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On December 26, the SEC announced a settlement with a national bank to resolve allegations that the bank mishandled the pre-release of American Depositary Receipts (ADRs)—U.S. securities that represent shares in foreign companies. The SEC noted in its press release that ADRs can be pre-released without the deposit of foreign shares only if: (i) the brokers receiving the ADRs have an agreement with a depository bank; and (ii) the broker or the broker's customer owns the number of foreign shares that corresponds to the number of shares the ADR represents. The SEC alleged that the bank improperly provided thousands of pre-released ADRs where neither the broker nor its customers possessed the required shares. According to the SEC’s order, the bank’s alleged practice of allowing pre-released ADRs, that were in many instances not backed by ordinary shares, violated the Securities Act of 1933. The bank has neither admitted nor denied the SEC’s allegations, but has agreed to pay more than $71 million in disgorgement, roughly $14.4 million in prejudgment interest, and an approximate $49.7 million penalty. The SEC’s order further acknowledges the bank’s cooperation in the investigation and implementation of remedial measures.
On December 26, 2018, a Brazilian electric utilities company entered into an administrative order to settle the SEC’s claims that the company violated the books and records and internal accounting controls provisions of the FCPA and agreed to pay a civil monetary penalty of $2.5 million.
The company, which is majority-owned by the Brazilian government, is alleged to have – through former officers of its nuclear power generation subsidiary – rigged bids and paid bribes through private construction companies in relation to construction of a nuclear power plant in Brazil. This matter was first announced publicly in October 2016 when the company hired outside counsel to conduct an internal investigation into related conduct.
In entering into this administrative order, the SEC consider the company’s cooperation efforts, including sharing facts discovered in its internal investigation and producing and translating related documents, as well as its efforts towards remediation, including discipline of involved employees, enhancement of internal accounting controls and compliance functions, and adoption of new anti-corruption policies and procedures.
Previous coverage can be found here.
On December 26, 2018, an American communication technology company (the company) entered into an administrative order to settle claims by the SEC that the company violated the books and records and internal accounting controls provisions of the FCPA. The alleged conduct involved improper payments made through distributors and resellers its subsidiary in China (the subsidiary) to Chinese government officials from 2006 through 2014 in an effort to obtain business from public sector customers.
According to the administrative order, at the instruction of the Vice President of the subsidiary, sales personnel used a sales management system outside of the U.S.-based company-approved database to parallel-track sales to public sector customers in China. The scheme involved providing discounts to distributors and resellers that were used to cover the costs of payments to Chinese government officials. These discounts were not passed on to the end customer, and the purpose of those discounts was not tracked in the company-approved database. The subsidiary's sales personnel were also instructed by the VP to use non-company email addresses when discussing and arranging these deals.
Pursuant to the administrative order, the company will pay to the SEC approximately $10.7 million in disgorgement, $1.8 million in prejudgment interest, and a $3.8 million civil monetary penalty.
On the same day, DOJ released a December 20, 2018 declination letter settling its investigation of the same conduct. Pursuant to the declination letter, the company agreed to disgorge approximately $10.15 million to the U.S. Treasury Department and $10.15 to the U.S. Postal Inspection Service Consumer Fraud Fund.
In settling these matters, both the SEC and DOJ cited the company’s identification of the misconduct, thorough internal investigation conducted by outside counsel, prompt voluntary disclosure, full cooperation, and remediation efforts. The company’s lauded cooperative efforts included making certain employees available for interviews, as well as producing all requested documents and translating large volumes of those documents from Mandarin to English. The remedial efforts cited included termination of eight employees and discipline of eighteen others, termination or reorganization of certain channel partner relationships, enhancement of third party oversight, and improvements to anticorruption and related trainings provided to China-based employees (certain materials of which had previously not been translated into Mandarin, the first language of many of the subsidiary employees).
