The U.S. Department of Justice (DOJ) recently announced a series of updates to its guidance related to corporate compliance programs, including revisions to the Evaluation of Corporate Compliance Programs (the 2023 Evaluation Guidance), the Revised Memorandum on Selection of Monitors in Criminal Division Matters (the Monitor Memo), and The Criminal Division’s Pilot Program Regarding Compensation Incentives and Clawbacks (the Pilot Program). The updated guidance, in many ways, expands on or mirrors the messages in the September 15, 2022 Memorandum from Deputy Attorney General (DAG) Lisa Monaco (Monaco Memo). Two key takeaways from the latest suite of updates are DOJ’s continued emphasis on: (1) clawback or recoupment of compensation from employees in appropriate cases; and (2) appropriate compliance policies and procedures related to the use of personal devices and communication platforms, including ephemeral messaging applications.
The 2023 Evaluation Guidance: Setting DOJ’s Standards for Assessing Program Effectiveness
The 2023 Evaluation Guidance provides DOJ Criminal Division prosecutors a set of factors they should consider while evaluating the compliance programs of corporations facing a criminal resolution, such as a non-prosecution agreement (NPA), deferred prosecution agreement (DPA), or a plea agreement. As in the past, companies are not required to adopt the program elements described in the 2023 Evaluation Guidance. But the document serves as a valuable resource for companies as they design, implement, and test their corporate compliance programs. As with prior guidance, companies can benchmark their existing compliance programs against the 2023 Evaluation Guidance and the other recently issued guidance.
The 2023 Evaluation Guidance echoes the Monaco Memorandum in emphasizing the importance of adequate discipline for misconduct (and the necessity of appropriate internal processes related to disciplinary actions), as well as leveraging corporate compensation structures and clawbacks to promote a culture of compliance.
- Application, Communication, and Monitoring of Disciplinary Actions. The 2023 Evaluation Guidance’s most significant changes are in the section titled “Compensation Structures and Consequence Management,” which underscores that corporations should develop and maintain a positive compliance culture by establishing incentives for compliance and disincentives for compliance failures. Under the 2023 Evaluation Guidance, federal prosecutors handling corporate criminal matters will consider whether a company’s compliance program appropriately “identif[ies], investigate[s], discipline[s], and remediate[s] violations of law, regulation, or policy.” Factors for consideration include:
-
- Transparent communication regarding disciplinary processes and actions; and
- Tracking data on disciplinary actions to monitor the effectiveness of the compliance program.
- Compensation Structure and Clawbacks. The 2023 Evaluation Guidance reflects DOJ’s view that the design and implementation of compensation schemes can foster a positive compliance culture and reduce the financial burden on shareholders and investors when misconduct results in monetary consequences for the corporation. The 2023 Evaluation Guidance instructs prosecutors to consider, for example, whether a company has:
- Incentivized compliance by designing compensation systems that defer or escrow certain compensation tied to conduct standards;
- Attempted to recoup compensation previously awarded to individuals who are responsible for corporate wrongdoing; or
- Made working in compliance a means of career advancement by, for example, offering opportunities in compliance-related roles or setting compliance as a significant metric for management bonuses.
The Pilot Program: Promoting Compliance through Compensation Clawbacks
In connection with the 2023 Evaluation Guidance, DOJ launched the Pilot Program, effective on March 15, 2023, a three-year initiative applicable to all corporate Criminal Division matters. Under the Program, the Criminal Division will require that every corporate resolution require the defendant company to implement compliance-promoting criteria in its compensation and bonus systems. In addition, a company entering into a criminal resolution may receive a reduction in fines if it has in good faith initiated the process to recoup compensation from individual wrongdoers before the resolution.
- Mandatory Compliance-Related Compensation Criteria for Corporate Criminal Matters. During the Pilot Program’s duration, companies entering into criminal resolutions must now implement compliance-related criteria in their compensation and bonus systems. In addition, companies must report to the Criminal Division annually about their implementation of this requirement during the term of their criminal resolutions. The compliance-related compensation criteria may include provisions such as:
-
- A prohibition on bonuses for employees who do not satisfy compliance performance requirements;
- Disciplinary measures for employees who violate applicable law and others who both (a) had supervisory authority over the employee(s) or business area engaged in the misconduct, and (b) knew of, or were willfully blind to, the misconduct; and
- Incentives for employees who demonstrate full commitment to compliance processes.
- Deferred Reduction of Criminal Fines. Under the Pilot Program, a company may be eligible for a deferred reduction of fines if it fully cooperates, timely and appropriately remediates, and demonstrates that it has implemented a program to recoup compensation from employees who engaged in or were otherwise meaningfully implicated in misconduct related to the investigation. A company eligible for a reduced fine must pay the full amount of the applicable fine, less the amount of compensation the company is attempting to recoup or claw back. If the company has not recouped that amount by the end of its resolution’s term, the company must pay back any amount it has not recouped. If the company has in good faith tried to recoup compensation from employees but failed, the prosecutors may, in their discretion, nevertheless reduce the amount the company must pay back to DOJ by 25% of the amount of compensation that the company attempted to claw back.
Unfortunately, neither the 2023 Evaluation Guidance nor the Pilot Program includes a carve-out for circumstances where other applicable laws, such as local labor and employment laws, conflict with DOJ policies. It is unclear how DOJ would handle matters where the employees subject to the clawback requirement are from jurisdictions that bar recouping incentives such as bonuses or limit the circumstances under which employers may recoup such compensation (e.g., China, France, or Singapore). Even in jurisdictions where clawback provisions are enforceable, enforcing them may expose companies to employment disputes and litigation. The latest guidance on compensation clawbacks and the Pilot Program will leave companies to sort through these additional layers of legal complications. In doing so, companies also will need to factor in prior regulatory efforts to mandate clawback policies. For example, as covered in our previous update, in October 2022, the U.S. Securities and Exchange Commission directed U.S. stock exchanges and securities associations to promulgate listing standards that will (in the future) require their listed companies to adopt, implement, and adhere to a written clawback policy. The final rule implementing this requirement sets forth several granular requirements for the clawback policy that should inform companies’ consideration of how to address the 2023 Evaluation Guidance.
The Use of Personal Devices, Communications Platforms, and Messaging Applications
The 2023 Evaluation Guidance adds extensive direction regarding communication platforms and channels, tracking the Monaco Memo and the DAG’s speech at the 39th American Conference Institute International Conference on the FCPA, in which DAG Monaco admonished that “all corporations with robust compliance programs should have effective policies governing the use of personal devices and third-party messaging platforms.” Assistant Attorney General (AAG) Kenneth Polite likewise stated at a March 3, 2023 American Bar Association (ABA) conference that DOJ is “looking to reward companies who are being already thoughtful” about these communications. AAG Polite warned companies that Criminal Division prosecutors “aren’t going to accept a company’s explanation at face value” if companies do not produce these communications to the government upon request, and that such failures to produce communications may result in an unfavorable resolution.
Consistent with DOJ’s core theme that compliance programs should be company-specific, the 2023 Evaluation Guidance states that policies governing the use of communication applications should also be tailored to the company’s risk profile and specific business needs. The 2023 Evaluation Guidance instructs Criminal Division prosecutors to consider how a company has informed its employees of its communication-platform-related policies and procedures, and whether the company has enforced the policies and procedures regularly and consistently in practice. In evaluating the communication-platform policies, prosecutors must assess:
- The types of communication channels company personnel use;
- The policies and procedures governing the use of communication platforms and channels; and
- The company’s risk management measures, such as the consequences for employees who refuse the company access to company communications, the impact of the use of ephemeral messaging applications on the company’s evaluation of employees’ compliance with company policies and procedures, and related disciplinary actions.
Notably, DOJ’s admonishments on communication policies do not delve into the complexities of various local data privacy laws that may apply, particularly when employees use their own mobile devices. AAG Polite noted in his ABA speech that, in the event companies decline to provide data from ephemeral messaging applications or other communication platforms, DOJ prosecutors will “ask about the company’s ability to access such communications, whether they are stored on corporate devices or servers, as well as applicable privacy and local laws,” and that such responses (or lack of responses) “may very well affect the offer it receives to resolve criminal liability.”
The reality is that the execution of a consistent policy across multiple jurisdictions in this respect may be difficult, and companies will confront many complications as they try to implement the 2023 Evaluation Guidance. To satisfy DOJ’s expectations, multinational corporations will now have to navigate applicable local data privacy laws, blocking statutes, and legal or securities-related requirements that may be at odds with DOJ’s position regarding messaging applications and communication platforms. In light of AAG Polite’s remarks, companies should review existing data privacy and communication policies to see whether they need to be, and can be, updated to reflect DOJ’s guidance, as well as identify potential conflicts between local data privacy laws and DOJ guidance and take mitigating steps as appropriate.
Updated Guidance on Corporate Monitorships
On March 1, 2023, AAG Polite issued the Monitor Memo, which codifies the policies announced in the Monaco Memo. Under the Monitor Memo, when determining whether to impose a monitorship, prosecutors should consider ten non-exhaustive factors to assess the need for, and potential benefits of, a monitor. As a general matter, prosecutors should consider a monitorship where a corporation’s compliance program and controls are “untested, ineffective, inadequately resourced, or not fully implemented at the time of a resolution.” On the other hand, where a corporation’s compliance program and controls are “demonstrated to be tested, effective, adequately resourced, and fully implemented at the time of a resolution,” a monitor may not be necessary. The Monitor Memo also clarifies that (1) consistent with the Criminal Division’s practice since at least 2018, many of the requirements for monitors apply to monitor teams, in addition to the named monitor; (2) monitor selections are and will be made in keeping with DOJ’s commitment to diversity, equity, and inclusion; and (3) the cooling-off period for monitors is now not less than three years, rather than two years, from the date of the termination of the monitorship.
Conclusion
The recent announcements and guidance signal DOJ’s focus on incentivizing corporations with strong compliance programs that are tested, effective, adequately resourced, and fully implemented. Companies should assess their existing compliance policies and procedures to see what, if any, changes should be made (and what changes can be made under applicable laws), particularly with respect to the policies related to communication channels and platforms, employee evaluation and disciplinary actions, and compensation clawback in light of the new DOJ guidance.
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Krista P. Hanvey is a partner in Gibson, Dunn & Crutcher’s Dallas office. She is a Co-Chair of Gibson Dunn’s Employee Benefits and Executive Compensation Practice Group and Co-Partner-In-Charge in the firm’s Dallas office. She counsels clients of all sizes across all industries, both public and private, using a multi-disciplinary approach to compensation and benefits matters that crosses tax, securities, labor, accounting and traditional employee benefits legal requirements. Ms. Hanvey has significant experience with all aspects of executive compensation, health and welfare benefit plan compliance, and retirement plan compliance, planning, and transactional support. She also routinely advises clients with respect to general corporate and non-profit governance matters.
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Kristen P. Poole is a partner in Gibson, Dunn & Crutcher’s New York office, where her practice focuses on mergers and acquisitions and private equity. Ms. Poole represents both public and private companies, as well as financial sponsors, in connection with mergers, acquisitions, divestitures, minority investments, restructurings, and other complex corporate transactions. She also advises clients with respect to general corporate governance matters and shareholder activism matters.
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Orange County partner Michael Titera and associate Meghan Sherley are the authors of “How S&P 100 Cos.’ Human Capital Disclosures Are Evolving” [PDF] published by Law360 on March 8, 2023.
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On 1 July 2023, the North American Free Trade Agreement (“NAFTA”)—which has helped to facilitate trade among the United States, Canada, and Mexico for over 25 years—is set to expire. NAFTA was terminated and replaced by a new treaty, the United States-Mexico-Canada Agreement (“USMCA”), on 1 July 2020. However, the USMCA provides for a three-year “sunset period” following the termination of NAFTA, during which North American investors could still obtain certain investment protections under NAFTA for their “legacy claims” (i.e., claims relating to investments that were established or acquired prior to 1 July 2020).[1] That sunset period will end on 1 July 2023, following which investors will only be able to resort to the USMCA’s more limited protections. As described below, North American investors are strongly encouraged to consider whether they have any legacy claims under NAFTA in connection with their investment in Canada and the United States, and especially in Mexico (in view of the far-reaching regulatory changes in Mexico discussed below) and file their formal notices no later than 1 April 2023.
I. NAFTA’s Sunset Period
NAFTA entered into force on 1 January 1994, and expired on 1 July 2020, upon the entry into force of the USMCA.[2] Under Annex 14-C of the USMCA, investors can bring NAFTA “legacy investment claims” for a period of three years after the termination of NAFTA, or until 1 July 2023.[3] These claims are limited to investments “established or acquired between January 1, 1994, and the date of termination of NAFTA,” “and in existence on the date of entry into force of” the USMCA.[4] Arbitrations already initiated under NAFTA will not be affected by the expiration of the sunset period.[5]
While the sunset period will end on 1 July 2023, investors must notify the respondent State at least 90 days before the claim is submitted, i.e., by 1 April 2023, to comply with NAFTA’s requirements.[6] As the notice period is even longer for claims arising from taxation measures (six months), any legacy claims relating to taxation matters have now since expired.[7]
A. Implications for Investment Disputes Involving Canada or Canadian Investors
Canada did not sign the USMCA’s investor-state dispute mechanism (Chapter 14). This means that investment arbitration is no longer available for claims by U.S. and Mexican investors against Canada under Chapter 14—nor to Canadian investors in the other two USMCA States.
However, other investment treaty protections would apply to Canadian investors in Mexico and Mexican investors in Canada. For example, both Canadian and Mexican investors may submit their disputes to arbitration under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CPTPP”).[8]
U.S. investors, on the other hand, would have no recourse to arbitration under the CPTPP because the United States is not a signatory. NAFTA therefore provides the last opportunity for Canadian investors in the U.S. or U.S. investors in Canada to arbitrate their claims.
B. Implications for Investment Disputes Involving Mexico or Mexican Investors
As noted above, Mexican investors in the United States and U.S. investors in Mexico may still submit claims to arbitration under Chapter 14 of the USMCA (which is modelled after Chapter 11 of NAFTA). However, the new investment treaty regime contains important procedural and substantive differences relative to NAFTA. As described below, for many U.S. and Mexican investors, a legacy claim under NAFTA will offer higher substantive protections and simpler procedural requirements and may be more advantageous than filing under the USMCA.[9]
II. Potential Procedural Limitations
Under NAFTA, an investor can bring an arbitration claim directly before a NAFTA investment panel assuming basic procedural requirements are met.[10] Under Chapter 14 of the USMCA, by contrast, an aggrieved investor must first exhaust local remedies in the national courts of the host State before resorting to international arbitration.[11] To exhaust local remedies, an investor must either “obtain a final decision from a court of last resort of the respondent” or wait 30 months from the date on which proceedings were initiated.[12] These provisions do not apply to the extent recourse to domestic remedies was “obviously futile.”[13]
The exhaustion requirement does not apply, however, to investors with a “covered government contract” (“a written agreement between a national authority” of the United States or Mexico, “and a covered investment or investor” of the other Party).[14] It likewise does not apply to investors engaged in a “covered sector,” which includes oil and natural gas, power generation, telecommunications, transportation, and transportation infrastructure.[15]
III. Potential Substantive Limitations
Under NAFTA’s Chapter 11, an investor can bring a range of investment treaty claims against the host State, including that the host State (directly or indirectly) expropriated its investment, failed to afford the investor or its investment the minimum standard of treatment, national treatment, and most-favored-nation treatment.[16]
Under the USMCA, however, many investors can no longer bring claims for indirect expropriation, and they may not submit to arbitration claims for violations of the minimum standard of treatment.[17]
Again, investors with covered government contracts or in covered sectors enjoy greater substantive protections under the USMCA. They may arbitrate claims for violations of all of Chapter 14’s substantive provisions, including indirect expropriation.[18] However, it remains to be seen whether in practice the scope of those rights may be more limited than under NAFTA.[19]
IV. Why Are NAFTA Legacy Claims Important in the Current Investment Context in Mexico?
In the North American context, a disproportionate number of NAFTA claims has been filed or announced against Mexico in recent years. Mexico is the respondent in 12 of the 16 publicly known pending or announced NAFTA arbitrations involving legacy claims—or 75%.[20] By comparison, there are two pending NAFTA arbitrations against the United States[21] and two against Canada.[22] Mexico has faced numerous investment treaty claims outside of the NAFTA context as well and has been the respondent in approximately 40 arbitrations, including 8 disputes that are currently pending before the International Centre for Settlement of Investment Disputes (“ICSID”) in Washington, D.C.
Figure 1. Number of NAFTA Legacy Disputes Filed or Announced Against the NAFTA States (as of March 2023)
A number of these claims relate to the Mexican Government’s regulatory and legislative measures to transform how the country’s energy, electricity, and mining sectors are governed:
- As discussed in our previous client alert, recent amendments to Mexico’s Hydrocarbon Law and Electricity Industry Law have accorded preferential treatment to State-owned companies and granted the Mexican Government broad discretion to suspend or refuse operating permits to private companies.[23] The changes to the electricity legislation were subsequently upheld by the Mexican Supreme Court.[24] Mexico’s President, Andres Manuel Lopez Obrador, has argued that such reforms are necessary to rebalance the economy away from private actors and in favor of the public sector.[25] Some of the concerns involving certain Canadian investors were reportedly resolved in January 2023.[26]
- The Mexican Government has also sought to solidify State control of the energy sector in the Mexican Constitution. Earlier this year, for example, Mexico’s lower house of congress defeated a proposed constitutional amendment that would have allowed Mexico’s State-owned electricity company to produce at least 54% of the country’s electricity, limited private participation in the market, and consolidated independent energy regulators into the federal government.[27]
- In April 2022, the Government also passed a bill nationalizing the country’s lithium mining sector and allowing the Government to take over “other minerals declared strategic.”[28] Mexico has indicated that it will review all contracts held by foreign companies to explore for lithium deposits in the country.[29] In January 2023, Mexico announced that the first concessions to a State-owned company would be awarded in February 2023.[30]
Some of these developments led the United States and Canada to invoke in July 2022 the State-to-State dispute settlement provisions under Chapter 31[31] of the USMCA over Mexico’s energy policies.[32] The discussions among the three countries are still ongoing.[33]
These inter-State consultations, however, are limited to the specific concerns surrounding Mexico’s energy policies. They would not address other sectors, or even necessarily solve the specific concerns or losses of Canadian or U.S. investors in the energy sector. NAFTA investors with legacy investment claims would therefore be well advised to carefully assess the status, operation, and viability of their investments in Mexico in this evolving investment climate and whether they need to seek investment protections under NAFTA by 1 April 2023.
V. Conclusion
Under the USMCA’s three-year sunset period, investors have until 1 July 2023, to submit claims involving investments created or acquired during NAFTA’s existence to arbitration. Because investor-state arbitration will no longer be available to Canadian investors or for investments in Canada, this category of investors should carefully consider whether they have a viable claim under NAFTA. As between Canada and the United States, NAFTA provides the last resort to international investment arbitration. Similarly, due to the USMCA’s generally less favorable two-tiered dispute resolution regime, U.S. and Mexican investors with legacy claims under NAFTA would be well advised to consider whether to avail themselves of the soon-to-expire treaty protections.
_______________________
[1] United States-Mexico-Canada Agreement (hereinafter “USMCA”), Annex 14-C.
[2] USMCA Protocol; see also Press Release, Office of the U.S. Trade Rep., USMCA To Enter Into Force July 1 After United States Takes Final Procedural Steps For Implementation (Apr. 24, 2020).
[3] USMCA Annex 14-C, (1)–(3).
[4] Id., Annex 14-C, (4), 6(a).
[5] Id., Annex 14-C, para. 5.
[6] North American Free Trade Agreement (hereinafter “NAFTA”) Art. 1119.
[7] Id., Art. 2102.
[8] Comprehensive and Progressive Agreement for Trans Pacific Partnership Agreement, Annex 1-A. The CPTPP entered into force for both Canada and Mexico on December 30, 2018. See About the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, Gov’t of Canada.
[9] The USMCA also excludes specific types of claimants, such as investors that are “owned or controlled by a person of a non-Annex Party that the other Annex Party considers to be a non-market economy, that is a party to a qualifying investment dispute.” See USMCA, Annex 14-D, para. 1.
