed any such notion, stating that the Health Care Corporate Strike Force is “going strong under steady leadership” and that DOJ is “continuing to vigorously investigate and hold accountable individuals and companies that engage in fraud.”[11]  And DOJ left in place the related Medicare Fraud Strike Force, which has an established expertise in complex health care cases and a long track record of pursuing health care FCA cases.  Thus, it is safe to say that DOJ remains committed to health care fraud cases more broadly, even as it has reorganized how it handles such cases internally. Although we will continue to track these developments in the upcoming year, we do not anticipate any significant slowdown from the Administration.  We certainly have not seen any shortfall of aggression from DOJ since the change in Administration, and efforts to combat “waste, fraud, and abuse” continue to draw bipartisan support. D.     Industry Breakdown The past year’s distribution of recoveries by industry remained consistent with prior years, as health care industry companies continued to pay the majority (67%) of all sums collected by the government.  The financial industry, too, remained a significant target even though more than eight years have passed since the 2008 financial crisis.  Notably, the government recovered more than $543 million stemming from alleged housing and mortgage fraud in 2017.[12] Settlement or Judgments by Industry in 2017   1.     Health Care and Life Sciences Industries The health care industry paid 67% of all federal FCA recoveries this past year, in line with its average annual proportion since 2010.  In 2017, that amounted to almost $2.5 billion, a slight decrease from $2.6 billion the year before.  Since 2010, these figures have been remarkably consistent, as the government has recovered between $2.4 billion and $2.7 billion from health care companies every year but two—in 2012 when it recovered $3.1 billion, and in 2015 when it recovered $2.1 billion. As in years past, a handful of disproportionately large settlements drove the ten-figure sum.  In a case that drew substantial media attention, a branded pharmaceutical maker paid $465 million to resolve government allegations that the company avoided paying Medicare rebates by misclassifying its life-saving emergency medication as a generic drug.[13]  Meanwhile, in a case that garnered relatively less attention, a company that sells electronic health records software settled with the government for $155 million after allegedly misrepresenting its software’s capabilities.[14] DOJ and qui tam actions are not the only area of risk for health care and life sciences companies.  In its Spring 2017 Semiannual Report to Congress, the U.S. Department of Health and Human Services, Office of Inspector General (“HHS OIG”) reported that it also commenced 458 civil actions (including but not limited to FCA actions) in the first half of the 2017 fiscal year,[15] an increase from the 379 it commenced during the first half of the 2016 fiscal year.[16] No description of DOJ’s and HHS OIG’s enforcement activities is complete without discussion of the Anti-Kickback Statute (“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.[17]  Since the Affordable Care Act of 2010, claims resulting from a violation of the AKS are deemed “false” for purposes of the FCA.  The Stark Law prohibits physicians from referring Medicare patients to a provider with which the physician has a financial relationship.[18] One of the largest health care industry FCA settlements of the year, a $350 million agreement, involved a medical device manufacturer that allegedly paid kickbacks to health care providers in exchange for agreeing to use its skin graft product.[19] In recent years, FCA recoveries from hospitals and hospital systems have taken a back seat to recoveries from pharmaceutical companies, medical device companies, and outpatient clinics.  However, in 2017, a large chain of hospitals paid $60 million after the government alleged that it overbilled various federal programs for services provided by claiming that it had actually provided other, more expensive, services.[20]  And two related Missouri hospitals agreed to pay $34 million for allegedly paying improper incentives to doctors who referred oncology patients to a chemotherapy infusion clinic.[21] 2.     Government and Defense Contracting Industry Recoveries from government contracting firms rebounded in 2017, up to $220 million from $122 million in 2016.[22]  Defense contractors, however, made up a smaller-than-usual percentage of government contracting enforcement actions in 2017, while contractors who provide more routine government services were more of a focus of FCA cases over the last year.  For example, a software company paid $45 million after the government alleged that it failed to disclose some of its discounting practices to the General Services Administration, resulting in overpayments.[23]  The government also continued in 2017 its recent trend of pursuing FCA theories based on evasion of import duties, for example, when it secured a settlement from a company and two individuals who allegedly evaded customs duties after they imported wood furniture from China.[24] 3.     Financial Industry Even as the 2008 financial crisis has begun to recede into memory, 2017 was a banner year for FCA recoveries from financial services companies who allegedly defrauded the government in the run-up to the crisis.  Most notably, the government won more than $296 million at trial against a company and its CEO who allegedly falsely certified the quality of thousands of mortgage loans and then recovered tens of millions of FHA insurance dollars when the loans failed.[25]  The government also secured a $74 million settlement from another mortgage lender who allegedly engaged in similar activities dating back to 2006.[26] III.     NOTEWORTHY SETTLEMENTS AND JUDGMENTS ANNOUNCED DURING THE SECOND HALF OF 2017 We summarize below a number of the notable FCA settlements and judgments announced during the past six months (we covered notable settlements and judgments from the first half of the year in our 2017 Mid-Year Update), including those in the health care and life sciences industries, government and defense contracting industry, and the financial industry.  These cases provide specific examples of the industries the government has targeted, as well as the theories of liability that the government and relators have advanced. A.     Settlements 1.     Health Care and Life Sciences Industries On July 17, 2017, three Ohio-based health care providers and their executives agreed to pay roughly $19.5 million to resolve allegations related to their alleged submission of false claims to Medicare for unnecessary rehabilitation and hospice services.  The government alleged that the companies provided therapy services at excessive levels to increase Medicare reimbursement and provided hospice services to patients who were ineligible for those Medicare benefits.  In addition, the individual executive defendants allegedly solicited and received kickbacks to refer patients from skilled nursing facilities managed by corporations they partially controlled or owned to a particular home health care services provider.  As part of the settlement, two defendants entered into a five-year corporate integrity agreement with HHS OIG.  The whistleblowers, three former employees of the corporate defendants, will receive almost $3.7 million for their share of the government’s recovery.[27] On August 17, 2017, two wholly owned subsidiaries of a pharmaceutical company headquartered in Pennsylvania agreed to pay $465 million to settle allegations that they knowingly misclassified a certain product as a generic drug to avoid rebate expenditures primarily owed to Medicaid.  The company also entered into a five-year corporate integrity agreement with HHS OIG, which requires an independent organization to conduct an annual review of the defendant’s practices regarding the Medicaid drug rebate program.  The whistleblower, a competing pharmaceutical manufacturer, will receive approximately $38.7 million as a relator’s share.[28] On August 21, 2017, two suppliers of ophthalmological goods and services, as well as their former chief executive officer, agreed to pay more than $12 million to resolve allegations that they paid unlawful kickbacks to physicians and thereby violated the AKS and FCA.  The alleged kickbacks included the provision of free travel, entertainment, and improper consulting agreements.  The government contended that by providing these items of value, the defendants knowingly induced physicians to utilize the defendants’ products and services, and subsequently submit false claims to the federal government.  In connection with the FCA settlement, the defendants agreed to a five-year corporate integrity agreement with HHS OIG.  The whistleblower will receive 19.5% of the amount recovered.[29] On August 28, 2017, two California-based companies and their two principal executives agreed to pay approximately $2 million to resolve federal and state allegations that they knowingly overbilled a program designed to serve Californians with developmental disabilities.  Specifically, defendants allegedly submitted claims for payment of services that were never provided, retained overpayments to which they knew they had no claim, and falsified documents to support their claims for services that were never performed.  The whistleblower will receive a 20% share of all proceeds paid to the federal government.[30] On September 1, 2017, a medical center located in New Mexico and its Texas-based partner agreed to pay approximately $12.24 million to settle allegations that they made illegal donations to county governments, which the counties used to fund the state share of Medicaid payments to the hospital.  Under New Mexico’s now discontinued Sole Community Provider program, the state provided supplemental Medicaid funds to hospitals, and the federal government reimbursed 75% of the expenditures.  Federal law mandated that the state or counties had to provide the remaining 25% of the funds; it was allegedly unlawful for private hospitals to do so.  The whistleblower, a former county health care administrator, will receive approximately $2.2 million of the recovery.[31] On September 5, 2017, a pharmaceutical manufacturer agreed to pay $58.65 million to settle allegations that it did not comply with U.S. Food and Drug Administration (“FDA”)-mandated Risk Evaluation and Mitigation Strategy (“REMS”) for its Type II diabetes medication.  The settlement includes disgorgement of $12.15 million for alleged violations of the Federal Food, Drug, and Cosmetic Act (“FDCA”), and $46.5 million for alleged violations of the FCA.  The FCA-related payment resolves specific allegations that the company caused the submission of false claims related to the drug by authorizing sales messages that could create a false or misleading impression with physicians that the REMS-required message was erroneous, irrelevant, or unimportant, and by encouraging use of the drug by adult patients who did not have Type II diabetes.  The federal government will receive approximately $43.1 million, and state Medicaid programs will receive more than $3.3 million; the amount to be recovered by private party whistleblowers is undecided.[32] On September 8, 2017, a California-based biopharmaceutical company agreed to pay more than $7.55 million to settle allegations that it paid kickbacks to doctors to induce them to prescribe a fentanyl-based drug.  The improper payments allegedly included (1) 85 free meals to doctors and staff from a high-prescribing practice; (2) paying doctors $5,000 and speakers $6,000 to attend an “advisory board” partly organized, and attended, by the defendant’s sales team members; (3) paying approximately $82,000 to a physician-owned pharmacy under a performance-based rebate program; and (4) payments to doctors to refer patients to the company’s patient registry study.  The whistleblower will receive more than $1.2 million of the amount recovered.[33] On September 11, 2017, a South Carolina chain of physician-owned family medicine clinics agreed to pay $1.56 million to settle allegations that it submitted false claims to the Medicare and TRICARE programs.  The principal owner and former chief executive officer, as well as the former laboratory director, also agreed to pay $443,000 to resolve the allegations, bringing the total settlement to over $2 million.  The government specifically alleged that the entity’s incentive compensation plan paid its physicians a percentage of the value of laboratory and other diagnostic tests that they ordered, which the entity then billed to Medicare in violation of the Stark Law.  In addition, the defendants allegedly submitted claims for medically unnecessary laboratory services by creating, and using, custom panels comprised of needless diagnostic tests, and programming accounting software to change billing codes for laboratory tests to ensure payment.  The entity and the principal owner also agreed to a corporate integrity agreement with HHS OIG, which ensures that the owner has no management role for five years and obligates the company to implement internal compliance reforms.[34] On September 13, 2017, a New York hospital operator agreed to pay $4 million to resolve allegations that it engaged in improper financial relationships with referring physicians.  The improper relationships included compensation and office lease arrangements that allegedly did not comply with requirements of the Stark Law, which restricts relationships between entities and referring physicians.  The whistleblower will receive $600,000 of the recovery.[35] On September 18, 2017, an Alaska state agency agreed to pay almost $2.5 million to resolve allegations that it submitted inaccurate quality control data and information to the U.S. Department of Agriculture and received unearned performance bonuses for fiscal years 2010 through 2013.  The inaccuracies occurred in connection with the agency’s implementation of the Supplemental Nutrition Assistance Program (formerly the Food Stamp Program).  The agency had contracted with a third-party consultant to provide recommendations to lower its quality control error rate, but the advice, as implemented by the agency, allegedly injected bias into the quality control process, which resulted in the reporting inaccuracies.  This is the third settlement with a state agency arising from the advice given by the consulting company.[36] On September 22, 2017, a Massachusetts-based pharmaceutical company agreed to pay more than $35 million to resolve criminal and civil charges related to the introduction of an alleged misbranded drug into interstate commerce.  The company also agreed to plead guilty to certain criminal charges, entered into a deferred prosecution agreement relating to its criminal liability under the Health Insurance Portability and Accountability Act of 1996, agreed to a civil consent decree and permanent injunction to prevent future violations of the FDCA, and entered into a corporate integrity agreement with HHS OIG.  Of the $35 million, the company will pay $28.8 million over three years to settle federal ($26.1 million) and state ($2.7 million) liability for allegedly (1) submitting claims to government health care programs arising from its improper promotion of the drug; (2) altering or falsifying statements of medical necessity and prior authorizations that were submitted to federal health care programs; and (3) defraying patients’ copayment obligations, in alleged violation of the AKS, by funneling funds through an entity that claimed to be a non-profit patient organization.  Three whistleblowers will receive $3.7 million from the federal proceeds.[37] On September 27, 2017, a hospital based in South Carolina agreed to pay more than $7 million to settle allegations that it submitted false Medicare claims.  The government contended that the defendant knowingly disregarded the statutory requirements for submitting Medicare claims for services, including radiation oncology services, emergency department services, and clinic services.  In particular, the hospital allegedly (1) billed for radiation oncology services when a qualified practitioner was not immediately available to provide direction throughout the radiation procedure; (2) billed for services provided at a minor care clinic as if it was an emergency department; and (3) billed emergency department services rendered by mid-level providers as if they were provided by a physician.  The whistleblower will receive more than $1.2 million of the recovery and will also receive over $850,000 to resolve her wrongful termination claims.[38] On October 19, 2017, a Tennessee-based nursing home operator agreed to pay $5 million to settle allegations that the company billed Medicare and Medicaid for allegedly worthless nursing home services and services that were never provided.  The company also agreed to enter into a corporate integrity agreement with HHS OIG.  The government’s investigation originated with claims by the whistleblower, a former nursing home employee, of patient abuse and neglect, substandard care, and denial of basic services.  The whistleblower will receive $1 million as part of the settlement.[39] On October 27, 2017, a New York-based health care provider agreed to pay $6 million to resolve allegations that a subsidiary submitted false claims to government health care programs for unnecessary rehabilitation therapy services.  The defendant also agreed to enter into a five-year corporate integrity agreement with HHS OIG.  The two whistleblowers will receive $990,000 of the recovery.[40] On October 30, 2017, an Ohio-based hospice care provider, and various wholly owned subsidiaries, agreed to pay $75 million to settle allegations that they submitted false claims for hospice services to Medicare.  The settlement also included a five-year corporate integrity agreement with HHS OIG.  The government alleged that the defendants submitted claims for services to hospice patients who were not terminally ill, and submitted claims for continuous home care services that were unnecessary, not provided, or not performed in line with Medicare requirements.  In addition, the government alleged that the provider rewarded employees with bonuses for the number of patients receiving hospice services, and pressured staff to increase the volume of continuous home care, regardless of need.  The settlement constitutes the largest recovery ever from a provider of hospice services under the FCA.[41] On December 1, 2017, a physician-owned hospital located in Texas agreed to pay $7.5 million to settle allegations that it paid physicians illegal kickbacks in the form of free marketing services in exchange for surgical referrals.  The marketing services included print, radio, and television advertisements, pay-per-click campaigns, billboards, website upgrades, brochures, and business cards.  The defendant also agreed to enter into a five-year corporate integrity agreement with HHS OIG.  The whistleblowers, two former employees in the defendant’s marketing department, will receive $1.1 million of the amount recovered.[42] On December 12, 2017, a Florida-based cancer care provider, and certain of its subsidiaries and affiliates, agreed to pay $26 million to resolve a Medicare compliance issue that the company had voluntarily disclosed regarding the submission of false attestations about the company’s use of electric health records software, as well as separate whistleblower allegations related to the submission of claims for services provided pursuant to referrals from physicians with whom the defendant allegedly had improper financial relationships.  The company also entered into a five-year corporate integrity agreement with HHS OIG.  The whistleblower, the company’s former interim vice president of financial planning, will receive a $2 million share of the government’s recovery.[43] On December 20, 2017, a Maryland-based pharmaceutical company agreed to pay $210 million to resolve allegations that it used a 501(c)(3) organization as a conduit to pay copays for Medicare patients taking the company’s pulmonary arterial hypertension drugs.  The company allegedly made donations to the foundation, which then used the donations to satisfy the copays.  The company also allegedly prohibited needy Medicare patients from participating in its free drug program; instead, the company allegedly referred these patients to the foundation, which allowed for Medicare claims.  In addition to the settlement, the company entered into a five-year corporate integrity agreement with HHS OIG.[45] On December 21, 2017, a Florida-based hospice company agreed to pay over $5 million to settle allegations that it knowingly billed the government for medically unnecessary and undocumented hospice services.  The whistleblower, a former employee, will receive approximately $900,000 of the recovered funds.[46] On December 22, 2017, an Illinois-based retailer agreed to pay $32.3 million to settle allegations that in-store pharmacies failed to report discounted prescription drug prices to Medicare, Medicaid, and TRICARE.  The government alleged that the corporation offered discounted generic drug prices to customers who paid cash through club programs, but knowingly failed to report the discounted prices to federal health care programs when reporting its usual and customary prices, which the government uses to determine reimbursement rates.  The settlement is part of a larger $59 million settlement that also resolves state Medicaid and insurance claims against the company.  The whistleblower will receive $9.3 million of the recovered funds.[47] 2.     Government and Defense Contracting Industry On August 10, 2017, a Virginia-based contractor and its subsidiaries agreed to pay $16 million to settle allegations that they knowingly conspired with, and caused, small businesses to submit false claims for payment related to fraudulently obtained small business contracts.  The defendant and its subsidiaries allegedly induced the government to award certain contracts by misrepresenting eligibility requirements, including the small businesses’ affiliation with the defendant, size, and standing as service-disabled or as qualified socially or economically disadvantaged businesses under federal business development programs.  In addition, the defendant allegedly engaged in bid rigging to distort or inflate prices charged to the government under the contracts.  The settlement is one of the largest involving alleged fraud implicating small business contract eligibility.  The whistleblower will receive a share of the recovery of approximately $2.9 million.[48] On August 15, 2017, a Virginia-based defense contractor agreed to a $9.2 million settlement to resolve allegations that it overbilled the government for labor on Navy and Coast Guard ships located at its shipyards in Mississippi.  The contractor allegedly mischarged labor to certain contracts when it was actually performed under other contracts, and billed the government for dive operations to support ship hull construction that did not actually occur.  The whistleblower will receive more than $1.5 million of the recovery.[49] On September 13, 2017, a Virginia-based contractor agreed to pay $5 million to settle allegations that it failed to properly vet personnel working in Afghanistan under a State Department contract for labor services.  The contract required the contractor to conduct extensive background checks on U.S. personnel in specific positions and to submit the names of non-U.S. personnel to the State Department for additional security clearance.  The government alleged that claims submitted by the contractor for labor services of the improperly vetted personnel, in violation of the background-check requirements, were false claims.  The whistleblower will receive $875,000 as his share of the recovery.[50] On October 3, 2017, three New York-based contractors, as well as two New York-based owners, agreed to pay more than $3 million to resolve allegations that they improperly obtained federal set-aside contracts reserved for service-disabled veteran-owned (“SDVO”) small businesses.  One of the three contractors allegedly recruited a service-disabled veteran to serve as a figurehead, received several SDVO small business contracts, and subcontracted almost all of the work to the other two entities rather than the veteran.  The two individual defendants allegedly executed the scheme by making, or causing to be made, false statements to the Department of Veterans Affairs (“VA”) regarding eligibility to participate in the SDVO small business contracting program and compliance with related requirements.  The whistleblower will receive $450,000 of the recovery.[51] On October 16, 2017, a Virginia-based defense contractor agreed to pay $2.6 million to resolve allegations that the company submitted false claims for payment to the Department of Defense for unqualified security guards stationed in Iraq.  The government alleged that the defendant knowingly billed the United States for security guards who failed to pass contractually required firearms proficiency tests, and concealed the guards’ inability to satisfy the requirements by creating false test scorecards.  The whistleblower, a former employee, will receive approximately $500,000 of the amount recovered.[52] On November 8, 2017, a Kentucky-based trucking company agreed to pay $4.4 million to settle allegations that it submitted claims for payment related to shipping contracts that were obtained by bribing government officials.  The whistleblower will receive $814,000 of the recovery.[53] 3.     Financial Industry On August 8, 2017, two mortgage originators and underwriters based in New Jersey, and a third based in Minnesota, agreed to pay more than $74 million to resolve allegations that they knowingly provided mortgage loans insured by the FHA, guaranteed by the VA, and purchased by Fannie Mae and Freddie Mac that did not meet origination, underwriting, and quality control requirements mandated by those entities.  Of the $74 million, $65 million will satisfy the FHA allegations, and $9.45 million will satisfy the remaining allegations.  The whistleblower who made some of the allegations, a former employee, will receive more than $9 million from the settlement.[54] On December 8, 2017, a banking conglomerate headquartered in Louisiana agreed to pay more than $11.6 million to settle allegations that it falsely certified compliance with federal requirements to obtain insurance on mortgage loans from the FHA.  The defendant, who participated as a direct endorsement lender in the FHA insurance program, admitted the following facts as part of the settlement: (1) it certified insurance mortgage loans that did not meet Department of Housing and Urban Development (“HUD”) requirements and were ineligible for FHA mortgage insurance, and HUD paid FHA insurance claims on some of these mortgages; (2) it advised HUD that it was no longer paying illegal commissions to underwriters and those who provided underwriting activities, but failed to disclose that it was making incentive payments; (3) it failed to timely self-report material violations of HUD requirements, including audit findings regarding substandard quality reviews; and (4) as a result of its conduct and omissions, HUD insured loans approved by the bank that were ineligible for FHA mortgage insurance that HUD would not have otherwise insured, and HUD incurred losses when it paid insurance on those loans.  The whistleblowers, two former employees of the bank, will receive a 20% share of the recovery.[55] 4.     Other On September 22, 2017, a California-based renewable energy company agreed to pay $29.5 million to resolve allegations that it submitted inflated claims on behalf of itself and affiliated investment funds to the Department of Treasury under Section 1603 of the American Recovery and Reinvestment Act of 2009 (“Section 1603”).  The company allegedly overstated the cost bases of its solar energy properties in its certified Section 1603 grant applications and received inflated payments from the Treasury as a result.  As part of the settlement, the defendant, and its affiliates, also agreed to release pending and future claims against the United States for Section 1603 payments.[56] On December 19, 2017, a Texas-based oil and gas corporation and its affiliates agreed to pay $2.25 million to settle allegations that they underpaid royalties owed on natural gas produced from federal lands in Wyoming.  The government alleged that the entities knowingly reduced the royalty amounts by deducting fees paid to other companies, including the cost of placing the gas in marketable condition.[57] B.     Judgments ·         On September 14, 2017, a federal judge in the Southern District of Texas awarded a $296 million judgment against two mortgage entities and a $25.3 million judgment against their president and chief executive officer for alleged fraudulent conduct while participating in the FHA mortgage insurance program.  In November 2016, a unanimous jury found that the defendants violated the FCA and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”).  Specifically, the jury determined that the defendants falsely certified that thousands of high-risk, low-quality loans were eligible for FHA insurance, and subsequently submitted claims to FHA when the loans defaulted.  The defendants were also found liable for allegedly originating FHA-insured loans from “shadow” branch offices without HUD approval, and submitting false quality control reports and certifications to HUD.  The court’s judgment trebled the jury’s $92 million FCA verdict and imposed additional statutory penalties under the FCA and FIRREA.[58] IV.     LEGISLATIVE ACTIVITY A.     Federal Legislation The federal legislative front was frankly uneventful during the latter half of 2017, with no new legislation significantly affecting the FCA enacted or introduced in Congress.  Additionally, at least for this year, Congress largely shelved consideration of President Trump’s plan to repeal and replace the Affordable Care Act (“ACA”) (except for the repeal of the individual mandate as part of the recent tax cut legislation), which could have affected the ACA’s amendments to the FCA, as discussed in our 2017 Mid-Year False Claims Act update. Federal regulatory activity implicating the FCA also remained quiet.  An FDA regulation proposed in January 2017—amending the agency’s definition of “intended use” for drugs and devices codified in 21 C.F.R. § 201.128 and 21 C.F.R. § 801.4, respectively—saw little progress during the past six months.[59]  As noted in our Mid-Year update, the rule’s effective date was delayed until March 19, 2018,[60] in response to a petition from industry opponents that argued against an expansion of the definition of “intended use,”[61] which could have spawned a flurry of unwarranted FCA lawsuits.  