New York partner Joel Cohen and Washington, D.C. of counsel Linda Noonan are the authors of “Chapter 35: USA” [PDF] published in The International Comparative Legal Guide to: Anti-Money Laundering 2019, 2nd Edition.
New York partner Joel Cohen and Washington, D.C. of counsel Linda Noonan are the authors of “Chapter 35: USA” [PDF] published in The International Comparative Legal Guide to: Anti-Money Laundering 2019, 2nd Edition.
Click for PDF Decided February 20, 2019 Timbs v. Indiana, No. 17-1091 The Supreme Court held 9-0 that the Eighth Amendment’s prohibition of excessive fines applies to the States. Background: After Tyson Timbs pled guilty to dealing in a controlled substance and conspiracy to commit theft, an Indiana state trial court considered Indiana’s request for civil forfeiture of his Land Rover, which he used to transport heroin. The trial court denied the request, reasoning that forfeiture of the vehicle would be grossly disproportionate to Timbs’s offense, and thus impermissible under the Eighth Amendment’s Excessive Fines Clause, because Timbs had recently purchased the vehicle for $42,000—far more than the maximum $10,000 fine assessable against him for the drug conviction. The Indiana Supreme Court reversed, concluding that the Excessive Fines Clause applies to only the federal government, not the States. Issue: Does the Eighth Amendment’s Excessive Fines Clause apply to the States? Court’s Holding: Yes. The Excessive Fines Clause is “fundamental to our scheme of ordered liberty” or “deeply rooted in this Nation’s history and tradition,” McDonald v. Chicago, 561 U.S. 742, 767 (2010), and therefore applies to the States under the Fourteenth Amendment’s Due Process Clause. “[T]he historical and logical case for concluding that the Fourteenth Amendment incorporates the Excessive Fines Clause is overwhelming.” Justice Ginsburg, writing for the unanimous Court What It Means: The Court ruled that the Constitution’s prohibition of excessive fines applies to state and local governments, limiting their abilities to impose fines and seize property for forfeiture. The opinion imposes a new constitutional constraint on more than thirty States that have not already incorporated the Excessive Fines Clause (e.g., Michigan, New York, and Virginia), limiting their ability to levy fines and forfeitures, which are often key sources of revenue for state and local governments. The Court did not address when a fine is impermissibly “excessive” under the Eighth Amendment. It noted, however, that the lineage of the Excessive Fines Clause traces back to the Magna Carta, which generally required economic sanctions to be proportionate to the underlying wrong. The opinion gives defendants in suits brought by state and local governments a potential new defense to excessive fines and penalties. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Supreme Court. Please feel free to contact the following practice leaders: Appellate and Constitutional Law Practice Caitlin J. Halligan +1 212.351.3909 firstname.lastname@example.org Mark A. Perry +1 202.887.3667 email@example.com Related Practices: Anti-Money Laundering, Forfeiture, White Collar Defense, and Investigations Joel M. Cohen +1 212.351.2664 firstname.lastname@example.org Charles J. Stevens +1 415.393.8391 email@example.com F. Joseph Warin +1 202.887.3609 firstname.lastname@example.org Stephanie Brooker +1 202.887.3502 email@example.com M. Kendall Day +1 202.955.8220 firstname.lastname@example.org
Click for PDF In 2018, the number of corporate non-prosecution agreements (“NPAs”) and deferred prosecution agreements (“DPAs”) in the United States remained steady—2018 yielded at least 24 agreements—but the monetary recoveries skyrocketed to nearly $8.1 billion.[2a] While the comparative year over year analysis has become more difficult because of a third resolution vehicle, declination with disgorgement, the Department of Justice (“DOJ” or “Department”) continues to embrace corporate NPAs and DPAs as effective tools in resolving investigations into corporate criminal misconduct. This client alert, the twenty-first in our biannual series on NPAs and DPAs: (1) compiles statistics regarding NPAs and DPAs through 2018; (2) highlights important shifts in enforcement agency policy on corporate cooperation; (3) addresses new guidance on imposing and selecting corporate monitors; (4) identifies key provisions in NPAs and DPAs, which may vary depending on the prosecuting authority; (5) analyzes NPAs and DPAs released during the second half of the year; (6) discusses declinations to prosecute that required disgorgement in 2018; and (7) identifies developments in foreign jurisdictions’ use of DPA-style regimes. NPAs and DPAs in 2018 DOJ entered into at least 24 agreements in 2018, of which 13 are NPAs and 11 are DPAs. The Department also entered into one NPA addendum to address additional conduct without breaching a previously entered NPA, and three declinations that required disgorgement. In contrast, the Securities and Exchange Commission (“SEC” or “Commission”), for the second year in a row, did not enter into any NPAs or DPAs. This year’s 24 agreements exceed the number of agreements in 2017 by two, but represent a decrease from 2016, when there were 39 agreements. Of note, 14 of the 24 agreements (and the addendum) involved financial institutions, and seven of the 24 agreements resolved allegations arising under the Foreign Corrupt Practice Act (“FCPA”). In addition, two of the agreements executed during the second half of 2018 resolved immigration law allegations related to the employment of foreign workers. Although the natural ebb and flow of resolutions makes broad conclusions from these agreements difficult, we know that DOJ officials continue to emphasize the Department’s commitment to pursuing alleged corporate wrongdoers. Chart 1 below shows all known corporate NPAs and DPAs from 2000 through 2018. Monetary recoveries exploded to nearly $8.1 billion, which almost matched the 2012 high of $9 billion. A handful of high-value resolutions led to the large recovery amount. Chart 2 below illustrates the total monetary recoveries related to NPAs and DPAs from 2000 through 2018. Corporate Cooperation Redefined Statements of U.S. Deputy Attorney General Rod J. Rosenstein On November 29, 2018, U.S. Deputy Attorney General Rod J. Rosenstein announced changes to the Department’s approach to defining corporate cooperation when identifying culpable individuals in corporate investigations. The newly articulated policy, which applies to both criminal and civil corporate cases prosecuted by DOJ, modifies the September 9, 2015 memorandum authored by former Deputy Attorney General Sally Yates (the “Yates Memorandum”). Under the Yates Memorandum, as a prerequisite for any cooperation credit whatsoever, corporations had to identify all individuals responsible for, or involved in, the underlying misconduct and provide all facts pertaining to such misconduct. Under the revised policy, corporate criminal defendants must identify “every individual who was substantially involved in or responsible for the criminal conduct.” Although the revised policy conditions cooperation credit on corporations identifying those who were substantially involved in wrongdoing, the policy also emphasizes that DOJ will not delay resolution of an investigation to gather information on those “whose involvement was not substantial, and who are not likely to be prosecuted.” The Deputy Attorney General detailed how the revised policy modifies cooperation requirements in the civil context. In contrast to the binary approach to cooperation in criminal matters, the revised policy contemplates a range of cooperation-based outcomes in a civil case. To qualify for maximum credit, corporate civil defendants must still identify every person who was substantially involved in, or responsible for, wrongdoing. But “some credit” is available to corporations that fall short of this standard, provided they “meaningfully assist the government’s civil investigation,” and “identify all wrongdoing by senior officials, including members of senior management or the board of directors.” The revised policy better harmonizes the Yates Memorandum with directives in the Justice Manual (formerly known as the U.S. Attorney’s Manual) concerning joint-defense agreements. Under the Justice Manual, prosecutors cannot ask corporations to refrain from entering into a joint-defense agreement. Parties to a joint-defense agreement are often prevented from sharing information derived from internal investigations. The Justice Manual states that corporations in joint-defense agreements may nevertheless wish to tailor their agreements to allow them to provide “some relevant facts to the government” to remain eligible for cooperation credit. But merely providing “some relevant facts” falls short of the “all relevant facts” threshold under the Yates Memorandum. By emphasizing that corporations need only identify individuals who were substantially involved in or responsible for wrongdoing, the revised policy is congruent with the “some relevant facts” standard for cooperation credit in the Justice Manual. The History of Prosecution Policy and DOJ’s Increasing Focus on Cooperation The new policy represents a recalibration of the Department’s approach to corporate cooperation, but it is not a wholesale reversal of the Yates Memorandum. The policy continues to focus on identifying misconduct at the managerial levels of the corporate hierarchy. The Deputy Attorney General emphasized in his speech announcing the policy that the “most important aspect” of the new policy in the civil context is that corporations “must identify all wrongdoing by senior officials, including members of senior management or the board of directors.” A natural consequence of the Department’s focus on individual accountability has been to incentivize corporate cooperation in identifying culpable individuals. In doing so, the Department has elevated the importance of cooperation credit in negotiating criminal and civil resolutions, while ostensibly reducing the significance of an effective, pre-existing compliance program as a mitigating factor. This shift in emphasis is seen in DOJ’s history of prosecution policy, which we outline below. In 1991, Congress took the groundbreaking step of enacting the Federal Sentencing Guidelines for Organizations (“Organizational Guidelines”), which provide a detailed set of sentencing principles whose twin objectives are the prevention and detection of corporate crime. Employing a “carrot and stick” approach, the Organizational Guidelines contemplate severe fines imposed on corporations that promote or show indifference toward wrongdoing while drastically reducing fines on companies that actively seek to prevent and discourage illegal activity. The Organizational Guidelines’ “carrot” (in the form of fine reductions) to incentivize good corporate behavior could be awarded for either or both (1) “self-reporting, cooperation, or acceptance of responsibility,” or (2) “the existence of an effective compliance and ethics program.” The Organizational Guidelines are clear that credit for an effective compliance program can be awarded separate and apart from cooperation. Starting in 1999 with the Holder Memorandum authored by then-Deputy Attorney General Eric Holder, DOJ issued a series of eponymous policy memoranda attempting to guide the exercise of federal prosecutors’ considerable discretion in the pursuit of corporate actors. Consistent with the Organizational Guidelines, the Holder Memorandum emphasized both cooperation and the effectiveness of a company’s compliance program as mitigating considerations in DOJ’s charging calculus. These two mitigating factors are featured in the Thompson Memorandum (2003), the McNulty Memorandum (2007), the Morford Memorandum (2008), and the Filip Memorandum (2008), each of which pronounced new or revised prosecution guidelines. They also are required considerations in the Justice Manual as part of a prosecutor’s decision to bring charges. The Yates Memorandum is the sixth iteration of namesake policy documents modifying prosecutors’ charging analysis. The Yates Memorandum sent waves across the defense bar by affirmatively requiring prosecutors to pursue individual defendants from the inception of a corporate investigation. Perhaps less noticed is the Yates Memorandum’s silence regarding the benefits of an effective compliance program, which was featured prominently in every preceding policy memorandum. To be sure, the Yates Memorandum was intended to expound on what gives rise to cooperation credit, so it naturally does not address what mitigating consideration DOJ affords an effective compliance program under the Justice Manual, seemingly leaving undisturbed the mitigating credit derived from an effective compliance program. Regardless, the Yates Memorandum marked the beginning of DOJ policy pronouncements that focus so heavily on cooperation that they appear to obscure and risk devaluing the status of an effective compliance program as a mitigating factor in DOJ’s charging calculus. This phenomenon looms large in the FCPA Pilot Program, which was adopted as the FCPA Corporate Enforcement Policy in November 2017. The policy explicitly aims to incentivize companies’ behavior “once they learn of misconduct” by offering declinations or penalty reductions to those companies that self-disclose, cooperate, and remediate. In other words, a company’s compliance program, as it existed before the occurrence of any wrongdoing, is not a required consideration that favors declination or penalty reductions under the FCPA Corporate Enforcement Policy. To receive cooperation credit for voluntary self-disclosure under the policy, an organization must provide, in a fashion similar to the Yates Memorandum, “all relevant facts known to it, including all relevant facts about all individuals involved in the violation of law”—a requirement that now appears to be at odds with the Department’s recent recognition that identifying all individuals involved in wrongdoing is inefficient and needlessly delays resolutions. Practical Implications of the Department’s Revised Policy The Department’s revised policy defining corporate cooperation will have practical implications on corporate investigations that are likely to enhance information sharing with DOJ. Since the Filip Memorandum’s release, the Justice Manual has prohibited prosecutors from affirmatively seeking waiver of attorney-client privilege and protected work product. Nevertheless, because companies often conduct investigations with the assistance and advice of counsel, they have not always been able to furnish “all relevant facts” to DOJ absent some form of waiver. The revised policy, by more narrowly focusing on those with substantial involvement in wrongdoing, likely will reduce the number of instances companies will face dueling priorities of protecting privilege versus cooperating with DOJ. Developments in Corporate Monitorships A compliance monitorship is often a condition of resolving a corporate investigation or prosecution with enforcement authorities. Because monitorships can be time consuming, costly, and intrusive, it is important for companies to understand what the government considers when evaluating the necessity of a monitor, and how the government selects the individual monitor. In 2018, the government issued guidance addressing both of those points. The Benczkowski Memorandum On October 12, 2018, Assistant Attorney General Brian A. Benczkowski announced the publication of new guidance on the imposition and selection of monitors in conjunction with corporate resolutions in Criminal Division matters (the “Benczkowski Memorandum”). The Department promulgated the Benczkowski Memorandum to supplement the 2008 guidance from then-Acting Deputy Attorney General Craig S. Morford (the “Morford Memorandum”), and “to further refine the factors that go into the determination of whether a monitor is needed, as well as clarify and refine the monitor selection process.” Although the Benczkowski Memorandum technically applies only to the Criminal Division, its practical effect is much broader, both because the Criminal Division is almost always involved in significant corporate resolutions and because the Criminal Division’s policies tend to serve as a bellwether for wider Department efforts. Imposition of a Monitor The Benczkowski Memorandum reiterates the “foundational principle” that imposition of a corporate monitor is not meant to be punitive, but rather aims to deter future misconduct. In his speech announcing the new guidance, Benczkowski noted that for the past five years, only one in three corporate resolutions involved a corporate monitorship—the majority of corporate resolutions did not require monitors. The Benczkowski Memorandum reiterates the Morford Memorandum’s pronouncement that prosecutors, when considering the need for a monitor, should assess “(1) the potential benefits that employing a monitor may have for the corporation and the public, and (2) the cost of a monitor and its impact on the operations of a corporation.” The Benczkowski Memorandum articulates the following factors for consideration when evaluating the “potential benefits” of a monitor: (1) the type of misconduct (i.e., whether it involved manipulation of corporate books and records or exploitation of an inadequate system of internal controls); (2) the pervasiveness of the misconduct, and whether it was approved or facilitated by senior management; (3) the company’s investments in, and improvements to, its corporate compliance program and internal control systems; and (4) whether remedial improvements to the compliance program and internal controls have been tested to demonstrate effective deterrence. In other words, a robust internal compliance system may move the needle toward a resolution without a monitor requirement. The calculus of whether to impose a monitor accounts for proactive steps taken by the company to prevent or remediate wrongdoing; therefore, maintaining an effective and well-resourced compliance department and/or retaining an independent compliance consultant as soon as wrongdoing is detected may mitigate the likelihood of a monitorship. The ultimate decision of whether to require a monitor weighs the projected costs of the monitorship (both monetary costs and burden on the company’s operations) against the clear benefit derived from it. The explicit statement that DOJ will consider financial costs signals that DOJ is receptive to concerns voiced by corporations and the white collar bar regarding the heavy financial burden caused by monitorships. Costs of a monitor include not only professional fees, but also the operational costs of employee time devoted to working with the monitor and responding to requests for documentation. The Benczkowski Memorandum acknowledges these costs and requires consideration of them in deciding whether a monitor is appropriate. Within the Criminal Division, attorneys handling a matter must seek and obtain approval from their supervisors and obtain the concurrence of the Assistant Attorney General of the Criminal Division or his or her designee prior to imposing a monitor. Selection of a Monitor In cases where a monitorship is warranted, the Benczkowski Memorandum outlines procedures for initial selection—and, if necessary, replacement—of the corporate monitor. As an initial step, the company may recommend three qualified candidates and identify one as the top choice. A “qualified candidate” is defined by his or her (1) general background, education, experience, and reputation; (2) substantive expertise in the particular area(s) at issue; (3) ability to be objective and independent; and (4) access to adequate resources to effectively discharge his or her responsibilities. Within 20 days of the execution of a qualifying agreement (e.g., NPA, DPA, or plea agreement), the company should provide a written proposal outlining each candidate’s qualifications and credentials, and certifying that the proposed candidates are not employed by or affiliated with the company and will not be employed by or affiliated with the company for at least two years following the termination of the monitorship. The written statement should also certify that the company has reviewed potential conflicts with clients of the monitor candidate and resolved conflicts where applicable. The procedures formalize the selection process, although the practice of companies recommending monitor candidates is not new. Following submission of the written statement from the company, the Criminal Division will review the candidates’ experience, credentials, and expertise in the particular matters at issue, and assess whether the candidates have sufficient resources to carry out monitorship responsibilities effectively. The attorneys will then determine which monitor candidate(s) to recommend to the Standing Committee on the Selection of Monitors (“Standing Committee”). Absent from the Benczkowski Memorandum is reference to DOJ’s “commitment to diversity and inclusion” in selecting a compliance monitor, which was—as we discussed in our 2018 Mid-Year Update—a stated consideration for selecting a monitor highlighted in the Panasonic Avionics Corporation (“PAC”) DPA. PAC had agreed to pay $280 million and to a two-year monitorship in a foreign bribery settlement with DOJ and the SEC in April 2018. The Standing Committee, as described in the Benczkowski Memorandum, includes the Deputy Assistant Attorney General with supervisory responsibility for the Fraud Section (or his or her designee), the Chief of the Fraud Section or other relevant section (or his or her designee), and the Deputy Designated Agency Ethics Official for the Criminal Division. The Criminal Division attorneys handling a matter where a monitor is imposed will provide the Standing Committee with a memorandum describing the case, explaining why a monitor is required, and setting forth the proposed and recommended candidates. The Standing Committee will then review and vote on whether to accept the recommendation. Following the vote, the Office of the Deputy Attorney General will review the recommendation of the Standing Committee and determine whether to grant final approval of the proposed monitor. The paramount goal of this robust selection process is the appointment of a highly qualified, suitable, and conflict-free monitor who will instill public confidence in the monitorship process. Since the release of the Benczkowski Memorandum, no resolutions have mandated monitorships, and it is difficult to meaningfully assess the memorandum’s impact. Some view the Benczkowski Memorandum as “business-friendly” and restrictive to prosecutors; they assert that the Trump Administration has blunted enforcement tools like corporate monitorships. When announcing the new guidance, Benczkowski reiterated that imposition of a monitorship should be “the exception, not the rule.” Although the Benczkowski Memorandum requires weighing the potential benefits of a monitor against the financial and operational costs, the prosecutor still retains discretion when making the determination. It remains to be seen whether the guidance will, in practice, reduce the use of monitorships in corporate settlements. We will continue to track how the Benczkowski Memorandum impacts both the number of monitorships imposed in corporate resolutions and the selection of individuals as monitors. Corporate Resolution Extensions The conclusion and extension of corporate resolutions in 2018 highlight the challenges some corporations face even after a resolution is reached. MoneyGram International, Inc. (“MoneyGram”) extended its DPA seven times in 2018 (and once in late 2017), most recently through May 10, 2021, and agreed to forfeit an additional $125 million. MoneyGram’s DPA, originally signed in 2012, resolved allegations that MoneyGram failed to maintain an effective anti-money laundering (“AML”) program and that its agents were complicit in alleged consumer fraud schemes. Under the DPA, MoneyGram agreed to implement significant compliance measures, including changes to executive compensation, a remediation due diligence plan related to agents, a risk-based transaction monitoring program, and the designation of at least one AML compliance officer to each high risk country. Standard Chartered Bank (“Standard Chartered”) also extended its DPA, and the length of the related monitorship, four times. Standard Chartered entered a two-year DPA in 2012 to resolve allegations of facilitating payments involving Burma, Iran, Libya, and Sudan in violation of U.S. sanctions laws. Standard Chartered’s commitments in its 2012 DPA included continued “cooperation with the United States” (as defined in the agreement), as well as “full compliance” with certain AML best practices recommended by third parties. Standard Chartered noted that it continues to cooperate in an ongoing sanctions-related investigation, and the company has “taken a number of steps and made significant progress” with respect to compliance, but its sanctions compliance program “has not yet reached the standard required by the DPA.” Standard Chartered most recently extended the DPA term until March 31, 2019, noting that the “vast majority of the issues under investigation pre-date 2012,” and the company is “engaged in constructive discussions with relevant authorities to resolve the investigation as soon as practicable.” These DPA extensions underscore the long resolution process that can await companies after entering into a DPA. Particularly in complex areas, such as AML and sanctions compliance, companies must devote substantial resources and technical sophistication to implement the compliance enhancements required under their DPAs. Key Provisions in Corporate Resolutions Because DOJ has not issued a standard template for NPAs and DPAs, there is substantial variety in the salient terms of these resolution vehicles. The variety is evident across agreements signed by different divisions of DOJ and the 93 Offices of the U.S. Attorneys—core terms may vary depending on which prosecutor’s office drafts the resolution. For example, the U.S. Attorney’s Office for the Southern District of New York often mandates forfeiture of accounts in DPAs. This practice is unique from NPA and DPA structures in other U.S. Attorney’s Offices, and is followed irregularly at Main Justice. Accordingly, when negotiating terms of NPAs and DPAs, it is important to focus on the substantive elements, including the following: (1) duration of the agreement (typically ranges from 12 to 48 months); (2) entities covered by the resolution (parents, subsidiaries, affiliates, and/or joint venture partners); (3) release language (may encompass a specific, alleged crime or all disclosed conduct by the putative defendant to DOJ); (4) what constitutes breach (material violation of law, violation of the agreement, or violation of the statute underlying the resolution); (5) cure for breach (extension of the agreement, revocation of the agreement followed by a plea of guilty, or monetary liquidated damages, as seen in the Netcracker Technology Corporation NPA discussed in our 2017 Year-End Update); and (6) post-agreement reporting obligations (monitorship, self-reporting, annual self-assessment report, or nothing). The diversity of terms is illustrated in our discussion of recent NPAs and DPAs in the subsequent section. Recent NPAs and DPAs Since the publication of our 2018 Mid-Year Update, DOJ has announced 12 NPAs and DPAs, bringing the total to 24 agreements in 2018. The Department also issued one NPA addendum. In July, we discussed the six NPAs and six DPAs announced between January 1, 2018 and July 10, 2018. Those agreements resolved a wide range of allegations, which most prominently related to the FCPA, Racketeer Influenced and Corrupt Organizations Act, money laundering, and wire fraud. Most of the 12 agreements are in effect for terms of 12, 24, or 36 months, and a majority require self-reporting. You can find a summary of the agreements in the Appendix to this publication or read about them in detail in our 2018 Mid-Year Update. As noted in our statistics of this year’s NPAs and DPAs, more than half of the agreements involved financial institutions, seven of which (and the addendum) were executed during the second half of 2018. Our Developments in the Defense of Financial Institutions publication discusses some of the larger settlements in detail and provides insight into the legal complexities of the industry. In addition to the government’s distinct focus on financial institutions, two of the agreements announced since July 10 resolved allegations related to the employment of foreign workers. We discuss the key provisions of each agreement announced during the second half of 2018 below. American Media, Inc. (NPA) On December 12, 2018, the U.S. Attorney’s Office for the Southern District of New York announced that it entered into an NPA with American Media, Inc. (“AMI”) on September 20, 2018. The U.S. Attorney’s Office made the announcement in conjunction with the sentencing of Michael Cohen, who, in relevant part, violated campaign finance laws when he facilitated two payments to women to prevent the public disclosure of alleged affairs with then-presidential candidate Donald Trump. Cohen allegedly used AMI to make a $150,000 payment to one of the women. In the NPA, the U.S. Attorney’s Office acknowledged AMI’s “cooperation and implementation of remedial measures” as principal factors in its decision to forgo criminal prosecution. AMI agreed to cooperate with government officials and its obligations under the NPA will continue until the later of three years or “the date on which all prosecutions arising out of the conduct described in the opening paragraph of this Agreement are final.” As part of its remedial duties, AMI agreed to provide employees with written standards covering federal election laws, conduct annual, mandatory training on the written standards, and work with “counsel knowledgeable in the field of federal election law” to advise on the written standards and ensure that “payments to acquire stories involving individuals running for office” comply with the written policies. In addition, AMI must report to the U.S. Attorney’s Office any violations of its written standards or federal election law during the term of the agreement. The NPA did not impose a monetary penalty. Bank Lombard Odier & Co Ltd. (NPA addendum) On July 31, 2018, Bank Lombard Odier & Co Ltd. (“Bank Lombard”) entered into an addendum to the NPA it signed on December 31, 2015, with DOJ. The original NPA arose from Bank Lombard’s disclosure of its cross-border business for U.S.-related accounts as part of the Swiss Bank Program established by DOJ on August 29, 2013. This addendum to an NPA is unusual; it is likely the result of the unique nature of the NPAs associated with the Swiss Bank Program. The Swiss Bank Program provided a path for Swiss banks to resolve potential U.S. criminal liabilities related to tax evasion. To enter the program, Swiss banks were required to advise DOJ by December 31, 2013, that they had reason to believe that they had committed tax-related criminal offenses in connection with undeclared U.S.-related accounts. To be eligible, banks had to (1) make a complete disclosure of their cross-border activities; (2) provide detailed information on an account-by-account basis in which U.S. taxpayers had a direct or indirect interest; (3) cooperate in treaty requests for account information; (4) provide detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed; (5) agree to close accounts of accountholders who fail to come into compliance with U.S. reporting obligations; and (6) pay appropriate penalties. Swiss banks meeting all of these requirements were eligible for an NPA. Bank Lombard entered into an NPA under the Swiss Bank Program on December 31, 2015. After entering into the original NPA—which required Bank Lombard to disclose all of its U.S.-related accounts that were open at each bank between August 1, 2008 and December 31, 2014—Bank Lombard self-disclosed that it was “aware of or should have been aware of” additional U.S.-related accounts at the time it entered into the original NPA. DOJ acknowledged Bank Lombard’s early self-disclosure of the additional accounts and its full cooperation under the Swiss Bank Program. Under the terms of the addendum, Bank Lombard agreed to pay an additional sum of $5.3 million calculated in accordance with the terms of the Swiss Bank Program. The term of Bank Lombard’s obligations under the original NPA (four years) was not extended by the addendum. Basler Kantonalbank (DPA) On August 28, 2018, Basler Kantonalbank (“BKB”), a bank headquartered in Basel, Switzerland, entered into a three-year DPA with DOJ’s Tax Division and the U.S. Attorney’s Office for the Southern District of Florida. The DPA resolved a seven-year investigation into the bank by U.S. authorities, which emerged from a U.S. crackdown on offshore tax evasion by wealthy Americans utilizing undeclared Swiss bank accounts. As part of the DPA, BKB admitted that between 2002 and 2012 it conspired with its employees, external asset managers, and clients to: (1) defraud the United States with respect to taxes; (2) commit tax evasion; and (3) file false federal tax returns. The bank assisted certain U.S. clients in concealing their offshore assets and income from U.S. tax authorities. By 2010, when BKB’s U.S.-related business was at its peak, the bank held approximately 1,144 accounts for U.S. customers, with an aggregate value of approximately $813.2 million. Many, but not all, of these accounts were undeclared and part of the conspiracy to defraud the United States. BKB agreed to pay $60.4 million in total penalties. First, BKB agreed to pay $17.2 million in restitution to the Internal Revenue Service (“IRS”), which represents the unpaid taxes resulting from BKB’s participation in the conspiracy. Second, BKB agreed to forfeit $29.7 million to the United States, which represents gross fees (not profits) that the bank earned on its undeclared accounts between 2002 and 2012. Finally, BKB agreed to pay a fine of $13.5 million. DOJ explained that the penalty amount reflected BKB’s thorough internal investigation and cooperation with the United States, as well as the bank’s extensive remedial efforts. In particular, BKB demonstrated its acceptance and acknowledgment of responsibility for its conduct by, among other things: (1) advocating for a decision by the Swiss Federal Council in April 2012 to allow banks under investigation by DOJ to legally produce employee and third-party information to DOJ; (2) quickly producing such information after the Swiss Federal Council decision; (3) providing the government with the broadest scope of information permissible under Swiss law; and (4) disclosing facts, including unfavorable ones, discovered during the course of its investigation. DOJ also credited BKB for waiving any potential defense of foreign sovereign immunity, which may have protected BKB as a state-guaranteed, semi-governmental organization. Central States Capital Markets, LLC (DPA) On December 10, 2018, Central States Capital Markets, LLC (“CSCM”) and the U.S. Attorney’s Office for the Southern District of New York entered into a DPA to resolve allegations that CSCM failed to timely file a Suspicious Activity Report in violation of the Bank Secrecy Act (“BSA”). CSCM agreed to accept responsibility for the allegations and forfeited $400,000 to the United States, which “represents a substitute res” for monies processed by CSCM relating to payday lending fraud executed by a customer. CSCM agreed to cooperate with the government’s investigation, and self-disclose all criminal conduct related to violations of federal law. As part of its remediation efforts, the DPA requires CSCM to implement and maintain an effective BSA/AML compliance program, as well as “retain an independent consultant on the terms and conditions set by the SEC.” The term of the DPA is two years. Of note, this is the first criminal BSA charge brought against a U.S. broker-dealer. In his announcement of the DPA, U.S. Attorney Geoffrey S. Berman stated that the charge “makes clear that all actors governed by the [BSA]—not only banks—must uphold their obligations to protect our economy from exploitation by fraudsters and thieves.” Hallman Chevrolet (DPA) On August 31, 2018, DOJ announced that the U.S. Attorney’s Office for the Western District of Pennsylvania had entered into a four-year DPA with Hallman Chevrolet, a car dealership located in Erie, Pennsylvania. The DPA resolved allegations that Hallman Chevrolet engaged in a bank fraud scheme and a conspiracy to commit bank fraud. In particular, Hallman Chevrolet engaged in a fraudulent down payment scheme by manipulating bills of sale and bank lending contracts to hide from financial institutions the true source of customer down payments and to make customers appear more credit-worthy than they actually were. As a result, Hallman Chevrolet led the financial institutions into making unsafe investment decisions by having under-collateralized assets and financially risky credit applicants. Pursuant to the DPA, Hallman Chevrolet agreed to pay a monetary penalty of $1.4 million and more than $737,000 in restitution to various lending institutions. In addition, “Hallman Chevrolet must engage in a substantial corporate compliance and ethics program and a vigorous monitoring and audit regime.” Health Management Associates, LLC (NPA) Health Management Associates, LLC (“HMA”) entered into an NPA with the Fraud Section on September 21, 2018, to resolve criminal and civil claims relating to “a formal and aggressive plan to improperly increase overall emergency department inpatient admissions at all HMA hospitals.” Specifically, DOJ alleged that HMA executives and hospital administrators pressured, coerced, and induced physicians and medical directors to meet mandatory admission rate benchmarks and admit patients who did not need inpatient treatment. The NPA notes that a “relevant consideration” for entering into an NPA was that the parent company of HMA—Community Health Systems (“CHS”)—acquired HMA after the relevant behavior had occurred, and at the time of acquisition HMA was facing multiple lawsuits and was the subject of criminal and civil investigations. The NPA also notes that following the acquisition of HMA, CHS “engaged in remedial measures, including (1) removing the HMA Board of Directors and senior executives; and (2) integrating the HMA hospitals into [CHS’s] compliance program and implementing certain compliance initiatives to address and remediate . . . [the] issues that were alleged in certain . . . lawsuits and were part of the criminal and civil investigations.” HMA and CHS also received credit for their cooperation with the Fraud Section, which included, among other things, making regular factual presentations; collecting, analyzing, and organizing voluminous evidence and information for the Fraud Section; and providing substantial cooperation to the U.S. Attorney’s Office for the Middle District of Florida in connection with the prosecution of a former HMA executive. Under the NPA, which has a term of three years, HMA agreed to cooperate with the investigation, report allegations or evidence of violations of federal health care offenses, ensure that its compliance and ethics program satisfies the requirements of an amended and extended Corporate Integrity Agreement, and report annually to the Fraud Section regarding remediation and implementation of compliance measures. HMA also agreed to pay a monetary penalty in the amount of over $35 million. The NPA notes that HMA and CHS agreed to a global resolution of HMA’s civil and criminal liability. An indirect subsidiary of HMA, Carlisle HMA, LLC, pleaded guilty to one count of conspiracy to commit health care fraud and agreed to pay a criminal fine of over $2.5 million. HMA also agreed to pay almost $75 million to resolve civil claims arising under federal and state False Claims Acts, and over $148 million to settle qui tam allegations that HMA hospitals provided improper financial incentives to physicians for patient referrals. Mirelis Holding S.A. (NPA) Mirelis Holding S.A. (“Mirelis”), a Swiss financial asset and management firm, entered into an NPA with DOJ’s Tax Division on July 24, 2018, to resolve allegations related to facilitating U.S.-based tax evasion. DOJ alleged that Mirelis opened, maintained, and serviced accounts for U.S. taxpayer-clients where Mirelis knew or had reason to know that the U.S. taxpayer-clients were not complying with their U.S. tax obligations. Mirelis originally submitted a Letter of Intent on December 23, 2013, to participate in DOJ’s Swiss Bank Program, but it was ultimately determined that Mirelis did not qualify due to its structure as both an asset management firm and a bank. However, the NPA entered into on July 24, 2018, requires Mirelis to fully comply with the obligations imposed under the terms of the program. Additionally, the NPA requires Mirelis to provide transaction information related to certain accounts, close as soon as practicable any U.S.-related dormant accounts, and pay a sum of $10.245 million. The NPA characterized the $10.245 million as $3.245 million in restitution for the approximate pecuniary loss suffered by the United States, $5 million as disgorgement of profits for the approximate amount earned by Mirelis by servicing undeclared U.S. taxpayers, and $2 million as a penalty for Mirelis’s conduct with respect to U.S.-related accounts. In support of the agreement not to prosecute Mirelis, DOJ cited Mirelis’s voluntary disclosure of its conduct, cooperation with the Tax Division on the status and findings of its internal investigation, and retention of a qualified independent examiner who verified the information Mirelis disclosed, pursuant to the requirement under the Swiss Bank Program. The NPA has a term of four years. Neue Privat Bank AG (NPA) On July 18, 2018, the Tax Division announced an NPA with Neue Privat Bank AG (“NPB”), stemming from NPB’s cross-border business, which allegedly ran afoul of U.S. tax law. NPB, a private Swiss bank, must pay a $5 million penalty for aiding U.S. clients in concealing assets and income from the IRS. In 2009, NPB’s Board voted to allow U.S. clients to open accounts at the bank, even when the clients had been forced out of other banks. NPB’s assets under management for U.S. clients subsequently jumped to 450 million Swiss Francs from 8 million Swiss Francs the previous year. Most of NPB’s U.S. client accounts were managed by external asset managers and firms, and NPB had very little contact with many of its clients. For some of those clients, NPB did not disclose the account owner’s identity to the IRS. NPB believed it could maintain its U.S. accounts, even if it knew or had reason to believe the accounts were to evade taxes, and indeed continued to service some of those accounts after knowledge that some owners had not declared their accounts to the IRS. NPB serviced accounts that employed different strategies to conceal income from the IRS, including using numbered accounts, hold mail services, and shell companies. NPB began to increase its U.S. tax compliance efforts in 2010 and 2011, requiring tax compliance evidence from external asset managers in August 2011, but it still continued to maintain undeclared accounts. NPB cooperated in the investigation by disclosing the identities of account holders and making bank executives available for interview. NPB must comply with periodic reporting if it fails to close dormant accounts. The NPA was set for a term of four years. Petróleo Brasileiro S.A. – Petrobras (NPA) On September 26, 2018, the Fraud Section and the U.S. Attorney’s Office for the Eastern District of Virginia announced an NPA with Petróleo Brasileiro S.A. – Petrobras (“Petrobras”), resolving allegations arising under the FCPA. Petrobras, the Brazilian semi-public, state-run energy company, agreed to pay $170.64 million to U.S. authorities, with credit for $682.56 million paid to Brazilian authorities after Brazilian and U.S. investigations into the company’s internal controls, books and records, and financial statements. As discussed in greater detail in our 2018 Year-End FCPA Update, certain former Petrobras executives engaged in a corrupt scheme with politicians and Petrobras suppliers and contractors. Petrobras reached settlements with both DOJ and the SEC. DOJ agreed to credit payments to the SEC and the Brazilian government to the overall penalty, such that DOJ and the SEC each receive 10% of the total penalty ($85.32 million) and the Brazilian government, which has not found wrongdoing by Petrobras, will receive the remaining 80% ($682.56 million). In the related SEC settlement, the SEC will credit any amounts Petrobras pays in the shareholder derivative suit against the SEC’s order of approximately $933.473 million in disgorgement and prejudgment interest. Although Petrobras did not voluntarily disclose the underlying conduct, it fully cooperated in the investigation by conducting a thorough internal investigation, sharing findings of that investigation with the government in real time, and presenting regularly to the government. Petrobras also took significant remedial measures, including replacing its Board of Directors and a number of high-level executives, completely revamping its internal governance systems, and terminating and distancing itself from any employee implicated in the alleged bribery scheme. DOJ will not require an independent compliance monitor. Petrobras will, however, be required to report to DOJ every 12 months on its remedial measures over the course of the agreement, including the implementation of its internal governance systems. The NPA has a term of three years. Société Générale S.A. (DPA) On November 18, 2018, Société Générale S.A. (“SocGen”) and the U.S. Attorney’s Office for the Southern District of New York entered a DPA to resolve allegations involving the Trading with the Enemy Act (“TWEA”) and the Cuban Assets Control Regulations (“Cuban Regulations”) promulgated thereunder. The DPA term is three years, and it requires SocGen to pay over $1.34 billion, including $717.2 million in forfeiture to the United States. The remaining portion of the monetary penalty consists of payments to be made for SocGen’s concurrent settlement of related criminal and civil actions with the New York County District Attorney’s Office, the U.S. Department of Treasury, Office of Foreign Assets Control (“OFAC”), the New York State Department of Financial Services, and the Federal Reserve Board of Governors and the Federal Reserve Bank of New York. The $1.34 billion in penalties represents the second largest penalty ever imposed on a financial institution for violations of U.S. economic sanctions. DOJ charged SocGen with violations of the TWEA and the Cuban Regulations, alleging that SocGen participated in a conspiracy, which lasted from about 2004 to 2010, to make transfers of credit and payments between, by, and through banking institutions with respect to property in which Cuba had an interest. Specifically, DOJ alleged that SocGen structured U.S. dollar transactions and operated 21 credit facilities that provided significant money flow to Cuban banks, entities controlled by Cuba, and Cuban and foreign corporations for business conducted in Cuba. In total, SocGen allegedly engaged in more than 2,500 transactions through U.S. financial institutions that caused those institutions to process close to $13 billion in transactions that otherwise should have been blocked for investigation pursuant to OFAC regulations. DOJ alleges that SocGen’s management and Group Compliance failed to disclose the discovered conduct to OFAC promptly. Demonstrating good faith and cooperation, SocGen agreed, as part of the DPA, to implement remedial measures required by various state and federal regulators. Specifically, SocGen agreed to implement or enhance its BSA/AML compliance programs and internal controls to prevent the occurrence of similar criminal conduct going forward. Waste Management of Texas (NPA) On August 29, 2018, the U.S. Attorney’s Office for the Southern District of Texas entered into an NPA with Waste Management of Texas (“Waste Management”). Between 2003 and April 2012, managers at Waste Management’s Afton, Texas, location allegedly hired individuals to work at the facility without inquiring into their work status in the United States. In January 2012, after firing ten employees because they were undocumented, the managers provided the fired individuals with identification documents of other, documented people so that they could return to work at Waste Management. The three managers were indicted in May 2014 for the above conduct, and Waste Management both cooperated in the criminal investigation and conducted its own internal investigation. As part of the NPA, Waste Management agreed to continue its already enhanced immigration compliance procedures and forfeit over $5.5 million, which amounts to the estimated proceeds from employing undocumented workers at the Afton facility from 2003 to 2012. Wright State University (NPA) On November 16, 2018, Wright State University (“WSU”), a public university, and the U.S. Attorney’s Office for the Southern District of Ohio entered into an NPA in connection with WSU’s admission that it engaged in a conspiracy to commit H-1B visa fraud. The H-1B visa program allows companies in the United States to temporarily employ foreign workers in occupations that require highly specialized knowledge and a bachelor’s or higher degree in a specific specialty. There is a numerical cap on the number of H-1B visas that can be issued per year, but, as an institute of higher learning, WSU is “cap exempt,” unlike other types of organizations. According to the agreement, WSU employed 24 foreign employees—pursuant to sponsored research contracts with Webyoga, Inc. (“Webyoga”), a privately held software company—through H-1B visas. WSU used its “cap exempt” status to apply for the visas. In doing so, WSU submitted a signed employment offer letter from the university indicating each visa employee would be working for the university and under the supervision of university employees. In fact, the visa employees worked as consultants on behalf of Webyoga in various cities throughout the country, including Atlanta, Orlando, and New York City. Moreover, WSU invoiced Webyoga for more than $1.8 million in fees associated with the employees’ visas, the employees’ salaries and benefits, and administrative costs for the university. Between 2010 and 2015, WSU also entered into similar arrangements with other companies wherein it would apply for H-1B visas for individuals, the individuals would work on a routine basis for another company, and that company would reimburse the school. WSU acknowledged that the placement of H-1B visa employees with other companies violated the terms of their visa applications, and, as a result, companies who were subject to the numerical H-1B visa limitation were able to use excess H-1B employees through their contracts with WSU. As part of the NPA, WSU will pay the federal government a $1 million fine in three installments. The NPA will remain in effect for a term of two years or until the date upon which the full monetary payment is made, whichever is later. Zürcher Kantonalbank (DPA) On August 7, 2018, Zürcher Kantonalbank (“ZKB”) and the U.S. Attorney’s Office for the Southern District of New York entered a DPA. The U.S. Attorney’s Office announced the filing of charges against ZKB in a press release along with the DOJ Tax Division and the IRS. As part of the DPA, ZKB consented to the filing of a one-count Information charging ZKB with conspiring with others, including U.S. taxpayers, in violation of 18 U.S.C. § 371 to (1) defraud the United States and the IRS; (2) file false federal income tax returns; and (3) evade federal income taxes. The DPA resolves allegations that from roughly 2002 through 2009, numerous U.S. taxpayer-clients conspired with ZKB to conceal from the IRS the existence of bank accounts held by the U.S. taxpayer-clients at ZKB and the income earned in these accounts in order to evade U.S. taxes on income generated in the undeclared accounts. ZKB allegedly permitted U.S. taxpayer-clients to engage in a number of practices that helped the U.S. taxpayer-clients avoid reporting income to the IRS, including allowing U.S. taxpayer-clients to open undeclared accounts using code names, place assets in undeclared accounts held in the name of sham entities, and make structured withdrawals by checks from undeclared accounts in amounts less than $10,000. DOJ asserts that these practices helped U.S. taxpayers avoid reporting to the IRS accounts and income earned therefrom by ensuring that taxpayer-clients’ names would appear on the fewest possible documents relating to their accounts, concealing the taxpayer-clients’ beneficial ownership of assets in the accounts, and minimizing the size of withdrawal transactions in order to conceal their occurrence from the U.S. authorities. As a result of this conduct, the DPA requires ZKB to make payments of over $98.5 million to the United States, of which (1) $39.142 million constitutes restitution; (2) over $24.266 million constitutes forfeiture; and (3) over $35.125 million constitutes a penalty. The restitution amount represents the approximate unpaid pecuniary loss to the United States as a result of the concealment of the ZKB taxpayer-clients’ accounts and income earned therefrom. The DPA is set for a term of three years. Recent Declinations with Disgorgement In 2018, DOJ agreed to three declinations that require disgorgement under the Department’s FCPA Corporate Enforcement Policy, which it adopted in November 2017. Companies that would otherwise receive NPAs are now entering into declination with disgorgement letters if they meet certain disclosure, cooperation, and remediation criteria. We summarize below the three declination with disgorgement letters from 2018. The agreements notably reiterate the Department’s continued commitment to hold individuals accountable for misconduct. The Dun & Bradstreet Corporation On April 23, 2018, the Fraud Section and the U.S. Attorney’s Office for the District of New Jersey declined to prosecute The Dun & Bradstreet Corporation (“Dun & Bradstreet”), a business data and analytics company, for alleged violations of the FCPA bribery provisions committed by the company’s subsidiaries in China. DOJ declined to prosecute due to several factors, including the company’s (1) identification and voluntary disclosure of misconduct; (2) thorough investigation; (3) full cooperation, including the identification of culpable individuals, sharing all related facts, facilitating interviews of current and former employees, and translation of foreign documents; (4) enhancement of internal controls and its compliance program; (5) full remediation, including terminating and disciplining employees; and (6) disgorgement of monies to the SEC. In its parallel administrative order, the Commission ordered Dun & Bradstreet to pay more than $9 million in disgorged profits, prejudgment interest, and a civil penalty. The order states that the two Chinese subsidiaries allegedly used third parties to make improper payments to obtain non-public financial and personal information in violation of Chinese law. In violation of the FCPA accounting provisions, Dun & Bradstreet allegedly “failed to devise and maintain sufficient internal accounting controls to detect or prevent the improper payments,” and failed to accurately reflect the transactions in its consolidated books and records. Insurance Corporation of Barbados Limited On August 23, 2018, the Fraud Section and the U.S. Attorney’s Office for the Eastern District of New York declined to prosecute Insurance Corporation of Barbados Limited (“ICBL”), an insurance company based in Barbados, for alleged violations of the FCPA. The Fraud Section’s investigation determined that ICBL made approximately $36,000 in bribe payments to Barbadian government officials in exchange for insurance contracts. The government official who received the bribes laundered the money through U.S. bank accounts. DOJ declined to prosecute due to several factors, including ICBL’s (1) timely and voluntary disclosure; (2) thorough investigation; (3) cooperation, including the provision of all known, relevant facts and continued cooperation in ongoing DOJ matters; (4) disgorgement of profits related to the misconduct; (5) improvements to its compliance program and internal controls; (6) remedial actions, including termination of involved employees; and (7) DOJ’s ability to identify and charge culpable individuals. ICBL agreed to disgorge almost $94,000, which represents the profit from the illegally obtained insurance contracts. The company agreed to pay the disgorgement amount to the Treasury Department. The letter states that it does not protect any individuals against prosecution. Polycom, Inc. On December 20, 2018, the Fraud Section declined to prosecute Polycom, Inc. (“Polycom”), a communications solutions provider, for alleged violations of the FCPA bribery and accounting provisions caused by the company’s subsidiaries in China. Polycom’s subsidiaries allegedly used local channel partners to make improper payments via a discount scheme in exchange for business contracts. DOJ declined to prosecute after considering several factors, including Polycom’s (1) identification of misconduct; (2) prompt and voluntary disclosure of wrongdoing; (3) thorough investigation; (4) full cooperation, including the provision of all related facts, facilitation of current and former employee interviews, translation of documents, identification of unrelated wrongdoing, and continued cooperation with DOJ’s ongoing investigations or prosecutions; and (5) remedial actions, including enhanced internal controls and compliance programs, employee terminations and discipline, and cutting ties with a channel partner. As part of the agreement, Polycom agreed to disgorge $30.978 million, which reflects the profit from the illegally obtained contracts. The company will pay the disgorged profits to the SEC, the Treasury Department, and the Postal Inspection Service Consumer Fraud Fund. The declination letter explicitly notes that the agreement does not preclude prosecution of any individuals. On December 26, 2018, the Commission issued an administrative order to resolve alleged violations of the FCPA accounting provisions by Polycom. As part of the resolution, Polycom agreed to pay over $16 million in disgorged profits ($10,672,926), prejudgment interest ($1,833,410), and a civil penalty ($3,800,000). The Commission settled with Polycom after considering the company’s self-disclosure, cooperation, and remediation. Polycom’s resolutions with DOJ and the Commission bring the total monetary penalty to approximately $36 million. International DPA Developments We continue to observe a global trend of adopting and developing DPA frameworks. As we discussed in our 2018 Mid-Year Update, some jurisdictions—for example, the United Kingdom and France—have already executed DPA-like resolutions. Other countries—like Canada and Singapore—have fledgling programs that have yet to be utilized. And still others— for example, Switzerland, Australia, and Poland—are considering proposals to institute similar regimes. These DPA frameworks have all been discussed at length in our 2018 Mid-Year Update. The section below updates this prior analysis with new developments from the United Kingdom, which continues to refine its approach to corporate resolutions and completed the term of its first DPA, and Ireland, which is considering the adoption of a DPA model. United Kingdom The U.K. Serious Fraud Office (“SFO”) did not enter into any DPAs in 2018, keeping the total number at four since the United Kingdom established a DPA program in February 2014. Nevertheless, agency officials have made clear that they “are open for business,” with a recent increase in core funding, approximately seventy active investigations as of October 2018, and the completion of the United Kingdom’s first DPA. Remarks of SFO Officials In June 2018, the U.K. Attorney General’s Office named a new Director of the SFO, Lisa Osofsky, who officially assumed the role on August 28, 2018. During her first week on the job, Osofsky delivered remarks at the Cambridge International Symposium on Economic Crime, where she highlighted the importance of “multijurisdictional . . . cooperation to achieve global settlements like Rolls-Royce,” which involved coordination among authorities in the United States, Brazil, and the United Kingdom before reaching a resolution in January 2017. Osofsky has committed to “[w]orking with the newcomers to DPAs,” including France, Argentina, Canada, and Australia, to strengthen the SFO’s international relationships in anticipation of future complex, global resolutions. Osofsky underscored the importance of remediation in determining whether to offer a DPA to a company under investigation. In addition to evaluating whether “the company engaged in proactive efforts to clean house and to reform” (including implementing “the right controls”), the SFO also assesses a company’s tone at the top, ensuring that the remediation efforts are “backed by demonstrable commitment at the appropriate level.” Recent remarks from Matthew Wagstaff, Joint Head of Bribery and Corruption at the SFO, echo Osofsky’s emphasis on remediation, while also highlighting the critical importance of cooperation for a company seeking a DPA: “no co-operation means no agreement.” Notably, during a subsequent speech, Wagstaff stated that the SFO may ask companies that wish to cooperate to waive privilege over first-hand, factual accounts. Wagstaff asserted that the SFO will not mandate waiver, but “‘the refusal to do so may well be incompatible with an assertion of a desire to cooperate.'” This statement is significant when coupled with a speech made by Osofsky in which she emphasized “the importance of giving ‘first witness accounts’ to individuals who are later charged with crimes.” She stated that those accounts “are sometimes the very interviews that you do in the course of your internal investigations,” and warned that investigations may result in tension between the assertion of privilege and “what a court believes MUST be provided to a criminal defendant to ensure a fair trial.” She concluded that it “is not cooperation” to “blunder into this and then be distressed and offended if we seek those interviews because a court wants us . . . to provide this material to a defendant in the dock.” Although the SFO does not provide formal guidance to assist companies that are looking to cooperate or self-report—and former Director David Green famously said that the SFO does not “do guidance”—Osofsky has signaled that such guidance may be forthcoming to assist companies that “want to understand what cooperation would look like in the context of [the SFO’s] assessment for a DPA.” Expiration of the Standard Bank PLC DPA On November 30, 2018, the SFO announced that Standard Bank PLC (now ICBC Standard Bank PLC) (“Standard Bank”) had fully complied with the terms of its DPA, marking the successful completion of the SFO’s first-ever DPA. The SFO entered into a DPA with Standard Bank in November 2015 to resolve allegations of an approximately $6 million payment made by a former subsidiary of Standard Bank to a local entity controlled by Tanzanian government officials. Standard Bank uncovered evidence of potential wrongdoing and self-reported to the SFO in April 2013. The press release announcing the end of the DPA states that the SFO will publish (on its website) a “‘Details of Compliance’ outlining how Standard Bank” met the terms of the DPA. Review of the U.K. Bribery Act In addition to the work conducted by the SFO, the House of Lords appointed an ad hoc Select Committee to review and report on the effectiveness of the United Kingdom’s 2010 Bribery Act (“Bribery Act Committee”), with a focus on the impact of DPAs on corporate conduct. Over the last several months, a number of prominent U.K. enforcement officials have appeared before the Bribery Act Committee, including Osofsky; Max Hill QC, Director of Public Prosecutions at the Crown Prosecution Service; and Hannah von Dadelszen, Head of Fraud at the SFO. During a Bribery Act Committee session last fall, von Dadelszen provided insight into the SFO’s decision-making process behind whether to offer a DPA. Von Dadelszen reiterated the requirement of cooperation, and emphasized the importance of personnel “housekeeping” at a company looking to secure a DPA. Von Dadelszen explained the necessity of “maintain[ing] the integrity of the DPA brand,” which “should not be watered down and given to companies run by those who are not truly good corporate citizens.” Ireland On October 23, 2018, the Law Reform Commission (“LRC”) of Ireland published a report recommending that Ireland adopt a DPA regime largely resembling the U.K. DPA model. Though the report is currently no more than a proposal, it invites the Irish legislature to pass a comprehensive statute to institute the recommended regime. The LRC’s recommendation draws largely on the U.K. DPA model; therefore, the proposed Irish DPA system would differ from the U.S. DPA framework in a number of key ways. For example, the LRC recommends that the Irish DPA regime be instituted by statute and be operated by the Office of the Director of Public Prosecutions (“DPP”). The decision of whether to seek a DPA would remain entirely within the discretion of the DPP, but unlike DPAs in the United States, the DPP would have to obtain judicial approval in order to initiate the DPA process, to finalize a DPA, and to modify an existing DPA. The DPP would need to present the terms of any proposed DPA to the High Court, which is an intermediate court that hears the most serious criminal and civil cases, as well as appeals from lower courts, for approval. The LRC’s report outlines the test that the High Court would use when deciding whether to approve a DPA, recommending that the court ask whether the DPA is “in the interests of justice,” and whether its terms are “fair, reasonable, and proportionate.” The LRC further recommends that the DPP only use DPAs if the company admits wrongdoing and the proposal requires that DPA terms be published, which is also distinct from DPAs in the United States. The LRC’s recommended DPA regime includes several features that would limit the availability of DPAs in Ireland. For example, the LRC recommends that DPAs only be made available to corporations and other unincorporated entities like partnerships, but not to individuals. The LRC also recommends that DPAs only be made available in cases involving certain enumerated economic crimes, including conspiracy to defraud, theft, fraud, bribery, corruption, Companies Act and Competition Act offenses, revenue offenses, and market abuse offenses. Both of these aspects of the Irish model also set it apart from the U.S. DPA system. ________________________________ APPENDIX: 2018 NPAs, DPAs, and Declinations with Disgorgement The charts below summarize the agreements concluded in 2018. The complete text of each publicly available agreement is hyperlinked in the chart. If the agreement is not publicly available, the text of the DOJ press release is hyperlinked in the chart. The figures for “Monetary Recoveries” may include amounts not strictly limited to an NPA, DPA, or declination with disgorgement, such as fines, penalties, forfeitures, and restitution requirements imposed by other regulators and enforcement agencies, as well as amounts from related settlement agreements, all of which may be part of a global resolution in connection with the agreement, paid by the named entity and/or subsidiaries. The term “Monitoring & Reporting” includes traditional compliance monitors, self-reporting arrangements, and other monitorship arrangements found in settlement agreements. U.S. Non-Prosecution and Deferred Prosecution Agreements in 2018 Company Agency Alleged Violation Type Monetary Recoveries Monitoring & Reporting Term of DPA/ NPA (months) American Media, Inc. S.D.N.Y. Campaign Finance NPA N/A Yes 36 Bank Lombard Odier & Co Ltd. DOJ Tax Swiss Bank Program NPA Addendum $5,300,000 No N/A Basler Kantonalbank DOJ Tax; S.D. Fla. Tax Evasion; Fraud (Tax) DPA $60,400,000 Yes 36 Central States Capital Markets, LLC S.D.N.Y. BSA DPA $400,000 Yes 24 Credit Suisse (Hong Kong) Limited DOJ Fraud; E.D.N.Y. FCPA NPA $47,029,916 Yes 36 Cultural Resource Analysts, Inc. M.D. Tenn. Archaeological Resources Protection Act DPA $15,024 No Indefinite Hallman Chevrolet W.D. Pa. Fraud (Bank Loan) DPA $2,137,000 Yes 48 Health Management Associates, LLC DOJ Fraud Fraud (Health Care); FCA NPA $261,026,648 Yes 36 HSBC Holdings plc DOJ Fraud Fraud (Wire Fraud) DPA $109,579,000 Yes 36 Imagina Media Audiovisual SL E.D.N.Y. FCPA NPA $12,883,320 Yes 36 Legg Mason, Inc. E.D.N.Y. FCPA NPA $64,242,000 Yes 36 Mirelis Holding S.A. DOJ Tax Tax and Money-Transaction Violations NPA $10,245,000 No 48 Neue Privat Bank AG DOJ Tax Tax and Money-Transaction Violations NPA $5,000,000 No 48 Panasonic Avionics Corporation DOJ Fraud FCPA DPA $280,602,831 Yes 36 Petróleo Brasileiro S.A. – Petrobras DOJ Fraud; E.D. Va. FCPA NPA $170,640,000 (U.S.) $853,200,000 (Brazil/U.S.) Yes 36 Red Cedar Services, Inc. S.D.N.Y. RICO Act; Fraud (Wire Fraud); AML NPA $2,000,000 No 12 Rite Aid Corporation S.D. W. Va. Controlled Substances Act NPA $4,000,000 No 24 Santee Financial Services, Inc. S.D.N.Y. RICO Act; Fraud (Wire Fraud); AML NPA $1,000,000 No 12 Société Générale S.A. DOJ Fraud; E.D.N.Y. FCPA; Transmitting false commodities reports DPA $1,335,552,888 Yes 36 Société Générale S.A. S.D.N.Y. Trading with the Enemy Act; Cuban Assets Control Regulations DPA $1,340,165,000 Yes 36 Transport Logistics International, Inc. DOJ Fraud; D. Md. FCPA DPA $2,000,000 Yes 36 U.S. Bancorp S.D.N.Y. BSA DPA $613,000,000 Yes 24 Waste Management Texas S.D. Tex. Immigration Violations NPA $5,527,091.55 No Indefinite Wright State University S.D. Ohio Fraud (Visa) NPA $1,000,000 Yes 24 Zürcher Kantonalbank S.D.N.Y.; DOJ Tax Tax Evasion; Fraud (Tax) DPA $98,533,560 Yes 36 FCPA Pilot Program Declination with Disgorgement Letters in 2018 Company Agency Alleged Violation Type Monetary Recoveries Monitoring & Reporting Term of DPA/ NPA (months) The Dun & Bradstreet Corporation DOJ Fraud; D.N.J. FCPA Declination $9,221,484 No N/A Insurance Corporation of Barbados Limited DOJ Fraud; E.D.N.Y. FCPA Declination $93,940.19 No N/A Polycom, Inc. DOJ Fraud FCPA Declination $36,611,410 No N/A  NPAs and DPAs are two kinds of voluntary, pre-trial agreements between a corporation and the government, most commonly DOJ. They are standard methods to resolve investigations into corporate criminal misconduct and are designed to avoid the severe consequences, both direct and collateral, that conviction would have on a company, its shareholders, and its employees. Though NPAs and DPAs differ procedurally—a DPA, unlike an NPA, is formally filed with a court along with charging documents—both usually require an admission of wrongdoing, payment of fines and penalties, cooperation with the government during the pendency of the agreement, and remedial efforts, such as enhancing compliance programs and—on occasion—a corporate monitorship. Although multiple agencies use NPAs and DPAs, since Gibson Dunn began tracking corporate NPAs and DPAs in 2000, we have identified approximately 509 agreements initiated by DOJ and 10 initiated by the SEC.  