[10] See NAFTA Arts. 1116–1117, 1121 (setting out the procedural requirements for the submission of claims to arbitration).
[11] No claim may be submitted to arbitration unless “the claimant or the enterprise . . . first initiated a proceeding before a competent court or administrative tribunal of the respondent with respect to the measures alleged to constitute a breach.” USMCA Art. 14.D.5(1)(a).
[12] Id., Art. 14.D.5(1)(b).
[13] Id., Art. 14.D.5(1)(b), footnote 25.
[14] Id., Annex 14-E, (6)(a).
[15] Id., Annex 14-E, (6)(b).
[16] Pursuant to NAFTA Art. 1116(1)(a) and 1117(1)(a), an investor may submit a claim to arbitration on its own behalf or on behalf of an enterprise, respectively, for a violation of Chapter 11, Section A of NAFTA. See NAFTA Arts. 1116(1)(a) and 1117(1)(a). Section A includes NAFTA’s provisions regarding national treatment (Art. 1102), most-favored-nation treatment (Art. 1103), and minimum standard of treatment (Art. 1105).
[17] Compare NAFTA Arts. 1105, 1116–1117, 1110 (permitting claims for violations of minimum standard of treatment and direct and indirect expropriation) with USMCA Art. 14.D.3(1)(a), (b) (permitting claims for breach of provisions regarding national treatment, most-favored-nation treatment, and direct expropriation).
[18] See USMCA Annex 14-E, (2).
[19] For example, interpretation questions may arise with respect to the minimum standard of treatment (USMCA, Art. 14.6.4) and the scope of indirect expropriation (Annex 14-B, 3(a)(i)–(iii)), especially in relation to measures “designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment” (USMCA Annex 14-B, 3(b)).
[20] See Silver Bull, Press Release, Silver Bull Announces Commencement of Legacy NAFTA Claim Against Mexico (Mar. 2, 2023); Goldgroup Resources, Inc. v. United Mexican States, ICSID Case No. ARB/23/4; Monterra Energy, Press Release, Monterra Energy Takes Legal Action Against Closure of its Tuxpan Facility by Submitting to the Government of Mexico a Notice of Intent Under NAFTA (Feb. 22, 2022); Access Business Group LLC v. United Mexican States, Notice of Intent to Submit a Claim to Arbitration, Oct. 11, 2022; Finley Resources Inc., MWS Management Inc., and Prize Permanent Holdings, LLC v. United Mexican States, ICSID Case No. ARB/21/25; First Majestic Silver Corp. v. United Mexican States, ICSID Case No. ARB/21/14; Doups Holdings LLC v. United Mexican States, ICSID Case No. ARB/22/24; Coeur Mining v. United Mexican States, IA Reporter; Sepadeve International LLC v. United Mexican States, Notice of Intent (Sept. 4, 2020); AMERRA Capital Management, LLC, AMERRA Agri Fund, LP, AMERAA Agri Opportunity Fund, LP, and JPMorgan Chase Bank, N.A. v. United Mexican States, Notice of Intent (Dec. 3, 2020); L1bero Partners LP and Fabio M. Covarrubias Piffer v. United Mexican States, Notice of Intent (Dec. 30, 2020); Margarita Jenkins, Maria Elodia Jenkins, and Juan Carlos Jenkins v. United Mexican States, Notice of Intent (July 19, 2021).
[21] See TC Energy Corp. and TransCanada PipeLines Ltd. v. United States of America, ICSID Case No. ARB/21/63; Alberta Petroleum Marketing Commission v. United States of America, Notice of Intent to Submit a Claim to Arbitration, Feb. 9, 2022.
[22] See Koch Industries Inc. and Koch Supply & Trading, LP v. Canada, ICSID Case No. ARB/20/52; Windstream Energy LLC v. Canada, PCA Case No. 2021-26.
[23] Mexico’s Reforms to Hydrocarbon Law and Electricity Industry Law May Violate Investment Treaty Protections, Gibson, Dunn & Crutcher LLP (June 1, 2021).
[24] Mexico’s Top Court Upholds Changes to Power Law in Win for President, Reuters (Apr. 7, 2022).
[25] Id.
[26] Mexico’s President announced that he had met with representatives from four Canadian companies, including Canada’s second-largest pension fund, and successfully resolved the companies’ concerns regarding Mexico’s electricity sector policies (including issues over self-supply electricity contracts and permits allowing energy connections for new projects). See Mathieu Dion & Maya Averbuch, Mexico’s AMLO Met with Canada Pension Giant Amid Energy Feud, Bloomberg (Jan. 18, 2023).
[27] Max de Haldevang & Michael O’Boyle, Mexico President’s Electricity Bill Fails to Pass Lower House, Bloomberg (Apr. 18, 2022).
[28] Mexico Nationalizes Lithium, Plans Review of Contracts, Reuters (Apr. 19, 2022).
[29] Mexico Creates State-Run Lithium Company, To Go Live Within 6 Months, Reuters (Aug. 24, 2022).
[30] Cody Copeland, US Urges Mexico to Open Up Lithium Production to Private Sector, Courthouse News Serv. (Jan. 17, 2023).
[31] Pursuant to Article 31.4 of the USMCA, the USCMA State Parties must engage in consultations within 30 days of the date of delivery of a request for consultations. See USMCA, Art. 31. If the issue that is the subject of consultations is not resolved within 75 days of delivery of the request, a State Party may request the establishment of a panel to rule on the dispute. Id. Art. 31.6. If a State Party refuses to comply with a decision rendered by a panel, the other State Parties may implement retaliatory measures. Id. Art. 31.19.
[32] Press Release, Office of the U.S. Trade Rep., United States Requests Consultations Under the USMCA Over Mexico’s Energy Policies (July 20, 2022); Press Release, Global Affairs Canada, Statement by Minister Ng on Canada Launching Canada-United States-Mexico Agreement Consultations on Mexico’s New Energy Policies (July 21, 2022).
[33] Mexico Invites U.S. Trade Team to Third Round of Energy Consultations, Reuters (Dec. 1, 2022).
The following Gibson Dunn lawyers prepared this client alert: Lindsey D. Schmidt, Maria L. Banda, and Brian Yeh.
Gibson Dunn’s 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 International Arbitration practice group, or the following:
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Please also feel free to contact the following practice group leaders:
International Arbitration Group:
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This edition of Gibson Dunn’s Federal Circuit Update summarizes the current status of several petitions pending before the Supreme Court. We address the Federal Circuit’s adoption of amendments to its Rules of Practice. And we also discuss recent Federal Circuit decisions concerning tortious interference with prospective business relations, the public use bar under pre-AIA 35 U.S.C. § 102(b), delisting patents from the Orange Book, and ineligibility under 35 U.S.C. § 101.
In case you missed it, on February 2, 2023, Gibson Dunn published the 2021/2022 Federal Circuit Year in Review, providing a statistical overview and substantive summaries of the precedential patent opinions issued by the Federal Circuit between August 1, 2021 and July 31, 2022.
Federal Circuit News
Supreme Court:
As we summarized in our December 2022 update, the Supreme Court has granted certiorari in Amgen Inc. v. Sanofi (U.S. No. 21-757). Oral argument has been scheduled for March 27, 2023.
Noteworthy Petitions for a Writ of Certiorari:
This month, no new petitions were filed before the Supreme Court that originated from the Federal Circuit by parties represented by counsel.
As we summarized in our January 2023 update, the Court is considering petitions in Novartis Pharmaceuticals Corp. v. HEC Pharm Co., Ltd. (US No. 22-671) and Arthrex, Inc. v. Smith & Nephew, Inc. (US No. 22-639). A response was filed in Novartis on March 3, 2023. Gibson Dunn partners Thomas G. Hungar, Jacob T. Spencer, Jane M. Love, and Robert Trenchard are counsel for Novartis. The Court granted an extension for the response in Arthrex until April 12, 2023.
The petitions in Interactive Wearables, LLC v. Polar Electro Oy (US No. 21-1281) and Tropp v. Travel Sentry, Inc. (US No. 22-22) are still pending the views of the Solicitor General. After requesting a response, the Court denied Jump Rope’s petition in Jump Rope Systems, LLC v. Coulter Ventures, LLC (US No. 22-298).
Other Federal Circuit News:
Appointment of New Circuit Executive and Clerk of Court. On February 24, 2023, the Federal Circuit announced that Jarrett B. Perlow has been selected as the next Circuit Executive and Clerk of Court and will officially assume the responsibilities on July 1, 2023. Mr. Perlow will succeed Peter R. Marksteiner, who is retiring as of June 30, 2023.
Federal Circuit Practice Update
Amendments to the Federal Circuit Rules of Practice. In our January 2023 update, we discussed the Federal Circuit’s proposed amendments to the Federal Circuit Rules of Practice. The amendments have now been adopted and went into effect on March 1, 2023. The final version of the Federal Circuit Rules of Practice are available here.
Upcoming Oral Argument Calendar
The list of upcoming arguments at the Federal Circuit is available on the court’s website.
Key Case Summaries (February 2023)
CyWee Group Ltd. v. Google LLC, Nos. 20-1565, 20-1567 (Fed. Cir. Feb. 8, 2023): In United States v. Arthrex, Inc., 141 S. Ct. 197 (2021), the Supreme Court held that an administrative patent judge’s power to render final patentability decisions unreviewable by an accountable principal officer violated the Appointments Clause. Subsequently, CyWee requested rehearing on two final written decisions issued by the Patent Trial and Appeal Board (“Board”). The requests were referred to the Commissioner for Patents, who was performing the duties of the Director and Deputy Director, as those offices were vacant at the time, and he denied the rehearing requests. As CyWee’s current appeal was pending, the Federal Circuit rejected challenges to the Commissioner’s authority to review the Board’s decisions under Arthrex. CyWee acknowledged that the decision foreclosed its challenges to the Commissioner’s authority, but appealed on grounds that the Director’s review was untimely as it occurred outside the time window for institution decisions and final written decisions.
The Federal Circuit (Prost, J., joined by Taranto and Chen, JJ.) affirmed, rejecting CyWee’s timeliness arguments. The Court reasoned that there is nothing in the statute that required Director review of Board decisions to occur within the same timeframe as that required of the Board.
SSI Technologies, LLC v. Dongguan Zhengyang Electronic Mechanical Ltd., Nos. 21-2345, 22-1039 (Fed. Cir. Feb. 13, 2023): SSI sued DZEM for patent infringement and DZEM asserted counterclaims for a declaration for tortious interference with prospective business relations. SSI had sent letters to several companies advising them of SSI’s lawsuit against DZEM. The district court granted summary judgment to SSI because DZEM did not “adduce evidence that it had prospective contracts with those companies.”
The Federal Circuit (Bryson, J., joined by Reyna and Cunningham, JJ.) affirmed-in-part, reversed-in-part, vacated-in-part, and remanded. The Federal Circuit held that the district court properly granted summary judgment on the tortious interference counterclaim because DZEM had failed to introduce any evidence showing that SSI’s communications with DZEM customers were “objectively unreasonable” and therefore constituted wrongful conduct sufficient to sustain a state-law tort claim.
ChromaDex, Inc. v. Elysium Health, Inc., No. 22-1116 (Fed. Cir. Feb. 13, 2023): The district court granted summary judgment that the asserted claims were ineligible under 35 U.S.C. § 101 because they were directed to a natural phenomenon—compositions comprising isolated nicotinamide riboside (“NR”), a naturally occurring vitamin present in cow’s milk. The district court rejected ChromaDex’s argument that isolated NR was different from naturally occurring NR.
The Federal Circuit (Prost, J., joined by Chen and Stoll, JJ.) affirmed. The Court reasoned that the isolated NR did not have characteristics markedly different from the naturally occurring version found in milk. The Court relied on pre-Alice precedent (Chakrabarty, Myriad), commenting that the inquiry could end there. The Court nevertheless moved on to step two in light of Alice/Mayo, and determined that recognizing the utility of NR, which is synonymous to recognizing a natural phenomenon, was not inventive.
Minerva Surgical, Inc. v. Hologic, Inc., No. 21-2246 (Fed. Cir. Feb. 15, 2023): Minerva sued Hologic, asserting infringement of its patent directed to surgical devices for “endometrial ablation.” The district court granted summary judgment to Hologic, holding the asserted claims anticipated under the public use bar of pre-AIA 35 U.S.C. § 102(b). More than one year before the asserted patent’s priority date, Minerva had presented fifteen fully functional prototypes of a device disclosing every limitation of the asserted claims at an industry trade show referred to as the “Super Bowl.”
The Federal Circuit (Reyna, J., joined by Prost and Stoll, JJ.) affirmed. The Court agreed with Hologic that both elements of the public use bar were met. First, the patented technology was “in public use” because it had been disclosed at the industry trade show where Minerva had demonstrated the normal operation of its prototypes and permitted members of the industry to closely examine their function. Minerva even revealed the materials used to construct the prototypes, thus disclosing one of the key limitations of the asserted claims. Second, Minerva’s technology was also “ready for patenting” because it was both reduced to practice in the working prototypes and described in internal documents that would have enabled a person of ordinary skill in the art to practice the invention.
Jazz Pharmaceuticals, Inc. v. Avadel CNS Pharmaceuticals, LLC, No. 23-1186 (Fed. Cir. Feb. 24, 2023): Jazz holds a New Drug Application (“NDA”) for a narcolepsy drug, Xyrem. Xyrem’s active ingredient, GHB, is colloquially known as the date-rape drug. Jazz’s patent, which was listed in the Orange Book,[1] relates to a single-pharmacy distribution system that controls access to abuse-prone prescription drugs such as Xyrem. A patent is properly listed in the Orange Book if it claims a drug or a method of use. Jazz sued Avadel for infringing this patent when Avadel submitted an NDA for its own narcolepsy drug. Avadel counterclaimed, arguing that Jazz’s patent was improperly listed in the Orange Book and sought an order to delist the patent.
The Federal Circuit (Lourie, J., joined by Reyna and Taranto, JJ.) affirmed. On appeal, Jazz argued that its system claims essentially recited a method of use. The Court rejected this argument, concluding that the applicable regulation “does not broaden the term ‘method’” to include system claims.
Venue in the Western District of Texas:
In re Google LLC, No. 23-101 (Fed. Cir. Feb. 1, 2023): Google petitioned for writ of mandamus directing the Western District of Texas to transfer the case to the Northern District of California. Jawbone filed suit in Western District of Texas four months after being assigned ownership of the asserted patents and seven months after being incorporated in Texas.
The Federal Circuit (Stark, J., joined by Lourie and Taranto, JJ.) granted the petition, determining that the district court had put too much weight on co-pending litigations in the same district and on the time to trial when the plaintiff was “not engaged in product competition” that “might add urgency to case resolution.” The Federal Circuit also determined that the cost of attendance for willing witnesses, the local interest factor, and relative ease of access to sources of proof all weighed in favor of transfer given the patented technology was invented and prosecuted in Northern California, Google developed the accused products in Northern California, and Jawbone’s connection to Western Texas was “recent and ephemeral.” In sum, because a total of four factors weighed in favor of transfer and four factors were neutral, the Federal Circuit granted the petition and ordered the district court to grant the motion to transfer.
________________________
[1] The U.S. Food and Drug Administration’s Approved Drug Products with Therapeutic Equivalence Evaluations publication is commonly known as the Orange Book.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Federal Circuit. Please contact the Gibson Dunn lawyer with whom you usually work or the authors of this update:
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Audrey Yang – Dallas (+1 214-698-3215, ayang@gibsondunn.com)
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© 2023 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome.
Washington, D.C. partners Michael Bopp and Thomas Hungar and associate Megan Kiernan are the authors of “118th Congress: Investigative Tools And Potential Defenses” [PDF] published by Law360 on March 3, 2023.
Washington, D.C. partner Roscoe Jones Jr. and of counsel Daniel Smith contributed to the article.
Washington, D.C. partners Michael Bopp and Thomas Hungar and associate Megan Kiernan are the authors of “118th Congress: Investigative Priorities And Rule Changes” [PDF] published by Law360 on March 2, 2023.
Washington, D.C. partner Roscoe Jones Jr. and of counsel Daniel Smith contributed to the article.
2022 marked another year of robust enforcement of the Foreign Corrupt Practices Act (“FCPA”) and other anti-corruption laws by enforcers in the United States and globally. In particular, the U.S. Department of Justice (“DOJ” or the “Department”) continues to indict, try, and convict individual defendants in FCPA and money laundering cases at a vigorous pace, even as it reworks corporate enforcement policies to rebuild the robust pipeline of corporate cases seen in prior years. Additionally, the network of anti-corruption enforcers at home and abroad continues to expand, leading to a complex decision tree for any general counsel and chief compliance officer facing a serious anti-corruption matter.
This client update provides an overview of the FCPA and other domestic and international anti-corruption enforcement, litigation, and policy developments from 2022 and select developments from early 2023, as well as the trends we see from this activity. Gibson Dunn has the privilege of helping our clients navigate anti-corruption-related challenges every day, and we are honored to have once again been ranked Number 1 in the Global Investigations Review “GIR 30” ranking of the world’s top investigations practices—Gibson Dunn’s fifth consecutive year and seventh in the last eight years to have been so honored in this top spot.
For more analysis on anti-corruption enforcement and related developments over the past year, we invite you to join us for our upcoming complimentary webcast presentation on March 28, 2023: FCPA 2022 Year-End Update.
FCPA OVERVIEW
The FCPA’s anti-bribery provisions make it illegal to corruptly offer or provide money or anything else of value to officials of foreign governments, foreign political parties, or public international organizations with the intent to obtain or retain business. These provisions apply to “issuers,” “domestic concerns,” and those acting on behalf of issuers and domestic concerns, as well as to “any person” who acts while in the territory of the United States. The term “issuer” covers any business entity that is registered under 15 U.S.C. § 78l or that is required to file reports under 15 U.S.C. § 78o(d). In this context, foreign issuers whose American Depositary Receipts (“ADRs”) or American Depositary Shares (“ADSs”) are listed on a U.S. exchange are “issuers” for purposes of the FCPA. The term “domestic concern” is even broader and includes any U.S. citizen, national, or resident, as well as any business entity that is organized under the laws of a U.S. state or that has its principal place of business in the United States.
In addition to the anti-bribery provisions, the FCPA also has “accounting provisions” that apply to issuers and those acting on their behalf. First, there is the books-and-records provision, which requires issuers to make and keep accurate books, records, and accounts that, in reasonable detail, accurately and fairly reflect the issuer’s transactions and disposition of assets. Second, the FCPA’s internal accounting controls provision requires that issuers devise and maintain reasonable internal accounting controls aimed at preventing and detecting FCPA violations. Prosecutors and regulators frequently invoke these latter two sections when they cannot establish the elements for an anti-bribery prosecution or as a mechanism for compromise in settlement negotiations. Because there is no requirement that a false record or deficient control be linked to an improper payment, even a payment that does not constitute a violation of the anti-bribery provisions can lead to prosecution under the accounting provisions if inaccurately recorded or attributable to an internal accounting controls deficiency.
International corruption also may implicate other U.S. criminal laws. Prosecutors from DOJ’s FCPA Unit also charge non-FCPA crimes such as money laundering, mail and wire fraud, Travel Act violations, tax violations, and false statements, in addition to or instead of FCPA charges. Without question, the most prevalent amongst these “FCPA-related” charges is money laundering—a generic term used as shorthand for statutory provisions that generally criminalize conducting or attempting to conduct a transaction involving proceeds of “specified unlawful activity” or transferring funds to or from the United States, in either case to promote the carrying on of specified unlawful activity, to conceal or disguise the nature, location, source, ownership or control of the proceeds, or to avoid a transaction reporting requirement. “Specified unlawful activity” includes over 200 enumerated U.S. crimes and certain foreign crimes, including the FCPA, fraud, and corruption offenses under the laws of foreign nations. Although this has not always been the case, in recent history, DOJ has frequently deployed the money laundering statutes to charge “foreign officials” who are not themselves subject to the FCPA. It is not unusual for DOJ to charge the alleged provider of a corrupt payment under the FCPA and the alleged recipient with money laundering violations.
FCPA AND FCPA-RELATED ENFORCEMENT STATISTICS
The below table and graph detail the number of FCPA enforcement actions initiated by DOJ and the Securities and Exchange Commission (“SEC”), the statute’s dual enforcers, during the past 10 years.