After expiration of the comment period on the issues raised by the petition, the FDA published an interim response to those concerns on July 28, 2017, noting that a decision is still forthcoming, pending further review and analysis by agency officials.[62] B.     State Legislation As noted in previous updates, HHS OIG is in the process of determining if state FCA laws appropriately mirror the federal FCA’s enforcement abilities so that they are deemed as effective as the federal FCA in facilitating qui tam actions; if HHS OIG finds that they do not, the states lose their ability to increase their share of recoveries in cases that prosecute Medicaid fraud by 10%.  In our Mid-Year update, we reported that HHS OIG notified 15 states that their state FCA laws needed to be amended to mirror the federal law’s increased civil penalties by no later than the end of 2018.  Since then, a few states have progressed toward that goal: On July 24, 2017, a bill that would amend the California False Claims Act to mirror penalties allowed under the federal FCA was signed by the Governor.[63] On August 25, 2017, a bill amending the Illinois False Claims Act to mirror penalties allowed under the federal FCA was approved by the Governor.[64] On November 28, 2017, a bill that would amend the civil penalties in the Michigan Medicaid False Claims Act to mirror penalties allowed under the federal FCA was referred to the Senate Judiciary Committee.[65] Bills that would have similarly amended the New York and North Carolina false claims act statutes remain under consideration and have not progressed since our last update.[66] Additionally, a number of states have either enacted into law, introduced, or failed to progress legislation making other notable changes to their respective state FCA laws.  Those developments include: Alabama passed a law amending its Medicaid fraud statute, which strengthened penalties for violations, but also introduced a requirement that violations be “knowing.”[67]  A related bill that would have established a broader state false claims act, on which we reported in our Mid-Year 2017 Update, failed to emerge from committee.[68] Florida introduced a bill that would remove the Florida False Claims Act from the ambit of the Open Government Sunset Review Act, a 1995 law that mandates periodic review and repeal of all exemptions to Florida’s open records law.  The amendment would exempt the Florida FCA’s under seal requirements from review and potential repeal under the Sunset Review Act.[69] Arkansas enacted a bill that updates and clarifies several definitions in the state’s Medical Fraud Act and Medicaid Fraud False Claims Act, but does not significantly alter the substance of the law.[70] In Michigan, a bill that would create a general Michigan False Claims Act remains in the state Senate’s Committee on the Judiciary.[71]  If enacted, the bill would expand Michigan’s current Medicaid False Claims Act beyond the Medicaid context.[72] A Pennsylvania law that would create the state’s False Claims Act remains in the House Judiciary Committee, where it has resided since March 2017.[73] North Dakota failed to pass House Bill 1174, which would have provided liability and a penalty for false claims for medical assistance made to the state.[74] We expect that the upcoming year will bring increased state legislative activity as the December 31, 2018 deadline set by HHS OIG approaches. V.     NOTABLE CASE LAW DEVELOPMENTS While the legislative front was uneventful, the jurisprudential front was just the opposite.  In 2017, courts continued to grapple with the Supreme Court’s seminal decision in Escobar, draw the boundaries of the public disclosure and first-to-file bars, and explore many other nuances of the FCA.  The results were dozens of cases that contribute meaningfully to the corpus of FCA case law.  As always, we summarize the most significant cases below. A.     Continued Development of the Materiality Requirement Post-Escobar Eighteen months after it was decided, the application of the Supreme Court’s landmark decision in Escobar continues to be an issue confronting courts throughout the country.  In particular, courts have been forced to determine how to apply the Escobar Court’s self-described “rigorous” and “demanding” materiality requirement.  136 S. Ct. at 2002–03. 1.     The Third Circuit Extends Escobar to Pre-2009 Claims In United States ex rel. Spay v. CVS Caremark Corp., 875 F.3d 746 (3d Cir. 2017), the Third Circuit addressed a question left unanswered by Escobar—whether the materiality standard also applies to conduct before the adoption of the Fraud Enforcement and Recovery Act of 2009 (“FERA”), which included a “material” standard in the FCA’s text for the first time.  After reviewing the Court’s analysis in Escobar, the Third Circuit reached the “unavoidable conclusion” that:  “(1) Section (a)(1) [of the FCA] has a materiality requirement, even though that requirement has never been expressed in the statute [prior to FERA], and (2) the standard used to measure materiality did not change in 2009 when Congress amended the FCA to include a definition of ‘material.'”  Spay, 875 F.3d at 763.  The Third Circuit further concluded “that the FCA has always included a materiality element . . . and the definition of ‘material,’ which is derived from the common law and was enshrined in the statute itself in 2009, has not changed.”  Id. The Third Circuit’s analysis is relevant to the small number of remaining cases that are premised on pre-2009 conduct.  But it has broader implications as well.  For example, the Third Circuit’s determination that the FCA and common law “both employ the same standard” for materiality suggests that the materiality analysis in Escobar applies to all theories of FCA liability, regardless of the statutory premise or theory of liability pursued by the government or relators. 2.     The Third, Fifth, and Seventh Circuits Address the Importance of the Government Continuing to Make Payments In recent months, three circuits have addressed the extent to which the government’s continued payment of claims establishes a lack of materiality following Escobar.  In Spay, the Third Circuit considered whether the general industry use of dummy prescriber information on authorized claims that “errored out” because of missing or incorrectly formatted prescriber information constituted material misstatements.  875 F.3d at 750.  The record established that government employees responsible for authorizing payments “knew that dummy identifiers were being used” and “the reason for using them,” but the government nevertheless paid for the prescriptions.  Id. at 764.  Because the misstatements at issue actually “allowed patients to get their medication,” the Third Circuit concluded that “they are precisely the type of ‘minor or insubstantial’ misstatements where ‘[m]ateriality . . . cannot be found.'”  Id. (quoting Escobar, 136 S. Ct. at 2003). The Fifth Circuit reached a similar conclusion in United States ex rel. Harman v. Trinity Industries Inc., 872 F.3d 645 (5th Cir. 2017).  In Harman, a contractor “inadvertently omitted” information about a design change to a guardrail system, which subsequently became eligible for federal-aid reimbursement in 2005.  Id. at 665.  In 2012, the Federal Highway Administration (“FHWA”) was advised of the design change, but continued to maintain the system’s eligibility for federal reimbursement, including by issuing a June 2014 memorandum that affirmed that the system remained eligible for reimbursement.  Id. at 649, 665.  Nevertheless, a federal jury found the contractor liable for the submission of false claims and imposed a verdict of more than $663 million—the largest judgment in the history of the FCA.  Id. at 651.  But the Fifth Circuit reversed that judgment, observing that, “though not dispositive,” the payment of claims despite knowledge of alleged fraud “substantially increased the burden . . . in establishing materiality.”  Id. at 663.  Because the evidence in the record was “insufficient to overcome” the “very strong evidence” that FHWA knew about the design changes and still authorized reimbursement, the court reversed and entered judgment as a matter of law for the defendant.  Id. at 668, 670.  In a recent amicus brief, DOJ cited the Harman case as an example of “circumstances in which a court may properly decide [materiality] as a matter of law.”  Brief for the United States as Amicus Curiae Supporting Appellant, United States ex rel. Prather v. Brookdale Senior Living Communities, 2017 WL 4769476, at *13 n.2. A more recent Seventh Circuit decision shows, however, that at least under some circumstances one court has found that continued payment of claims alone may not be dispositive on the question of materiality.  In United States v. Luce, 873 F.3d 999 (7th Cir. 2017), the defendant mortgage company owner allegedly falsely asserted that he had no criminal history in order to participate in a government insurance program.  Id. at 1002–03.  On appeal from the district court’s ruling granting summary judgment to the government, the Seventh Circuit considered whether the fact that the government-insured loans continued to be issued after defendant’s false statements became known was adequate evidence to preclude summary judgment in the government’s favor.  The Seventh Circuit concluded that it was not, stating that “[a]lthough new loans were issued, the Government also began debarment proceedings, culminating in actual debarment.  There was no prolonged period of acquiescence.”  Id. at 1008. 3.     District Courts Address Adequacy of Materiality Allegations at Pleadings Stage Post-Escobar  Before the Supreme Court’s decision in Escobar, the materiality element was often viewed as a fact-intensive issue that was difficult to contest at the summary judgment stage, let alone based on the pleadings.  In Escobar, however, the Supreme Court instructed that materiality is “[not] too fact intensive for courts to dismiss [FCA] cases on a motion to dismiss.”  136 S. Ct. at 2004 n.6. As a result, defendants have increasingly advanced materiality arguments as a basis for dismissal, including at the pleading stage.  While the courts are continuing to evaluate the precise requirements for alleging materiality, certain common themes have been developing.  For instance, district courts have repeatedly made clear that a conclusory allegation that the false statement is material to the government’s payment decision is inadequate to avoid dismissal.  See, e.g., United States ex rel. Payton v Pediatric Servs. of Am., Inc., No. cv416-102, 2017 WL 3910434, at *10 (S.D. Ga. Sept. 6, 2017) (holding that a complaint “must do something more than simply state that compliance is material”); United States v. Scan Health Plan, No. CV 09-5013-JFW, 2017 WL 4564722, at *6 (C.D. Cal. Oct. 5, 2017) (dismissing claim based “only [on] conclusory allegations that the [defendants’] conduct was material”). Thus, a conclusory statement that the government would not have paid if it had been aware of the alleged false statements is “insufficient” because “it does not show how [the] misrepresentations were material.”  United States ex rel. Mateski v. Raytheon Co., No. 2:06-cv-03614, 2017 WL 3326452, at *7 (C.D. Cal. Aug. 3, 2017).  In contrast, some district courts have determined that materiality has been adequately pleaded where complaints included allegations that:  the government had terminated eligibility for similar violations, see United States ex rel. Lacey v. Visiting Nurse Serv. of N.Y., No. 14-cv-5739, 2017 WL 5515860, at *10 (S.D.N.Y. Sept. 26, 2017); the defendant had been informed by the government that compliance was material, see Smith v. Carolina Med. Ctr., No. 11-2756, 2017 WL 3310694, at *11 (E.D. Pa. Aug. 2, 2017); regulatory language established a link between compliance and payment, see United States ex rel. LaPorte v. Premiere Educ. Grp., No. 11-3523, 2016 WL 2747195, at *17 (D.N.J. May 11, 2016), recons. denied, 2017 WL 4167434, at *4 (D.N.J. Sept. 20, 2017); the misrepresentation shifted the risks bargained for by the parties, see United States ex rel. Hussain v. CDM Smith, Inc., No. 14-CV-9107, 2017 WL 4326523, at *8 (S.D.N.Y. Sept. 27, 2017) (addressing allegations that contractor “was improperly shifting billables from fixed-fee to cost-plus-fee contracts”); and defendant’s conduct indicates a belief that fraudulent content “would be important,” see United States ex rel. Gelman v. Donovan, No. 12-cv-5142, 2017 WL 4280543, at *7 (E.D.N.Y. Sept. 25, 2017). Ultimately, while the cases make clear that more than a conclusory allegation is required to comply with Federal Rule of Civil Procedure 9(b), the case law has not definitively decided how much more will suffice.  Given the factual nature of the issue, courts may have a difficult time defining in the abstract what makes a materiality allegation adequate. B.     Updates on Rule 9(b) Pleading Standards As discussed in past updates, circuit courts have taken varying approaches to the application of the heightened pleading standards set forth by Rule 9(b) to FCA claims.  Although the circuits generally agree that Rule 9(b) applies to FCA claims, a circuit split has developed among those circuits that apply the standard strictly, see, e.g., United States ex rel. Clausen v. Lab. Corp. of Am., 290 F.3d 1301, 1311 (11th Cir. 2002) (requiring “some indicia of reliability . . . to support the allegation of an actual false claim for payment being made to the Government”), and those that apply a “relaxed” standard, see, e.g., United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 190 (5th Cir. 2009) (requiring the allegation of “particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted”).  Thus, the question of how much detail is required to survive a motion to dismiss remains a hotly debated issue. 1.     The Second Circuit Claims the Circuit Split Is “Greatly Exaggerated” In United States ex rel. Chorches v. American Medical Response, 865 F.3d 71 (2d Cir. 2017), the Second Circuit downplayed the circuit split over the Rule 9(b) standard.  The court identified instances in which even those circuits that apply a “stricter” standard “declined to impose an ineluctable bright-line rule that every relator must allege details of actual claims submitted,” but instead took a more nuanced approach that evaluates the pleadings on a case-by-case basis.  Id. at 90–92.  Based on its reading of the requirement, the Second Circuit concluded that a relator must allege “specific and plausible facts from which [a court] may easily infer” that the defendant “systematically falsified its records to support false claims” and “that the false records were actually presented to the government for reimbursement.”  Id. at 84. 2.     The First Circuit Establishes an Exception to Its “Strict” Application of Rule 9(b) The First Circuit has applied the “stricter” standard.  See, e.g., United States ex rel. Karvelas v. Melrose-Wakefile Hosp., 360 F.3d 220, 233 (1st Cir. 2004) (holding that at least “some of th[e] information [e.g., the date or amount of claims or other details regarding the forms submitted] for at least some of the claims must be pleaded”) (internal quotations omitted).  However, in United States ex rel. Nargol v. DePuy Orthopaedics, Inc., 865 F.3d 29 (1st Cir. 2017), the First Circuit recognized an exception to this rule where a complaint “essentially alleges facts showing that it is statistically certain that [the defendant] cause[d] third parties to submit many false claims to the government.”  Id. at 41.  Nargol involved allegations that a manufacturer “palmed off latently defective versions of its FDA-approved [hip-replacement device] on unsuspecting doctors who sought government reimbursement for the defective products.”  Id. at 31. The First Circuit determined that the complaint’s absence of specific information regarding claims was not fatal for several reasons.  First, there was no reason to suggest that the defects “were known to the doctors, the patients, or the government” or that they could have been readily discovered during surgery.  Id. at 40.  Second, there was no reason to suspect that physicians did not seek reimbursement for defective devices.  Id.  Third, it was likely that every sale of the device “was accompanied by an express or plainly implicit representation that the product being supplied was the FDA-approved product, rather than a materially deviant version of that product.”  Id. at 40–41.  Finally, the First Circuit found that it was “highly likely that the expense is not one that is primarily borne by uninsured patients in most instances.”  Id. at 41.  Given these facts, and the allegations that thousands of devices were sold, it was “virtually certain that the insurance provider in many cases was Medicare, Medicaid, or another government program.”  Id.  Under these circumstance, the First Circuit saw “little reason for Rule 9(b) to require Relators to plead false claims with more particularity than they have done” as the complaint “alleges the details of a fraudulent scheme with ‘reliable indicia that lead to a strong inference that claims were actually submitted.'”  Id. (quoting United States ex rel. Duxbury v. Ortho Biotech Prods., L.P., 579 F.3d 13, 29 (1st Cir. 2009)). 3.     The Sixth Circuit Requires the Entire Chain Linking Defendant’s Conduct to the Eventual Submission of Claims to Be Pleaded With Particularity In United States ex rel. Ibanez v. Bristol-Myers Squibb Co., 874 F.3d 905 (6th Cir. 2017), the Sixth Circuit considered the application of Rule 9(b) to allegations involving “a long chain of causal links from defendants’ conduct to the eventual submission of claims.”  Id. at 914.  Ibanez involved allegations of false claims stemming from an off-label promotion scheme of Abilify, “an antipsychotic drug approved for various prescriptive uses by the FDA.”  Id. at 912.  Specifically, the relator alleged that the defendant improperly promoted Abilify to a physician, who then prescribed the medication to a patient for an off-label use.  That patient thereafter filled the prescription at a pharmacy, with the pharmacy subsequently submitting a claim to the government for reimbursement of the prescription.  Id. at 915.  The Sixth Circuit held that the complaint must “adequately allege the entire chain—from start to finish—to fairly show defendants cause[d] false claims to be filed,” including “alleg[ing] specific intervening conduct” along the chain.  Id. at 914–15.  Because relators failed to provide details of “any representative claim that was actually submitted to the government for payment,” the district court’s dismissal of the claim was upheld.  Id. at 915. Additionally, in Ibanez, the Sixth Circuit further clarified the boundaries of the circuit’s “personal knowledge exception” for applying a “relaxed Rule 9(b) pleading standard,” established in United States ex rel. Prather v. Brookdale Senior Living Communities, Inc., 838 F.3d 750 (6th Cir. 2016).  Ibanez, 874 F.3d at 915 (internal quotations omitted).  The Sixth Circuit held that the exception only “applies in limited circumstances . . . where the relator was specifically employed to review [the] documentation allegedly submitted to [the government].”  Id. at 915.  It was this knowledge, paired with specific allegations regarding payment requests, “that satisfied a relaxed 9(b) standard.”  Id. at 915–16.  Based on this decision, along with a decision earlier this year in United States ex rel. Hirt v. Walgreen Co., 846 F.3d 879 (6th Cir. 2017), it appears that outside of the specific circumstance in Prather, the Sixth Circuit will employ a “strict” Rule 9(b) analysis in FCA cases. C.     Developments in the FCA’s Public Disclosure Bar As amended by the Affordable Care Act in 2010, the public disclosure bar states that a court “shall dismiss” an FCA action if “substantially the same allegations or transactions were publicly disclosed” through listed sources, as long as the relator does not qualify as an “original source.”  31 U.S.C. § 3730(e)(4) (2010).  A relator is an “original source” when he or she “has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions.”  Id. § 3730(e)(4)(B). Courts have grappled with the extent to which their precedent interpreting the prior version of the statute survived the 2010 amendments, including when assessing whether the bar remains jurisdictional (which the prior version of the statute had indicated), how similar allegations must be to previous disclosures before triggering the bar, and how much detail a relator must add to qualify as an original source. 1.     The Seventh Circuit Interprets the Public Disclosure Bar and Original Source Standards The Seventh Circuit assessed the as-amended language in Bellevue v. Universal Health Services of Hartgrove, Inc., 867 F.3d 712, 721 (7th Cir. 2017), in which it dismissed claims that the defendant submitted false certifications to the government.  Analyzing both versions of the statute, the Seventh Circuit noted that it was “unclear” whether the amended public disclosure bar remained jurisdictional (like its predecessor), but ultimately declined to reach the issue, choosing instead to apply the jurisdictional bar under the pre-amendment framework because some of the alleged conduct occurred before 2010.  Id. at 717–18.  Turning to the substantive impact of the amendments, the Seventh Circuit explained that the amended version of the statute “expressly incorporates the ‘substantially similar’ standard” previously used by the Seventh and other circuits when assessing whether the current action was “based upon” previous public disclosures.  Id. at 718.  The court also held that the amendment to the “original source” definition was a “clarification rather than a substantive change,” and thus would apply retroactively to conduct occurring before 2010.  Id.  With regard to the disclosure, the court explained that allegations are publicly disclosed for purposes of the bar “when the critical elements exposing the transaction as fraudulent are placed in the public domain.”  Id. (internal citation omitted).  Rejecting the relator’s argument that the prior public disclosure found in audit reports and letters did not reference any knowing misrepresentation of facts, the court clarified that it is enough to be able to “infer, as a direct and logical consequence of the disclosed information,” that a defendant knowingly submitted false claims to the government.  Id. at 718–19 (internal citation omitted).  The court distinguished other case law involving “qualitative judgments” as to appropriate standards of care, for example, and found that the allegations had been publicly disclosed where the “audit report and letters provided a sufficient basis to infer that [the defendant] was presenting false information to the government.”  Id. at 719. In assessing whether the allegations were “substantially similar,” the court listed several factors to consider, including whether a relator alleged “a different kind of deceit,” presented allegations that “required independent investigation and analysis to reveal any fraudulent behavior,” or alleged information involving “an entirely different time period.”  Id. (internal citation omitted).  Ultimately, the court found that the alleged conduct was “based upon” allegations publicly disclosed through the audit report and letters.  Id. at 720. As to whether the relator qualified as an original source, the court applied the as-amended standard, which requires that the relator have knowledge that “is independent of and materially adds to the publicly disclosed allegations or transactions.”  Id. (quoting 31 U.S.C. § 3730(e)(4)(B) (2010)).  The court concluded that the relator had “not ‘materially added’ to the publicly disclosed allegations,” and therefore did not address the question of whether the relator had independent knowledge, indicating a deficiency in either element undermines a relator’s original source status.  Id.  2.     The Fifth Circuit Assesses Pre-Filing Disclosure Requirements Under the Public Disclosure Bar Before a relator brings an FCA claim in the name of the government, the relator must disclose to the government information on which the allegations are based, in order to qualify as an “original source.”  31 U.S.C. § 3730(e)(4)(A).  This is in addition to another pre-filing disclosure requirement found in the FCA.  Id. § 3730(b)(2).  In United States ex rel. King v. Solvay Pharmaceuticals, Inc., 871 F.3d 318 (5th Cir. 2017), the Fifth Circuit clarified that not just any “disclosure” to the government will satisfy the “original source” pre-filing disclosure requirement.  Instead, the disclosure must “suggest an FCA violation” to qualify.  Id. at 327.  Specifically, in affirming dismissal of the action at issue, the Fifth Circuit found that the relators “failed to present any evidence indicating that their pre-suit disclosure connected the knowledge of [the defendant’s] conduct to false claims made to the government.”  Id. at 326.  The court explained that the disclosure “must—at a minimum—connect direct and independent knowledge of information about [the defendant’s] conduct to false claims submitted to the government.”  Id. at 327.  Because the pre-suit disclosure at issue, although providing details regarding alleged FDCA and AKS violations, was “completely devoid of any indication connecting such information with false claims presented to the government,” the court found the disclosure insufficient to satisfy the FCA’s “original source” pre-filing disclosure requirement. 3.     The Sixth Circuit Analyzes How the Public Disclosure Bar May Apply to Allegations of Later Conduct The Sixth Circuit assessed whether a relator’s claims may move forward despite public disclosures of similar conduct if the allegations in the current action pertain to a different time period.  In Ibanez, the court determined that the “common principle” that a “public disclosure occurs when enough information exists in the public domain to expose the fraudulent transaction” survived the amendments to the statute.  874 F.3d at 918.  But the court disagreed with the defendant’s claim that the government’s previous FCA actions and related corporate integrity agreements with the defendant publicly disclosed the allegedly improper promotion of the product at issue.  Id. at 919.  Rather, the Sixth Circuit found that allegations—like those asserted by the relator—”that [a] scheme either continued despite the agreements or was restarted after the agreements”—would not be precluded by the allegations previously disclosed through corporate integrity agreements, even if the present allegations resembled those of the previously resolved scheme.  Id.  The court clarified that this conclusion “may be true only to the extent that the new allegations are temporally distant from the previously resolved conduct.” Id. at 919 n.4. 4.     The Eighth Circuit Interprets the Original Source Standard Interpreting the original source exception under the pre-amendment version of the public disclosure bar, the Eighth Circuit found in In re Baycol Products Litigation, 870 F.3d 960, 962 (8th Cir. 2017), that in some circumstances a relator need not have direct and independent knowledge of a defendant’s allegedly false communications to the government.  The defendant argued that lawsuits, news articles, public filings, and medical literature publicly disclosed the relator’s allegations that the defendant concealed drug risks through its marketing efforts, and that the relator did not qualify as an original source.  Disagreeing with the defendant’s arguments, the court emphasized that a relator need only “possess direct and independent knowledge of the ‘information’ on which her allegations are based, not of the ‘transaction.'”  Id. As such, the court relied upon precedent to explain that the bar does not require a relator to have direct and independent knowledge of “‘all of the vital ingredients to a fraudulent transaction.'”  Id. (quoting United States ex rel. Springfield Terminal Ry. Co. v. Quinn, 14 F.3d 645, 656–57 (D.C. Cir. 1994)).  In light of the statute’s specific wording and the fact that the government “already knows about communications made to [it] by an alleged defrauder,” the court concluded that a relator’s “‘direct and independent knowledge of any essential element of the underlying fraud transaction'” is enough to afford “original-source status under the [FCA].”  Id. (quoting Springfield, 14 F.3d at 657).  The Eighth Circuit ultimately remanded the matter to the district court to determine whether the relator possessed direct and independent knowledge of the “true state of the facts,” specifically whether the defendant had evidence of the inefficacy and risks of the product at issue.  Id. D.     Developments in Application of the First-to-File Bar The FCA’s so-called “first-to-file bar” limits the ability of qui tam relators to bring an action based on facts already at issue in another pending FCA matter.  Specifically, the statute provides that, when a qui tam action is “pending,” “no person other than the Government may intervene or bring a related action based on the [same] facts.”  31 U.S.C. § 3730(b)(5).  In the past six months, the Fourth and D.C. Circuits weighed in on what, if any, impact the resolution of the original action would have on an ongoing suit that otherwise would run afoul of the first-to-file bar, as well as the ability of relators to avoid the first-to-file bar by amending the later-filed complaint. In United States ex rel. Carter v. Halliburton Co., 866 F.3d 199, 203 (4th Cir. 2017), following a complicated procedural history that culminated in an appeal before the Supreme Court, the Fourth Circuit faced both of these questions.  The Fourth Circuit first found the bar applies, even if the earlier-filed action has since been dismissed.  The Court held that the “appropriate reference point for a first-to-file analysis is the set of facts in existence at the time that the FCA action under review is commenced,” and that “[f]acts that may arise after the commencement of a relator’s action, such as the dismissals of earlier-filed, related actions pending at the time the relator brought his or her action, do not factor into this analysis.”  Id. at 207.  Referencing the Supreme Court, which described the first-to-file rule as “one of ‘a number of [FCA] provisions that do require, in express terms, the dismissal of a relator’s action,'” the Fourth Circuit held that it must dismiss the action without prejudice, even though the statute of limitations could prevent the relator from re-filing.  Id. at 209 (quoting State Farm Fire & Cas. Co. v. United States ex rel. Rigsby, 137 S.Ct. 436, 442–43 (2016)).  Next, the Fourth Circuit rejected the argument that a relator could propose amendments to the complaint (to file after the earlier case had been dismissed) and that such would cure the first-to-file bar:  the “proposed amendment simply adds detail to [the relator’s] damages theories,” instead of “address[ing] any matters potentially relevant to the first-to-file rule, such as the dismissals of the [other actions].”  