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On May 15, the cities of New York and Los Angeles adopted ordinances that will require banks doing business with those cities to report certain information about their banking and lending activities. In New York, the City Council adopted a Local Law that, once approved by the mayor or passed over the mayor’s veto, will establish a community investment advisory board comprised of city officials, banking industry representatives, community development or consumer protection groups, and small business owners. The board will assess the banking needs of the city and evaluate the performance of the city’s depository banks in meeting those needs. To conduct the assessment and evaluation, the board will collect from depository banks information regarding each institution’s efforts to, among other things, (i) meet small business credit needs, (ii) conduct consumer outreach and other steps to provide mortgage assistance and foreclosure prevention, and (iii) offer financial products for low and moderate income individuals throughout the city. The board will be required to publish the information collected and prepare an annual report, which city officials can consider in deciding with which institutions the city will place its deposits. The ordinance adopted by the Los Angeles City Council establishes a monitoring program headed by the City Treasurer. Under the program, a depository bank doing business with the city or wishing to do so will be required to report each year information regarding its small business, mortgage, and community development lending, as well as information about its participation in foreclosure prevention and principal reduction programs. Investment banks will be required to file a statement describing their corporate citizenship in areas such as participation in charitable programs or scholarships and internal policies regarding the utilization of subcontractors designated as women-owned, minority-owned, or disadvantaged businesses. The disclosures will be posted online for public viewing within 30 days of the beginning of each new fiscal year. The cities of Cleveland, Pittsburgh, Philadelphia, and San Diego already have laws in place designed for the same general purposes, and other cities are considering similar laws.
On May 14, the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation issued guidance on stress tests for banks with more than $10 billion in total consolidated assets. The final guidance provides, in a manner largely consistent with the proposed guidance, principles for banks to follow when conducting stress tests, including: (i) a stress testing framework, (ii) general stress testing principles, (iii) stress testing approaches and applications, (iv) the importance of stress testing in assessing the adequacy of capital and liquidity, and (v) the need for internal governance and controls over the stress testing framework. The regulators amended the final guidance to clarify certain issues raised during the comment period, including changes to (i) incorporate an additional principle for stress testing, (ii) clarify application of the guidance to U.S. branches and agencies of foreign banking organizations, (iii) clarify the role of a bank’s liabilities and operational risk in conducting a stress test, (iv) explain that senior management should have the primary responsibility for stress testing implementation and technical design, and (v) clarify that a banking organization’s minimum annual review and assessment should ensure that stress testing coverage is comprehensive, tests are relevant and current, methodologies are sound, and results are properly considered. In a separate announcement, the banking regulators explicitly addressed concerns raised by community bankers by explaining that community banks are neither required nor expected to conduct the stress tests described above. However, the statement stresses that all banking organizations, regardless of size, should have the capacity to analyze the potential impact of adverse outcomes on their financial condition.
On May 16, the U.S. District Court for the Southern District of Florida certified a nationwide class of plaintiffs alleging breach of contract, breach of the duty of good faith and fair dealing, unconscionability, unjust enrichment, and violations of state consumer protection statutes with regard to the overdraft practices of a national bank. In re Checking Account Overdraft Litigation, MDL No. 2036, slip op. (S.D. Fla. May 16, 2012). The plaintiffs claim that the bank created a scheme in which it manipulated debit card transactions to increase the number of overdraft fees charged to customers by re-ordering daily transactions from highest to lowest dollar amount, resulting in a higher number of individual overdraft transactions. After a year of class discovery, the court held that the class meets the four prerequisites for certification under Rule 23(a)–numerosity, commonality, typicality, and adequacy. The defendant argued that the claims made by the plaintiffs were similar to questions raised in the Supreme Court’s decision in Walmart v. Dukes, 131 S. Ct. 2541 (2011), where the Court rejected class certification in an employment discrimination suit due to insufficient commonality. The district court disagreed, holding that because the plaintiffs all were subject to the same uniform corporate policy, the reason why each class member was harmed is not at issue, as it was in Dukes. Other bank defendants have faced and continue to face similar allegations in several other suits, including some that have been consolidated with the above action. Several of those defendants have settled, including most recently a $62 million agreement announced on May 11, 2012.