But as our readers know, the number of FCPA enforcement actions represents only a piece of the robust pipeline of international anti-corruption enforcement efforts by DOJ. Indeed, the increasing proportion of “FCPA-related” charges in the overall enforcement docket of FCPA prosecutors is a trend we have been remarking upon for years. In total, DOJ brought 12 such FCPA-related actions in 2022, bringing the overall count to 30 cases that DOJ’s FCPA unit filed, unsealed, or otherwise joined since the beginning of the year. The past 10 years of FCPA plus FCPA-related enforcement activity is illustrated in the following table and graph.
2022 FCPA-RELATED ENFORCEMENT TRENDS
In each of our year-end FCPA updates, we seek not merely to report on the year’s FCPA enforcement actions, but also to distill the thematic trends we see stemming from these individual events. For 2022, we have identified three key enforcement developments that we believe stand out from the rest, although the first two will likely require more time to see if they develop into longer-term trends:
- A rebound in corporate FCPA enforcement actions;
- Revitalized interest in corporate monitorships; and
- Individual FCPA and FCPA-related enforcement continues apace.
Rebound in Corporate FCPA Enforcement Actions
As we reported in our 2021 Year-End FCPA Update, corporate FCPA enforcement fell off of the proverbial cliff in 2021 with the lowest total of corporate enforcement actions (6) in modern FCPA enforcement history. 2022 saw a rebound back toward normalcy, with a total of 14 corporate enforcement actions—more than a 100% increase over 2021. In addition, the financial significance of these cases increased over those brought in 2021, with three 2022 cases topping the $100 million mark in combined disgorgement and penalties, one of which joined the all-time Corporate FCPA Top Ten list. That was Glencore, with over $700 million in FCPA-related penalties, as discussed in our 2022 Mid-Year FCPA Update. A chart of corporate FCPA enforcement actions for the past decade is set forth below, followed by our updated Corporate FCPA Top 10 List and then a discussion of corporate enforcement cases from the last four months of the year.
* Our figures do not include the 2018 FCPA case against Petróleo Brasileiro S.A. – Petrobras (“Petrobras”), even though some sources have reported the resolution as high as $1.78 billion, because the first-of-its kind resolution negotiated by Gibson Dunn offset the vast majority of payments against a shareholders’ class action lawsuit and foreign regulatory proceeding, leaving only $170.6 million fairly attributable to the DOJ / SEC FCPA resolution.
** Goldman agreed to pay several billion to authorities in the United States, United Kingdom, Singapore, Hong Kong, and Malaysia.
*** Siemens’s U.S. FCPA resolutions were coordinated with a €395 million ($569 million) anti-corruption settlement with the Munich Public Prosecutor.
**** Glencore negotiated a coordinated resolution of market manipulation charges with the U.S. Commodity Futures Trading Commission and anti-corruption authorities in the UK, Netherlands, and Switzerland, with a total anticipated price tag of approximately $1.5 billion to resolve all matters.
***** Telia agreed to pay a total of $965,603,972 in criminal penalties and disgorgement to authorities in the United States, the Netherlands, and Sweden.
ABB Ltd.
The second-largest corporate FCPA action of 2022 was announced on December 2, 2022, against Swiss-based global technology company and U.S. issuer ABB. According to the charging documents, between 2014 and 2017 ABB paid bribes to a high-ranking official of a state-owned energy company in South Africa to maintain and secure engineering contracts at a power plant in Witbank. It did so by hiring subcontractors associated with the government official, one of which was owned by a member of the official’s family, even though these subcontractors were allegedly unqualified to do the work and more expensive than other options, with the expectation that portions of the subcontractor payments would benefit the government official. In exchange, ABB allegedly received various types of preferential treatment by the government official in the contracting process, including confidential bid information about competitors and inflated purchase orders paid to ABB.
To resolve the matter, ABB entered into coordinated resolutions with DOJ and the SEC in the United States and criminal authorities in South Africa and Switzerland. The DOJ resolution took the form of a deferred prosecution agreement (“DPA”) with parent ABB, as well as guilty pleas by two subsidiaries, involving FCPA bribery and books-and-records charges and a criminal penalty of $315 million, although portions are offset against other resolutions. The SEC brought FCPA bribery and accounting charges and imposed a $75 million civil penalty, plus just over $72.5 million in disgorgement and prejudgment interest that was deemed satisfied by a 2020 civil restitution agreement with the South African government. In addition, ABB reached coordinated criminal resolutions with South African and Swiss authorities, and is reportedly in talks with German authorities. The total 2022 resolutions amounted to over $315 million; including the prior civil settlement with South Africa brings the total price tag to approximately $460 million.
There are several notable aspects of the ABB resolution. First, this is the first coordinated anti-corruption resolution between DOJ, the SEC and South African authorities, which DOJ in particular heralded as it seeks continuously to expand its network of law enforcement partners across the globe.
Second, the settlement papers outline an intriguing (and for others, informative) chain of events leading to the initiation of the investigation. According to the DPA, shortly after becoming aware of the South Africa allegations, ABB contacted DOJ to schedule a meeting at which it planned to disclose the conduct to DOJ, but without describing the content of that disclosure in its initial contact. Between the initial call and the scheduled meeting with DOJ, the media reported on the subject-matter of the investigation, making DOJ aware of it prior to ABB’s disclosure. Accordingly, DOJ did not grant ABB voluntary disclosure credit under the FCPA Corporate Enforcement Policy, although it asserts that it considered ABB’s “demonstrated intent to disclose the misconduct” in fashioning other aspects of the resolution, including by allowing the company to resolve via DPA rather than requiring a guilty plea.
Finally, ABB is now a three-time FCPA offender, having previously resolved separate criminal and civil FCPA enforcement matters with DOJ and the SEC in 2004 and 2010, as reported in our 2010 FCPA Year-End Update. The principal consequence of this recidivism is that the 25% discount DOJ granted to ABB based on its substantial cooperation and remediation was taken not from the bottom of the U.S. Sentencing Guidelines (“Guidelines”) range as is customary, but rather from the mid-point between the middle- and high-ends of the Guidelines. In announcing DOJ’s subsequent Criminal Division Corporate Enforcement Policy on January 17, 2023, covered in more detail below, Criminal Division Assistant Attorney General Kenneth A. Polite cited ABB as the example of DOJ not applying discounts from the bottom of the Guidelines range—but rather higher points in the range—for so-called “recidivists.”
Honeywell International, Inc.
The third-largest FCPA resolution of 2022 came on December 19, 2022, when North Carolina-based manufacturing and technology company Honeywell International, Inc. agreed to pay $202.7 million to resolve parallel anti-corruption investigations by DOJ, the SEC, and Brazilian prosecutors. The DOJ matter was resolved by way of an FCPA bribery conspiracy DPA with Honeywell subsidiary Honeywell UOP—with certain guarantees by the parent company—which alleged that between 2010 and 2014 the subsidiary paid $4 million to an official of Brazilian state oil company Petrobras in exchange for a contract to design and build an oil refinery. The resolution with Brazil’s Office of the Attorney General, Comptroller General, and Federal Prosecution Service concerned the same conduct. The SEC cease-and-desist proceeding also included the Petrobras conduct, but further added allegations that in 2011 and 2012 Honeywell’s Belgian subsidiary paid $75,000 to obtain a contract with Algerian state oil company Sonatrach.
The three-year DPA with DOJ included a $79.2 million criminal penalty, reflecting what was then the maximum 25% discount from the bottom of the Guidelines range for Honeywell’s substantial cooperation and remediation, as well as $105.7 million in forfeiture. But the full forfeiture amount and half the criminal penalty were credited against other resolutions. The SEC resolution included $81.2 million in disgorgement and prejudgment interest, but credited nearly half to payments made in the Brazilian resolutions and did not impose a penalty in light of the DOJ resolution. Finally, the Brazilian resolutions, resolved by way of leniency agreements, added an incremental $42.3 million in additional payments bringing the total to $202.7 million.
Gibson Dunn served as co-counsel to Honeywell in connection with aspects of the investigations.
GOL Linhas Aéreas Inteligentes S.A.
On September 15, 2022, Brazilian airline and U.S. issuer GOL resolved corruption-related charges with DOJ, the SEC, and Brazilian authorities. According to the charging documents, in 2012 and 2013, a member of GOL’s Board of Directors agreed to pay Brazilian officials approximately $3.8 million to secure favorable legislation that reduced payroll and aviation fuel taxes specific to the airline industry. The alleged bribes were paid through consulting companies, using sham contracts, and then recorded in GOL’s books as legitimate advertising or other expenses.
In its DPA with DOJ, GOL received maximum cooperation and remediation credit that reduced its fine to $87 million—25% below the bottom of the Guidelines range—but then DOJ further reduced the fine to $17 million after GOL demonstrated an inability to pay the full amount. A further $1.7 million of this amount was then credited against the $3.4 million paid to Brazilian authorities. The SEC cease-and-desist order, which charged FCPA bribery and accounting violations, imposed $70 million in disgorgement plus prejudgment interest, then waived all but $24.5 million, which will be paid over the next two years, based on the financial condition of GOL.
Oracle Corp.
Two weeks later, on September 27, 2022, Texas-headquartered information technology company Oracle resolved FCPA books-and-records and internal controls charges with the SEC. According to the cease-and-desist order, between 2014 and 2019, Oracle subsidiaries in India, Turkey, and the UAE entered into a variety of schemes with indirect channel resellers to pass along improper benefits to government officials. The schemes generally involved Oracle employees authorizing excess discounts to value-added distributors and resellers, which then pooled portions of these extra discounts and used them to fund customer travel and entertainment that did not meet Oracle policies and even, in certain instances, may have been used to make improper payments.
Without admitting or denying the allegations, Oracle agreed to pay a total of close to $23 million, including a $15 million penalty and $7.9 million in disgorgement plus prejudgment interest. As discussed in our 2012 Year-End FCPA Update, the SEC previously sanctioned Oracle for similar “slush fund”-based FCPA allegations in India in 2012. In this case, the SEC acknowledged Oracle’s full cooperation with the investigation and substantial remedial actions.
Safran S.A.
The final corporate FCPA enforcement event of 2022 was a “declination with disgorgement” issued by DOJ to French defense company Safran on December 21, 2022. According to DOJ’s declination letter, two current subsidiaries of Safran, one based in the U.S. and one in Germany, paid millions of dollars to a consultant in China between 1999 and 2015 while knowing that the consultant was a close relative of a high-ranking Chinese government official who favorably influenced the award of train lavatory contracts to these businesses. Safran did not own these businesses at the time of the misconduct, but subsequently acquired them, identified the conduct during post-acquisition due diligence, and took appropriate remedial action, including voluntarily disclosing the matter to DOJ. As a condition of the declination, Safran agreed to disgorge nearly $17.2 million in allegedly ill-gotten gains from the pre-acquisition misconduct, and also committed to resolving a parallel investigation in Germany.
Rounding Out the 2022 Corporate Enforcement Docket
Other corporate FCPA enforcement events discussed in our 2022 Mid-Year FCPA Update include those involving Jardine Lloyd Thompson Group Holdings Ltd. (DOJ declination with disgorgement), KT Corp. (SEC only), Stericycle, Inc. (DOJ and SEC), and Tenaris, S.A. (SEC only).
Revitalized Interest in Corporate Monitorships
The practice of imposing a compliance monitor as a condition of resolution has ebbed and flowed over the years of corporate FCPA enforcement. Following a two-year hiatus in any FCPA cases involving monitors—likely influenced by the 2018 “Benczkowski Memo,” wherein then-Assistant Attorney General Brian A. Benczkowski stated that monitors should only be used “where there is a demonstrated need for, and clear benefit to be derived from, a monitorship relative to the projected costs and burden”—2022 saw the return of this practice in two FCPA resolutions. Those two cases are Glencore and Stericycle, both discussed in our 2022 Mid-Year FCPA Update. It is no coincidence that current Deputy Attorney General Lisa O. Monaco retracted any presumption against corporate monitorships that could be read from the Benczkowski Memo in guidance she issued in interim form in October 2021, and then final form in September 2022 (the “Monaco Memorandum”), as discussed below and in our separate client alerts: Deputy Attorney General Announces Important Changes to DOJ’s Corporate Criminal Enforcement Policies and From the Broader Perspective: Deputy Attorney General Announces Additional Revisions to DOJ’s Corporate Criminal Enforcement Policies.
The current guidance according to the latest Monaco Memorandum is that there is no presumption in favor or against corporate monitorships, and that each case is to be weighed on its own merits. However, DOJ prosecutors are not to seek to impose a monitor if a company has implemented and tested an effective compliance program. Consistent with this guidance, the January 2023 Criminal Division Corporate Enforcement Policy discussed below reiterates that generally, monitors will not be necessary in voluntary disclosure cases where, by the time of the resolution, the company “has implemented and tested an effective compliance program and remediated the root cause of the misconduct.”
Against this background, it is too soon to tell whether the two corporate monitorships imposed in 2022 FCPA cases represent a blip or a trend upward. We will continue to monitor these developments and report in future updates. For now, the below chart illustrates the frequency with which monitors (including hybrids, where a monitor is imposed for a shorter period with a self-reporting period thereafter) have been imposed in corporate FCPA enforcement actions over the past seven years:
Individual FCPA and FCPA-related Enforcement Continues Apace
DOJ has for years been stating that “individual accountability” is its top priority. The statistics bear this out, and the current question is whether we have passed beyond “trend” and into the realm of the “new normal.” In the September 2022 Monaco Memorandum, DOJ implemented additional guidance requiring prosecutors to analyze warranted criminal charges against individuals as part of every corporate charging memorandum, with a preference for bringing individual cases first or simultaneously, and later only if supported by a detailed plan.
There were at least 23 FCPA and FCPA-related charges filed or unsealed, or in which DOJ FCPA prosecutors first entered an appearance, in 2022. We note that many charges against individuals are initially filed under seal, and only become publicly known months or even years later after being unsealed, often in connection with an arrest or other enforcement development. We covered 19 of those defendants in our 2022 Mid-Year FCPA Update, and discuss the remaining four from the last four months of the year below.
Cary Yan & Gina Zhou
On September 2, 2022, DOJ unsealed a 2020 indictment charging Yan and Zhou with FCPA and money laundering offenses arising out of alleged bribe payments to officials of the Republic of the Marshall Islands. The indictment alleges that between 2016 and 2020, Yan and Zhou paid tens of thousands of dollars to these officials in exchange for legislation that would create a semi-autonomous region within the Republic of the Marshall Islands to the benefit of Yan and Zhou’s business interests. Illustrating the long tail of these cases, Yan and Zhou were originally charged in August 2020, and the case was unsealed upon their extradition to the United States from Thailand more than two years later.
On December 1, 2022, each of Yan and Zhou pleaded guilty to a single count of conspiracy to violate the FCPA’s anti-bribery provision. Sentencing before the Honorable Naomi Reice Buchwald of the U.S. District Court for the Southern District of New York is currently set for March 2023.
Asante Kwaku Berko
On November 3, 2022, Berko, a dual U.S. and Ghanaian citizen and former executive director of a UK subsidiary of Goldman Sachs, was arrested as he landed at Heathrow Airport and United States authorities unsealed a six-count indictment from 2020. The indictment alleges that between 2014 and 2017 Berko paid more than $700,000 to Ghanaian government officials to assist a Turkish energy company client in securing required approvals to build an electric power plant in Ghana.
What is most interesting about Berko’s case is that, as discussed in our 2020 Mid-Year FCPA Update, the SEC filed a civil complaint against Berko for FCPA violations relating to the same conduct in 2020. Then, in June 2021, without admitting or denying the charges and without appearing physically in court, Berko agreed to resolve the SEC enforcement action via an injunction and the payment of approximately $330,000. Berko is still undergoing extradition proceedings in the United Kingdom.
Nilsen Arias Sandoval
On January 19, 2022, Arias pleaded guilty to a single count of money laundering, though the connection to DOJ’s FCPA Unit was not solidified until the entry of an appearance by a FCPA Unit attorney in October 2022. The information charges that between 2010 and 2021 Arias, a former senior manager of Ecuadorian state oil company Empresa Publica de Hidrocarburos del Ecuador (“Petroecuador”), received millions of dollars in bribe payments from a series of energy, asphalt, and transportation companies in exchange for influencing the award of Petroecuador contracts. This is part of the Petroecuador investigation we have been covering for years, which led to a sprawling array of charges against individuals and companies, as most recently covered in our 2022 Mid-Year FCPA Update.
On December 2, 2022, prosecutors also filed a superseding indictment against Javier Aguilar, a former Vitol Group oil trader whom the government alleges caused approximately $920,000 in bribes to be paid to Arias. We covered the original charges against Aguilar in our 2020 Year-End FCPA Update. Aguilar has pleaded not guilty.
2022 FCPA-RELATED ENFORCEMENT LITIGATION (with an Early 2023 Bonus)
As our readership knows, following the filing of FCPA or FCPA-related charges, criminal and civil enforcement proceedings can take years to wind their way through the courts. The substantial number of enforcement cases from prior years, especially involving contested criminal indictments of individual defendants, has led to an active year in enforcement litigation. In addition to the matters discussed in our 2022 Mid-Year FCPA Update, a selection of 2022 matters that saw material enforcement litigation developments follows (in addition to one matter from early 2023).
Former Venezuelan National Treasurer and Husband Convicted of Money Laundering
On December 13, 2022, a federal jury sitting in the Southern District of Florida found ex-Venezuelan National Treasurer Claudia Patricia Diaz Guillen and her husband Adrian Jose Velasquez Figueroa guilty of conspiracy to commit money laundering, as well as two counts of substantive money laundering for Velasquez Figueroa, and one count for Diaz Guillen (who was acquitted of the other count). We first covered this case in our 2020 Year-End FCPA Update. According to the evidence presented to the jury, the defendants received more than $100 million in bribes from Venezuelan billionaire and media mogul Raul Gorrín Belisario in exchange for Diaz Guillen allowing him access to favorable exchange rates on Venezuelan treasury bonds. Gorrín Belisario remains a fugitive, reportedly living in Venezuela.
Diaz Guillen and Velasquez Figueroa have filed a motion to set aside the verdict, or in the alternative for a new trial, which remains pending before the Honorable William P. Dimitrouleas. Sentencing has been scheduled for March 28, 2023.
Saab Moran’s Motion to Dismiss Indictment Based on Diplomatic Immunity Denied
As we first covered in our 2019 Year-End FCPA Update, joint Colombian and Venezuelan citizen Alex Nain Saab Moran was indicted on money laundering offenses in connection with an alleged $350 million construction-related bribery scheme in Venezuela. After he was detained in the Republic of Cape Verde on an INTERPOL “red notice” request by U.S. authorities, Saab Moran filed a motion to enter a special appearance and challenge the indictment from abroad. The motion was denied by the Honorable Robert N. Scola, Jr. of the U.S. District Court for the Southern District of Florida, as reported in our 2021 Year-End FCPA Update. Saab Moran’s appeal was dismissed as moot by the Eleventh Circuit after he was successfully extradited to the United States, as reported in our 2022 Mid-Year FCPA Update. On December 23, 2022, with both Saab Moran and his motion to dismiss squarely before the Court, Judge Scola denied the motion to dismiss the indictment in a 15-page order.
Saab Moran argued that at the time of his arrest in Cape Verde he was a Venezuelan diplomat with immunity under the Vienna Convention on Diplomatic Relations, incorporated into U.S. law by the Diplomatic Relations Act, such that his arrest and subsequent extradition were improper. Judge Scola rejected the argument that Saab Moran was a “special envoy” sent on a trade mission by Nicholas Maduro, as well as the significance of Saab Moran’s post-arrest appointment as an “Alternative Permanent Representative [] to the African Union,” the timing of which the Court found “only added more cause for suspicion.” In addition to finding that Saab Moran doctored evidence submitted to the Court in a “post hoc [effort] to imprint upon Saab Moran a diplomatic status that he did not factually possess” at the time of his arrest, the Court further held that because the U.S. Government does not recognize the regime of President Maduro, Saab Moran could not be a recognized diplomat. Saab Moran already has filed a notice of appeal with the Eleventh Circuit.