Id. at 210. The D.C. Circuit, in United States ex rel. Shea v. Cellco Partnership, 863 F.3d 923, 930 (D.C. Cir. 2017), came to a similar conclusion.  There, the court held that the relator’s action “was incurably flawed from the moment he filed it,” because the relator’s earlier-filed separate action was still pending at the time.  This was true even though the earlier-filed action was subsequently settled and dismissed.  Id. at 927.  On appeal, a divided panel affirmed, interpreting the bar to apply even when the initial action was no longer pending, since it had been “pending” at the time the second action was actually filed.  Id. at 928.  The D.C. Circuit also agreed with the district court that the relator could not amend his complaint, holding that it could not salvage his claims from the first-to-file bar and that the relator would need to re-file a new action if he wanted to litigate further.  Id. These cases stand in contrast to United States ex rel. Gadbois v. PharMerica Corp., 809 F.3d 1, 6 (1st Cir. 2015), discussed in a previous update, which effectively found a relator could amend his complaint, after a prior case had been dismissed, to avoid the first-to-file bar.  This sets up a potential split of authority that may eventually reach the Supreme Court. E.     The Ninth Circuit Examines the Scope of the Government-Action Bar Although the public disclosure bar and first-to-file bar are more commonly litigated, they are not the only bars that apply in FCA cases.  The related “government-action bar” prohibits a relator from bringing a qui tam suit “based upon allegations or transactions which are the subject of a civil suit . . . in which the Government is already a party.”  31 U.S.C. §3730(e)(3).  In a case of first impression, the Ninth Circuit recently clarified the reach of the government-action bar in a decision with potentially important ramifications for companies facing FCA liability.  United States ex rel. Bennett v. Biotronik, Inc., 876 F.3d 1011 (9th Cir. 2017). The case concerned a relator who tried to bring an FCA suit against a company that had already settled similar allegations with the government in a different suit, brought by a separate relator.  Id. at 1014–15.  The second relator argued that, because the first suit was no longer pending, the government-action bar no longer barred his subsequent suit.  Affirming summary judgment for the defendant company, the Ninth Circuit held “that the government-action bar applies even when the Government is no longer an active participant in an ongoing qui tam lawsuit.”  Id. at 1016.  In so holding, the court rejected arguments that the government was no longer a “party” in a suit it has settled.  Id. at 1019–20. Notably, the court also held that when the government-action bar applies, it applies to all claims that overlap with the earlier-settled suit, regardless of whether those specific claims were part of the government settlement.  In other words, if the government settles a qui tam action, that settlement bars subsequent suits based on any of the theories advanced by the original suit, regardless of whether those specific theories were investigated and included in the settlement.  Id. at 1020–21.  According to the Ninth Circuit, so long as “the Government was made aware of the claims it ultimately chose not to settle,” the government became “a ‘party’ to the suit as a whole,” and the government-action bar therefore likewise applies to the “suit as a whole.”  Id. at 1021. This provides an important point of reference for defendants, particularly those who face repeated FCA actions, to evaluate how earlier FCA actions may affect the viability of new cases.  Based on Bennett, claims that were involved in—but not settled by—government-settled cases may be off limits from further litigation by other relators. F.     The Fifth and Seventh Circuits Explore Causation Under the FCA For years, the Seventh Circuit stood as the sole circuit to apply a “but for” causation standard for damages in FCA cases, allowing plaintiffs to recover for those events that were “but for” caused by the alleged misconduct, even if the alleged misconduct was not a predominant or primary cause of the event at issue.  In Luce, discussed above, the Seventh Circuit finally joined its sister circuits by requiring that plaintiffs also show proximate causation, not just “but for” causation, to establish damages in an FCA matter. The case involved allegations that the defendant “had defrauded the Government by falsely asserting that he had no criminal history so that his company could participate in the FHA’s insurance program.”  873 F.3d at 1000.  The district court, applying the Seventh Circuit’s prior “but for” causation standard, granted summary judgment for the government, finding the defendant could be liable for government-insured loans that later went into default because, without the defendant’s initial alleged false assertion, defendant would not have been able to participate in the program.  The district court found this should be the case, even if the loans went into default for reasons unrelated to the defendant’s actions (such as because of reasons associated with borrower hardship or other borrower-related reasons).  Id.  On appeal, the Seventh Circuit reversed, and reversed its view on causation.  The Seventh Circuit, recognizing the unfair and inappropriate aspects of “but for” causation, found that a plaintiff should have to prove proximate causation, by showing both that the “defendant’s conduct was a material element and a substantial factor in bringing about the injury,” (cause in fact) and that “the injury is of a type that a reasonable person would see as a likely result of his or her conduct” (legal cause).  Id. at 1012 (internal citations and quotations marks omitted).  The Seventh Circuit remanded the case for further proceedings on the issue of proximate causation. Meanwhile, in King, also discussed above, the Fifth Circuit affirmed a grant of summary judgment for a defendant pharmaceutical company based on causation, because the relator failed to show that alleged off-label marketing and kickbacks caused any false claims.  Although there allegedly was evidence that the company discussed off-label uses with physicians and sponsored studies on off-label uses, among other activities, the court held there was insufficient evidence to show that these efforts caused any false claims.  871 F.3d at 330–31.  Likewise, the court held that there was no evidence that the company’s legal payments to physicians for consulting and speaker fees actually caused “those physicians to prescribe to Medicaid patients.”  Id. at 332. Notably, in ruling on the off-label issues, the Fifth Circuit also planted the seed for a more far-reaching defense against off-label promotion claims, at least in Medicaid cases.  According to the Fifth Circuit, because “Medicaid pays for claims without asking whether the drugs were prescribed for off-label uses,” and “given that it is not uncommon for physicians to make off-label prescriptions,” then “it [is] unlikely that prescribing off-label is material to Medicaid’s payment decisions under the FCA.”  Id. at 329 n.9.  Defendants in the Fifth Circuit, and across the country, are sure to push this defense in future Medicaid cases. G.     The Ninth Circuit Declines to Enforce Arbitration Agreement in FCA Case The Ninth Circuit weighed in this year on the relationship between arbitration agreements and the FCA, and in the process provided defendants a guide to what they should—and should not—include in arbitration agreements if they wish for the agreements potentially to cover FCA claims. In United States ex rel. Welch v. My Left Foot Children’s Therapy, LLC, 871 F.3d 791 (9th Cir. 2017), the Ninth Circuit affirmed a district court’s ruling that a relator’s FCA claims were not subject to an arbitration agreement between the relator and her employer.  Although the district court’s decision was based on the broad principle that the arbitration agreement at issue may not apply in an FCA suit, the Ninth Circuit said it was avoiding the “interesting” question of “the enforceability of a relator’s agreement to arbitrate FCA claims,” and instead engaged in an “unremarkable textual analysis” to hold that the plain text of the arbitration agreement at issue did not cover FCA claims.  Id. at 798.  To reach this conclusion, the Ninth Circuit explained that the relator’s FCA claims did not “arise out of” or “relate to” her employment; the claims had “no direct connection with [her] employment because even if [she] ‘had never been employed by defendants, assuming other conditions were met, she would still be able to bring a suit against them for presenting false claims to the government.'”  Id. at 799 (quoting Mikes v. Strauss, 889 F. Supp. 746, 754 (S.D.N.Y. 1995)).  Likewise, the court held that relator’s FCA claims could not be considered claims relator herself “ha[d] against” her employer because “FCA fraud claims always belong to the government.”  Id. at 800. Notably, however, the Ninth Circuit opined that “had the parties wished to agree to arbitrate FCA claims, they were free to draft a broader agreement that covers ‘any lawsuits brought or filed by the employee whatsoever’ or ‘all cases [the employee] brings against [the company], including those brought on behalf of another party.'”  Id. at 800 n.3.  By including this instructional dicta, the Ninth Circuit provided defendants a potential guide on how to structure arbitration provisions. H.     The Eighth and Ninth Circuits Examine Sovereign Immunity and the FCA In two cases dealing with sovereign immunity and the FCA, the Eighth and Ninth Circuits explored when quasi-governmental entities and Indian tribes can be liable under the FCA. First, in United States ex rel. Fields v. Bi-State Development Agency of the Missouri-Illinois Metropolitan District, 872 F.3d 872 (8th Cir. 2017), the Eighth Circuit held that a bi-state transportation agency created by a compact between Illinois and Missouri was not entitled to Eleventh Amendment immunity from suit under the FCA.  Applying a six-factor test for determining the nature of the entity created by state law, the Eighth Circuit affirmed a previous ruling that the transportation agency was “more like a local governmental entity than an arm of Missouri and Illinois,” and therefore could be liable under the FCA.  Id. at 877. Second, in United States ex rel. Cain v. Salish Kootenai College, Inc., 862 F.3d 939 (9th Cir. 2017), the Ninth Circuit held that an Indian tribe is not a “person” for purposes of the FCA, and therefore is immune from FCA liability.  The court analogized the Indian tribe’s sovereign immunity to a state’s sovereignty, which the Supreme Court has previously held exempts states from FCA liability.  Id. at 942.  Because the FCA applies only to “any person” who violates one of its provisions, and a sovereign Indian tribe is not a “person,” the Ninth Circuit affirmed the district court’s dismissal of the case against the Indian tribe (but remanded for further proceedings on whether a college operated by the tribe also had immunity).  Id. at 943. I.     The Sixth Circuit Supports Attorney’s Fees Against DOJ for Inflated FCA Allegations The Sixth Circuit weighed in once more—and perhaps for the final time—on the long-running Circle C Construction litigation, this time to find that the defendants were entitled to attorney’s fees because of the government’s “unreasonable” positions.  United States ex rel. Wall v. Circle C Construction, LLC, 868 F.3d 466 (6th Cir. 2017).  As we discussed in the 2016 Mid-Year Update, the Sixth Circuit previously reversed a $763,000 damages award for false claims allegedly resulting from non-compliance with Davis-Bacon wage requirements, and instead awarded the government $14,478.  United States ex rel. Wall v. Circle C Construction, LLC, 813 F.3d 616 (6th Cir. 2016).  In reversing the damages award, the Sixth Circuit observed that the damages the government sought to recover were “fairyland rather than actual.”  Id. at 618.  Because the government’s theories were so aggressive and “unreasonable,” the Sixth Circuit held in this most recent decision that defendant was entitled to attorney’s fees, representing a significant win against over-aggressive DOJ enforcement of the FCA. VI.     CONCLUSION The FCA continues to be a high-stakes and fast-changing area of law, and we will continue to both monitor and shape developments in the FCA space.  As always, we will report back to you on the latest news mid-year, in early July. [1] See Oversight of the False Claims Act:  Hearing Before the Subcomm. on the Constitution and Civil Justice of the Comm. on the Judiciary, House of Rep., 114th Cong. 72 (2016), https://judiciary.house.gov/wp-content/uploads/2016/04/114-72_99945.pdf. [2] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Justice Department Recovers Over $3.7 Billion From False Claims Act Cases in Fiscal Year 2017 (Dec. 21, 2017), https://www.justice.gov/opa/pr/justice-department-recovers-over-37-billion-false-claims-act-cases-fiscal-year-2017 [hereinafter DOJ FY 2017 Recoveries Press Release]. [3] See Fraud Statistics Overview (Dec. 21, 2017), https://www.justice.gov/opa/press-release/file/1020126/download [hereinafter DOJ FY 2017 Stats]. [4] That amount was originally reported as over $1.1 billion, see Fraud Statistics Overview (Nov. 23, 2015), http://www.justice.gov/opa/file/796866/download, but has since been revised to $512 million, see DOJ FY 2017 Stats. [5] 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. [6] Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Attorney General Jeff Sessions Delivers Remarks at Press Conference Announcing 2017 Health Care Fraud Takedown (July 13, 2017), https://www.justice.gov/opa/speech/attorney-general-jeff-sessions-delivers-remarks-press-conference-announcing-2017-health. [7] The Future of Housing in America: Oversight of the Department of Housing and Urban Development (Oct. 12, 2017), https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=402415 at 3:12:40. [8] Daniel Wilson, DOJ Denies Claims of Change to FCA Dismissal Policy, (Nov. 17, 2017), https://www.law360.com/articles/986650/doj-denies-claims-of-change-to-fca-dismissal-policy. [9] Id. [10] Sue Reisinger and Kristen Rasmussen, As Priorities Shift at DOJ, Health Care Corporate Fraud Strike Force Gutted (July 10, 2017), The National Law Journal, https://www.law.com/nationallawjournal/almID/1202792591440/. [11] Id. [12] See DOJ FY 2017 Recoveries Press Release. [13] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Mylan Agrees to Pay $465 Million to Resolve False Claims Act Liability for Underpaying EpiPen Rebates (Aug. 17, 2017), https://www.justice.gov/opa/pr/mylan-agrees-pay-465-million-resolve-false-claims-act-liability-underpaying-epipen-rebates. [14] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Electronic Health Records Vendor to Pay $155 Million to Settle False Claims Act Allegations (May 31, 2017), https://www.justice.gov/opa/pr/electronic-health-records-vendor-pay-155-million-settle-false-claims-act-allegations. [15] See U.S. Dep’t of Health & Human Services, Office of Inspector Gen., Semiannual Report to Congress (October 1, 2016 – March 31, 2017) at 15, https://oig.hhs.gov/reports-and-publications/archives/semiannual/2017/sar-spring-2017.pdf. [16] See U.S. Dep’t of Health & Human Services, Office of Inspector Gen., Semiannual Report to Congress (October 1, 2015 – March 31, 2016) at 12, https://oig.hhs.gov/reports-and-publications/archives/semiannual/2016/SAR_Spring_2016.pdf. [17] See 42 U.S.C. § 1320a-7b. [18] See 42 U.S.C. § 1395nn. [19] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Shire PLC Subsidiaries to Pay $350 Million to Settle False Claims Act Allegations (Jan. 11, 2017), https://www.justice.gov/opa/pr/shire-plc-subsidiaries-pay-350-million-settle-false-claims-act-allegations. [20] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Healthcare Service Provider to Pay $60 Million to Settle Medicare and Medicaid False Claims Act Allegations (Feb. 6, 2017), https://www.justice.gov/opa/pr/healthcare-service-provider-pay-60-million-settle-medicare-and-medicaid-false-claims-act. [21] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Missouri Hospitals Agree to Pay United States $34 Million to Settle Alleged False Claims Act Violations Arising from Improper Payments to Oncologists (May 18, 2017), https://www.justice.gov/opa/pr/missouri-hospitals-agree-pay-united-states-34-million-settle-alleged-false-claims-act. [22] See DOJ FY 2017 Recoveries Press Release, supra note 2. [23] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, CA Inc. to Pay $45 Million for Alleged False Claims on Government-Wide Information Technology Contract (Mar. 10, 2017), https://www.justice.gov/opa/pr/ca-inc-pay-45-million-alleged-false-claims-government-wide-information-technology-contract. [24] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Import Merchandising Concepts L.P. and Two Individuals Agree to Pay $275,000 to Settle False Claims Act Liability for Evading Customs Duties (May 1, 2017), https://www.justice.gov/opa/pr/import-merchandising-concepts-lp-and-two-individuals-agree-pay-275000-settle-false-claims-act. [25] See DOJ FY 2017 Recoveries Press Release, supra note 2. [26] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, PHH Agrees to Pay Over $74 Million to Resolve Alleged False Claims Act Liability Arising from Mortgage Lending (Aug. 8, 2017), https://www.justice.gov/opa/pr/phh-agrees-pay-over-74-million-resolve-alleged-false-claims-act-liability-arising-mortgage. [27] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Three Companies and Their Executives Pay $19.5 Million to Resolve False Claims Act Allegations Pertaining to Rehabilitation Therapy and Hospice Services (July 17, 2017), https://www.justice.gov/opa/pr/three-companies-and-their-executives-pay-195-million-resolve-false-claims-act-allegations. [28] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Mylan Agrees to Pay $465 Million to Resolve False Claims Act Liability for Underpaying EpiPen Rebates (Aug. 17, 2017), https://www.justice.gov/opa/pr/mylan-agrees-pay-465-million-resolve-false-claims-act-liability-underpaying-epipen-rebates. [29] See Press Release, U.S. Atty’s Office for the Dist. of Minn., U.S. Dep’t of Justice, United States Recovers More Than $12 Million in False Claims Act Settlements for Alleged Kickback Scheme (Aug. 21, 2017), https://www.justice.gov/usao-mn/pr/united-states-recovers-more-12-million-false-claims-act-settlements-alleged-kickback. [30] See Press Release, U.S. Atty’s Office for the Eastern Dist. of Cal., U.S. Dep’t of Justice, Action for Defrauding a Program for Individuals with Developmental Disabilities Settles for Approximately $2 M (Aug. 28, 2017), https://www.justice.gov/usao-edca/pr/action-defrauding-program-individuals-developmental-disabilities-settles-approximately. [31] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, CHRISTUS St. Vincent Regional Medical Center and CHRISTUS Health to Pay $12.24 Million to Settle Medicaid False Claims Act Allegations (Sept. 1, 2017), https://www.justice.gov/opa/pr/christus-st-vincent-regional-medical-center-and-christus-health-pay-1224-million-settle. [32] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Novo Nordisk Agrees to Pay $58 Million for Failure to Comply with FDA-Mandated Risk Program (Sept. 5, 2017), https://www.justice.gov/opa/pr/novo-nordisk-agrees-pay-58-million-failure-comply-fda-mandated-risk-program. [33] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Galena Biopharma Inc. to Pay More Than $7.55 Million to Resolve Alleged False Claims Related to Opioid Drug (Sept. 8, 2017), https://www.justice.gov/opa/pr/galena-biopharma-inc-pay-more-755-million-resolve-alleged-false-claims-related-opioid-drug. [34] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, South Carolina Family Practice Chain, Its Co-Owner, and Its Laboratory Director Agree to Pay the United States $2 Million to Settle Alleged False Claims Act Violations for Illegal Medicare Referrals and Billing Unnecessary Medical Services (Sept. 11, 2017), https://www.justice.gov/opa/pr/south-carolina-family-practice-chain-its-co-owner-and-its-laboratory-director-agree-pay. [35] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, New York Hospital Operator Agrees to Pay $4 Million to Settle Alleged False Claims Act Violations Arising from Improper Payments to Physicians (Sept. 13, 2017), https://www.justice.gov/opa/pr/new-york-hospital-operator-agrees-pay-4-million-settle-alleged-false-claims-act-violations. [36] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Alaska Department of Health and Social Services to Pay Nearly $2.5 Million to Resolve Alleged False Claims for SNAP Funds (Sept. 18, 2017), https://www.justice.gov/opa/pr/alaska-department-health-and-social-services-pay-nearly-25-million-resolve-alleged-false. [37] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Drug Maker Aegerion Agrees to Plead Guilty; Will Pay More Than $35 Million to Resolve Criminal Charges and Civil False Claims Allegations (Sept. 22, 2017), https://www.justice.gov/opa/pr/drug-maker-aegerion-agrees-plead-guilty-will-pay-more-35-million-resolve-criminal-charges-and. [38] See Press Release, U.S. Atty’s Office for the Dist. of S.C., U.S. Dep’t of Justice, AnMed Health Agrees to Pay $7 Million to Settle False Claims Act Allegations (Sept. 27, 2017), https://www.justice.gov/usao-sc/pr/anmed-health-agrees-pay-7-million-settle-false-claims-act-allegations. [39] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Huntsville Nursing Home Pays the United States and the State of Texas $5 million to Settle Claims Alleging Poor Quality of Care (Oct. 19, 2017), https://www.justice.gov/usao-sdtx/pr/huntsville-nursing-home-pays-united-states-and-state-texas-5-million-settle-claims. [40] See Press Release, U.S. Atty’s Office for the Western Dist. of N.Y., U.S. Dep’t of Justice, Catholic Health to Pay $6,000,000 to Settle False Claims Act Allegations (Oct. 27, 2017), https://www.justice.gov/usao-wdny/pr/catholic-health-pay-6000000-settle-false-claims-act-allegations. [41] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Chemed Corp. and Vitas Hospice Services Agree to Pay $75 Million to Resolve False Claims Act Allegations Relating to Billing for Ineligible Patients and Inflated Levels of Care (Oct. 30, 2017), https://www.justice.gov/opa/pr/chemed-corp-and-vitas-hospice-services-agree-pay-75-million-resolve-false-claims-act. [42] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Dallas-Based Physician-Owned Hospital to Pay $7.5 Million to Settle Allegations of Paying Kickbacks to Physicians in Exchange for Surgical Referrals (Dec. 1, 2017), https://www.justice.gov/opa/pr/dallas-based-physician-owned-hospital-pay-75-million-settle-allegations-paying-kickbacks. [43] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, 21st Century Oncology to Pay $26 Million to Settle False Claims Act Allegations (Dec. 12, 2017), https://www.justice.gov/opa/pr/21st-century-oncology-pay-26-million-settle-false-claims-act-allegations. [45] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Drug Maker United Therapeutics Agrees to Pay $210 Million to Resolve False Claims Act Liability for Paying Kickbacks (Dec. 20, 2017), https://www.justice.gov/opa/pr/drug-maker-united-therapeutics-agrees-pay-210-million-resolve-false-claims-act-liability. [46] See Press Release, U.S. Atty’s Office for the Middle Dist. of Fla., U.S. Dep’t of Justice, United States Settles False Claims Allegations Against Haven Hospice For More Than $5 Million (Dec. 21, 2017), https://www.justice.gov/usao-mdfl/pr/united-states-settles-false-claims-allegations-against-haven-hospice-more-5-million. [47] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Kmart Corporation to Pay U.S. $32.3 Million to Resolve False Claims Act Allegations for Overbilling Federal Health Programs for Generic Prescription Drugs (Dec. 22, 2017), https://www.justice.gov/opa/pr/kmart-corporation-pay-us-323-million-resolve-false-claims-act-allegations-overbilling-federal. [48] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Defense Contractor ADS Inc. Agrees to Pay $16 Million to Settle False Claims Act Allegations (Aug. 10, 2017), https://www.justice.gov/usao-dc/pr/defense-contractor-ads-inc-agrees-pay-16-million-settle-false-claims-act-allegations. [49] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Defense Contractor Agrees to Pay $9.2 Million to Settle False Billing Allegations (Aug. 15, 2017), https://www.justice.gov/opa/pr/defense-contractor-agrees-pay-92-million-settle-false-billing-allegations. [50] See Press Release, U.S. Atty’s Office for the Dist. of Columbia, U.S. Dep’t of Justice, Pacific Architects and Engineers, LLC to Pay $5 Million in False Claims Act Settlement (Sept. 13, 2017), https://www.justice.gov/usao-dc/pr/pacific-architects-and-engineers-llc-pay-5-million-false-claims-act-settlement. [51] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Western New York Contractors and Two Owners to Pay More Than $3 Million to Settle False Claims Act Allegations (Oct. 3, 2017), https://www.justice.gov/opa/pr/western-new-york-contractors-and-two-owners-pay-more-3-million-settle-false-claims-act. [52] See Press Release, U.S. Atty’s Office for the Eastern Dist. of Va., U.S. Dep’t of Justice, Government Contractor Pays $2.6M to Settle False Claims Act Suit (Oct. 16, 2017), https://www.justice.gov/usao-edva/pr/government-contractor-pays-26m-settle-false-claims-act-suit. [53] See Press Release, U.S. Atty’s Office for the Middle Dist. of Ga., U.S. Dep’t of Justice, Mercer Transportation Company Agrees to Pay $4.4 Million to Resolve Alleged Violations of the False Claims Act (Nov. 8, 2017), https://www.justice.gov/usao-mdga/pr/mercer-transportation-company-agrees-pay-44-million-resolve-alleged-violations-false. [54] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, PHH Agrees to Pay Over $74 Million to Resolve Alleged False Claims Act Liability Arising from Mortgage Lending (Aug. 8, 2017), https://www.justice.gov/opa/pr/phh-agrees-pay-over-74-million-resolve-alleged-false-claims-act-liability-arising-mortgage. [55] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, IBERIABANK Agrees to Pay Over $11.6 Million to Resolve Alleged False Claims Act Liability for Submitting False Claims for Loan Guarantees (Dec. 8, 2017), https://www.justice.gov/opa/pr/iberiabank-agrees-pay-over-116-million-resolve-alleged-false-claims-act-liability-submitting. [56] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, SolarCity Agrees to Resolve Alleged False Claims Act Violations Arising From Renewable Energy Grant Claims to Treasury (Sept. 22, 2017), https://www.justice.gov/opa/pr/solarcity-agrees-resolve-alleged-false-claims-act-violations-arising-renewable-energy-grant. [57] See Office of Pub. Affairs, U.S. Dep’t of Justice, Citation Companies Agree to Pay $2.25 Million to Settle Civil False Claims Act Allegations (Dec. 19, 2017), https://www.justice.gov/opa/pr/citation-companies-agree-pay-225-million-settle-civil-false-claims-act-allegations. [58] See Press Release, U.S. Atty’s Office for the Southern Dist. of N.Y., U.S. Dep’t of Justice, Acting Manhattan U.S. Attorney Announces Award of $296 Million Judgment Against Allied Home Mortgage Entities For Civil Mortgage Fraud (Sept. 19, 2017), https://www.justice.gov/usao-sdny/pr/acting-manhattan-us-attorney-announces-award-296-million-judgment-against-allied-home. [59] See Clarification of When Products Made or Derived From Tobacco Are Regulated as Drugs, Devices, or Combination Products; Amendments to Regulations Regarding “Intended Uses,” 82 Fed. Reg. 2193 (Jan. 9, 2017), https://www.gpo.gov/fdsys/pkg/FR-2017-01-09/pdf/2016-31950.pdf. [60] See Petition Interim Response from FDA OP to MIWG (Aug. 1, 2017), available in Docket Nos. FDA-2011-P-0512, FDA-2013-P-1079, FDA-2015-N-2002, and FDA-2016-N-1149 at https://www.regulations.gov [hereinafter FDA Interim Response]. [61] See Petition to Stay and for Reconsideration, Ropes & Gray and Sidley Austin LLP on behalf of the Medical Information Working Group, the Pharmaceutical Research and Manufacturers of America, and the Biotechnology Innovation Organization (Feb. 8, 2017), available in Docket Nos. FDA-2011-P-0512, FDA-2013-P-1079, FDA-2015-N-2002, and FDA-2016-N-1149 at https://www.regulations.gov. [62] See FDA Interim Response, supra note 60. [63] S.B. 387, 2017-2018 Reg. Sess. (Cal. 2017), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB387. [64] S.B. 1577, 100th Gen. Assembly (Ill. 2017),  http://www.ilga.gov/legislation/billstatus.asp?DocNum=1577&GAID=14&GA=100&DocTypeID=SB&LegID=104225&SessionID=91. [65] S.B. 0669, 2017 Reg. Sess. (Mich. 2017), http://legislature.mi.gov/doc.aspx?2017-SB-0669. [66] A.B. A7989, 2017-2018 Leg. Sess. (N.Y. 2017), https://www.nysenate.gov/legislation/bills/2017/a7989; S.B. 378, 2017-2018 Reg. Sess. (N.C. 2017), https://legiscan.com/NC/bill/S378/2017. [67] S.B. 85, 2017 Reg. Sess. (Ala. 2017), https://legiscan.com/AL/bill/SB85/2017. [68] S.B. 216, 2016 Reg. Sess. (Ala. 2016), https://legiscan.com/AL/bill/SB216/2016. [69] S.P.B. 7006, 2017 Reg. Sess. (Fla. 2017), https://www.flsenate.gov/Session/Bill/2018/7006/ByVersion. [70] S.B. 564, 91st Gen. Assembly (Ark. 2017), https://legiscan.com/AR/bill/SB564/2017. [71] S.B. 0065, 2017 Reg. Sess. (Mich. 2017), http://legislature.mi.gov/doc.aspx?2017-SB-0065. [72] See Mich. Comp. Laws § 400.607 (2009). [73] 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. [74] H.B. 1174, 2017 Leg. Sess. (N.D. 2017), http://www.legis.nd.gov/assembly/65-2017/bill-actions/ba1174.html. The following Gibson Dunn lawyers assisted in preparing this client update: F. Joseph Warin, Stephen Payne, Robert Blume, Timothy Hatch, Alexander Southwell, Charles Stevens, Joseph West, Benjamin Wagner, Stuart Delery, Winston Chan, Andrew Tulumello, Karen Manos, Monica Loseman, Robert Walters, Reed Brodsky, John Partridge, James Zelenay, Jonathan Phillips, Ryan Bergsieker, Jeremy Ochsenbein, Sean Twomey, Reid Rector, Allison Chapin, Justin Epner, Chelsea Ferguson, Ian Sprague, and Harper Gernet-Girard. Gibson Dunn’s lawyers have handled hundreds of FCA investigations and have a long track record of litigation success.  Among other significant victories, Gibson Dunn successfully argued the landmark Allison Engine case in the Supreme Court, a unanimous decision that prompted Congressional action.  See Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008).  Our win rate and immersion in FCA issues gives us the ability to frame strategies to quickly dispose of FCA cases.  The firm has more than 30 attorneys with substantive FCA expertise and more than 30 former 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) Caroline Krass (+1 202-887-3784, ckrass@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) © 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.