We strive to provide the most up-to-date, accurate information; however, the government shutdown has affected the press functions of the federal government, limiting our access to agreements executed or announced in December 2018. [2a] This amount may include amounts not strictly limited to an NPA or DPA, such as fines, penalties, forfeitures, and restitution requirements imposed by other regulators and enforcement agencies, as well as amounts from related settlement agreements, all of which may be part of a global resolution in connection with the agreement, paid by the named entity and/or subsidiaries.  See Rod J. Rosenstein, Deputy Attorney General, U.S. Dep’t of Justice, Remarks at the American  See Rod J. Rosenstein, Deputy Attorney General, U.S. Dep’t of Justice, Remarks at the American Conference Institute’s 35th International Conference on the Foreign Corrupt Practices Act (Nov. 29, 2018), https://www.justice.gov/opa/speech/deputy-attorney-general-rod-j-rosenstein-delivers-remarks-american-conference-institute-0 [hereinafter Rosenstein Speech].  Memorandum from Sally Q. Yates, Deputy Attorney General, U.S. Dep’t of Justice, to Assistant Attorney General, Antitrust Division, et al., Individual Accountability for Corporate Wrongdoing (Sept. 9, 2015), https://www.justice.gov/archives/dag/file/769036/download.  Rosenstein Speech, supra note 3.  Id.  Id.  Id.  U.S. Dep’t of Justice, Justice Manual, § 9-28 Principles of Federal Prosecution of Business Organizations, https://www.justice.gov/jm/jm-9-28000-principles-federal-prosecution-business-organizations.  Rosenstein Speech, supra note 3.  U.S. Sentencing Comm’n, Guidelines Manual, § 8C2.5(f), https://www.ussc.gov/sites/default/files/pdf/guidelines-manual/2018/GLMFull.pdf.  Memorandum from Brian A. Benczkowski, Assistant Attorney General, U.S. Dep’t of Justice, to All Criminal Division Personnel, Selection of Monitors in Criminal Division Matters (Oct. 11, 2018), https://www.justice.gov/opa/speech/file/1100531/download [hereinafter Benczkowski Memorandum].  Memorandum from Craig S. Morford, Acting Deputy Attorney General, U.S. Dep’t of Justice, to Heads of Department Components and United States Attorneys, Selection and Use of Monitors in Deferred Prosecution Agreements and Non-Prosecution Agreements with Corporations (Mar. 7, 2008), https://www.justice.gov/sites/default/files/dag/legacy/2008/03/20/morford-useofmonitorsmemo-03072008.pdf [hereinafter Morford Memorandum].  See Brian A. Benczkowski, Assistant Attorney General, U.S. Dep’t of Justice, Remarks at NYU School of Law Program on Corporate Compliance and Enforcement Conference on Achieving Effective Compliance (Oct. 12, 2018), https://www.justice.gov/opa/speech/assistant-attorney-general-brian-benczkowski-delivers-remarks-nyu-school-law-program [hereinafter Benczkowski Speech].  Id.  Id.  Morford Memorandum, supra note 13, see also Benczkowski Memorandum, supra note 12, at 2.  Benczkowski Memorandum, supra note 12, at 2.  See C. Ryan Barber, DOJ’s New Compliance Monitor Guidance Accounts for ‘Burdens’ on Companies, The National Law Journal (Oct. 12, 2018), https://www.law.com/nationallawjournal/2018/10/12/dojs-new-compliance-monitor-guidance-accounts-for-burdens-on-companies/.  Deferred Prosecution Agreement, United States v. Panasonic Avionics Corp. (D.D.C. Apr. 30, 2018).  Id.  Id.  Barber, supra note 19.  Benczkowski Speech, supra note 14.  See United States. v. MoneyGram International, Inc., 12-cr-00291 (M.D. Pa.), Dkt. 21 (extension from Nov. 8, 2017 to Feb. 6, 2018); Dkt. 23 (to Mar. 23, 2018); Dkt. 25 (to May 7, 2018); Dkt. 27 (to June 21, 2018); Dkt. 29 (to Sept. 18, 2018); Dkt. 31 (to Nov. 6, 2018); Dkt. 33 (to Nov. 9, 2018); Dkt. 34 (to May 10, 2021).  Press Release, U.S. Dep’t of Justice, MoneyGram Int’l Inc. Agrees To Extend Deferred Prosecution Agreement, Forfeits $125 Million In Settlement With Justice Department And Federal Trade Commission (Nov. 9, 2018), https://www.justice.gov/usao-mdpa/pr/moneygram-international-inc-agrees-extend-deferred-prosecution-agreement-forfeits-125.  Please see our 2012 Year-End Update for more details.  Press Release, Standard Chartered, Extension of the U.S. Deferred Prosecution Agreements (July 27, 2018), https://www.sc.com/en/media/press-release/extension-of-the-u-s-deferred-prosecution-agreements/.  Press Release, U.S. Dep’t of Justice, Standard Chartered Bank Agrees to Forfeit $227 Million for Illegal Transactions with Iran, Sudan, Libya, and Burma (Dec. 10, 2012), https://www.justice.gov/opa/pr/standard-chartered-bank-agrees-forfeit-227-million-illegal-transactions-iran-sudan-libya-and; Press Release, Standard Chartered, We Have Extended our Deferred Prosecution Agreements (Nov. 9, 2017), https://www.sc.com/en/media/press-release/we-have-extended-our-deferred-prosecution-agreements/.  Deferred Prosecution Agreement, United States v. Standard Chartered, Case No. 11-cr-262, Dkt. 2 ¶ 4 (D.D.C. Dec. 10, 2012).  Id.  Press Release, Standard Chartered, Extension of the U.S. Deferred Prosecution Agreements (Dec. 22, 2018), https://www.sc.com/en/media/press-release/extension-of-the-us-deferred-prosecution-agreements/.  Press Release, U.S. Dep’t of Justice, Michael Cohen Sentenced to 3 Years in Prison (Dec. 12, 2018), https://www.justice.gov/usao-sdny/pr/michael-cohen-sentenced-3-years-prison.  Id.  Id.  Non-Prosecution Agreement, American Media, Inc. (Sept. 20, 2018), at 1.  Id. at 2.  Id.  Id.  Addendum to Non-Prosecution Agreement, Bank Lombard Odier & Co Ltd. (July 13, 2018), at 1 [hereinafter Bank Lombard Addendum].  Id.  U.S. Dep’t of Justice, Swiss Bank Program, available at https://www.justice.gov/tax/swiss-bank-program.  Id.  Id.  Id.  Bank Lombard Addendum, supra note 40, at 1.  Press Release, U.S. Dep’t of Justice, Justice Department Announces Addendum to Swiss Bank Program Category 2 Non-Prosecution Agreement, Bank Lombard Odier & Co Ltd. (July 31, 2018), https://www.justice.gov/opa/pr/justice-department-announces-addendum-swiss-bank-program-category-2-non-prosecution-agreement.  Bank Lombard Addendum, supra note 40, at 1.  Id.  Id.  Deferred Prosecution Agreement, United States v. Basler Kantonalbank, No. 18-CR-60228-Bloom (Aug. 29, 2018) [hereinafter BKB DPA].  Press Release, U.S. Dep’t of Justice, Justice Department Announces Deferred Prosecution Agreement With Basler Kantonalbank (Aug. 28, 2018), https://www.justice.gov/opa/pr/justice-department-announces-deferred-prosecution-agreement-basler-kantonalbank [hereinafter BKB Press Release].  BKB DPA, supra note 51, at 29.  Id. at 16–17.  BKB Press Release, supra note 52.  BKB DPA, supra note 51, at 10.  Deferred Prosecution Agreement, Central States Capital Markets, LLC (Dec. 10, 2018), at 1 [hereinafter CSCM DPA].  Id. at 1–2.  Press Release, U.S. Dep’t of Justice, Manhattan U.S. Attorney Announces Bank Secrecy Act Charges Against Kansas Broker Dealer (Dec. 19, 2018), https://www.justice.gov/usao-sdny/pr/manhattan-us-attorney-announces-bank-secrecy-act-charges-against-kansas-broker-dealer [hereinafter CSCM Press Release].  CSCM DPA, supra note 57, at 2-3.  Id. at 6.  Id. at 3.  CSCM Press Release, supra note 59.  Id.  Press Release, U.S. Dep’t of Justice, Auto Dealership Agrees to Pay Penalty of $1.4 Million and Restitution of More than $730K in Bank Loan Fraud Scheme (Aug. 31, 2018), https://www.justice.gov/usao-wdpa/pr/auto-dealership-agrees-pay-penalty-14-million-and-restitution-more-730k-bank-loan-fraud.  Id.  Id.  Press Release, U.S. Dep’t of Justice, Hospital Chain Will Pay Over $260 Million to Resolve False Billing and Kickback Allegations; One Subsidiary Agrees to Please Guilty (Sept. 25, 2018), https://www.justice.gov/opa/pr/hospital-chain-will-pay-over-260-million-resolve-false-billing-and-kickback-allegations-one [hereinafter HMA Press Release].  Id.  Non-Prosecution Agreement, Health Management Associates, LLC (Sept. 21, 2018), at 1 [hereinafter HMA NPA].  Id.  Id. at 1–2.  Id. at 4.  Id.  Id. at 2.  Id.  Settlement Agreement, U.S. Dep’t of Justice and Health Management Associates, LLC (Sept. 2018), https://www.justice.gov/opa/press-release/file/1096401/download.  Press Release, U.S. Dep’t of Justice, Justice Department Announces Resolution With Swiss Financial and Asset Management Firm Mirelis Holding S.A. (July 27, 2018), https://www.justice.gov/opa/pr/justice-department-announces-resolution-swiss-financial-and-asset-management-firm-mirelis.  Id.  Id.  Id.  Non-Prosecution Agreement, Mirelis Holding S.A. (July 24, 2018), at 5.  Id. at 2.  Id. at 4.  Id. at 6.  Press Release, U.S. Dep’t of Justice, Justice Department Announces Resolution with NPB Neue Privat Bank AG (July 18, 2018), https://www.justice.gov/opa/pr/justice-department-announces-resolution-npb-neue-privat-bank-ag.  Non-Prosecution Agreement, NPB Neue Privat Bank AG (June 22, 2018), at 2 [hereinafter NPB NPA].  Press Release, U.S. Dep’t of Justice, Justice Department Announces Resolution with NPB Neue Privat Bank AG (July 18, 2018), https://www.justice.gov/opa/pr/justice-department-announces-resolution-npb-neue-privat-bank-ag.  Id.  Id.  Id.  Id.  Id.  Id.  NPB NPA, supra note 87, at 2–3.  Id. at 4.  Id.  Press Release, U.S. Dep’t of Justice, Petróleo Brasileiro S.A. – Petrobras Agrees to Pay More Than $850 Million for FCPA Violations (Sept. 27, 2018), https://www.justice.gov/opa/pr/petr-leo-brasileiro-sa-petrobras-agrees-pay-more-850-million-fcpa-violations.  Id.  Id.  Id.  Id.  Id.  Id.  Non-Prosecution Agreement, Petróleo Brasileiro S.A. – Petrobras (Sept. 26, 2018), at 3.  Id. at 5.  Id. at 4.  See Press Release, U.S. Dep’t of Justice, Manhattan U.S. Attorney Announces Criminal Charges Against Société Générale S.A. For Violations Of The Trading With The Enemy Act (Nov. 19, 2018), https://www.justice.gov/usao-sdny/pr/manhattan-us-attorney-announces-criminal-charges-against-soci-t-g-n-rale-sa-violations [hereinafter SocGen Press Release].  See Deferred Prosecution Agreement, Société Générale (Nov. 18, 2018) [hereinafter SocGen DPA].  See SocGen Press Release, supra note 109.  See SocGen DPA, supra note 110.  See id.  See SocGen Press Release, supra note 109.  See id.  See id.  See id.  Press Release, U.S. Dep’t of Justice, Waste Management to Forfeit $5.5 Million for Hiring Illegal Aliens (Aug. 29, 2018), https://www.justice.gov/usao-sdtx/pr/waste-management-forfeit-55-million-hiring-illegal-aliens.  Id.  Id.  Id.  Id.  Non-Prosecution Agreement, Wright State University (Nov. 16, 2018) [hereinafter WSU NPA].  Press Release, U.S. Dep’t of Justice, Wright State University Agrees to Pay Government $1 Million for Visa Fraud (Nov. 16, 2018), https://www.justice.gov/usao-sdoh/pr/wright-state-university-agrees-pay-government-1-million-visa-fraud.  WSU NPA, supra note 123, at 5.  Id.  Id.  Id. at 6.  Id.  Id.  Id. See Press Release, U.S. Dep’t of Justice, Manhattan U.S. Attorney Announces Criminal Charges Against Zürcher Kantonalbank of Switzerland, With Deferred Prosecution Agreement Requiring Payment Of $98.5 Million, As Well As Guilty Pleas of Two Zürcher Kantonalbank Bankers (Aug. 13, 2018), https://www.justice.gov/usao-sdny/pr/manhattan-us-attorney-announces-criminal-charges-against-z-rcher-kantonalbank [hereinafter ZKB Press Release].  Id.  Id.  See Deferred Prosecution Agreement, Zürcher Kantonalbank (Aug. 7, 2018) [hereinafter ZKB DPA].  See id.  See ZKB Press Release, supra note 132.  See ZKB DPA, supra note 135.  See id.  U.S. Dep’t of Justice, Declination Letter for The Dun & Bradstreet Corporation (Apr. 23, 2018), at 1.  Id.  The Dun & Bradstreet Corp., U.S. Sec. & Exch. Comm’n Admin. Order, File No. 3-18446 (Apr. 23, 2018), at 8.  Id. at 2, 4–6.  Id. at 2.  U.S. Dep’t of Justice, Declination Letter for Insurance Corporation of Barbados Limited (Aug. 23, 2018), at 1.  Id.  Id.  Id. at 2.  Id.  Id.  Id.  U.S. Dep’t of Justice, Declination Letter for Polycom, Inc. (Dec. 20, 2018), at 1 [hereinafter Polycom Declination].  Press Release, U.S. Sec. & Exch. Comm’n, SEC Charges Polycom, Inc. with FCPA Violation, Admin. Proceeding, File No. 3-18964 (Dec. 26, 2018), https://www.sec.gov/enforce/34-84978-s.  Polycom Declination, supra note 152, at 1.  Id. at 2.  Id.  Id.  Polycom, Inc., U.S. Sec. & Exch. Comm’n, Admin. Proceeding, File No. 3-18964 (Dec. 26, 2018), at 1.  Id. at 6.  Id. at 5.  Camilla de Silva, Address at ABC Minds Financial Services Conferences (Mar. 16, 2018), https://www.sfo.gov.uk/2018/03/16/camilla-de-silva-at-abc-minds-financial-services.  Remarks of Lisa Osofsky, Transcript of House of Lords 2010 Bribery Act Committee Oral Evidence 5 (Nov. 13, 2018), http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/bribery-act-2010-committee/bribery-act-2010/oral/92752.pdf.  Remarks of Hannah von Dadelszen, Transcript of House of Lords 2010 Bribery Act Committee Oral Evidence (Oct. 23, 2018), http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/bribery-act-2010-committee/bribery-act-2010/oral/92103.html.  Press Release, SFO, Lisa Osofsky Begins Tenure as SFO Director (Aug. 28, 2018), https://www.sfo.gov.uk/2018/08/28/lisa-osofsky-begins-tenure-as-sfo-director/.  Lisa Osofsky, Director, SFO, Ensuring Our Country is a High Risk Place for the World’s Most Sophisticated Criminals to Operate (Sept. 3, 2018), https://www.sfo.gov.uk/2018/09/03/lisa-osofsky-making-the-uk-a-high-risk-country-for-fraud-bribery-and-corruption/.  Id.  Id.  Id.  Matthew Wagstaff, Joint Head of Bribery and Corruption, SFO, Current Priorities and Future Directions (Nov. 21, 2018), https://www.sfo.gov.uk/2018/11/21/current-priorities-and-future-directions/.  Waithera Junghae, Waiving Privilege Shows Willingness to Cooperate, SFO Official Says, Global Investigations rev. (Dec. 6, 2018), https://globalinvestigationsreview.com/article/1177673/waiving-privilege-shows-willingness-to-cooperate-sfo-official-says.  Id.  Lisa Osofsky, Director, SFO, Keynote Address at the 35th International Conference on the Foreign Corrupt Practices Act in Washington, D.C. (Nov. 28, 2018), https://www.sfo.gov.uk/2018/12/04/keynote-address-fcpa-conference-washington-dc/.  Id.  Id.  Michael Griffiths, SFO Director: We Don’t Do Guidance, Global Investigations rev. (Nov. 1, 2017), https://globalinvestigationsreview.com/article/1149586/sfo-director-we-dont-do-guidance.  Waithera Junghae, Lisa Osofsky: “Tell Us Something We Don’t Know”, Global Investigations rev. (Nov. 8, 2018), https://globalinvestigationsreview.com/article/1176629/lisa-osofsky-%E2%80%9Ctell-us-something-we-don%E2%80%99t-know%E2%80%9D.  Press Release, SFO, UK’s First Deferred Prosecution Agreement, Between the SFO and Standard Bank, Successfully Ends (Nov. 30, 2018), https://www.sfo.gov.uk/2018/11/30/uks-first-deferred-prosecution-agreement-between-the-sfo-and-standard-bank-successfully-ends/.  We addressed the Standard Bank DPA in detail in a client alert on December 3, 2015.  Joanne Faulkner, SFO Wraps Up First Deferred Prosecution Agreement, Law360 (Nov. 30, 2018), https://www.law360.com/articles/1106556/sfo-wraps-up-first-deferred-prosecution-agreement.  Id.  Mara Lemos Stein, U.K. Bribery Act Review Puts Deferred Prosecution Agreements Under Scrutiny, Wall St. J. (Aug. 27, 2018), https://www.wsj.com/articles/u-k-bribery-act-review-puts-deferred-prosecution-agreements-under-scrutiny-1535362200.  Caroline Doherty de Novoa, Some of the UK’s most senior prosecutors and judges on the Bribery Act, DPAs and the future of economic crime enforcement, Freshfields Bruckhas Deringer (Nov. 15, 2018), https://risk.freshfields.com/post/102f5vh/some-of-the-uks-most-senior-prosecutors-and-judges-on-the-bribery-act-dpas-and; Remarks of Hannah von Dadelszen, supra note 163.  Remarks of Hannah von Dadelszen, supra note 163.  Id.  Colm Keena, The DPA Regime Recommended for Ireland Does Not Allow Deals Which Give Immunity to Particular Individuals, Irish Times (Oct. 26, 2018), https://www.irishtimes.com/news/crime-and-law/the-dpa-regime-recommended-for-ireland-does-not-allow-deals-which-give-immunity-to-particular-individuals-1.3675677.  Law Reform Commission of Ireland, Regulatory Powers and Corporate Offences 266 (2018), https://www.lawreform.ie/_fileupload/Completed%20Projects/LRC%20119-2018%20Regulatory%20Powers%20and%20Corporate%20Offences%20Volume%201.pdf.  Id.  Id. at 266-67, 275.  Id. at 267.  Id.  Keena, supra note 185.  Law Reform Commission of Ireland, supra note 186, at 267.  Id. at 269.  If Mirelis fails to close any and all U.S.-related accounts classified as “dormant” within the specified time period, it must provide periodic reporting at the request of the Tax Division.  If NPB fails to close any and all U.S.-related accounts classified as “dormant” within the specified time period, it must provide periodic reporting at the request of the Tax Division. The following Gibson Dunn lawyers assisted in preparing this client update: F. Joseph Warin, M. Kendall Day, Sacha Harber-Kelly, Courtney Brown, Melissa Farrar, Chelsea Ferguson, Ben Belair, Abbey Bush, Laura Cole, Brittany Garmyn, Patricia Herold, Jillian Katterhagen Mills, Katie King, William Lawrence, Dan Nadratowski, Susanna Schuemann, and Jason Smith. Gibson Dunn’s White Collar Defense and Investigations Practice Group successfully defends corporations and senior corporate executives in a wide range of federal and state investigations and prosecutions, and conducts sensitive internal investigations for leading companies and their boards of directors in almost every business sector. The Group has members in every domestic office of the Firm and draws on more than 125 attorneys with deep government experience, including more than 50 former federal and state prosecutors and officials, many of whom served at high levels within the Department of Justice and the Securities and Exchange Commission. Joe Warin, a former federal prosecutor, served as the U.S. counsel for the compliance monitor for Siemens and as the FCPA compliance monitor for Alliance One International. He previously served as the monitor for Statoil pursuant to a DOJ and SEC enforcement action. He co-authored the seminal law review article on NPAs and DPAs in 2007. Debra Wong Yang is the former United States Attorney for the Central District of California, and has served as independent monitor to a leading orthopedic implant manufacturer to oversee its compliance with a DPA. In the United Kingdom, Sacha Harber-Kelly is a former Prosecutor and Case Controller at the Serious Fraud Office. Washington, D.C. F. Joseph Warin (+1 202-887-3609, email@example.com) Richard W. Grime (202-955-8219, firstname.lastname@example.org) Scott D. Hammond (+1 202-887-3684, email@example.com) Stephanie L. Brooker (+1 202-887-3502, firstname.lastname@example.org) M. Kendall Day (+1 202-955-8220, email@example.com) David Debold (+1 202-955-8551, firstname.lastname@example.org) Stuart F. Delery (+1 202-887-3650, email@example.com) Michael Diamant (+1 202-887-3604, firstname.lastname@example.org) John W.F. Chesley (+1 202-887-3788, email@example.com) Daniel P. Chung (+1 202-887-3729, firstname.lastname@example.org) Patrick F. Stokes (+1 202-955-8504, email@example.com) New York Reed Brodsky (+1 212-351-5334, firstname.lastname@example.org) Joel M. Cohen (+1 212-351-2664, email@example.com) Mylan L. Denerstein (+1 212-351-3850, firstname.lastname@example.org) Lee G. Dunst (+1 212-351-3824, email@example.com) Barry R. Goldsmith (+1 212-351-2440, firstname.lastname@example.org) Christopher M. Joralemon (+1 212-351-2668, email@example.com) Mark A. Kirsch (+1 212-351-2662, firstname.lastname@example.org) Randy M. Mastro (+1 212-351-3825, email@example.com) Mark K. Schonfeld (+1 212-351-2433, firstname.lastname@example.org) Orin Snyder (+1 212-351-2400, email@example.com) Alexander H. Southwell (+1 212-351-3981, firstname.lastname@example.org) Lawrence J. Zweifach (+1 212-351-2625, email@example.com) Denver Robert C. Blume (+1 303-298-5758, firstname.lastname@example.org) Ryan T. Bergsieker (+1 303-298-5774, email@example.com) Los Angeles Debra Wong Yang (+1 213-229-7472, firstname.lastname@example.org) Marcellus McRae (+1 213-229-7675, email@example.com) Michael M. Farhang (+1 213-229-7005, firstname.lastname@example.org) Douglas Fuchs (+1 213-229-7605, email@example.com) Eric D. Vandevelde (+1 213-229-7186, firstname.lastname@example.org) Palo Alto Benjamin B. Wagner (+1 650-849-5395, email@example.com) San Francisco Thad A. Davis (+1 415-393-8251, firstname.lastname@example.org) Marc J. Fagel (+1 415-393-8332, email@example.com) Charles J. Stevens (+1 415-393-8391, firstname.lastname@example.org) Michael Li-Ming Wong (+1 415-393-8234, email@example.com) Winston Y. Chan (+1 415-393-8362, firstname.lastname@example.org) London Patrick Doris (+44 20 7071 4276, email@example.com) Sacha Harber-Kelly (+44 20 7071 4205, firstname.lastname@example.org) Munich Benno Schwarz (+49 89 189 33-110, email@example.com) Mark Zimmer (+49 89 189 33-130, firstname.lastname@example.org) Dubai Graham Lovett (+971 (0) 4 318 4620, email@example.com) Hong Kong Kelly Austin (+852 2214 3788, firstname.lastname@example.org) Oliver D. Welch (+852 2214 3716, email@example.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.
To Disclose or Not to Disclose: Analyzing the Consequences of Voluntary Self-Disclosure for Financial Institutions Click for PDF One of the most frequently discussed white collar issues of late has been the benefits of voluntarily self-disclosing to the U.S. Department of Justice (“DOJ”) allegations of misconduct involving a corporation. This is the beginning of periodic analyses of white collar issues unique to financial institutions, and in this issue we examine whether and to what extent a financial institution can expect a benefit from DOJ for a voluntary self-disclosure (“VSD”), especially with regard to money laundering or Bank Secrecy Act violations. Although the public discourse regarding VSDs tends to suggest that there are benefits to be gained, a close examination of the issue specifically with respect to financial institutions shows that the benefits that will confer in this area, if any, are neither easy to anticipate nor to quantify. A full consideration of whether to make a VSD to DOJ should include a host of factors beyond the quantifiable benefit, ranging from the likelihood of independent enforcer discovery; to the severity, duration, and evidentiary support for a potential violation; and to the expectations of prudential regulators and any associated licensing or regulatory consequences, as well as other factors. VSD decisions arise in many contexts, including in matters involving the Foreign Corrupt Practices Act (“FCPA”), sanctions enforcement, and the Bank Secrecy Act (“BSA”). In certain situations, the benefits of voluntary self-disclosure prior to a criminal enforcement action can be substantial. Prosecutors have at times responded to a VSD by reducing charges and penalties, offering deferred prosecution and non-prosecution agreements, and entering into more favorable consent decrees and settlements. However, as Deputy Attorney General Rod Rosenstein stated in recent remarks, enforcement policies meant to encourage corporate disclosures “do not provide a guarantee” that disclosures will yield a favorable result in all cases. The outcome of a prosecution following a VSD is situation-specific, and, as such, the process should not be entered into without careful consideration of the costs and benefits. In the context of Bank Secrecy Act and anti-money laundering regulation (“BSA/AML”), VSDs present an uncertain set of tradeoffs. The BSA and its implementing regulations already require most U.S. financial institutions subject to the requirements of the BSA to file suspicious activity reports (“SARs”) with the U.S. government when the institution knows, suspects or has reason to suspect that a transaction by, through or to it involves money laundering, BSA violations or other illegal activity. Guidance from DOJ encourages voluntary self-disclosure, and at least one recent non-prosecution agreement entered with the Department has listed self-disclosure as a consideration in setting the terms of a settlement agreement. Over the past three years, however, no BSA/AML criminal resolution has explicitly given an institution credit for voluntarily disclosing potential misconduct. During this same period, DOJ began messaging an expanded focus on VSDs in the context of FCPA violations, announced the FCPA Pilot Project, and ultimately made permanent in the U.S. Attorney’s Manual the potential benefits of a VSD for FCPA violations. This alert addresses some of the considerations that financial institutions weigh when deciding whether to voluntarily self-disclose potential BSA/AML violations to criminal enforcement authorities. In discussing these considerations, we review guidance provided by DOJ and the regulatory enforcement agencies, and analyze recent BSA/AML criminal resolutions, as well as FCPA violations involving similar defendants. Guidance from the Department of Justice – Conflicting Signals DOJ guidance documents describe the Department’s general approach to VSDs, but, until recently, they left unanswered many questions dealing specifically with self-disclosure by financial institutions. The Department’s high-level approach to general voluntary self-disclosure is outlined in the United States Attorney Manual (“USAM”). Starting from the principle that “[c]ooperation is a mitigating factor” that can allow a corporation to avoid particularly harsh penalties, the USAM instructs prosecutors that they “may consider a corporation’s timely and voluntary disclosure” when deciding whether and how to pursue corporate liability. In the FCPA context, a self-disclosure is deemed to be voluntary—and thus potentially qualifying a company for mitigation credit—if (1) the company discloses the relevant evidence of misconduct prior to an imminent threat of disclosure or government investigation; (2) the company reports the conduct to DOJ and relevant regulatory agencies “within a reasonably prompt time after becoming aware of the offense”; and (3) the company discloses all relevant facts known to it, including all relevant facts about the individual wrongdoers involved. DOJ has not yet offered specific instruction, however, on how prosecutors should treat voluntary self-disclosure in the BSA/AML context and, unlike other areas of enforcement, no formal self-disclosure program currently exists for financial institutions seeking to obtain mitigation credit in the money laundering context. Indeed, the only guidance document to mention VSDs and financial institutions—issued by DOJ’s National Security Division in 2016—specifically exempted financial institutions from the VSD benefits offered to other corporate actors in the export control and sanctions context, citing the “unique reporting obligations” imposed on financial institutions “under their applicable statutory and regulatory regimes.” Despite this lack of guidance, the recent adoption of DOJ’s FCPA Corporate Enforcement Policy may provide insight on how prosecutors could treat voluntary disclosures by financial institutions moving forward. Enacted in the fall of 2017, the Corporate Enforcement Policy arose from DOJ’s 2016 FCPA Pilot Program, which was created to provide improved guidance and certainty to companies facing DOJ enforcement actions, while incentivizing self-disclosure, cooperation, and remediation. One year later, based on the success of the program, many of its aspects were codified in the USAM. Specifically, the new policy creates a presumption that entities that voluntarily disclose potential misconduct and fully cooperate with any subsequent government investigation will receive a declination, absent aggravating circumstances. In early 2018, Acting Assistant Attorney General John Cronan announced that the Corporate Enforcement Policy would serve as non-binding guidance for corporate investigations beyond the FCPA context. This expanded consideration of VSDs beyond the FCPA space was on display in March 2018, when, after an investigation by DOJ’s Securities and Financial Fraud Unit, the Department publicly announced that it had opted not to prosecute a financial institution in connection with the bank’s alleged front-running of certain foreign exchange transactions. DOJ’s Securities and Financial Fraud Unit specifically noted that DOJ’s decision to close its investigation without filing charges resulted, in part, from “timely, voluntary self-disclosure” of the alleged misconduct, a sentiment echoed by Cronan in subsequent remarks at an American Bar Association white collar conference regarding the reasons for the declination. Cronan further commented that “[w]hen a company discovers misconduct, quickly raises its hand and tells us about it, that says something. . . . It shows the company is taking misconduct seriously . . . and we are rewarding those good decisions.” Other Agency Guidance Guidance issued by other enforcement agencies similarly may offer clues as to how financial institutions can utilize VSDs to more successfully navigate a criminal enforcement action. In the context of export and import control, companies that self-disclose to the U.S. Treasury Department’s Office of Foreign Asset Control (“OFAC”) can benefit in two primary ways. First, OFAC may be less likely to initiate an enforcement proceeding following a VSD, as OFAC considers a party’s decision to cooperate when determining whether to initiate a civil enforcement proceeding. Second, if OFAC decides it is appropriate to bring an enforcement action, companies that self-disclose receive a fifty-percent reduction in the base penalty they face, as detailed in the below-base-penalty matrix published in OFAC guidance: As depicted by the chart, in the absence of a VSD, the base penalty for egregious violations is the applicable statutory maximum penalty for the violation. In non-egregious cases, the base penalty is calculated based on the revenue derived from the violative transaction, capped at $295,141. When the apparent violation is voluntarily disclosed, however, OFAC has made clear that in non-egregious cases, the penalty will be one-half of the transaction value, capped at $147,571 per violation. This is applicable except in circumstances where the maximum penalty for the apparent violation is less than $295,141, in which case the base amount of the penalty shall be capped at one-half the statutory maximum penalty applicable to the violation. In an egregious case, if the apparent violation is self-disclosed, the base amount of the penalty will be one-half of the applicable statutory maximum penalty. Other agencies tasked with overseeing the enforcement of financial regulations also have issued guidance encouraging voluntary disclosures. Although the Financial Crimes Enforcement Network (“FinCEN”) has not provided guidance on how it credits voluntary disclosures, guidance issued by the Federal Financial Institutions Examination Council (“FFIEC”), consisting of the Office of the Comptroller of the Currency (“OCC”), the Federal Reserve, the Federal Deposit Insurance Corporation (“FDIC”), the Office of Thrift Supervision (“OTS”), and the National Credit Union Administration (“NCUA”), has made clear that, in determining the amount and appropriateness of a penalty to be assessed against a financial institution in connection with various types of violations, the agencies will consider “voluntary disclosure of the violation.” In 2016, the OCC published a revised Policies and Procedures Manual to ensure this and other factors are considered and to “enhance the consistency” of its enforcement decisions. That guidance includes a matrix with several factors, one of which is “concealment.” In the event that a financial institution self-discloses, they are not penalized for concealment. Thus, while not directly reducing potential financial exposure, a VSD ensures that a financial institution is not further penalized for the potential violation. It is also worth noting that, unlike DOJ, these regulators do not appear to draw distinctions regarding the type of offense at issue (i.e., FCPA versus BSA versus sanctions violations). Moreover, financial institutions contemplating not disclosing potential misconduct need to consider whether the nature of the potential misconduct at issue goes to the financial institution’s safety and soundness, adequacy of capital, or other issues of interest to prudential regulators such as the Federal Reserve, OCC, and FDIC. To the extent such prudential concerns are implicated, a financial institution may be required to disclose the underlying evidence of misconduct and may face penalties for failing to do so. The Securities and Exchange Commission (“SEC”) also has indicated that it will consider VSDs as a factor in its enforcement actions under the federal securities laws. In a 2001 report (the “Seaboard Report”), the SEC confirmed that, as part of its evaluation of proper enforcement actions, it would consider whether “the company voluntarily disclose[d] information [its] staff did not directly request and otherwise might not have uncovered.” The SEC noted that self-policing could result in reduced penalties based on how much the SEC credited self-reporting—from “the extraordinary step of taking no enforcement action to bringing reduced charges, seeking lighter sanctions, or including mitigating language in documents . . . use[d] to announce and resolve enforcement actions.” In 2010, the SEC formalized its cooperation program, identifying self-policing, self-reporting, and remediation and cooperation as the primary factors it would consider in determining the appropriate disposition of an enforcement action. In 2015, the former Director of the SEC’s Division of Enforcement, reaffirmed the importance of self-reporting to the SEC’s enforcement decisions, stating that previous cases “should send the message loud and clear that the SEC will reward self-reporting and cooperation with significant benefits.” As of mid-2016, the SEC had signed over 103 cooperation agreements, six non-prosecution agreements, and deferred nine prosecutions since the inception of the cooperation program. Finally, like its federal counterparts, the New York Department of Financial Services (“NYDFS”) has previously signaled, at least in the context of export and import sanctions, that “[i]t is vital that companies continue to self-report violations,” and warned that “those that do not [self-report] run the risk of even more severe consequences.” The NYDFS has not directly spoken to money laundering enforcement, but financial institutions considering disclosures to New York state authorities should keep this statement in mind. Similar to the considerations an institution might face when dealing with federal regulators, to the extent DFS prudential concerns are implicated, a financial institution may be required to disclose the underlying evidence of misconduct and face penalties for failing to do so. Recent BSA/AML and FCPA Resolutions Even against this backdrop, over the last few years, voluntary self-disclosure has not appeared to play a significant role in the resolution of criminal enforcement proceedings arising from alleged BSA/AML violations. Since 2015, DOJ, in conjunction with other enforcement agencies, has resolved BSA/AML charges against twelve financial institutions. In eleven of those cases, the final documentation of the resolution—the settlement agreements and press releases accompanying the settlement documents—make no mention of voluntary self-disclosure. Even in the FCPA context, where DOJ has sought to provide greater certainty and transparency concerning the benefits of voluntary disclosure, there is a scant track record of financial institutions making voluntary disclosures in connection with FCPA resolutions. Since 2015, DOJ has announced FCPA enforcement actions with six financial institutions. The Justice Department did not credit any of them with voluntarily self-disclosing the conduct. Although recent resolutions have not granted credit for VSDs, financial entities facing enforcement actions should consider how such a disclosure might affect the nature of a potential investigation and the ultimate disposition of an enforcement action. It is worth noting that in the one recent BSA/AML resolution with a financial institution in which voluntary self-disclosure was referenced—DOJ’s 2017 resolution with Banamex USA—it was in the course of explaining why the financial institution did not receive disclosure credit. In other words, there is no example of a criminal enforcement action commending a financial institution for a VSD, or of an agency softening the enforcement measures as a result of a VSD. The fact that the Banamex USA resolution affirmatively explains why the defendant did not receive VSD credit may imply that this type of credit may be available to financial institution defendants when they do make adequate VSDs. Furthermore, over the same time period, prosecutors have credited financial institutions for other forms of cooperation. For example, in 2015, the Department of Justice deferred prosecution of CommerceWest Bank officials for a BSA charge arising from their willful failure to file a SAR, in part because of the bank’s “willingness to acknowledge and accept responsibility for its actions” and “extensive cooperation with [DOJ’s] investigation.” Similarly, a 2015 non-prosecution agreement with Ripple Labs Inc. credited the financial institution with, among other factors, “extensive cooperation with the Government.” These favorable dispositions signal that the government is willing to grant mitigation credit for cooperation, even when financial institutions are not credited with making VSDs. Other Relevant Considerations Relating to VSDs As discussed above, the government’s position regarding the value of VSDs and their effect on the ultimate resolution of a case vary based on the agency and the legal and regulatory regime(s) involved. Given the lack of clear guidance from FinCEN about how it credits VSDs and the fact that BSA/AML resolutions tend not to explicitly reference a company’s decision to disclose as a relevant consideration, navigating the decision of whether to self-report to DOJ is itself a fraught one. Beyond the threshold question of whether or not to self-disclose to DOJ, financial institutions faced with potential BSA/AML liability should be mindful of a number of other considerations, always with an eye on avoiding the specter of a full-blown criminal investigation and trying to minimize institutional liability to the extent possible. Likelihood of Discovery: A financial institution deciding whether to self-disclose to DOJ must contemplate the possibility that the government will be tipped off by other means, including by the prudential regulators, and will investigate the potential misconduct anyway, without the financial institution gaining the benefits available for bringing a case to the government’s attention and potentially before the financial institution has had the opportunity to develop a remediation plan. Financial institutions that plan to forego self-disclosure of possible misconduct will have to guard against both whistleblower disclosures and the possibility that other institutions aware of the potential misconduct will file a Suspicious Activity Report implicating the financial institution. Timing of Disclosure: Even after a financial institution has decided to self-report to DOJ, it will have to think through the implications of when a disclosure is made. A financial institution could decide to promptly disclose to maximize cooperation credit, but risks reporting without developing the understanding of the underlying facts that an internal investigation would provide. Additionally, a prompt disclosure to DOJ may be met with a deconfliction request, in which the government asks that the company refrain from interviewing its employees until the government has had a chance to do so. This may slow down the company’s investigation and impede its ability to take prompt and decisive remedial actions, including those related to personnel decisions. On the other hand, waiting until after the internal investigation has concluded (or at least reached an advanced stage) presents the risk of the government finding out first in the interim. The financial institution also will have to decide whether to wait longer to report to the government having already designed and begun to implement a remediation plan or to disclose while the remediation plan is still being developed. Selective or Sequential Disclosures: Given the number of agencies with jurisdiction over the financial industry and the overlaps between their respective spheres of authority, financial institutions contemplating self-disclosure will often have to decide how much to disclose, whether to both prudential regulators and DOJ, and in what order. In some cases, a financial institution potentially facing both regulatory and criminal liability may be well-advised to engage civil regulators first in the hope that, if DOJ does get involved, they will stand down and piggy-back on a global resolution with other regulators rather than seeking more serious penalties. Indeed, DOJ prosecutors are required to consider the adequacy of non-criminal alternatives – such as civil or regulatory enforcement actions – in determining whether to initiate a criminal enforcement action. For example, the non-prosecution agreement DOJ entered in May 2017 with Banamex recognized that Citigroup, Banamex’s parent, was already in the process of winding down Banamex USA’s banking operations pursuant to a 2015 resolution with the California Department of Business Oversight and FDIC and was operating under ongoing consent orders with the Federal Reserve and OCC relating to BSA/AML compliance; consequently, DOJ sought only forfeiture rather than an additional monetary penalty. Of course, any decision to selectively disclose must be balanced carefully against the practical reality that banking regulators will, in certain instances, notify DOJ of potential criminal violations whether self-disclosed or identified in the examination process. Whether that communication will occur often is influenced by factors such as the history of cooperation between the institutions or the relationships of those involved. Nevertheless, the timing and nature of any referral by a regulator to DOJ might nullify any benefit from a selective or sequential disclosure. Conclusion In this inaugural Developments in the Defense of Financial Institutions Client Alert, we addressed whether and to what extent a financial institution should anticipate receiving a benefit when approaching the pivotal decision of whether to voluntarily self-disclose potential BSA/AML violations to DOJ. We hope this publication serves as a helpful primer on this issue, and look forward to addressing other topics that raise unique issues for financial institutions in this rapidly-evolving area in future editions.  U.S. Dep’t of Justice, Guidance Regarding Voluntary Self-Disclosures, Cooperation, and Remediation in Export Control and Sanctions Investigations Involving Business Organizations (Oct. 2, 2016), https://www.justice.gov/nsd/file/902491/download.  Rod Rosenstein, Deputy Att’y Gen., Deputy Attorney General Rosenstein Delivers Remarks at the 34th International Conference on the Foreign Corrupt Practices Act (Nov. 29, 2017), https://www.justice.gov/opa/speech/deputy-attorney-general-rosenstein-delivers-remarks-34th-international-conference-foreign.  Throughout this alert, we use the term “financial institution” as it is defined in the Bank Secrecy Act. “Financial institution” refers to banks, credit unions, registered stock brokers or dealers, currency exchanges, insurance companies, casinos, and other financial and banking-related entities. See 31 U.S.C. § 5312(a)(2) (2012). These institutions should be particularly attuned to the role that voluntary disclosures can play in the disposition of a criminal enforcement action.  See, e.g., 31 CFR § 1020.320 (FinCEN SAR requirements for banks); 12 C.F.R. § 21.11 (SAR requirements for national banks).  See Non-Prosecution Agreement with Banamex USA, U.S. Dep’t of Justice (May 18, 2017), https://www.justice.gov/opa/press-release/file/967871/download (noting that “the Company did not receive voluntary self-disclosure credit because neither it nor Citigroup voluntarily and timely disclosed to the Office the conduct described in the Statement of Facts”).  U.S. Dep’t of Justice, U.S. Attorneys’ Manual § 9-28.700 (2017).  For a definition of self-disclosure in the sanctions space, see U.S. Dep’t of Justice, Guidance Regarding Voluntary Self-Disclosures, Cooperation, and Remediation in Export Control and Sanctions Investigations Involving Business Organizations (Oct. 2, 2016), https://www.justice.gov/nsd/file/902491/download. For a definition in the FCPA context, see U.S. Dep’t of Justice, U.S. Attorneys’ Manual § 9-47.120 (2017).  U.S. Dep’t of Justice, Guidance Regarding Voluntary Self-Disclosures, Cooperation, and Remediation in Export Control and Sanctions Investigations Involving Business Organizations, at 4 n.7 (Oct. 2, 2016), https://www.justice.gov/nsd/file/902491/download. Gibson Dunn’s 2016 Year-End Sanctions Update contains a more in-depth discussion of this DOJ guidance.  Id. at 2 n.3  Press Release, U.S. Dep’t of Justice, Criminal Division Launches New FCPA Pilot Program (Apr. 5, 2016), https://www.justice.gov/archives/opa/blog/criminal-division-launches-new-fcpa-pilot-program. For a more in-depth discussion of the original Pilot Program, see Gibson Dunn’s 2016 Mid-Year FCPA Update, and for a detailed description of the FCPA Corporate Enforcement Policy, see our 2017 Year-End FCPA Update. For discussion regarding specific declinations under the Pilot Program, in which self-disclosure played a significant role, see our 2016 Year-End FCPA Update and 2017 Mid-Year FCPA Update.  Rod Rosenstein, Deputy Att’y Gen., Deputy Attorney General Rosenstein Delivers Remarks at the 34th International Conference on the Foreign Corrupt Practices Act (Nov. 29, 2017), https://www.justice.gov/opa/speech/deputy-attorney-general-rosenstein-delivers-remarks-34th-international-conference-foreign (announcing that the FCPA Corporate Enforcement Policy would be incorporated into the USAM); U.S. Dep’t of Justice, U.S. Attorneys’ Manual § 9-47.120 (2017).  Id.  Jody Godoy, DOJ Expands Leniency Beyond FCPA, Lets Barclays Off, Law360 (Mar. 1, 2018), https://www.law360.com/articles/1017798/doj-expands-leniency-beyond-fcpa-lets-barclays-off.  U.S. Dep’t of Justice, Letter to Alexander Willscher and Joel Green Regarding Investigation of Barclays PLC (Feb. 28, 2018), https://www.justice.gov/criminal-fraud/file/1039791/download.  Id.  Tom Schoenberg, Barclays Won’t Face Criminal Case for Hewlett-Packard Trades, Bloomberg (Mar. 1, 2018), https://www.bloomberg.com/news/articles/2018-03-01/barclays-won-t-face-criminal-case-over-hewlett-packard-trades.  Id.  31 C.F.R. Pt. 501, app. A, § III.G.1 (2018).  Id. § V.B.1.a.iv (2018).  OFAC has established a two-track approach to penalty assessment, based on whether violations are “egregious” or “non-egregious.” Egregious violations are identified based on analysis of several factors set forth in OFAC guidelines, including, among others: whether a violation was willful; whether the entity had actual knowledge of the violation, or should have had reason to know of it; harm caused to sanctions program objectives; and the individual characteristics of the entity involved.  31 C.F.R. Pt. 501, app. A, § V.B.2.a.iv (2018).  Id. § V.B.2.a.ii (2018).  Id. § V.B.2.a.i (2018).  Id.  Id. § V.B.2.a.iii (2018).  Robert B. Serino, FinCEN’s Lack of Policies and Procedures for Assessing Civil Money Penalties in Need of Reform, Am. Bar Ass’n (July 2016), https://www.americanbar.org/publications/blt/2016/07/07_serino.html. It is worth noting, however, that there are certain circumstances in which FinCEN imposes a continuing duty to disclose, such as when there has been a failure to timely file a SAR (31 C.F.R. § 1020.320(b)(3)); failure to timely file a Currency Transaction Report (31 C.F.R. § 1010.306); and failure to timely register as a money-services business (31 C.F.R. § 1022.380(b)(3)). In circumstances in which a financial institution identifies that it has not complied with these regulatory requirements and files belatedly, the decision whether to self-disclose to DOJ is impacted by the fact that the late filing will often be evident to FinCEN.  Federal Financial Institutions Examination Council: Assessment of Civil Money Penalties, 63 FR 30226-02, 1998 WL 280287 (June 3, 1998).  Office of the Comptroller of the Currency, Policies and Procedures Manual, PPM 5000-7 (Rev.) (Feb. 26, 2016), https://www.occ.gov/news-issuances/bulletins/2016/bulletin-2016-5a.pdf.  Id. at 15-17.  U.S. Secs. & Exch. Comm’n, Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions, Release No. 44969 (Oct. 23, 2001), https://www.sec.gov/litigation/investreport/34-44969.htm.  Id.  U.S. Secs. & Exch. Comm’n, Enforcement Cooperation Program, https://www.sec.gov/spotlight/enforcement-cooperation-initiative.shtml (last modified Sept. 20, 2016).  Andrew Ceresney, Director, SEC Division of Enforcement, ACI’s 32nd FCPA Conference Keynote Address (Nov. 17, 2015), https://www.sec.gov/news/speech/ceresney-fcpa-keynote-11-17-15.html.  Juniad A. Zubairi & Brooke E. Conner, Is SEC Cooperation Credit Worthwhile?, Law360 (Aug. 30, 2016), https://www.law360.com/articles/833392.  Press Release, N.Y. Dep’t Fin. Servs., Governor Cuomo Announced Bank of Tokyo-Mitsubishi UFJ to Pay $250 Million to State for Violations of New York Banking Law Involving Transactions with Iran and Other Regimes (June 20, 2013), https://www.dfs.ny.gov/about/press/pr1306201.htm.  Id.  Press Release, U.S. Dep’t of Justice, U.S. Gold Refinery Pleads Guilty to Charge of Failure to Maintain Adequate Anti-Money Laundering Program (Mar. 16, 2018), https://www.justice.gov/usao-sdfl/pr/us-gold-refinery-pleads-guilty-charge-failure-maintain-adequate-anti-money-laundering; Deferred Prosecution Agreement with U.S. Bancorp, U.S. Dep’t of Justice (Feb. 12, 2018), https://www.justice.gov/usao-sdny/press-release/file/1035081/download; Plea Agreement with Rabobank, National Association, U.S. Dep’t of Justice (Feb. 7, 2018), https://www.justice.gov/opa/press-release/file/1032101/download; Non-Prosecution Agreement with Banamex USA, U.S. Dep’t of Justice (May 18, 2017), https://www.justice.gov/opa/press-release/file/967871/download; Press Release, U.S. Dep’t of Justice, Western Union Admits Anti-Money Laundering and Consumer Fraud Violations, Forfeits $586 Million in Settlement with Justice Department and Federal Trade Commission (Jan. 19, 2017), https://www.justice.gov/opa/pr/western-union-admits-anti-money-laundering-and-consumer-fraud-violations-forfeits-586-million; Non-Prosecution Agreement Between CG Technology, LP and the United States Attorneys’ Offices for the Eastern District of New York and the District of Nevada, U.S. Dep’t of Justice (Oct. 3, 2016), https://www.gibsondunn.com/wp-content/uploads/documents/publications/CG-Technology-dba-Cantor-Gaming-NPA.PDF; Press Release, U.S. Dep’t of Justice, Normandie Casino Operator Agrees to Plead Guilty to Federal Felony Charges of Violating Anti-Money Laundering Statutes (Jan. 22, 2016), https://www.justice.gov/usao-cdca/pr/normandie-casino-operator-agrees-plead-guilty-federal-felony-charges-violating-anti; Press Release, U.S. Dep’t of Justice, Hong Kong Entertainment (Overseas) Investments, Ltd, D/B/A Tinian Dynasty Hotel & Casino Enters into Agreement with the United States to Resolve Bank Secrecy Act Liability (July 23, 2015), https://www.justice.gov/usao-gu/pr/hong-kong-entertainment-overseas-investments-ltd-dba-tinian-dynasty-hotel-casino-enters; Deferred Prosecution Agreement with Bank of Mingo, U.S. Dep’t of Justice (May 20, 2015), https://www.gibsondunn.com/wp-content/uploads/documents/publications/Bank-of-Mingo-NPA.pdf; Settlement Agreement with Ripple Labs Inc., U.S. Dep’t of Justice (May 5, 2015), https://www.justice.gov/file/421626/download; Deferred Prosecution Agreement with Commerzbank AG, U.S. Dep’t of Justice (Mar. 12, 2015), https://www.justice.gov/sites/default/files/opa/press-releases/attachments/2015/03/12/commerzbank_deferred_prosecution_agreement_1.pdf; Deferred Prosecution Agreement with CommerceWest Bank, U.S. Dep’t of Justice (Mar. 10, 2015) https://www.justice.gov/file/348996/download.  Deferred Prosecution Agreement with Société Générale S.A., U.S. Dep’t of Justice (June 5, 2018), https://www.justice.gov/opa/press-release/file/1068521/download; Non-Prosecution Agreement with Legg Mason, Inc., U.S. Dep’t of Justice (June 4, 2018), https://www.justice.gov/opa/press-release/file/1068036/download; Non-Prosecution Agreement with Credit Suisse (Hong Kong) Limited, U.S. Dep’t of Justice (May 24, 2018), https://www.justice.gov/opa/press-release/file/1077881/download; Deferred Prosecution Agreement with Och-Ziff Capital Management Group, LLC, U.S. Dep’t of Justice (Sept. 29, 2016), https://www.justice.gov/opa/file/899306/download; Non-Prosecution Agreement with JPMorgan Securities (Asia Pacific) Ltd, U.S. Dep’t of Justice (Nov. 17, 2016), https://www.justice.gov/opa/press-release/file/911206/download; Non-Prosecution Agreement with Las Vegas Sands Corp., U.S. Dep’t of Justice (Jan. 17, 2017), https://www.justice.gov/opa/press-release/file/929836/download.  See Non-Prosecution Agreement with Banamex USA, U.S. Dep’t of Justice, at 2 (May 18, 2017), https://www.justice.gov/opa/press-release/file/967871/download (explaining that Banamex “did not receive voluntary disclosure credit because neither it nor [its parent company] Citigroup voluntarily and timely disclosed to [DOJ’s Money Laundering and Asset Recover Section] the conduct described in the Statement of Facts”) (emphasis added).  Deferred Prosecution Agreement Between United States and CommerceWest Bank, U.S. Dep’t of Justice, at 2-3 (Mar. 9, 2015), https://www.justice.gov/file/348996/download.  Settlement Agreement Between United States and Ripple Labs Inc., U.S. Dep’t of Justice (May 5, 2015), https://www.justice.gov/file/421626/download; see also Press Release, U.S. Dep’t of Justice, Ripple Labs Inc. Resolves Criminal Investigation (May 5, 2015), https://www.justice.gov/opa/pr/ripple-labs-inc-resolves-criminal-investigation.  See U.S. Attorney’s Manual 9-28.1200 (recommending the analysis of civil or regulatory alternatives).  Non-Prosecution Agreement Between U.S. Dep’t of Justice, Money Laundering and Asset Recovery Section and Banamex USA at 2 (May 18, 2017), https://www.justice.gov/opa/press-release/file/967871/download. The following Gibson Dunn attorneys assisted in preparing this client update: F. Joseph Warin, M. Kendall Day, Stephanie L. Brooker, Adam M. Smith, Linda Noonan, Elissa N. Baur, Stephanie L. Connor, Alexander R. Moss, and Jaclyn M. Neely. Gibson Dunn has deep experience with issues relating to the defense of financial institutions, and we have recently increased our financial institutions defense and anti-money laundering capabilities with the addition to our partnership of M. Kendall Day. Kendall joined Gibson Dunn in May 2018, having spent 15 years as a white collar prosecutor, most recently as an Acting Deputy Assistant Attorney General, the highest level of career official in the U.S. Department of Justice’s Criminal Division. For his last three years at DOJ, Kendall exercised nationwide supervisory authority over every Bank Secrecy Act and money-laundering charge, deferred prosecution agreement and non-prosecution agreement involving every type of financial institution. Kendall joined Stephanie Brooker, a former Director of the Enforcement Division at the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) and a former federal prosecutor and Chief of the Asset Forfeiture and Money Laundering Section for the U.S. Attorney’s Office for the District of Columbia, who serves as Co-Chair of the Financial Institutions Practice Group and a member of White Collar Defense and Investigations Practice Group. Kendall and Stephanie practice with a Gibson Dunn network of more than 50 former federal prosecutors in domestic and international offices around the globe. For assistance navigating white collar or regulatory enforcement issues involving financial institutions, please contact any Gibson Dunn attorney with whom you usually work, or any of the following leaders and members of the firm’s White Collar Defense and Investigations or Financial Institutions practice groups: Washington, D.C. F. Joseph Warin – (+1 202-887-3609, firstname.lastname@example.org) Richard W. Grime (+1 202-955-8219, email@example.com) Patrick F. Stokes (+1 202-955-8504, firstname.lastname@example.org) Judith A. Lee (+1 202-887-3591, email@example.com) Stephanie Brooker (+1 202-887-3502, firstname.lastname@example.org) David P. Burns (+1 202-887-3786, email@example.com) John W.F. Chesley (+1 202-887-3788, firstname.lastname@example.org) Daniel P. Chung (+1 202-887-3729, email@example.com) M. Kendall Day (+1 202-955-8220, firstname.lastname@example.org) David Debold (+1 202-955-8551, email@example.com) Stuart F. Delery (+1 202-887-3650, firstname.lastname@example.org) Michael S. Diamant (+1 202-887-3604, email@example.com) Adam M. Smith (+1 202-887-3547, firstname.lastname@example.org) Linda Noonan (+1 202-887-3595, email@example.com) Oleh Vretsona (+1 202-887-3779, firstname.lastname@example.org) Christopher W.H. Sullivan (+1 202-887-3625, email@example.com) Courtney M. Brown (+1 202-955-8685, firstname.lastname@example.org) Jason H. Smith (+1 202-887-3576, email@example.com) Ella Alves Capone (+1 202-887-3511, firstname.lastname@example.org) Pedro G. Soto (+1 202-955-8661, email@example.com) New York Reed Brodsky (+1 212-351-5334, firstname.lastname@example.org) Joel M. Cohen (+1 212-351-2664, email@example.com) Lee G. Dunst (+1 212-351-3824, firstname.lastname@example.org) Mark A. Kirsch (+1 212-351-2662, email@example.com) Arthur S. Long (+1 212-351-2426, firstname.lastname@example.org) Alexander H. Southwell (+1 212-351-3981, email@example.com) Lawrence J. Zweifach (+1 212-351-2625, firstname.lastname@example.org) Daniel P. Harris (+1 212-351-2632, email@example.com) Denver Robert C. Blume (+1 303-298-5758, firstname.lastname@example.org) John D.W. Partridge (+1 303-298-5931, email@example.com) Ryan T. Bergsieker (+1 303-298-5774, firstname.lastname@example.org) Laura M. Sturges (+1 303-298-5929, email@example.com) Los Angeles Debra Wong Yang (+1 213-229-7472, firstname.lastname@example.org) Marcellus McRae (+1 213-229-7675, email@example.com) Michael M. Farhang (+1 213-229-7005, firstname.lastname@example.org) Douglas Fuchs (+1 213-229-7605, email@example.com) San Francisco Winston Y. Chan (+1 415-393-8362, firstname.lastname@example.org) Thad A. Davis (+1 415-393-8251, email@example.com) Marc J. Fagel (+1 415-393-8332, firstname.lastname@example.org) Charles J. Stevens – Co-Chair (+1 415-393-8391, email@example.com) Michael Li-Ming Wong (+1 415-393-8333, firstname.lastname@example.org) Palo Alto Benjamin Wagner (+1 650-849-5395, email@example.com) London Patrick Doris (+44 20 7071 4276, firstname.lastname@example.org) Charlie Falconer (+44 20 7071 4270, email@example.com) Sacha Harber-Kelly (+44 20 7071 4205, firstname.lastname@example.org) Philip Rocher (+44 20 7071 4202, email@example.com) Steve Melrose (+44 (0)20 7071 4219, firstname.lastname@example.org) Paris Benoît Fleury (+33 1 56 43 13 00, email@example.com) Bernard Grinspan (+33 1 56 43 13 00, firstname.lastname@example.org) Jean-Philippe Robé (+33 1 56 43 13 00, email@example.com) Audrey Obadia-Zerbib (+33 1 56 43 13 00, firstname.lastname@example.org) Munich Benno Schwarz (+49 89 189 33-110, email@example.com) Michael Walther (+49 89 189 33-180, firstname.lastname@example.org) Mark Zimmer (+49 89 189 33-130, email@example.com) Hong Kong Kelly Austin (+852 2214 3788, firstname.lastname@example.org) Oliver D. Welch (+852 2214 3716, email@example.com) São Paulo Lisa A. Alfaro (+55 (11) 3521-7160, firstname.lastname@example.org) Fernando Almeida (+55 (11) 3521-7095, email@example.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
New York partner Joel Cohen and Washington, D.C. partner Stephanie Brooker are contributing editors for the first edition of International Comparative Legal Guide to: Anti-Money Laundering 2018. Mr. Cohen and Ms. Brooker are also the authors of “Anti-Money Laundering 2018 – Overview of Recent AML Gatekeeper International and U.S. Developments,” [PDF] Stephanie Brooker and Washington, D.C. of counsel Linda Noonan are the authors of “Anti-Money Laundering 2018 – USA.” [PDF] These were published in The ICLG to: Anti-Money Laundering on June 5, 2018.