The relatively sparse judicial caselaw on the FCPA expanded last week with a new opinion interpreting the “public international organization” language in the statute. In an opinion denying the defense’s Motion to Dismiss an indictment originally brought in 2015, Judge Paul Diamond of the United States District Court for the Eastern District of Pennsylvania found that the FCPA “plainly” applies to public international organizations. United States v. Dmitrij Harder, No. 2:15-cr-00001 (E.D. Pa. Mar. 2, 2016). Combined with the Eleventh Circuit’s 2014 opinion in Esquenazi, the contours of the types of foreign government entities subjecting defendants to FCPA sanctions are beginning to be fleshed out. (Previous FCPA Scorecard coverage of the Esquenazi case can be found here.)
Dmitrij Harder – a Russian national, German citizen, and U.S. permanent resident – owned and operated two consulting companies that, in 2007 and 2009, assisted two different independent energy companies in obtaining financing from the European Bank for Regional Development (the “EBRD”). The EBRD is a multilateral development bank founded in 1991 to foster the growth of businesses operating in the former Soviet Union. Today it invests throughout Europe and is jointly owned by sixty-four countries.
The DOJ charged Harder in 2015 with 14 counts of violating the FCPA, the Travel Act, and money laundering. The government alleged that the energy companies entered into agreements with Harder whereby they agreed to pay him success fees upon receiving financing from the EBRD. After both companies obtained sizable investments from the EBRD – one company received an $85 million investment; the other a $40 million investment and $60 million loan – they allegedly paid Harder success fees totaling almost $8 million. Shortly after the success fees were paid, Harder allegedly wired payments totaling almost $3.5 million to the sister of an EBRD official. The government alleged that the sister of the EBRD official entered into sham consulting agreements with Harder’s companies, making it appear that the payments were made for services rendered under the agreements, but no such services were actually performed.
In arguing for dismissal of the FCPA counts of the indictment, Harder challenged the sufficiency of the Indictment on several bases, including a failure to plead the involvement of a “foreign official,” and that the Indictment impermissibly substituted the phrase “foreign government or instrumentality thereof” with “public international organization” in reciting the fourth of the FCPA’s proscribed corrupt purposes: “inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality.” 15 USC 78dd-2(a)(3)(B).
On the first challenge, Judge Diamond rejected the idea that officials of EBRD could not qualify as “foreign official[s]” within the FCPA’s prohibitions. Op. at 6; see also Op. at 8 (noting that “whether EBRD falls within the FCPA’s ambit is necessarily a ‘fact-bound question’ properly decided by a jury”). On the second challenged, Harder had maintained that permitting the government to substitute “public international organization” into the statute would create an entirely new offense with no basis in the statute. Rejecting this argument, Judge Diamond pointed out that public international organizations are themselves “an association of foreign governments.” Op. at 7. He reasoned that refusing to allow this substitution in the language of indictments where a public international organization, rather than a foreign government, is involved would “make it impossible to prosecute any public international organization employee who unlawfully used his position,” calling this “an absurd result” in light of Congress’ decision to include public international organizations within the scope of the FCPA. Op. at 7.
Harder also raised two challenges to the constitutionality of the FCPA’s inclusion of the EBRD. In 1998, the FCPA was amended to include employees of public international organizations within the scope of the Act’s prohibition on certain corrupt payments. The 1998 amendments brought employees of two groups of public international organizations within the scope of the FCPA; (1) those organizations that the President declares by Executive order are covered by the FCPA, and (2) those organizations identified pursuant to the International Organization Immunities Act (“the IOIA”), 22 USC 288. The IOIA allows the President, acting by executive order, to provide public international organizations in which the US participates with legal capacity, certain immunities, and privileges under US law. In 1991, the EBRD was designated a public international organization under the IOIA, and so it became subject to the FCPA after the 1998 amendments.