January 4, 2018 |
2017 Year-End Update on Corporate Non-Prosecution Agreements (NPAs) and Deferred Prosecution Agreements (DPAs)

Click for PDF Only two years removed from the height of corporate non-prosecution agreement (“NPA”) and deferred prosecution agreement (“DPA”) use by U.S. enforcement agencies,[1] 2017 saw their usage decline to the lowest levels in recent history, with statistics mirroring those at the peak of the global economic recession toward the end of the last decade.  Rather than a shift in enforcement policy, however, we continue to believe that this is largely a sign—as it was in 2009—of a new administration in transition and the cyclic nature of prosecution.  The U.S. government signaled repeatedly in 2017 that NPAs and DPAs remain favored tools for resolving complex corporate enforcement matters in the United States.  The global trend toward adoption of similar DPA regimes also continues apace. This client alert, our nineteenth semiannual update on NPAs and DPAs (1) analyzes NPAs and DPAs of 2017 and compares these to prior years’ statistics and practices; (2) spotlights a particularly interesting NPA with the National Security Division of the U.S. Department of Justice (“DOJ”); (3) discusses changes in white collar enforcement priorities and their likely impacts on NPAs and DPAs; (4) highlights recent developments in court preservation of corporate monitor report privacy; and (5) provides updates regarding DPA developments across the globe, including in the United Kingdom, France, and Canada. NPAs and DPAs in 2017 In 2017, DOJ entered into 22 NPAs and DPAs, and the U.S. Securities and Exchange Commission (“SEC”) entered into none.  The overall trend of NPA and DPA resolutions reflects the episodic nature of enforcement.  2017 saw the lowest levels of corporate NPA and DPA use since 2009, when we recorded 22 publicly released NPAs and DPAs with U.S. enforcement agencies.  This figure, however, does not necessarily signal changing enforcement priorities; in our experience, the dedicated investigation and trial attorneys of DOJ and the SEC have continued to zealously investigate alleged corporate offenses, and none have signaled a move away from NPAs and DPAs as available resolution vehicles.  To the contrary, this year’s NPAs and DPAs—particularly the resolution with Netcracker Technology Corp. (“NTC”), discussed in the sections that follow—indicated a continued willingness by DOJ to use these tools creatively to develop nuanced resolutions for corporate enforcement actions. 2017 continued to see these resolution vehicles proliferate throughout the United States, from West Virginia to Utah, and for crimes as varied as obstructing the Internal Revenue Service to Federal Food, Drug, and Cosmetic Act violations. Chart 1 below shows all known corporate NPAs and DPAs since 2000.[2] Of this year’s 22 NPAs and DPAs, 11 are NPAs and 11 are DPAs.  DOJ’s Fraud Section, which entered into six of the agreements, including several of the highest-penalty agreements, entered into one publicly available NPA in 2017.  This is particularly notable in light of the Fraud Section’s recent emphasis on declinations in the Foreign Corrupt Practices Act (“FCPA”) context for companies meeting certain disclosure, cooperation, and remediation criteria set forth in the Fraud Section’s FCPA Enforcement Plan and Guidance Pilot Program of April 5, 2016 (the “Pilot Program”).[3]  As discussed further below, DOJ has recently highlighted the successes of the Pilot Program—which was enhanced and made permanent this year[4]—in securing declinations for companies in 2017;[5] it is possible that certain companies that previously would have received NPAs are benefitting from the FCPA Enforcement Plan and Guidance and instead receiving declinations, or declinations-plus-disgorgement letters (discussed at length in our 2016 Year-End and 2017 Mid-Year Updates).  In 2016, by way of comparison, when implementation of the FCPA Enforcement Plan and Guidance was in its infancy, the Fraud Section entered into nine NPAs and DPAs, of which three were NPAs.[6]  We note that the tremendous overall spike in 2015 is attributable to the DOJ Tax Division’s Program for NPAs or “Non-Target Letters” for Swiss Banks, discussed in our 2015 Mid-Year and Year-End Updates, which invited banks to self-disclose tax-related conduct (and pay associated penalties) in exchange for NPAs. Chart 2 below illustrates the total monetary recoveries related to NPAs and DPAs from 2000 through 2017.  Consistent with the lower overall yield of NPAs and DPAs, 2017’s recoveries were lower than in recent years, netting approximately $2.7 billion. The Netcracker Technology Corp. NPA One agreement in particular, DOJ’s National Security Division’s NPA with global software company NTC,[7] is an especially interesting example of how NPAs and DPAs may be tailored creatively to resolve government investigations into corporate conduct.  NTC is a Massachusetts-based subsidiary of NEC Corporation.[8]  To resolve allegations relating to security measures implemented by NTC in connection with two projects for the Defense Information Systems Agency, the National Security Division imposed unique penalties and terms—and included similarly unique “carrot” provisions—in the NTC NPA to help ensure NTC’s compliance. First, and most strikingly, the NTC agreement contained an express disavowal of guilt by NTC; the statement of facts appended to the NPA stated that “[a]lthough NTC denie[d] that it engaged in any criminal wrongdoing,” NTC agreed to the statement of facts “in the interest of reaching a mutual agreement to resolve the investigation and enhance U.S. national security.”[9]  This is highly unusual, but is bolstered by another example from the Middle District of Pennsylvania.  The U.S. Attorney’s Office for the Middle District of Pennsylvania’s NPAs with Breakthru Beverage Pennsylvania; Southern Glazer’s Wine and Spirits of Pennsylvania, LLC; White Rock Distilleries, Inc.; and Pio Imports, LLC, which involved alleged bribery of public officials, similarly included disavowals of criminal liability by these companies.[10]  These NPAs also, however, included statements to the effect that senior supervisors, senior officials, and/or employees of the Company “provided and were aware that [the Company] was engaged in a practice of providing things of value to [Pennsylvania Liquor Control Board] decision makers who were involved in making decisions beneficial to the Company,”[11] and separate acknowledgements that “the USAO-MDPA believes that the facts described in the Statement of Facts establish a pattern of gratuities to public officials which, if given in quid pro quo exchange for official decisions, would constitute violations of federal law . . . .”[12] Most NPAs and DPAs require a clear acknowledgement by the company that the statement of facts is “true and accurate,” and that the company bears responsibility for the actions of officers, directors, employees and agents acting on its behalf.  For example, the Los Vegas Sands Corp. NPA, executed in January 2017, provided that “The Company admits, accepts, and acknowledges that it is responsible for the acts of its then-officers, directors, employees, and agents as set forth in the Statement of Facts and incorporated by reference into this Agreement, and that the facts described in the Statement of Facts are true and accurate.”[13] Second, given the nature of the allegations at issue, rather than including lengthy provisions relating to NTC’s corporate compliance program—a common feature of NPAs and DPAs—the NTC NPA attached a detailed “Enhanced Security Plan for U.S.-Based Customers’ Domestic Communications Infrastructure” that set forth requirements for the following:  (1) the designation of a Security Director; (2) the development of a Security Policy implementing certain minimum conditions; (3) implementation of specific code security, data transfer, and U.S.-based infrastructure security requirements; and (4) retention of a third-party auditor to monitor compliance with the plan.[14]  In exchange for NTC’s “voluntary” agreement to abide by the plan, which the National Security Division called “a model for the kind of security that U.S. critical infrastructure should expect from the firms they use to develop, install, and maintain technology in their networks,”[15]  DOJ agreed not to prosecute NTC or any of its present or former employees or officers relating to any allegation investigated by DOJ in connection with the allegations.[16]  This provision is unusual, as NPAs and DPAs often expressly state that they do not immunize individual employees or officers against future prosecution.  The Telia Company AB DPA, for example, executed in September 2017, stated “this Agreement does not provide any protection against prosecution of any individuals, regardless of their affiliation with the Company.”[17]  The NTC NPA provision also goes beyond typical NPA language, which usually focuses on the instant resolution, in that it explicitly claims to “advance[] industry best practices” and offers broad guidance to other organizations about securing their technological infrastructure.[18] Third, DOJ agreed not to impose any penalties upon NTC, unless NTC did not comply with the terms of the plan or the NPA, in which case NTC would be assessed liquidated damages totaling $35 million.[19]  Zero penalties and liquidated damages provisions also are highly unusual; most NPAs and DPAs impose criminal penalties, and do not condition the payment of penalties on potential breach of the agreement.  The Aegerion Pharmaceuticals Inc. DPA, also signed this year, similarly included a term providing for a “monetary payment of up to $15,000 per day for each day Aegerion is in breach” of the DPA, as an “alternative to instituting a prosecution . . . .”[20] Fourth, contrary to DOJ’s standard practice of reserving exclusive authority to find a material breach, the NTC NPA also built in a third-party arbitration provision, providing a check on any finding of material breach by DOJ.[21]  Although the NPA included a standard provision that DOJ would “determine, in [its] sole discretion, whether NTC has materially breached [the NPA],” it also provided for a third-party arbiter to decide whether DOJ had proven by a preponderance of the evidence that (1) its finding of breach was supported by the evidence, and (2) the breach was material, before liquidated damages could be assessed.[22]  In contrast, a typical breach provision includes only the reservation of sole discretion quoted above, without any arbitration option.[23]  This provision is particularly interesting in light of the ongoing debate about the government’s use of NPAs and DPAs and whether they represent an unlawful expansion of prosecutorial power.  One element of U.S.-style NPAs and DPAs that detractors sometimes point to is the authority reserved by prosecutors to find breach.[24]  The United Kingdom, for example, resolved this question in connection with its own DPA program by requiring the judiciary to determine whether a company has breached its agreement.[25]  The middle road taken by the NTC agreement, between exclusive DOJ authority and judicial oversight, may reflect an effort to address this concern. As we have indicated in earlier alerts, we believe that current NPA and DPA practices in the United States strike the appropriate balance between DOJ and judicial authority.  In particular, they provide prosecutors with necessary discretion to consider mitigating factors when fashioning a resolution to achieve a more just and tailored result.  More specifically, NPAs and DPAs allow companies to acknowledge employee wrongdoing and missteps, and prosecutors to create a remedy precisely tailored to the particular circumstances of a given case, without the disproportionate consequences that can accompany a guilty plea, like debarment, devastating reputational damage, and untrammeled collateral application in other litigation.[26]  NPAs and DPAs allow DOJ to target specific conduct without undue negative impacts to otherwise upstanding corporate citizens and their employees, shareholders, and communities.  Furthermore, such discretion allows prosecutors to consider factors that the Sentencing Guidelines do not necessarily consider but that are nonetheless relevant, like fines paid by a company to a foreign jurisdiction in a parallel enforcement proceeding.  It is worth noting that prosecutorial discretion plays a critical role in DOJ’s decisions to address potential wrongdoing even outside of the NPA/DPA context, as prosecutors must decide whether to prosecute a company at all.  Finally, while NPAs and DPAs offer additional flexibility that is not generally available in a traditional prosecution, this does not mean they are necessarily lenient.  Indeed,  NPAs and DPAs often impose substantial fines that materially impact a company’s bottom line, while also frequently imposing tough terms spanning multiple years that require ongoing reporting and widespread corporate reform. Legislative and DOJ Enforcement Developments Impacting NPAs and DPAs As noted above, although U.S. authorities continue to bring enforcement actions against corporations with the same vigor as before, prosecutors have only expanded the available options for corporate resolutions, and have particularly emphasized the value of declinations in cases where companies meet prescribed disclosure, cooperation, and remediation criteria.  Most notably, in November 2017, Deputy Attorney General Rod Rosenstein announced a new policy creating a presumption that companies will receive a declination for FCPA misconduct if they satisfy certain standards, including self-disclosure, full cooperation, and timely remediation.[27]  A detailed synopsis and analysis of the new policy can be found in our Year-End 2017 FCPA Update. Although the policy builds upon the Pilot Program’s contours, the new policy significantly enhances the status of declinations.  The Pilot Program merely committed to considering a declination for companies that disclosed FCPA offenses, whereas the new policy introduces a “presumption” of declination that is rebutted only by “aggravating circumstances.”[28]  Announcing the new policy on November 29, 2017, Rosenstein touted the Pilot Program’s success, noting that seven matters had resulted in declinations as a result of self-disclosures since the Pilot Program commenced.[29]  Four of these seven declinations featured additional terms, including disgorgement, not typically seen in traditional Fraud Section declination letters.[30]  The new “declination with disgorgement” letters (also termed “letter agreements”) blur the line between traditional declinations and NPAs by, among other things, requiring payment; imposing continuing cooperation and compliance requirements; and reserving DOJ’s right to reopen investigations if the recipient companies fail to comply with the declination terms.  If successful, the new policy should further incentivize companies to cooperate with DOJ and potentially increase the number of FCPA matters that result in declinations rather than NPAs or DPAs. Another factor that may impact the use of NPAs and DPAs is H.R. 732, entitled “Stop Settlement Slush Funds Act,” which was passed by the U.S. House of Representatives on October 24, 2017.[31]  Congress rarely engages directly with NPAs and DPAs, instead leaving their use and interpretation to the executive and the judicial branches of government.  However, this bill, if passed by the full U.S. Congress and signed by the President, would operate to prohibit government officials from entering into or enforcing settlement agreements—expressly including NPAs and DPAs—providing for “payment[s] or loan[s] to any person or entity other than the United States.”[32]  The primary purpose of this bill appears to be to prevent mandatory donation provisions that (1) reinstate funding that Congress has already explicitly cut, (2) usurp Congress’s authority to decide funding priorities, and (3) circumvent grant oversight.[33]  The bill as currently drafted also could also jeopardize the use of offsets and credits, which are an important and growing feature of NPAs and DPAs, particularly in an enforcement landscape in which global coordinated resolutions are becoming more common. Through offsets, corporations may receive credit for parallel resolutions with foreign regulators related to the same underlying conduct.  For example, the DPA that DOJ reached in 2017 with Telia Company AB required the company to pay $548.6 million in criminal penalties to the U.S. Treasury, of which $274 million could be offset by any criminal penalties paid to enforcement authorities in the Netherlands in connection with a parallel enforcement action by the Netherlands against several Telia Company AB subsidiaries.[34]  This type of provision could be considered a form of “payment or loan to [a] person or entity other than the United States” in violation of the statute because, absent the monetary credit given to the defendant, the full resolution proceeds would presumably have gone to the U.S. Treasury.  Notably, as the legislation is currently drafted, the government may argue that these offsets are permissible under an exception allowing payments to foreign entities that provide “restitution for or otherwise directly remed[y] actual harm” caused by the party making the payment.[35]  If used, however, this exception would require the federal agency entering into the resolution to report annually for seven years to the Congressional Budget Office about the parties, funding sources, and distribution of funds for the related agreements.[36] The legislative history of H.R. 732 does not indicate that the House has directly engaged with the question of how this legislation might impact foreign resolution offsets, but it does reflect DOJ’s “strenuous opposition” to a “substantively identical version” of the bill in 2016, on the basis that the bill would “unwisely constrain the government’s settlement authority and preclude many permissible settlements that would advance the public interest” and interfere with DOJ’s ability to address, remedy, and deter systemic harm caused by unlawful conduct.[37]  We agree.  Any impairment of DOJ’s ability to fashion fair and measured penalties for alleged misconduct, including the ability to account for  payments to foreign governments for the same conduct, would run contrary to global law enforcement cooperation. Updates in Corporate Monitorship Report Disclosures Over the past three years we have followed developments in the court battle over disclosure of the HSBC independent monitor report.  In our 2015 Mid-Year Update, we reported that Judge John Gleeson of the Eastern District of New York issued an order on April 28, 2015, instructing the government to file with the court the complete “First Annual Follow-Up Review” drafted by HSBC’s appointed compliance monitor;[38] the government filed the report under seal on June 1, 2015.[39]  As discussed in our 2016 Mid-Year Update and 2016 Year-End Update, a private citizen requested access to the report after initiating a dispute with HSBC, and on January 28, 2016, Judge Gleeson decided that the report was a “judicial record” to which the public maintained a qualified First Amendment right of access.[40]  After receiving proposed redactions from the government and HSBC, Judge Gleeson issued a ruling on March 9, 2016, ordering redactions of portions of the report in preparation for public disclosure, but further ordering that it remain under seal pending appellate review.[41]  Both the government and HSBC appealed the order. On July 12, 2017, the Second Circuit blocked the release of the monitor report.  The court concluded that the monitor report was not a “judicial document” because it was “not now relevant to the performance of a judicial function.”[42]  As a result, the court held that the district court abused its discretion in ordering that the report be unsealed.[43]  The Second Circuit addressed the four grounds on which the intervening appellee and his amici argued that the report was relevant to the performance of a judicial function. First, the court rebuffed the contention that the report was relevant to the district court’s supervisory authority to oversee the DPA.  The court opined that by invoking its supervisory power sua sponte in this context, the district court ran afoul of the separation of powers.[44]  In particular, the district court ignored the presumption of regularity, a doctrine that requires courts to give deference to prosecutors in the absence of clear evidence to the contrary.[45]  The Second Circuit stated that, absent extraordinary circumstances, a district court’s role regarding DPAs is “limited to arraigning the defendant, granting a speedy trial waiver . . . and adjudicating motions or disputes as they arise.”[46] Second, the court rejected the contention that the report was relevant to the district court’s authority to approve the DPA under the Speedy Trial Act.  The Second Circuit agreed with the D.C. Circuit, which had previously held that the Speedy Trial Act did not grant the judiciary the power to second-guess DOJ’s exercise of discretion in making charging decisions.[47]  The Second Circuit reasoned that if Congress wanted to reallocate historical powers among the branches of government, it would have done so clearly; as a result, the court declined to interpret vague language in the Speedy Trial Act to endow the courts with broad oversight power related to DPAs.[48] The court addressed the third and fourth contentions together, rejecting the notion that the report was relevant to either the assessment of a Rule 48(a) motion to dismiss at the conclusion of the DPA’s term, or the adjudication of proceedings regarding any alleged breach of the DPA.  The court emphasized that the report’s potential future relevance was insufficient to render it a judicial document at present.[49]  The court also reiterated that the district court originally erred when it ordered the government to file the report because the court held no authority over the implementation of the DPA.[50] As an advocate supporting NPAs and DPAs, we believe that the Second Circuit’s decision vested appropriate authority in the Justice Department. Recently, on December, 12, 2017, DOJ filed a motion to dismiss the criminal information against HSBC that led to the DPA at issue.[51]  DOJ concluded that HSBC had complied with its obligations under the DPA, and therefore opted to forgo a criminal prosecution against the bank.[52] DPAs Go Global Updates from the United Kingdom As detailed in our Mid-Year Update, this year the Serious Fraud Office (“SFO”) reached DPAs with two companies, Rolls-Royce and Tesco Stores Limited, bringing the total number of DPAs under the United Kingdom’s DPA program to four.[53]  To resolve allegations including conspiracy to corrupt, false accounting, and failure to prevent bribery, Rolls-Royce agreed to disgorge alleged profits of £258,170,000, pay a financial penalty of £239,082,645, and reimburse the SFO for £12,960,754 in costs incurred during the agency’s investigation, which was its largest-ever investigation to date (for a total SFO fine exceeding $615 million).  Notably, in what some commentators have considered to be a departure from the SFO’s prior practice, Rolls-Royce was afforded an opportunity to resolve the investigation through a DPA even though a whistleblower’s anonymous blog post, rather than the company’s self-reporting, initially alerted the SFO to certain elements of the relevant conduct.[54]  Earlier in the year, the SFO announced a DPA with Tesco Stores Limited to resolve allegations that Tesco had overstated its profits in 2013 and 2014 by £284 million (more than $350 million).  The SFO has announced that Tesco has agreed to pay £129 million (approximately $160 million) in penalties, but little additional information about the resolution is available at this time.  The full statement of facts and the Crown Court’s fairness determination will be made available to the public only at the conclusion of trials against three former Tesco executives.[55] Also during 2017, Parliament adopted legislation expanding the category of cases that might be resolved through DPAs to include a number of financial offenses.  Under the Policing and Crime Act 2017, violations of various financial-sanctions regimes may now be resolved by a DPA.[56]  Likewise, the Criminal Finances Act 2017 creates two new corporate criminal offenses that also may be resolved through DPAs.[57]  Those offenses, which have structures akin to the Bribery Act 2010 offense for failure to prevent bribery, create criminal liability for companies and partnerships that fail to prevent a person who performs services on its behalf from committing a U.K. or foreign tax evasion facilitation offense.[58]  One available defense is to prove that, when the offense was committed, the corporation “had in place such reasonable prevention procedures as it was reasonable in all the circumstances to expect [it] to have in place.”[59]  While providing guidance related to the new offenses, HM Revenue and Customs opined that the resolution of these offenses by DPA would “enable a corporate body to make full reparation for criminal behavior without the collateral damage of a conviction,” in addition to helping the corporation “avoid lengthy and costly trials.”[60] Against the backdrop of this legislative expansion, and the increasing use of DPAs by the SFO, two prominent SFO officials recently addressed the status of the DPA program and the expectations on participating companies at the Cambridge Symposium on Economic Crime.  Alun Milford, General Counsel of the SFO, highlighted lessons that he believes can be derived from the SFO’s four negotiated DPAs.  First, the SFO General Counsel emphasized that judicial approval of DPAs—aimed at determining whether the proposed agreement is in the interest of justice and that its terms are fair, reasonable, and proportionate—is “no rubber stamp exercise.”[61]  Instead, experience shows that the court “scrutinizes every aspect of the application for approval.”  Second, citing the example of Rolls-Royce, which involved criminal conduct in numerous jurisdictions and spanning a number of decades, Milford explained that “cases in which criminality was of the most serious kind remain in principle eligible for a disposal by way of DPA.” However, the speech focused on the SFO’s expectations for companies seeking DPAs.  The SFO has been clear “[f]rom the Director down” that “only co-operative companies will ever be offered the opportunity of entering into a DPA with us.”  The SFO General Counsel rejected the idea that Rolls-Royce had not been fully cooperative because the investigation did not begin with the company’s lawyers “picking the phone and arranging an appointment to tell us about a problem it had discovered of which we were entirely unaware.”  It is true that “the absence of a self-report meant that [Rolls-Royce] started at a disadvantage” when seeking a DPA.  Indeed, in considering the proposed Rolls-Royce DPA, the reviewing court “made clear that the fact that an investigation had not been triggered by a self-report would usually be highly relevant in the determination of the interests of justice test.”  But “for a number of years thereafter,” Rolls-Royce “had provided [the SFO] with a consistently high-degree of cooperation, involving bringing to [its] attention wrong-doing [the SFO] had hitherto been unaware of.”  Because “what was reported was far more extensive and of a different order to what may have been exposed” without Rolls-Royce’s cooperation, the SFO deemed the company worthy of a DPA offer.  According to the SFO General Counsel, the Rolls-Royce matter thus conveys an important lesson for lawyers:  “Lawyers advising corporates should not expect to go down the DPA route if, by the time we come knocking, we already have a good idea of what happened.” Separately, SFO Director David Green has stated that DPAs provide companies with the opportunity to “draw a line under the past and radically to overhaul compliance and remov[e] the board on whose watch the conduct took place.”[62]  Because radical personnel changes may be a necessary component of a DPA, “[i]t should never be thought that a DPA with a company somehow lets culpable former senior management off the hook: far from it.”  Once a DPA is completed, moreover, the SFO can “concentrate resource[s] on human suspects and on new investigations,” as it has done in the case of Tesco, where the SFO is currently pursuing the criminal convictions of three former executives. Taken together, these developments constitute an expansion of the DPA program in the United Kingdom and, consequently, suggest that DPAs will remain a central part of U.K. corporate criminal enforcement in the years to come.  Through legislation, Parliament has expanded the range of offenses that are eligible for resolution through DPAs, including the newly created offenses for failure to prevent the facilitation of tax evasion.  These changes could produce an increase in the number of agreements.  According to Solicitor General Robert Buckland, the “threat of conviction is greater” under these failure-to-prevent offenses and, “as a result, companies might be more likely to . . . enter into DPAs.”[63]  The SFO’s handling of the Rolls-Royce matter further suggests that DPAs may be available even in cases involving extensive criminal conduct and where an element of misconduct is independently discovered by the SFO. France Issues Inaugural DPA-Style Agreement Background on the Introduction and Availability of DPAs in France On November 14, 2017, the National Financial Prosecutor of France announced a Convention judiciaire d’intérêt public (a public interest judicial agreement, hereinafter “CJIP”) entered into with HSBC Private Bank Suisse SA (“PBRS”).  This marks the first application of a corporate settlement provision in France’s Law on Transparency, Fight against Corruption and Modernization of Economic Life (Loi relatif à la transparence, à la lutte contre la corruption et à la modernisation de la vie économique, referred to as “Sapin II,” after Finance Minister Michel Sapin, who presented the legislation).[64]  We previously covered the development of this long-anticipated legislation in our 2016 Mid-Year Update and  2016 Year-End Update.  Sapin II emerged as a response to reports by the Organisation for Economic Co-operation and Development highlighting the need for an improved anti-corruption regime in France.  Increased imposition of fines on French companies by DOJ and other foreign enforcement authorities further prompted France to develop its own legislation to “bring France in line with the highest international standards in the area of transparency and the fight against corruption.”[65] On December 9, 2016, French President François Hollande signed Sapin II into law following a series of heated debates and a lengthy reconciliation process in both of France’s legislative chambers.[66]  One key provision of Sapin II allows the Public Prosecutor (procureur de la République) to offer a CJIP to a legal entity accused of corruption, trading in influence, or laundering tax proceeds.[67]  The CJIP process is available only to legal entities; involved individuals are not parties to the CJIP and remain subject to prosecution even if a CJIP is reached.  A legal entity may enter into a CJIP only if (1) the investigating magistrate identifies and specifies a sufficient factual basis for imposing liability; (2) the corporation recognizes responsibility for its acts; and (3) the prosecutor agrees that a CJIP is appropriate.[68] A CJIP may require that the defendant pay fines up to 30% of its annual turnover over the past three years and to pay additional damages to victims.[69]  The CJIP process may also impose provisions requiring companies to engage in remedial measures under the supervision of a monitor who reports to the French anti-corruption authority (Agence française anticorruption), an agency created under Sapin II.  Once an agreement is reached between a prosecutor and a company, it must be submitted for judicial approval.  Companies have the option to withdraw from a CJIP within 10 days after judicial approval; after the expiration of the opt-out period, the CJIP decision is shared with the public.[70]  If a corporation complies with the provisions in its CJIP for a period of three years, a definitive order is entered precluding further prosecution under the same facts.  This occurs without the corporation ever having a conviction on its record. HSBC Private Bank (Suisse) SA Matter On November 14, 2017, the National Financial Prosecutor of France announced the first negotiated resolution under Sapin II.[71]  The agreement with PBRS, the Swiss subsidiary of HSBC, did not include any finding of guilt or require any ongoing compliance measures.[72]  The CJIP alleged that numerous clients of PBRS had, to avoid taxes, failed to adequately disclose to the French government the full extent of assets they owned through PBRS-held accounts and used Swiss industry-standard client services provided by PBRS to do so.[73]  Ultimately PBRS agreed to pay €300 million to settle tax evasion and money laundering charges arising from its alleged failure to prevent clients from using PBRS services for improper purposes. Mechanics First, the operation of a CJIP is different than that of a U.S.-style DPA.  In the case of a DPA in the United States, upon reaching resolution, prosecutors will file a criminal information against the defendant(s), which will then be docketed.  DPAs typically impose continuing obligations upon their recipients, including reporting and monitoring requirements.  If the terms of the DPA are violated or if the defendants fail to comply with the ongoing obligations set forth in the agreement, the matter is then returned to the court and the proceedings begin where they left off, with the charging document already filed.  The PBRS CJIP, however, is a comprehensive settlement agreement, which does not impose any continuing obligations on PBRS (after the payment of the fine), and brings final resolution to the investigative proceedings against the bank.  The agreement does not have a defined term, and there are no terms and conditions defining misconduct or breaches of contract terms that could result in prosecution. Overall Structure The PBRS CJIP itself is only 10 pages, with no attachments or other appendices.  It contains a brief statement of facts that, as explained below, differs from its counterpart in a U.S. DPA, in which a lengthy factual statement is typically separately attached to the agreement. The CJIP contains a determination of the “public interest fine.”  Not unlike a U.S. DPA, in which the calculation under the U.S. Sentencing Guidelines is set forth, the PBRS CJIP also contains the relevant calculations and offers additional context for the final amount.  