Click for PDF On May 8, 2018, President Donald Trump announced his decision to abandon the 2015 Iran nuclear deal—the Joint Comprehensive Plan of Action (the “JCPOA”)—and re-impose U.S. nuclear-related sanctions on the Iranian regime. Though it came as no surprise, the decision went further than many observers had anticipated. Notably, under the terms of the JCPOA, U.S. sanctions were held in abeyance through a series of waivers that were periodically renewed by both the Obama and Trump administrations. Many commentators expected the current administration to discontinue only waivers of sanctions on the Iranian financial sector that were set to expire on May 12, 2018, leaving other sanctions untouched. Instead, the Trump administration re-imposed all nuclear related sanctions on Iran, staggering the implementation over the course of the next six months. As described in an initial volley of frequently asked questions (“FAQs”) set forth by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the re-imposition of nuclear sanctions will be subject to certain 90 and 180 day wind-down periods that expire on August 6, 2018 and November 4, 2018, respectively. Background The JCPOA The JCPOA was a purposefully limited accord focusing only on Iran’s nuclear activities and the international community’s nuclear-related sanctions. Prior to the JCPOA, the international community, including the United Nations, the European Union, and the United States imposed substantial sanctions on Iran of varying scope and severity. The European Union had implemented an oil embargo and U.S. nuclear sanctions had included the “blacklisting” of more than 700 individuals and entities on OFAC’s list of Specially Designated Nationals and Blocked Persons (“SDN List”), as well as economic restrictions imposed on entities under U.S. jurisdiction (“Primary Sanctions”) and restrictions on entities outside U.S. jurisdiction (“Secondary Sanctions”). Secondary Sanctions threatened non-U.S. entities with limitations on their access to the U.S. market if they transacted with various Iranian entities. Broadly, Secondary Sanctions forced non-U.S. entities to decide whether they were going to deal with Iran or with the United States. They could not do both. The JCPOA, signed between Iran and the five permanent members of the United Nations Security Council (the United States, the United Kingdom, France, Russia, and China) and Germany (the “P5+1”) in 2015, committed both sides to certain obligations related to Iran’s nuclear development. Iran committed to various limitations on its nuclear program, and in return the international community (the P5+1 alongside the European Union and the United Nations) committed to relieving substantial portions of the sanctions that had been placed on Iran to address that country’s nuclear activities. This relief included the United States’ commitment to ease certain Secondary Sanctions, thus opening up the Iranian economy for non-U.S. persons without risking their access to the U.S. market to pursue Iranian deals. This sanctions relief came into effect in January 2016 (on “Implementation Day”) when the IAEA determined that Iran was compliant with the initial nuclear components of the JCPOA. Criticism of the Deal Donald Trump made his opposition to the JCPOA a cornerstone of his presidential campaign. On occasions too numerous to count, then candidate and now President Trump criticized the deal and indicated his intent to withdraw from the JCPOA unless it was “fixed” to address his concerns, including the deal’s silence on Iran’s ballistic missile development and the existence of certain “sunset provisions” (after which any remaining sanctions would be permanently lifted). There were at least two challenges built into the JCPOA that critics—including President Trump—have seized upon. First, in an effort to reach an agreement to limit Iran’s nuclear capabilities, the Obama administration and other JCPOA parties not only included “sunset” provisions in the accord after which certain restrictions on Iran would be lifted, but also drew a distinction between Iran’s compliance with the nuclear deal and its conduct in other areas (including its support for groups the United States deems terrorists, its repression of its citizens, its support for Syrian President Bashar al-Assad, and its conventional weapons development programs). Supporters of the deal argued that addressing the immediate nuclear weapons risk was paramount—this necessitated both the sunset provisions and the absence of addressing other troubling activities. Critics of the deal, however, including some powerful Congressional leaders and President Trump, derided these compromises and claimed not only that the sunset periods were too brief to be meaningful, but also that by ignoring non-nuclear issues Iran was given both a free pass to continue its bad behavior and indeed the ability to fund that bad behavior out of proceeds received from the nuclear-related sanctions relief. A second challenge to the deal came from the fact that while the other parties to the JCPOA agreed to remove almost all of their sanctions on Iran, U.S. relief was far more surgical and reversible. This was recognized by all parties to the JCPOA but so long as President Obama (or a successor with similar political views) was in office, it was thought to be a manageable limitation. One of the key limits to the U.S. relief was that U.S. persons—including financial institutions and companies—have remained broadly prohibited from engaging with Iran even after the JCPOA was implemented in 2016. Instead, the principal relief the U.S. offered was on the sanctions risks posed to non-U.S. parties pursuant to Secondary Sanctions and related measures. As a consequence, it has remained a challenge for non-U.S. persons to fully engage with Iran due to the continued inability to leverage U.S. banks, insurance and other institutions that remain central to the bulk of cross-border finance and trade. Changes to U.S. Sanctions Regarding Iran Wind-Down Periods In conjunction with the May 8, 2018 announcement, the President issued a National Security Presidential Memorandum (“NSPM”) directing the Secretary of State and the Secretary of the Treasury to prepare immediately for the re-imposition of all of the U.S. sanctions lifted or waived in connection with the JCPOA, to be accomplished as expeditiously as possible and in no case later than 180 days from the date of the NSPM. According to FAQs published by OFAC, the 90-day wind-down period will apply to sanctions on: The purchase and acquisition of U.S. dollar banknotes by the Government of Iran; Gold and precious metals; Graphite, raw or semi-finished metals such as aluminum and steel; Coal; Software for integrating industrial processes; Iranian rials; Iranian sovereign debt; and Iran’s automobile sector. At the end of the 90-day wind-down period, the U.S. government will also revoke authorizations to import into the United States Iranian carpets and foodstuffs and to sell to Iran commercial passenger aircraft and related parts and services. The longer 180-day wind-down period will apply to sanctions on: Iranian port operators, shipping and shipbuilding; Petroleum-related transactions; Transactions by foreign financial institutions with the Central Bank of Iran and designated Iranian financial institutions; Provision of specialized financial messaging services to the Central Bank of Iran and certain Iranian financial institutions; Underwriting services, insurance and reinsurance; and Iran’s energy sector. At the end of the 180-day wind-down period, the U.S. government will also revoke General License H, which authorizes foreign entities of U.S. companies to do business with Iran, and the U.S. government will re-impose sanctions against individuals and entities removed from the SDN List on Implementation Day. The nature and scope of the “wind-down” period resulted in immediate, and significant, concerns from companies seeking to comply with U.S. sanctions. OFAC has clarified that, in the event a non-U.S. non-Iranian person is owed payment after the conclusion of the wind-down period for goods or services that were provided lawfully therein, the U.S. government would allow that person to receive payment according to the terms of the written contract or written agreement. Similarly, if a non-U.S., non-Iranian person is owed repayment after the expiration of the wind-down periods for loans or credits extended to an Iranian counterparty prior to the end of the 90-day or 180-day wind-down period, as applicable, provided that such loans or credits were extended pursuant to a written contract or written agreement entered into prior to May 8, 2018, and such activities were consistent with U.S. sanctions in effect at the time the loans or credits were extended, the U.S. government would allow the non-U.S., non-Iranian person to receive repayment of the related debt or obligation according to the terms of the written contract or written agreement. These allowances are designed for such parties to be made whole for debts and obligations owed or due to them for goods or services fully provided or delivered or loans or credit extended to an Iranian party prior to the end of the wind-down periods. Notably, any payments would need to be consistent with U.S. sanctions, including that payments could not involve U.S. persons or the U.S. financial system, unless the transactions are exempt from regulation or authorized by OFAC. Changes to the SDN List In assessing the impact of the “re-designations” under the SDN List, it is useful to note the restrictions that remained in place after the JCPOA was implemented. For example, although they were not classified as SDNs, the property and interests in property of persons of the Government of Iran and Iranian financial institutions remained blocked if they are in or come within the United States or if they are in or come within the possession or control of a U.S. person, wherever located. As a result, U.S. persons were broadly prohibited from engaging in transactions or dealing with the Government of Iran and Iranian financial institutions, while non-U.S. persons could deal with them in non-dollar currencies. But under the new policy, such persons will be moved to the SDN List, which means that non-U.S. persons who continue to deal with them will be subject to Secondary Sanctions. OFAC indicated that it will not add such persons to the SDN List immediately, so as “to allow for the orderly wind down by non-U.S., non-Iranian persons of activities that had been undertaken” consistent with the prior regulations. This change will happen no later than November 5, 2018. Diplomatic Next Steps Yesterday’s announcement followed significant diplomatic efforts to save the deal. Trump’s January 2018 announcement that he would extend existing waivers until May 2018 set off a feverish round of negotiations with European partners, culminating in recent visits by French President Emmanuel Macron and German Chancellor Angela Merkel to try to persuade the Trump administration to remain in the deal. Many expect those negotiations to continue, as the global community is significantly more exposed to the Iranian market than U.S. persons, who continued to be subject to sanctions post-JCPOA. Indeed, since sanctions were suspended in early 2016, Iran’s oil exports have increased dramatically, reaching approximately two million barrels per day in 2017. European imports from Iran rose by nearly 800 percent between 2015 and 2017 (primarily imports of Iranian oil), while European exports to Iran rose by more than four billion euros ($5 billion) annually over the same period. Major European companies have also resumed investing in Iran—France’s Total has announced plans to invest $1 billion in one of Iran’s largest offshore gas fields. Early press reports following President Trump’s May 2018 announcement, if accurate, suggest that Iran and the other JCPOA parties remain committed to the underlying deal and plan to begin prompt negotiations to salvage the JCPOA. Because full re-imposition of U.S. sanctions is not scheduled to take effect for another six months, it is entirely possible that the announcement by President Trump will serve as an impetus to negotiations that bring Iran and the rest of the P5+1 to the table. Such an approach could mirror the Trump administration’s recent tactics with respect to steel and aluminum tariffs, where a splashy public announcement is followed by a series of repeated extensions as the administration seeks to extract further concessions. One point of leverage the EU may have in these negotiations is the possibility of extending the existing “Blocking Regulation,” which makes it unlawful for EU persons to comply with a specific list of U.S. sanctions laws against Cuba, Libya and Iran as of 1996. That list could be extended to capture U.S. sanctions against Iran in respect of which the JCPOA offered relief. This possibility has been mentioned by senior EU officials a number of times since late last year, including by the EU ambassador to the United States in September 2017, and the head of the Iranian Taskforce in the EU’s External Action Service in February 2018. For now, the EU remains committed to the deal. On the same day that President Trump announced the change in Iran sanctions policy, European Union High Representative and Vice-President Federica Mogherini remarked that “[a]s long as Iran continues to implement its nuclear related commitments, as it is doing so far, the European Union will remain committed to the continued full and effective implementation of the nuclear deal. . . . The lifting of nuclear related sanctions is an essential part of the agreement. The European Union has repeatedly stressed that the lifting of nuclear related sanctions has not only a positive impact on trade and economic relations with Iran, but also and mainly crucial benefits for the Iranian people. The European Union is fully committed to ensuring that this continues to be delivered on.” Notably, the Trump administration may be hard pressed to convince Iran’s most significant trading partners —many of whom are mired in disputes with the United States—to add pressure on Tehran. China and India are Iran’s largest importers, and China appears particularly unlikely to reduce its reliance on Iranian oil given heightened tensions between Beijing and Washington over bilateral trade and investment issues. Furthermore, the Trump administration would need to convince Russia to halt plans to invest potentially tens of billions of dollars in Iran’s oil and gas sector, and the Trump administration’s strained ties with Turkey make it far from clear that Turkey would cooperate with renewed U.S. pressure on Iran. Furthermore, the expected rise in oil prices as a result of the withdrawal is seen as a boon to Russia, whose economy is heavily dependent on petroleum and natural gas exports. Alternatively, U.S. allies in the Middle East, led by Israel and Saudi Arabia, support the Trump administration and have argued that Iran threatens their own national security. Last week Israeli Prime Minister Benjamin Netanyahu unveiled documents regarding Iran’s covert nuclear weapons project from the 1990s as proof that Iran lied about the extent of its program, a move that was widely criticized as an effort to influence U.S. public opinion with information that was widely known and had provided the impetus for the negotiations in the first place. The U.S. intelligence community had confirmed the weapons program ended in 2003. Furthermore, the Trump administration could have a difficult time persuading countries to cut commercial ties with Iran in the absence of any international legal basis for doing so. Although U.S. sanctions on Iran have more force than United Nations sanctions, the latter created an important international framework that the United States and other countries could expand on. Most of these sanctions were repealed with the passage of UN Security Council Resolution 2231 (2015), which endorsed the JCPOA. The “snapback” mechanism in UNSCR 2231 would enable the United States to unilaterally require the restoration of UN sanctions on Iran under international law. But as the UN’s nuclear watchdog has repeatedly confirmed Iran’s compliance with the JCPOA’s nuclear terms, the diplomatic costs of unilaterally requiring UN sanctions’ reactivation would likely outweigh any benefits. Although the JCPOA contains no provisions for withdrawal, Iran has long threatened to resume its nuclear program if the United States reneges on its obligations by reinstituting sanctions. In the immediate aftermath of the Trump administration’s May 8 announcement, however, Iranian President Hassan Rouhani said that his government remains committed to maintaining the nuclear deal with other world powers. The Iranian leader said he had directed his diplomats to negotiate with the deal’s remaining signatories—including European countries, Russia and China—and that the JCPOA could survive without the United States. Rouhani, who had made the deal his signature achievement, faces stiff pressure from the hardline elements within Iran who objected to the deal. If Iran resumes uranium enrichment activities, that could move European parties to walk away from the negotiating table, thereby dooming the JCPOA on which President Rouhani has staked so much political capital and empowering more hardline elements within the Iranian regime. Conclusion Although many expect negotiations regarding the fate of the JCPOA to continue over the next six months, the outcome of such deliberations is highly uncertain. Notably, it took the combined efforts of the Bush and Obama administrations to convince foreign governments and companies to join the United States in imposing sanctions on Iran, and such coordinated actions are unlikely to be replicated in the wake of leaving the JCPOA. As the Trump administration negotiates with the rest of the parties to the JCPOA, it is possible that the U.S. administration may exercise discretion and decline to bring enforcement actions against non-U.S. persons that continue to do business with Iran. That would mitigate the immediate impact of re-imposing sanctions. The precise nature of any EU response remains to be seen. Although potential blocking regulations may serve as leverage in negotiations, the impact would be severe for European companies seeking to comply with both U.S. and European laws. Whether the position of the United Kingdom will remain aligned with its European partners once it has left the EU is another imponderable, although the U.K., French and German governments have projected a united front in re-affirming their commitment to the JCPOA, and the U.K. is a signatory to the JCPOA separate from its status as an EU member state. Further strains to the U.S.–EU relationship are likely if the U.S. were to bring enforcement actions against EU persons for alleged breaches of re-imposed sanctions. The EU has stated that “it is determined to act in accordance with its security interests and to protect its economic investments.” However, what this might mean in practice remains unclear.  Press Release, White House, Remarks by President Trump on the Joint Comprehensive Plan of Action (May 8, 2018), available at https://www.whitehouse.gov/briefings-statements/remarks-president-trump-joint-comprehensive-plan-action; see also Presidential Memorandum, Ceasing U.S. Participation in the JCPOA and Taking Additional Action to Counter Iran’s Malign Influence and Deny Iran All Paths to a Nuclear Weapon (May 8, 2018), available at https://www.whitehouse.gov/presidential-actions/ceasing-u-s-participation-jcpoa-taking-additional-action-counter-irans-malign-influence-deny-iran-paths-nuclear-weapon.  These sanctions were enacted on the last day of 2011, when President Obama signed into law the National Defense Authorization Act for Fiscal Year 2012 (“NDAA”). Included within the NDAA is a measure that designated the entire Iranian financial sector as a primary money laundering concern, which effectively required the President to freeze the assets of Iranian financial institutions and prohibit all transactions with respect to Iranian financial institutions’ property and interests in property if the property or interest in property comes within the United States’ jurisdiction or the possession and control of a United States person. In addition, the measure broadly authorized the President to impose sanctions on the Central Bank of Iran.  Press Release, U.S. Dep’t of Treasury, Statement by Secretary Steven T. Mnuchin on Iran Decision (May 8, 2018), available at https://home.treasury.gov/news/press-releases/sm0382.  U.S. Dep’t of State, Joint Comprehensive Plan of Action (July 14, 2015), available at https://www.state.gov/documents/organization/245317.pdf.  Press Release, White House, Statement by the President on the Iran Nuclear Deal (Jan. 12, 2018), available at https://www.whitehouse.gov/briefings-statements/statement-president-iran-nuclear-deal.  U.S. Dep’t of Treasury, Frequently Asked Questions Regarding the Re-Imposition of Sanctions Pursuant to the May 8, 2018 National Security Presidential Memorandum Relating to the Joint Comprehensive Plan of Action (JCPOA) (May 8, 2018), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/jcpoa_winddown_faqs.pdf, FAQ No. 1.2.  Id.  OFAC FAQ No. 1.3.  Id.  OFAC FAQ No. 2.1.  Id.  Id.  E.O. 13599, 77 Fed. Reg. 6659 (Feb. 5, 2012); U.S. Dep’t of Treasury, Resource Center, OFAC, JCPOA-related Designation Removals, JCPOA Designation Updates, Foreign Sanctions Evaders Removals, NS-ISA List Removals; 13599 List Changes (Jan. 16, 2016), available at https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/updated_names.aspx.  OFAC FAQ No. 3.  Id. (“Beginning on November 5, 2018, activities with most persons moved from the E.O. 13599 List to the SDN List will be subject to secondary sanctions. Such persons will have a notation of “Additional Sanctions Information – Subject to Secondary Sanctions” in their SDN List entry.”)  Peter Harrell, The Challenge of Reinstating Sanctions Against Iran, Foreign Affairs (May 4, 2018), available at https://www.foreignaffairs.com/articles/iran/2018-05-04/challenge-reinstating-sanctions-against-iran?cid=int-fls&pgtype=hpg.  Id.  See, e.g., Erin Cunningham & Bijan Sabbagh, Iran to Negotiate with Europeans, Russia and China about Remaining in Nuclear Deal, Wash. Post (May 8, 2018), available at https://wapo.st/2HWaI9w?tid=ss_tw&utm_term=.ed12421ad6a6; James McAuley, After Trump Says U.S. Will Withdraw from Iran Deal, Allies Say They’ll Try to Save It, Wash. Post (May 8, 2018), available at https://wapo.st/2rokYfI?tid=ss_tw&utm_term=.291cd9490f2e.  Council Regulation (EC) No 2271/96 of 22 November 1996 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom.  Jessica Schulberg, Europe Considering Blocking Iran Sanctions if U.S. Leaves Nuclear Deal, EU Ambassador Says, Huffington Post (Sept. 26, 2017), available at https://www.huffingtonpost.co.uk/entry/europe-iran-sanctions-nuclear-deal_us_59c9772ce4b0cdc77333e758.  John Irish & Parisa Hafezi, EU could impose blocking regulations if U.S. pulls out of Iran deal, Reuters, (Feb. 8, 2018), available at https://uk.reuters.com/article/uk-iran-nuclear-eu/eu-could-impose-blocking-regulations-if-u-s-pulls-out-of-iran-deal-idUKKBN1FS2F0.  Press Release, European Union External Action Service, Remarks by HR/VP Mogherini on the statement by US President Trump regarding the Iran nuclear deal (JCPOA) (May 8, 2018).  Harrell, see supra n. 16.  Id.  The last sentence of the JCPOA expressly provides: “Iran has stated that if sanctions are reinstated in whole or in part, Iran will treat that as grounds to cease performing its commitments under this JCPOA in whole or in part.”  See Erin Cunningham & Bijan Sabbagh, Iran to Negotiate with Europeans, Russia and China about Remaining in Nuclear Deal, Wash. Post (May 8, 2018), available at https://wapo.st/2HWaI9w?tid=ss_tw&utm_term=.ed12421ad6a6; James McAuley, After Trump Says U.S. Will Withdraw from Iran Deal, Allies Say They’ll Try to Save It, Wash. Post (May 8, 2018), available at https://wapo.st/2rokYfI?tid=ss_tw&utm_term=.291cd9490f2e.  While the U.K. is currently in the EU, it will be leaving the EU shortly, at which time it may seek to negotiate trade deals with a variety of governments. Particularly if negotiations over the U.K.’s exit from the EU were to become fractious, it is possible a post-Brexit U.K. could use its stance on the JCPOA as a bargaining counter in negotiations with the Trump administration over a new U.K.–U.S. trade deal.  Press Release, U.K. Prime Minister’s Office, Joint statement from Prime Minister May, Chancellor Merkel and President Macron following President Trump’s statement on Iran (May 8, 2018), available at https://www.gov.uk/government/news/joint-statement-from-prime-minister-may-chancellor-merkel-and-president-macron-following-president-trumps-statement-on-iran.  Press Release, EU External Action Serv., Remarks by HR/VP Mogherini on the statement by US President Trump regarding the Iran nuclear deal (JCPOA) (May 8, 2018. The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Adam Smith, Patrick Doris, Mark Handley, Stephanie Connor, Richard Roeder, and Scott Toussaint. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s International Trade Group: United States: Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, firstname.lastname@example.org) Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, email@example.com) Jose W. Fernandez – New York (+1 212-351-2376, firstname.lastname@example.org) Marcellus A. McRae – Los Angeles (+1 213-229-7675, email@example.com) Daniel P. Chung – Washington, D.C. (+1 202-887-3729, firstname.lastname@example.org) Adam M. Smith – Washington, D.C. (+1 202-887-3547, email@example.com) Christopher T. Timura – Washington, D.C. (+1 202-887-3690, firstname.lastname@example.org) Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, email@example.com) Kamola Kobildjanova – Palo Alto (+1 650-849-5291, firstname.lastname@example.org) Courtney M. Brown – Washington, D.C. (+1 202-955-8685, email@example.com) Laura R. Cole – Washington, D.C. (+1 202-887-3787, firstname.lastname@example.org) Scott R. Toussaint – Palo Alto (+1 650-849-5320, email@example.com) Europe: Peter Alexiadis – Brussels (+32 2 554 72 00, firstname.lastname@example.org) Attila Borsos – Brussels (+32 2 554 72 10, email@example.com) Patrick Doris – London (+44 (0)207 071 4276, firstname.lastname@example.org) Penny Madden – London (+44 (0)20 7071 4226, email@example.com) Mark Handley – London (+44 (0)207 071 4277, firstname.lastname@example.org) Benno Schwarz – Munich (+49 89 189 33 110, email@example.com) Richard W. Roeder – Munich (+49 89 189 33-160, firstname.lastname@example.org) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Gibson Dunn partners provide an overview of significant trends and key issues in Bank Secrecy Act (BSA)/Anti-Money Laundering (AML) and sanctions enforcement and compliance. Topics covered: BSA/AML Overview Recent trends in BSA/AML enforcement Recent trends in BSA/AML compliance BSA/AML Reform Efforts Sanctions Overview Key OFAC sanctions program developments Recent trends in sanctions enforcement The future of sanctions under the Trump Administration (and beyond) View Slides [PDF] PANELISTS M. Kendall Day was a white collar prosecutor for 15 years, serving most recently as an Acting Deputy Assistant Attorney General with the U.S. Department of Justice’s Criminal Division, where he supervised Bank Secrecy Act investigations, enforcement of anti-money laundering and sanctions laws, deferred prosecution agreements and non-prosecution agreements involving all types of financial institutions. He previously served in a variety of leadership and line attorney roles, including as Chief of the DOJ Money Laundering and Asset Recovery Section. Mr. Day will join Gibson Dunn’s Washington, D.C. office as a partner effective May 1, 2018. Stephanie L. Brooker is co-chair of Gibson Dunn’s Financial Institutions Practice Group. She is former Director of the Enforcement Division at the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), and previously served as the Chief of the Asset Forfeiture and Money Laundering Section in the U.S. Attorney’s Office for the District of Columbia and as a trial attorney for several years. Stephanie represents financial institutions, multi-national companies, and individuals in connection with criminal, regulatory, and civil enforcement actions involving BSA/AML, sanctions, anti-corruption, securities, tax, wire fraud, and sensitive employee matters. Her practice also includes BSA/AML compliance counseling and due diligence and significant criminal and civil asset forfeiture matters. Adam M. Smith is an experienced international trade lawyer who previously served in the Obama Administration as the Senior Advisor to the Director of OFAC and as the Director for Multilateral Affairs on the National Security Council. Adam focuses on international trade compliance and white collar investigations, including with respect to federal and state economic sanctions enforcement, the FCPA, embargoes, and export controls. F. Joseph Warin is co-chair of Gibson Dunn’s White Collar Defense and Investigations Practice Group, and chair of the Washington, D.C. office’s Litigation Department. He is a former Assistant United States Attorney in Washington, D.C., one of only ten lawyers in the United States with Chambers rankings in five categories, was named by Best Lawyers® as 2016 Lawyer of the Year for White Collar Criminal Defense in the District of Columbia, and recognized by Benchmark Litigation as a U.S. White Collar Crime Litigator Star for seven consecutive years (2011–2017). In 2017, Chambers honored Mr. Warin with the Outstanding Contribution to the Legal Profession Award. MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.50 credit hours, of which 1.50 credit hours may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or email@example.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.
Click for PDF On April 3, 2018, FinCEN issued its long-awaited Frequently Asked Questions Regarding Customer Due Diligence Requirements for Financial Institutions, FIN-2018-G001. https://www.fincen.gov/resources/statutes-regulations/guidance/frequently-asked-questions-regarding-customer-due-0. The timing of this guidance is very controversial, issued five weeks before the new Customer Due Diligence (“CDD”) regulation goes into effect on May 11, 2018. Most covered financial institutions (banks, broker-dealers, mutual funds, and futures commission merchants and introducing brokers in commodities) already have drafted policies, procedures, and internal controls and made IT systems changes to comply with the new regulation. Covered financial institutions will need to review these FAQs carefully to ensure that their proposed CDD rule compliance measures are consistent with FinCEN’s guidance. The guidance is set forth in 37 questions. As discussed below, some of the information is helpful, allaying financial institutions’ most significant concerns. Other FAQs confirm what FinCEN has said in recent months informally to industry groups and at conferences. A few FAQs raise additional questions, and others, particularly the FAQ on rollovers of certifications of deposit and loan renewals, are not responsive to industry concerns and may raise significant compliance burdens for covered financial institutions. The guidance reflects FinCEN’s regulatory interpretations based on discussions within the government and with financial institutions and their trade associations. The need for such extensive guidance on so many issues in the regulation illustrates the complexity of compliance and suggests that FinCEN should consider whether clarifications and technical corrections to the regulation should be made. We provide below discussion of highlights from the FAQs, including areas of continued ambiguity and uncertainty in the regulation and FAQs. Highlights from the FAQs FAQ 1 and 2 discuss the threshold for obtaining and verifying beneficial ownership. FinCEN states that financial institutions can “choose” to collect beneficial ownership information at a lower threshold than required under the regulation (25%), but does not acknowledge that financial institution regulators may expect a lower threshold for certain business lines or customer types or that there may be regulatory concerns if financial institutions adjust thresholds upward to meet the BSA regulatory threshold. A covered financial institution may be in compliance with the regulatory threshold, but fall short of regulatory expectations. FAQ 7 states that a financial institution need not re-verify the identity of a beneficial owner of a legal entity customer if that beneficial owner is an existing customer of the financial institution on whom CIP has been conducted previously provided that the existing information is “up-to-date, accurate, and the legal entity’s customer’s representative certifies or confirms (verbally or in writing) the accuracy of the pre-existing CIP information.” The example given suggests that no steps are expected to verify that the information is up-to-date and accurate beyond the representative’s confirmation or certification. The beneficial ownership records must cross reference the individual’s CIP record. FAQs 9-12 address one of the most controversial aspects of the regulation, about which there has been much confusion: the requirement that, when an existing customer opens a new account, a financial institution must identify and verify beneficial ownership information. FinCEN provides further clarity on what must be updated and how:Under FAQ 10, if a legal entity customer, for which the required beneficial ownership information has been obtained for an existing account, opens a new account, the financial institution can rely on the information obtained and verified previously “provided the customer certifies or confirms (verbally or in writing) that such information is up-to-date and accurate at the time each subsequent new account is opened,” and the financial institution has no knowledge that would “reasonably call into question” the reliability of the information. The financial institution also would need to maintain a record of the certification or confirmation by the customer.There is no grace period. If an account is opened on Tuesday, and a new account is opened on Thursday, the certification or confirmation is still required. In advance planning for compliance, many financial institutions had included a grace period in their procedures. FAQ 11 provides that, when the financial institution opens a new account or subaccount for an existing legal entity customer whose beneficial ownership has been verified for the institution’s own recordkeeping and operational purposes and not at the customer’s request, there is no requirement to update the beneficial ownership information for the new account. This is because the account would be considered opened by the financial institution and the requirement to update only applies to each new account opened by a customer. This is consistent with what FinCEN representatives have said at recent conferences.The FAQ specifies that this would not apply to (1) accounts or subaccounts set up to accommodate a trading strategy of a different legal entity, e.g., a subsidiary of the customer, or (2) accounts of a customer of the existing legal entity customer, “i.e., accounts (or subaccounts) through which a customer of a financial institution’s existing legal entity carries out trading activity through the financial institution without intermediation from the existing legal entity customer.” We believe the FAQ may fall far short of addressing all the concerns expressed to FinCEN on this issue by the securities industry. FAQ 12 addresses an issue which has been a major concern to the banking industry: whether beneficial ownership information must be updated when a certificate of deposit (“CD”) is rolled over or a loan is renewed. These actions are generally not considered opening of new accounts by banks.FinCEN continues to maintain that CD rollovers or loan renewals are openings of new accounts for purposes of the CDD regulation. Therefore, the first time a CD or loan renewal for a legal entity customer occurs after May 11, 2018, the effective date of the CDD regulation, beneficial ownership information must be obtained and verified, and at each subsequent rollover or renewal, there must be confirmation that the information is current and accurate (consistent with FAQ 10) as for any other new account for an existing customer. There is an exception or alternative approach authorized in FAQ 12 “because the risk of money laundering is very low”: If, at the time of the rollover or renewal, the customer certifies its beneficial ownership information, and also agrees to notify the financial institution of any change in information in the future, no action will be required at subsequent renewals or rollovers.The response in FAQ 12 is not responsive to the concerns that have been expressed by the banking industry and will be burdensome for banks to administer. Obtaining a certification in time, without disrupting the rollover or renewal, will be challenging, and it appears that if it the certification or promise to update is not obtained in time, the account may have to be closed. FAQs 13 through 17 address another aspect of the regulation that has generated extensive discussion: When (1) must beneficial ownership be obtained for an account opened before the effective date of the regulation, or (2) beneficial ownership information updated on existing accounts whose beneficial ownership has been obtained and verified.Following closely what was said in the preamble to the final rule, FAQ 13 states that the obligation is triggered when a financial institution “becomes aware of information about the customer during the course of normal monitoring relevant to assessing or reassessing the risk posed by the customer, and such information indicates a possible change in beneficial ownership.”FAQ 14 clarifies somewhat what is considered normal monitoring but is not perfectly clear what triggers obtaining and verifying beneficial ownership. It is clear that there is no obligation to obtain or update beneficial ownership information in routine periodic CDD reviews (CDD refresh reviews) “absent specific risk-based concerns.” We would assume that means, following FAQ 13, concerns about the ownership of the customer. Beyond that FAQ 14 is less clear. It states that the obligation is triggered “when, in the course of normal monitoring a financial institution becomes aware of information about a customer or an account, including a possible change of beneficial ownership information, relevant to assessing or reassessing the customer’s overall risk profile. Absent such a risk-related trigger or event, collecting or updating of beneficial ownership information is at the discretion of the covered financial institution.”The trigger or event may mean in the course of SAR monitoring or when conducting event-driven CDD reviews, e.g., when a subpoena is received or material negative news is identified – something that may change a risk profile. Does the obligation then arise only if the risk profile change includes a concern about whether the financial institution has accurate ownership information? That may be the intent, but is not clearly stated. If the account is being considered for closure because of the change in risk profile, would the financial institution be released from the obligation to obtain beneficial ownership? That would make sense, but is not stated. This FAQ is in need of clarification and examples would be helpful.On another note, the language in FAQ 14 also is of interest because it may suggest, in FinCEN’s view, that periodic CDD reviews should be conducted on a risk basis, and CDD refresh reviews may not be expected for lower risk customers, as is the practice for some banks. FAQ 18 seems to address at least partially a technical issue with the regulation that arises because SEC-registered investment advisers are excluded from the definition of legal entity customer in the regulation, but U.S. pooled investment vehicles advised by them are not excluded. FAQ 18 states that, if the operator or adviser of a pooled investment vehicle is not excluded from the definition of legal entity customer, under the regulation, e.g., like a foreign bank, no beneficial ownership information is required to be obtained on the pooled investment vehicle under the ownership prong, but there must be compliance with beneficial ownership control party prong, i.e., verification of identity of a control party. A control party could be a “portfolio manager” in these situations.FinCEN describes why no ownership information is required as follows: “Because of the way the ownership of a pooled investment vehicle fluctuates, it would be impractical for covered financial institutions to collect and verify ownership identity for this type of entity.” Thus, in the case where the operator or adviser of the pooled investment vehicle is excluded from the definition of legal entity, like an SEC-registered investment adviser, it would seem not to be an expectation to obtain beneficial ownership information under the ownership prong. Nevertheless, the question of whether you need to obtain and verify the identity of a control party for a pooled investment vehicle advised by a SEC registered investment adviser is not squarely answered in the FAQ. A technical correction to the regulation is still needed, but it is unlikely there would be regulatory or audit criticism for following the FAQ guidance at least with respect to the ownership prong. FAQ 19 clarifies that, when a beneficial owner is a trust (where the legal entity customer is owned more than 25% by a trust), the financial institution is only required to verify the identity of one trustee if there are multiple trustees. FAQ 20 deals with what to do if a trust holds more than a 25% beneficial interest in a legal entity customers and the trustee is not an individual, but a legal entity, like a bank or law firm. Under the regulation, if a trust holds more than 25% beneficial ownership of a legal entity customer, the financial institution must verify the identity of the trustee to satisfy the ownership prong of the beneficial ownership requirement. The ownership prong references identification of “individuals.” Consequently, the language of the regulation does not seem to contemplate the situation where the trustee was a legal entity.FAQ 20 seems to suggest that, despite this issue with the regulation, CIP should be conducted on the legal entity trustee, but apparently, on a risk basis, not in every case: “In circumstances where a natural person does not exist for purposes of the ownership/equity prong, a natural person would not be identified. However, a covered financial institution should collect identification information on the legal entity trustee as part of its CIP, consistent with the covered institution’s risk assessment and customer risk profile.” (Emphasis added.)More clarification is needed on this issue, and perhaps an amendment to the regulation to address this specific situation. Pending additional guidance, the safest course appears to be to verify the identity of legal entity trustee consistent with CIP requirements, which may pose practical difficulties, e.g., will a law firm trustee easily provide its TIN? Presumably, CIP would not be required on any legal entity trustee that is excepted from the definition of legal entity under 31 C.F.R. § 1010.230(e)(2). FAQ 21 addresses the question of how does a financial institution verify that a legal entity comes within one of the regulatory exceptions to the definition of legal entity customer in 31 C.F.R. § 1010.230(e)(2). The answer is that the financial institution generally can rely on information provided by the customer if it has no knowledge of facts that would reasonably call into question the reliability of the information. Nevertheless, that is not the end of the story. The FAQ provides that the financial institution also must have risk-based policies and procedures that specify the type of information they will obtain and reasonably rely on to determine eligibility for exclusions. FAQ 24 may resolve another technical issue in the regulation. The exceptions to the definition of legal entity in the regulation refer back to the BSA CIP exemption provisions, which in turn, cross reference the Currency Transaction Reporting (CTR) exemption for banks when granting so-called Tier One exemptions. One category for the CTR exemption is “listed” entities, which includes NASDAQ listed entities, but excludes NASDAQ Capital Markets Companies, i.e., this category of NASDAQ listed entity is not subject to CIP or CTR Tier One exemptions. 31 C.F.R. § 1020.315(b)(4). This carve out was not discussed in the preamble to the CDD final regulation or in FAQ 24.The FAQ simply states: “[A]ny company (other than a bank) whose common stock or analogous equity interests are listed on the New York Stock Exchange, the American Stock Exchange (currently known as the NYSE American), or NASDAQ stock exchange” is excepted from the definition of legal entity. In any event, as with the FAQ 18 issue, it would appear that a technical correction is needed on this point, but, given the FAQ, it is unlikely that a financial institution would be criticized if it treated NASDAQ Capital Markets Companies as excepted legal entities. FAQs 32 and 33 end the speculation that the CDD regulation impacts CTR compliance. Consistent with FinCEN CTR guidance, under FAQ 32, the rule remains that, for purposes of CTR aggregation, the fact that two businesses share a common owner does not mean that a financial institution must aggregate the currency transactions of the two businesses for CTR reporting, except in the narrow situation where there is a reason to believe businesses are not being operated separately. Conclusion Financial institutions and their industry groups will likely continue to seek further guidance on the most problematic issues in the CDD regulation. It is our understanding that FinCEN and the bank regulators also will address compliance with the CDD regulation in the upcoming update to the FFIEC Bank Secrecy Act/Anti-Money Laundering Examination Manual. Covered financial institutions already have spent, and will continue to spend, significant time and resources to meet the complex regulatory requirements and anticipated regulatory expectations. In this flurry of activity to address regulatory risk, it is essential for financial institutions to continue to consider any money laundering risk of legal entity clients and that CDD not become simply mechanical. It is not only a matter of documenting and updating all of the right information about beneficial ownership and control, but financial institutions should continue to assess whether the ownership structure makes sense for the business or whether it is overly complex for the business type and purposely opaque. Also, it is important to consider whether it makes sense for a particular legal entity to be seeking a relationship with your financial institution and whether the legal entity is changing financial institutions voluntarily. CDD measures to address regulatory risk and money laundering risk overlap but are not equivalent.  FinCEN also issued FAQs on the regulation on July 19, 2016. https://www.fincen.gov/sites/default/files/2016-09/FAQs_for_CDD_Final_Rule_%287_15_16%29.pdf. FINRA issued guidance on the CDD regulation in FINRA Notice to Members 17-40 (Nov. 21, 2017). http://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-17-40.pdf.  The Notice of Final Rulemaking was published on May 11, 2016 and provided a two-year implementation period. 81 Fed. Reg. 29,398 (May 11, 2016). https://www.gpo.gov/fdsys/pkg/FR-2016-05-11/pdf/2016-10567.pdf. FinCEN made some slight amendments to the rule on September 29, 2017. https://www.fincen.gov/sites/default/files/federal_register_notices/2017-09-29/CDD_Technical_Amendement_17-20777.pdf The new regulations are set forth in the BSA regulations at 31 C.F.R. § 1010.230 (beneficial ownership requirements); 31 C.F.R. § 1020.210(a)(5) (banks); 31 C.F.R. § 1023.210(b)(5) (broker-dealers); 31 C.F.R. § 1024.210(b)(4) (mutual funds); and 31 C.F.R. § 1026.210(b)(5) (future commission merchants and introducing brokers in commodities).  The regulation does not clearly address the beneficial ownership requirements for a U.S. pooled investment vehicle operated or controlled by a registered SEC investment adviser. Pooled investment vehicles operated or advised by a “financial institution” regulated by a Federal functional regulator are not considered legal entities under the regulation. 31 C.F.R. § 1010.230(e)(2)(xi). An SEC registered investment adviser, however, is not yet a financial institution under the BSA. Under 31 C.F.R. § 1010.230(e)(3), a pooled investment vehicle that is operated or advised by a “financial institution” not excluded from the definition of legal entity is subject to the beneficial ownership control party prong. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work in the firm’s Financial Institutions practice group, or the authors: Stephanie L. Brooker – Washington, D.C. (+1 202-887-3502, firstname.lastname@example.org) Arthur S. Long – New York (+1 212-351-2426, email@example.com) Linda Noonan – Washington, D.C. (+1 202-887-3595, firstname.lastname@example.org) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Click for PDF On April 6, 2018, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) significantly enhanced the impact of sanctions against Russia by blacklisting almost 40 Russian oligarchs, officials, and their affiliated companies pursuant to Obama-era sanctions, as modified by the Countering America’s Adversaries Through Sanctions Act (“CAATSA”) of 2017. In announcing the sanctions, Treasury Secretary Steven Mnuchin cited Russia’s involvement in “a range of malign activity around the globe,” including the continued occupation of Crimea, instigation of violence in Ukraine, support of the Bashal al-Assad regime in Syria, attempts to subvert Western democracies, and malicious cyber activities. Russian stocks fell sharply in response to the new measures, and the ruble depreciated almost 5 percent against the dollar. Although this is not the first time that the Trump administration imposed sanctions against Russia, it is the most significant action taken to date. In June 2017, OFAC added 38 individuals and entities involved in the Ukraine conflict to OFAC’s list of Specially Designated Nationals (“SDNs”). The April 6 sanctions added seven Russian oligarchs and 12 companies they own or control, 17 senior Russian government officials, the primary state-owned Russian weapons trading company and its subsidiary, a Russian bank, to the SDN List. These designations include major, publicly-traded companies that have been listed on the London and Hong Kong exchanges and that have thousands of customers and tens of thousands of investors throughout the world. OFAC has never designated similar companies, and the potential challenges for global companies seeking to comply with OFAC measures are substantial. An SDN designation prohibits U.S. persons—including U.S. companies, U.S. financial institutions, and their foreign branches—from engaging in any transactions with the designees or with entities in which they hold an aggregate ownership of 50 percent or more. The designation of a small company in a regional market can be devastating for the company, but rarely would it impose meaningful collateral consequences on global markets or investors. In this case, sanctions on companies such as EN+ and RUSAL (amongst others) have already impacted a substantial portion of a core global commodity (the aluminum market) while also preventing further trades in their shares, a move that could harm pension funds, mutual funds, and other investors that have long held stakes worth billions of dollars. To minimize the immediate disruptions, OFAC issued two time-limited general licenses (regulatory exemptions) permitting companies and individuals to undertake certain transactions to “wind down” business dealings related to the designated parties. However, our assessment is that disruptions are inevitable and the size of the sanctions targets in this case means that the general licenses will have potentially limited effect in reducing dislocations. Background OFAC’s April 6 designations mark a clear change in tone from the Trump administration, which had initially resisted imposing the full force of CAATSA’s sanctions. For example, as we wrote in our 2017 Year-End Sanctions Update, CAATSA required the imposition of secondary sanctions on any person the President determined to have been engaging in “a significant transaction with a person that is part, or operates for or on behalf of, the defense or intelligence sectors of the Government Russia.” On the day such sanctions were to be imposed, State Department representatives provided classified briefings to Congressional leaders to explain their decision not to impose any such sanctions under CAATSA, namely because the Trump administration felt that CAATSA was already having an deterrent effect which removed any immediate need to impose sanctions. Section 241 of CAATSA also required OFAC to publish a report on January 29, 2018 identifying “the most significant senior foreign political figures and oligarchs in the Russian Federation,” (the “Section 241 List”). The Treasury Department issued the report shortly before midnight on the due date, publicly naming 114 senior Russian political figures and 96 oligarchs. Although the report did not result in any sanctions or legal repercussions, the public naming of such persons did cause confusion for those who sought to engage with them in compliance with U.S. law. However, most observers were highly critical of the list, claiming that it demonstrated that the Trump administration was failing to adequately address Congressional intent to punish Moscow. Interestingly, almost all of the oligarchs designated on April 6 originally appeared on the Section 241 List. Designations Included among the list of sanctioned parties were seven Russian oligarchs designated for being a Russian government official or operating in the energy sector of the Russian Federation economy, and 12 companies they own or control. In its press release, OFAC warned that the 12 companies identified as owned or controlled by the designated Russian oligarchs “should not be viewed as exhaustive, and the regulated community remains responsible for compliance with OFAC’s 50 percent rule.” This rule extends U.S. sanctions prohibitions to entities owned 50 percent or more, even if those companies are not themselves listed by OFAC. The opacity of ownership in the Russian economy makes the 50 percent rule very difficult to operationalize. In addition, OFAC designated 17 senior Russian government officials, a state-owned company and its subsidiary. The sanctioned individuals and entities, as described by OFAC, are provided in the following table. SDN Description Designated Russian Oligarchs 1. Vladimir Bogdanov Bogdanov is the Director General and Vice Chairman of the Board of Directors of Surgutneftegaz, a vertically integrated oil company operating in Russia. OFAC imposed sectoral sanctions on Surgutneftegaz pursuant to Directive 4 issued under E.O. 13662 in September 2014. 2. Oleg Deripaska Deripaska has said that he does not separate himself from the Russian state. He has also acknowledged possessing a Russian diplomatic passport, and claims to have represented the Russian government in other countries. Deripaska has been investigated for money laundering, and has been accused of threatening the lives of business rivals, illegally wiretapping a government official, and taking part in extortion and racketeering. There are also allegations that Deripaska bribed a government official, ordered the murder of a businessman, and had links to a Russian organized crime group. 3. Suleiman Kerimov Kerimov is a member of the Russian Federation Council. On November 20, 2017, Kerimov was detained in France and held for two days. He is alleged to have brought hundreds of millions of euros into France – transporting as much as 20 million euros at a time in suitcases, in addition to conducting more conventional funds transfers – without reporting the money to French tax authorities. Kerimov allegedly launders the funds through the purchase of villas. Kerimov was also accused of failing to pay 400 million euros in taxes. 4. Kirill Shamalov Shamalov married Putin’s daughter Katerina Tikhonova in February 2013 and his fortunes drastically improved following the marriage; within 18 months, he acquired a large portion of shares of Sibur, a Russia-based company involved in oil and gas exploration, production, processing, and refining. A year later, he was able to borrow more than one $1 billion through a loan from Gazprombank, a state-owned entity subject to sectoral sanctions pursuant to E.O. 13662. That same year, long-time Putin associate Gennady Timchenko, who is himself designated pursuant to E.O. 13661, sold an additional 17 percent of Sibur’s shares to Shamalov. Shortly thereafter, Kirill Shamalov joined the ranks of the billionaire elite around Putin. 5. Andrei Skoch Skoch is a deputy of the Russian Federation’s State Duma. Skoch has longstanding ties to Russian organized criminal groups, including time spent leading one such enterprise. 6. Viktor Vekselberg Vekselberg is the founder and Chairman of the Board of Directors of the Renova Group. The Renova Group is comprised of asset management companies and investment funds that own and manage assets in several sectors of the Russian economy, including energy. In 2016, Russian prosecutors raided Renova’s offices and arrested two associates of Vekselberg, including the company’s chief managing director and another top executive, for bribing officials connected to a power generation project in Russia. Designated Oligarch-Owned Companies 7. B-Finance Ltd. British Virgin Islands company owned or controlled by, directly or indirectly, Oleg Deripaska. 8. Basic Element Limited Basic Element Limited is based in Jersey and is the private investment and management company for Deripaska’s various business interests. 9. EN+ Group Owned or controlled by, directly or indirectly, Oleg Deripaska, B-Finance Ltd., and Basic Element Limited. EN+ Group is located in Jersey and is a leading international vertically integrated aluminum and power producer. This is a publicly traded company that has been listed, inter alia, on the London Stock Exchange. 10. EuroSibEnergo Owned or controlled by, directly or indirectly, Oleg Deripaska and EN+ Group. EuroSibEnergo is one of the largest independent power companies in Russia, operating power plants across Russia and producing around nine percent of Russia’s total electricity. 11. United Company RUSAL PLC Owned or controlled by, directly or indirectly, EN+ Group. United Company RUSAL PLC is based in Jersey and is one of the world’s largest aluminum producers, responsible for seven percent of global aluminum production. This is a publicly traded company that has been listed, inter alia¸ on the Hong Kong Stock Exchange. 12. Russian Machines Owned or controlled by, directly or indirectly, Oleg Deripaska and Basic Element Limited. Russian Machines was established to manage the machinery assets of Basic Element Limited. 13. GAZ Group Owned or controlled by, directly or indirectly, Oleg Deripaska and Russian Machines. GAZ Group is Russia’s leading manufacturer of commercial vehicles. 14. Agroholding Kuban Owned or controlled by, directly or indirectly, Oleg Deripaska and Basic Element Limited. 15. Gazprom Burenie, OOO Owned or controlled by Igor Rotenberg. Gazprom Burenie, OOO provides oil and gas exploration services in Russia. 16. NPV Engineering Open Joint Stock Company Owned or controlled by Igor Rotenberg. NPV Engineering Open Joint Stock Company provides management and consulting services in Russia. 17. Ladoga Menedzhment, OOO Owned or controlled by Kirill Shamalov. Ladoga Menedzhment, OOO is located in Russia and engaged in deposit banking. 18. Renova Group Owned or controlled by Viktor Vekselberg. Renova Group, based in Russia, is comprised of investment funds and management companies operating in the energy sector, among others, in Russia’s economy. Designated Russian State-Owned Firms 19. Rosoboroneksport State-owned Russian weapons trading company with longstanding and ongoing ties to the Government of Syria, with billions of dollars’ worth of weapons sales over more than a decade. Rosoboroneksport is being designated under E.O. 13582 for having materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services in support of, the Government of Syria. 20. Russian Financial Corporation Bank (RFC Bank) Owned by Rosoboroneksport. RFC Bank incorporated is in Moscow, Russia and its operations include deposit banking activities. Designated Russian Government Officials 21. Andrey Akimov Chairman of the Management Board of state-owned Gazprombank 22. Mikhail Fradkov President of the Russian Institute for Strategic Studies (RISS), a major research and analytical center established by the President of the Russian Federation, which provides information support to the Presidential Administration, Federation Council, State Duma, and Security Council. 23. Sergey Fursenko Member of the board of directors of Gazprom Neft, a subsidiary of state-owned Gazprom 24. Oleg Govorun Head of the Presidential Directorate for Social and Economic Cooperation with the Commonwealth of Independent States Member Countries. Govorun is being designated pursuant to E.O. 13661 for being an official of the Government of the Russian Federation. 25. Alexey Dyumin Governor of the Tula region of Russia. He previously headed the Special Operations Forces, which played a key role in Russia’s purported annexation of Crimea. 26. Vladimir Kolokoltsev Minister of Internal Affairs and General Police of the Russian Federation 27. Konstantin Kosachev Chairperson of the Council of the Federation Committee on Foreign Affairs 28. Andrey Kostin President, Chairman of the Management Board, and Member of the Supervisory Council of state-owned VTB Bank 29. Alexey Miller Chairman of the Management Committee and Deputy Chairman of the Board of Directors of state-owned company Gazprom 30. Nikolai Patrushev Secretary of the Russian Federation Security Council 31. Vladislav Reznik Member of the Russian State Duma 32. Evgeniy Shkolov Aide to the President of the Russian Federation 33. Alexander Torshin State Secretary – Deputy Governor of the Central Bank of the Russian Federation 34. Vladimir Ustinov Plenipotentiary Envoy to Russia’s Southern Federal District 35. Timur Valiulin Head of the General Administration for Combatting Extremism within Russia’s Ministry of Interior 36. Alexander Zharov Head of Roskomnadzor (the Federal Service for the Supervision of Communications, Information Technology, and Mass Media) 37. Viktor Zolotov Director of the Federal Service of National Guard Troops and Commander of the National Guard Troops of the Russian Federation All assets subject to U.S. jurisdiction of the designated individuals and entities, and of any other entities blocked by operation of law as a result of their ownership by a sanctioned party, are frozen, and U.S. persons are generally prohibited from dealings with them. OFAC’s Frequently Asked Questions (“FAQs”) make clear that if a blocked person owns less than 50 percent of a U.S. company, the U.S. company will not be blocked. However, the U.S. company (1) must block all property and interests in property in which the blocked person has an interest and (2) cannot make any payments, dividends, or disbursement of profits to the blocked person and must place them in a blocked account at a U.S. financial institution. Non-U.S. persons could face secondary sanctions for knowingly facilitating significant transactions for or on behalf of the designated individuals or entities. CAATSA strengthened the secondary sanctions measures that could be used to target such persons, although such measures typically carry less risk because as a matter of implementation OFAC traditionally warns those who may be transacting with parties that could subject them to secondary sanctions and provides them with an opportunity to cure. While this outreach and deterrence model of imposing secondary sanctions was developed under the Obama administration (and resulted in very few impositions of secondary sanctions), the Trump administration could theoretically change it and impose secondary sanctions without the traditional warning. However, that appears unlikely and the Trump administration has indicated that it will continue to provide warnings before imposing secondary sanctions. Two CAATSA provisions bear particular note as they are implicated by Friday’s actions: section 226, which authorizes sanctions on foreign financial institutions for facilitating a transaction on behalf of a Russian person on the SDN List, and section 228, which seeks to impose sanction on a person who “facilitates a significant transaction…for or on behalf of any person subject to sanctions imposed by the United States with respect to the Russian Federation.” OFAC has clarified that the section 228 provision extends to persons listed on either the SDN or the Sectoral Sanctions Identifications (“SSI”) List, as well as persons they may own or control pursuant to OFAC’s 50 percent rule. As we noted when CAATSA was passed, despite the mandatory nature of these sections, the President appears to retain the discretion to impose restrictions based upon whether he finds certain transaction significant or for other reasons. With the increase in the SDN list to include major players in global commodities such as EN+ or RUSAL, more companies around the world that rely on these companies could find themselves at least theoretically at risk of being sanctioned themselves. Companies should also consider this risk where there is reliance on material produced by any company in the Russian military establishment and sold by the Russian state arms company such as Rosoboronexport, which was also sanctioned. General Licenses In an effort to minimize the immediate disruptions to U.S. persons and global markets (especially given the sanctioning of major publicly traded corporations that have thousands of clients and investors throughout the world), OFAC issued General Licenses 12 and 13, permitting companies to undertake certain transactions and activities to “wind down” certain business dealings related to certain, listed designated parties. These General Licenses only cover U.S. persons, which has led some non-U.S. companies to inquire whether their ability to wind down operations with respect to the SDN companies would place them at risk for secondary sanctions (as they would be engaging with sanctioned parties and perhaps trigger the CAATSA provisions above). OFAC has noted in its FAQs that the U.S. Government would not find a transaction “significant” if a U.S. person would not need a specific license to undertake it. That is, it would seem that at least for the duration of the General Licenses a non-U.S. party can engage in similar wind down operations without risking secondary sanctions. General License 12, which expires June 5, 2018, authorizes U.S. persons to engage in transactions and activities with the 12 oligarch-owned designated entities that are “ordinarily incident and necessary to the maintenance or wind down of operations, contracts, or other agreements” related to these 12 entities (as well as those entities impacted by operation of OFAC’s 50 percent rule). This is a broader wind down provision than OFAC has issued in the past in that it allows not just “wind down” activities but also non-defined “maintenance” activities. Despite this breadth it is already uncertain how this General License will actually work in practice. Permissible transactions and activities include importation from blocked entities and broader dealings with them. However, no payments are allowed to be made to blocked entities–rather such payments can only be made to the blocked entities listed in General License 12 into blocked, interest-bearing accounts and reported to OFAC by June 18, 2018 (10 business days after the expiration of the license). It is not clear why a sanctioned party would wish to deliver goods and services to parties if the sanctioned party cannot be paid. In line with the FAQ noted above, for non-U.S. companies it would seem that in order to avoid secondary sanctions implications the same restrictions would apply–that is, continued transactions are permitted on a wind down basis, but transfer of funds to the SDN companies could be viewed as “significant” or otherwise sanctionable. Recognizing how broad the sanctions are and how far they may implicate subsidiaries of SDN companies inside the United States, OFAC’s FAQs clarify that General License 12 generally permits the blocked entities listed to pay U.S. persons their salaries, pension payments, or other benefits due during the wind down period. U.S. persons employed by entities that are not explicitly listed in General License 12—principally the designated Russian state-owned entities—do not have the benefit of this wind down period. OFAC FAQs note that such U.S. persons may seek authorization from OFAC to maintain or wind down their relationships with any such blocked entity, but make clear that continued employment or board membership related to these entities is prohibited. The implications of these restrictions are significant where, as is the case with the blocked entities listed in General License 12, U.S. subsidiaries exist and U.S. persons are involved throughout company operations. General License 13, which expires May 7, 2018, similarly allows transactions and activities otherwise prohibited under the April 6 sanctions. This license allows transactions and activities necessary to “divest or transfer debt, equity, or other holdings” in three designated Russia entities: EN+ Group PLC, GAZ Group, and United Company RUSAL PLC. Permitted transactions include facilitating, clearing, and settling transactions. General License 13, however, does not permit any divestment or transfer to a blocked person, including the three entities listed in General License 13. As with General License 12, transactions permitted under General License 13 must be reported to OFAC within 10 business days after the expiration of the license. Once again, it is uncertain how the General License will work in practice. Given the designations which have depressed the share prices of the sanctions parties it is unknown who might be willing to purchase the shares even if U.S. holders are permitted to sell them. Other Ramifications for Investors, Supply Chains, and Customers The April 6 sanctions raise other significant questions and practical challenges for U.S. and non-U.S. companies, with particular risks for investors as well as the manufacturers, suppliers, and customers of the SDN companies. Investors and fund managers will need to conduct significant diligence into the participants and ownership structures of their funds, including fund limited partners, to determine whether sanctioned persons or entities are involved. Moreover, for those who have seen the value of any assets tied to these companies decline significantly, they are allowed to continue to try sell their assets to non-U.S. persons. However, given the challenge in finding buyers and evidence that certain financial institutions and brokers are already refusing to engage in any trades (even during the wind down period), the investment community needs to potentially prepare for long-term holding of blocked assets (by setting up sequestered accounts). For those within the supply chains of sanctioned companies, from suppliers of commodities to finished goods, as well as customers of sanctioned companies, the concern will be to potentially replace key commercial relationships which will become increasingly difficult (if not prohibited) to maintain. For companies that have relied on RUSAL, for example, as a source of aluminum or as a customer for their goods they will potentially need to find replacements. While aluminum is not in short supply globally, in certain jurisdictions RUSAL has a commanding position and even a monopoly. It is unclear how companies that seek to be compliant with OFAC regulations will navigate a world in which RUSAL has been a primary or secondary supplier (and there is no clear way to avoid such engagement so long as the company seeks to be active in that jurisdiction and in need of aluminum). Moreover, it is not just U.S. person counterparties that are likely to be affected by prohibitions on dealing with sanctioned parties. In line with the FAQ noted above, if non-U.S. companies were to make payments to the sanctioned companies for deliveries, these could be deemed “significant transactions” and could make the non-U.S. companies, themselves, the target of OFAC designations and/or secondary sanctions. One option—reportedly pursued by one major trading company—is to declare force majeure on contracts with Rusal. As noted above, relief contemplated by General Licenses 12 and 13 may be operationally difficult to implement. The sanctions apply to companies 50 percent owned or controlled by blocked parties. Companies will need to undertake, under a short time line, significant due diligence to determine whether any such companies are involved in its operations. The wind down process may be further complicated by any Russian response to the U.S. sanctions. What Happens Next? The April 6 sanctions are likely not the end of the story. The next steps to watch include: 1.) Potential Russian Retaliation: During an address to the State Duma on April 11, Prime Minister Dmitry Medvedev said, for example, that Russia should consider targeting U.S. goods or goods produced in Russia by U.S. companies when considering a possible response. Any such measures could implicate further U.S. business dealings with Russian entities, including the blocked entities. 2.) Changing Ownership and Structure of Sanctioned Parties: Given that the sanctioned companies were listed due to their ownership/control by sanctioned persons (pursuant to the 50 percent rule) there have already been moves to dilute their ownership and thus potentially have the companies de-listed. While possible, it is important to note that because the companies were explicitly listed by OFAC (and now appear on the SDN list), any reduction in ownership or control will not result in an automatic de-listing. Rather, OFAC will need to process these changes and formally de-list the entities before they can be treated as non-sanctioned. OFAC could opt not to de-list, or could decide to list the companies on other bases. Regardless the process will undoubtedly take some time. We note that at least one engineering firm whose stock was held by a designated entity has already obtained a license to complete the transfer of these shares; this is helpful precedent for any company impacted but only tangentially related to the designated entities. Sanctioned entities have also changed their board membership in response to the U.S. sanctions. On Monday, April 11, for example, the entire board at Renova Management AG, the Swiss subsidiary of the Renova Group, was dismissed after Renova Group’s designation. 3.) European Follow On Restrictions: The shock of many of Europe’s major powers following the poisoning of Sergei and Yulia Skripal in Salisbury in early March and the resulting mass expulsion of Russian diplomats from European capitals suggests that sanctions may be next. Core European U.S. allies were likely notified in advance of the April 6 measures. In the run up to sanctions in 2014, Washington and Brussels worked very closely to institute parallel measures against Moscow. While that unity has broken down under the Trump administration, especially since CAATSA was passed in August, it would appear as though some European sanctions are liking in the offing. 4.) OFAC FAQs/Licenses and Potentially New Measures: Due to the complexity of the April 6 measures, we expect that OFAC will issue additional FAQs and potentially revisions to General Licenses 12 and 13 (or new General Licenses) in the near term to clear up questions and further calibrate response. Depending upon next steps from Russia and Europe we may see additional sanctions as well. Secretary of State-designate Mike Pompeo’s statement that the United States “soft” policy toward Russia is over suggests as much. Unfortunately, there is no clear path towards a de-escalation in Washington-Moscow tensions. When the U.S. first issued sanctions against Russia in response to the Crimea incursion in 2014 the sanctions “off-ramp” was very clearly defined: if Russia altered its behavior in Crimea/Ukraine there was a way that sanctions could be removed. Since 2014, as Secretary Mnuchin noted, Russia’s activities have exacerbated in scope and territory to include support for the Bashar regime in Syria, election meddling, cyber-attacks, and the nerve agent attack in the United Kingdom. The breadth and boldness of this activity makes it even more unlikely that Russia will comply with the West’s wishes and thus even less likely that the sanctions would be removed or even reduced at any point in the near term. For its part, bipartisan Congressional leadership expressed broad support for the Trump administration’s actions—however, Congress will likely demand more from the President in the near term. Perhaps eager to placate Congress and dispel any notion that he is “soft” on Russia and buffeted by external circumstances ranging from any potential attack in Syria to the investigation by Robert Mueller, the President may impose still harsher measures on Moscow.  Press Release, U.S. Department of the Treasury, Treasury Designates Russian Oligarchs, Officials, and Entities in Response to Worldwide Malign Activity (Apr. 6, 2018), available at https://home.treasury.gov/news/featured-stories/treasury-designates-russian-oligarchs-officials-and-entities-in-response-to.  Natasha Turak, US sanctions are finally proving a ‘major game changer’ for Russia, CNBC, (Apr. 10, 2018) available at https://www.cnbc.com/2018/04/10/us-moscow-sanctions-finally-proving-a-major-game-changer-for-russia.html.  Press Release, U.S. Dep’t of the Treasury, Treasury Designates Individuals and Entities Involved in the Ongoing Conflict in Ukraine (June 20, 2017), available at https://www.treasury.gov/press-center/press-releases/Pages/sm0114.aspx. Designated persons and entities included separatists and their supporters; entities operating in and connected to the Russian annexation of Crimea; entities owned or controlled by, or which have provided support to, persons operating in the Russian arms or materiel sector; and Russian government officials.  U.S. Department of the Treasury, supra, n. 1.  Id.  CAATSA, Title II, § 231 (a). Specifically, CAATSA Section 231(a) specified that the President shall impose five or more of the secondary sanctions described in Section 235 with respect to a person the President determines knowingly “engages in a significant transaction with a person that is part of, or operates for or on behalf of, the defense or intelligence sectors of the Government of the Russian Federation, including the Main Intelligence Agency of the General Staff of the Armed Forces of the Russian Federation or the Federal Security Service of the Russian Federation.” The measures that could be imposed under Section 231 are discretionary in nature. The language of the legislation is somewhat misleading in this regard. Section 231 is written as a mandatory requirement—providing that the President “shall impose” various restrictions. However, the legislation itself—and the October 27, 2017 guidance provided by the State Department—makes clear that secondary sanctions are only imposed after the President makes a determination that a party “knowingly” engaged in “significant” transactions with a listed party. The terms “knowingly” and “significant” have imprecise meanings, even under the State Department guidance. OFAC Ukraine-/Russia-related Sanctions FAQs (“OFAC FAQs”), OFAQ No. 545, available at https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#567.  Press Release, U.S. Dep’t of State, Background Briefing on the Countering America’s Adversaries Through Sanctions Act (CAATSA) Section 231 (Jan. 30, 2018), available at https://www.state.gov/r/pa/prs/ps/2018/01/277775.htm.  CAATSA, Title II, § 241.  See U.S. Dep’t of the Treasury, Report to Congress Pursuant to Section 241 of the Countering America’s Adversaries Through Sanctions Act of 2017 Regarding Senior Foreign Political Figures and Oligarchs in the Russian Federation and Russian Parastatal Entities (Unclassified) (Jan. 29, 2018), available at https://www.scribd.com/document/370313106/2018-01-29-Treasury-Caatsa-241-Final.  See, e.g., Press Release, U.S. Dep’t of the Treasury, Treasury Releases CAATSA Reports, Including on Senior Foreign Political Figures and Oligarchs in the Russian Federation (Jan. 29, 2018), available at https://home.treasury.gov/news/press-releases/sm0271.  The one exception is Igor Rotenberg. Although Igor Rotenberg did not appear on the Section 241 List, his father and uncle were included. According to the April 6 OFAC announcement, Igor Rotenberg acquired significant assets from his father, Arkady Rotenberg, after OFAC designated the latter in March 2014. Specifically Arkady Rotenberg sold Igor Rotenberg 79 percent of the Russian oil and gas drilling company Gazprom Burenie. Igor Rotenberg’s uncle, Boris Rotenberg, owns 16 percent of the company. Like his brother Arkady Rotenberg, Boris Rotenberg was designated in March 2014.  OFAC FAQ No. 573.  CAATSA, Title II, §228.  OFAC FAQ No. 546. In its implementing guidance, OFAC confirmed that Section 228 extends to SDNs and SSI entities but clarified that it would not deem a transaction “significant” if U.S. persons could engage in the transaction without the need for a specific license from OFAC. In other words, only transactions prohibited by OFAC—specifically, transactions with SDNs and/or transactions with SSI entities that are prohibited by the sectoral sanctions—will “count” as significant for purposes of Section 228. OFAC also noted that even a transaction with an SSI that involves prohibited debt or equity would not automatically be deemed “significant”—it would need to also involve “deceptive practices” and OFAC would assess this criteria on a “totality of the circumstances” basis.  OFAC FAQ No. 574.  General License 12; OFAC FAQ No. 569.  See also OFAC FAQ Nos. 567-568.  See also OFAC FAQ Nos. 570-571.  Russia’s Renova says board at its Swiss subsidiary dismissed due to sanctions, Reuters (Apr. 11, 2018), available at https://uk.reuters.com/article/usa-russia-sanctions-renova/russias-renova-says-board-at-its-swiss-subsidiary-dismissed-due-to-sanctions-idUKR4N1NE02P.  Russia ready to prop Up Deripaska’s Rusal as US sanctions bite, Financial Times (Apr. 11, 2018), available at https://www.ft.com/content/4904f6d4-3d97-11e8-b7e0-52972418fec4.  Patricia Zengerle, Lesley Wroughton, As Pompeo signals hard Russia line, lawmakers want him to stand on his own, Reuters (Apr. 12, 2018), available at https://www.reuters.com/article/us-usa-trump-pompeo/as-pompeo-signals-hard-russia-line-lawmakers-want-him-to-stand-on-his-own-idUSKBN1HJ0HO. The following Gibson Dunn lawyers assisted in preparing this client update: Adam Smith, Judith Alison Lee, Christopher Timura, Stephanie Connor, and Courtney Brown. