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January 10, 2020 |
2019 Year-End German Law Update

Click for PDF Since the end of World War II, Germany’s foreign policy and economic well-being were built on three core pillars: (i) a strong transatlantic alliance and friendship, (ii) stable and influential international institutions and organizations, such as first and foremost, the EU, but also others such as the UN and GATT, and, finally, (iii) the rule of law. Each of these pillars has suffered significant cracks in the last years requiring a fundamental re-assessment of Germany’s place in the world and the way the world’s fourth largest economy should deal with its friends, partners, contenders and challengers. A few recent observations highlight the urgency of the issue: The transatlantic alliance and friendship has been eroding over many years. A recent Civey study conducted for the think tank Atlantic-Brücke showed that 57.6% of Germans prefer a “greater distance” to the U.S., 84.6% of the 5,000 persons polled by Civey described the German-American relationship as negative or very negative, while only 10.4% considered the relationship as positive. The current state of many international institutions and organizations also requires substantial overhaul, to put it mildly: After Brexit has occurred, the EU will have to re-define its role for its remaining 27 member states and its (new) relationship with the UK, which is still the fifth-largest economy on a stand-alone basis. GATT was rendered de facto dysfunctional on December 10, 2019, when its Appellate Body lost its quorum to hear new appeals. New members cannot be approved because of the United States’ veto against the appointment of new appeal judges. The UN is also suffering from a vacuum created by an attitude of disengagement shown by the U.S., that is now being filled by its contenders on the international stage, mainly China and Russia. Finally, the concept of the rule of law has come under pressure for some years through a combination of several trends: (i) the ever expanding body of national laws with extra-territorial effect (such as the FCPA or international sanction regulations), a rule-making trend not only favored by the U.S., but also by China, Russia, the EU and its member states alike, (ii) the trend – recently observed in some EU member states – that the political party in charge of the legislative and executive branch initiates legislative changes designed to curtail the independence of courts (e.g. Poland and Hungary), and (iii) the rise of populist parties that have enjoyed land-slide gains in many countries (including some German federal states) and promulgate simple solutions, not least by cutting corners and curtailing legal procedures and legal traditions. These fundamental challenges occur toward the end of a period of unprecedented rise in wealth and economic success of the German economy: Germany has reaped the benefits of eight decades of peace and the end of the Cold War after the decay of the Soviet Union. It regained efficiencies after ambitious structural changes to its welfare state in the early years of the millennium, and it re-emerged as a winner from the 2008 financial crisis benefiting (among others) from the short-term effects of the European Central Bank’s policy of a cheap Euro that mainly benefits the powerful German export machine (at the mid- and long-term cost to German individual savers). The robust economy that Germany enjoyed over the last decade resulted in record budgets, a reduction of public debt, a significant reduction in unemployment, and individual consumption at record levels. Therefore, the prospects of successfully addressing the above challenges are positive. However, unless straight forward and significant steps are identified and implemented to address the challenges ahead, the devil will be in the detail. The legislative changes across all practice areas covered in this year-end update are partly encouraging, partly disappointing in this respect. It is impossible to know whether the new laws and regulations will, on balance, make Germany a stronger and more competitive economy in 2020 and beyond. Healthy professional skepticism is warranted when assessing many of the changes suggested and introduced. However, we at Gibson Dunn are determined and committed to ensuring that we utilize the opportunities created by the new laws to the best benefit of our clients, and, at the same time, helping them in their quest to limit any resulting threats to the absolute minimum. As in prior years, in order to succeed in that, we will require your trust and confidence in our ability to support you in your most complicated and important business decisions and to help you form your views and strategies to deal with sophisticated German legal issues in times of fundamental change. Your real-world questions and the tasks you entrust us with related to the above developments and changes help us in forming our expertise and sharpening our focus. This adds the necessary color that allows us to paint an accurate picture of the multifaceted world we are living in, and on this basis, it will allow you to make sound business decisions in the interesting times to come. In this context, we are excited about every opportunity you will provide us with to help shaping our joint future in the years to come. _______________________ Table of Contents       Corporate, M&A Tax Financing and Restructuring Labor and Employment Real Estate Compliance and Litigation Antitrust and Merger Control Data Protection IP & Technology  _______________________ 1.   Corporate, M&A 1.1   ARUG II – New Transparency Rules for Listed German Corporations, Institutional Investors, Asset Managers, and Proxy Advisors In November 2019, the German parliament passed ARUG II, a long awaited piece of legislation implementing the revised European Shareholders’ Rights Directive (Directive (EU) 2017/828). ARUG II is primarily aimed at listed German companies and provides changes with respect to “say on pay” provisions, as well as additional approval and disclosure requirements for related party transactions, the transmission of information between a corporation and its shareholders and additional transparency and reporting requirements for institutional investors, asset managers and proxy advisors. “Say on pay” on remuneration of board members; remuneration policy and remuneration report In a German stock corporation, shareholders determine the remuneration of the supervisory board members at a shareholder meeting, whereas the remuneration of the management board members is decided by the supervisory board. Under ARUG II, shareholders of German listed companies must be asked to vote on the remuneration of the board members pursuant to a prescribed procedure. First, the supervisory board will have to prepare a detailed remuneration policy (including maximum remuneration amounts) for the management board, which must be submitted to the shareholders if there are major changes to the remuneration, and in any event at least once every four years. The result of the vote on the policy will only be advisory except that the shareholders’ vote to reduce the maximum remuneration amount will be binding. With respect to the remuneration of supervisory board members, the new rules require a shareholder vote at least once every four years. Second, at the annual shareholders’ meeting, the shareholders will vote ex post on the remuneration report which contains the remuneration granted to the present and former members of the management board and the supervisory board in the previous financial year. Again, the shareholders’ vote, however, will only be advisory. Both the remuneration report and the remuneration policy have to be made public on the company’s website for at least ten years. The changes introduced by ARUG II will not apply retroactively and will not therefore affect management board members’ existing service agreements, i.e. such agreements will not have to be amended in case they do not comply with the new remuneration policy. Related party transactions German stock corporation law already provides for various safeguards to protect minority shareholders in transactions with major shareholders or other related parties (e.g. the capital maintenance rules and the laws relating to groups of companies). In the future, for listed companies, these mechanisms will be supplemented by a detailed set of approval and transparency requirements for related party transactions. In particular, transactions exceeding certain thresholds will require prior supervisory board approval, provided that a rejection by the supervisory board can be overruled by shareholder vote, and a listed company must publicly disclose any such material related party transaction, without undue delay over media channels providing for European-wide distribution. Communication / Know-your-Shareholder Listed corporations will have the right to request information on the identity of their shareholders, including the name and both a postal and electronic address, from depositary banks, thus allowing for a direct communication line, also with respect to bearer shares (“know-your-shareholder”). Furthermore, depositary banks and other intermediaries will be required to pass on important information from the corporation to the shareholders and vice versa, e.g. with respect to voting in shareholders’ meetings and the exercise of subscription rights. Where there is more than one intermediary in a chain, the intermediaries are required to pass on the respective information within the chain. Increased transparency requirements for institutional investors, asset managers and proxy advisors Institutional investors and asset managers will be required to disclose their engagement policy (including how they monitor, influence and communicate with investee companies, exercise shareholders’ rights and manage actual and potential conflicts of interests). They will also have to report annually on the implementation of their engagement policy and on their voting decisions. Institutional investors will also have to disclose to which extent key elements of their investment strategy match the profile and duration of such institutional investors’ liabilities towards their ultimate beneficiaries. If they involve asset managers, institutional investors also have to disclose the main aspects of their arrangements with them. The new disclosure and reporting requirements, however, only apply on a “comply or explain” basis, i.e. investors and asset managers may choose not to comply with the transparency requirements provided that they give an explanation as to why this is the case. Proxy advisors will have to publicly disclose on an annual basis whether and how they have applied their code of conduct based again on the “comply or explain” principle. They also have to provide information on the essential features, methodologies and models they apply, their main information sources, the qualification of their staff, their voting policies for the different markets they operate in, their interaction with the companies and the stakeholders as well as how they manage conflicts of interests. These rules, however, do not apply to proxy advisors operating from a non-EEA state with no establishment in Germany. Entry into force and transitional provisions The provisions concerning related party transactions already apply. The rules relating to communications via intermediaries and know-your-shareholder information will apply from September 3, 2020. The “mandatory say on pay” resolutions will only have to be passed in shareholder meetings starting in 2021. The remuneration report will have to be prepared for the first time for the financial year 2021. It needs to be seen whether companies will already adhere to the new rules prior to such dates on a voluntary basis following requests from their shareholders or pressure from proxy advisors. In any event, both listed companies as well as the other addressees of the new transparency rules should make sure that they are prepared for the new reporting and disclosure requirements. Back to Top 1.2   Restatement of the German Corporate Governance Code – New Stipulations for the Members of the Supervisory Board and the Remuneration of the Members of the Board of Management A restatement of the German Corporate Governance Code (Deutscher Corporate Governance Kodex, “DCGK” or the “Code”) is expected for the beginning of 2020, after the provisions of the EU Shareholder Rights Directive II (Directive (EU) 2017/828 of the European Parliament and of the Council of May 17, 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement) were implemented into German domestic law as part of the “ARUG II” reform as of January 1, 2020. This timeline seeks to avoid overlaps and potentially conflicting provisions between ARUG II and the Code. In addition to structural changes, which are designed to improve legal clarity compared to the previous 2017 version, the new Code contains a number of substantial changes which affect boards of management and supervisory boards in an effort to provide more transparency to investors and other stakeholders. Some of the key modifications can be summed up as follows: (a)   Firstly, restrictions on holding multiple corporate positions are tightened considerably. The new DCGK will recommend that (i) supervisory board members should hold no more than five supervisory board mandates at listed companies outside their own group, with the position of supervisory board chairman being counted double, and (ii) members of the board of management of a listed company should not hold more than two supervisory board mandates or comparable functions nor chair the supervisory board of a listed company outside their own group. (b)   A second focal point is the independence of shareholder representatives on the supervisory board. In this context, the amended DCGK for the first time introduces certain criteria which can indicate a lack of independence by supervisory board members such as long office tenure, prior management board membership, family or close business relationships with board members and the like. However, the Government Commission DCGK (Regierungskommission Deutscher Corporate Governance Kodex) (the “Commission”) has pointed out that these criteria should not replace the need to assess each case individually. Furthermore, at least 50% of all shareholder representatives (including the chairperson) shall be independent. If there is a controlling shareholder, at least two members of the supervisory board shall be independent of such controlling shareholder (assuming a supervisory board of six members). (c)   A third key area of reform focuses on the remuneration of members of the board of management. Going forward, it is recommended that companies should determine a so-called “target total remuneration”, i.e. the amount of remuneration that is paid out in total if 100 percent of all previously determined targets have been achieved, as well as a “maximum compensation cap”, which should not be exceeded even if the previously determined targets are exceeded. Under the new Code, the total remuneration of the management board should be “explainable to the public”. (d)  Finally, the Commission has decided to simplify corporate governance reporting and put an end to the parallel existence of (i) the corporate governance report under the Code and (ii) a separate corporate governance statement contained in the management report of the annual accounts. Going forward, the corporate governance statement in the annual financial statements will be the core instrument of corporate governance reporting. In recent years, governance topics have assumed ever increasing importance for both domestic and foreign investors and are typically a matter of great interest at annual shareholders’ meetings. Hence, we recommend that (listed) stock corporations, in a first step, familiarize themselves with the content of the new recommendations in the Code and, thereafter, take the necessary measures to comply with the rules of the revised DCGK once it takes effect . In particular, stock corporations should evaluate and disclose the different mandates of their current supervisory board members to comply with the new rules. Back to Top 1.3   Cross-Border Mobility of European Corporations Facilitated On January 1, 2020 the European Union Directive on cross-border conversions, mergers and divisions (Directive (EU) 2019/2121 of the European Parliament and of the Council of November 27, 2019) (the “Directive”) has entered into force. While a legal framework for cross-border mergers had already been implemented by the European Union in 2005, the lack of a comparable set of rules for cross-border conversions and divisions had led to fragmentation and considerable legal uncertainty. Whenever companies, for example, attempted to move from one member state to another without undergoing national formation procedures in the new member state and liquidation procedures in the other member state, they were only able to rely on certain individual court rulings of the European Court of Justice (ECJ). Cross-border asset transfers by (partial) universal legal succession ((partielle) Gesamtrechtsnachfolge) were virtually impossible due to the lack of an appropriate legal regime. The Directive now seeks to create a European Union-wide legal framework which ultimately enhances the fundamental principle of freedom of establishment (Niederlassungsfreiheit). The Directive in particular covers the following cross-border measures: The conversion of the legal structure of a corporation under the regime of one member state into a legal structure of the destination member state (grenzüberschreitende Umwandlung) as well as the transfer of the registered office from one member state to another member state (isolierte Satzungsitzverlegung); Cross-border division whereby certain assets and liabilities of a company are transferred by universal legal succession to one or more entities in another member state which are to be newly established in the course of the division. If all assets and liabilities are transferred, at least two new transferee companies are required and the transferor company ceases to exist upon effectiveness of the division. In all cases, the division is made in exchange for shares or other interests in the transferor company, the transferee company or their respective shareholders, depending on the circumstances. The Directive further amends the existing legal framework for cross-border merger procedures by introducing common rules for the protection of creditors, dissenting minority shareholders and employees. Finally, the Directive provides for an anti-abuse control procedure enabling national authorities to check and ultimately block a cross-border measure when it is carried out for abusive or fraudulent reasons or in circumvention of national or EU legislation. Surprisingly, however, the Directive does not cover a cross-border transfer of assets and liabilities to one or more companies already existing in another member state (Spaltung durch Aufnahme). In addition, the Directive only applies to corporations (Kapitalgesellschaften) but not partnerships (Personengesellschaften). Member states have until January 2023 to implement the Directive into domestic law. Through this legal framework for corporate restructuring measures, it is expected that the Directive will harmonize the interaction between national procedures. If the member states do not use the contemplated national anti-abuse control procedure excessively, the Directive can considerably facilitate cross-border activities. Forward looking member states may even consider implementing comparable regimes for divisions into existing legal entities which are currently beyond the scope of the Directive. Back to Top 1.4   Transparency Register: Reporting Obligations Tightened and Extended to Certain Foreign Entities The Act implementing the 5th EU Anti-Money Laundering Directive (Directive (EU) 2018/843) which amended the German Anti-Money Laundering Act (Geldwäschegesetz, GwG) with effect as of January 1, 2020 (see below under section 6.2) also introduced considerable new reporting obligations to the transparency register (Transparenzregister), which seeks to identify the “ultimate beneficial owner”. Starting on January 1, 2020, not only associations incorporated under German private law, but also foreign associations and trustees that have a special link to Germany must report certain information on their „beneficial owners“ to the German transparency register. Such link exists if foreign associations acquire real property in Germany. Non-compliance is not only an administrative offence (potential fines of up to EUR 150,000), but the German notary recording a real estate transaction must now check actively that the reporting obligation has been fulfilled before notarizing such transaction and must refuse notarization if it has not. Foreign trustees must in addition report the beneficial owners of the trust if a trust acquires domestic real property or if a contractual partner of the trust is domiciled in Germany. Reporting by a foreign association or trustee to the German transparency register is, however, not required if the relevant information on the beneficial owners has already been filed with a register of another EU member state. Additional requirements apply to foreign trustees. In addition, the reporting obligations of beneficial owners, irrespective of their place of residence, towards a German or, as the case may be, foreign association, regarding their interest have been clarified and extended. Associations concerned must now also actively make inquiries with their direct shareholders regarding any beneficial owners and must keep adequate records of these inquiries. Shareholders must respond to such inquiries within a reasonable time period and, in addition, must also notify the association pro-actively, if they become aware that the beneficial owner has changed as well as duly record any such notification. Furthermore, persons or entities subject to the GwG obligations (“Obliged Persons”) inspecting the transparency register to fulfil their customer due diligence requirements (e.g. financial institutions and estate agents) must now notify the transparency register without undue delay of any discrepancies on beneficial ownership between entries in the register and other information and findings available to them. Finally, the transparency register is now also accessible to the general public without proof of legitimate interest with regard to certain information about the beneficial owner (full legal name of the beneficial owner, the month and year of birth, nationality and country of residence as well as the type and extent of the economic interest of the beneficial owner). As in the past, however, the registry may restrict inspection into the transparency register, upon request of the beneficial owner, if there are overriding interests worthy of protection. In return for any disclosure, starting on July 1, 2020, beneficial owners may request information on inspections made by the general public (in contrast to inspections made by public authorities or Obliged Persons such as, e.g. financial institutions, auditing firms, or tax consultants and lawyers). Although reporting obligations to the transparency register were initially introduced more than 2.5 years ago, compliance with these obligations still seems to be lacking in practice. Therefore, any group with entities incorporated in Germany, any foreign association intending to acquire German real estate and any individual qualifying as a beneficial owner of a domestic or foreign association should check whether new or outstanding inquiry, record keeping or reporting obligations arise for them and take the required steps to ensure compliance. In this context, we note that for some time now the competent administrative enforcement authority (Bundesverwaltungsamt) has increased its efforts to enforce the transparency obligations, including imposing fines on associations that have failed to make required filings. It is to be expected that they will further tighten the reins based on this reform. Back to Top 1.5   UK LLPs with Management Seat in Germany – Status after Brexit? As things stand at present the British government is pushing to enact its Withdrawal Agreement Bill (the “WAB”) to ensure that it can take the UK out of the EU on January 31, 2020. Pursuant to the WAB such withdrawal from the EU is not intended to result in a so-called “Hard Brexit” as the WAB introduces a transition period until December 31, 2020 during which the European fundamental freedoms including the freedom of establishment would continue to apply. Freedom of establishment has, over the last decade in particular, resulted in German law recognizing that UK (and other EU) companies can have their effective seat of management (Verwaltungssitz) in Germany rather than the respective domestic jurisdiction. Until the end of the transition period, UK company structures such as UK Plc, Ltd. or LLP will continue to benefit from such recognition. But what happens thereafter if the EU and the UK (or, alternatively, Germany and the UK) do not succeed in negotiating particular provisions for the continued recognition of UK companies in the EU or Germany, respectively? From a traditional German legal perspective, such companies will lose their legal capacity as a UK company in Germany after the transition period because German courts traditionally follow the real or effective seat theory (Sitztheorie) and thus apply German corporate law to the companies in question rather than the incorporation theory (Gründungstheorie) which would lead to the application of English law. There would be a real risk that UK companies that have their effective management seat in Germany would have to be reclassified as a German company structure under the numerus clausus of German company structures. For some company structures such as the “LLP” German law does not have an equivalent LLP company structure as such, and reclassifying it as a German law limited partnership would not work either in most cases due to lack of registration in the German commercial register. In short, the only alternative for future recognition of a UK multi-person LLP, under German law, may be a German civil law partnership (GbR) or in certain cases a German law commercial partnership (OHG), with all legal consequences that flow from such structures, including, in particular, unlimited member liability. The discussion on how to resolve this issue in Germany has focused on a type of German partnership with limited liability (Partnerschaftsgesellschaft mit beschränkter Haftung, PartGmbB), that has only limited scope. A PartGmbB is only open to members of the so-called liberal or free professions such as attorneys or architects. In addition, the limitation of liability in a PartGmbB applies only to liability due to professional negligence and risks associated with the profession, and would thus not benefit their members generally. Unless UK companies with an effective seat of management in Germany opted to risk reliance on the status quo – in the event there is no new framework for recognition after the transition period – affected companies should either change their seat of management to the UK (or any other EU jurisdiction that applies the incorporation theory) and establish a German branch office, or, alternatively, consider forming a suitable German legal corporate structure before the end of the transition period at the end of December 2020. Back to Top 1.6   The ECJ on Corporate Agreements and the Rome I Regulation In its decision C-272/18, of 3 October 2019, the European Court of Justice (ECJ) further clarified the scope of the EU regulation Rome I (Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (the “Rome I Regulation”) on the one hand, and international company law which is excluded from the scope of the Rome I Regulation on the other hand. The need for clarification resulted from Art. 1 para. 2 lit f. of the Rome I Regulation pursuant to which “questions governed by the law of companies and other bodies, corporate or unincorporated, such as the creation, by registration or otherwise, legal capacity, internal organization or winding-up of companies and other bodies […]” are excluded from the scope of the Rome I Regulation. The ECJ, as the highest authority on the interpretation of the Regulation, held that the “corporate law exception” does not apply to contracts which have shares as object of such contract only. According to the explicit statement of the Advocate General Saugmandsgaard Øe, this also includes share purchase agreements which are now held to be within the scope of the Rome I Regulation. This exception from the scope of the Rome I Regulation is thus much narrower than it has been interpreted by some legal commentators in the past. The case concerned a law suit brought by an Austrian consumer protection organization (“VKI”) against a German public instrument fund (“TVP”), and more particularly, trust arrangements for limited (partnership) interests in funds designed as public limited partnerships. The referring Austrian High Court had to rule on the validity of a choice of law clause in trust agreements concerning German limited partnership interests between the German fund TVP, as trustee over the investors’ partnership interests, and Austrian investors qualifying as consumers, as trustors. This clause provided for the application of German substantive law only. VKI claimed that this clause was, under Austrian substantive law, not legally effective and binding because pursuant to the Rome I Regulation, a contract concluded by a consumer with another person acting in the exercise of his/her trade or profession shall either be governed by the law of the country of the consumer’s habitual residence (in this case Austria) and/or, in the event the parties have made a choice as to the applicable law, at least not result in depriving the consumer of the protection offered to him/her by his/her country of residence. The contractual choice of German law could not therefore, in VKI’s view, deprive Austrian investors of rights guaranteed by Austrian consumer protection laws. TVP, on the other hand, argued that the Rome I Regulation was not even applicable as the contract in question was an agreement related to partnership interests and, thus, to corporate law which was excluded from the scope of the Rome I Regulation. The ECJ ruled that the relevant corporate law exclusion from the scope of the Rome I Regulation is limited to the organizational aspects of companies such as their incorporation or internal statutes. In turn, a mere connection to corporate law was ruled not to be sufficient to fall within the exclusion. Sale and purchase agreements in M&A transactions, or as in the matter at hand trust arrangements, are therefore covered by the Rome I Regulation. The decision provides that the choice of law principle of the Rome I Regulation is, subject to the restrictions imposed by the Regulation itself for particular groups such as consumers and employees, applicable in more cases than considered in the past with respect to corporate law related contracts. Back to Top 1.7   German Foreign Direct Investment – Further Rule-Tightening Announced for 2020 Restrictions on foreign investment is increasingly becoming a perennial topic. After the tightening of the rules on foreign direct investment in 2017 (see 2017 Year-End German Law Update under 1.5) and the expansion of the scope for scrutiny of foreign direct investments in 2018 (see 2018 Year-End German Law Update under 1.3), the German Ministry of Economy and Energy (Bundesministerium für Wirtschaft und Energie) in November 2019 announced further plans to tighten the rules for foreign direct investments in Germany in its policy guideline on Germany’s industrial strategy 2030 (Industriestrategie 2030 – Leitlinien für eine deutsche und europäische Industriepolitik). The envisaged amendments to the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung, AWV) relate to the following three key pillars: Firstly, by October 2020, the German rules shall be adapted to reflect the amended EU regulations (so-called EU Screening Directive dated March 19, 2019). This would be achieved, inter alia, by implementing a cooperation mechanism to integrate other EU member states as well as the EU Commission into the review process. Further, the criteria for public order or security (öffentliche Ordnung oder Sicherheit) relevant to the application of foreign trade law is expected to be revised and likely expanded to cover further industry sectors such as artificial intelligence, robotics, semiconductors, biotechnology and quantum technology. The threshold for prohibiting a takeover may be lowered to cover not only a “threat” but a “foreseeable impairment” of the public order or security (as contemplated in the EU directive). Secondly, if the rules on foreign direct investments cannot be relied on to block an intended acquisition, but such acquisition nonetheless affects sensitive or security related technology, another company from the German private sector may acquire a stake in the relevant target as a so-called “White Knight” in a process moderated by the government. Thirdly, as a last resort, the strategy paper proposes a “national fallback option” (Nationale Rückgriffsoption) under which the German state-owned Kreditanstalt für Wiederaufbau could acquire a stake in enterprises active in sensitive or security-related technology sectors for a limited period of time. Even though the details for the implementation of those proposals are not yet clear, the trend towards more protectionism continues. For non-EU investors a potential review pursuant to the rules on foreign direct investment will increasingly become the new rule and should thus be taken into account when planning and structuring M&A transactions. Back to Top 2.   Tax – German Federal Government Implements EU Mandatory Disclosure Rules On December 12, 2019 and December 20, 2019, respectively, the two chambers of the German Federal Parliament passed the Law for the Introduction of an Obligation to report Cross-Border Tax Arrangements (the “Law”), which implements Council Directive 2018/822/EU (referred to as “DAC 6”) into Germany’s domestic law effective as of July 1, 2020. DAC 6 entered into force on June 25, 2018 and requires so-called intermediaries, and in some cases taxpayers, to report cross-border arrangements that contain defined characteristics with their national tax authorities within specified time limits. The stated aim of DAC 6 is to provide tax authorities with an early warning mechanism for new risks of tax avoidance. The Law follows the same approach as provided for in DAC 6. The reporting obligation would apply to “cross-border tax arrangements” in the field of direct taxes (e.g. income taxes but not VAT). Cross-border arrangements concern at least two member states or a member state and a non-EU country. Purely national German arrangements are – contrary to previous drafts of the Law – not subject to reporting. (a)   Reportable cross-border arrangements must have one or more specified characteristics (“hallmarks”). The hallmarks are broadly scoped and represent certain typical features of tax planning arrangements, which potentially indicate tax avoidance or tax abuse. (i)    Some of these hallmarks would result in reportable transactions only if the “main benefit test” is satisfied. The test would be satisfied if it can be established that the main benefit that a person may reasonably expect to derive from an arrangement is obtaining a tax advantage in Germany or in another member state. Hallmarks in that category are, inter alia, the use of substantially standardized documentation or structures, the conversion of income into lower taxed categories of revenue or payments to an associated enterprise that are tax exempt or benefit from a preferential tax regime or arrangement. (ii)   In addition, there are hallmarks that would result in reportable transactions regardless of whether the main benefit test is satisfied. Hallmarks in this category are, for example, assets that are subject to depreciation in more than one jurisdiction, relief from double taxation that is claimed more than once, arrangements that involve hard-to-value intangibles or specific transfer pricing arrangements. (b)   The primary obligation to disclose information to the tax authorities rests with the intermediary. An intermediary is defined as “any person that promotes, designs for a third party, organizes, makes available for implementation or manages the implementation of a reportable cross-border arrangement.” Such intermediary must be resident in the EU or provides its services through a branch in the EU. Typical intermediaries are tax advisors, accountants, lawyers, financial advisors, banks and consultants. When multiple intermediaries are engaged in a cross-border arrangement, the reporting obligation lies with all intermediaries involved in the same arrangement. However, an intermediary can be exempt from reporting if he can prove that a report of the arrangement has been filed by another intermediary. In the event an intermediary is bound by legal professional privilege from reporting information, the intermediary would have to inform the relevant taxpayer of the possibility of waiving the privilege. If the relevant taxpayer does not grant the waiver, the responsibility for reporting the information would shift to the taxpayer. Other scenarios where the reporting obligation is shifted to the taxpayer are in-house schemes without involvement of intermediaries or the use of intermediaries from countries outside the EU. (c)   Reporting to the tax office is required within a 30-day timeframe after the arrangement is made available for implementation or when the first step has been implemented. The report must contain the applicable hallmark, a summary of the cross-border arrangement including its value, the applicable tax provisions and certain information regarding the intermediary and the taxpayer. The information will be automatically submitted by the competent authority of each EU member state through the use of a central directory on administrative cooperation in the field of direct taxation. (d)  The reporting obligations commence on July 1, 2020. However, the Law also has retroactive effect: for all reportable arrangements that were implemented in the interim period between June 24, 2018 and June 30, 2020 the report would have to be filed by August 31, 2020. Penalties for noncompliance with the reporting obligations are up to EUR 25,000 while there are no penalties for noncompliance with such reportable arrangements for the interim period between June 25, 2018 and June 30, 2020. Since, as noted above, the reporting obligation can be shifted to the client as the taxpayer and the client will then be responsible for complying with the reporting obligations, taxpayers should consider establishing a suitable reporting compliance process. Such process may encompass sensitization for and identification of reportable transactions, the determination of responsibilities, the development of respective DAC 6 governance and a corresponding IT-system, recording of arrangements during the transitional period after June 24, 2018, robust testing and training as well as live operations including analysis and reporting of potential reportable arrangements. Back to Top 3.   Financing and Restructuring 3.1   EU Directive on Preventive Restructuring Framework – Minimum Standards Across Europe? On June 26, 2019, the European Union published Directive 2019/1023 on a preventive restructuring framework (Directive (EU) 2019/1023 of the European Parliament and of the Council of June 20, 2019) (the “Directive”). The Directive aims to introduce standards for “honest entrepreneurs” in financial difficulties providing businesses with a “second chance” in all EU member states. While some member states had already introduced preventive restructuring schemes in the past (e.g. the UK scheme of arrangement), others, like Germany, stayed inactive, leaving debtors with the largely creditor-focused and more traditional tools set forth in the German Insolvency Code (Insolvenzordnung, InsO). By contrast, the Directive now seeks to protect workers and creditors alike in “a balanced manner”. In addition, a particular focus of the Directive are small and medium-sized enterprises, which often do not have the resources to make use of already existing restructuring alternatives abroad. The key features of the Directive provide, in particular: The preventive restructuring regime shall be available upon application of the debtor. Creditors and employee representatives may file an application, but generally the consent of the debtor shall be required in addition; Member states are required to implement early warning tools and to facilitate access to information enabling debtors to properly assess their financial situation early on and detect circumstances which may ultimately lead to insolvency; Preventive restructuring mechanisms must be set forth in domestic law in the event there is a “likely insolvency”. Debtors must be given the possibility to remain in control of the business operations while restructuring measures are implemented to avoid formal insolvency proceedings. In Germany, it will be a challenge to properly distinguish between the newly introduced European concept of “likely insolvency” which is the door opener for preventive restructuring under the Directive and the existing German legal concept of “imminent illiquidity” (drohende Zahlungsunfähigkeit) which under current insolvency law enables German debtors to proceed with a voluntary insolvency filing; A stay of individual enforcement measures for an initial period of four months (with an extension option of up to a maximum of 12 months) must be provided for, thus putting debtors in a position to negotiate a restructuring plan. During this time period, the performance of executory contracts cannot be withheld solely due to non-payment; Minimum requirements for a restructuring plan include an outline of the contemplated restructuring measures, effects on the workforce, as well as the prospects that insolvency can be prevented on the basis of such measures; Restructuring measures contemplated by the Directive are wide ranging and include a change in the composition of a debtor’s assets and liabilities, a sale of assets or of the business as a going concern, as well as necessary operational changes; Voting on the restructuring plan is generally effected by separate classes of creditors in each case with a majority requirement of not more than 75%. Cross-class cram down will be available subject to certain conditions including (i) a majority of creditor classes (including secured creditors) voted in favor and (ii) dissenting creditors are treated at least equal to their pari passu creditors (or better than creditors ranking junior). In addition, the restructuring plan must be approved by either a judicial or administrative authority in order to be binding on dissenting voting classes. Such approval is also required in the event of new financing or when the workforce is reduced by more than 25%. Member states have until July 17, 2021 to implement the Directive into domestic law (subject to a possible extension of up to one year), but considering the multiple alternative options the Directive leaves to member states, discussions on how to best align existing domestic laws with the requirements of the Directive have already started. Ultimately, the success of the Directive depends on the willingness of the member states to implement a truly effective pre-insolvency framework. The inbuilt flexibility and variety of structuring alternatives left to the member states can be an opportunity for Germany to finally enact an out-of-court restructuring scheme beyond the existing debtor in possession (Eigenverwaltung) or protective shield (Schutzschirm) proceedings which, however, currently kick in only at a later stage of financial distress after an insolvency filing has already been made. Back to Top 3.2   Insolvency Contestation in Cash Pool Scenarios One of the noticeable developments in the year 2019 was that inter-company cash-pool systems have increasingly come under close scrutiny in insolvency scenarios. There were several decisions by the German Federal Supreme Court (Bundesgerichtshof, BGH), the most notable one probably a judgment handed down on June 27, 2019 (case IX ZR 167/18) in a double insolvency case where the respective insolvency administrators of an insolvent group company and its insolvent parent and cash pool leader were fighting over the treatment of mutually granted upstream and downstream loans during the operation of a group-wide cash management system that saw multiple loan movements between the two insolvent debtors during the relevant pre-insolvency period. Under applicable German insolvency contestation laws (Insolvenzanfechtung), the insolvency administrator of the insolvent subsidiary has the right to contest any shareholder loan repayments or equivalent payments made to its parent as shareholder and pool leader within a period of one year prior to the point in time when the insolvency filing petition is lodged. The rationale of this rule is to protect the insolvent estate and regular unsecured trade creditors from pre-insolvency payments to shareholders who in an insolvency would only be ranked as subordinated creditors. The contestation right – if successful – allows the insolvency administrator to claw back from shareholders such earlier repayments to boost the funds available for distribution in the insolvency proceedings. In cases such as the one at hand where the cash pool was operated in a current account system resulting in multiple cash payments to and from the pool leader, the parent’s potential exposure could have grown exponentially if the insolvency administrator of the subsidiary could have simply added up all loan repayments made within the last year, irrespective of the fact that the pool leader, in turn, regularly granted new down-stream loan payments to the subsidiary as and when liquidity was needed. In one of the main conclusions of the judgment, the BGH confirmed the calculation mechanism for the maximum amount that can be contested and clawed back in scenarios such as this: The court, in this respect, does not simply add up all loan repayments in the last year. Instead, it uses the historic maximum amount of the loans permanently repaid within the one-year contestation period as initial benchmark and then deducts the outstanding amounts still owed by the insolvent subsidiary at the end of the contestation period. Interim fluctuations, where further repayments to the pool leader occurred, are deemed immaterial if they have been re-validated by new subsequent downstream loans. Consequently, the court limits the exposure of the pool leader in current account situations to the balance of loans, not by way of a simple addition of all repayments. In a second clarification, the BGH decreed that customary, arm’s length interest charged by the pool leader to the insolvent subsidiary for its downstream loans and then paid to the shareholder as pool leader are not qualified as a “payment equivalent to a loan repayment”, because interest is an independent compensation for the downstream loan, not capital transferred to the lender for temporary use. Beyond the specifics of the decision, the increased focus of the courts on cash pools in crisis situations should cause larger groups of companies that operate such group-wide cash management systems to revisit the underlying contractual arrangements to ensure that participating companies and the pool leader have adequate mutual early warning systems in place, as well as robust remedies and/or withdrawal rights to react as early as possible to the deterioration of the financial position of one or several cash pool participants. Even though the duration of the one-year contestation period will often mean that even carefully and appropriately drafted cash pooling documentation cannot always preempt or avoid all risk in a later financial crisis, at least, the potential personal liability risks for management which go beyond the mere contestation risk can be mitigated and addressed this way. Back to Top 4.   Labor and Employment 4.1   De-Facto Employment – A Rising Risk for Companies A widely-noticed court decision by the Federal Social Court (Bundessozialgericht) (judgment of June 4, 2019 – B12 R11 11/18 R) on the requalification of freelancers as de-facto employees has potentially increased risks to companies who employ freelancers. In this decision, the court requalified physicians officially working as “fee doctors” in hospitals as de-facto employees, because they were considered as integrated into the hospital hierarchy, especially due to receiving instructions from other doctors and the hospital management. While this decision concerned physicians, it found wide interest in the general HR community, as it tightened the leeway for employing freelancers. This aspect is particularly important for companies in Germany, as there is a war for talent, particularly with respect to engineers and IT personnel. These urgently sought-after experts are in high demand and therefore often able to dictate the contractual relationships. In this respect, they often prefer a freelancer relationship, as it is more profitable for them and gives them the opportunity to also work for other (even competing) companies. Against the background of this decision, every company would be well advised to review very thoroughly, whether a “freelancer” is really free of instructions regarding the place of work, the working hours, and the details of the work to be done. Otherwise, the potential liability for the company – both civil and criminal – is considerable if freelancers are deemed to be de-facto employees. Back to Top 4.2   New Constraints for Post-Contractual Non-Compete Covenants A recently published decision by the Higher District Court (Oberlandesgericht) of Munich has restricted the permissible scope of post-contractual non-compete covenants for managing directors (decision of August 2, 2018 – 7 U 2107/18). The court held that such restrictions are only valid if and to the extent they are based upon a legitimate interest of the company. In addition, their scope has to be explicitly limited in the respective wording tailored to the individual case. This court decision is important, because, unlike for “regular” employees, post-contractual non-compete agreements for managing directors are not regulated by statutory law. Therefore, every company should, in a first step, carefully review whether a post-contractual non-compete is really necessary for the relevant managing director. If it is deemed to be indispensable, the wording should be carefully drafted according to the above-mentioned principles. Back to Top 4.3   ECJ Judgments on Vacation and Working Hours The European Court of Justice (ECJ) has handed down two employee-friendly decisions regarding (a) the forfeiture of entitlement to vacation and (b) the control of working hours (case C-684/16, judgment of November 6, 2018 and case C-55/18, judgment of May 14, 2019). According to the first decision, employee vacation entitlement cannot simply be forfeited due to the lapse of time, even if such a forfeiture is stipulated by national statutory law. Rather, the employer has an obligation to actively notify employees of their outstanding entitlement to vacation and encourage them to take their remaining vacation. In the other decision, the ECJ demanded that the company establish a system to control and document all the working hours of its employees, not only those exceeding a certain threshold. In practical terms of the German economy, not all companies currently have such seamless time control and documentation systems in place. However, until this ECJ judgment is implemented into German statutory law, companies cannot be fined solely based upon the ECJ judgment. Thus, a legislative response to this issue and the court decision must be awaited. Back to Top 5.         Real Estate 5.1   Real Estate – Rent Price Cap concerning Residential Space in Berlin On November 26, 2019, the Berlin Senate (the government of the federal state of Berlin) passed a draft bill for the “Act on Limiting Rents on Berlin’s Residential Market” (Gesetz zur Mietenbegrenzung im Wohnungswesen in Berlin), the so-called Berlin rent price cap (Mietendeckel). It is expected that this bill will be adopted by the Berlin House of Representatives (the legislative chamber of the federal state of Berlin) and come into force in early 2020, with certain provisions of the bill having retroactive effect as of June 18, 2019. This bill shall apply to residential premises in Berlin (with a few exceptions) that were ready for occupancy for the first time before January 1, 2014. The three key instruments of this bill are (a) a rent freeze, (b) the implementation of rent caps and (c) a limit on modernization costs that can be passed on to the tenant. (a)   The rent freeze shall apply to all existing residential leases and shall freeze the rent at the level of the rent on June 18, 2019 (or, if the premises were vacant on that date, the last rent before that date). This rent freeze also applies to indexed rents and stepped rents. As of 2022, landlords shall be entitled to request an annual inflation related rent adjustment, however, capped at 1.3% p.a.. Prior to entering into a new residential lease agreement, the landlord must inform the future tenant about the relevant rent as at June 18, 2019 (or earlier, as applicable). (b)   Depending on the construction year and fit-out standards (with / without collective heating / bathroom), initial monthly base rent caps between EUR 3.92 and EUR 9.80 per square meter (m²) shall apply. These caps shall be increased by 10% for buildings with up to two apartments. Another increase of EUR 1 per m² shall apply with respect to an apartment with “modern equipment”, i.e. an apartment that has at least three of the following five features: (i) barrier-free access to a lift, (ii) built-in kitchen, (iii) “high quality” sanitary fit-out, (iv) “high quality” flooring in the majority of the living space and (v) low energy performance (less than 120 kWh/(m²a). The bill does not contain a definition of what constitutes “high quality”. For new lettings after June 18, 2019 and re-lettings after this bill has come into force, the rent must not exceed the lower of the applicable rent caps and the rent level as of June 18, 2019 (or earlier, as applicable). If the agreed monthly rent as of June 18, 2019 (or earlier) was below EUR 5.02 per m², the re-letting rent may be increased by EUR 1 per m² up to a maximum monthly rent of EUR 5.02 per m². Once the act has been in effect for nine months, the tenants may request the public authorities to reduce the rent of all existing leases to the appropriate level if the rent is considered “extortionate”, i.e. if the rent exceeds the applicable rent cap level (subject to certain surcharges / discounts for the location of the premises) by more than 20% and it has not been approved by public authorities. The surcharges / discounts amount to +74 cents per m² (good location), -9 cents per m² (medium location) and –28 cents per m² (simple location). (c)   Modernization costs shall only be passed on to tenants if they relate to (i) measures required under statutory law, (ii) thermal insulation of certain building parts, (iii) measures for the use of renewable energies, (iv) window replacements to save energy, (v) replacement of the heating system, (vi) new installation of elevators or (vii) certain measures to remove barriers. Such costs can also only be passed on to tenants to the extent that the monthly rent is not increased by more than EUR 1 per m² and the applicable rent cap is not exceeded by more than EUR 1 per m². To cover the remaining modernization costs, landlords may apply for subsidies under additional subsidy programs of the state of Berlin. Any rent increase due to modernization measures is to be notified to the state-owned Investitionsbank Berlin. Breaches of the material provisions of this bill are treated as an administrative offence and may be fined by up to EUR 500,000 in each individual case. Many legal scholars consider the Berlin rent price cap unconstitutional (at least, in parts) for infringing the constitutional property guarantee, the freedom of contract and for procedural reasons. In particular, they raise concerns about whether the state of Berlin is competent to pass such local legislation (as certain provisions deviate from the German Civil Code (BGB) as federal law) and whether the planned retroactive effect is permissible. The opposition in the Berlin House of Representatives and a parliamentary faction on the federal level have already announced that they intend to have the Berlin rent cap reviewed by the Berlin’s Regional Constitutional Court (Verfassungsgerichtshof des Landes Berlin) and the Federal Constitutional Court (Bundesverfassungsgericht). In light of the severe potential fines, landlords should nonetheless consider compliance with the provisions of the Berlin rent price cap until doubts on the constitutional permissibility have been finally clarified. Back to Top 5.2   Changes to the Transparency Register affecting Real Property Transactions Certain aspects of the act implementing the 5th EU Anti-Money Laundering Directive (Directive (EU) 2018/843) which amended the German Anti-Money Laundering Act (GwG) are of particular interest to the property sector. We would, therefore, refer interested circles to the above summary in section 1.4. Back to Top 6.   Compliance and Litigation 6.1   German Corporate Sanctions Act German criminal law so far does not provide for corporate criminal liability. Corporations can only be fined under the law on administrative offenses. In August 2019, the German Federal Ministry of Justice and Consumer Protection (Bundesministerium der Justiz und für Verbraucherschutz) circulated a legislative draft of the Corporate Sanctions Act (Verbandssanktionengesetz, the “Draft Corporate Sanctions Act”) which would, if it became law, introduce a hybrid system. The main changes to the current legal situation would eliminate the prosecutorial discretion in initiating proceedings, tighten the sentencing framework and formally incentivize the implementation of compliance measures and internal investigations. So far, German law grants the prosecution discretion on whether to prosecute a case against a corporation (whereas there is a legal obligation to prosecute individuals suspected of criminal wrongdoing). This has resulted not only in an inconsistent application of the law, in particular among different federal states, but also in a perceived advantageous treatment of corporations over individuals. The Draft Corporate Sanctions Act now intends to introduce mandatory prosecution of infringements by corporations, with an obligation to justify non-prosecution under the law. The law as currently proposed would also apply to criminal offenses committed abroad if the company is domiciled in Germany. Under the current legal regime, corporations can be fined up to a maximum of EUR10 million (in addition to the disgorgement of profits from the legal violation), which is often deemed insufficient by the broader public. The Draft Corporate Sanctions Act plans to increase potential fines to a maximum of 10% of the annual—worldwide and group-wide—turnover, if the group has an average annual turnover of more than EUR100 million. Additionally, profits could still be disgorged. The Draft Corporate Sanctions Act would also introduce two new sanctions: a type of deferred prosecution agreement with the possibility of imposing certain conditions (e.g. compensation for damages and monitorship), and a “corporate death penalty,” namely the liquidation of the company to combat particularly persistent and serious criminal behavior. The Draft Corporate Sanctions Act would also allow the prosecutor to either refrain from pursuing prosecution or to positively take into account in the determination of fines the existence of an adequate compliance system. If internal investigations are carried out in accordance with the requirements set out in the Draft Corporate Sanctions Act (including in particular: (i) substantial contributions to the authorities’ investigation, (ii) formal division of labor between those conducting the internal investigation, on the one hand, and those acting as criminal defense counsel, on the other, (iii) full cooperation, including full disclosure of the investigation and its results to the prosecution, and (iv) adherence to fair trial standards, in particular the interviewee’s right to remain silent in internal investigations), the maximum fine might be reduced by 50%, and the liquidation of the company or a public announcement might be precluded. It is unclear under the current legal regime whether work product created in the context of an internal investigation is protected against prosecutorial seizure. The Draft Corporate Sanctions Act wants to introduce a clarification in this respect: only such documents will be protected against seizure that are part of the relationship of trust between the company as defendant and its defense counsel. Therefore, documents used or created in the preparation of the criminal defense would be protected. Documents from interviews in the context of an internal investigations, however, would only be protected in case they stem from the aforementioned relationship between client and defense counsel. Interestingly, and as mentioned above, the draft law requires that counsel conducting the internal investigation must be separate from defense counsel if the corporation wants to claim a cooperation bonus. How this can be achieved in practice, in particular in an international context where criminal defense counsel is often expected to conduct the internal investigation and where the protection of legal privilege may depend on this dual role, is unclear. In particular here, the draft does not seem sufficiently thought-through, and both the legal profession and the business community are voicing strong opposition. Overall, it is doubtful at the moment that the current government coalition, in its struggle for survival, will continue to pursue the implementation of this legislative project as a priority. Therefore, it remains to be seen whether, when, and with what type of amendments the German Corporate Sanctions Act will be passed by the German Parliament. Back to Top 6.2   Amendments to the German Anti-Money Laundering Act: Further Compliance Obligations, including for the Non-Financial Sector On January 1, 2020, the Act implementing the 5th EU Anti-Money Laundering Directive (Directive (EU) 2018/843) became effective. In addition to further extending the scope of businesses that are required to conduct anti-money laundering and anti-terrorist financing procedures in accordance with the German Anti-Money Laundering Act (Geldwäschegesetz, GwG), in particular in the area of virtual currencies, it introduced new obligations and stricter individual requirements for persons or entities subject to the GwG obligations (“Obliged Persons”). The new requirements must be taken into account especially in relation to customer onboarding and ongoing anti-money laundering and countering terrorist financing (“AML/CTF”) compliance. The following overview provides a summary of some key changes, in particular, concerning the private non-financial sector, which apply in addition to the specific reporting obligations to the transparency register already described above under section 1.4. The customer due diligence obligations (“KYC”) were further extended and also made more specific. In particular, Obliged Persons are now required to collect proof of registration in the transparency register or an excerpt of the documents accessible via the transparency register (e.g. shareholder lists) when entering into a new business relationship with a relevant entity. In addition, the documentation obligations with regard to the undertaken KYC measures have been further increased and clarified. Further important changes concern the enhanced due diligence measures required in the case of a higher risk of money laundering or terrorist financing, in particular with regard to the involvement of “high-risk countries”. Obliged Persons must now also notify the registrar of the transparency register without undue delay of any discrepancies on beneficial ownership between entries in the transparency register and other information and findings available to them. Obliged Persons must register with the Financial Intelligence Unit (FIU), regardless of whether they intend to report a suspicious activity, as soon as the FIU’s new information network starts its operations, but no later than January 1, 2024. In accordance with the findings of the First National Risk Assessment, the duties for the real estate sector were significantly extended and increased. Real estate agents are now also subject to the AML/CTF risk management requirements of the GwG and are required to conduct customer due diligence when they act as intermediaries in the letting of immovable property if the monthly rent amounts to EUR 10,000 or more. Furthermore, notaries are now explicitly required to check the conclusiveness of the identity of the beneficial owner before notarizing a real estate purchase transaction in accordance with section 1 of the German Federal Real Estate Transfer Tax Act (Grunderwerbsteuergesetz) and may even be required to refuse notarization, see also section 1.4 above on the transparency register. In an effort towards a more uniform EU-wide approach with regard to politically exposed persons (“PEPs”), EU member states must submit to the EU Commission a catalogue of specific functions and offices which under the relevant domestic law justify the qualification as PEP by January 10, 2020. The EU Commission will thereafter publish a consolidated catalogue, which will be binding for Obliged Persons when determining whether a contractual partner or beneficial owner qualifies as PEP with the consequence that enhanced customer due diligence applies. Furthermore, the new law brought some clarifications by changing or introducing definitions, including in particular a new self-contained definition for the term “financial company”. For example, the legislator made clear that industrial holdings are not subject to the duties of the GwG: Any holding companies which exclusively hold participations in companies outside of the credit institution, financial institution or insurance sector do not qualify as financial companies under the GwG, unless they engage in business activities beyond the tasks associated with the management of their participations. That said, funds are not explicitly excluded from the definition of financial companies – and since their activities generally also include the acquisition and sale of participations, it is often questionable whether the exemption for holding companies applies. Another noteworthy amendment concerns the group-wide compliance obligations in section 9 of the GwG: the amended provision now distinguishes (more) clearly between obligations applicable to an Obliged Person that is the parent company of a group and the other members of the group. The amendments to the GwG have further intensified the obligations not only for the classical financial sector but also the non-financial sector. Since the amendments entered into force on January 1, 2020, the relevant business circles are well advised to review whether their existing AML/CTF risk management system and KYC procedures need to be adjusted in order to comply with the new rules. Back to Top 6.3   First National Risk Assessment on the Money Laundering and Terrorist Financing Risk for Germany – Implications for the Company-Specific Risk Analyses The first national risk assessment for the purposes of combatting money laundering and terrorist financing (“NRA”) was finally published on the website of the German Federal Ministry of Finance (Bundesministerium der Finanzen) on October 21, 2019 (currently in German only). When preparing their company-specific risk analyses under the GwG, Obliged Persons must now take into consideration also the country-, product- and sector-specific risks identified in the NRA. Germany as a financial center is considered a country with a medium-high risk (i.e. level 4 of a five-point scale from low to high) of being abused for money laundering and terrorist financing. The NRA identifies, in particular, the following key risk areas: anonymity in transactions, the real estate sector, the banking sector (in particular, in the context of correspondent banking activities and international money laundering) and the money remittance business due to the high cash intensity and cross-border activities. With regard to specific cross-border concerns, the NRA has identified eleven regions and states that involve a high risk of money laundering for Germany: Eastern Europe (particularly Russia), Turkey, China, Cyprus, Malta, the British Virgin Islands, the Cayman Islands, Bermuda, Guernsey, Jersey and the Isle of Man. Separately, a medium-high cross-border threat was identified for Lebanon, Panama, Latvia, Switzerland, Italy and Great Britain, and a further 17 countries were qualified as posing a medium, medium-low or low threat with regard to money laundering. The results of the NRA (including the assessment of cross-border threats in its annex 4) need to be taken into consideration by Obliged Persons both of the financial and non-financial sector when preparing or updating their company-specific risk analyses in a way that allows a third party to assess how the findings of the NRA were accounted for. Obliged Persons (in particular, if supervised by the BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht) or active in other non-financial key-risk sectors), if they have not already done so, should thus conduct a timely review, and document such a review, of whether the findings of the NRA require an immediate update to their risk assessment or whether they consider an adjustment in the context of their ongoing review. Back to Top 7.   Antitrust and Merger Control 7.1   Antitrust and Merger Control Overview 2019 Germany’s antitrust watchdog, the German Federal Cartel Office (Bundeskartellamt), has had another very active year. On the cartel enforcement side, the Bundeskartellamt concluded several cartel investigations and imposed fines totaling EUR 848 million against 23 companies or associations and 12 individuals from various industries including bicycle wholesale, building service providers, magazines, industrial batteries and steel. As in previous years, leniency applications continue to play an important role for the Bundeskartellamt‘s antitrust enforcement activities with a total of 16 leniency applications received in 2019. With these applications and dawn raids at 32 companies, it can be expected that the agency will have significant ammunition for an active year in 2020 in terms of antitrust enforcement. With respect to merger control, the Bundeskartellamt reviewed approximately 1,400 merger filings in 2019. 99% of these filings were concluded during the one-month phase 1 review. Only 14 merger filings (i.e. 1% of all merger filings) required an in-depth phase 2 examination. Of those, four mergers were prohibited and five filings were withdrawn – only one was approved in phase 2 without conditions, and four phase 2 proceedings are still pending. In addition, the Bundeskartellamt has been very active in the area of consumer protection and concluded its sector inquiry into comparison websites. The agency has also issued a joint paper with the French competition authority regarding algorithms in the digital economy and their competitive effects. For 2020, it is expected that the Bundeskartellamt will conclude its sector inquiry regarding online user reviews as well as smart TVs and will continue to focus on the digital economy. Furthermore, the Bundeskartellamt has also announced that it is hoping to launch the Federal Competition Register for Public Procurement by the end of 2020 – an electronic register that will list companies that have been involved in serious economic offenses. Back to Top 7.2   Competition Law 4.0: Proposed Changes to German Competition Act The German Federal Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie) has compiled a draft bill for the tenth amendment to the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen, GWB) that aims at further developing the regulatory framework for digitalization and implementing European requirements set by Directive (EU) 2019/1 of December 11, 2018 by empowering the competition authorities of the member states to be more effective enforcers and to ensure the proper functioning of the internal market. While it is not yet clear when the draft bill will become effective, the most important changes are summarized below. (Super) Market Dominance in the Digital Age Various amendments are designed to help the Federal Cartel Office (Bundeskartellamt) deal with challenges created by restrictive practices in the field of digitalization and platform economy. One of the criteria to be taken into account when determining market dominance in the future would be “access to data relevant for competition”. For the first time, companies that depend on data sets of market-dominating undertakings or platforms would have a legal claim to data access against such platforms. Access to data will also need to be granted in areas of relative market power. Giving up the reference to “small and medium-sized” enterprises as a precondition for an abuse of relative or superior market power takes into account the fact that data dependency may exist regardless of the size of the concerned enterprise. Last but not least, the draft bill refers to a completely new category of “super dominant” market players to be controlled by the Bundeskartellamt, i.e. undertakings with “paramount significance across markets”. Large digital groups may not have significant market shares in all affected markets, but may nevertheless be of significant influence on these markets due to their key position for competition and their conglomerate structures. Before initiating prohibitive actions against such “super dominant” market players, the Bundeskartellamt will have to issue an order declaring that it considers the undertaking to have a “paramount significance across markets”, based on the exemplary criteria set out in the draft bill. Rebuttable Presumptions Following an earlier decision of the German Federal Supreme Court (Bundesgerichtshof, BGH), the draft bill suggests introducing a rebuttable presumption whereby it is presumed that direct suppliers and customers of a cartel are affected by the cartel in case of transactions during the duration of the cartel with companies participating in the cartel. The rebuttable presumption is intended to make it easier for claimants to prove that they are affected by the cartel. Another rebuttable presumption shall apply in favor of indirect customers in the event of a passing-on. However, there is still no presumption for the quantification of damages. Another procedural simplification foreseen in the draft bill is a lessening of the prerequisites to prove an abuse of market dominance. It would suffice that market behavior resulted in an abuse of market dominance, irrespective of whether the market player utilized its dominance for abusive purposes. Slight Increase of Merger Control Threshold The draft bill provides for an increase of the second domestic turnover threshold from EUR 5 million to EUR 10 million. Concentrations would consequently only be subject to filing requirements in the future if, in the last business year preceding the concentration, the combined aggregate worldwide turnover of all the undertakings concerned was more than EUR 500 million, and the domestic turnover of, at least, one undertaking concerned was more than EUR 25 million and that of another undertaking concerned was more than EUR 10 million. This change aims at reducing the burden for small and medium-sized enterprises. The fact that transactions that provide for an overall consideration of more than EUR 400 million may trigger a filing requirement remains unchanged. Back to Top 7.3   “Undertakings” Concept Revisited – Parents Liable for their Children? Following the Skanska ruling of the European Court of Justice (ECJ) earlier this year (case C-724/17 of March 14, 2019) , the first German court decisions (by the district courts (Landgerichte) of Munich and Mannheim) were issued in cases where litigants were trying to hold parent companies liable for bad behavior by their subsidiaries. As a reminder: In Skanska, the ECJ ruled on the interpretation of Article 101 of the Treaty on the Functioning of the European Union (TFEU) in the context of civil damages regarding the application of the “undertakings” concept in cases where third parties claim civil damages from companies involved in cartel conduct. The “undertakings” concept, which the ECJ developed with regard to the determination of administrative fines for violations of Article 101 TFEU, establishes so-called parental liability. This means that parent entities may be held liable for antitrust violations committed by their subsidiaries, as long as the companies concerned are considered a “single economic unit” because the parent has “decisive influence” over the offending company and is exercising that influence. The Skanska case extends parental liability to civil damages cases. The decisions by the two German courts in Mannheim and Munich denied a subsidiary’s liability for its parent company, or for another subsidiary, respectively. Back to Top 8.   Data Protection: GDPR Fining Concept Raises the Stakes While some companies are still busy implementing the requirements of the General Data Protection Regulation (the “GDPR”), the German Conference of Federal and State Data Protection Authorities has increased the pressure in October 2019 by publishing guidelines for the determination of fines in privacy violation proceedings against companies (the “Fining Concept”). Even though the Fining Concept may seem technical at first glance, it has far-reaching consequences for the fine amounts, which have already manifested in practice. The Fining Concept applies to the imposition of fines by German Data Protection Authorities within the scope of the GDPR. Since the focus for determining fines is on the global annual turnover of a company in the preceding business year, it is to be expected that fines will increase significantly. For further details, please see our client update from October 30, 2019 on this subject. In the past few months, in particular after the Fining Concept was published, several German Data Protection Authorities already issued a number of higher fines. Most notably, in November 2019 the Berlin Data Protection Authority imposed a fine against a German real estate company in the amount of EUR 14.5 million (approx. USD 16.2 million) for non-compliance with general data processing principles. The company used an archive system for the storage of personal data from tenants, which did not include a function for the deletion of personal data. In December 2019, another fine in the amount of EUR 9.5 million (approx. USD 10.6 million) was imposed by the Federal Commissioner for Data Protection and Freedom of Information against a major German telecommunications service provider for insufficient technical and organizational measures to prevent unauthorized persons from being able to obtain customer information. Many German data protection authorities have announced further investigations into possible GDPR violations and recent fines indicate that the trend towards higher fine levels will continue. This development leaves no doubt that the German Data Protection Authorities are willing to use the sharp teeth that data protection enforcement has received under the GDPR – and leave behind the rather symbolic fine ranges that were predominant in the pre-GDPR era. This is particularly true in light of the foreseeable temptation to use the concept of “undertakings” as developed under EU antitrust laws, which may include parental liability for GDPR violations of subsidiaries in the context of administrative fines as well as civil damages. For further details on the concept of “undertakings” in light of recent antitrust case law, please see above under Section 7.3. Back to Top 9.   IP & Technology On April 26, 2019, the German Trade Secret Act (the “Act”) came into effect, implementing the EU Trade Secrets Directive (2016/943/EU) on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure. The Act aims at consolidating what has hitherto been a potpourri of civil and criminal law provisions for the protection of trade secrets and secret know-how in German legislation. Besides an enhanced protection of trade secrets in litigation matters, one of the most important changes to the pre-existing rules in Germany is the creation of a new and EU-wide definition of trade secrets. Trade secrets are now defined as information that (i) is secret (not publicly known or easily available), (ii) has a commercial value because it is secret, (iii) is subject to reasonable steps to keep it secret, and (iv) there is a legitimate interest to keeping it secret. This definition therefore requires the holder of a trade secret to take reasonable measures to keep a trade secret confidential in order to benefit from its protection. To prove compliance with this requirement when challenged, trade secret holders will further have to document and track their measures of protection. This requirement goes beyond the previous standard pursuant to which a manifest interest in keeping an information secret would have been sufficient. There is no clear guidance yet on what is to be understood as “reasonable measures” in this respect. A good indication may be the comprehensive case law developed by U.S. courts when interpreting the requirement of “reasonable efforts” to maintain the secrecy of a trade secret under the U.S. Uniform Trade Secrets Act. Besides a requirement to advise recipients that the information is a confidential trade secret not to be disclosed (e.g. through non-disclosure agreements), U.S. courts consider the efforts of limiting access to a “need-to-know” scope (e.g. through password protection). Another point that is of particular importance for corporate trade secret holders is that companies may be indirectly liable for negligent breaches of third-party trade secrets by their employees. Enhanced liability risks may therefore result when hiring employees who were formerly employed by a competitor and had access to the competitor’s trade secrets. Reverse engineering of lawfully acquired products is now explicitly considered a lawful means of acquiring information, except when otherwise contractually agreed. Previously, reverse engineering was only lawful if it did not require considerable expense. To avoid disclosing trade secrets that form part of a product or object by surrendering prototypes or samples, contracts should provide for provisions to limit the acquisition of the trade secret. In a nutshell, companies would be well advised to review their internal policies and procedures to determine whether there are reasonable and sufficiently trackable legal, technical and organizational measures in place for the protection of trade secrets, to observe and assess critically what know-how is brought into an organization by lateral hires, and to amend contracts for the surrender of prototypes and samples as appropriate. Back to Top The following Gibson Dunn lawyers assisted in preparing this client update: Birgit Friedl, Marcus Geiss, Silke Beiter, Stefan Buehrle, Lutz Englisch, Daniel Gebauer, Kai Gesing, Franziska Gruber, Selina Gruen, Dominick Koenig, Markus Nauheim, Mariam Pathan, Annekatrin Pelster, Wilhelm Reinhardt, Sonja Ruttmann, Martin Schmid, Sebastian Schoon, Benno Schwarz, Dennis Seifarth, Ralf van Ermingen-Marbach, Milena Volkmann, 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, financing and restructuring, tax, labor, real estate, antitrust, intellectual property law and extensive compliance / white collar crime and litigation 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 69 247 411 503, doberbracht@gibsondunn.com) Wilhelm Reinhardt (+49 69 247 411 502, wreinhardt@gibsondunn.com) Birgit Friedl (+49 89 189 33 122, bfriedl@gibsondunn.com) Silke Beiter (+49 89 189 33 170, sbeiter@gibsondunn.com) Annekatrin Pelster (+49 69 247 411 502, apelster@gibsondunn.com) Marcus Geiss (+49 89 189 33 122, mgeiss@gibsondunn.com) Finance, Restructuring and Insolvency Sebastian Schoon (+49 69 247 411 505, sschoon@gibsondunn.com) Birgit Friedl (+49 89 189 33 122, bfriedl@gibsondunn.com) Alexander Klein (+49 69 247 411 505, aklein@gibsondunn.com) Marcus Geiss (+49 89 189 33 122, mgeiss@gibsondunn.com) Tax Hans Martin Schmid (+49 89 189 33 110, mschmid@gibsondunn.com) Labor Law Mark Zimmer (+49 89 189 33 130, mzimmer@gibsondunn.com) Real Estate Peter Decker (+49 89 189 33 115, pdecker@gibsondunn.com) Daniel Gebauer (+49 89 189 33 115, dgebauer@gibsondunn.com) Technology Transactions / Intellectual Property / Data Privacy Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) Corporate Compliance / White Collar Matters Benno Schwarz (+49 89 189 33 110, bschwarz@gibsondunn.com) Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Mark Zimmer (+49 89 189 33 130, mzimmer@gibsondunn.com) Finn Zeidler (+49 69 247 411 504, fzeidler@gibsondunn.com) Markus Rieder (+49 89189 33 170, mrieder@gibsondunn.com) Ralf van Ermingen-Marbach (+49 89 18933 130, rvanermingenmarbach@gibsondunn.com) Antitrust Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Jens-Olrik Murach (+32 2 554 7240, jmurach@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) Litigation Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Mark Zimmer (+49 89 189 33 130, mzimmer@gibsondunn.com) Finn Zeidler (+49 69 247 411 504, fzeidler@gibsondunn.com) Markus Rieder (+49 89189 33 170, mrieder@gibsondunn.com) Kai Gesing (+49 89 189 33 180, kgesing@gibsondunn.com) Ralf van Ermingen-Marbach (+49 89 18933 130, rvanermingenmarbach@gibsondunn.com) International Trade, Sanctions and Export Control Michael Walther (+49 89 189 33 180, mwalther@gibsondunn.com) Richard Roeder (+49 89 189 33 122, rroeder@gibsondunn.com) © 2020 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 9, 2020 |
Developments in the Defense of Financial Institutions – The International Reach of the U.S. Money Laundering Statutes