On December 19, the United States Attorney for the Southern District of New York announced it filed charges against a Kansas-based broker-dealer for allegedly willfully failing to file a suspicious activity report (SAR) in connection with the illegal activities of one of its customers in violation of the Bank Secrecy Act (BSA). According to the announcement, this is the first criminal BSA action ever brought against a U.S. broker-dealer. The allegations are connected to the actions of the broker-dealer’s customer, who was the owner of a Kansas-based payday lending scheme that was ordered to pay a $1.3 billion judgment for making false and misleading representations about loan costs and payments in violation of the FTC Act (previously covered by InfoBytes here). The U.S. Attorney alleges the broker-dealer, among other things, failed to follow its customer identification procedures, disregarded “red flags that were known prior to [the customer] opening the accounts,” and continued to ignore additional red flags that arose over time. Additionally, the U.S. Attorney alleges the broker-dealer failed to monitor transactions using its anti-money laundering (AML) tool, which led to numerous suspicious transactions going undetected and unreported until long after the customer was convicted at trial for his actions in the scheme.
Along with the announcement of the filing, the U.S. Attorney’s Office further stated it had entered into a deferred prosecution agreement with the broker-dealer in which it agreed to accept responsibility for its conduct, pay a $400,000 penalty, and enhance its BSA/AML compliance program.
The SEC also settled with the broker-dealer for the failure to file the SARs. The settlement requires the broker-dealer to hire an independent consultant to review its AML and customer identification program and implement any recommended changes. The independent consultant will monitor for compliance with the recommendations for two years.
On December 18, the former CEO and CFO of U.S.-based in-flight entertainment company settled SEC charges that they knowingly violated books and records and internal accounting controls provisions of the federal securities laws and caused similar violations by the company’s parent company. As detailed in prior FCPA Scorecard coverage, the parent company and the entertainment company settled related FCPA charges in April and agreed to pay a combined $280 million to the DOJ and SEC.
The company’s former President and CEO and its former CFO consented to the entry of their administrative orders without admitting or denying the findings and agreed to pay penalties of $75,000, and $50,000, respectively.
The SEC alleged the former CEO authorized the use of a third-party to pay more than $1.76 million to several consultants who provided little to no services. One of these consultants, a Middle East government official, was paid $875,000 to help secure over $700 million in business from a state-owned airline, but the position “required little to no work.” The bribery scheme involving this foreign official was previously described in the DPA with DOJ and the SEC Settlement Order. The former CEO was also charged with making false representations to the company’s auditor regarding internal accounting controls, and books and records.
The SEC charged the former CFO in connection with a backdating scheme that resulted in the parent company improperly recording $82 million in revenue. The former CFO was charged with making false representations to the company’s auditor regarding the company’s financial statements, internal accounting controls, and books and records. The order against him suspends him from appearing or practicing before the Commission as an accountant for at least five years.
The former CEO and CFO were previously described in the SEC Settlement Order as the company's Executive 1 and the company's Executive 2, respectively. The DOJ has not brought any criminal charges against any individuals in this matter.
On December 17, the SEC announced a settlement with a global investment bank to resolve allegations that the bank mishandled the pre-release of American Depositary Receipts (ADRs)—U.S. securities that represent shares in foreign companies. The SEC noted in its press release that ADRs can be pre-released without the deposit of foreign shares only if: (i) the brokers receiving the ADRs have an agreement with a depository bank; and (ii) the broker or the broker's customer owns the number of foreign shares that corresponds to the number of shares the ADR represents. The SEC alleged that the bank improperly provided thousands of pre-released ADRs where neither the broker nor its customers beneficially owned the required shares. According to the SEC’s order, the bank’s alleged practice of allowing pre-released ADRs that were in many instances not backed by ordinary shares violated the Securities Act of 1933. The bank has neither admitted nor denied the SEC’s allegations, but has agreed to pay more than $29.3 million in disgorgement, roughly $4.2 million in prejudgment interest, and a $20.5 million penalty. The SEC’s order further acknowledges the bank’s cooperation in the investigation and implementation of remedial measures.
On December 17, the Financial Industry Regulatory Authority (FINRA), the Financial Crimes Enforcement Network (FinCEN), and the SEC announced separate settlements (see here, here, and here) with a global broker-dealer following investigations into the firm’s anti-money laundering (AML) programs. According to FINRA, the broker-dealer and its affiliated securities firm allegedly failed to establish and implement AML processes reasonably designed to detect and report potentially high-risk transactions, including foreign currency wire transfers to and from countries known to be at high risk for money laundering, as well as penny stock transactions processed through the use of an omnibus account on behalf of undisclosed customers. FINRA alleged that from January 2004 to April 2017, the broker-dealer “processed thousands of foreign currency wires for billions of dollars, without sufficient oversight.”