First, Harder argued that the FCPA’s inclusion of the EBRD and other public international organizations violates the non-delegation doctrine, which provides that where Congress delegates legislative authority it must do so with “an intelligible principle” to guide the exercise of the delegated authority. United States v. Cooper, 750 F.3d 263, 270 (3d Cir. 2014). Harder argued that Congress, by allowing the President to expand the list of public international organizations covered by the FCPA by executive order, impermissibly delegated its legislative function to the executive branch. Judge Diamond rejected this argument, finding that the legislative scheme enacted by Congress constrains the President’s ability to add public international organizations to the scope of the FCPA, and that the clearly stated purposes of the FCPA provide sufficient guidance. Op. at 9-11.
Second, Harder argued that the FCPA’s inclusion of the EBRD violates the void-for-vagueness doctrine, which provides that a criminal law is void if it fails to define the offense in a way that “ordinary people can understand what conduct is prohibited” and in a way that does not encourage “arbitrary and discriminatory enforcement.” Skilling v. United States, 561 U.S. 358, 402-403 (2010). Harder argued that the somewhat circuitous route by which the EBRD was made subject to the FCPA renders the law unconstitutionally vague because it would require individuals to monitor whether a particular public international organization has been the subject of an executive order that subjects it to the FCPA. Judge Diamond rejected this argument also, finding that an ordinary person could research the status of a public international organization. Judge Diamond also pointed out that there is a publicly available list of all public international organizations subject to the FCPA, and that the FCPA’s knowledge requirement alleviated any concern that a defendant might unwittingly violate the FCPA. Op. at 13.
On May 14, the Federal Housing Finance Agency released for public comment a draft strategic plan for fiscal years 2013-2017. The draft plan updates FHFA’s existing strategic plan document to incorporate a proposal sent to Congress in February 2012 that outlined FHFA’s plan to build a new infrastructure for the secondary mortgage market, contract Fannie Mae and Freddie Mac’s current market dominance, and maintain the Enterprises’ roles in foreclosure prevention activities and refinance initiatives. The draft plan sets forth four strategic goals: (i) Safe and sound housing GSEs; (ii) Stability, liquidity, and access in housing finance; (iii) Preserve and conserve Enterprise assets; and (iv) Prepare for the future of housing finance in the U.S.
On March 1, Miami-based Olympus Latin America, Inc. (OLA) entered into a deferred prosecution agreement (DPA) to resolve charges of conspiracy to violate the FCPA and violating the FCPA in connection with improper payments and benefits to health care practitioners at government-owned facilities in Central and South America. OLA, which is a majority-owned subsidiary of the United States’ largest distributor of endoscopes and related medical equipment, Olympus Corporation of the Americas, agreed to pay a $22.8 million penalty and admitted its criminal conduct.
According to OLA’s admissions, from 2006 through August 2011, OLA “designed and implemented a plan to increase medical equipment sales in Central and South America by providing personal benefits, including cash, money transfers, [ ] travel, free or heavily discounted equipment, and other things of value to certain health care practitioners” employed at government-owned health care facilities. The improper payments totaled nearly $3 million, which resulted in the recognition of more than $7.5 million in profits.
Under the terms of the DPA, the DOJ will defer criminal prosecution for a period of three years and OLA will appoint a compliance monitor and implement numerous compliance measures. In reaching the resolution, the DOJ gave OLA a 20 percent reduction on its penalty as a result of its cooperation, which included “conducting an extensive internal investigation, translating documents, and collecting, analyzing, and organizing voluminous evidence and information.” However, in assessing the penalty, the DOJ noted that OLA did not voluntarily disclose the misconduct in a timely manner.
The SEC announced on March 1 that it settled FCPA charges with Qualcomm Inc., the San Diego-based mobile chip maker. Qualcomm agreed to pay a $7.5 million civil penalty to resolve charges that it violated the FCPA by hiring relatives of Chinese government officials and providing things of value to foreign officials and their family members, in an attempt to influence these officials to take actions that would assist Qualcomm in obtaining or retaining business in China.
