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11th Circuit First To Define "Instrumentality" Under FCPA
On May 16, the U.S. Court of Appeals for the Eleventh Circuit became the first circuit court to define “instrumentality” under the FCPA. U.S. v. Esquenazi, No. 11-15331 (11th Cir. May 16, 2014). The FCPA generally prohibits bribes to a “foreign official” defined as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.” Two individuals appealed their convictions and sentences imposed for FCPA and related violations, arguing that the telecommunications company whose employees they were alleged to have bribed in exchange for relief from debt owed to that company was not, as the government asserted and a jury found, an “instrumentality” of a foreign government. As the court explained, “instrumentality” is not defined in the FCPA, and no circuit court has yet offered a definition. The court held that, based on the statutory context of the term following amendment of the FCPA in 1998 to implement the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, an instrumentality is “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own." The court explained that to determine control, triers of fact should consider (i) the foreign government’s formal designation of the entity; (ii) whether the government has a majority interest in the entity; (iii) the government’s ability to hire and fire the entity’s principals; (iv) the extent to which the entity’s profits, if any, go directly into the governmental fisc, and the extent to which the government funds the entity if it fails to break even; and (v) the length of time those indicia have existed. The court added that the factors to consider in determining whether an entity performs a function of the government include: (i) whether the entity has a monopoly over the function it exists to carry out; (ii) whether the government subsidizes the costs associated with the entity providing services; (iii) whether the entity provides services to the public at large in the foreign country; and (iv) whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function. In this case, the court determined that the telecommunications company at issue was an instrumentality under the FCPA, and after applying that decision to the convicted individuals’ specific challenges, affirmed their convictions and sentences.
DOJ, SEC Announce More Charges In Broker-Dealer Foreign Bribery Case
On April 14, the DOJ and the SEC announced additional charges in a previously announced case against employees of a U.S. broker-dealer related to an alleged “massive international bribery scheme.” The DOJ announced the arrest of the CEO and a managing partner of the New York-based U.S. broker-dealer on felony charges arising from an alleged conspiracy to pay bribes to a senior official in Venezuela’s state economic development bank in exchange for the official directing financial trading business to the broker-dealer. The SEC, whose routine compliance examination detected the allegedly illegal conduct, announced parallel civil charges against the same two executives. Broker-dealer employees charged earlier in the case pleaded guilty last August for conspiring to violate the FCPA, the Travel Act, and anti-money laundering laws, as well as for substantive counts of those offenses, relating, among other things, to the scheme involving bribe payments. In November 2013, the Venezuelan bank senior official pleaded guilty in Manhattan federal court for conspiring to violate the Travel Act and anti-money laundering laws, as well as for substantive counts of those offenses, for her role in the scheme.
State AGs, Mexico Agree To Form AML Working Group
On March 25, California Attorney General (AG) Kamala Harris announced that she and four other state AGs—Suthers (CO), Bondi (FL), Cortez Masto (NV), and King (NM)—signed a letter of intent with the President of the National Banking and Securities Commission of Mexico to establish a bi-national working group on money laundering enforcement. The working group will be tasked with (i) establishing the scope of coordination between Mexico and U.S. state AGs on money laundering enforcement issues; (ii) developing a plan for mutual technical assistance and training on combating money laundering; and (iii) sharing best practices on money laundering enforcement techniques and other enforcement issues of mutual concern, including the impact of money laundering on the border region of the U.S. and Mexico.
FinCEN Guidance Updates FATF AML/CFT Deficient Jurisdictions List
On March 25, FinCEN issued an advisory notice, FIN-2014-A003, in which it provided guidance to financial institutions for reviewing their obligations and risk-based approaches with respect to certain jurisdictions. The Financial Action Task Force (FATF) recently updated its lists of jurisdictions that appear in two documents: (i) jurisdictions that are subject to the FATF’s call for countermeasures or Enhanced Due Diligence as a result of the jurisdictions’ Anti-Money Laundering/Counter-Terrorist Financing (AML/CFT) deficiencies, or (ii) jurisdictions identified by the FATF as having AML/CFT deficiencies. The advisory notice (i) summarizes the changes made by the FATF; (ii) provides specific guidance regarding jurisdictions listed in each category; and (iii) reiterates that if a financial institution knows, suspects, or has reason to suspect that a transaction involves funds derived from illegal activity or that a customer has otherwise engaged in activities indicative of money laundering, terrorist financing, or other violation of federal law or regulation, the financial institution must file a Suspicious Activity Report.