Click for PDF Our clients frequently inquire about precisely when U.S. money laundering laws provide jurisdiction to reach conduct that occurred outside of the United States.  In the past decade, U.S. courts have reiterated that there is a presumption against statutes applying extraterritorially,[1] and explicitly narrowed the extraterritorial reach of the Foreign Corrupt Practices Act (“FCPA”)[2] and the wire fraud statute.[3]  But the extraterritorial reach of the U.S. money laundering statutes—18 U.S.C. §§ 1956 and 1957—remains uncabined and increasingly has been used by the U.S. Department of Justice (“DOJ”) to prosecute crimes with little nexus to the United States.  Understanding the breadth of the money laundering statutes is vital for financial institutions because these organizations often can become entangled in a U.S. government investigation of potential money laundering by third parties, even though the financial institution was only a conduit for the transactions. This alert is part of a series of regular analyses of the unique impact of white collar issues on financial institutions.  In this edition, we examine how DOJ has stretched U.S. money laundering statutes—perhaps to a breaking point—to reach conduct that occurred outside of the United States.  We begin by providing a general overview of the U.S. money laundering statutes.  From there, we discuss how DOJ has relied on a broad interpretation of “financial transactions” that occur “in whole or in part in the United States” to reach, for instance, conduct that occurred entirely outside of the United States and included only a correspondent banking transaction that cleared in the United States.  And while courts have largely agreed with DOJ’s interpretation of the money laundering statutes, a recent acquittal by a jury in Brooklyn in a case involving money laundering charges with little nexus to the United States shows that juries occasionally may provide a check on the extraterritorial application of the money laundering statutes—for those willing to risk trial.  Next, we discuss three recent, prominent examples—the FIFA corruption cases, the 1MDB fraud civil forfeitures, and the recent Petróleos de Venezuela, S.A. (“PDVSA”) indictments—that demonstrate how DOJ has increasingly used the money laundering statutes in recent years to police corruption and bribery abroad.  The alert concludes by illustrating the risks that the broad reach of the money laundering statutes can have for financial institutions. 1. The U.S. Money Laundering Statutes and Their Extraterritorial Application In 1980, now-Judge Rakoff wrote that “[t]o federal prosecutors of white collar crime, the mail fraud statute is our Stradivarius, our Colt 45, our Louisville Slugger, our Cuisinart—and our true love.”[4]  In 2020, the money laundering statutes now play as an entire string quartet for many prosecutors, particularly when conduct occurs outside of the United States. Title 18, Sections 1956 and 1957 are the primary statutes that proscribe money laundering.  “Section 1956 penalizes the knowing and intentional transportation or transfer of monetary proceeds from specified unlawful activities, while § 1957 addresses transactions involving criminally derived property exceeding $10,000 in value.”  Whitfield v. United States, 543 U.S. 209, 212-13 (2005).  To prosecute a violation of Section 1956, the government must prove that: (1) a person engaged in a financial transaction, (2) knowing that the transaction involved the proceeds of some form of unlawful activity (a “Specified Unlawful Activity” or “SUA”),[5] and (3) the person intended to promote an SUA or conceal the proceeds of an SUA.[6]  And if the person is not located in the United States, Section 1956 provides that there is extraterritorial jurisdiction if the transaction in question exceeds $10,000 and “in the case of a non-United States citizen, the conduct occurs in part in the United States.”[7]  The word “conducts” is defined elsewhere in the statute as “includ[ing] initiating, concluding, or participating in initiating, or concluding a transaction.”[8]  Putting it all together, establishing a violation of Section 1956 by a non-U.S. citizen abroad requires: Figure 1: Applying Section 1956 Extraterritorially Section 1957 is the spending statute, involving substantially the same elements as Section 1956 but substituting a requirement that a defendant spend proceeds of criminal activity for the requirement that a defendant intend to promote or conceal an SUA.[9] a. “Financial Transaction” and Correspondent Banking Although the term “financial transaction” might at first blush seem to limit the reach of money laundering liability, the reality is that federal prosecutors have repeatedly and successfully pushed the boundaries of the types of value exchanges that qualify as “financial transactions.”  As one commentator has noted, “virtually anything that can be done with money is a financial transaction—whether it involves a financial institution, another kind of business, or even private individuals.”[10]  Indeed, courts have confirmed that the reach of money laundering statutes extends beyond traditional money.  One such example involves the prosecution of the creator of the dark web marketplace Silk Road.  In 2013, federal authorities shut down Silk Road, which they alleged was “the most sophisticated and extensive criminal marketplace on the Internet” that permitted users to anonymously buy and sell illicit goods and services, including malicious software and drugs.[11]  Silk Road’s creator, Ross William Ulbricht, was charged with, among other things, conspiracy to commit money laundering under Section 1956.[12]  The subsequent proceedings focused in large part on the meaning of “financial transactions” as used in Section 1956 and specifically, whether transactions involving Bitcoin can qualify as “financial transactions” under the statute.  Noting that “financial transaction” is broadly defined, the district court reasoned that because Bitcoin can be used to buy things, transactions involving Bitcoin necessarily involve the “movement of funds” and thus qualify as “financial transactions” under Section 1956.[13] In addition to broadly interpreting “financial transaction,” DOJ also has taken an expansive view of what constitutes a transaction occurring “in part in the United States”—a requirement to assert extraterritorial jurisdiction over a non-U.S. citizen.[14]  One area where DOJ has repeatedly pushed the envelope involves correspondent banking transactions. Correspondent banking transactions are used to facilitate cross-border transactions that occur between two parties using different financial institutions that lack a direct relationship.  As an example, if a French company (the “Ordering Customer”) maintains its accounts at a French financial institution and wants to send money to a Turkish company (the “Beneficiary Customer”) that maintains its accounts at a Turkish financial institution, and if the French and Turkish banks lack a direct relationship, then often those banks will process the transaction using one or more correspondent accounts in the United States.  An example of this process is depicted in Figure 2. Figure 2: Correspondent Banking Transactions[15] Although correspondent banking transactions can occur using a number of predominant currencies, such as euros, yen, and renminbi, U.S. dollar payments account for about 50 percent of correspondent banking transactions.[16]  Not only that, but “[t]here are indications that correspondent banking activities in US dollars are increasingly concentrated in US banks and that non-US banks are increasingly withdrawing from providing services in this currency.”[17]  As a result, banks in the United States play an enormous role in correspondent banking transactions. Given the continued centrality of the U.S. financial system, when confronted with misconduct taking place entirely outside of the United States, federal prosecutors are often able to identify downstream correspondent banking transactions in the United States involving the proceeds of that misconduct.  On the basis that the correspondent banking transaction qualifies as a financial transaction occurring in part in the United States, prosecutors have used this hook to establish jurisdiction under the money laundering statutes.  Two notable examples are discussed below. i. Prevezon Holdings The Prevezon Holdings case confirmed DOJ’s ability to use correspondent banking transactions as a jurisdictional hook for conduct occurring overseas.  The case arose from an alleged $230 million fraud scheme that a Russian criminal organization and Russian government officials perpetrated against hedge fund Hermitage Capital Management Limited.[18]  In 2013, DOJ filed a civil forfeiture complaint alleging that (1) the criminal organization stole the corporate identities of certain Hermitage portfolio companies by re-registering them in the names of members of the organization.  Then, (2) other members of the organization allegedly filed bogus lawsuits against the Hermitage entities based on forged and backdated documents.  Later, (3) the co-conspirators purporting to represent the Hermitage portfolio companies confessed to all of the claims against them, leading the courts to award money judgments against the Hermitage entities.  Finally, (4) the representatives of the purported Hermitage entities then fraudulently obtained money judgments to apply for some $230 million in fraudulent tax refunds.[19]  DOJ alleged that this fraud scheme constituted several distinct crimes, all of which were SUAs supporting money laundering violations.  DOJ then sought forfeiture of bank accounts and real property allegedly traceable to those money laundering violations. The parties challenging DOJ’s forfeiture action (the “claimants”) moved for summary judgment on certain of the SUAs, claiming that those SUAs, including Interstate Transportation of Stolen Property (“ITSP,” 18 U.S.C. § 2314), did not apply extraterritorially.  The district court rejected claimants’ challenge to the ITSP SUA.  The court held that Section 2314 does not, by its terms, apply extraterritorially.[20]  Nevertheless, the court found the case involved a permissible domestic application of the statute because it involved correspondent banking transactions.  Specifically, the court held that “[t]he use of correspondent banks in foreign transactions between foreign parties constitutes domestic conduct within [the statute’s] reach, especially where bank accounts are the principal means through which the relevant conduct arises.”[21]  In support of this holding, the court described U.S. correspondent banks as “necessary conduits” to accomplish the four U.S. dollar transactions cited by the government, which “could not have been completed without the services of these U.S. correspondent banks,” even though the sender and recipient of the funds involved in each of these transactions were foreign parties.[22]  The court also rejected claimants’ argument that they would have had to have “purposefully availed” themselves of the services of the correspondent banks, on the basis that this interpretation would frustrate the purpose of Section 2314 given that “aside from physically carrying currency across the U.S. border, it is hard to imagine what types of domestic conduct other than use of correspondent banks could be alleged to displace the presumption against extraterritoriality in a statute addressing the transportation of stolen property.”[23] ii. Boustani The December 2019 acquittal of a Lebanese businessman on trial in the Eastern District of New York marks an unusual setback in DOJ’s otherwise successful efforts to expand its overseas jurisdiction by using the money laundering statutes and correspondent banking transactions. Jean Boustani was an executive at the Abu Dhabi-based shipping company Privinvest Group (“Privinvest”).[24]  According to prosecutors, three Mozambique-owned companies borrowed over $2 billion through loans that were guaranteed by the Mozambican government.[25]  Although these loans were supposed to be used for maritime projects with Privinvest, the government alleged that Boustani and his co-conspirators created the maritime projects as “fronts to raise as much money as possible to enrich themselves,” ultimately diverting over $200 million from the loan funds for bribes and kickbacks to themselves, Mozambican government officials, and Credit Suisse bankers.[26]  According to the indictment, Boustani himself received approximately $15 million from the proceeds of Privinvest’s fraudulent scheme, paid in a series of wire transfers, many of which were paid through a correspondent bank account in New York City.[27] Boustani did not engage directly in any activity in the United States, and he filed a motion to dismiss arguing that, with respect to a conspiracy to commit money laundering charge, as a non-U.S. citizen he must participate in “initiating” or “concluding” a transaction in the United States to come under the extraterritorial reach of 18 U.S.C. § 1956(f).[28]  Specifically, he argued that “[a]ccounting interactions between foreign banks and their clearing banks in the U.S. does not constitute domestic conduct . . . as Section 1956(f) requires.”[29]  In response, prosecutors argued that Boustani “systematically directed $200 million of U.S. denominated bribe and kickback payments through the U.S. financial system using U.S. correspondent accounts”[30] and that such correspondent banking transactions are sufficient to allow for the extraterritorial application of Section 1956.[31] The court agreed with the government’s position.  In denying the motion to dismiss, the court held that correspondent banking transactions occurring in the United States are sufficient to satisfy the jurisdictional requirements of 18 U.S.C. § 1956(f).[32]  It cited to “ample factual allegations” that U.S. individuals and entities purchased interests in the loans at issue by wiring funds originating in the United States to locations outside the United States and that Boustani personally directed the payment of bribe transactions in U.S. dollars through the United States, describing this as “precisely the type of conduct Congress focused on prohibiting when enacting the money laundering provisions with which [Boustani] is charged.”[33] The jury, however, was unconvinced.  After a roughly seven-week trial, Boustani was acquitted on all charges on December 2, 2019.[34]  The jurors who spoke to reporters after the verdict said that a major issue for the jury was whether or not U.S. charges were properly brought against Boustani, an individual who had never set foot in the United States before his arrest.[35]  The jury foreman commented, “I think as a team, we couldn’t see how this was related to the Eastern District of New York.”[36]  Another juror echoed this sentiment, adding, “We couldn’t find any evidence of a tie to the Eastern District. . . .  That’s why we acquitted.”[37] The Boustani case illustrates that even if courts are willing to accept the position that the use of correspondent banks in foreign transactions between foreign parties constitutes domestic conduct within the reach of the money laundering statute, juries may be less willing to do so. b. Using “Specified Unlawful Activities” to Target Conduct Abroad Another way in which the U.S. money laundering statutes reach broadly is that the range of crimes that qualify as SUAs for purposes of Sections 1956 and 1957 is virtually without limit.  Generally speaking, most federal felonies will qualify.  More expansively, however, the money laundering statutes include specific foreign crimes that also qualify as SUAs.  For example, bribery of a public official in violation of a foreign nation’s bribery laws will qualify as an SUA.[38]  Similarly, fraud on a foreign bank in violation of a foreign nation’s fraud laws qualifies as an SUA.[39]  In addition to taking an expansive view of what constitutes a “financial transaction” and when it occurs “in part in the United States,” DOJ also has increasingly used the foreign predicates of the money laundering statute to prosecute overseas conduct involving corruption or bribery.  This subsection discusses a few notable recent examples. i. FIFA In May 2015, the United States shocked the soccer world when it announced indictments of nine Fédération Internationale de Football Association (“FIFA”) officials and five corporate executives in connection with a long-running investigation into bribery and corruption in the world of organized soccer.[40]  Over a 24-year period, the defendants allegedly paid and solicited bribes and kickbacks relating to, among other things, media and marketing rights to soccer tournaments, the selection of a host country for the 2010 FIFA World Cup, and the 2011 FIFA presidential elections.[41]  The defendants included high-level officials in FIFA and its constituent regional organizations, as well as co-conspirators involved in soccer-related marketing (e.g., Traffic Sports USA), broadcasting (e.g., Valente Corp.), and sponsorship (e.g., International Soccer Marketing, Inc.).[42]  Defendants were charged with money laundering under Section 1956(a)(2)(A) for transferring funds to promote wire fraud, an SUA.[43]  Two defendants were convicted at trial.[44]  The majority of the remaining defendants have pleaded guilty and agreed to forfeitures.[45] One of the defendants, Juan Ángel Napout, challenged the extraterritorial application of the U.S. money laundering statutes.  At various points during the alleged wrongdoing, Napout served as the vice president of FIFA and the president of the Confederación Sudamericana de Fútbol (FIFA’s South American confederation).[46]  Napout was accused of using U.S. wires and financial institutions to receive bribes for the broadcasting and commercial rights to the Copa Libertadores and Copa America Centenario tournaments.[47]  He argued that the U.S. money laundering statutes do not apply extraterritorially to him and that, regardless, this exercise of extraterritorial jurisdiction was unreasonable.[48]  The district court rejected these arguments, concluding that extraterritorial jurisdiction was proper because the government satisfied the two requirements in 18 U.S.C. § 1956(f): the $10,000 threshold and conduct that occurred “in part” in the United States.[49]  Notably, at trial, the jury acquitted Napout of the two money laundering charges against him but convicted him on the other three charges (RICO conspiracy and two counts of wire fraud).[50]  At the same trial, another defendant, José Marin, was charged with seven counts, including two for conspiracy to commit money laundering.  Marin was acquitted on one of the money laundering counts but convicted on all others.[51] ii. 1MDB The 1MDB scandal is “one of the world’s greatest financial scandals.”[52]  Between 2009 to 2014, Jho Low, a Malaysian businessman, allegedly orchestrated a scheme to pilfer approximately $4.5 billion from 1 Malaysia Development Berhad (“1MDB”), a Malaysian sovereign wealth fund created to pursue projects for the benefit of Malaysia and its people.[53]  Low allegedly used that money to fund a lavish lifestyle including buying various properties in the United States and running up $85 million in gambling debts at Las Vegas casinos.[54]  The former Prime Minister of Malaysia, Rajib Nazak, also personally benefited from the scandal, allegedly pocketing around $681 million.[55]  Additionally, his stepson, Riza Aziz, used proceeds from the scandal to fund Red Granite Pictures, a U.S. movie production company, which produced “The Wolf of Wall Street,” among other films.[56] In 2016, DOJ filed the first of a number of civil forfeiture actions against assets linked to funds pilfered from 1MDB, totaling about $1.7 billion.[57]  As the basis of the forfeiture, DOJ asserted a number of different violations of the U.S. money laundering statutes on the basis of four SUAs.[58] In March 2018, Red Granite Pictures entered into a settlement agreement with the DOJ to resolve the allegations in the 2016 civil forfeiture action.[59]  On October 30, 2019, DOJ announced the settlement of a civil forfeiture action against more than $700 million in assets held by Low in the United States, United Kingdom and Switzerland, including properties in New York, Los Angeles, and London, a luxury yacht valued at over $120 million, a private jet, and valuable artwork.[60]  Although neither Red Granite Pictures nor Low challenged the extraterritoriality of the U.S. money laundering statute as applied to their property, the cases nevertheless serve as noteworthy examples of DOJ using its authority under the money laundering statutes to police political corruption abroad. iii. PDVSA To date, more than 20 people have been charged in connection with a scheme to solicit and pay bribes to officials at and embezzle money from the state-owned oil company in Venezuela,  Petróleos de Venezuela, S.A.[61]  The indictments charge money laundering arising from several SUAs, including bribery of a Venezuelan public official.[62] Many of the defendants have pled guilty to the charges, but the charges against two former government officials, Nervis Villalobos and Rafael Reiter, remain pending.[63]  In March 2019, Villalobos filed a motion to dismiss the FCPA and money laundering claims against him on the basis that these statutes do not provide for extraterritorial jurisdiction.[64]  As to the money laundering charges, he argued that “[e]xtraterritorial jurisdiction over a non-citizen cannot be based on a coconspirator’s conduct in the United States,” and that extraterritorial application of the money laundering statute would violate international law and the due process clause.[65]  As of this writing, the court has not ruled on the motion. 2. The Risks to Financial Institutions The degree to which the U.S. money laundering statutes can reach extraterritorial conduct outside the United States has important implications for financial institutions.  Prosecutions of foreign conduct under the money laundering statutes frequently involve high-profile scandals, as shown above.  Financial institutions are often drawn into these newsworthy investigations.  In the wake of the FIFA indictments, for instance, “[f]ederal prosecutors said they were also investigating financial institutions to see whether they were aware of aiding in the launder of bribe payments.”[66]  Indeed, more than half a dozen banks reportedly received inquiries from law enforcement related to the FIFA scandal.[67] At a minimum, cooperating with these investigations is time-consuming and costly.  The investigations can also create legal risk for financial institutions.  In the United States, “federal law generally imposes liability on a corporation for the criminal acts of its agents taken on behalf of the corporation and within the scope of the agent’s authority via the principle of respondeat superior, unless the offense conduct solely furthered the employee’s interests at the employer’s expense (for instance, where the employee was embezzling from the employer).”[68]  And prosecutors can satisfy the intent required by arguing that individual employees were “deliberately ignorant” of or “willfully blind” to, for instance, clearing suspicious transactions.[69] The wide scope of potential corporate criminal liability in the United States is often surprising to our clients, particularly those with experience overseas where the breadth of corporate liability is narrower than in the United States.  As one article explained, the respondeat superior doctrine is “exceedingly broad” as “it imposes liability regardless of the agent’s position in the organization” and “does not discriminate” in that “the multinational corporation with thousands of employees whose field-level salesman commits a criminal act is as criminally responsible as the small corporation whose president and sole stockholder engages in criminal conduct.”[70] Given the breadth of corporate criminal liability, DOJ applies a 10-factor equitable analysis to determine whether to impute individual employee liability to the corporate employer.  These 10 factors are the “Principles of Federal Prosecution of Business Organizations,” and are often referred to by the shorthand term “Filip Factors.”  The factors include considerations such as the corporation’s cooperation, the pervasiveness of the wrongdoing, and other considerations meant to guide DOJ’s discretion regarding whether to pursue a corporate resolution.[71]  They are not equally weighted (indeed, there is no specific weighting attached to each, and the DOJ’s analysis will not be mathematically precise).  Financial institutions should continually assess, both proactively and in the event misconduct occurs, the actions that can be taken to ensure that they can persuasively argue that, even if there is legal liability under the doctrine of respondeat superior, prosecution is nevertheless unwarranted under the Filip Factors. 3. Conclusion In recent years, DOJ has expansively applied the money laundering statutes to reach extraterritorial conduct occurring almost entirely overseas.  Indeed, a mere correspondent banking transaction in the United States has been used by DOJ as the hook to prosecute foreign conduct under the U.S. money laundering statutes.  Because of the extraordinary breadth of corporate criminal liability in the United States, combined with the reach of the money laundering statutes, the key in any inquiry is to quickly assess and address prosecutors’ interests in the institution as a subject of the investigation. ____________________ [1]              Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010). [2]              United States v. Hoskins, 902 F.3d 69 (2d Cir. 2018).  Although the Second Circuit rejected the government’s argument that Hoskins could be charged under the conspiracy and complicity statutes for conduct not otherwise reachable by the FCPA, id. at 97, he was nevertheless found guilty at trial in November 2019 on a different theory of liability: that he acted as the agent of Alstom S.A.’s American subsidiary.  See Jody Godoy, Ex-Alstom Exec Found Guilty On 11 Counts In Bribery Trial, Law360 (Nov. 8, 2019), https://www.law360.com/articles/1218374/ex-alstom-exec-found-guilty-on-11-counts-in-bribery-trial. [3]              See, e.g., United States v. Elbaz, 332 F. Supp. 3d 960, 974 (D. Md. 2018) (collecting cases where extraterritorial conduct not subject to the wire fraud statute). [4]              Jed S. Rakoff, The Federal Mail Fraud Statute (Part I), 18 Duq. L. Rev. 771, 822 (1980). [5]              Many of the SUAs covered by Section 1956 are incorporated by cross-references to other statutes.  See 18 U.S.C. § 1956(c)(7).  All of the predicate acts under the Racketeer Influenced and Corrupt Organizations Act, for instance, are SUAs under Section 1956.  18 U.S.C. § 1956(c)(7)(a).  One commentator has estimated that there are “250 or so” predicate acts in Section 1956.  Stefan D. Cassella, The Forfeiture of Property Involved in Money Laundering Offenses, 7 Buff. Crim. L. Rev. 583, 612 (2004).  Another argues this estimate is “exceptionally conservative.”  Charles Doyle, Cong. Research Serv., RL33315, Money Laundering: An Overview of 18 U.S.C. § 1956 and Related Federal Criminal Law 1 n.2 (2017). [6]              See, e.g., Fifth Circuit Pattern Jury Instructions (Criminal Cases) Nos. 2.76A, 2.76B, available at   http://www.lb5.uscourts.gov/viewer/?/juryinstructions/Fifth/crim2015.pdf; Ninth Circuit Manual of Model Criminal Jury Instruction Nos. 8.147-49, available at http://www3.ce9.uscourts.gov/jury-instructions/sites/default/files/WPD/Criminal_Instructions_2019_12_0.pdf. [7]              18 U.S.C. § 1956(f). [8]              18 U.S.C. § 1956(c)(2). [9]              See, e.g., Fifth Circuit Pattern Jury Instructions (Criminal Cases) No. 2.77; Ninth Circuit Manual of Model Criminal Jury Instruction No. 8.150. [10]             Stefan D. Cassella, The Money Laundering Statutes (18 U.S.C. §§ 1956 and 1957), The United States Attorneys’ Bulletin, Vol. 55, No. 5 (Sept. 2007); see also 18 U.S.C. § 1956(c)(4)(i) (definition of “financial transaction”). [11]             United States v. Ulbricht, 31 F. Supp. 3d 540, 549-50 (S.D.N.Y. 2014). [12]             Id. at 568-69. [13]             Id.  Ultimately, Ulbricht was convicted and his conviction was affirmed on appeal.  See United States v. Ulbricht, 858 F.3d 71 (2d Cir. 2017).  The Second Circuit did not address the district court’s interpretation of the term “financial transactions” under Section 1956. [14]             18 U.S.C. § 1956(f)(1). [15]             International Monetary Fund, Recent Trends in Correspondent Banking Relationships: Further Considerations, at 9 (April 21, 2017), https://www.imf.org/en/Publications/Policy-Papers/Issues/2017/04/21/recent-trends-in-correspondent-banking-relationships-further-considerations. [16]             Id. [17]             Bank for International Settlements Committee on Payments and Market Infrastructures, Correspondent Banking, at 12 (July 2016), https://www.bis.org/cpmi/publ/d147.pdf. [18]             See generally Bill Browder, Red Notice: A True Story of High Finance, Murder, and One Man’s Fight for Justice (2015).  The alleged scheme was discovered by Russian tax lawyer Sergei Magnitsky, who was arrested on specious charges and died after receiving inadequate medical treatment in a Russian prison.  In response to Magnitsky’s death, the United States passed a bill named after him sanctioning Russia for human rights abuses.  See Russia and Moldova Jackson–Vanik Repeal and Sergei Magnitsky Rule of Law Accountability Act of 2012, Pub. L. 112–208 (2012). [19]             Second Amended Complaint at 10-12, United States v. Prevezon Holdings Ltd., No. 13-cv-06326 (S.D.N.Y. Oct. 23, 2015), ECF No. 381. [20]             United States v. Prevezon Holdings Ltd., 251 F. Supp. 3d 684, 691-92 (S.D.N.Y. 2017). [21]             Id. at 692. [22]             Id. at 693. [23]             Id.  [24]             Stewart Bishop, Boustani Acquitted in $2B Mozambique Loan Fraud Case, Law360 (Dec. 2, 2019), https://www.law360.com/articles/1221333/boustani-acquitted-in-2b-mozambique-loan-fraud-case. [25]             Superseding Indictment at 6, United States of America v. Boustani et al., No. 1:18-cr-00681 (E.D.N.Y. Aug. 16, 2019), ECF No. 137. [26]             Id. at 6-7. [27]             Id. at 33. [28]             Motion to Dismiss at 35-36, United States of America v. Boustani et al., No. 1:18-cr-00681 (E.D.N.Y. June 21, 2019), ECF No. 98. [29]             Id. at 36. [30]             Opposition to Motion to Dismiss at 38, United States of America v. Boustani et al., No. 1:18-cr-00681 (E.D.N.Y. July 22, 2019), ECF No. 113. [31]             Id. at 34-35 (citing United States v. All Assets Held at Bank Julius (“All Assets”), 251 F. Supp. 3d 82, 96 (D.D.C. 2017).) [32]             Decision & Order Denying Motions to Dismiss at 14, United States of America v. Boustani et al., No. 1:18-cr-00681 (E.D.N.Y. Oct. 3, 2019), ECF No. 231. [33]             Id. at 15-16; see also All Assets, 251 F. Supp. 3d at 95 (finding correspondent banking transactions fall within U.S. money laundering statutes because “[t]o conclude that the money laundering statute does not reach [Electronic Fund Transfers] simply because [defendant] himself did not choose a U.S. bank as the correspondent or intermediate bank for his wire transfers would frustrate Congress’s intent to prevent the use of U.S. financial institutions ‘as clearinghouses for criminals’”).  In United States v. Firtash, No. 13-cr-515, 2019 WL 2568569 (N.D. Ill. June 21, 2019), the defendant recently moved to dismiss an indictment on grounds including that correspondent banking transactions do not fall within the scope of the U.S. money laundering statute.  The court has sidestepped the argument for now, concluding that this argument “does not support dismissal of the Indictment at this stage” because “the Indictment does not specify that the government’s proof is limited to correspondent bank transactions.”  Id. at *9. [34]             Stewart Bishop, Boustani Acquitted in $2B Mozambique Loan Fraud Case, Law360 (Dec. 2, 2019), https://www.law360.com/articles/1221333/boustani-acquitted-in-2b-mozambique-loan-fraud-case. [35]             Id. [36]             Id. [37]             Id. [38]             18 U.S.C. § 1956(c)(7)(B)(iv).  In United States v. Chi, 936 F.3d 888, 890 (9th Cir. 2019), the Ninth Circuit recently rejected the argument that the term “bribery of a public official” in Section 1956 should be read to mean bribery under the U.S. federal bribery statute, as opposed to the article of the South Korean Criminal Code at issue in that case. [39]             18 U.S.C. § 1956(c)(7)(B)(iii). [40]             U.S. Dep’t of Justice, Attorney General Loretta E. Lynch Delivers Remarks at Press Conference Announcing Charges Against Nine FIFA Officials and Five Corporate Executives (May 27, 2015), https://www.justice.gov/opa/speech/attorney-general-loretta-e-lynch-delivers-remarks-press-conference-announcing-charges. [41]             Superseding Indictment at ¶¶ 95-360, United States v. Hawit, No. 15-cr-252 (E.D.N.Y. Nov. 25, 2015), ECF No. 102. [42]             See, e.g., id. at ¶¶ 30-93. [43]             See, e.g., id. at ¶ 371. [44]             Press Release, U.S. Dep’t of Justice, High-Ranking Soccer Officials Convicted in Multi-Million Dollar Bribery Schemes (Dec. 26, 2017), https://www.justice.gov/usao-edny/pr/high-ranking-soccer-officials-convicted-multi-million-dollar-bribery-schemes. [45]             U.S. Dep’t of Justice, FIFA Prosecution United States v. Napout et al. and Related Cases, Upcoming Court Dates, https://www.justice.gov/usao-edny/file/799016/download (last updated Nov. 5, 2019). [46]             Superseding Indictment, supra note 41, at ¶ 41. [47]             Superseding Indictment, supra note 41, at ¶¶ 376-81, 501-04. [48]             Memorandum of Law in Support of Defendant Juan Angel Napout’s Motion to Dismiss All Charges for Lack of Extraterritorial Jurisdiction, at 3-4, Hawit, supra note 41, ECF No. 491-1. [49]             United States v. Hawit, No. 15-cr-252, 2017 WL 663542, at *8 (E.D.N.Y. Feb. 17, 2017). [50]             United States v. Napout, 332 F. Supp. 3d 533, 547 (E.D.N.Y. 2018). [51]             Id.  On appeal, Napout challenged the extraterritoriality of the honest-services wire-fraud statutes, a case currently pending before the Second Circuit.  See United States of America v. Webb et al., No. 18-2750 (2d. Cir. appeal docketed Sept. 17, 2018), Dkt. 107.  Marin did not raise the extraterritoriality of the money laundering statute on appeal.  Id., Dkt. 104. [52]             Heather Chen, Mayuri Mei Lin, and Kevin Ponniah, 1MDB: The Playboys, PMs and Partygoers Around a Global Financial Scandal, BBC (Apr. 2, 2019), https://www.bbc.com/news/world-asia-46341603; see generally Tom Wright & Bradley Hope, Billion Dollar Whale: The Man Who Fooled Wall Street, Hollywood, and the World (2018). [53]             Complaint at 6, United States v.“The Wolf of Wall Street,” No. 2:16-cv-05362 (C.D. Cal. July 20, 2016), ECF No. 1, https://www.justice.gov/archives/opa/page/file/877166/download. [54]             Complaint, supra note 53, at 37. [55]             Najib 1MDB Trial: Malaysia Ex-PM Faces Court in Global Financial Scandal, BBC (Apr. 3, 2019), https://www.bbc.com/news/world-asia-47194656.  In the aftermath of the scandal, Nazak was voted out of office and currently faces trial in Malaysia.  Id. [56]             Complaint, supra note 53, at 63-65. [57]             Complaint, supra note 53; Rishi Iyengar, ‘Wolf of Wall Street’ Maker Settles US Lawsuit for $60 Million, CNN Business (Mar. 7, 2018), https://money.cnn.com/2018/03/07/media/wolf-wall-street-red-granite-1mdb-settlement/index.html. [58]             See Complaint, supra note 53, at 132. [59]             Consent Judgment of Forfeiture, No. 2:16-cv-05362 (C.D. Cal. Mar. 8, 2018), ECF No. 143.  As a part of the settlement, Red Granite Pictures agreed to forfeit $60 million.  Id. at 5. [60]             See United States v. Any Rights to Profits, Royalties and Distribution Proceeds Owned by or Owed Relating to EMI Music Publishing Group, Stipulation and Request to Enter Consent Judgment of Forfeiture, No. 16-cv-05364 (C.D. Cal. Oct. 30, 2019), ECF No. 180; Press Release, U.S. Dep’t of Justice, United States Reaches Settlement to Recover More Than $700 Million in Assets Allegedly Traceable to Corruption Involving Malaysian Sovereign Wealth Fund (Oct. 30, 2019), https://www.justice.gov/opa/pr/united-states-reaches-settlement-recover-more-700-million-assets-allegedly-traceable. [61]             See Indictment, United States v. De Leon-Perez et al., No. 4:17-cr-00514 (S.D. Tex. Aug. 23, 2017), ECF No. 1; Press Release, U.S. Dep’t of Justice, Two Members of Billion-Dollar Venezuelan Money Laundering Scheme Arrested (July 25, 2018), https://www.justice.gov/opa/pr/two-members-billion-dollar-venezuelan-money-laundering-scheme-arrested. [62]           Criminal Information at 1-2, United States v. Krull, No. 1:18-cr-20682 (S.D. Fla. Aug. 16, 2018), ECF No. 23; Criminal Complaint at 6, United States v. Guruceaga, et al., No. 18-MJ-03119 (S.D. Fla. July 23, 2018), ECF No. 3. [63]           Press Release, U.S. Dep’t of Justice, Former Venezuelan Official Pleads Guilty to Money Laundering Charge in Connection with Bribery Scheme (July 16, 2018), https://www.justice.gov/opa/pr/former-venezuelan-official-pleads-guilty-money-laundering-charge-connection-bribery-scheme-0. [64]           See Defendant’s Motion to Dismiss at 9-24, United States v. Villalobos, No. 4:17-cr-00514 (S.D. Tex. Mar. 28, 2019), ECF No. 123. [65]           See id. at 21-35. [66]           Gina Chon & Ben McLannahan, Banks face US investigation in Fifa corruption scandal, Financial Times (May 27, 2015); see also Christie Smythe & Keri Geiger, U.S. Probes Bank Links in FIFA Marketing Corruption Scandal, Bloomberg (May 27, 2015). [67]           Christopher M. Matthews & Rachel Louise Ensign, U.S. Authorities Probe Banks’ Handling of FIFA Funds, Wall St. Journal (July 23, 2015). [68]           Fed. Ins. Co. v. United States, 882 F.3d 348, 368 (2d Cir. 2018). [69]           See, e.g., Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754, 769 (2011); United States v. Florez, 368 F.3d 1042, 1044 (8th Cir. 2004). [70]           Philip A. Lacovara & David P. Nicoli, Vicarious Criminal Liability of Organizations: RICO as an Example of a Flawed Principle in Practice, 64 St. John’s L. Rev. 725, 725-26 (1990). [71]           See U.S. Department of Justice, Principles of Federal Prosecution of Business Organizations (Aug. 28, 2008), https://www.justice.gov/sites/default/files/dag/legacy/2008/11/03/dag-memo-08282008.pdf. The following Gibson Dunn attorneys assisted in preparing this client update:  M. Kendall Day, Stephanie L. Brooker, F. Joseph Warin, Chris Jones, Jaclyn Neely, Chantalle Carles Schropp, Alexander Moss, Jillian Katterhagen Mills, Tory Roberts, and summer associates Beatrix Lu and Olivia Brown. Gibson Dunn has deep experience with issues relating to the defense of financial institutions.  For assistance navigating white collar or regulatory enforcement issues involving financial institutions, please contact the Gibson Dunn lawyer with whom you usually work, any of the leaders and members of the firm’s Financial Institutions, White Collar Defense and Investigations, or International Trade practice groups, or the following authors in the firm’s Washington, D.C., New York, and San Francisco offices: M. Kendall Day – Washington, D.C. (+1 202-955-8220, kday@gibsondunn.com) Stephanie Brooker –  Washington, D.C.(+1 202-887-3502, sbrooker@gibsondunn.com) F. Joseph Warin – Washington, D.C. (+1 202-887-3609, fwarin@gibsondunn.com) Jaclyn Neely – New York (+1 212-351-2692, jneely@gibsondunn.com) Chris Jones* – San Francisco (+1 415-393-8320, crjones@gibsondunn.com) Chantalle Carles Schropp – Washington, D.C. (+1 202-955-8275, cschropp@gibsondunn.com) Alexander R. Moss – Washington, D.C. (+1 202-887-3615, amoss@gibsondunn.com) Jillian N. Katterhagen* – Washington, D.C. (+1 202-955-8283 , jkatterhagen@gibsondunn.com) Please also feel free to contact any of the following practice group leaders: Financial Institutions Group: Matthew L. Biben – New York (+1 212-351-6300, mbiben@gibsondunn.com) Stephanie Brooker – Washington, D.C. (+1 202-887-3502, sbrooker@gibsondunn.com) Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com) White Collar Defense and Investigations Group: Joel M. Cohen – New York (+1 212-351-2664, jcohen@gibsondunn.com) Charles J. Stevens – San Francisco (+1 415-393-8391, cstevens@gibsondunn.com) F. Joseph Warin – Washington, D.C. (+1 202-887-3609, fwarin@gibsondunn.com) International Trade Group: Ronald Kirk – Dallas (+1 214-698-3295, rkirk@gibsondunn.com) Judith Alison Lee – Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com) *Mr. Jones and Ms. Katterhagen Mills are not yet admitted in California and Washington, D.C., respectively.  They are practicing under the supervision of Principals of the Firm. © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 8, 2020 |
2019 Year-End Update on Corporate Non-Prosecution Agreements and Deferred Prosecution Agreements