Second Circuit Affirms Money Laundering Convictions of Donville Inniss
As discussed in our 2020 Mid-Year FCPA Update, in January 2020 a federal jury in the Eastern District of New York found Donville Inniss, the one-time Minister of Industry and member of the Parliament of Barbados, guilty of one count of conspiracy to commit money laundering and two counts of substantive money laundering. The charges stemmed from a scheme in which Inniss conspired with Insurance Corporation of Barbados Ltd. (“ICBL”) executives to increase ICBL’s portion of a governmental agency’s business in exchange for $36,000 in bribes. ICBL received a “declination with disgorgement” letter from DOJ, as discussed in our 2018 Year-End FCPA Update. Inniss, for his part, appealed.
On October 5, 2022, the U.S. Court of Appeals for the Second Circuit issued a summary order affirming the convictions. The Court rejected Inniss’s arguments that the evidence was insufficient to support a money laundering conviction because he only received the illicit proceeds, without further laundering them after receipt, as foreclosed by Circuit precedent. The Circuit also held that the District Court properly instructed the jury on various witness issues, as well as on the law on intent and what constitutes a “specified unlawful activity” for purposes of money laundering.
Fifth Circuit Reinstates Venezuelan FCPA / Money Laundering Indictment (2023)
We covered in our 2021 Year-End and 2022 Mid-Year FCPA Updates the dismissal of FCPA and money laundering indictments against Swiss wealth management advisors Daisy Teresa Rafoi Bleuler and Paulo Jorge Da Costa Casqueiro Murta by the Honorable Kenneth M. Hoyt of the U.S. District Court for the Southern District of Texas. Rafoi Bleuler and Casqueiro Murta were charged with setting up accounts used to launder bribes associated with alleged corrupt business dealings with the Venezuela state-owned oil company Petróleos de Venezuela, S.A. (“PDVSA”). Judge Hoyt dismissed both indictments on jurisdictional grounds, finding that the U.S. contact allegations set forth in the indictment were insufficient as a matter of law as to each defendant, and further that for Casqueiro Murta the indictment was untimely. DOJ appealed and the cases were consolidated for argument. Although the opinion came down in 2023, its significance warrants coverage here.
On February 8, 2023, the Fifth Circuit rejected all aspects of Judge Hoyt’s decisions below, reinstated the indictment, and remanded the case back to the Southern District of Texas for further proceedings. (The panel withdrew and reissued its opinion with inconsequential changes on February 28, 2023.) Writing for the unanimous panel, the Honorable Kurt D. Engelhardt first found that it was error to dismiss the indictment for lack of subject-matter jurisdiction because in federal criminal cases the only subject matter needed is for the indictment to state an offense against the United States—the question of extraterritoriality goes to the merits of the case at trial. As to the FCPA counts, the Court held that the indictment sufficiently alleged that both defendants were agents of a domestic concern and that Casqueiro Murta additionally engaged in a corrupt act while within the territory of the United States. The Fifth Circuit panel further held that the “agency” allegations were not unconstitutionally vague on their face because, although the term is not defined in the FCPA, a person of common intelligence can understand its meaning. With respect to the money laundering counts, the Court held that there is “no physical-presence requirement” under the applicable money laundering statutes, and therefore, it is sufficient for the government to allege that the unlawful transactions occurred, in part, in the United States. The Court was clear that its holding was limited to the facial sufficiency of the indictment, and that the defendants may be able to argue as a matter of fact at trial that the evidence is insufficient to establish jurisdiction or agency.
The panel also rejected the District Court’s holding regarding the untimeliness of the indictment as to Casqueiro Murta. The statute of limitations for Casqueiro Murta’s alleged offenses is five years, and Casqueiro Murta argued that his indictment was not handed down until more than five years after his involvement in the conspiracy ended. The government sought to remedy this issue by arguing that the statute was tolled for a sufficient period under 18 U.S.C. § 3292 while DOJ sought evidence located abroad pursuant to Mutual Legal Assistance Treaty (“MLAT”) requests to the Swiss and Portuguese governments. The District Court agreed with Casqueiro Murta, holding that because Casqueiro Murta was not the subject of DOJ’s initial MLAT request or the initial indictment, and because § 3292 refers an application for tolling “filed before return of an indictment,” the return of the first indictment after the first MLAT request ended the tolling period. The Fifth Circuit reversed, holding in a case of first impression that “before return of the indictment” means the indictment in which a defendant is charged, and thus the earlier indictment that did not name Casqueiro Murta did not stop tolling as to him.
2022 FCPA-RELATED POLICY DEVELOPMENTS (with a 2023 Bonus)
In addition to enforcement developments, 2022 and early 2023 saw important developments in FCPA-related policy areas.
Monaco Memorandum Update
As discussed in our 2021 Year-End FCPA Update, in October 2021 Deputy Attorney General Lisa O. Monaco made an important announcement modifying certain corporate criminal enforcement policies generally applicable to white collar crime. Those updates were coupled with the creation of a Corporate Crime Advisory Group with the mandate to study and make recommendations for further updates regarding Department policy in this area.
On September 15, 2022, Deputy Attorney General Monaco issued a further memorandum (“Monaco Memorandum”) updating the prior guidance concerning DOJ’s corporate criminal enforcement policies with the benefit of the Corporate Crime Advisory Group’s work. We cover this important update more thoroughly in our separate client alert From the Broader Perspective: Deputy Attorney General Announces Additional Revisions to DOJ’s Corporate Criminal Enforcement Policies, but in brief, the announcement covers six key areas generally relevant to white collar corporate crime: (1) expressing a clear priority for individual prosecutions;
(2) evaluating companies’ history of misconduct; (3) requiring all corporate criminal enforcement components of DOJ to develop voluntary self-disclosure policies; (4) evaluating corporate cooperation; (5) evaluating corporate compliance programs; and (6) evaluating the imposition of corporate compliance monitors.
In some respects, the core thrust of the Monaco Memorandum is to take the best practices developed in FCPA enforcement and expand them Department-wide. For example, Deputy Attorney General Monaco cited the voluntary disclosure and cooperation credit guidance from the FCPA Corporate Enforcement Policy as a model for replication across DOJ’s corporate prosecution components. Further, designating individual accountability as the “number one priority” is nothing new to FCPA enforcers, although FCPA practitioners would do well to note the Monaco Memorandum’s admonitions regarding the focus on timeliness regarding reporting on evidence relating to individual misconduct. What is new across the board, with implementation still an outstanding question, is the novel statement that companies should shift the burden of financial penalties from shareholders to executives via compensation clawbacks, in effect expanding the concept of SOX 404 clawbacks well beyond that provision. We direct our readers to our separate client alert on this important subject for more detailed discussion and analysis.
Criminal Division Corporate Enforcement & Voluntary Self-Disclosure Policy (2023)
In another significant early 2023 development, on January 17, Criminal Division Assistant Attorney General Kenneth A. Polite, Jr. issued a new Criminal Division Corporate Enforcement & Voluntary Self-Disclosure Policy (“Corporate Enforcement Policy”). This is an update that replaces the FCPA Corporate Enforcement Policy discussed in our 2019 Year-End, 2017 Year-End, and (in its pilot form) 2016 Mid-Year FCPA Updates. But importantly, it also expressly applies the guidance throughout the Criminal Division for the first time.
The most significant update to the Corporate Enforcement Policy is to substantially increase the discounts available to companies for voluntary disclosure, cooperation, and remediation. Under the old FCPA Corporate Enforcement Policy, the maximum credit a company could get if prosecution was appropriate in a voluntary disclosure case—where the company disclosed misconduct before DOJ was aware of it, then fully cooperated and remediated—was a 50% discount below the Guidelines range, and in non-voluntary disclosure cases the maximum was 25%. Under the Corporate Enforcement Policy, the presumption in voluntary disclosure cases is still a “declination with disgorgement” if the relevant requirements are met, but now if a case is brought companies are eligible for up to a 75% discount below the Guidelines range. In non-voluntary disclosure cases, companies may now receive up to a 50% discount.
Whereas the overall policy standards are much the same as before, the new watchword for cooperation and remediation is “extraordinary.” In announcing the new policy at his alma mater Georgetown University Law Center, also the alma mater of numerous senior DOJ officials and a number of the authors of this update, Assistant Attorney General Polite made clear that 50% is not “the new norm” that companies can expect for cooperation and remediation. Rather, raising the ceiling to 50% credit in non-voluntary disclosures is meant to provide room to distinguish between cooperation that is merely “full” and that which is “truly extraordinary.” The latter and tougher standard requires companies to go “above and beyond” and deliver evidence that DOJ simply could not have gotten on its own. This may include producing overseas evidence, consensual recordings, or immediate images of electronic devices as the case warrants, with the ultimate standard for prosecutors likely being “I know it when I see it.”
The other key development in the revised Corporate Enforcement Policy is enhanced guidance on the point in the applicable Sentencing Guidelines range from which the cooperation and remediation discount is taken. As FCPA practitioners know, these discounts (like the Guidelines themselves) present a math problem: in addition to knowing the discount, it is important to know the figure to which the discount applies. The Corporate Enforcement Policy makes clear that in most cases involving cooperating companies, it will be appropriate to apply the discount from the bottom of the Guidelines range. But for non-cooperating companies, not only is there no presumption of a discount, but there is also no presumption that DOJ’s sentencing recommendation will be at the bottom of the range. And for cooperating companies that are “recidivists,” the Corporate Enforcement Policy directs prosecutors to consider taking the appropriate discount from a different and higher point within the Guidelines range. As discussed above, this is what happened to three-time FCPA offender ABB—it received a 25% discount (at the time, the maximum in a non-disclosure case), but because of its criminal history the discount was taken from a midpoint between the middle- and high-end of the Guidelines range rather than the bottom. Notably, the term “recidivist” is not defined, and although the application to those with recent prior FCPA convictions may be straightforward, it is less clear how this has and will be applied to companies with prior enforcement actions for non-FCPA conduct.
2022 FCPA SPEAKER’S CORNER
U.S. anti-corruption enforcement personnel stayed active on the speaking circuit in the last months of 2022, offering a glimpse into DOJ and SEC priorities and expectations for the companies that appear before them. In addition to the notable speeches from the first eight months of 2022, covered in our 2022 Mid-Year FCPA Update, we offer the below for our readers’ attention, all of which come from the 39th American Conference Institute International Conference on the FCPA.
Acting Principal Deputy Assistant Attorney General Nicole M. Argentieri
Delivering the Conference’s keynote address, Argentieri emphasized DOJ’s coordination efforts with international anti-corruption partners. She noted that in recent years DOJ has worked closely in FCPA matters with the governments of the United Kingdom, Brazil, Malaysia, Switzerland, Ecuador, France, the Netherlands, Singapore, and others, which, as noted above in our discussion of the ABB matter, now also includes South Africa. Argentieri also highlighted DOJ’s efforts to repatriate the proceeds of international corruption to the people of the country harmed by the bribery, whether by transferring monies forfeited in criminal resolutions or allowing companies to offset penalties owed to DOJ against those paid to the foreign governments in coordinated settlements pursuant to the “Anti-Piling On” Policy.
DOJ Fraud Section Chief Glenn S. Leon
In response to critiques regarding a drop in corporate enforcement, Leon trumpeted the Fraud Section’s record of over 160 individuals prosecuted, as well as 65 trials, in 2022—well above prior-year numbers. As for corporate cases, Leon emphasized that it is important to look not only at the numbers, “but are we doing the right cases, are we bringing the right results, are we having the right impact?” And by that measure, Leon stated that he felt quite confident DOJ’s Fraud Section is doing its job.
SEC FCPA Unit Chief Charles E. Cain
Discussing the knotty challenge of ephemeral messaging, Cain emphasized that if companies implement third-party application messaging policies, they are expected to consistently follow them. “You either prohibit it and actually prohibit it or you don’t. . . . [If you have a policy and do not enforce it] it’s going to have unintended consequences.” According to DOJ officials speaking at the conference, the Criminal Division is preparing additional guidance on ephemeral messaging, which is expected to be released in 2023.
2022 FCPA-RELATED PRIVATE CIVIL LITIGATION
We continue to note that although the FCPA does not provide for a private right of action, civil litigants pursue a variety of causes of action in connection with FCPA-related conduct, with varying degrees of success. In addition to the matters discussed in our 2022 Mid-Year FCPA Update, a selection of noteworthy developments in the last several months of the year follows.
Select Shareholder Lawsuits / Class Actions
- Goldman Sachs Group Inc. – On September 16, 2022, the Honorable Vernon S. Broderick of the U.S. District Court for the Southern District of New York issued an order of preliminary approval for a May 2022 settlement agreement between Goldman Sachs and derivative plaintiffs who alleged that bank officers and directors breached their fiduciary duties in connection with the 1Malaysia Development Bhd (“1MDB”) matter leading to a DOJ / SEC FCPA settlement as previously reported in our 2020 Year-End FCPA Update. Pursuant to the agreement, which was finally approved on January 20, 2023, Goldman Sachs agreed to use $79.5 million (minus a 25% attorneys’ fee award) to improve its compliance and governance measures, establish an anonymous hotline for employee tips, and expand the powers of its Chief Compliance Officer.
- Cognizant Technology Solutions Corp. – On September 27, 2022, the Honorable Kevin McNulty of the U.S. District Court for the District of New Jersey dismissed derivative claims filed on behalf of shareholders of Cognizant arising from the company’s resolution of an FCPA matter with the SEC (as well as a “declination with disgorgement” from DOJ) as reported in our 2019 Year-End FCPA Update. Judge McNulty granted the motion based on “an unexcused failure to make a demand on the Board,” and also commented that the lawsuit lacked plausible allegations that current or former board members ignored red flags about Cognizant’s overseas business practices. Shareholders have appealed to the U.S. Court of Appeals for the Third Circuit, which appeal remains pending as of publication.
2022 INTERNATIONAL ANTI-CORRUPTION DEVELOPMENTS
World Bank
In his foreword to the World Bank Group’s FY 2022 Sanctions System Annual Report, World Bank Group President David Malpass wrote that the World Bank “must be continually vigilant against corruption” in Bank-supported projects, and must work to “send a clear message: corruption has no place in development.” The World Bank’s actions in 2022 did indeed send a clear message, as the Bank sanctioned 35 companies and individuals for corrupt practices and other sanctionable conduct, debarring the vast majority with conditional release—a requirement that the firm or individual sanctioned must satisfy certain conditions in order to be released from debarment and regain eligibility to participate in Bank-funded projects. One notable recent enforcement action from the last months of 2022 is:
- On November 16, 2022, the World Bank announced a three-year debarment with conditional release of Spanish national Carlos Barberán Diez and two companies he controls, AC Oil & Gas SL and AC Oil & Gas Emirates LLC, for corrupt practices related to a Bank-funded project to aid in the development of Guyana’s legal framework and institutional capacity to manage its oil and gas sector. The debarment is based on allegations that Barberán Diez solicited four consulting companies for payments in return for offers to give them preferential treatment in the project procurement process. Notably, the Bank reduced the duration of its debarment in recognition of Barberán Diez’s cooperation with the Bank investigation and his agreement to take remedial steps, including “corporate ethics training.”
An important characteristic of interactions between multilateral development banks (“MDBs”) is the cross-debarment agreements between them, whereby sanctions by one MDB are recognized by other MDBs such that sanctioned parties are barred from doing business with multiple MDBs. In Fiscal Year 2022, the World Bank recognized 72 cross-debarments by other MDBs, and 30 World Bank debarments were eligible for recognition by other MDBs. In one particularly interesting example from the second half of 2022:
- On August 11, 2022, the Inter-American Development Bank (“IDB”) debarred Brazilian construction company Sociedad Anónima de Obras y Servicios Copasa do Brasil (“Copasa”) for 18 months for corrupt and fraudulent practices related to a Brazilian road construction project. Copasa was sanctioned not for engaging in corrupt conduct itself, but for failing to report suspected bribery it became aware of by a consortium partner when it had a chance to prevent it. Copasa cooperated with the IDB investigation and did not contest its responsibility for failing to act to prevent bribery from occurring. This debarment—as with the July 2022 debarment of the consortium partner directly responsible for the alleged bribes (Construcap)—qualified for cross-debarment by the World Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, and the African Development Bank.
Europe
United Kingdom
Glencore Energy UK Limited
On November 3, 2022, Glencore UK was ordered to pay nearly £281 million in fines and costs to resolve the UK portion of the global anti-corruption settlement (also including U.S., Brazilian, and Swiss authorities) reported in our 2022 Mid-Year FCPA Update. The UK resolution involved corrupt payments in Cameroon, Equatorial Guinea, Ivory Coast, Nigeria, and South Sudan, and represents the largest-ever penalty handed out for a corporate criminal conviction in the UK, consisting of a fine of £182.9 million, a confiscation order of £93.5 million for the profits obtained from bribes, and payment of £4.5 million in investigation costs.
This is the first-ever conviction of a company on substantive charges of authorizing bribery, rather than purely a failure to prevent it, obtained by the UK Serious Fraud Office (“SFO”) since the introduction of the UK Bribery Act 2010. In total, Glencore UK admitted to seven bribery counts. According to press reports, as many of 17 individuals, including 11 former Glencore employees, are being investigated by the SFO for their role in this conduct, but as of this writing no charging decisions have been announced.
New Economic Crime Bill Introduced That Could Expand SFO Powers
On September 22, 2022, the UK government introduced a new Economic Crime and Corporate Transparency Bill, which includes provisions that would expand the SFO’s Section 2A pre-investigative powers under the Criminal Justice Act 1987. These powers allow the SFO to compel suspected criminals and financial institutions to share information in relation to a suspected crime. Under the existing legislation, the SFO can only employ Section 2A powers to cases of suspected international bribery and corruption. The new bill would expand the SFO’s Section 2A authority to encompass cases involving allegations of domestic bribery and corruption, as well as fraud. These expanded powers would help expedite the information gathering process, enabling the SFO to reduce its reliance on voluntary cooperation by third parties, open investigations more quickly, and prevent the destruction of relevant evidence of criminal activity. As of this writing, the bill has advanced through the House of Commons and is under consideration by the House of Lords.
Belgium
As 2022 came to a close, the EU was shaken by a scandal involving corruption charges against European Parliament Vice President Eva Kaili, among others. On December 9 and 10, 2022, Belgian authorities raided more than 20 homes and offices across Europe and seized considerable amounts of cash as well as assets such as computers and mobile devices. According to a statement from the Belgian federal prosecutor’s office, a Gulf country has allegedly sought to influence decisions at the European Parliament through paying large sums of money or offering substantial gifts to people with a significant political and/or strategic position. Several media reported that Qatar may be the country said to be involved in providing money and gifts, leading the investigation to be dubbed “Qatargate.”
Kaili recently made positive comments about Qatar’s labor rights record, in tension with reports of harsh labor conditions for construction workers involved in building facilities for the World Cup. On December 1, 2022, Kaili also voted in favor of an EU visa liberalization process for Qatari nationals during a parliamentary committee meeting. On December 15, 2022, the European Public Prosecutor’s Office requested the lifting of parliamentary immunity for Kaili.
France
Idemia
On July 7, 2022, the French National Financial Prosecutor’s Office (“PNF”) announced that it had entered into a deferred prosecution agreement (“CJIP”) with digital security company Idemia, which was ordered to pay just under €8 million ($9.4 million) to resolve charges arising from its alleged improper payment to an official in Bangladesh in order to secure a contract to create identity cards for the Bangladesh Election Commission. Under the CJIP, Idemia is required to undergo audits and verifications conducted by the French Anti-Corruption Agency (“AFA”) and implement certain compliance program enhancements over a three-year period.
Doris Group SA
On the same day, the PNF announced a second, unrelated CJIP with oil and gas engineering company Doris Group. Based on allegations that a subsidiary in Angola had made improper payments to officials of state-oil provider Sonangol, Doris Group was required to pay nearly €3.5 million ($4.1 million) and undergo audits and verifications by the AFA and implement compliance program enhancements over a three-year period.
The Idemia and Doris CJIPs are examples of the increasing cooperation between international enforcement agencies, as the French investigations were commenced after authorities received information from their counterparts in the UK (Idemia) and the United States (Doris).