Sapin II puts a cap on the total fine to be assessed at 30% of average yearly revenue for the past three years, which was applied to PBRS, yielding a total fine of €157,975,422.[74]  In reaching this conclusion, prosecutors required PBRS to disgorge €86,400,000 in profits associated with the accounts during the relevant time period.[75]  The CJIP justifies the remaining penalty with reference to the “particular seriousness of the facts ascribed to PBRS, as well as their continuing nature.”[76]  Although the agreement criticizes PBRS’s supposed “minimal cooperation” and says that PBRS neither self-disclosed nor acknowledged criminal liability related to the facts, it also acknowledges that “when the investigation started and until December 2016, the French legal system did not provide for a legal mechanism encouraging full cooperation.”[77]  Pursuant to Sapin II, the CJIP also cited a €142,000,000 loss to the French tax authorities. Finally, PBRS had 15 days from receipt of the proposed agreement to notify the National Financial Prosecutors of its acceptance.  This is, of course, in contrast to a U.S. DPA, which the parties agree to before it is officially filed and docketed with the court. Presentation of Facts Like U.S. DPAs, the PBRS CJIP contains a statement of facts.  The CJIP presents considerably less factual detail than a typical U.S. DPA.  The average “Attachment A” to a U.S. DPA describing the underlying facts provides multiple pages of detail, often citing specific incriminating documents uncovered during the course of the investigation or particular transactions at issue.  By contrast, the HSBC CJIP contains only general descriptions of the offenses at issue, namely that: Based on the analysis performed by the investigators, the prosecution considers that the list of bank accounts found in the IT files seized at the domicile of PBRS’s former employee included more than 8,900 names of French tax payers. During the 2006 to 2007 period alone, the amount of assets held by French tax payers with PBRS’s operations in Geneva, Lugano and Zürich, has been valued to be at least €1,638,723,980. Although it cannot be ruled out that a small proportion of these assets were held in accounts which had been declared to the French tax authorities prior to the opening of this investigation, it has been found that most of the concerned French clients did not declare their accounts or the accounts of which they were the beneficial owners in the books of PBRS to the French tax authorities.[78] In addition to this brief description of the underlying conduct, the short CJIP factual section also describes, not unlike a U.S. DPA, the underlying controls implemented at the time within PBRS, as well as certain areas requiring improvement as previously acknowledged by HSBC during the investigation.[79] Continuing Obligations of the Corporate Defendant As noted above, U.S. DPAs, particularly those addressing FCPA violations, will typically have a series of continuing obligations with which defendants must comply for the duration of the agreement, including disclosing “credible evidence or allegations of a violation of U.S. federal law”[80] and fully cooperating “in any and all matters related to the conduct described in this Agreement and the Statements of Facts and other conduct related to possible corrupt payments under investigation by the United States.”[81]  In addition, as part of several U.S. DPAs, prosecutors require the appointment of an independent compliance monitor, who is tasked with reviewing and monitoring an entity’s internal controls and compliance program elements as they relate to the particular violation in question, as well as any enhancements to those controls.[82]  The PBRS CJIP has no such monitoring requirement.  Despite the ability to require ongoing compliance and reporting obligations under Sapin II, the PBRS CJIP imposes none, perhaps in recognition of the bank’s prior efforts undertaken in this area. Judicial Approval In both the United States and France, DPAs and CJIPs must be submitted to a court.  The appropriate level of judicial scrutiny of the U.S. DPA process is a topic fraught with disagreement, as discussed in our 2015 Year-End Update and herein above.  Judges have taken different views regarding the appropriate scope of oversight, and there is no standard template for how judges should oversee DPAs.  The CJIP process contemplates an involved role for the judiciary, requiring a holistic judicial review of all aspects of the agreement, including whether all proper procedures were followed and whether the fine was justified.[83]  The CJIP between the French Prosecutor and PBRS was agreed to on October 9, and the Prosecutor requested approval by the Paris High Court (le tribunal de grand instance de Paris) on October 30.  The Paris High Court announced its approval in a four-page decision on November 14, 2017, identifying the legal authority for the agreement and the factual underpinnings.[84]  The court validated the agreement on the grounds that proper procedures were followed and the terms of the CJIP were justified in principle and in amount. Collateral Consequences Individuals cannot be parties to a CJIP and remain subject to prosecution even if a CJIP is reached with a company for the same underlying conduct.[85]  Similarly, in the United Kingdom, DPAs cannot be used for resolutions with individuals.[86]  In the United States, the genesis of DPAs arose from prosecuting minor offenses by first-time offender individuals.  The focus on individual liability in the United States sharpened following a September 9, 2015 memorandum issued by then-Deputy Attorney General Sally Quillian Yates entitled “Individual Accountability for Corporate Wrongdoing” (the “Yates Memorandum”).[87]  The parameters and implications of the Yates Memorandum are discussed in detail in our 2015 Year-End Update.  Individual responsibility is not only allowed through the U.S. DPA process but is heavily emphasized in all corporate resolutions. A common collateral consequence of DPAs is the increased exposure to subsequent civil litigation that is created by agreeing to a particular statement of facts.  In the United States, defendants who agree to a DPA generally must acknowledge facts sufficient to support a conviction.  Under Sapin II, if a company enters a CJIP at a preliminary investigation stage prior to initiation of public prosecution, there is no requirement for the company to acknowledge the facts or their legal significance.  However, if a CJIP is entered pursuant to a formal investigation, the facts and their legal significance must be acknowledged by the company.  Because the PBRS CJIP was reached after the initiation of a formal investigation, Sapin II required acknowledgement of the statement of facts presented in the CJIP.  The extent to which this requirement will expose companies to further civil litigation remains to be seen. Canada Considers a DPA Program In September 2017, the Government of Canada released a public discussion paper regarding the possible adoption of a DPA regime in Canada as part of Canada’s efforts to assess whether it has the right tools in place to address corporate wrongdoing.[88]  This discussion paper comes in the wake of an effort led by SNC-Lavalin, Canada’s largest engineering firm, which was charged in 2015 with fraud and corruption, to encourage Canada to adopt a DPA regime.[89]  While the charges against SNC-Lavalin remain pending,[90] it has argued that adopting a DPA regime would ensure that Canadian businesses operate on the same playing field as counterparts in other countries that have DPA regimes, such as the United States and the United Kingdom.[91] In the discussion paper, the Government of Canada invited Canadians to provide their views on ten key issues: (1) the usefulness of DPAs as part of the Canadian criminal justice system; (2) the scope of offenses for which DPAs should be available; (3) the role of the courts with respect to DPAs; (4) conditions for negotiating a DPA, such as what factors should be taken into account in offering a DPA and under what circumstances a DPA is not appropriate; (5) potential DPA terms and what factors should be considered in setting the duration of a DPA; (6) whether DPAs should be publicly published; (7) the process for addressing non-compliance; (8) under what circumstances facts disclosed during DPA negotiations should be admissible in a prosecution against the company should the DPA not ultimately be approved or in a prosecution for other offenses; (9) compliance monitoring, including how a compliance monitor is selected and governed, and how compliance monitoring reports should be used; and (10) under what circumstances victim compensation should be included as a DPA term.[92] It also included an overview and comparison of the U.S. and U.K. DPA regimes, with in-depth analysis of some key considerations.[93]  In its discussion of the U.S. and U.K. approaches to various DPA-related issues, the discussion paper generally did not adopt either approach on a given issue.  Unlike the U.S. regime, however, the paper specified that Canada’s proposed regime would apply only to organizations, including “corporations, companies, firms, partnerships, and trade unions,” and would not apply to individuals.[94]  This suggestion stems from the government’s “focus on corporate wrongdoing and the goal of prosecuting implicated individuals.”[95] The government accepted submissions until December 8, 2017, and is currently in the process of reviewing feedback.  It intends to publish a summary report of the comments received during the consultation process. Public Comment – Transparency International Canada In July 2017, prior to the government’s discussion paper, Transparency International Canada (“TI Canada”), an anti-corruption NGO, published a paper outlining DPAs and addressing many of the key issues.[96]  Although on balance it encouraged the government to adopt a DPA regime, it cautioned against creating a system where DPAs are seen as a simple cost of doing business.[97]  TI Canada recommended a DPA regime closer to the U.K. model, that is enacted through specific legislation and carried out under transparent judicial supervision.[98]  Acknowledging Canada’s Integrity Regime, which separately provides for potential debarment from contracting of government suppliers that have “been charged with, or admit[ted] guilt of, any of the offences identified [in Canada’s Ineligibility and Suspension Policy] . . . “[99], TI Canada also added that DPAs should not ensure automatic protection against debarment, and that “such a protection should be the object of the prosecutor’s negotiation with the corporation in exchange for correspondingly significant guarantees of both reparations and sincere compliance reform.”[100] Public Comment – The Canadian Bar Association The Canadian Bar Association (“CBA”) published comments on each topic presented in the discussion paper.[101]  In its submission, the CBA stated that DPAs should be available for economic crimes,[102] offenses that can result in debarment under the existing Integrity Regime,[103] and offenses under the Competition Act.[104]  The CBA agreed with the Canadian government’s proposal to limit the availability of DPAs to “organizations,” such as corporations, and not to include individuals.[105] In discussing the role of the courts with respect to DPAs, the CBA encouraged the Canadian government to consider, if court filings are required, a model where a DPA is filed with the court and open to public comment for the prosecutor’s consideration for a set period.[106]  It also offered NPAs as an alternative to DPAs.[107] The CBA suggested that the following factors be taken into consideration in determining whether a DPA is appropriate:  (1) has the organization accepted responsibility for the conduct; (2) has the organization demonstrated that it genuinely seeks to reform its practices and corporate culture; (3) has the organization mitigated the damages caused by the conduct; (4) does the offending conduct represent the actions of individuals or is it sanctioned by company policy and practice and are any implicated individuals still with the organization; (5) is a criminal conviction likely to have disproportionate negative impacts on innocent people (e.g., shareholders, pension plan holders, employees, suppliers); and (6) is the organization a repeat offender.[108]  The CBA further stated that DPAs should not be available when the conduct raises national security or foreign affairs issues or led to death or serious injury, or when the organization exists only for illegal conduct or has been previously warned or sanctioned.[109] In its discussion of the appropriate terms to include in a DPA, the CBA suggested that Canada adopt a regime similar to the United Kingdom’s, where an express admission of guilt is not mandatory, but agreement on fundamental facts, compensation of victims, and a commitment to remediation is required.[110]  The CBA explained that requiring an admission could easily be used by class action plaintiffs, which could lead to a chilling effect on DPAs.[111] The CBA contended that there should be no publication of the DPA in the initial stages of negotiations, but that it would be appropriate for the government to announce when it has entered into a DPA and indicate the relevant conduct and key terms, without necessarily filing the entire DPA.[112]  The CBA also stated that information gleaned in the course of a DPA negotiation should not be used in subsequent proceedings against the organization.[113]  However, facts disclosed during DPA negotiations could be admissible in a prosecution against another company or rogue employee for other crimes.[114] The CBA viewed the use of compliance monitors favorably but stated that they may not always be necessary.[115]  The CBA suggested that if court oversight is ultimately required, then any compliance monitoring reports should not form part of the DPA, and should instead be used to inform the court of compliance and appropriateness of remedial measures.[116]  The CBA set out the general principle that victim compensation should be included when applicable, but that it may be appropriate to limit victim compensation to persons who suffered direct harm.[117] The Government of Canada has demonstrated its commitment to addressing corporate wrong-doing by publishing a discussion paper and soliciting public commentary on a proposed DPA regime.  As noted above, it is now in the process of reviewing the submissions and is expected to publish a summary of the comments in the coming weeks. APPENDIX:  2017 Non-Prosecution and Deferred Prosecution Agreements The chart below summarizes the agreements concluded by DOJ in 2017.  As noted above, the SEC did not enter into any NPAs or DPAs in 2017.  The complete text of each publicly available agreement is hyperlinked in the chart. The figures for “Penalty/Fine” may include amounts not strictly limited to an NPA or a 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 NPA or DPA, 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. Deferred and Non-Prosecution Agreements in 2017 Company Agency Alleged Violation Type Penalty/Fine Monitoring & Reporting Term of DPA/NPA (months) Aegerion Pharmaceuticals D. Mass.; DOJ Consumer Protection HIPAA; FCA; FDCA DPA $36,000,000 Yes 36 Banamex USA (Citigroup) DOJ Money Laundering and Asset Recovery Bank Secrecy Act NPA $237,440,000 Yes 12 Baxter Healthcare W.D.N.C.; DOJ Consumer Protection FDCA DPA $18,158,000 No 30 Breakthru Beverage Pennsylvania M.D. Pa. Bribery of a Public Official NPA $2,000,000 No 12 DAXC, LLC S.D. Fla. Theft of Government Property DPA $5,212,825 No 12 Dennis Corporation N.D.W. Va Conspiracy to impede the IRS DPA $250,000 No 36 Keppel Offshore & Marine LTD DOJ Fraud; E.D.N.Y. FCPA DPA $422,216,980 Yes 36 Las Vegas Sands Corp. DOJ Fraud FCPA NPA $15,960,000 Yes 36 Netcracker Technology Corporation DOJ National Security Division; E.D.V.A. ITAR; Export Administration Regulations NPA $0 (a) Yes 36; 84 (b) PDQ Imaging Services, LLC E.D. Tex. Illegal remunerations under federal health care program DPA $300,000 (c) Yes 36 Pharmaceutical Technologies, Inc. E.D. Tex. ERISA; Anti-Kickback Statute NPA $8,500,000 Unknown Unknown Pio Imports, LLC M.D. Pa. Bribery of a Public Official NPA $200,000 No 12 Prime Partners SA DOJ Tax; S.D.N.Y. Fraud (Tax); other tax-related offenses NPA $5,000,000 No 36 (d) RBS Securities Inc. D. Conn. Fraud (Securities) NPA $44,091,317 No 12 SBM Offshore N.V. DOJ Fraud; S.D. Tex. FCPA DPA $238,000,000 Yes 36 Sociedad Quimica y Minera de Chile, S.A. DOJ Fraud FCPA DPA $30,487,500 Yes 36 Southern Glazer’s Wine and Spirits of Pennsylvania, LLC M.D. Pa. Bribery of a Public Official NPA $5,000,000 No 12 State Street Corporation D. Mass; DOJ Fraud Fraud (wire fraud; securities fraud) DPA $64,600,000 Yes 36 Telia Company AB DOJ Fraud; S.D.N.Y. FCPA DPA $965,773,949 No 36 Utah Transit Authority D. Utah Misuse of public funds NPA $0 Yes 36 (with possible indefinite extension) Western Union Company, The DOJ Criminal (Money Laundering and Asset Recovery Section); M.D. Pa.; C.D. Cal.; E.D. Pa.; S.D. Fla. AML, aiding and abetting wire fraud. DPA $586,000,000 Yes 36 White Rock Distilleries, Inc. M.D. Pa. Bribery of a Public Official NPA $2,000,000 No 12 FCPA Pilot Program Declination Letters with Disgorgement in 2017 CDM Smith Inc. DOJ Fraud FCPA Declination $4,037,138 Yes N/A Linde North America Inc. and Linde Gas North America LLC DOJ Fraud FCPA Declination $3,415,000 Yes N/A (a) Netcracker Technology Corp. received a penalty of $0, unless it is found to have materially breached the terms of the NPA, in which case it must pay $35 million in liquidated damages. (b) Certain of Netcracker Technology Corp.’s NPA terms expire after three years, and others expire after seven years. (c) The NPA between PDQ Imaging Services, LLC and the United States Attorney’s Office for the Eastern District of Texas provides that the $300,000 penalty shall be paid “in [a] civil case . . . in lieu of the monetary penalty.  The parties agree that absent this provision the payment of the monetary penalty would substantially jeopardize the continued vitality of the Company.”[119] (d) The Prime Partners SA NPA stipulates a term of the greater of (1) three years, or (2) the date on which all prosecutions arising out of the conduct described in the agreement are final.   [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 a compliance program and—on occasion—cooperating with a monitor who reports to the government.  Although NPAs and DPAs are used by multiple agencies, since Gibson Dunn began tracking corporate NPAs and DPAs in 2000, we have identified approximately 473 agreements initiated by the DOJ, and ten initiated by the SEC. [2]      We note that the statistics for 2016 have increased by four agreements since our 2016 Year-End Update, due to four DPAs that were publicly announced by the United States Attorney’s Office for the Central District of California in November 2017.  See Press Release, U.S. Dep’t of Justice, “San Diego Nursing Homes Owned by L.A.-Based Brius Management to Pay up to $6.9 Million to Resolve Kickback and Fraud Allegations” (Nov. 16, 2017), https://www.justice.gov/usao-cdca/pr/san-diego-nursing-homes-owned-la-based-brius-management-pay-69-million-resolve-kickback. [3]      See U.S. Dep’t of Justice, Criminal Division, The Fraud Section’s Foreign Corrupt Practices Act Enforcement Plan and Guidance (Apr. 5, 2016), https://www.justice.gov/archives/opa/blog-entry/file/838386/download. [4]      U.S. Dep’t of Justice, Remarks of Deputy Attorney General Rod Rosenstein, “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. [5]      Id. [6]      In 2015, the Fraud Section also issued one NPA, but this was a relative historical low point for the Fraud Section, which issued two total NPAs and DPAs in 2015. [7]      Press Release, U.S. Dep’t of Justice, National Security Division Announces Agreement with Netcracker for Enhanced Security Protocols in Software Development (Dec. 11, 2017), https://www.justice. gov/opa/pr/national-security-division-announces-agreement-netcracker-enhanced-security-protocols. [8]      Netcracker Website, About, https://www.netcracker.com/company/about-netcracker.html. [9]      Netcracker Technology Corporation, Non-Prosecution Agreement, Attachment A – Statement of Facts 1 (Dec. 6, 2017), https://www.justice.gov/opa/pr/national-security-division-announces-agreement-netcracker-enhanced-security-protocols. [10]     E.g., Non-Prosecution Agreement, Breakthru Beverage Pennsylvania, at 4 (July 19, 2017) (“[T]he Company and Breakthru Beverage Group den[y] criminal liability for the conduct”). [11]     Although the Pio Imports NPA included a statement that “certain supervisors” were engaging in such practices, it did not include a statement that those supervisors were otherwise aware that the company as a whole was engaging in the alleged practices.  Non-Prosecution Agreement, Pio Imports, LLC, at 2 (July 20, 2017). [12]     E.g., Breakthru Beverage NPA, supra note 10, at 2-3.  The language from the White Rock Distilleries NPA differed slightly from the others, reading, “While the Company does not admit that the conduct in the Statement of Facts violates federal or state criminal law, the Company recognizes and acknowledges that the facts described in the attached Statement of Facts establish a pattern of things of value to public officials which, had they been given in quid pro quo exchange for official decisions, would have constituted violations of federal law . . . .”  Non-Prosecution Agreement, White Rock Distilleries, Inc., at 2-3 (June 28, 2017). [13]     Non-Prosecution Agreement, Las Vegas Sands Corp. at 2 (Jan. 17, 2017). [14]     Netcracker Technology Corporation, Non-Prosecution Agreement, Enhanced Security Plan for U.S.-Based Customers’ Domestic Communications Infrastructure, see https://www.justice.gov/opa/pr/national-security-division-announces-agreement-netcracker-enhanced-security-protocols. [15]     Press Release, U.S. Dep’t of Justice, National Security Division Announces Agreement with Netcracker for Enhanced Security Protocols in Software Development (Dec. 11, 2017), https://www.justice.gov/ opa/pr/national-security-division-announces-agreement-netcracker-enhanced-security-protocols. [16]     Netcracker Technology Corporation, Non-Prosecution Agreement 2 (Dec. 6, 2017), https://www.justice.gov/ opa/pr/national-security-division-announces-agreement-netcracker-enhanced-security-protocols. [17]     Deferred Prosecution Agreement, United States v. Telia Co., 10 (S.D.N.Y. Sept. 21, 2017) (No. 1:17-cr-00581-GBD). [18]     Netcracker Technology Corporation, supra note 16, at 2. [19]     Netcracker Technology Corporation, supra note 16, at 2, 6-8. [20]     Deferred Prosecution Agreement, United States v. Aegerion Pharmaceuticals, Inc., 10 (D. Mass. Sept. 22, 2017) (No. 1:17-cr-10288). [21]     Netcracker Technology Corp., supra note 16, at 6-8. [22]     Id. [23]     E.g., Telia DPA, supra note 17, at 5 (“Determination of whether the Company has breached the Agreement and whether to pursue prosecution of the Company shall be in the Fraud Section’s sole discretion.”); NPA, Southern Glazer’s Wine & Spirits of Penn., LLC, 3-4 (June 29, 2017) (reserving “sole discretion” in the U.S. Attorney’s Office for the Middle District of Pennsylvania to determine whether breach has occurred). [24]     For example, as discussed in our 2013 Year-End Update, Schedule 17 of the U.K. Crime and Courts Act 2013, which authorizes the use of DPAs, expressly limits the role of prosecutorial discretion by granting judges, rather than prosecutors, the power to make breach determinations.  See also, e.g., Jennifer Arlen, Negotiated Corporate Criminal Settlements: Bringing DPA Mandates Within the Rule of Law, Program on Corporate Compliance and Enforcement at N.Y.L. Sch. (Nov. 21, 2017), https://wp.nyu.edu/compliance_enforcement/2017/11/21/negotiated-corporate-criminal-settlements-bringing-dpa-mandates-within-the-rule-of-law/. [25]     See id. [26]     In a possible acknowledgement of this fact, for example, a 2017 DPA between the United States Attorney’s Office for the Eastern District of Texas and PDQ Imaging Services, LLC, expressly required that a penalty imposed by the DPA be paid in connection with a separate civil action, rather than the criminal action connected to the DPA, because “absent this provision the payment of the monetary penalty would substantially jeopardize the continued viability of the Company.”  Deferred Prosecution Agreement at 5, United States v. PDQ Imaging Servs., LLC (E.D. Tex. Nov. 22, 2017) (4:17-cr-00199-ALM-KPJ). [27]     Rod Rosenstein, Deputy Attorney General, DOJ, 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. [28]     Id. [29]     Id. [30]     See our 2016 Year-End and 2017 Mid-Year Updates. [31]     Stop Settlement Slush Funds Act of 2017, H.R. 732, 115th Cong. (2017), https://www.congress.gov/bill/115th-congress/house-bill/732/text.  A substantively similar bill was introduced in the United States Senate, but has not yet been put to a vote.  See Stop Settlement Slush Funds Act of 2017, S. 333, 115th Cong. (2017). [32]     Id. [33]     H.R. Rep. No. 115-72, Stop Settlement Slush Funds Act of 2017 (2017), https://www.congress.gov/ congressional-report/115th-congress/house-report/72. [34]     Telia DPA, supra note 17, at 8-9; Press Release, Openbaar Ministerie, “International Fight Against Corruption: Telia Company Pays 274.000.000 US Dollars to the Netherlands” (Sept. 21, 2017), https://www.om.nl/actueel/nieuwsberichten/ @100345/ international-fight/. [35]     Stop Settlement Slush Funds Act of 2017, H.R. 732, 115th Cong. (2017), https://www.congress.gov/bill/115th-congress/house-bill/732/text. [36]    Id. [37]     Report 115-72, Stop Settlement Slush Funds Act of 2017, H.R. 732, 115th Cong. (2017), https://www.congress.gov/congressional-report/115th-congress/house-report/72 (citing comments from the U.S. Dep’t of Justice on H.R. 5063, the ”Stop Settlement Slush Funds Act of 2016,” to Members of the H. Comm. on the Judiciary 1, 3 (May 17, 2016) (on file with Democratic staff of the H. Comm. on the Judiciary)). [38]     Order, United States v. HSBC Bank USA, N.A., No. 12-cr-00763 (E.D.N.Y. Apr. 28, 2015). [39]     Monitor’s First Annual Follow-Up Report (Parts I and II), United States v. HSBC Bank USA, N.A., No. 12-cr-00763 (E.D.N.Y. June 1, 2015), ECF Nos. 36–37. [40]     Order, United States v. HSBC Bank USA, N.A., No. 12-cr-00763, slip op. at 1, 7 (E.D.N.Y. Jan. 28, 2016), ECF No. 52. [41]     Order, United States v. HSBC Bank USA, N.A., No. 12-cr-00763 (E.D.N.Y. Mar. 9, 2016), ECF No. 70. [42]     United States v. HSBC Bank USA, N.A., Nos. 16-308, 16-353, 16-1068, 16-1094, slip op. at 2 (2d Cir. July 12, 2017). [43]     Id. at 39. [44]     Id. at 6, 22. [45]     Id. at 25–26.  The presumption of regularity obliges federal courts to defer to prosecutorial conduct and decision making.  Id. at 25.  The doctrine is rooted in the separation of powers and provides that “‘in the absence of clear evidence to the contrary, courts presume that [public officers] have properly discharged their official duties.'” United States v. Armstrong, 517 U.S. 456, 464 (1996) (quoting United States v. Chem. Found., Inc., 272 U.S. 1, 14–15 (1926)). [46]     United States v. HSBC Bank USA, N.A., Nos. 16-308, 16-353, 16-1068, 16-1094, slip op. at 6 (2d Cir. July 12, 2017). [47]     Id. at 29 (referencing United States v. Fokker Services B.V., 818 F.3d 733, 738 (D.C. Cir. 2016)). [48]     Id. at 30–31. [49]     Id. at 32, 39. [50]     Id. at 32 (“Critically, as we held above, the district court erred in ordering the government to file the Monitor’s Report pursuant to its authority over the implementation of the DPA for the simple reason that the district court had no such authority.”). [51]     Motion to Dismiss, United States v. HSBC Bank USA, N.A., No. 12-cr-00763 (E.D.N.Y. Dec. 12, 2017), ECF 96; see Evan Weinberger, DOJ Seeks Dismissal of HSBC Money Laundering Case, Law360 (Dec. 12, 2017, 1:35 PM), https://www.law360.com/whitecollar/articles/993914/doj-seeks-dismissal-of-hsbc-money-laundering-case. [52]     Motion to Dismiss, United States v. HSBC Bank USA, N.A., No. 12-cr-00763 (E.D.N.Y. Dec. 12, 2017), ECF 96. [53]     Gibson, Dunn & Crutcher, 2017 Mid-Year Update on Corporate Non-Prosecution Agreements (NPAs) and Deferred Prosecution Agreements (DPAs), at 6, http://www.gibsondunn.com/publications/Pages/2017-Mid-Year-Update-Corporate-NPA-and-DPA.aspx. [54]     See id. at 6–8. [55]     See id. at 8–9. [56]     See Policing and Crime Act 2017, c. 3, § 150 (amending the Crime and Courts Act 2013). [57]     For additional information on the Criminal Finances Act 2017, please see our September 29, 2017 client alert devoted solely to that topic, http://www.gibsondunn.com/publications/Pages/Criminal-Finances-Act-2017-New-Corporate-Facilitation-of-Tax-Evasion-Offence-Act-Now.aspx. [58]     See Criminal Finances Act 2017, c. 22, § 45 (UK tax evasion); id. § 46 (foreign tax evasion). [59]     Id. § 45(2) (UK tax evasion); see also id. § 46(3) (foreign tax evasion). [60]     HM Revenue & Customs, Tackling tax evasion: Government guidance for the corporate offenses of failure to prevent the criminal facilitation of tax evasion, at 13–14 (Sept. 1, 2017), https://www.gov.uk/government/ uploads/system/uploads/attachment_data/file/642714/Tackling-tax-evasion-corporate-offences.pdf. [61]  Serious Fraud Office, News Release, Alun Milford on Deferred Prosecution Agreements (Sept. 5, 2017),  https://www.sfo.gov.uk/2017/09/05/alun-milford-on-deferred-prosecution-agreements/. [62]     Serious Fraud Office, News Release, Cambridge Symposium 2017 (Sept. 4, 2017), https://www.sfo.gov.uk/ 2017/09/04/cambridge-symposium-2017/. [63]     Robert Buckland, Speech, Solicitor General’s speech at Cambridge Symposium on Economic Crime (Sept. 4, 2017), https://www.gov.uk/government/speeches/solicitor-generals-speech-at-cambridge-symposium-on-economic-crime. [64]     See Law on Transparency, Fight against Corruption and Modernization of Economic Life, No. 2016-1691 of 9 December 2016, French Official Gazette, No. 0287 (Dec. 10, 2016) [hereinafter “Law on Transparency”], https://www.legifrance.gouv.fr/eli/loi/2016/12/9/2016-1691/jo/texte. [65]     Sapin II Law: Transparency, the Fight Against Corruption, Modernisation of the Economy, Apr. 6, 2016, http://www.gouvernement.fr/en/sapin-ii-law-transparency-the-fight-against-corruption-modernisation-of-the-economy. [66]     One day prior, on December 8, 2016, the Constitutional Council ruled that the public interest judicial agreement (i.e., Article 22) was constitutional.   See Constitutional Council, Decision No. 2016-741 (Dec. 8, 2016), http://www.senat.fr/dossier-legislatif/pjl15-691.html. [67]     Law on Transparency at Art. 22. [68]     Frederick T. Davis, A French Court Authorizes the First-Ever “French DPA,”  Program on Corporate Compliance and Enforcement at N.Y.L. Sch., Nov. 24, 2017, https://wp.nyu.edu/compliance_enforcement/2017/11/24/a-french-court-authorizes-the-first-ever-french-dpa/. [69]     Id. [70]     Id. [71]     Convention judiciaire d’intérêt public between the National Finance Prosecutor and HSBC Private Bank (Suisse) SA, “PRBS,” (hereinafter, “PBRS CJIP”), Oct. 30, 2017. [72]     David Keohane & Martin Arnold, HSBC agrees to pay €300m to settle probe into tax evasion, F.T., Nov. 14, 2017. [73]     PBRS CJIP at ¶¶ 14-15. [74]     PBRS CJIP, at ¶¶ 37-38. [75]     Id. at 42. [76]     Id. at 43. [77]     Id. [78]     PBRS CJIP at ¶¶ 21-22. [79]     Id. at ¶33; see also HSBC Group, HSBC’s Swiss Private Bank – Progress Update, Jan. 2015, www.hsbc.com/~/media/hsbc-com/…/financial-and…/gbp-update%20-290115. [80]     Deferred Prosecution Agreement, United States v. Dallas Airmotive, Inc., Attachment D, at ¶ 6 (Dec. 10, 2014). [81]     SBM Offshore, N.V., DPA, at ¶ 5 (Nov. 29, 2017). [82]     See, e.g., Deferred Prosecution Agreement, United States v. State Street Corporation, Attachment C (Jan. 17, 2017). [83]     Ordonnance de Validation D’Une Convention Judiciaire D’intérêt Public, Cour D’Appel de Paris, Nov. 14, 2017. [84]     Id. [85]     Following the PBRS CJIP, two former directors of HSBC remain under investigation.  Id. at 2, n. 7. [86]     Public Consultation Paper, Australia Attorney-General’s Department, Improving enforcement options for serious corporate crime: Consideration of a Deferred Prosecution Agreements scheme in Australia, at 13, Mar. 2016, https://www.ag.gov.au/Consultations/Documents/Deferred-prosecution-agreements/Deferred-Prosecution-Agreements-Discussion-Paper.pdf. [87]     U.S. Dep’t of Justice, Memorandum from Deputy Attorney Gen. Sally Quillian Yates Regarding Individual Accountability for Corporate Wrongdoing (2015), http://www.justice.gov/dag/file/769036/download. [88]     Gov’t of Canada, Expanding Canada’s Toolkit to Address Corporate Wrongdoing: Deferred Prosecution Agreement Stream, Discussion paper for public consultation (“Discussion Paper”) at 4, 82 https://www.tpsgc-pwgsc.gc.ca/ci-if/ar-cw/documents/volet-stream-eng.pdf; Online public consultation examines Government tools for fighting Corruption, Public Services and Procurement Canada, September 25, 2017, https://www.canada.ca/en/public-services-procurement/news/2017/09/government_of_canadaseeksviewson addressingcorporatewrongdoing.html. [89]     SNC Lavalin Pushes for Deferred Prosecution Agreements in Canada, Corp. Crime Rep., January 31, 2017, https://www.corporatecrimereporter.com/news/200/snc-lavalin-pushes-for-deferred-prosecution-agreem ents-in-canada/; see also Ross Marowits, Deferred Prosecution Agreements Under Review, Canadian Press (Sept. 25, 2017), http://www.msn.com/en-ca/news/other/deferred-prosecution-agreements-under-review/ar-AAsstD3. [90]     SNC’s fraud, corruption hearing set for 2018, The Globe and Mail, February 26, 2016, https://www.theglobeandmail.com/report-on-business/sncs-fraud-corruption-hearing-set-for-2018/article28929552/. [91]     Submission to the DPA/Integrity Regime Consultation DPA Submission, SNC Lavalin, October 13, 2017, http://www.snclavalin.com/en/files/documents/publications/dpa-consultation-submission-october-13-2017_en.pdf.   [92]     Expanding Canada’s Toolkit, supra note 88.   [93]     Id. at 5, 7, 10. For a comparison of the U.S. and U.K. DPA regimes, see the 2015 Year-End Update. [94]     Id. at 4, n. 1. [95]     Id. at 8, n. 2. [96]     Another Arrow in the Quiver? Consideration of a Deferred Prosecution Agreement Scheme in Canada, Transparency International Canada, (July 2017), http://www.transparencycanada.ca/wp-content/uploads/ 2017/07/DPA-Report-Final.pdf. [97]     Id. at 3. [98]    Id. at 3, 23, 28. [99]     Gov’t of Canada, Ineligibility and Suspension Policy, Section 7(d), http://www.tpsgc-pwgsc.gc.ca/ci-if/politique-policy-eng.html. [100]   Id. [101]   Canadian Bar Ass’n, Addressing Corporate Wrongdoing in Canada (“CBA Comment”) (Dec. 2017), http://www.cba.org/CMSPages/GetFile.aspx?guid=d437189b-f458-456a-8feb-bc4abe56391a. [102]   According to the CBA, this includes “fraud, false accounting, corruption, foreign bribery and money laundering (or dealing with the proceeds of crime), exportation and or/importation of prohibited or restricted goods and related offences.”  Id. at 2. [103]   Id. at 3. [104]   Id. [105]   Id. [106]   Id. at 4. [107]   Id. [108]   Id. at 5. [109]   Id. at 6. [110]   Id. at 6-7.  The U.K.’s Deferred Prosecution Agreements Code of Practice requires a statement of facts that include particulars relating to each alleged offense.  The Code of Practice also states, “There is no requirement for formal admissions of guilt in respect of the offences charged by the indictment though it will be necessary for [an organization] to admit the contents and meaning of key documents referred to in the statement of facts.”  Serious Fraud Office, Deferred Prosecution Agreements Code of Practice, Crime and Courts Act of 2013, 11, https://www.sfo.gov.uk/?wpdmdl=1447 . [111]   Id. [112]   Id. at 8. [113]   Id. at 9. [114]   Id. [115]   Id. at 10. [116]   Id. [117]   Id. [118]   PDQ, supra note 26. [119]   PDQ, supra note 26. The following Gibson Dunn lawyers assisted in preparing this client update:  F. 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January 2, 2018 |