Click for PDF In 2019, the drumbeat favoring corporate non-prosecution agreements (“NPAs”) and deferred prosecution agreements (“DPAs”)[1] kept time, and we are continuing to see these agreements used frequently by prosecutors to resolve complex corporate enforcement actions. Despite perennial scrutiny, NPAs and DPAs have withstood political vicissitudes and the comings and goings of administrations and agency heads; they have weathered the test of time and we have seen them become more sophisticated year over year as regulators and practitioners alike learn from past agreements and hone key language to achieve desired results. This has led not only to template language used repeatedly by certain units of the U.S. Department of Justice (“DOJ” or the “Department”), but also an expansion of NPAs and DPAs to other agencies. In this client alert, the twenty-first in our series on NPAs and DPAs, we: (1) report statistics regarding NPAs and DPAs from 2000 through 2019; (2) discuss the recent return of DPAs to the political spotlight; (3) overview the Commodity Futures Trading Commission’s (“CFTC’s”) new Enforcement Manual and its implications for NPAs and DPAs; (4) discuss developments in DOJ corporate enforcement policy; (5) summarize 2019’s publicly available federal corporate NPAs and DPAs; and (6) survey recent developments in DPA regimes abroad. Chart 1 below shows all known corporate NPAs and DPAs from 2000 through 2019. Chart 2 reflects total monetary recoveries related to NPAs and DPAs from 2000 through 2019. At nearly $7.8 billion, recoveries associated with NPAs and DPAs in 2019 came close to the approximately $8 billion in total recoveries in 2018, and far outstrip total recoveries in 2017. Total 2019 recoveries also exceeded the average annual recovery from 2005-2018, of approximately $4.56 billion. DOJ entered into seven NPAs and DPAs this year addressing allegations of violations of the Foreign Corrupt Practices Act (“FCPA”). These agreements included the third-largest resolution overall in 2019, a DPA with Swedish telecommunications company Ericsson that imposed a total of nearly $1.1 billion in monetary obligations. Together, the seven FCPA-focused resolutions imposed a total of approximately $2.8 billion, or about 36% of total monetary recoveries this year. Only one of the FCPA resolutions involved a voluntary self-disclosure by the settling company, and four of the seven agreements imposed independent compliance monitors. For a more detailed analysis of this year’s FCPA resolutions, see our 2019 FCPA Year-End Update. DPAs Back in Political Crosshairs In April 2019, Senator Elizabeth Warren (D-Mass.) introduced proposed legislation expanding criminal liability to negligent executives of large corporations that enter into DPAs or NPAs.[2] Under the Corporate Executive Accountability Act, executives may be criminally liable if they are negligent with regard to the conduct of companies with more than $1 billion in annual revenue that: (1) are found guilty of or plead guilty to a crime; (2) enter into a DPA or NPA regarding any criminal allegations; (3) enter into a settlement with any state or federal regulator for any civil law violation that affects the health, safety, finances, or personal data of at least 1% of the population of any state or of the United States; or (4) commit a second civil or criminal violation while operating under a civil or criminal judgment, DPA, NPA, or other state or federal settlement.[3] Punishments under the Corporate Executive Accountability Act would include up to a year in jail, or up to three years for a repeat violation. Senator Warren is known for being a frequent and outspoken critic of the use of NPAs or DPAs, arguing they are used to soften the blow for corporations implicated in corporate wrongdoing and act as “get-out-of-jail cards.”[4] Senator Warren views the existence of DPAs, and the difficulty of proving that any individual executive had “knowledge” of corporate wrongdoing by their employer, as reasons why no CEO of a major bank has gone to jail for conduct related to the 2008 financial crisis.[5] Thus, the Corporate Executive Accountability Act requires only a finding of “negligence” to impose liability.[6] Along with the Corporate Executive Accountability Act, Senator Warren also re-introduced the Ending Too Big to Jail Act—covered in our 2018 Mid-Year Update—which requires judicial oversight of DPAs between DOJ and financial institutions; requires DOJ to post on its website both DPAs and the terms and conditions of any agreements between the subject companies and independent compliance monitors; and limits courts’ discretion to approve DPAs absent a finding that the agreement is in the “public interest.”[7] As Senator Warren seeks to advance her bid for the 2020 Democratic presidential nomination, we will continue to monitor public discourse about the use and oversight of NPAs and DPAs. Normalization of Corporate NPAs and DPAs Across Agencies On May 8, 2019, the U.S. Commodity Futures Trading Commission (“CFTC”) Division of Enforcement issued its first public Enforcement Manual. The Enforcement Manual provides a broad overview of the CFTC and its Division of Enforcement, the CFTC’s investigative process, and the tools available to the CFTC in pursuing or settling enforcement actions, including DPAs and NPAs.[8] The Enforcement Manual, which tracks language in the SEC Enforcement Manual, states that DPAs typically will require that the company cooperate “truthfully and fully in the CFTC’s investigation and related enforcement actions,” enter into a long-term tolling agreement, comply with express prohibitions or undertakings during the period of deferred prosecution, and agree to “either admit or not to contest” the underlying facts that the CFTC could assert to establish a violation of the Commodity Exchange Act.[9] Unlike the SEC, however, the CFTC does not include a lengthy list of terms that “a [DPA] should generally include.”[10] The Enforcement Manual states that NPAs will be utilized in “generally very limited” circumstances and will require—again, tracking the SEC Enforcement Manual—truthful and full cooperation with the CFTC’s investigation and related enforcement actions, as well as compliance “under certain circumstances” with “express undertakings”.[11] Of course, we know from experience that, despite the SEC’s pronouncements in its own Enforcement Manual—from which the relevant portions of the CFTC Enforcement Manual are drawn—the SEC heavily favors administrative action over NPAs and DPAs. To date, the CFTC has not issued any corporate NPAs or DPAs, and time will tell whether the CFTC follows the SEC’s lead and continues to favor administrative proceedings over NPAs and DPAs. The CFTC’s Enforcement Manual devotes significant attention to self-reporting, cooperation, and remediation, including a policy that the Division of Enforcement will consider a “substantial reduction from the otherwise applicable civil monetary penalty” if a company or individual self-reports, fully cooperates, and remediates.[12] With respect to FCPA matters, the CFTC Enforcement Manual distinguishes between companies that are required to register with the CFTC, and those that are not. For the former, the Division of Enforcement will recommend, absent aggravating circumstances, a resolution with no civil monetary penalty in a case where a company makes a voluntary disclosure, fully cooperates, and appropriately remediates.[13] Companies and individuals who are required to register with the CFTC are not eligible to take advantage of the presumption of no civil monetary policy, but the Division of Enforcement will recommend a “substantial reduction” in the penalty. Developments in DOJ Corporate Enforcement Policies Regarding FCPA and National Security Matters 2019 witnessed additional developments in DOJ’s corporate enforcement policy. DOJ updated its FCPA Corporate Enforcement Policy (the “FCPA Policy”) in four key areas. First, DOJ changed its policy—originally put forth in December 2017—of requiring companies that self-disclose misconduct to prohibit their employees from “using software that generates but does not appropriately retain business records or communications” to receive full remediation credit.[14] That policy was widely interpreted as covering the use of ephemeral messaging platforms such as WhatsApp. With the changes announced in March 2019, the policy no longer strictly prohibits the use of ephemeral messaging platforms and instead now requires companies seeking remediation credit to “implement[] appropriate guidance and controls on the use of personal communications and ephemeral messaging platforms . . . to appropriately retain business records or communications or otherwise comply with the company’s document retention policies or legal obligations.”[15] Second, DOJ codified its position that there will be a presumption of a declination where “a company undertakes a merger or acquisition, uncovers misconduct by the merged or acquired entity through thorough and timely due diligence or, in appropriate instances, through post-acquisition audits or compliance integration efforts, and voluntarily self-discloses the misconduct.”[16] Third, DOJ revised the requirement for receiving full cooperation credit after making a self-disclosure. Now, the FCPA Policy states that to receive cooperation credit, a company must disclose “all relevant facts known to it at the time of the disclosure, including as to any individuals substantially involved in or responsible for the misconduct at issue.”[17] These changes reflect then Deputy Attorney General Rod J. Rosenstein’s statement in 2018 that “investigations should not be delayed merely to collect information about individuals whose involvement was not substantial, and who are not likely to be prosecuted.”[18] The revisions to the FCPA Policy also included a footnote acknowledging that “a company may not be in a position to know all relevant facts at the time of a voluntary self-disclosure, especially where only preliminary investigative efforts have been possible. In such circumstances, a company should make clear that it is making its disclosure based upon a preliminary investigation or assessment of information, but it should nonetheless provide a fulsome disclosure of the relevant facts known to it at that time.”[19] Notably, the revisions also involved modifying language in the previous policy that required a self-disclosing company to identify to the Department opportunities “to obtain relevant evidence not in the company’s possession and not otherwise known to the Department” that the company is or should be aware of.[20]  The revised FCPA Policy now states that a self-reporting company must simply identify relevant evidence of which it is actually aware.[21] Finally, DOJ also relaxed its policy on de-confliction—that is, the deferral, at the request of DOJ, of investigative steps a company otherwise wishes to take in its internal investigation. The previous policy required that a self-disclosing company seeking full cooperation credit agree to de-confliction “where requested.”[22] The FCPA Policy now states that DOJ will only request de-confliction where “requested and appropriate.”[23] Additionally, in a new footnote, the FCPA Policy states that DOJ will not “take any steps to affirmatively direct a company’s internal investigation.”[24] DOJ’s National Security Division also revised its policy (the “NSD Policy”) regarding voluntary disclosures of export control and sanctions violations to more closely resemble the FCPA Policy.[25] The changes are detailed in our client alert titled “DOJ National Security Division Released Updated Guidance on Voluntary Self-Disclosures,” and several significant changes warrant mention here. First, the NSD Policy now applies to financial institutions.[26] Additionally, the NSD Policy now includes a presumption that companies that voluntarily self-disclose export control or sanctions violations to the Counterintelligence and Export Control Section, fully cooperate, and timely and appropriately remediate will receive an NPA and will not be fined if there are no aggravating factors. If aggravating factors do exist warranting a different criminal resolution (such as a DPA or guilty plea) but the company otherwise satisfies the above criteria, DOJ will recommend at least a 50% reduction in the fine otherwise available under the alternative fine statute,[27] and will not impose a monitor if the company has implemented an effective compliance program by the time of resolution.[28] However, even a company that receives an NPA will still be required to pay applicable disgorgement, forfeiture, and/or restitution.[29] Second, in another parallel to the FCPA Policy revisions, the NSD Policy now grants a presumption of an NPA where “a company undertakes a merger or acquisition, uncovers misconduct by the merged or acquired entity through thorough and timely due diligence or, in appropriate instances, through post-acquisition audits or compliance integration efforts, and voluntarily self-discloses the misconduct.”[30] Third, the revisions to the NSD Policy follow the changes to the FCPA Policy on voluntary self-disclosure credit: to qualify for a credit, a company must disclose “all relevant facts known to it at the time of the disclosure, including as to any individuals substantially involved in or responsible for the misconduct at issue.”[31] Additionally, the revised NSD Policy includes a footnote mirroring footnote 1 in the FCPA Policy, stating that “a company may not be in a position to know all relevant facts at the time of a voluntary self-disclosure, especially where only preliminary investigative efforts have been possible. In such circumstances, a company should make clear that it is making its disclosure based upon a preliminary investigation or assessment of information, but it should nonetheless provide a fulsome disclosure of the relevant facts known to it at that time.”[32] Fourth, the NSD—like the Fraud Section—also modified its policy on de-confliction. The NSD Policy now states that the Department will only request de-confliction where “appropriate.”[33] Additionally, in a footnote, the NSD Policy says the Department will not “take any steps to affirmatively direct a company’s internal investigation.”[34] Finally, as it relates to remediation, the NSD Policy now requires companies to conduct root cause analyses to address and remediate the underlying causes of the conduct at issue.[35] Moreover, the NSD Policy now includes guidance addressing ephemeral messaging mirroring the FCPA Policy: a company must “implement[] appropriate guidance and controls on the use of personal communications and ephemeral messaging platforms that undermine the company’s ability to appropriately retain business records or communications or otherwise comply with the company’s document retention policies or legal obligations.”[36] 2019 Corporate NPAs and DPAs Avanir Pharmaceuticals (DPA) On September 26, 2019, Avanir Pharmaceuticals (“Avanir”), a pharmaceutical manufacturer, entered into a DPA with the U.S. Attorney’s Office for the Northern District of Georgia to resolve allegations that it had paid kickbacks to a physician to induce prescriptions of its drug Nuedexta.[37] As part of the DPA, which has a term of three years, Avanir consented to the filing of a one-count Information alleging that Avanir violated the Anti-Kickback Statute by: (1) paying a doctor to become a high prescriber of Nuedexta to beneficiaries of federal health care programs, (2) offering that doctor financial incentives to write additional Nuedexta prescriptions for beneficiaries of federal health care programs, and (3) inducing the doctor to recommend that other physicians prescribe Nuedexta to beneficiaries of federal health care programs.[38] The DPA required Avanir to pay a monetary penalty in the amount of $7,800,000, and forfeiture in the amount of $5,074,895.[39] In light of a parallel civil settlement (described below), the DPA did not require additional restitution to be paid by the company.[40] Although Avanir did not receive voluntary self-disclosure credit in the DPA, the company did otherwise receive full credit for its cooperation with the government’s investigation.[41] The DPA noted its extensive remedial measures (including terminating, or permitting to resign in lieu of termination, multiple employees, at various levels of the organization, including senior executives), and enhancements to its compliance program.[42] In determining that an independent compliance monitor was unnecessary, DOJ cited these considerations, as well as the fact that Avanir had entered into a Corporate Integrity Agreement with the Department of Health and Human Services, Office of the Inspector General (“HHS OIG”), which required the engagement of an independent review organization (“IRO”).[43] In a parallel civil settlement, Avanir also resolved allegations that it violated the civil False Claims Act (“FCA”) by paying kickbacks to long-term care providers and engaging in false and misleading marketing of Nuedexta, all in an effort to induce the physicians to prescribe the drug for off-label uses.[44] The FCA settlement required Avanir to pay $95,972,017 to the U.S. government, and $7,027,983 to resolve state Medicaid claims.[45] The civil settlement resolved allegations, among others, that between October 29, 2010, and December 31, 2016, Avanir provided remuneration in the form of money, honoraria, travel, and food to certain physicians and other health care professionals to induce them to write prescriptions for Nuedexta.[46] Contemporaneous with the civil settlement, Avanir entered into a five-year Corporate Integrity Agreement with HHS OIG. The agreement requires, among other things, that Avanir implement additional controls around its interactions with physicians and conduct internal and external (through an IRO) monitoring of promotional and other activities.[47] Baton Holdings LLC / Bankrate, Inc. (NPA) On March 5, 2019, DOJ reached an NPA with Baton Holdings, LLC, the successor in interest of Bankrate, Inc., to resolve allegations of accounting fraud. The misconduct occurred prior to Bankrate’s acquisition by Red Ventures Holdco, LP, the ultimate parent company of Baton Holdings LLC.[48] Although the company did not receive self-disclosure credit, DOJ credited Bankrate’s Audit Committee for, two years into the investigation, hiring new outside counsel, ordering an independent internal investigation, and cooperating fully.[49] Under the leadership of the Audit Committee, the company engaged in extensive remedial measures, including termination of employees who engaged in or were aware of misconduct, and issuance of restated financial statements.[50] Further, the company committed to continued improvements in its compliance and reporting programs.[51] The NPA has a three year term, with a possible one-year extension, and no provision for early termination.[52] In addition to a monetary penalty of $15.54 million, Baton Holdings agreed to pay $15 million in disgorgement of profits and prejudgment interest to the SEC, and $13 million in restitution to shareholders via a third-party claims administrator.[53] The NPA did not impose a monitor, but Baton Holdings agreed to designate knowledgeable employees to provide information to DOJ upon request, including disclosure of “credible evidence or allegations and internal or external investigations.”[54] Celadon Group, Inc. (DPA) On April 25, 2019, Celadon Group, Inc. (“Celadon”), a transportation company headquartered in Indianapolis, Indiana, entered into a DPA with DOJ’s Criminal Division Fraud Section and the U.S. Attorney’s Office for the Southern District of Indiana to resolve allegations that it had misled investors and falsified books and records.[55] As part of the DPA, which has a term of five years, Celadon consented to the filing of a one-count Information charging the company with conspiracy to commit securities fraud and to “knowingly and willfully falsify the books, records and accounts of the Company.”[56] The DPA resolves allegations that between June 2016 and October 2016, Celadon conspired with a wholly owned subsidiary, Quality Companies LLC (“Quality”), in a scheme that “resulted in Celadon falsely reporting inflated profits and inflated assets to the SEC and the investing public through Celadon’s financial statements.”[57] Ultimately, the DPA alleges, Celadon used falsified invoices reflecting inflated truck values to “hide millions of dollars of losses from investors when reporting its financial condition.”[58] Although Celadon did not voluntarily disclose the conduct, a “relevant consideration” for entering into the DPA was that, “after learning of the allegations of misconduct by Company officials, the Company retained an external law firm to conduct an independent investigation, and ultimately notified [DOJ] of its investigation and intent to fully cooperate.”[59] The DPA also credits Celadon with engaging in “significant remedial measures,” including that “(i) the Company no longer employs or is affiliated with any of the individuals known to the Company to be implicated in the conduct at issue . . .; (ii) the Company created the new position of Chief Accounting Officer reporting directly to the Chief Financial Officer; (iii) the Company hired an experienced Internal Audit staff member reporting directly to the Company’s Internal Audit Manager; and (iv) the Company enhanced its compliance program . . . .”[60] On the same day DOJ announced the Celadon DPA, it also announced it had reached a guilty plea with the former president of the Celadon subsidiary that included counts of conspiracy to commit securities fraud, to make false statements to auditors, and to falsify the company’s books, records, and accounts.[61] Pursuant to the DPA, Celadon agreed to pay approximately $42.2 million in restitution to victims of the offense, in addition to the “cost of the administration of all restitution claims by a third party claims administrator.”[62] Unusually for a resolution lacking in voluntary disclosure credit, the company did not have to pay a fine or further financial penalty beyond the approximately $42.2 million in victim restitution. On December 5, 2019, the SEC charged two of Celadon’s former top executives for their participation in the alleged conduct.[63] Less than a week after the executives were charged, Celadon filed for Chapter 11 bankruptcy protection, citing “legacy and market headwinds” as well as the “significant costs associated with a multi-year investigation into the actions of former management, including the restatement of financial statements.”[64] ContextMedia Health LLC (NPA) On October 17, 2019, ContextMedia Health LLC (“ContextMedia”), a digital provider of medical information and advertising in doctors’ offices, entered into an NPA with DOJ and the U.S. Attorney’s Office for the Northern District of Illinois.[65] The agreement was secured by Gibson Dunn and resolved allegations that from 2012 to 2017, former executives and employees of ContextMedia defrauded clients—most of which were pharmaceutical companies—by falsely inflating the numbers of physicians it told those clients they would reach by placing advertisements on ContextMedia’s network.[66] ContextMedia admitted that former executives invoiced clients as if advertising campaigns had been delivered in full, when in reality the company under-delivered the campaigns because its advertising network did not reach all of the physicians that ContextMedia represented it did.[67] To conceal the under-deliveries, former employees allegedly falsified records to make it appear the company was delivering advertising content to the number of in-office devices its clients were promised their advertisements would reach.[68] Former executives and employees also allegedly inflated metrics measuring the frequency with which patients engaged with devices receiving the clients’ advertising content.[69] The NPA noted that ContextMedia no longer employs the former executives and employees who were involved in the alleged wrongdoing, and the company has made significant improvements to address and improve the reliability of reporting on advertising campaign delivery, including by hiring third parties to audit all of its advertising campaigns.[70] Based on these improvements and the strength of the company’s enhanced compliance program, DOJ determined that a compliance monitor was not necessary and did not impose a fine.[71] ContextMedia’s obligations under the agreement have a term of three years.[72] Under the terms of the NPA, the company committed to compensating its pharmaceutical clients up to a cumulative amount of $70 million, approximately $65.5 million of which the company had already returned through a combination of cash payments and in-kind services and the remaining $4.5 million of which will be set aside to cover any future claims for restitution made by ContextMedia’s clients.[73] Dannenbaum Engineering Corporation (DPA) On November 22, 2019, Dannenbaum Engineering Company (“DEC”) and its parent company, Engineering Holding Corporation (“EHC”), entered into a three-year DPA with DOJ’s Public Integrity Section and the U.S. Attorney’s Office for the Southern District of Texas. The government alleged that DEC violated the Federal Election Campaign Act (“FECA”).[74] As part of the resolution, DEC agreed to pay a monetary penalty of $1.6 million. According to the DPA’s Statement of Facts, from at least March 2015 through April 2017, DEC and EHC made $323,300 in illegal conduit contributions through various employees and their family members to federal candidates and their committees.[75] The DPA alleges that DEC corporate funds were used to advance or reimburse employee monies for these contributions, and that the object of the alleged scheme was for DEC, its CEO, and a former employee to gain access to and potentially influence various candidates for federal office, including candidates for President, the Senate, and the House of Representatives.[76] DOJ listed several factors on which it based the resolution, including DEC’s cooperation with the government investigation, the “thorough” internal investigation DEC conducted, and its remedial measures. The remedial measures included, among others: (1) resignation by the CEO and departure of the one other employee who allegedly engaged in misconduct; (2) the restructuring of the company’s board to ensure that the former CEO cannot control it; (3) ending all politically related payments to its employees; (4) the hiring/designation of a full-time Chief Governance and Compliance Officer, and the engagement of an independent company to design a new compliance program; and (5) the creation of a whistleblower email system and training program for employees.[77] Ericsson (DPA) On November 26, 2019 DOJ and the U.S. Attorney’s Office for the Southern District of New York entered into a three-year DPA with Telefonaktiebolaget LM Ericsson (“Ericsson”), a multinational telecommunications company headquartered in Sweden, for conspiring to violate the FCPA. Ericsson’s subsidiary Ericsson Egypt Ltd. (“Ericsson Egypt”) also pled guilty to one count of conspiracy to violate the anti-bribery provisions of the FCPA.[78] The DPA alleged that Ericsson paid bribes to high-level government officials in Djibouti and committed violations of the FCPA’s books and records and internal controls provisions to disguise payments in Djibouti, China, Vietnam, Indonesia, and Kuwait over the course of 17 years.[79] The DPA imposed a total criminal penalty of $520,650,432, which includes a $9,520,000 criminal fine Ericsson agreed to pay on behalf of Ericsson Egypt. The total penalty reflects an aggregate discount of 15% off the bottom of the U.S. Sentencing Guidelines fine range.[80] Ericsson also settled a related investigation by the SEC by agreeing to pay $458,380,000 in disgorgement and $81,540,000 in prejudgment interest.[81] The approximately $1.1 billion in total monetary obligations imposed on Ericsson make this matter the third-largest FCPA settlement reached to date. The Ericsson DPA is the largest agreement of 2019 (measured by total dollar value) to require an independent compliance monitor. The DPA imposed a three-year independent compliance monitor, citing the fact that Ericsson “has not yet fully implemented or tested its compliance program.”[82] Ericsson also agreed to “implement rigorous internal controls” and “cooperate fully with the [g]overnment in any ongoing investigations.”[83] Among the factors DOJ considered in entering into the DPA was the fact that although Ericsson had “inadequate anti-corruption controls and an inadequate anti-corruption compliance program” during the relevant period, Ericsson enhanced its compliance program and controls in the course of DOJ’s investigation.[84] DOJ did not give Ericsson full cooperation credit because the company “did not disclose allegations of corruption with respect to two relevant matters, produced certain relevant materials in an untimely manner, and did not timely and fully remediate, including by failing to take adequate disciplinary measures with respect to certain executives and other employees involved in the misconduct.”[85] Fresenius Medical Care AG & Co. KGaA (NPA) On March 28, 2019, Fresenius Medical Care AG & Co. KGaA (“Fresenius”), “a German-based provider of medical products and services,” entered into an NPA with DOJ’s Criminal Division, Fraud Section, and the U.S. Attorney’s Office for the District of Massachusetts to resolve criminal and civil claims relating to Fresenius’s alleged violations of the FCPA through “participation in various corrupt schemes to obtain business in multiple foreign countries.”[86] Specifically, Fresenius admitted to making improper payments to “publicly employed health and/or government officials to obtain or retain business in Angola and Saudi Arabia.” Furthermore, DOJ alleged that in certain foreign countries, “Fresenius knowingly and willfully failed to implement reasonable internal accounting controls over financial transactions and failed to maintain books and records that accurately and fairly reflected the transactions.”[87] The NPA notes that Fresenius received voluntary disclosure credit “because it voluntarily and timely disclosed to the Department the conduct described in the Statement of Facts [attached to the NPA].”[88] The company also received partial credit for its cooperation with DOJ, including, among other things: “conducting a thorough internal investigation; making regular factual presentations to the Department; . . . [and] collecting, analyzing, and organizing voluminous evidence and information from multiple jurisdictions for the Department.”[89] Fresenius also engaged in remedial measures, according to the NPA, including: (1) terminating the employment of at least ten employees who were involved in or failed to detect the admitted misconduct; “(2) enhancing its compliance program, controls, and anti-corruption training; (3) terminating business relationships with the third party agents and distributors who participated in the misconduct described in the Statement of Facts; (4) adopting heightened controls over the selection and use of third parties, to include third party due diligence; and (5) withdrawing from consideration of pending public contracts potentially related to the misconduct described in the Statement of Facts.”[90] Under the NPA, which has a term of three years, Fresenius “agree[d] to pay a monetary penalty in the amount of $84,715,273” and to pay “disgorgement and prejudgment interest in the amount of $147 million,” toward which DOJ credited Fresenius’s disgorgement to the SEC.[91] The monetary penalty reflected a discount of 40% off of the bottom of the U.S. Sentencing Guidelines fine range.[92] Fresenius agreed “to an independent compliance monitor for a term of two years, followed by self-monitoring for the remainder of the Agreement.”[93] It also agreed to cooperate with DOJ and “any other domestic or foreign law enforcement and regulatory authorities and agencies, as well as with Multilateral Development Banks, in any investigation of the Company, its parent company or its affiliates, or any of its present or former officers, directors, employees, agents, and consultants, or any other party.”[94] The NPA also acknowledges that Fresenius must comply with relevant data privacy laws, among other applicable laws and regulations, and it requires the company to provide DOJ with “a log of any information or cooperation that is not provided based on the assertion of law, regulation, or privilege.”[95] This is in keeping with DOJ’s public statements that, under the FCPA Corporate Enforcement Policy, the “company bears the burden of establishing the prohibition” on disclosing information.[96] DOJ has expressed an expectation that “a cooperating company will work to identify all available legal means to provide” requested data.[97] On October 21, 2019, German prosecutors confirmed they are conducting an investigation based on findings in the NPA.[98] Heritage Pharmaceuticals (DPA) On May 30, 2019, Heritage Pharmaceuticals Inc. (“Heritage”), and the Antitrust Division of DOJ entered into a DPA.[99] The Heritage DPA secured by Gibson Dunn is the Antitrust Division’s first DPA with a company other than a financial institution and the only DPA to provide protection from criminal prosecution for all of the company’s current officers, directors and employees. The Heritage DPA resolved allegations that from about April 2014 until at least December 2015, Heritage participated in a criminal antitrust conspiracy with other companies and individuals engaged in the production and sale of generic pharmaceuticals, a purpose of which was to fix prices, rig bids, and allocate customers for glyburide, a medicine used to treat diabetes.[100] The agreement requires Heritage to cooperate fully with the ongoing investigation and pay a $225,000 criminal penalty.[101] In return, the prosecution of Heritage is deferred for a period of three years.[102] Heritage’s resolution with the DOJ does not require the imposition of a corporate monitor. DOJ noted the agreement was based on a variety of facts and circumstances, including the fact that a criminal conviction would have potentially exposed Heritage to mandatory exclusion from federal health care programs.[103] Heritage has agreed to resolve all civil claims relating to federal health care programs arising from its conduct.[104] In a separate civil resolution, Heritage agreed to pay $7.1 million to resolve allegations under the FCA related to the alleged price-fixing conspiracy.[105] For additional information regarding the Antitrust Division’s latest guidance on DPAs, and particularly the role that corporate compliance programs will play in securing a DPA, please see our recent client alert, “DOJ Antitrust Division Will Now Consider DPAs for Companies Demonstrating ‘Good Corporate Citizenship.’” HSBC Private Bank (Suisse) SA (DPA) On December 10, 2019, HSBC Private Bank (Suisse) SA (“HSBC Switzerland”), a private bank headquartered in Geneva, entered into a DPA with DOJ’s Tax Division and the U.S. Attorney’s Office for the Southern District of Florida.[106] The agreement resolved allegations that HSBC Switzerland conspired with U.S. taxpayers to evade taxes.[107] As part of the DPA, which has a term of three years, HSBC Switzerland consented to the filing of a one-count Information charging the bank with conspiracy to (1) defraud the United States for the purpose of impeding the lawful collection of federal income taxes, (2) file false federal income tax returns, and (3) evade federal income taxes, all in violation of 18 U.S.C. § 371.[108] Specifically, DOJ alleged that from at least 2000 through 2010, HSBC Switzerland “used Swiss bank secrecy to conceal the accounts of U.S. clients from the U.S. tax authorities.”[109] This included the provision of a number of traditional Swiss banking services, such as numerical and coded names for accounts, prepaid debit and credit cards to allow U.S. clients to withdraw funds remotely “without a clear paper trail back to their undeclared accounts in Switzerland,” and hold-mail services in which the bank would not send any account documents to U.S. account holders.[110] HSBC Switzerland bankers also assisted U.S. clients with creating entities that were incorporated in offshore tax havens and opening accounts in the names of nominee entities and trusts.[111] Pursuant to the DPA, HSBC Switzerland agreed to pay a total of $192,350,000 to the United States, consisting of restitution of the approximate unpaid pecuniary loss to the United States that allegedly resulted from the conduct, forfeiture of the approximate gross fees paid to HSBC Switzerland by U.S. taxpayers with undeclared accounts at the bank, and a monetary penalty.[112] Notably, the monetary penalty portion of the resolution reflected a discount of 50% off of the bottom of the U.S. Sentencing Guidelines fine range.[113] DOJ considered that HSBC self-reported its conduct, performed a thorough internal investigation, and extensively cooperated with the government as mitigating factors in support of the lower penalty.[114] The DPA did not impose a monitor or regular self-reporting requirement.[115] Hydro Extrusion USA LLC (DPA) On April 23, 2019, Hydro Extrusion USA, LLC, formerly known as Sapa Extrusions Inc. (“SEI”), entered into a three-year DPA for mail fraud after an extensive investigation by the National Aeronautics and Space Administration (“NASA”) Office of Inspector General, FBI’s Portland Field Office, and the Defense Criminal Investigative Service (“DCIS”).[116] At the same time, SEI’s direct subsidiary, Hydro Extrusion Portland, Inc., formerly known as SAPA Profiles Inc. (“SPI”), agreed to plead guilty to one count of mail fraud in connection with the same criminal activity and to pay restitution in the amount of $34.1 million and a forfeiture money judgment in the amount of $1.8 million.[117] The resolutions were entered after the two companies admitted to providing customers, including U.S. government contractors, with falsified certifications from altered tensile test results for nearly two decades.[118] The tests were designed to ensure the consistency and reliability of aluminum extruded at the companies’ facilities in Oregon, and the falsified results therefore allegedly resulted in the sale of aluminum that did not meet contract specifications for use on rockets for NASA and missiles provided to the Department of Defense’s Missile Defense Agency.[119] A number of factors contributed to DOJ’s criminal resolution with the companies. The DPA noted that Hydro Extrusion USA LLC and SPI “received full credit for their cooperation with the United States’ investigation and the Civil Division’s parallel civil investigation.”[120] That cooperation included “conducting an independent internal investigation and making regular factual presentations to the United States; facilitating witness interviews of current and former SPI employees; collecting, analyzing, and organizing voluminous evidence and information for the United States; providing counsel for certain witnesses; and responding to the United States’ requests for evidence and information.”[121] Moreover, the companies received significant credit for “their engagement in extensive remedial measures to address the misconduct, including the termination and severance of employees who were involved, the implementation of state-of-the-art equipment to automate the tensile testing process, company-wide audits at all U.S. tensile labs, increased resources devoted to compliance, and revamping internal quality controls and quality audit processes.”[122] In entering the DPA, the government also considered SPI’s ongoing negotiations with DOJ’s Civil Division, Commercial Litigation Branch, Fraud Section, “to resolve its civil liability for related civil claims, including under the federal False Claims Act.”[123] Hydro Extrusion USA’s extensive remediation efforts, the state of its compliance program, and its agreement to periodic self-reporting, led DOJ to determine that an independent compliance monitor was unnecessary.[124] However, the companies did not receive more significant mitigation credit, either in the penalty or the form of resolution, because the companies did not voluntarily self-disclose the full extent of their misconduct to the Department.[125] Insys Therapeutics, Inc. (DPA) Insys Therapeutics, Inc. (“Insys”) entered into a five-year DPA with the U.S. Attorney’s Office for the District of Massachusetts on June 5, 2019, to resolve federal criminal charges arising from Insys’s payment of kickbacks and other unlawful marketing practices related to its promotion of Subsys, a sublingual fentanyl spray DOJ described as a “powerful, but highly addictive opioid painkiller.”[126] DOJ alleged that between August 2012 and June 2015, Insys used sham “speaker programs” as a vehicle for paying bribes and kickbacks to physicians and other medical practitioners in exchange for prescribing Subsys to their patients, in many instances where the drug was not medically necessary.[127] As part of the resolution, Insys’s wholly owned operating subsidiary, Insys Pharma, Inc. (“Insys Pharma”), pled guilty to five counts of mail fraud.[128] As part of the DPA, Insys agreed to pay a $2 million criminal fine and to forfeit $28 million, representing its unlawful proceeds from the mail fraud scheme.[129] Additionally, Insys agreed to pay $195 million as part of a related FCA settlement, bringing its total penalty amount to $225 million.[130] Insys also agreed to “cooperate fully with the United States . . . in any federal investigation, trial, or other proceeding of its current and former officers, agents, and employees” arising from this investigation or otherwise related the company’s sales, promotion, and marketing practices related to Subsys.[131] This cooperation obligation may prove significant given that eight Insys executives have been convicted for crimes related to the illegal marketing of Subsys, five of whom, including company founder John Kapoor, were convicted at trial for racketeering conspiracy in May.[132] Insys also agreed to fully comply with federal law related to the marketing, sale, and distribution of pharmaceutical products, to continue implementing its associated compliance policies, procedures, and controls, and to abide by all of the terms of its Corporate Integrity Agreement and associated civil Settlement Agreement with HHS OIG.[133] The Corporate Integrity Agreement sets forth detailed undertakings regarding the structure, content, and oversight of Insys’s corporate compliance program and the commissioning of an annual independent review process,[134] as well as: (1) a requirement that Insys establish a program allowing for clawback of up to three years of executive incentive-based compensation;[135] (2) restrictions on research grants and charitable donations;[136] and (3) a requirement that Insys divest Subsys and an associated product and cease all business activities related to opioids within 12 months.[137] The Settlement Agreement required payment of a $195 million civil penalty over a five-year period.[138] The OIG reserved the right to exclude Insys from participating in federal health care programs in the event of a material breach of the Corporate Integrity Agreement or a default in its payment obligations under the Settlement Agreement.[139] Less than a week after entering this resolution, on June 10, 2019 Insys filed for Chapter 11 bankruptcy protection, claiming it could not keep up with its obligations due to the combination of significantly declined sales amid enhanced scrutiny of opioid prescriptions and its costs associated with the DOJ investigation and numerous associated civil lawsuits brought by municipalities seeking damages from Insys’s alleged contributions to the opioid epidemic.[140] Since then, Insys has filed a recovery plan providing for tiered treatment of claims, including DOJ’s claim based on the $225 million settlement.[141] The plan has not yet been confirmed, and it is not yet clear how much of the settlement amount DOJ would actually receive under the plan. LLB-Verwaltung (Switzerland) AG (NPA) In July 2019, DOJ’s Tax Division entered into an NPA with LLB-Verwaltung (Switzerland) AG (“LLB-Switzerland”), a private Swiss bank, to resolve allegations that LLB-Switzerland and certain of its employees, including members of management, conspired with an independent Swiss asset manager and with U.S. clients to conceal the clients’ assets and incomes from the IRS through various means, including using Swiss bank secrecy and nominee companies set up in tax-haven jurisdictions.[142] The NPA’s Statement of Facts noted that during 2009, “the Bank held nearly $200 million” in assets for 93 U.S. clients despite allegedly knowing that many of these clients had brought undeclared funds to LLB-Switzerland, and despite knowing of an investigation then being conducted by the U.S. government into similar conduct at another Swiss bank.[143] LLB-Switzerland’s parent, Liechtensteinische Landesbank, AG (“LLB-Vaduz”), reached a separate agreement with DOJ in 2013 through the DOJ Tax Swiss Bank Program (covered extensively in our 2015 Mid-Year and Year-End Updates), that excluded LLB-Switzerland from the resolution.[144] The NPA, which has a term of four years, imposed a penalty of $10,680,554.[145] The DOJ Tax Division entered into the Agreement, in part, based on factors including: “(a) [LLB-Switzerland’s] disclosure of the Conduct, including how LLB-Switzerland structured, operated, and supervised its cross-border business for accounts owned and/or controlled by U.S. persons; (b) [LLB-Vaduz’s] termination of the banking activities by LLB-Switzerland and the return of LLB-Switzerland’s banking license to [the Swiss Financial Market Supervisory Authority (“FINMA”)] in December 2013; and (c) [LLB-Switzerland’s] cooperation with the Tax Division as well as the cooperation of LLB-Vaduz” in the investigation.[146] Additionally, DOJ noted LLB-Switzerland’s “comprehensive” remediation efforts since 2012, which included the bank’s termination of all cross-border business with U.S. clients and of its relationship with the Swiss asset manager.[147] LLB-Switzerland also closed and surrendered its banking license, as noted above, and dismissed the managers and employees implicated in the investigation.[148] Lumber Liquidators (DPA) In March 2019, the DOJ Fraud Section, U.S. Attorney’s Office for the Eastern District of Virginia (E.D. Va.), and Lumber Liquidators entered into a DPA in connection with a criminal information charging the company with securities fraud.[149] The agreement capped a multiyear investigation initiated following a March 1, 2015, 60 Minutes segment that claimed laminate floors Lumber Liquidators sold did not comply with California Air Resource Board (“CARB”) regulations because they contained an unacceptably high amount of formaldehyde.[150] According to the DPA, Lumber Liquidators filed a false and misleading Form 8-K with the SEC, affirming that it complied with CARB regulations while failing to disclose material facts, the day after the 60 Minutes segment aired.[151] The DPA alleged that Lumber Liquidators had failed to include in its 8-K that the company’s products had failed its own tests for CARB compliance and that the company had discontinued its relationship with a supplier due to compliance concerns.[152] Lumber Liquidators paid DOJ a total penalty of $33 million, including a criminal fine of approximately $19 million, and approximately $14 million in forfeiture. The DPA is for a three-year period.[153] The agreement reflects the company’s cooperation and remedial efforts, which included offering consumers in-home testing for installed flooring, implementing new policies and procedures regarding CARB compliance, and terminating all employees involved in the wrongdoing who did not resign.[154] The company entered into a separate resolution with the SEC through which it agreed to pay more than $6 million in disgorgement of profits and prejudgment interest.[155] Merrill Lynch Commodities, Inc. (NPA) On June 25, 2019, Merrill Lynch Commodities, Inc. (“Merrill Lynch”) entered into a three-year NPA with DOJ’s Fraud Section.[156] The agreement binds Merrill Lynch, which operates a global commodities trading business, as well as its parent company, Bank of America Corporation.[157] The agreement resolved allegations that Merrill Lynch’s precious metals traders deceived other market participants by manipulating U.S. commodities markets with false and misleading information.[158] Specifically, from about 2008 to 2014, its traders allegedly created the false impression of increased supply or demand by placing orders for precious metals future contracts on the market that they intended to cancel before execution (a practice known as “spoofing”).[159] That spoofing purportedly induced other market participants “to buy or to sell precious metals futures contracts at prices, quantities, and times that they likely would not have otherwise.”[160] The NPA states that Merrill Lynch agreed to pay “combined appropriate criminal fine, forfeiture, and restitution amounts” of $25 million. Merrill Lynch also committed to report evidence or allegations of similar misconduct to DOJ.[161] The NPA noted that Merrill Lynch received credit for its cooperation with DOJ’s investigation and engaged in remedial measures before the investigation began, “including enhancing their compliance program and internal controls designed to detect and deter spoofing and other manipulative conduct.”[162] Based on these factors, DOJ determined that an independent compliance monitor was unnecessary.[163] On the same day the parties entered into the NPA, the CFTC announced a separate settlement with Merrill Lynch to end parallel civil proceedings.[164] Merrill Lynch agreed to pay $25 million to the CFTC, including a civil penalty of $11.5 million, as well as restitution and disgorgement for which it received a credit for restitution and disgorgement paid to DOJ.[165] Edward Bases and John Pacilio, two former precious metals traders employed by Merrill Lynch, were also indicted last year in connection with the alleged spoofing.[166] The litigation is pending in the U.S. District Court for the Northern District of Illinois.[167] Microsoft Magyarország Számítástechnikai Szolgáltató és Kereskedelmi Kft. (Microsoft Hungary) (NPA) On July 22, 2019, DOJ announced an FCPA resolution with the Hungarian subsidiary of leading technology company Microsoft, relating to alleged violations of the FCPA’s books-and-records and internal controls provisions.[168] These allegations involved Microsoft’s subsidiary allegedly making improper payments to government officials through third parties.[169] To resolve the DOJ matter, Microsoft’s Hungarian subsidiary entered into a three-year non-prosecution agreement and paid a criminal fine of $8,751,795.[170] The DOJ awarded a 25% cooperation credit to Microsoft Hungary for its substantial cooperation and extensive remedial measures.[171] Microsoft’s Hungarian subsidiary was not required to retain a monitor, but will report on its compliance program efforts and enhanced internal control policies and procedures for the three-year non-prosecution period.[172] In a parallel resolution with the SEC, parent company Microsoft consented to the entry of a cease-and-desist order and agreed to pay $16,565,151 in disgorgement plus prejudgment interest, in connection with alleged conduct in Hungary, Turkey, Saudi Arabia, and Thailand. For additional details, please see our 2019 Year-End FCPA Client Alert. Mizrahi Tefahot Bank Ltd., United Mizrahi Bank Switzerland Ltd., and Mizrahi Tefahot Trust Co. Ltd. (DPA) On March 12, 2019, the DOJ’s Tax Division and U.S. Attorney’s Office for the Central District of California entered into a DPA with Mizrahi-Tefahot Bank Ltd., (“Mizrahi-Tefahot”) and its subsidiaries, United Mizrahi Bank (Switzerland) Ltd. (“UMBS”) and Mizrahi Tefahot Trust Company Ltd. (“Mizrahi Trust Company”).[173] In the Gibson Dunn negotiated DPA, Mizrahi-Tefahot admitted responsibility, “under United States respondeat superior law,” for the actions of “[c]ertain private bankers, relationship managers, and other employees of [MTB Entities] with similar levels of responsibility” which had, from 2002-2012, allegedly enabled U.S. customers to evade U.S. tax obligations by disguising and failing to report the customers’ ownership and control of assets held at all three entities.[174] The DPA involved payment terms totaling $195 million, of which $53 million was restitution; $24 million was disgorgement; and $118 million was a penalty.[175] The agreement notes that a potentially “higher penalty” was “mitigat[ed]” by the fact that Mizrahi-Tefahot “conducted an internal investigation and engaged in concomitant efforts to provide information and materials . . . derived from that investigation to U.S. authorities.”[176] The agreement describes a comprehensive internal investigation, which involved, among other things, reviewing “millions of e-mails from three countries,” producing over 560,000 pages of documents to the government, providing translations for various documents, conducting internal interviews and proffering the substance of those interviews to the government, and presenting the results of the internal investigation to the government.[177] The DPA will remain in place for a two-year period.[178] Mobile TeleSystems PJSC (DPA) On March 7, 2019, DOJ announced the Mobile TeleSystems (“Mobile TeleSystems”) DPA, which involved allegations that Mobile TeleSystems conspired to violate the anti-bribery, books and records, and internal controls provisions of the FCPA.[179] Mobile TeleSystems’ Uzbek subsidiary, Kolorit Dizayn Ink LLC (“Kolorit”), pled guilty to anti-bribery and books and records violations.[180] According to DOJ, the companies allegedly paid bribes to Gulnara Karimova, the daughter of former president of Uzbekistan Islam Karimov, in exchange for the ability to conduct business in Uzbekistan.[181] Between the DPA and an SEC settlement announced the day before, Mobile TeleSystems and Kolorit agreed to pay a total of $950 million in civil and criminal penalties.[182] In indictments announced the same day as the DPA, Karimova and Bekhzod Akhmedov, the former CEO of another Mobile TeleSystems subsidiary, were charged with money laundering violations, and money laundering and FCPA violations, respectively.[183] According to the press release announcing the indictments, the amount that Karimova allegedly received in bribes is the largest ever paid to any individual FCPA defendant.[184] The Mobile TeleSystems DPA highlights DOJ’s continued emphasis on prosecuting individuals, even in the wake of the recent curtailment of the Yates Memorandum’s requirement of blanket disclosure of relevant individuals by companies hoping for cooperation credit.[185] While only the fifth-largest NPA or DPA by dollar value in 2019, the Mobile TeleSystems DPA is the second-largest agreement in 2019 to impose an independent compliance monitor.[186] Consistent with its prior practice of imposing monitorships where it believes companies’ compliance programs are immature, DOJ’s agreement with Mobile TeleSystems explains it is imposing a monitor “because the Company [i.e., Mobile TeleSystems] has not yet fully implemented or tested its compliance program.”[187] The Mobile TeleSystems DPA also marks the second monitorship to be imposed in recent years against a foreign telecommunications company over bribery allegations concerning Uzbekistan. DOJ’s 2016 DPA with VimpelCom Limited imposed a three-year monitorship on that company in a case that involved overlapping factual allegations and nearly as much in criminal and civil penalties as the Mobile TeleSystems case did.[188] The largest agreement in 2019 under which a monitor was imposed was the Ericsson DPA, which is discussed further above. Two additional notable features of the Mobile TeleSystems DPA relate to the nature and size of the company’s total monetary penalty under the U.S. Sentencing Guidelines (“USSG”). First, the penalty was nearly 25% higher than the bottom end of the guideline range dictated by the USSG.[189] In setting forth the facts and circumstances that DOJ believed warranted this upward deviation and the nature and size of the resolution more broadly, the DPA noted (among other things) that Mobile TeleSystems “did not receive voluntary disclosure credit . . . because it did not voluntarily and timely self-disclose . . . the conduct described in the Statement of Facts,” and that while Mobile TeleSystems “ultimately provided” DOJ with “all relevant facts known to it,” the company “did not receive additional credit for cooperation and remediation . . . because it significantly delayed production of certain relevant materials, refused to support interviews with current employees during certain periods of the investigation, and did not appropriately remediate.”[190] The second notable feature of Mobile TeleSystems’ total penalty is the fact that DOJ’s USSG analysis relied primarily on the value of the alleged bribes, and not on any alleged profit Mobile TeleSystems made as a result of the payments.[191] Unlike other FCPA cases that have involved some amount of profit realized from the alleged improper payments, Mobile TeleSystems’ conduct “result[ed] in no realized pecuniary gain to the Company” because “the Uzbek government expropriated the Company’s telecommunications assets in Uzbekistan.”[192] Only if profits surpassed the value of the alleged bribes would the USSG calculation have required that the profit figure, rather than the value of the bribe, dictate the penalty level.[193] Because the value of the alleged bribe here was larger than the base fine that the USSG would have otherwise provided for were profit used as a starting point, the result was a significant increase over the penalty DOJ could have otherwise sought from Mobile TeleSystems.[194] For additional analysis regarding the Mobile TeleSystems DPA and other FCPA-related agreements, see Gibson Dunn’s 2019 Year-End FCPA Update. Monsanto Company (DPA) On November 21, 2019, the U.S. Attorney’s Office for the Central District of California (C.D. Cal.), acting as Special Attorney in the District of Hawaii,[195] announced a two-year DPA with the agrochemical and biotechnology company Monsanto, in connection with a criminal information charging the company with storing a banned pesticide.[196] Monsanto also agreed to plead guilty to spraying the pesticide.[197] The case is the result of an investigation by the U.S. Environmental Protection Agency (EPA), Criminal Investigation Division.[198] According to the DPA, Monsanto continued spraying and storing the pesticide Penncap-M in Hawaii after the EPA issued a cancellation order in 2013 prohibiting all sale or use of the pesticide.[199] After the cancellation order, the pesticide had to be managed as “acute hazardous waste” in compliance with the Resource Conversation and Recovery Act (RCRA), which required a permit for storage or transportation of the pesticide.[200] According to the DPA, from 2013 through 2014 Monsanto stored and transported the pesticide without the required permit.[201] The resolution required Monsanto to pay $10.2 million, including a fine of $6.2 million and $4 million in community service payments to Hawaiian government entities.[202] The DPA provides that the community services payments will be used for various purposes, including the creation of a pesticide disposal program by the Hawaii Department of Agriculture.[203] The agreement also requires that Monsanto develop and implement an environmental compliance program for all of its Hawaii sites and retain a third-party environmental compliance auditor.[204] The auditor will conduct “audits every six months of all of [Monsanto’s] locations in Hawaii in order to determine whether or not [Monsanto] is in full compliance with RCRA and FIFRA [the Federal Insecticide, Fungicide, and Rodenticide Act].”[205] Reckitt Benckiser Group (NPA) On July 11, 2019, Reckitt Benckiser Group plc (“RB Group”), a global consumer goods conglomerate headquartered in Slough, England, entered into an NPA with DOJ’s Consumer Protection Branch and the U.S. Attorney’s Office for the Western District of Virginia. The NPA resolved the investigation of RB Group related to the marketing, sale, and distribution of Suboxone in the United States by its former subsidiary Reckitt Benckiser Pharmaceuticals Inc., which spun off from RB Group in 2014 and is now a separate company known as Indivior.[206] Indivior was indicted on April 9, 2019 for alleged fraud in connection with the promotion and sale of Suboxone Film, an opioid used to treat opioid addiction.[207] The NPA with RB Group resolved potential liability “based on the subject matter” of that indictment.[208] The NPA imposed monetary obligations on RB Group of $1.4 billion – by total dollar value, the RB Group NPA is the largest resolution reached in 2019. According to the Indivior indictment, Indivior promoted Suboxone Film as less-divertible and less-abusable and safer around children, families, and communities than other buprenorphine drugs, even though such claims have never been established.[209] The Indivior indictment further alleged that Indivior used its “Here to Help” internet and telephone program to connect patients to doctors it knew were prescribing Suboxone to more patients than allowed by federal law, at high doses, and in a careless and clinically unwarranted manner.[210] The Indivior indictment alleged substantial costs to the government as a result of the company’s conduct.[211] As part of the NPA, which has a term of three years, RB Group agreed that neither RB Group nor any affiliated entity will manufacture, distribute, or sell in the United States any Schedule I, II, or III controlled substance, as defined in the Controlled Substances Act, during the term of the NPA.[212] Moreover, RB Group agreed to fully cooperate with all investigations and prosecutions by DOJ related, in any way, to Suboxone.[213] The agreement did not impose an independent compliance monitor or a self-reporting obligation on RB Group. The $1.4 billion in monetary obligations imposed by the NPA consisted of a $700,000,000 payment pursuant to a Civil Settlement Agreement; a $647,000,000 payment for forfeiture of alleged proceeds; a $50,000,000 payment to resolve claims by the Federal Trade Commission;[214] and a $3,000,000 payment to the Virginia Medicaid Fraud Control Unit’s Program Income Fund.[215] Notably, the government did not impose a criminal penalty on RB Group. The Civil Settlement Agreement resolved six qui tam actions filed in the Western District of Virginia and the District of New Jersey alleging that RB Group engaged in fraudulent marketing of Suboxone and promoted the drug to physicians it knew were prescribing the drug illegitimately.[216] As a result, the government alleged, RB Group caused false claims for Suboxone to be submitted to government health care programs.[217] Republic Metals Corporation (NPA) In an NPA announced on April 17, 2019, the United States Attorney’s Office for the Southern District of Florida and Republic Metals Corporation (“RMC”), a gold refinery based in Miami, Florida, resolved allegations regarding RMC’s role in an ongoing investigation concerning alleged money laundering and Bank Secrecy Act violations in the gold importation and refining industry.[218] Little information is available on the nature of DOJ’s concerns regarding RMC, and on the precise allegations in the broader investigation, as the parties expressly agreed in the NPA—at RMC’s request—to keep the agreement’s statement of facts confidential “absent a court order.”[219] While such a provision is not unheard of in negotiated resolutions, it is rare absent special circumstances, and here may reflect the fact that RMC is currently subject to a Chapter 11 bankruptcy proceeding filed in November 2018.[220] The NPA provided that RMC and the government “may disclose” the agreement publicly without its attachments,[221] but RMC’s motion for bankruptcy court approval of the NPA, which attached the NPA itself, was originally filed completely under seal.[222] However, the bankruptcy court determined “that certain information pertaining to the Motion should be made public consistent with the importance of transparency in public proceedings,”[223] and accordingly ordered disclosure of the NPA without attachments.[224] The NPA did not impose a penalty on RMC.[225] Notably, DOJ granted RMC “full credit for its voluntary cooperation” with the government’s investigation, and explicitly noted that the information RMC produced to the government “tended to show that the Company has made significant efforts to create a culture of proper compliance” and “has been corroborated by other evidence.”[226] The NPA also cited RMC’s remediation efforts and “the state of its compliance program” as factors informing the government’s decision not to impose a monitor.[227] Among RMC’s remediation efforts was its termination, prior to being aware of the government’s investigation, of “several suppliers who ultimately proved suspicious” and which RMC had hired not because it intended to violate the anti-money laundering (“AML”) laws, but because of an alleged failure in the company’s compliance controls.[228] Rick Weaver Buick GMC, Inc. (Pretrial Diversion Agreement) On January 15, 2019, Rick Weaver Buick GMC, Inc. (the “Dealership”) entered into an agreement with the U.S. Attorney’s Office of the Western District of Pennsylvania to resolve allegations of wire fraud and conspiracy to commit wire fraud.[229] According to the indictment incorporated into the agreement and originally handed down in August 2017, the Dealership and three individual defendants defrauded auto loan providers by using straw purchasers to buy vehicles from the Dealership at inflated prices.[230] Pursuant to the agreement, which has a term of three years, the Dealership agreed to an annual independent audit of its business operations and books, as well as an independent monitor for the term of the agreement.[231] The Dealership also agreed to undertake remedial efforts, including conducting employee training on ethics and amending its policies and procedures relating to the integrity of its company-wide ethics and compliance program.[232] Under the agreement, the Dealership paid full restitution in the total amount of approximately $143,794 under the agreement to five financial institutions.[233] The Dealership also paid a monetary penalty of $400,000.[234] The agreement is notable for several reasons. First, it was styled as an Agreement for Pretrial Diversion, which has a deferring effect like that of a DPA but which is more traditionally used in prosecutions of individuals.[235] As such, the agreement does not contain other customary features of corporate DPAs, such as a discussion of the company’s cooperation with the government’s investigation. Second, the agreement was reached over two years after the Dealership was originally indicted, which stands in contrast to the vast majority of DPAs reached before the government has filed charges. Rising Pharmaceuticals, Inc. (DPA) On December 13, 2019, Rising Pharmaceuticals, Inc. (“Rising”) and the Antitrust Division of DOJ entered into a DPA to resolve allegations that from at least April 2014 until at least September 2015, Rising participated in a criminal antitrust conspiracy with other companies and individuals engaged in the production and sale of generic pharmaceuticals.[236] The alleged purpose of the conspiracy was “to suppress and eliminate competition by agreeing to allocate customers for and to stabilize, maintain, and fix prices of Benazepril HCTZ,” a generic drug used to treat hypertension.[237] As part of the DPA, Rising consented to the filing of a one-count Information in the Eastern District of Pennsylvania charging the company with conspiracy to suppress and eliminate competition in violation of the Sherman Act.[238] The agreement imposed $1.5 million in criminal penalties and $438,066 in restitution.[239] The DPA has a term of three years but will end earlier if the ongoing Chapter 11 bankruptcy cases of Rising and several related entities are closed before three years have elapsed.[240] The DPA does not impose a formal monitoring or reporting requirement on Rising, but the agreement does require prompt reporting of any “credible evidence or allegations of criminal violations” of which Rising learns.[241] In a separate civil resolution, Rising agreed to pay approximately $1.1 million to resolve allegations under the FCA related to the alleged price-fixing conspiracy.[242] This amount was offset in the calculation of the criminal restitution in the DPA. The payment of the monetary obligations imposed by the resolutions will be subject to certain levels of pro rata treatment under the reorganization plan in the Chapter 11 bankruptcy.[243] In entering into the DPA, the Antitrust Division considered that “Rising provided substantial, timely cooperation with the United States’ investigation,” including disclosing information regarding additional alleged antitrust violations other than those detailed in the DPA.[244] The DPA also cited to the fact that “Rising’s cooperation has allowed the United States to advance its investigation into criminal antitrust conspiracies among other manufacturers of generic pharmaceuticals,” and to Rising’s agreement to pay restitution.[245] Lastly, the DPA also stated that a conviction or guilty plea of Rising would likely result in a substantial delay of the ongoing bankruptcy proceedings.[246] Rochester Drug Co-Operative (DPA) As part of the federal government’s continued efforts to combat the opioid crisis, on April 23, 2019, the U.S. Attorney’s Office for the Southern District of New York announced a DPA with Rochester Drug Co-Operative (“RDC”).[247] The DPA resolved criminal allegations that RDC conspired to distribute controlled substances in violation of the Controlled Substances Act (“CSA”), conspired to defraud the Drug Enforcement Administration (“DEA”), and knowingly failed to file suspicious order reports with DEA.[248] A separate consent judgment agreed to by the parties resolved allegations that RDC committed civil violations of the CSA’s suspicious order reporting requirements.[249] RDC agreed to pay $20 million in civil forfeiture in satisfaction of its obligations under both the criminal and civil resolutions.[250] The DPA is notable for several reasons. First, it is one of only three agreements from 2019 to carry a term of at least five years,[251] which is longer than that typically imposed by DPAs and NPAs. The agreement also includes an option for a one-year extension at the government’s sole discretion.[252] The agreement also imposes an independent monitor, but the monitorship carries only a three-year term. Second, whereas a typical DPA or NPA gives the company the opportunity to provide a written response within 30 days of any determination by the government that the company has breached the agreement,[253] the RDC DPA affords the “opportunity to make a presentation” in response to such a determination, without explicitly imposing a timeframe for doing so.[254] Third, the DPA imposes significant compliance undertakings on RDC—for example, by requiring that the company’s board “establish and maintain a standing Controlled Substances Compliance Committee (the ‘CSCC’),” and by imposing detailed rules for the CSCC’s formation, composition, and activities.[255] For example, the DPA requires that the CSCC “report regularly to the full Board on compliance issues, and . . . regularly review the reports from, and interact with, the Independent Monitor [imposed by the agreement],”[256] and that the CSCC monitor the company’s compliance program and spearhead updates to the program.[257] The agreement also provides that “the CSCC, as well as the full Board, shall have access to timely legal advice, and shall be regularly advised by counsel regarding all aspects of RDC’s compliance with the [CSA], its implementing regulations, and this Agreement.”[258] While it is common for a DPA to commit a company to providing its employees with compliance guidance, the explicit requirement of legal advice to RDC’s board represents a rare and substantial level of involvement by the government in corporate governance in the wake of a DPA. Samsung Heavy Industries Company Limited (DPA) On November 22, 2019, DOJ and the U.S. Attorney’s Office for the Eastern District of Virginia entered into a three-year DPA with Samsung Heavy Industries Company Ltd. (“SHI”), an engineering company based in South Korea, for conspiring to violate the anti-bribery provisions of the FCPA.[259] This was the second DPA in 2019 concerning alleged FCPA violations related to projects involving Brazil’s state-owned energy company Petróleo Brasileiro S.A. – Petrobras. SHI agreed to pay a criminal penalty totaling $75,481,600 – half of which it will pay to the United States, and the other half of which it will pay to Brazilian authorities with which SHI entered into MOUs and leniency agreements.[260] If SHI fails to pay the Brazilian authorities within a year of the execution of the DPA, that half will also be paid to the United States.[261] In reaching the decision to defer prosecution, DOJ considered among other factors SHI’s “significant remedial measures,” which included increasing the headcount of its compliance function, enhancing its anti-corruption policies, and imposing heightened due diligence requirements for engaging third-party vendors.[262] DOJ noted that an independent monitor was not necessary because of these measures and the company’s agreement to make yearly compliance reports to DOJ for the term of the DPA.[263] DOJ also noted that SHI did not receive full cooperation credit because it did not meet “reasonable deadlines imposed by” DOJ and caused delays in reaching a resolution.[264] The total criminal penalty reflects a 20% reduction off the bottom of the U.S. Sentencing Guidelines range,[265] rather than the 25% reduction usually associated with full cooperation credit in the absence of voluntary self-disclosure. Standard Chartered Bank (DPA) On April 9, 2019, DOJ’s Money Laundering and Asset Recovery Section (“MLARS”) and the U.S. Attorney’s Office for the District of Columbia announced the amendment of their 2012 DPA with Standard Chartered Bank (“SCB”) over alleged sanctions violations.[266] The amended DPA, together with an amended agreement with the New York County District Attorney’s Office, imposes approximately $1.01 billion in additional penalties on SCB.[267] In conjunction with the amended agreements, one former employee of SCB’s Dubai operation pled guilty to conspiracy allegations, and an Iranian national, who previously engaged in business with SCB, was indicted on similar charges.[268] Notably, the agreement demonstrates that DOJ may credit a company’s remediation and compliance efforts,[269] even while perceiving it as a “repeat corporate offender.”[270] An earlier amendment of the 2012 DPA imposed a three-year compliance monitorship, which ended on March 31, 2019, and which DOJ and SCB agreed was unnecessary to extend.[271] The 2019 amended DPA marks the conclusion of a DOJ investigation commenced in 2014, before the term of the 2012 DPA had elapsed, on the basis of “new information” DOJ had learned “through an unrelated investigation.”[272] The information concerned alleged violations “which took place after the time period specified in the Factual Statement incorporated into the 2012 DPA.”[273] The amended DPA further alleges that the violations were known to SCB during the government’s initial investigation.[274] The amended SCB DPA suggests that DOJ will not hesitate to pursue additional penalties where it believes that an existing resolution was reached on the basis of an incomplete record. Tower Research Capital LLC (DPA) On November 6, 2019, Tower Research Capital LLC (“Tower”), a New York-based financial services firm, entered into a DPA with DOJ and the U.S. Attorney’s Office for the Southern District of Texas to resolve criminal charges concerning three former traders who allegedly engaged in unlawful trading activity in U.S. commodities markets.[275] Specifically, DOJ alleged that from approximately March 2012 until December 2013, three traders who were employees of Tower engaged in spoofing by fraudulently placing orders to buy and sell futures contracts traded on the Chicago Mercantile Exchange and the Chicago Board of Trade with the intent to cancel those orders before execution.[276] According to the DPA, these orders were “intended to, and did, inject false and misleading information about the genuine supply and demand” for these futures contracts into the markets, causing other market participants to make trading decisions that they otherwise likely would not have made.[277] Although Tower did not voluntarily disclose the conduct, the Company otherwise received full credit for its cooperation with the investigation, including by conducting an internal investigation, voluntarily making employees available for interviews, and making factual presentations to DOJ.[278] Tower also undertook “extensive remedial measures” beginning in early 2014, including terminating the traders involved, enhancing the company’s compliance program and internal controls, and making changes to senior management and the company’s corporate governance structure.[279] As part of the DPA, Tower agreed to pay a total of approximately $67.4 million, which comprises $24.4 million in criminal penalties, $10.5 million in disgorgement, and approximately $32.6 million in victim compensation payments.[280] Simultaneously with the DPA, Tower entered into a separate settlement with the CFTC to end parallel civil proceedings.[281] Tower agreed to pay $67.4 million to the CFTC, including a civil monetary penalty, disgorgement, and restitution, with all amounts to be offset by payments made to DOJ. According to the CFTC, this is “the largest monetary relief ever ordered in a spoofing case.”[282] For the three-year term of the DPA with DOJ, Tower is obligated to review and modify its corporate compliance program “to ensure that it maintains an effective compliance program that is designed to deter and detect violations of” the Commodity Exchange Act and commodities fraud statute.[283] Pursuant to this obligation, Tower agreed to make periodic annual reports to DOJ detailing its remediation efforts and proposals to improve its compliance program.[284] The three traders involved in the alleged spoofing were all charged criminally in the Southern District of Texas for their roles in the alleged scheme.[285] Kamaldeep Gandhi and Krishna Mohan pled guilty in 2018 to conspiracy to engage in wire fraud, commodities fraud and spoofing, and criminal charges against Yuchun (Bruce) Mao are still pending.[286] UniCredit Bank Austria (NPA) On April 15, 2019, DOJ MLARS and the U.S. Attorney’s Office for the District of Columbia entered into a three-year NPA with UniCredit Bank Austria (“UniCredit BA”), a financial institution headquartered in Vienna, Austria and part of the UniCredit Group, for violating U.S. economic sanctions laws and regulations.[287] UniCredit BA has also entered into an NPA with the New York County District Attorney’s Office for violating New York state law.[288] As part of the federal NPA, UniCredit BA admitted that it conspired with certain customers to violate the International Emergency Economic Powers Act (“IEEPA”) from at least around 2002 to around 2012 by processing payments to or through the United States involving persons prohibited under IEEPA from accessing the U.S. financial system.