Airbus SE
On November 30, 2022, the PNF announced a “limited extension” of the wide-ranging 2020 global corruption settlement discussed in our 2020 Mid-Year FCPA Update. The instant charges were resolved by CJIP and involved the use of intermediaries in connection with the sale of jets to the Gaddafi regime in Libya in 2007 and the sale of helicopters and satellites to the Kazakh government in 2009. These matters were reportedly known at the time of the prior resolution, but because of a procedural matter could not be charged at that time. To resolve the 2022 case, Airbus paid an additional €15.9 million ($16.5 million).
Italy
In October 2022, the OECD Working Group on Bribery published its Phase 4 Report on Italy’s implementation and enforcement of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and related instruments. The report concluded that Italy has strengthened its legislative framework to fight foreign bribery since the Phase 3 report in 2011, including by lengthening the statute of limitations for foreign bribery offenses by natural persons, increasing prison terms and disqualification sanctions, and introducing whistleblower protections. Further, the report acknowledged that Italy has shown an increase in enforcement actions since 2011 and complimented Italy for process improvements to its judiciary system to improve the efficiency of case processing, improvements to its mutual legal assistance and extradition framework, and improved cooperation between law enforcement and tax authorities.
Despite these improvements, the report expressed concern about the high number of dismissals of litigated foreign bribery cases with almost all foreign bribery convictions being secured through non-trial resolution. Recommendations by the Working Group instruct Italy to (1) develop a comprehensive national strategy to fight foreign bribery, (2) strengthen its monitoring of Italian and foreign media to identify potential instances of corruption, (3) raise awareness of foreign bribery and the Convention among Italian officials, accountants and auditors, and small- and medium-sized enterprises, (4) encourage companies to adopt anti-corruption compliance programs, and (5) strengthen the sanctions imposed for foreign bribery offenses. Italy has until October 2024 to make a written submission addressing all of the Working Group’s recommendations and providing an update regarding its enforcement efforts.
Russia & Former CIS
Kazakhstan
In September 2022, Kairat Satybaldy, a former high-ranking public official and nephew of Kazakhstan’s former president Nursultan Nazarbayev, was sentenced to six years in prison and banned from holding public office for 10 years for embezzling funds from and causing property damage to state-owned companies Kazakhtelekom and Transport Service Center. Satybaldy admitted to embezzling over $58 million and causing property damage worth over $25 million. The Kazakh Anti-Corruption Agency reports that it has recovered over $700 million in assets as part of its investigation into Satybaldy and four other suspects.
Russia
The state crackdown on all forms of dissent, which has intensified since Russia’s invasion of Ukraine, continues to impact the anti-corruption domain. In August, Russian federal agents arrested a number of Telegram channel administrators engaged in anti-corruption reporting work, on charges that have been widely decried as pretextual. For example, journalist Alexandra Bayazitova has been charged with extortion of an executive at the state-owned Promsvyazbank, but maintains her innocence and attributes her wrongful detention to her publication of evidence that, in fact, Promsvyazbank executives themselves had engaged in embezzlement of state funds.
In early December 2022, Russian Prosecutor General Igor Krasnov estimated that corruption had caused around 37.6 billion rubles (~ $520 million) of damage to the Russian state through the first nine months of 2022. Krasnov asserted, however, that law enforcement authorities had recovered over 62 billion rubles (~ $900 million) worth of property to compensate for the damage. This report followed an earlier announcement by Krasnov, in October, that efforts to investigate and weed out corruption had resulted in the dismissal of 800 malfeasant state officials over the preceding 18 months.
Ukraine
As Russia’s war of aggression shows no signs of abating, Ukraine has sought to shore up support from the West. In June 2022, the European Commission granted Ukraine candidate status for membership in the European Union. To move down the path to full EU membership, Ukraine must implement a list of anti-corruption initiatives. Ukraine has wasted no time in getting its house in order, as reflected by its National Anti-Corruption Bureau’s June 2022 decision to go to trial on charges initially filed in 2020 against the Chairman of the Kyiv District Administrative Court, Pavlo Vovk, two of his deputies, and four judges for soliciting bribes in exchange for favors related to judicial processes. Then, in December, just days after the United States announced sanctions against Vovk, Ukraine’s parliament voted to disband the Kyiv District Administrative Court altogether, noting that it had become a “criminal organization.”
Ukraine has also been working toward implementing the specific reforms required by the European Commission, enacting all of the anti-corruption legislation that the EU had required Ukraine to pass continuing EU membership talks. Among those reforms, the legislature passed a law that met with some controversy related to changes to the selection process for Constitutional Court judges. Additional reforms implemented in recent months have included laws strengthening Ukraine’s anti-corruption measures, harmonizing media regulation with EU standards, and protecting national minorities.
The Americas
Argentina
On December 6, 2022, sitting Vice President of Argentina Cristina Fernández de Kirchner was found guilty of “fraudulent administration” over the awarding of some 51 fraudulent public works contracts to a friend while she served as President (2007 – 2015), and a three-judge panel sentenced her to six years in prison. Prosecutors alleged the kickback scheme had caused the Argentine state a loss of at least $1 billion. Many legal observers note she is unlikely to serve time, in part due to legal immunity she enjoys as head of the Senate in Argentina. Even though Kirchner has been banned for life from holding public office as part of her sentence, she continues to serve as Vice President during the pendency of her appeal, which could take years to resolve.
Brazil
On July 12, 2022, the Brazilian government issued Decree No. 11,129/2022, a new regulation on the Brazilian Clean Company Act that, among other things, establishes procedures regarding the entry of leniency agreements and updates the methods of calculating penalties and consequences for their breach. In addition, the Decree enhances the regulations around corporate integrity programs, including providing further guidance on requirements regarding: (1) tone from the top and the proper allocation of resources to compliance functions; (2) ongoing compliance communications; (3) the need for periodic risk assessments to ensure continuous monitoring and improvement; (4) due diligence of third parties; (5) due diligence for sponsorships and donations; and (6) complaint hotline procedures, among other topics.
On December 19, 2022, Brazil’s Comptroller General and its Attorney General’s Office announced a leniency agreement with Keppel Offshore & Marine, five years after the company reached a resolution on the same facts with U.S. and Singaporean authorities, as well as a different Brazilian authority (the Federal Prosecution Service) as reported in our 2017 Year-End FCPA Update. The 2022 settlement required the payment of an additional $64.9 million payment, but is reported to resolve the matter completely for Keppel.
Canada
On September 21, 2022, the Royal Canadian Mounted Police (“RCMP”) announced that Ultra Electronics Forensic Technology Inc., along with four former executives, are facing charges of bribery and fraud under the Corruption of Foreign Public Officials Act and the Criminal Code. The company and each of the four individuals were charged with two counts of bribery of a foreign public official and one of defrauding the public arising from allegations that the defendants directed local agents in the Philippines to bribe foreign public officials in an effort to influence and expedite the award of a multi-million-dollar contract.
Eight days later, on September 29, Ultra Electronics announced that it had agreed to a remediation agreement—akin to U.S. and UK deferred prosecution agreements—with the Public Prosecution Service of Canada to resolve the claims. Details of the settlement still have not been made public as the agreement is subject to approval by the Quebec Superior Court. The settlement does not resolve the matter for the four former Ultra Electronics executives, whom the company said would be tried separately.
Panama
In June 2022, a Panamanian court provisionally dismissed money laundering charges against more than 40 defendants charged in the long-running Lava Jato (“Operation Car Wash”) cases, including the founders of Mossack Fonseca, the Panamanian law firm at the epicenter of the “Panama Papers” leak in 2016. The court found that prosecutors had not sufficiently established the precise amount of funds the defendants allegedly received from offshore sources. But then in mid-October 2022, Panama’s Superior Court of Settlement of Criminal Cases overturned the provisional dismissal of charges against 32 of those individuals, resetting their cases for trial.
Peru
In October 2022, prosecutors in Peru filed a constitutional complaint against then-President Pedro Castillo, alleging that he was operating a de facto “criminal organization” within the Peruvian government in order to corruptly benefit himself and his allies, also detaining five of his associates. As Peru’s Congress prepared to pursue its third impeachment against Castillo since he assumed office in July 2021, on December 7, 2022, Castillo declared that he was replacing Congress with an “exceptional emergency government.” Hours later, lawmakers called an emergency impeachment session, voting to remove Castillo immediately from the presidency, setting off a wave of protests by his supporters that left more than 20 dead. The same day, Castillo was also arrested and charged with rebellion, and he is being held in pretrial detention while his investigation proceeds. Following Castillo’s ouster, Vice President Dina Boluarte was elevated to the presidency to complete the term through 2026. Given recent corruption scandals, President Boluarte is Peru’s fifth president since 2020. On February 17, 2023, Peru’s Congress passed a constitutional complaint alleging corruption charges against Castillo, allowing the Attorney General’s office to open a formal criminal investigation.
Asia
China
In October 2022, the Twentieth Congress of the Chinese Communist Party (“CCP”) concluded in Beijing with a strong reiteration of the Party’s commitment to combating corruption within its ranks. Subsequently, on December 9, 2022, the Supreme People’s Procuratorate issued its Guiding Opinions on Strengthening the Handling of Bribery Criminal Cases, which emphasize its enforcement focus on both bribe givers and receivers. The Guiding Opinions provide further guidance to the lower-level procuratorates and reiterate some of the key points mentioned in the synopses of five bribery prosecutions reported in our 2022 Mid-Year FCPA Update.
The last year brought an increase in anti-corruption enforcement actions in China’s technology manufacturing and financial sectors. For example, the Central Commission for Discipline Inspection (“CCDI”) investigated a number of high-profile figures of Sino IC Capital, which manages the state-backed China Integrated Circuit Industry Investment Fund, and brought corruption-related charges against senior officials of the Bank of East Asia, China Merchants Bank, and People’s Bank of China.
Hong Kong
On August 19, 2022, the Independent Commission Against Corruption (“ICAC”) indicted Ricky Lee, the principal manager of the Hong Kong Airport Authority, and Ng Kai-on of Carol Engineering for allegedly accepting and offering bribes totaling approximately HKD 3.8 million (~ USD 490,000) in connection with the Hong Kong International Airport third-runway project. According to the ICAC, Carol Engineering was a subcontractor on the project and made payments to Lee in exchange for being awarded works and materials supply contracts, and for assistance in securing the release of payments due to Carol Engineering by the general contractors on the project. On February 15, 2023, the ICAC announced charges against eight additional defendants for their roles in offering, accepting, or handling bribes related to the third-runway project scheme. The new defendants include the former General Manager of the Hong Kong Airport Authority, Ricky Lee’s wife, four individuals related to subcontractors Carol Engineering and Goldwave Steel Structure Engineering, and two operators of a supplier for the third-runway project.
India
In June 2022, India’s Central Bureau of Investigation (“CBI”) arrested an officer of India’s drug regulator (the Central Drugs Standard Control Organization), and an employee of Biocon Biologics (a subsidiary of the well-known Indian biotechnology company Biocon Limited), on allegations of corruption. The CBI alleged that the arrested official accepted a bribe from a middle-man representing Biocon Biologics in exchange for a clinical trial waiver for a new drug being manufactured by the company. The CBI also arrested another public official from the drug regulator and employees of two private firms that were liaising with the drug regulator on behalf of Biocon Biologics.
Also in June 2022, India’s anti-corruption ombudsman (the “Lokpal”) announced that it had received 5,680 corruption-related complaints through its publicly available reporting channels between April 2021 and March 2022. In response to a Right to Information petition, the Lokpal also disclosed that it has yet to commence formal investigations into more than 5,100 of these complaints. Directors of inquiry and prosecution have not yet been appointed and we are not aware of any significant anti-corruption actions undertaken by the Lokpal. Further, two judicial member positions in the eight person Lokpal have remained vacant and unfilled for more than two years.
In a significant court decision issued in August 2022, the High Court of Karnataka quashed a 2016 executive order issued by the state government creating the state’s Anti-Corruption Bureau (“ACB”). The executive order had created the ACB under the supervision of the state’s Chief Minister and had empowered it to probe corruption allegations involving state public officials. In invalidating the executive order, the High Court found that the state government had sought to usurp the powers of the state’s Lokayukta—an anti-corruption watchdog that is empowered to investigate and prosecute corruption cases involving public officials. The court also found that the executive order did not explicitly stipulate the authority that is empowered to investigate corruption cases involving the Chief Minister, other ministers, or members of the state legislature. Historically, the Lokayukta has been responsible for the most significant anti-corruption enforcements in Karnataka and is viewed as less prone to political influence.
Finally, a court of appeal in Delhi recently upheld the right of enforcement agencies to intercept telephone conversations of a person suspected to have violated provisions of India’s Prevention of Corruption Act. The court recognized the right of the Indian Government to approve such “phone tapping” on public security grounds, though the Indian Government did not provide elaborate reasons as to why the interception was required for public security.
Indonesia
On August 15, 2022, Indonesia’s Attorney General’s Office announced that businessman Surya Darmadi voluntarily surrendered after eight years on the run from corruption charges. Indonesia’s Corruption Eradication Commission (known locally as the “KPK”) alleged that Darmadi paid 3 billion rupiah (~ $200,000) in bribes to the then-governor of Riau province, Annas Maamum, to amend a forestry regulation that allowed Darmadi’s Duta Palma Group to convert 91,000 acres of forest into palm oil estates. The corruption allegedly cost the country IDR 78 trillion rupiah (~$5 billion), making it the largest corruption case in the country’s history. On February 23, 2023, a court sentenced Darmadi to fifteen years in prison, in addition to a 39 billion rupiah (~$2.6 million) fine.
On September 25, 2022, the KPK announced that it had detained Supreme Court judge Sudrajad Dimyati, and six other individuals, for involvement in an alleged scheme to pay IDR 2.2 billion
(~ $141,430) in bribes to secure a favorable rulings in an appeal by a lending cooperative facing insolvency.
Japan
In November 2022, the Tokyo District Public Prosecutors Office filed indictments against former 2020 Tokyo Olympic and Paralympic Organizing Committee Executive Board Member Haruyuki Takahashi, Aoki Holdings founder Hironori Aoki, former Aoki executive Katsuhisa Ueda, and twelve other individuals. The indictments alleged that Takahashi accepted a total of ¥196 million (~ $11.2 million) in bribes from five companies, including Aoki Holdings and the Kadowaka publishing firm, in exchange for awarding them sponsorship rights at the Olympics. On December 22, 2022, Takahashi, Aoki, and Ueda all pleaded guilty to the allegations at the same trial. Prosecutors are continuing to investigate the executives of the five companies, as well as former Prime Minister Yoshiro Mori, in relation to the alleged bribery.
Korea
Recent amendments to the Improper Solicitation and Graft Act, also widely known as the Kim Young-Ran Act, went into effect on June 8, 2022. Among other things, the amendments now prohibit providing improper payments and other benefits to persons reviewing scholarship, thesis, and internship applications, such as professors and company employees. Moreover, the amendment enhances protections for those who report violations. For example, individuals may now report anonymously through attorneys to further protect their identities. Furthermore, if the individual making the report has violated the Act, the amendments allow for reduced liability, including potential non-prosecution or exemption from fines, in exchange for information regarding potential violations committed by the reporter or others. Lastly, the amendment allows for compensation of reporters who incur medical expenses in connection with submitting reports, such as mental distress.
On August 12, 2022, South Korea’s President Suk-Yeol Yoon administered National Liberation Day special pardons to nearly 1,700 people, including Samsung Electronics Co.’s Chairman Jae-Yong Lee and Lotte Group’s Chairman Dong-Bin Shin. As previously reported in our 2019 Year-End and 2018 Mid-Year FCPA Updates, respectively, Lee was convicted of bribing former president Geun-Hye Park in exchange for securing government support during a merger between two Samsung affiliates in 2015, and Shin was convicted of bribing the former president in exchange for assistance in securing a license for his duty-free business. Importantly, through the special pardons, Lee and Shin are no longer subject to Korean laws that prohibit employers from re-hiring individuals who committed certain crimes (such as bribery) for five years following a term of imprisonment, making it possible for Lee and Shin to resume leadership positions within their former companies.
2022 also saw the first trial and judgment arising from case brought by Korea’s Corruption Investigation Office for High-Ranking Officials (“CIO”), which we reported on in our 2021 Year-End FCPA Update. On November 9, 2022, the Seoul Central District Court’s 1st Criminal Division acquitted a former chief prosecutor, Hyung-Jun Kim, who was charged with receiving a bribe from a lawyer in exchange for leniency during investigations in 2015 and 2016. In acquitting Kim, the Court found that part of the alleged bribe was a loan from the lawyer, and that there was insufficient evidence to conclude that the remainder of the funds were provided in exchange for favors during the investigations. The CIO has suggested that it may appeal the ruling.
Australia
In September 2022, Australian prosecutors charged Panjak Patel and Sornalingam Ragavan, two former senior managers of engineering firm SMEC International, with conspiring to bribe public officials in Sri Lanka in connection with a bid to win contracts for a pair of infrastructure projects in the country worth a combined AUD 14 million (~ $8.8 million). The pair are alleged to have paid roughly AUD 304,000 (~ $200,000) in bribes to the Sri Lankan officials between 2009 and 2016.
On November 30, 2022, Australia’s parliament passed legislation creating a new National Anti-Corruption Commission (“NACC”) to investigate public corruption and empowering it to act independently of political authorities, with broad jurisdiction to investigate and prosecute corrupt conduct across Australia’s public sector. The legislation also creates strong protections for whistleblowers who report corrupt conduct and exemptions allowing journalists to protect the identity of their sources.
Africa
Democratic Republic of the Congo
On December 5, 2022, Glencore plc announced that it will pay $180 million to the Democratic Republic of the Congo as part of an agreement to resolve alleged corruption between 2007 and 2018. This settlement relates to the same underlying conduct in the Democratic Republic of the Congo that formed part of the FCPA settlement with the company as reported in our 2022 Mid-Year FCPA Update, and illustrates the increasing risk of follow-on claims by local governments after companies resolve FCPA cases.
South Africa
In September 2022, South Africa’s National Prosecuting Agency charged the South African subsidiary of McKinsey & Company in connection with the consulting company’s work for state railway company Transnet. McKinsey’s prosecution is connected to an ongoing criminal case against five former Transnet executives charged with fraud, corruption, and money laundering over a bribery scheme allegedly designed to assist a Chinese state company in winning a contract to supply 1,300 trains for South Africa’s railways. A previous commission had found that Transnet awarded tenders to McKinsey due in part to its connections to the Gupta family, who have drawn scrutiny for using connections to former president Jacob Zuma to embezzle state funds. McKinsey previously agreed to pay back over 870 million rand (~ $63 million) in connection with the fees it received, but did not admit any wrongdoing.
In October 2022, South African President Cyril Ramaphosa announced that the government will establish a permanent and independent agency to combat corruption and fraud. The proposed Permanent Anti-Corruption Commission and Public Procurement Anti-Corruption Agency are consequences of the recommendations of the Commission of Inquiry into State Capture, also known as the Zondo Commission, created in 2018 to investigate widespread corruption allegations against former President Jacob Zuma’s government. Legislation connected to the Commission’s recommendations is set to be finalized in Parliament in March 2023.
The following Gibson Dunn lawyers participated in preparing this client update: F. Joseph Warin, John Chesley, Richard Grime, Patrick Stokes, Kelly Austin, Patrick Doris, Katharina Humphrey, Matthew Nunan, Oleh Vretsona, Oliver Welch, Brian Anderson, Hadhy Ayaz, Anthony Balzofiore, Joerg Biswas-Bartz, Ella Alves Capone, Peter Chau, Josiah Clarke, Rommy Lorena Conklin, Angela Coco, Bobby DeNault, Andreas Dürr, Kate Goldberg, Sarah Hafeez, Kathryn Harris, Michael Kutz, Nicole Lee, Allison Lewis, Ramona Lin, Lora MacDonald, Nikita Malevanny, Andrei Malikov, Jacob McGee, Megan Meagher, Katie Mills, Su Moon, Sandy Moss, Jaclyn Neely, Ning Ning, Bryan Parr, Mariam Pathan, Julian Reichert, Jasmine Robinson, Hayley Smith, Jason Smith, Pedro Soto, Laura Sturges, Karthik Ashwin Thiagarajan, Katie Tomsett, Alyse Ullery-Glod, Tim Velenchuk, Dillon Westfall, Edward Zhang, Yan Zhao, and Caroline Ziser Smith.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. We have more than 100 attorneys with FCPA experience, including a number of former federal prosecutors and SEC officials, spread throughout the firm’s domestic and international offices. Please contact the Gibson Dunn attorney with whom you work, or any of the following:
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In the pursuit of finding more effective and efficient ways to recruit, train, evaluate and retain employees, employers have turned to the use of automated tools.