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s International Trade Group: United States: Judith Alison Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, email@example.com) Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, firstname.lastname@example.org) Jose W. Fernandez – New York (+1 212-351-2376, email@example.com) Marcellus A. McRae – Los Angeles (+1 213-229-7675, firstname.lastname@example.org) Daniel P. Chung – Washington, D.C. (+1 202-887-3729, email@example.com) Adam M. Smith – Washington, D.C. (+1 202-887-3547, firstname.lastname@example.org) Christopher T. Timura – Washington, D.C. (+1 202-887-3690, email@example.com) Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, firstname.lastname@example.org) Kamola Kobildjanova – Palo Alto (+1 650-849-5291, email@example.com) Courtney M. Brown – Washington, D.C. (+1 202-955-8685, firstname.lastname@example.org) Laura R. Cole – Washington, D.C. (+1 202-887-3787, email@example.com) Europe: Peter Alexiadis – Brussels (+32 2 554 72 00, firstname.lastname@example.org) Attila Borsos – Brussels (+32 2 554 72 10, email@example.com) Patrick Doris – London (+44 (0)207 071 4276, firstname.lastname@example.org) Penny Madden – London (+44 (0)20 7071 4226, email@example.com) Mark Handley – London (+44 (0)207 071 4277, firstname.lastname@example.org) Benno Schwarz – Munich (+49 89 189 33 110, email@example.com) Richard Roeder – Munich (+49 89 189 33-160, firstname.lastname@example.org) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Click for PDF In 2017, several Latin American countries stepped up enforcement and legislative efforts to address corruption in the region. Enforcement activity regarding alleged bribery schemes involving construction conglomerate Odebrecht rippled across Latin America’s business and political environments during the year, with allegations stemming from Brazil’s ongoing Operation Car Wash investigation leading to prosecutions in neighboring countries. Simultaneously, governments in Latin America have made efforts to strengthen legislative regimes to combat corruption, including expanding liability provisions targeting foreign companies and private individuals. This update focuses on five Latin American countries (Mexico, Brazil, Argentina, Colombia, and Peru) that have ramped up anti-corruption enforcement or passed legislation expanding anti-corruption legal regimes. New laws in the region, coupled with potentially renewed prosecutorial vigor to enforce them, make it imperative for companies operating in Latin America to have robust compliance programs, as well as vigilance regarding enforcement trends impacting their industries. 1. Mexico Notable Enforcement Actions and Investigations In 2017, Petróleos Mexicanos (“Pemex”) disclosed that Mexico’s Ministry of the Public Function (SFP) initiated eight administrative sanctions proceedings in connection with contract irregularities involving Odebrecht affiliates. The inquiries stem from a 2016 Odebrecht deferred prosecution agreement (“DPA”) with the U.S. Department of Justice (“DOJ”). According to the DPA, Odebrecht made corrupt payments totaling $10.5 million USD to Mexican government officials between 2010 and 2014 to secure public contracts. In September 2017, Mexico’s SFP released a statement noting the agency had identified $119 million pesos (approx. $6.7 million USD) in administrative irregularities involving a Pemex public servant and a contract with an Odebrecht subsidiary. In December 2017, Mexican law enforcement authorities arrested a former high-level official in the political party of Mexican President Enrique Peña Nieto. The former official, Alejandro Gutiérrez, allegedly participated in a broad scheme to funnel public funds to political parties. While the inquiry has not yet enveloped the private sector like Brazil’s Operation Car Wash investigation, the prosecution could signal a new willingness from Mexican authorities to take on large-scale corruption cases. The allegations are also notable due to their similarity to the allegations in Brazil’s Car Wash investigation. In both inquiries, funds were allegedly embezzled from state coffers for the benefit of political party campaigns. Legislative Update Mexico’s General Law of Administrative Responsibility (“GLAR”)—an anti-corruption law that provides for administrative liability for corporate misconduct—took effect on July 19, 2017. The GLAR establishes administrative penalties for improper payments to government officials, bid rigging in public procurement processes, the use of undue influence, and other corrupt acts. The law reinforces a series of Mexican legal reforms from 2016 that expanded the scope of the country’s existing anti-corruption laws and created a new anti-corruption enforcement regime encompassing federal, state, and municipal levels of government. Among the GLAR’s most significant changes are provisions that target corrupt activities by corporate entities and create incentives for companies to implement compliance programs to avoid or minimize corporate liability. The GLAR applies to all Mexican public officials who commit what the law calls “non-serious” and “serious” administrative offenses. Non-serious administrative offenses include the failure to uphold certain responsibilities of public officials, as defined by the GLAR (e.g., cooperating with judicial and administrative proceedings, reporting misconduct, etc.). Serious administrative offenses include accepting (or demanding) bribes, embezzling public funds, and committing other corrupt acts, as defined by the GLAR. The GLAR also applies to private persons (companies and individuals) who commit acts considered to be “linked to serious administrative offenses.” These offenses include the following: Bribery of a public official (directly or through third parties); Participation in any federal, state, or municipal administrative proceedings from which the person has been banned for past misconduct; The use of economic or political power (be it actual or apparent) over any public servant to obtain a benefit or advantage, or to cause injury to any other person or public official; The use of false information to obtain an approval, benefit, or advantage, or to cause damage to another person or public servant; Misuse and misappropriation of public resources, including material, human, and financial resources; The hiring of former public officials who were in office the prior year, acquired confidential information through their prior employment, and give the contractor a benefit in the market and an advantage against competitors; and Collusion with one or more private parties in connection with obtaining improper benefits or advantages in federal, state, or municipal public contracting processes. Notably, the collusion provisions apply extraterritorially and ban coordination in “international commercial transactions” involving federal, state, or municipal public contracting processes abroad. The GLAR provides administrative penalties for violations committed by both physical persons and legal entities. Physical persons who violate the GLAR can be subjected to: (1) economic sanctions (up to two times the benefit obtained, or up to approximately $597,000 USD); (2) preclusion from participating in public procurements and projects (for a maximum of eight years); and/or (3) liability for any damages incurred by any affected public entities or governments. Legal entities, on the other hand, can be fined up to twice the benefit obtained, or up to approximately $5,970,000 USD, precluded from participating in public procurements for up to ten years, and held liable for damages. The GLAR also creates two additional penalties for legal entities: suspension of activities within the country for up to three years, and dissolution. Article 81 limits the ability to enforce these two stiffer penalties to situations where (1) there was an economic benefit and the administration, compliance department, or partners were involved, or (2) the company committed the prohibited conduct in a systemic fashion. The GLAR’s penalties for physical and legal persons are administrative, rather than criminal. Under Article 25 of the GLAR, Mexican authorities can take into account a company’s robust compliance “Integrity Program” in determining and potentially mitigating corporate liability under the GLAR. The law requires the Integrity Program to have several elements, including clearly written policies and adequate review, training, and reporting systems. The GLAR contains a self-reporting incentive that provides for up to a seventy percent reduction of penalties for those who report past or ongoing misconduct to an investigative authority. As previously noted, the GLAR’s non-monetary sanctions include preclusion from participating in public procurements and projects for up to eight years (for physical persons) or ten years (for companies). If a person subject to a preclusion sanction self-reports GLAR violations, the preclusion sanction can be reduced or completely lifted by the Mexican authorities. Requirements for obtaining a reduction of penalties through self-reporting include: (1) involvement in an alleged GLAR infraction and being the first to contribute information that proves the existence of misconduct and who committed the violations; (2) refraining from notifying other suspects that an administrative responsibility action has been initiated; (3) full and ongoing cooperation with the investigative authorities; and (4) suspension of any further participation in the alleged infraction. Notably, other participants in the alleged misconduct who might be the second (or later) to disclose information could receive up to a fifty percent penalty reduction, provided that they also comply with the above requirements. If a party confesses information to the investigative authorities after an administrative action has already begun, that party could potentially receive a thirty percent reduction of penalties. For a full analysis of the GLAR, see https://www.gibsondunn.com/mexicos-new-general-law-of-administrative-responsibility-targets-corrupt-activities-by-corporate-entities/. 2. Brazil Following the success of the massive Operation Car Wash investigation into corruption involving the country’s energy sector, Brazilian regulators launched or advanced inquiries in 2017 impacting companies in the healthcare, meatpacking, and financial industries, among others. Brazilian authorities have also continued to garner international accolades for their anti-corruption work, with Brazil’s federal prosecution service (“Ministério Público Federal” or “MPF”) winning Global Investigation Review’s “Enforcement Agency or Prosecutor of the Year” award for its 2017 Operation Car Wash efforts. This award follows a 2016 recognition of the Car Wash Taskforce by Transparency International. The robust enforcement environment in Brazil is also reflected in this year’s public company disclosures. In 2017, thirty-four companies disclosed information regarding new or ongoing inquiries involving Brazil, while disclosures regarding other Latin American nations numbered in the single digits. Notable Enforcement Actions and Investigations A. Operation Car Wash (Operação Lava Jato) Operation Car Wash, the multi-year investigation into allegations of corruption related to contracts with state-owned oil company Petrobras, has remained a focus area for the Brazilian authorities. The investigation opened four new phases in 2017. Notably, in October 2017, Judge Sergio Moro—the lead jurist for the investigation—stated at a public event that the Car Wash inquiry was “moving toward the final phase.” Judge Moro did not, however, provide a potential date for closing the investigation, stating, “a good part of the work is done, but this does not mean that work does not remain.” To date, Brazilian authorities investigating the Car Wash allegations have obtained 177 convictions, with sentences totaling more than 1,750 years in prison. B. Operation Zealots (Operação Zelotes) In 2017, Brazilian authorities launched new phases of Operation Zealots, a multi-year investigation into alleged payments to members of Brazil’s Administrative Board of Tax Appeals. The investigation began as an inquiry into one of the largest alleged tax evasion schemes in the country’s history. Large companies and banks, including Bradesco, Santander, and Safra, allegedly paid bribes to members of the appeals board in exchange for a reduction or waiver of taxes owed. Operation Zealots was launched in 2015 and initially implicated companies in the financial sector. The scope of the investigation has expanded in the last two years to also reach companies in the automobile sector and a Brazilian steel distributor. Notably, in 2017, a criminal complaint was filed against former Brazilian President Luiz Inácio Lula da Silva alleging that he received payments in exchange for securing tax benefits for automobile companies. The total amount of evaded taxes through various alleged Operation Zealots schemes is estimated to reach nearly $19 billion BRL (approx. $5.8 billion USD). C. Operation Weak Flesh (Operação Carne Fraca) In early 2017, the Brazilian Federal Police launched an investigation into the alleged bribery of government food sanitation inspectors called Operation Weak Flesh. The operation was reported to be one of the largest in the history of the Federal Police, with Brazilian authorities executing 194 search-and-seizure warrants. Dozens of inspectors are accused of taking bribes in exchange for allowing the sale of rancid products, falsifying export documents, overlooking illicit additives, and failing to inspect meatpacking plants. Authorities are investigating more than thirty meatprocessing companies, including giants such as JBS S.A. and BRF S.A. D. Operation Bullish (Operação Bullish) On May 12, 2017, the Federal Police launched Operation Bullish, an investigation into fraud and irregularities in the manner by which Brazil’s National Bank for Economic and Social Development approved investments of over $8 billion BRL (approx. $2.4 billion USD) for the expansion of the Brazilian meatpacking company JBS. While JBS claims that it did not receive any favors from the bank’s investment arm (“BNDESPar”), Brazil’s Federal Court of Accounts (“TCU”) claims that the bank approved “risky” investments for JBS with inadequate time for analysis. The Federal Police further claim that although BNDESPar approved funds for a JBS acquisition of a foreign company, the acquisition never occurred and the investment funds were never returned. E. Operation Mister Hyde (Operação Mister Hyde) Brazilian authorities also continued inquiries in the healthcare space as part of a multi-year investigation into an alleged “Prosthetics Mafia” of doctors and medical instrument suppliers that rigged the bidding process for surgical supplies. Investigators alleged that in exchange for payments, doctors would identify patients for unnecessary surgeries and ensure that the surgical instruments used in the operations came from a specified provider. The inquiry stems from a 2015 congressional investigation. In February 2017, it was reported that three employees from one of the companies under investigation, TM Medical, agreed to plea bargains with the federal authorities. Settlements and Leniency Agreements UTC Engenharia. In July 2017, UTC Engenharia signed a leniency agreement with the Brazilian government and agreed to pay $574 million BRL (approx. $175 million USD), including a fine, damages, and unjust enrichment. UTC signed the agreement with Brazil’s Comptroller General of the Union (“CGU”) and Brazil’s Federal Attorney General’s Office. Under the agreement, UTC must adopt an integrity program and pay its fine within twenty-two years. According to the Brazilian government, the agreement reflects “the basic pillars enumerated by the two federal agencies in the negotiations, that is, speed in obtaining evidence, identification of others involved in the crimes, cooperation with investigations, and commitment to the implementation of effective integrity mechanisms.” Notably, according to the press release, the implementation of UTC’s integrity program “will be monitored by the CGU, which can perform inspections at the company and request access to any documents and information necessary.” Rolls-Royce plc. In January 2017, Rolls-Royce settled allegations that the company offered, paid, or failed to prevent bribes involving the sale of engines, energy systems, and related services in Brazil and five other foreign jurisdictions. According to charging documents, between 2003 and 2013, Rolls-Royce allegedly made commission payments to an intermediary while knowing that portions of the payments would be paid to officials at Brazil’s state-owned oil company Petrobras. Rolls-Royce’s intermediary allegedly made more than $1.6 million BRL (approx. $485,700 USD) in corrupt payments to obtain contracts for supplying equipment and long-term service agreements. As a part of a global settlement with DOJ, Britain’s Serious Fraud Office, and Brazil’s Ministério Público Federal, Rolls-Royce agreed to pay $800 million USD total, with $25.5 million USD of that settlement being paid to the Brazilian authorities. SBM Offshore N.V. In November 2017, SBM settled allegations with DOJ that the company made payments to foreign officials in Brazil, Angola, Equatorial Guinea, Kazakhstan, and Iraq. According to the DPA, SBM used a sales agent to provide payments and hospitalities to Petrobras executives to secure an improper advantage in business with the state-owned company. SBM agreed to pay a $238 million USD criminal fine. DOJ took into account overlapping conduct prosecuted by other jurisdictions when calculating SBM’s fine, including the company’s ongoing negotiations with the MPF and a $240 million USD settlement with the Dutch authorities. The government’s press release also stated that DOJ was “grateful to Brazil’s MPF” and authorities in the Netherlands and Switzerland “for providing substantial assistance in gathering evidence during [the] investigation.” Braskem/Odebrecht. In December 2016, Brazilian construction conglomerate Odebrecht and its petrochemical production subsidiary, Braskem, resolved bribery charges with authorities in Brazil, Switzerland, and the United States. At the time of the 2016 settlement, the DOJ/SEC segment of the multibillion-dollar resolution was $419 million USD. The settlement agreement did note, however, that Odebrecht represented it could pay no more than $2.6 billion USD in penalties. The agreement further noted that the Brazilian and U.S. authorities would conduct an independent analysis of Odebrecht’s representation. According to an April 2017 sentencing memorandum filed with the court, the U.S. and Brazilian authorities analyzed Odebrecht’s ability to pay the proposed penalty and determined that Odebrecht was indeed unable to pay a total criminal penalty in excess of $2.6 billion USD. The sentencing memorandum noted the parties agreed that Odebrecht would therefore pay a reduced fine of $93 million USD to the U.S. government. Legislative Updates and Agency Guidance State-Level Anti-Corruption Law. In late 2017, the state of Rio de Janeiro passed an anti-corruption law requiring companies contracting with the state to have compliance programs. The law applies to companies and individuals, including foreign companies with “headquarters, subsidiaries, or representation in Brazil.” While the Clean Company Act takes a company’s compliance program into consideration in the application of sanctions, Rio de Janeiro’s law goes one step further and requires companies to have programs in place before contracting with the state. Ten Measures Against Corruption. An initiative from Brazil’s Ministério Público Federal to strengthen anti-corruption laws has yet to pass both houses of Brazil’s legislative branch. The initiative—called the “Ten Measures Against Corruption”—was first announced by the MPF in 2015. The proposal was introduced to Congress as a public initiative in 2016 after it received more than 1.7 million signatures of support from the public. The measures propose changes in corruption laws and criminal proceedings that would make the judiciary and prosecutor’s office more transparent, criminalize unjust enrichment of civil servants, hold political parties liable for accepting undeclared donations, and increase penalties for corrupt acts. Consideration of the proposal was halted in the Senate in 2017 after public outrage in response to the lower Congress’s addition of a provision that would impose harsh penalties on the judiciary and federal prosecutors for “abuse of authority.” Operation Car Wash prosecutor Deltan Dallagnol claimed that the House’s amendments “favored” white collar crimes and undermined the proposal’s purpose. Ministério Público Federal Leniency Agreement Guidance. In August 2017, the Ministério Público Federal issued guidance for prosecutors negotiating leniency agreements. The guidance provides insights into the process Brazil’s prosecutors use for negotiating such agreements and the expectations for collaborators. One section of the guidance, for example, states that negotiations should be conducted by “more than one member of the MPF” and preferably by a criminal and administrative prosecutor for the agency. The guidance also notes the possibility that the negotiations could take place together with other Brazilian authorities, including the CGU [the chief regulator of the Clean Company Act], the Federal Attorney General’s Office (“AGU”), the chief anti-trust regulator, and the TCU. The guidance also notably details obligations of collaborators in leniency agreements, including: Communicating relevant information and proof (time frames, locations, etc.); Ceasing illicit conduct; Implementing a compliance program and submitting to external audit, at the company’s expense; Collaborating fully with the investigations during the life of the agreement and always acting with honesty, loyalty, and good faith, without reservation; Paying applicable fines and damages; and Declaring that all information supplied is correct and accurate, under the penalty of rescission of the leniency agreement. 3. Argentina Notable Enforcement Actions and Investigations A. Investigation into President Mauricio Macri Beginning in 2016 and continuing throughout 2017, federal prosecutors in Argentina launched investigations concerning current President Mauricio Macri. While Macri was elected on promises to combat corruption in Argentina, his family’s extensive business holdings have been scrutinized by Argentine authorities in connection with various influence trafficking and money laundering probes. An investigation opened in April 2017, for example, focuses on the grant of airline routes to a company connected to Macri’s father. Argentine prosecutors are also probing allegations that a government official received payments from construction conglomerate Odebrecht in connection with renewing a public contract. At the time of the alleged payments, Odebrecht was a participant in a consortium with a company connected to Macri’s cousin. B. Investigation into Former President Cristina Fernández de Kirchner In April 2017, former President Cristina Fernández de Kirchner was indicted in connection with allegations that she led a scheme to launder funds misappropriated from public coffers through a family-owned business. The charges represent the second indictment filed against Kirchner since she left office more than two years ago. In December 2016, charges were brought against Kirchner alleging that she led a criminal organization that attempted to illegally benefit its members by awarding public contracts to construction company Austral Construcciones. In a separate investigation, a judge ordered Kirchner’s arrest in connection with allegations that she covered up possible Iranian involvement in the 1994 bombing of a Jewish community center in Buenos Aires in exchange for a potentially lucrative trade deal. Other former high-level employees in Kirchner’s government have been arrested for unjust enrichment, including Vice President Amado Boudou and former planning minister Julio de Vido. Legislative Update In November 2017, Argentina’s Congress passed new legislation imposing criminal liability on corporations for bribery (national and transnational), influence peddling, unjust enrichment of public officials, falsifying balance sheets and reports, and other designated offenses. The bill, called the Law on Corporate Criminal Liability, applies to both Argentine and multinational companies domiciled in the country. The law went into effect on March 1, 2018. Under the bill, legal entities can be held liable for bribery and other misconduct carried out directly or indirectly, with the company’s intervention, or in the company’s name, interest, or benefit. Legal entities can also be held liable if the company ratifies the initially unauthorized actions of a third party. The bill states that legal entities are not held liable, however, if the physical person who committed the misconduct acted “for his exclusive benefit, and without providing any advantage” for the company. The bill also imposes successor liability on parent companies in mergers, acquisitions, and other corporate restructurings. The bill applies to transnational bribery for acts committed by Argentine citizens and entities that are domiciled in Argentina. The bill imposes monetary and non-monetary sanctions, including: Monetary fines from two to five times the benefit that was (or could have been) obtained by the company, Complete or partial suspension of activities for up to ten years, Suspension for up to ten years from participating in public bids, contracts, or any other activity linked to the state, and Dissolution and liquidation of the corporate person when the entity was created solely for the purposes of committing misconduct, or when misconduct constituted the principal activities of the entity. Legal entities can be exempted from criminal liability where the company (1) self-reported misconduct detected through its own efforts and internal investigation, (2) implemented an adequate internal control and compliance system before the misconduct occurred, and (3) returned undue benefits obtained through the misconduct. The bill also contains provisions allowing for Argentina’s public prosecutor’s office, the Ministério Público Fiscal, to enter into collaboration agreements with legal entities. The agreements require legal entities to provide information regarding the misconduct, pay the equivalent of half the minimum monetary fine imposed under the law, and comply with other conditions of the agreement (including, but not limited to, implementing a compliance program). Minimal requirements for compliance programs consistent with the bill include: A code of ethics or conduct, or the existence of integrity policies and procedures applicable to all directors, administrators, and employees that prevent the commission of the crimes contemplated by the law, Specific rules and procedures to prevent wrongdoing in the context of tenders and bidding processes in the execution of administrative contracts, or in any other interaction with the public sector, and Periodic trainings on the compliance program for directors, administrators, and employees. The law also notes that a compliance program may include additional elements, including, among others: Periodic risk assessments, Visible and unequivocal support of the program from upper management, Misconduct-reporting channels that are open to third parties and adequately defined, Anti-retaliation policies, Internal investigation systems, Due diligence processes for M&A transactions, Monitoring and evaluation of the effectiveness of the compliance program, and Designation of an employee responsible for the coordination and implementation of the program. The compliance program components listed in the law are notably similar to elements of effective compliance programs delineated by DOJ, the SEC, and Mexico’s General Law of Administrative Responsibility. 4. Colombia Notable Enforcement Actions and Investigations A. Odebrecht Fallout According to a December 2016 deferred prosecution agreement with DOJ, Odebrecht made more than $11 million USD in corrupt payments to government officials in Colombia to secure public works contracts. In the wake of this settlement with U.S. authorities and Brazil’s multi-year investigation into Odebrecht’s dealings, Colombian prosecutors have announced inquiries into congressional involvement in the allegations and have arrested former Colombian senator Otto Bula for allegedly taking $4.6 million USD in bribes from the company. Odebrecht allegedly paid Bula to ensure that a contract for the construction of the Ocaña-Gamarra highway included higher-priced tolls that would benefit the company. Odebrecht also allegedly made $6.5 million USD in payments to former Vice Minister of Transportation Gabriel García Morales in exchange for a contract to construct a section of the Ruta del Sol highway. B. Reficar Oil Refinery In 2017, Colombian authorities brought corruption charges against executives from an American engineering firm, Chicago Bridge & Iron Company (“CB&I”), in connection with the Refineria de Cartagena (“Reficar”) oil refinery. The Reficar oil refinery is a subsidiary of Colombia’s state-owned oil company, Ecopetrol. Colombian authorities charged CB&I and Reficar executives with various corruption charges, including unjust enrichment, misappropriation of funds, and embezzlement. According to the Colombian authorities, Reficar executives directed contracts to CB&I without abiding by legal requirements for public bidding. The Colombian authorities also claimed to have discovered irregularities with payments CB&I received in connection with Reficar contracts, including payments for work that was not performed, reimbursements for extravagant expenses unrelated to the refinery project, and double billing. C. Conviction of Former Anti-Corruption Chief Luis Gustavo Moreno On June 27, 2017, former anti-corruption chief Luis Gustavo Moreno was arrested in his office by the CTI (the Technical Investigation Team, a division of the Colombian Attorney General). They charged him with soliciting bribes in return for interfering with anti-corruption investigations into Alejandro Lyons Muskus, ex-governor of Córdoba, with the possibility of ending such investigations. After his arrest, Moreno turned into a key collaborator with various officials, shedding light on a massive corruption scandal in the judiciary and congressional branch. According to Moreno, the scandal involved state politicians such as Musa Besaile Fayad and Bernardo “Ñoño” Elías, while also accusing judges such as Gustavo Malo Fernández, Francisco José Ricaurte, and Leónidas Bustos of accepting bribes in order to corrupt judicial proceedings. President Juan Manuel Santos signed extradition orders for Moreno and extradited him to Florida, where DOJ officials charged him with conspiracy to launder money with the intent to promote foreign bribery. Legislative Update In 2017, Colombian President Juan Manuel Santos announced a series of measures to address corruption issues in the country. The announcement followed Colombia’s 2016 passage of its first foreign bribery statute, the Transnational Corruption Act (“TCA”). The TCA notably has extraterritorial effect and holds legal entities administratively liable for improper payments to foreign government officials made by the entity’s employees, officers, directors, subsidiaries, contractors, or associates. The new anti-corruption measures announced by President Santos, among others, include passing new laws that would provide labor protections and economic incentives for whistleblowers, require that companies disclose information regarding “the persons who in reality profit from a business or company,” and eliminate the use of house arrest for corruption cases. The President also proposed creating a group of judges who specialize in anti-corruption cases. Other corruption reforms considered by Colombia’s Congress in 2017 include requiring lobbyists to disclose meetings with public officials and the creation of a registry of beneficiaries of public contracts. Transnational Cooperation In 2017, Colombia’s Superintendence of Corporations and the Peruvian Ministry entered into a Memorandum of Understanding (“MOU”) to prosecute international corruption. The goal of the MOU is to help investigate corruption in Peru and Colombia by focusing on a bilateral exchange of evidence between the two countries. Colombia signed a similar agreement with Spain in 2017. These new efforts are meant to assist partnering states in overcoming the difficulties of cross-border investigations, including the need to acquire evidence in foreign territories. 5. Peru Notable Enforcement Actions and Investigations The Odebrecht scandal has significantly impacted the political and anti-corruption landscape in Peru. In its settlement with Odebrecht, DOJ disclosed that Odebrecht executives admitted to funneling around $29 million USD in bribes to Peruvian government officials between 2004 and 2015. Government officials announced that Odebrecht and other companies involved in corruption would no longer be able to bid on public work contracts. This marked the end of Odebrecht’s four-decade run as a successful bidder on public work projects in Peru. The government will now decide on a case-by-case basis what to do with the remaining contracts awarded to Odebrecht. Three of Peru’s recent former presidents have been arrested and/or accused of crimes related to corruption, all with some alleged connection to Odebrecht. In July 2017, a Peruvian judge ordered the arrest of former President Ollanta Humala and his wife on charges of money laundering and conspiracy related to the alleged receipt of a $3 million USD bribe from Odebrecht. Humala, who has continued to maintain his innocence, became the first former head of state detained in connection with the Odebrecht scandal. Prosecutors are also investigating former President Alan Garcia, who allegedly facilitated irregular bidding on the subway in Lima. Another former president, Alejandro Toledo, was ordered arrested by a Peruvian judge in February, pursuant to accusations that he had received $20 million USD in bribes from Odebrecht in connection with bidding on the Interoceanic Highway between Brazil and Peru. Toledo has remained in the United States and denied any wrongdoing. A formal extradition request to the United States for Toledo to return to Peru and face charges for the alleged bribe is near approval on the Peruvian side. Even Peru’s current president, Pedro Pablo Kuczynski, has been unable to evade implication in the ever-expanding Odebrecht probe. Earlier in 2017, he had to testify as a witness in the same investigation implicating former President Toledo in the alleged irregular bidding process to build the Interoceanic Highway. In November 2017, former Odebrecht CEO Marcelo Odebrecht told Brazilian prosecutors that Odebrecht hired Kuczynski as a consultant after he had opposed highway contracts granted to the company. Kuczynski denied the allegations, but subsequently documents showed Kuczynski may have received $782,000 in payments from Odebrecht through his investment banking firm, Westfield Capital. Kuczynski narrowly survived an impeachment vote based on the corruption allegations in late December 2017. Recent additional testimony from an Odebrecht official purporting to confirm impropriety in Kuczynski’s relationship with Odebrecht has renewed calls for Kuczynski to step down or be impeached. On a regional and local level in Peru, several governors have been under investigation or accused of corruption. Remarkably, a May 2014 study by Peru’s office of the anti-corruption solicitor reported that a significant majority of mayors in office between 2011 and 2014 in Peru had been investigated for criminal activity. Legislative Update The most significant development in anti-corruption legislation in Peru over the last year was Legislative Decree No. 1352, enacted on January 6, 2017. This decree modifies Law No. 30424 (Law Regulating Administrative Liability of Legal Entities for the Commission of Active Transnational Bribery), which was enacted in 2016 to declare that legal entities, including corporations, would be autonomously and administratively liable for active transnational bribery when it was committed in their name or for them and on their behalf. Decree No. 1352 extended the administrative and autonomous liability of legal entities to include those guilty of active bribery of public officials. The liability provided for in Decree No. 1352 is termed “autonomous” because a natural person does not have to be found liable first; the Decree’s charges now create independent liability, and an independent entity like a corporation can be charged separately. The law provides for autonomous liability for certain crimes of bribery and money laundering. Parent companies are not liable for penalties under the autonomous liability provisions of Decree No. 1352 unless the employees who engaged in corruption or money laundering did so with specific consent or authorization from the parent company. Additionally, companies that acquire entities found guilty of corruption under the autonomous liability provision may not be separately penalized if the acquiring company used proper due diligence, defined as taking reasonable actions to verify that no autonomous liability crimes had been committed. Finally, entities can avoid autonomous liability by implementing a sufficient criminal law compliance program designed to prevent such crimes of corruption from being committed on behalf of the company. Elements of a properly designed program include: an autonomous person in charge of the compliance program, proper implementation of complaint procedures, continuous monitoring of the program, and training for those involved. The Peruvian securities regulator had promised additional guidance before January 1, 2018—when the Decree took effect—but, as of the date of this publication, no such guidance has been issued. The Peruvian government has also modified the procurement laws via Decree 1341 to ban any company with representatives who have been convicted of corruption from securing government contracts. The ban applies even if the crimes are admitted as part of a plea bargain agreement for a reduced sentence. Peru has also enacted harsher penalties for public officials found guilty of corruption and prohibitions on such officials from being able to work in the public sector post-conviction. Legislative Decree No. 1243 (the “civil death” law) was enacted in late 2016 to establish harsher sentences for corruption-related offenses and to increase the “civil disqualification” period to five to twenty years for corruption crimes like extortion, simple and aggravated collusion, embezzlement, and bribery. That said, this disqualification only applies to crimes committed as part of a “criminal organization,” and because of the practicalities involved in these types of crimes, it is unlikely that many officials will be found to have been part of a “criminal organization” and thus barred from public service. Legislative Decree No. 1295 was also enacted on December 30, 2016 with provisions to improve government integrity. The decree created the National Registry of Sanctions against Civil Servants (Registro Nacional de Sanciones contra Servidores Civiles). This online registry will be updated monthly by the National Authority of Civil Service (Autoridad Nacional del Servicio Civil) and will consolidate all the information relevant to disciplinary actions and/or sanctions against public officials (including corruption charges). Anyone listed in the registry is prohibited from government employment for the duration of their registry.  This article is intended to review key developments in the five enumerated countries. Changes to the compliance environment continue throughout Central and South America, though they are not covered in this particular update.  Petróleos Mexicanos – Pemex, Report of Foreign Private Issuer (Form 6-K) (Nov. 11, 2017), at 8.  Petróleos Mexicanos – Pemex, Report of Foreign Private Issuer (Form 6-K) (Sept. 29, 2017), at 21.  See Plea Agreement, Attach. B ¶¶ 59-60, United States v. Odebrecht S.A., Cr. No. 16-643 (RJD) (E.D.N.Y. Dec. 21, 2016).  See Secretaría de la Función Pública, Abre SFP nuevos procedimientos administrativos en contra de filial de Odebrecht (Sep. 11, 2017), https://www.gob.mx/sfp/articulos/abre-sfp-nuevos-procedimientos-administrativos-en-contra-de-filial-de-odebrecht-126170?idiom=es.  Azam Ahmed and J. Jesus Esquivel, Mexico Graft Inquiry Deepens with Arrest of a Presidential Ally, N.Y. Times, Dec. 20, 2017, https://www.nytimes.com/2017/12/20/world/americas/mexico-corruption-pri.html.  Id.; Detienen a extesorero del PRI por presunto desvío de recursos en 2016, El Financiero, Dec. 20, 2017, http://www.elfinanciero.com.mx/nacional/detienen-a-extesorero-del-pri-por-presunto-desvio-de-recursos-en-2016.html.  Ley General de Responsabilidades Administrativas, Artículos 2, 52, 66, 70 (July 18, 2016) (Mex.) [hereinafter “GLAR”].  GLAR at Artículos 49, 51.  Id. at Artículo 49.  Id. at Artículos 51-64.  Id. at Artículos 3, 4, 65.  Bribery includes promising, offering, or giving any benefit, whether it be through money, valuables, property, services well below market value, donations, or any other benefit, to a public servant or their spouse in return for the public servant performing or refraining from performing any act related to their duties, or using their influence in their position, for the purpose of obtaining or maintaining a benefit or advantage, irrespective of the benefit actually being achieved. Id. at Artículos 52, 66.  Id. at Artículo 67.  Id. at Artículo 68.  Id. at Artículo 69.  Id. at Artículo 71.  Id. at Artículo 72.  Id. at Artículo 70.  Id.  Under Article 81 of the GLAR, if no benefit is obtained through the corrupt act, the financial penalty is calculated by multiplying a statutorily defined value by the daily tenor of a Mexican government economic reference rate called the Unidad de Medida y Actualización (“UMA”). While the UMA is a variable rate that changes over time, the statutory multiple is static and defined by the GLAR. For physical persons—if no benefit was obtained—the penalty can be up to 150,000 times the UMA (approximately $597,000 USD as of May 2017). GLAR, Artículo 81.  Id.  Id.  Id.  Id.  Id.  Id. at Artículo 25.  The seven required elements of the integrity program are delineated in the statute and discussed more fully in Gibson Dunn’s review of the GLAR, found at https://www.gibsondunn.com/mexicos-new-general-law-of-administrative-responsibility-targets-corrupt-activities-by-corporate-entities/.  GLAR at Artículos 88-89.  Id. at Artículo 81.  Id. at Artículos 88-89.  Id. at Artículo 89. Id. Id.  Ministério Público Federal, MPF recebe prêmio internacional por trabalho no combate à corrupção (Nov. 6, 2017), http://www.mpf.mp.br/rj/sala-de-imprensa/noticias-rj/mpf-recebe-premio-internacional-pelo-combate-a-corrupcao.  Press Release, Transparency Int’l Secretariat, Brazil’s Carwash Task Force Wins Transparency Int’l Anti-Corruption Award (Dec. 6, 2016).  See generally FCPA Tracker, https://fcpatracker.com/.  See Felipe Gutierrez, Moro se diz ‘cansado’ e que trabalho da Lav Jato em Curitiba esta no fim, Folha de Sao Paulo, Aug. 15, 2017, http://www1.folha.uol.com.br/poder/2017/10/1923633-moro-diz-que-trabalho-da-lava-jato-em-curitiba-esta-acabando.shtml.  Id.  See Ministério Público Federal, A Lava Jato em numeros – STF (Jan. 12, 2018), http://www.mpf.mp.br/para-o-cidadao/caso-lava-jato/atuacao-no-stj-e-no-stf/resultados-stf/a-lava-jato-em-numeros-stf.  Entenda a Operação Zelotes da Polícia Federal, Folha de São Paulo, Apr. 1, 2015, http://www1.folha.uol.com.br/mercado/2015/04/1611246-entenda-a-operacao-zelotes-da-policia-federal.shtml.  Id.  Mateus Rodrigues, MPF denuncia executivos da Gerdau na Zelotes por corrupcão e lavagem de dinheiro, Oglobo, Aug. 24, 2017, https://g1.globo.com/distrito-federal/noticia/mpf-denuncia-executivos-da-gerdau-na-zelotes-por-corrupcao-e-lavagem-de-dinheiro.ghtml; MPF denuncia Lula e Gilberto Carvalho por corrupcao passive na Operacoes Zelotes, Oglobo, Sept. 11, 2017, https://g1.globo.com/politica/noticia/mpf-denuncia-lula-por-corrupcao-passiva-na-operacao-zelotes.ghtml.  MPF denuncia Lula e Gilberto Carvalho por corrupcao passive na Operacoes Zelotes, supra note 43.  Entenda a Operação Zelotes da Polícia Federal, supra note 41.  Estelita H. Carazzai, Bela Megale, & Camila Mattoso, Operação contra frigoríficos prende 37 e descobre até carne podre à venda, Folha de S. Paulo, Mar. 17, 2017, http://www1.folha.uol.com.br/mercado/2017/03/1867309-pf-faz-operacao-contra-frigorificos-e-cumpre-quase-40-prisoes.shtml.  Id.  Id.  Operação Bullish investiga fraudes em empréstimos no BNDES, Agência de Notícias de Polícia Federal, May 12, 2017, http://www.pf.gov.br/agencia/noticias/2017/05/operacao-bullish-investiga-fraudes-em-emprestimos-no-bndes; Bela Megale, Camila Mattoso, & Raquel Landim, Operação policial põe sob suspeita apoio do BNDES à expansão da JBS, Folha de S. Paulo, May 12, 2017, http://www1.folha.uol.com.br/mercado/2017/05/1883367-pf-deflagra-operacao-que-investiga-fraudes-em-emprestimos-no-bndes.shtml.  Megale et al., supra note 49.  Id.  Graziele Frederico and Gabriela Lapa, Grupo de acusados na ‘máfia de próteses’ do DF fecha acordo de delação premiada, Oglobo, Feb. 9, 2017, http://g1.globo.com/distrito-federal/noticia/grupo-de-acusados-na-mafia-das-proteses-do-df-fecha-acordo-de-delacao-premiada.ghtml.  Id.  Ministério da Transparência e Controladoria-Geral da União, CGU e AGU assinam acordo de leniência com UTC Engenharia, July 10, 2017, http://www.cgu.gov.br/noticias/2017/07/cgu-e-agu-assinam-acordo-de-leniencia-com-o-utc-engenharia.  Id.  Id.  Id.  Id.  Press Release, U.S. Dep’t of Justice, Rolls-Royce plc Agrees to Pay $170 Million Criminal Penalty to Resolve Foreign Corrupt Practices Act Case (Jan. 17, 2017), https://www.justice.gov/opa/pr/rolls-royce-plc-agrees-pay-170-million-criminal-penalty-resolve-foreign-corrupt-practices-act.  Deferred Prosecution Agreement, Attach. A ¶ 20, United States v. Rolls-Royce plc, No. 2:16-CR-00247-EAS (S.D. Ohio. Dec. 20, 2016).  Id.  Press Release, U.S. Dep’t of Justice, supra note 59.  Press Release, U.S. Dep’t of Justice, SBM Offshore N.V. and United States-Based Subsidiary Resolve Foreign Corrupt Practices Act Case Involving Bribes in Five Countries (Nov. 29, 2017), https://www.justice.gov/opa/pr/sbm-offshore-nv-and-united-states-based-subsidiary-resolve-foreign-corrupt-practices-act-case.  Deferred Prosecution Agreement, Attach. A ¶¶ 27, 35, United States v. SBM Offshore N.V., No. 17-686 (S.D. Tex. Nov. 29, 2017).  Press Release, U.S. Dep’t of Justice, supra note 63.  Id.  Id.  Press Release, U.S. Dep’t of Justice, Odebrecht and Braskem Plead Guilty and Agree to Pay at Least $3.5 Billion in Global Penalties to Resolve Largest Foreign Bribery Case in History (Dec. 21, 2016), https://www.justice.gov/opa/pr/odebrecht-and-braskem-plead-guilty-and-agree-pay-least-35-billion-global-penalties-resolve.  Plea Agreement ¶ 21(b), United States v. Odebrecht, No. 16-643 (RJD) (Dec. 21, 2016).  Id. at ¶ 21(c).  Sentencing Memorandum at 4, United States v. Odebrecht S.A., No. 13-643 (RJD) (Apr. 11, 2017).  Id.  Lei No. 7753 de 17 de outubro de 2017, do Rio de Janeiro.  Id. at Artigo 1.  Id.; Lei No. 12.846 de 2013, at Artigo 7.  Fausto Macedo, Quais são e o Que propõem as ’10 Medidas contra a corrupção’ do Ministério Público, Estadão, Sept. 16, 2015, http://politica.estadao.com.br/blogs/fausto-macedo/quais-sao-e-o-que-propoem-as-10-medidas-contra-a-corrupcao-do-ministerio-publico/.  Marcello Larcher, CCJ valida assinaturas do projeto das dez medidas contra a corrupção, Agência Câmara Notícias, Mar. 28, 2017, http://www2.camara.leg.br/camaranoticias/noticias/POLITICA/527029-CCJ-VALIDA-ASSINATURAS-DO-PROJETO-DAS-DEZ-MEDIDAS-CONTRA-A-CORRUPCAO.html.  Renan Ramalho, MP apresenta dez propostas para reforçar combate à corrupção no país, Oglobo, Mar. 20, 2015, http://g1.globo.com/politica/noticia/2015/03/mp-apresenta-dez-propostas-para-reforcar-combate-corrupcao-no-pais.html.  Felipe Gelani, Lei de abuso de autoridade divide opinões entre juristas, Jornal do Brasil, Dec. 4, 2016, http://m.jb.com.br/pais/noticias/2016/12/04/lei-de-abuso-de-autoridade-divide-opinioes-entre-juristas/; Projeto com medidas contra a corrupção aguarda relator na CCJ, Senado Notícias (Apr. 17, 2017), https://www12.senado.leg.br/noticias/materias/2017/04/17/projeto-com-medidas-contra-a-corrupcao-aguarda-relator-na-ccj.  Ricardo Brandt, ‘Congresso destruiu’ as 10 Medidas contra Corrupção, diz procurador da Lava Jato, Estadão, Dec. 3, 2016, http://politica.estadao.com.br/blogs/fausto-macedo/congresso-destruiu-as-10-medidas-contra-corrupcao-diz-procurador-da-lava-jato/.  Ministério Público Federal, Orientation No. 07/2017 – Leniency Agreements (Aug. 24, 2017), http://www.mpf.mp.br/pgr/documentos/ORIENTAO7_2017.pdf.  Id.  Id.  Id.  Almudena Calatrava, Argentine Clean-up President Macri Finds Scandals of His Own, U.S. News, Mar. 3, 2017 https://www.usnews.com/news/world/articles/2017-03-03/argentine-clean-up-president-macri-finds-scandals-of-his-own; Abren investigación contra presidente de Argentina por presunta asociación ilícita y tráfico de influencias, CNN Español, Mar. 1, 2017, http://cnnespanol.cnn.com/2017/03/01/abren-investigacion-al-presidente-de-argentina-mauricio-macri-por-entrega-de-rutas-aereas-a-avianca/.  Lucia de Dominicis, 10 promesas incumplidas de Macri en sus 2 años de gobierno, La Primera Piedra, Dec. 10, 2017, http://www.laprimerapiedra.com.ar/2017/12/10-promesas-incumplidas-de-macri/.  Calatrava, supra note 85; Fiscal argentino abre investigación a Mauricio Macri por firmas ‘offshore,’ La Prensa, Apr. 7, 2016, https://www.prensa.com/mundo/Fiscal-argentino-investigacion-Mauricio-Macri_0_4455304547.html.  Abren investigación contra presidente de Argentina por presunta asociación ilícita y tráfico de influencias, supra note 85.  Hugo Alconada Mon, Un Operador de Odebrecht le giro US$ 600.00 al jefe de inteligencia argentine, La Nacion, Jan. 11, 2017, http://www.lanacion.com.ar/1974791-un-operador-de-odebrecht-le-giro-us-600000-al-jefe-de-inteligencia-argentino; AFP, Argentina: fiscal abre causa contra jefe de espias por giro de Odebrecht, La Prensa, Jan. 24, 2017, https://www.prensa.com/mundo/Argentina-fiscal-causa-espias-Odebrecht_0_4674282545.html.  Mon, supra note 89.  Frederico Rivas Molina, Cristina Fernández de Kirchner suma otro procesamiento por corrupción, El Pais, Apr. 4, 2017, https://elpais.com/internacional/2017/04/04/argentina/1491322535_840466.html.  Id.  Id.  Max Radwin and Anthony Faiola, Argentine Ex-president Cristina Fernández de Kirchner Charged with Treason, Wash. Post, Dec. 7, 2017, https://www.washingtonpost.com/world/the_americas/argentine-ex-president-cristina-fernandez-charged-with-treason/2017/12/07/e3e326e0-db80-11e7-a241-0848315642d0_story.html?utm_term=.37df90a6bf06.  Argentina Former Vice-President Amado Boudou Arrested, BBC News, Nov. 3, 2017, http://www.bbc.com/news/world-latin-america-41867239.  Argentina Congress Passes Law to Fight Corporate Corruption, Reuters, Nov. 8 2017, https://www.reuters.com/article/us-argentina-corruption/argentina-congress-passes-law-to-fight-corporate-corruption-idUSKBN1D83AX; La Ley de Responsabilidad Penal de las Personas Jurídicas, Law No. 27401 (Nov. 8, 2017), Artículo 1 (Arg.) [hereinafter Ley de Responsabilidad Penal].  La Ley de Responsabilidad Penal de las Personas Jurídicas, at Artículo 1, supra note 96.  Paula Urien, Cómo reaccionan las compañías ante la ley penal empresaria, La Nacion, March 4, 2018, https://www.lanacion.com.ar/2113848-como-reaccionan-las-companias-ante-la-ley-penal-empresaria.  Ley de Responsibilidad Penal, at Artículo 2, supra note 97.  Id. at Artículo 1.  Id. at Artículo 2.  Id. at Artículo 3.  Id. at Artículo 29.  Id. at Artículo 7.  Id.  Id.  Id.  Id. at Artículo 9.  Id. at Artículo 16.  Id. at Artículos 16, 18.  Id. at Artículo 23.  Id.  Id.  Id.  Id.  Id.  Id.  Id.  Id.  Id.  Id.  DOJ and SEC, A Resource Guide to the U.S. Foreign Corrupt Practices Act, at 57 (Nov. 14, 2012); GLAR at Artículo 25.  See Plea Agreement, Attach. B ¶ 51, United States v. Odebrecht S.A., Cr. No. 13-643 (RJD) (E.D.N.Y. Dec. 21, 2016).  ¿Pueden las leyes acabar con la corrupción?, Política, July 29, 2017, http://www.semana.com/nacion/articulo/corrupcion-10-proyectos-de-ley-se-tramitan-en-el-congreso-sirven/534225; Julia Symmes Cobb & Guillermo Parra-Bernal, Colombia Arrests Ex-Senator Linked to Odebrecht Graft Scandal, Reuters, Jan. 15, 2017, https://www.reuters.com/article/brazil-corruption-odebrecht-colombia/colombia-arrests-ex-senator-linked-to-odebrecht-graft-scandal-idUSL1N1F5073.  Cobb & Parra-Bernal, supra note 124.  Jose Maria Irujo & Joaquin Girl, La policía investiga la conexión Colombia-Miami en los pagos al Exviceministro García Morales, El Pais, Nov. 9, 2017, https://elpais.com/internacional/2017/11/06/actualidad/1509965659_671036.html.  Fiscalía General de la Nación, Imputados empresarios extranjeros y colombianos por corrupción en la construcción de Reficar (July 26, 2017), https://www.fiscalia.gov.co/colombia/bolsillos-de-cristal/imputados-empresarios-extranjeros-y-colombianos-por-corrupcion-en-la-construccion-de-reficar/.  Id.  Id.  Fiscalía General de la Nación, Refineria de Cartagena (2017), https://www.fiscalia.gov.co/colombia/wp-content/uploads/Presentacion-REFICAR270417.pdf. Santos ratificó extradición del exfiscal Luis Gustavo Moreno, RCN Radio, Mar. 12, 2018, https://www.rcnradio.com/judicial/santos-ratifico-extradicion-del-exfiscal-luis-gustavo-moreno.  Id.  Presidencia de la República, Gobierno presenta paquete de iniciativas para combatir la corrupción (Aug. 18, 2017), http://es.presidencia.gov.co/noticia/170818-Gobierno-presenta-paquete-de-iniciativas-para-combatir-la-corrupcion.  Ley. 1778 de 2016 (Feb. 2, 2016) Diario Oficial 49.774 (Colo).  Id. at Artículo 2.  Presidente anuncia nuevas medidas para seguir enfrentando el desafío de la corrupción y a los corruptos, El Observatario, Apr. 19, 2017, http://www.anticorrupcion.gov.co/Paginas/Presidente-anuncia-nuevas-medidas-para-seguir-enfrentando-el-desafio-de-la-corrupcion-y-a-los-corruptos.aspx.  Colombia tendrá jueces especializados en casos de corrupción, El Observatario, Dec. 7, 2017, http://www.anticorrupcion.gov.co/Paginas/Colombia-tendra-jueces-especializados-en-casos-de-corrupcion.aspx.  Leyes en Contra de la Corrupción, la Apuesta del Gobierno Nacional, Actualicese, July 13, 2017, http://actualicese.com/actualidad/2017/07/13/leyes-en-contra-de-la-corrupcion-la-apuesta-del-gobierno-nacional/.  Colombia y Peru contra soborno transnacional, El Nuevo Siglo, Sep. 23, 2017, http://www.elnuevosiglo.com.co/articulos/09-2017-colombia-y-peru-combatiran-soborno-transnacional.  Id.  See Juan Cruz Peña, Colombia investiga a tres empresas españolas por sobornos e irregularidades, El Confidencial, May 17, 2017, https://www.elconfidencial.com/empresas/2017-05-17/colombia-investiga-empresas-espanolas-sobornos-desfalco_1379311/.  United States v. Odebrecht S.A., Docket No. 16-CR-643 (RJD) (E.D.N.Y. 2016).  Odebrecht Banned from Signing Contracts with Peru State, Andina, Jan. 9, 2017, http://www.andina.com.pe/Ingles/noticia-odebrecht-banned-from-signing-contracts-with-peru-state-648542.aspx.  Mitra Taj, Peru to Bar Odebrecht from Public Bids with New Anti-graft Rules, Reuters, Dec. 28, 2016, http://www.reuters.com/article/peru-corruption-odebrecht-idUSL1N1EO00K.  Id.  Lucas Perelló, Pablo Kuczynski Loses Another Battle to the Fujimorista Opposition, Global Americans, Sept. 28, 2017, https://theglobalamericans.org/2017/09/perus-pedro-pablo-kuczynski-loses-another-battle-fujimorista-opposition/.  Simeon Tegel, Latin America’s Mega-Corruption Scandal Just Claimed its Two Biggest Names, Wash. Post, July 15, 2017, https://www.washingtonpost.com/news/worldviews/wp/2017/07/15/latin-americas-mega-corruption-scandal-just-claimed-its-two-biggest-names/?utm_term=.6c05e8a6bb8c; Jimena De La Quintana, Ordenan prisión preventive para Ollanta Humala y Nadine Heredia, CNN en Espanol, July 13, 2017, http://cnnespanol.cnn.com/2017/07/13/ordenan-prision-para-ollanta-humala-y-nadine-heredia/.  Id.  ¿Cuál es la relación de Alan García con el caso Odebrecht y Lava Jato?, Radio Programas del Perú, Aug. 7, 2017, http://rpp.pe/politica/judiciales/la-relacion-de-alan-garcia-con-los-casos-odebrecht-y-lava-jato-noticia-1049631.  Ryan Dube, Judge Orders Arrest of Former Peruvian President Alejandro Toledo in Odebrecht Bribery Case, Wall Street J., Feb. 9, 2017, https://www.wsj.com/articles/judge-orders-arrest-of-former-peruvian-president-alejandro-toledo-in-odebrecht-bribery-case-1486698137; U.S. State Department Office of Investment Affairs, Peru Country Commercial Guide – Investment Climate Statement (Sept. 20, 2017), https://www.export.gov/article?id=Peru-Corruption.  Peru court approves Toledo extradition request, Yahoo News, Mar. 13, 2018, https://www.yahoo.com/news/peru-court-approves-toledo-extradition-request-164803106.html.  Lucas Perelló, Pablo Kuczynski Loses Another Battle to the Fujimorista Opposition, Global Americans, Sept. 28, 2017, https://theglobalamericans.org/2017/09/perus-pedro-pablo-kuczynski-loses-another-battle-fujimorista-opposition/; PPK declarará el Viernes por Caso Odebrecht ante fiscalía, El Comercio, Mar. 29, 2017, https://elcomercio.pe/politica/justicia/ppk-declarara-viernes-caso-odebrecht-fiscalia-420928.  Ex-Odebrecht CEO Says Hired Peru President as Consultant – Reports, Reuters, Nov. 14, 2017, https://www.reuters.com/article/peru-politics/ex-odebrecht-ceo-says-hired-peru-president-as-consultant-reports-idUSL1N1NK1H4.  Peru: President Kuczynski Denies Odebrecht Bribe Allegations, BBC News, Nov. 16, 2017, http://www.bbc.com/news/world-latin-america-42006558; Andrea Zarate & Nicholas Casey, Peru Leader Could Be Biggest to Fall in Latin America Graft Scandal, N.Y. Times, Dec. 19, 2017, https://www.nytimes.com/2017/12/19/world/americas/peru-kuczynski-impeachment.html.  Simeon Tegel, Peru’s President Survives Impeachment Vote Over Corruption Charges, Wash. Post, Dec. 22, 2017, https://www.washingtonpost.com/world/the_americas/perus-president-faces-impeachment-over-corruption-allegations/2017/12/20/61b2b624-e4d9-11e7-927a-e72eac1e73b6_story.html?utm_term=.e542fa1216da. Sonia Goldenberg, ‘Game of Thrones’, Inca Style, N.Y. Times, Dec. 28, 2017, https://www.nytimes.com/2017/12/28/opinion/peru-kuczynski-fujimori-pardon-odebrecht.html.  Jacqueline Fowks, El fantasma de Odebrecht arrecia en Perú, El País, Mar. 8, 2018, https://elpais.com/internacional/2018/03/08/america/1520467389_977266.html.  U.S. State Department Office of Investment Affairs, supra note 150.  Id.  Decreto Legislativo No. 1352, Artículo 1 (Jan. 2017) (Peru).  Id. at Artículo 3.  Id. at Artículo 1.  Id. at Artículo 4.  Id. at Artículos 3-4; New Criminal Liability System for Corporate involved in Corrupt Practices and/or Money Laundering, http://www.estudiorodrigo.com/en/new-criminal-liability-system-for-corporate-involved-in-corrupt-practices-andor-money-laundering/.  Decreto Legislativo No. 1352, Artículo 3.  Id. at Artículo 17.  Id.  Id.  Omar Manrique, Todas las empresas deberán tomar medidas para prevenir corrupción, Gestión, Dec. 27, 2017, https://gestion.pe/economia/empresas-deberan-medidas-prevenir-corrupcion-223626.  Decreto Legislativo No. 1341, Artículo 11 (Jan. 2017) (Peru); José Antonio Payet & Payet Rey Cauvi Pérez, PERUVIAN UPDATE – The Impact of “Lava Jato” on M&A in Peru, International Institute for the Study of Cross-Border Investment and M&A, May 30, 2017, http://xbma.org/forum/peruvian-update-the-impact-of-lava-jato-on-ma-in-peru/.  Decreto Legislativo No. 1341, supra note 169.  Ejecutivo oficializó ley de muerte civil para corruptos, El Comercio, Oct. 22, 2016, http://elcomercio.pe/politica/gobierno/ejecutivo-oficializo-ley-muerte-civil-corruptos-273517; Decreto Legislativo No. 1243, Artículo 38 (Oct. 2016) (Peru).  Comentarios a la “Muerte Civil,” Decreto Legislativo 1243, Parthenon, Nov. 1, 2016, http://www.parthenon.pe/editorial/comentarios-a-la-muerte-civil-decreto-legislativo-1243/.  Decreto Legislativo No. 1295 (Dec. 2016) (Peru).  Id. at Artículo 1.  Id. at Artículo 4.  Id. The following Gibson Dunn lawyers assisted in preparing this client update: F. Joseph Warin, Michael Farhang, Lisa Alfaro, Tafari Lumumba, Michael Galas, Abiel Garcia, Renee Lizarraga, John Sandoval and Sydney Sherman. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. We have more than 110 attorneys with FCPA experience, including a number of former prosecutors and SEC officials, spread throughout the firm’s domestic and international offices. Please contact the Gibson Dunn attorney with whom you usually work in the firm’s FCPA group, or the authors: F. Joseph Warin – Washington, D.C. (+1 202-887-3609, email@example.com) Michael M. Farhang – Los Angeles (+1 213-229-7005, firstname.lastname@example.org) Please also feel free to contact the following Latin America practice group leaders: Lisa A. Alfaro – São Paulo (+55 (11) 3521-7160, email@example.com) Kevin W. Kelley – New York (+1 212-351-4022, firstname.lastname@example.org) Tomer Pinkusiewicz – New York (+1 212-351-2630, email@example.com) Jose W. Fernandez – New York (+1 212-351-2376, firstname.lastname@example.org) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Our constantly-evolving regulatory landscape expands existing obligations while creating new compliance risks for companies big and small. Join our panel of experts as they review key developments in 2017 and offer valuable insight on how to address challenges forecasted for 2018. Topics discussed include: Global Enforcement and Regulatory Developments Change and Continuity in the New Administration Key Tips for Identifying and Addressing Top Areas of Compliance Risk Practical Recommendations for Improving Corporate Compliance DOJ and SEC Priorities, Policies, and Penalties Update on Key Governance Issues and Regulatory Requirements View Slides [PDF] PANELISTS: This year’s presentation assembles a deep bench of experts with broad expertise. The following panelists join moderator Joe Warin for the 14th annual installment of ‘Challenges in Compliance and Corporate Governance’: Gibson Dunn partner Stephanie L. Brooker, Co-Chair of the firm’s Financial Institutions Practice Group, is former Director of the Enforcement Division at the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). As a federal prosecutor, Stephanie served as the Chief of the Asset Forfeiture and Money Laundering Section in the U.S. Attorney’s Office for the District of Columbia. She represents financial institutions, multi-national companies, and individuals in connection with criminal, regulatory, and civil enforcement actions involving anti-money laundering (AML)/Bank Secrecy Act (BSA), sanctions, anti-corruption, securities, tax, and wire fraud New Gibson Dunn partner Avi S. Garbow, the former EPA General Counsel and co-chair of Gibson Dunn’s Environmental Litigation and Mass Tort Practice Group. As General Counsel, he successfully managed one of the most active regulatory and defensive litigation dockets among large federal agencies. Avi previously held positions in EPA’s enforcement office and served as a distinguished prosecutor in DOJ’s Environmental Crimes Section New Gibson Dunn partner Caroline Krass, the former CIA General Counsel and chair of Gibson Dunn’s National Security Practice Group. As General Counsel, Caroline oversaw more than 150 attorneys and advised on complex, highly sensitive issues, including cybersecurity, foreign investment in the U.S. and export controls, government investigations and litigation, and crisis management. Previously, Caroline served as Acting Assistant Attorney General at the Department of Justice, as Special Counsel to the President for National Security Affairs, as a federal prosecutor, at the National Security Council, and at the Treasury and State Departments. Gibson Dunn partner Stuart Delery, the former Acting Associate Attorney General, the No. 3 position in the Justice Department. In that role, Stuart was a member of DOJ’s senior management and oversaw the civil and criminal work of five litigating divisions — Antitrust, Civil, Tax, Civil Rights, and Environment and Natural Resources — as well as other components. Previously, Stuart led the Civil Division, overseeing litigation involving the False Claims Act among other matters. Gibson Dunn partner Adam M. Smith, an experienced international trade lawyer who previously served in the Obama Administration as the Senior Advisor to the Director of OFAC and as the Director for Multilateral Affairs on the National Security Council. Adam focuses on international trade compliance and white collar investigations, including with respect to federal and state economic sanctions enforcement, the FCPA, embargoes, and export controls. Gibson Dunn partner Lori Zyskowski, a member of the firm’s Securities Regulation and Corporate Governance Practice Group who was previously Executive Counsel, Corporate, Securities & Finance at GE. Lori advises clients on a wide array of securities, compliance and corporate governance issues, and provides a unique perspective gained from over 12 years working in-house at S&P 500 corporations. Gibson Dunn partner F. Joseph Warin, Co-Chair of the firm’s White Collar Defense and Investigations practice and former Assistant United States Attorney in Washington, D.C. Joe is one of only ten lawyers in the United States with Chambers rankings in five categories. Chambers recently honored him with the Outstanding Contribution to the Legal Profession Award in 2017. Chambers Global 2017 ranked Mr. Warin a “Star” in USA – FCPA “with exceptional expertise across all aspects of anti-corruption law”. Chambers USA 2017 ranked him a “Star” in Nationwide FCPA and D.C. Litigation: White Collar Crime & Government Investigations. Chambers USA 2017 also selected him as a Leading Lawyer in the nation in the areas of Securities Regulation Enforcement and Securities Litigation, as well as in D.C. Securities Litigation. From 2015–2017, he has been selected by Chambers Latin America as a top-tier lawyer in Latin America-wide, Fraud & Corporate Investigations. In 2017, Who’s Who Legal selected him as a “Thought Leader: Investigations,” including “only the best of the best” of those listed in their guides and who obtained the biggest number of nominations from peers, corporate counsel and other market sources. In 2016, Who’s Who Legal and Global Investigations Review also named Mr. Warin to their list of World’s Ten-Most Highly Regarded Investigations Lawyers. He has been listed in The Best Lawyers in America® every year from 2006 – 2017 for White Collar Criminal Defense. BTI Consulting named Mr. Warin to its 2017 BTI Client Service All-Stars list, recognizing lawyers who “truly stand out as delivering the absolute best client service.” Best Lawyers® also named Mr. Warin 2016 Lawyer of the Year for White Collar Criminal Defense in the District of Columbia. In 2016, he was named among the Lawdragon 500 Leading Lawyers in America. Mr. Warin also was recognized by Latinvex as one of its 2017 Latin America’s Top 100 Lawyers. He was selected as a 2015 Top Lawyer for Criminal Defense by Washingtonian magazine. U.S. Legal 500 has repeatedly named Mr. Warin a Leading Lawyer for White Collar Criminal Defense Litigation. Benchmark Litigation has recognized him as a U.S. White Collar Crime Litigator Star for seven consecutive years (2011–2017). MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 3.0 credit hours, of which 3.00 credit hours may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or email@example.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 2.50 hours. California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.
The Chinese Ministry of Commerce (“MOFCOM“) recently conditionally approved Advanced Semiconductor Engineering’s proposed acquisition of Siliconware Precision Industries under China’s Anti-Monopoly Law. Despite the parties’ market shares in China not exceeding 30%, the decision imposes a two-year “hold-separate” condition, under which the two companies must remain as two independent competitors, with unchanged business models and market practices. The AML has a compulsory pre-closing merger control review with low financial thresholds, catching many global transactions even if they do not have any nexus with China. MOFCOM has been particularly concerned by transactions that may affect Chinese competitors or customers, consistent with its mandate under the AML. Between 2011 and 2013, MOFCOM imposed hold-separate remedies in 4 transactions. Most observers believed that MOFCOM has stayed away from such remedies in the recent years because of the difficulty to monitor hold-separate arrangements. MOFCOM’s recent decision confirms that hold-separate arrangements are still part of MOFCOM’s toolbox. Given the importance of the high tech sector for the Chinese government, we can expect more of these remedies in future high tech transactions. 1. Background Advanced Semiconductor Engineering, Inc. (“ASE“) and Siliconware Precision Industries Co., Ltd (“Siliconware“) (together, the “Parties“) are Taiwanese integrated-circuit semiconductor packaging and testing companies. On 30 June 2016, they signed a merger agreement (the “Transaction“), according to which the Parties would establish Advanced Semiconductor Investment Holding Co., Ltd (the “Holding Company“), which would fully own and acquire sole control of both ASE and Siliconware. The Transaction triggered merger filings in Taiwan, the US and China. The Taiwanese Trade Commission and the US Federal Trade Commission issued their unconditional clearance decisions in November 2016 and May 2017, respectively. 2. MOFCOM filing and review procedures The Parties first filed their notification to MOFCOM on 25 August 2016. At the end of Phase 3 (which was supposed to end on 11 June 2017), the Parties withdrew their filing and submitted a fresh filing on 6 June 2017. On 6 July 2016, MOFCOM commenced its Phase 2 review of the second filing, thus extending the final review deadline to 29 November 2017. The deal was cleared on 24 November 2017, 15 months after the first filing. 3. Decision MOFCOM’s review focused on a narrow product market of semiconductor packaging and testing (“P&T“) outsourcing service. Upon examination of the market, MOFCOM found that there is a distinction between P&T services provided by integrated design and manufacturing (“IDM“) companies, such as Samsung, and those provided by professional outsourcing companies, such as the Parties. MOFCOM noted that P&T providers in the former category have their own semiconductor brand and cover all elements of production, including design, manufacturing, P&T and sales, with some players even selling electronic products for end use. MOFCOM commented that IDM companies have been “gradually stripping off” lower end production services, such as P&T, and outsourcing them to companies such as the Parties. ASE and Siliconware are ranked first and third in the global market and fifth and first in the Chinese market for semiconductor P&T outsourcing services, respectively. Post-merger, MOFCOM noted that ASE would rank first in both the global and Chinese markets, with a combined market share of approximately 25 to 30% in both markets. In contrast, the global market share of the next three competitors would be approximately 10 to 15% each, with the rest of the competitors being fragmented with a market share of less than 4%. MOFCOM’s market investigation revealed that customers are relatively “sticky” in this sphere due to the risks, costs and length of time (approximately six months to two years) involved in switching providers. In addition, MOFCOM noted that ASE and Siliconware are close competitors and the most important providers of P&T outsourcing services for many customers in China. Given the Parties’ strength in the market, MOFCOM found that post-merger, the merged entity would have the ability and motive to raise prices and to carry out other harmful practices, such as a price discrimination strategy maximizing profits to the detriment of Chinese customers with weak bargaining power. However, the anti-competitive effects of the Transaction would be offset to an extent by the rapid development of the industry and P&T service providers’ dependence on their clients. In order to address MOFCOM’s concerns, the Parties offered commitments, pursuant to which the two companies will remain independent of each other for 24 months, by keeping their financial, HR, pricing, sales, production capacity and procurement matters separate. The Holding Company will exercise limited shareholders’ rights during this period. In addition, the Parties will provide P&T services to clients in a non-discriminatory way and set the prices and transaction conditions in a reasonable manner. Both Parties also undertake not to restrict customers’ selection of, or transition to, other providers. 4. Commentary A hold-separate remedy generally requires merging parties to keep all or a portion of their businesses independent post-merger, until the condition is removed with MOFCOM’s express approval. Critics of the hold-separate remedy argue that this is an inappropriate intervention into the economic operations of undertakings and constitutes an overstepping of MOFCOM’s regulatory powers. In addition, hold-separate remedies are difficult and time-consuming to monitor for compliance. Prior to ASE/Siliconware, MOFCOM used the hold-separate remedy on four occasions. MOFCOM’s first two uses of this remedy were both in the hard-disk sector: a 12-month hold-separate condition in Seagate’s acquisition of Samsung’s hard-disk business in 2011; and a 24-month hold-separate condition in Western Digital and Hitachi’s merger in 2012. In Seagate/Samsung, MOFCOM lifted the condition in 2015, only after a detailed review of the parties’ fulfilment of their hold-separate obligations. In Western Digital/Hitachi, MOFCOM carried out an investigation into the parties’ alleged failure to observe the hold-separate obligation, which resulted in a delayed and only partial removal of the condition in October 2015 and a fine of 600,000 yuan (c. USD 90,000) for two violations. MOFCOM also imposed a 24-month hold-separate obligation in agricultural trader Marubeni’s buyout of Gavilon in April 2013. Most recently, MOFCOM imposed the longest hold-separate obligation to date in the MediaTek/Mstar merger in August 2013. There, MOFCOM required Mstar’s LCD chip business to be independently operated for 36 months. In contrast to the four hold-separate conditions previously imposed by MOFCOM, the condition in ASE/Siliconware automatically expires after a fixed period. This is a significant advantage for the Parties, as MOFCOM’s approval process for removing a hold-separate condition can be lengthy and complicated. Finally, this shows that MOFCOM will pay close attention to the impact of a merger on Chinese market players, even if the merging parties’ market shares are low. This is in line with MOFCOM’s mandate under Article 24 of the Anti-Monopoly Law, which is to assess the impact of a merger on the development of the national economy. Considering that the development of the high tech sector is a priority for the Chinese government, we may see more hold-separate conditions in the future.  Dated 24 November 2017. English version available at http://english.mofcom.gov.cn/article/policyrelease/buwei/201711/20171102677556.shtml. Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Antitrust and Competition Practice Group, or the authors in the firm’s Hong Kong office: Sébastien Evrard (+852 2214 3798, firstname.lastname@example.org) Emily Seo (+852 2214 3725, email@example.com) Please also feel free to contact any of the following practice group leaders and members: Hong Kong Kelly Austin (+852 2214 3788, firstname.lastname@example.org) Sébastien Evrard (+852 2214 3798, email@example.com) Brussels Peter Alexiadis (+32 2 554 72 00, firstname.lastname@example.org) Jens-Olrik Murach (+32 2 554 72 40, email@example.com) David Wood (+32 2 554 72 10, firstname.lastname@example.org) London Patrick Doris (+44 20 7071 4276, email@example.com) Charles Falconer (+44 20 7071 4270, firstname.lastname@example.org) Ali Nikpay (+44 20 7071 4273, email@example.com) Philip Rocher (+44 20 7071 4202, firstname.lastname@example.org) Deirdre Taylor (+44 20 7071 4274, email@example.com) Munich Michael Walther (+49 89 189 33-180, firstname.lastname@example.org) Kai Gesing (+49 89 189 33 180, email@example.com) Washington, D.C. D. Jarrett Arp (+1 202-955-8678, firstname.lastname@example.org) Adam Di Vincenzo (+1 202-887-3704, email@example.com) Scott D. Hammond (+1 202-887-3684, firstname.lastname@example.org) Joseph Kattan P.C. (+1 202-955-8239, email@example.com) Joshua Lipton (+1 202-955-8226, firstname.lastname@example.org) Cynthia Richman (+1 202-955-8234, email@example.com) Joshua H. Soven (+1 202-955-8503, firstname.lastname@example.org) New York John A. Herfort (+1 212-351-3832, email@example.com) Peter Sullivan (+1 212-351-5370, firstname.lastname@example.org) Denver Richard H. Cunningham (+1 303-298-5752, email@example.com) Ryan T. Bergsieker – Denver (+1 303-298-5774, firstname.lastname@example.org) Dallas Veronica S. Lewis (+1 214-698-3320, email@example.com) Brian Robison (+1 214-698-3370, firstname.lastname@example.org) M. Sean Royall (+1 214-698-3256, email@example.com) Robert C. Walters (+1 214-698-3114, firstname.lastname@example.org) San Francisco Rachel S. Brass (+1 415-393-8293, email@example.com) Trey Nicoud (+1 415-393-8308, firstname.lastname@example.org) Los Angeles Daniel G. Swanson (+1 213-229-7430, email@example.com) Samuel G. Liversidge (+1 213-229-7420, firstname.lastname@example.org) Jay P. Srinivasan (+1 213-229-7296, email@example.com) Rod J. Stone (+1 213-229-7256, firstname.lastname@example.org) Sarretta C. McDonough (+1 213-229-7227, email@example.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Topics to be discussed include: Global Enforcement and Regulatory Developments The Impact of the Election on Enforcement and Regulation Key Tips for Identifying and Addressing Top Areas of Compliance Risk Practical Recommendations for Improving Corporate Compliance DOJ and SEC Priorities, Policies and Penalties Update on Key Governance Issues and Regulatory Requirements Who should view this program: In-house counsel, directors, senior executives, corporate governance and compliance officers, finance and audit staff, corporate secretaries and others responsible for corporate compliance. View Slides [PDF] PANELISTS: This year’s presentation assembles the deepest bench of expertise in the panel’s 13-year history. The following experts join Joe Warin, who now is in his 13th year of hosting ‘Challenges in Compliance and Corporate Governance’: New Gibson Dunn partner Stuart Delery, the former Acting Associate Attorney General, the No. 3 position in the Justice Department. In that role, Stuart was a member of DOJ’s senior management and oversaw the civil and criminal work of five litigating divisions — Antitrust, Civil, Tax, Civil Rights, and Environment and Natural Resources — as well as other components. Previously, Stuart led the Civil Division, overseeing litigation involving the FCA, Food Drug and Cosmetic Act and FIRREA, as well as challenges to statutes, regulations, and government actions in trial courts and on appeal. New Gibson Dunn partner Stephanie Brooker, most recently Enforcement Director at the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), the lead federal regulator with responsibility for enforcing the U.S. AML laws and regulations. Stephanie also served as Chief of the Asset Forfeiture and Money Laundering Section, U.S. Attorney’s Office for the District of Columbia, and has nearly 8 years of experience as a federal prosecutor. New Gibson Dunn partner Patrick Stokes, recently the Chief of the Foreign Corrupt Practices Act Unit and previously the Co-Chief of the Securities and Financial Fraud Unit of the Fraud Section of DOJ. Patrick has nearly 18 years of experience as a federal prosecutor. New Gibson Dunn partner Adam M. Smith, an experienced international trade lawyer who previously served in the Obama Administration as the Senior Advisor to the Director of OFAC and as the Director for Multilateral Affairs on the National Security Council. Gibson Dunn partner Lori Zyskowski, a member of the firm’s Securities Regulation and Corporate Governance Practice Group who was previously Executive Counsel, Corporate, Securities & Finance at GE. Lori advises clients on a wide array of securities, compliance and corporate governance issues, and provides a unique perspective gained from over 12 years working in-house at S&P 500 corporations. Gibson Dunn associate Sarah E. Fortt, a member of the firm’s Securities Regulation and Corporate Governance Practice Group. Sarah advises clients on a wide array of securities, disclosure and corporate governance issues. MODERATOR: F. Joseph Warin — Co-Chair of the firm’s White Collar Defense and Investigations practice and former Assistant United States Attorney in Washington, D.C., Mr. Warin is one of only ten lawyers in the United States with Chambers rankings in five categories. Chambers Latin America 2017 ranked him in tier one in Latin-America wide: Fraud and Corporate Investigations. He received the Chambers USA Award for Excellence in 2014 in the category of Litigation: White Collar Crime & Government Investigations. Mr. Warin was honored by Who’s Who Legal for a second year in a row as its 2015 Investigative Lawyer of the Year. In 2016, Who’s Who Legal and Global Investigations Review also name Mr. Warin to their list of World’s Ten-Most Highly Regarded Investigations Lawyers. He has been listed in The Best Lawyers in America® every year from 2006 – 2016 for White Collar Criminal Defense. Best Lawyers® also named Mr. Warin 2016 Lawyer of the Year for White Collar Criminal Defense in the District of Columbia. In 2016, he was named among the Lawdragon 500 Leading Lawyers in America. From 2015-2017, he has been selected by Chambers and Partners Latin America as a top tier lawyer, Latin America-wide, in Fraud & Corporate Investigations. Chambers Global 2016 ranked Mr. Warin as a top attorney for USA – FCPA. In 2016 Chambers USA: America’s Leading Lawyers for Business selected Mr. Warin as a Leading Lawyer in the areas of Securities Regulation Enforcement, Securities, and Litigation: FCPA in the nation. He was also ranked as a Leading Lawyer in the areas of Securities Litigation and White Collar Crime and Government Investigations in the District of Columbia. He was selected as a 2015 Top Lawyer for Criminal Defense by Washingtonian magazine. U.S. Legal 500 named Mr. Warin a 2015 Leading Lawyer for White Collar Criminal Defense Litigation. Benchmark Litigation has recognized him a U.S. White Collar Crime Litigator Star for three consecutive years (2013-2015). In 2013, Mr. Warin was awarded the Best FCPA Client Service Award by Main Justice. He was also named to the publication’s FCPA Masters list.