[289] In particular, according to the NPA, beginning in 2002, and up through and including 2012, UniCredit BA knowingly and willfully processed 16 transactions worth at least $20 million through the United States involving persons located or doing business in Iran and other countries subject to U.S. economic sanctions, and willfully caused financial services to be exported from the United States to sanctioned customers in Iran and elsewhere in violation of U.S. sanctions laws and regulations.[290] UniCredit BA agreed to forfeit $20 million, the amount of proceeds obtained by UniCredit BA in violation of the IEEPA.[291] However, the NPA credited $20 million in payments made by UniCredit BA in connection with a concurrent settlement with the New York State Department of Financial Services (“DFS”).[292] Additionally, UniCredit BA represented that it has implemented and will continue to implement a U.S. sanctions compliance program designed to prevent and detect violations of U.S. economic sanctions.[293] DOJ explained that the penalty amount reflected UniCredit BA’s thorough internal investigation and cooperation with DOJ in its investigation, as well as its remedial efforts. Specifically, UniCredit BA received credit “for its cooperation with [DOJ’s] investigation, including conducting a thorough internal investigation, making regular factual presentations to the Offices, voluntarily making employees available for interviews, producing documents to the Offices consistent with applicable data privacy laws, and collecting, analyzing, and organizing voluminous evidence and information for the Offices.”[294] DOJ also noted that UniCredit BA had enhanced its U.S. sanctions compliance program and, based on those remediation efforts, DOJ determined that an independent compliance monitor was unnecessary.[295] In addition to UniCredit BA’s NPA, UniCredit Bank AG (“UCB AG”), a financial institution headquartered in Munich and also part of the UniCredit Group, agreed to enter a guilty plea with DOJ for conspiring to violate the IEEPA and to defraud the United States by processing hundreds of millions of dollars of transactions through the U.S. financial system on behalf of an entity designated as a weapons of mass destruction proliferator and other Iranian entities subject to U.S. economic sanctions.[296] According to DOJ, “over the course of almost 10 years, UCB AG knowingly and willfully moved at least $393 million through the U.S. financial system on behalf of sanctioned entities, most of which was for an entity the U.S. Government specifically prohibited from accessing the U.S. financial system.”[297] Pursuant to the guilty plea, UniCredit Group banks will pay total financial penalties of approximately $1.3 billion. The plea agreement, which has been approved by the court, provides that UCB AG will forfeit $316,545,816 and pay a fine of $468,350,000. UniCredit SpA, which is the parent entity of both UCB AG and UCB BA, has agreed to ensure that UCB AG and BA’s obligations are fulfilled. As part of a coordinated settlement, UniCredit Group entities also entered into agreements with the Office of Foreign Assets Control (“OFAC”), the Federal Reserve Board (“Federal Reserve”), and DFS under which they will pay additional penalties of approximately $660 million. In particular, UniCredit agreed to pay approximately $611 million to OFAC, which will be satisfied in part by payments to DOJ and the Federal Reserve; approximately $158 million to the Federal Reserve; and $405 million to DFS.[298] Finally, UCB AG entered into a separate guilty plea in New York state court for violating New York state law and agreed to forfeit $316 million as part of a deal with the Manhattan District Attorney’s Office (“DANY”).[299] DOJ has agreed to credit up to $468,350,000 in payments made in connection with the concurrent resolutions with the Federal Reserve, DFS, and DANY towards the criminal fine, which represents the full criminal fine amount.[300] Unitrans International Inc. (NPA) On December 4, 2019, DOJ announced that Unitrans International Inc. (“Unitrans”), a privately held Virginia defense contracting company, agreed to pay $45 million to resolve criminal obstruction charges and civil FCA allegations.[301] The allegations arose out of a contract awarded by the U.S. Defense Logistics Agency (“DLA”) in 2012 for the provision of material and logistical support to U.S. troops in Afghanistan.[302] The contract was awarded to Anham FZCO (“Anham”), an associated Dubai Free Zone company incorporated under the laws of the United Arab Emirates.[303] Unitrans, an associated company, provided logistical services to Anham.[304] According to DOJ, officers of Unitrans facilitated the illegal transportation of goods across Iran which Anham then used in its performance of the DLA contract in Afghanistan.[305] DOJ alleged that certain officers of Unitrans and Anham obstructed proceedings before DLA, and the related FCA suit alleged that Unitrans and Anham fraudulently induced DLA to award the contract by knowingly and falsely certifying compliance with U.S. sanctions against Iran.[306] As part of the resolution, Unitrans entered into an NPA with DOJ and agreed to pay $31.5 million as a combined criminal monetary penalty and victim compensation payment.[307] Under the civil settlement, Unitrans agreed to pay $27 million, half of which will be deemed satisfied by Unitrans’s payment of $13.5 million of its monetary obligations under the NPA.[308] Together, the two resolutions imposed a total of $45 million in monetary obligations.[309] DLA separately entered into an administrative agreement with Anham in May 2019,[310] and DOJ entered into NPAs with three Anham officials who were previously indicted in relation to the alleged scheme.[311] Zurich International Life Limited and Zurich Life Insurance Company Limited (NPA) On April 25, 2019, DOJ’s Tax Division announced an NPA with Zurich Life Insurance Company Limited (“Zurich Life”), an insurance carrier headquartered in Zurich, Switzerland, and Zurich International Life Limited (“Zurich International”), an insurance carrier focusing on the international expatriate market based in Isle of Man (collectively, “Zurich”).[312] According to DOJ, from January 1, 2008 through June 30, 2014, “Zurich issued or had certain insurance policies and accounts of U.S. taxpayer customers[] who used their policies to evade U.S. taxes and reporting requirements.”[313] After DOJ initiated its Swiss Bank Program—covered in more detail in our 2015 Mid-Year Update and our 2015 Year-End Update—Zurich conducted an internal review of its non-U.S. operating companies’ sales of life insurance, savings, and pension products, to identify policies or accounts with a possible U.S. nexus.[314] Once accounts and policies with a possible U.S. nexus had been identified, Zurich contacted the relevant customers to evaluate their compliance and encourage them to participate in an IRS voluntary disclosure program.[315] Zurich contacted DOJ in July 2017 to self-report the findings of the internal review.[316] Following this voluntary disclosure, Zurich conducted a full investigation and reported substantial findings to DOJ’s Tax Division.[317] Zurich also coordinated closely with the Swiss Federal Department of Finance to ensure that the bank could provide full disclosures to DOJ.[318] Under the NPA, Zurich Life and Zurich International agreed to cooperate in any related criminal or civil proceedings, to implement controls to stop misconduct involving undeclared U.S. accounts, and to pay a $5,115,000 penalty.[319] International DPA Developments United Kingdom In 2019, the UK Serious Fraud Office (“SFO”) entered its fifth and sixth DPAs since the introduction of the country’s DPA program in February 2014. The July 4, 2019 DPA with Serco Geografix Limited (“SGL”) marked the first DPA since the agreements entered with Tesco Stores Limited (“Tesco”) in April 2017 and Rolls-Royce PLC (“Rolls-Royce”) in January 2017. And the DPA with Güralp Systems Ltd, confirmed on December 20, 2019, came after a series of closures of long-lasting investigations. The closure of a number of high-profile SFO investigations suggests that the SFO may be refocusing its efforts on new investigations, under the leadership of Director Lisa Osofsky, who began her five-year term in late August 2018. Further, the recently published guidance on corporate cooperation may suggest a renewed focus by the SFO on encouraging early self-reporting. Investigation Closures Rolls-Royce In January 2017, Rolls-Royce entered into a DPA with the SFO and agreed to the largest penalty ever levied by the SFO in a bribery matter.[320] In February 2019, the SFO announced its decision to close the Rolls-Royce investigation without pursuing any individual prosecutions.[321] The 2017 DPA remains in force with continuing obligations on Rolls-Royce including to make annual payments until 2021. If the schedule expected by the Compliance Terms has been adhered to, the compliance remediation required will have been completed. GlaxoSmithKline At the time of the February Rolls-Royce announcement, the SFO also announced the closure of a long-running investigation into the “commercial practices” of pharmaceutical company GlaxoSmithKline.[322] In a statement announcing the closure of the Rolls-Royce and GlaxoSmithKline investigations, SFO Director Lisa Osofsky remarked: “After an extensive and careful examination I have concluded that there is either insufficient evidence to provide a realistic prospect of conviction or it is not in the public interest to bring a prosecution in these cases.”[323] The statement released by the SFO noted that under Osofsky’s leadership, the SFO has closed additional cases that were not announced to the public.[324] Unaoil In June 2019, the SFO closed its three-year bribery investigation of high-ranking executives of the oil-sector consultancy company Unaoil who were being investigated for paying bribes to secure contracts in the energy industry.[325] The SFO declined to comment on the closure of the investigation into the individuals, which marked the third major closure of an investigation by the SFO in 2019 and prompted criticism from some anti-corruption observers.[326] However, on October 30, 2019, it was announced that two of these executives had pleaded guilty in March 2019 in the United States.[327] The SFO prosecution and investigation of Unaoil continues.[328] DPAs Announced in 2019 Güralp Systems Ltd. On December 20, 2019, the SFO announced a DPA with Güralp Systems Ltd. (“Güralp”), a manufacturer of seismic instrumentation, to resolve charges of (1) conspiracy to make corrupt payments and (2) failure to prevent bribery by employees, both arising from alleged corrupt payments made to a South Korean public official between 2002 and 2015.[329] The SFO announced the agreement after the founder and two former executives of Güralp were acquitted of charges of conspiracy to make corrupt payments following a ten-week trial. This DPA ended a four-year SFO investigation commenced after Güralp self-reported the findings of an internal investigation initiated by its newly appointed executive chairman. Self-reporting and cooperation were key considerations in the SFO’s decision to enter a DPA with Güralp. As Director Osofsky said, “[t]he DPA is a result of Güralp Systems Ltd’s timely self-reporting and full cooperation, and holds the company to account whilst also promoting positive changes in corporate culture[.]”[330] The judgment approving the DPA also agreed that Güralp’s current senior management “has done all that it can to remedy the position and to co-operate with prosecuting authorities in two jurisdictions.”[331] The cooperation included agreeing not to interview employees. Under the terms of the five-year DPA, Güralp will provide the SFO with annual reports regarding implementation of its compliance program and pay disgorgement of gross profits of £2,069,861 (approximately $2.5 million) over the term of the agreement.[332] Although the conduct carried a potential penalty of £4 million (approximately $5.2 million), the Crown Court at Southwark considered that a penalty of that amount “or any sum remotely near to it [] would put GSL out of business.”[333] Thus, the DPA imposed no financial consequences other than disgorgement paid on a flexible schedule. In deciding to approve the penalty-free DPA, the Crown Court found that (1) the management of the company had changed completely, (2) the individuals responsible for the corrupt payments were no longer associated with the company, (3) the current management was cooperating to the full extent possible, (4) Güralp had not previously or otherwise engaged in criminal conduct, (5) Güralp investigated and self-reported the misconduct, and (6) most of Güralp’s workforce was innocent and did not deserve to be forced out of business due to conduct by a small number of former senior employees and officers.[334] The Crown Court also considered the unique nature of Güralp’s seismological expertise, noting that if Güralp was forced out of business by a fine it could not pay, its closure would cause “some deleterious effect on agencies around the world.”[335] Further analysis of this agreement is available here. Serco Geografix Ltd. On July 4, 2019, the Southwark Crown Court approved a DPA with Serco Georgrafix Ltd (“SGL”), a wholly owned subsidiary of Serco Group PLC (“Serco” or “Group”), a leading global provider of outsourced services to governments.[336] The DPA resolved charges of fraud and false accounting committed between 2010 and 2013 and marks the fifth DPA entered since the UK introduced DPAs. SGL, a government services company, allegedly misled the UK Ministry of Justice regarding Serco’s profits from a contract for electronic monitoring services.[337] SGL agreed to pay a penalty of £19.2 million (about $24 million) and to reimburse the SFO’s investigation costs of £3.7 million (over $4.6 million).[338] The payments supplement £12.8 million (about $16 million) in compensation that Serco paid to the UK Ministry of Justice in 2013 as part of a £70 million (about $88 million) civil settlement.[339] The penalty was reduced by 50% to account for Serco’s self-reporting and subsequent cooperation. The term of the DPA is three years.[340] During that time, under the terms of the agreement, SGL must cooperate with enforcement and regulatory authorities, report evidence of fraud, and improve, and report annually on, its compliance program.[341] Although not a party to the DPA, Serco similarly agreed to cooperate on an ongoing basis with authorities, report evidence of fraud to the authorities, strengthen its Group-wide compliance functions, and report annually to the SFO on its Group-wide assurance program.[342] In the judgment approving the DPA, Mr. Justice William Davis emphasized that the commitments made by Serco “are a key component of the DPA,” without which “it is very unlikely that the goals of a DPA could have been achieved in the circumstances of this case.”[343] He highlighted that “[t]his is the first occasion on which undertakings of the kind made by Serco Group PLC have been [made] by a parent company in relation to a DPA entered into by one of its subsidiaries.”[344] The right to initiate DPA negotiations rests with the SFO, not the company under investigation. The SFO offered SGL a DPA based on several factors, including SGL’s (1) prompt and voluntary self-disclosure, (2) agreement not to conduct employee interviews, (3) past and future cooperation, (4) lack of recidivism, (5) payment of the financial penalty, and (6) payment of the SFO’s investigation costs.[345] The SFO also considered Serco’s (1) cooperation and compliance commitments, (2) significant remedial efforts, (3) commitment that SGL would not be dissolved for the three-year term, and (4) agreement to implement specific compliance programming.[346] The remedial efforts included (1) company-wide compliance programs, (2) complete turnover in senior management, (3) “numerous forms of internal and external examination, analysis, detailed review, and audits,” and (4) disgorgement and compensation paid to the UK Ministry of Justice in December 2013.[347] Notably, the judgment touched on cooperation and waiver of privilege. At the SFO’s request, Serco and its subsidiaries did “not engage in any internal inquiry by way of interviewing witnesses during the criminal investigation.”[348] Rather, an independent law firm conducted a comprehensive document review and reported its findings to the SFO. The judgment states that Serco provided “[s]ome waiver of privilege” related to accounting materials, and credits Serco’s proactive disclosure of information and developments as “very substantial” cooperation.[349] The SFO has given mixed messages regarding whether the “full cooperation” requirement for DPA eligibility necessitates waiver of privilege. In August 2019, the SFO published a new section of its Operational Guidance entitled “Corporate Co-operation Guidance” with the goal of providing clarity to companies regarding what they can expect if they decide to self-report. Further coverage of the Corporate Co-operation Guidance is available here. The DPA concludes the SFO’s six-year investigations into SGL and other Serco companies. On December 16, 2019 the SFO announced that it had charged two Serco senior executives with fraud and false accounting.[350] Further analysis of the SGL DPA is available here. Tesco Stores Limited January 2019 marked the conclusion of the SFO’s cases against three former directors at Tesco, who were charged with false accounting.[351] As we previously reported in our 2017 Mid-Year Update, Tesco entered into a DPA in April 2017 to resolve allegations that it engaged in financial misreporting and agreed to pay £129 million in penalties, cooperate with the SFO’s investigation, and implement an ongoing compliance program throughout the three-year term of the DPA. In December 2018, the Crown Court at Southwark found that two of the former Tesco directors had no case to answer.[352] At a hearing for the third director in January 2019, the SFO offered no evidence, resulting in an acquittal on all charges.[353] Shortly thereafter, in January 2019, the SFO published the full terms of the Tesco DPA, which was previously unavailable to the public pending the resolution of the individual trials.[354] The published DPA revealed the underlying facts behind the SFO investigation, which centered on charges that Tesco, through its now acquitted three former directors, allowed and encouraged false accounting in order to reach accounting targets. The judgment approving the DPA also revealed that Tesco agreed to a limited waiver of privilege over relevant materials. The inclusion of privilege waivers in recent DPAs suggests that willingness to consider waiver of privilege may be an important consideration for the SFO when determining whether to enter an agreement. In the judgment, the limited waiver of privilege was cited as one piece of evidence of Tesco’s cooperation, in addition to the company’s agreement not to conduct employee interviews, voluntary disclosure of relevant material, provision of mailbox accounts of former employees without filtering contents for privileged or out-of-scope items, and facilitation of evidence collection.[355] Further, the judgment cited significant changes to Tesco’s leadership structure as a factor favoring adoption of the DPA.[356] Additionally, the judgment highlighted a number of “tangible remedial measures,” including simplification of reporting lines, the re-launch of an externally run whistleblowing service, increased compliance headcount, a re-launched Code of Business Conduct, implementation of expensive technology services to support the compliance program, and adoption of a new commercial buying model which reduced the emphasis on back margin, the type of commercial income that the SFO alleged Tesco improperly inflated.[357] In addition to noting Tesco’s leadership changes and cooperation, the judgment also noted that (1) this was Tesco’s first incidence of misconduct, and (2) severe repercussions for Tesco could also risk harm to innocent third parties and the UK supermarket and food industry, thus presenting a public interest factor weighing against prosecution.[358] Canada Quebec engineering company SNC-Lavalin’s efforts to resolve fraud and bribery charges against it through a DPA ended with a guilty plea by the company’s construction division, and resulted along the way in a political scandal reaching the Office of the Prime Minister. SNC-Lavalin was accused of paying approximately 47.7 million Canadian dollars (approximately $36.4 million using current conversion rates) in bribes to Libyan officials between 2001 and 2011.[359] If it had been convicted, the company could have faced a ten-year ban on receiving federal government contracts under Canada’s “integrity regime.”[360] In October 2018, after the federal director of public prosecutions ruled that the case was not suited for a DPA, the company’s market value fell by roughly 2.2 billion Canadian dollars (approximately $1.7 billion).[361] In February 2019, former Canadian attorney general Jody Wilson-Raybould testified to the House of Commons justice committee that she was pressured by Prime Minister Justin Trudeau’s aides to resolve the charges through a DPA.[362] As attorney general, she had the power to overrule the federal director of public prosecutions and direct the prosecution to negotiate a DPA. The former attorney general testified that individuals from the Prime Minister’s Office, the Privy Council Office, and the office of the Minister of Finance engaged in a “consistent and sustained effort” to politically interfere with her exercise of prosecutorial discretion.[363] In March 2019, Canada’s Federal Court rejected SNC-Lavalin’s application for a review of the prosecutor’s decision not to negotiate a DPA.[364] Following a preliminary hearing in May 2019, a Quebec court judge ruled that there was enough evidence against SNC-Lavalin for the trial to move forward.[365] The company issued a press release stating that it will “vigorously defend itself and plead not guilty to the charges.”[366] On December 18, 2019, SNC-Lavalin’s subsidiary SNC-Lavalin Construction Inc. pled guilty and “admitted to paying 127 million Canadian dollars [approximately $97.3 million] in bribes to Libyan officials to secure contracts in that country.”[367] Pursuant to the plea, a fine of 280 million Canadian dollars (approximately $214 million) was imposed.[368] According to a statement by the company, prosecutors have withdrawn all charges against SNC-Lavalin Group Inc. and SNC-Lavalin International Inc., the parent company’s international marketing division.[369] Pursuant to the probation order imposed as part of the construction subsidiary’s plea, the parent company must engage an independent compliance monitor for a period of three years.[370] According to the company, it “does not anticipate that the guilty plea by [its] construction subsidiary . . . will affect the eligibility of SNC-Lavalin Group companies to bid on future projects that are aligned with the SNC-Lavalin Group’s newly announced strategic direction.”[371] If SNC-Lavalin had entered into a DPA, it would have been the first agreement under Canada’s fledgling Remediation Agreement Regime, which took effect in September 2018. Please see our 2017 Year-End and 2018 Mid-Year Updates for additional information regarding the Canadian DPA regime. Brazil Braskem SA At the end of May 2019, Braskem SA (“Braskem”), the largest petrochemical company in Brazil and Latin America, announced that it agreed to pay 2.87 billion reais (approximately $745.25 million) by 2025 in a leniency deal to settle corruption charges related to Brazil’s “Operation Car Wash.”  The agreement was the first of four leniency deals reached in 2019 related to “Operation Car Wash.” The “Operation Car Wash” investigation has been covered in detail in our 2016, 2017, and 2018 Year-End FCPA updates.[372] The other agreements are described below. Brazil’s Office of the Comptroller-General (“CGU”) and Office of the General Counsel of the Federal Government (“AGU”) have the power to enter into leniency agreements with corporate entities to resolve civil liability under the Clean Companies Act.[373] To be eligible for a leniency agreement, similar to NPAs in the United States, companies must admit liability, cease engaging in illicit conduct, and effectively cooperate with the investigation and any administrative proceedings.[374] Companies subject to a leniency agreement must implement a compliance program, submit to an external audit, and pay applicable fines and damages.[375] The agreement covers the same conduct underlying the global settlement between Braskem and the Brazilian Federal Prosecution Office, the DOJ, the SEC, and the Swiss Office of the Attorney General executed in December 2016.[376] Camargo Corrêa S.A. At the end of July 2019, the CGU and AGU announced that engineering group Camargo Corrêa S.A. (“Camargo”) agreed to pay 1.396 billion reais (approximately $344 million) by January 2038 to settle allegations that the company entered into fraudulent construction contracts involving public resources and was unjustly enriched as a result.[377] The settlement amount includes 905.9 million reais (approximately $223 million) received from the alleged fraud, 330.3 million reais (approximately $81.4 million) totaling the value of the alleged bribes, a 36.2 million reais (approximately $9 million) administrative fine, and a 123.6 million reais (approximately $30.5 million) civil sanction under Brazil’s administrative misconduct law.[378] The agreement also obligates Camargo to improve its compliance program, with a focus on preventing improper conduct and prioritizing ethics and transparency in the conduct of its business.[379] The agreement is not the first settlement Camargo and Brazilian authorities have reached related to “Operation Car Wash.” In January 2017, Camargo sought plea agreements for 40 of its executives,[380] and in August 2015, it agreed to pay 700 million reais (approximately $173 million) to Brazilian state-owned companies in damages related to bribery and price-fixing practices.[381] Engevix Group On November 12, 2019, the CGU and AGU announced a 516.3 million reais (approximately $127 million) leniency agreement with Brazilian construction company Engevix Group (“Engevix”), now known as Nova Participações, to settle charges related to bribes the company allegedly paid to win construction contracts.[382] Engevix cooperated with “Operation Car Wash” by providing evidence of conduct by over 100 individuals and entities.[383] Under the agreement, Engevix will pay the value of the alleged bribes, which totaled 315.84 million reais (approximately $78 million); 105 million reais (approximately $26 million) in disgorgement; and 95.44 million reais (approximately $23 million) in administrative and civil fines.[384] The payments will be made in installments until 2046.[385] The agreement also requires Engevix to improve its compliance program by preventing improper conduct and promoting ethics and transparency throughout the company.[386] OAS S.A. Two days after CGU and AGU announced the agreement with Engevix, they announced another leniency agreement related to “Operation Car Wash.” Construction company OAS S.A. (“OAS”) agreed to pay 1.92 billion reais (approximately $473 million) by 2047 to settle bribery charges.[387] The settlement is the third largest of its kind and the ninth leniency agreement related to “Operation Car Wash.” OAS cooperated with the investigation by providing evidence of conduct by more than 304 individuals and 184 entities.[388] Under the settlement agreement, OAS must pay 720.14 million reais (approximately $177 million), the amount of the alleged bribes; 800.37 million reais (approximately $197 million) in disgorgement; and 404.79 million reais (approximately $99 million) in administrative and civil fines.[389] The agreement also obligates OAS to improve its compliance program, including by implementing an ISO 37.001 certification.[390] France On June 26, 2019, the French National Financial Prosecutor (“PRF”) and the French Anti-Corruption Agency (“AFA”) published guidelines (the “PRF-AFA Guidelines”)[391] on the corporate settlement mechanism in France known as a Judicial Public Interest Agreement (convention judiciaire d’intérêt public, or “CJIP”). 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) (“Sapin II”)[392] created the CJIP procedure, which gives prosecutors the power to offer a company suspected of committing a covered offense the opportunity to settle the case without formal prosecution.[393] Prosecutors may offer a CJIP to a company suspected of having committed corruption, bribery, tax fraud or laundering of the proceeds of tax fraud.[394] The implementation of Sapin II and the first CJIPs entered into under the law were covered in our 2016 and 2017 Year-End Updates and 2018 Mid-Year Update. The PRF-AFA Guidelines are the first joint guidelines issued by the PRF and AFA, and they are the first guidelines directed at compliance officers, companies, and individuals subject to enforcement actions. Previously, on January 31, 2018 and March 21, 2019, the French Ministry of Justice issued guidance to prosecutors regarding the CJIP process.[395] The stated purpose of the PRF-AFA Guidelines is to encourage corporate wrongdoers to cooperate with judicial authorities by providing an element of predictability to the CJIP process.[396] The guidelines outline the facts and circumstances relevant to the PRF in considering whether to enter into CJIPs in cases involving allegations of bribery or corruption, as well as guidance on what terms to apply in any agreements that are negotiated. The guidelines do not extend to other crimes like tax evasion. The PRF-AFA Guidelines cover (1) prerequisites to enter a CJIP;[397] (2) determination of fines;[398] (3) compliance program obligations;[399] (4) international coordination;[400] and (5) compliance with the French Blocking Statue (discussed further below).[401] Prerequisites for Entering a CJIP The PRF-AFA Guidelines clarify that a company may enter into informal discussions with a prosecutor to express a willingness to enter a CJIP.[402] Although in practice companies have done so since the implementation of Sapin II, under the law itself only prosecutors were given authority to initiate a CJIP. Additional prerequisites for a CJIP, as outlined by the PRF-AFA Guidelines, include the absence of prior sanctions for corruption or bribery; the implementation of an efficient compliance program, if one is required by law;[403] cooperation in the criminal investigation; and implementation of an internal investigation.[404] Voluntary and timely self-reporting is not required, but it is looked upon favorably when prosecutors are considering a CJIP and determining the amount of the financial penalty.[405] An initiative by the company to compensate alleged victims even before the proposal to enter into a CJIP is also considered as a positive factor.[406] The PRF-AFA Guidelines discuss the necessity, conduct, and conditions of internal investigations in detail and note that a company must submit a report to the prosecutor, describing the investigation’s findings in detail.[407] The report must identify relevant witnesses and provide reports of the interviews, as well as the documents on which those reports rely. More generally, a company that has conducted an internal investigation must produce the relevant documents in its possession. The PRF-AFA Guidelines acknowledge that relevant documents may be subject to attorney-client privilege if the investigation is conducted by a lawyer.[408] However, the Guidelines note that not all evidence appearing in an investigative report is necessarily privileged, and a client may nevertheless choose to waive the privilege. If a company refuses to disclose certain documents, prosecutors will determine if the refusal is justified in light of the applicable rules. If there is a disagreement between the prosecutor and company regarding privilege, the prosecutor may consider the refusal to disclose the information at issue as a lack of cooperation. Determination of Fines Under Sapin II, the amount of the fine imposed under a CJIP is proportionate to the benefits derived from the misconduct, up to a limit of 30% of the legal entity’s average annual turnover calculated over the previous three years.[409] The PRF-AFA Guidelines state that where accounting data is available, the financial benefit should be calculated on the basis of the profit generated from performance of the relevant contracts, less the expenses directly related to the contracts.[410] The guidelines enumerate several categories of costs that are excluded from these deductions, including: overheads “not exclusively related” to the relevant project; research and development costs; depreciation and amortization provisions; and the amounts of the alleged bribes.[411] The PRF-AFA Guidelines state that a company subject to a CJIP procedure should communicate its cost accounting, as well as all forecast documents relating to the relevant contracts, to allow prosecutors to assess the expected benefits of the contracts.[412] The PRF-AFA Guidelines also enumerate the aggravating and mitigating factors taken into account by prosecutors when determining fines. The aggravating factors are: corruption of a public official; failure to implement an anti-corruption compliance program under Sapin II, if statutorily required; past convictions or sanctions in France or abroad for corruption-related offenses; use of company resources to conceal the corruption; and repeated or systemic corruption.[413] The mitigating factors are: self-reporting prior to the commencement of a criminal investigation; “excellent” cooperation and a “complete and effective” internal investigation; a preexisting, efficient compliance program and/or the implementation of corrective measures; and voluntary implementation of a compliance program, in the absence of a legal obligation to do so.[414] Compliance Program Obligations In addition to a financial penalty, the CJIP may require a company to implement a compliance program. The PRF determines whether to impose such an obligation, after consulting with the AFA.[415] The AFA is then responsible for supervising the implementation of the program. An appendix to the PRF-AFA Guidelines outlines the five steps of AFA supervision, which are: (1) an initial audit; (2) formulation of an action plan on the basis of the findings of the initial audit; (3) validation of the action plan; (4) validation of the main tools of the company’s anti-corruption program, and the performance of targeted audits; and (5) a final audit.[416] Together, the estimated durations of all five stages total just over three years.[417] The AFA must update the PRF at least once a year on the status of implementation of the compliance program and any difficulties encountered by AFA or the company.[418] A company’s failure to implement the program and pay the associated expert monitoring fees may be grounds for rescission of a CJIP.[419] International Coordination The CJIP allows the PRF to coordinate its response with the prosecution authorities of different countries dealing with the same offenses.[420] The determination of the financial penalty may be discussed with foreign prosecuting authorities in order to assess the overall fines and penalties paid by a company. If a compliance program is required under a CJIP, the PRF-AFA Guidelines acknowledge that it is preferable to appoint one monitoring body. If the company facing charges has its registered office or operating base in France or conducts all or part of its business activities in France, the French Code of Criminal Procedure requires that the AFA be the monitoring body.[421] Compliance with French Blocking Statute Article 1 of Law No. 68-678 of July 26, 1968 (the “French Blocking Statute”) makes it a criminal offense, under certain conditions, to communicate to foreign public authorities information which may harm the economic interests of France.[422] When a French company is subject to an anti-corruption compliance program ordered by a foreign authority, the AFA is responsible for ensuring that the information shared with the foreign authority complies with the French Blocking Statute.[423] The PRF-AFA Guidelines state that when a company suspects or detects the commission of a transnational incident of corruption during the course of implementing a compliance program imposed upon it by a foreign authority, the company must inform the AFA of the incident before reporting it to the foreign authority.[424] The AFA will assess whether reporting the incident to a foreign authority would violate the French Blocking Statute. The AFA will update the PRF regarding the potential disclosure to the foreign authority to allow the PRF to assess whether the detected offense falls within its jurisdiction.[425] ____________________________ APPENDIX: 2019 Non-Prosecution and Deferred Prosecution Agreements The chart below summarizes the agreements concluded by DOJ in 2019.  The SEC has not entered into any NPAs or DPAs in 2019. The complete text of each publicly available agreement is hyperlinked in the chart. The figures for “Monetary Recoveries” 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 2019 Company Agency Alleged Violation Type Monetary Recoveries Monitoring & Reporting Term of DPA/ NPA (months) Avanir Pharmaceuticals N.D. Ga. Anti-Kickback Statute DPA $115,874,895 No 36 Baton Holdings LLC DOJ Fraud Fraud (Accounting) NPA $43,540,000 Yes 36 Celadon Group, Inc. DOJ Fraud; S.D. Ind. Fraud (Securities) DPA $42,245,302 Yes 60 ContextMedia Health LLC DOJ Fraud; N.D. Ill. Fraud (Wire) NPA $70,000,000 Yes 36 Dannenbaum Engineering Corp. DOJ Public Integrity; S.D. Tex. FECA DPA $1,600,000 No 36 Fresenius Medical Care AG & Co. KGaA DOJ Fraud; D. Mass. FCPA NPA $231,715,273 Yes 36 Heritage Pharmaceuticals Inc. DOJ Antitrust Antitrust DPA $7,325,000  No 36 HSBC Private Bank (Suisse) SA DOJ Tax; S.D. Fla. Tax Evasion; Fraud (Tax) DPA $192,350,000 No 36 Hydro Extrusion USA, LLC, f/k/a Sapa Extrusions, Inc. DOJ Fraud; E.D. Va. Fraud (Mail) DPA $46,945,100 Yes 36 Insys Therapeutics, Inc. D. Mass. Fraud (Mail) DPA $225,000,000 No 60 LLB Verwaltung (Switzerland) AG DOJ Tax Fraud (Tax) NPA $10,680,555 No 48 Lumber Liquidators Holdings, Inc. E.D. Va.; DOJ Fraud Fraud (Securities) DPA $33,000,000 Yes 36 Merrill Lynch Commodities, Inc. DOJ Fraud Fraud (Commodities) NPA $25,000,000 Yes 36 Microsoft Magyarország Számítástechnikai Szolgáltató és Kereskdelmi Kft. (Microsoft Hungary) DOJ Fraud; S.D.N.Y. FCPA NPA $25,316,946 Yes 36 Mizrahi Tefahot Bank Ltd.; United Mizrahi Bank (Switzerland) Ltd.; Mizrahi Tefahot Trust Company Ltd. DOJ Tax; C.D. Cal. Fraud (Tax) DPA $195,000,000 No 24 Mobile TeleSystems PJSC DOJ Fraud; S.D.N.Y. FCPA DPA $850,000,000 Yes 36 Monsanto Company C.D. Cal. Environmental (RCRA) DPA $10,200,000 Yes 24 Reckitt Benckiser Group plc DOJ Consumer Protection; W.D. Va. Fraud (Health Care; Mail; Wire) NPA $1,400,000,000 No 36 Republic Metals Corporation S.D. Fla. AML NPA $0 No 36 Rick Weaver Buick GMC, Inc. W.D. Pa. Fraud (Wire) DPA $543,794 Yes 36 Rising Pharmaceuticals, Inc. DOJ Antitrust Antitrust DPA $3,043,207 No 36 Rochester Drug Co-operative, Inc. S.D.N.Y. Narcotics (conspiracy) DPA $20,000,000 Yes 60 Samsung Heavy Industries DOJ Fraud; E.D. Va. FCPA DPA $75,481,600 Yes 36 Standard Chartered Bank DOJ MLARS; D.D.C. Sanctions DPA $1,012,210,160 Yes 24 TechnipFMC plc DOJ Fraud; E.D.N.Y. FCPA DPA $296,184,000 Yes 36 Telefonaktiebolaget LM Ericsson DOJ Fraud; S.D.N.Y. FCPA DPA $1,060,570,432 Yes 36 Tower Research Capital LLC DOJ Fraud; S.D. Tex. Fraud (Commodities) DPA $67,493,849 Yes 36 Unicredit Bank Austria AG DOJ MLARS; D.D.C. Sanctions NPA $1,378,728,678 Yes 36 Unitrans International Inc. DOJ Fraud; E.D. Va. Obstruction of Justice NPA $45,000,000 No Unknown Walmart Inc. DOJ Fraud; E.D.Va. FCPA NPA $282,646,421 Yes 36 Zurich International Life Limited and Zurich Life Insurance Company Limited DOJ (Tax) Fraud (Tax) NPA $5,115,000 No 48   [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 532 agreements initiated by the DOJ, and 10 initiated by the U.S. Securities and Exchange Commission (“SEC”). [2]      Press Release, Elizabeth Warren, Senator Warren Unveils Bill to Expand Criminal Liability to Negligent Executives of Giant Corporations (April 3, 2019), https://www.warren.senate.gov/newsroom/press-releases/senator-warren-unveils-bill-to-expand-criminal-liability-to-negligent-executives-of-giant-corporations. [3]      Corporate Executive Accountability Act, S. 1010, 116th Cong. § 1 (2019), https://www.congress.gov/bill/116th-congress/senate-bill/1010. [4]      Senator Elizabeth Warren, The Unfinished Business of Financial Reform, Remarks at the Levy Institute’s 24th Annual Hyman P. Minsky Conference, 4 (Apr. 15, 2015), http://www.warren.senate.gov/files/documents/Unfinished_Business_20150415.pdf. [5]      Elizabeth Warren, Summary of the Corporate Executive Accountability Act (April 3, 2019), https://www.warren.senate.gov/imo/media/doc/2019.4.1%20Corporate%20Executive%20Accountability%20Act%20Summary.pdf. [6]      Id. [7]      Ending Too Big to Jail Act, S. 1005, 116th Cong. § 1 (2019), https://www.govtrack.us/congress/bills/116/s1005. [8]      CFTC Enforcement Manual, §§ 7.2.2-.3. [9]      Id. § 7.2.2; SEC Enforcement Manual, § 6.2.2. [10]     SEC Enforcement Manual, § 6.2.2. [11]     CFTC Enforcement Manual, § 7.2.3; SEC Enforcement Manual, § 6.2.3. [12]     Id. § 7.1.2. [13]     The aggravating circumstances that the CFTC considers align with several of DOJ’s Filip Factors: executive or senior management involvement, pervasive misconduct within the company, and prior history of misconduct. [14]     U.S. Dep’t of Justice, Corporate Enforcement Policy (November 2017 Version) [hereinafter “2017 FCPA Policy”]. [15]     U.S. Dep’t of Justice, Corporate Enforcement Policy (November 2019 Update), https://www.justice.gov/jm/jm-9-47000-foreign-corrupt-practices-act-1977 [hereinafter “FCPA Policy”]. [16]     Id. [17]     Id. (emphases added). [18]     Rod J. Rosenstein, Deputy Attorney General, “Deputy Attorney General Rod J. Rosenstein Delivers Remarks at the American Conference Institute’s 35th International Conference on the Foreign Corrupt Practices Act” (Nov. 29, 2018), https://www.justice.gov/opa/speech/deputy-attorney-general-rod-j-rosenstein-delivers-remarks-american-conference-institute-0. [19]     FCPA Policy, supra note 15, n.1. [20]     2017 FCPA Policy, supra note 15. [21]     FCPA Policy, supra note 15. [22]     2017 FCPA Policy, supra note 15. [23]     FCPA Policy, supra note 15 (emphasis added). [24]     Id. at n.2. [25]     U.S. Dep’t of Justice, Export Control and Sanctions Enforcement Policy for Business Organizations (December 2019 Update), https://www.justice.gov/nsd/ces_vsd_policy_2019/download [hereinafter “NSD Policy”]. [26]     The NSD Policy eliminated the original footnote 3, which stated that “[b]ecause financial institutions often have unique reporting obligations under their applicable statutory and regulatory regimes, this Guidance does not apply to financial institutions.” [27]     18 U.S.C. § 3571(d). [28]     NSD Policy, supra note 25 at 2. [29]     Id. at 2–3. [30]     Id. at 3 n.7. [31]     Id. at 3. [32]     Id. at 3 n.8. [33]     Id. at 4. [34]     Id. at 4 n.9. [35]     Id. at 5. [36]     Id. at 6. [37]     Press Release, U.S. Dep’t of Justice, Pharmaceutical Company Targeting Elderly Victims Admits to Paying Kickbacks, Resolves Related False Claims Act Violations (Sept. 26, 2019), https://www.justice.gov/usao-ndga/pr/pharmaceutical-company-targeting-elderly-victims-admits-paying-kickbacks-resolves [hereinafter “Avanir Press Release”]. [38]     Id. [39]     Deferred Prosecution Agreement, United States v. Avanir Pharmaceuticals, Inc., Case No. 1:19-CR-00369, (October 2, 2019) [hereinafter “Avanir DPA”]. [40]     Avanir DPA at 9. [41]     Avanir DPA at 4. [42]     Id. [43]     Avanir Press Release; Corporate Integrity Agreement between the Office of Inspector General of the Department of Health and Human Services and Avanir Pharmaceuticals, Inc. (Sept. 25, 2019), https://oig.hhs.gov/fraud/cia/agreements/Avanir_Pharmaceuticals_Inc_09252019.pdf [hereinafter “Avanir CIA”]. [44]     Avanir Press Release. [45]     Id. [46]     Id. [47]     Avanir Press Release; Avanir CIA at 12. [48]     Non-Prosecution Agreement, Bankrate Criminal Investigation (March 5, 2019), https://www.gibsondunn.com/wp-content/uploads/2019/07/Baton-Holdings-NPA.pdf [hereinafter “Bankrate NPA”]. [49]     Bankrate NPA at 1-2. [50]     Id. [51]     Id. [52]     Id. at 3. [53]     Id. at 5. [54]     Id. at 3-4. [55]     Press Release, U.S. Dep’t of Justice, Celadon Group, Inc. Enters into Corporate Resolution for Securities Fraud and Agrees to Pay $42.2 Million in Restitution (April 25, 2019), https://www.justice.gov/opa/pr/celadon-group-inc-enters-corporate-resolution-securities-fraud-and-agrees-pay-422-million [hereinafter “Celadon Press Release”]. [56]     Deferred Prosecution Agreement, United States v. Celadon Group, Inc., No. 19-CR-0141 (April 25, 2019), at B-1 [hereinafter “Celadon DPA”]. [57]     Id. at 4. [58]     Celadon DPA, supra note 56 at 7. [59]     Id. at 3. [60]     Id. at 4. [61]     Petition to Enter Plea of Guilty and Plea Agreement, United States of America v. Danny Ray Williams, 1:19-cr-00138, ¶ 1 (Apr. 22, 2019). [62]     Id. at 8. [63]     Press Release, Sec. & Exch. Comm’n, SEC Charges Trucking Executives With Accounting Fraud (Dec. 5, 2019), https://www.sec.gov/news/press-release/2019-253. [64]     Vi Ryckaret, Indiana Trucking Company Files for Bankruptcy, Cutting 4,000 Jobs After Two Executives Accused of Fraud, South Bend Tribune (Dec. 9, 2019), https://www.southbendtribune.com/news/local/celadon-group-files-for-bankruptcy-cutting-jobs-after-two-executives/article_992a39c9-0b8d-58a2-a4f9-b47ac2cd17a7.html. [65]     Press Release, U.S. Dep’t of Justice, Outcome Health Agrees to Pay $70 Million to Resolve Fraud Investigation (Oct. 30, 2019), https://www.justice.gov/opa/pr/outcome-health-agrees-pay-70-million-resolve-fraud-investigation [hereinafter “ContextMedia Press Release”]. [66]     Id. [67]     Non-Prosecution Agreement, ContextMedia LLC (Oct. 17, 2019), Attach. A at 2 [hereinafter “ContextMedia NPA”]; ContextMedia Press Release. [68]     ContextMedia Press Release. [69]     Id. [70]     ContextMedia NPA at 2-3. [71]     Id. at 3. [72]     Id. at 4. [73]     ContextMedia Press Release. [74]     Press Release, U.S. Dep’t of Justice, Houston Engineering Corporation Enters into Corporate Resolution and Agrees to Pay $1.6 Million Fine (Nov. 22, 2019), https://www.justice.gov/opa/pr/houston-engineering-corporation-enters-corporate-resolution-and-agrees-pay-16-million-fine [hereinafter “DEC Press Release”]. [75]     Deferred Prosecution Agreement, United States v. Dannenbaum Engineering Corporation & Engineering Holdings Corporation (S.D. Tex Nov. 22, 2019) [hereinafter “DEC DPA”]. [76]     DEC Press Release. [77]     DEC DPA at 4-7, 10. [78]     Press Release, U.S. Dep’t of Justice, Ericsson Agrees to Pay More than $1 Billion To Resolve Foreign Corrupt Practices Act Case (Dec. 6, 2019), https://www.justice.gov/usao-sdny/pr/ericsson-agrees-pay-more-1-billion-resolve-foreign-corrupt-practices-act-case [hereinafter “Ericsson Press Release”]; Ericsson Egypt Ltd. Guilty Plea (Nov. 26, 2019). [79]     Telefonaktiebolaget LM Ericsson Deferred Prosecution Agreement ¶ 4, ¶ 116 [hereinafter “Ericsson DPA”]; Ericsson Press Release, supra note 78. [80]     Ericsson DPA, supra note 79, ¶ 7. [81]     Id. ¶ 4. [82]     Id. ¶ 4, ¶ 10. [83]     Ericsson Press Release, supra note 78. [84]     Ericsson DPA ¶ 4(d). [85]     Id. ¶ 4(c). [86]     Press Release, U.S. Dep’t of Justice, Fresenius Medical Care Agrees to Pay $231 Million in Criminal Penalties and Disgorgement to Resolve Foreign Corrupt Practices Act Charges (April 25, 2019), https://www.justice.gov/opa/pr/fresenius-medical-care-agrees-pay-231-million-criminal-penalties-and-disgorgement-resolve [hereinafter “Fesenius Press Release”]. [87]     Id. [88]     Non-Prosecution Agreement, Fresenius Medical Care AG & Co. KGaA, No. 19-CR-0141 (February 25, 2019), at 1 [hereinafter “Fresenius NPA”]. [89]     Id. [90]     Id. at 2. [91]     Id. at 6. [92]     Id. at 3. [93]     Id. at 2. [94]     Id. at 3. [95]     Id. [96]     Speech, Deputy Assistant Attorney General Matt Miner Delivers Remarks at The American Bar Association, Criminal Justice Section Third Global White Collar Crime Institute Conference (June 27, 2019) https://www.justice.gov/opa/speech/deputy-assistant-attorney-general-matt-miner-delivers-remarks-american-bar-association. [97]             Id. [98]     Ian P. Johnson, German Prosecutors Probe Dialysis Firm Fresenius, Deutsche Welle (Oct. 21. 2019), https://www.dw.com/en/german-prosecutors-probe-dialysis-firm-fresenius/a-50922473. [99]     Deferred Prosecution Agreement with Heritage Pharmaceuticals, Inc. (June 11, 2019) [hereinafter “Heritage DPA”]. [100]   Press Release, U.S. Dep’t of Justice, Pharmaceutical Company Admits to Price Fixing in Violation of Antitrust Law, Resolves Related False Claims Act Violations (May 31, 2019), https://www.justice.gov/opa/pr/pharmaceutical-company-admits-price-fixing-violation-antitrust-law-resolves-related-false [hereinafter “Heritage Press Release”]. [101]   Heritage DPA, supra note 99, at 4–7. [102]   Id. at 3. [103]   Heritage Press Release, supra note 100. [104]   Heritage DPA, supra note 99, at 4. [105]   Heritage Press Release, supra note 100. [106]   Press Release, U.S. Dep’t of Justice, Justice Department Announces Deferred Prosecution Agreement with HSBC Private Bank (Suisse) SA (Dec. 10, 2019), https://www.justice.gov/opa/pr/justice-department-announces-deferred-prosecution-agreement-hsbc-private-bank-suisse-sa. [107]   Id. [108]   Deferred Prosecution Agreement, United States v. HSBC Private Bank (Suisse) SA, No. 19-CR-60359 (Dec. 10, 2019), at 1 [hereinafter “HSBC Switzerland DPA”]. [109]   Information, United States v. HSBC Private Bank (Suisse) SA, No. 19-CR-60359 (Dec. 10, 2019), at 3. [110]   Id. at 4–5. [111]   Id. at 5–6. [112]   HSBC Switzerland DPA, supra note 108, at 2–3. [113]   Id. at 3. [114]   Id. [115]   Id. at 5–7. [116]   Press Release, U.S. Dep’t of Justice, Aluminum Extrusion Manufacturer Agrees to Pay Over $46 Million for Defrauding Customers, Including the United States, in Connection with Test Result Falsification Scheme (April 23, 2019), https://www.justice.gov/opa/pr/aluminum-extrusion-manufacturer-agrees-pay-over-46-million-defrauding-customers-including [hereinafter “Hydro Extrusion Press Release”]. [117]   Deferred Prosecution Agreement, United States v. Hydro Extrusion USA, LLC, No. 19-CR-124 (E.D. Va. April 23, 2019) [hereinafter “Hydro Extrusion DPA”]. [118]   Hydro Extrusion Press Release, supra note 116. [119]   Id. [120]   Hydro Extrusion DPA, supra note 117, at 4. [121]   Id. [122]   Hydro Extrusion Press Release, supra note 116. [123]           Hydro Extrusion DPA, supra note 117, at 3. [124]   Hydro Extrusion DPA, supra note 117, at 5-6. [125]   Hydro Extrusion DPA, supra note 117, at 4. [126]           Press Release, U.S. Dep’t of Justice, Opioid Manufacturer Insys Therapeutics Agrees to Enter $225 Million Global Resolution of Criminal and Civil Investigations (June 5, 2019), https://www.justice.gov/opa/pr/opioid-manufacturer-insys-therapeutics-agrees-enter-225-million-global-resolution-criminal [hereinafter “Insys Press Release”]. [127]   Id. [128]   Deferred Prosecution Agreement, United States v. Insys Therapeutics, Inc., No. 19-CR-10191 (D. Mass. June 5, 2019), at 3 [hereinafter “Insys DPA”]. [129]   Id. [130]   See Insys Press Release, supra note 126. [131]   Insys DPA at 6, supra note 128. [132]   See Insys Press Release, supra note 126. [133]   Insys DPA, supra note 128, at 7-8. [134]   Corporate Integrity Agreement, Insys Therapeutics, Inc. (June 5, 2019) at 4-18 [hereinafter “Insys Corporate Integrity Agreement”]. [135]   Id. at 20, App. C. [136]   Id. at 26-36. [137]   Id. at 50. [138]   Settlement Agreement, Insys Therapeutics, Inc. (June 5, 2019), ¶ 1 [hereinafter “Insys Settlement Agreement”]. [139]   Insys Corporate Integrity Agreement at 49-52; Insys Settlement Agreement, supra note 138, ¶¶ 17-19. [140]   Nate Raymond, Opioid Manufacturer Insys Files for Bankruptcy after Kickback Probe, Reuters (June 10, 2019), https://www.reuters.com/article/us-insys-opioids-bankruptcy/opioid-manufacturer-insys-files-for-bankruptcy-after-kickback-probe-idUSKCN1TB15Q. [141]   Vince Sullivan, Insys Files New Ch. 11 Plan Reflecting Deal with DOJ, States, Law360 (Dec. 2, 2019), https://www.law360.com/articles/1224485/insys-files-new-ch-11-plan-reflecting-deal-with-doj-states. [142]   Press Release, U.S. Dep’t of Justice, Justice Department Announces Resolution with LLB Verwaltung (Switzerland) AG (Aug. 5, 2019), https://www.justice.gov/opa/pr/justice-department-announces-resolution-llb-verwaltung-switzerland-ag [hereinafter “LLB-Switzerland Press Release”]. [143]   Non-Prosecution Agreement, LLB-Verwaltung (Switzerland) AG, Exhibit A: Statement of Facts, (July 31, 2019), ¶ 21. [144]   LLB-Switzerland Press Release, supra note 142. [145]   Id. [146]   Non-Prosecution Agreement, LLB-Verwaltung (Switzerland) AG (July 31 2019), at 2. [147]   LLB-Switzerland Press Release, supra note 142. [148]   Id. [149]   Press Release, U.S. Dep’t of Justice, Lumber Liquidators Enters into Corporate Resolution for Securities Fraud and Agrees to Pay $33 Million Penalty (Mar. 12, 2019), https://www.justice.gov/opa/pr/lumber-liquidators-enters-corporate-resolution-securities-fraud-and-agrees-pay-33-million [hereinafter “Lumber Liquidators Press Release”]. [150]   Id. [151]   Deferred Prosecution Agreement, United States v. Lumber Liquidators Holdings Inc., 19-CR-52 (E.D. Va. Mar. 12, 2019), at 33-34, 39 [hereinafter “Lumber Liquidators DPA”]. [152]   Id. at 39. [153]   Lumber Liquidators Press Release, supra note 149. [154]   Lumber Liquidators DPA, supra note 151, at 4. [155]   Press Release, Sec. & Exch. Comm’n, SEC Charges Lumber Liquidators with Fraud (Mar. 12, 2019), https://www.sec.gov/news/press-release/2019-29. [156]   Non-Prosecution Agreement with Merrill Lynch Commodities, Inc. (June 25, 2019) at 1–2 [hereinafter “Merrill Lynch NPA”]. [157]   Id. at 7. [158]   Merrill Lynch NPA, supra note 156, Attachment A, at 4. [159]   Id. at 4-7. [160]   Id. at 4. [161] Id. at 4–5. [162]   Id. at 1. [163]   Id. at 2. [164]   Press Release, U.S. Dep’t of Justice, Merrill Lynch Commodities Inc. Enters into Corporate Resolution and Agrees to Pay $25 Million in Connection with Deceptive Trading Practices Executed on U.S. Commodities Markets (June 25, 2019), https://www.justice.gov/opa/pr/merrill-lynch-commodities-inc-enters-corporate-resolution-and-agrees-pay-25-million [hereinafter “Merrill Lynch Press Release”]. [165]   Id. [166]   Id. [167]   See United States v. Bases, No. 18-CR-48 (N.D. Ill.). [168]   Press Release, U.S. Dep’t of Justice, Hungary Subsidiary of Microsoft Corporation Agrees to Pay $8.7 Million in Criminal Penalties to Resolve Foreign Bribery Case (July 22, 2019), https://www.justice.gov/opa/pr/hungary-subsidiary-microsoft-corporation-agrees-pay-87-million-criminal-penalties-resolve [hereinafter Microsoft Hungary Press Release. [169]   Id. [170]   Id. [171]   Non-Prosecution Agreement, Microsoft Magyarország Számítástechnikai Szolgáltató és Kereskedelmi Kft. (Jul 22, 2019), at 2-3 [hereinafter MS Hungary NPA]. [172]   Id. at 5. [173]   Press Release, U.S. Dep’t of Justice, Mizrahi-Tefahot Bank LTD. Admits Its Employees Helped U.S.Taxpayers Conceal Income and Assets (Mar. 12, 2019), https://www.justice.gov/opa/pr/mizrahi-tefahot-bank-ltd-admits-its-employees-helped-ustaxpayers-conceal-income-and-assets. [174]   Deferred Prosecution Agreement, Mizrahi-Tefahot Bank LTD., United Mizarhi Bank (Switzerland) LTD., Mizrahi Tefahot Trust Company LTD. (Mar. 12, 2019) at 3, 6. [175]   Id. at 5. [176]   Id. at 6. [177]   Id. at 14-15. [178]   Id. at 10-11. [179]   Press Release, U.S. Dep’t of Justice, Mobile Telesystems Pjsc and Its Uzbek Subsidiary Enter into Resolutions of $850 Million with the Department of Justice for Paying Bribes in Uzbekistan (Mar. 7, 2019), https://www.justice.gov/opa/pr/mobile-telesystems-pjsc-and-its-uzbek-subsidiary-enter-resolutions-850-million-department. [180]   Id. [181]   Id. [182]   See id.; Press Release, U.S. Sec. & Exch. Comm’n, Mobile TeleSystems Settles FCPA Violations (Mar. 6, 2019), https://www.sec.gov/news/press-release/2019-27. The combined total monetary penalty amounted to $950 million, of which DOJ credited $100 million in forfeiture extracted by the SEC. [183]   Id. [184]   Press Release, U.S. Attorney’s Office, Southern District of New York, Former Uzbek Government Official and Uzbek Telecommunications Executive Charged in Bribery and Money Laundering Scheme Involving the Payment of Nearly $1 Billion in Bribes (Mar. 7, 2019), https://www.justice.gov/usao-sdny/pr/former-uzbek-government-official-and-uzbek-telecommunications-executive-charged-bribery. [185]   See Justice Manual § 9-28.700(A) (requiring that a company seeking cooperation credit “identify all individuals substantially involved in or responsible for the misconduct at issue” (emphasis added)). [186]   Two larger settlements in 2019 both imposed self-reporting obligations. See SCB DPA ¶ 16; UniCredit NPA at Attach. D. [187]   Deferred Prosecution Agreement, United States v. Mobile TeleSystems PJSC, (Feb. 22, 2019) ¶ 4(e) [hereinafter “Mobile TeleSystems DPA”]. [188]   See Press Release, U.S. Dep’t of Justice, VimpelCom Limited and Unitel LLC Enter into Global Foreign Bribery Resolution of More than $795 Million; United States Seeks $850 Million Forfeiture in Corrupt Proceeds of Bribery Scheme (Feb. 18, 2016), https://www.justice.gov/opa/pr/vimpelcom-limited-and-unitel-llc-enter-global-foreign-bribery-resolution-more-795-million. [189]   See Mobile TeleSystems DPA, supra note 187, ¶¶ 4(k), 7. [190]   Id. ¶¶ 4(a)-(c). [191]   See id. ¶ 7(b). [192]   Id. ¶ 4(j). [193]   See U.S. Sentencing Guidelines [“USSG”] § 2C1.1(d)(1)(A) (2018) (requiring that the base fine under § 8C2.4 be calculated based on “the greatest of: (A) the value of the unlawful payment; (B) the value of the benefit received or to be received in return for the unlawful payment; or (C) the consequential damages resulting from the unlawful payment”). [194]   See Mobile TeleSystems DPA, supra note 187, ¶ 7(c); USSG 8C2.4. [195]   According to DOJ, the U.S. Attorney’s Office for the District of Hawaii was recused from the investigation that led to the settlement. [196]   Press Release, U.S. Dep’t of Justice, Monsanto Agrees to Plead Guilty to Illegally Spraying Banned Pesticide at Maui Facility (Nov. 21, 2019), https://www.justice.gov/usao-cdca/pr/monsanto-agrees-plead-guilty-illegally-spraying-banned-pesticide-maui-facility [hereinafter “Monsanto Press Release”]. [197]   Id. [198]   Id. [199]   Deferred Prosecution Agreement, United States v. Monsanto Company, No. 1:19-CR-00162 (D. Haw. Nov. 21, 2019), at 6 [hereinafter “Monsanto DPA”]; Exhibit B – Factual Basis, United States v. Monsanto Company, 19-CR-00162 (D. Haw, Nov. 21, 2019) [hereinafter “Monsanto Exhibit B Factual Basis”]. [200]   Id. at 2. [201]   Id. at 2-4. [202]   Monsanto Press Release, supra note 196. [203]   Exhibit C – Conditions of Probation, United States v. Monsanto Company, 19-CR-00162 (D. Haw. Nov. 21, 2019). [204]   Id. at 2. [205]   Id. [206]   Non-Prosecution Agreement, United States v. Indivior Inc. et al., No. 1:19-CR-16 (July 11, 2019), ¶ 1 [hereinafter “RB Group NPA”]; see also Indivior, History, http://www.indivior.com/about/our-history/ (last visited Dec. 22, 2019). [207]   See Indictment, United States v. Indivior Inc. and Indivior PLC, No. 1:19-CR-16 (Apr. 9, 2019), ¶ 1 [hereinafter “Indivior Indictment”]. [208]   RB Group NPA, supra note 206, at 2. [209]   Press Release, U.S. Dep’t of Justice, Justice Department Obtains $1.4 Billion from Reckitt Benckiser Group in Largest Recovery in a Case Concerning an Opioid Drug in United States History (July 11, 2019), https://www.justice.gov/opa/pr/justice-department-obtains-14-billion-reckitt-benckiser-group-largest-recovery-case. [210]   Id. [211]   Id. [212]   RB Group NPA, supra note 206, ¶ 9. [213]   Id. ¶ 10. [214]   A separate agreement with the FTC resolved claims that RB Group engaged in unfair methods of competition in violation of the Federal Trade Commission Act. [215]   RB Group NPA, supra note 206, ¶ 5. [216]   Settlement Agreement, U.S. Dep’t of Justice and Reckitt Benckiser Group (July 11, 2019), https://www.justice.gov/opa/press-release/file/1181846/download, at II.B, II.F. [217]   Id. at II.F. [218]   Press Release, U.S. Attorney’s Office, Southern District of Florida, United States Government and Cooperating U.S. Gold Refinery Enter an Agreement After Money Laundering Investigation (Apr. 17, 2019), https://www.justice.gov/usao-sdfl/pr/united-states-government-and-cooperating-us-gold-refinery-enter-agreement-after-money. [219]   Republic Metals Corporation Non-Prosecution Agreement [hereinafter “RMC NPA”]. [220]   See Docket, In re Miami Metals I, Inc, et al., No. 18-BK-13357 (Bankr. S.D.N.Y. Nov. 2, 2018). [221]   See RMC NPA, supra note 219, at 6. [222]   Order Granting Motion for Approval of Non-Prosecution Agreement with the United States Attorney’s Office for the Southern District of Florida Pursuant to Federal Rule of Bankruptcy Procedure 9019 at 1, No. 18-13359 (Bankr. S.D.N.Y. Apr. 16, 2019). [223]   Id. (emphasis omitted). [224]   Id. at 2. [225]   See generally RMC NPA, supra note 219. [226]   RMC NPA, supra note 219, at 1-2. [227]   Id. at 2. [228]   Id. [229]   Pretrial Diversion Agreement, United States v. Rick Weaver Buick GMC Inc., No. 16-CR-00030 (Jan. 15, 2019) [hereinafter “Rick Weaver Agreement”]. [230]   Superseding Indictment Mem., United States v. Rick Weaver Buick GMC Inc., No. 16-CR-00030 (Aug. 8, 2017). The Dealership was originally indicted in September 2016. [231]   Rick Weaver Agreement §§ 3­–4. [232]   Id. § 2. [233]   Id. § 5. [234]   Id. § 6. [235]   See U.S. Dep’t of Justice, Justice Manual § 9.22-100 Pretrial Diversion Program (providing that “[t]he U.S. Attorney, in his/her discretion, may divert any individual against whom a prosecutable case exists and who” meets certain other criteria), https://www.justice.gov/jm/jm-9-22000-pretrial-diversion-program. [236]   Deferred Prosecution Agreement, United States v. Kavod Pharmaceuticals LLC (f/k/a Rising Pharmaceuticals, LLC, f/k/a Rising Pharmaceuticals, Inc.), No. 2:19-cr-00689 (E.D. Pa. Dec. 13, 2019) [hereinafter “Rising DPA”]. [237]   Id. at 15; see also Press Release, U.S. Dep’t of Justice, Second Pharmaceutical Company Admits to Price Fixing, Resolves Related False Claims Act Violations (Dec. 3, 2019), https://www.justice.gov/opa/pr/second-pharmaceutical-company-admits-price-fixing-resolves-related-false-claims-act [hereinafter “Rising Press Release”]. [238]   Rising DPA, supra note 236, at 1. [239]   Id. at 6. [240]   Rising Press Release, supra note 237. [241]   Rising DPA supra note 236, at 5. [242]   Rising Press Release, supra note 237. [243]   See Rising DPA, supra note 236, ¶¶ 9-10. [244]   Id. at 3-4. [245]   Id. at 4. [246]   Id. [247]   Press Release, U.S. Attorney’s Office for the Southern District of New York, Manhattan U.S. Attorney and DEA Announce Charges against Rochester Drug Co-Operative and Two Executives for Unlawfully Distributing Controlled Substances (Apr. 23, 2019), https://www.justice.gov/usao-sdny/pr/manhattan-us-attorney-and-dea-announce-charges-against-rochester-drug-co-operative-and. [248]   See generally Rochester Drug Co-operative Deferred Prosecution Agreement [hereinafter “RDC DPA”]. [249]   See generally Consent Order, United States v. Rochester Drug Cooperative, Inc., 1:15-cv-05219 (July 8, 2015) [hereinafter “RDC Consent Judgment”]. [250]   See RDC DPA, supra note 248, at ¶ 3; RDC Consent Judgment, supra note 249 ¶ 3. [251]   RDC DPA, supra note 248, ¶ 10. [252]   RDC DPA, supra note 248, ¶ 16. [253]   See, e.g., Mobile TeleSystems DPA, supra note 187, ¶ 16; RMC NPA, supra note 219, at 5. [254]   See RDC DPA, supra note 248, ¶ 18. [255]   See id. ¶¶ 19-26. [256]   Id. ¶ 23. [257]   Id. ¶¶ 24-25. [258]   Id. [259]   Press Release, U.S. Dep’t of Justice, Samsung Heavy Industries Company Ltd Agrees to Pay $75 Million in Global Penalties to Resolve Foreign Bribery Case (Nov. 22, 2019), https://www.justice.gov/opa/pr/samsung-heavy-industries-company-ltd-agrees-pay-75-million-global-penalties-resolve-foreign [hereinafter “SHI Press Release”]; Deferred Prosecution Agreement, United States v. Samsung Heavy Indus. Co. Ltd., No. 1:19-CR-328 (E.D. Va. Nov. 22, 2019), at A-4 [hereinafter “SHI DPA”]. [260]   SHI DPA, supra note 259, at 7-9; SHI Press Release, supra note 259. [261]   SHI DPA, supra note 259, at 9. [262]   Id. at 3-5. [263]   Id. at 4; see also id. at D-1. [264]   Id. at 3. [265]   Id. at 5. [266]   Press Release, U.S. Dep’t of Justice, Standard Chartered Bank Admits to Illegally Processing Transactions in Violation of Iranian Sanctions and Agrees to Pay More Than $1 Billion (Apr. 9, 2019), https://www.justice.gov/opa/pr/standard-chartered-bank-admits-illegally-processing-transactions-violation-iranian-sanctions [hereinafter “SCB Press Release”]. [267]   See id. [268]   Id. [269]   See Amended Deferred Prosecution Agreement, United States v. Standard Chartered Bank, No. 12-CR-262 (D.D.C., Apr. 9, 2019) ¶ 19 [hereinafter “SCB DPA”] (citing “the progress in SCB’s ongoing remediation and compliance efforts, including the comprehensive enhancement of SCB’s U.S. economic sanctions compliance program,” as justification for the parties’ agreement not to extend the prior monitorship). [270]   See SCB Press Release, supra note 266 (remarks of U.S. Attorney Jessie Liu). [271]   SCB DPA, supra note 269, ¶ 19. [272]   See SCB DPA, supra note 269 at 1. [273]   SCB DPA, supra note 269 at 1. [274]   Id., Ex. B at 3. [275]   Press Release, U.S. Dep’t of Justice, Tower Research Capital LLC Agrees to Pay $67 Million in Connection With Commodities Fraud Scheme (Nov. 7, 2019), https://www.justice.gov/opa/pr/tower-research-capital-llc-agrees-pay-67-million-connection-commodities-fraud-scheme [hereinafter “Tower Press Release”]. [276]   Deferred Prosecution Agreement, United States v. Tower Research Capital LLC, No. 19-CR-819 (S.D. Tex. Nov. 6, 2019), at A-24 [hereinafter “Tower DPA”]. [277]   Id. at A-25. [278]   Id. at 3. [279]   Id. at 4-5. [280]   Id. at 7. [281]   Tower Press Release, supra note 275. [282]   Press Release, U.S. Commodity Futures Trading Comm’n, CFTC Orders Proprietary Trading Firm to Pay Record $67.4 Million for Engaging in a Manipulative and Deceptive Scheme and Spoofing (Nov. 7, 2019), https://www.cftc.gov/PressRoom/PressReleases/8074-19. [283]   Tower DPA, supra note 276, at C-30. [284]   Id. at D-35. [285]   Tower Press Release, supra note 275. [286]   Id. [287]   Non Prosecution Agreement, UniCredit Bank Austria AG (April 15, 2019) at 1. [288]   Id. at 10. [289]   Id. at 10. [290]   Id. at 10-11. [291]   Id. at 4. [292]   Id. [293]   Id. at 4-5. [294]   Id. at 1. [295]   Id. at 2. [296]   Press Release, U.S. Dep’t of Justice, UniCredit Bank AG Agrees to Plead Guilty for Illegally Processing Transactions in Violation of Iranian Sanctions (April 15, 2019) https://www.justice.gov/opa/pr/unicredit-bank-ag-agrees-plead-guilty-illegally-processing-transactions-violation-iranian [hereinafter “UCB Press Release”]. [297]   Id. [298]   Id. [299]   Press Release, Manhattan District Attorney’s Office, Unicredit Bank AG to Plead Guilty and Pay $316 Million to DA’s Office Related to Illegal Transactions on Behalf of Nuclear Weapons Proliferator (April 15, 2019). https://www.manhattanda.org/unicredit-bank-ag-to-plead-guilty-and-pay-316-million-to-das-office-related-to-illegal-transactions-on-behalf-of-nuclear-weapons-proliferator/. [300]   UCB Press Release, supra note 296. [301]   Press Release, U.S. Dep’t of Justice, Defense Contractor Agrees to Pay $45 Million to Resolve Criminal Obstruction Charges and Civil False Claims Act Allegations (Dec. 4, 2019), https://www.justice.gov/opa/pr/defense-contractor-agrees-pay-45-million-resolve-criminal-obstruction-charges-and-civil-false [hereinafter “Unitrans Press Release”]. [302]   Id. [303]   Id. [304]   Id. [305]   Id. [306]   Id. [307]   Id. [308]   Id. [309]   Id. [310]   Administrative Agreement Between ANHAM FZCO and ANHAM U.S.A., Inc. and the Defense Logistics Agency (May 21, 2019). [311]   Unitrans Press Release. [312]   Press Release, U.S. Dep’t of Justice, Zurich Life Insurance Company Ltd. And Zurich International Life Limited Enter Agreement with U.S. Regarding Insurance Products (Apr. 25, 2019), https://www.justice.gov/opa/pr/zurich-life-insurance-company-ltd-and-zurich-international-life-limited-enter-agreement-us. [313]   Id. [314]   Id. [315]   Id. [316]   Id. [317]   Id. [318]   Id. [319]   Id. [320]   Suzi Ring and Benjamin D. Katz, Rolls to Pay $807 Million to End U.K., U.S. Bribery Probes, Bloomberg (Jan. 16, 2017), https://www.bloomberg.com/news/articles/2017-01-16/rolls-royce-will-pay-807-million-in-settlement-of-bribery-cases. [321]   Serious Fraud Office, Statements, SFO closes GlaxoSmithKline investigation and investigation into Rolls-Royce individuals (Feb. 22, 2019), https://www.sfo.gov.uk/2019/02/22/sfo-closes-glaxosmithkline-investigation-and-investigation-into-rolls-royce-individuals/. [322]   Id. [323]   Id. [324]   Id. [325]   David Pegg and Rob Evans, SFO drops investigation into trio accused of energy industry bribes, The Guardian (June 25, 2019), https://www.theguardian.com/business/2019/jun/25/sfo-drops-investigation-into-trio-accused-of-energy-industry-bribes-unaoil. [326]   Id. [327]   Press Release, U.S. Dep’t of Justice, Oil Executives Plead Guilty for Roles in Bribery Scheme Involving Foreign Officials (Oct. 30, 2019), https://www.justice.gov/opa/pr/oil-executives-plead-guilty-roles-bribery-scheme-involving-foreign-officials [328]   See Serious Fraud Office, Unaoil, https://www.sfo.gov.uk/cases/unaoil/ (last visited Jan. 6, 2019). [329]   Serious Fraud Office, News Release, Three Individuals Acquitted as SFO Confirms DPA with Güralp Systems Ltd (Dec. 20, 2019), https://www.sfo.gov.uk/2019/12/20/three-individuals-acquitted-as-sfo-confirms-dpa-with-guralp-systems-ltd/. [330]   Id. [331]   Approved Judgment, In the Matter of s.45 of the Crime and Courts Act 2013 between Serious Fraud Office and Güralp Systems Limited (Oct. 22, 2019), ¶ 35. [332]   Id. ¶¶ 39-40. [333]   Id. ¶ 34. [334]   Id. ¶¶ 27-30, 35. [335]   Id. ¶ 35. [336]   Serious Fraud Office, News Release, SFO Completes DPA with Serco Geografix Ltd. (July 4, 2019), https://www.sfo.gov.uk/2019/07/04/sfo-completes-dpa-with-serco-geografix-ltd/. [337]   Id. [338]   Id. [339]   Id. [340]   Deferred Prosecution Agreement, Serco Geografix Limited (July 2, 2019), at ¶ 4 [hereinafter “SGL DPA”]. [341]   Id. ¶¶ 9-14. [342]   See SGL DPA, Attach. A. [343]   Judgment, In the Matter of s.45 of the Crime and Courts Act 2013 (April 7, 2019), https://www.judiciary.uk/wp-content/uploads/2019/07/serco-dpa-4.07.19-2.pdf [hereinafter “SGL Judgment”]. [344]   Id. [345]   See SGL DPA, ¶ 5(i). [346]   Id. ¶ 5(ii). [347]   Id. ¶ 5(ii)(b). [348]   SGL Judgment. [349]   Id. [350]   Serious Fraud Office, SFO charges former Serco directors with fraud (Dec. 16, 2019), https://www.sfo.gov.uk/2019/12/16/sfo-charges-former-serco-directors-with-fraud/ [351]   Serious Fraud Office, News Release, Deferred Prosecution Agreement between the SFO and Tesco published (Jan. 23, 2019), https://www.sfo.gov.uk/2019/01/23/deferred-prosecution-agreement-between-the-sfo-and-tesco-published/ [hereinafter “Tesco DPA Press Release”]. [352]   Serious Fraud Office, News Release, ‘No case to answer’ ruling in case against former Tesco executives (Dec. 6, 2018), https://www.sfo.gov.uk/2018/12/06/no-case-to-answer-ruling-in-case-against-former-tesco-executives/. [353]   Tesco DPA Press Release, supra note 351. [354]   Id. [355]   Judgment, In the Matter of s.45 of the Crime and Courts Act 2013 (April 10, 2017), https://www.judiciary.uk/wp-content/uploads/2019/01/sfo-v-tesco-stores-ltd-2017-approved-final.pdf, at ¶ 38. [356]   Id. ¶¶ 53-58. [357]   Id. ¶ 60. [358]   Id. ¶¶ 61-62. [359]   Ian Austen, The Strange Story Behind the SNC-Lavalin Affair, New York Times (Feb. 15, 2019) https://www.nytimes.com/2019/02/15/world/canada/snc-lavalin-justin-trudeau.html. [360]   Andy Blatchford, SNC-Lavalin could avoid ban from federal contracts due to delay in policy update, Global News (June 1, 2019), https://globalnews.ca/news/5342074/snc-lavalin-federal-contracts-delay/. [361]   Jonathan Montpetit, SNC-Lavalin to stand trial on corruption charges, Quebec judge rules, CBC News (May 29, 2019), https://www.cbc.ca/news/canada/montreal/snc-lavalin-trial-corruption-bribery-1.5153429. [362]   Read and listen to Jody Wilson-Raybould’s latest SNC-Lavalin evidence, CBC News (March 29, 2019) https://www.cbc.ca/news/politics/wilson-raybould-committee-documents-audio-1.5077533. [363]   Id. [364]   David Ljunggren and Julie Gordon, Canada court dismisses bid by SNC-Lavalin to escape corruption trial, Reuters (March 8, 2019), https://www.reuters.com/article/us-canada-politics-snc-lavalin/canada-court-dismisses-bid-by-snc-lavalin-to-escape-corruption-trial-idUSKCN1QP1W8. [365]   Id. [366]   SNC-Lavalin, Press Release, Update on federal charges (May 29, 2019), https://www.snclavalin.com/en/media/press-releases/2019/29-05-2019 [hereinafter “SNC‑Lavalin Press Release”]. [367]   Ian Austen, Corruption Case that Tarnished Trudeau Ends with SNC‑Lavalin’s Guilty Plea, N.Y. Times (Dec. 18, 2019), https://www.nytimes.com/2019/12/18/world/canada/snc-lavalin-guilty-trudeau.html; Press Release, SNC‑Lavalin (Dec. 18, 2019), https://www.snclavalin.com/en/media/press-releases/2019/18-12-2019. [368]   Id. [369]   SNC‑Lavalin Press Release, supra note 366. [370]   Id. [371]   Id. [372]   Notice to the Market, Braskem, Signing of CGU/AGU Agreement (May 31, 2019) http://www.braskem-ri.com.br/detail-notices-and-material-facts/signing-of-cguagu-agreement [hereinafter “Braskem Press Release”]. [373]   Clean Companies Act 2014 (Law No. 12,846), English translation available at http://f.datasrvr.com/fr1/813/29143/Trench_Rossi_e_Watanabe_-_Brazil’s_anti-bribery_law__12846-2013.pdf. [374]   Id. [375]   Id. [376]   Braskem Press Release, supra note 372. [377]   Controladoria-Geral da União, Notícias, CGU e AGU Celebram Acordo de Leniência com a Camargo Corrêa (July 31, 2019), http://cgu.gov.br/noticias/2019/07/cgu-e-agu-celebram-acordo-de-leniencia-com-a-camargo-correa; James Thomas, Camargo Corrêa Signs Bribery Settlement in Brazil, Global Investigations Review (Aug. 1, 2019), https://globalinvestigationsreview.com/article/1195811/camargo-correa-signs-bribery-settlement-in-brazil. [378]   CGU e AGU Celebram Acordo de leniência com a Camargo Corrêa, supra note 377. [379]   Id. [380]   Brazil’s Camargo Correa Seeks New Plea Deal Over Corruption-Veja, Reuters (Jan. 14, 2017), https://www.reuters.com/article/brazil-corruption-camargo-correa/brazils-camargo-correa-seeks-new-plea-deal-over-corruption-veja-idUSL1N1F409L. [381]   Id. [382]   Controladoria-Geral da União, Notícias, CGU e AGU Assinam Acordo de Leniência com Nova Participações S.A. (Dec. 11, 2019), https://www.cgu.gov.br/noticias/2019/11/cgu-e-agu-assinam-acordo-de-leniencia-com-nova-participacoes-s-a); James Thomas, Engevix Group Signs $124 Million Leniency Agreement in Brazil, Global Investigations Review (Nov. 13, 2019), https://globalinvestigationsreview.com/article/1210879/engevix-group-signs-usd124-million-leniency-agreement-in-brazil. [383]   Thomas, supra note 361. [384]   Id. [385]   Id. [386]   Id. [387]   Controladoria-Geral da União, Notícias, CGU e AGU Assinam Acordo de Leniência com Grupo OAS (Nov. 14, 2019), https://www.cgu.gov.br/noticias/2019/11/cgu-e-agu-assinam-acordo-de-leniencia-com-grupo-oas; Reuters, Brazil Construction Firm OAS Signs $461 Mln Leniency Deal in Corruption Case (Nov. 14, 2019) https://www.reuters.com/article/oas-corruption/brazil-construction-firm-oas-signs-461-mln-leniency-deal-in-corruption-case-idUSL2N27U0VF. [388]   CGU e AGU Assinam Acordo de Leniência com Grupo OAS, supra note 387. [389]   Id. [390]   Id. [391]   French National Financial Prosecutor’s Office & French Anti-Corruption Agency, Guidelines on the Implementation of the Convention Judiciare d’Interet Public (Judicial Public Interest Agreement) (June 26, 2019), https://www.agence-francaise-anticorruption.gouv.fr/files/files/EN_Lignes_directrices_CJIP_revAFA%20Final%20(002).pdf [hereinafter “PRF-AFA Guidelines”]. [392]   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), https://www.legifrance.gouv.fr/eli/loi/2016/12/9/2016-1691/jo/texte [hereinafter “Law on Transparency”]. [393]   Law on Transparency at Art. 22. [394]   Id. [395]   See French Ministry of Justice, Circulaire relative à la présentation et la mise en oeuvre des dispositions pénales prévues par la loi n°2016-1691 du 9 décembre 2016 relative à la transparence, à la lutte contre la corruption et à la modernisation de la vie économique [Circular on the presentation and implementation of the penal provisions laid down by Law no 1102016-1691 of 9 December 2016 on transparency, combatting corruption and modernization of economic life], JUSD1802971C (Jan. 31, 2018), http://circulaire.legifrance.gouv.fr/index.php?action=afficherCirculaire&hit=1&r=43109; see also PRF-AFA Guidelines at 1-2. [396]   PRF-AFA Guidelines at 2. [397]   Id. at 5. [398]   Id. at. 11. [399]   Id. at 13. [400]   Id. at 15. [401]   Id. [402]   Id. at 6. [403]   If a company is not required by law to have a compliance program, the existence of such a program will be looked upon favorably by the prosecutor. Id. at 7. [404]   Id. at 7-8. [405]   Id. at 9. [406]   Id. at 11. [407]   Id. at 9. [408]   Id. at 10. [409]   Law on Transparency at Art. 22. [410]   PRF-AFA Guidelines at 11. [411]   Id. at 11-12. [412]   Id. at 12. [413]   Id. at 13. [414]   Id. [415]   Id. at 13-14. [416]   Id. at 17. [417]   See id. [418]   Id. at 15. [419]   See id. at 3, 15. [420]   Id. [421]   Id. [422]   Law No. 68-678 of July 26, 1968. [423]   PRF-AFA Guidelines at 15. [424]   Id. at 16. [425]   Id. The following Gibson Dunn lawyers assisted in preparing this client update:  F. Joseph Warin, Kendall Day, Courtney Brown, Melissa Farrar, Michael Dziuban, Lisa Alfaro, Fernando Almeida, Patrick Doris, Sacha Harber-Kelly, Matthew Aiken, Ben Belair, Laura Cole, Chelsea D’Olivo, Cate Harding, Amanda Kenner, Madelyn La France, Allison Lewis, Elizabeth Niles, Tory Roberts, Susanna Schuemann, Luke Sullivan, Blair Watler, Crystal Weeks, and Brian Williamson. Gibson Dunn’s White Collar Defense and Investigations Practice Group successfully defends corporations and senior corporate executives in a wide range of federal and state investigations and prosecutions, and conducts sensitive internal investigations for leading companies and their boards of directors in almost every business sector.  The Group has members across the globe and in every domestic office of the Firm and draws on more than 125 attorneys with deep government experience, including more than 50 former federal and state prosecutors and officials, many of whom served at high levels within the Department of Justice and the Securities and Exchange Commission, as well as former non-U.S. enforcers.  Joe Warin, a former federal prosecutor, is co-chair of the Group and served as the U.S. counsel for the compliance monitor for Siemens and as the FCPA compliance monitor for Alliance One International.  He previously served as the monitor for Statoil pursuant to a DOJ and SEC enforcement action.  He co-authored the seminal law review article on NPAs and DPAs in 2007.  M. 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January 8, 2020 |
United States v. Blaszczak: Second Circuit Ruling Heightens Risks of Insider Trading Investigations and Prosecutions