In a separate investigation conducted by FinCEN in conjunction with FINRA and the SEC, the broker-dealer reached a settlement over allegations that it failed to, among other things, (i) develop and implement a risk-based AML program that “adequately addressed the risks associated with accounts that included both traditional brokerage and banking-like services”; (ii) implement policies and procedures, which would ensure the detection and reporting of suspicious activity through all accounts, particularly for those accounts with little to no securities training; (iii) “implement an adequate due diligence program for foreign correspondent accounts”; and (iv) provide sufficient staffing, leading to a backlog of alerts and decreased ability to file suspicious activity reports (SARs).
According to the SEC's investigation, from at least 2011 to 2013, the broker-dealer allegedly failed to file SARs as required by the Bank Secrecy Act’s reporting requirements and Section 17(a) of the Securities Exchange Act of 1934. Among other things, the SEC also claimed that the broker-dealer (i) provided customers with other services, such as cross-border wires, internal transfers between accounts and check writing, which increased its susceptibility to risks of money laundering and other types of associated illicit financial activity; and (ii) “did not properly review suspicious transactions flagged by its internal monitoring systems and failed to detect suspicious transactions involving the movement of funds between certain accounts in suspicious long-term patterns.”
After factoring in remedial actions, the broker-dealer has been assessed total civil money penalties of $14.5 million, including a $500,000 fine against the securities firm.
On December 18, the FDIC, the Federal Reserve Board, the OCC, the SEC, and the CFTC (collectively, the Agencies) issued a notice of proposed rulemaking to amend regulations implementing Section 13 of the Bank Holding Company Act (known as, the “Volcker Rule”) to be consistent with Sections 203 and 204 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act). (Previously covered by InfoBytes here.) Consistent with Section 203 of the Act, the proposal would exempt community banks from the restrictions of the Volcker Rule if they, and every entity that controls them, have (i) total consolidated assets equal to or less than $10 billion; and (ii) total trading assets and liabilities that are equal to or less than five percent of their total consolidated assets.
The proposal also, consistent with Section 204 of the Act, would permit a hedge fund or private equity fund organized and offered by a banking entity to share a name with a banking entity that is its investment advisor, if (i) the advisor is not an insured depository institution, does not control a depository institution, and is not treated as a bank holding company under the International Banking Act; (ii) the advisor does not share a name with any such entities; and (iii) the shared name does not include "bank."
Comments will be due 60 days after publication in the Federal Register.
On November 30, a U.S.-based agriculture company disclosed in an SEC filing that it is cooperating with an investigation being conducted by the SEC and DOJ involving payments made to Mexican customs officials. The payments were made in connection with grain shipments crossing the U.S.-Mexican border by train. The company is a Fortune 100 company that is owned primarily by farmer and rancher cooperatives and has extensive operations in the energy sector in addition to agriculture.
The SEC filing states that the company voluntarily self-disclosed the potential violations and stressed the company’s full cooperation with the investigation, which includes “investigating other areas of potential interest to the government.” The DOJ has placed great emphasis on the importance of voluntary self-disclosure and cooperation in recent policy statements. See previous Scorecard coverage here. This investigation is noteworthy because while investigations in the energy sector are common, investigations in the agricultural sector are less so. The eventual resolution of this investigation may provide useful guidance for other agribusiness companies.
On November 19, the SEC announced a settlement with a Texas offshore drilling company based on the improper activities of the company’s predecessor in connection with a Brazilian oil company bribery scheme. The Administrative Order found that the offshore drilling company had “failed to devise a system of internal accounting controls with regard to [its] transactions with [its] former outside director, largest shareholder, and only supplier of drilling assets . . . and failed to properly implement internal accounting controls related to its use of third-party marketing agents,” noting the company’s “ineffective anticorruption compliance program.” According to the Order, these failures permitted payments that “created a risk that [it] was providing or reimbursing funds that [a director] intended to use to make improper payments to" the Brazilian company at the center of a massive FCPA scheme.
The settlement with the SEC concludes the company’s involvement in the Brazilian company's investigations. According to the drilling company, they received a cooperation letter from the DOJ last year confirming the company’s full cooperation in the Brazilian company's investigation, and that the DOJ would not move forward with any actions against the drilling company.
Further coverage of the Brazilian oil company matter is available here.
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