2017 Year-End FCPA Update

Click for PDF When President Jimmy Carter signed the Foreign Corrupt Practices Act (“FCPA”) into law on December 19, 1977, not many predicted the dramatic impact this singular U.S. statute would still be having on the global rule of law some 40 years later.  Indeed, the FCPA seems to have truly hit its stride as it passes 40 and looks toward its fifth decade of existence.  Almost poetically, this 40th year of the FCPA saw 39 combined enforcement actions by the U.S. Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”), the statute’s dual enforcers, joined in many cases by a global legion of anti-corruption enforcers unlike anything imagined four decades ago.  In no small part the FCPA’s coming of age is due to the fact that the FCPA—the only one of its kind when enacted—is now joined by numerous other international corruption laws, multinational conventions, and hundreds of investigators, prosecutors, and regulators worldwide with a mission of ensuring a level playing field in global business markets. This client update provides an overview of the FCPA and other domestic and foreign anti-corruption enforcement, litigation, and policy updates in 2017, as well as the trends we see from this activity. 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”) 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. 40 YEARS OF FCPA ENFORCEMENT STATISTICS On this the 40th anniversary of the FCPA, we have expanded the traditional 10-year FCPA enforcement statistics that have become a mainstay of our semi-annual updates over the past decade to detail the entire history of FCPA enforcement by the numbers.  These statistics detail the meteoric rise of FCPA enforcement—from the sleepy 1970s, 80s, and 90s, through the bustling 2000s.  They also demonstrate the increasingly stiff penalties imposed in FCPA enforcement actions, by dollar and by the increasing certitude of time behind bars, as well as the most frequent situses of FCPA violations, with China holding a commanding lead after dominating the last decade in FCPA enforcement. 2017 FCPA ENFORCEMENT TRENDS With dozens of dedicated and talented enforcement lawyers at DOJ and the SEC, and a team of law enforcement agencies working alongside them, it is little wonder that the FCPA’s 40th year was one of its most prolific.  There is an energy in the hallways of the Bond Building, where DOJ’s FCPA Unit is staffed with a driven and relatively young team of prosecutors—clocking in at a median age just shy of 40, most were not alive when the statute was signed into law.  Led by the articulate and indefatigable Dan Kahn, the majority of the 31 attorneys currently assigned to the Unit attended elite law schools, nearly 70% completed prestigious federal judicial clerkships early in their careers, and while more than 80% have private practice experience, the majority started with prior prosecutorial experience.  Charles Cain, a quick study who distills complicated scenarios effortlessly, just this year assumed leadership of the SEC’s FCPA Unit.  His attorneys likewise have deep experience, with the majority of the 31 attorneys joining the Unit from other positions at the SEC and nearly half having spent five years or more in the Unit.  Each agency’s commitment to anti-corruption enforcement was on display during the second half of the year, with 21 combined FCPA enforcement actions in the last six months, bringing the total to 39 in 2017. 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 2017, five key enforcement trends stand out from the rest: 1.      Multi-jurisdictional anti-corruption resolutions continue apace; 2.      DOJ continues to demonstrate a focus on culpable individuals; 3.      DOJ and the SEC bring FCPA cases absent proof of bribery; 4.      Recurring enforcement actions; and 5.      DOJ and the SEC push the boundaries of “foreign official.”       Multi-Jurisdictional Anti-Corruption Resolutions Continue Apace The FCPA was born of the policy judgment that corruption is bad business, and U.S. persons, companies, and those operating within the U.S. financial system should not profit from it.  Of course, this was not a view uniformly held in 1977, and the reality is that there are still corners of the world where corruption is the norm rather than the exception.  In these economies, the criticism has long been that foreign companies and individuals who do not have to play by the U.S. rulebook have an unfair advantage over those subject to the FCPA.  Thus, one of the most important efforts in FCPA enforcement has been DOJ and SEC lawyers helping to build an aligned multinational network of law enforcers, aided by expanded legal tools, that together are making it increasingly more difficult for corrupt actors to engage in bribery with impunity.  One way in which this increasingly complex enforcement environment manifests itself is coordinated, multi-jurisdictional anti-corruption actions involving DOJ and/or the SEC and any one (or more) of a growing number of their foreign counterparts.  Four examples highlighted this phenomenon in 2017, resulting in more than $3 billion in cumulative corporate penalties. The year in 2017 FCPA enforcement came to a roaring close with the announcement of a coordinated anti-corruption resolution with Singaporean shipyard company Keppel Offshore & Marine Ltd. (“KOM”).  KOM is alleged to have paid, between 2001 and 2014, approximately $55 million in bribes to Brazilian government officials, including certain officers of Petróleo Brasileiro S.A. – Petrobras (“Petrobras”), Brazil’s state-owned oil company and the center of the Operation Car Wash investigation we have been reporting on for the past several years.  The corrupt payments reportedly helped KOM win 13 contracts that netted the company more than $351 million in profits. To resolve these allegations, KOM agreed to pay combined financial penalties of more than $422 million to authorities in the United States, Brazil, and Singapore.  Specifically, DOJ calculated a total U.S. criminal fine of $422,216,980, and agreed with KOM, the Ministério Público Federal in Brazil, and the Attorney General’s Chambers in Singapore that this criminal fine would be satisfied by KOM paying 50% ($211,108,490) to Brazilian authorities and 25% ($105,554,245) to each of the other two.  The total U.S. criminal fine reflected a 25% discount from the bottom of the U.S. Sentencing Guidelines range, the maximum amount KOM was entitled to under DOJ policy based on its significant cooperation but failure to voluntarily disclose the conduct at issue.  The U.S. resolution took the form of a deferred prosecution agreement with KOM and a guilty plea by its U.S. subsidiary, each charging conspiracy to violate the FCPA’s anti-bribery provisions; the Singaporean resolution took the form of a “conditional warning” from the Corrupt Practices Investigation Bureau; and the Brazilian resolution took the form of a leniency agreement with the Ministério Público Federal.  DOJ did not impose a compliance monitor on KOM, but KOM did agree to submit annual reports to DOJ on the status of its compliance program over the three-year term of the deferred prosecution agreement.  Because KOM is not an issuer, there was no parallel SEC enforcement action. In another multi-jurisdictional enforcement action arising from Operation Car Wash, on November 29, 2017, DOJ announced an FCPA resolution with Dutch oil and gas services provider SBM Offshore N.V.  According to the charging documents, from 1996 to 2012 SBM conspired to pay more than $180 million in commissions to third parties, knowing that at least part of the funds would be used to bribe government officials in Angola, Brazil, Equatorial Guinea, Iraq, and Kazakhstan.  SBM reportedly gained more than $2.8 billion in profits from projects received in return for these illicit payments. As we reported in our 2014 Year-End FCPA Update, SBM previously reached a $240 million anti-corruption settlement with the Dutch Public Prosecutor (Openbaar Ministerie) in November 2014 arising from substantially the same course of conduct.  DOJ closed its investigation at that time, with no intention of bringing a parallel enforcement action of its own, since at that time there was no evidence of conduct in the United States sufficient to vest jurisdiction over the non-issuer Dutch entity.  However, in 2016 DOJ reopened its investigation based on new evidence that a substantial portion of the corrupt scheme was allegedly managed by a U.S.-based executive of a U.S. subsidiary of SBM.  In addition, this new evidence opened the allegations of corruption in Iraq and Kazakhstan, which were not part of the original resolution with Dutch authorities. To resolve the November 2017 U.S. charges, SBM agreed to pay a $238 million criminal penalty in connection with a deferred prosecution agreement, and to have its U.S. subsidiary plead guilty, with both charging documents alleging a conspiracy to violate the FCPA’s anti-bribery provisions.  Notably, SBM did not receive voluntary disclosure credit from DOJ, even though it voluntarily disclosed the matter to DOJ and Dutch authorities, because SBM allegedly failed to bring the full facts and circumstances to DOJ’s attention for one year, which was not timely according to DOJ.  With only a 25% discount from the bottom of the U.S. Sentencing Guidelines range for cooperation, rather than the 50% discount from a lower Guidelines range it may have received if this matter had been viewed as a voluntary disclosure, SBM’s penalty should have been set at $3.83 billion.  The $238 million fine (roughly 7% of this discounted figure) reflects the $240 million already paid to Dutch authorities, an additional amount (reportedly $342 million) to be paid to Brazilian authorities, and most significantly, a desire to “avoid[] a penalty that would substantially jeopardize the continued viability of the Company.”  DOJ did not impose a compliance monitor on SBM, but SBM did agree to submit annual reports to DOJ on the status of its compliance program over the three-year term of the deferred prosecution agreement.  Because SBM is not an issuer, there was no parallel SEC enforcement action. Still another multi-jurisdictional anti-corruption resolution is that of Swedish telecom company and former ADR issuer Telia Company AB, which was announced jointly by authorities in the United States, the Netherlands, and Switzerland on September 21, 2017.  Weighing in at more than $965 million, the Telia enforcement action is one of the largest in global anti-corruption history.  Similar to the VimpelCom resolution, reported in our 2016 Mid-Year FCPA Update, this case arose from allegations that Telia paid hundreds of millions of dollars to the daughter of the President of Uzbekistan—including making payments to a shell company beneficially owned by the daughter, as well as purchasing at an inflated price a company in which she held a financial stake—all to facilitate entry into and licenses to operate in the Uzbek telecommunications market.  The revenue Telia generated from its business in Uzbekistan allegedly totaled more than $2.5 billion, on which Telia allegedly earned $457 million in profits. To resolve the U.S. charges, Telia entered into a deferred prosecution agreement with DOJ and had its Uzbek subsidiary plead guilty to charges of conspiracy to violate the FCPA’s anti-bribery provisions.  The parent also consented to an SEC administrative cease-and-desist order alleging FCPA bribery and internal controls violations.  In addition, Telia reached parallel resolutions with the Dutch Public Prosecutor (Openbaar Ministerie) and Swedish Prosecution Authority (Åklagarmyndigheten).  After netting out a series of financial credits and offsets, Telia is expected to pay $274.6 million to DOJ, $274 million to the Dutch Public Prosecutor, $208.5 million to the SEC, and $208.5 million to either the Dutch Public Prosecutor or Swedish Prosecution Authority.  (The uncertainty of the final payment is a function of Swedish law, which may require prosecutors to first establish the corruption beyond a reasonable doubt in ongoing criminal cases against individual Telia executives before it may accept its share of the corporate settlement.)  Notably, not only was Telia able to escape a compliance monitor as part of its U.S. resolution, but it also is not required to report annually on its compliance program during the term of the deferred prosecution agreement. In addition to the three discussed above, we reported on a fourth multi-jurisdictional anti-corruption enforcement action of 2017, involving Rolls Royce plc, in our 2017 Mid-Year FCPA Update.  The following chart captures such resolutions from 2016 and 2017 and demonstrates this growing trend, which we expect will continue to be a significant part of global anti-corruption enforcement.       Multi-National Anti-Corruption Enforcement Actions – 2016 & 2017 Company Total Resolution U.S. Portion Other Countries Involved – Payments Keppel Offshore & Marine (Dec. 2017) $      422,216,980 $  105,554,245 (DOJ) Brazil (Ministério Público Federal) Singapore (Atty. Gen.’s Chambers) $  211,108,490 $   105,554,245 SBM Offshore (Nov. 2017) $    820,000,000 $ 238,000,000 (DOJ) Brazil (Ministério Público Federal) Netherlands (Openbaar Ministerie) $   342,000,000 $   240,000,000 Telia (Sep. 2017) $       965,773,949 $  483,273,949 (DOJ / SEC) Netherlands (Openbaar Ministerie) Sweden (Åklagarmyndigheten) $    274,000,000 $    208,500,000 Rolls-Royce (Jan. 2017) $      800,305,272 $  169,917,710 (DOJ) Brazil (Ministério Público Federal) United Kingdom (Serious Fraud Office) $      25,579,170 $    604,808,392 Odebrecht & Braskem (Dec. 2016) $    3,557,625,337 $  252,893,801 (DOJ / SEC) Switzerland (Swiss Attorney General) Brazil (Federal Prosecution Office) $    210,893,801 $ 3,093,837,736 Embraer (Oct. 2016) $     205,000,000 $ 185,000,000 (DOJ / SEC) Brazil (Federal Prosecution Office) Brazil (Securities & Exchange Comm.) $      19,300,000 $        1,800,000 GlaxoSmithKline (Sep. 2016) $     509,000,000 $   20,000,000 (SEC) China (Changsha People’s Court) $    489,000,000 VimpelCom (Feb. 2016) $     795,300,000 $ 397,600,000 (DOJ / SEC) Netherlands (Openbaar Ministerie) $    397,500,000       DOJ Continues to Demonstrate a Focus on Culpable Individuals After years of Deputy Attorneys General issuing namesake memoranda pronouncing DOJ policy for corporate prosecutions, the 2015 “Yates Memo” signaled an emphatic shift toward holding individual actors accountable for corporate misconduct.  This focus on individual liability has survived and even flourished through the shift in administrations, with nearly 70% of DOJ’s 2017 FCPA enforcement docket constituting prosecutions against individual defendants.  (The percentage is even higher if non-FCPA charges arising from FCPA investigations are considered.)  Indeed, DOJ’s 20 individual FCPA prosecutions this year is the highest number in any of the FCPA’s 40-year history except 2010, the year of the numerous (and subsequently dismissed) SHOT Show indictments.  The SEC, for its part, continues to espouse the importance of individual accountability, with Co-Director of Enforcement Steven Peiken most recently asserting that individual liability will be an “intense focus [of the SEC] in every FCPA investigation.”  Yet the SEC’s numbers for 2017 continue to reflect the inverse of DOJ’s, with individuals representing 30% of the SEC’s FCPA enforcement docket. There are several subsidiary points to be made of DOJ’s focus on individual culpability. First, it has been a commonly recited critique of recent years that DOJ and the SEC have focused too heavily on corporate liability in FCPA enforcement, and not sufficiently on holding accountable the individual actors responsible for the corporate FCPA violations.  Whether or not this is a fair criticism historically, certainly it does not accurately reflect 2017 FCPA enforcement, and our suspicion is that it will not in years to come.  DOJ’s 2017 enforcement docket, in particular, makes good on statements that DOJ officials have been making for years about its focus on prosecuting culpable individuals.  Examples from 2017 FCPA enforcement include: KOM Lawyer – On August 29, 2017, senior KOM lawyer Jeffrey S. Chow entered a guilty plea in the U.S. District Court for the Eastern District of New York to a single count of conspiracy to violate the FCPA’s anti-bribery provisions.  As allocuted at his plea hearing, Chow was a more than 25-year lawyer at KOM responsible for, among other things, drafting and preparing contracts with the company’s agents.  In the course of executing these duties, Chow became aware that the agent KOM had hired for Petrobras business was being overpaid, sometimes by millions of dollars.  Although he did not negotiate the contracts or make the decision to pay the bribes, Chow admitted that his role in drafting the contracts gave the illicit payments a semblance of legality and was therefore an important part of the corrupt scheme.  Chow’s plea was unsealed on December 26, 2017, days after charges were filed against his former employer as described above. Rolls-Royce Five – On November 7, 2017, nearly a year after the corporate resolution covered in our 2017 Mid-Year FCPA Update, FCPA charges were unsealed in the U.S. District Court for the Southern District of Ohio against three former Rolls-Royce employees (James Finley, Keith Barnett, and Aloysius Johannes Jozef Zuurhout), a former company intermediary (Petros Contoguris), and an executive of an international engineering and consulting firm working with Rolls-Royce (Andreas Kohler).  The allegations concern an alleged plot to bribe officials of a state-owned joint venture between the governments of China and Kazakhstan, formed to transport natural gas between the two nations.  The Rolls-Royce defendants allegedly disguised corrupt payments as commissions to Contoguris’s company, which then passed portions of those payments on to Kohler’s firm to use as bribes.  Contoguris, a Greek citizen believed to be residing in Turkey, has yet to be brought before the court and has been deemed by DOJ to be a fugitive.  Contoguris has been indicted on seven counts of FCPA bribery, 10 counts of money laundering, and one count each of conspiracy to violate these two statutes.  The other four defendants have each pleaded guilty to criminal informations charging conspiracy to violate the FCPA and/or substantive FCPA bribery violations. SBM Executives – In early November 2017, weeks before the corporate resolution described above, two former executives of SBM Offshore were charged criminally for their role in the corruption scheme.  Anthony Mace and Robert Zubiate, respectively the former CEO of the parent company and a sales and marketing executive of its U.S. subsidiary, pleaded guilty to one count each of FCPA conspiracy in connection with the company’s bribery of government officials in Angola, Brazil, and Equatorial Guinea.  The charges against Mace are noteworthy not only in that he was the CEO of a major international company, but also because the entire theory of liability was so-called willful blindness—i.e., that he authorized payments to third parties without actually knowing that they would be used for corrupt purposes, but while being “aware of a high probability [that] these payments were bribes and deliberately avoided learning the truth” about them. Embraer Executive – On December 21, 2017, more than a year after the corporate resolution covered in our 2016 Year-End FCPA Update, former Embraer sales executive Colin Steven was charged by criminal information in the U.S. District Court for the Southern District of New York.  Steven, a UK citizen residing in the United Arab Emirates while working for the Brazilian aircraft company, pleaded guilty to substantive and conspiracy FCPA and money laundering violations in connection with a scheme to pay $1.5 million in bribes to an official of Saudi Arabia’s state-owned oil company to secure the $93 million sale of three airplanes, as well as a related personal enrichment kickback scheme.  Steven also pleaded guilty to making a false statement to FBI agents concerning the purpose of the funds related to the kickback scheme. Odebrecht-Related Charges – Although little is known about these cases due to the fact that virtually all filings are under seal, FCPA Unit prosecutors have filed non-FCPA charges against two individuals reportedly connected to the wide-ranging Odebrecht bribery scheme reported on in our 2016 Year-End FCPA Update.  On April 20, 2017, Paulo César de Miranda and Barry W. Herman were charged by criminal complaint with one count each of failing to report a foreign financial account.  Miranda was also charged with a second count of making and using a false document. Second, the FCPA’s anti-bribery provisions, by their plain terms, do not cover the receipt of bribes by foreign government officials.  This was a conscious decision by Congress, which in passing the FCPA sought to regulate the domestic effects of corrupt business practices without treading too much upon the sovereignty of foreign nations and their own government officials.  Decades ago, DOJ sought to get around this statutory barrier by charging foreign official bribe recipients with conspiracy to violate the FCPA.  This approach was soundly rejected in a per curiam opinion of the U.S. Court of Appeals for the Fifth Circuit in United States v. Castle, 925 F.2d 831 (5th Cir. 1991), and has not been revisited since.  However, as we have noted in recent years (e.g., 2011 Year-End FCPA Update), DOJ has found the money laundering statute to be an effective tool for holding foreign official bribe recipients criminally liable where they use the U.S. financial system to launder the proceeds of their corruption.  Although these are not “FCPA” cases, they are generally prosecuted by the FCPA Unit, often in conjunction with FCPA cases, as can be seen from the following 2017 examples: PDVSA Defendants – DOJ has announced and unsealed the ninth and tenth guilty pleas in its ongoing investigation of a “pay to play” corruption scheme involving Venezuelan state-owned oil company Petróleos de Venezuela S.A. (“PDVSA”), which we last covered in our 2017 Mid-Year FCPA Update.  Specifically, on October 11, 2017, Florida businessman Fernando Ardila-Rueda pleaded guilty to substantive and conspiracy FCPA bribery charges, and on June 21, 2017, the Court unsealed the prior guilty plea to money laundering conspiracy by PDVSA purchasing representative and foreign official Karina Del Carmen Nunez-Arias, in connection with hundreds of thousands of dollars in bribes paid to place Ardila-Rueda’s company on bidding panels for PDVSA projects.  In total, six businesspersons and four PDVSA officials have been charged with and pleaded guilty to FCPA and money laundering offenses, respectively, in connection with this investigation to date.  Notably, Nunez-Arias was charged in 2016, but the charges were kept under seal while the investigation developed, a standard practice in FCPA investigations that leads us always to caution that the true extent of FCPA enforcement during a given period is not always public knowledge. Petroecuador Defendant – On October 12, 2017, DOJ charged a former executive of Ecuadorean state-owned oil company Petroecuador, Marcelo Reyes Lopez, for his alleged role in an FCPA-related money laundering scheme.  The public, unredacted version of the indictment is extremely sparse, but a DOJ motion to enter a protective order limiting disclosure of information about the case alleges that it has developed evidence of an “extensive bribery scheme that existed to provide illicit payments to officials from [Petroecuador] in order to secure and profit from contracts with that company.”  Lopez has been detained pending a June 2018 trial date, and DOJ is seeking the forfeiture of six of his properties in Florida. Third, debates often ensue about whether the suspected corrupt payments at issue in FCPA cases were actually used for corruption or simply pocketed by a third party as fraud.  This truism of FCPA enforcement was explicitly alleged in two 2017 FCPA cases as follows: Vietnamese Skyscraper Defendants – We reported in our 2017 Mid-Year FCPA Update on FCPA charges arising from a plot to bribe an official of a Middle Eastern sovereign wealth fund to induce the official to cause the fund to purchase a financially distressed skyscraper in Hanoi.  On October 31, 2017, FBI agents arrested real estate broker Andrew Simon for his alleged role in the plot, which involves Simon’s former co-workers, Sang Woo and Joo Hyun Bahn; Bahn’s father and executive of the South Korean construction company who owned the distressed property, Ban Ki Sang; and a fashion designer who was supposed to broker the corrupt deal, Malcolm Harris.  Much to the surprise of everyone else in the alleged deal, Harris did not actually know the official at the sovereign wealth fund and used the $500,000 down payment on an agreed-upon $2.5 million bribe for his own enrichment.  Harris pleaded guilty to non-FCPA fraud charges and was sentenced in October 2017 to 42 months in prison; Woo has reportedly pleaded guilty and is cooperating with DOJ; Bahn is reportedly in plea discussions with DOJ; Simon has pleaded not guilty; and Sang, who is in South Korea, has not yet been brought before the court.  DOJ’s theory of FCPA liability for these defendants, even where there was no real corruption of a foreign official, is that the defendants (other than Harris) agreed to bribe a foreign official and that the agreement itself, even without money changing hands, was a violation of the anti-bribery provisions. Haitian Development Defendant – On August 29, 2017, DOJ unsealed a criminal complaint charging Joseph Baptiste, a retired U.S. Army colonel and founder of a non-profit formed to help Haiti’s poor, on charges stemming from his alleged role in a corruption scheme connected to a Haitian development project.  Unbeknownst to Baptiste, the project’s investors who provided him the bribe money were undercover FBI agents.  Unbeknownst to the undercover FBI agents, Baptiste used the $50,000 down payment on a bribe for his own personal expenses.  DOJ alleges that there was an FCPA violation because Baptiste allegedly intended to use additional payments for actual bribery of Haitian port officials.  Baptiste reportedly entered into a signed plea agreement with DOJ after being approached by authorities and before the charges were made public, but then backed out of that deal, leading to his arrest.  On October 4, 2017, DOJ filed an indictment charging Baptiste with FCPA, Travel Act, and money laundering violations. The final set of individual cases brought by DOJ in 2017 concerns a new branch of corruption at the United Nations.  We first reported in our 2015 Year-End FCPA Update on bribery charges implicating former President of the U.N. General Assembly John Ashe and a scheme to corruptly influence a plan to build a U.N.-sponsored conference center in Macau (a 2017 trial conviction of one of the businessmen involved in this scheme is discussed below).  On November 20, 2017, DOJ unsealed a criminal complaint alleging a completely distinct bribery scheme involving Ashe’s successor to the U.N. General Assembly presidency.  Chi Ping Patrick Ho, the head of a non-governmental organization that holds “special consultative status” at the United Nations and is associated with the China Energy Fund, and Cheikh Gadio, the former Foreign Minister of Senegal and a business consultant, were each charged with substantive and conspiracy FCPA and money laundering violations associated with two separate bribery schemes.  The first involved an alleged scheme to pay $2 million to the President of Chad to secure valuable oil concessions and reduce a substantial fine for environmental violations by Ho’s Chinese employer.  The second scheme, allegedly “hatched in the hallways of the United Nations,” involved a separate plan to bribe the current Foreign Minister of Uganda and then-President of the U.N. General Assembly with $500,000 for various illicit benefits, including a share in profits from a Ugandan joint venture with Ho’s Chinese employer.  Ho alone was indicted on these charges on December 18, 2017.  Neither individual has yet (publicly) entered a plea in connection with these charges. As noted in many of the cases described above, a substantial portion of the individual FCPA defendants in 2017 are foreign nationals.  Specifically, as shown below, 15 of the 23 individual defendants (nearly two-thirds) were foreign nationals.       DOJ and the SEC Bring FCPA Cases Absent Proof of Bribery In the opening paragraphs of each of our semi-annual reports we note that the FCPA’s accounting provisions enable DOJ and the SEC to bring FCPA charges against issuers and their representatives even in the absence of proven bribery.  This year, DOJ and the SEC utilized these provisions to bring several cases predicated upon aggressive theories of FCPA liability. In our 2017 Mid-Year FCPA Update, we reported on two such FCPA enforcement cases containing no allegations of actual bribery:  (1) the SEC’s cease-and-desist proceeding against Cadbury / Mondelēz International, where the violation alleged by the SEC was payments to an agent on whom due diligence was not conducted and no written documentation of activities was obtained; and (2) DOJ’s non-prosecution agreement with Las Vegas Sands, where the violation alleged by DOJ was payments to a Chinese consultant, continuing even after being warned of the consultant’s allegedly dubious business practices. More recently, on July 27, 2017, the SEC announced an FCPA cease-and-desist action against Texas-based oilfield services provider Halliburton Company relating to alleged accounting violations arising from its retention of a local Angolan company.  According to the charging document, in 2008 Halliburton customer Sonangol, the Angolan state-owned oil company, put pressure on Halliburton to partner with more locally-owned businesses to satisfy local content regulations for foreign firms operating in Angola.  In response, Halliburton retained and paid $3.7 million to a local company owned by a neighbor and friend of the Sonangol official responsible for approving Halliburton’s contracts.  There was no bribery alleged.  But the SEC contended that Halliburton violated its own internal controls over the approval of local business partners, including by subverting a required internal bidding process and by reclassifying the type of vendor to one with a lower degree of scrutiny, to expedite the retention of this local firm.  Further, while the SEC acknowledged that there were “possible justifications for selecting the local Angolan company,” the SEC found it significant that these justifications were discussed only in company e-mails and not documented in Halliburton’s accounting system.  Collectively these actions, the SEC contended, violated the books-and-records and internal controls provisions of the FCPA. To resolve these charges, Halliburton consented to the entry of a cease-and-desist order and agreed to pay $29.2 million, consisting of $14 million in disgorgement from contracts awarded during the relevant period, $1.2 million in prejudgment interest, and a $14 million civil penalty.  In addition, Halliburton was required to retain an independent consultant, focused on African operations, for an 18-month term.  Finally, the SEC also brought an action against Halliburton’s former Angola country manager, Jeannot Lorenz, who allegedly selected and caused the accounting violations associated with the retention of the vendor in question.  To settle his charges, Lorenz paid a $75,000 civil penalty and agreed to cease and desist from future violations of the FCPA’s accounting provisions.  DOJ closed its investigation without taking any action.       Recurring Enforcement Actions The FCPA now having been around for four decades, as well as the subject of some of the most aggressive corporate enforcement seen over the last 10-15 years, we are beginning to see more and more companies find themselves the subject of a second FCPA enforcement action.  For example, the Halliburton action of July 2017, described immediately above, follows a somewhat larger scale FCPA resolution between the company and the SEC in 2009 arising from the participation of its former subsidiary in the Bonny Island “TSKJ” liquid natural gas consortium in Nigeria, as covered in our 2009 Mid-Year FCPA Update. But Halliburton was only one of three companies to register a second FCPA charge in 2017.  In addition, as covered in our 2017 Mid-Year FCPA Update, Zimmer Biomet Holdings (formerly Biomet, Inc.) and Orthofix International each reached FCPA resolutions during the first half of the year that each followed prior FCPA enforcement actions in 2012.  Notably, it appears from the public documents that the companies’ reporting and oversight obligations imposed as part of the first FCPA resolutions played a role in some or all three of these companies uncovering the conduct leading to the second FCPA resolutions.  The lesson to be learned is that companies must not let down their guard following an FCPA settlement with DOJ and/or the SEC, as the standard obligation in most corporate FCPA resolutions to report for several years “credible evidence” of “corrupt payments” presents significant ongoing risk to the company if not handled appropriately. With an acknowledgement that the ever-changing corporate form renders this a somewhat imprecise exercise, at least 12 companies have had multiple FCPA resolutions. The industry sectors range widely from pharmaceutical companies, to information and infrastructure, to technology and telecommunications.       