Click for PDF The year 2016 has been another of continuing developments in the UK’s white collar sector. These have ranged from the Competition and Markets Authority’s largest ever fine, to the UK’s second deferred prosecution agreement, to the continuing enforcement efforts of the Serious Fraud Office (“SFO”), National Crime Agency (“NCA”) and the Financial Conduct Authority (“FCA”), as well as of a myriad range of other enforcement bodies. Fines and confiscations totaling over £130 million were imposed and sentences totaling over 115 years. The year also saw significant legislative changes in the forthcoming Criminal Finances Bill and the Policing and Crime Bill. Table of Contents 1.…. Developments Relating to the White Collar Sector as a Whole Panama Papers Failure to prevent economic crime Deferred Prosecution Agreements David Green and the Future of the SFO Use of Judicial Review to challenge prosecutorial decisions Privilege and the SFO’s and FCA’s approach to co-operation Privilege in witness accounts obtained in investigations Crown criticized for warrant to recover materials held by a law firm The FCA will not rely on internal investigations International co-operation between Regulators and Prosecutors FCA’s proposal for New Whistleblowing Regime Modern Slavery Act Health and Safety and Corporate Manslaughter 2.… Bribery and Corruption Enforcement: Bribery Act section 7 Enforcement: Bribery Act sections 1-2 – giving/receiving bribes Enforcement: Prevention of Corruption Act Enforcement: Ongoing Foreign Bribery Prosecutions Enforcement: Ongoing Foreign Bribery Investigations Enforcement: Ongoing Domestic Bribery and Corruption Prosecutions and Investigations 3.… Fraud Investigations: SFO Enforcement: SFO Enforcement: FCA Confiscation orders 4.… Financial and Trade Sanctions Brexit The Office of Financial Sanctions Implementation and Policing and Crime Bill Key Developments in Sanctions Regimes Additional Powers for FCA Enforcement Case Law 5.… Money Laundering Legislation: Criminal Finances Bill Legislation: Guidelines on risk-based supervision under the Fourth Money Laundering Directive Legislation: Beneficial Ownership Register Enforcement: United Kingdom Enforcement: Offshore 6.… Competition Enforcement 7.…. Insider Trading and Market Abuse and other Financial Sector Wrongdoing Market Abuse Regulation and Criminal Sanctions for Market Abuse Directive FCA Enforcement – Insider Dealing Civil enforcement for Market Abuse 1. Developments Relating to the White Collar Sector as a Whole Panama Papers Some measure of the current regulatory tone, the planned reforms and legislative developments result, from the controversy arising from the so-called “Panama Papers” and related press reporting. On April 4, 2016, it was reported that 11 million documents had been leaked from the Panamanian law firm Mossack Fonseca. This was not the first such data leak. Shortly before the first Panama stories emerged the Monégasque company Unaoil – also discussed further below – was the subject of a data leak, and other offshore leaks have taken place over the last few years. Most recently 1.3m files from the Bahamian Company Registry have been leaked. Panama, however, saw the swiftest response. On April 7, it was reported that the FCA had contacted 20 banks imposing a deadline of April 15 for the banks to report to the FCA on any links they had to Mossack Fonseca. In a Freedom of Information Act response the FCA has since confirmed that, in fact, the FCA had contacted 64 firms, all of which responded. On November 8, 2016 Chancellor of the Exchequer, Philip Hammond, and Home Secretary, Amber Rudd, updated the House of Commons on the work of the Panama Papers Taskforce created by David Cameron in April 2016 with funding of £10 million. This included the announcement that the Taskforce is investigating more than 30 individuals and companies for civil and criminal offences linked to tax fraud and financial wrongdoing. The taskforce has also identified links to eight SFO investigations, and announced that a number of individuals have come forward to settle their affairs in advance of any action being taken against them. Failure to prevent economic crime As reported in our 2016 Mid-Year UK White Collar Crime Update, the British government in September 2015 announced that it would not proceed with the creation of a new strict liability offence of failure of a commercial organization to prevent economic crime. In the wake of the Panama Papers, this decision was reversed, and on May 12, 2016 the government announced a consultation on this new offence. On September 5, 2016, remarks made by the Attorney General Jeremy Wright at the Cambridge Symposium on Economic Crime that the government would “soon consult on plans to extend the scope of the criminal offence of a corporation ‘failing to prevent’ offending beyond bribery to other economic crimes, such as money laundering, false accounting and fraud” led to a flurry of press reports. However, as the consultation has yet to be launched and no details of the proposed offence have been disclosed, it remains to be seen whether a strict liability corporate offence will ultimately be implemented. Deferred Prosecution Agreements The first half of 2016 has seen the UK’s second deferred prosecution agreement (“DPA”). This was in relation to an unnamed company (named only as XYZ Limited) and will be discussed in detail below in the section on Bribery Act enforcement. There continue to be questions and uncertainties over the extent and speed of co-operation that will be required by the prosecuting authorities to secure a DPA. There also continue to be questions asked as to the financial benefit, or otherwise, of a DPA. As noted in our 2016 Mid-Year Update on Corporate Non-Prosecution Agreements (NPAs) and Deferred Prosecution Agreements (DPAs), and as discussed further below in the section of financial sanctions, the DPA regime is to be extended to cover financial sanctions offences under the Policing and Crime Bill that is currently before Parliament. David Green and the Future of the SFO On February 9, 2016 the SFO announced that its Director, David Green QC, had been given a two year contract extension. Since then, the upheavals in British politics have resulted in Theresa May becoming Prime Minister. This may precipitate a period of uncertainty for the SFO as May, while Home Secretary, was reported to have been considering ways to abolish the SFO on a number of occasions. Use of Judicial Review to challenge prosecutorial decisions One feature of 2016 has been the use to which judicial review proceedings have been put. As discussed below, in both the Soma Oil and Unaoil investigations those acting for the companies sought to challenge decisions taken by the prosecutors by way of judicial review. While judicial review has been used before, such as when Corner House challenged the SFO’s decision not to prosecute BAE, it does appear to be a tactic growing in frequency with the examples from 2016 building on those from 2015 mentioned in our 2015 Year End United Kingdom White Collar Crime Update. The British authorities, however, may not be warming to this practice. Noteworthy is the service of a section 2 notice under the Criminal Justice Act 1987 on a partner of the law firm of Clifford Chance who had commenced the judicial review on behalf of Unaoil. It was reported in the press that the partner in question was threatened with personal criminal prosecution. Privilege and the SFO’s and FCA’s approach to co-operation On June 6, 2016 the SFO issued new guidance on the Presence of interviewee’s legal adviser at a section 2 interview (in which a person is compelled to provide answers in furtherance of the SFO’s investigation). This guidance continues the thread of the SFO seeking to diminish the prospects of legal privilege and advice interfering with an investigation, and follows on from the decision in R (on the application of Jason Lord & others) v Director of the Serious Fraud Office  EWHC 865 (Admin), discussed in our 2015 Year End UK White Collar Crime Alert, in which the SFO’s decision to bar the lawyers acting for the company from attending an interview with that company’s employee was upheld. The Guidance states that a lawyer “will be allowed to attend the interview if the case controller believes it likely they will assist the purpose of the interview and/or investigation” (emphasis added). It is the case therefore, that SFO policy gives discretion to the SFO itself as to whether a person being interviewed will be able to have a lawyer attend. This Guidance is significant and timely as the number of interviews conducted by the SFO went from 129 in 2014 to 177 in 2015. In addition, the Guidance states that a lawyer must give undertakings to the SFO that they owe no duty of disclosure “to any other person (natural or legal) who may come under suspicion during the course of the investigation, including the interviewee’s employer“. If the lawyer cannot give such an undertaking “they are unlikely to be allowed to attend the interview“. Further, the Guidance places restrictions on what the lawyer may and may not do during the interview: “If a particular lawyer is allowed to attend the interview, it will be on the agreed understanding that certain ground rules apply. They may, if they are able to, advise the interviewee in the event that any matter of legal professional privilege (LPP) arises. Otherwise, they must not do anything to undermine the free flow of information which the interviewee, by law, is required to give. It is the duty of the interviewer to ensure that this rule is observed. In the event of any perceived infraction, or obstruction of the interview process generally, the lawyer will be excluded from the interview“. While it is possible to sympathise with the SFO’s desire to have unimpeded conduct of its investigation, the fact that access to legal advice for those being interviewed by the SFO is subject to restriction at the discretion of the SFO will not be welcome in all quarters. Privilege in witness accounts obtained in investigations In The RBS Rights Issue Litigation  EWHC 3161 (Ch), the High Court applied the decision in Three Rivers No 5 taking a narrow approach to the application of legal advice privilege. RBS had sought to withhold notes prepared by external counsel of interviews that had been taken in the context of a response to a sub-poena issued by the SEC and notes prepared by in house counsel of interviews conducted in the context of a separate internal investigation disclosure of which was sought by the claimant’s in unrelated litigation. Given the decision in Three Rivers No 5 ( EWCA Civ 218), it is not surprising that Hildyard J was not willing to accept that the notes were subject to legal advice privilege. What is of note to those involved in global investigations is that Hildyard J would not accept that the notes in question were privileged as lawyer’s working papers. RBS had argued that the notes were not verbatim transcripts, were produced by legal counsel for the purpose of providing legal advice to RBS, evidenced the impressions of the lawyer for the purposes of advising their client, and in the case of some of the notes explicitly stated that they reflect external counsel’s mental impressions. However, RBS were not able to identify any respect in which the notes did in fact record lawyer’s mental impressions. This should act as a reminder that under English law, unless litigation is in prospect or under way the circumstances in which privilege can be claimed are limited. As of December 12, 2016 RBS has been granted leave to appeal the judgment to the Supreme Court, leapfrogging the Court of Appeal. The SFO’s approach to the claims of privilege over witness interviews conducted in the context of internal investigations was addressed by Alun Milfurd, the SFO’s general counsel on March 29, 2016. The SFO is primarily concerned to obtain first witness accounts which can give it a quicker route to understanding the facts as well as serving as an important tool for the SFO, as prosecutor, to fulfill its duty to assess witness credibility. While publicly stating that it is not concerned to obtain communications between lawyers and their clients which concern rights and liabilities, and that, in accordance with English law, it will not hold a well-made out claim of privilege against a company under investigation, it has also stated that it will consider it a “significant mark of cooperation” if a company is willing to give up witness accounts sought by the SFO notwithstanding a well-made out claim to privilege or if it structures its internal investigations in such a way as not to attract privilege over witness interviews. Mr Milfurd also stated that the SFO will review very carefully whether privilege does apply over notes of witness interviews “we will view as uncooperative false or exaggerated claims of privilege, and we are prepared to litigate over them“. In each situation the decision as to whether or not an attempt should be made to assert privilege over notes of witness interviews will involve a careful balancing of risk. However, it seems clear that the risks of asserting a weak claim to privilege will likely outweigh the consequences of disclosure of information in response to the initial request. Where there is a likelihood that notes of witness interviews will be handed over to prosecutorial authorities timely consideration should also be given to whether employees should be provided with their own counsel at the initial stages of an internal investigation. Crown criticized for warrant to recover materials held by a law firm In Clyde and Co (Scotland) v The Procurator Fiscal, Edinburgh  HCJAC 93, the Scottish High Court criticised the Scottish prosecutor, known as the Procurator Fiscal, for its approach to seeking to enforce a search warrant to seize documents held by the Edinburgh office of the law firm, Clyde and Co. The case discusses the application of the principles laid down in an unpublished decision, H Complainers, which apply when executing search warrants at lawyers’ offices. The firm represented its client, “S”, in civil proceedings, the underlying facts of which were also relevant to an investigation being conducted by Police Scotland. During the course of the representation S provided Clyde and Co with certain documents, which Police Scotland sought during its investigation. A representative of Police Scotland had calls with Clyde and Co, who explained that certain of the documents were protected by legal privilege and confidential. Clyde and Co explained that it would consider and take instructions regarding the extent to which anything could or should be released. In anticipation that an application for a warrant might be made, Clyde and Co wrote to the clerk of the Sheriff in Edinburgh requesting that they contact Clyde and Co in the event of any application to the sheriff with a view to S being represented at any hearing before the sheriff. Clyde and Co explained that the firm and client had provided such assistance to Police Scotland as they could within the confines of the Data Protection Act 1998, confidentiality and legal privilege. Notwithstanding that, without first notifying the law firm, the Crown applied for and was granted a warrant to seize materials that may have been held by the firm. Clyde and Co’s challenge to the warrant was upheld, in part because the Crown had failed to follow the unpublished decision in H Complainers. Taken together the two cases make it clear that: The Crown has a duty to disclose to the Court that the subject of the warrant is a law firm that is unwilling to provide documents on the basis that they are subject to legal privilege. A police officer seeking a warrant must not provide information which he knows to be inaccurate or misleading and he should provide all relevant information. If it is not alleged that the law firm is involved in any form of illegality, nor likely to destroy, or conceal, the relevant material, an application for a warrant to search its offices is likely to be oppressive (and therefore refused). The Court has a duty to protect the importance of legal privilege, and must give that privilege due consideration in deciding whether it is appropriate to issue a warrant to search a law firm’s offices. Where a warrant is issued to search a law firm’s offices and where legal privilege is being claimed, any warrant ought either to have provided for independent supervision of the police search by a court appointed representative or to have contained a requirement that any material seized should be sealed unread and delivered to the court to adjudicate upon the issue. The case is a reminder that law firms’ offices can be the subject of search warrants, but that such warrants will not be granted unless there is a suggestion that the firm itself was involved in some illegal conduct, or there is a risk the firm may conceal or destroy material. See our 2015 Year End United Kingdom White Collar Crime Update for a similar case where an order seeking the disclosure of 180,000 documents from law firms was upheld. The FCA will not rely on internal investigations Mark Rutherford, the FCA’s director of enforcement and market oversight has publicly stated that the FCA will not rely on the content of internal investigations. Mr Rutherford was speaking at the American Bar Association’s Fifth London White Collar Crime Institute on October 10, 2016. He explained that from the FCA’s perspective it has a duty to carry out independent and comprehensive and independent investigations and “There is an inescapable conflict of interest, either actual or perceived, in the way internal investigations are conducted“. Mr Rutherford stated that this should not prevent assistance being provided to the FCA and indicated that counsel who have carried out an investigation can provide valuable assistance in pointing the regulator in the direction of the most helpful witnesses. He also noted that internal investigations can be of assistance in relation to jurisdictions where the FCA has difficulties in obtaining information. Practitioners should therefore be aware that the value in internal investigations from an advocacy perspective may not arise until negotiations with the regulator begin, firstly as to whether a referral to enforcement should be made and secondly when the level and nature of sanction is discussed. International co-operation between Regulators and Prosecutors International co-operation in the area of white collar enforcement remains high, which is necessary given the number of cases with cross-border elements. David Green said earlier this year that the SFO has “invested real effort in building strong cooperative relations with foreign agencies in key financial centres across the globe. This involves secondments, rolling discussions, exchange of information and coordinated activity“. At a Global Investigations Review (GIR) event in New York in September 2016, Patrick Stokes, the former head of the US Department of Justice’s FCPA unit and new Gibson Dunn partner, engaged in a dialogue with Ben Morgan, the Serious Fraud Office’s lead anticorruption enforcer, on “cooperation, voluntary disclosures, deferred prosecution agreements and other aspects of the evolving transatlantic legal landscape“. This is worth reading in full. In the context of a company that self-reported to the US authorities but not the UK authorities, Ben Morgan had this to say: “If they don’t have the courtesy to come and talk to us about the risk they face, that’s a pretty bad start. It goes without saying that any sophisticated company should realise that we speak several times a week, so the likelihood is that it would come back to us anyway, so it really is well worth having that conversation directly. It doesn’t mean that we’ll take it and it doesn’t mean that you’re committed to a definite penalty, but it sets the right start for the range of options”. The FCA reports that international cooperation in the white collar area remains high. The NCA continues to work closely with national agencies in other countries as part of the Interpol and Euripol networks. It was recently announced that the Criminal Division of the US DoJ is to second a lawyer to the UK for two years to work at the FCA and the SFO, “to further cooperation between the jurisdictions and share best practice“. The secondee will spend one year at the FCA, one at the SFO, and one in Washington with the Fraud Section of the Criminal Division, investigating and prosecuting transnational economic crimes and training colleagues in the light of their experience in the UK. The recruitment process was announced on 9 December 2016. A DoJ representative said that “To address crime on a global scale, we are forging deep coalitions with our international enforcement and regulatory counterparts, and our relationship with the United Kingdom’s Financial Conduct Authority (FCA) and the Serious Fraud Office (SFO) is vitally important in these efforts”. David Green, Director of the SFO, added: “This is a concrete demonstration of the close and valued relationship we have built with our American colleagues, which has been so evident in our casework“. FCA’s proposal for New Whistleblowing Regime As noted in our 2015 Year End UK White Collar Crime Update, in October 2015 the FCA and PRA published new rules in relation to whistleblowing, primarily directed at UK firms’ internal whistleblowing procedures, which were due to be implemented by September 7, 2016. On September 28, 2016, the FCA published a consultation paper proposing to extend its whistleblowing regime to UK branches of overseas banks. The consultation closes on January 9, 2017. Modern Slavery Act On July 31, 2016 the British government published its Modern Slavery Act Review, covering the first 12 months of the act. This made 29 recommendations for further and better reporting, training and prosecution. It also noted that 289 offences were prosecuted during 2015 of which 27 were under the Modern Slavery Act itself and 262 under the pre-existing human trafficking legislation. April 2016 also saw relevant companies issue their first slavery and human trafficking statements pursuant to section 54 of the Modern Slavery Act. Under section 54, commercial organisations that supply goods or services and have a total turnover of £36 million or more are required to issue publically a board-approved slavery and human trafficking statement that details “all the actions” the company has taken to eliminate slavery and human trafficking from their business and supply chain during the financial year. Health and Safety and Corporate Manslaughter On February 1, 2016 the new sentencing guidelines in relation to health and safety, corporate manslaughter, food safety and food hygiene came into force, with the aim of creating a more consistent approach to prosecutions in this field. These guidelines allow for higher fines to be given to larger companies because their turnover is given substantial weight when determining the level of fine. An illustration of the guidelines at work was shown in the Merlin Case arising from an accident on a theme park roller coaster. In this case culpability and harm were regarded as very high, creating a starting point which was adjusted in relation to both aggregating and mitigating factors. Merlin was fined £5,000,000, a substantial reduction from the £7,500,000 fine that they would have faced had it not been for the early guilty plea. Merlin was viewed as a large organisation due to its high turnover. A medium sized organisation with a turnover between £10 million and £50 million would have been fined £2,000,000 for the same conduct. The new guidelines allow for focus to be given to the risk of harm, as opposed to just the actual harm caused. This has led to a substantial increase in the level of fines and may also lead to a higher number of prosecutions being taken in this area going forward. An example of this was the sentence imposed upon ConocoPhillips (UK) Limited where despite no actual harm being caused as a result of the breaches a £3,000,000 fine was given. Other substantial fines under the 2016 guidelines have ranged from £800,000 to £2,600,000 (plus costs), showing the growing trend for increased fines and a shift from the thousands bracket to the millions. To date there have been no appeals regarding any sentences given under the new guidelines. In addition, there have been 4 (reported) sentences handed down for corporate manslaughter during 2016. The largest fine was £600,000. 2. Bribery and Corruption Enforcement of the UK’s anti-corruption laws has continued apace during 2016. A total of 14 individuals have been convicted, 6 of whom for offences under the Bribery Act. This brings the total number of individuals convicted since 2008 to 89. Fewer companies have been the subject of concluded enforcements in 2016, but this may be only a temporary blip as a significant number of enforcements are expected to conclude during 2017, and a number of trials against corporate defendants are already scheduled for the coming year. Based on these enforcements, a number of trends are visible. Firstly, the UK’s second DPA for XYZ Limited is illustrative of the expanding role for this prosecutorial tool. Secondly, we are seeing the continuing emergence of other enforcement bodies alongside the Serious Fraud Office. For example, the International Corruption Unit (the “ICU”) set up during 2015 within the National Crime Agency has started to flex its muscles. The ICU now has 50-60 staff and we are aware that it has started to conduct raids in relation to Bribery Act offences. Other prosecutorial bodies currently with bribery and corruption investigations or prosecutions on foot include the NCA more broadly, the Metropolitan Police Complex Fraud Team, the City of London Police, the Insurance Fraud Enforcement Department of the City of London Police, the Surrey and Sussex Economic Crime Unit, and Leicestershire Police. With the passage of time, we are seeing a growing number of instances where charges are being laid under both the Bribery Act and the pre-Bribery Act legislation. During 2016 this can be seen in the examples of XYZ Limited, as well as Wesley Mezzone, John Reynolds, and the individuals from Sarclad Limited. Despite this, research from Henley Business School published during 2016 conducted over 12 years and based on interviews with over 900 business leaders suggests that more than 85% of UK business managers are involved in international bribery on a monthly basis. The research also found that 80 percent of board-level executives admitted to being aware of the practice. Enforcement: Bribery Act section 7 Braid Logistics (UK) Limited In April 2016, Braid Logistics (UK) Limited (“Braid“) became the latest company to enter into a civil settlement with Scotland’s Civil Recovery Unit under the amnesty program run by Scotland’s Crown Office and Procurator Fiscal Service. Under the terms of the agreement with the Scottish authorities Braid will pay the Crown £2.2 million, its total gross profit resulting from the unlawful conduct. Having become aware of potentially-improper activities in relation to two freight forwarding contracts in 2012, Braid voluntarily made a self-report to the Crown Office accepting responsibility for contraventions of both the section 1 (paying a bribe) and section 7 (failing to prevent an associated person from paying a bribe) offences under the Bribery Act. Only limited information has been released on the underlying conduct that gave rise to this self-report as the authorities are considering whether to prosecute the individuals involved. In relation to the first of the contracts, what is known is that a Braid employee and the employee of a customer agreed a scheme whereby unauthorised expenses incurred by the customer’s employee were funded by the dishonest inflation of invoices provided to that customer. The expenses included personal travel, holidays, gifts, hotels, car hire and cash. During the investigation into this contract, separate bribery concerns in relation to a profit-sharing arrangement with a director of a second customer were discovered. Under this arrangement the profit achieved on services provided to the customer was split in return for orders continuing to be placed with Braid. XYZ Limited On July 11, 2016, the SFO announced that it had concluded the UK’s second DPA with a company named only as XYZ Limited, a wholly-owned subsidiary of a US parent company named only as ABC Companies LLC. XYZ Limited is described in the Serious Fraud Office v XYZ Limited (Case no. U20150856) as a “small to medium sized enterprise (“SME”) which between June 2004 and June 2012 was involved, through its controlling minds, in the offer and/or payment of bribes to secure contracts in foreign jurisdictions“. Further it was held that “in total, of 74 contracts which were ultimately examined, 28 are said to be “implicated”“, and that these contracts represented 15.81% of XYZ’s turnover and 20.82% of its gross profit during that period. In 2012 the parent company instituted a new global compliance program which resulted in the discovery of the bribes. An internal investigation was launched and the company self-reported to the SFO and then continued to co-operate. The company is unnamed because of “ongoing criminal proceedings” against individuals related to the company. The offences were a mixture of giving corrupt payments under the Prevention of Corruption Act, as well as the section 1 and section 7 offences under the Bribery Act. For an in-depth discussion of the terms of the DPA, see our 2016 Mid-Year United Kingdom White Collar Crime Update. Enforcement: Bribery Act sections 1-2 – giving/receiving bribes In addition to the above-mentioned enforcements against Braid and XYZ Limited for the section 1 offence, there have been a number of other instances during 2016 of the enforcement of this offence. Saeed Shakir and Muzaffar Hussain On March 15, 2016, sentences of 20 months and 3 years were handed down to Saeed Shakir and Muzaffar Hussain for offering a bribe of £500, and a promise of a further payment to a local government official in the UK. These were the 11th and 12th convictions of individuals under the Bribery Act. Wesley Mezzone and John Reynolds On September 26, 2016, sentences of 20 months and 30 months were handed down to Wesley Mezzone and John Reynolds respectively. The charges related to offences committed between 2010 and 2013, when Mr Reynolds worked as an IT network manager at East Sussex Fire and Rescue Service (“ESFRS”). During this period, he had disclosed rival bids for computer equipment supplies to Mr Mezzone’s company, Mason IT Limited, recommended that the ESFRS buy from Mason IT, and received personal payments from Mason IT. Mr Reynolds earned more than £30,000 from this relationship. Mr Reynolds was also convicted of stealing some £70,765 worth of computer and telecom equipment and a pager from ESFRS. Mr Reynolds was found guilty of theft by employee, fraud by abuse of position, and false accounting as well as of the section 2 offence of receiving a bribe under the Bribery Act, and the offence of receiving a corrupt payment under the Prevention of Corruption Act. Mr Mezzone was found guilty of paying a bribe under the Bribery Act, and of making a corrupt payment under the earlier legislation. These were the 13th and 14th individuals convicted under the Bribery Act. Aisha Elliot and Stephen Oates As reported in our 2016 Mid-Year United Kingdom White Collar Crime Update, the City of London Police’s Insurance Fraud Enforcement Department brought its first case under the Bribery Act against Aisha Elliot and Stephen Oates. Ms Elliot, who worked at a claims management company, was charged with offering a bribe (section 1) and Mr Oates with receiving a bribe (section 2). On December 20, 2016 each was sentenced to 12 months’ imprisonment. These were the 15th and 16th individuals convicted under the Bribery Act. The conduct related to the sale of confidential information by Mr Oates for £150 for each sale. These cases demonstrate the continuing appetite of the British authorities to prosecute individuals for fairly small-scale acts of bribery. Sarclad Limited – individuals Charges have been brought against Sarclad Limited’s former director Michael Sorby and former sales manager, Adrian Leek. Mr Sorby and Mr Leek were charged with one count of conspiracy to bribe under section 1 of the Bribery Act, and also one count of conspiracy to corrupt contrary to section 1 Prevention of Corruption Act. The press release from the SFO dated February 25, 2016 has now been removed from its website. Gary West and Stuart Stone As reported in our 2014 Year End FCPA Update, in December 2014 the SFO secured its first convictions under the Bribery Act of Gary West and Stuart Stone. In March 2016 Mr West applied to the Court of Appeal for permission to appeal his 4-year sentence. Permission was refused. A similar application had earlier been made by Mr Stone regarding his 6-year sentence which was also refused. On July 29, 2016, the SFO announced that it had secured confiscation orders against the two defendants. Gary West was ordered to pay £52,805 and Stuart Stone was ordered to pay £1,141,680. The SFO has reported that Mr Stone has so far paid £835,589.07 towards this confiscation, and been granted an extension to pay the balance until 28 January 2017. Mr West has paid £15,663.78. Enforcement: Prevention of Corruption Act Simon Davies and Robert Gillam At a hearing on June 3, 2016, Simon Davies and Robert Gillam each pleaded guilty to the making of a corrupt payment in 2009 of £122,000 to Robert Gannon, a British national who pleaded guilty to related charges in the U.S. in November 2015. Mr Gannon was jailed for one year in the US. The payment was made in return for confidential information in relation to a £5m contract to supply bomb disposal equipment in Afghanistan. Mr Gillam and Mr Davies were sentenced to two years and eleven months’ imprisonment and were disqualified from acting as company directors for five and two years respectively. They are to be the subject of confiscation proceedings under the Proceeds of Crime Act. Four convicted in relation to corruption of a member of the Royal Household On August 9, 2016 the second of two trials concluded resulting in convictions of three individuals and the guilty plea of a fourth for offences of conspiring to give and receive corrupt payments. Ronald Harper was a member of the British Royal Household entrusted with overseeing the award of works contracts. He accepted payments from Christopher Murphy and Aseai Zlaoui on behalf of one company, and Stephen Thompson on behalf of a second company in return for awarding them contracts. At a hearing on September 28, 2016 the four were sentenced. Mr Harper was sentenced to 5 years’ imprisonment; Mr Murphy to 18 months; Mr Zlaoui to 12 months suspended for 2 years and 200 hours unpaid work; and Mr Thompson to 15 months for his corruption offence. Richard Moxon and Peter Lewis The IT director of an NHS trust – Peter Lewis – pleaded guilty on November 21, 2016 to one count of receiving corrupt payments totalling £80,970 in return for awarding a contract valued at £950,000. His co-defendant – Richard Moxon – had earlier pleaded guilty at a hearing in March 2016. On January 6, 2017 Mr Lewis was sentenced to 3 and a half years’ imprisonment, and Mr Moxon to 14 months’. Enforcement: Ongoing Foreign Bribery Prosecutions F.H. Bertling Limited On July 13, 2016 the SFO announced charges against F.H. Bertling Limited, and seven individuals (Peter Ferdinand, Marc Schweiger, Stephen Elmer, Joerg Blumberg, Dirk Jürgensen, Giuseppe Morreale, and Ralf Peterson). The charges relate to an alleged conspiracy to “bribe an agent of the Angolan state oil company, Sonangol, to further F.H. Bertling’s business operations in that country“. The offences are alleged to have taken place in 2005 and 2006. The Pre-Trial Review is scheduled for July 20, 2017. [Withheld] Enforcement: Ongoing Foreign Bribery Investigations Rolls Royce In May and November 2016, it was reported that the SFO had extended its investigation into Rolls Royce plc over suspicions that Rolls Royce made corrupt payments via intermediaries to secure contracts in Nigeria and Iraq. These fresh allegations are added to the existing SFO investigation, which commenced in 2012, concerning suspicions that Rolls Royce paid bribes to agents in China, Brazil and Indonesia. Part of the investigation is focused on the relationship between Unaoil and Rolls Royce. Unaoil represented Rolls Royce in several countries, and whilst Unaoil itself is the subject of a separate on-going SFO investigation it denies any impropriety in its relationship with Rolls Royce. Rio Tinto On November 9, 2016 it was reported that Rio Tinto had discovered multi-million-dollar payments to a contractor relating to its Simandou iron ore project in Guinea. Rio Tinto said it became aware of email correspondence relating to the payments in August 2016, and notified the authorities in the UK, the US and Australia on November 8, 2016. GlaxoSmithKline In April 2016 it was reported that GlaxoSmithKline is conducting an internal investigation into the conduct of staff in Yemen. For further information, see our 2016 Mid-Year UK White Collar Crime Update. This is alongside the investigation regarding allegations of improper conduct in China. Airbus On August 8, 2016 the SFO announced that it was opening a criminal investigation into “allegations of fraud, bribery and corruption in the civil aviation business of Airbus Group. These allegations relate to irregularities concerning third party consultants“. For further information, see our 2016 Mid-Year UK White Collar Crime Update. Eurasian Natural Resources Corporation / Eurasian Resources Group On September 9, 2016 it was reported that the SFO had conducted further interviews in this ongoing investigation. The reported interview was of the company’s former head of African operations. This follows an application by the SFO to the government for so-called “blockbuster” funding for this investigation. Unaoil The SFO’s investigation into Unaoil continues following the SFO’s request for mutual legal assistance to the Monégasque authorities and a raid of Unaoil’s premises. The allegations against Unaoil relate to claims of corruption and bid-rigging in the global oil and gas industry. Following the commencement of the SFO investigation, it was reported in October 2016 that a former Unaoil executive is now cooperating with the UK authorities, and is claiming to have paid historical bribes on Unaoil’s behalf. For further discussion, see our 2016 Mid-Year UK White Collar Crime Update. Since then Unaenergy Group Holding PTE Ltd, Unaoil Monaco S.A.M., Ata Ahsani, Cyrus Ahsani and Saman Ahsani have brought judicial review proceedings against the Serious Fraud Office which were heard on 1 December 2016. Judgment is awaited. Soma Oil and Gas As reported in our 2016 Mid-Year UK White Collar Crime Update, Soma Oil and Gas Holdings Limited was unsuccessful in its attempt to have the SFO’s investigation of it terminated. However, on December 14, 2016 the SFO announced that it had closed its investigation into Soma Oil and Gas on the basis of “insufficient evidence to provide a realistic prospect of conviction“. The SFO noted that, whilst there were “reasonable grounds to suspect the commission of offences involving corruption“, the evidence obtained during the investigation would be unlikely to meet the evidential burden required in mounting a successful prosecution. R v A Ltd & others In its judgment of July 28, 2016, the UK Court of Appeal has held that the diary entries of an absent company executive can be used to establish corporate criminal liability: R v A Ltd & others  EWCA Crim 1469. A Ltd, a company incorporated in England Wales and part of a multinational conglomerate operating in the power generation and transport sectors, was being prosecuted by the SFO for allegedly paying bribes to officials of foreign companies in several countries to secure contracts via two senior executives, X and Y. In the course of the SFO’s prosecution, the judge at the Southwark Crown Court had held that the diaries of BK, a former director of A Ltd and not a defendant in the case, was inadmissible as evidence. While both prosecution and defence both agreed that BK was the “directing mind and will of the company“, they disagreed over whether his diaries could be used as evidence. On appeal, the Court of Appeal held that the lower court had misdirected itself in law. The reliance by the prosecution on BK’s diary entries to prove BK’s guilty state of mind, and thus the guilty state of mind of the company, was “entirely orthodox and unobjectionable“. The case will now be referred back to Southwark Crown Court pending a jury trial. Enforcement: Ongoing Domestic Bribery and Corruption Prosecutions and Investigations Barratt Developments PLC On October 19, 2016, the London chief of Barratt Developments PLC, the UK’s largest housebuilder, was arrested by the London Metropolitan Police on suspicion of bribery offences. Alistair Baird, the managing director was arrested along with an unnamed former employee. These detentions form part of an ongoing inquiry by the Metropolitan Police’s Complex Fraud Team into the awarding of contracts by the company. They follow an internal investigation by Barratt which began in August 2015 and resulted in a referral by the group to the police in April 2016. National Assets Management Agency (“NAMA”) The National Crime Agency on October 6, 2016 provided an update on its investigation into the sale by NAMA of its Northern Ireland property portfolio to Cerberus Capital Management (a US investment fund) in 2014. Six people are under criminal investigation for bribery, corruption and fraud amongst other offences. More than 40 witnesses have been interviewed, and the NCA has also conducted eight searches of properties. By way of background, the Irish state asset agency sold the property portfolio to Cerberus Capital Management in 2014. In July 2015, it was alleged that £7.5m in fees paid to Tughans, a Belfast law firm engaged by Cerberus, had been moved to an Isle of Man bank account, reportedly to facilitate a payment to a Northern Ireland politician or political party. The NCA began its investigation shortly thereafter. In September 2016, the Irish government also announced its intention to set up an investigation into the NAMA deal. Metropolitan Police officer On November 1, 2016 it was reported that a serving Metropolitan Police officer and four other men had been arrested on suspicion of bribery. The 49-year-old constable, a member of Scotland Yard’s Specialist Operations team – which covers counter-terrorism, airport security and protecting public figures – was accused of misconduct in public office and bribery. The four other men were held on suspicion of bribery and aiding and abetting misconduct in public office. Scotland Yard has not released further information at this stage in order to protect the investigation by the Independent Police Complaints Commission. Bribery in football On November 17, 2016 the City of London Police announced its decision to begin a criminal investigation into a single suspected offence of bribery, following its review of the material gathered by a Daily Telegraph investigation into suspected corruption in football. R v Alexander & others Trial against six defendants commenced on September 5, 2016. Three of these – Stephen Dartnell, Kerry Lloyd, and Simon Mundy – are charged with conspiracy to make corrupt payments in connection with the purchase of agreements by KBC Lease (UK) Limited and Barclays Asset Finance from Total Asset Limited. The trial is ongoing. Mark Dobson, David Mills, Alison Mills, Michael Bancroft, Jonathan Cohen, John Cartwright In September 2016, the trial of Mark Dobson, David Mills, Alison Mills, Michael Bancroft, Jonathan Cohen, John Cartwright for corruption offences and other offences began at Southwark Crown Court. The defendants had all been arrested and charged in 2013. The alleged offences relate to dealings at the Reading Branch of the former Halifax Bank of Scotland which led to losses to the bank estimated at upwards of £266m. The trial is expected to last for 6 months. 3. Fraud Lower profile prosecutions naturally continue in relation to fraud, such as the school staff members jailed for defrauding the government of £69,000. The focus for this update, however, is on the continuing efforts of the major UK prosecutors and regulators. Investigations: SFO Barclays Reports from November 14, 2016 reveal that the SFO is planning to decide by March, 2017, whether to press charges in its criminal probe of Barclays‘ 2008 Qatar fundraising. The agency is investigating £322 million in ‘advisory fees’ paid by Barclays to the Qatar Investment Authority in a financial crisis-era deal to avoid a government bailout of Barclays. The SFO is investigating whether money was secretly invested back into Barclays without proper disclosures. Many, including former senior Barclays management, have been interviewed as part of the probe. In a related £1 billion civil claim filed by PCP Capital Partners, a private equity firm, the High Court was reportedly told that the SFO has re-interviewed various people in the case and has been continuing its interviews throughout December 2016 and January 2017. Matthew Parker QC, for the SFO, told the High Court that the agency was “broadly on course” to make a charging decision by March 2017. Foreign Exchange On March 15, 2016, the SFO formally announced that it was closing its investigation into allegations of fraudulent trading in the forex market. In its statement the SFO explained that following an investigation lasting over one and a half years and involving more than half a million documents, it had been unable to identify sufficient evidence to meet the test required to bring a prosecution under English law. The investigation had been commenced in July 2014 after the FCA had referred material to the SFO. Enforcement: SFO Tesco Supermarkets On September 9, 2016, the SFO announced that it was charging Carl Rogberg, Christopher Bush and John Scouler each with one count of fraud by abuse of position contrary to sections 1 and 4 of the Fraud Act 2006, and one count of false accounting contrary to the Theft Act 1968. The three individuals were senior executives of Tesco Supermarkets, and the alleged activity occurred between February 2014 and September 2014. The SFO’s press release added that the investigation into the company was ongoing. Rogberg, Bush and Scouler are reported as having pleaded not guilty to the fraud charges at a preliminary hearing which took place on September 22, 2016. The charges follow an investigation commenced by the SFO in October 2014 after the company admitted that it had overstated profits by £263 million because it had incorrectly booked certain payments. The scandal came to light after irregularities were reported by a whistleblower to the company’s new chief executive. Saunders Electrical Wholesale Limited On May 24, 2016, Michael Dean Strubel, Spencer Mitchell Steinberg and Jolan Marc Saunders, were convicted of conspiracy to defraud following an investigation by the SFO. The three fraudsters took almost £80 million from London investors and spent the money on yachts, cars and expensive property. The three were sentenced to a total of 21 years: Mr Saunders was sentenced to seven years for conspiracy to defraud with one year to run concurrently for acting as a director of a company whilst disqualified; Mr Strubel was sentenced to seven years’ imprisonment and Mr Steinberg was sentenced to six years and nine months’ imprisonment. The three men had induced wealthy individuals to invest significant sums (in some cases millions of pounds) in an electrical supply business which purported to be a supplier to blue chip hotel chains. The actual trade carried out by the business concerned was significantly below the levels portrayed to potential investors. They also falsely claimed to be the preferred supplier of the Olympic village ahead of the 2012 Games. Tata Steel On April 8, 2016, the SFO announced that it had opened a criminal investigation into the activities of Specialty Steels, which is a business unit of Tata Steel (UK) Limited. The investigation has been underway since December 2015. On the same day the UK’s Daily Telegraph newspaper reported that police officers are investigating allegations that certificates setting out the composition of products were falsified. The company reportedly suspended nine employees and referred itself to the SFO following an internal audit. The Daily Telegraph also noted that there is a separate trading standards investigation underway. Football Apprenticeships The SFO has charged six men in connection with the SFO’s investigation into Luis Michael Training Limited which is alleged to have claimed payments from several further education colleges for training and football apprenticeships that were never provided. On May 4, 2016 the six men appeared at Westminster Magistrates Court. All six were charged with one count of conspiracy to commit fraud by false representation under section 1(1) of the Criminal Law Act 1977, five individuals were charged with a further count under the same section and one individual was also charged with one count of fraud under section 1 of the Fraud Act 2006 and of using a false instrument under section 3 of the Forgery and Counterfeiting Act 1981. Further case management hearings are scheduled for March 2017. Bank of England Liquidity Auctions In our 2015 Year End UK White collar Crime Update we reported that the SFO had opened an investigation into the Bank of England‘s liquidity auctions carried out during the financial crisis in 2007 and 2008. In August 2016 Bloomberg reported that the SFO will decide whether to pursue charges by the end of 2016 and that the SFO is in the process of conducting interviews. Charges have yet to be pursued. The investigation relates to the operation of the Bank of England’s Extended Collateral Long-Term Report Operations in 2007 and its Special Liquidity Scheme in 2008. Both schemes allowed banks to swap assets for liquidity funding. Bloomberg’s report stated that the SFO’s investigation centers around whether officials at the Bank of England had told lenders the level at which they should bid in advance of the liquidity auctions. Enforcement: FCA On November 1, 2016, in a case brought by the FCA, Scott Crawley, Daniel Forsyth, Adam Hawkins, Ross Peters, Aaron Petrou and Dale Walker were banned from performing any function in relation to any regulated activity following their involvement in the operation of an unauthorized collective investment scheme. The scheme led to over 100 investors losing just under £4.3 million. The individuals who operated the scheme received sentences totaling more than 30 years. Between them, the individuals were convicted of offences including: conspiracy to defraud; breaching, or aiding and abetting the breach of, the general prohibition against carrying on a regulated activity without authorisation; possessing criminal property; and providing information knowing it to be false or misleading. On November 18, 2016, following an investigation by the FCA, Charanjit Sandhu was charged before the City of London Magistrates Court with conspiracy to defraud, together with offences under the Financial Services and Markets Act 2000 and the Fraud Act 2006. The offences relate to the promotion and sale of shares through a succession of four alleged ‘boiler room’ companies. In June 2016, five other individuals had already been charged as a result of the investigation: Michael Nascimento, Hugh Edwards, Stuart Rea, Ryan Parker and Jeannine Lewis. Confiscation orders The SFO continues to pursue confiscation orders and to seek significant penalties in the event of default of payment. On November 14, 2016, David Gerald Dixon, the founder and creator of now defunct companies Arboretum Sports (UK) Limited and Arboretum Sports (USA), was ordered to pay a confiscation order of £275,000. Through the Arboretum companies, investors were persuaded to invest into what they were told was a no-risk gambling syndicate with the potential for dramatic rates of return. In reality, however, the scheme was a dishonest vehicle for Mr Dixon to appropriate its members’ funds. The compensation will be apportioned equally between known victims of the fraud. Mr Dixon will face a two-year default imprisonment sentence if he fails to satisfy the order within three months. On September 27, 2016, Alex Hope was sentenced to 603 days’ imprisonment for failing to pay the full value of a Proceeds of Crime Act 2002 confiscation order made against him on February 12, 2016 in the amount of £166,696. This sentence is in addition to the 7 years’ imprisonment imposed on him on January 30, 2015 following his conviction by a jury on January 9, 2015 for defrauding investors of significant sums and operating a collective investment scheme without authorization. Alex Hope used over £2 million of the £5.5 million investors entrusted to him to fund his lifestyle. Raj von Badlo, who was also involved in the scheme, had been sentenced to 2 years’ imprisonment for recklessly making false representations to investors and operating a collective investment scheme without authorization. He paid in full the confiscation order made against him in the amount of £99,819. In total, investors should receive in excess of £2.9 million (approx. 55% of the capital sums owed to them), which is the largest sum returned to victims of crime following an FSA/FCA prosecution. As we reported in our 2016 Mid-Year United Kingdom White Collar Crime Update, on June 17, 2016, Richard Clay and Kathryn Clark were ordered to pay a total of £562,766.07 for fraud charges under the Fraud Act, having defrauded investors through Arck LLP, a company which created and marketed financial products. On October 25, 2016, Mr Clay and Ms Clark were banned from carrying on any function in relation to any regulated activities. On April 19, 2016, Jeffery Revell-Reade was ordered to pay a confiscation order of £10,751,000 within three months failing which he would face an additional prison sentence of 10 years for default of payment. Mr Revell-Reade is currently serving an eight-and-a-half-year prison sentence following his conviction in connection with one of the UK’s largest ever boiler room schemes. A further individual, Anthony May who is currently serving a seven years and four months’ prison sentence was ordered to pay £250,000 within three months. 4. Financial and Trade Sanctions Please note that a more detailed analysis of financial and trade sanctions developments prior to September 22, 2016 is set out in our 2016 Mid-Year United Kingdom White Collar Crime Update.) Brexit Half a year on from the UK’s June 23, 2016 vote to leave the European Union and still much of the original political and legal uncertainty persists, including in relation to the world of financial and trade sanctions. As we have already set out in more detail in our Mid-Year Update, the following observations about Brexit can nonetheless be made: Until the UK leaves the EU, EU law remains in force and the UK is obliged to give effect to EU legislation, including sanctions legislation. The UK’s underlying obligation to implement United Nations Security Council sanctions will continue, but the mechanics (namely implementation first at EU level, then by regulation in the UK) will need to change. The easing of sanctions against Iran through the Joint Comprehensive Plan of Action (“JCPOA”), (cf. our client alert “Implementation Day” Arrives: Substantial Easing of Iran Sanctions alongside Continued Limitations and Risks), will not be affected. The UK’s departure from the EU may have significant practical ramifications in respect of the EU’s political stance on the imposition and targets of sanctions. By way of example, the bloc’s approach to sanctions against Russia may undergo a policy shift. Once no longer an EU member, the UK will have a number of policy options as to how to address sanctions issues, such as moving in step with US sanctions policy, adopting EU sanctions wholesale, following the Swiss model of adopting watered-down versions of EU sanctions or adopting an autonomous sanctions regime. The Office of Financial Sanctions Implementation and Policing and Crime Bill Two important developments over the past year, which will greatly impact the UK’s sanctions enforcement landscape are firstly the passage of the Policing and Crime Bill through Parliament and secondly the formation of the Office of Financial Sanctions Implementation (“OFSI”) within HM Treasury in March 2016. Policing and Crime Bill The Policing and Crime Bill, which continues to work its way through the legislative process, will significantly strengthen sanctions enforcement in the UK and empower the recently-created OFSI (see below). Presented to Parliament in February 2016, the Bill completed its passage through the House of Commons in June, before moving on to the House of Lords. The House of Lords committee stage began in September, with a fifth sitting occurring on November 11 and report stages taking place on November 30, 2016 and December 7 and 12, 2016. On January 10, the amendments proposed by the House of Lords were considered by the House of Commons. While not all Lords’ amendments were accepted, meaning that there will now be a process of “ping-pong” between the Houses, the amendments in relation to sanctions, most importantly a new right of appeal to the Upper Tribunal, were accepted by the Commons. After all the proposed amendments have been resolved, the next stage is Royal assent and the passing of the bill into law. OFSI’s consultation, mentioned below, provides an estimated timetable for the act coming into force in April 2017. Part 8 of the Bill, which has remained largely unchanged since introduction, will bring about the following key developments (presented in more detail in the 2016 Mid-Year United Kingdom White Collar Crime Update): Increase in maximum custodial sentences The maximum custodial sentence for violating UK financial sanctions rules will be substantially increased from two to seven years (on indictment) and to two years (on summary conviction), in line with sentences for offences under the Terrorist Asset-Freezing Act 2010. Imposition of civil monetary penalties As an alternative to criminal prosecution for non-compliance with financial sanctions, OFSI will be able to impose civil monetary penalties of the greater of £1 million or 50% of the value of the funds or resources involved. The Bill envisions that senior officers and managers of companies can be fined on the same scale. Availability of Deferred Prosecution Agreements (DPAs) and Serious Crime Prevention Orders (SCPOs) Under the Bill, financial sanctions breaches will be added to the list of offences for which DPAs and SCPOs are available (by amendment to the Crime and Courts Act 2013 and the Serious Crime Act 2007, respectively). For discussion of the UK’s DPA regime see our 2013 Mid-Year Update on Corporate DPAs and NPAs). An SCPO is a court order which can be imposed as part of a criminal sentence and which prevents involvement in serious crime by imposing prohibitions, restrictions or requirements on individuals or entities. Breach of an SCPO is punishable by a fine and/or imprisonment of up to five years. Rapid implementation of UN sanctions The Bill also seeks to address the delay between adoption of sanctions by the UN Security Council and their implementation by the EU, which can take up to a month. OFSI will be empowered to adopt temporary regulations that would give immediate effect to the UN’s resolutions and which would then fall away once the EU publishes its regulation (this mechanism will of course have to be adapted post-Brexit). The Bill also allows HM Treasury to extend its temporary regulations to the Channel Islands, the Isle of Man and British Overseas Territories. However, this power will not be used in relation to any Crown dependency or overseas territory that has implemented its own legislative measures to implement sanctions without delay. At present, the Government of Jersey is the only one to have taken such steps and therefore, at its request, Jersey has been omitted from the clause of the Bill dealing with rapid implementation. OFSI: creation and enforcement policies An important development that goes hand-in-hand with the Policing and Crime Bill is the formation of a new government body to oversee sanctions enforcement in the UK. OFSI, established within HM Treasury and headed by Rena Lalgie, became operational on March 31, 2016. Since its creation, OFSI has published on its website numerous guidance papers, including in relation to current lists of designated persons in various countries, general guidance on financial sanctions obligations and the approach it will take when issuing licences and considering compliance. It has also taken responsibility for HM Treasury’s annual frozen assets reporting and issued a reminder in October 2016 for all persons holding or controlling funds belonging to sanctioned persons to provide details of these funds to OFSI. When the Policing and Crime Bill comes into force, OFSI and the UK’s prosecuting authorities will have a multi-faceted and flexible enforcement regime. As promised by Ms. Lalgie in a May 2016 speech, and as required by the Bill, a public consultation was launched in early December 2016 to seek views on the draft guidance relating to the imposition and determination of monetary penalties. In summary, this guidance explains OFSI’s powers under the Bill, its compliance and enforcement approach, how it will assess whether or not to apply a monetary penalty and, if so, what factors will be taken into account, as well as the procedure for deciding and imposing details of penalties. In particular: Determination of penalty amount The guidance states that OFSI will assess each case “fairly and proportionately“, basing its approach on the relevant facts. Each factor is weighted by reference to OFSI’s strategy, policy, guidance and processes and to the case facts. The following mitigating and aggravating factors will all be taken into account for the purpose of determining penalty levels: direct provision of funds or economic resources to designated persons; circumvention of sanctions; severity; knowledge and compliance standards in the relevant sector; behavior; failure to apply for a licence/breach of licence terms; professional facilitation; repeated, persistent or extended breaches; reporting of breaches to OFSI (see “Expectation of cooperation”, below); public interest, strategic priority and future compliance effect; and other relevant factors. Penalty imposition procedure When it comes to the procedure for penalty imposition, the guidance suggests that OFSI will begin by writing to the relevant person(s) and setting out the reasons for and the amount of the penalty. The person(s) will then be able to make representations about “any relevant matters“, including matters of law and fact, OFSI’s interpretation of the facts, whether OFSI has followed its processes and whether the penalty is fair and proportionate. Thereafter, the person(s) will have the chance to request ministerial review of both the fact of a penalty or the amount of the penalty. While the bill was passing through the House of Lords a further right of appeal to the Upper Tribunal was added. Whilst both OFSI and the Minister’s decisions would of course be subject to judicial review, recourse to the Upper Tribunal would “ensure that there can be a full-merits hearing on points of law and fact“, whereas a judicial review hearing before the High Court would only allow an examination of points of law (as observed by Baroness Chisholm of Owlpen during the December 7, 2016 House of Lords report stage). No penalty will be imposed where: (i) it would have no meaningful effect (e.g. the value is too low to act as a deterrant or provide restitution for the wrongdoing); (ii) it would be “perverse” (e.g. if it arose as a result of improper coercion or blackmail); or (iii) it is not in the public interest to impose a penalty. “UK nexus” For a sanctions breach to come within OFSI’s auspices, there must be a UK connection. However, according to the draft guidance, this does not mean that a breach must occur within the UK. A sufficient “UK nexus” could be created by factors such as: (i) a UK company working overseas; (ii) an international transaction clearing or transiting through the UK; (iii) action by a local subsidiary of a UK parent company; or (iv) financial products or insurance bought on UK markets but held or used overseas. The extension of the UK’s enforcement jurisdiction to cover foreign subsidiaries is noteworthy and a significant change to the current law. Expectation of co-operation A further key point to draw from the guidance is that OFSI expects all persons involved in a breach to co-operate, even if doing so would result in their being subject to enforcement action. Failure to co-operate will be taken “very seriously” and result in the imposition of a monetary penalty. The guidance also makes clear that OFSI places a “premium” on voluntary disclosures. As a result, where a person makes a prompt and complete voluntary disclosure, a reduction of up to 50% of the final penalty amount may be available. Publication of penalty decisions One of OFSI’s main goals is deterrence and, as such, details of all monetary penalties imposed will be published and include details including the person(s) fined, a case summary, the values of the breach and penalty and “compliance lessons OFSI wishes to highlight” to help others avoid committing a similar breach. DPAs Given that the guidance focuses on monetary penalties, OFSI’s approach to DPAs is not covered. However, one can look to Ms. Lalgie’s May 2016 speech for guidance on this point. In particular, Ms. Lalgie noted that the terms of a DPA should be expected to include a fine, disgorgement of profits and possibly the imposition of a compliance monitor. We will be responding to the consultation in due course and will keep our clients and friends updated on further developments. Key Developments in Sanctions Regimes North Korea The United Nations Security Council has strengthened its existing sanctions regime against North Korea by introducing UNSC Resolution 2321. These new measures, referred to by Secretary-General Ban Ki-moon as the “toughest ever” against the country, include: (i) prohibiting North Korean exports of copper, nickel, silver, zinc, new helicopters and vessels, and statues; (ii) imposing an annual cap on North Korean coal exports (reducing their volume by over half); and (iii) imposing further asset freezes and travel bans on 11 individuals and 10 entities thought to be connected to the regime’s nuclear and ballistic missile programs. In addition, UN Member States must limit North Korean diplomatic missions to one bank account each and suspend scientific and technical cooperation with persons sponsored by or representing North Korea (other than for medical exchanges). These measures follow a raft of other measures imposed during 2016. In March 2016, the UN imposed and the EU implemented (see here also), new far-reaching sanctions on North Korea, including amongst others: inspection of cargo leaving or entering North Korea; asset freezes and travel bans; bans on the import and export of certain goods; the closure of North Korean banks in UN member state jurisdictions and termination of certain banking relationships; prohibiting new branches, subsidiaries or representative offices of North Korean banks in member states; and prohibiting financial institutions from establishing new joint ventures or establishing or maintaining correspondent relationships with North Korean banks. Further sanctions followed in May 2016, including the introduction of a €15,000 threshold for all financial transfers to or from North Korea. In the UK, any such transfer will require prior written authorization from OFSI (Regulation 2016/841 and OFSI Guidance). In addition, UK financial institutions must refrain from commencing certain banking activities and joint ventures in North Korea and terminate existing banking activities and joint ventures in North Korea where HM Treasury has determined that they could contribute to North Korea’s illicit programmes. Other sanctions prohibit the provision of financial support for trade with North Korea, investment by North Korea in the EU’s mining, refining or chemical sectors, and the import of petroleum products, dual-use goods and technology and luxury goods (Financial Sanctions Notice and Council Decision 2016/849). Russia As mentioned in our August 2014 client alert Bear Baiting – EU Sectoral Sanctions Against Russia, there are currently three main sanctions regimes in respect of Russia, namely asset freezes and travel bans relating to Ukrainian sovereignty; sanctions imposed in relation to Crimea and Sevastopol; and sectoral sanctions, including the restrictions on accessing EU capital markets and prohibitions in the energy and arms sectors. Each of these regimes has recently been extended. In March and September 2016, the EU extended asset freezes and travel bans (Decision 2016/359 and Decision 2016/1671). In June, the EU renewed its sanctions on Crimea and Sevastopol until June 23, 2017 (Council Decision (CFSP) 2016/982), and in July the general sectoral sanctions against Russia were extended for six months, until January 31, 2017 (Council Decision 2016/1071). Iran For more detailed analysis of the changes to the EU’s Iran sanctions post-Implementation Day, see our client alert Implementation Day Arrives: Substantial Easing of Iran Sanctions alongside Continued Limitations and Risks. In March 2016, the UK introduced an Order in Council which gives effect to the JCPOA reduced sanctions regime to the UK’s Overseas Territories, including the British Virgin Islands and the Cayman Islands. Bermuda and the UK’s three offshore Crown Dependencies (Guernsey, Jersey and the Isle of Man) gave effect to the JCPOA through local measures. See our 2016 Mid-Year UK White Collar Crime Update for more detail. Additional Powers for FCA In a July 2016 Policy Statement, the FCA outlined its intention to introduce an annual “Financial Crime Return”, as part of which firms subject to money laundering regulations (including banks, building societies, investment firms and mortgage lenders) above the minimum £5 million revenue threshold will be asked to provide information to help the FCA systematically assess their financial crime systems and controls. Returns will have to be filed beginning March 2017 and contain information including firms’ sanctions screening systems, frequency of screening and the number of sanctions matches detected. Enforcement As part of its announcement of the above-mentioned consultation, on December 1, 2016 HM Treasury issued a release stating that during 2016 HM Treasury had dealt with over 100 suspected breaches of financial sanctions rules, the highest-value of which was worth around £15 million. Case Law In our Mid-Year Update, we detailed three judgments involving key developments in the field of sanctions and enforcement, namely: the Royal Court of Guernsey’s final judgment in Bordeaux Services (Guernsey) Limited & Ors v Guernsey Financial Services Commission (unreported, May 11, 2016), an appeal by Bordeaux Services against the length and level of certain penalties imposed on it and three of its directors by the Commission in July 2015; the Supreme Court of Bermuda’s judgment of January 29, 2016, upholding the decision of Cornhill Natural Resources Fund Limited to deny the Libyan Investment Authority (“LIA”) the ability to redeem investment shares held in the fund by the LIA’s nominee (Cornhill Natural Resources Fund Limited v Libyan Investment Authority  SC Bda 9 (Com)); and the English Court of Appeal’s judgment in Libyan Investment Authority v Maud  EWCA Civ 788 on the EU regulatory exemption concerning the treatment of frozen funds. Clients and friends interested in learning more are invited to refer to the 2016 Mid-Year UK White Collar Crime Update 5. Money Laundering On October 21, 2016, the Financial Action Task Force (“FATF”) issued statements which reaffirmed its blacklisting of Iran and the Democratic People’s Republic of Korea. The FATF also updated statements regarding the jurisdictions it has committed to working with to improve their anti-money laundering or counter terrorist financing frameworks. These jurisdictions are: Afghanistan, Bosnia and Herzegovina, Iraq, Laos, Syria, Uganda, Vanuatu and Yemen. Guyana was named as a jurisdiction no longer subject to the FATF’s ongoing global anti-money laundering/counter terrorist financing compliance process. As reported in our 2016 Mid-Year White Collar Crime Update, money laundering continues to be a priority issue for the UK government. The government has continued to push for greater transparency, with particular focus exerted on introducing The Criminal Finances Bill (“CFB”), which we discuss below. Legislation: Criminal Finances Bill The CFB was published on October 13, 2016 and is likely to be subject to amendment before becoming the Criminal Finance Act 2017. The CFB contains provisions to amend the Proceeds of Crime Act 2002, which forms the basis for UK money laundering legislation. The Bill aims to strengthen law enforcement powers against money laundering and corruption, provide greater scope for recovery of the proceeds of crime, and counter terrorist financing. Unexplained wealth orders The CFB creates unexplained wealth orders (“UWO”), which may be used to require those suspected of corruption (individuals or companies) to explain the origin of certain assets. The High Court needs to be satisfied that “there are reasonable grounds for suspecting that the known sources of a respondent’s lawfully obtained income would have been insufficient for the purposes of enabling the respondent to obtain the property“. Failure to provide a satisfactory explanation can lead to the presumption that the property is “criminal property“. Property can include precious metals, stones and other high value assets such as watches. The assets in question must be located in the UK and valued over £100,000. There is no requirement for the subject of an UWO to be resident in the UK. UWOs will also apply to property acquired before the coming into force of the act. The UWO provisions are backed up in the CFB by a provision for interim freezing orders and by a specific offence for knowingly or recklessly making a false or misleading statement in response to a UWO. UWOs are targeted at foreign politicians or officials, and their family members or close associates. In an interview given to a London newspaper, Donald Toon, the NCA’s Director of Prosperity (Economic Crime and Cyber Crime), gave the example that an UWO may be used if a non-European politically-exposed person is identified as the owner of property in London with significant value (he offered the example of £5-6 million), and there is no obvious means by which the person was able to fund the property. In the same interview Mr Donald stated that the NCA had identified £170 million in laundered property in London. The NCA, Crown Prosecution Service, FCA, SFO and HM Revenue and Customs will all be able to apply for a UWO by making an application to the High Court. In November 2016, the Home Office published its assessment of the CFB, and estimates that the use of 20 UWOs each year would result in a benefit to the UK through seized property in the region of between £3 million and £9 million. New offence of failure to prevent the facilitation of tax evasion The CFB also creates the new offence of failure to prevent tax evasion. This offence is similar but wider to the offence of failing to prevent bribery under section 7 of the Bribery Act 2010. This measure introduces two new criminal offences: a domestic tax evasion offence and an overseas tax evasion offence. The latter criminalises corporations carrying out a business in the UK which fail to put in place reasonable procedures to prevent their representatives facilitating tax evasion in another jurisdiction, where such conduct would also amount to an offence in the foreign jurisdiction in question. Importantly, there is no requirement for the corporation to have benefited from the tax evasion. The only defence available is one of “prevention procedures” being in place that are reasonable in all the circumstances and which are designed to prevent the conduct in question. A detailed explanation of what such procedures might encompass is expected before the act comes into force. It is notable that prior to the publication of the CFB there was discussion about the introduction of an offence of failure to prevent economic crime which would include offences such as fraud, money laundering and false accounting. While this offence may yet be introduced, it is not found within the CFB. Suspicious activity reporting regime The CFB will give the NCA the opportunity to extend the “moratorium period” in which a transaction cannot proceed in situations where the NCA has refused consent after a suspicious activity report (“SAR”) has been made. The moratorium period is currently 31 days and, under the Bill, can be extended by up to a further 186 days pursuant to a court order. The current 31-day period is sometimes not sufficient, especially where the law enforcement agency needs to obtain evidence or to secure responses to formal letters of request from overseas authorities. This new provision could prove burdensome as advisors would have to be careful of committing the “tipping off” offence and a 6-month delay could be fatal to a transaction. Some discussion, however, indicates an extension of the 31 day period will be rare in practice and the Home Office estimates that there would be 173 extensions per year. Disclosure orders The CFB extends the use of disclosure orders from their current use in the POCA for corruption and fraud investigations, to money laundering and terrorist financing investigations. The CFB will also simplify the existing process to make it easier for law enforcement agencies to use. A disclosure order will require a person to answer questions and disclose information in relation to the investigation. These orders may also be served on a third party such as a bank, but the information disclosed cannot be used against the third party in criminal proceedings. Information sharing The CFB will create a provision under the Proceeds of Crime Act 2002 to explicitly allow information sharing between regulated companies relating to money laundering prevention. This provision may be useful as there was previous concern that companies could be at risk of breaching confidentiality by sharing such information. The information sharing will result in a joint disclosure report which brings together information from more than one reporter into a single SAR. Legislation: Guidelines on risk-based supervision under the Fourth Money Laundering Directive On November 16, 2016, the Joint Committee of the European Supervisory Authorities published the final version of its guidelines on risk-based supervision. The guidelines are addressed to national competent authorities who have responsibility for supervising compliance with anti-money laundering and counter-terrorist financing obligations. The guidelines require the authorities to identify the risk of money laundering and terrorist financing in their sector and adjust the focus and frequency of supervisory actions in line with the risk based approach. The guidelines aim to provide a common EU basis for the application of the risk based approach to anti-money laundering and counter-terrorist financing supervision. Legislation: Beneficial Ownership Register As discussed in our 2016 Mid-Year UK White Collar Crime Update, at the global Anti-Corruption Summit held in London in May 2016, David Cameron announced a requirement for foreign businesses owning land and property in Britain to join a public register of beneficial ownership, which will cover the 100,000 UK properties already under foreign ownership. Further, foreign companies seeking government contracts must publish details of who owns and controls their business on a beneficial ownership register. In this vein, in June 2016, the UK government established a PSC Register (a public register of persons with “significant control” over a company), requiring companies to make PSC filings with Companies House on an annual basis. Non-compliance can result in criminal sanctions for the company, its officers, and the PSCs themselves. On November 15, 2016, the European Union (Anti-Money Laundering: Beneficial Ownership of Corporate Entities) Regulations 2016 took effect. These regulations are the result of the Fourth Anti- Money Laundering Directive. One of the aims of the directive is to increase transparency in relation to the real ownership of corporate vehicles. The Government will consult later this year on the measures that it proposes to bring forward to meet the Directive’s requirements, including changes to the PSC legislation where required. Enforcement: United Kingdom Deutsche Bank On October 29, 2016, Reuters reported that Deutsche Bank could settle allegations of money laundering with the US DOJ and the FCA by early 2017. The allegations relate to “mirror trades” in Russia and may have allowed customers to illegally move money from one country to another in possible violation of money laundering controls. Although the German financial regulator BaFin concluded in October 2016 there was no evidence of wrongdoing, Deutsche Bank has reportedly set aside €1 billion in connection with this case. Tariq Carrimjee On October 20, 2016, the Upper Tribunal upheld the FCA’s decision to ban Tariq Carrimjee of Somerset Asset Management LLP from carrying out the compliance oversight and money laundering reporting in relation to any regulated activity, but not barred from the financial sector entirely. Mr Carrimjee had received the ban after the FCA’s 2013 decision notice found that he had failed to act with integrity in failing to escalate the risk that one of his clients might have been intending to engage in market manipulation. The Tribunal found that the FCA’s decision to impose a partial prohibition order was not affected by any improper considerations and the decision was one which was reasonably open to the FCA to make. Sonali Bank (UK) Limited On October 12, 2016 the FCA announced it had imposed fines and restrictions on Sonali Bank (UK) Limited (“SBUK”) and its former money laundering reporting officer (“MLRO”), Steven Smith, for serious anti-money laundering systems failings. These failings occurred despite SBUK having received clear warnings about weaknesses in its anti-money laundering controls which resulted in its failure to maintain adequate systems between August 20, 2010 and July 21, 2014. SBUK was fined £3,250,600 and was prevented from accepting deposits from new customers for 168 days. Mr Smith was fined £17,900 and prohibited from performing the MLRO or compliance oversight functions at regulated firms. Both SBUK and Mr Smith agreed to settle at an early stage and therefore qualified for a 30% discount on the penalty. Herbert Austin As mentioned in our 2016 Mid-Year United Kingdom White Collar Crime Update, Herbert Charles Austin, 66, who had been sentenced to over five years in prison in December 2011 for being the mastermind of an organised crime group that conspired to launder more than £12 million stolen from Commerzbank in 2000, was in January 2016 ordered to pay back almost £5 million within 12 months. In September 2010 £2.5 million was restrained in the UK by the High Court with additional sums being restrained in Spain and Portugal. Elena Kotova Further, in April 2016, Elena Kotova, former executive director of the European Bank for Reconstruction and Development, was ordered by the High Court to comply with a civil recovery order to surrender suspected criminal assets. The NCA seized property worth £1.5 million along with £230,000 that was held in two bank accounts. Diezani Alison-Madueke In October 2016, the former Nigerian petroleum minister Diezani Alison-Madueke and her mother Beatrice Agama were told by a London court they may have a case to answer regarding a £27,000 money laundering investigation conducted by the NCA. This is a global investigation. In September 2016, a seven-person team from the NCA had travelled to Nigeria to interview associates of Mrs Alison-Madueke, and in Switzerland the billionaire businessman Kola Aluko had his home searched and was questioned at the NCA’s request. Mr Aluko owns Atlantic Energy and signed a contract in 2011 with Nigerian National Petroleum Corporation. The contract had an estimated value of US$7 billion and was signed during the period when Mrs Alison-Madueke was petroleum minister. Phillip Rudall On November 14, 2016, Phillip Rudall, a former solicitor cleared of money laundering charges, won the right to a trial in a claim against his prosecutors. The High Court dismissed the application of the Crown Prosecution Service and the Chief Constable of South Wales Police to strike out claims by Mr Rudall for misuse of process, malicious prosecution, misfeasance in public office and breach of section 6 of the Human Rights Act in respect of Mr Rudall’s alleged involvement in money laundering and other criminal offences. Mr Rudall was charged with nine money laundering offences but these charges were dismissed in 2013. Finally, the SFO failed to secure convictions for two individuals accused of laundering money from a £83 million investment (“boiler room”) fraud in the wake of a nine-year investigation. On March 17, 2016, both were found not guilty of one count under s. 328 of the Proceeds of Crime Act 2002 following a nine-week trial. Enforcement: Offshore British Virgin Islands On November 11, 2016, the British Virgin Islands Financial Services Commission imposed a fine of US$400,000 on Mossack Fonseca & Co (B.V.I.) Limited. The fine was for eight breaches of anti-money laundering regulations, and related to failures in record keeping, risk assessment and adequate updating of customer due diligence. This is the largest penalty ever issued by this regulator and followed a fine of US$31,500 imposed on Mossack Fonesca on April 11, 2016 for similar breaches. Jersey and Guernsey As reported in our 2016 Mid-Year United Kingdom White Collar Crime Update, Jersey company Windward Trading Limited pleaded guilty to four counts of money laundering at Jersey’s Royal Court in relation to corrupt activities taking place between 1999 and 2001 in Kenya, where Windward’s beneficial owner, and CEO of the government utility Kenya Power and Lighting Company, Samuel Gichuru, is resident. The global investigation lasted nine years and involved legal assistance from twelve jurisdictions, including the UK and the US. More than £3.6 million in company assets were confiscated from an offshore account and are due to be repatriated to Kenyan authorities. On January 18, 2016 the Guernsey Financial Services Commission imposed fines on Provident Trustees (Guernsey) Limited, as well as on two directors and the company’s MLRO, for anti-money laundering and anti-terrorist finance systems and controls violations. These fines were reduced as the company and the individuals concerned had co-operated with the investigation and agreed to settle at an early stage. 