Some employers use artificial intelligence to sort through high volumes of applications, select applicants for automated interviews or guide candidates through the application process. Meanwhile, others are leveraging AI to ensure employee safety and monitor productivity and performance.
Following a momentous year in 2022, employers must now consider the application of, and potentially prepare to comply with, a series of new transparency, data and auditing requirements imposed by state and local AI and privacy laws affecting such tools, many of which are taking effect in 2023.
For example, beginning in April, New York City employers using automated employment decision-making tools in hiring and promotion will have to navigate new notice and bias auditing requirements.
Meanwhile, California employers will need to be ready for the enforcement of applicant and employee data rights under the California Consumer Privacy Act, as amended by the California Privacy Rights Act, which took effect Jan. 1.
At the same time, we are continuing to see increasing involvement from the U.S. Equal Employment Opportunity Commission in this space, as well as ongoing legislative efforts to regulate the use of automated tools in the workplace.
In this article, we will address the top 10 takeaways for consideration regarding AI and privacy developments for employers already using, or contemplating the use of, automated tools in the employment lifecycle.
Originally published by Law360, © Portfolio Media Inc., March 1, 2023.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Artificial Intelligence or Labor and Employment practice groups, or the authors:
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The CHIPS and Science Act (“CHIPS Act”) appropriated $50 billion to spur development of a U.S.-based semiconductor industry and supply chains, including $39 billion to “incentivize investment in facilities and equipment in the United States for the fabrication, assembly, testing, advanced packaging, production, or research and development of semiconductors, materials used to manufacture semiconductors, or semiconductor manufacturing equipment.”[1] On February 28, 2023, the Biden administration issued its first Notice of Funding Opportunity (“NOFO”) under the CHIPS Act to begin distributing that $39 billion through direct investments, loans, and loan guarantees. The Department of Commerce provided key information for potential applicants through a webcast, Vision for Success paper, and online announcement. This alert highlights key details from those sources that will be of use to clients applying for CHIPS Act funding.
Who Should Apply?
The CHIPS Act limits eligibility to “covered entities,” which include non-profit entities, private entities, consortia of private entities, or consortia of non-profit, public, and private entities. They must demonstrate the ability to finance, construct, or expand a facility related to the fabrication, assembly, testing, advanced packaging, or production of semiconductors.[2]
For this first round of funding, the Department is seeking applicants in the following categories:
- Leading-Edge Facilities
- Current-Generation Facilities
- Mature-Node Facilities
- Back-End Production Facilities[3]
In all but extraordinary cases, applicants should be domestic U.S. entities.[4]
Application Schedule
The Department of Commerce announced the following schedule for interested parties to follow in applying for this first round funding:
February 28, 2023: First Notice of Funding Opportunity announced. The Statement of Interest (“SOI”) portal is now open. All applicants with proposals “for the construction, expansion, or modernization of commercial facilities for the front-and back-end fabrication of leading-edge, current generation, and mature-node semiconductors” should submit a Statement of Interest as soon as possible. The Statement of Interest must be submitted at least 21 days prior to submitting a pre-application or full application.
March 31, 2023: Earliest submission date for applicants for leading-edge project funding to submit an optional pre-application or mandatory full application.
May 1, 2023: Earliest date for applicants for current generation, mature node, and back-end project funding to submit an optional pre-application.
June 26, 2023: Earliest date for applicants for current generation, mature node, and back-end project funding to submit a mandatory full application.[5]
The Department noted that it will announce another round of funding in the late spring for material suppliers and equipment manufacturers, and a third round of funding in the fall to support construction of semiconductor research and development facilities.[6]
The Department also indicated that projects should start their environmental permitting processes as soon as possible. While questions exist regarding whether the administration will exempt CHIPS Act projects from the National Environmental Policy Act (“NEPA”) authorization process, and the Department did not comment on that question directly, it did urge applicants not to wait to start the authorization process.[7]
Application Process Key Points
Statement of Interest: The Department of Commerce encouraged parties to submit a statement of interest to help the CHIPS Program Office gauge interest in the program and understand the types of projects that will be applying. The SOI should include applicant information and basic project information such as the nature of the project and its potential scope.
Pre-Application: Applicants are not required to submit a pre-application, but submitting one creates another opportunity for dialogue between the Program Office and applicants. The CHIPS Program Office is willing to provide feedback on pre-applications that will strengthen the full application. Pre-applications should include a more detailed project description and a summary of financial information. The Department strongly recommends pre-applications for current-generation, mature-node, and back-end production facility applications.
Full Application: Applicants must submit a full application, with substantial detailed information on the proposed project, to be considered for an award.
Due Diligence and Award: If the Program Office determines an applicant is likely to receive an award, it will enter into a preliminary memorandum of terms with the applicant. That memorandum will require validation of national security and financial information. The Program Office will engage outside advisers to assist with the due diligence, which the applicant must fund. The Program Office will disburse funds based on meeting project milestones rather than through lump sum payments.[8]
Issues to Emphasize in Applications
The Department of Commerce has underscored that the CHIPS program should advance U.S. economic and national security objectives; demonstrate commercial viability, financial strength, and technical feasibility, and readiness; promote workforce development and diversity; and encourage broader investment in semiconductors. Successful applicants should explain how they will advance each of those priorities, which the Department details in its online Fact Sheet.
Of particular note, the Department is expected to favor projects that support the Department of Defense, other national security objectives, or other government functions. It also intends to fund projects that demonstrate they can be self-sustaining without future subsidies after the initial government investment, as well as those that can improve the semiconductor supply chain. The Department will give preference to companies that commit to growing the semiconductor industry through research and development and workforce training. In addition, the Department seeks projects that:
- Promote women-owned and small businesses;
- Include “concrete goals” for outreach plans to underserved communities;
- Commit to enter project labor agreements with building trade unions;
- Develop strategic partnerships with training entities and institutions of higher education to provide workforce training;
- Demonstrate how an accounting for weather and climate risks and include a climate and responsibility plan in their applications;
- Provide childcare “to the greatest extent feasible” (see further discussion below); and
- Are sponsored by companies that commit not to engage in stock buybacks for five years after receiving an award.[9]
Unique Program Requirements
The Department webcast speakers flagged several program requirements detailed in the NOFO worth applicants’ early attention. Funds may not be used to construct or modify facilities outside of the United States or to physically relocate an existing U.S. facility to another U.S. jurisdiction unless it is in the interest of the United States as determined by the Department. They also may not be used for stock buybacks or dividend payments (though there is no detail of compliance as money ultimately is fungible), and project budgets may not include indirect costs.[10]
Two special requirements apply to applicants seeking more than $150 million in direct funding:
- Applicants must provide a plan for how they will provide childcare for their workers (the $150 million threshold triggers an actual requirement, rather than the “to the greatest extent feasible” standard); and
- Applicants must share a portion of cash flows exceeding the applicants’ projections with the federal government, which will use the funds for CHIPS Act purposes.[11]
How Gibson Dunn Can Assist
Gibson Dunn has an expert team of industry subject matter experts and public policy professionals tracking implementation of the CHIPS Act closely. We are available to assist eligible clients to secure funds throughout the application process. We also can engage with the Department of Commerce and other federal agencies regarding the structure of future CHIPS Act programs as the agencies develop them.
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[1] Pub. Law No. 117–167 Sec. 102(a) (funding the authorization of the semiconductor incentive program established under the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021 (15 U.S.C. §§ 4652, 4654, 4656, Pub. Law No. 116-283)).
[2] 15 U.S.C. § 4651(2); U.S. Dep’t of Commerce Nat’l Institute of Standards and Technology Notice of Funding Opportunity, CHIPS Incentives Program—Commercial Fabrication Facilities, here [hereinafter, NOFO].
[3] For an in-depth discussion of the types of facilities, see the NOFO at Sec. 1.
[4] U.S. Dep’t of Commerce Nat’l Institute of Standards and Technology CHIPS Frequently Asked Questions, https://www.nist.gov/chips/frequently-asked-questions.
[5] CHIPS for America Guide (Feb. 28, 2023), here.
[6] Department of Commerce Webcast (Feb. 28, 2023).
[7] Id.
[8] Department of Commerce Webcast (Feb. 28, 2023).
[9] Id.; see NOFO.
[10] Id.; Department of Commerce Webcast (Feb. 28, 2023).
[11] NOFO Sec. 6.
Gibson, Dunn & Crutcher’s 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 in the firm’s Public Policy practice group, or the following authors:
Michael D. Bopp – Co-Chair, Public Policy Group, Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com)
Roscoe Jones, Jr. – Co-Chair, Public Policy Group, Washington, D.C. (+1 202-887-3530, rjones@gibsondunn.com)
Ed Batts – Palo Alto (+1 650-849-5392, ebatts@gibsondunn.com)
Robert C. Blume – Denver (+1 303-298-5758, rblume@gibsondunn.com)
Amanda H. Neely – Washington, D.C. (+1 202-777-9566, aneely@gibsondunn.com)
Daniel P. Smith – Washington, D.C. (+1 202-777-9549, dpsmith@gibsondunn.com)
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On February 20, 2023, the Hong Kong Securities and Futures Commission (“SFC”) published its highly-anticipated Consultation Paper on the Proposed Regulatory Requirements for Virtual Asset Trading Platform Operators Licensed by the Securities and Futures Commission (“Consultation Paper”).[1] This follows the passing in December 2022 of significant amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (“AMLO”), which introduce a new licensing regime for virtual asset trading platforms that carry on the business of trading non-security tokens in Hong Kong and/or actively markets such services to Hong Kong investors (“AMLO Licensing Regime”).[2] The AMLO Licensing Regime will come into effect on June 1, 2023. We have previously published client alerts on this topic.[3]
The aim of the Consultation Paper is to obtain feedback from the market on the implementation of the AMLO Licensing Regime. As a first step, the SFC will be focusing on the regulation of virtual asset trading platform operators (“Platform Operators”), e.g. virtual asset exchanges and other types of virtual asset trading entities, under the AMLO Licensing Regime.
The Consultation Paper broadly covers two areas: (i) licensing and conduct requirements concerning Platform Operators and (ii) anti-money laundering and counter-financing of terrorism (“AML/CFT”) requirements applicable to virtual asset service providers (“VASP”). To aid the consultation, the SFC has helpfully included draft texts of the Guidelines for Virtual Asset Trading Platform Operators (“VATP Guidelines”) and the Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (For Licensed Corporations and SFC-Licensed Virtual Asset Service Providers) (“VASP AML/CFT Guidelines”).
The Consultation Paper effectively proposes to align the regulatory requirements applicable to virtual asset service providers (“VASPs “) under the AMLO Licensing Regime with the requirements applicable to current Type 1 (dealing in securities) and Type 7 (automated trading services) licensed virtual asset trading platforms that provide trading services in at least one security token under the Securities and Futures Ordinance (“SFO”) (“SFO Licensing Regime”).[4]
Notably, the VATP Guidelines build on the existing Terms and Conditions for Virtual Asset Trading Platform Operators (“VATP Terms and Conditions”), which are currently applicable to licensed Platform Operators under the SFO Licensing Regime (“SFO-licensed Platform Operators”).[5] Whilst the VATP Guidelines have preserved much of the existing licensing conditions under the VATP Terms and Conditions, significant additions and modifications are also introduced to the existing regulatory requirements set out in the VATP Terms and Conditions. Once the VATP Guidelines come into effect, it will supersede the VATP Terms and Conditions. In this client alert, we focus on these additions or variations. A recap on key aspects of the existing requirements under the VATP Terms and Conditions are summarized in an Appendix.
I. Transitional Arrangements
The AMLO Licensing Regime will become effective on June 1, 2023. This means that any Platform Operator operating or marketing its services to Hong Kong investors without a valid licence will commit a breach unless they qualify for the 12-month transitional period. As such, Platform Operators not operating in Hong Kong immediately before June 1, 2023 should not commence any virtual asset trading platform business in Hong Kong until they are SFC-licensed.
A 12-month transitional period will be introduced for compliance with the requirements in relation to existing clients or virtual assets currently made available by SFO-licensed platform operators. To be eligible for the transitional arrangements, a Platform Operator must be in operation in Hong Kong immediately prior to June 1, 2023 and must have meaningful and substantial presence. Considerations on whether a Platform Operator has meaningful and substantial presence in Hong Kong include whether it is incorporated in Hong Kong, whether it has a physical office in Hong Kong, and whether its key personnel are based in Hong Kong.
The following timeline highlights the key dates and implementation details of the transitional arrangements:
To avoid confusion on whether a Platform Operator is operating legally during the transitional period, the SFC will publish lists on its website to inform the public of the different regulatory statuses of Platform Operators.
Note that the above transitional arrangements are only applicable under the AMLO Licensing Regime. There are no transitional arrangement for compliance with the SFO Licensing Regime. This means that Platform Operators intending to offer trading in security tokens should only commence business upon obtaining the relevant Type 1 and 7 licences from the SFC.
II. Overview of Key Proposals Introduced by The Consultation Paper
The key proposals under the Consultation Paper are summarized below:
Licensing Requirements |
All Platform Operators (including existing SFO-licensed Platform Operators) will be subject to the AMLO Licensing Regime. SFO-licensed Platform Operators engaging in security tokens trading will additionally be subject to the Type 1 and 7 Licensing Regime under the SFO. The SFC has expressed its view that, considering that terms and features of virtual assets may evolve (which could impact on the classification of a security / non-security token), it encourages all VASPs (including their proposed responsible officers and licensed representatives) to be dual licensed under both the SFO and AMLO Licensing Regimes. However, strictly under the law, it is not be mandatory to be dual licensed under both the SFO and AMLO Licensing Regime (see Section VI “Licensing Requirements and Procedures” for further discussion on this point). |
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Retail Access |
Currently, SFO-licensed Platform Operators can only serve professional investors, and are restricted from providing services to retail investors. Under the VATP Guidelines, the SFC contemplates expanding the scope of licences to allow for retail access. To this end, the SFC has proposed safeguards intended to protect retail investors, for example:
The SFC notes that there are diverse views on whether retail investors should be granted access to services provided by Platform Operators. On one hand, such access may legitimise the trading of virtual assets, which are prone to high volatility and market manipulation. On the other hand, denying retail access may result in investor harm and push retail investors to trade on unregulated platform.
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Token Admission and Review Committee |
As mentioned above, the SFC has proposed that each relevant Platform Operator set up a token admission and review committee. Although the functions of a token admission and review committee are normally closely associated with virtual asset exchanges, in virtual asset markets, other forms of virtual asset trading entities will have similar committees, and it will be the SFC’s expectation that all Platform Operators shall implement such committees. The token admission and review committee will have the following functions:
At a minimum, the token admission and review committee should consist of members of senior management principally responsible for managing the key business line, compliance, risk management, and information technology. The token admission and review committee will report to the Board of Directors at least monthly. To comply with the SFC’s regulatory requirements, we anticipate that Platform Operators will implement a virtual asset listing policy which covers all aspects of the token admission and withdrawal process, as well as virtual asset due diligence questionnaire to be completed for each virtual asset prior to its admission to the platform. Many global virtual asset trading platforms will have already implemented such policies and due diligence questionnaires, which can be updated to align with the regulatory requirements for Platform Operators. |
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Insurance and Compensation Arrangement |
Currently, an SFO-licensed Platform Operator must maintain an insurance policy covering the risks involved with client virtual assets held in hot storage and in cold storage. In view of industry feedback on the practical difficulties with complying with these requirements, the SFC has proposed the following modifications:[10]
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Virtual Asset Derivatives |
The current SFO Licensing Regime does not allow SFO-licensed Platform Operators to offer, trade or deal in virtual asset futures contracts or related derivatives. This restriction is preserved under the VATP Guidelines.[12] In light of growing market interest in offering virtual asset derivatives (especially to institutional investors), the SFC is keen to understand the market’s views on virtual asset derivatives. The SFC will be conducting a separate review exercise to formulate the policies around virtual asset derivatives trading.
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Proprietary Trading |
The SFO Licensing Regime currently prohibits SFO-licensed Platform Operators from engaging in proprietary trading or market-making activities on a proprietary basis (see Appendix, “Conflict of Interest”). This restriction is adopted under the VATP Guidelines, with a slight modification. The SFC proposes to carve out an exception, such that Platform Operators will be allowed to engage in off-platform back-to-back transactions entered into by the Platform Operator,[13] and any other limited circumstances approved by the SFC on a case-by-case basis. |
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Corporate Governance |
Platform Operators and their responsible officers seeking a licence must demonstrate to the SFC that they are a fit and proper, and that they have the ability to carry out licensed activities competently.[14] The introduction of the fit and proper and competence requirements is modelled on the same requirements for the licensing of regulated activities under the SFO.[15] The VATP Guidelines also introduce a series of general principles governing the conduct of Platform Operators. Again, these general principles take after the general principles under the SFC’s “Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission”.[16]. Further, to align corporate governance standards with those applicable to licensed corporations, the SFC has introduced requirements for Platform Operators to establish independent audit, risk management and compliance functions. The SFC has emphasised that there should be appropriate segregation between compliance and internal audit functions, and operations to preserve independence. |
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AML/CFT |
In light with the Financial Action Task Force’s recommendation on wire transfers (i.e., the travel rule),[17] the SFC has proposed to impose similar requirements on virtual asset transfers (see Section V “Virtual Asset Transfers and Application of the Travel Rule” for further discussion on this point).
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Disciplinary Fining Guidelines |
The SFC has set out a set of guidelines providing insight on its disciplinary powers in relation to breaches of the AMLO Licensing Regime by regulated persons. In short, where a regulated person is guilty of misconduct,[18] or the SFC is of the opinion that a regulated person is or was not a fit and proper, the SFC has the power to impose a fine up to a maximum of HK$10 million or three times of the profit gained or loss avoid as a result of the misconduct, whichever is higher.[19] The SFC can use the number of affected persons as the multiplier in assessing the appropriate level of the fine; by way of an illustration, the SFC may impose a fine not exceeding HK$10 million for each person affected by the misconduct. The appropriate approach will be determined on a case-by-case basis.
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In the subsequent sections, we will provide discuss some of the significant aspects of the proposals under the Consultation Paper.
III. Token Admission Criteria
The VATP Guidelines require Platform Operators to exercise due skill, care and diligence when selecting virtual assets to be made available for trading, irrespective of whether they are made available to retail investors. The VATP Guidelines introduce general due diligence factors applicable to all token offerings, and specific due diligence factors applicable only to retail investors offerings, as set out below:
General Due Diligence Factors |
The VATP Guidelines list out some non-exhaustive factors which a Platform Operator must consider when conducting due diligence on all virtual assets before admitting them for trading. As illustrations:
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Due Diligence Factors Applicable to Retail Offerings |
In addition to the general due diligence factors explained above, where a Platform Operator intends to make a specific virtual asset available for trading by its retail investors, it should also ensure that the virtual asset is a large-cap virtual asset. A large-cap virtual asset refers to a specific virtual asset that have been included in at least two accepted indices issued by at least two separate index providers. An acceptable index is an index which has a clearly defined objective to measure the performance of the largest virtual asset. In particular, the index should be objectively calculated and rules-based, the constituent virtual assets of the index should be sufficient liquid, and the methodology and rules of the index should be consistent and transparent. Among the two indices, a Platform Operator should ensure that at least one of them is issued by an index provider which has experience in publishing indices for the traditional non-virtual asset financial market. If the virtual asset concerned does not meet the criteria of being a large-cap virtual asset, but meets all of the general due diligence criteria mentioned above, the Platform Operator may submit a detailed proposal on the virtual asset at issue for the SFC’s consideration on a case-by-case basis |
A Platform Operator is under a duty to monitor each virtual asset admitted for trading on an ongoing basis, consider whether the virtual asset continues to satisfy all the token admission criteria, and provide regular reports to the token admission and review committee. As an illustration, if an admitted virtual asset falls outside the constituent pool of an acceptable index, a Platform Operator may consider whether there are any material adverse news or underlying liquidity issues surrounding the virtual asset. If the concerns are unlikely to be resolved in the near future, the token admission and review committee should assess whether to halt trading, or restrict retail access. Where this is the case, the Platform Operator should notify affected clients holding the virtual asset at issue, and inform them of the remedial options available.