DOJ Opinion Release Discusses FCPA Risk Related To Investment Bank's Buyout Of Minority Shareholder
Recently, the DOJ issued its first opinion release of 2014 regarding application of the FCPA. In this instance, an investment bank and securities issuer who was a majority shareholder of a foreign financial services company sought the DOJ’s opinion with regard to the bank’s purchase of the remaining minority interest from a foreign businessman who now serves as a senior foreign official. The DOJ determined that based on the facts and representations described by the requestor, the only purpose of the payment to the official would be consideration for the minority interest. The DOJ explained that although the FCPA generally prohibits an issuer from corruptly giving or offering anything of value to any “foreign official” in order to assist “in obtaining or retaining business for or with, or directing business to” the issuer, it does not “per se prohibit business relationships with, or payments to, foreign officials.” In this situation, the DOJ determined, based on numerous, fact-intensive considerations, that the transfer of value as proposed would not be prohibited under the FCPA. The DOJ found no indications of corrupt intent, citing, among other things, the proffered purpose to sever the parties’ existing financial relationship to avoid a conflict of interest, and the use of a reasonable alternative valuation model. The DOJ also determined the bank demonstrated that the parties would appropriately and meaningfully disclose their relationships before the sale closed, and that the bank would implement strict recusal and conflict-of-interest-avoidance measures to prevent the shareholder/foreign official from assisting the bank in obtaining or retaining business. As with all Opinion Releases under the FCPA, the DOJ cautioned that the opinion has no binding application to any other party.
Japanese Trading Company Pleads Guilty In DOJ FCPA Enforcement Action
On March 19, the DOJ announced that Marubeni Corporation, a Japanese trading company, agreed to plead guilty to violating the FCPA by participating in a seven-year scheme to bribe high-ranking government officials in Indonesia to help the company secure a contract for a power project. The DOJ charged that to conceal the bribes, the company and a consortium partner retained two consultants purportedly to provide legitimate consulting services on behalf of the power company and its subsidiaries in connection with the project. The DOJ asserted, however, that the primary purpose for hiring the consultants was to use them to pay bribes to Indonesian officials.The eight-count criminal information against the company included one count of conspiracy to violate the anti-bribery provisions of the Foreign Corrupt Practices Act (FCPA) and seven counts of violating the FCPA. As part of its plea, the company admitted its criminal conduct and agreed to pay a criminal fine of $88 million, subject to the district court’s approval. Sentencing is scheduled for May 15, 2014. Two years ago, the company entered a deferred prosecution agreement and agreed to pay $54.6 million to resolve allegations it acted as an agent for a joint venture in a scheme to bribe Nigerian officials.
New York Financial Services Regulator Urges More Enforcement Against Individuals, Reaffirms Focus On Nonbank Mortgage Servicers
On March 19, New York State Department of Financial Services (DFS) Superintendent Benjamin Lawsky called on banking regulators to assess whether they are doing enough, particularly with regard to enforcement, to deter or prevent financial crime. In remarks delivered to the Exchequer Club, Mr. Lawsky asserted that true deterrence means focusing not only on corporate liability, but individual accountability. He called on banking regulators to “publicly expose – in great detail – the actual, specific misconduct that individual employees engaged in,” and, where appropriate, ensure individuals face “real, serious penalties and sanctions when they break the law.” Mr. Lawsky is the most recent of several regulators and policymakers to advocate for more individual accountability. Federal enforcement officials, including CFPB Director Richard Cordray and SEC Chair Mary Jo White, have similarly threatened an enhanced enforcement focus on individuals. Earlier this year, U.S. District Judge Jed Rakoff wrote critically of financial fraud enforcement, and suggested “that the future deterrent value of successfully prosecuting individuals far outweighs the prophylactic benefits of imposing internal compliance measures that are often little more than window-dressing.” In addition to his prepared statement on individual enforcement, Superintendent Lawsky devoted a substantial amount of his remarks and Q&A responses to his concerns about nonbank mortgage servicers. He specifically raised concerns about nonbank servicers’ staffing, especially in the context of the single point of contact requirements of the CFPB’s new servicing rules and the agreements certain servicers entered into with the DFS in 2011 and 2012.