6. Competition 2016 was a ground-breaking year in terms of competition enforcement in a number of respects. The Competition and Markets Authority (“CMA’s”) enforcement record for the year includes the first director disqualification and the highest ever fine imposed on an undertaking, as well as a number of cases in the online sector and a continued focus on bringing criminal cartel cases. The SFO, meanwhile, has seen significant developments in the LIBOR and EURIBOR cases. Enforcement Online poster supplies In December 2016, the CMA secured the first disqualification of a company director found to have infringed competition law. Mr Daniel Aston (managing director of an online poster supplier Trod Limited (“Trod”) was given a disqualification undertaking not to act as a director of any UK company for 5 years. The disqualification follows the CMA’s decision of August 12, 2016 that Trod breached competition law by agreeing with GB eye Limited (“GBeye”) that they would not undercut each other’s prices for posters and frames sold on Amazon’s UK website. The CMA also imposed a fine on Trod of £163,371. GBeye reported the cartel to the CMA under the CMA’s leniency policy and obtained immunity from fines. As well as the enforcement action against Trod and Mr. Aston, the CMA launched a campaign to ensure online sellers know how to avoid breaking UK competition law and wrote to a number of online companies that it considered may be denying customers the best available deals to remind them of their competition law obligations. Online refrigeration sales In May 2016, the CMA imposed a fine of just over £2 million on fridge supplier, ITW Limited, for engaging in resale price maintenance (RPM) in internet sales of its Foster commercial fridges from 2012 to 2014. It had operated a ‘minimum advertised price’ policy and threatened dealers with sanctions (including threatening to charge them higher cost prices for Foster products or stopping supply) if they advertised below that minimum price. As well as the enforcement action against ITW, the CMA sent warning letters to 20 other businesses in the commercial catering equipment sector which it suspected may have been involved in similar internet sales practices. Online golf club sales In June 2016, the CMA issued a statement of objections to Ping Europe Limited (“Ping”) alleging that it has breached the competition rules by imposing a ban on retailers selling Ping golf clubs online. The statement of objections is a provisional decision only and does not necessarily lead to an infringement decision. Ping will have the opportunity to respond before the CMA makes a final decision. Online hotel bookings In July and September 2016, the CMA continued its monitoring of online hotel bookings, by sending questionnaires to a large sample of hotels in the UK. The monitoring project is looking at how changes to room pricing terms, and other recent developments, have affected the market. In particular, the project is examining whether the Europe-wide removal by online travel agents Expedia and Booking.com of certain “rate parity” or “most-favoured nation” clauses in their standard contracts with hotels in July 2015 has affected the market. The CMA is working in partnership with the European Commission and competition agencies of 9 other EU member states. Online price comparison websites In September 2016, the CMA launched a market study into digital comparison tools (“DCTs”), in particular looking at whether consumers would benefit from being made more aware of how DCTs earn money, and the impact this might have on the services they offer and whether arrangements between the comparison tools and the suppliers that sell through them might restrict competition. An interim report is expected in March 2017. Steel Tanks industry As reported in GDC’s 2015 Year End UK White Collar Crime Update, the CMA’s criminal prosecutions in relation to an alleged cartel in the galvanised steel tanks industry came to an end, with one defendant being convicted following a guilty plea and sentenced to six months’ imprisonment, suspended for 12 months, and completion of 120 hours of community service. The other two defendants were acquitted. In parallel to the criminal prosecutions, the CMA has been carrying out a civil investigation. In March 2016, as detailed in the 2016 Mid Year UK White Collar Crime Update three of the five companies under investigation agreed to pay fines totalling more than £2.6 million for taking part in the cartel. On December 19, 2016, the CMA issued its infringement decision imposing these fines on the three settling suppliers. The fourth participant in the cartel received immunity. In a separate infringement decision, the CMA also found that three of the suppliers and one other supplier (who was not part of the cartel) exchanged information about current and future pricing intentions at a single meeting in July 2012. The three cartel participants were not fined for this separate infringement. However, the non-cartel member was fined £130,000. Building and Construction Industry Following an investigation into suspected cartel conduct in respect of the supply of precast concrete drainage products on March 7, 2016, the CMA confirmed that Mr Barry Cooper had been charged with dishonestly agreeing with others to divide supply, fix prices and divide customers between 2006 and 2013 in respect of the supply in the UK of precast concrete drainage products. The alleged arrangements related to the businesses Stanton Bonna (UK) Limited, FP McCann Limited, CPM Group Limited and Milton Pipes Limited. The CMA is carrying out a related civil investigation into whether businesses have infringed the Competition Act 1998. Fashion Industry Following dawn raids carried out in early 2015, the CMA issued on May 25, 2016 a statement of objections to five modelling agencies (FM Models, Models 1, Premier, Storm and Viva) and a trade association (the Association of Model Agents (“AMA”)), alleging that the agencies agreed to exchange confidential, competitively sensitive information, including future pricing information, and in some instances agreed a common approach to pricing. The CMA also alleged that the AMA played an important role in the alleged conduct. The CMA noted that this is its first enforcement case in the creative industries and that it shows the CMA’s commitment to enforcement across all sectors of the economy. Pharmaceuticals In December 2016, the CMA imposed a record £84.2 million fine on Pfizer, the manufacturer of phenytoin sodium (an anti-epilepsy drug) and a £5.2 million fine on its distributor Flynn Pharma. Prior to September 2012, Pfizer manufactured and sold phenytoin sodium capsules to UK wholesalers and pharmacies under the brand name Epanutin and the prices of the drug were regulated. In September 2012, Pfizer sold the UK distribution rights for Epanutin to Flynn Pharma, which de-branded (or ‘genericised’) the drug, meaning that it was no longer subject to price regulation. After de-branding, Pfizer supplied the drug to Flynn Pharma at prices between 780% and 1,600% higher than Pfizer’s previous prices. Flynn Pharma then sold on the products to UK wholesalers and pharmacies at prices between 2,300% and 2,600% higher than those they had previously paid. The CMA found that both companies held a dominant position in their respective markets for the manufacture and supply of phenytoin sodium capsules and each had abused that dominant position by charging excessive and unfair prices. The CMA found that the conduct was a deliberate exploitation of the opportunity offered by de-branding to increase the price of the drug, in the absence of any recent innovation or significant investment in the drug. The size of the fine was intended to send “a clear message” to the pharmaceutical sector that the CMA is determined to protect customers, including the NHS, and taxpayers from being exploited. The Pfizer case is not the CMA’s only investigation in this area. During 2016, the CMA opened three new investigations into alleged anticompetitive practices in the pharmaceutical industry and is continuing to investigate another case opened in 2015. Financial services 2016 also saw a number of UK developments regarding ongoing enforcement action against banks and their employees for alleged manipulation of financial benchmarks. LIBOR In January 2016, six individuals charged with conspiracy to defraud in connection with the criminal investigation into manipulation of the LIBOR benchmark were acquitted by a jury at Southwark Crown Court. The SFO had alleged that the six defendants had conspired with Tom Hayes, the first individual found guilty after a trial for the manipulation of LIBOR. In June, three individuals (Jonathan Mathew, Jay Merchant and Alex Pabon) were convicted of conspiring to defraud in connection with the manipulation of US Dollar LIBOR. A senior LIBOR submitter, Peter Johnson, had also pleaded guilty in October 2014. The four were sentenced in July to a total of 17 years in prison (four years; six and a half years; two years and nine months; and four years, respectively). The jury was unable to reach verdicts on two other defendants, Stylianos Contogoulas and Ryan Reich, and the SFO is seeking a retrial for those defendants. EURIBOR The SFO issued criminal proceedings against 11 individuals accused of manipulating the Euro Interbank Offered Rate (EURIBOR). Six individuals appeared at Westminster Magistrates’ Court on January 11, 2016, where they were charged with conspiracy to defraud. Five individuals declined to appear, and the SFO obtained arrest warrants for these individuals. The SFO is in the process of enforcing the warrants. 7. Insider Trading and Market Abuse and other Financial Sector Wrongdoing Market Abuse Regulation and Criminal Sanctions for Market Abuse Directive On July 3, 2016, the Market Abuse Regulation 596/2014 (“MAR”) came into force and consequential changes have been made to the FCA Handbook, the details of which were published by the FCA in April 2016. Changes have been made to the following Handbook sections: the Glossary, SYSC, COCON, APER, GEN, FEES, COBS, MAR, SUP, REC, LR, DTR, SERV, BENCH and the Financial Crime Guide. By a separate instrument amendments have also been made to the Decisions Penalties and Procedures Manual and to the Enforcement Guide. We set out a detailed account of the changes to the UK’s civil market abuse regime arising from MAR coming into force in our 2015 Year End UK White collar Crime Update. Firms should be aware that although it is unclear what effect the eventual departure of the UK from the EU will have on the UK civil market abuse regime the global trends since the financial crisis of 2008 have been for an enhancement of the mechanisms available to regulators to sanction market abuse and a significant relaxation of the regime in the UK would be contrary to this. In fact, in its 2015/2016 Annual Report the FCA stated that MAR “will bring real benefits to the functioning and reputation of UK financial markets, and work in these areas will remain a priority for us in the coming year“. Firms should also remember that until the UK formally leaves the EU the European civil market abuse regime set out in MAR will remain good law. The FCA’s statement following the referendum result on June 24, 2016 reiterated that firms operating in the UK must continue to comply with their obligations under EU law and there is no reason to believe that the FCA will take a more relaxed approach to enforcement activity deriving solely from the EU. On July 3, 2016 the Criminal Sanctions for Market Abuse Directive 2014/57/EU (“CSMAD”) came into force. Although the UK has opted out of CSMAD it will apply to the operations of UK firms in other member states as well as to trading activity on European exchanges carried out from London. FCA Enforcement – Insider Dealing Operation Tabernula As we covered in our 2015 Year End UK White Collar Update, Operation Tabernula has been the FCA’s most complex and high-profile insider-trading probe, aimed at demonstrating the FCA’s dedication to combatting insider trading. In January 2016, a twelve-week trial commenced against Martyn Dodgson, a senior investment banker and former executive of a number of lending investment banks, and his associate and close friend Andrew Hind, a businessman, property developer and Chartered Accountant. The case involved serious and sophisticated offending over a number of years whilst Mr Dodgson held senior investment banking positions. Mr Dodgson sourced inside information from within the investment banks at which he worked, either by working on transactions himself or by gleaning sensitive market information in relation to his colleagues’ transactions. He then passed this inside information on to Mr Hind. It was held that Mr Dodgson had been entrusted by his employers with sensitive and valuable information, which he and Mr Hind exploited for their own benefit in order to deceive the market. The two used a number of elaborate techniques designed to avoid detection, including payments in cash and in kind, and the use of unregistered mobile phones. After eight days of jury deliberations, Mr Dodgson and Mr Hind were convicted of conspiring to insider deal between November 2006 and March 2010. Iraj Parvizi, Ben Anderson and Andrew Harrison – whose charges we covered in our in our 2015 Year End UK White collar Crime Update – were acquitted. At their sentencing hearing on May 12, 2016, His Honour Judge Pegden described Mr Dodgson and Mr Hind’s offending as being “persistent, prolonged, deliberate, dishonest behaviour“. Mr Dodgson was sentenced to four and a half years’ imprisonment: the longest ever handed down for insider trading in a case brought by the FCA. Mr Hind was sentenced to three and a half years’ imprisonment on the same day. Confiscation proceedings will also be pursued against both defendants for their wrongful gains in the amount of an estimated £7.4 million. Damian Clarke On June 13, 2016, Damian Clarke, a former equities trader, was sentenced to two years in prison for insider dealing over a nine-year period between 2003 and 2012. He pleaded guilty to seven charges of insider dealing in July 2015, and to two more charges in March 2016, just two weeks before his trial was to commence. Mr Clarke was employed as a fund manager’s assistant and subsequently as an equities trader. In these roles, he received inside information including anticipated public announcements about mergers and acquisitions. He used this information to place trades using accounts in his name and in the names of his close family members, earning profits of at least £155,161.98. The nine charges brought against Mr Clarke were “sample counts” from multiple instances of suspicious trading. Eight of the nine charges related to potential takeovers in companies in which his employer was a shareholder. Mr Clarke was found to have carried out trades within minutes of receiving information on deals in which his employer was involved, such as draft press releases. He would use a shared office computer in a staff tearoom to carry out those trades. He was arrested at his desk in 2013. Judge Joanna Korner held that it was necessary to give Mr Clarke a prison sentence given the length of time over which he had used insider information and his nefarious use of his family members’ trading accounts (which had in fact led to their arrest) in an attempt to avoid detection. On one occasion he even impersonated his father-in-law on the phone in order to gain access to his account. Judge Korner found that he had “deliberately and dishonestly” misused his position, and therefore sentenced him to two years’ imprisonment. The FCA has reported that confiscation proceedings will also be commenced against Mr Clarke for his wrongful gains. Mark Lyttleton On November 2, 2016, Mark Lyttleton, a former Equity Portfolio Manager, pleaded guilty to two counts of insider dealing. This followed his arrest in 2013 and his having been charged with three counts of insider dealing in September 2016. The FCA alleged that during 2011 Mr Lyttelton was able to discover and act on inside information either by working on the deals concerning stocks or being party to conversations conducted by colleagues. Mr Lyttleton was able to use the inside information to inform his purchase of shares a short time before any public announcement was made about the stocks concerned. The trading was conducted by Mr Lyttleton through an overseas asset manager trading on behalf of a Panamanian registered company. On 21 December 2016 Mr Lyttleton was sentenced to twelve months’ imprisonment. Civil enforcement for Market Abuse Mark Taylor On May 5, 2016, the FCA issued a final notice against Mark Taylor, who was at the relevant time employed by a British wealth management company, for market abuse contrary to section 118(2) FSMA. Mr Taylor had traded on inside information that had been circulated inadvertently within his employer. The following day Mr Taylor had contacted his broker asking if it was possible to reverse the trade as he was concerned that he may have been insider dealing. Mr Taylor did not report this to his employer’s compliance department but the incident was reported to the FCA by his broker. Mr Taylor was ordered to pay a financial penalty of £36,285 (reduced from £78,819 as a result of financial hardship) and is subject to a ban on performing any function relating to any regulated activity carried out by an authorised or exempt person for two years. Gavin Breeze On July 15, 2016 the FCA issued a final notice against Gavin Breeze as a result of trading on the basis of inside information which amounted to market abuse contrary to section 118(2) FSMA and improper disclosure of inside information contrary to section 118(3) FSMA. Mr Breeze, a Jersey resident, was a non-executive director and shareholder of MoPowered Group Plc. In September 2014 he was made an insider in respect of a potential share placing by MoPowered. Mr Breeze forwarded this information to another shareholder. Mr Breeze also instructed his broker to sell his shares in MoPowered. Illiquidity in the market meant that Mr Breeze was not able to sell all his shares. However, when the inside information became known to the market MoPowered’s share price fell. The final notice records that Mr Breeze avoided a loss of £1,900. Had he been able to sell all his shares he would have avoided a loss of £242,000. Mr Breeze was ordered to pay a financial penalty of £59,557, pay restitution of £1,850 and interest of £59 to be distributed by the FCA to those who had suffered loss as a result of his actions. WH Ireland Limited On February 23, 2016 the FCA issued a final notice to WH Ireland Limited as a result of a failure to have in place proper systems and controls to prevent market abuse amounting to a breach of Principle 3 as well as a breaches of the SYSC rules (i.e. Systems and Controls) relating to conflicts of interest. WH Ireland was fined £1.2 million and restricted from taking on new clients in its corporate broking division for 72 days. This serves as a further reminder that the FCA’s enforcement activities in relation to market abuse are not solely focused on instances of market abuse offences having been committed and that the FCA will continue to use the Principles of Business to pursue a prevention agenda ensuring that firms have sufficient controls in place. Bermuda Monetary Authority – Barrington Investments Limited In March 2016, the Bermuda Monetary Authority – the island’s financial services regulator – announced a new policy whereby it would publish all uses of its disciplinary and enforcement powers on its website. This signaled a more pro-active enforcement stance. On August 29, 2016 the Bermuda Monetary Authority published its first such notice. Barrington Investments Limited was fined $50,000 for serious failings in relation to corporate governance, the prudent conduct of business and risk management. In addition, restrictions were placed on Barrington’s licence. The following Gibson Dunn lawyers assisted in the preparation of this client update: Mark Handley, Patrick Doris, Deirdre Taylor, Emily Beirne, Kim Burnside, Helen Elmer, Besma Grifat-Spackman, Jon Griffin, Yannick Hefti-Rossier, Steve Melrose, Nooree Moola, Shannon Pepper, Rebecca Sambrook, Frances Smithson, Dan Tan, Ryan Whelan and Caroline Ziser Smith. Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following members of the firm’s White Collar Defence and Investigations Practice Group: London Philip Rocher (+44 (0)20 7071 4202, firstname.lastname@example.org) Patrick Doris (+44 (0)20 7071 4276, email@example.com) Charles Falconer (+44 (0)20 7071 4270, firstname.lastname@example.org) Charlie Geffen (+44 (0)20 7071 4225, email@example.com) Osma Hudda (+44 (0)20 7071 4247, firstname.lastname@example.org) Penny Madden (+44 (0)20 7071 4226, email@example.com) Allan Neil (+44 (0)20 7071 4296, firstname.lastname@example.org) Ali Nikpay (+44 (0)20 7071 4273, email@example.com) Deirdre Taylor (+44 (0)20 7071 4274, firstname.lastname@example.org) Mark Handley (+44 20 7071 4277, email@example.com) Steve Melrose (+44 (0)20 7071 4219, firstname.lastname@example.org) Sunita Patel (+44 (0)20 7071 4289, email@example.com) Rebecca Sambrook (+44 (0)20 7071 4285, firstname.lastname@example.org) Brussels Peter Alexiadis (+32 2 554 72 00, email@example.com) Attila Borsos (+32 2 554 72 10, firstname.lastname@example.org) Munich Benno Schwarz (+49 89 189 33-110, email@example.com) Mark Zimmer (+49 89 189 33-130, firstname.lastname@example.org) Dubai Graham Lovett (+971 (0) 4 318 4620, email@example.com) Hong Kong Kelly Austin (+852 2214 3788, firstname.lastname@example.org) Oliver D. Welch (+852 2214 3716, email@example.com) Washington, D.C. F. Joseph Warin (+1 202-887-3609, firstname.lastname@example.org) Patrick F. Stokes (+1 202-955-8504, email@example.com) Richard W. Grime (+1 202-955-8219, firstname.lastname@example.org) Scott D. Hammond (+1 202-887-3684, email@example.com) D. Jarrett Arp (+1 202-955-8678, firstname.lastname@example.org) Stephanie L. Brooker (+1 202-887-3502, email@example.com) David P. Burns (+1 202-887-3786, firstname.lastname@example.org) David Debold (+1 202-955-8551, email@example.com) Stuart F. Delery (+1 202-887-3650, firstname.lastname@example.org) Michael Diamant (+1 202-887-3604, email@example.com) John W.F. Chesley (+1 202-887-3788, firstname.lastname@example.org) Daniel P. Chung (+1 202-887-3729, email@example.com) Judith A. Lee (+1 202-887-3591, firstname.lastname@example.org) Linda Noonan (+1 202-887-3595, email@example.com) Adam M. Smith (+1 202-887-3547, firstname.lastname@example.org) David A. Wolber (+1 202-887-3727, email@example.com) New York Reed Brodsky (+1 212-351-5334, firstname.lastname@example.org) Joel M. Cohen (+1 212-351-2664, email@example.com) Mylan L. Denerstein (+1 212-351-3850, firstname.lastname@example.org) Lee G. Dunst (+1 212-351-3824, email@example.com) Jose W. Fernandez (+1 212-351-2376, firstname.lastname@example.org) Barry R. Goldsmith (+1 212-351-2440, email@example.com) Christopher M. Joralemon (+1 212-351-2668, firstname.lastname@example.org) Mark A. Kirsch (+1 212-351-2662, email@example.com) Randy M. Mastro (+1 212-351-3825, firstname.lastname@example.org) Marc K. Schonfeld (+1 212-351-2433, email@example.com) Orin Snyder (+1 212-351-2400, firstname.lastname@example.org) Alexander H. Southwell (+1 212-351-3981, email@example.com) Lawrence J. Zweifach (+1 212-351-2625, firstname.lastname@example.org) Los Angeles Debra Wong Yang (+1 213-229-7472, email@example.com) Marcellus McRae (+1 213-229-7675, firstname.lastname@example.org) Michael M. Farhang (+1 213-229-7005, email@example.com) Douglas Fuchs (+1 213-229-7605, firstname.lastname@example.org) Eric D. Vandevelde (+1 213-229-7186, email@example.com) Denver Robert C. Blume (+1 303-298-5758, firstname.lastname@example.org) Ryan T. Bergsieker (+1 303-298-5774, email@example.com) Orange County Nicola T. Hanna (+1 949-451-4270, firstname.lastname@example.org) Palo Alto Benjamin B. Wagner (+1 650-849-5395, email@example.com) San Francisco Thad A. Davis (+1 415-393-8251, firstname.lastname@example.org) Marc J. Fagel (+1 415-393-8332, email@example.com) Charles J. Stevens (+1 415-393-8391, firstname.lastname@example.org) Michael Li-Ming Wong (+1 415-393-8234, email@example.com) Rachel S. Brass (+1 415-393-8293, firstname.lastname@example.org) Winston Y. Chan (+1 415-393-8362, email@example.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
The Office of the Comptroller of the Currency (OCC), on December 2, 2016, issued a proposal in the form of a white paper (Fintech Proposal) describing a new special purpose national bank charter for Fintech firms. With less than two months before the Trump Administration comes into office, the Fintech Proposal is best described as opening a discussion on how Fintech businesses may fit within the federally regulated sphere and enjoy the benefits of federal regulation, such as preemption of certain state laws and licensing requirements. The Fintech Proposal contains a series of questions about the new charter, and the OCC is accepting comments on the proposal until January 15, 2017. I. The Proposed Charter Comptroller of the Currency Thomas Curry introduced the Fintech Proposal in a speech at Georgetown University Law Center, in which he noted that “the number of Fintech companies in the United States and United Kingdom has ballooned to more than 4,000, and in just five years investment in this sector has grown from $1.8 billion to $24 billion worldwide.” Curry stated that the OCC wished to respond to innovation in the financial sector, and that it believed that a special purpose national bank charter could serve Fintech companies. To date, special purpose charters have been granted principally to trust banks focused on fiduciary activities, and credit card banks limited to a credit card business. The Fintech Proposal, however, asserts that, under the National Bank Act, “there is no legal limitation on the type of [purpose] for which a national bank charter may be granted, as long as the entity engages in fiduciary activities or in activities that include receiving deposits, paying checks, or lending money.” “Bank-permissible, technology-based innovations in financial services” – which could cover a broad array of activities – are also activities for which the OCC can grant a charter; the OCC stated that it would “consider on a case-by-case basis the permissibility of a new activity that a company seeking a special purpose charter wishes to conduct.” As a national banking association, a Fintech firm would be subject to the federal statutes applicable to other national banks, such as lending limits, limits on real estate and securities investments, the Bank Secrecy Act and other anti-money laundering laws, OFAC sanctions requirements, and, where applicable, such as with respect to lending, federal consumer law. A Fintech national bank would be required to become a member bank in the Federal Reserve System and subscribe for stock in the applicable Federal Reserve Bank in an amount equal to six percent of the bank’s paid-up capital and surplus. If a Fintech national bank did not accept FDIC-insured deposits, it would not be subject to Community Reinvestment Act, FDIC insolvency proceedings, and other laws applicable only to FDIC-insured institutions. Special purpose Fintech banks would benefit to the same degree as other national banks from OCC preemption of state law. The Dodd-Frank Act revised National Bank Act preemption, so that a “state financial consumer law” may be preempted by the OCC only if its application would have a discriminatory effect on national banks in comparison with its effect on state-chartered banks; the state consumer financial law prevents or significantly interferes with the execution by a national bank of its powers (the Barnett standard); or the state law is preempted by a federal consumer financial law other than Dodd-Frank. OCC preemption, moreover, now extends only to the activities of a national bank itself, but not the activities of a national bank’s subsidiaries. Among the benefits of federal preemption are the ability of a national bank to export interest rates of its home state nationally without regard to state usury limitations – which would benefit a Fintech firm engaged in lending – and the ability of a national bank to avoid state licensing requirements – which would benefit a Fintech firm engaged in “money transmission” activities broadly understood, including certain digital currency activities. The OCC clarified that even if certain laws (such as the Community Reinvestment Act) did not apply to a special purpose Fintech bank, the OCC had the ability to impose similar requirements as conditions to receiving a national charter, if it believed the conditions “appropriate based on the risks and business model of the institution.” II. OCC Expectations The Fintech Proposal makes clear that the OCC is not proposing a “bank-lite” approach to Fintech. The OCC expects any charter proposal to have a comprehensive business plan covering at a minimum three years, and providing “a full description of proposed actions to accomplish the primary functions of the proposed bank.” The plan should include comprehensive alternative business strategies to address various best-case and worst-case scenarios. In keeping with its post-Financial Crisis approach to corporate governance, the OCC emphasized the role of a firm’s board of directors, who must have a prominent role in the overall governance framework, actively oversee management, provide “credible challenge,” and exercise independent judgment. The OCC also emphasized the importance of capital, minimum and ongoing levels of which “need to be commensurate with the risk and complexity of the proposed activities (including on- and off-balance sheet activities).” Where a Fintech firm’s business activities were principally off-balance sheet, the OCC believed that its minimum capital requirements might not adequately reflect all risks, and would therefore require applicants in such circumstances to propose a minimum level of capital that the proposed bank would meet or exceed at all times. In this regard, the OCC noted that national trust banks often hold capital that “exceeds the capital requirements for other types of banks.” The OCC would expect a similarly granular presentation with respect to a proposed Fintech bank’s liquidity, including consideration of planned and unplanned balance sheet changes, varying interest ratio scenarios, and market conditions. Charter applicants would also be expected to demonstrate a “top-down enterprise wide commitment to understanding and adhering to applicable laws and regulations,” including “appropriate systems and programs to identify, assess, manage and monitor the compliance process,” including policies and procedures, practices, training, internal control and audit. Of particular importance is a compliance program for anti-money laundering and OFAC sanctions, as well as a consumer compliance program designed to ensure fair treatment of customers. The risk management system should be risk-based, and consider the nature of the applicant’s business, size, and the diversity and complexity of the risks associated with its operations. With respect to Fintech firms engaged in lending, the OCC would expect the business plan to include a financial inclusion component, which would cover the following: an identification of, and method for defining, the relevant market, customer base, or community; a description of products and services intended to be offered, marketing and outreach plans, and intended delivery mechanisms; an explanation of how the firm would promote financial inclusion; and full information regarding how the proposed bank’s policies, procedures, and practices are designed to ensure that its products and services were offered on a fair and non-discriminatory basis. The OCC added that, as with other elements of the business plan, it could require a Fintech bank to obtain approval, or no-objection, before it departed materially from its financial inclusion plans. In terms of chartering procedure, the OCC indicated that the procedures that apply to other national banks would apply in the case of a special purpose Fintech charter. III. Questions for Fintech Firms The Fintech Proposal includes thirteen questions for public comment. The questions themselves demonstrate some of the challenges in adapting the existing federal regulatory regime to the variety of businesses that may be engaged in by Fintech firms. For example, the OCC asks “[w]hat elements should the OCC consider in establishing capital and liquidity requirements” for uninsured special purpose banks that limit the type of assets they hold. A later question suggests that the answer to that question may not be the same for all Fintech firms – “are there particular products and services . . . such as digital currencies, that may require different approaches to supervision to mitigate risk?” It is not clear that the current OCC approach to capital for special purpose trust banks, where levels above minimum requirements may be imposed, translates to well to all Fintech firms. And even if the OCC limited that approach to firms with a monoline lending business, it is not clear that the capital and compliance costs of a national charter would be outweighed by the benefits of federal preemption. So too, there are three OCC questions about financial inclusion, including the OCC’s requiring a financial inclusion commitment. Although one of the promises of many Fintech firms is advancing financial inclusion, it is not clear that an uninsured institution that receives no benefits from federal deposit insurance should be required to meet the same community lending standards as an insured national bank. * * * * * Ultimately, it will be up to the Trump Administration as to where the Fintech Proposal goes. During his campaign, the President-elect made it clear that he believed that the financial industry was overregulated, leading to restrictions on the availability of credit, and so it is reasonable to believe that he will want to put his own stamp on the OCC just as with other regulatory agencies. The Comptroller of the Currency serves a five-year term, and Comptroller Curry assumed his position in April 2012. The Fintech Proposal is thus the beginning of a process, and industry comment and advocacy will be important. If commenters make a persuasive case for regulatory flexibility, under which the particular risks of particular business models can be prudently addressed without hindering those models, the prospects of a national charter as an alternative to Fintech firms affiliating with banks could increase in attractiveness. Eight years after the Financial Crisis, increasing the number of new charters over the very currently low numbers granted could be beneficial. As rational decisionmakers, however, Fintech firms will weigh all of the costs and benefits of particular schemes before deciding which regulatory path to pursue.  Remarks by Thomas J. Curry, Comptroller of the Currency, Regarding Special Purpose National Bank Charters for Fintech Companies, December 2, 2016.  OCC, Exploring Special Purpose National Bank Charters for Fintech Companies (December 2016), at 3-4.  Id. at 4.  Dodd-Frank Wall Street Reform and Consumer Protection Act, § 1044.  Id. § 1045.  Fintech Proposal, at 6.  Id. at 9.  Id.  Id. at 10.  Id. at 11.  Id. at 12-13.  Id. at 15.  Id. at 16. The following Gibson Dunn lawyers assisted in the preparation of this client update: Arthur Long and James Springer. Gibson Dunn’s Financial Institutions Practice Group lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following: Arthur S. Long – New York (+1 212-351-2426, firstname.lastname@example.org) Carl E. Kennedy – New York (+1 212-351-3951, email@example.com) Stephanie L. Brooker – Washington, D.C. (+1 202-887-3502, firstname.lastname@example.org) Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, email@example.com) James O. Springer – Washington, D.C. (+1 202-887-3516, firstname.lastname@example.org) Benjamin B. Wagner – Palo Alto (+1 650-849-5395, email@example.com) © 2016 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
On July 27, 2016, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) announced an expansion of the Geographic Targeting Orders (GTOs) targeting alleged money laundering risk in the real estate sector. Gibson Dunn published a comprehensive client alert on the original GTOs involving Manhattan and Miami-Dade County, Florida, in February 2016 entitled “Do Not Pass Go, Do Not Collect $200: FinCEN Imposes Temporary Reporting Requirements on Title Insurance Companies for All Cash Luxury Real Estate Transactions in Manhattan and Miami”, which is supplemented by this client alert. The original GTOs expire on August 27, 2016. The new GTOs will temporarily require U.S. title insurance companies to identify the natural persons behind shell companies used to pay “all cash” for high-end residential real estate in six major metropolitan areas. In announcing the new GTOs, FinCEN explained that it remains concerned that all-cash purchases (i.e., those without bank financing) may be conducted by individuals attempting to hide their assets and identity by purchasing residential properties through limited liability companies or other similar structures. The new GTOs will be effective on August 28, 2016 for 180 days and cover the following areas: (1) all boroughs of New York City; (2) Miami-Dade County and the two counties immediately north (Broward and Palm Beach); (3) Los Angeles County, California; (4) three counties comprising part of the San Francisco area (San Francisco, San Mateo, and Santa Clara counties); (5) San Diego County, California; and (6) the county that includes San Antonio, Texas (Bexar County). The monetary thresholds for each county vary from $500,000 to $3 million. FinCEN published a table showing these thresholds here (https://www.fincen.gov/sites/default/files/shared/Title_Ins_GTO_Table_072716.pdf). In its press release, FinCEN explained that the initial GTOs have helped law enforcement identify possible illicit activity and are informing future regulatory approaches. In particular, FinCEN reported that a significant portion of covered transactions have indicated possible criminal activity associated with the individuals reported to be the beneficial owners behind shell company purchasers. Federal and state law enforcement agencies have also informed FinCEN that information generated by the GTOs has provided greater insight on potential assets held by persons of investigative interest and, in some cases, has helped generate leads and identify previously unknown subjects. According to Treasury officials reported in The Wall Street Journal, more than a quarter of transactions reported in the original GTOs involved someone listed in at least one of the 17 million suspicious activity reports (SARs) filed with FinCEN by financial institutions since shortly after the September 11, 2001, terrorist attacks. Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, or the authors: Stephanie L. Brooker – Washington, D.C. (+1 202-887-3502, firstname.lastname@example.org) Joel M. Cohen – New York (+1 212-351-2664, email@example.com) Andrew A. Lance – New York (+1 212-351-3871, firstname.lastname@example.org) Judith A. Lee – Washington, D.C. (+1 202-887-3591, email@example.com) Arthur S. Long – New York (+1 212-351-2426, firstname.lastname@example.org) Amy G. Rudnick – Washington, D.C. (+1 202-955-8210, email@example.com) F. Joseph Warin – Washington, D.C. (+1 202-887-3609, firstname.lastname@example.org) Debra Wong Yang – Los Angeles (+1 213-229-7472, email@example.com) Linda Noonan – Washington, D.C. (+1 202–887–3595, firstname.lastname@example.org) Adam M. Smith – Washington, D.C. (+1 202-887-3547, email@example.com) © 2016 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
In the wake of a record-breaking 2015, the SEC’s Division of Enforcement appeared to continue to initiate new matters at breakneck speed throughout the first half of 2016. The agency appeared particularly active in the public company reporting space. As described in prior publications, the slowdown in public company financial reporting and disclosure cases over the past decade has reversed course. In fiscal 2015, these matters comprised the largest portion of the Division of Enforcement’s docket, and that pace looks to have continued through the past six months. That said, most of the cases continued to involve smaller companies, and the cases involving auditors in particular were not of the same blockbuster nature as several 2015 matters. Similarly, while cases involving investment advisers, broker-dealers, and financial institutions remained a mainstay of the Enforcement docket, there appeared to be fewer cases raising significant emerging issues of concern for the industry, although scrutiny of brokers in connection with complex trading platforms and protection of customer privacy led to some noteworthy matters. One area in which the agency was busier than last year is in the municipal securities and pension arena; though still a relatively small segment of the Enforcement universe, there were a number of interesting cases in recent months. Meanwhile, looking forward, the Division of Enforcement has indicated several priorities likely to shape its future docket, including its scrutiny of private equity advisers (particularly in regards to undisclosed or misallocated fees and expenses and inadequately disclosed conflicts of interest) and various issues involving high-profile pre-IPO companies (including crowdfunding and secondary market trading). Our report begins with a general assessment of interesting developments from the past six months, including several important court rulings and a review of whistleblower activity. We then review cases of note from each of the Division of Enforcement’s major program areas. I. Significant Developments A. Major Court Rulings One of the more important court rulings for those who litigate against the SEC came out of the Eleventh Circuit, which broke from several other courts in ruling that SEC claims for disgorgement and declaratory relief are subject to the five year statute of limitations set forth in 28 U.S.C. § 2462. While claims for penalties and other punitive remedies are typically barred by the statute of limitations, the courts have generally held that forward-looking remedies are not subject to the statute. However, disagreeing with rulings from the DC and Ninth Circuits, the Eleventh Circuit held in SEC v. Graham that the SEC’s request for disgorgement was time-barred. In Graham, the SEC brought a civil enforcement action in the Southern District of Florida, alleging that the defendants had sold unregistered securities from at least November 2004 to July 2008. The district court dismissed the case, finding that all of the remedies sought by the SEC were barred by 28 U.S.C. § 2462, which prohibits any action “for the enforcement of any fine, penalty, or forfeiture” if brought more than five years from the date the claim first accrued. On appeal, the Eleventh Circuit rejected the district court’s decision in part, holding that Section 2462 does not apply to injunctions because they are typically forward-looking with the purpose of preventing future violations. However, the Court affirmed as to the SEC’s demand for declaratory relief and disgorgement, holding that declaratory relief constitutes a “penalty” under the statute because it is backward-looking and intended to punish past wrongdoing, and that disgorgement is effectively synonymous with the ordinary meaning of “forfeiture” under the statute. The Graham decision sets up a circuit split which may ultimately need to be resolved by the Supreme Court. Second, in a ruling that will be useful to parties under SEC investigation who are faced with parallel private litigation, a federal district court denied a plaintiffs’ firm’s request for access to the SEC’s investigative files under the Freedom of Information Act (“FOIA”). In an action stemming from an SEC investigation into alleged violations of the Foreign Corrupt Practices Act (“FCPA”), the SEC prevailed in dismissing a lawsuit brought by Robbins Geller Rudman & Dowd, which had filed a FOIA request seeking documents that the SEC obtained in the course of its ongoing investigation. In refusing to turn over these documents, the SEC relied on Exemption 7(A) of FOIA, which provides that the government may withhold documents and information that are “compiled for law enforcement purposes,” the disclosure of which “could reasonably be expected to interfere with enforcement proceedings.” Ruling on the SEC’s motion to dismiss, the United States District Court for the Middle District of Tennessee held that the SEC properly withheld the documents it received from the company under Exemption 7(A). The court agreed with the SEC that disclosing these documents would reveal the nature and scope of the agency’s investigation. The court also rejected the argument that the SEC was required to disclose those documents that were already made public through a 2012 press report and a related Congressional investigation, emphasizing that the SEC’s investigative interests differed from those of journalists or legislators. Finally, in another decision highlighting the interplay between SEC investigations and private securities litigation, Judge John Koeltl of the Southern District of New York dismissed a putative securities fraud class action against Lions Gate Entertainment Corp., finding that the company did not have an independent duty to disclose to investors that the company had received a Wells notice, that it was under investigation by the SEC, and that it intended to settle with the SEC. Judge Koeltl held that these enforcement-related developments were not per se material to investors and their nondisclosure did not, as the putative class alleged, constitute a violation of Section 10(b) of the Securities Exchange Act of 1934. B. Cooperation The SEC notched a few more examples of its growing use of cooperation agreements. Notably, the SEC also recently made a pointed illustration of the consequences for those who renege on their cooperation obligations. On February 16, 2016, the SEC announced its first deferred prosecution agreement (DPA) with an individual in an FCPA case. In that case, the SEC found that a Massachusetts-based technology company and its Chinese subsidiaries provided non-business related travel and other improper payments to Chinese government officials to win business. The SEC deferred FCPA charges for three years against a former employee at one of the Chinese subsidiaries because of his significant cooperation with the SEC’s investigation. The company and its subsidiaries agreed to pay $13.622 million and $14.54 million, respectively, to settle the FCPA charges as part of a non-prosecution agreement. In another FCPA matter, the SEC announced in June that it had entered into non-prosecution agreements (NPAs) with two companies accused of FCPA violations after the companies self-reported the violations promptly, cooperated extensively with the SEC, and agreed to pay disgorgement. According to the NPAs, the companies: “(1) [r]eported the situation to the SEC on their own initiative in the early stages of internal investigations; (2) [s]hared detailed findings of the internal investigations and provided timely updates to enforcement staff when new information was uncovered; (3) [p]rovided summaries of witness interviews and voluntarily made witnesses available for interviews, including those in China; (4) [v]oluntarily translated documents from Chinese into English; (5) [t]erminated employees responsible for the misconduct; and (6) [s]trengthened their anti-corruption policies and conducted extensive mandatory training with employees around the world with a focus on bolstering internal audit procedures and testing protocols.” And in a financial reporting case filed by the SEC in March (described in more detail below), the SEC entered into a deferred prosecution agreement with the former board chairman of a developmental-stage technology company alleged to have misled investors about its products. According to the SEC, the chairman became aware of the company’s inaccurate press releases but failed to ensure that they were corrected. Under the terms of the DPA, the former company chair agreed to provide ongoing cooperation in the SEC’s continuing federal litigation against company executives; he also agreed to resign all positions he held as an officer or directory of a public company. Finally, in March, the SEC for the first time penalized an individual for backing out of a cooperation agreement. The SEC broke off its cooperation deal with Thomas C. Conradt, who testified in the SEC’s insider trading trial against two individuals, saying that he broke his vow to testify truthfully by feigning a fuzzy memory and denying facts that he had previously provided to federal authorities. Judge Rakoff of the Southern District of New York, who presided over the trial, found that Conradt “materially varied from [his] testimony at his deposition… in ways that indicate that Conradt was intentionally watering down his prior testimony in contravention of his cooperation agreement and . . . in contravention of the truth.” Rather than the $2500 in disgorgement that Conradt had agreed to pay under his cooperation agreement, the court ordered that he pay penalties of $980,000. C. Whistleblowers The number of SEC whistleblower awards has continued to mount since the implementation of the Dodd-Frank bounty regime. According to the agency’s 2015 annual whistleblower report, the SEC received over 4,000 tips–up 8% from fiscal year 2014 and 30% from the program’s first full year in 2012. And since the release of that report, there has been a spate of additional awards. Among those reported in the first half of 2016: On January 15, the SEC announced an award of more than $700,000 to a company outsider whose in-depth analysis led to a successful enforcement action. The award demonstrated the agency’s willingness to accept information not only from insiders but from independent analysts whose insights reveal the need for investigation or enforcement. On March 8, the SEC disclosed a divided award totaling almost $2 million–$1.8 million to the original whistleblower and approximately $65,000 each to two other whistleblowers who offered information once the investigation had begun. On May 13, the SEC authorized an even larger award, $3.5 million, to a company employee whose tip strengthened an ongoing investigation with additional evidence. The agency pointed to this as encouragement for all to come forward even if the SEC may already be looking into the wrongdoing they have observed. On May 17, the SEC announced an award of between $5 and $6 million to a whistleblower whose “detailed tip” uncovered violations that would have been impossible for the agency to detect but for the whistleblower coming forward. And, finally, on June 9, the SEC announced its second highest award to date, paying $17 million to a company insider for detailed information advancing the agency’s investigation. In addition to using these public announcements of significant cash awards to incentivize potential whistleblowers to come forward, the agency took several opportunities to call out companies which had failed to treat internal whistleblower claims with adequate seriousness or, in the eyes of the SEC, had dissuaded potential whistleblowers from approaching the government. For example, in a financial fraud case described in greater detail below, the SEC specifically criticized the company’s alleged failure to adequately address an internal whistleblower complaint in its settled order instituting administrative proceedings. According to the SEC, the company identified the legal and accounting issues raised by the complaint, but did not seek legal or accounting opinions about the propriety of the questioned practice, and thereafter closed its internal investigation based on “insufficient inquiry.” In addition, the SEC for the second time sanctioned a company for using employee agreements viewed by the agency as impeding employees from voluntarily providing information to the SEC. In a case against a large broker-dealer (also described in greater detail below), the SEC included allegations that the firm violated Exchange Act Rule 21F-17, which prohibits taking any action to impede someone from informing the SEC about a possible securities law violation. According to the SEC’s settled order instituting proceedings, the firm’s severance agreements included language prohibiting departing employees from disclosing confidential information absent a formal legal requirement or company authorization, which the SEC viewed as precluding employees from voluntary reporting information to the government. The SEC further noted that, while the language was later revised to allow communications with the SEC, it limited such information to the facts and circumstances surrounding the severance agreement itself. D. Administrative Proceedings As discussed at length in our reports over the past few years, one of the most talked-about trends in SEC enforcement has been the agency’s increasing use of administrative proceedings rather than federal court trials for contested actions. A number of respondents who had been charged in administrative proceedings filed civil injunctive actions seeking to enjoin the proceedings, typically raising constitutional challenges under the Appointments Clause to the manner in which SEC administrative law judges are appointed. After some initial success at the district court level, the Courts of Appeal have consistently rejected these challenges on jurisdictional grounds, holding such constitutional challenges could not be pursued in stand-alone injunctive actions; rather, all four Circuits to have considered the issue (including two June 2016 decisions) have required the respondents to go through the administrative proceedings process and raise the issue on appeal. There are a couple cases in which these constitutional challenges have been raised before the Commission, rejected, and taken up on appeal to the DC Circuit. At the time this report went to press, one of these matters had been briefed and argued before the Court, with a decision still pending. Meanwhile, at least anecdotally it appears that the SEC has stepped back somewhat from its increased reliance on administrative proceedings, with most of its more high profile pieces of litigation this year filed in federal court. Notably, just as this report went to press, the SEC announced on July 13 that it had adopted amendments to its Rules of Practice governing administrative proceedings. These amendments, first proposed in late 2015, are intended to provide some additional discovery rights, and expand certain timelines (among other things), for parties to such proceedings. We previously addressed the proposed rule changes in a client alert, and anticipate much discussion of their benefits (and limitations) in the months ahead. II. Public Company Reporting and Accounting Cases A. Financial Fraud Cases Most of the financial reporting fraud cases that the SEC brought in the first half of 2016 related to earnings management, often through improper asset valuations and delayed impairment charges, as well as other accounting tricks geared towards improving a company’s net income. For example, in April, the SEC simultaneously announced a pair of enforcement actions involving inflated earnings. In one of the cases, a technology manufacturer was alleged to have inflated its financial results through a delayed write-down of excess inventory and improper warranty accruals. The company paid a $7.5 million penalty, and its former controller and former director of accounting also agreed to pay penalties of $50,000 and $25,000, respectively. A litigated action against the company’s former CFO and then-acting controller is ongoing. In the other, unrelated case, the SEC alleged that a battery manufacturer overstated and income by failing to impair investments in and receivables from one of the company’s largest customers. The former CEO and board chairman, former CFO, and former Chief Accounting Officer all reached settlements with the SEC and agreed to pay penalties. The SEC further settled with the audit firm engagement partner for his allegedly inadequate audit work. The engagement partner agreed to a two year suspension from appearing or practicing before the SEC as an accountant. Also in April, the SEC instituted settled administrative proceedings against an outdoor recreation retailer and its CFO for allegedly failing to eliminate intercompany promotional fees in preparing the company’s financial statements. In so doing, the company understated its merchandise costs and boosted margin metrics that were touted to investors. The company its CEO agreed to settle various non-fraud charges by paying penalties of $1 million and $50,000, respectively. In May, the SEC settled fraud charges against a hygiene and sanitation company. The SEC alleged that the company engaged in a scheme to manipulate reported financial results to predetermined targets, and improperly used reserve accounts to reduce losses. The company entered into a deferred prosecution agreement with the SEC, and without admitting or denying the charges, agreed to pay a $2 million penalty. The SEC concurrently filed charges against the company’s former CFO, Director of External Reporting, and Director of Financial Planning for their participation in the allegedly fraudulent earnings management scheme; one officer has settled and agreed to a permanent officer and director bar with no penalty based on his cooperation with the SEC, while the other two individuals are litigating. The U.S. Attorney’s Office also delivered criminal indictments against the three individuals. In June, the SEC announced a settled administrative proceeding against a New York-based electronics company relating to charges of overstatement of profits using improper inventory accounting. The company, without admitting or denying the allegations, agreed to pay a penalty of $200,000. Also without admitting wrongdoing, the former Executive Vice President of Operations agreed to a penalty and a five-year bar from serving as an officer or director of a public company, and a former controller agreed to a permanent suspension from appearing as an accountant before the SEC. Revenue recognition also continues to be a mainstay of SEC financial reporting fraud actions. For example, in February, the SEC charged a biopesticide company and its former Chief Operating Officer for allegedly concealing significant customer sales concessions from finance personnel and the company’s auditors in order to boost revenue. Continuing a theme from other recent enforcement actions, the SEC also alleged that the former COO had falsified his expense reports, using company funds to pay for various personal expenses. The company agreed to pay a $1.75 million penalty in order to settle the SEC’s charges. The U.S. Attorney’s Office for the Eastern District of California announced parallel criminal charges against the company’s former COO. The following month, the SEC instituted cease-and-desist proceedings against a company that provides supply chain and logistics services to other companies. The SEC alleged that the company overstated its revenue by keeping vendor rebates rather than passing them on to customers and by marking up prices. According to the SEC, these practices resulted in five years of inaccurate financial statements, which the company restated. Without admitting or denying the allegations, the company agreed to pay a $1.6 million penalty. In another rebate case, the SEC settled non-scienter fraud charges against an agribusiness company relating to improper recognition of revenue from rebate programs. The SEC alleged that the company had insufficient internal accounting controls, which resulted in a misstatement of consolidated earnings during a three year period. Without admitting or denying the allegations, the company agreed to an $80 million settlement, which included retention of an independence compliance consultant. Three accounting and sales executives also agreed to penalties and bars with potential reinstatement. The SEC also announced a pair of cases relating to the improper valuation of assets in the first half of 2016. In a January case which did not involve any allegations of fraud, the SEC alleged that a servicer of mortgages falsely represented that it fair-valued its assets in accordance with GAAP when, in reality, it relied on flawed valuations provided by a related party. The SEC further alleged that the company lacked adequate internal controls, which failed to prevent conflicts of interest caused by the dual role its chairman played in related party transactions. And in June, the SEC settled charges with two executives and an auditor of an oil and gas company relating to the improper valuation of certain oil and gas assets acquired by the company which resulted in a nearly 5000% increase in the company’s total assets and had a significant impact on stock price. Both executives agreed to pay civil monetary penalties, and also consented to five-year bars. The partner in charge of the company’s audit agreed to a three-year bar from appearing before the SEC as an accountant. Beyond accounting improprieties, the SEC also brought a number of cases in the first half of 2016 relating to deficient disclosures. For example, the SEC alleged that a company that develops technologies for touchscreen devices misled investors into believing that a key product was in production when in fact only samples had been manufactured. The company, without admitting or denying the SEC’s allegations, agreed to pay $750,000 to settle the charges. The CEO and CFO are litigating, and the company’s former board chairman entered into a deferred prosecution agreement and agreed to a five-year officer and director bar. The SEC also announced fraud charges against a biotech company and three of the company’s former executives, alleging that the company misrepresented the Food and Drug Administration’s level of concern about clinical trials for the company’s flagship drug. The company neither admitted nor denied the allegations, but agreed to pay a $4 million penalty to settle the SEC’s charges. The three former executives–the CEO, CFO, and chief medical officer–are currently litigating the charges. Similarly, the SEC charged a company for failing to fully disclose the difficulties of getting Environmental Protection Agency certification for an advanced technology truck engine. The SEC’s order instituting a settled administrative proceeding against the company alleged that the company misled investors regarding EPA approvals of the engine in 2011 and 2012. The company neither admitted nor denied the allegations, but agreed to pay a $7.5 million penalty. The SEC charged the company’s former CEO in federal court, and that litigation is ongoing. Finally, in a case confirming that the financial crisis continues to reverberate, the SEC brought fraud charges against eleven executives and board members at a bank for concealing the extent of loan losses. The SEC alleged that the directors and officers used false appraisals, straw borrowers, and insider deals in order to report net income figures that diverged substantially from true income figures in both 2009 and 2010. Nine of the eleven directors and officers settled with the SEC, neither admitting nor denying the SEC’s charges. Each is permanently barred from serving as an officer or director of a public company. Two of the eleven executives charged are litigating. B. Internal Controls While the SEC routinely includes charges regarding deficient internal controls alongside cases alleging fraud and false filings, the agency also continues to pursue stand-alone internal controls actions. In March, the SEC instituted settled administrative proceedings against a Texas-based oil company and several individuals, including two senior officers, in a case alleging deficient evaluation of the company’s internal controls and failures to maintain internal control over financial reporting. The SEC specifically called out the company’s insufficient accounting resources at a time it was undergoing significant revenue growth. The company, without admitting or denying the charges, agreed to a $250,000 penalty subject to bankruptcy court approval, and the officers agreed to pay civil penalties as well. Notably, the SEC also brought settled charges against the engagement partner at the company’s audit firm, as well as an independent consultant, for their inadequate assessment of the company’s internal control deficiencies. In April, the SEC settled internal controls charges against a publicly-traded securities services firm relating to accounting errors in recording and reporting over-the-counter derivative trading gains at a subsidiary, and failures to timely prevent or detect the errors. The alleged errors resulted in an overstatement of operating revenues by $10 million and net income by $6 million. The company agreed to a civil monetary penalty of $150,000, and the settlement noted that the SEC considered remedial measures which the company had undertaken. C. CEO and CFO Clawbacks Many of the cases referenced above reflect the SEC’s growing use of stand-alone clawback actions under Section 304 of the Sarbanes-Oxley Act, requiring CEOs and CFOs, even though not accused of wrongdoing, to return incentive-based compensation based on financial results later restated by the company. In both the ModusLink and Marrone Bio cases, executives were ordered to reimburse the company for cash and equity incentive-based compensation that they received and failed to repay after the company’s restatements. In other cases referenced above, including Logitech and IEC Electronics, the SEC noted in its press releases that it did not pursue clawback actions against the executives because they had already voluntarily reimbursed the company for