IV. Suitability Obligations
A Platform Operator is required to ensure the suitability of the recommendation or solicitation for the client is reasonable when making a recommendation or solicitation to retail investors. Whether there has been a recommendation or solicitation is assessed in light of the circumstances leading up to the point of sale or advice, for example, a relevant consideration is the context (such as the presentation) and content of product-specific materials posted on the platform and/or website, assessed against the overall impression created by such content. Generally, posting factual, fair and balanced product-specific materials would not itself amount to solicitation or recommendation, and therefore, would not trigger suitability requirements.
The same suitability assessments must also be conducted in respect of the solicitation and recommendation of complex products, i.e. a virtual asset whose terms, features and risks are not reasonably likely to be understood by a retail investor due to its complex structure.[21] Where a Platform Operator determines a virtual asset to be complex product, it should ensure that there are clear warning statements to warn clients about the complexity of the product prior to and reasonably proximate to the point of sale and advice. Note that these requirements are not triggered in the absence of solicitation and recommendation. As a general market observation, a virtual asset which is assessed to be a complex product is also likely to have features similar to “securities”.
V. Virtual Asset Transfers and Application of The Travel Rule
Given that Platform Operators are exposed to money laundering and terrorist financing (“ML/TF”) risks arising from the distinct characteristics of virtual assets, Platform Operators are required to comply with additional virtual-asset specific AML/CFT requirements introduced by the VASP AML/CFT Guidelines. A Platform Operator is allowed to accept virtual asset transfers provided that the following are met (i.e., the ‘Travel Rule’):
- When acting as an ordering institution of virtual asset transfers, a Platform Operator must obtain, record and submit the required information of the originator and recipient to the beneficiary institution immediately and securely;
- When acting as a beneficiary institution, a Platform Operator must obtain and record information submitted by the ordering institution or intermediary institution;
- A Platform Operator must conduct due diligence on a virtual asset transfer counterparty (i.e. the ordering institution, intermediary institution or beneficiary institution) to identify and assess any associated ML/TF risks, and apply risk-based AML/CFT measures as appropriate; and
- When conducting virtual asset transfers to or from unhosted wallets,[22] a Platform Operator should obtain and record the required information from its customer who may be the originator or recipient, and take reasonable measures to mitigate and manage the ML/TF risks associated with the transfers.
Separately, AML/CFT provisions on the identification of suspicious transactions and sanctions screening, similar to those imposed on licensed incorporations, are also provided in the VASP AML/CFT Guidelines.[23]
VI. Licensing Requirements and Procedures
As previously explained, the SFO Licensing Regime and the AMLO Licensing Regime will run in tandem. Since the AMLO Licensing Regime is itself a standalone licensing regime, virtual asset trading platforms should be able to choose to either:
- be licensed under the AMLO Licensing Regime only, or
- be dual licensed under both the SFO Licensing Regime and the AMLO Licensing Regimes.
The decision will depend on the contemplated business plan and the types of virtual assets proposed to be offered. Virtual asset trading platforms planning to offer only non-security tokens may consider only applying for a licence under the AMLO Licensing Regime (and not the SFO Licensing Regime). However these platform operators will need to have robust systems and controls in place (including ongoing monitoring) to ensure that they are aware of and can address situations where a virtual asset’s classification may change from a non-security token to a security token. The potential regulatory risk of not having the dual licence is that, in the event a virtual asset’s classification changes from a non-security token to a security token and the platform operator is unaware of the changes and therefore continues to offer trading in the re-classified security token, then the platform operator could be in breach of the SFO for carrying on unlicensed dealing in securities.
To address the risk of a virtual asset’s classification changing from a non-security token to a security token, the SFC encourages virtual asset trading platforms to apply for approvals under both the SFO Licensing Regime and the AMLO Licensing Regime. The SFC intends to implement a streamlined application process for virtual asset trading platforms applying to be dually licensed (i.e., under both the SFO Licensing Regime and the AMLO Licensing Regime) and approved. However, it is important to note that even if a Platform Operator is dual-licensed, it still cannot offer security tokens to retail investors.
To assist the application process, the SFC will require Platform Operator applicants to engage an external assessor to assess its business going forward, and submit the assessor’s reports to the SFC (i) when submitting the licence application (“Phase One Report”); and (ii) after approval-in-principle is granted (“Phase Two Report”).
The Phase One Report will cover the design effectiveness of the Platform Operator’s proposed structure, governance, operations, systems and controls, with a focus on key areas including token admission, custody of virtual assets, governance, AML/CFT, market surveillance and risk management.
The Phase Two Report will contain the assessor’s assessment of the implementation and effectiveness of the actual adoption of the planned policies, procedures, systems and controls. The SFC will only grant final approval if it is satisfied with the findings of the Phase Two Report.
VII. Conclusion
The Consultation Paper contains substantive and important proposals in relation to the AMLO Licensing Regime. Interested parties are encouraged to respond to the proposals prior to the close of the consultation period on March 31, 2023.
In the meantime, Platform Operators minded to continue or commence operations in Hong Kong are encouraged to review their internal policies and practices to ensure compliance with the AMLO Licensing Regime.
APPENDIX: Overview of Existing Requirements Applicable to SFO-Licensed Platform Operators
The table below summarizes the key requirements currently applicable to SFO-licensed Platform Operators, as contained in the VATP Terms and Conditions, which are also adopted by the VATP Guidelines. Note that once effective, the VATP Guidelines will supersede the VATP Terms and Conditions.
Financial Soundness |
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Onboarding Requirements |
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Custody of Client Assets |
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Risk Management |
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Prevention of Market Manipulation and Abusive Activities |
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Conflict of Interest |
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Auditing |
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[1] “Consultation Paper on the Proposed Regulatory Requirements for Virtual Asset Trading Platform Operators Licensed by the Securities and Futures Commission”, Securities and Futures Commission (February 20, 2023), available at https://apps.sfc.hk/edistributionWeb/gateway/EN/consultation/doc?refNo=23CP1
[2] Anti-Money Laundering and Counter-Terrorist Financing (Amendment) Ordinance, available at https://www.legco.gov.hk/yr2022/english/ord/2022ord015-e.pdf; Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615), available at https://www.elegislation.gov.hk/hk/cap615
[3] Hong Kong Introduces Licensing Regime for Virtual Asset Service Providers”, Gibson, Dunn & Crutcher (June 30, 2022), available at https://www.gibsondunn.com/hong-kong-introduces-licensing-regime-for-virtual-asset-services-providers/; “Hong Kong Licensing Regime for Virtual Asset Service Providers Passed with Three-Month Delay to Implementation Timelines”, Gibson, Dunn & Crutcher (December 8, 2022), available at https://www.gibsondunn.com/hong-kong-licensing-regime-for-virtual-asset-service-providers-passed-with-three-month-delay-to-implementation-timelines/
[4] Securities and Futures Ordinance (Cap. 571), available at https://www.elegislation.gov.hk/hk/cap571?xpid=ID_1438403467298_001
[5] Terms and Conditions for Virtual Asset Trading Platform Operators, Securities and Futures Commission, available at https://apps.sfc.hk/publicreg/Terms-and-Conditions-for-VATP_10Dec20.pdf
[6] “Securities” is defined under Part 1, Schedule 1 of the SFO.
[7] See Part IV of the SFO.
[8] See Part II and Part XII of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), available at https://www.elegislation.gov.hk/hk/cap32
[9] Under the VATP Guidelines, written legal advice in the form of a legal memorandum or opinion confirming that the virtual asset does not fall within the definition of securities under the SFO is only required for virtual assets to be traded and made available by retail investors. The requirement will not apply to virtual assets only made available to professional investors.
[10] As noted in the Consultation Paper, industry participants have reported on the difficulty of complying with the current insurance requirements as many insurers are unwilling to provide coverage for risks associated with hot storage, and even if they are willing to do so, the insurance premiums meant that maintaining such a policy would not be commercially viable.
[11] “Associated Entity” means a company which (i) has notified the SFC that it has become an “associated entity” of the licensee Platform Operator, (ii) is incorporated in Hong Kong, (iii) holds a “trust or company service provider licence”, and (iv) is a wholly owned subsidiary of the Platform Operator.
[12] See paragraph 7.23 of the VATP Guidelines.
[13] “Back-to-back transactions” refer to those transactions where a Platform Operator, after receiving (i) a purchase order from a client, purchases a virtual asset from a third party and then sell the same virtual asset to the client; or (ii) a sell order from a client, purchases a virtual asset from the client and then sells the same virtual asset to a third party, and no market risk is taken by the Platform Operator.
[14] Under the AMLO Licensing Regime, an applicant wishing to be licensed as a VASP have at least two responsible officers who will assume general responsibility of overseeing the licensed VASP’s operations. Any person who may carry out regulated functions of providing a virtual asset service must also apply to be a licensed representative. Both the responsible officers and licensed representative must be fit and proper, with reference to criteria such as their financial integrity, education, experience, reputation, character, and reliability.
[15] See section 129 of the SFO. See also the “Guidelines on Competence”, Securities and Futures Commission (January 2022), available at https://www.sfc.hk/-/media/EN/assets/components/codes/files-current/web/guidelines/guidelines-on-competence/Guidelines-on-Competence.pdf?rev=17109ba82b614119a9c463d08e6e344f
[16] “Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission”, Securities and Futures Commission (August 2022), available at https://www.sfc.hk/-/media/EN/assets/components/codes/files-current/web/codes/code-of-conduct-for-persons-licensed-by-or-registered-with-the-securities-and-futures-commission/Code_of_conduct_05082022_Eng.pdf?rev=0fd396c657bc46feb94f3367d7f97a05
[17] See Recommendation 16 of “International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation: The FATF Recommendations”, Financial Action Task Force (March 2022), available here.
[18] See section 53ZSR of the AMLO for the definition of “misconduct”. Note that the definition includes an act or omission relating to the provision of any virtual asset service by a regulated person which, in the SFC’s opinion, is or is likely to be prejudicial to the interests of the investing public or to the public interest.
[19] This is consistent with the SFC’s current disciplinary powers in respect of breaches of its code, guidelines and circulars with respect to licensed corporations.
[20] Note that under the existing SFO Licensing Regime, one of the licensing requirements relating to “security tokens” require SFO-licensed Platform Operators to only admit security tokens that are (i) asset-backed; (ii) approved or registered with regulators in comparable jurisdictions; and (iii) with a post-issuance track record of 12 months. The SFC has revisited this provision in the Consultation Paper. Considering the changes in the market landscape and the emergence of tokenised securities, the SFC has decided to remove this requirement, and going forward, the VATP Guidelines and future SFC guidance on distribution of security tokens will apply.
[21] The VATP Guidelines have provided some factors to assist Platform Operators to determine whether a virtual asset constitutes a “complex products”; for instance, whether the virtual asset is a derivative product; whether there is a risk of losing more than the amount invested; whether there are any features of the virtual asset that might render the investment illiquid or difficult to value; and whether any features or terms of the virtual asset could fundamentally alter the nature or risk of the investment or pay-out profile or include multiple variables or complicated formulas to determine the return (such as investments that incorporate a right for the issuer to convert the instrument into a different investment).
[22] “Unhosted wallets” refer to software or hardware that enables a person to store and transfer virtual assets on his/her behalf, with a private key controlled or held by that person.
[23] See paragraphs 12.7.6, 12.8.1 to 12.8.3 in Chapter 12 of the VASP AML/CFT Guidelines.
[24] Securities and Futures (Financial Resources) Rules (Cap. 571N), available at https://www.elegislation.gov.hk/hk/cap571N?xpid=ID_1438403475924_002
[25] Note that the SFC has proposed to introduce an exception to this restriction under the Consultation Paper, such that Platform Operators will be allowed to engage in off-platform back-to-back transactions entered into by the Platform Operator, and any other limited circumstances approved by the SFC on a case-by-case basis. Please refer to Section II of this client alert, under the sub-heading “Proprietary Trading”.
The following Gibson Dunn lawyers prepared this client alert: William Hallatt, Arnold Pun, Becky Chung, and Jane Lu.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. If you wish to discuss any of the matters set out above, please contact any member of Gibson Dunn’s Digital Asset Taskforce or the Global Financial Regulatory team, including the following authors in Hong Kong and Singapore:
William R. Hallatt – Hong Kong (+852 2214 3836, whallatt@gibsondunn.com)
Grace Chong – Singapore (+65 6507 3608, gchong@gibsondunn.com)
Emily Rumble – Hong Kong (+852 2214 3839, erumble@gibsondunn.com)
Arnold Pun – Hong Kong (+852 2214 3838, apun@gibsondunn.com)
Becky Chung – Hong Kong (+852 2214 3837, bchung@gibsondunn.com)
© 2023 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome.
In a time of highly volatile markets and rising interest rates, convertible notes can be an effective financing or refinancing tool. Gibson Dunn attorneys Stewart McDowell, Eric Scarazzo, Melissa Barshop and Jennifer Sabin provide a 60-minute briefing on some key considerations for issuers considering convertible notes as a financing option.
PANELISTS:
Stewart L. McDowell is a partner in the San Francisco office of Gibson, Dunn & Crutcher. She is a member of the firm’s Corporate Department and Co-Chair of the Capital Markets Practice Group. Her practice involves the representation of business organizations as to capital markets transactions, mergers and acquisitions, SEC reporting, corporate governance and general corporate matters. She has significant experience representing both underwriters and issuers in a broad range of both debt and equity securities offerings. She also represents both buyers and sellers in connection with U.S. and cross-border mergers, acquisitions and strategic investments.
Eric M. Scarazzo is a partner in the New York office of Gibson, Dunn & Crutcher, and a member of the firm’s Capital Markets, Securities and Regulation and Corporate Governance, Power and Renewables, Global Finance, and Mergers & Acquisitions Practice Groups. As a key member of the capital markets practice, Mr. Scarazzo is involved in some of the firm’s most complicated and high-profile securities transactions. Additionally, he has been a certified public accountant for over 20 years, and provides critical guidance to clients navigating the intersection of legal and accounting matters, principally as they relate to capital markets financings and M&A disclosure obligations. Mr. Scarazzo’s practice covers both the conduct of securities offerings and service as clients’ outside corporate counsel. He advises in a wide range of areas, such as capital raising transactions, reporting obligations under the Exchange Act (including significant advisory work with respect to acquisition reporting), prospective and remedial stock exchange compliance, and beneficial ownership reporting matters (particularly complex Section 13 and 16 disclosure matters).
Melissa Barshop is Of Counsel in the Century City office of Gibson, Dunn & Crutcher. She is a member of the firm’s Corporate Department and its Global Finance and Business Restructuring and Reorganization Practice Groups. Ms. Barshop’s practice includes acquisition financings, secured and unsecured corporate credit facilities, Rule 144A transactions, private placements, convertible debt offerings, exchange offers, mezzanine transactions and work-outs and debt restructurings.
Jennifer Sabin is of counsel in the New York office of Gibson, Dunn & Crutcher. Ms. Sabin represents clients in a broad range of domestic and international tax matters, including taxable and tax-free mergers and acquisitions (public and private), spin-offs, joint ventures, financings, and restructurings. Her practice also includes formation of, and transactions undertaken by, private equity, hedge funds, and asset managers. In addition, Ms. Sabin advises on various aspects of information reporting, including matters relating to the Foreign Account Tax Compliance Act. Ms. Sabin received her Juris Doctor, cum laude, in 2011 from The University of Pennsylvania Law School. She received her Bachelor of Arts, magna cum laude, in History from Yale University in 2006. Ms. Sabin is admitted to practice in the State of New York.
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In 2022, China has finally amended its Anti-Monopoly Law. This has been more than two years in the making: the State Administration for Market Regulation (“SAMR”) first proposed amendments in early 2020 and a formal draft amendment was submitted to the Standing Committee of the National People’s Congress for a first reading in October 2021. In an effort to support and clarify the amended law, the Government released draft amendments to a number of antitrust regulations and rules for public consultation in June 2022. The Government also published its draft amendments to the Anti-Unfair Competition Law for comment consultation in November 2022.
This client alert provides an overview of China’s major antitrust developments in 2022.
1. Legislative / Regulatory Developments
Amendments to the Anti-Monopoly Law. In 2022, China finally amended the Anti-Monopoly Law (“Amended AML”) for the first time, 14 years after its introduction. The Amended AML came into force on August 1, 2022. It emphasizes the fundamental role of competition in China’s market economy and introduces substantial changes to the country’s merger review process and rules on anticompetitive agreements. It also substantially increases fines for violating the Amended AML and introduced, among other new penalties, liabilities on individuals. Here are some of the key substantive provisions included in the Amended AML:
- Review of non-threshold transactions: The Amended AML enables SAMR to require parties to a concentration (where the concentration does not otherwise trigger mandatory reporting obligations) to notify the transaction where “the concentration of undertakings has or may have the effect of eliminating or restricting competition.”
- Introduction of the stop-the-clock system: The Amended AML grants SAMR the power to suspend the review period in merger investigations under any of the following scenarios: where the undertaking fails to submit documents and materials leading to a failure of the investigation; where new circumstances and facts that have a major impact on the review of the merger need to be verified; or where additional restrictive conditions on the merger need to be further evaluated and the undertakings concerned agree. The clock resumes once the circumstances leading to the suspension are resolved.
- Abandoning per se treatment for resale price maintenance (“RPM”): The Amended AML introduces a provision which states that a monopoly agreement between parties fixing the price or setting a minimum price for resale of goods to a third party “shall not be prohibited if the undertaking can prove that it does not have the effect of eliminating or restricting competition.” This means where a plaintiff alleges breach of the Amended AML by way of an RPM agreement, it is open to a defendant to prove that the RPM agreement does not eliminate or restrict competition and therefore is not unlawful.
- Safe harbors for vertical monopoly agreements: The Amended AML introduces a “safe harbor” for vertical monopoly agreements, which presumably include RPM agreements, in circumstances where “undertakings can prove that their market share in the relevant market is lower than the standards set by the anti-monopoly law enforcement agency of the State Council and meet other conditions set by the anti-monopoly law enforcement agency of the State Council shall not be prohibited.” This provision authorizes SAMR to determine the threshold for the safe harbor, which we can expect in due course.
- Cartel facilitators: The Amended AML provides that undertakings “may not organize other undertakings to reach a monopoly agreement or provide substantial assistance for other undertakings to reach a monopoly agreement.” This provision fills an arguable gap in the AML, as cartel facilitators e.g., third parties that aid the conclusion of anticompetitive agreements or cartels, may now be found in breach of the Amended AML.
- Increased and new penalties: The Amended AML substantially increases fines that could be imposed and creates new fines. These include:
- Penalties on cartel facilitators: SAMR may impose a fine up to RMB 1 million (~USD 147,000) on cartel facilitators.
- Increased penalties for merger-related conduct: Where an undertaking implements a concentration in violation of the Amended AML, SAMR may impose a fine of less than 10% of the undertaking’s sales from the preceding year. Where such concentration does not have the effect of eliminating or restricting competition, the fine will be less than RMB 5 million (~USD 727,000).
- Superfine: Where the violation of the Amended AML is “extremely severe,” its impact “extremely bad” and the consequence “especially serious,” SAMR can multiply the amount of fine by a factor between two and five.
- Penalties for failure to cooperate with investigations: Where an undertaking fails to cooperate in anti-monopoly investigations, SAMR may impose a fine of less than 1% of the undertaking’s sales from the preceding year or, where there are no sales or the data is difficult to be assessed, a maximum fine of RMB 5 million (~USD 727, 000) on enterprises and RMB 500,000 (~USD 72,700) on individuals involved.
- Penalties on individuals: The Amended AML introduces individual liability of a fine up to RMB 1 million (~USD 147,000) for legal representatives, principal person-in-charge or directly responsible persons of an undertaking if that individual is personally responsible for reaching an anticompetitive agreement.