Click for PDF On December 30, 2019, the Second Circuit issued an opinion in United States v. Blaszczak that raises the investigative and prosecutorial risk in certain types of insider trading cases in two significant respects. 2019 WL 7289753 (2d Cir. Dec. 30, 2019). First, in a departure from traditional insider trading principles under the Securities Exchange Act (“Title 15 securities fraud”), the Second Circuit held in Blaszczak that the government can prosecute insider trading under both the criminal securities fraud provisions added in the 2002 Sarbanes-Oxley Act (“Title 18 securities fraud”) and the wire fraud statutes without any proof of a “personal benefit” to the tipper—that is, the government need not allege or prove that the tipper breached a duty in exchange for a direct or indirect personal benefit, or that the downstream tippee knew of a personal benefit to the tipper. Second, in a 2-1 decision that featured a forceful dissent by Judge Amalya L. Kearse, the Second Circuit adopted an expansive definition of “property” for purposes of the wire fraud and Title 18 securities fraud statutes, holding that “predecisional” confidential government information relating to planned medical treatment reimbursement rate changes constituted government “property” necessary to bring insider trading cases under an embezzlement or misappropriation theory. These holdings heighten the risks of criminal prosecution in insider trading cases where there is limited-to-no evidence of a direct or indirect personal benefit to the tipper or that the downstream tippee knew of any personal benefit to the tipper, as well as in cases involving disclosure of nonpublic government information. Blaszczak Factual and Procedural Background In Blaszczak, the United States Department of Justice (“DOJ”) alleged that, between 2009 and 2014, certain Centers for Medicare & Medicaid Services (“CMS”) employees disclosed confidential information to David Blaszczak, a former CMS employee who become a “political intelligence” consultant for certain hedge funds. Blaszczak allegedly provided confidential information relating to the timing and substance of CMS’ planned changes to its reimbursement rates for certain medical treatments to employees of the healthcare-focused hedge fund Deerfield Management Company, L.P. These employees allegedly directed Deerfield to short stocks of healthcare companies that would be hurt by the planned reimbursement rate changes. The DOJ indicted Blaszczak, one CMS employee, and two Deerfield employees for the alleged insider trading scheme, including counts for conspiracy, conversion of U.S. property, Title 15 securities fraud, wire fraud, and Title 18 securities fraud. At an April 2018 trial, the district court instructed the jury, as relevant here, that, in order to convict on the Title 15 securities fraud count, the jury had to find that a CMS employee tipped the confidential CMS information in exchange for a personal benefit and that Blaszczak and the Deerfield employees knew that a CMS insider had done so in exchange for a personal benefit. Notably, the district court refused to give this “personal benefit” instruction on the wire fraud and Title 18 securities fraud counts. On May 3, 2018, the jury returned a split verdict that, in relevant part, acquitted all defendants on the Title 15 counts, but found the defendants guilty on other counts, including conversion, wire fraud, and (except for the CMS employee) Title 18 securities fraud. The defendants appealed on a number of grounds, including that the district court erred by refusing to include the “personal benefit” test in the Title 18 jury instructions and that the confidential CMS information did not constitute CMS’ “property” supporting conviction on the wire fraud and Title 18 securities fraud counts. Personal Benefit Requirement Does Not Apply in Title 18 cases The Supreme Court engrafted a “personal benefit” test on to criminal or civil insider trading cases over 35 years ago in Dirks v. SEC, 463 U.S. 646 (1983). In that case, Dirks, a broker-dealer officer, had been charged by the SEC with a civil violation of the Title 15 securities fraud statutes based on his receipt of material nonpublic information (“MNPI”) from a company’s insiders regarding fraud at that company, which information he then shared with investors who later sold the company’s stock. The Supreme Court held that tippers are only liable where they breach a fiduciary duty to the company’s shareholders, and they only breach such a duty where they “personally . . . benefit, directly or indirectly, from [their] disclosure. Absent some personal gain, there has been no breach of duty to stockholders. And absent a breach by the insider, there is no derivative breach” by those who passed on or traded on the inside information. Because the insiders in Dirks did not benefit from their disclosures to Dirks, but rather “were motivated by a desire to expose the fraud,” they did not breach any fiduciary duty; Dirks thus “had no duty to abstain from use of the inside information that he obtained.”[1] What constitutes a “personal benefit” under Dirks has been the subject of significant litigation in recent years, including the extent to which gifting of confidential information to friends or relatives satisfied the personal benefit test. Compare United States v. Newman, 773 F.3d 438, 452 (2d Cir. 2014) (vacating insider trading convictions for lack of personal benefit where government failed to prove a “meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature”), with Salman v. United States, 137 S. Ct. 420 (2016) (affirming conviction where tipper gifted confidential information to a trading relative). In the 2002 Sarbanes-Oxley Act, Congress added a new securities fraud provision to the criminal code, 18 U.S.C. § 1348, to “supplement the patchwork of existing technical securities law violations with a more general and less technical provision, with elements and intent requirements comparable to current bank fraud and health care fraud statutes.” S. Rep. No. 107-146, at 14 (2002). The defendants in Blaszczak challenged their convictions under this Title 18 securities fraud provision, arguing that the Dirks “personal benefit” test should apply to Title 18 charges, just as it does to Title 15 charges. In analyzing this question, the Second Circuit in Blaszczak noted that neither the Title 15 nor Title 18 securities fraud provisions include in their text a personal benefit test. “Rather, the personal-benefit test [under Title 15] is a judge-made doctrine premised on the Exchange Act’s statutory purpose … of eliminating the use of inside information for personal advantage.” (internal quotation marks omitted; emphasis in original). The Second Circuit stated that, on the contrary, “Section 1348 was added to the criminal code by the Sarbanes-Oxley Act of 2002 in large part to overcome the ‘technical legal requirements’ of the Title 15 fraud provisions.” The Second Circuit therefore concluded, “[g]iven that Section 1348 was intended to provide prosecutors with a different – and broader – enforcement mechanism to address securities fraud than what had been previously provided in the Title 15 fraud provisions, we decline to graft the Dirks personal-benefit test onto the elements of Title 18 securities fraud.” The Court also noted that the personal-benefit test did not apply to the overlapping wire fraud statute. The Second Circuit’s decision is consistent with those of two Northern District of Georgia courts that previously examined this issue and similarly rejected a personal benefit test under Title 18 securities fraud. See United States v. Melvin, 143 F. Supp. 3d 1354 (N.D. Ga. 2015); United States v. Slawson, 2014 WL 5804191 (N.D. Ga. Nov. 7, 2014), adopted 2014 WL 6990307 (N.D. Ga. Dec. 10, 2014). While the Second Circuit appears to be the first Court of Appeals to have reached this issue, prosecutors’ ability to reach well beyond the geographic boundaries of the Second Circuit in policing the marketplace renders the Blaszczak ruling significant precedent. Predecisional Confidential Government Information Constitutes Government Property The defendants in Blaszczak also challenged their Title 18 convictions on the grounds that there was insufficient evidence to prove that they defrauded CMS of any “property” because a government agency’s confidential information was purportedly not “property” belonging to that agency. In assessing this question, the court analyzed two Supreme Court decisions: Carpenter v. United States, 484 U.S. 19 (1987), and Cleveland v. United States, 531 U.S. 12 (2000). In Carpenter, a Wall Street Journal (“WSJ”) reporter and three co-conspirators were convicted of mail and wire fraud where a reporter gave his co-conspirators advance nonpublic information regarding the timing and contents of his columns on particular stocks, so they could trade in advance of his column’s publication. The defendants argued that they did not obtain any “money or property” from the victim of the fraud, the WSJ, a necessary element for their fraud convictions. The Supreme Court disagreed, explaining that, while intangible, “the publication schedule and contents of the [] column” constituted confidential business information belonging to the WSJ, and “[c]onfidential business information has long been recognized as property.” In Cleveland, the Supreme Court analyzed whether fraudulently-obtained Louisiana state video poker licenses constituted Louisiana’s “property” for purposes of the mail fraud statute. Distinguishing Carpenter, the Supreme Court noted that “whatever interests Louisiana might be said to have in its video poker licenses, the State’s core concern is regulatory” and those interests “cannot be economic.” (emphasis in original). Because “the State did not decide to venture into the video poker business,” but instead “permit[ted], regulate[d], and tax[ed] private operators of the games,” the Court concluded that the licenses in the State’s hands did not constitute “property.” In a 2-1 decision, the Second Circuit in Blaszczak found the confidential CMS information more analogous to the WSJ’s confidential information in Carpenter than the state licenses in Cleveland. Specifically, in contrast to the exercise of “traditional police powers” in Cleveland, the Second Circuit concluded that “CMS’s right to exclude the public from accessing its confidential predecisional information squarely implicates the government’s role as property holder, not as sovereign.” In addition, while the court did “not read Cleveland as strictly requiring the government’s property interest to be ‘economic’ in nature, the government presented evidence that CMS does have an economic interest in its confidential predecisional information,” including “that CMS invests time and resources into generating and maintaining the confidentiality of” the information. (emphasis in original). The court therefore held that, “in general, confidential government information may constitute government ‘property’ for purposes of” wire fraud and Title 18 securities fraud charges. Judge Kearse dissented, arguing that confidential CMS information did not constitute government “property” because “CMS is not a business…; it is a regulatory agency” and, unlike in Carpenter, “information is not CMS’s ‘stock in trade.’” Given the dissent, which increases the possibility of further review either by the Second Circuit en banc or by the Supreme Court, the Second Circuit’s December 30 opinion may not be the last decision in this case. Implications of Blaszczak Blaszczak heightens the risk of DOJ investigation and prosecution in the subset of insider trading cases where there is limited-to-no evidence of personal benefit to the tipper or the downstream tippee’s knowledge of the personal benefit, or cases that involve the disclosure of confidential government information. In particular, by not requiring prosecutors to prove that the tipper embezzled or stole the information in exchange for a direct or indirect personal benefit, Blaszczak heightens the risk for analysts and others who communicate with company executives, employees, and other insiders to obtain investment-relevant information without providing any benefit to those employees. Investment professionals who trade while in possession of MNPI from company insiders, as well as whistleblowers who do not receive any personal benefit, could also see heightened risks of investigation and prosecution. In fact, while Dirks’ conviction for Title 15 insider trading was reversed by the Supreme Court, an identical prosecution by the DOJ under Title 18’s wire fraud and securities fraud provisions would likely be sustained under the reasoning in Blaszczak. Indeed, it is difficult to square Blaszczak with Dirks, where the Supreme Court explained that “[w]hether disclosure is a breach of duty … depends in large part on the purpose of the disclosure.” In fact, the Second Circuit itself commented in Newman, “Dirks counsels us that the exchange of confidential information for personal benefit is not separate from an insider’s fiduciary breach; it is the fiduciary breach that triggers liability for securities fraud under Rule 10b–5.” 773 F.3d at 447-448 (emphasis in original). With “the purpose of the disclosure” seemingly no longer relevant under Title 18 in the wake of Blaszczak, it is unclear what remains of the breach of fiduciary duty requirement in the context of Title 18 securities fraud. Whether the DOJ will now use Title 18 to bring insider trading cases that it would not otherwise have brought in the past due to the absence of any personal benefit evidence remains unknown. But Blaszczak makes it more likely that prosecutors will routinely bring Title 18 securities fraud and wire fraud charges in conjunction with Title 15 charges, especially given the continually evolving case law regarding what constitutes a “personal benefit.” Bringing both Title 15 and Title 18 charges could also offer the jury a way to compromise with a guilty verdict only on the easier-to-prove Title 18 charges. Indeed, one need look no further than the jury verdict in Blaszczak itself, in which the jury acquitted on the Title 15 charges where there was a personal benefit instruction, but convicted on the Title 18 charges where there was no such instruction. Because Title 18 is a criminal statute, this ruling may also create the peculiar—and inequitable—situation where the government is forced to prosecute a defendant criminally due to lack of personal benefits evidence and the SEC’s inability to proceed with civil charges under Title 15. Blaszczak could therefore prompt the SEC to seek legislation creating an analogous provision to 18 U.S.C. § 1348 that does not have the “technical legal requirements” existing in Title 15 securities fraud provisions. It could also prompt the SEC to seek the removal of the personal benefit requirement from proposed insider trading legislation currently pending in Congress. See Insider Trading Prohibition Act, H.R. 2534 116th Cong. § 16A. In addition, Blaszczak’s holding that predecisional confidential government information constitutes government property heightens the risk of both SEC and DOJ investigations in cases involving trading while in possession of confidential executive agency information, whether obtained directly from a government employee or, as was the case in Blaszczak, from a consultant with access to government employees. This could include confidential government information covering a range of issues, including for example tariff policies, budgeting decisions, military actions, evaluations of a potential merger under anti-trust law, or the calculation of job growth or unemployment figures. Analysts and investors speaking with government personnel and “political intelligence” consultants with sources inside the government should therefore be especially wary about receiving and trading even in part based on confidential government information, particularly given that the DOJ will not be required under Title 18 to prove that the government tipper received any personal benefit from disclosure of the information. The enhanced risks and uncertainties created by the Second Circuit’s decision in Blaszczak heighten the need to consult with in-house and outside counsel whenever there is a concern that a firm, or one of its employees, may have obtained MNPI. Blaszczak also further highlights the need to review and update compliance policies and annual trainings, to be clear that the receipt of MNPI from any source and under any circumstances requires extreme care before using the information in connection with a securities transaction. ____________________    [1]   In United States v. Chestman, 947 F.2d 551 (2d Cir. 1991), and subsequent cases, courts extended the Dirks breach of fiduciary duty analysis to circumstances where a tippee is found to have breached a duty as a temporary insider and trading occurs. The following Gibson Dunn lawyers assisted in preparing this client update: Barry Goldsmith, Avi Weitzman, Reed Brodsky, Richard Grime, Joel Cohen, Mark Schonfeld and Jonathan Seibald. Gibson Dunn lawyers are available to assist in addressing any questions you may have about this development.  Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following leaders and members of the firm’s Securities Enforcement or White Collar Defense and Investigations practice groups: New York Matthew L. Biben (+1 212-351-6300, mbiben@gibsondunn.com) Reed Brodsky (+1 212-351-5334, rbrodsky@gibsondunn.com) Joel M. Cohen (+1 212-351-2664, jcohen@gibsondunn.com) Lee G. Dunst (+1 212-351-3824, ldunst@gibsondunn.com) Barry R. Goldsmith (+1 212-351-2440, bgoldsmith@gibsondunn.com) Laura Kathryn O’Boyle (+1 212-351-2304, loboyle@gibsondunn.com) Mark K. Schonfeld (+1 212-351-2433, mschonfeld@gibsondunn.com) Alexander H. Southwell (+1 212-351-3981, asouthwell@gibsondunn.com) Avi Weitzman (+1 212-351-2465, aweitzman@gibsondunn.com) Lawrence J. 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Loseman (+1 303-298-5784, mloseman@gibsondunn.com) Los Angeles Michael M. Farhang (+1 213-229-7005, mfarhang@gibsondunn.com) Douglas M. Fuchs (+1 213-229-7605, dfuchs@gibsondunn.com) Debra Wong Yang (+1 213-229-7472, dwongyang@gibsondunn.com) © 2020 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