Qualcomm and the SEC settled the case via an Administrative Order Instituting Cease-and-Desist Proceedings, in which Qualcomm did not admit or deny the findings set forth in the order. The order found that Qualcomm had violated the anti-bribery, internal controls, and books-and-records provisions of the FCPA. In addition to the $7.5 million civil penalty, Qualcomm agreed to provide the SEC with self-reports and certifications concerning its FCPA compliance during a two-year period.
According to the order, Qualcomm both offered and provided employment and paid internships to family members of Chinese foreign officials in order to try to obtain business. Many of these hires were referred to internally at Qualcomm as “must place” or “special” hires and did not satisfy Qualcomm’s internal hiring standards. The order also details Qualcomm’s provision of meals, gifts, travel, and entertainment to both foreign officials and relatives of foreign officials in an effort to influence these officials to use Qualcomm technology.
The settlement appears to be an extension of the SEC’s “Sons and Daughters” investigations which, up until now, have been focused on the hiring practices of financial institutions in the Asia Pacific. As previously reported by the Wall Street Journal, in March 2014, the SEC sent letters to at least five U.S. and European banks, including Credit Suisse Group AG, Goldman Sachs Group Inc., Morgan Stanley, Citigroup Inc., and UBS AG, seeking more information about their hiring practices in Asia and to examine whether the banks violated the FCPA’s anti-bribery provisions by hiring relatives of well-connected government officials. Prior FCPA Scorecard coverage of other aspects of the “Sons and Daughters” investigations around the world is available here.
Alabama Enacts Residential Mortgage Satisfaction Act. On May 3, Alabama enacted Senate Bill 347, which establishes procedures by which a borrower can obtain a payoff statement for a residential mortgage, including the form of such a request, deadlines for responding to a request (14 days), and the method for providing the statement, among other things. The bill also requires a secured creditor to record a mortgage satisfaction within 30 days after it receives full payment and performance of the obligation, and establishes a process for enforcing the recording requirement. The bill takes effect March 1, 2013.
West Virginia Amends Mortgage Record Keeping Requirements. Recently, West Virginia amended regulations that implement the record keeping requirements for all licensed residential mortgage lenders, brokers, and servicers. For lenders who provide the initial funding on a loan, the rules now make clear that the requirement to retain electronic records includes emails between the lender and borrower. Initial lenders and mortgage brokers also must maintain an itemized list of all fees and charges imposed on each loan and received by the lender or broker and by any third party. Further, the regulation adds a new requirement that a lender or broker document tangible net benefit to the borrower prior to refinancing a residential mortgage. The regulation also contains a new section on the process by which the state Division of Banking will determine if mortgage loan originator applicants meet certain standards of financial responsibility required by West Virginia law. The requirements took effect May 1, 2012.
Eleventh Circuit Court of Appeals Finds that "Dunning" Notice Enforcing a Security Interest May Give Rise to FDCPA Claim
On May 1, the U.S. Court of Appeals for the Eleventh Circuit reversed and remanded a lower court’s dismissal of an FDCPA claim, finding that the contents of a “dunning” notice from the lender’s foreclosing law firm constitutes an attempt to collect a debt under the FDCPA. Reese v. Ellis, Painter, Rattertree & Adams, LLP, No. 10-14366, 2012 WL 1500108 (11th Cir. May 1, 2012). The borrowers received a letter and documents from the lender’s law firm demanding payment of the debt on the borrowers’ defaulted mortgage loan and threatening to foreclose on their home if they did not pay the outstanding debt. The borrowers filed a class action lawsuit against the law firm alleging that the communication violated the FDCPA. The district court dismissed the complaint for failure to state a claim under the FDCPA. On appeal, the court held that the borrowers’ obligation to pay off the promissory note, which the court distinguished from a security interest, represents a debt under the FDCPA. The court then rejected the law firm’s argument that the purpose of the letter and accompanying documents was not to collect a debt, but rather to inform the borrowers of the lender’s intent to enforce its security interest through possible foreclosure. The court determined that the documents at issue, which contained disclaimers such as “This law firm is acting as a debt collector attempting to collect a debt,” had a dual purpose of providing notice of foreclosure and collecting a debt. In so holding, the court noted that following the law firm’s reasoning would create a giant loophole in the FDCPA wherein the law only would apply to efforts to collect on unsecured debt and would permit collectors to “harass or mislead [secured] debtors without violating the FDCPA.”