incentive-based compensation received during the time of the alleged misconduct. D. Auditor Cases As noted above, many of the financial reporting cases pursued against issuers and their executives included related proceedings against the companies’ auditors. The SEC also brought a number of additional enforcement actions against audit firms and individual accountants, though, in contrast with some of the cases involving large audit firms in 2015, most of these involved smaller players in local markets. In February, the SEC announced charges against California-based audit firm for multiple instances of improper professional conduct and audit failures in connection with their audits of a Chinese company. According to the SEC, the auditors learned that certain material information regarding an acquisition had been materially misstated or omitted from prior financial statements. The firm then performed procedures to confirm this, proposed corrections, but then failed to implement the changes, instead signing off on financial statements that repeated the earlier material misstatements. In addition, the audit firm, in connection with the 2011 year-end audit of the same company, allegedly failed to test VAT payments made by a subsidiary, relied solely on information provided by the company, and issued an audit report containing an unqualified opinion with materially misstated the Chinese company’s tax liabilities. The SEC also charged the engagement partner and manager responsible for the audits. The firm later reached a settlement with the SEC in which it agreed–without admitting or denying the allegations–to pay approximately $50,000 in disgorgement and an additional $50,000 civil monetary penalty. The engagement partner and manager also agreed to settlements, without admitting or denying the allegations, which included fines of $5,000 and $1,000, respectively, and suspensions from practice as accountants. The matter stemmed from the SEC’s Cross-Border Working Group, which focuses on companies that are publicly traded in the United States but have substantial foreign operations, and has enabled the SEC to file both fraud and non-fraud cases against foreign issuers, their executives, auditors, and other gatekeepers. In April, a Texas audit firm agreed to a settlement with the SEC in connection with charges that it failed to register with the Public Company Accounting Oversight Board (“PCAOB”) and failed to maintain independence when conducting audits. According to the settlement order, the firm, after acquiring the assets of another accounting firm, continued to conduct audits under the predecessor firm’s name, despite the fact that it did not have the right to do so, was not licensed in Texas, and was not registered with the PCAOB. The settlement also included charges against the founding partner, President of Operations, and managing partner who served as engagement partner in connection with each of the relevant audits. Specifically, the SEC alleged that the engagement partner knew or was at least reckless in knowing that the firm was not properly licensed or registered with the PCAOB and that he failed to issue audit reports with engagement quality reviews. In addition, the SEC alleged that the firm lacked independence because the principal of its predecessor firm became CFO of the audit client. All parties settled with the SEC without admitting or denying the findings, with the firm paying over $300,000 in disgorgement, prejudgment interest, and civil penalties, and the individuals paying civil penalties in various amounts and agreeing to suspensions. Separately, the SEC instituted litigated administrative proceedings against the predecessor firm, its principal, and certain other affiliated accountants for failure to conduct audits and reviews according to PCAOB standards. Also in April, the SEC filed a settled order with a Maryland-based accounting firm and one of its partners for conducting deficient surprise examinations of an investment adviser client. According to the SEC, in connection with the investment adviser’s president secret theft of money from accounts belonging to professional athletes, the firm engaged in improper professional conduct by failing to adequately consider fraud risk factors and by filing paperwork with untrue statements regarding client assets. Without admitting or denying the allegations, the firm and its partner consented to the SEC’s order, agreeing to suspensions, disgorgement of over $25,000, and penalties of $15,000 each. Most recently, on June 6, the SEC announced settled charges against a Michigan-based audit firm and four related individuals for engaging in improper professional conduct and failing to comply with PCAOB standards in connection with the audits of nine issuer clients. According to the SEC, the firm failed to comply with PCAOB standards including: obtaining sufficient evidence to support audit opinions; evaluating the reasonableness of accounting estimates made by management; properly documenting procedures; and properly supervising audits. For one of the audits at issue, the firm allegedly used audit testing prepared for and performed by a different accounting firm for a different audit, as well as duplicate or near duplicate paperwork from audits of other clients. In order to settle the matter, the firm and individuals each consented to relief including civil penalties and individual suspensions from practicing before the SEC. III. Investment Advisers and Funds A. Fees and Expenses The Division of Enforcement, and the Asset Management Unit in particular, are maintaining their focus on the fees and expenses charged by investment advisers and private fund managers, as well as by mutual fund advisers. In March, the SEC instituted settled cease-and-desist proceedings against an Atlanta-based adviser to high net worth individuals and institutional investors, and its Chief Compliance Officer, for calculating and charging advisory fees in a manner different from that provided for within client advisory agreements. The firm agreed to pay disgorgement and prejudgment interest on the improperly charged fees, while its principal agreed not to act as a compliance officer of any regulated entity for three years. Also in March, the SEC instituted settled proceedings against three AIG affiliates for having allegedly collected approximately $2 million in extra fees by placing mutual fund clients in share classes that charged fees for marketing and distribution, despite the clients’ eligibility to buy shares in fund classes without those charges. The Commission noted that the advisers did so without disclosure of this conflict of interest. The three firms settled without admitting or denying wrongdoing, and agreed to disgorge its fees and pay a $7.5 million penalty. In May, the SEC filed a litigated court action against a Connecticut-based mutual fund manager as well as its founder and CEO. The Commission alleged that the firm moved investors’ money into newly-created mutual funds that charged higher fees without investors’ authorization. As a result, the firm purportedly collected almost $111,000 in additional fees without providing any additional services. The SEC also alleged that, in connection with this conduct, the firm made misleading disclosures in its Form ADV. The Commission’s complaint seeks permanent injunctions, disgorgement, and a civil penalty. The same day, the SEC also brought charges against a Nashville-based adviser and its owner for allegedly manipulating the firm’s month-end trading in order to circumvent the funds’ fee structure and collect extra monthly fees. The adviser and its owner agreed to an interim order restricting them from accessing their own investments in the funds and prohibiting them from collecting any further fees until they satisfy the high water mark in the funds’ fee structure. Without admitting or denying the allegations, the firm also agreed to a preliminary injunction from violating the antifraud provisions of the federal securities laws. In June, the SEC brought fraud charges against a Florida-based firm and its controlling principal, alleging that they charged investors additional undisclosed incentive fees of 40-50% of profits, and made various false claims regarding the firm’s investment track record. The matter is litigating. B. Conflicts of Interest The SEC continued to level broad charges against advisers that various business practices constituted improper or inadequately disclosed conflicts of interest. In March, the SEC commenced a litigated administrative proceeding against the principal of a Georgia-based hedge fund adviser for alleged front-running. According to the SEC, the adviser invested the majority of the fund’s assets in a single security in which he had also personally invested, to the point where the fund held more than 10% of the company’s outstanding common stock. As the stock price began to plunge, he allegedly sold the shares he held in his personal account and two other accounts he controlled, allowing him to receive prices higher than the fund received when he subsequently sold the fund’s shares. He is further alleged to have sold shares on behalf of a favored investor ahead of sales by the fund, and to have purchased put options for himself and family members in advance of the fund’s liquidation of its shares, thereby profiting from the decline brought on by the large sell-off. In June, the SEC alleged that a North Carolina-based private fund adviser failed to disclose conflicts of interest arising out of his steering $11.5 million of investor funds into real estate projects in which he had an ownership interest or controlled. According to the SEC, the adviser also misled investors about the performance and valuation of these investments. Without admitting or denying the allegations, the adviser agreed to a partial settlement which barred him from any future sale of pooled investment vehicles and subjected him to potential future disgorgement and penalties. The SEC also brought a number of cases involving “cherry picking,” or the allocation of profitable trades to affiliated or favored client accounts. In April, the Commission instituted litigated administrative proceedings against a Southern California adviser and its owner, alleging that they engaged in a cherry-picking scheme by allocating profitable trades to certain favored clients, despite the firm’s internal policies requiring equitable trade allocation. The same day, the SEC simultaneously announced that it had filed settled charges against another California adviser, alleging that he allocated profitable trades to proprietary accounts and unprofitable clients. The adviser agreed to pay disgorgement and penalties of about $190,000, and to be barred from associating with an investment adviser or investment company. Similarly, in June, the SEC filed a settled case against a UK-based investment adviser and its Chief Investment Officer, alleging that they breached their fiduciary duties by operating two private funds in a manner inconsistent with disclosures to investors. According to the SEC, although disclosures reflected that the two funds employed significantly different investment strategies, the funds’ investments overlapped significantly, and the adviser is alleged to have routinely allocated highly profitable trades to the fund in which he personally held a much higher stake despite such trades being more in line with the other fund’s strategy. Without admitting or denying the findings, the adviser agreed to pay a $400,000 penalty, and its CIO agreed to pay disgorgement and prejudgment interest of approximately $1.9 million and a $2,000 penalty. C. Misrepresentations and Misappropriation In addition to cases challenging representations and omissions relating to fees and conflicts of interest, the SEC brought a number of actions alleging various other misrepresentations, including a pair of cases in which investment advisers tried to conceal their pasts from investors. At the beginning of the year, the SEC filed a settled action against a Manhattan-based investment adviser and its founder, alleging that they misled investors about a fund’s investment strategy and historical performance. According to the SEC, the adviser told investors that it would employ a scientific stock selection strategy, but in practice, the firm repeatedly deviated from that strategy, and then avoided disclosing heavy trading losses by using a misleading mixture of hypothetical and actual returns when providing the fund’s performance history. In addition, the adviser is alleged to have poured most of the fund’s assets into a single penny stock, and then making misleading and incomplete disclosures to fund investors about the value and liquidity of this penny stock investment. Without admitting or denying the findings, the adviser agreed to pay $2.9 million to fully reimburse fund investors for their losses, and its founder agreed to pay an additional $75,000 penalty and to be barred from the securities industry. In February, the SEC charged a Boston-based investment adviser with advertising the overstated performance track record of a third-party entity’s investment strategy used by the adviser. In a prior action initiated in December 2014, the SEC brought proceedings against adviser F-Squared, alleging that it falsely claimed that its strategy had a history dating back to April 2001, when in fact much of that track record was actually hypothetical and backtested. In the new action, the SEC contended that the Boston firm offered F-Squared’s strategy to its own investors without verifying the performance claims. Without admitting or denying the findings, the adviser agreed to pay a $100,000 penalty. The next month, the SEC instituted litigated administrative proceedings against an unregistered investment adviser and its principal, alleging that they (i) took extensive measures to hide the founder’s background, which included two felony fraud convictions, a bankruptcy filing, and other money judgments and liens; (ii) distributed false and misleading investment marketing materials; and (iii) misappropriated more than $1 million from fund assets and falsely characterized the withdrawals as assets of the funds. An administrative hearing is set for October. Also in March, the SEC charged an Oregon-based investment firm and its senior executives with attempting to raise investor capital without adequately disclosing the firm’s deteriorating financial condition. Without admitting the allegations, the firm agreed to be preliminarily enjoined from raising any additional funds and agreed to the appointment of a receiver to marshal assets for distribution to investors. And in a case against a manager of equipment leasing funds which had public reporting obligations under the 1934 Act, the SEC alleged that the fund failed to properly impair assets, leading to a material overstatement of net income (or understatement of net loss) in SEC filings. The company agreed to pay a $750,000 penalty to settle the SEC’s charges. In a separate case involving asset valuation–more notable for its claims involving insider trading, described in detail below–the SEC in June charged a pair of hedge fund portfolio managers with purportedly using sham broker quotes in order to mismark securities for an 18-month period, leading to artificially inflated fund returns, and resulting in a pay-out of more than $5.9 million in inflated management and performance fees to the investment adviser. The first half of this year also saw a trio of misappropriation cases against fund principals. In March, the SEC brought fraud charges against a New Jersey-based fund manager whose firms marketed shares in promising pre-IPO tech companies in the Bay Area. The SEC alleged that the manager stole $5.7 million raised through the firms to prop up other funds and pay family-related expenses, including diverting the majority of the misappropriated money to his nephew, who had been barred from the securities industry in a prior SEC enforcement action involving the sale of securities in pre-IPO companies. The case highlights the SEC’s growing focus on high-visibility pre-IPO companies, and particularly advisers and funds purporting to create investment opportunities for investors seeking to invest in these companies. Less than a week later, the SEC announced the settlement of similar charges against a San Francisco-based biotech venture capitalist, alleging that he siphoned money from one of his biotech funds to prop up other struggling businesses he owned and to fund his own lavish lifestyle. The firm and its principal agreed to pay disgorgement and penalties of nearly $6 million, and the principal agreed to be permanently barred from the securities industry. The SEC also entered into settlements with the firm’s chief legal officer and controller who, in their role as gatekeepers, were alleged to have facilitated the improper payments. The two agreed to permanent bars from appearing before the SEC as an attorney or accountant, respectively. Then in May, the SEC announced settled fraud charges against a Pittsburgh-based financial adviser who allegedly took money from client accounts (including those of a number of professional athletes and other high net worth individuals). The SEC alleged that the adviser engaged in a Ponzi-like scheme to return money that was withdrawn without authorization. When faced with SEC inquiries, the adviser is alleged to have made false statements to SEC examiners and to have produced false deal documents to attempt to hide his misconduct. The adviser settled the charges without admitting or denying the allegations, with disgorgement and financial penalties to be set by the court at a later date. Finally, in a case confirming the SEC’s determination to look beyond investment advisers themselves and scrutinize the actions of gatekeepers and other industry participants, the agency in June instituted settled proceedings against fund administrator Apex Fund Services for its alleged failure to identify indications of fraud while keeping records and preparing statements for various private funds for which it provided services. According to the SEC, despite clear indications that the funds were engaged in illegal activity, Apex failed to stop or correct prohibited transactions. False reports and statements prepared by Apex were ultimately used by the funds to communicate false information to the investors. Without admitting or denying the SEC’s findings, the firm agreed to retain an independent consultant and to pay a total of $352,449, including disgorgement and penalties. D. Compliance Deficiencies The SEC also brought several compliance program-related cases. In April, the Commission charged an Iowa investment adviser with over $23 billion in assets under management with failure to supervise a principal who misappropriated client funds. The firm settled with a cease-and-desist order, and agreed to pay a civil monetary penalty of $225,000. Also in April, the SEC brought charges against the owner of a Scottsdale, Arizona adviser, alleging the firm failed to maintain proper custody of client funds and failed to maintain adequate compliance policies and procedures regarding custody rules. The SEC also alleged that the firm made certain false representations in its Form ADV. The owner of the adviser settled the proceedings (and admitted wrongdoing), agreeing to a cease-and-desist order, a $45,000 civil penalty, and a bar from the securities industry for at least one year. Given that the SEC only infrequently requires defendants to admit wrongdoing as a term of settlement, the inclusion of an admission of wrongdoing in the agreement confirms the SEC’s heightened scrutiny of custody rule compliance. E. Insider Trading Controls As discussed in more detail in the Insider Trading section below, the SEC continues to scrutinize trading by funds and other institutional traders, including pursuing charges against firms for failing to implement adequate controls to prevent insider trading. In May, the Commission instituted settled proceedings against the New York-based adviser to a $10 billion fund complex for failing to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information. Specifically, the SEC alleged that the firm failed to include its outside securities research and analysis consultant within its compliance program, and failed to monitor the consultant’s access to non-public information. As a result, the firm’s funds invested in four different companies for which the consultant was a director, and the consultant traded in securities which otherwise would have been off limits. Without admitting or denying the SEC’s findings, the firm agreed to pay a $1.5 million penalty. And in a high-profile enforcement action announced in June involving trading by several hedge funds based on tips from a former FDA employee (discussed below), the SEC specifically challenged the hedge fund manager’s controls over insider trading. While the SEC has not charged the firm, in its complaint against the portfolio manager alleged to have traded based on improper tips of nonpublic information from a consultant to the firm, the SEC alleged that the firm’s policies failed to prevent the portfolio manager’s misuse of material nonpublic information. According to the complaint, the firm’s procedures “put the onus on employees to alert its Legal Department or CCO whenever there was a possibility that information they received was material nonpublic information,” and the firm allegedly “did little to prevent” the manager from violating the firm’s insider trading policies. F. Broker-Dealer Registration Finally, the SEC also brought a significant action against private equity firm Blackstreet Capital Management in June. In the Commission’s first action of its kind against a private-equity adviser, the SEC instituted settled administrative proceedings against the firm and its managing member, alleging that they received transaction-based compensation in connection with the acquisition and disposition of portfolio companies without registering as a broker-dealer. (The action also included other allegations, including the firm’s assessment of undisclosed fees and undisclosed use of fund assets to pay for political and charitable contributions.) Without admitting or denying the allegations, Blackstreet and its principal agreed to pay over $3.1 million to settle the matter. This case calls into question a practice believed to be fairly common in the industry, and is likely to have broad ramifications for private equity funds who are not registered as or affiliated with a broker-dealer. IV. Brokers and Financial Institutions A. Disclosure and Accounting Cases The first half of 2016 saw the SEC bring a variety of cases involving failures in disclosure and accounting by brokers and other large financial institutions, including for inadequate disclosures in dark pool trading systems and commercial mortgage-backed securities ratings. In January, the SEC announced settlements with some of the largest operators of dark pools and other alternative trading systems. For example, the SEC alleged that Credit Suisse Securities had misrepresented that opportunistic traders would be kicked off its electronic communications network, improperly accepted sub-penny orders, and failed to disclose that confidential information was being sent out of the dark pool and that its software shared orders with two high frequency trading firms. Without admitting or denying the allegations, the firm agreed to pay $30 million penalties to each of the SEC and the New York Attorney General, as well as $24.3 million in disgorgement and prejudgment interest. In February, a former Deutsche Bank research analyst agreed to pay a $100,000 penalty to settle charges that he certified a stock rating that was inconsistent with his personal views. The analyst issued a 2012 research report on discount retailer Big Lots with a “BUY” recommendation, and, pursuant to Regulation AC, certified that the report accurately reflected his own beliefs about the company and its securities. However, according to the SEC, the analyst in private conversations with clients and internal personnel expressed reservations about the retailer and said he issued the “BUY” recommendation to preserve his relationship with the company’s management. The analyst, who did not admit or deny the SEC’s findings, also agreed to a suspension from the securities industry for one year. Also in February, the SEC brought litigated charges against a New York lending company and its principal, alleging that they falsely stated that the company’s financial statements had been audited and would continue to be within 90 days of the end of each fiscal year, when in fact no audits occurred until years later. The SEC further alleged that they misled investors about the “extent and expertise” of management, and sent monthly account statements that failed to disclose that the loans they had financed were likely unrecoverable. In addition, the SEC brought charges against the placement agent, as well as its president and its owner, charging that they learned of the fraud but continued to solicit sales based on misleading private placement memoranda. In May, the SEC initiated a litigated court action against a former executive of a publicly-traded financial holding company for engaging in a $20 million scheme to defraud investors by charging hidden and unauthorized mark-ups on securities trades. According to the SEC, the executive applied mark-ups to transactions made on behalf of large institutional clients buying and selling significant quantities of securities when changing fund managers or investment strategies. When one customer noticed some of the hidden mark-ups, the executive allegedly directed others at the firm to characterize them as a “fat finger error” or “inadvertent commissions.” The SEC’s action followed criminal charges filed by the U.S. Attorney’s Office for the District of Massachusetts which are predicated on the same conduct. And in June, the SEC filed settled charges against Merrill Lynch for allegedly inadequately disclosing fees for a proprietary volatility index fund. This was the agency’s second ever case involving misleading statements in structured notes, which are debt securities issued by a financial institution in which returns are linked to a reference asset, such as equity indexes, interest rates, commodities, or foreign currencies. The SEC alleged that the firm failed to adequately disclose the “execution factor,” which imposed a cost of 1.5 percent of the index value each quarter. Without admitting wrongdoing, Merrill Lynch agreed to pay a $10 million penalty. Several years after the mortgage crisis, the SEC continues to pursue enforcement actions relating to the sale of mortgage-backed securities. In a March 2016 case involving commercial mortgage backed securities (“CMBS”), the SEC alleged that a Standard & Poor’s senior researcher failed to disclose significant assumptions in a study supporting then-new criteria for rating CMBS. The study looked to Great Depression era commercial mortgages and concluded that average commercial mortgage pool losses were 20% under levels of economic stress like those found during the Great Depression. However, the SEC alleged that the analyst’s undisclosed assumptions understated the risk of loss and failed to properly model key aspects of modern CMBS. The analyst agreed to pay a $25,000 penalty and be barred from working for any nationally recognized statistical rating organization. In May, the SEC announced that a California-based mortgage company, as well as six of its senior executives, agreed to pay $12.7 million to settle charges related to the sale of residential mortgage-backed securities (“RMBS”). The SEC alleged that between March 2011 and March 2015, the company delayed depositing checks from borrowers who had been behind on their loans in order to claim that the loans remained delinquent. The firm then allegedly repurchased the loans at a discounted rate, and subsequently re-sold them into new RMBS pools at a higher price applicable to current loans. The six individual executives, who did not admit or deny the SEC’s allegations, agreed to pay disgorgement and penalties ranging from $50,000 to $200,000. In other matters, the SEC filed settled charges against Canaccord Genuity Inc., a broker-dealer, for improperly initiating research on an issuer for which it was seeking to act as an underwriter. The SEC settled with J.P. Morgan Securities LLC on charges that the broker did not compensate advisors “based on [their] clients’ performance,” as stated in some marketing materials. And the SEC brought charges against the former CFO of broker KeyBanc Capital Markets for using “plug” entries to reconcile variances between ledgers, effectively overstating assets and income. The firm itself was not charged. B. Customer Protection Rule In one of the more significant broker-dealer developments of the first half of 2016, the Commission announced in June that Merrill Lynch agreed to pay $415 million in disgorgement and penalties to settle charges that it violated the SEC’s Customer Protection Rule. The Rule imposes certain requirements to avoid delays in returning customer securities in the event of a broker-dealer failure, including the creation of certain reserves. According to the SEC, the firm used customer cash that should have been deposited into a reserve account to instead fund complex option trades. The SEC further alleged that the firm held up to $58 billion of customer securities per day in accounts subject to general liens, rather than in lien-free accounts as the Commission contended was required. As part of the settlement, Merrill Lynch was required to admit certain of the SEC’s charges. The SEC also initiated a related litigated proceeding against the firm’s former Head of Regulatory Reporting. In announcing the settlement, the SEC noted that the financial institution cooperated fully with the Commission’s investigation, and agreed to engage in extensive remediation, including retaining an independent compliance consultant and implementing a mandatory annual whistleblower-training program for all employees. In conjunction with the above announcement, the SEC simultaneously announced a new sweep against other firms designed to detect abuses of the Customer Protection Rule. The new initiative will have two parts. The first part will encourage broker-dealers to proactively report potential violations of the Customer Protection Rule in exchange for potential cooperation credit and favorable settlement terms. Under the second part, the Enforcement Division, Division of Trading and Markets, and the Office of Compliance Inspections and Examinations will conduct risk-based examinations of certain broker-dealers to assess compliance with the rule. C. Customer Confidentiality The SEC settled several cases in the first half of 2016 where individuals or firms were accused of misusing confidential customer information, or failing to maintain adequate security measures to protect such information. First, in February, the SEC instituted settled proceedings against a broker who was alleged to have shared confidential customer information with an outside third party without the customers’ knowledge or consent. According to the SEC, the registered representative of an unnamed broker-dealer shared confidential information–including holdings in particular stocks, cash balances, and trade activity–relating to at least 14 of his customers’ accounts with an associate who had worked at his firm prior to a finding that he had engaged in unauthorized trading. The SEC further noted the broker’s improper use of his personal email account to transmit the information and avoid the firm’s security restrictions. The representative was suspended from associating with any broker or dealer for six months, and required to pay a civil penalty of $75,000. Then in April and June 2016, the SEC settled charges related to the failure of two separate firms to protect private customer information. In the first matter, the SEC announced that a New York broker-dealer and its two co-owners agreed to settle charges that they violated rules requiring the firm to adopt written policies and procedures to protect confidential customer information and records, and to keep and maintain copies of all business communications. The SEC alleged that, among other deficiencies, the firm used personal email addresses to receive faxes from customers and other third parties. The faxes allegedly contained sensitive customer information, including names, addresses, social security numbers, bank and brokerage account numbers, and copies of driver’s licenses and passports. The firm and its principals agreed to pay the SEC a total of $150,000 in penalties. In the second matter, the SEC instituted settled administrative proceedings alleging that Morgan Stanley Smith Barney failed to institute adequate technological safeguards to restrict employees’ access to customer data based on each employee’s legitimate business need. According to the SEC, these technical limitations allegedly enabled a former employee to download and transfer confidential data for approximately 730,000 accounts to a personal server at the employee’s home. A suspected third-party hack of the employee’s personal server apparently resulted in portions of the confidential information being posted online for sale. Without admitting or denying the SEC’s allegations, the firm agreed to pay a $1 million penalty. D. Anti-Money Laundering Violations The first half of 2016 also saw the SEC bring a first-of-its-kind case against a brokerage firm charged with violating regulations designed to prevent money laundering. On June 1, the SEC announced that a New York broker-dealer agreed to pay a $300,000 penalty for failure to file legally-mandated Suspicious Activity Reports (SARs) with bank regulators. Although the SEC has previously used federal securities laws to discipline firms for anti-money laundering failures, the case was first time the SEC has charged a firm solely for failing to file SARs. According to the SEC, over a five-year period some of the firm’s customers engaged in activity that should have triggered a SAR filing. This included, on more than one occasion, a customer trading in a security on a given day that exceeded 80 percent of the overall market volume. And in February, the SEC announced that a Miami-based broker-dealer agreed to pay a $1 million penalty to settle changes that it violated customer identification program (“CIP”) protocols by allowing foreign entities to trade securities without verifying the identities of non-U.S. citizens who beneficially owned such securities. Federal law requires all financial institutions to maintain sufficient CIP rules to ensure that institutions do not become vehicles for money laundering or terrorist financing. According to the SEC, for about 10 years the firm maintained a brokerage account for a Central American bank that was purportedly trading for its sole benefit. In actuality, 13 non-U.S. corporate entities and 23 non-U.S. citizens were the beneficial owners of the bank’s securities, and they were able to execute more than $23 million in transactions through the bank’s brokerage account. E. Regulation SHO Finally, in January 2016, the SEC announced a settled administrative action against Goldman Sachs & Co. relating to compliance with regulations governing the process of locating securities for customers to borrow for short selling, known as Reg. SHO. When customers want to short-sell a security, they typically ask a broker-dealer to locate the stock in question. A broker-dealer granting a “locate” represents that the firm has borrowed, arranged to borrow, or reasonably believes it could borrow the security to settle the short sale. According to the SEC, the firm allegedly provided locates to customers when it had not performed an adequate review of the securities to be located. The SEC further alleged that the firm inaccurately recorded the locates in a log. In settling the matter without admitting or denying the SEC’s allegations, the firm consented to pay a $15 million penalty. According to the SEC’s order, the settlement took into account the firm’s remedial efforts. V. Insider Trading A. Cases Involving Investment Professionals One of the more significant insider trading cases of the past year or so came in June, where the SEC sued two hedge fund managers and a former government official who allegedly served as a source of material non-public information. One of the hedge fund managers, now deceased, allegedly received information from an outside consultant, who worked for a trade association representing generic drug manufacturers and distributors but had previously spent over at decade at the U.S. Food and Drug Administration. According to the SEC, the consultant obtained confidential information about upcoming FDA drug approvals from former colleagues at the FDA and relayed this information to the hedge fund manager, who made nearly $32 million in profits for his funds by trading ahead of public announcements of the FDA approvals. The trader is alleged to have also shared these tips with another hedge fund manager, who was similarly charged by the SEC. The United States Attorney’s Office for the Southern District of New York announced parallel criminal charges against all of those involved. This case confirms the SEC’s continued scrutiny of private fund managers and, in particular, their use of expert consultants as sources of information. The SEC also brought several other insider trading cases against securities industry professionals in the first half of the year. In March, the SEC filed a settled injunctive action against a trader alleged to have made over $700,000 after being tipped about a confidential merger by a friend who worked for an investment adviser. The tipper, who was previously charged by the SEC in 2013, had allegedly learned of an upcoming merger when a client of his firm–a board member of the pharmaceutical company to be acquired–sought financial advice related to the acquisition. The friend ultimately entered a guilty plea in a parallel criminal action and was permanently barred from the securities industry. In April, the SEC brought litigated charges against a research analyst who allegedly traded after his firm was approached by the potential acquirer of a home security company looking to finance the transaction. According to the SEC, after reviewing several confidential deal-related documents, the analyst bought call options using his mother’s brokerage account. The SEC did not suggest any misconduct on the part of the companies involved in the transaction. The United States Attorney’s Office for the Southern District of New York announced criminal charges against the analyst as well. The SEC’s press release touted other examples of recent cases in which traders had attempted to evade detection by trading through relatives’ accounts. In May, the SEC filed a litigated case against an investment banker alleged to have been divulging confidential information about potential mergers and acquisitions involving the bank’s clients to a friend, a plumber, in exchange for cash and free bathroom remodeling services. The friend, who had purchased securities in 10 different companies ahead of deal announcements based on the tips, yielding $76,000 in ill-gotten profits, was also named in the complaint. Both men were charged in parallel criminal actions in the Southern District of New York. B. Officers and Directors The SEC also brought charges against company executives, senior management, and board members who exploited their access to their companies’ confidential information for their own personal gain. In February, the SEC charged the Vice President of Tax at an electronics company with trading ahead of an earnings announcement based on his knowledge of the financial results. According to the SEC, the vice president purchased 17,000 shares of the company’s stock the day before the announcement, netting over $130,000 when the shares rose more than 12% on the news of stronger-than-expected earnings. A parallel criminal action was also filed. In May, a senior executive at a Silicon Valley semiconductor equipment manufacturer agreed to settle allegations that he traded on information received from the board member of an acquisition target that was trying to solicit a competitive bid from his company. The executive is alleged to have served as a conduit of information between the officer at his company responsible for analyzing acquisition opportunities and the board membership of the target company. Based on the information he received, the executive bought 105,000 shares of the target company’s stock and tipped his brother, who bought 1,000 shares. Once a merger agreement was publicly announced, the executive sold his shares for approximately $250,000 in illegal profits. Without admitting or denying the allegations, the executive agreed to pay over half a million dollars in disgorgement and penalties. Also in May, the SEC charged the board member of a dairy company and a well-known sports gambler to whom he owed money with engaging in a $40 million insider trading scheme. According to the SEC, the director repeatedly provided non-public information about corporate developments, which the tippee used for personal profit and to offset the tipper’s gambling debts. The SEC further alleged that the gambler provided the board member with a prepaid cell phone and developed code words to be used to relay tips. Related criminal charges have also been filed. Notably, the SEC’s complaint also named professional golfer Phil Mickelson, who owed a debt to the same sports gambler, as a relief defendant. While the SEC did not allege wrongdoing on the part of Mickelson, the agency alleged that he netted approximately $1 million in trading profits based on trades he made at the urging of the gambler, which he agreed to pay back (with interest) without admitting liability. The SEC’s somewhat novel position that a relief defendant who is not alleged to have personally engaged in illegal insider trading must nonetheless return his profits because the source of the information acted improperly raises interesting questions about the reach of the SEC’s authority. In June, the SEC announced insider trading charges against a former global vice president of a software company and three friends he tipped in exchange for kickbacks. The software executive, by virtue of his position, became aware of plans for a merger between his company and another software company. The executive allegedly tipped his friend, whose business was suffering, about the impending merger. The friend, his brother, and another mutual friend purchased call options in the target company, netting over $500,000 after the merger was announced and paying the tipper $90,000 in kickbacks. The SEC linked the same executive and his friend to suspicious trades made in 2007 in advance of a tender offer, which allegedly resulted in $42,000 in illegal profits, and charged them with an additional count of insider trading. The complaint was filed in federal court in Indiana. C. Other Trading and Misappropriation Cases The SEC pursued several additional cases against other professionals and company insiders, as well as those who misappropriated information from corporate insiders. In February, the SEC instituted settled administrative proceedings against the assistant controller of a retail chain, which was the subsidiary of a larger retail group. The controller is alleged to have purchased call options ahead of earnings announcements based on confidential sales data indicating stronger than expected performance. In addition, the controller learned of the retail group’s impending bid for another retail chain and purchased shares of the target company. When the acquisition was publicly announced, the controller sold his shares and obtained a profit. Without admitting or denying the findings, the controller agreed to pay disgorgement and penalties of $420,669, and to be permanently barred from serving as an officer or director of a public company. In March, the SEC settled administrative proceedings against five individuals who traded the stock of an e-commerce company in advance of its acquisition by eBay. According to the SEC, the wife of an insider at the target company learned about the acquisition and shared the news with her friend, who traded on the information and also tipped her husband, her father, and another friend, who likewise traded on the information. The husband tipped another friend, who ultimately cooperated in the investigation. The e-commerce company’s stock went up 50% once the acquisition was announced, and the five individuals obtained illegal profits exceeding $160,000. The individuals agreed to pay a combined settlement of approximately $384,000 in disgorgement and penalties. Also in March, a finance manager at a software company agreed to settle allegations that he bought put options after learning that the company would not meet earnings expectations, realizing a $9,000 gain when the stock price later fell. According to the SEC, the employee also purchased call options in a mobile phone company he learned his company planned to acquire, netting $175,000 in profits when the deal was announced. Pursuant to the settlement, the individual, who did not admit or deny the allegations, agreed to disgorge his illicit profits and pay a penalty of $184,132, and to be barred from serving as an officer or director of a publicly-traded company for five years. Neither the software company nor the mobile phone company was a party to the settlement or accused of any wrongdoing. In June, the SEC filed a litigated action against a pharmaceutical company employee and his stockbroker friend with insider trading. The pharmaceutical employee obtained through his company clinical and business data about other pharmaceutical companies, including information about potential acquisitions, and traded on that information to gain approximately $116,000 in illegal profits. In addition, he shared this information with a childhood friend, a stockbroker, who used the information to make trades for himself and his clients. The stockbroker realized at least $187,000 in profits for himself and $145,000 for his clients. The United States Attorney’s Office for the Southern District of New York is pursuing criminal charges against both men. Also in June, the SEC settled charges against an optical physicist, who was advising two private equity firms pursuing a buyout of a U.S.-based maker of optical semiconductor devices. The SEC alleged that the physicist traded on confidential information obtained in the course of performing due diligence and attending acquisition-related meetings. The physicist began stockpiling shares of the optical device maker before the acquisition was announced and reaped nearly $370,000 in illicit profits when the stock rose 15% following the deal announcement, in breach of the duty he owed to the firms for which he was consulting. Without admitting or denying the SEC’s allegations, the consultant agreed to disgorge the trading profits and pay interest and a penalty amounting to a total settlement of over $756,000. D. Post-Newman Litigation As discussed in our 2015 Year-End Securities Enforcement Update, on October 5, 2015, the Supreme Court denied the government’s petition for certiorari in United States v. Newman, precluding additional review of the Second Circuit’s decision. Left to stand, Newman arguably narrowed the scope of tipper-tippee liability by requiring prosecutors to prove that the insider disclosed information in exchange for a personal benefit of monetary value. While more of an issue for criminal prosecutors, given the higher burden of proof, the decision represents a setback for SEC civil actions as well. That said, Newman‘s impact on the SEC may be overstated. For example, in an April 15, 2015 ruling by Judge Jed Rakoff of the Southern District of New York, the court distinguished civil and criminal insider trading liability under Newman based on the tippee’s level of knowledge or awareness of the tipper’s pecuniary benefit. The court held that while criminal liability for insider trading requires a tippee to act with actual knowledge that the tipper will receive a benefit, civil liability requires only reckless disregard that the original tipper is likely to benefit. That action proceeded to jury trial, and in a March 2016 verdict the jury found both tippees liable for insider trading. The same Judge Rakoff, sitting by designation on the Ninth Circuit Court of Appeals, again pressed back on Newman in the July 2015 decision in United States v. Salman. In Salman, the court held that providing nonpublic information to the alleged tipper’s brother constituted a personal benefit despite the lack of a clear pecuniary gain. The Supreme Court granted a petition for certiorari on January 19, 2016 to review Salman. Specifically, the Court will consider whether the personal benefit requirement must involve “at least a potential gain of a pecuniary or similarly valuable nature,” per Newman, or whether Salman‘s close friendship or family relationship between the insider and tippee is sufficient. Finally, in March 2016, the U.S. District Court for the District of Rhode Island also took an expansive approach to tipping liability, notwithstanding Newman, in denying a defendant’s motion to dismiss. In SEC v. Andrade, the SEC alleged that a former bank director illegally tipped three friends and business associates about a potential bank acquisition. The court found both that the insider had close personal ties with the tippees and that the tippees were aware of the potential benefits the tipper would receive. The court also noted that even under Newman, the SEC does not need to prove a “specific tangible benefit,” but “at most, it needs to plead specific facts showing that Defendants’ relationship is ‘meaningfully close’ enough to support an inference that there is ‘at least a potential gain of a pecuniary or similarly valuable nature.'” Because the SEC’s complaint alleged such a connection, the court denied the defendant’s motion to dismiss. The litigation remains ongoing. VI. Municipal Securities and Public Pensions Cases A. Municipal Offering Cases After a somewhat slower pace in fiscal year 2015, the SEC’s Municipal Securities and Public Pensions Unit got busy in the first half of calendar year 2016, with a number of high profile enforcement actions. In January, the SEC announced a settlement with a Massachusetts financial institution and its former senior vice president in connection with an alleged pay-to-play scheme to win Ohio public pension fund contracts. According to the SEC, the bank, through an outside fundraiser and lobbyist, allegedly entered into an agreement with the deputy treasurer of Ohio, in which the bank made illegal campaign contributions in order to obtain lucrative contracts. Without admitting or denying the allegations, the bank agreed to pay $12 million in disgorgement and penalties, and its officer agreed to pay approximately $175,000 in disgorgement and a $100,000 penalty. The SEC also filed a litigated complaint against the lobbyist for his role. In March, the SEC initiated settled proceedings against California’s largest agricultural water district and its general manager and former assistant general manager for misleading investors about its financial condition in connection with a $77 million bond offering. According to the SEC, the district engaged in “extraordinary accounting transactions” to reclassify funds to maintain its debt service coverage ratio, which measures an issuer’s ability to make future bond payments. According to the SEC, the district’s general manager allegedly referred to these transactions as “a little Enron accounting” when describing them to the board of directors and customers. The water district became the second municipal issuer to pay a financial penalty in connection with an SEC enforcement action, agreeing to pay $125,000. The general manager and former assistant general manager paid penalties of $50,000 and $20,000 respectively. In April, the town of Ramapo, New York, as well as its local development corporation and four town officials, were charged with allegedly hiding the town’s financial situation from municipal bond investors in the wake of costs from the building of a baseball stadium and other declining sales and property tax revenues. According to the SEC, town officials “cooked the books” to falsely show positive balances when the town actually had balance deficits as high as $14 million. These balances were reflected in offering materials used in connection with 16 municipal bond offerings by the town or its development corporation. The town supervisor also allegedly misled a credit rating agency and told other town officials to quickly refinance the short-term debt in order to realize the purported financial results. The case is being litigated, and the U.S. Attorney’s Office for the Southern District of New York has also filed a parallel criminal action against the town supervisor and a former town attorney. In May, the SEC filed a settled action against the mayor of Harvey, Illinois, in connection with a series of allegedly fraudulent bond offerings by the city. (The city itself had been sued by the SEC in 2014, in an emergency action freezing an ongoing bond offering.) According to the SEC, city officials diverted funds that they told investors would be used to develop a Holiday Inn to instead fund operational costs, including the city’s payroll; the new complaint alleged that the mayor exercised control over the city’s operations and signed important offering documents relating to the bonds. Without admitting or denying the allegations, the mayor agreed to pay $10,000 and to never participate in a bond offering again. Most recently, in another Illinois matter (also arising out of a 2014 enforcement action), the SEC announced a settlement with the CEO of a Chicago charter school operator alleged to have misled investors in connection with a $37.5 million bond offering to build charter schools. According to the SEC, the executive negligently approved and signed a bond offering statement that omitted information about contracts between the charter schools and the organization’s chief operating officer’s brothers. The SEC alleged that he signed grant agreements with the Illinois Department of Commerce to build charter schools, in which the organization certified that no conflicts of interest existed. Without admitting or denying the allegations, the CEO agreed to pay a $10,000 civil penalty and to a bar from participation in municipal bond offerings. Finally, as discussed in our 2015 mid-year and year-end updates, the SEC Enforcement Division continued to roll out settlements against muni bond underwriters under the agency’s Municipalities Continuing Disclosure Cooperation Initiative (MCDC). The Initiative encourages municipal bond underwriters and issuers to self-report material misstatements and omissions in municipal bond offering continuing disclosures in exchange for favorable settlement terms. In February, the SEC announced actions against another 14 underwriting firms, bringing its total to 74 charged underwriters under the Initiative. The firms agreed to pay civil penalties based on the number and size of faulty offerings identified, and to retain an independent consultant to review policies and procedures going forward. Although the Initiative has now concluded, the SEC is continuing to investigate issuers who may have had deficient disclosures. B. Municipal Advisors Cases Taking advantage of the SEC’s broadened reach following the 2010 enactment of Dodd-Frank, the SEC this year filed its first two enforcement actions against municipal advisors. First, in March, the SEC alleged that a Kansas-based municipal advisor, its CEO, and two employees failed to disclose a conflict of interest in connection with bond offerings that were underwritten by a broker-dealer for which all three of the firms’ employees also worked as registered representatives. The employees did not inform their client, an unnamed city, of this relationship, and therefore of the financial benefit they would obtain from serving both roles. Without admitting or denying the allegations, all parties settled with the SEC, agreeing to bars, disgorgement of approximately $290,000 by the advisor, and civil penalties ranging from $17,500 to $85,000. And in June, the SEC announced settled administrative proceedings against two California-based municipal advisory firms and certain of their executives. According to the SEC, the principal of one of the firms, who advised school districts about their hiring process for financial professionals, shared information about the hiring process with the other firm, which was seeking to advise the same school districts. According to the SEC, while the school districts were aware of the relationship between the two firms, they did not necessarily know that information (such as potential interview questions) had been shared. Without admitting or denying the allegations, the advisors and their principals agreed to be censured and to pay monetary fines. VII. Other Cases of Note This spring, the SEC filed several actions highlighting its continued efforts to demonstrate the international reach of the U.S. securities laws. In April, the SEC charged two individuals and their companies with fraud for allegedly making false statements and misusing funds acquired under the EB-5 Immigrant Investor Program. The EB-5 Program provides a method for foreign nationals to obtain a green card when they invest a requisite amount of capital in the United States, thereby creating jobs for U.S. workers. The SEC alleges that investors were told they were investing in a ski resort and a biomedical research facility, but instead the money was used to fund deficits in earlier projects and for personal expenses. The case is part of an ongoing SEC initiative to curb abuses in the EB-5 Program. In June, the SEC announced a settlement with Ethiopia’s electric utility to pay almost $6.5 million for its failure to register bonds it had offered and sold to U.S. residents of Ethiopian descent, in contravention of U.S. securities laws. In announcing the action, an SEC official commented, “Foreign governments are welcome to raise money in the U.S. capital markets so long as they comply with the federal securities laws, including registration provisions designed to ensure that investors receive important information about prospective investments.” Finally, one Enforcement-related development from the first half of 2016 warrants some attention. In April, the SEC appears to have vacated an earlier order that would have allowed an investment professional to return to work in the securities industry after serving a five-year bar as part of an SEC settlement. The SEC originally issued an order granting a request by FINRA that the individual be authorized to associate with a broker-dealer. However, shortly thereafter, the SEC vacated that order, noting that FINRA had withdrawn the application. The exact circumstances of that order are unclear. According to press reports, the individual voluntarily withdrew the request; however, these reports also suggested that some SEC Commissioners questioned the original decision (which had been made on behalf of the SEC by the Division of Trading and Markets). If it is indeed the case that some members of the Commission are reluctant to allow settling parties to again work in the securities industry even after a time-limited bar has expired, it could raise serious fairness concerns and make it more difficult for parties to contemplate settling with the agency.  For more on the statistical breakdown of 2015 enforcement actions, see M. Fagel, SEC Enforcement By The Numbers, Law360 (Mar. 8, 2016), available at www.gibsondunn.com/publications/Pages/SEC-Enforcement-By-The-Numbers.aspx.  SEC Speech, Andrew Ceresney, Securities Enforcement Forum West 2016 Keynote Address: Private Equity Enforcement (May 12, 2016), available at www.sec.gov/news/speech/private-equity-enforcement.html; SEC Speech, Mary Jo White, Keynote Address at the SEC-Rock Center on Corporate Governance Silicon Valley Initiative (Mar. 31, 2016), available at www.sec.gov/news/speech/chair-white-silicon-valley-initiative-3-31-16.html.  SEC v. Graham, No. 14-cv-13562, 2016 WL 3033605 (11th Cir. May 26, 2016)  For additional analysis, see Gibson Dunn Client Alert, Eleventh Circuit Limits SEC Power to Seek Disgorgement and Declaratory Relief (May 27, 2016), available at www.gibsondunn.com/publications/Pages/Eleventh-Circuit-Limits-SEC-Power-to-Seek-Disgorgement-and-Declaratory-Relief.aspx.  5 U.S.C. § 552(b)(7)(A) (2016).  In re Lions Gate Entm’t Corp. Sec. Litig., No. 14-cv-5197 (JGK), 2016 WL 297722 (S.D.N.Y. Jan. 22, 2016).  SEC Press Release, SEC: Tech Company Bribed Chinese Officials (Feb. 16, 2016), available at www.sec.gov/news/pressrelease/2016-29.html.  SEC Press Release, SEC Announces Two Non-Prosecution Agreements in FCPA Cases (June 7, 2016), available at www.sec.gov/news/pressrelease/2016-109.html.  SEC Press Release, Tech Company Misled Investors About Key Product (Mar.9, 2016), available at www.sec.gov/news/pressrelease/2016-45.html.  Ed Beeson, SEC shows Stiff Hand For Cooperation Deals Gone Awry, Law360 (Mar. 21, 2016), available at www.law360.com/securities/articles/774015.  Lit. Rel. No. 23577, SEC Obtains $980,000 Penalty from Defendant Who Violated Cooperation Agreement (June 21, 2016), available at www.sec.gov/litigation/litreleases/2016/lr23577.htm.  SEC, 2015 Annual Report to Congress on the Dodd-Frank Whistleblower Program, available at www.sec.gov/whistleblower/reportspubs/annual-reports/owb-annual-report-2015.pdf.  SEC Press Release, SEC Awards Whistleblower More Than $700,000 for Detailed Analysis (Jan. 15, 2016), available at www.sec.gov/news/pressrelease/2016-10.html.  SEC Press Release, SEC Awarding Nearly $2 Million to Three Whistleblowers (Mar. 8, 2016) available at www.sec.gov/news/pressrelease/2016-41.html.  SEC Press Release, Whistleblower Earns $3.5 Million Award for Bolstering Ongoing Investigation (May 13, 2016), available at www.sec.gov/news/pressrelease/2016-88.html.  SEC Press Release, SEC Awards More Than $5 Million to Whistleblower (May 17, 2016), available at www.sec.gov/news/pressrelease/2016-91.html.  SEC Press Release, SEC Issues $17 Million Whistleblower Awards (June 9, 2016), available at www.sec.gov/news/pressrelease/2016-114.html.  In re ModusLink Global Sols., Inc., Joseph C. Lawler, Steven G. Crane, and Catherine L. Venable, Admin. Proc. File No.3-17171 (Mar. 15, 2016), available at www.sec.gov/litigation/admin/2016/33-10055.pdf.  SEC Press Release, Merrill Lynch to Pay $415 Million for Misusing Customer Cash and Putting Customer Securities at Risk (June 23, 2016), available at www.sec.gov/news/pressrelease/2016-128.html.  Hill v. SEC, No. 15-Cv-01801 (LMM) (11th Cir. June 17, 2016); Tilton v. SEC, No. 15-cv-2103, 2016 WL 3084795 (2d Cir. June 1, 2016); Jarkesy v. SEC, 803 F.3d 9 (D.C. Cir. 2015); Bebo v. SEC, 799 F.3d 765 (7th Cir. 2015), cert. denied, 136 S. Ct. 1500 (2016).  M. Macagnone, DC Circuit Questions Merit of SEC Constitutionality Appeal (May 13, 2016), Law360, available at www.law360.com/articles/796400.  SEC Press Release, SEC Adopts Amendments to Rules of Practice for Administrative Proceedings (Jul. 13, 2016), available atwww.sec.gov/news/pressrelease/2016-142.html.  See Gibson Dunn Client Alert, SEC Moves in the Right Direction . . . (Sept. 28, 2015), available atwww.gibsondunn.com/publications/Pages/SEC-Proposed-Amendments-to-Rules-Governing-Administrative-Proceedings.aspx.  SEC Press Release, SEC Announces Financial Fraud Cases (Apr. 19, 2016), available at www.sec.gov/news/pressrelease/2016-74.html.  SEC Press Release, SEC Announces Settlement with Cabela’s and its CFO for Misleading Statements in Commission Filings and Earnings Releases (Apr. 26, 2016), available at www.sec.gov/litigation/admin/2016/34-77717-s.pdf.  In re Swisher Hygiene Inc., Admin. Proc. File No.3-17257 (May 24, 2016), available at www.sec.gov/litigation/admin/2016/33-10081.pdf.  Lit. Rel. No. 23544, SEC Charges Corporate Officers with Earnings Management Scheme Fraud (May 24, 2016), available at www.sec.gov/litigation/litreleases/2016/lr23544.htm.  SEC Press Release, SEC Bars Corporate VP and Controller for False Accounting (June 8, 2016), available at www.sec.gov/news/pressrelease/2016-110.html.  SEC Press Release, SEC Charges Biopesticide Company and Former Executive With Accounting Fraud (Feb. 17, 2016), available at https://www.sec.gov/news/pressrelease/2016-32.html.  In re ModusLink GlobSol, Inc., Joseph C. Lawler, Steven G. Crane, and Catherine L. Venable, Admin. Proc. File No.3-17171 (Mar. 15, 2016), available at www.sec.gov/litigation/admin/2016/33-10055.pdf.  SEC Press Release, Monsanto Paying $80 Million Penalty for Accounting Violations (Feb. 9, 2016), available at https://www.sec.gov/news/pressrelease/2016-25.html.  SEC Press Release, Ocwen Paying Penalty for Misstated Financial Results (Jan. 20, 2016), available at www.sec.gov/news/pressrelease/2016-13.html.  In re Miller Energy Resources, Inc., et al., Admin. Proc. File No.3-16729 (June 7, 2016), available at www.sec.gov/litigation/admin/2016/33-10089.pdf; www.sec.gov/litigation/admin/2016/33-10090.pdf; and www.sec.gov/litigation/admin/2016/33-10091.pdf.  SEC Press Release, Tech Company Misled Investors About Key Product (Mar. 9, 2016), available at www.sec.gov/news/pressrelease/2016-45.html.  SEC Press Release, Biotech Company Misled Investors About New Drug’s Status With FDA (Mar. 29, 2016), available at www.sec.gov/news/pressrelease/2016-59.html.  SEC Press Release, Navistar International and Former CEO Misled Investors About Advanced Technology Engine (Mar. 31, 2016), available at www.sec.gov/news/pressrelease/2016-62.html.  SEC Press Release, SEC Charges 11 Bank Officers and Directors With Fraud (Jan. 13, 2016), available at www.sec.gov/news/pressrelease/2016-7.html.  SEC Press Release, SEC Charges Company and Executives for Faulty Evaluations of Internal Controls (Mar. 10, 2016), available at www.sec.gov/news/pressrelease/2016-48.html.  In re Int’l FCStone Inc., Admin. Proc. File No. 3-17207 (Apr. 12, 2016), available at www.sec.gov/litigation/admin/2016/34-77596.pdf.  In re Frazer Frost LLP, Susan Woo, CPA, and Miranda Suen, CPA, Admin. Proc. File No. 3-17112 (Feb. 11, 2016), available at www.sec.gov/litigation/admin/2016/33-10039.pdf.  In re Frazer Frost LLP, Susan Woo, CPA, and Miranda Suen, CPA, Admin. Proc. File No. 3-17112 (June 7, 2016), available at www.sec.gov/litigation/admin/2016/33-10092.pdf.  In re Thakkar CPA, PLLC, Gregory Scott Williford, CPA, Mahesh Thakkar, CPA, and Poorvesh Thakkar, Admin. Proc. File No. 3-17201 (Apr. 6, 2016), available at www.sec.gov/litigation/admin/2016/34-77542.pdf.  In re David S. Hall, P.C. d/b/a The Hall Group CPAs, David S. Hall, CPA, Michelle L. Helterbran Cochran, CPA, and Susan A. Cisneros, Admin. Proc. File No. 3-17228 (Apr. 26, 2016), available at www.sec.gov/litigation/admin/2016/34-77718.pdf.  SEC Press Release, Accounting Firm, Partner, Conducted Deficient Surprise Exams (Apr. 29, 2016), available at www.sec.gov/news/pressrelease/2016-78.html.  In re Silberstein Ungar PLLC, Ronald N. Silberstein, CPA, Joel M. Ungar, CPA, Seth A. Gorback, and David A. Kobylarek, CPA, Admin. Proc. File No. 3-17277 (June 6, 2016), available at www.sec.gov/litigation/admin/2016/34-77997.pdf.  In re Marco Inv. Mgmt., LLC and Steven S. Marco, Admin. Proc. File No. 3-17150 (Mar. 2, 2016), available at www.sec.gov/litigation/admin/2016/ia-4348.pdf.  SEC Press Release, AIG Affiliates Charged With Mutual Fund Shares Conflicts (Mar. 14, 2016), available at www.sec.gov/news/pressrelease/2016-52.html; In re Royal Alliance Assoc., Inc., et. al., Admin. Proc. File No. 3-17169 (Mar. 14, 2016), available at http://www.sec.gov/litigation/admin/2016/34-77362.pdf.  Litig. Rel. No. 23549, SEC Charges Connecticut-Based Investment Adviser for Failure to Disclose Fees to Clients (May 31, 2016), available at www.sec.gov/litigation/litreleases/2016/lr23549.htm.  SEC Press Release, Nashville Firm Schemed to Collect Extra Fees From Hedge Funds (May 31, 2016), available at www.sec.gov/news/pressrelease/2016-98.html.  Litig. Rel. No. 23560, SEC Charges Fort Myers, Florida-Based Investment Adviser and Manager in Fraudulent Fee-Siphoning Scheme (June 7, 2016), available at www.sec.gov/litigation/litreleases/2016/lr23560.htm  In re Christopher M. Gibson, Admin. Proc. File No. 3-17184 (Mar. 29, 2016), available at www.sec.gov/litigation/admin/2016/34-77466.pdf.  SEC Press Release, Adviser Steered Investor Money to His Own Companies (June 2, 2016), available at www.sec.gov/news/pressrelease/2016-104.html.  SEC Press Release, SEC Announces Charges Against Two California-based Investment Advisers for Cherry-Picking Profitable Trades for Favored Accounts (Apr. 19, 2016), available at www.sec.gov/litigation/admin/2016/34-77649-s.pdf.  In re James Caird Asset Mgmt. LLP and Timothy G. Leslie, Admin. Proc. File No. 3-17276 (June 2, 2016), available at www.sec.gov/litigation/admin/2016/ia-4413.pdf.  In re Peter Kuperman and QED Benchmark Mgmt., LLC, Admin. Proc. File No. 3-17075 (Jan. 28, 2016), available at www.sec.gov/litigation/admin/2016/33-10009.pdf.  In re Cantella & Co., Admin. Proc. File No. 3-17127 (Feb. 23, 2016), available at www.sec.gov/litigation/admin/2016/ia-4338.pdf.  In re Steven Zoernack and EquityStar Capital Mgmt., LLC, Admin. Proc. File No. 3-17157 (Mar.8, 2016), available at www.sec.gov/litigation/admin/2016/33-10051.pdf.  SEC Press Release, SEC Charges Oregon-Based Investment Group and Executives With Defrauding Investors (Mar. 10, 2016), available at www.sec.gov/news/pressrelease/2016-49.html.  SEC Press Release, SEC Charges Manager of Equipment Leasing Funds with Causing Financial Reporting Violations (June 10, 2016), available at www.sec.gov/litigation/admin/2016/34-78030-s.pdf.  SEC Press Release, Hedge Fund Managers and Former Government Official Charged in $32 Million Insider Trading Scheme (June 15, 2016), available at www.sec.gov/news/pressrelease/2016-119.html.  SEC Press Release, SEC Halts Fraud by Manager of Investments in Pre-IPO Companies (Mar. 25, 2016), available at www.sec.gov/news/pressrelease/2016-57.html.  For more on the SEC’s scrutiny of pre-IPO companies and related issues, see SEC Speech, Chair Mary Jo White, Keynote Address at the SEC-Rock Center on Corporate Governance Silicon Valley Initiative (Mar. 31, 2016), available at www.sec.gov/news/speech/chair-white-silicon-valley-initiative-3-31-16.html.  SEC Press Release, Biotech Venture Capitalist Stole Investor Funds for Personal Use (Mar. 30, 2016), available at www.sec.gov/news/pressrelease/2016-61.html.  SEC Press Release, Financial Advisers Defrauded Pro Athletes and Lied to SEC Examiners (May 6, 2016), available at www.sec.gov/news/pressrelease/2016-83.html.  In re Apex Fund Serv. (US), Inc., Admin. Proc. File No. 3-17300 (June 16, 2016), available at www.sec.gov/litigation/admin/2016/ia-4429.pdf; In re Apex Fund Serv. (US), Inc., Admin. Proc. File No. 3-17299 (June 16, 2016), available at www.sec.gov/litigation/admin/2016/ia-4428.pdf.  In re Cambridge Inv. Research Advisors, Inc., Admin. Proc. File No. 3-17195 (Apr. 5, 2016), available at www.sec.gov/litigation/admin/2016/ia-4361.pdf.  SEC Press Release, Owner of Formerly Registered Investment Adviser Settles with SEC Regarding Custody Rule, Compliance Rule, and Form ADV Violations (Apr. 14, 2016), available at www.sec.gov/litigation/admin/2016/34-77625-s.pdf.  SEC Press Release, Fund Adviser Settles Charges Relating to Oversight of Consultant Relationship (May 27, 2016), available at www.sec.gov/litigation/admin/2016/ia-4401-s.pdf.  SEC Press Release, Hedge Fund Managers and Former Government Official Charged in $32 Million Insider Trading Scheme (June 15, 2016), available at www.sec.gov/news/pressrelease/2016-119.html.  See Compl., SEC v. Valvani et al., 16-cv-4512 (KPF) (S.D.N.Y. June 15, 2016).  SEC Press Release, Private Equity Fund Adviser Acted As Unregistered Broker (June 1, 2016), available at www.sec.gov/news/pressrelease/2016-100.html.  See D. Lim & C. Cumming, SEC Official Puts Broker-Dealer Issue Back on Private Equity’s Radar, Wall St. J. (June 7, 2016).  SEC Press Release, Barclays, Credit Suisse Charged With Dark Pool Violations (Jan. 31, 2016), available at www.sec.gov/news/pressrelease/2016-16.html.  SEC Press Release, Deutsche Bank Analyst Issued Stock Rating Inconsistent with Personal View (Feb. 17, 2016), available at www.sec.gov/news/pressrelease/2016-30.html.  SEC Press Release, SEC Charges Lending Company and Brokerage Firm With Fraud (Feb. 3, 2016), available at www.sec.gov/news/pressrelease/2016-21.html.  SEC Press Release, SEC Charges Former Executive of Massachusetts-Based State Street Corporation with Defrauding Investors (May 13, 2016), available at www.sec.gov/litigation/litreleases/2016/lr23540.htm.  SEC Press Release, Merrill Lynch Paying $10 Million Penalty for Misleading Investors in Structured Notes (June 23, 2016), available at www.sec.gov/news/pressrelease/2016-129.html.  In re Francis Parisi, Admin. Proc. File No.3-17155 (Mar. 7, 2016), available at www.sec.gov/litigation/admin/2016/33-10050.pdf.  SEC Press Release, Mortgage Company and Executives Settle Fraud Charges (May 31, 2016), available at www.sec.gov/news/pressrelease/2016-97.html.  In re Canaccord Genuity Inc., Admin. Proc. File No.3-17178 (Mar. 24, 2016), available at www.sec.gov/litigation/admin/2016/33-10059.pdf.  SEC Press Release, J.P. Morgan Misled Customers on Broker Compensation (Jan. 6, 2016), available at www.sec.gov/news/pressrelease/2016-1.html.  In re Jason Maiher, Admin. Proc. File No.3-17126 (Feb. 23, 2016), available at www.sec.gov/litigation/admin/2016/34-77207.pdf.  SEC Press Release, Merrill Lynch to Pay $415 Million for Misusing Customer Cash and Putting Customer Securities at Risk (June 23, 2016), available at www.sec.gov/news/pressrelease/2016-128.html.  In re Maximillian Santos, Admin. Proc. File No. 3-17139 (Feb. 29, 2016), available at www.sec.gov/litigation/admin/2016/34-77253.pdf.  In re Craig Scott Capital, Admin. Proc. File No. 3-17206 (Apr. 12, 2016), available at www.sec.gov/litigation/admin/2016/34-77595.pdf.  SEC Press Release, Morgan Stanley Failed to Safeguard Customer Data (June 8, 2016), available at www.sec.gov/news/pressrelease/2016-112.html.  SEC Press Release, Brokerage Firm Charged with Anti-Money Laundering Failures (June 1, 2015), available at www.sec.gov/news/pressrelease/2016-102.html.  SEC Press Release, Miami Firm Broke Anti-Money Laundering Protocols (Feb. 4, 2016), available at www.sec.gov/news/pressrelease/2016-23.html.  SEC Press Release, SEC Charges Goldman Sachs With Improper Securities Lending Practices (Jan. 14, 2016), available at www.sec.gov/news/pressrelease/2016-9.html.  SEC Press Release, Hedge Fund Managers and Former Government Official Charged in $32 Million Insider Trading Scheme (June 15, 2016), available at www.sec.gov/news/pressrelease/2016-119.html.  SEC Press Release, Insider Traders Returning Illegal Profits and Kickbacks (Mar. 9, 2016), available at www.sec.gov/news/pressrelease/2016-44.html.  SEC Press Release, Research Analyst Is Insider Trading in Mother’s Brokerage Account (Apr.13, 2016), available at www.sec.gov/news/pressrelease/2016-67.html.  SEC Press Release, Investment Banker and Plumber Charged With Insider Trading (May 31, 2016), available at www.sec.gov/news/pressrelease/2016-96.html.  SEC Press Release, SEC Charges Company Executive With Insider Trading (Feb. 5, 2016), available at www.sec.gov/news/pressrelease/2016-24.html.  SEC Press Release, Silicon Valley Executive Settles Insider Trading Charges (May 2, 2016), available at www.sec.gov/news/pressrelease/2016-79.html.  SEC Press Release, SEC Announces Insider Trading Charges in Case Involving Sports Gambler and Board Member (May 19, 2016), available at www.sec.gov/news/pressrelease/2016-92.html.  For a critique of the case, see D. Rosenfeld, Phil Mickelson and the SEC’s Legal Bogey, Wall St. J. (June 16, 2016).  SEC Press Release, Software Executive and Three Friends Charged with Insider Trading (June 16, 2016), available at www.sec.gov/news/pressrelease/2016-121.html.  In re Nicholas A. Prezioso, Admin. Proc. File No. 3-17124 (Feb. 19, 2016), available at www.sec.gov/litigation/admin/2016/34-77185.pdf.  SEC Press Release, SEC Charges Five Individuals With Insider Trading in Stock of E-Commerce Company Prior to Acquisition by eBay (Mar. 1, 2016), available at www.sec.gov/litigation/admin/2016/34-77257-s.pdf.  Lit. Rel. No. 23492, Former Microsoft Finance Manager Agrees to Settle Insider Trading Charges (Mar. 18, 2006), available at www.sec.gov/litigation/litreleases/2016/lr23492.htm.  