December 23, 2019 |
Guralp Systems Limited – UK Serious Fraud Office’s Sixth Deferred Prosecution Agreement Results in No Penalty for Company. Tectonic Shift in DPAs or Factual Peculiarity?

Click for PDF Facts The SFO alleged that three senior employees of Guralp Systems Limited (“the Company”), a UK based seismology company, conspired to corruptly make payments of approximately £1 million over a period of twelve years between 2003 and 2015 to a public official and employee of the Korea Institute of Geoscience and Mineral Resources, in return for £2 million worth of contracts. The trial of those individuals resulted in not guilty verdicts, the last of which was returned on 20 December 2019. Shortly after the announcement of those verdicts the SFO announced here for the first time that it had, on 22 October 2019, entered into a Deferred Prosecution Agreement (“DPA”) with the Company, based on the facts for which the individuals were acquitted. It should be noted that the public official who received the bribe was convicted after a trial in California in July 2017 (https://www.justice.gov/opa/pr/director-south-koreas-earthquake-research-center-convicted-money-laundering-million-dollar). DPA Offences The DPA is for both an offence of conspiracy to corrupt, contrary to the Criminal Law Act 1977 and Prevention of Corruption Act 1906 and an offence of failing to prevent, contrary to the Bribery Act 2010. The choice of the conspiracy charge is explained by the fact that the conduct commenced prior to the coming into force of the Bribery Act 2010. The failing to prevent charge is in respect of that failure commencing on the date the Bribery Act came into force. Cooperation and the Interests of Justice Test The Court recognised the following matters as demonstrating that it was in the interests of justice for the case to be resolved by way of a DPA: Self-reporting in circumstances where much of the evidence relied on in the DPA and trial of the individuals was volunteered by the company. Removal of employees responsible for the alleged misconduct. No prior corporate misconduct. Introduction of a new compliance programme and the severing of links with distributors which presented compliance concerns. The SFO in its application for approval of the DPA identified without elaboration further conduct that it described as demonstrating extensive cooperation: Deferring employee interviews until the SFO was content for the interviews to proceed. Providing material relating to the interviews. Consulting the SFO in relation to other matters including communications with customers and suppliers. Keeping the SFO informed of all contact with the public official and his travel arrangements. The factors recognised by the court and the SFO are largely conventional. It should however be noted that this is the third DPA in a row where a company received credit for deferring employee interviews. The deferring of interviews is also consistent with the SFO’s Corporate Cooperation Guidance previously analysed here. Such requests will no doubt be made in future cases, albeit likely not in all. A common feature in each of the DPAs in which the SFO has required this is their ostensibly domestic nature, with a small number of persons of interest. Terms Of note, and unlike the five prior DPAs, there is no penalty element in this DPA. There is however a full disgorgement of profit. That disgorgement has to be paid within the five year currency of the DPA. The Court stated that both the absence of a penalty and the loose arrangement for the payment of disgorgement do not set any precedent, but are a result of the impecunious financial circumstances of the Company (paragraph 42). This is not therefore a tectonic shift in the approach to financial terms. The judgment recognises the possibility that the disgorgement will not be paid in the five year currency of the DPA. As such the judgement suggests that a variation of the DPA may be necessary (paragraph 41). However, a DPA can only be varied in respect of “circumstances that were not, and could not have been, foreseen” (see Crime and Courts Act 2013, Schedule 17, paragraph 10(1)(b)). Here the circumstance of not being able to pay are foreseeable. There is a compliance reporting term that requires the Company to provide annual reports to the SFO containing various compliance metrics, including the effectiveness of training. The term does not require any SFO or third party approval of the effectiveness of the training. If the SFO concludes the training to be ineffective there is no mechanism in the DPA to compel an improvement nor would the ineffectiveness amount to a breach of the DPA. Further, the absence of a third party approval mechanism means that the SFO is effectively entering the arena as a compliance assessor. Having taken on this role, the SFO must therefore ensure that it retains resource on the case to properly receive reports and provide criticism and feedback. If the SFO is passive and future misconduct occurs as a result of inadequate training, the Company would be able to point to the lack of any SFO criticism as implicit approval and the SFO could find itself a witness in a future trial. There is also a requirement for the company’s Compliance Officer to “co-operate generally” with the SFO. That appears at first glance to be a significant shift in enforcement policy. The term is not one however that creates any civil or criminal liability for the compliance officer. A compliance officer who felt that a request from the SFO was unreasonable and refused to comply with a request would not therefore be subject to any form of court sanction. Similarly the compliance officer’s refusal would not amount to a breach of the DPA by the Company. This term therefore looks as if it will be difficult to enforce, though in the spirit of the company’s cooperation it may not prove to be an issue. As first used in the Serco DPA, there is a requirement to report defined future misconduct. Conclusion This is the second DPA resolved by the SFO this year and the second by its current Director, Lisa Osofsky. There is much about this DPA in common with its predecessors and particularly its immediate predecessor. The significant difference is the omission of a penalty, but this is case specific and explicitly stated not to set any precedent. The recognition given by the SFO for the deferring of employee interviews has become a trend, albeit in smaller largely domestic focussed cases. It is interesting to observe however that the court did not refer to this factor in its judgment. In prior DPAs the court has adopted all the interests of justice factors advanced by the SFO in its application for the DPA. It would however be too much to infer that this factor played no role in the court’s decision making. The same judge who approved this DPA previously expressly recognised it in a prior DPA as an important demonstration of cooperation. Companies who identify misconduct over which the SFO will have jurisdiction should approach internal investigations with care. Our view is that initial interviews and other unavoidable overt steps designed to establish whether there is anything to report are reasonable. The Director of the SFO has recognised this in a number of speeches including on April 3, 2019 where she said, “I know that companies will want to examine any suspicions of criminality or regulatory breaches – indeed they have a duty to their shareholders to ensure allegations or suspicions are investigated, assessed and verified, so they understand what they may be reporting before they report it.” However once initial interviews, whether alone or combined with other evidence, demonstrate misconduct that would be of interest to the SFO, then further interviews or overt steps prior to self-reporting will likely fall short of the SFO’s expectations. Companies will therefore have to give careful consideration as to whether interviews should be suspended, pending consultation with the SFO. This client alert was prepared by Sacha Harber-Kelly, Patrick Doris and Steve Melrose. Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these developments.  If you would like to discuss this alert in greater detail, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following members of the firm’s UK disputes practice. Philip Rocher (+44 (0)20 7071 4202, procher@gibsondunn.com) Patrick Doris (+44 (0)20 7071 4276, pdoris@gibsondunn.com) Sacha Harber-Kelly (+44 (0)20 7071 4205, sharber-kelly@gibsondunn.com) Charles Falconer (+44 (0)20 7071 4270, cfalconer@gibsondunn.com) Allan Neil (+44 (0)20 7071 4296, aneil@gibsondunn.com) Steve Melrose (+44 (0)20 7071 4219, smelrose@gibsondunn.com) Sunita Patel (+44 (0)20 7071 4289, spatel2@gibsondunn.com) Shruti S. Chandhok (+44 (0)20 7071 4215, schandhok@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

December 4, 2019 |
Webcast: Preparing for Enhanced Antitrust Enforcement in Government Procurement

DOJ’s newly-announced Procurement Collusion Strike Force portends increased federal antitrust and False Claims Act enforcement in government procurement. Join Gibson Dunn partners as they discuss DOJ’s enforcement techniques, strategies for mitigating legal risks in the procurement process, and response plans for in-house counsel when alerted to a potential government investigation. Topics to be covered include: How antitrust and False Claims Act enforcement are being deployed in government procurement cases Risk factors and red flags in competitive bids that may attract DOJ prosecutors Best practices to minimize antitrust risks in government procurement processes To read more about the Procurement Collusion Strike Force, visit our Client Alert regarding its announcement, “DOJ Announces a New Strike Force to Combat Antitrust Misconduct in Government Procurement.” View Slides (PDF) PANELISTS: Kristen Limarzi is a partner in the Washington, D.C. office. Before joining Gibson Dunn, Ms. Limarzi was the Chief of the Appellate Section of DOJ’s Antitrust Division, and she was involved in every civil non-merger matter and all of the most complex criminal cases the Division litigated in the last decade. Her practice focuses on investigations, litigation, and counseling on antitrust merger and conduct matters, as well as appellate and civil litigation. Scott Hammond is a partner in the Washington, D.C. office and Co-Chair of the Antitrust and Competition Practice Group. Previously, Mr. Hammond served as a DOJ prosecutor for 25 years, including 8 years as the Antitrust Division’s Deputy Assistant Attorney General for Criminal Enforcement – the highest ranking career lawyer in the Antitrust Division. He assists clients in antitrust and white-collar crime compliance, crisis management and government investigations across all industry sectors. Jeremy Robison is a partner in the Washington, D.C. office. His practice focuses on defending companies and individuals involved in antitrust investigations by U.S. and international enforcement authorities, conducting internal investigations, and advising companies on antitrust compliance programs and policies. Mr. Robison has represented clients from a range of industries in antitrust investigations, including in the financial services, pharmaceutical, defense, healthcare, and technology sectors. Jonathan Phillips is a partner in the Washington, D.C. office where he focuses on white collar enforcement matters and related litigation. Before joining the firm, Mr. Phillips served as a Trial Attorney in DOJ’s Civil Division, Fraud Section, where he investigated and prosecuted allegations of fraud against the United States under the False Claims Act and related statutes, including cases involving bid rigging and other allegations of fraud by government contractors. Joseph West is a partner in the Washington, D.C. office and former Co-Chair of the firm’s Government Contracts Practice. For 40 years, Mr. West has concentrated his practice on contract counseling, compliance/enforcement, and dispute resolution. He has represented both contractors (and their subcontractors, vendors and suppliers) and government agencies, and has been involved in cases before numerous federal courts and agencies. Lindsay Paulin is a litigation associate in the Washington, D.C. office. Her practice focuses on a wide range of government contracts issues, including internal investigations, claims preparation and litigation, bid protests, and government investigations under the False Claims Act. Ms. Paulin’s clients include contractors and their subcontractors, vendors, and suppliers across a range of industries including aerospace and defense, information technology, professional services, private equity, and insurance. 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 1.0 credit hour, of which 1.0 credit hour 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 1.0 hour. 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.

November 4, 2019 |
U.S. Department of Justice and U.S. Department of Housing and Urban Development Issue Memorandum on Application of the False Claims Act

Click for PDF In a move designed to encourage greater participation by banks and other lending institutions in Federal Housing Administration (“FHA”) programs, on October 28, 2019, the U.S. Department of Justice (“DOJ”) and the U.S. Department of Housing and Urban Development (“HUD”) signed a Memorandum of Understanding (“MOU”) setting forth guidance on the appropriate use of the False Claims Act (“FCA”) to enforce violations of FHA regulatory requirements.[1] The guidance—Inter-Agency Coordination Of Civil Actions Under The False Claims Act Against Participants In FHA Single Family Mortgage Insurance Programs—is voluntary and creates no legal rights or obligations. Nevertheless, the MOU describes the interagency process for and considerations involved in determining whether certain conduct should be addressed through HUD’s administrative proceedings or similar civil action, or referred to DOJ to pursue action under the FCA. In public remarks proclaiming the MOU’s goal of encouraging banks to participate in FHA lending, HUD Secretary Ben Carson expressed that “the False Claims Act became a monster” that drove banks away in the decade following the financial crisis, “[b]ut now, the monster has been slayed.”[2] Secretary Carson added his “suspicion” that “relatively few things” will warrant referral to DOJ under the MOU, stating that “an obvious case of fraud [is] one thing,” but that “we’re not going to make a big deal of” conduct that “is not a pattern” and is a “mistake that’s correctable.”[3] This alert briefly describes the background and key takeaways from the MOU. Gibson Dunn is available to answer any questions you may have about how this guidance applies to your organization, as well as any other topics related to the FCA. Background The FHA provides important access to government-backed mortgage loans, particularly for lower income and first time home buyers. Over the past decade, however, banks and other lending institutions have dramatically reduced participation in FHA programs—originating less than 14 percent of FHA-insured mortgages this year, down from nearly 45 percent in 2010. HUD officials have attributed this decline to aggressive FCA enforcement against large FHA lenders following the financial crisis.[4] DOJ has recovered approximately $7 billion in FCA actions against mortgage lenders in the last 10 years. Against this backdrop, the MOU is specifically “intended to address [the] concerns [regarding] uncertain and unanticipated FCA liability for regulatory defects [that] led many well-capitalized lenders, including many banks and credit unions … to largely withdraw from FHA lending.”[5] The MOU, which pledges to dial back the use of the FCA in enforcing regulatory noncompliance in FHA programs, also marks the latest development in what has become a broader trend of reining in FCA enforcement under the Trump Administration. In recent years, DOJ policy changes have included issuance of the Brand Memo,[6] which prohibits DOJ attorneys from pursuing enforcement actions predicated on violations of non-binding agency guidance; issuance of the Granston Memo,[7] which instructed prosecutors to more regularly consider moving to dismiss qui tam actions in which DOJ declines to intervene; and revisions to the Yates Memo to provide more opportunities for corporate cooperation credit and inclusion of individuals in corporate settlements, among others.[8] These policy changes have been incorporated into the Justice Manual, the main internal policy manual for DOJ.[9] The MOU As the MOU makes clear, going forward, HUD will handle enforcement of violations of FHA program requirements “primarily through HUD’s administrative proceedings,” including through the agency’s mortgage review board. For more serious regulatory violations, the MOU sets forth a framework for the two agencies to follow in “deciding when to pursue False Claims Act cases to remedy material and knowing FHA violations.”[10] Specifically, the MOU identifies the standards for when HUD may refer a matter to DOJ for pursuit of FCA claims (the “FCA Evaluation Standards”), providing for referral where the following two conditions are met: (1) the most serious violations (so-called “Tier 1” violations under HUD regulations) exist either: (i) in at least 15 loans or (ii) in loans with an unpaid principal balance of at least $2 million; AND (2) there are aggravating factors such as evidence that the violations are systemic or widespread.[11] Beyond this referral framework, the MOU acknowledges that DOJ will solicit HUD’s views during the investigative, litigation, and settlement phases of any FCA matters predicated in whole or in part on alleged violations of FHA requirements. This includes HUD’s view as to whether the alleged violations “are material or not material to the agency” so that DOJ “can determine whether [the materiality element and other] elements of FCA [liability] can be established.” It has always been the case that DOJ attorneys would solicit HUD’s views of the allegations under investigation and, as a matter of policy, HUD would have to approve any DOJ action. It is therefore remarkable that the agencies not only highlight this procedure in the guidance but specifically mention materiality—an element which allows an administration to tailor its enforcement agenda by taking the position that an alleged FHA regulatory violation was not important, or at least would not have resulted in non-payment had the government known about it (i.e., was not material). The MOU also specifically addresses qui tam litigation initiated by private relators. Although noting that ultimate dismissal authority remains with DOJ, the MOU nevertheless provides for HUD to recommend dismissal of qui tam suits where HUD determines that: the alleged conduct would not have warranted referral to DOJ under the FCA Evaluation Standards; the alleged conduct does not represent a material violation of FHA requirements; or the litigation threatens to interfere with HUD’s policies or the administration of its FHA lending program and dismissal would avoid these effects. Finally, the MOU makes clear that even in cases where HUD declines to refer to DOJ or recommends dismissal, it retains discretion to pursue civil monetary penalties for violations of FHA regulations under other applicable laws, including the Program Fraud Civil Remedies Act. Conclusion Citing fears of draconian FCA liability for even minor noncompliance with FHA regulations facing prospective lenders, banks and other lending institutions have shied away from participation in the program in recent years. But particularly if comments from HUD officials are any indication, the new MOU provides a sign that the government has shifted its enforcement priorities in an effort to mitigate these concerns. Organizations that follow the guidance may decrease the likelihood that they will face the prospect of FCA enforcement actions in connection with FHA programs. And particularly noteworthy is that under the MOU DOJ will seek the guidance from HUD as to whether violations alleged by qui tam whistleblowers are material or not, such that DOJ may seek to dismiss such claims outright under its recently-flexed authority to dismiss qui tam cases even over a whistleblower’s objections. As noted above, the MOU is the latest action taken by the Trump Administration in a broader effort to temper FCA enforcement, promote more practical uses of government resources, and reduce the burden on regulated businesses of defending against cases of low or no merit. This effort has begun to generate real change—for example, since the Granston Memo, DOJ has, in fact, begun moving to dismiss qui tam actions at a greater rate than it did in the past. Whether the same can be said of the MOU as to FCA enforcement in connection with FHA lending remains to be seen, but at a minimum, it appears defendants in FCA actions based on alleged FHA program violations will have additional means to pursue declination and dismissal by the government. Gibson Dunn will monitor how this MOU actually works in practice, and will provide updates as they develop. _____________________    [1]   U.S. Dep’t of Justice and U.S. Dep’t of Housing and Urban Development, Inter-Agency Coordination Of Civil Actions Under The False Claims Act Against Participants In FHA Single Family Mortgage Insurance Programs (Oct. 28, 2019), https://www.hud.gov/sites/dfiles/SFH/documents/sfh_HUD_DOJ_MOU_10_28_19.pdf    [2]   Ben Lane, HousingWire, Exclusive: HUD’s Carson on False Claims Act – “The monster has been slayed” (Oct. 28, 2019), https://www.housingwire.com/articles/exclusive-huds-carson-on-false-claims-act-the-monster-has-been-slayed/    [3]   Id.    [4]   Jessica Guerin, HousingWire, FHA clarifies rules to attract more participants to its mortgage lending program (May 9, 2019), https://www.housingwire.com/articles/49011-fha-clarifies-rules-to-attract-more-participants-to-its-mortgage-lending-program/; MarketWatch, Trump administration says it will penalize fewer banks who violate FHA regulations (Oct. 29, 2019), https://www.marketwatch.com/story/trump-administration-says-it-will-penalize-fewer-banks-who-violate-mortgage-regulations-2019-10-29    [5]   Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Departments of Justice and Housing and Urban Development Sign Interagency Memorandum on the Application of the False Claims Act (Oct. 28, 2019), https://www.justice.gov/opa/pr/departments-justice-and-housing-and-urban-development-sign-interagency-memorandum-application    [6]   U.S. Dep’t of Justice, Memorandum from Rachel Brand, Associate Attorney General (Nov. 16, 2017), https://www.justice.gov/opa/press-release/file/1012271/download    [7]   U.S. Dep’t of Justice, Memorandum from Michael D. Granston, Director, Commercial Litigation Branch, Fraud Section (Jan. 10, 2018), https://drive.google.com/file/d/1PjNaQyopCs_KDWy8RL0QPAEIPTnv31ph/view    [8]   See Rod J. Rosenstein, Deputy Attorney General, U.S. Dep’t of Justice, Remarks at the American Conference Institute’s 35th International Conference on the Foreign Corrupt Practices Act (Nov. 29, 2018), https://www.justice.gov/opa/speech/deputy-attorney-general-rod-j-rosenstein-delivers-remarks-american-conference-institute-0 [announcing changes]; see also U.S. Dep’t of Justice, Memorandum from Sally Yates, Deputy Attorney General (Sep. 9, 2015), https://www.justice.gov/archives/dag/file/769036/download    [9]   U.S. Dep’t of Justice, Justice Manual §§ Section 4-4.111 (Granston), 4-4.112 (Yates), Title 1-20.000 et seq. (Brand)    [10]   Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Departments of Justice and Housing and Urban Development Sign Interagency Memorandum on the Application of the False Claims Act (Oct. 28, 2019), https://www.justice.gov/opa/pr/departments-justice-and-housing-and-urban-development-sign-interagency-memorandum-application    [11]   U.S. Dep’t of Housing and Urban Development, Office of Lender Activities & Program Compliance, Loan Review System (LRS): Implementation and Process Changes (Jan. 26, 2017), https://www.hud.gov/sites/documents/LRS_LENDER_PROCESS.PDF, at 24 (Tier 1: Fraud/Misrepresentation; Violations of statutory requirements; Significant eligibility or insurability issues; Inability to determine/support loan approval). The following Gibson Dunn lawyers assisted in preparing this client update: Stuart Delery, Jonathan Phillips, James Zelenay, and Sean Twomey. Gibson Dunn’s lawyers have handled hundreds of FCA investigations and have a long track record of litigation success. Our lawyers are available to assist in addressing any questions you may have regarding the above developments. For more information, please feel free to contact the Gibson Dunn lawyer with whom you work, the authors, or any of the following members of the False Claims Act group. 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) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) Geoffrey M. Sigler (+1 202-887-3752, gsigler@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) Deborah L. Stein (+1 213-229-7164, dstein@gibsondunn.com) Palo Alto Benjamin Wagner (+1 650-849-5395, bwagner@gibsondunn.com) San Francisco Charles J. Stevens (+1 415-393-8391, cstevens@gibsondunn.com)Winston Y. Chan (+1 415-393-8362, wchan@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

October 15, 2019 |
Webcast: The False Claims Act – 2019 Mid-Year Update: Health Care and Life Sciences Sector

The False Claims Act (FCA) is well-known as one of the most powerful tools in the government’s arsenal to combat fraud, waste and abuse anywhere government funds are implicated. The U.S. Department of Justice has recently issued statements and guidance indicating some new thinking about its approach to FCA cases that may signal a meaningful shift in its enforcement efforts. But at the same time, newly filed FCA cases remain at historical peak levels and the DOJ has enjoyed eight straight years of nearly $3 billion or more in annual FCA recoveries. As much as ever, any company that deals in government funds—especially in the health care and life sciences sector—needs to stay abreast of how the government and private whistleblowers alike are wielding this tool, and how they can prepare and defend themselves. Please join us to discuss developments in the FCA, including: The latest trends in FCA enforcement actions and associated litigation affecting drug and device companies; Updates on the Trump Administration’s approach to FCA enforcement, including developments with the Yates Memo, guidance on cooperation credit in FCA cases, and DOJ’s use of its statutory dismissal authority; Notable legislative and administrative developments affecting the FCA’s statutory framework and application; and The latest developments in FCA case law, including recent Supreme Court jurisprudence and the continued evolution of how lower courts are interpreting the Supreme Court’s Escobar decision. View Slides (PDF) PANELISTS: Stuart F. Delery is a partner in the Washington, D.C. office. He represents corporations and individuals in high-stakes litigation and investigations that involve the federal government across the spectrum of regulatory litigation and enforcement. Previously, as the Acting Associate Attorney General of the United States (the third-ranking position at the Department of Justice) and as Assistant Attorney General for the Civil Division, he supervised the DOJ’s enforcement efforts under the FCA, FIRREA and the Food, Drug and Cosmetic Act. Marian J. Lee is a partner in the Washington, D.C. office where she provides FDA regulatory and compliance counseling to life science and health care companies. She has significant experience advising clients on FDA regulatory strategy, risk management, and enforcement actions. John D. W. Partridge is a partner in the Denver office where he focuses on white collar defense, internal investigations, regulatory inquiries, corporate compliance programs, and complex commercial litigation. He has particular experience with the False Claims Act and the Foreign Corrupt Practices Act (“FCPA”), including advising major corporations regarding their compliance programs. Jonathan M. Phillips is a partner in the Washington, D.C. office, where his practice focuses on FDA and health care compliance, enforcement, and litigation, as well as other government enforcement matters and related litigation. He has substantial experience representing pharmaceutical and medical device clients in investigations by the DOJ, FDA, and HHS OIG. Previously, he served as a Trial Attorney in DOJ’s Civil Division, Fraud Section, where he investigated and prosecuted allegations of fraud under the FCA and related statutes. MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.50 credit hours, of which 1.50 credit hours may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.50 credit hours, of which 1.50 credit hours may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.50 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.