Following its December guilty plea in the UK, global building and infrastructure company Sweett Group on Friday was ordered by a UK court to pay £2.25 million (including a fine of £1.4 million) for violating Section 7 of the UK Bribery Act of 2010. This was the first-ever conviction and sentence for a company under Section 7, which in essence penalizes companies for failing to prevent bribes made on their behalf. The conduct at issue related to a three-year arrangement in the UAE to secure contracts related to large building contracts.
Prior FCPA Scorecard coverage is also available.
- Amanda R. Lawrence to discuss "Navigating the challenges of the latest data protection regulations and proven protocols for breach prevention and response" at the ACI National Forum on Consumer Finance Class Actions and Government Enforcement
- Tim Lange to discuss "Ease your pain at the state level: Recommendations for navigating the licensing issues in the states" at the Online Lenders Alliance Compliance University
- Amanda R. Lawrence, Aaron C. Mahler, and Jonice Gray Tucker to discuss "Expanded role for the FTC ahead: Implications for bank and nonbank financial institutions" at an American Bar Association Banking Law Committee Webinar
- Buckley Webcast: Flirting with alternatives — Opportunities and challenges created by alternative data, modeling, and technology
- Daniel P. Stipano to discuss "Reporting requirements for credit unions: CTRs and SARs" at the National Association of Federally-Insured Credit Unions BSA Seminar
- Daniel P. Stipano and Moorari K. Shah to discuss "Vendor management: What is the NCUA looking for?" at the National Association of Federally-Insured Credit Unions BSA Seminar
- Sasha Leonhardt and John B. Williams to discuss "Privacy" at the National Association of Federally-Insured Credit Unions Summer Regulatory Compliance School
- Warren W. Traiger to discuss "CRA modernization" at the National Association of Industrial Bankers and the Utah Association of Financial Services Annual Convention
- Benjamin W. Hutten to discuss "Requirements for banking inherently high-risk relationships" at the Georgia Bankers Association BSA Experience Program
- Hank Asbill to discuss "Ethical guidance in conducting internal investigations – The intersection of Yates and Upjohn" at the American Bar Association Southeastern White Collar Crime Institute
- Brandy A. Hood to discuss "RESPA Section 8/referrals: How do you stay compliant?" at the New England Mortgage Bankers Conference
- Daniel P. Stipano to discuss "Risk management in enforcement actions: Managing risk or micromanaging it" at the American Bar Association Business Law Section Annual Meeting
- Daniel P. Stipano to discuss "Navigating the conflicting federal and state laws for doing business with cannabis companies" at the American Bar Association Business Law Section Annual Meeting
- Tim Lange to discuss "Services and value" at the North American Collection Agency Regulatory Association Annual Conference
- Amanda R. Lawrence to discuss "Data privacy litigation" at the Mortgage Bankers Association Regulatory Compliance Conference
- Brandy A. Hood to discuss "How to ace your TRID exam" at the Mortgage Bankers Association Regulatory Compliance Conference
- Jonice Gray Tucker to discuss "HMDA data is out, now what?" at the Mortgage Bankers Association Regulatory Compliance Conference
- Daniel P. Stipano to discuss "Assessing the CDD final rule: A year of transitions" at the ACAMS AML & Financial Crime Conference
- Daniel P. Stipano to discuss "Lessons learned from recent enforcement actions and CMPs" at the ACAMS AML & Financial Crime Conference
- Melissa Klimkiewicz to discuss "Navigating FHA rules and regs" at the Mortgage Bankers Association Regulatory Compliance Conference
- Kathryn L. Ryan to discuss "The state’s role in fintech: Providing an industry framework for innovation" at Lend360
- Amanda R. Lawrence to discuss "How to balance a successful (and stressful) career with greater personal well-being" at the American Bar Association Women in Litigation Joint CLE Conference