DOJ and the SEC Push the Boundaries of “Foreign Official” For years there has been debate, from the courts to congressional committees, about the FCPA’s application to employees of commercial entities owned or controlled by foreign governments.  To date, DOJ and the SEC have gotten the better of this “state-owned entities” argument, as efforts to amend the statute petered out and the courts have with virtual unanimity sided with the government’s view.  Unless and until there are further developments, we are guided by complex, multi-factored tests from United States v. Esquenazi, 752 F.3d 912 (11th Cir. 2014) and the DOJ/SEC FCPA Resource Guide, as described in our 2014 Mid-Year and 2012 Year-End FCPA updates, respectively. In 2017, DOJ and the SEC pushed the boundary on who constitutes a “foreign official” for purposes of the FCPA perhaps even a step further.  In two corporate FCPA settlements, they included allegations buried deep in the charging documents that, although they do not constitute binding precedent as they were settled outside of court, do give a window into the government’s increasingly expansive view of the statute’s coverage. The SEC’s final FCPA charges of 2017 were levied against Massachusetts-based medical diagnostic test manufacturer Alere, Inc.  On September 28, 2017, the SEC announced that Alere consented to a cease-and-desist order alleging a variety of accounting violations, principally related to alleged revenue recognition violations, but which also included the failure to prevent and properly record improper payments to foreign officials in Colombia and India.  To resolve the charges, Alere without admitting or denying the SEC’s findings agreed to pay more than $3.8 million in disgorgement plus prejudgment interest and a $9.2 million civil penalty.  Alere has announced that DOJ closed its investigation without taking action. The SEC alleged that Alere made corrupt payments to a manager of a health insurance company in Colombia.  Although the health insurance company was privately incorporated, the SEC alleged that Colombia’s Ministry of Health took control of the company following allegations of mismanagement.  According to the SEC, the health insurance company thus became “an instrumentality of the Government of Colombia and its employees were officials of the Government of Colombia.” The second allegation of note in this regard concerns DOJ’s charges against SBM Offshore discussed above, and specifically the allegations of corruption in Kazakhstan.  SBM was alleged to have made corrupt payments to obtain oil exploration and development contracts both to an employee of KazMunayGas, Kazakhstan’s state-owned oil company, and to an employee of a subsidiary of an Italian oil and gas company.  Although the latter entity is clearly commercial in nature, DOJ alleged that its employee “was acting in an official capacity for or on behalf of KazMunayGas” because his employer was granted a concession to operate the oil field.  In other words, consistent with a view espoused in FCPA Opinion Procedure Release 2010-03, covered in our 2010 Year-End FCPA Update, DOJ treated an employee of a commercial company as a “foreign official” for purposes of the FCPA based on the company’s license to operate on behalf of a state-owned entity. 2017 FCPA-RELATED POLICY DEVELOPMENTS       New FCPA Corporate Enforcement Policy One of the most challenging decisions any corporate counsel faces is whether, upon learning of suspected misconduct within the company, to self-report that information to government prosecutors and regulators.  Most companies operate with a sincere commitment to ethical conduct and transparency, and would be naturally inclined to make such reports and see the wrongdoers held accountable, particularly since in so many cases it is the company that has been victimized by the misconduct.  But the U.S. legal construct of respondeat superior liability, whereby the company itself may be held civilly or even criminally liable for the misdeeds of its representatives if there was at least some intention to benefit the company, even where the action was clearly against corporate policy, gives any company counsel pause.  Add to that prospect of potential corporate criminal liability the cost, collateral consequences (such as civil litigation), distraction, length, and uncertainty of corporate criminal investigations, and you have a recipe for what inevitably is a difficult disclosure decision. Recognizing these difficulties, and incentivized to encourage more corporate disclosures, DOJ has sought to provide greater certainty and transparency concerning the benefits of voluntary disclosure in anti-corruption cases.  This effort began with the announcement of a 12-month “FCPA Pilot Program” in April 2016, covered in our 2016 Mid-Year FCPA Update, which was subsequently extended and then, finally, codified in the U.S. Attorneys’ Manual as the new “FCPA Corporate Enforcement Policy,” announced by Deputy Attorney General Rod J. Rosenstein on November 29, 2017. The FCPA Corporate Enforcement Policy introduces a presumption that DOJ will decline prosecution of a company that voluntarily discloses FCPA-related misconduct, cooperates fully in the ensuing investigation, and appropriately remediates the misconduct.  There are, however, many caveats. First and foremost is what DOJ considers “appropriate remediation.”  To qualify for a “declination” under the FCPA Corporate Enforcement Policy, companies are required to disgorge any allegedly improper profits from the conduct.  This can be accomplished in the form of a resolution with a parallel regulator, such as the SEC, or it could take the form of the so-called “declination with disgorgement” resolutions we covered in our 2016 Year-End and 2017 Mid-Year FCPA updates.  In either event, even a “declination” under this policy may be accompanied by public allegations (or even admissions) of corporate misconduct and financial “penalties.” Second, the “presumption” of declination that accompanies a voluntary disclosure is just that, a “presumption” that may be overcome by “aggravating circumstances.”  Such circumstances enumerated in the FCPA Corporate Enforcement Policy include, but according to DOJ are not necessarily limited to:  (1) the involvement of executive management in the misconduct; (2) significant profits from the misconduct; (3) misconduct that was pervasive; and (4) “criminal recidivism.”  If DOJ determines that such aggravating circumstances (or others, not enumerated in the Policy) render it inappropriate to provide a “declination,” the FCPA Corporate Enforcement Policy provides that in the ensuing prosecution it will provide a 50% reduction off the low end of the U.S. Sentencing Guidelines range (except in cases of recidivism) and also generally not require a monitor for organizations that have implemented an effective compliance program.  Like the FCPA Pilot Program, for companies that do not self-disclose, but otherwise cooperate and undertake appropriate remediation, DOJ will provide at most a 25% discount off the bottom of the Guidelines range. There is no question that DOJ’s FCPA Corporate Enforcement Policy is a positive step forward in providing some transparency to companies that discover corruption-related misconduct.  Nevertheless, many questions concerning this policy abound.  For example, what is a “criminal recidivist”?  Another interesting and rather novel statement included in the Policy with no elaboration is that as a precursor to receiving mitigation credit, a company must “prohibit[] employees from using software that generates but does not appropriately retain business records and communications.”  Given the prevalence of commercial messaging apps throughout the workforce, the vast majority of which are used for completely legitimate means, companies will need to be prepared to address this issue.       Following Kokesh, IRS Reaffirms View Disgorgement Is Not Tax Deductible As reported in our client alerts 2017 Mid-Year FCPA Update and United States Supreme Court Limits SEC Power to Seek Disgorgement Based on Stale Conduct, in Kokesh v. SEC, 137 S. Ct. 1635 (2017), the Supreme Court unanimously held that disgorgement in an SEC enforcement proceeding is a “penalty” within the meaning of 28 U.S.C. § 2462 and therefore is subject to the five-year statute of limitations.  This decision limits the SEC’s ability to seek disgorgement based on conduct that occurred more than five years earlier, and also rejects the SEC’s long-held position that disgorgement is an equitable remedy not subject to any limitations period. Following Kokesh, on December 1, 2017, the Internal Revenue Service released a Chief Counsel Advice Memorandum (CCA 201748008) addressing the deductibility of amounts paid as disgorgement for securities law violations.  Similar to the May 2016 CCA covered in our 2016 Mid-Year FCPA Update, the IRS concludes that a taxpayer cannot claim a U.S. federal income tax deduction for a disgorgement payment associated with a securities law violation.  Section 162(f) of the Internal Revenue Code prohibits a deduction for any fine or similar penalty paid to a government for a violation of law.  In light of the Supreme Court’s ruling in Kokesh that disgorgement is equivalent to a penalty, the IRS took the view that disgorgement payments are penalties and therefore not deductible.       Global Magnitsky Executive Order on Human Rights Abuses / Corruption We have for years been following the U.S. government’s increasing focus on sanctioning foreign government officials engaged in corruption.  Examples covered in this Update include the increased employment of the money laundering statute for criminal prosecution of the individuals discussed above and in rem civil forfeiture actions against the corrupt proceeds discussed below. On December 20, 2017, prosecutors and regulators were handed still another tool in the fight against international corruption.  In an Executive Order titled, “Blocking the Property of Persons Involved in Serious Human Rights Abuse or Corruption,” President Trump declared “that the prevalence and severity of human rights abuse and corruption . . . have reached such scope and gravity that they threaten the stability of international political and economic systems.”  Relying on the Executive Order, on December 21, 2017 the Treasury Department’s Office of Foreign Assets Control (“OFAC”) designated 52 persons and entities, thereby making it unlawful for U.S. persons to engage with them in business transactions of any kind absent an OFAC license.  Notably, several of the listed individuals have been tied, directly or indirectly, to recent FCPA enforcement actions, including Dan Gertler, Gulnara Karimova, and Ángel Rondón Rijo. 2017 FCPA ENFORCEMENT LITIGATION       DOJ Secures Three FCPA-Related Trial Convictions As discussed in our 2009 Year-End FCPA Update, in 2009 the then-Assistant Attorney General for the Criminal Division proclaimed that year “the year of the FCPA trial” following four high-profile FCPA trial convictions.  The intervening years have seen somewhat more mixed results for DOJ’s FCPA Unit.  But 2017 again saw DOJ back on top, securing convictions in three separate trials involving FCPA and FCPA-related charges. First, as reported in our 2017 Mid-Year FCPA Update, on May 3, 2017 former Guinean Minister of Mines and Geology Mahmoud Thiam was found guilty by a Manhattan federal jury on one count of transacting in criminally derived property and one count of money laundering in connection with the alleged receipt of bribes to secure valuable investment rights in Guinea.  The Honorable Denise L. Cote denied Thiam’s motion for a new trial on July 11, and on August 25 sentenced Thiam to seven years’ imprisonment and ordered him to forfeit $8.5 million.  Thiam is appealing to the U.S. Court of Appeals for the Second Circuit. Second, on July 17, 2017, Heon-Cheol Chi, Director of the Korea Institute of Geoscience and Mineral Resources (“KIGAM”) Earthquake Research Center, was convicted by a federal jury in Los Angeles of one count of transacting in criminally derived property associated with payments from two seismological companies with business before KIGAM.  The jury did not reach a verdict on the other five money laundering counts with which Chi was charged, which were subsequently dismissed on DOJ’s motion.  On October 2, the Honorable John F. Walter sentenced Chi to 14 months in prison, along with a $15,000 fine.  Chi is appealing to the U.S. Court of Appeals for the Ninth Circuit. Third, on July 27, 2017, Macau billionaire Ng Lap Seng was convicted by a Manhattan federal jury for his role in a scheme to pay more than $1 million in bribes to two U.N. officials in connection with, among other things, a plan to build a U.N.-sponsored conference center in Macau.  After a four-week trial, the jury needed only hours to return a verdict finding Seng guilty on all six counts, including FCPA, federal programs bribery, and money laundering charges.  Seng has filed a Rule 33 motion for a new trial, which remains pending before the Honorable Vernon S. Broderick.  Judge Broderick denied DOJ’s request to revoke bail following the conviction, but has placed Seng on house arrest pending an early 2018 sentencing date.       Och-Ziff Defendants Oppose SEC Disgorgement and Injunctive Relief In our 2017 Mid-Year FCPA Update we covered the SEC’s civil complaint alleging that former Och-Ziff executive Michael Cohen and analyst Vanja Baros violated the FCPA’s anti-bribery provisions, among other securities law violations.  Cohen and Baros have filed separate motions to dismiss arguing, among other things, that the SEC is barred from seeking disgorgement and injunctive relief under the Kokesh decision, in which as discussed above the Supreme Court held that disgorgement is a “penalty” within the meaning of 28 U.S.C. § 2462 and therefore subject to the five-year statute of limitations.  Cohen and Baros contend that the bulk of the conduct in the SEC’s complaint is at least 10 years old.  Cohen further argues that the SEC’s complaint does not sufficiently allege that he had knowledge of the bribery scheme, while Baros, an Australian citizen living in the United Kingdom, argues that the court does not have personal jurisdiction over him.  The SEC opposed the motions to dismiss, and the parties presented oral argument before the Honorable Nicholas G. Garaufis of the U.S. District Court for the Southern District of New York on December 19, 2017.  A ruling is pending.       Hearing on Dmitry Firtash’s Motion to Dismiss As noted in our 2017 Mid-Year FCPA Update, in February 2017 Austria’s Constitutional Court approved the extradition of Ukrainian billionaire Dmitry Firtash to the United States to face FCPA charges that he authorized $18.5 million in bribes to Indian officials.  But on December 12, 2017, the extradition was stayed by the Austrian Supreme Court pending Firtash’s request for a new hearing in Austria and request that the Court of Justice of the European Union hear whether the extradition would violate the EU Charter on Human Rights. Meanwhile, in the U.S. proceedings, Firtash has moved in absentia to dismiss the indictment pending against him in the U.S. District Court for the Northern District of Illinois, arguing improper venue, that the laws he is charged with violating have no extraterritorial effect, and that “the prosecution is a violation of [his] due process rights because the United States has no legitimate interest in prosecuting the charged conduct.”  The Honorable Rebecca R. Pallmeyer heard two days of oral argument in September 2017, which of note featured DOJ FCPA Unit Chief Dan Kahn.  A ruling is pending.       Novel Motion to Unseal Indictment by Potential FCPA Defendant We reported in our 2017 Mid-Year FCPA Update on the curious case of a “John Doe” plaintiff who brought suit against DOJ alleging that DOJ violated his due process rights by accusing him in all but name of participating in the infamous Bonny Island Nigeria corruption scheme.  On April 11, 2017, the U.S. Court of Appeals for the Fifth Circuit affirmed a district court order dismissing the novel claim as barred by the statute of limitations. Then, on September 29, 2017, “John Doe” Samir Khoury made the even more unorthodox move of filing a motion to unseal and then dismiss an indictment that may or may not have ever been filed against him.  Khoury, who is overtly described in public court records only as “LNG Consultant,” contends that the identifying information about his employment history, citizenship, and business relationship with various named parties together have “identified [him] in all respects except by name.”  Based on the conduct attributed to him in the charging documents of other defendants, as well as DOJ’s alleged refusal to confirm his status in the investigation, Khoury alleges that it is likely that an indictment has been pending against him under seal of the court since 2009, waiting for him to travel to the United States or another country with an extradition treaty.  Khoury contends that this amounts to a violation of his Speedy Trial Act rights and that any indictment must be unsealed and then dismissed as untimely under the applicable statute of limitations. DOJ attorneys have entered appearances in Khoury’s case, but all further substantive pleadings have been made under seal.       Siemens Defendant Makes Initial Court Appearance; Pleads Not Guilty In a case nearly as old as the Bonny Island bribery scandal, on December 22, 2017, former Siemens executive Eberhard Reichert appeared in the U.S. District Court for the Southern District of New York and entered a not guilty plea before the Honorable Denise L. Cote.  As discussed in our 2011 Year-End FCPA Update, Reichert was one of eight Siemens representatives indicted on FCPA charges in December 2011.  Since then, only one other defendant (Andres Truppel) has appeared to answer the criminal charges.  Reichert, who was extradited to the United States following his arrest in Croatia in September 2017, was released on bond pending a July 2018 trial date. 2017 FCPA-RELATED SENTENCING DOCKET Fifteen defendants were sentenced on FCPA and FCPA-related charges in 2017.  Sentences ranged from probationary, non-custodial sentences to as high as seven years in prison.  Similar to an observation we made in our 2015 Year-End FCPA Update, the data for 2017 show that one of the most pertinent factors in the sentencing of a defendant involved in an FCPA-related prosecution is whether the defendant additionally (or instead) faces a money laundering charge.  Whereas the FCPA carries a statutory maximum of five years per violation, the statutory maximum for money laundering is 20 years.  Further, the way in which sentences for money laundering offenses are calculated under the U.S. Sentencing Guidelines generally leads to higher advisory prison terms.  Although sentences vary by a wide degree depending on the facts of the case, the average prison term in 2017 for FCPA convictions not including a money laundering count was 19 months, whereas the average of FCPA-related convictions including a money laundering count was more than one-and-a-half times that, at 33.5 months. The sentences imposed in FCPA and FCPA-related cases in 2017 follow: Defendant Sentence Date Sentenced Date Charged Court (Judge) Comment $ Laundering Conviction? Ernesto Hernandez Montemayor 24 months 01/23/2017 11/06/2015 S.D. Tex. (Bennett) $2 million forfeiture Yes (no FCPA charge) Kamta Ramnarine 3 years’ probation 02/02/2017 08/15/2016 S.D. Tex. (Hinojosa) No Daniel Perez 3 years’ probation 02/02/2017 08/15/2016 S.D. Tex. (Hinojosa) No Victor Hugo Valdez Pinon 12 months, 1 day 03/02/2017 09/15/2016 S.D. Tex. (Bennett) $90,000 restitution + $275,000 forfeiture No Douglas Ray 18 months 04/17/2017 09/15/2016 S.D. Tex. (Bennett) $590,000 in restitution + $2.1 million forfeiture No Samuel Mebiame 24 months 06/14/2017 08/12/2016 E.D.N.Y. (Garaufis) No Dmitrij Harder 60 months 07/19/2017 01/06/2015 E.D. Pa. (Diamond) $100,000 fine + $1.9 million forfeiture No Mahmoud Thiam 84 months 08/28/2017 12/12/2016 S.D.N.Y. (Cote) $8.5 million forfeiture Yes (no FCPA charge) Frederic Pierucci 30 months 09/25/2017 11/27/2012 D. Conn. (Arterton) $20,000 fine No Amadeus Richers ~ 8 months 09/27/2017 12/04/2009 S.D. Fla. (Martinez) Extradited from Panama No Heon-Cheol Chi 14 months 10/02/2017 12/12/2016 C.D. Cal. (Walter) $15,000 fine Yes (no FCPA charge) Malcolm Harris 42 months 10/05/2017 12/15/2016 S.D.N.Y. (Ramos) $760,000 restitution + $500,000 forfeiture No (no FCPA charge) Boris Rubizhevsky 12 months, 1 day 11/13/2017 10/29/2014 D. Md. (Chuang) $26,500 forfeiture Yes (no FCPA charge) Eduardo Betancourt 12 months, 1 day 12/21/2017 02/02/2016 S.D. Tex. (Harmon) $150,000 restitution No (no FCPA charge) Franklin Marsan 12 months, 1 day 12/21/2017 02/02/2016 S.D. Tex. (Harmon) $150,000 restitution No (no FCPA charge) 2017 KLEPTOCRACY FORFEITURE ACTIONS For years we have been following DOJ’s Kleptocracy Asset Recovery Initiative, spearheaded by DOJ’s Money Laundering and Asset Recovery Section, which uses civil forfeiture actions to freeze, recover, and, in some cases, repatriate the proceeds of foreign corruption.  2017 saw increased coordination between attorneys from this section and DOJ’s FCPA Unit, as frequently they have been appearing in one another’s enforcement actions, working hand-in-glove across section lines. In our 2016 Year-End and 2017 Mid-Year FCPA updates, we reported on DOJ’s massive civil forfeiture action seeking to recover more than $1 billion in assets associated with Malaysian sovereign wealth fund 1Malaysia Development Berhad (“1MDB”).  In September 2017, however, DOJ obtained an indefinite stay of the forfeiture actions pending before the Honorable Dale S. Fischer of the U.S. District Court for the Central District of California because of concerns the civil forfeiture actions could jeopardize DOJ’s ongoing criminal investigation. In another significant civil forfeiture action, on July 14, 2017, DOJ announced the filing of a complaint to seize and forfeit $144 million in proceeds of alleged corruption involving Nigeria’s former Minister for Petroleum Resources, Diezani Alison-Madueke, and Nigerian businessmen Kolawole Akanni Aluko and Olajide Omokore.  The assets named in the complaint include most prominently an $80 million yacht and a $50 million Manhattan apartment.  Various parties have made an appearance in the action and asserted an interest in the property to be seized, including the Federal Republic of Nigeria. 2017 FCPA-RELATED PRIVATE CIVIL LITIGATION Despite the fact that the FCPA does not provide for a private right of action, civil litigants have long used a variety of causes of action, with varying degrees of success, to pursue private redress for losses allegedly associated with FCPA-related misconduct.       Shareholder Lawsuits Shareholder litigation all too frequently follows a company’s announcement of an FCPA-related event, either through a class action lawsuit brought on behalf of shareholders whose stock value has dropped, allegedly as a result of the misconduct, or a shareholder derivative lawsuit brought against the company’s directors for allegedly violating their fiduciary duties to run the business in a compliant manner.  Examples with significant developments during the second half of 2017 include: Braskem S.A. – On September 14, 2017, Brazilian chemical company Braskem agreed to a settle a class action lawsuit with a payment of $10 million to investors who alleged that the company committed securities fraud by misleading them regarding its role in the Operation Car Wash scandal.  As covered in our 2016 Year-End FCPA Update, Braskem pleaded guilty in December 2016 to conspiring to violate the FCPA’s anti-bribery provisions.  The Honorable Paul A. Engelmayer of the U.S. District Court for the Southern District of New York has granted preliminary approval to the settlement, with a final settlement hearing scheduled for February 2018. Och-Ziff Capital Mgmt. Group LLC – On September 29, 2017, the Honorable J. Paul Oetken of the U.S. District Court for the Southern District of New York for the second time dismissed certain securities fraud claims against Och-Ziff and senior executives alleging, among other things, that they failed to timely disclose the investigation that led to the DOJ/SEC FCPA resolution covered in our 2016 Year-End FCPA Update.  Other claims were allowed to proceed to discovery.  Plaintiffs’ motion to certify a class of investors is now fully briefed and awaiting disposition. Sinovac Biotech Ltd. – On July 3, 2017, shareholders of vaccine developer Sinovac Biotech filed a putative class action lawsuit in the U.S. District Court for the District of New Jersey alleging that the company misled investors about its corrupt business dealings in China.  The action came in the wake of a 2016 report published by a financial research firm that Sinovac’s CEO had bribed a Chinese official to obtain vaccine approval.  The report prompted an SEC investigation, later joined by DOJ, which allegedly caused the company’s stock price to drop.  On September 6, 2017, the named plaintiff voluntarily dismissed the action, which the court granted without prejudice. VimpelCom Ltd. – In late 2015, a putative class of investors sued VimpelCom (now VEON Ltd.) alleging violations of the federal securities laws after the company’s stock price dropped following revelations of the investigation leading to the FCPA resolution covered in our 2016 Mid-Year FCPA Update.  Among the allegations, the plaintiffs contend that VimpelCom made material misstatements and omissions in its SEC filings, including referencing an increase in the company’s subscriptions and revenue in Uzbekistan without disclosing that this was, at least in part, a result of bribery.  On September 19, 2017, the Honorable Andrew L. Carter, Jr. of the U.S. District Court for the Southern District of New York denied VimpelCom’s motion to dismiss most of the claims.  The company is scheduled to file an answer to the complaint in early 2018.       Civil Fraud Actions Associação Brasileira De Medicina De Grupo (“Abramge”), an association of Brazilian health insurers, has filed civil fraud and conspiracy complaints in various federal district courts against numerous medical device companies, including Abbott Laboratories, Inc. (Northern District of Illinois), Arthrex, Inc., Boston Scientific Corporation, and Zimmer Biomet Holdings (District of Delaware), and Stryker Corporation (Western District of Michigan).  Abramge alleges that the defendants, which it dubs “the Prosthetic Mafia,” engaged in corrupt practices that inflated prices for medical devices ultimately reimbursed by the association’s members. Abramge filed a motion with the Judicial Panel on Multidistrict Litigation, seeking to consolidate the actions before one court.  This motion was denied by the Panel on May 31, 2017, on the grounds that the allegations in each case were distinct enough, and the number of actions few enough, to proceed with the cases separately.  In the Stryker case, on June 28, 2017, the Honorable Robert J. Jonker dismissed the action on the doctrine of forum non conveniens, holding that the fraud allegations belong in Brazilian, not American, court.  Not long after, Abbott Laboratories consented to jurisdiction in Brazil and Abramge voluntarily dismissed its U.S. lawsuit on August 29, 2017.  Arthrex, Boston Scientific, and Zimmer Biomet have moved to dismiss the case in Delaware, which motion is pending. Another civil fraud action with ties to international corruption allegations concerns the lawsuit of husband and wife private investigators Peter Humphrey and Yu Yingzeng against their former client GlaxoSmithKline plc (“GSK”).  As we reported in our 2014 Year-End FCPA Update, Humphrey and Yu were convicted in Chinese court and spent more than a year in Chinese prison for illegally obtaining private information while investigating a corruption-related whistleblower claim on behalf of GSK.  In November 2016, they brought a Racketeer Influenced and Corrupt Organizations (“RICO”) Act lawsuit against their former client, alleging that the company misled them into believing that the whistleblower’s claims were false and failed to disclose that the whistleblower had powerful connections in China.  On September 29, 2017, the Honorable Nitza I. Quiñones Alejandro of the U.S. District Court for the Eastern District of Pennsylvania granted GSK’s motion to dismiss the complaint in its entirety, holding that Humphrey and Yu did not suffer a domestic injury and RICO does not cover injuries that occurred entirely outside of the United States.       Corruption as Support of Terrorism Allegations On October 17, 2017, scores of American service members and their families filed an Anti-Terrorism Act lawsuit in U.S. District Court for the District of Columbia against five healthcare companies and various subsidiaries alleging a pattern of corruption in Iraq that ultimately funded a terrorist organization.  Specifically, plaintiffs allege that between 2005 and 2009 the defendant entities provided extra “in-kind” goods to the Iraqi Ministry of Health, beyond those called for in contracts, which goods were then sold on the black market to support the Jaysh al-Mahdi, which purportedly controlled the Ministry of Health during this period of conflict in Iraq.  Defendants’ response to the complaint is currently due in February 2018.       Breach of Contract Litigation On March 23, 2017, Cicel (Beijing) Science & Technology Co. Ltd. filed a breach of contract action against Misonix, Inc. in the U.S. District Court for the Eastern District of New York.  Misonix argued that it terminated Cicel, its Chinese distributor, after discovering potentially corrupt conduct and disclosing the same to DOJ and the SEC.  Cicel claimed this justification was a pretext and nevertheless that Misonix breached the parties’ contractual arrangement by terminating the relationship.  On October 7, 2017, the Honorable Arthur D. Spatt denied Misonix’s motion to dismiss the breach of contract claim, allowing the case to proceed to discovery. 2017 INTERNATIONAL ANTI-CORRUPTION DEVELOPMENTS       World Bank Integrity Vice Presidency Pascale Hélène Dubois is now the leader of World Bank Group Integrity Vice Presidency (“INT”), a unit that plays an important role in global anti-corruption enforcement.  INT kept an active docket under Dubois’s leadership in Fiscal Year 2017, sanctioning 60 entities and individuals, honoring 84 cross-debarments from other development banks, and making 456 referrals to national authorities in more than 100 countries. World Bank investigations and sanctions proceedings can at times place targets involved in parallel criminal proceedings in a difficult spot.  That tension was on display in Sanctions Board Decision No. 93, issued June 2, 2017.  The respondent was charged with obstruction after refusing to allow INT to audit its records, asserting that the audit would compromise its right against self-incrimination in the context of a pending criminal charge.  The Sanctions Board, however, upheld the INT sanction, concluding that the respondent could not use the right against self-incrimination to avoid its contractual obligations to the World Bank.  This case is part of a larger World Bank and criminal inquiry involving Wassim Tappuni, a former World Bank consultant who, as discussed below, was convicted in July 2017 in the United Kingdom for his involvement in a scheme to defraud World Bank and U.N. Development Programme projects.       United Kingdom As we will cover in significantly greater detail in our forthcoming 2017 Year-End UK White Collar Crime Update, to be released on January 8, 2018, the year 2017 was a record for UK anti-corruption enforcement.  Including the domestic bribery cases prosecuted under the UK Bribery Act 2010, 27 individuals were convicted and three companies concluded enforcement actions, two with convictions and one with a deferred prosecution agreement.  To assist our clients with these challenges, we are pleased to announce that Sacha Harber-Kelly has joined the firm as a partner after working at the SFO for many years.  A brief summary of the international anti-corruption actions follows. In our 2017 Mid-Year UK White Collar Crime Update, we reported that the UK Serious Fraud Office (“SFO”) had announced charges against F.H. Bertling Limited and seven individuals relating to an alleged conspiracy to pay $250,000 to an agent of Angolan state oil company Sonangol.  Between September 2016 and August 2017, the SFO secured guilty pleas by F.H. Bertling and six of the individuals for 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.  On October 20, 2017, three of the individuals were given suspended 20-month prison sentences, fined £20,000, and disqualified from serving as company directors for five years.  The only defendant to take his case to trial was acquitted by a jury at Southwark Crown Court on September 21, 2017. In November 2017, the SFO announced Prevention of Corruption Act 1906 charges against five individuals in its ongoing investigation of contracts awarded by Unaoil to SBM Offshore in Iraq.  Three of the individuals are former Unaoil employees—Ziad Akle, Basil Al Jarah, and Saman Ahsani—and two are former SBM Offshore employees—Paul Bond and Stephen Whiteley. On July 25, 2017, World Bank and U.N. Development Programme consultant Wassim Tappuni was convicted by a jury at Southwark Crown Court of corruption-related charges associated with his receipt of £1.7 million in bribes to skew his evaluation and otherwise to subvert the competitive process of the tenders he oversaw.  Tappuni was sentenced to six years’ imprisonment on September 22, 2017.       Rest of Europe France As reported in our 2017 Mid-Year FCPA Update, Teodoro Nguema Obiang Mangue, the son of the President and himself Second Vice President of Equatorial Guinea, went on trial in France for allegedly embezzling more than $112 million from his home country.  In October 2017, Obiang was convicted, fined €30 million, given a suspended three-year prison sentence, and had his assets in France confiscated. Greece In our 2014 Year-End and 2015 Mid-Year FCPA updates, we reported on the indictment of 64 individuals in the Siemens – OTE corruption case.  On July 28, 2017, an Athens appeals court found former Greece Transport Minister Tassos Mantelis guilty of money laundering in connection with payments by Siemens’s Greek branch in 1998 and 2000 to secure contracts to digitalize phone lines for the then state-owned Greek telecom.  The court found that some 450,000 Deutsche Marks were transferred to an account controlled by Mantelis as a kickback, rather than as a campaign contribution as Mantelis had claimed.  Another defendant, Ilias Georgiou, a former Siemens executive in Greece, was convicted of money laundering and bribery in connection with his role in transferring the funds to Mantelis.  