October 1, 2019 |
Webcast: The False Claims Act – 2019 Mid-Year Update: Government Contracting Sector

The False Claims Act (FCA) is well-known as one of the most powerful tools in the government’s arsenal to combat fraud, waste and abuse anywhere government funds are implicated. The U.S. Department of Justice has recently issued statements and guidance indicating some new thinking about its approach to FCA cases that may signal a meaningful shift in its enforcement efforts. But at the same time, newly filed FCA cases remain at historical peak levels and the DOJ has enjoyed eight straight years of nearly $3 billion or more in annual FCA recoveries. As much as ever, any company that deals in government funds—especially in the government contracting sector—needs to stay abreast of how the government and private whistleblowers alike are wielding this tool, and how they can prepare and defend themselves. Please join us to discuss developments in the FCA, including: The latest trends in FCA enforcement actions and associated litigation affecting government contractors; Updates on the Trump Administration’s approach to FCA enforcement, including developments with the Yates Memo, guidance on cooperation credit in FCA cases, and DOJ’s use of its statutory dismissal authority; Notable legislative and administrative developments affecting the FCA’s statutory framework and application; and The latest developments in FCA case law, including recent Supreme Court jurisprudence and the continued evolution of how lower courts are interpreting the Supreme Court’s Escobar decision. View Slides (PDF) PANELISTS: John W.F. Chesley is a partner in the Washington, D.C. office. He represents corporations, audit committees, and executives in internal investigations and before government agencies in matters involving the FCPA, procurement fraud, environmental crimes, securities violations, antitrust violations, and whistleblower claims. He also litigates government contracts disputes in federal courts and administrative tribunals. Jonathan M. Phillips is a partner in the Washington, D.C. office where he focuses on compliance, enforcement, and litigation involving government contractors, as well as other white collar enforcement matters and related litigation. A former Trial Attorney in DOJ’s Civil Fraud section, he has particular experience representing clients in enforcement actions by the DOJ and Department of Defense brought under the False Claims Act and related statutes. Erin N. Rankin is an associate in the Washington, D.C. office and a member of the firm’s Litigation Department. She represents clients on government contracts matters relating to contract claims, bid protests, suspension and debarment proceedings, voluntary disclosures and government investigations, and she is well-versed in conducting internal investigations and defending against civil False Claims Act allegations brought by qui tam relators. She has substantial litigation experience representing clients before the U.S. Court of Federal Claims, the Armed Services Board of Contract Appeals, and the U.S. Government Accountability Office. James Zelenay is a partner in the Los Angeles office where he practices in the firm’s Litigation Department. He is experienced in defending clients involved in white collar investigations, assisting clients in responding to government subpoenas, and in government civil fraud litigation. He also has substantial experience with the federal and state False Claims Acts and whistleblower litigation, in which he has represented a breadth of industries and clients, and has written extensively on the False Claims Act. MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.50 credit hours, of which 1.50 credit hours may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.50 credit hours, of which 1.50 credit hours may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.50 hours. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

September 24, 2019 |
FCPA Enforcement Against U.S. and Non-U.S. Companies

Washington, D.C. partner Michael S. Diamant, of counsel Christopher W.H. Sullivan, and associate Jason H. Smith are the authors of  “FCPA Enforcement Against U.S. and Non-U.S. Companies,” [PDF] published in the Michigan Business & Entrepreneurial Law Review in spring of 2019.

September 17, 2019 |
Webcast: The False Claims Act – 2019 Mid-Year Update: Financial Services Sector

The False Claims Act (FCA) is well-known as one of the most powerful tools in the government’s arsenal to combat fraud, waste and abuse anywhere government funds are implicated. The U.S. Department of Justice has recently issued statements and guidance indicating some new thinking about its approach to FCA cases that may signal a meaningful shift in its enforcement efforts. But at the same time, newly filed FCA cases remain at historical peak levels and the DOJ has enjoyed eight straight years of nearly $3 billion or more in annual FCA recoveries. As much as ever, any company that deals in government funds—especially in the financial services sector—needs to stay abreast of how the government and private whistleblowers alike are wielding this tool, and how they can prepare and defend themselves. Please join us to discuss developments in the FCA, including: The latest trends in FCA enforcement actions and associated litigation affecting the financial services sector; Updates on the Trump Administration’s approach to FCA enforcement, including developments with the Yates Memo, guidance on cooperation credit in FCA cases, and DOJ’s use of its statutory dismissal authority; Notable legislative and administrative developments affecting the FCA’s statutory framework and application; and The latest developments in FCA case law, including recent Supreme Court jurisprudence and the continued evolution of how lower courts are interpreting the Supreme Court’s Escobar decision. View Slides (PDF)  PANELISTS: Stuart F. Delery is a partner in the Washington, D.C. office. He represents corporations and individuals in high-stakes litigation and investigations that involve the federal government across the spectrum of regulatory litigation and enforcement. Previously, as the Acting Associate Attorney General of the United States (the third-ranking position at the Department of Justice) and as Assistant Attorney General for the Civil Division, he supervised the DOJ’s enforcement efforts under the FCA, FIRREA and the Food, Drug and Cosmetic Act. Sean S. Twomey is a senior litigation associate in the Los Angeles office with experience in complex commercial cases at both the trial and appellate level, with an emphasis in sports law and health care compliance, enforcement, and litigation. He is experienced in handling white collar investigations, internal audits, and enforcement actions, and also has significant experience in False Claims Act qui tam litigation and related civil and criminal investigations in which he has represented clients in a variety of industries. F. Joseph Warin is a partner in the Washington, D.C. office, chair of the office’s Litigation Department, and co-chair of the firm’s White Collar Defense and Investigations practice group. His practice focuses on complex civil litigation, white collar crime, and regulatory and securities enforcement – including Foreign Corrupt Practices Act investigations, False Claims Act cases, special committee representations, compliance counseling and class action civil litigation. James Zelenay is a partner in the Los Angeles office where he practices in the firm’s Litigation Department. He is experienced in defending clients involved in white collar investigations, assisting clients in responding to government subpoenas, and in government civil fraud litigation. He also has substantial experience with the federal and state False Claims Acts and whistleblower litigation, in which he has represented a breadth of industries and clients, and has written extensively on the False Claims Act. MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.50 credit hours, of which 1.50 credit hours may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.50 credit hours, of which 1.50 credit hours may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.50 hours. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

September 10, 2019 |
The UK Serious Fraud Office’s latest guidance on corporate co-operation – Great expectations fulfilled or left asking for more?

Click for PDF On August 6, 2019 the Serious Fraud Office (“SFO”) in London published a new section of its Operational Guidance entitled Corporate Co-operation Guidance (the “Co-operation Guidance”). The Director of SFO, Lisa Osofsky, foreshadowed the publication of such guidance in previous speeches, noting in one that the purpose of the guidance was “to provide… added transparency about what [companies] might expect if they decide to self-report fraud or corruption.” [1] This raised great expectations amongst practitioners and companies alike. The question is whether these expectations have been met or do they leave readers asking for more? The primary audience for the Co-operation Guidance is SFO prosecutors and investigators. This is also the case for the Deferred Prosecution Agreement Code of Practice (the “DPA Code”) where, the Crime and Courts Act 2013 directs that a Code be published to give prosecutors “guidance on – the general principles to be applied in determining whether a DPA is likely to be appropriate in a given case.” [2] However, despite the intended primary audience of these documents, knowing the considerations that prosecutors will take into account when assessing whether it is in the public interest to offer a Deferred Prosecution Agreement  (“DPA”) is invaluable insight for companies. In many respects the Co-operation Guidance codifies the content of speeches given by the Director and other members of the SFO’s senior leadership. Reliance on speeches to understand the requirements had always been unsatisfactory where they may have been unpublished, selectively reported and on occasions were inconsistent.[3] Introduction to the Co-operation Guidance The Co-operation Guidance begins by providing high level opening descriptions of cooperation, which includes timely self-reporting to the SFO, the identification of the alleged perpetrators and the prompt provision of evidence. On the other hand it identifies delay, stalling tactics or prejudicing a criminal investigation by warning potential suspects, as uncooperative. The Co-operation Guidance also makes clear early on that it is not a “checklist”, that “each case will turn on its own facts” and that “co-operation is one of many factors that the SFO will take into consideration when determining an appropriate resolution…” In saying this the SFO preserves a significant breadth of prosecutorial discretion. This is welcome to the extent that it provides the possibility for a case being resolved by a DPA that does not fit a conventional view of what constitutes the interests of justice. For example, such discretion has permitted a previous DPA to be concluded where the Court’s first reaction was that if the company in that matter “were not to be prosecuted … then it was difficult to see when any company would be prosecuted.” [4] Whilst discretion may therefore be welcome, the unqualified  words that “even full, robust co-operation – does not guarantee any particular outcome” suggests that the SFO has missed the opportunity to maximise the incentivisation for self-reporting and other co-operation. In contrast, the DOJ’s FCPA Corporate Enforcement Policy contains a presumption in favour of a declination with disgorgement for self-reporting, co-operation and remediation absent aggravating circumstances. Those considering reporting conduct captured by both UK and US enforcers are therefore presented on the face of it with different and potentially inconsistent standards and consequences for self-reporting and other co-operation. In its introductory paragraphs the Co-operation Guidance refers to and quotes from the separate but similarly named Guidance on Corporate Prosecutions (the “Corporate Guidance”). The Corporate Guidance is undated but heralds back to the Directorship of the SFO under Richard Alderman which ended in 2012. It was the first attempt to provide direction in respect of the SFO’s expectations of companies regarding co-operation. It contains the public interest factors both in favour of charging and not charging companies. Those public interest criteria were adopted in the public consultation draft of the DPA Code in 2013. As a result of that public consultation the public interest criteria were amended in the DPA Code as finally published. The Corporate Guidance is now therefore redundant. Anyone referring to both the Corporate Guidance and the DPA Code will find inconsistent criteria, and may therefore arrive at a conclusion which is flawed. [5] Examples of Co-operative Conduct Provision of Information In a speech delivered by Ms Osofsky on December 4, 2018 she stated: “Cooperation is making the path to a case easier. For the prosecutor that means making the path to admissible evidence easier. This is not rocket science. It is documents. It is financial records. It is witnesses. Make them available – promptly. Point us to the evidence that is most important – both inculpatory and exculpatory. In other words, give us the “hot” documents. Don’t just bury us in a document dump. Make the evidence available in a way that comports with our laws. Make it available in a way useful to us so that we can do our job – which we will do. We will not, of course, simply take your word for it. We will use what you give us as a starting point, not an end point. We will test, we will probe. Do not do things that create proof issues for us or create procedural barriers.” Despite the Co-operation Guidance making it plain that it is not exhaustive nor a checklist for identifying cooperative conduct, instead of providing overarching guidance which describe positive behaviours consistent with the Director’s words, it instead begins by particularising in detail over twenty mechanistic criteria in respect of material identification, collection, processing and production which reads like the very checklist it previously disavows. Those experienced in conducting internal investigations will already approach document identification, collection, processing and production in a methodical manner. The detail given in the Co-operation Guidance however signals that the SFO will seek the provision of material of a specified scope, that is compliant with a particular collection and production methodology, is accompanied by an audit trail and individuals are identified who will be able to give evidence in a future trial in these respects. Given the particularised approach, companies and their advisors should familiarise themselves with the requirements. Individual Interview Accounts The importance of the company’s approach to interviewing individuals is dealt with in detail. Obtaining, preserving and disclosing early accounts from persons central to the events under investigation has long been a key focus of the SFO, and has led to extensive litigation, either where the SFO has sought such accounts (SFO v ENRC)[6] or failed to do so properly (R (on the application of AL) v SFO).[7] The Co-operation Guidance states that companies should seek the SFO’s view “before interviewing potential witnesses or suspects” or “taking other overt steps”. In this respect, the Co-operation Guidance does not acknowledge that there may be interviews or other overt steps that need to be conducted by the company in order to establish whether there is any conduct to self-report to the SFO. The Director of the SFO however has recognised that this may be the case in a number of speeches including on April 3, 2019 where Ms Osofsky stated that, “I know that companies will want to examine any suspicions of criminality or regulatory breaches – indeed they have a duty to their shareholders to ensure allegations or suspicions are investigated, assessed and verified, so they understand what they may be reporting before they report it.” The absence of this recognition in the Co-operation Guidance is a significant omission which creates uncertainty. Our view is that  those conducting investigations may conduct interviews and take other unavoidable overt steps in order to establish whether there is anything to report. However if those interviews, whether alone or combined with other steps, demonstrate misconduct that would be of interest to the SFO, then any further interviewing or taking of overt steps prior to self-reporting, will likely fall short of what is suggested by the Co-operation Guidance. Companies will therefore have to give careful consideration as to whether interviews should be suspended, pending consultation with the SFO. It would seem that it is not the SFO’s desire to direct internal investigations, but instead to secure the opportunity to determine whether it should conduct interviews first, in order for example to secure an individual’s first account or prevent a suspect being tipped off. A request not to interview is comparable to the de-confliction of witness interviews in the DOJ’s FCPA Corporate Enforcement Policy. If the SFO makes such a request in practice, it is then reasonable to assume that it will conduct an interview promptly to ensure that the company may proceed to interview for its own fact gathering purposes, including  disciplinary or remedial action. A company’s disciplinary and remedial action are also documented as important considerations for assessing whether a DPA is in the interests of justice.[8] There have been instances where companies in the UK have been directed not to conduct interviews at all. This occurred in the investigations of Tesco Stores Limited and Serco Geografix Limited. The acquiescence by the companies to such a request weighed positively in favour of DPAs being approved. However, there are more recently commenced investigations in which companies have not been so directed so it cannot be determined yet whether this reflects a settled trend. It may be expected that such direction will be given in the future, particularly in cases concerning uniquely UK misconduct and involving a small number of persons of interest. Privilege Claims over Internal Investigation Interview Records A whole section of the Co-operation Guidance is devoted to privilege. Waiver is characterised as co-operative but an assertion of privilege will in the eyes of the SFO be neutral. While this is a welcome clarification, the Co-operation Guidance notes that a Court may view the assertion differently and footnotes the case of SFO v ENRC in support of that caution. In our view the judgement in that case says no more than waiving privilege will be viewed positively. However, it is in our view unlikely that a Court deciding whether a DPA is in the interests of justice would weigh a properly established assertion of privilege against a company when establishing whether to approve a DPA. Of the five DPAs approved to date in the UK, two involved assertions of privilege yet were approved by the same judge who gave the judgment in SFO v ENRC. Those DPAs are in our view clear authority that waiver of privilege is not a prerequisite. Where there is a balancing exercise of potentially competing considerations as to whether a DPA is in the interest of justice, the positive weight of a waiver of privilege in some cases may make a determinative difference favouring a DPA. However, this will be difficult to determine at the early stages of a self-reporting process and may be incapable of remedy later. Whether to assert privilege thereby forfeiting credit, or waiving privilege to receive it, will require careful judgements to be made. Where privilege claims are made, the Co-operation Guidance reminds prosecutors that the claims will need to be properly established. Not only is the SFO interested in knowing what individuals have said in interviews that it was not party to, it is cognisant that future defendants will be equally interested. The SFO has a duty to those defendants to pursue all reasonable lines of enquiry to secure such information. In our client alert of September 5, 2018, commenting on the case of SFO v ENRC, we set out what a company must demonstrate in order to best establish a claim of privilege. The Co-operation Guidance states that such claims should be certified by independent counsel. The SFO appears therefore not to be prepared to accept representations made by a company, regardless of how well they might be articulated or evidenced. While not prescriptive on the level of detail that will be required in independent counsel’s certification, given the statement that claims of privilege will need to be properly established, it suggests that significant detail will be expected. The reasons for this are twofold. Firstly, in requiring independent counsel certification, the SFO is implicitly agreeing to be bound by such certifications. As such they must be able to make a qualitative examination of the certification. Secondly, the detail will be important since future individual defendants may dispute the certification even if the SFO is satisfied, and therefore the reasoning will need to be capable of withstanding such challenge. The use of independent counsel is a proactive step to address potential criticism by individual defendants that the testing of a company’s assertion of privilege was inadequate. Whether the use of independent counsel will halt the satellite litigation contesting privilege claims rather than merely providing a different springboard for the challenge remains to be seen. We suspect it will be the latter given the often complex and finely balanced factual considerations that need to be assessed. In 2014 individual defendants made precisely such a challenge to independent counsel’s determination, albeit in that case they were unsuccessful. [9] Conclusion The Co-operation Guidance is the product of repeated requests from companies and legal practitioners for clarity as to what constitutes co-operation in corporate investigations in order that they know how to secure a DPA. Under the SFO’s previous Director, the issuing of such guidance was resisted. [10] For the SFO to depart from this position was worth doing only if the outcome is to provide clarity and certainty. The clarification on conducting interviews and claims of privilege is certainly helpful and sets some recent ambiguity to rest. How document collection, processing and production should occur is made clear. However the manner of a company’s document collection and production is unlikely to ever be weighed heavily in an SFO decision to offer to resolve a case by way of a DPA. Therefore whilst understanding SFO requirements in this respect is helpful, the lengthy addressing of this issue in the Co-operation Guidance elevates disproportionately its relative importance in any such decision. It is however the unwillingness to describe definitively the consequences of self-reporting and other co-operative behaviour which, absent aggravating features, would presumptively result in a DPA being offered is the key point on which the Co-operation Guidance does not meet expectations. Whilst the SFO is likely to dismiss this uncertainty as a difficulty for companies and their advisors to navigate, the enforcement of multi-jurisdictional financial crime and the incentivisation of its self-reporting is an enforcer’s responsibility and requires an appreciation of the global enforcement landscape. Providing such clarity and certainty could have significantly encouraged self-reporting thereby advancing the prompt and effective enforcement of corporate crime, which was the main driver behind the introduction of DPAs. As the then Solicitor General, Oliver Heald QC said in 2012 when announcing the decision to introduce DPAs, “Whatever perspective we bring to the issue of enforcement, it is clear that all involved could benefit from a tool to reduce the complexity and uncertainty of current enforcement powers, and to deal with cases more quickly and in a way which better meets the interests of justice and commands public confidence.”[11] This unresolved lack of clarity and certainty is likely to leave companies asking for more. _____________________ [1]   Lisa Osofsky, “Fighting fraud and corruption in a shrinking world” 3 April, 2019, Royal United Services Institute, London. [2]   Schedule 17, paragraph 6(1) (a). [3]   See reporting of a speech given at GIR Live, London, December 6, 2018 which made the novel suggestion that asserting privilege may be inconsistent with co-operation – https://globalinvestigationsreview.com/article/1177673/waiving-privilege-shows-willingness-to-cooperate-sfo-official-says [4]   SFO v Rolls-Royce Plc, Southwark Crown Court, 17 January 2017, https://www.judiciary.uk/wp-content/uploads/2017/01/sfo-v-rolls-royce.pdf at paragraph 61. [5]   By way of illustration the Corporate Guidance states that: “A genuinely proactive approach adopted by the corporate management team when the offending is brought to their notice, involving self-reporting and remedial actions, including the compensation of victims: In applying this factor the prosecutor needs to establish whether sufficient information about the operation of the company in its entirety has been supplied in order to assess whether the company has been proactively compliant. This will include making witnesses available and disclosure of the details of any internal investigation.” The DPA Code however states (with emphasis added for illustration) that “Considerable weight may be given to a genuinely proactive approach adopted by P’s management team when the offending is brought to their notice, involving within a reasonable time of the offending coming to light reporting P’s offending otherwise unknown to the prosecutor and taking remedial actions including, where appropriate, compensating victims. In applying this factor the prosecutor needs to establish whether sufficient information about the operation and conduct of P has been supplied in order to assess whether P has been co-operative. Co-operation will include identifying relevant witnesses, disclosing their accounts and the documents shown to them. Where practicable it will involve making the witnesses available for interview when requested. It will further include providing a report in respect of any internal investigation including source documents.” [6]   [2018] EWCA Civ 2006. [7]   [2018] EWHC 856 (Admin). [8]   DPA Code, paragraph 2.8.2 iv. [9]   R v Dennis Kerrison and Miltos Papachristos, Southwark Crown Court. [10]   https://globalinvestigationsreview.com/article/1149586/sfo-director-we-dont-do-guidance [11]   Oliver Heald QC, “Keynote Speech to the World Bribery and Corruption Compliance Forum, 23 October 2012:  https://www.gov.uk/government/speeches/keynote-speech-to-the-world-bribery-and-corruption-compliance-forum. This client alert was prepared by Sacha Harber-Kelly, Patrick Doris and Shruti Chandhok. Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these developments.  If you would like to discuss this alert in greater detail, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following members of the firm’s UK disputes practice. Philip Rocher (+44 (0)20 7071 4202, procher@gibsondunn.com) Patrick Doris (+44 (0)20 7071 4276, pdoris@gibsondunn.com) Sacha Harber-Kelly (+44 20 7071 4205, sharber-kelly@gibsondunn.com) Charles Falconer (+44 (0)20 7071 4270, cfalconer@gibsondunn.com) Allan Neil (+44 (0)20 7071 4296, aneil@gibsondunn.com) Steve Melrose (+44 (0)20 7071 4219, smelrose@gibsondunn.com) Sunita Patel (+44 (0)20 7071 4289, spatel2@gibsondunn.com) Shruti Chandhok (+44 (0)20 7071 4215, schandhok@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 31, 2019 |
Dropping the Pilot – DOJ’s Toned-Down Corporate Enforcement Policy Reduces the Burden on Business and Could Improve Information Sharing

Washington, D.C. partners F. Joseph Warin, M. Kendall Day and Daniel P. Chung, and associate Laura R. Cole are the authors of “Dropping the Pilot – DOJ’s Toned-Down Corporate Enforcement Policy Reduces the Burden on Business and Could Improve Information Sharing,” [PDF] published in Global Investigations Review’s Practitioner’s Guide to Global Investigations Half-Year Update in July 2019.

August 15, 2019 |
Gibson Dunn Lawyers Recognized in the Best Lawyers in America® 2020

The Best Lawyers in America® 2020 has recognized 158 Gibson Dunn attorneys in 54 practice areas. Additionally, 48 lawyers were recognized in Best Lawyers International in Belgium, Brazil, France, Germany, Singapore, United Arab Emirates and United Kingdom.

August 13, 2019 |
Getting the Deal Through: Appeals 2019

Washington, D.C. partner Mark Perry and Los Angeles partner Perlette Jura are the contributing editors of “Appeals 2019,” a publication examining Appellate law and procedure between jurisdictions around the globe, published by Getting the Deal Through in June 2019.  Perry and Jura are the authors of the “Global Overview” and the “United States” chapters of the book, and London partners Patrick Doris and Doug Watson and associate Daniel Barnett are the authors of the “United Kingdom” chapter.

August 5, 2019 |
Mid-Year Review: False Claims Act Enforcement in 2019

Los Angeles partner James L. Zelenay Jr. and associate attorney Sean S. Twomey are the authors of “Mid-Year Review: False Claims Act Enforcement in 2019” [PDF] published by the Daily Journal on August 1, 2019.

July 25, 2019 |
Navigating Cross-Border Investigations Involving Switzerland

Washington D.C. partner F. Joseph Warin and associate attorneys Jason Smith and Susanna Schuemann are the authors of “Navigating Cross-Border Investigations Involving Switzerland” [PDF] published by the Global Investigations Review on July 12, 2019.