SEC Press Release, Childhood Friends Charged With Insider Trading in Pharmaceutical Stocks (June 3, 2016), available at www.sec.gov/news/pressrelease/2016-108.html.  SEC Press Release, Consultant to Chinese Private Equity Firms Settles Insider Trading Charges (June 9, 2016), available at www.sec.gov/news/pressrelease/2016-115.html.  United States v. Newman, 136 S. Ct. 242 (2015) (denying petition for certiorari).  SEC v. Payton, 97 F. Supp. 3d 558 (S.D.N.Y. 2015).  SEC Press Release, SEC Obtains Jury Verdict in its Favor Against Former Brokers on Insider Trading Charges (Mar. 2, 2016), available at www.sec.gov/litigation/litreleases/2016/lr23478.htm.  United States v. Salman, 792 F.3d 1087 (9th Cir. 2015).  A. Viswanatha & B. Kendall, Supreme Court Takes Up Case That Tests Limits on Insider-Trading Prosecutions, Wall St. J. (Jan. 19, 2016).  Lit. Rel. No. 23447, Rhode Island Federal Court Denies Alleged Insider Trading Defendants’ Motion to Dismiss (Jan. 20, 2016), available at www.sec.gov/litigation/litreleases/2016/lr23447.htm.  SEC v. Andrade, No. 15-cv-231, 2016 WL 199423, at *5 (D.R.I. Jan. 15, 2016).  SEC Press Release, SEC Charges State Street for Pay-to-Play Scheme (Jan. 14, 2016), available at www.sec.gov/news/pressrelease/2016-8.html.  SEC Press Release, California Water District to Pay Penalty for Misleading Investors (Mar. 9, 2016), available at www.sec.gov/news/pressrelease/2016-43.html.  SEC Press Release, Town Officials in New York Hid Financial Troubles From Bond Investors (Apr. 14, 2016), available at www.sec.gov/news/pressrelease/2016-68.html.  SEC Press Release, Mayor in Illinois Settles Muni Bond Fraud Charges (May 19, 2016), available at www.sec.gov/news/pressrelease/2016-93.html.  SEC Press Release, SEC Obtains Court Order to Halt Fraudulent Bond Offering by City of Harvey, Ill. (June 25, 2014), available at www.sec.gov/News/PressRelease/Detail/PressRelease/1370542163027.  SEC Press Release, Former CEO of Chicago Charter School Operator Settles Muni-Bond Fraud Charges (June 21, 2016), available at www.sec.gov/news/pressrelease/2016-125.html.  SEC Press Release, SEC Completes Muni-Underwriter Enforcement Sweep (Feb. 2, 2016), available at www.sec.gov/news/pressrelease/2016-18.html.  SEC Press Release, Municipal Advisor Charged for Failing to Disclose Conflict (Mar. 15, 2016), available at www.sec.gov/news/pressrelease/2016-54.html.  SEC Press Release, Muni Advisors Acted Deceptively With California School Districts (June 13, 2016), available at www.sec.gov/news/pressrelease/2016-118.html.  SEC Press Release, SEC Case Freezes Assets of Ski Resort Steeped in Fraudulent EB-5 Offerings (Apr. 14, 2016), available at www.sec.gov/news/pressrelease/2016-69.html.  See SEC Investor Alert: Investment Scams Exploit Immigrant Investor Program (Oct. 9, 2013), available at investor.gov/news-alerts/investor-alerts/investor-alert-investment-scams-exploit-immigrant-investor-program.  SEC Press Release, Ethiopia’s Electric Utility Sold Unregistered Bonds in U.S. (June 8, 2016), available at www.sec.gov/news/pressrelease/2016-113.html.  In re Application of FINRA, Exch. Act Rel. No. 77746 (April 29, 2016), available at www.sec.gov/rules/other/2016/34-77746.pdf.  D. Michaels, SEC Vacates Order Allowing Rattner to Return to Wall Street, Wall St. J. (Apr. 29, 2016). The following Gibson Dunn lawyers assisted in the preparation of this client update: Marc Fagel, Diane Chan, Mary Kay Dunning, Michael Eggenberger, Tanya Fridland, Melissa Goldstein, Leesa Haspel, Deena Klaber, Amy Mayer, Cary McClelland, Jaclyn Neely, Charles Proctor, Tina Samanta, and Vania Wang. Gibson Dunn is one of the nation’s leading law firms in representing companies and individuals who face enforcement investigations by the Securities and Exchange Commission, the Department of Justice, the Commodities Futures Trading Commission, the New York and other state attorneys general and regulators, the Public Company Accounting Oversight Board (PCAOB), the Financial Industry Regulatory Authority (FINRA), the New York Stock Exchange, and federal and state banking regulators. Our Securities Enforcement Group offers broad and deep experience. Our partners include the former Directors of the SEC’s New York and San Francisco Regional Offices, the former head of FINRA‘s Department of Enforcement, the former United States Attorneys for the Central and Eastern Districts of California, and former Assistant United States Attorneys from federal prosecutors’ offices in New York, Los Angeles, San Francisco and Washington, D.C., including the Securities and Commodities Fraud Task Force. Securities enforcement investigations are often one aspect of a problem facing our clients. Our securities enforcement lawyers work closely with lawyers from our Securities Regulation and Corporate Governance Group to provide expertise regarding parallel corporate governance, securities regulation, and securities trading issues, our Securities Litigation Group, and our White Collar Defense Group. Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work or any of the following: New York Reed Brodsky (212-351-5334, firstname.lastname@example.org) Joel M. Cohen (212-351-2664, email@example.com) Lee G. Dunst (212-351-3824, firstname.lastname@example.org) Barry R. Goldsmith (212-351-2440, email@example.com) Mark K. Schonfeld (212-351-2433, firstname.lastname@example.org) Alexander H. Southwell (212-351-3981, email@example.com) Avi Weitzman (212-351-2465, firstname.lastname@example.org) Lawrence J. Zweifach (212-351-2625, email@example.com) Washington, D.C. Stephanie L. Brooker (202-887-3502, firstname.lastname@example.org) David P. Burns (202-887-3786, email@example.com) Daniel P. Chung (202-887-3729, firstname.lastname@example.org) Richard W. Grime (202-955-8219, email@example.com) F. Joseph Warin (202-887-3609, firstname.lastname@example.org) San Francisco Winston Y. Chan (415-393-8362, email@example.com) Thad A. Davis (415-393-8251, firstname.lastname@example.org) Marc J. Fagel (415-393-8332, email@example.com) Charles J. Stevens (415-393-8391, firstname.lastname@example.org) Michael Li-Ming Wong (415-393-8234, email@example.com) Palo Alto Paul J. Collins (650-849-5309, firstname.lastname@example.org) Denver Robert C. Blume (303-298-5758, email@example.com) Monica K. Loseman (303-298-5784, firstname.lastname@example.org) Los Angeles Michael M. Farhang (213-229-7005, email@example.com) Douglas M. Fuchs (213-229-7605, firstname.lastname@example.org) © 2016 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) released its long-awaited final Customer Due Diligence rule (Final Rule) on May 6, 2016. In response to extensive comments from the industry, the Final Rule provides covered financial institutions with two years to implement new policies and procedures required by the Final Rule. FinCEN released the Final Rule as part of a larger White House announcement of legislation and regulations aimed at strengthening the legal framework for anti-money laundering and anti-corruption compliance. In the weeks following release of the Final Rule, there was significant activity in Washington regarding the Rule and the legislation. On May 24, 2016, the U.S. House of Representatives Financial Services Committee Task Force on Terrorism Financing held a hearing on developments in terrorist financing and on the impact of the Final Rule and proposed legislation. On May 16, 2016, in published remarks to the Institute of International Bankers, FinCEN heralded the process leading up to the Final Rule as an unprecedented example of collaboration between the financial services industry and the government and noted the significant incorporation of feedback from the industry into provisions of the Final Rule. Notwithstanding this engagement with the industry, the Final Rule places significant new compliance burdens on covered financial institutions that the Rule justifies based on a questionable cost-benefit analysis. In this client memorandum, we analyze the provisions of the Final Rule and recommend initial implementation steps that covered financial institutions may want to consider. We also discuss the potential impact of the companion Treasury and Justice Department legislation and an Internal Revenue Service (IRS) proposed regulation issued as part of the White House announcement. CUSTOMER DUE DILIGENCE FINAL RULE Background The Final Rule amends the Bank Secrecy Act (BSA) regulations to make explicit that customer due diligence (CDD) is a regulatory requirement. The Final Rule strengthens CDD procedures by adding a new requirement to obtain and verify the identity of beneficial owners of customers that are legal entities (Beneficial Ownership Requirement) and imposes an express requirement to conduct CDD as part of a financial institution’s existing Anti-Money Laundering (AML) program. The Final Rule applies to financial institutions that currently are subject to the Customer Identification Program (CIP) regulations—banks, brokers and dealers in securities, mutual funds, and futures commission merchants and introducing brokers in commodities (Covered Financial Institutions). The Final Rule is silent as to the government’s intentions regarding whether comparable requirements will be applied to other financial institutions subject to the BSA in the future. The Final Rule provides Covered Financial Institutions with two years, until May 11, 2018, to comply with the requirements of the Final Rule. The Final Rule follows the issuance of a Notice of Proposed Rulemaking (NPRM) in August 2014 and the issuance of an Advanced Notice of Proposed Rulemaking (ANPRM) in March 2012. FinCEN received approximately 141 comments on the NPRM and issued the agency’s first regulatory impact analysis to weigh the potential costs and benefits. As part of the ANPRM phase, FinCEN held five regional hearings to gain a better understanding of the concerns and challenges raised by the industry. According to FinCEN, the Final Rule will enhance financial transparency, safeguard the financial system against illicit use, and advance the purposes of the BSA by: (1) enhancing the availability of beneficial ownership information to law enforcement and the federal functional regulators in investigations and regulatory examinations; (2) increasing the ability of financial institutions and government agencies to identify the assets of terrorist organizations, money launderers, drug kingpins, proliferators of weapons of mass destruction, and other national security threats, and strengthening compliance with economic sanctions programs; (3) helping financial institutions to assess and mitigate BSA and AML risk and comply with existing legal requirements; (4) facilitating tax reporting, investigations, compliance, and U.S. commitments to foreign governments with respect to the Foreign Account Tax Compliance Act (FATCA); (5) promoting consistency in the implementation and enforcement of the regulators’ expectations across financial sectors; and (6) advancing the Treasury Department’s broad strategy to enhance financial transparency of legal entities. The timing of the issuance of the Final Rule is not surprising and is the result of intense international pressure on the United States, which has lagged behind other countries in requiring beneficial ownership information. The Financial Action Taskforce (FATF), which is the international standard-setting body for anti-money laundering compliance, is currently conducting its fourth mutual evaluation of the United States. FATF expects to issue its U.S. mutual evaluation report in the fall of 2016. In the previous U.S. mutual evaluation in 2006, FATF criticized the lack of a requirement for a "financial institution to look through a customer that is an entity to its beneficial owner." Other countries have required collection of beneficial ownership information for many years, many with the assistance of national corporate registries that provide a means to validate beneficial ownership information. The United States has committed to implement all FATF recommendations, including the recommendation related to beneficial ownership. To achieve its objectives, the Final Rule requires Covered Financial Institutions to establish and maintain written procedures that are reasonably designed to identify and verify the beneficial owners of legal entities (unless exempted). The Final Rule also amends the AML program requirements applicable to Covered Financial Institutions in FinCEN’s regulations to make explicit certain CDD requirements and regulatory expectations and to ensure consistency with the AML program requirements issued by the Covered Financial Institutions’ federal functional regulators. CDD Requirements As discussed in the Final Rule, FinCEN considers a CDD program to include, at a minimum, four key elements: (1) identifying and verifying the identity of customers; (2) identifying and verifying the identity of beneficial owners of legal entity customers (i.e., the natural persons who own or control legal entities); (3) understanding the nature and purpose of customer relationships; and (4) conducting ongoing monitoring. FinCEN did not impose any changes to the BSA regulations to address the first element because the first element (the identification and verification of the identity of customers) is already addressed by existing regulations that require Covered Financial Institutions to maintain a CIP. Consistent with the CIP regulations, the Final Rule extends certain CIP provisions and regulatory guidance to the proposed Beneficial Ownership Requirement, e.g., all of the CIP exemptions to the definition of a "customer" and reliance on other financial institutions to perform CDD, and it provides additional exemptions. With respect to the second element (the requirement to identify and verify the identity of beneficial owners), the Final Rule imposes the Beneficial Ownership Requirement described further below. Regarding the third and fourth elements, the Final Rule makes these elements explicit within the core AML program requirements for each Covered Financial Institution in FinCEN’s BSA regulations. The Beneficial Ownership Requirement The Final Rule requires Covered Financial Institutions to identify and verify the identity of natural persons who are the beneficial owners of a legal entity customer, subject to certain exemptions. These requirements apply to all new accounts going forward from the date of implementation of the final CDD rule; they do not apply to existing accounts unless a legal entity customer opens a new account with the financial institution. Although FinCEN narrowed the requirement in response to industry concerns regarding existing accounts, FinCEN recognized that financial institutions may consider identifying the beneficial owners of existing customers when updating customer information on a risk basis. This risk-based approach could leave Covered Financial Institutions vulnerable to regulatory criticism for not obtaining beneficial ownership information in situations where the regulator disagrees with the financial institution’s criteria for obtaining beneficial ownership information on existing customers. Beneficial Owner The Final Rule defines the term "beneficial owner" using a two-pronged test of ownership and control. Under the ownership prong, a beneficial owner is "[e]ach individual, if any, who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, owns 25 percent or more of the equity interests of a legal entity customer." FinCEN recognized that a legal entity customer may be owned by one or more legal entities. Financial institutions are not required to identify more than four beneficial owners. If no individual owns 25% or more of a legal entity, the financial institution is not required to identify any beneficial owner under this prong. Under the control prong, a beneficial owner is defined as "[a] single individual with significant responsibility to control, manage, or direct a legal entity customer[.]" The single individual with control could be an executive officer or senior manager, including one of the positions enumerated in the definition, such as the Chief Executive Officer, the Chief Financial Officer, the Chief Operating Officer, a Managing Member, a General Partner, the President, the Vice President, the Treasurer, or "[a]ny other individual who regularly performs similar functions." If an individual is both a 25% owner and meets the definition of control, the same individual could be identified as the "beneficial owner" under both prongs. This mechanical, two-pronged one-size-fits-all approach does not necessarily go far enough to address money laundering risk. Covered Financial Institutions must continue to understand fully the nature and purpose of the ownership structure of legal entities on a risk basis. The structure should make sense for the type of business, not be overly complex, and not be designed to obscure the true ownership. Because the Final Rule sets forth minimum beneficial ownership requirements, a financial institution may, based on its own risk assessment, lower the percentage threshold, e.g., to 10%, for all customers or for its high-risk customers, or it may require the identification of other individuals who are not covered by the beneficial ownership definition. This would be consistent with the regulators’ expectations that financial institutions apply enhanced due diligence procedures to higher-risk customers. Identification of Beneficial Owners Under the Final Rule, a Covered Financial Institution has the option to obtain the required information (1) through the use of a standard certification form, which FinCEN provided as Appendix A to the Final Rule; or (2) through other means, including, for example, the institution’s own form. Significantly, the Final Rule provides that use of the form is "optional, but it requires collection of the identical information required by the form." The form requires the individual opening the account to identify the beneficial owner(s) of the legal entity customer, and to certify that the information is true and accurate to the best of that person’s knowledge. Verification of Beneficial Owners The Final Rule only requires that financial institutions verify a beneficial owner’s identity and not the beneficial owner’s status as a beneficial owner. The Final Rule’s procedures for verifying identity are identical to the risk-based procedures for verifying the identity of natural persons who open accounts under the CIP regulations, which permit verification by documentary or non-documentary methods. Photocopies or other reproductions of identification are permitted, but "given the vulnerabilities inherent in the reproduction process, Covered Financial Institutions should conduct their own risk-based analyses of the types of photocopies or reproductions that they will accept . . . so that such reliance is reasonable." Of note, FinCEN stated that financial institutions "may rely on the information supplied by the legal entity customer regarding the identity of the beneficial owner or owners [and the extent of their ownership or type of control], provided that it has no knowledge of facts that would reasonably call into question the reliability of such information." This standard, however, could leave financial institutions open to second-guessing by regulators, or even prosecutors, if it turns out that the information is not correct. The government appears to find utility in financial institutions collecting beneficial ownership information without verifying the information, even if the information recorded is false. Providing false information may be useful in the few instances where accounts subject to the Final Rule play a role in criminal investigations. The government also appears to be recognizing the difficulty Covered Financial Institutions would have in verifying beneficial ownership information absent a reliable corporate registry. Legal Entity Customers and Exemptions The Final Rule defines legal entity customers—those entities owned by beneficial owners—to include corporations, limited liability companies, or other entities that are created by the filing of a public document with a Secretary of State or similar office, a general partnership, and any similar entities formed under the laws of a state or of the United States or a foreign jurisdiction. The Final Rule provides for a number of exemptions from the Beneficial Ownership Requirement. FinCEN did not impose a Beneficial Ownership Requirement for trusts, given the variety of possible trust arrangements and the different persons who may have roles in a trust, e.g., the settlor, the grantor, the trustee or other persons. In particular, FinCEN noted that financial institutions generally are identifying and verifying the identity of the trustee who necessarily opens the account, and that financial institutions should continue to use a risk-based approach to collecting information with respect to various persons associated with trusts in order to know their customers. The Final Rule also provides guidance on intermediated account relationships and non-excluded pooled investment vehicles. Reliance on Other Financial Institutions The Final Rule permits financial institutions to rely on other financial institutions to conduct CDD to the same extent permitted under the CIP rules. Under the CIP rules, a financial institution generally can rely on another financial institution to conduct CIP with respect to shared customers, provided that (i) reliance on the other financial institution to conduct CIP is reasonable; (ii) the other financial institution is subject to an AML program rule and is regulated by a federal functional regulator; and (iii) the other financial institution enters into a contract that requires it to certify annually that it has implemented an AML program, and that it will perform the specified requirements of the financial institution’s CIP. Updating Beneficial Ownership Information The Final Rule does not require financial institutions to update or refresh periodically CDD information, but it does require updating under the risk-based approach. FinCEN emphasized that "the obligation to update customer information . . . is triggered only when, in the course of normal monitoring, the financial institution detects information relevant to assessing the risk posed by the customer, i.e., based on a "triggering event." This is an unexpected statement because the Final Rule would not impact the expectations of bank regulators that banks conduct periodic CDD reviews on customers at set intervals based on the customer’s risk rating. Record Retention The Final Rule requires that financial institutions implement procedures for generally maintaining, for five years after the account is closed, a record of the information obtained in connection with the identification of the beneficial owners, including the beneficial ownership certification form and any other related identifying information collected. Information regarding the verification of a customer’s identity must be maintained for five years after the record is made, as with the CIP requirements. AML Program Amendments The Final Rule amends the AML program rules for Covered Financial Institutions to "explicitly include risk-based procedures for conducting ongoing customer due diligence, to include understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile." Specifically, the Final Rule includes in the AML program regulations a requirement that Covered Financial Institutions, at a minimum, include in their AML program: (1) a system of internal controls to assure ongoing compliance with the BSA; (2) the designation of an individual or individuals responsible for coordinating and monitoring day-to-day compliance with the AML program; (3) training of appropriate personnel; (4) independent testing of the AML program; and (5) appropriate risk-based procedures for conducting ongoing customer due diligence, to include, but not be limited to (i) understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile; and (ii) conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information, including CDD information. SUGGESTIONS FOR COVERED FINANCIAL INSTITUTIONS TO CONSIDER IN IMPLEMENTING THE FINAL RULE Current CDD practices by financial institutions vary significantly. Some financial institutions obtain beneficial ownership information routinely, while others obtain this information for only certain categories of customers or following a triggering event. Practices also vary with respect to percentage of ownership thresholds and the extent of information collected. Given the variation in current practices, the CDD compliance burden will be different for each financial institution. The following are general suggestions that financial institutions may want to consider for the initial phases of implementation: Modifications to Systems: The two-year delayed implementation is critical for one of the most time-consuming aspects of any BSA/AML program — information technology (IT) systems. Financial institutions may want to consider prioritizing the assessment of current IT systems for customer on-boarding, transaction monitoring, record retention, and suspicious activity investigation and reporting. Modifications to AML Program and Processes: Implementation will require modifications to a financial institution’s written AML program, corresponding procedures, and forms. To provide enough time for personnel training in advance of the implementation deadline, financial institutions should consider ensuring that the required modifications are made well in advance of the implementation date. Modifications to Account Opening Processes: For financial institutions not currently collecting beneficial ownership information, the Final Rule will impact significantly account opening processes and forms. Although the Final Rule permits financial institutions to rely on the beneficial ownership information provided by the customer, a financial institution only can do so "provided that it has no knowledge of facts that would reasonably call into question the reliability of such information." Consideration should be given to developing criteria for assessing the reliability of the beneficial ownership information provided, escalation procedures, and training that includes red flags. Updating Beneficial Ownership Information and Current Accounts: The Final Rule applies only to new accounts opened after the effective applicability date, May 11, 2018. The Final Rule requires, however, financial institutions to update beneficial ownership information "based on risk, generally triggered by a financial institution learning through its normal monitoring of facts relevant to assessing the risk posed by the customer." Thus, as part of implementation, financial institutions should consider their approach to, and develop procedures for, situations that will require financial institutions to obtain beneficial ownership information on existing customers after the effective date of the Final Rule. Incorporation of Beneficial Ownership Information: The Final Rule provides several specific examples of how FinCEN expects financial institutions to incorporate beneficial ownership information into a BSA/AML program. Specifically, FinCEN expects financial institutions to fully incorporate beneficial ownership information into transaction monitoring and suspicious activity reports (SARs), and to use beneficial ownership information for purposes of enhancing Office of Foreign Assets Control (OFAC) sanctions and negative media screening, and for Currency Transaction Reporting. Threshold for Ownership: FinCEN imposed a 25 percent threshold for ownership and explicitly declined to impose a 10 percent threshold. The Final Rule noted that "consistent with the risk-based approach, FinCEN anticipates that some financial institutions may determine that they should identify and verify beneficial owners at a lower threshold in some circumstances." Financial institutions should consider whether a lower threshold may be appropriate for customers or products or services that could pose a higher risk. Certification Form: In the Final Rule, FinCEN made the Certification Form optional in response to comments from some financial institutions that mandating the use and retention of a specific form would require significant technological changes that could be costly and challenging to implement for some financial institutions. Financial institutions should consider in the initial phases of implementation whether they will use the Certification Form as part of CDD compliance and, if not, they should take steps to ensure that the form that they use includes all of the required information contained in the Certification Form. Training: New processes and procedures will require training for substantial numbers of job categories within financial institutions. In establishing implementation timelines, financial institutions should build in sufficient time for classroom and on-the-job training. LEGISLATIVE PROPOSALS Treasury Department Legislation As part of the White House announcement, the Treasury Department submitted to Congress legislation that would amend the BSA to require the reporting of beneficial ownership information for United States entities. Legislation requiring the disclosure of beneficial ownership information has been introduced in every Congressional session since 2008, but never enacted, and has been opposed by certain states, both because of the costs involved and because a number of these states generate significant revenue from incorporation fees. Treasury’s proposed legislation would amend the BSA to include a section allowing the Secretary to require the maintenance of records and filing of reports with the Treasury Department relating to the beneficial owners of entities formed in the United States at the time of the company’s creation. The proposed legislation addresses widespread criticism of the ability for shell companies to incorporate under U.S. state law and hide assets. The Final Rule and the beneficial ownership draft legislation dovetail together. The Final Rule focuses on financial institutions knowing who their legal entity customers are, regardless of where those entities are formed, as part of due diligence at the time of account opening, but the information provided may not be reliable, and may be impossible to verify given the lack of requirements for states to maintain reliable, verified, and up-to-date corporate formation information. The proposed legislation focuses on ensuring that legal entities formed in the United States are more transparent to law enforcement regardless of where they conduct their financial activity. Not directly related to the beneficial ownership issue, the second part of the U.S. Treasury’s proposed legislation amends the BSA’s section authorizing Geographic Targeting Orders (GTOs). A GTO is an order issued by FinCEN to require enhanced recordkeeping and reporting requirements in a particular geographic area for a defined period of time. The amendments would expand FinCEN’s GTO authority to permit such orders to require reporting on transactions that do not involve a monetary instrument (cash, certain types of checks, and money orders), such as transactions conducted through wire transfers. Over the last several years, FinCEN has issued public GTOs in a number of geographic areas targeting a range of money laundering typologies, including trade-based money laundering, money laundering through real estate, and drug trafficking across the southwest border of the United States. In January 2016, FinCEN issued GTOs requiring certain U.S. title insurance companies to record and report the beneficial ownership information of legal entities making "all cash" or "non-mortgaged" purchases of high-value residential real estate in Manhattan and in Miami-Dade County, Florida. In Congressional testimony in late May 2016, FinCEN’s Director explained that the GTO statute’s limitation on collecting wire transfer information impacted the effectiveness of the real estate GTO. Justice Department Legislation As part of the White House announcement, the Department of Justice also submitted to Congress proposed legislation aimed at strengthening U.S. capabilities to combat corruption. The proposed legislation targets cross-border international corruption, and amends the substantive offense, 18 U.S. § 666, criminalizing theft or bribery in connection with programs receiving federal funds. In 2010, the Department of Justice launched the Kleptocracy Asset Recovery Initiative, in coordination with the FBI and other federal agencies, which seeks to forfeit the proceeds of corruption by foreign officials. The Justice Department’s proposal is the latest step toward achieving the goals of the Kleptocracy Asset Recovery Initiative. The legislation includes: (1) Expanding money laundering predicates to include any violation of non-U.S. law that would be a money laundering predicate if committed in the United States. This amendment will allow prosecutors to prosecute kleptocracy directly and prosecute money laundering linked to a broader set of crimes, by allowing them to prosecute, for example, the laundering of proceeds linked to the foreign corruption activities criminalized in the 2003 U.N. Convention Against Corruption. (2) Allowing investigators to obtain administrative subpoenas for money laundering investigations. Amending Section 3486 of Title 18, United States Code, this proposal would allow for administrative subpoenas in cases "against a foreign nation constituting specified unlawful activity" or certain "criminal or civil forfeiture." The administrative subpoena process is significantly faster and bypasses the judicial oversight embedded in the grand jury subpoena process. (3) Enhancing investigators’ access to foreign bank or business records by allowing service of subpoenas on those entities’ branches situated in the United States, regardless of the bank secrecy or privacy laws in foreign jurisdictions. Current law permits U.S. law enforcement, with approval from the Department of Justice, to attempt to obtain bank records located abroad by serving subpoenas on branches of the bank located in the United States, even where production of the records would violate the foreign country’s bank secrecy or data protection laws. However, obtaining such records as legally admissible evidence can still result in protracted negotiation and litigation, which can ultimately prevent law enforcement from obtaining those records. This proposed amendment will enhance the ability of U.S. investigators to obtain overseas records as a form of legally admissible evidence. (4) Creating a mechanism to use and protect classified information in civil asset recovery cases analogous to what is used in criminal cases under the Classified Information Procedures Act (CIPA). (5) Aligning the period of time the government can restrain property based on a request from a foreign country to that permitted in the domestic context (from 30 days to 90 days). The proposal would give foreign governments up to 90 days to show probable cause why assets in the United States should be frozen and ultimately forfeited under the Kleptocracy Asset Recovery Initiative. The proposal would also allow prosecutors to use foreign business records in civil asset recovery cases, provided there is a certificate attesting that those records meet the business records test—a mechanism that already exists in the criminal context. (6) Resolving a current circuit split over whether 18 U.S.C. § 666, which criminalizes payments to influence or reward agents of entities receiving more than $10,000 in federal funds per year, is solely a bribery statute, or whether it criminalizes gratuities as well. Federal prosecutors rely on this statute heavily to prosecute local corruption cases. The legislation would resolve the split by expressly criminalizing the corrupt offer or acceptance of payments to "reward" official action as well as those intended to "influence" official action, thereby including gratuities in the definition of criminal conduct. CONCLUSION The package of provisions announced by the White House will have a significant impact on financial institutions, just by virtue of the Final Rule alone. The election year may impact the likelihood of the Treasury and Justice Department legislative proposals becoming law in this Congressional session. In addition, as noted above, states will likely continue to oppose vigorously the Treasury legislation. And, even if the beneficial ownership legislation were passed, it would likely take years to come into force and for there to be a viable way for financial institutions to verify beneficial ownership information. We will continue to monitor developments arising from the Final Rule and related legislative provisions and update clients accordingly.  Final Rule, Customer Due Diligence Requirements for Financial Institutions, 81 Fed. Reg. 29398 (May 11, 2016) (to be codified at 31 C.F.R. pts. 1010, 1020, 1023, 1024, 1026), available at https://www.gpo.gov/fdsys/pkg/FR-2016-05-11/pdf/2016-10567.pdf.  Id. at 29428.  See Press Release, U.S. House of Reps., Fin. Servs. Committee, Task Force Examines Federal Efforts to Combat Terror Financing (May 24, 2016), available at http://financialservices.house.gov/news/documentsingle.aspx?DocumentID=400712.  Published Remarks of Jamal El-Hindi, Deputy Director, Financial Crimes Enforcement Network (FinCEN), U.S. Treasury Department, Institute of International Bankers Anti-Money Laundering Seminar (May 16, 2016), available at https://www.fincen.gov/news_room/speech/html/20160518.html.  81 Fed. Reg. 29398.  Id. at 29446 & n.170.  Id. at 29398.  Id. at 29402.  Id. at 29402, 29450; see also Published Remarks of Jamal El-Hindi, Deputy Director, Financial Crimes Enforcement Network (FinCEN), U.S. Dept. of Treas., Institute of International Bankers Anti-Money Laundering Seminar (May 16, 2016), available at https://www.fincen.gov/news_room/speech/html/20160518.html.  81 Fed. Reg. 29398, 29402.  Id. at 29399-400.  Financial Action Taskforce Mutual Evaluation Calendar, available at http://www.fatf-gafi.org/home/.  Id.  Financial Action Task Force, Third Mutual Evaluation Report on Anti-Money Laundering and Combating the Financing of Terrorism §§ 445-55 (June 23, 2006), available athttp://www.fatf-gafi.org/media/fatf/documents/reports/mer/MER%20US%20full.pdf.  The European Union (EU) member states have long since adopted AML beneficial owner identification rules in accordance with the EU’s Third Anti-Money Laundering Directive. The Third AML Directive was adopted in 2005 and mandates, inter alia, that EU Member States adopt CDD measures that include identifying and verifying beneficial owners of legal entities. See Directive 2005/60/EC of the European Parliament and of the Counsel of 26 October 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing, 2005 O.J. (L309) 23-24. These CDD measures were retained and enhanced in the EU’s May 2015 Fourth Directive, which member states must implement by June 26, 2017. See Directive (EU) 2015/849 of the European Parliament and of the Counsel of 20 May 2015 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing, 2015 O.J. (L 141) 91-93, 111. The EU’s Fourth Directive also requires that member states create central repositories of the beneficial ownership information of all companies and legal entities incorporated in each State. Id. at 96-97. EU member states must adopt this provision by June 26, 2017, id. at 111, and several European countries, including the UK, Norway, and Denmark, have already done so. Sophie Haggerty, "Norway Latest Country to Adopt Public Registry of Beneficial Ownership," Global Financial Integrity, available at http://www.gfintegrity.org/norway-latest-country-to-adopt-public-registry-of-beneficial-ownership/ (last visited June 30, 2016); see also Small Business, Enterprise and Employment Act, 2015, c. 26, § 81, sch. 3. However, as the British government will now be embarking on a review of all EU-derived legislation to determine what will survive post Brexit, it is now unclear what the UK’s anti-money laundering regime will look like in the future.  81 Fed. Reg. 29398, 29399.  Id. at 29451-53.  Id.  Id. at 29457.  Id. at 29404.  Id.  Id. at 29449.  Id. at 29451-53.  Id.  Id. at 29452.  Id.  Id.  Id.  Id.  Id.  Id. at 29405; see also 81 Fed. Reg. 29398, 29454-57 (to be codified at 31 C.F.R. § 1010.230, App. A (Standard Certification Form)).  81 Fed. Reg. 29398, 29405.  Id.  Id. at 29407.  Id.  Id. at 29408.  Id. at 29407.  Id. at 29452.  Id.  81 Fed. Reg. 29398, 29412.  Id. at 29415.  Id. at 29398.  31 C.F.R. § 103.121(b)(6).  81 Fed. Reg. 29398, 29421.  Id.  Id. at 29452.  Id. at 29453.  Id. at 29398.  The amended program regulations also include compliance with regulations issued by the Federal functional regulator governing the institutions program. See 81 Fed. Reg. 29398, 29457-29458.  81 Fed. Reg. 29398, 29401.  Id.  Id. at 29407.  Id. at 29399, 29410.  Id. at 29409.  Id. at 29410.  Id.  Id. at 29405.  Proposed Legislation, U.S. Dept. of Treas., FinCEN, Amending the Bank Secrecy Act to Require Reporting and Recordkeeping on Beneficial Ownership of Legal Entities, available at https://www.treasury.gov.  Press Release, Transparency Intl., House and Senate introduce legislation promoting transparency in beneficial ownership of companies (Feb. 3, 2016), availablehere.  Press Release, U.S. Dept. of Treas., FinCEN, Treasury Announces Key Regulations and Legislation to Counter Money Laundering and Corruption, Combat Tax Evasion (May 5, 2016), available at https://www.treasury.gov/press-center/press-releases/Pages/jl0451.aspx.  See Letter, Treasury Secretary Jacob J. Lew to House Speaker Paul D. Ryan (May 5, 2016), available at https://www.treasury.gov/press-center/press-releases/documents/Lew%20to%20Ryan%20on%20CDD.pdf; see also Press Release, CNNMoney, These U.S. companies hide drug dealers, mobsters and terrorists (Dec. 9, 2015), available at http://money.cnn.com/2015/12/09/news/shell-companies-crime/ ("But despite repeated bills from lawmakers to eliminate this secrecy, Congress has yet to take action, leaving the United States far behind other countries when it comes to identifying criminal enterprises.").  See Stopping Terror Finance: A Coordinated Government Effort: Hearing Before the H. Comm. on Fin. Servs., 114th Cong. 2016 WL 2986440 (May 24, 2016) (statement of J. S. Calvery, Director, FinCEN, U.S. Dept. of Treas.).  Id.  Id.  Proposed Legislation, U.S. Dept. of Treas., FinCEN, Amending the Bank Secrecy Act to Require Reporting and Recordkeeping on Beneficial Ownership of Legal Entities, available at https://www.treasury.gov/.  31 U.S.C. § 5326; 31 C.F.R. § 1010.370.  Proposed Legislation, U.S. Dept. of Treas., FinCEN, Amending the Bank Secrecy Act to Require Reporting and Recordkeeping on Beneficial Ownership of Legal Entities, available at https://www.treasury.gov/.  Press Release, U.S. Dept. of Treas., FinCEN, FinCEN Renews and Broadens Geographic Targeting Orders on Border Cash Shipments in California and Texas (Aug. 7, 2015), available at https://www.fincen.gov/news_room/nr/html/20150807.html; Press Release, U.S. Dept. of Treas., FinCEN, FinCEN Combats Stolen Identity Tax Refund Fraud in South Florida with Geographic Targeting Order (July 13, 2015), available at https://www.fincen.gov/news_room/nr/html/20150713.html; Press Release, U.S. Dept. of Treas., FinCEN, FinCEN Targets Money Laundering Infrastructure with Geographic Targeting Order in Miami (Apr. 21, 2015), available at https://www.fincen.gov/news_room/nr/html/20150421.html; Press Release, U.S. Dept. of Treas., FinCEN, FinCEN Issues Geographic Targeting Order Covering the Los Angeles Fashion District as Part of Crackdown on Money Laundering for Drug Cartels (Oct. 2, 2014), available at https://www.fincen.gov/news_room/nr/html/20141002.html.  Press Release, U.S. Dept. of Treas., FinCEN, FinCEN Takes Aim at Real Estate Secrecy in Manhattan and Miami, "Geographic Targeting Orders" Require Identification for High-End Cash Buyers (Jan. 13, 2016), available at https://www.fincen.gov/news_room/nr/html/20160113.html.  See Stopping Terror Finance: A Coordinated Government Effort: Hearing Before the H. Comm. on Fin. Servs., 114th Cong. 2016 WL 2986440 (May 24, 2016) (statement of J. S. Calvery, Director, FinCEN, U.S. Dept. of Treas.).  Press Release, Dep’t of Justice, Justice Department Proposes Legislation to Advance Anti- Corruption Efforts (May 5, 2016), available at https://www.justice.gov/opa/pr/justice-department-proposes-legislation-advance-anti-corruption-efforts.  Id.; see also U.S. Attorneys’ Manual, Title 9: Criminal Resource Manual, § 1002 (Theft and Bribery in Federally Funded Programs).  Comments by Eric Holder, Attorney General, African Union Summit (July 25, 2010), available at https://www.justice.gov/opa/speech/attorney-general-holder-african-union-summit.  Dept. of Justice, Anti-Corruption Legislative Proposals to the 114th Cong., 2 (May 10, 2016), available at https://www.justice.gov/opa/file/849986/download.  Id. at 9.  Id. at 3.  Id.  Id. at 4.  Id. at 9.  Id. at 7.  Id. at 8.  Id.  Id at 11.  The White House also announced an IRS notice of proposed regulation with the stated intention of "provid[ing] the IRS with improved access to information that it needs to satisfy its obligations under U.S. tax treaties, tax information exchange agreements and similar international agreements, as well as to strengthen the enforcement of U.S. tax laws." Specifically, the proposed rule would require foreign-owned entities classified as "disregarded entities" for federal income tax purposes to obtain an employer identification number (EIN) (if they are not already required to), as well as to file a Form 5472 for each "reportable transaction," defined broadly in the Treasury Regulations to include, among other things, contributions, distributions, and transactions between the entity and the foreign owner. Disregarded entities would also be required to maintain books and records sufficient to substantiate the reported transactions and other U.S. tax treatment of the entity. Existing civil and criminal penalties for failure to meet these requirements would extend to disregarded entities. See Treatment of Certain Domestic Entities Disregarded as Separate From Their Owners as Corporations for Purposes of Section 6038A, 81 Fed. Reg. 28,784 (May 10, 2016). By way of background, Sections 301.7701-1 through 301.7701-3 of the Treasury Regulations (entity classification regulations) allow an eligible business entity with a single owner to elect to be classified as either a disregarded entity (an entity disregarded as separate from its owner for federal income tax purposes) or as an association taxable as a corporation. When an entity is classified as a partnership or corporation, the IRS obtains information about the entity through return filing and information obtained when the entity applies for and maintains an EIN. Certain disregarded entities, on the other hand, are not subject to those requirements; as such, the IRS can only obtain information about these disregarded entities if it is included in the owner’s personal return filings (assuming the owner is required to file returns). Under current law, where the owner of a disregarded entity is foreign, it is possible that the IRS will not obtain any information about the disregarded entity. The stated intent of the proposed regulation is to close this "loophole" in U.S. law. See Press Release, U.S. Dept. of Treas., FinCEN, Treasury Announces Key Regulations and Legislation to Counter Money Laundering and Corruption, Combat Tax Evasion (May 5, 2016), available at https://www.treasury.gov/press‑center/press-releases/Pages/jl0451.aspx. The following Gibson Dunn lawyers assisted in the preparation of this client alert: Stephanie Brooker, Joel Cohen, Arthur Long, Amy Rudnick, Linda Noonan, Mark Handley, Mehrnoosh Aryanpour, Courtney Brown, Ella Capone, Jesse Melman, Masha Bresner, Eric Veres and Melissa Goldstein. Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following members of the firm’s Financial Institutions and White Collar practice groups: Stephanie L. Brooker – Washington, D.C. (+1 202-887-3502, email@example.com)Joel M. Cohen – New York (+1 212-351-2664, firstname.lastname@example.org)Arthur S. Long – New York (+1 212-351-2426, email@example.com)Amy G. Rudnick – Washington, D.C. (+1 202-955-8210, firstname.lastname@example.org)Linda Noonan - Washington, D.C. (+1 202–887–3595, email@example.com)Mark Handley – London (+44 (0) 207 071 4277, firstname.lastname@example.org) Mehrnoosh Aryanpour – Washington, D.C. (+1 202-955-8619, email@example.com)Courtney M. Brown – Washington, D.C. (+1 202-955-8685, firstname.lastname@example.org) © 2016 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Los Angeles partner Michael Farhang is the author of "Proposed Anti-Money Laundering Rules Focus on Investment Advisers" [PDF] published on April 5, 2016 by The Daily Journal.
On January 13, 2016, the U.S. Treasury Department’s Financial Crimes Enforcement Network ("FinCEN") issued geographic targeting orders ("GTOs") that will temporarily require title insurance companies to identify and report the individuals behind legal entities that pay "all cash" for high-end residential real estate in the Borough of Manhattan in New York City (over $3 million) and in Miami-Dade County, Florida (over $1 million). The GTOs are designed to address concerns that corrupt officials and other transnational criminals are hiding ill-gotten gains by purchasing residential properties through opaque shell entities with cash, thereby avoiding the scrutiny imposed by financial institutions involved in lending transactions. For purposes of the GTO, "all cash" means any purchase of high-end residential real estate that (i) is not financed by a bank loan or other external financing source and (ii) is purchased, at least in part, using currency or a cashier’s check, a certified check, a traveler’s check, or a money order. The GTOs will be in effect beginning on March 1, 2016, and will expire on August 27, 2016 (unless renewed) and require reporting the identity of individuals who, directly or indirectly, own 25% or more of the equity interests of the purchasing entity. This is the first time that U.S. authorities have subjected title insurance companies to any special anti-money laundering ("AML") requirements. Although FinCEN has the authority under the Bank Secrecy Act ("BSA") to impose a range of recordkeeping, reporting and compliance program requirements on "persons involved in real estate closings and settlements," it has refrained from doing so to date. But as a nonfinancial trade or business, a title insurance company is subject to some limited reporting requirements, such as the requirement to report cash payments of more than $10,000 to the Internal Revenue Service and FinCEN. Similarly, nonfinancial trades and businesses are subject to the GTO provisions of the BSA. A GTO is a rare and potent tool that the Treasury Department can use to require financial institutions as well as nonfinancial trades or businesses to report on transactions over a specified threshold within a certain geographic area, if only for a limited period of time to address law enforcement needs. Historically, GTOs were not made public, and until recently, only the businesses served with a GTO were made aware of its existence. Over the last two years, however, FinCEN has issued a number of GTOs to address areas of money laundering concern across the country. FinCEN has publicly announced the issuance of the GTOs, released copies of the GTOs, explained the terms, and set forth the money laundering risks the GTOs were designed to address. Notably, the January 2016 order was the third GTO in less than a year targeting Miami. Use of Shell Companies in Luxury Real Estate Transactions Over the past several years, the global effort to combat corruption and money laundering has resulted in greater public awareness of the methods used by criminals to hide the proceeds of transnational crime. In July 2006, the Financial Action Task Force on Money Laundering ("FATF"), a leading international AML organization, criticized the United States for failing to comply with a FATF standard on the collection of beneficial ownership information and urged the United States to correct this deficiency. In August 2014, FinCEN issued a notice of proposed rulemaking that would require banks, securities-broker dealers and certain other financial institutions to obtain beneficial ownership information, but a final rule has not been issued to date. Indeed, many U.S. states continue to use automated procedures that allow for the creation of new corporations and limited liability companies within 24 hours or less by filing an online application. Dozens of internet sites highlight the anonymity of beneficial owners allowed under applicable state laws, point to those practices as a reason to incorporate in those states, and list those states together with offshore jurisdictions as preferred locations for the formation of new corporations. In 2015, U.S. media sources reported on the growing use of shell companies to purchase domestic real estate, which can make it difficult to ascertain the ultimate or "beneficial" owner of real property. U.S. regulators emphasized the complexities involved in determining beneficial owners of shell companies–Assistant Attorney General Leslie R. Caldwell noted that it could be "very, very difficult to penetrate who is the beneficial owner of these shell companies," and FinCEN Director Jennifer Shasky Calvery acknowledged that her agency had "seen instances in which multimillion-dollar homes were being used as safe deposit boxes for ill-gotten gains, in transactions made more opaque by the use of anonymous shell agencies." The increasing use of shell entities to purchase residential real estate has further shrouded the ultimate owners of many high-end properties in major U.S. cities. In Manhattan, where roughly $8 billion is spent each year on residential property valued at $5 million or more, the use of shell companies in real estate transactions is on the rise. In 2008, 39% of the units in buildings with residences that sold for $5 million or more were purchased with shell companies. By 2014, the figure was 54%. According to a recent series in The New York Times, neighbors at one luxury condominium complex in New York City included a former Russian senator with connections to organized crime, a Greek businessman arrested as part of a corruption sweep, a Chinese contractor who was found housing workers in hazardous conditions, and an Indian mining magnate fined for pollution in Africa. Most of the properties had been purchased through shell companies. The prevalence of sales to shell companies is not unique to Manhattan: in Los Angeles, 51% of sales $5 million or more were made to shell companies. For the San Francisco Bay Area and Miami, the figures were 48% and 37%, respectively. – Louise Story & Stephanie Saul, Stream of Foreign Wealth Flows to Elite New York Real Estate, N.Y. TIMES, Feb. 7, 2015 FinCEN’s Risk-Based Approach to Money Laundering in Real Estate FinCEN has adopted a "risk-based" approach to money laundering in the real estate sector, an industry still struggling to regain its footing in the wake of the financial crisis. Because most real estate transactions involve some form of financing, and are thus subject to the AML scrutiny imposed by financial institutions, FinCEN has been reluctant to impose potentially duplicative requirements on the rest of the industry. Although the BSA includes "persons involved in real estate closings and settlements" in the definition of financial institution, regulatory action is required to enumerate the persons that would fit in this category. Under the authority granted by the USA PATRIOT Act, FinCEN exempted persons involved in real estate closings and settlements from AML requirements on April 29, 2002 and again on November 6, 2002. In 2003, FinCEN issued an Advance Notice of Proposed Rulemaking seeking comment on how to define "persons involved in real estate closings and settlements," the money laundering risks posed by such persons, and whether they should be subject to anti-money laundering program requirements, but no subsequent action was taken. As such, existing FinCEN regulations do not require real estate professionals to establish AML programs, identify customers or file suspicious activity reports ("SARs"). Real estate professionals who engage in transactions with knowledge that the proceeds are derived from illegal activity still run the risk of liability under criminal anti-money laundering statutes and related civil forfeiture provisions. Over the last several years, FinCEN assessed the need for further regulatory action in the real estate industry. In 2012, FinCEN released a study of eight years’ worth of data from SAR and Form 8300 reports filed by or in relation to real estate title and escrow businesses which demonstrated significant trends in suspicious activity characterizations, notably mortgage loan fraud and money laundering. SARs filed on the real estate title and escrow-related industry characterized mortgage loan fraud as the most reported activity, followed by false statements and "BSA/structuring/money laundering." Furthermore, SARs filed by money services businesses regarding real estate title and escrow-related firms overwhelmingly (over 96 percent) listed structuring, the practice of conducting transactions in a specific pattern calculated to avoid the creation of records and reports required under the BSA, as at least one of the activity characterizations. In light of these findings, FinCEN prioritized risks surrounding mortgage fraud, extending the BSA’s AML compliance program and SAR requirements to non-bank residential mortgage lenders and originators in 2012. At the time, FinCEN noted that several comments received in response to the Notice of Proposed Rulemaking expressed support for expanding the regulations to cover other businesses and professions in the real estate industry. FinCEN deferred issuing regulations for these other businesses and professions until further research and analysis could be conducted. Three years later, in November 2015, Director Calvery announced that FinCEN had detected the frequent use of shell companies by international corrupt politicians, drug traffickers, and other criminals to purchase luxury residential real estate: 78% of real estate purchases were financed by some type of mortgage, and thus captured in the current regulatory structure, but the remaining 22% of real estate purchases were made in all-cash, effectively circumventing regulatory scrutiny. Director Calvery noted that FinCEN had engaged in productive discussions with its state regulatory counterparts in an effort to target vulnerabilities "with the least amount of burden." The January 2016 GTOs: FinCEN Takes Aim at Real Estate Transactions in Manhattan and Miami After media reports highlighted the patterns of money laundering through the real estate sector in 2015, there were more vociferous calls for greater due diligence requirements applicable to professionals in the real estate sector. In issuing the GTOs for Manhattan and Miami, FinCEN is experimenting with additional reporting requirements while continuing to study the impact and utility of such reports for the industry and law enforcement. "We are seeking to understand the risk that corrupt foreign officials, or transnational criminals, may be using premium U.S. real estate to secretly invest millions in dirty money," explained FinCEN Director Calvery when announcing the GTOs. "Over the years, our rules have evolved to make the standard mortgage market more transparent and less hospitable to fraud and money laundering. But cash purchases present a more complex gap that we seek to address. These GTOs will produce valuable data that will assist law enforcement and inform our broader efforts to combat money laundering in the real estate sector." The January 2016 GTOs are directed at title insurance companies and their subsidiaries and agents, and do not apply to other real estate professionals, such as brokers, appraisers or lawyers involved in real estate transactions. FinCEN explained that it pinpointed title insurance companies for AML reporting because title insurance is "a common feature in the vast majority" of real estate transactions. Furthermore, title insurers tend to be larger and more sophisticated institutions with the capacity and experience to comply with these types of reporting requirements. FinCEN emphasized that the GTOs did not imply any "derogatory finding" with respect to the covered entities, and expressed its appreciation for the assistance and cooperation of title insurance companies and the American Land Title Association in protecting real estate markets from abuse by illicit actors. In the short term, FinCEN’s GTOs could impact high-end residential real estate transactions in Manhattan and Miami. According to PropertyShark, a real estate data company, 1,045 residential properties were sold for more than $3 million in the second half of 2015 in Manhattan alone, worth roughly $6.5 billion in total. The New York Times found that nearly half of homes nationwide worth at least $5 million are purchased using shell companies. In major U.S. cities, however, the figure is higher. Specific Requirements of the GTOs The GTOs require certain title insurance companies and any of their subsidiaries and agents to report any transaction in which (1) a legal entity, defined as "a corporation, limited liability company, partnership or other similar business entity, whether formed under the laws of a state or of the United States or a foreign jurisdiction"; (2) purchases residential real property located in the Borough of Manhattan in New York, New York for a total purchase price greater than $3,000,000 or residential real property in Miami-Dade County, Florida for a total purchase price greater than $1,000,000; (3) such purchase is made without a bank loan or other similar form of external financing; and (4) such purchase is made, at least in part, using currency or a cashier’s check, a certified check, a traveler’s check, or a money order in any form. FinCEN has confirmed that the definition of "legal entity" does not include trusts. The transaction must be reported by electronically filing a FinCEN Form 8300 within 30 days of the closing of the transaction. The GTOs provide specific instructions on how to complete the form to comply with the GTOs. The FinCEN Form 8300 must contain (1) information about the identity of the individual primarily responsible for representing the purchaser (the title insurance company must obtain and record a copy of this individual’s driver’s license, passport, or other similar identifying documentation); (2) information about the identity of the purchaser; (3) information about the identity of the beneficial owner(s) (each individual who, directly or indirectly, owns 25% or more of the equity interests of the purchaser) of the purchaser (the title company must obtain and record a copy of the beneficial owner’s driver’s license, passport, or other similar identifying documentation); (4) information about the transaction, including the date of closing, the total amount transferred, the total purchase price, and the address of the real property; and (5) information about the title insurance company. Unlike the existing Form 8300 requirements which only require title insurance companies to report receipts over $10,000 of cash and, in certain circumstances, cashier’s checks, bank drafts, travelers checks and money orders that have a face amount of $10,000 or less, these GTOs require reporting on transactions conducted in part by currency, cashier’s, certified, or traveler’s checks, or money orders, regardless of the amount of cash or the instruments involved. Real estate transactions conducted only with checks drawn on an account and/or wire transfers are not subject to the GTO reporting requirements. The GTOs require title insurance companies to retain all records relating to compliance with the GTOs for five years and to make the records available to FinCEN, other agencies, and law enforcement upon request. Title insurance companies and their officers, directors, employees, and agents may be liable for civil or criminal penalties for violating the terms of the GTOs. The temporary GTOs will remain in effect for 180 days beginning on March 1, 2016 and ending on August 27, 2016, unless extended. If the orders prove effective in Manhattan and Miami, and result in significant actionable information for law enforcement, they could be used as the model for similar reporting requirements in other regions. Practice Point for Residential Real Estate Buyers Plan Ahead. Title insurance companies usually conduct diligence in purchase transactions to verify due authorization of both the buyer and the seller and authority of the signatories. The level of this diligence typically requires production of certain organizational documents of the legal and beneficial owners. Purchasers now may need to produce more extensive organizational documentation and, at a minimum while the temporary GTOs are in effect, a list of the beneficial owners of the purchasing entity and any intermediate entities. This production will supplement the searches that many title insurers already perform to confirm that the transaction parties are not prohibited individuals or entities under applicable sanctions from the Treasury Department’s Office of Foreign Assets Control ("OFAC").* Prepare for Longer Due Diligence Periods. Prior to signing the purchase agreement, a buyer may need to negotiate with the seller to extend the due diligence period to provide sufficient time for the title insurer to determine that it has obtained the information it is required to collect and report. Certain unanticipated events or occurrences could require additional time for the title insurer to perform its reporting obligations; for instance, a buyer unexpectedly may have to use cash to supplement financing proceeds, or a new investor may join a buyer group late in the transaction, or for estate planning or other reasons the buyer may decide to change the actual grantee of title from a natural person to an entity. These common occurrences may result in delay since the title insurer will need to confirm all the required information has been collected and reported. Costs. Finally, buyers should be aware that closing costs may increase if title insurance companies decide to charge new fees to collect this information and to provide it to FinCEN. * As part of its enforcement efforts, OFAC publishes a list of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries. It also lists individuals, groups, and entities, such as terrorists and narcotics traffickers designated under programs that are not country-specific. Collectively, such individuals and companies are called Specially Designated Nationals; their assets are blocked and U.S. persons are generally prohibited from dealing with them. In order to expedite this process and to close on time, buyers should have the appropriate documentation and disclosure ready to produce to title insurance companies. Sellers should consider requiring their buyer to agree in the contract of sale to satisfy such production demands. AML Enforcement in the Real Estate Sector FinCEN’s recent GTOs represent only one part of a broader federal effort to reduce money laundering in the real estate sector. The Treasury Department and federal law enforcement officials are investing greater resources into investigating luxury real estate sales that involve shell companies, including a new 10-agent Federal Bureau of Investigation unit to focus on money laundering. Federal officials have noted that future AML investigations will be expanded to focus on professionals who assist in money laundering in the real estate sector, including real estate agents, lawyers, bankers, and corporate entity formation agents. Public scrutiny of these professionals increased precipitously on January 31, 2016, less than two weeks after FinCEN issued the GTOs, when the CBS News program 60 Minutes profiled an undercover investigation by Global Witness, a nonprofit group that has been pushing for stricter anti-money laundering rules. A Global Witness investigator posing as the agent of a government official from a mineral-rich African country surreptitiously taped meetings with U.S. lawyers who allegedly provided advice on how to move suspect money into the United States, including through the use of shell companies. The resulting media blitz may result in stronger reporting requirements than those imposed by FinCEN to date. Shortly after the 60 Minutes broadcast, the U.S. House of Representatives reintroduced legislation to require states to collect beneficial ownership information for limited liability companies and other corporate entities used in real estate transactions, or to have the Treasury Department do so if states are unable to meet the requirement. Certain reporting measures, when imposed on attorneys, may conflict with the attorney-client privilege, which protects communications between clients and their lawyers for the purpose of obtaining or providing legal advice. Notably, a client’s communication with his or her attorney may not be privileged if made in furtherance of a crime or fraud.  Press Release, U.S. Dep’t of Treas., FinCEN, FinCEN Takes Aim at Real Estate Secrecy in Manhattan and Miami (Jan. 13, 2016), available at https://www.fincen.gov/news_room/nr/html/20160113.html. These superseded GTOs issued on January 6, 2016.  The Uniting And Strengthening America By Providing Tools Required To Intercept And Obstruct Terrorism Act of 2001 ("USA PATRIOT Act"), which imposed AML program requirements on certain financial institutions, provided a temporary exemption from the AML program requirements for "persons involved in real estate closings and settlements" until such time as FinCEN issued applicable regulations. Pub. L. No. 107-56, 115 Stat. 272 (2001); 31 C.F.R. §103.170(b)(1)(vii) (2002) (currently codified at 31 C.F.R. § 1010.205(b)(1)(v) (2016)).  26 U.S.C. § 60501. The Internal Revenue Code requires reporting to the IRS of cash payments over $10,000 by all trades or businesses that are not required to file similar reports on currency transactions under the BSA (i.e., non-financial institutions). In 2001, the USA PATRIOT Act incorporated these IRS reporting requirements for nonfinancial trades and businesses into the BSA. Treasury regulations allow a single Form 8300 to satisfy both the IRS and BSA filing requirements. See 31 CFR 1010.330(a)(1)(ii) and (e) (formerly 103.30(a)(ii)); IRS Part 4, Ch. 26, Section 10, Form 8300 History and Law, available at https://www.irs.gov/irm/part4/irm_04-026-010.html#d0e41.  See 31 U.S.C. § 5326(a) (2015); 31 C.F.R §1010.370. The USA PATRIOT Act extended the duration of a GTO from 60 to 180 days.  Recent GTOs have focused on shipments of cash across the border in California and Texas, on the Fashion District of Los Angeles, on exporters of electronics in South Florida, and on check cashing businesses in South Florida. See, e.g., Press Release, FinCEN, FinCEN Issues Geographic Targeting Order Covering the Los Angeles Fashion District as Part of Crackdown on Money Laundering for Drug Cartels (Oct. 2, 2014), available at https://www.fincen.gov/news_room/nr/pdf/20141002.pdf.  See FinCEN, supra n.1; Press Release, FinCEN, FinCEN Renews Geographic Targeting Order (GTO) Requiring Enhanced Reporting and Recordkeeping for Electronics Exporters Near Miami, Florida (Oct. 23, 2015), available at https://www.fincen.gov/news_room/nr/pdf/20151023.pdf; FinCEN Combats Stolen Identity Tax Refund Fraud in South Florida with Geographic Targeting Order (July 13, 2015), available at https://www.fincen.gov/news_room/nr/pdf/20150713.pdf.  Incorporation Transparency and Law Enforcement Assistance Act, H.R. 4450, 114th Cong. (2016), available at https://www.gpo.gov/fdsys/pkg/BILLS-114hr4450ih/pdf/BILLS-114hr4450ih.pdf.  See FinCEN, Notice of Proposed Rulemaking, Customer Due Diligence Requirements for Financial Institutions, 79 Fed. Reg. 45151 (Aug. 4, 2014).  H.R. 4450, supra n.7.  Id.  See Louise Story & Stephanie Saul, Stream of Foreign Wealth Flows to Elite New York Real Estate, N.Y. Times, Feb. 7, 2015, available at http://www.nytimes.com/2015/02/08/nyregion/stream-of-foreign-wealth-flows-to-time-warner-condos.html?rref=collection%2Fnewseventcollection%2Fshell-company-towers-of-secrecy-real-estate&action=click&contentCollection=us®ion=rank&module=package&version=highlights&content Placement=1&pgtype=collection.  Id.  See Louise Story, U.S. Will Track Secret Buyers of Luxury Real Estate, N.Y. Times, Jan. 13, 2016, available at http://www.nytimes.com/2016/01/14/us/us-will-track-secret-buyers-of-luxury-real-estate.html?_r=0.  See Story & Saul, supra n.11.  Id.  Id.  Id.  FinCEN, supra n.1.  Supra n.2. 31 C.F.R. §103.170(b)(1)(vii) (codified at 31 C.F.R. § 1010.205(b)(1)(v) (2016)).  See FinCEN, Anti-Money Laundering Program Requirements for Persons Involved in Real Estate Closings and Settlements, 68 Fed. Reg. 17,569 (Apr. 10, 2003).  Id.; FinCEN, Real Estate Title and Escrow Companies: A BSA Filing Study, Assessing Suspicious Activity Reports Related to Real Estate Title and Escrow Businesses 2003-2011 (2012) [hereinafter "FinCEN Study"], citing 69 Fed. Reg. 17,569 and noting that no further regulatory action was taken in this regard.  Id. at 2 n.3; 31 U.S.C § 5326. As described above, nonfinancial trades or businesses are required to comply with the BSA requirements for the reporting of cash payments (and in certain instances, cash equivalents) greater than $10,000 and are subject to the Treasury Department’s GTO authority.  18 USC §1956 (laundering of monetary instruments); §1957 (engaging in monetary transactions in property derived from specified unlawful activity); § 981 (civil forfeiture).  FinCEN Study, supra n.21, at 5-6. FinCEN observed that from 2003 through 2011, real estate title and escrow-related businesses filed over 1,000 reports of suspicious activity, primarily using Form 8300. Notably, the ratio of SAR reports filed on the industry (which are mandatory) to those filed by the industry (which are voluntary) was about 750:1. Fifteen distinct real estate title and escrow businesses also filed 29 SARs, including 11 SARs for money services businesses ("SAR-MSBs") and 18 SARs. The industry was the subject of almost 22,000 SARs and SAR-MSBs during the review period. SARs filed on the real estate title and escrow-related industry during the nine year review period reported more than $41 billion in suspicious activity amounts. Suspicious Form 8300 filings by title and escrow-related businesses reported more than $43 million in total cash received from clients for the same period of time.  Id. at 7. More than 93 percent of the false statement characterizations coincided with reporting of mortgage loan fraud. Nine of the eighteen SARs filed by real estate title and escrow-related businesses described mortgage loan fraud as at least one of the reasons for filing the report.  Id.  FinCEN, Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements for Residential Mortgage Lenders and Originators, 77 Fed. Reg. 8,148 (Feb. 14, 2012) (codified at 31 C.F.R. § 1029.210 (2016)).  Id.  FinCEN, Director Jennifer Shasky Calvery Prepared Remarks for the American Bankers Association and American Bar Association Money Laundering Enforcement Conference (Nov. 16, 2015), available at https://www.fincen.gov/news_room/speech/html/20151116.html.  Id.  See Press Release, Transparency Int’l USA, Groups Call on U.S. Gov’t to Regulate the Use of Anonymous Cos. to Buy Prop. & to Require Diligence on the Sources of Money by Fin. Inst. (Mar. 11, 2015).  FinCEN, supra n.1.  Id.  Id.  Story & Saul, supra n.11.  Id.  Id.  FinCEN, Geographic Targeting Order – Miami-Dade County (Jan. 13, 2016); Geographic Targeting Order – Borough of Manhattan (Jan. 13, 2016).  Id.  Id. Purchaser means "the Legal Entity that is purchasing residential real property as part of a Covered Transaction."  Id.  See FinCEN, supra n.38.  See FinCEN, supra n.1.  See Story, supra n.13.  Id.  Id.  Id.  H.R. 4450, supra n.7. Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, or the authors: Andrew A. Lance – New York (+1 212-351-3871, email@example.com)Amy G. Rudnick – Washington, D.C. (+1 202-955-8210, firstname.lastname@example.org)Judith A. Lee – Washington, D.C. (+1 202-887-3591, email@example.com)Linda Noonan - Washington, D.C. (+1 202 887 3595, firstname.lastname@example.org)Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, email@example.com) Scott A. Sherwood – Los Angeles (+1 213-229-7320, firstname.lastname@example.org) © 2016 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.