Congressional Democrats Want Meeting With Attorney General On Mortgage Fraud Enforcement
On March 17, Senator Elizabeth Warren (D-MA) and Representatives Elijah Cummings (D-MD) and Maxine Waters (D-CA) sent a letter requesting a meeting with Attorney General Eric Holder to review the findings of a recent report on the DOJ’s mortgage fraud enforcement efforts. The lawmakers state that the report raises questions about the DOJ’s “commitment to investigate and prosecute crimes such as predatory lending, loan modification scams, and abusive mortgage servicing practices.” They are seeking information from the Attorney General about steps the DOJ will take to ensure that its efforts “to identify and prosecute those responsible for fraudulent mortgage practices are equal to the harms such crimes have caused [the members’] constituents.”
DOJ OIG Report Critical Of Mortgage Fraud Enforcement Programs
On March 13, the DOJ Office of Inspector General (OIG) issued a report on its audit of the DOJ’s efforts between 2009 and 2011 to pursue alleged mortgage fraud. Of particular note, the report reveals for the first time publicly that as part of a joint effort between HUD and the DOJ related to so-called “high default lenders,” the HUD OIG provided 84 U.S. Attorney Offices (USAOs) with lender default data for potential civil investigations and approximately 40 civil investigations were opened as a result. Much of the report focuses on the DOJ’s limited ability to track its mortgage fraud enforcement efforts. The audit revealed that, as a result of those limitations, the DOJ has repeatedly used inaccurate statistics in public statements about its mortgage enforcement results. Among a series of recommendations, the DOJ OIG suggests that DOJ (i) direct all USAOs to periodically assess any monetary thresholds applied to mortgage fraud cases to ensure they are reasonably based upon the threat within their respective jurisdictions and adequately allow for non-monetary harms that result from mortgage fraud schemes, as well as ensure that law enforcement agencies in their respective districts have a clear understanding of any limiting factors being applied to such cases; (ii) develop a method to capture additional data that will allow DOJ to better understand the results of its efforts in investigating and prosecuting mortgage fraud and to identify the position of mortgage fraud defendants within an organization; and (iii) develop a method to readily identify mortgage fraud criminal and civil enforcement efforts for reporting purposes.
Senate Report Urges DOJ Action Regarding Offshore Tax Evasion, Enforcement Against Swiss Banks
On February 27, the Senate Permanent Subcommittee on Investigations (PSI) issued a report and held a hearing related to its multi-year investigation of offshore tax evasion and the DOJ’s efforts to pursue Swiss banks who allegedly aid U.S. citizens in evading taxes. The hearing and report focused on one Swiss bank alleged to have facilitated tax evasion and criticized the DOJ for its supposedly “lax enforcement” approach towards numerous Swiss banks. The report states that U.S. law enforcement authorities have failed to prosecute more than a dozen Swiss banks the PSI staff believes facilitated U.S. tax evasion, and failed to take action against the thousands of U.S. citizens who have been revealed as tax evaders. The report also criticizes Swiss officials who the PSI alleges have worked to preserve Swiss bank secrecy by intervening in U.S. criminal investigations and hampering progress. The PSI report urges the DOJ to “use all available U.S. legal means” to obtain the names of alleged tax evaders, and to hold accountable “tax haven banks that aided and abetted” in the alleged evasion. The report also states that U.S. banking regulators should “institute a probationary period of increased reporting requirements for, or to limit the opening of new accounts by, tax haven banks that enter into deferred prosecution agreements, non-prosecution agreements, settlements, or other concluding actions with law enforcement for facilitating U.S. tax evasion, taking into consideration repetitive or cumulative misconduct.” Finally, the subcommittee recommended that the Senate promptly ratify a pending U.S.-Switzerland tax treaty that would allow for increased sharing of information by the Swiss.