July 16, 2019 |
2019 Mid-Year False Claims Act Update

Click for PDF As we progress through the Trump Administration’s third year, robust False Claims Act (“FCA”) enforcement continues. At the same time, the Administration has continued to signal a greater openness to tempering overly aggressive FCA theories. In the past six months, the Department of Justice (“DOJ”) issued long-awaited guidance about cooperation credit in FCA cases and also continued to seek dismissal of some declined cases pursued by whistleblowers (albeit with mixed success). Aside from these efforts, however, DOJ has not evidently relaxed its approach to enforcement: the first half of the year saw DOJ announce recoveries of nearly three-quarters of a billion dollars in settlements, largely from entities in the health care and life sciences industries. The next year should provide insight as to whether the Administration’s policy refinements are the vanguard of a more meaningful shift by DOJ away from its historical enforcement efforts. But even if that were the case, enterprising relators and aggressive state enforcers may end up filling any gaps. In just the past half year, several states took steps to enact or strengthen existing FCA statutes. Regardless of what direction DOJ and the Trump Administration head, federal courts’ FCA decisions from the last six months serve as a reminder that FCA litigation remains hard-fought, given the enormous stakes. At the highest level, the U.S. Supreme Court weighed in on the FCA again this year, resolving a circuit split about the FCA’s statute of limitation in favor of whistleblowers. This marked the third time in four years the land’s highest court interpreted the FCA. Meanwhile, lower courts also remained active in FCA jurisprudence, issuing a number of notable opinions that we have summarized herein. Below, we begin by addressing enforcement activity at the federal and state levels, turn to legislative developments, and then analyze significant court decisions from the past six months. As always, Gibson Dunn’s recent publications regarding 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. I.  NOTEWORTHY DOJ ENFORCEMENT ACTIVITY DURING THE FIRST HALF OF 2019 DOJ has announced more than $750 million in settlements this year, a slight uptick from this point in 2018, but somewhat down from half-year highs set in recent years. The dollar totals tell only part of the story, however, as neither DOJ nor qui tam relators have scaled back FCA investigations or whistleblower complaints considerably. As in recent years, DOJ secured the lion’s share of its FCA recoveries from enforcement actions involving health care and life sciences entities. Although DOJ’s recoveries came from cases reflecting a wide variety of theories of FCA liability, cases involving alleged violations of the Anti-Kickback Statute (“AKS”) and the Stark Law, which generally prohibit various types of remunerative arrangements with referring health care providers, continued to predominate. This year, DOJ’s AKS enforcement activity includes several large recoveries, totaling nearly $250 million, from pharmaceutical companies accused of unlawfully covering Medicare copays for their own products through charitable foundations. Further, DOJ backed up its statements regarding its plans to combat the opioid epidemic as it recovered more than $200 million from an opioid manufacturer accused of paying kickbacks. Below, we summarize these and some of the other most notable settlements thus far in 2019. A.  Health Care and Life Science Industries On January 28, a hospital and six of its owners agreed to pay the federal government $8.1 million to settle claims that it violated the FCA by submitting false claims to Medicare and Medicaid programs in violation of the AKS and Stark Law. DOJ alleged that the hospital, its subsidiary, and at least two affiliates recruited a medical director in order to secure his referrals of patients by offering the physician compensation that exceeded fair market value for his services. The whistleblower will receive $1.6 million from the federal government.[1] On January 30, a pathology laboratory agreed to pay $63.5 million to settle allegations that it violated the FCA by engaging in improper financial relationships with referring physicians. The settlement resolves allegations that the company violated the AKS and the Stark Law by providing subsidies to referring physicians for electronic health records (“EHR”) systems and free or discounted technology consulting services. The allegations stem from three whistleblower lawsuits, and the whistleblowers’ share of the settlement had not been determined at the time the settlement was announced.[2] On February 6, a Florida-based developer of EHR software agreed to pay $57.25 million to resolve allegations that it caused its users to submit false claims to the government by (1) misrepresenting the capabilities of its EHR product (thereby enabling them to seek meaningful use incentive payments) and (2) violating the AKS (by financially incentivizing its client health care providers to recommend its product to prospective customers).[3] On February 6, a Georgia-based hospital agreed to pay $5 million to resolve allegations that it violated the FCA by engaging in improper financial relationships with referring physicians between 2012 and 2016. DOJ alleged that the hospital compensated the physicians in amounts that were above fair market value or in a manner that took into account the volume or value of the physicians’ referrals.[4] On February 27, a Tennessee-based health care company and its related companies agreed to pay more than $18 million to resolve a lawsuit brought by DOJ and Tennessee alleging they billed the Medicare and Medicaid programs for substandard nursing home services. The settlement also resolves claims brought by DOJ against the company’s majority owners and CEO, as well as the LLC’s former director of operations, who agreed to pay $250,000 toward the settlement.[5] On March 11, a medical technology company agreed to pay more than $17.4 million to resolve allegations that it violated the FCA by providing free or discounted practice development and market development support, allegedly amounting to “in-kind” payments to induce physicians in California and Florida to purchase the company’s ablation products. Under the settlement, the company also will pay approximately $1.4 million to California and approximately $1.0 million to Florida for claims paid for by the states’ Medicaid programs. The two whistleblowers, former company employees, will receive approximately $3.1 million as their share of the federal recovery.[6] On March 21, a Maryland-based health care company and its affiliates agreed to pay $35 million to settle allegations under the FCA that it paid kickbacks to a Maryland cardiology group in exchange for referrals, through a series of contracts with two Maryland hospitals. The settlement resolved two whistleblower lawsuits brought by cardiac surgeons and former patients, who alleged that the company and its affiliates performed medically unnecessary cardiac procedures for which they submitted false claims to Medicare. The whistleblowers’ share had not been disclosed yet.[7] In April, several pharmaceutical companies reached settlements with DOJ over allegations involving charitable funds. For example: As part of a string of investigations by the U.S. Attorney’s Office for the District of Massachusetts, three pharmaceutical companies agreed to pay a total of $122.6 million to resolve allegations that they violated the FCA by illegally paying the Medicare or Civilian Health and Medical Program copays for their own products through purportedly independent foundations that were allegedly used as mere conduits. The government contended that the companies’ payments of the copays were kickbacks aimed at inducing patients to use the companies’ drugs. In all three matters, the government alleged that the foundations were used to generate revenues from prescriptions for patients who would have otherwise been eligible for the companies’ free drug programs. One company agreed to pay $57 million; the second company agreed to pay $52.6 million, and the third company agreed to pay $13 million.[8] On April 30, a Kentucky-based pharmaceutical company agreed to pay $17.5 million to resolve allegations that it violated the FCA and AKS by paying kickbacks to patients and physicians to induce prescriptions of two of its drugs. DOJ alleged that the company increased the drugs’ prices in January 2012, which increased Medicare patients’ copays. Then, DOJ asserted, the company paid these patients’ copays through a third-party Parkinson’s Disease fund, thereby providing illegal inducements to patients to purchase the drugs. The allegations underlying the settlement were originally raised by whistleblowers, who will receive $3.15 million as their share of the recovery.[9] On April 12, a California-based health care services provider and several affiliated entities agreed to pay $30 million to resolve allegations that the affiliated entities submitted false information about the health status of beneficiaries enrolled in Medicare Advantage plans, which purportedly resulted in overpayments to the provider.[10] On May 6, a West Virginia-based health care company agreed to pay $17 million to resolve allegations of a billing scheme that allegedly defrauded Medicaid of $8.5 million. This represented the largest health care fraud settlement in the history of West Virginia, and the state will collect $2.2 million from the settlement. DOJ alleged that the company, acting through a subsidiary and several of its drug treatment centers, sent blood and urine samples to outside laboratories for testing, and then submitted reimbursement claims to West Virginia Medicaid as if the treatment centers had performed the tests themselves. According to the government, since the company paid the outside laboratories a lower rate than its requested reimbursement to Medicaid, the company wrongfully collected $8.5 million.[11] On May 30, a Kansas-based cardiologist agreed to pay $5.8 million to resolve allegations that he and his medical group violated the FCA by improperly billing federal health care programs for medically unnecessary cardiac stent procedures. This marked the DOJ’s third False Claims settlement with the cardiologist and his medical group, who concurrently agreed with U.S. Department of Health and Human Services (“HHS”) to be excluded from participation in federal health programs for three years. The settlement announcement resolves allegations in a whistleblower lawsuit filed by another cardiologist, who will receive approximately $1.16 million from the settlement.[12] On May 31, a New Jersey-based pharmaceutical company was charged under the Sherman Act for conspiring with competitors to fix prices, rig bids, and allocate customers. In a separate civil resolution, the company agreed to pay $7.1 million to resolve allegations under the FCA related to the alleged price fixing conspiracy. DOJ asserted that between 2012 and 2015, the company paid and received remuneration through arrangements on price, supply, and allocation of customers with other pharmaceutical manufacturers for certain generic drugs, in violation of the AKS, and that its sale of such drugs resulted in claims submitted to or purchases by federal health care programs.[13] On June 5, an opioid manufacturing company agreed to a $225 million global resolution to settle the government’s criminal and civil investigations. DOJ alleged that the company paid kickbacks and engaged in other unlawful marketing practices to induce physicians and nurse practitioners to prescribe its opioid to patients. As part of the criminal resolution, the company entered into a deferred prosecution agreement with the government, and its subsidiary pleaded guilty to five counts of mail fraud. The company also agreed to pay a $2 million criminal fine and a $28 million forfeiture. As part of the civil resolution, the company agreed to pay $195 million. The allegations stem from five whistleblower lawsuits, and the whistleblowers’ share of the settlement has yet to be determined.[14] On June 30, the nation’s largest operator of inpatient rehabilitation centers agreed to pay $48 million to resolve allegations that its centers provided medically unnecessary treatment, and also submitted false information to Medicare to achieve higher levels of reimbursement. The settlement involved allegations across multiple facilities and was part of DOJ’s broader efforts to target inpatient treatment facilities nationally. B.  Government Contracting On January 28, a corporation that provides information and technology services agreed to pay $5.2 million to resolve allegations that it violated the FCA by falsely billing labor under its contract with the United States Postal Service (“USPS”). Under the contract, the company would bill the USPS for personnel performing services at rates established by certain billing categories. DOJ alleged that the corporation knowingly billed the USPS for certain personnel services at higher category rates, even though the personnel did not have the education and/or experience to be in these categories.[15] On March 25, a private university in North Carolina agreed to pay the government $112.5 million to resolve allegations that it violated the FCA by submitting applications and progress reports that contained purportedly falsified research on federal grants to the National Institutes of Health (“NIH”) and to the Environmental Protection Agency. Among other allegations, DOJ asserted that the university fabricated research results related to mice to claim millions of grant dollars from the NIH. The allegations stem from a whistleblower lawsuit brought by a former university employee, who will receive $33.75 million from the settlement.[16] On May 13, a California-based software development company agreed to pay $21.57 million to resolve allegations that it caused the government to be overcharged by providing misleading information about its commercial sales practices, which was then used in General Services Administration (“GSA”) contract negotiations. DOJ alleged that the company knowingly provided false information concerning its commercial discounting practices for its products and services to resellers. These resellers then allegedly used that information in negotiations with GSA for government-wide contracts. DOJ alleged this caused GSA to agree to less favorable pricing, which led the government purchasers to be overcharged. The allegations stemmed from a whistleblower lawsuit filed by a former company employee, who will receive over $4.3 million from the resolution.[17] II.  LEGISLATIVE AND POLICY DEVELOPMENTS A.  Federal Developments 1.  Guidance Regarding Cooperation Credit The first half of 2019 did not witness major legislative developments at the federal level pertaining to the FCA. But DOJ has advanced its recent efforts to more publicly and transparently articulate its approach to FCA cases, as evidenced by the May 2019 release of long-awaited guidance regarding cooperation credit in FCA investigations.[18] We covered this development in detail in our May 14, 2019 alert entitled “Cooperation Credit in False Claims Act Cases: Opportunities and Limitations in DOJ’s New Guidance.” Several key points regarding the guidance bear mention here. The guidance is the latest chapter in a broader effort by DOJ to scale back the “all or nothing” approach to cooperation credit set forth in the 2015 Yates Memorandum. This initiative stems from a belief that that approach, in the words of former Deputy Attorney General Rod J. Rosenstein, had been “counterproductive in civil cases” because it deprived DOJ attorneys of the “flexibility” they needed “to accept settlements that remedy the harm and deter future violations.”[19] In keeping with Mr. Rosenstein’s statements, the new DOJ guidance—codified at Section 4-4.112 of the Justice Manual[20]—provides that defendants may receive varying levels of cooperation credit depending on their efforts across ten non-exhaustive categories of cooperation.[21] These include: “[i]dentifying individuals substantially involved in or responsible for the misconduct”; making individuals available who have “relevant information”; “[a]dmitting liability or accepting responsibility for the relevant conduct”; and “[a]ssisting in the determination or recovery” of losses.[22] The guidance also notes that cooperation must have value for DOJ, as measured by the “timeliness and voluntariness” of the cooperation, the “truthfulness, completeness, and reliability” of the information provided, the “nature and extent” of the cooperation, and the “significance and usefulness of the cooperation” to DOJ. Under the guidance, DOJ’s determination of cooperation credit will consider remediation undertaken by the defendant, including remediation focused on root causes and discipline of relevant individuals.[23] The guidance states that to receive full credit, entities should “undertake a timely self-disclosure that includes identifying all individuals substantially involved in or responsible for the misconduct, provide full cooperation with the government’s investigation, and take remedial steps designed to prevent and detect similar wrongdoing in the future.”[24] Unlike DOJ’s guidance regarding cooperation in criminal cases, the new FCA guidance does not provide for percentage reductions in penalties (or damages) for various levels of cooperation. Instead, the guidance focuses on DOJ’s “discretion . . . [to] reduc[e] the penalties or damages multiple sought by the Department,” and provides that no defendant may receive cooperation credit so great as to result in the payment of an amount less than single damages (including relator’s share, plus lost interest and costs of investigation).[25] The new guidance provides a measure of clarity regarding DOJ’s overall approach to cooperation credit, and the flexible standards the guidance sets forth provide opportunities for defendants to formulate creative negotiation and litigation strategies. On the other hand, the guidance lacks specificity regarding several critical issues (e.g., what constitutes cooperation and how to assess the value that cooperation provides to DOJ). 2.  Application of the Granston Memorandum As we have previously discussed, DOJ signaled last year that it will increasingly consider moving to dismiss some FCA qui tam actions. Specifically, in January 2018, Michael Granston, the Director of the Fraud Section of DOJ’s Civil Division, issued a memorandum (the “Granston Memo”) stating that “when evaluating a recommendation to decline intervention in a qui tam action, attorneys should also consider whether the government’s interests are served, in addition, by seeking dismissal pursuant to section 3730(c)(2)(A).”[26] The Granston Memo established a list of non-exhaustive factors for DOJ to evaluate when considering whether to dismiss a case under section 3730(c)(2)(A), which states that the government may dismiss an FCA “action notwithstanding the objections of the person initiating the action if the person has been notified by the Government of the filing of the motion and the court has provided the person with an opportunity for a hearing on the motion.”[27] The Granston Memo’s release prompted cautious optimism among FCA observers that DOJ would step in to dismiss unmeritorious cases, but the Memo also left many open questions regarding exactly how DOJ would exercise its discretion. Since the Memo’s release, FCA defendants routinely have pushed DOJ to dismiss cases, and in some cases, DOJ has done just that. But a little more than a year after the Memo’s release, there are signs that DOJ is continuing to calibrate its approach, in response both to defendants’ insistent entreaties and scrutiny by the courts (which must approve any dismissal). First, the memorandum’s namesake, DOJ Civil Fraud Section Director Michael Granston, recently elaborated on how DOJ will apply the Granston Memo’s principles. In remarks at the Federal Bar Association’s FCA Conference in March, Mr. Granston explained that DOJ will not be persuaded to dismiss qui tam actions “[j]ust because a case may impose substantial discovery obligations on the government.”[28] The decision to seek dismissal, he said, will instead be evaluated on a case-by-case basis, with the cost-benefit analysis focusing on the likelihood that the relator can prove the allegations brought on behalf of the government.[29] Mr. Granston cautioned that defendants “should be on notice that pursuing undue or excessive discovery will not constitute a successful strategy for getting the government to exercise its dismissal authority,” and that “[t]he government has, and will use, other mechanisms for responding to such discovery tactics.”[30] Overall, Mr. Granston stated, “dismissal will remain the exception rather than the rule.”[31] Second, Deputy Associate Attorney General Stephen Cox delivered remarks at the 2019 American Conference Institute’s Advanced Forum on False Claims and Qui Tam Enforcement that explained DOJ’s approach to dismissals.[32] Regarding the Granston Memo, Mr. Cox characterized the relationship between qui tam relators and the government as a “partnership,” formed on the belief that relators “are often uniquely situated to bring fraudulent practices to light.”[33] He emphasized, however, that DOJ plays a “gatekeeping role” in ensuring that when a relator prosecutes a non-intervened FCA case, it does not do so in a way that harms the government’s financial interests or creates bad law for the government.[34] Mr. Cox stated that the Granston Memo “is not really a change in the Department’s historical position,” but he acknowledged that DOJ’s use of its dismissal authority has increased since 2017.[35] Mr. Cox told listeners that while DOJ “will remain judicious,” it “will use this tool more consistently to preserve our resources for cases that are in the United States’ interests.”[36] In more recent remarks, Mr. Cox has added that DOJ’s “more consistent[]” use of its dismissal authority will aim at “reign[ing] in overreach in whistleblower litigation.”[37] With DOJ’s increased use of its statutory dismissal authority has come greater judicial scrutiny of the scope of that authority and the standards to be applied in determining whether dismissal is appropriate. In the wake of the Granston Memo, lower courts have been forced to analyze the standard that courts should apply when the government moves to dismiss qui tam cases. These cases have pitted two competing standards against each other, with mixed results. Previously, in United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139 (9th Cir. 1998), the Ninth Circuit held that the government’s dismissal is first examined for: (1) an identification of a valid government purpose by the government; and (2) a rational relation between the dismissal and accomplishment of the government’s purpose. Id. at 1145. If the government’s dismissal meets the two-step test, the burden shifts to the relator to show that the “dismissal is fraudulent, arbitrary and capricious, or illegal.” Id. (quoting United States ex rel. Sequoia Orange Co. v. Sunland Packing House Co., 912 F. Supp. 1325, 1353 (E.D. Cal. 1995)). The Tenth Circuit adopted the Sequoia standard and also applies the above test. Ridenour v. Kaiser-Hill Co., 397 F.3d 925, 936, 940 (10th Cir. 2005). In contrast, in Swift v. United States, 318 F.3d 250, 253 (D.C. Cir. 2003), the D.C. Circuit rejected the Ninth Circuit’s Sequoia standard, holding that nothing in section 3730(c)(2)(A) “purports to deprive the Executive Branch of its historical prerogative to decide which cases should go forward in the name of the United States.” The court observed that the purpose of the hearing provided for in section 3730(c)(2)(A) “is simply to give the relator a formal opportunity to convince the government not to end the case.” Id. Therefore, the D.C. Circuit held that the government has “an unfettered right to dismiss” FCA actions, and so government dismissals are basically “unreviewable” (with a possible exception for dismissals constituting “fraud on the court”). Id. at 252-53. However, the remainder of the federal circuit courts have not weighed in on the standard for government dismissals of qui tam actions thus far. In the meantime, several district courts have confronted this issue, with some following Sequoia, while others followed Swift. Among the courts following Sequoia were the following: In United States v. EMD Serono, Inc., 370 F. Supp. 3d 483 (E.D. Pa. 2019), the U.S. District Court for the Eastern District of Pennsylvania adopted the Ninth Circuit’s Sequoia standard after critiquing the D.C. Circuit’s approach in Swift. The court then held that the government’s dismissal had met the Sequoia standard because the government had “articulated a legitimate interest” when it argued that the “allegations lack merit, and continuing to monitor, investigate, and prosecute the case will be too costly and contrary to the public interest.” at 489. Id. at 489. In United States ex rel. CIMZNHCA, LLC v. UCB, Inc., No. 17-CV-765-SMY-MAB, 2019 WL 1598109 (S.D. Ill. Apr. 15, 2019), the U.S. District Court for the Southern District of Illinois adopted the Ninth Circuit’s Sequoia standard and rejected the D.C. Circuit’s approach in Swift. Applying the Sequoia standard, the court found that the government’s “decision to dismiss this action is arbitrary and capricious, and as such, not rationally related to a valid governmental purpose.” Id. at *4. Although the government had identified a valid interest of avoiding litigation costs, the court found the government had failed to conduct the requisite “minimally adequate investigation” because it collectively investigated the eleven claims that the relator’s group filed without specifically investigating the relator’s claim against the defendants in this case. Id. at *3. Other district courts have been persuaded by Swift’s “unfettered” dismissal standard. In United States ex rel. Davis v. Hennepin County, No. 18-CV-01551 (ECT/HB), 2019 WL 608848 (D. Minn. Feb. 13, 2019), the U.S. District Court for the District of Minnesota stated that the Swift standard was more consistent with section 3730(c)(2)(A)’s text and with the Constitution, but did not decide the issue because the government was entitled to dismissal under both the Swift and Sequoia standards. According to the court, the government could dismiss because “the Relators were notified of the motion and received the opportunity for a hearing.” Id. at *7. However, the court then observed that the government would still be entitled to dismissal even under Sequoia. Id. The court credited the government’s rationale of avoiding the cost and burden of a case that would likely result in no recovery, and also noted that the relators had put forth no factual evidence that the government was acting capriciously by ignoring evidence. Id. In United States ex rel. Sibley v. Delta Reg’l Med. Ctr., No. 17-CV-000053-GHDRP, 2019 WL 1305069 (N.D. Miss. Mar. 21, 2019), the U.S. District Court for the Northern District of Mississippi indicated its agreement with the Swift standard, but then observed that the government was entitled to dismissal under either standard. There, the government declined to intervene, then moved to dismiss her action, arguing that the action would interfere with the government’s efforts to enforce the Emergency Medical Treatment Act, would use scarce government resources, and that the complaint did not allege any viable claims. Id. at *2-*3. Aligning with Swift, the court explained that the government “possesses the unfettered discretion to dismiss a qui tam [FCA] action” and therefore that the court must grant the government’s motion. Id. at *7. Regardless, the government was entitled to dismissal even under Sequoia, as the government had stated a “valid reason for dismissal” that the relator could not refute. Id. at *8. In United States ex rel. De Sessa v. Dallas Cty. Hosp. Dist., No. 3:17-CV-1782-K, 2019 WL 2225072 (N.D. Tex. May 23, 2019), the U.S. District Court for the Northern District of Texas also echoed Swift’s reasoning, while concluding that the government was entitled to dismissal under either standard. In a short decision, the court cited to Swift and granted the government’s motion to dismiss the relator’s FCA fraud claim. Id. at *2. The court then explicitly noted that its holding did not dismiss the relator’s FCA retaliation claim, as that claim was not brought on behalf of the U.S. government. Id. B.  State Developments As detailed in our 2018 Mid-Year and Year-End False Claims Act Updates, Congress created financial incentives in 2005 for states to enact their own false claims statutes that are as effective as the federal FCA in facilitating qui tam lawsuits, and that impose penalties at least as high as those imposed by the federal FCA.[38] States passing review by HHS’s Office of Inspector General (“OIG”) may be eligible to “receive a 10-percentage-point increase in [their] share of any amounts recovered under such laws” in actions filed under state FCAs.[39] As of June 2019, HHS OIG has approved laws in twenty states (California, Colorado, Connecticut, Delaware, Georgia, Illinois, Indiana, Iowa, Massachusetts, Montana, Nevada, New York, North Carolina, Oklahoma, Rhode Island, Tennessee, Texas, Vermont, Virginia and Washington), while nine states are still working towards FCA statutes that meet the federal standards (Florida, Hawaii, Louisiana, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, and Wisconsin).[40] Five approvals have occurred in 2019 to date (California, Delaware, Georgia, New York, and Rhode Island).[41] While HHS OIG did not publicly state the reasons for these approvals, they likely stemmed at least in part from the fact that all five states recently amended their false claims statutes to peg their civil penalties to those imposed by the federal FCA, including as adjusted for inflation under the Federal Civil Penalties Inflation Adjustment Act of 1990.[42] Some states have continued to consider (or implement) revisions to their false claims acts after federal approval. Most notably, in May 2019, the California Assembly passed Assembly Bill No. 1270, which would amend the California False Claims Act’s definition of materiality, for purposes of the “false record or statement” prong of the statute, to consider only “the potential effect of the false record or statement when it is made, not . . . the actual effect of the false record or statement when it is discovered.”[43] This change could mark a significant pro-plaintiff limiting of the concept of materiality in the wake of Escobar, which held that materiality is a matter of the “effect on the likely or actual behavior of the recipient of an alleged misrepresentation.”[44] The California bill also would expand the state false claims act to apply to certain claims, records, or statements made under the California Revenue and Taxation Code. Specifically, the bill extends the California false claims act to tax-related cases where the damages pleaded exceed $200,000, and where the state-taxable income or sales of any person or corporation against whom the action is brought exceeds $500,000.[45] The new law would require the state Attorney General or prosecuting authority, prior to filing or intervening in any false claims act case related to taxes, to consult with the relevant tax authority.[46] Under the bill, the state Attorney General or prosecuting authority, but not a qui tam relator, would be authorized to obtain from state government agencies otherwise confidential records relating to taxes, fees, or other obligations under California’s Revenue and Taxation Code.[47] The amendment would prohibit the state government authorities from disclosing federal taxation information to the state Attorney General or prosecuting authority without IRS authorization. The amendment would also prohibit disclosure by the state Attorney General or prosecuting authority of any taxation information it does receive, “except as necessary to investigate and prosecute suspected violations” of the California false claims act.[48] The bill is currently being considered by committees in the California Senate.[49] Other states lack false claims statutes and have moved in fits and starts towards enacting them. For example, as of June 2019, a bill to enact the South Carolina False Claims Act remained pending in the state’s legislature after being referred to the state senate’s judiciary committee in January.[50] The bill is nearly identical to the last false claims act bill introduced in South Carolina’s Senate, which died in that body’s judiciary committee after being referred in January 2015.[51] Other states that lack broad false claims acts have nonetheless moved incrementally towards endowing themselves with robust enforcement powers. West Virginia, for example, lacks a false claims statute broadly defined, but does prohibit Medicaid fraud through a statute that in some ways resembles the FCA.[52] Until early 2019, the state’s Medicaid Fraud Control Unit (“MFCU”), which holds the power to investigate possible violations of the statute, sat within the state department of health and human services. However, a bill was passed on March 7, 2019, which will relocate the MFCU to the Office of the Attorney General.[53] Once effective on October 1, 2019, the new law will give primary prosecution authority to the Office of the Attorney General; only if that office declines prosecution will attorneys employed or contracted by the state department of health and human services have authority to take the case forward.[54] This consolidation of power in the Office of the Attorney General could be the first step in a push for enactment of broader false claims enforcement powers. III.  NOTABLE CASE LAW DEVELOPMENTS With a U.S. Supreme Court decision, more than a dozen notable circuit court decisions, and a handful of important district court decisions too, the first half of 2019 was an active period on the case law front (as detailed below). A.  U.S. Supreme Court Extends the Statute of Limitations in Cases Where the Government Does Not Intervene The FCA provides two different limitations periods for “civil action[s] under section 3730”—(1) six years after the statutory violation occurs, or (2) three years “after the United States official charged with the responsibility to act knew or should have known the relevant facts, but not more than [ten] years after the violation.” 31 U.S.C. § 3731(b). Whichever period is longer applies. In Cochise Consultancy, Inc. v. United States ex rel. Hunt, 139 S. Ct. 1507 (2019), the Supreme Court resolved a circuit split regarding the FCA’s statute of limitations for qui tam actions pursued only by a whistleblower, without government participation. Specifically, the question that had split the circuit courts is whether a relator—pursuing a case where the government has declined to intervene—can take advantage of the longer statute of limitations period of up to ten years. In Cochise, the relator conceded that more than six years had elapsed before he filed his suit from when the alleged FCA violations occurred. Id. at 1511. However, the relator argued that fewer than three years had elapsed between when the relator had revealed the alleged FCA violations to federal agents and when the relator filed his suit. Id. Thus, the relator argued that he should be able to take advantage of the longer statute of limitations period, triggered from when he had disclosed his allegations to the government. Id. The district court initially dismissed the suit, holding that section 3731(b)(2)’s three-year period does not apply to relator-initiated suits in which the government declines to intervene. Id. But the Eleventh Circuit reversed, and held that the longer period could apply to relator-initiated suits in which the government declines to intervene. Id. The Supreme Court, looking to resolve a circuit split, unanimously affirmed the Eleventh Circuit’s ruling. Id. at 1510. The Court reasoned that, because section 3731(b)’s two statute of limitations periods apply to “civil action[s] under section 3730” and because both government and relator-initiated FCA suits constitute “civil action[s] under section 3730,” the statute’s plain text made both of the limitations periods applicable to both types of suits. Id. at 1511-12 (quoting section 3731(b)). The Court also held that private relators in non-intervened suits do not constitute “the official of the United States charged with responsibility to act in the circumstances” under section 3731(b)(2). Id. at 1514. In other words, section 3731(b)(2)’s three-year period does not begin when a private relator who initiates the suit knows or should have known about the fraud. Id. Thus, because section 3731(b)(2)’s three-year period is available in relator-initiated non-intervened suits and because the private relator’s learning of the facts does not begin this three-year period, dismissal of the relator’s suit was not warranted on statute-of-limitations grounds. Id. B.  Courts Continue to Interpret the FCA’s Materiality Requirement Post-Escobar As we have previously discussed, courts continue to wrestle with the implications of the Supreme Court’s decision in Universal Health Services v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), the landmark decision that addressed the implied certification theory of liability, and in the process gave renewed emphasis to the concepts of materiality and government knowledge under the FCA. 1.  The Fifth Circuit Applies Escobar in Analyzing Materiality In United States ex rel. Lemon v. Nurses To Go, Inc., 924 F.3d 155 (5th Cir. 2019), the Fifth Circuit, reviewing a district court’s dismissal of claims, engaged in a thorough application of Escobar, articulating three non-exhaustive “factors” for determining materiality. First, the court asked whether the government expressly conditioned payment on meeting the statutory or regulatory requirements at issue. Second, the court considered whether the government would have denied payment if it had known of the violations, a factor which the court referred to as “government enforcement.” And third, the court asked whether the defendant’s noncompliance was substantial or minor. In Lemon, the relators alleged that a hospice provider submitted claims affirming it had complied with various Medicare statutory and regulatory requirements, despite allegedly violating several requirements related to certifications, face-to-face physician patient encounters, and writing plans of care. Id. at 157. They also alleged that the hospital billed for ineligible services and patients, such as billing for already deceased patients. Id. at 157-58. Applying each of its articulated Escobar factors in turn, the Fifth Circuit began by addressing conditions of payment. The court acknowledged that Escobar held that violating a requirement which is labeled a condition of payment does not alone “conclusively establish materiality.” Id. at 161. Nevertheless, conditioning payment on a requirement is “certainly probative evidence of materiality.” Id. (quoting United States ex rel. Rose v. Stephens Institute, 909 F.3d 1012, 1020 (9th Cir. 2018)). Because the Medicare statute expressly noted that payment can only be made if the certification, face-to-face encounter, and plan-of-care requirements that the defendants allegedly violated were met, the court held that the defendants’ allegedly fraudulent certifications that they had complied with the statutory and regulatory requirements violated the government’s express conditions of payment. Id. Second, the court turned to government enforcement. Id. at 161-62. Here, the relators alleged in their complaint that HHS OIG had previously pursued enforcement actions against other hospice providers that had committed violations similar to the defendants’ alleged violations—namely submitting bills for ineligible services and patients and failing to conduct the required certifications. Id. at 162. Because of these past enforcement actions, the Court held that the relators here had created a reasonable inference that the government would have denied payment had it known of the defendants’ violations. Id. The Court found additional support for this conclusion in the Sixth Circuit’s holding in United States ex rel. Prather v. Brookdale Senior Living Communities, Inc., 892 F.3d 822 (6th Cir. 2018) (previously discussed here and here). There, the Sixth Circuit concluded that Escobar does not require relators to allege specific previous government prosecutions for claims similar to the relator’s. Id. Third, the Fifth Circuit analyzed whether the noncompliance was substantial or minor. Id. at 163. Citing Escobar, the court noted that a violation is material either when a reasonable person would “attach importance” to the noncompliance or when the defendant knew or had reason to know that the false representation’s recipient would attach importance to it, even though a reasonable person would not. Id. Because the court had determined in its government enforcement analysis that the government would have denied payment had it known of the defendants’ violations, the court therefore held that government would have attached importance to the violations. Id. Thus, the relators had also satisfied the third factor, showing that the noncompliance was substantial. Id. Given that all three factors were satisfied, the court held that the relators had sufficiently alleged material violations to survive the motion to dismiss. Id. 2.  The Third Circuit Analyzes Post-Escobar Materiality Standards on Summary Judgment In United States ex rel. Doe v. Heart Solutions, PC, 923 F.3d 308 (3d Cir. 2019), the Third Circuit explored materiality and causation in light of Escobar. There, the government filed an FCA claim alleging that the defendants, an individual and her health care company, had violated Medicare regulations requiring all diagnostic testing to be performed under the proper level of physician supervision. Id. at 311. Specifically, the government alleged that the defendants had falsely represented that a licensed neurologist performed all their company’s neurological testing as required by regulation, when their testing allegedly was not supervised by a neurologist in reality. Id. Applying Escobar to the government’s motion for summary judgment, the Third Circuit found that the government met its initial summary judgment burden to show materiality by submitting evidence that Medicare would not have paid the testing claims without a supervising neurologist’s certification, per regulation. Id. 318. When the defendants failed to introduce any evidence to rebut this, the court held that the government had met its materiality burden. Id. Notably, the court also held that by establishing materiality, the government also had adequately demonstrated causation. Id. According to the court, “because these misrepresentations were material, they caused damage to Medicare,” and therefore “but for the misrepresentations, Medicare would never have paid the claims.” Id. This ruling, which appears to conflate the separate elements of causation and materiality by hinging causation entirely on materiality, will be one to watch in future decisions. C.  Courts Continue to Analyze Rule 9(b)’s Particularity Requirement in FCA Claims In last year’s year-end update, we noted that the circuit courts continue to struggle with how to apply Rule 9(b)’s particularity requirement in FCA cases. Rule 9(b) heightens the pleading standard required in fraud claims, stating that a party alleging fraud “must state with particularity the circumstances constituting fraud or mistake.” This year, several circuits further analyzed Rule 9(b)’s application to FCA cases. 1.  The Ninth Circuit Discusses the Relationship between Rule 9(b)’s Particularity Standard and the FCA’s Materiality Requirement In United States ex rel. Mateski v. Raytheon Co., 745 F. App’x 49 (9th Cir. 2018), cert. denied sub nom. Mateski v. Raytheon Co., No. 18-1312, 2019 WL 1643040 (U.S. May 13, 2019), the Ninth Circuit elaborated on Rule 9(b)’s particularity standard and, in particular, the effect of a lack of particularity on meeting the materiality requirement. In Mateski, the relator filed a qui tam action against his employer, a defense contractor, alleging that it falsely claimed compliance with contract requirements for a satellite system sensor. Id. at *50. The case had been to the Ninth Circuit once before, under the public disclosure bar, at which point the Ninth Circuit reversed the district court’s dismissal of the complaint. Id. This time, however, the Ninth Circuit affirmed dismissal of the case. Id. First, the court held that the complaint failed to meet Rule 9(b)’s particularity requirement with regard “to the ‘what,’ ‘when,’ and ‘how’ of the allegedly false claims.” Id. For example, the relator alleged the defendant failed to comply with its contractual requirements to complete tests and retests on component parts, but never specified which parts, which tests, whether the tests were never done or whether they were instead done incompletely, as well as failing to name approximate dates of these tests. Id. Without these details, the court held that the defendant did not have enough information to defend against the claims, and so the complaint failed to meet Rule 9(b)’s particularity requirement. Id. The Ninth Circuit also concluded that because of this lack of particularity regarding the false claims, the complaint also inadequately pleaded the materiality requirement. Id. Noting that the materiality requirement is a “demanding” standard pursuant to Escobar, the court found itself unable to assess whether the noncompliance was material or minor because of the lack of particularity regarding the false claims. Id. 2.  The Eighth Circuit Provides Further Guidance on Rule 9(b)’s Particularity Requirement In United States ex rel. Strubbe v. Crawford County Memorial Hospital, 915 F.3d 1158 (8th Cir. 2019), the Eighth Circuit elaborated on its prior holding in United States ex rel. Thayer v. Planned Parenthood of the Heartland, 765 F.3d 914, 918 (8th Cir. 2014), in which the court concluded that relators in FCA cases can meet Rule 9(b)’s particularity requirement either by: (1) pleading representative examples of false claims; or (2) pleading the “particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.” Strubbe, 915 F.3d at 1163 (quoting Thayer, 765 F.3d at 918). In Strubbe, the relators, emergency medical technicians and paramedics, filed an FCA qui tam action against a hospital, alleging that it submitted false claims for Medicare reimbursement, made false statements to get false claims paid, and conspired to violate the AKS. Id. at 1162. The district court dismissed the claims for failure to plead with the required particularity, finding that the complaint did not allege facts showing any false claims were submitted or show how the relators acquired their information. Id. Over a dissent, the Eighth Circuit affirmed, holding that the complaint did not plead the fraud with the particularity required by Rule 9(b). Id. at 1166. First addressing the relator’s allegation that the hospital submitted false claims, the court found that the relators had not met Thayer’s first prong of submitting representative examples of false claims. Id. at 1164. For example, while they had alleged that the hospital made a false claim for an unnecessary treatment, they failed to include the requisite particularity because they did not identify the date of this incident, the provider, any specific information about the patient, what money was obtained, and crucially, whether the hospital actually submitted a claim for this specific patient. Id. Nor had relators met Thayer’s second prong, according to the court. Id. The court held that the complaint lacked sufficient indicia of reliability to create a strong inference that claims were actually submitted, because the complaint did not provide any details about the hospital’s billing practices. Id. at 1164-65. Moreover, the relators did not identify the basis for their allegations regarding billing; this was especially problematic given the relators lack of personal knowledge about the hospital’s billing due to their lack of access to the hospital’s billing department as EMTs and paramedics. Id. at 1165-66. The relators’ second claim that the hospital made false statements failed to meet Rule 9(b)’s particularity requirement for similar reasons as their first—namely, the complaint did not connect the false statements to claims submitted to the government and did not provide the basis on which the relators’ assertions were founded. Id. at 1166. Finally, their third claim, that the hospital conspired to violate the AKS, failed because they did not provide any details about the conspiracy, and so failed to plead with particularity. Id. Therefore, the court affirmed the complaint’s dismissal. Id. at 1170. 3.  Under Rule 9(b), the Fourth Circuit Requires Allegations Regarding a Sub-Contractor’s Billing and Payment Structure In United States ex rel. Grant v. United Airlines Inc., 912 F.3d 190 (4th Cir. 2018), the Fourth Circuit held that a relator failed to meet Rule 9(b)’s particularity requirement where his complaint alleged a fraudulent scheme without detailing the billing and payment structure. Because of this omission, the court found that relator’s allegations did not foreclose the possibility that the government was never billed or that the alleged fraud was remedied before billing or payment. The case involved allegations by a relator against his former employer, an airline, alleging that the airline violated the FCA by certifying airplane repairs that did not comply with various aviation regulations and contract requirements in the airline’s work as a sub-sub-contractor for the U.S. Air Force. Id. at 194. Specifically, the relator alleged that the defendant: (1) certified uncompleted work as completed; (2) certified repairs performed by uncalibrated and uncertified tools, in violation of the subcontract’s requirements; and (3) allowed inspectors to continue certifying repairs after their training and eye exams had expired. Id. at 194-95. Affirming dismissal of the claims, the Fourth Circuit held that Rule 9(b)’s “stringent” pleading standard requires the complaint to “provide ‘some indicia of reliability’ to support the allegation that an actual false claim was presented to the government.” Id. (quoting United States ex rel. Nathan v. Takeda Pharm. N. Am., Inc., 707 F.3d 451, 457 (4th Cir. 2013)). Relators can meet this standard either by: (1) alleging with particularity that specific false claims were actually submitted to the government or (2) alleging “a pattern of conduct that would ‘necessarily have led[ ] to submission of false claims’ to the government for payment.” Id. (quoting Nathan, 707 F.3d at 457). Over a dissent, the court concluded that the relator had not pleaded specific claims, and also failed to allege a pattern of conduct that would necessarily have led to the submission of false claims, because he had only particularly alleged that the defendant engaged in fraudulent conduct without connecting the fraudulent conduct to the necessary presentment of false claims to the government. Id. The court reasoned that the complaint failed “to allege how, or even whether, the bills for these fraudulent services were presented to the government and how or even whether the government paid [the defendant] for the services.” Id. at 198. Because the complaint alleged only an umbrella payment without describing the billing or payment structure, the court held that the complaint left open the possibility that no payments were ever made. The court held that alleging a link between the false claims and government payment is especially necessary to meet Rule 9(b)’s requirements where, as here, the defendant is several levels removed from the government because it is a sub-sub-contractor. Id. at 199. D.  Estoppel and the FCA As DOJ increasingly pursues parallel criminal and civil investigations in cases involving fraud on the government, the interplay between criminal and FCA charges becomes increasingly important. Several decisions during the first half of the year discussed issues relevant to this interplay. 1.  The Third Circuit Finds That a Company Is Not Estopped by an Individual Employee’s Criminal Conviction In United States ex rel. Doe v. Heart Solution, PC, 923 F.3d 308 (3d Cir. 2019) (discussed previously in relation to materiality), the Third Circuit held that, although an individual defendant was collaterally estopped from denying the falsity and knowledge elements of a civil FCA claim by her criminal conviction and plea colloquy regarding the same conduct, her employer was not. Id. at 316-17. The case involved an individual defendant who was convicted criminally of defrauding Medicare after having admitted at her plea colloquy that Medicare paid her company for diagnostic neurological testing that she falsely represented was supervised by a licensed neurologist. Id. at 312. After her conviction, the government intervened in a civil qui tam FCA case against her and her health care company regarding the same fraudulent neurologist certifications. Id. In granting summary judgment against the defendant company, the district court had relied on the individual defendant’s criminal conviction and plea colloquy. Id. at 313. But the Third Circuit held that the district court erred in finding that the health care company had conceded all of the essential elements of the FCA claim through the individual defendant’s plea. Id. at 316-17. In so holding, the court relied on the fact that collateral estoppel does not apply unless the party against whom the earlier decision is asserted previously had a “full and fair opportunity to litigate that issue.” Id. at 316 (internal quotation marks omitted) (quoting Allen v. McCurry, 449 U.S. 90, 95 (1980)). Here, the defendant company did not have any opportunity, let alone a “full and fair opportunity,” to contest the fraud claim at the individual’s separate criminal proceedings. Heart Sol., 923 F.3d at 317. Additionally, some of the elements of the FCA claim against the company, as opposed to the individual, were neither actually litigated nor determined by a final judgment in the individual’s criminal case, both of which are required for collateral estoppel to apply. Id. at 317. 2.  The Fourth Circuit Holds That Non-Intervened Qui Tam Actions Decided in Favor of the Defendant Do Not Collaterally Estop the Government from Pursuing Criminal Proceedings In United States v. Whyte, 918 F.3d 339 (4th Cir. 2019), the Fourth Circuit considered whether the government is collaterally estopped from pursuing its own criminal case by a prior qui tam FCA action in which it did not intervene. See id. at 344. There, the defendant, the owner of a company that supplied armored vehicles to multinational forces in Iraq, was indicted for criminal fraud in July 2012. Id. at 342-43. Then, in October 2012, a relator filed a civil FCA suit, in which the government declined to intervene, against the defendant. Id. at 343. The defendant ultimately prevailed at trial in his FCA civil suit, but then, over two years later, a jury convicted the defendant in the criminal case. Id. at 344. The defendant argued that the government was collaterally estopped in its criminal case by the defendant’s victory in the prior qui tam civil case, but the courts were not convinced. The Fourth Circuit affirmed the district court, holding as a matter of first impression that “the Government is not a party to an FCA action in which it has declined to intervene,” and so is not collaterally estopped by a prior FCA action in which it did not intervene. Id. at 345, 350. In so holding, the court first reasoned that collateral estoppel cannot bar a criminal prosecution when the government did not “have a full and fair opportunity to litigate the issue in the prior proceeding.” Id. at 345 (citation and internal quotation marks removed). Whether the government had that opportunity in turn depends on whether the government was a party to that prior proceeding. Id. Citing precedent, the FCA’s language and structure, and the government’s different interests in intervened versus non-intervened cases, the court held that the government is not a party to an FCA action in which it has not intervened. Id. at 345-49. Therefore, the court concluded that “the Government cannot be considered to have been a party with a full and fair opportunity to litigate” in a prior FCA action in which it declined to intervene, and so the government’s criminal prosecution was not collaterally estopped by a prior, nonintervened FCA qui tam action. Id. at 349-50. E.  The First Circuit Holds That Unsealing an FCA Complaint Begins the Statute of Limitations for Related Claims As we previously discussed, RICO suits mirroring FCA suits that challenge off-label drug marketing continue to appear. A recent First Circuit case held that the unsealing of an FCA complaint regarding off-label drug marketing begins the running of RICO’s four-year statute of limitations in these kinds of cases. In In re Celexa & Lexapro Marketing & Sales Practices Litigation, 915 F.3d 1 (1st Cir. 2019), the First Circuit addressed the relationship between FCA claims and the statute of limitations for RICO claims (as well as state consumer fraud claims). There, the government intervened in a qui tam FCA claim alleging that the defendant pharmaceutical companies engaged in illegal off-label drug marketing schemes intended to fraudulently induce doctors to prescribe their drugs for off-label uses. Id. at 5-6. The unsealing of the complaint led to more than a dozen consumers and entities that had paid for these drugs filing suit, including the suits in this case, alleging RICO and state consumer fraud violations related to the defendant’s alleged illegal off-label marketing schemes. Id. at 7. The First Circuit held that, as a matter of law, the unsealing of the government’s FCA complaint put the plaintiffs on notice that the defendants allegedly had been promoting off-label uses of their products. Id. at 15. Therefore, the unsealing of the government’s FCA complaint began the running of the four-year statute of limitations on the plaintiffs’ RICO claims related to the off-label marketing schemes alleged in the FCA complaint. Id. at 15-16. F.  The Ninth Circuit Upholds an FCA Settlement Agreement’s Confidentiality Provisions For companies involved in negotiations with DOJ about the terms of settlement agreements under the FCA, there was a bit of good news from the Ninth Circuit. In Brunson v. Lambert Firm PLC, 757 F. App’x 563 (9th Cir. 2018), the Ninth Circuit upheld the confidentiality provisions of an FCA settlement agreement, over objection from the relator. See id. at 566. In that case, the relator entered into an FCA settlement agreement with the defendants and the government, but later filed several post-settlement motions that put at issue the settlement agreement’s confidentiality provisions. See id. at 565. The Ninth Circuit held that the settlement agreement’s confidentiality provisions were not void on public policy grounds, because the settlement did not impede any whistleblower’s ability to bring information to the government, and so did not violate the public interest underlying the FCA’s provisions encouraging disclosures of fraud. Id. at 566. Additionally, the court held that the confidentiality provisions did not interfere with the public’s right to information, given that the entire qui tam complaint was still publicly available. Id. Finally, the Ninth Circuit held that the district court had not abused its discretion in maintaining the seal over the settlement agreement, because the settlement agreement was a “private agreement reached without court assistance” and was only in the judicial record through the relator’s efforts to void its confidentiality provisions. Id. G.  The Public Disclosure Bar and Its Original Source Exception The public disclosure bar, as amended in 2010 by the Affordable Care Act, requires courts to dismiss a relator’s FCA claims “if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed,” unless that relator “is an original source of the information.” § 3730(e)(4)(A). One of the statute’s definitions of an original source is an individual “who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions.” § 3730(e)(4)(B) (emphasis added). Although the “materially adds” language has been in effect for nearly a decade, the new language did not apply retroactively, and due to the long timeframe for many FCA cases, it is therefore just in recent years getting serious attention from the appellate courts. In April of this year, the Tenth Circuit became the latest court to opine on the meaning of the original source exception’s “materially adds” language. In United States ex rel. Reed v. KeyPoint Government Solutions, 923 F.3d 729 (10th Cir. 2019), the Tenth Circuit explored what a relator must allege to meet the original source exception by materially adding to publicly disclosed information. In defining the “materially adds” language in the original source exception, the Tenth Circuit cited United States ex rel. Winkelman v. CVS Caremark Corp., 827 F.3d 201 (1st Cir. 2016), and held that a relator satisfies the materially-adds requirement when she “discloses new information that is sufficiently significant or important that it would be capable of” influencing the government’s behavior, as contrasted with a relator who provides only background information or details about a previously disclosed fraud. Reed, 923 F.3d at 757. Under this standard, the court noted that a relator who merely identifies a new specific actor engaged in fraud usually would not materially add to public disclosures of alleged widespread fraud in an industry with only a few companies. Id. at 758. Ultimately, however, the court concluded that the relator here had materially added to the public disclosures about a specific program at her company. Id. at 760-63. Thus, the court held she met the original source exception’s materially-adds requirement, but remanded on whether her knowledge was “independent” and whether her claims should otherwise survive scrutiny under Rule 12(b)(6) and Rule 9(b). Id. at 763. H.  The First Circuit Holds That the First-to-File Bar Is Not Jurisdictional The First Circuit joined the D.C. and Second Circuits in holding that the FCA’s first-to-file bar is not jurisdictional, such that arguments under the first-to-file bar do not implicate the court’s subject matter jurisdiction, even if they are a cause for dismissal. This distinction can affect how, and when, arguments under the first-to-file bar may be made, and also the standard of review a court applies. In United States v. Millennium Laboratories, Inc., 923 F.3d 240 (1st Cir. 2019), Relator A, who filed first, alleged that the defendant used inexpensive point-of-care tests to induce physicians into excessive testing, including confirmatory testing, which was then billed to the government. Id. at 245-46. Another relator, Relator B, later filed a complaint against the same defendant related to confirmatory testing, not point-of-care testing, allegedly induced through improper custom profiles and standing orders. Id. at 246-47. The government intervened in Relator B’s action (but not Relator A’s) and pursued an FCA case focused on excessive confirmatory testing induced through improper custom profiles and standing orders. Id. at 247-48. The government and the defendant eventually settled for $227 million plus interest, without resolving which relator was entitled to the relator’s share. Id. at 247. The district court dismissed Relator B’s crossclaim for the relator’s share of the settlement, holding that Relator A was the first to file. Id. at 248. As Relator A was the first to file, the district court therefore held that it did not have subject matter jurisdiction over Relator B’s crossclaim, because the first-to-file bar was jurisdictional. Id. On appeal, the First Circuit reversed, and held that the first-to-file bar is not jurisdictional, overturning its prior precedent, for three reasons. Id. at 248-49. First, the First Circuit pointed to Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter, 135 S. Ct. 1970 (2015), in which the Supreme Court addressed a first-to-file issue in an FCA qui tam action on “decidedly non-jurisdictional terms,” implying that the Supreme Court did not consider the first-to-file rule a jurisdictional one. Millennium Labs., 923 F.3d at 249 (internal quotation marks removed) (quoting United States ex rel. Heath v. AT&T, Inc., 791 F.3d 112, 121 n.4 (D.C. Cir. 2015)). Second, the First Circuit noted that its prior cases all predated Carter and also did not substantively analyze whether the first-to-file rule was jurisdictional, but rather assumed it was. Millennium Labs., 923 F.3d at 250. Third, applying the Supreme Court’s “bright line rule” in Arbaugh v. Y & H Corp., 546 U.S. 500 (2006), which held that provisions are only jurisdictional when Congress clearly states that they are, the First Circuit held that the first-to-file bar’s statutory text, context, and legislative history did not describe the bar in jurisdictional terms. Millennium Labs., 923 F.3d at 250-51. For these reasons, the First Circuit held that the first-to-file bar is not jurisdictional. Id. at 251. Therefore, the court held that it had jurisdiction over Relator B’s crossclaim. Id. Next, the First Circuit turned to the issue of whether Relator A or B was the first to file for purposes of the relator’s share of the government’s settlement. Id. at 252-53. To determine whether Relator A was the first to file in the action in which the government intervened, the court analyzed whether Relator A’s complaint contained “all the essential facts” of the fraud that Relator B alleged, on a claim-by-claim basis, looking at the specific mechanisms of fraud alleged. Id. at 252-53. Because Relator A’s complaint never alleged the specific mechanisms of fraud that Relator B alleged—custom profiles and standing orders in the confirmatory, not point-of-care, stage—Relator A’s complaint did not cover the essential facts of the fraud that Relator B and the government alleged. Id. at 254. Thus, as Relator A alleged a different fraud than the fraud that the government pursued, he was not the first to file in this case; Relator B was. Id. I.  The Second Circuit Holds That a Relator Who Previously Voluntarily Dismissed His FCA Action Is Not Entitled to the Relator’s Share of the Government’s Subsequent Action In United States v. L-3 Communications EOTech, Inc., 921 F.3d 11 (2d Cir. 2019), the Second Circuit joined several other circuits in holding that a relator who previously voluntarily dismissed his qui tam action and had no other qui tam actions pending at the time the government pursued its own FCA claim is not entitled to the relator’s share of a later government settlement. Specifically, the court examined the FCA’s provision in section 3730(c)(5), which states that, notwithstanding the section of the FCA allowing qui tam actions, the government may pursue an “alternative remedy,” but if the government pursues an alternative remedy, then “the person initiating the action shall have the same rights in such proceeding as such person would have had if the action had continued under this section.” Id. at 24 (quoting § 3730(c)(5)). The court held that section 3730(c)(5) only applied if that relator had a pending qui tam action in which the government could intervene when the government initiated its own FCA action. Id. at 26. Thus, where, as here, the relator had no FCA action pending because the relator had voluntarily dismissed his FCA suit fourteen months before the government commenced its own FCA suit, the relator is not entitled to the relator’s share of the government’s action. Id. J.  FCA Retaliation Claims There were also a number of decisions from the courts of appeal that addressed issues under the FCA’s anti-retaliation provision, which protects would-be whistleblowers from retaliation based on certain protected activity undertaken in furtherance of a potential FCA claim. We very briefly summarize these decisions below. In United States ex rel. Reed v. KeyPoint Government Solutions, 923 F.3d 729 (10th Cir. 2019) (previously discussed regarding the public disclosure bar), the Tenth Circuit affirmed the district court’s dismissal of the relator’s retaliation claim, holding that the facts she pleaded were inadequate to show that the defendant was on notice that she was engaged in FCA-protected activity. Id. at 741, 764. Because the relator was a compliance officer, the court explained that she must plead facts to overcome the presumption that she was just doing her job in reporting fraud internally to her employer. That is, she must plead that the actions she took to report the alleged fraud internally went beyond what was required to fulfill her compliance job duties. Id. at 768-69. In that case, the relator did not adequately allege that her employer was on notice she was trying to stop FCA violations, and so the court affirmed the dismissal of her retaliation claim. Id. at 772. In United States ex rel. Strubbe v. Crawford County Memorial Hospital, 915 F.3d 1158 (8th Cir. 2019) (previously discussed regarding Rule 9(b)), the Eighth Circuit limited liability for FCA retaliation claims by affirming the district court’s ruling that relators’ retaliation claim was barred because the complaint did not allege that relators ever told their employer (a hospital) that its practices were fraudulent or potentially violated the FCA. Id. The court found that complaining about the hospital’s finances and changes the hospital made to certain treatments does not provide the hospital notice that the relators are taking action to stop an FCA violation or in furtherance of a qui tam action. Id. In addition, as a matter of first impression for FCA retaliation claims before the Eighth Circuit (but not whistleblower claims more generally), the court held that when there is no direct evidence of retaliation, the McDonnell Douglas framework—from McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973)—applies to FCA retaliation claims. Id. at 1168. Thus, for FCA retaliation claims, the plaintiff must show that: “(1) she engaged in protected conduct, (2) [her employer] knew she engaged in protected conduct, (3) [her employer] retaliated against her, and (4) ‘the retaliation was motivated solely by [the plaintiff’s] protected activity.’” Id. at 1167-68 (quoting Schuhardt v. Washington University, 390 F.3d 563, 566 (8th Cir. 2004)). If the plaintiff establishes a prima facie retaliation claim, then the burden shifts to the employer to “articulate a legitimate reason for the adverse action.” Id. at 1168 (quoting Elkharwily v. Mayo Holding Co., 823 F.3d 462, 470 (8th Cir. 2016)). Then, the burden again shifts back to the plaintiff to show that the employer’s reason was “merely a pretext and that retaliatory animus motivated the adverse action.” Id. (quoting Elkharwily, 823 F.3d at 470). In Guilfoile v. Shields, 913 F.3d 178 (1st Cir. 2019), the First Circuit explored the link between FCA retaliation claims and the AKS. The relator alleged that he was fired in retaliation for internally reporting that his employer, which provides specialty pharmacy services to chronically ill patients, was violating the AKS and making false representations in its contracts with hospitals. Id. at 182-83. The First Circuit affirmed dismissal with respect to his contract violation-based retaliation claim, but vacated the district court’s holding dismissing the plaintiff’s AKS-based retaliation claim, over a dissent. Id. at 195. In so doing, the First Circuit held that for FCA retaliation claims, plaintiffs do not need to meet Rule 9(b)’s particularity requirement, plead the submission of false claims, or plead that compliance with the AKS was material. Id. at 190. Instead, FCA retaliation plaintiffs “need only plead that their actions in reporting or raising concerns about their employer’s conduct ‘reasonably could lead to an FCA action.’” Id. at 189 (quoting United States ex rel. Booker v. Pfizer, Inc., 847 F.3d 52, 59 (1st Cir. 2017)). Under this standard, the court held that the plaintiff had plausibly pleaded that he was engaged in FCA-protected conduct, because by reporting his concerns about paying a consultant to secure contracts at hospitals at which the consultant worked, he was engaging in conduct that could reasonably lead to an FCA action based on the submission of claims resulting from an AKS violation. Id. at 193. Finally, in United States ex rel. Grant v. United Airlines Inc., 912 F.3d 190 (4th Cir. 2018) (discussed previously regarding Rule 9(b)), the Fourth Circuit held that an objective reasonableness standard applies to FCA retaliation claims’ new protected activity category, added in 2010, of “other efforts to stop 1 or more” FCA violations. Prior Fourth Circuit precedent applied a “distinct possibility” standard to evaluate protected activity under § 3730(h), which related to retaliation for actions taken “in furtherance” of an FCA action, meaning employees engage “in protected activity when ‘litigation is a distinct possibility, when the conduct reasonably could lead to a viable FCA action, or when . . . litigation is a reasonable possibility.’” Id. at 200 (quoting Mann v. Heckler & Koch Def., Inc., 630 F.3d 338, 344 (4th Cir. 2010)) (emphasis added). However, the court rejected the “distinct possibility” standard for “other efforts to stop 1 or more” FCA violations, and instead adopted an “objective reasonableness” standard. Id. at 201. Under the second category’s “objective reasonableness” standard, “an act constitutes protected activity where it is motivated by an objectively reasonable belief that the employer is violating, or soon will violate, the FCA.” Id. (emphasis added). IV.  CONCLUSION We will monitor these developments, along with other FCA legislative activity, settlements, and jurisprudence throughout the year and report back in our 2019 False Claims Act Year-End Update, which we will publish in January 2020. _________________________ [1] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Avanti Hospitals LLC, and Its Owners Agree to Pay $8.1 Million to Settle Allegations of Making Illegal Payments in Exchange for Referrals (Jan. 28, 2019), https://www.justice.gov/opa/pr/avanti-hospitals-llc-and-its-owners-agree-pay-81-million-settle-allegations-making-illegal. [2] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Pathology Laboratory Agrees to Pay $63.5 Million for Providing Illegal Inducements to Referring Physicians (Jan. 30, 2019), https://www.justice.gov/opa/pr/pathology-laboratory-agrees-pay-635-million-providing-illegal-inducements-referring. [3] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Electronic Health Records Vendor to Pay $57.25 Million to Settle False Claims Act Allegations Charges (Feb. 6, 2019), https://www.justice.gov/opa/pr/electronic-health-records-vendor-pay-5725-million-settle-false-claims-act-allegations. [4] See Press Release, U.S. Atty’s Office for the N. Dist. of GA., Union General Hospital to Pay $5 Million to Resolve Alleged False Claims Act Violations (Feb. 6, 2019), https://www.justice.gov/usao-ndga/pr/union-general-hospital-pay-5-million-resolve-alleged-false-claims-act-violations. [5] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Vanguard Healthcare Agrees to Resolve Federal and State False Claims Act Liability (Feb. 27, 2019), https://www.justice.gov/opa/pr/vanguard-healthcare-agrees-resolve-federal-and-state-false-claims-act-liability. [6] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Covidien to Pay Over $17 Million to The United States for Allegedly Providing Illegal Remuneration in the Form of Practice and Market Development Support to Physicians (Mar. 11, 2019), https://www.justice.gov/opa/pr/covidien-pay-over-17-million-united-states-allegedly-providing-illegal-remuneration-form. [7] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, MedStar Health to Pay U.S. $35 Million to Resolve Allegations that it Paid Kickbacks to a Cardiology Group in Exchange for Referrals (Mar. 21, 2019), https://www.justice.gov/opa/pr/medstar-health-pay-us-35-million-resolve-allegations-it-paid-kickbacks-cardiology-group. [8] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Three Pharmaceutical Companies Agree to Pay a Total of Over $122 Million to Resolve Allegations That They Paid Kickbacks Through Co-Pay Assistance Foundations (Apr. 4, 2019), https://www.justice.gov/opa/pr/three-pharmaceutical-companies-agree-pay-total-over-122-million-resolve-allegations-they-paid. [9] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Pharmaceutical Company Agrees to Pay $17.5 Million to Resolve Allegations of Kickbacks to Medicare Patients and Physicians (Apr. 30, 2019), https://www.justice.gov/opa/pr/pharmaceutical-company-agrees-pay-175-million-resolve-allegations-kickbacks-medicare-patients. [10] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Medicare Advantage Provider to Pay $30 Million to Settle Alleged Overpayment of Medicare Advantage Funds (Apr. 12, 2019), https://www.justice.gov/opa/pr/medicare-advantage-provider-pay-30-million-settle-alleged-overpayment-medicare-advantage. [11] See Press Release, U.S. Atty’s Office for the S. Dist. of W.V., United States Attorney Announces $17 Million Healthcare Fraud Settlement (May 6, 2019), https://www.justice.gov/usao-sdwv/pr/united-states-attorney-announces-17-million-healthcare-fraud-settlement. [12] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Kansas Cardiologist and His Practice Pay $5.8 Million to Resolve Alleged False Billings for Unnecessary Cardiac Procedures (May 30, 2019), https://www.justice.gov/opa/pr/kansas-cardiologist-and-his-practice-pay-58-million-resolve-alleged-false-billings. [13] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Pharmaceutical Company Admits to Price Fixing in Violation of Antitrust Law, Resolves Related False Claims Act Violations (May 31, 2019), https://www.justice.gov/opa/pr/pharmaceutical-company-admits-price-fixing-violation-antitrust-law-resolves-related-false. [14] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Opioid Manufacturer Insys Therapeutics Agrees to Enter $225 Million Global Resolution of Criminal and Civil Investigations (Jun. 5, 2019), https://www.justice.gov/opa/pr/opioid-manufacturer-insys-therapeutics-agrees-enter-225-million-global-resolution-criminal. [15] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Northrop Grumman Systems Corporation Agrees to Pay $5.2 Million to Settle Allegations of False Labor Charges (Jan. 28, 2019), https://www.justice.gov/opa/pr/northrop-grumman-systems-corporation-agrees-pay-52-million-settle-allegations-false-labor. [16] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Duke University Agrees to Pay U.S. $112.5 Million to Settle False Claims Act Allegations Related to Scientific Research Misconduct (Mar. 25, 2019), https://www.justice.gov/opa/pr/duke-university-agrees-pay-us-1125-million-settle-false-claims-act-allegations-related. [17] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Informatica Agrees to Pay $21.57 Million for Alleged False Claims Caused by Its Commercial Pricing Disclosures (May 13, 2019), https://www.justice.gov/opa/pr/informatica-agrees-pay-2157-million-alleged-false-claims-caused-its-commercial-pricing. [18] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Department of Justice Issues Guidance on False Claims Act Matters and Updates Justice Manual (May 7, 2019), https://www.justice.gov/opa/pr/department-justice-issues-guidance-false-claims-act-matters-and-updates-justice-manual. [19] Deputy Attorney General Rod J. Rosenstein Delivers Remarks at the American Conference Institute’s 35th International Conference on the Foreign Corrupt Practices Act (Nov. 29, 2018), https://www.justice.gov/opa/speech/deputy-attorney-general-rod-j-rosenstein-delivers-remarks-american-conference-institute-0. [20] See U.S. Dep’t of Justice, Justice Manual, Section 4-4.112. [21] Id. [22] Id. [23] Id. [24] Id. [25] Id. [26] See Memorandum, U.S. Dep’t of Justice, Factors for Evaluating Dismissal Pursuant to 31 U.S.C. 3730(c)(2)(A) (Jan. 10, 2018), https://assets.documentcloud.org/documents/4358602/Memo-for- Evaluating-Dismissal-Pursuant-to-31-U-S.pdf. [27] Id. at 2–3. [28] See Jeff Overly, DOJ Warns FCA Targets On Discovery Tactics, Law360 (Mar. 2, 2019), https://www.law360.com/articles/1134479/doj-atty-warns-fca-targets-on-discovery-tactics. [29] Id. [30] Id. [31] Id. [32] Press Release, U.S. Dep’t of Justice, Deputy Associate Attorney General Stephen Cox Delivers Remarks at the 2019 Advanced Forum on False Claims and Qui Tam Enforcement (Jan. 28, 2019), https://www.justice.gov/opa/speech/deputy-associate-attorney-general-stephen-cox-delivers-remarks-2019-advanced-forum-false. [33] Id. [34] Id. [35] Id. [36] Id. [37] Press Release, U.S. Dep’t of Justice, Deputy Associate Attorney General Stephen Cox Gives Remarks to the Cleveland, Tennessee, Rotary Club (Mar. 12, 2019), https://www.justice.gov/opa/speech/deputy-associate-attorney-general-stephen-cox-gives-remarks-cleveland-tennessee-rotary. [38] State False Claims Act Reviews, Dep’t of Health & Human Servs.—Office of Inspector Gen., https://oig.hhs.gov/fraud/state-false-claims-act-reviews/index.asp. [39] Id. [40] Id. Wisconsin repealed its false claims act in 2015. Assembly Bill 1021 would have reinstated the statute, but failed to pass in March 2018. See Wisconsin State Legislature, Assembly Bill 1021, http://docs.legis.wisconsin.gov/2017/proposals/reg/asm/bill/ab1021. [41] Id. [42] See Cal. Gov’t Code § 12651 (West 2018); Ga. Code Ann. § 49-4-168.1 (2018); Del. Code Ann. tit. 6, § 1201 (2018); N.Y. State Fin. Law §§ 189-190-b; 2018 R.I. Gen. Laws § 9-1.1-3 (2018). [43] Cal. AB-1270, 2019 Leg. Reg. Sess. (Cal. 2019). [44] Escobar, 136 S. Ct. at 2002 (emphasis added) (citation and internal quotation marks removed). [45] Cal. AB-1270, 2019 Leg. Reg. Sess. (Cal. 2019). [46] Id. [47] Id. [48] Id. [49] AB-1270 False Claims Act, California Legislative Information (July 9, 2019), http://leginfo.legislature.ca.gov/faces/billStatusClient.xhtml?bill_id=201920200AB1270. [50] See S. 40, A Bill to Amend Title 15 of the 1976 Code, by Adding Chapter 85, to Enact the “South Carolina False Claims Act” (123d Session), https://www.scstatehouse.gov/sess123_2019-2020/bills/40.htm. [51] See S. 223, A Bill to Amend the South Carolina Code of Laws, 1976, by Adding Chapter 85 to Title 15, so as to Enact the “South Carolina False Claims Act” (121st Session), https://www.scstatehouse.gov/sess121_2015-2016/bills/223.htm. [52] Notably, though, the statute covers claims a defendant “reasonably should have known” were false, thereby creating potential liability for mere negligence (unlike the federal FCA, which requires at least reckless disregard). The West Virginia law also lacks a qui tam provision. See W.Va. Code § 9-7-6 (2018). [53] See 2019 W.Va. Laws S.B. 318 (2019 Regular Session). [54] See id. at § 9-7-6. The following Gibson Dunn lawyers assisted in preparing this client update: F. Joseph Warin, Charles Stevens, Stuart Delery, Benjamin Wagner, Timothy Hatch, Joseph West, Robert Walters, Robert Blume, Andrew Tulumello, Karen Manos, Monica Loseman, Geoffrey Sigler, Alexander Southwell, Reed Brodsky, Winston Chan, John Partridge, James Zelenay, Jonathan Phillips, Ryan Bergsieker, Sean Twomey, Reid Rector, Allison Chapin, Michael Dziuban, Jillian N. Katterhagen Mills, and summer associate Marie Zoglo. Gibson Dunn’s lawyers have handled hundreds of FCA investigations and have a long track record of litigation success.  From U.S. Supreme Court victories, to appellate court wins, to complete success in district courts around the United States, Gibson Dunn believes it is the premier firm in FCA defense.  Among other notable recent victories, Gibson Dunn successfully overturned one of the largest FCA judgments in history in United States ex rel. Harman v. Trinity Indus. Inc., 872 F.3d 645 (5th Cir. 2017), and the Daily Journal recognized Gibson Dunn’s work in U.S. ex rel. Winter v. Gardens Regional Hospital and Medical Center Inc. as a Top Defense Verdict in its annual feature on the top verdicts for 2017.  Our win rate and immersion in FCA issues gives us the ability to frame strategies to quickly dispose of FCA cases.  The firm has dozens of attorneys with substantive FCA experience, including nearly 30 Assistant U.S. Attorneys and DOJ attorneys.  For more information, please feel free to contact the Gibson Dunn attorney with whom you work or the following attorneys. Washington, D.C. F. Joseph Warin (+1 202-887-3609, fwarin@gibsondunn.com) Stuart F. Delery (+1 202-887-3650, sdelery@gibsondunn.com) Joseph D. West (+1 202-955-8658, jwest@gibsondunn.com) Andrew S. Tulumello (+1 202-955-8657, atulumello@gibsondunn.com) Karen L. Manos (+1 202-955-8536, kmanos@gibsondunn.com) Jonathan M. Phillips (+1 202-887-3546, jphillips@gibsondunn.com) Geoffrey M. 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Chan (+1 415-393-8362, wchan@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 8, 2019 |
The SFO’s Fifth DPA – High Five or Down Low? Too Slow!

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

June 11, 2019 |
Webcast: Negotiating Closure of Government Investigations: NPAs, DPAs, and Beyond

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