Aristidis Mantas, a former Mantelis aide, also was convicted of complicity in the money laundering scheme but was acquitted of complicity to bribe. Italy On December 20, 2017, an Italian judge granted the Milan Public Prosecutor’s Office’s request to indict oil and gas giants Royal Dutch Shell and Eni—as well 11 of the companies’ current and former executives, including current Eni CEO Claudio Descalzi and former Shell UK Chairman Malcolm Brinded—on corruption charges associated with a $1.3 billion deal for oil exploration rights in an offshore block in Nigeria.  Among other things, prosecutors allege that $520 million from the 2011 deal was converted to cash for payments to then-Nigerian president Goodluck Ebele Azikiwe Jonathan and other officials.  The Nigerian government seized the offshore block in January 2017.  Shell, Eni, and the individuals have denied wrongdoing, and the case is currently scheduled to go to trial beginning in March 2018. Portugal In July 2017, the Portuguese Public Prosecutor’s Office filed corruption and forgery charges against four former TAP Airlines employees, including former TAP board member Fernando Sobral, in connection with up to €25 million in payments allegedly received from SonAir, an Angolan air transport provider.  Prosecutors allege that, between 2008 and 2009, SonAir paid TAP for aircraft maintenance services that were never provided, laundering the money through an intermediary that took a 75% commission before funneling the remaining funds to offshore accounts owned by SonAir.  Prosecutors also charged three lawyers accused of assisting with money laundering.  Notably, the conduct came to light during an internal audit and internal investigation by TAP, after which it self-reported to prosecutors in Lisbon. Russia On July 1, 2017, President Vladimir Putin signed into law a measure establishing a register of government employees terminated due to corruption.  Although there is no provision that would affirmatively prevent these individuals from occupying government positions, the Presidential Administration expects the publication of the register will assist in screening government service candidates.  In addition, to improve corporate anti-corruption compliance, the Ministry of Labor and the Ministry of Economic Development of the Russian Federation proposed a federal bill that, starting in 2019, would require companies to implement anti-corruption measures in accordance with federal anti-corruption standards. Sweden We reported in our 2017 Mid-Year FCPA Update on the March 2017 arrest of Evgeny Pavlov by Swedish authorities for suspected bribery in connection with helping his former employer, aerospace and transportation company Bombardier, secure a $350 million railway contract in Azerbaijan.  On October 11, 2017, a Swedish court found Pavlov not guilty.  Nevertheless, Sweden’s National Anti-Corruption Unit continues to investigate five other Bombardier employees referenced in the prosecution’s case against Pavlov.  In addition, Swedish prosecutors have charged three former Telia executives—former CEO Lars Nyberg, former deputy CEO and head of Eurasia Tero Kivisaari, and former general counsel for Eurasia Olli Tuohimaa—in connection with the Uzbek telecommunications corruption scandal described above.       The Americas Argentina We have been covering in recent years corruption-related prosecutions of political luminaries at the highest levels of the Argentinian government.  This year was no exception, with the indictment of former President Cristina Fernández de Kirchner and her former Vice President, Amado Boudou.  On the legislative front, the Corporate Liability Bill is now law.  The Bill imposes criminal liability on corporations (in addition to individuals) for certain crimes against the government, including bribery, foreign corruption, and falsifying balance sheets.  Fines of two-to-five times the illegal gains may be imposed, in addition to potential suspension and debarment from government contracts.  Pursuant to the Bill, companies may avoid prosecution by voluntarily self-disclosing the conduct, demonstrating an effective compliance program, and disgorging profits.  Moreover, even if unable to avoid prosecution entirely, companies can negotiate leniency agreements and obtain up to a 50% discount off the bottom end of the applicable fine range if they provide information that leads to uncovering all relevant facts. Brazil Even in the face of significant political turmoil, the long-running Lava Jato (Car Wash) investigation into allegations of corruption related to contracts with Petrobras and other state-owned entities continues.  Following perhaps the most notable conviction arising from the investigation to date, former President Luiz Inácio Lula da Silva was sentenced on July 12, 2017 to 9.5 years in prison after he was found guilty of accepting bribes.  Brazilian authorities have now charged more than 375 individuals and obtained 177 convictions, with total sentences of more than 1,750 years in prison. Despite, or perhaps because of, this success, tension has arisen over potential efforts to curb the investigation.  In May 2017, President Michel Temer appointed a close political ally, Torquato Jardim, to head the Ministry of Justice, which oversees the Federal Police.  In July 2017, the Federal Police announced it would shut down the Car Wash Task Force and absorb its members into a broader anti-corruption unit, a move that prompted widespread objections.  More recently, former Prosecutor General Rodrigo Janot, whom Temer replaced in mid-September, alleged that the personnel changes were part of an effort to divert graft investigations.  In the months before leaving his post, Janot charged Temer with corruption, obstruction of justice, and criminal conspiracy.  Temer avoided standing trial, however, after twice lobbying Brazil’s Congress to block his prosecution. 2017 also saw Brazilian authorities continue to investigate other instances of alleged corruption.  In September, Joesley Batista, one of the owners of Brazilian meatpacker JBS S.A., surrendered to police after a court revoked the immunity granted to him under a previous plea deal described in our 2017 Mid-Year FCPA Update.  JBS executive Ricardo Saud also was arrested.  Then-Prosecutor General Janot sought the arrests after Batista’s attorneys inadvertently produced a recording of Batista and Saud discussing crimes not covered by the plea deal.  In another prominent case, in October 2017, the head of Brazil’s Olympic Committee, Carlos Arthur Nuzman, and the Director of Operations for the Rio de Janeiro Olympic Games, Leonardo Gryner, were detained on suspicion that they paid bribes to ensure Rio de Janeiro’s selection to host the 2016 Summer Games.  Former governor of Rio de Janeiro State Sérgio Cabral and Brazilian businessman Arthur César de Menezes Soares Filho also have been accused of involvement, and Cabral has been sentenced to a total of more than 87 years in prison in connection with Operation Car Wash. As Brazilian anti-corruption investigations increasingly rely on leniency agreements—the Brazilian Public Prosecutor’s Office has entered into more than 10 such agreements in Operation Car Wash—prosecutors have faced public backlash regarding the terms and negotiation of the agreements.  On August 24, 2017, the Brazilian Public Prosecutor’s Office issued guidelines for Brazilian prosecutors to formalize the practices for negotiating leniency agreements. Beyond Brazil, the country’s anti-corruption crusade is being felt throughout Latin America.  Many of the countries in which Odebrecht S.A. admitted to paying bribes (as covered in our 2016 Year-End FCPA Update) have opened their own investigations, including the following: Colombia – In July 2017, Colombia’s Attorney General announced that Colombian officials had received $27 million in bribes from Odebrecht in connection with a contract to build a highway.  Authorities have made multiple arrests, and the Prosecutor General’s Office ordered an investigation into eight senators.  In November 2017, the former CEO of Odebrecht Colombia and two employees in Odebrecht’s Division of Structured Operations issued a formal apology to Colombia and agreed to return approximately $6.5 million in restitution.  In December 2017, the former Vice Minister of Transportation was sentenced to more than five years in prison for receiving a $6.5 million bribe from Odebrecht in connection with a highway construction contract. Ecuador – In December 2017, a court in Ecuador, where Odebrecht admitted to paying more than $33.5 million in bribes, sentenced former Vice President Jorge Glas to six years in prison after finding him guilty of receiving a $13.5 million bribe from Odebrecht.  A court in Ecuador announced in November 2017 that trial should proceed against Glas and 12 others in connection with the scandal. Peru – Prosecutors are investigating former Odebrecht CEO Marcelo Odebrecht’s claims that the company paid $29 million in bribes to Peruvian officials, including President Pedro Pablo Kuczynski and former presidents Ollanta Humala and Alejandro Toledo.  Humala and his wife were arrested in July 2017.  Toledo is living in the United States, and Peru has issued an international warrant for his arrest. In late December 2017, President Kuczynski fought and survived an impeachment vote by Congress, initiated as a result of the bribery allegations. Panama – Panamanian authorities have charged 17 people in connection with the scandal, and President Juan Carlos Varela has been accused of receiving campaign donations from Odebrecht. Canada In July 2017, the Ontario Court of Appeal upheld the Corruption of Foreign Public Officials Act (“CFPOA”) conviction of businessman Nazir Karigar and, in the process, clarified aspects of the statute.  According to the trial evidence, Karigar introduced a representative of security firm Cryptometrics Canada to Air India officials and then worked with Cryptometrics to transfer $200,000 in bribes to Indian officials to secure the deal.  After the arrangement soured and Karigar was unable to facilitate the transfer, he attempted to recast himself as a whistleblower and contacted DOJ, before ultimately being prosecuted himself in Canada.  First, the Court of Appeal rejected Karigar’s jurisdictional challenge, finding that even though the conduct predated the CFPOA’s 2013 amendment to add nationality jurisdiction, there was a “real and substantial link” between the offense and Canada, even if all of the essential elements of the offense did not take place in Canada.  Second, Karigar argued that the plain language of the CFPOA required proof of a direct agreement with a foreign official, but the court disagreed, holding that the statute also encompasses indirect agreements between parties concerning corrupt payments to officials.  In legislative news, Canada’s repeal of the CFPOA’s carve-out for facilitating payments, announced in 2013, took effect in October 2017. Guatemala Corruption investigations and prosecutions encountered unexpected obstacles this year from President Jimmy Morales‘s administration.  As noted in our 2016 Mid-Year FCPA Update, Morales, who won the presidency in 2015 with the slogan “neither corrupt, nor a thief,” previously supported the International Commission Against Impunity in Guatemala (known by its Spanish acronym “CICIG”), an independent UN-supported body of international prosecutors and investigators.  But on August 27, 2017, in a controversial move that spurred protests across the country, Morales ordered the expulsion of Iván Velásquez Gómez, the Colombian prosecutor who heads CICIG.  The order came after Velásquez and Guatemala’s Attorney General Thelma Aldana alleged that Morales failed to report anonymous campaign contributions and announced that they intended to strip him of immunity from prosecution.  Earlier in 2017, Morales’s brother and one of his sons were arrested on corruption charges.  The Guatemalan Supreme Court ultimately blocked the expulsion, as well as an effort by Congress to gut the laws used by CICIG and the Attorney General to prosecute corruption and abuse of power.  Since then, CICIG and the Attorney General’s office have continued their investigations. Mexico As detailed in our June 2017 client alert, Mexico’s New General Law of Administrative Responsibility Targets Corrupt Activities by Corporate Entities, the General Law of Administrative Responsibility, which prescribes liability for a variety of corruption-related offenses and mitigation of damages for companies with adequate integrity policies, took effect on July 19, 2017.  Steps remain before the law is fully implemented.  The 18 judges tasked to oversee anti-corruption cases have yet to be appointed, as is the case for the new independent prosecutor called for by the reforms. Peru Effective January 1, 2018, Legislative Decree No. 1352 provides that corporations can be liable for active transnational bribery committed in their name without a person first being found liable of the offense (a concept referred to in Peruvian law as “autonomous liability”).  Decree No. 1352 extends this liability to corporations for active bribery of any public official as well as for money laundering.  But parent companies are not liable under Decree No. 1352 unless the employees who engaged in the corruption or money laundering did so under specific consent or authorization from the parent.  In addition, companies that acquire entities found guilty of corruption via autonomous liability may not be penalized if they conducted proper due diligence, defined as reasonable actions to verify that no autonomous liability crimes had been committed.  Finally, entities can avoid autonomous liability by implementing a sufficient compliance program designed to prevent such crimes from being committed on the company’s behalf.  Peru also modified its procurement laws to ban companies with representatives that have been convicted of corruption from securing government contracts. Venezuela Corruption allegations continue to play a key role in the political turmoil engulfing Venezuela.  In August 2017, then-Prosecutor General and longtime Socialist Party member Luisa Ortega Díaz called for an investigation into corruption by President Nicolás Maduro.  Ortega was terminated immediately thereafter, fleeing to Colombia reportedly with documents proving that Maduro and other officials participated in corruption schemes, including dealings with Brazilian construction conglomerate Odebrecht.  Her efforts to call attention to alleged corruption by Maduro’s regime included a November 16, 2017 petition to the International Criminal Court in the Hague to open an investigation into Maduro and other top officials.  For its part, Maduro’s government has engaged in an aggressive anti-corruption campaign against current and former Venezuelan oil officials, reportedly detaining as many as 65 individuals, including in November 2017 Eulogio Del Pino and Nelson Martínez, respectively the former Minister of Oil and President of state-owned oil company PDVSA.  On December 3, 2017, the newly appointed head of PDVSA announced that henceforth all oil service contracts will be reviewed by Maduro moving forward.  The timing has raised suspicion that the arrests are part of an effort to consolidate power and find scapegoats for the current economic crisis, ahead of upcoming presidential elections.       Asia China The second half of 2017 saw notable changes to China’s anti-corruption landscape.  Most prominently, China passed the first amendments to the 1993 Anti-Unfair Competition Law (“AUCL”).  The revised AUCL, which took effect on January 1, 2018, provides additional guidance on what constitutes prohibited bribery.  In addition, under the AUCL a business operator is vicariously liable for an employee’s bribery unless it can prove “such acts of the employee are not related to seeking transaction opportunities or competitive advantages for the business operator.”  The range of fines for commercial bribery increased to between RMB 100,000 and RMB 3 million, and a business operator’s license may be revoked for a serious violation.  The revised AUCL, for the first time, provides the possibility of leniency for an offender who “proactively eliminates or mitigates the severe consequences caused by its illegal conduct” or whose misconduct is minor and promptly remediated.  In another significant legislative development we will be following, in November 2017 China released for public comment a draft National Supervision Law that, among other things, is expected to consolidate corruption-fighting powers from the National Bureau of Corruption Prevention, the Ministry of Supervision, and the anti-corruption department of the Procuratorate. In addition to these legislative changes, 2017 witnessed notable developments in China’s continuing anti-corruption crackdown, now in its fifth year and Xi Jinping’s second term with no sign of abating.  More officials at the provincial/ministerial level or above were ensnared this year than in 2016, including former Party Secretary of Chongqing Sun Zhengcai and top insurance regulator Xiang Junbo, who were both expelled from the Communist Party and whose cases were both referred for prosecution, and General Zhang Yang, who reportedly committed suicide while under investigation. India In December 2017, a special Central Bureau of Investigation court acquitted a former Indian telecom minister and 16 others (including politicians, bureaucrats, and executives of telecom companies) in what is popularly referred to as the “2G Scam” case.  The former telecom minister was alleged to have changed the standards for awarding telecom licenses in exchange for kickbacks, resulting in losses of INR 310 billion (approx. $4.84 billion) to the country.  In February 2012, the Supreme Court of India cancelled all 122 telecom licenses that had been awarded to the licensees. Korea As reported in our 2017 Mid-Year FCPA Update, former South Korea President Geun-Hye Park was impeached in December 2016 amid allegations of influence peddling and corruption that have come to be known as “Choi-gate.”  Her trial remains ongoing.  The investigation also led to the arrest of Samsung Electronics Vice Chairman Lee Jae-yong, who on August 24, 2017 was convicted of bribery and related charges and sentenced to five years in prison.  Another corporate executive engulfed in the scandal is Lotte Group Chairman Shin Dong-bin, who on December 22, 2017 was convicted of embezzlement and breach of trust, but given only a suspended prison sentence.       Middle East and Africa Israel The investigation of billionaire Israeli investor Beny Steinmetz continued in 2017 when Israeli authorities detained Steinmetz and several others in August.  As reported in our 2016 Year-End FCPA Update, Steinmetz was initially arrested in December 2016 on suspicion of money laundering and paying bribes to Guinean officials in connection with an iron ore mining concession.  He was placed under house arrest after posting bail of more than $20 million.  In August 2017, Steinmetz was detained once again for questioning, together with others, including Tal Silberstein, a political consultant who has worked for former Israeli prime minister Ehud Barak and other political leaders.  Steinmetz is reportedly under investigation in four other countries, including the United States. Saudi Arabia In November 2017, Saudi Arabian Crown Prince Mohammed bin Salman instituted a sweeping anti-corruption probe in which more than 200 influential Saudis were detained, including Prince Miteb bin Abdullah.  Prince Miteb was initially detained on November 4, 2017, and held at the Ritz-Carlton in Riyadh along with others facing corruption charges.  He was released weeks later after reaching a settlement of more than $1 billion.  Miteb was previously Minister of the National Guard, but was removed from that position hours before his detention.  Although some analysts have viewed the corruption campaign as a power grab by Prince Mohammed, the Saudi government insists its focus is combating endemic corruption.  In recent weeks, the anti-corruption purge has extended its reach beyond Saudi citizens: in early December, Palestinian billionaire businessman Sabih al-Masri was held in Saudi Arabia for questioning while on a business trip to Riyadh.  Al-Masri was not charged but was reportedly questioned about his business and business partners. South Africa On December 13, 2017, South Africa’s High Court delivered a major blow to embattled President Jacob Zuma, who has been entangled in a widespread corruption scandal involving allegedly illicit dealings with state-owned companies and multinational firms.  In November 2016, former public protector Thulisile Madonsela released a 350-page report on corruption in which she called for a public inquiry.  But Zuma refused to set up an inquiry.  In a harshly worded order, the High Court rejected Zuma’s efforts to block the further investigation and ordered him to set it up within 30 days.  Judge Dunstan Mlambo characterized Zumba’s conduct as a “clear abuse of the judicial process.”  The order followed a series of defeats for Zuma, including the recent removal of a chief prosecutor appointed by Zuma and the reinstatement of nearly 800 corruption charges against Zuma stemming from a 1999 arms deal.  The charges had been dropped before Zuma was elected president in 2009. CONCLUSION As is our semi-annual tradition, over the next several weeks Gibson Dunn will be publishing a series of enforcement updates for the benefit of our clients and friends as follows: Wednesday, January 3:  2017 Year-End Update on Corporate NPAs and DPAs; Thursday, January 4:  2017 Year-End False Claims Act Update; Friday, January 5:  2017 Year-End German Law Update; Monday, January 8:  2017 Year-End UK White Collar Crime Update; Tuesday, January 9:  2017 Year-End Securities Enforcement Update; Wednesday, January 10:  2017 Year-End Securities Litigation Update; Tuesday, January 16:  2017 Year-End Government Contracts Litigation Update; Tuesday, January 16:  2017 Year-End UK Labor & Employment Update; Wednesday, January 17:  2017 Year-End Activism Update; Thursday, January 18:  2017 Year-End E-Discovery Update; Friday, January 19:  2017 Year-End Environmental Litigation & Mass Tort – Oil & Gas Update; Monday, January 22:  2017 Year-End FDA and Health Care Compliance and Enforcement Update – Drugs and Devices; Thursday, January 25:  2017 Year-End Cybersecurity Update (United States); Monday, January 29:  2017 Year-End Cybersecurity Update (European Union); Tuesday, January 30:  2017 Year-End Transnational Litigation Update; Wednesday, January 31:  2017 Year-End Health Care Compliance and Enforcement Update – Providers; Monday, February 5:  2017 Year-End Sanctions Update; and Thursday, February 8:  2017 Year-End Aerospace & Related Technologies Update. The following Gibson Dunn lawyers assisted in preparing this client update: F. Joseph Warin, John Chesley, Christopher Sullivan, Richard Grime, Patrick Stokes, Elissa Baur, Liang Cai, Ella Alves Capone, Stephanie Connor, Tzung-Lin Fu, Melissa Goldstein, Julie Hamilton, Mark Handley, Daniel Harris, William Hart, Natalie Hausknecht, Patricia Herold, Korina Holmes, Derek Kraft, Nicole Lee, Renée Lizarraga, Zach Lloyd, Lora MacDonald, Andrei Malikov, Michael Marron, Jesse Melman, Laura Musselman, Rose Naing, Jaclyn Neely, Nick Parker, Emily Riff, Jeff Rosenberg, Rebecca Sambrook, Jason Smith, Pedro Soto, Laura Sturges, Marc Aaron Takagaki, Karthik Ashwin Thiagarajan, Caitlin Walgamuth, Oliver Welch, Eric Veres, Oleh Vretsona, and Carissa Yuk. 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 P. Burns (+1 202-887-3786, dburns@gibsondunn.com) David Debold (+1 202-955-8551, ddebold@gibsondunn.com) Michael S. Diamant (+1 202-887-3604, mdiamant@gibsondunn.com) John W.F. Chesley (+1 202-887-3788, jchesley@gibsondunn.com) Daniel P. Chung (+1 202-887-3729, dchung@gibsondunn.com) Stephanie Brooker (+1 202-887-3502, sbrooker@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Caroline Krass (+1 202-887-3784, ckrass@gibsondunn.com) Adam M. Smith (+1 202-887-3547, asmith@gibsondunn.com) Oleh Vretsona (+1 202-887-3779, ovretsona@gibsondunn.com) Christopher W.H. Sullivan (+1 202-887-3625, csullivan@gibsondunn.com) Courtney M. Brown (+1 202-955-8685, cmbrown@gibsondunn.com) Jason H. Smith (+1 202-887-3576, jsmith@gibsondunn.com) Pedro G. Soto (+1 202-955-8661, psoto@gibsondunn.com) New York Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Joel M. Cohen (+1 212-351-2664, jcohen@gibsondunn.com) Lee G. Dunst (+1 212-351-3824, ldunst@gibsondunn.com) Mark A. Kirsch (+1 212-351-2662, mkirsch@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Lawrence J. Zweifach (+1 212-351-2625, lzweifach@gibsondunn.com) Daniel P. Harris (+1 212-351-2632, dpharris@gibsondunn.com) Denver Robert C. Blume (+1 303-298-5758, rblume@gibsondunn.com) John D.W. Partridge (+1 303-298-5931, jpartridge@gibsondunn.com) Ryan T. Bergsieker (+1 303-298-5774, rbergsieker@gibsondunn.com) Laura M. Sturges (+1 303-298-5929, lsturges@gibsondunn.com) Los Angeles Debra Wong Yang (+1 213-229-7472, dwongyang@gibsondunn.com) Marcellus McRae (+1 213-229-7675, mmcrae@gibsondunn.com) Michael M. Farhang (+1 213-229-7005, mfarhang@gibsondunn.com) Douglas Fuchs (+1 213-229-7605, dfuchs@gibsondunn.com) San Francisco Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) Thad A. Davis (+1 415-393-8251, tadavis@gibsondunn.com) Marc J. Fagel (+1 415-393-8332, mfagel@gibsondunn.com) Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com) Michael Li-Ming Wong (+1 415-393-8333, mwong@gibsondunn.com) Palo Alto Benjamin Wagner (+1 650-849-5395, bwagner@gibsondunn.com) London Patrick Doris (+44 20 7071 4276, pdoris@gibsondunn.com) Charlie Falconer (+44 20 7071 4270, cfalconer@gibsondunn.com) Philip Rocher (+44 20 7071 4202, procher@gibsondunn.com) Mark Handley (+44 20 7071 4277, mhandley@gibsondunn.com) Paris Benoît Fleury (+33 1 56 43 13 00, bfleury@gibsondunn.com) Bernard Grinspan (+33 1 56 43 13 00, bgrinspan@gibsondunn.com) Jean-Philippe Robé (+33 1 56 43 13 00, jrobe@gibsondunn.com) Audrey Obadia-Zerbib (+33 1 56 43 13 00, aobadia-zerbib@gibsondunn.com) Munich Benno Schwarz (+49 89 189 33-110, bschwarz@gibsondunn.com) Michael Walther (+49 89 189 33-180, mwalther@gibsondunn.com) Mark Zimmer (+49 89 189 33-130, mzimmer@gibsondunn.com) Hong Kong Kelly Austin (+852 2214 3788, kaustin@gibsondunn.com) Oliver D. Welch (+852 2214 3716, owelch@gibsondunn.com) São Paulo Lisa A. Alfaro (+55 (11) 3521-7160, lalfaro@gibsondunn.com) Fernando Almeida (+55 (11) 3521-7095, falmeida@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.

December 7, 2017 |
Black and Grey: The EU Publishes Its Lists of Tax Havens

On Tuesday, December 5, 2017, the EU announced its long-awaited list of seventeen “non-cooperative” tax jurisdictions (the “Black List”) and identified a further 47 jurisdictions with whom discussions about tax reform are ongoing (the “Grey List”).  The countries identified in both lists were among a number of jurisdictions invited by the EU to engage in a dialogue on tax governance issues in early 2017.  The Black List identifies jurisdictions that failed to engage in a meaningful dialogue with the EU or to take action to address deficiencies identified in their tax practices. The Grey List identifies jurisdictions whose tax policies and practices continue to present concerns but which have committed to address issues raised by the EU. The origins of the list date back to a European Commission Recommendation from 2012, which was followed by detailed assessment work carried out since June 2015, pursuant to a published Commission action plan. The EU has not announced any immediate steps to be taken against the blacklisted jurisdictions and instead has deferred to EU member states to take action. The jurisdictions on the Black List are: American Samoa Marshall Islands St Lucia Bahrain Mongolia Samoa Barbados Namibia South Korea Grenada Palau Trinidad & Tobago Guam Panama Tunisia Macau United Arab Emirates In its announcement on December 5 the EU noted that these seventeen jurisdictions had “taken no meaningful action to effectively address the deficiencies [identified by the EU in relation to their tax legislation and policies] and do not engage in a meaningful dialogue…that could lead to…commitments” to resolve issues raised. The EU confirmed that the jurisdictions will remain on the Black List until they meet certain criteria it identified in a publication of November 8, 2016 in relation to tax transparency, fair taxation, and the implementation of the OECD Base Erosion and Profit Shifting (BEPS) package. In addition the EU published a Grey List containing a total of 47 other jurisdictions, and identified one or more specific ongoing concerns in relation to each of those jurisdictions. The jurisdictions on the Grey List are: Armenia Guernsey Niue Aruba Hong Kong Oman Belize Isle of Man Peru Bermuda Jamaica Qatar Bosnia and Herzegovina Jersey Saint Vincent and Grenadines Botswana Jordan San Marino Cape Verde Liechtenstein Serbia Cayman Islands Malaysia Seychelles Cook Islands Maldives Swaziland Curaçao Mauritius Taiwan Faroe Islands Montenegro Thailand Fiji Morocco Turkey FYR Macedonia Nauru Uruguay Georgia New Caledonia Vanuatu Greenland Vietnam In its conclusions on the Grey List the EU described these 47 jurisdictions as presenting concerns in relation to the criteria published on November 8, 2016 referred to above, and noted that it will continue to monitor the implementation of agreed steps to address the identified deficiencies. The stated purpose of the Grey List is therefore to act as a spur to continuing reform and progress in these jurisdictions. Having expressed its sympathy for jurisdictions hit by the severe hurricanes in the Caribbean this year, the EU has put its screening process for eight Caribbean jurisdictions on hold.  These jurisdictions are: Anguilla, Antigua and Barbuda, Bahamas, British Virgin Islands, Dominica, Saint Kitts and Nevis, the Turks and Caicos Islands, and the United States Virgin Islands. Contacts with those jurisdictions will resume by February 2018, with the screening process in relation to those jurisdictions to be completed by the end of 2018. While there is much to debate and dispute as to the allocation of jurisdictions to these lists, it should also be noted that the EU excluded from consideration EU member states themselves. This spares from consideration Gibraltar, as it is (pending BREXIT) formally part of the EU. After BREXIT there will be no bar to the United Kingdom or Gibraltar being considered for inclusion on either list. In the run up to the publication of the lists, there was much speculation as to the sanctions and punishments that the EU would impose on jurisdictions included in the Black List. It had been suggested the EU could impose an EU-wide withholding tax on financial transfers into such jurisdictions, as well as a transfer tax on transfers out of those jurisdictions. While such measures may be adopted if the European Commission considers blacklisted jurisdictions to be continuing to be non-cooperative, in the short term the EU has decided to leave the question of the imposition of sanctions to the individual EU member states themselves. This decision undercuts one of the stated purposes of the Black List – namely that of replacing the existing patchwork of national measures against non-cooperative jurisdictions with a coordinated approach by the EU. Nonetheless, inclusion on the Black List signals the EU’s view that a particular jurisdiction fails to comply with tax good governance standards. This carries with it a measure of reputational damage for the jurisdictions in question vis-à-vis investors. Clients and friends operating in the United Kingdom or in Europe may well have become familiar during the course of this year with the need to conduct a “risk assessment” for the purposes of complying with the EU’s Fourth Money Laundering Directive (implemented in the United Kingdom, for example, by The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017). One of the risks to be assessed as part of such work is “geographic risk”, with the assessing body required to take into consideration published views of international bodies. The publication of the Black List and Grey List should now be taken into account in the conduct, or periodic review, of that risk assessment. Those conducting risk assessments may need to consider the appropriateness of enhanced due diligence for entities incorporated in, doing business in, or with links to jurisdictions included on either list. Clients and friends operating in the United Kingdom may also have completed, or be embarking on, a similar risk assessment under the United Kingdom’s Criminal Finances Act 2017 regarding the “failure to prevent the facilitation of tax evasion” offences. Our recent  client alert on these offences can be found here. Again “geographic risk” forms part of such assessments. As in the AML sphere, best practice will be to take account of the EU’s Black  List and Grey List in the conduct of, or periodic review of, such a risk assessment. Operations in these jurisdictions (especially those blacklisted) or work relating to these jurisdictions may require enhanced scrutiny as part of any risk assessment, and, where necessary, possibly enhanced controls or training as part of the implementation of “reasonable prevention procedures”. When it comes time to update a company’s Bribery Act risk assessment, again the impact of these lists should be considered as part of that process. Finally, it is worth noting that these designations are relevant only with respect to the EU. In the United States, for example, no such list has been proposed to date, and the imposition of sanctions by EU member states is not expected to have any direct US legal or tax consequences for entities from the blacklisted jurisdictions. We will continue to monitor developments and will provide an update when the EU makes its decision in 2018 on eight outstanding Caribbean jurisdictions. The following Gibson Dunn lawyers assisted in preparing this client update: Mark Handley and Meghan Higgins. Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. For further information, please contact the Gibson Dunn lawyer with whom you usually work or any of the following members of the firm’s Tax and White Collar Defense and Investigations practice groups in the firm’s London office: Nicholas Aleksander (+44 (0)20 7071 4232, naleksander@gibsondunn.com) Jeffrey M. Trinklein (+44 (0)20 7071 4224; +1 212-351-2344, jtrinklein@gibsondunn.com) Patrick Doris (+44 (0)20 7071 4276, pdoris@gibsondunn.com) Allan Neil (+44 (0)20 7071 4296, aneil@gibsondunn.com) Mark Handley (+44 (0)20 7071 4277, mhandley@gibsondunn.com) Meghan Higgins (+44 (0)20 7071 4282, mhiggins@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.