- Public interest lawsuit: Public prosecutors can bring a civil public interest lawsuit against undertakings that have acted against social and public interests by engaging in anticompetitive conduct.
For more detail on the Amended AML, please refer to our client alert, China Amends Its Anti-Monopoly Law, published on June 29, 2022.
Proposed Amendments to six antitrust regulations and rules. On June 27, 2022, SAMR published draft amendments to the following six antitrust regulations and rules for public consultation, which aim to support and clarify the Amended AML (together, the “Proposed Amendments to the Implementing Rules”):
- Regulations on Filing Thresholds for Concentrations of Undertakings
- Provisions on Prohibition of Monopoly Agreements
- Provisions on Prohibition of Abuse of Dominance
- Provisions on Prohibition of Elimination and Restriction of Competition Through Intellectual Property Rights
- Provisions on Prohibition of Elimination and Restriction of Competition Through Abuse of Administrative Powers
- Provisions on Concentration of Undertakings
Among other draft amendments, SAMR proposed to revise the merger filing thresholds through first, increasing the existing thresholds and second, introducing a new threshold that aims at catching so-called “killer acquisitions,” where an established undertaking acquires a nascent competitor to preempt potential future competition. Specifically:
- The Proposed Amendments to the Implementing Rules provide that undertakings must obtain merger clearance from SAMR if:
- The undertakings’ combined worldwide turnover is more than RMB 12 billion (~USD 1.78 billion) (an increase from RMB 10 billion (~USD 1.48 billion)) and the Chinese turnover of each of at least two of the undertakings involved is more than RMB 800 million (~USD 118 million) (an increase from RMB 400 million (~USD 59 million)); or
- The undertakings’ combined Chinese turnover is more than RMB 4 billion (~USD 592 million) (an increase from RMB 2 billion (~USD 296 million)) and the Chinese turnover of each of at least two of the undertakings involved is more than RMB 800 million (an increase from RMB 400 million).
- If the above thresholds are not met, undertakings are still required to obtain SAMR’s merger clearance if:
- One undertaking’s Chinese turnover is more than RMB 100 billion (~USD 14.8 billion); and
- The other undertaking has a market value (or valuation) of RMB 800 million or more and that it generated more than one third of its worldwide turnover from China.
There is currently no indication on when these Proposed Amendments to the Implementing Rules may come into effect.
Proposed Amendments to the Anti-Unfair Competition Law. On November 22, 2022, SAMR released draft amendments to the Anti-Unfair Competition Law for public consultation (“Proposed Amendments to the AUCL”). The Anti-Unfair Competition Law (the “AUCL”), which came into effect in 1993 and was revised in 2017 and 2019, addresses unfair and anticompetitive practices, such as misappropriation of trade secrets, trademark infringement, commercial bribery and false advertising. Consistent with China’s legislative focus in recent years, the Proposed Amendments to the AUCL expressly bring the digital economy within the ambit of the AUCL by adding a new Article 4 that expressly prohibits undertakings to take advantage of data and algorithms, technologies, capital advantages and platform rules to engage in unfair competitive behavior. The Proposed Amendments to the AUCL also include new types of prohibited conduct that concern the digital economy, such as:
- Carrying out malicious transactions that obstruct or undermine another undertaking’s normal operations, including deliberately entering into large volume or high frequency transactions with another undertaking so as to trigger the online transaction platform’s disciplinary actions for countering fake transactions against the latter, maliciously ordering a large volume of goods from another undertaking within a short period of time without paying and maliciously returning or refusing to accept the goods after a bulk purchase from another undertaking (Article 14).
- Using technological means or platform rules to improperly exclude or hinder the access to and transaction of goods or services lawfully provided by another undertaking (Article 17).
- Improperly obtaining or using another undertaking’s commercial data (Article 18).
- Using algorithms (e.g. by analyzing user preferences and transaction behavior) to impose unreasonable differential treatment or other unreasonable trading conditions (Article 19).
Another key feature of the Proposed Amendments to the AUCL is the reintroduction of the concept of a “position of relative advantage,” which was included in previous draft amendments to the AUCL that were released in 2016 but was not adopted in the current version of the law. Under the Proposed Amendments to the AUCL, “position of relative advantage” is defined to include advantage based on technologies, capital, number of users, industry influence or the degree of the transaction counterparty’s reliance on the undertaking in transactions. The Proposed Amendments to the AUCL set out a number of prohibited conduct that effectively extend the Amended AML’s rules governing the abuse of a dominant position to undertakings with a “position of relative advantage,” but without including the defence of procompetitive effects. Thus, an undertaking with a “position of relative advantage” is prohibited from, for example, coercing its transaction counterparty to bundle goods or sign exclusive agreements.
Like the Amended AML, the Proposed Amendments to the AUCL introduce increased and new penalties for violations. For example, undertakings could face penalties of up to 5% of its revenue if the violations are found to involve circumstances or damages deemed particularly serious to fair competition or public interest, and individuals who are found responsible for the violations may be fined up to RMB 1 million (~USD 147,000).
There is currently no indication on when the Proposed Amendments to the AUCL may come into effect.
Pilot Program on the Review of Simplified Procedure Merger Filings. In July 2022, SAMR announced a three-year pilot program to take place from August 1, 2022 to July 31, 2025, during which SAMR would delegate the initial review of certain simplified procedure merger filings to five provincial Administrations for Market Regulation (“provincial AMRs”) in Beijing, Shanghai, Chongqing, Shaanxi and Guangdong. Parties to transactions that require merger clearance would continue to submit the filings to SAMR, but SAMR may delegate cases to the provincial AMRs at its discretion and inform the filing parties of the delegation. While the provincial AMRs would review cases assigned to them, SAMR remains the final decision maker on all merger filings. Given that provincial AMRs are relatively inexperienced in merger control, it is expected that the review of delegated filings may take longer than usual to complete.
2. Merger Control
In 2022, SAMR unconditionally approved more than 99% of approximately 750 deals it reviewed and imposed conditions in only five transactions.
SAMR took on average 18 days to complete its review of cases under the simplified procedure, an increase from 2021’s 14-15 days, and an average of over 450 days to complete its review of conditionally approved cases, an increase from 2021’s 288 days. The delay is likely a result of China’s surge in COVID-19 cases since the first quarter of 2022 and the geopolitical climate that has affected the review of deals involving US tech companies.
Separately, SAMR announced that they penalized parties in 45 transactions for failure to notify, most of which received the maximum fine of RMB 500,000 (~USD 72,700). While this is less than the 107 transactions that SAMR penalized in 2021, over 50% of the cases in 2022 involved internet platforms.
2.1 Conditional Approval Decisions
GlobalWafers Co., Ltd. (“GlobalWafers”) / Siltronic AG (“Siltronic”). In January 2022, SAMR conditionally approved the Taiwanese silicon-wafer manufacturer GlobalWafers’ acquisition of its German rival Siltronic. SAMR raised a number of competition concerns regarding the transaction. Among other findings, SAMR noted that the transaction would likely result in the combined entity holding 55-60% and 30-35% market shares globally and in the Chinese market, respectively, and that the reduced number of competitors would likely increase the risk of coordination. To resolve these competition concerns, SAMR imposed both structural and behavioral remedies on the parties, including: (1) to divest GlobalWafer’s zone melting wafer business within six months; (2) to continue supplying wafer products to Chinese customers on fair, reasonable and nondiscriminatory (“FRAND”) terms; and (3) not to refuse customer requests to renew contracts without reasonable justification and to ensure that the renewal conditions are not inferior to terms in the original contracts.
Advanced Micro Devices (“AMD”) / Xilinx, Inc. (“Xilinx”). In January 2022, US chipmaker AMD received conditional approval from SAMR for its acquisition of its peer, Xilinx. SAMR had competition concerns over the impact that the transaction may have on the global and Chinese markets for central processing units (“CPUs”), graphics processing units (“GPUs”) and programable gate arrays (“FPGAs”), as (1) Xilinx ranked first in the global and domestic markets for FPGAs in 2020 with a market share of 50-55%, such that the combined entity would have a dominant position in the market; (2) CPUs, GPUs and FPGAs are core components that determine the performance of servers in data centers; as such, incompatibility and insufficient interoperability among these components may lead to performance issues for servers; and (3) the combined entity would become the sole supplier in the world capable of providing CPUs, GPUs and FPGAs.
To remedy these concerns, the parties offered a number of commitments, to which SAMR agreed, including the following: (1) to refrain from bundling or imposing unreasonable condition when supplying CPUs, GPUs and FPGAs in China; (2) to continue supplying CPUs, GPUs and FPGAs on FRAND terms; (3) to ensure that the parties’ CPUs, GPUs and FPGAs sold in China are interoperable with those from third-party manufacturers; (4) to ensure the flexibility, programmability and availability of Xilinx’s FPGAs; and (5) to keep third-party manufacturers’ competitive sensitive information strictly confidential.
II-VI Incorporated (“II-VI”) / Coherent, Inc. (“Coherent”). In June 2022, II-VI, an optoelectronic components maker, received conditional approval from SAMR for its acquisition of Coherent, a lasers supplier. SAMR found competition concerns resulting from the vertical relationship between the parties, namely II-VI being in the upstream markets for supplying components and Coherent being in the downstream markets for producing and selling laser devices. To remedy these concerns, SAMR imposed behavioral conditions on the parties, which will expire automatically in five years. These conditions include: (1) to continue performing all existing contracts; (2) to continue supplying CO2 laser optics to Chinese customers on FRAND terms; (3) to continue sourcing glass-based laser optics for excimer lasers from multiple suppliers on a non-discriminatory basis; not to reduce the number of suppliers without reasonable justification or increase II-VI’s current share of supply to Coherent unless other suppliers are unable to fulfil demands in terms of quantity and quality; and (4) to keep third-party manufacturers’ competitive sensitive information strictly confidential.
Shanghai Airport Group (“Avinex”) / Eastern Air Logistics (“EAL”). In September 2022, SAMR conditionally approved the proposed joint venture (“JV”) between Avinex and EAL. This is China’s first merger control remedy case that involves purely domestic entities. Avinex operates two international airports in Shanghai, Pudong Airport and Hongqiao Airport, and provides ground handling, supply chain management and logistics services for air freight. EAL offers air express shipping services and integrated ground handling and logistics solutions. The JV would provide smart airport cargo terminal services at Pudong Airport.
SAMR identified a horizontal overlap as Avinex, EAL and the JV provide air cargo terminal services at Pudong Airport, and a vertical overlap with Avinex and the JV’s upstream air cargo terminal services and EAL’s downstream air freight services. SAMR found that the JV would obtain a dominant position at the upstream air cargo terminal services market at Pudong Airport, in view of Avinex and EAL’s combined market share of over 70% and the market’s high entry barriers. SAMR also expressed concerns that China Eastern Airlines, the ultimate controller of EAL, could strengthen its market power in the downstream air freight services market by leveraging the JV’s dominance in the upstream market for air cargo terminal services. To ease competition concerns, SAMR imposed a range of behavioral remedies, including requiring the parties to provide air cargo terminal services on FRAND terms, keep separate their cargo terminal businesses at Pudong Airport and compete fairly as independent entities.
Korean Air Co., Ltd. (“Korean Air”) / Asiana Airlines, Inc. (“Asiana Airlines”). In December 2022, SAMR conditionally approved Korean Air’s proposed acquisition of Asiana Airlines. SAMR found that the transaction may restrict competition in the market of passenger air-transport services on 15 routes between China and South Korea. The parties offered a number of commitments to ease SAMR’s competition concerns, to which SAMR agreed, including the following: (1) to transfer takeoff and landing slots at specified airports to airlines seeking to commence air services on certain routes; (2) to maintain services of the Seoul-Guangzhou and Seoul-Dalian routes at the 2019 level in terms of flight frequency and number of passenger seats; and (3) to provide passenger ground services at South Korean airports to new Chinese market entrants on FRAND terms.
3. Non-Merger Enforcement
With regard to non-merger enforcement actions, SAMR and its local bureaus continue to target public utilities, healthcare, construction and platform companies. Two of the cases stood out in particular due to the scale of the business and the significant amount of fine:
Geistlich Pharma AG (“Geistlich”) – Resale Price Maintenance (“RPM”). In February 2022, the Beijing Administration for Market Regulation (“Beijing AMR”) fined Geistlich, a Swiss-owned pharmaceutical company specializing in regenerative medical devices, RMB 9.12 million (~USD 1.45 million) for engaging in RPM practices between 2008 and 2020. The fine represented 3% of the company’s revenue in China in 2020. The Beijing AMR found that the company included a resale pricing clause in distribution agreements and explicitly required, through in-person meetings, WeChat and other verbal communications, that distributors sell specified products at a price no lower than a certain percentage of its recommended prices. According to the Beijing AMR, Geistlich monitored the resale prices closely, rewarded distributors that complied with the resale price requirements and penalized those who did not follow the requirements by temporarily raising the purchase price of its products. The Beijing AMR noted that Geistlich’s conduct restricted competition in a market with high entry barriers, highlighting the fact that Geistlich is a global market leader with no local competition and thus creating an imbalance of bargaining power with distributors.
China National Knowledge Infrastructure (“CNKI”) – Abuse of Dominance. In December 2022, SAMR imposed a fine of RMB 87.6 million (~USD 12.6 million) on CNKI, which is China’s most renowned online academic database service provider, for abuse of dominance. The fine represented 5% of CNKI’s revenue in 2021. In concluding that CNKI is in a dominant position, SAMR emphasized CNKI’s market share (over 50% in the market of online database for Chinese-language academic literature), scale and coverage of users (cooperates with over 90% of universities in China) and volume and quality of content (possesses the largest number of high-quality academic journals). SAMR found that between 2014 and 2021, CNKI abused its dominant position by (1) imposing a price hike of over 10% of its average annual fees, which SAMR viewed as unreasonably excessive; and (2) signing exclusive cooperation agreements with academic journals and universities, which restricted the latter from cooperating with other academic databases.
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 following authors in the firm’s Hong Kong office:
Sébastien Evrard (+852 2214 3798, sevrard@gibsondunn.com)
Bonnie Tong (+852 2214 3762, btong@gibsondunn.com)
© 2023 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome.
Decided February 28, 2023
Bittner v. United States, No. 21-1195
Today, in a 5–4 opinion, the Supreme Court held that the Bank Secrecy Act imposes a single penalty for each nonwillful failure to file an annual form disclosing foreign financial accounts, regardless of the number of accounts that were not disclosed.
Background: The Bank Secrecy Act requires U.S. residents and citizens to report all of their foreign financial accounts each year in a report known as an FBAR (for Report of Foreign Bank and Financial Reports). The Act also imposes statutory penalties on those who do not file an accurate, timely report. Nonwillful violations carry a maximum penalty of $10,000, and willful violations trigger a maximum penalty of $100,000 or 50% of the balance of the account at issue.
Alexandru Bittner did not timely file timely FBARs to report his more than 50 foreign bank accounts over a five-year period. The IRS imposed a $10,000 penalty for 272 separate nonwillful violations—in other words, a separate penalty for each account that was not timely reported each year—for a total statutory penalty of $2.72 million. Bittner fought the assessment on the theory that he committed only five violations of the Act—one for each year he did not file a timely FBAR. The Fifth Circuit, departing from a previous decision of the Ninth Circuit, disagreed, holding that the Bank Secrecy Act imposes a separate penalty for each improperly disclosed foreign account.
Issue: Whether a person who nonwillfully fails to report multiple foreign financial accounts faces a single annual penalty for not filing a complete FBAR or separate penalties for each account that was not properly reported.
Court’s Holding:
The Bank Secrecy Act authorizes only a single $10,000 penalty for the nonwillful failure to file an annual FBAR, even if multiple foreign financial accounts are not reported.
“Best read, the [Bank Secrecy Act] treats the failure to file a legally compliant report as one violation carrying a maximum penalty of $10,000, not a cascade of such penalties calculated on a per-account basis.”
Justice Gorsuch, writing for the Court
What It Means:
- The Court’s holding that the Bank Secrecy Act’s penalty provision for nonwillful violations operates on a per-form basis, with one penalty each year there is no timely FBAR, significantly curtails monetary liability under the Act. An FBAR lists ten accounts on average, which means that, had the government prevailed, the average maximum penalty for nonwillful violations would have been $100,000 rather than $10,000.
- According to the Court, its interpretation avoids anomalies that would have been created by reading the Act to impose a separate $10,000 penalty for each foreign account not reported in a timely FBAR. Under the interpretation the government urged, for instance, it would have been possible for penalties for nonwillful violations to exceed those for willful violations.
- The Court distinguished the Act’s provisions authorizing penalties for willful violations from those authorizing penalties for nonwillful violations, emphasizing that the Act permits penalties on a per-account basis for certain willful violations. The Court explained that by expressly allowing per-account penalties for certain willful violations, Congress indicated that per-account penalties were not available for nonwillful violations.
- The Court declined to decide several other issues concerning penalties under the Bank Secrecy Act, including what, if any, mens rea the government must prove to impose a non-willful penalty; whether a person who fails to file a timely report and who later files an inaccurate report would be subject to two penalties or one; and whether violations of the Act’s separate recordkeeping requirements accrue on a per-account basis.
The Court’s opinion is available here.
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
Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com |
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Michael J. Desmond +1 213.229.7531 mdesmond@gibsondunn.com |
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Eric B. Sloan +1 212.351.2340 esloan@gibsondunn.com |
Munich partner Lutz Englisch, of counsel Birgit Friedl and associates Marcus Geiss and Sonja Ruttmann are the authors of “Deutsches Gesellschaftsrecht 2023: Ein turbulentes Jahr” [PDF], published in the 1-2/2023 issue of M&A Review. The article summarizes selected important developments in German transactional law with specific focus on M&A activities and provides an outlook for the year 2023.
In this webcast, Gibson Dunn professionals and the current and former Executive Directors of the Federal Permitting Improvement Steering Council discuss how the FAST-41 program can help major infrastructure projects cut through red tape and get shovels in the ground faster. For certain “covered projects,” FAST-41 requires all of the major agencies involved in the permitting process to coordinate their reviews, stick to a timeline, and be accountable for delays. It also reduces the NEPA statute of limitations to two years, down from six, for covered projects. We discuss the recent successes of FAST-41 and how more projects can take advantage of the program’s benefits. We also review recent legislative efforts to improve the federal permitting process and discuss opportunities for permitting process improvements in the 118th Congress.
PANELISTS:
Roscoe Jones is a partner in Gibson, Dunn & Crutcher’s Washington, DC office, co-chair of the Firm’s Public Policy Practice Group, and a member of the Congressional Investigations Practice Group. Mr. Jones’s practice focuses on promoting and protecting clients’ interests before the U.S. Congress and the Administration, including providing a range of public policy services to clients such as strategic counseling, advocacy, coalition building, political intelligence gathering, substantive policy expertise, legislative drafting, and message development. Roscoe spent a decade on Capitol Hill as a chief of staff, legislative director and senior counsel advising three US Senators and a member of Congress, including Senators Feinstein, Booker and Leahy and Rep. Spanberger.
David Fotouhi is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher. He practices in the firm’s Litigation Department and is a member of the firm’s Environmental Litigation and Mass Tort practice group. Mr. Fotouhi joined the firm after nearly four years at the U.S. Environmental Protection Agency (EPA), where he served as Acting General Counsel, Principal Deputy General Counsel, and Deputy General Counsel. Mr. Fotouhi combines his expertise in administrative and environmental law with his litigation experience and a deep understanding of EPA’s inner workings to represent the firm’s clients in enforcement actions, regulatory challenges, and other environmental litigation.
Amanda H. Neely is of counsel in the Washington, D.C. office of Gibson, Dunn & Crutcher and a member of its Public Policy, Congressional Investigations, and Litigation Practice Groups. Ms. Neely served as Director of Governmental Affairs for the Senate Homeland Security and Governmental Affairs, and General Counsel to Senator Rob Portman (R-OH), as well as Oversight Counsel on the House Ways & Means Committee. She was the lead staff drafter and negotiator of the Federal Permitting Reform and Jobs Act, which became law in the Infrastructure Investment and Jobs Act in 2021.
Christine Harada is a Biden-Harris Administration Presidential appointee who serves as the Executive Director of the Federal Permitting Improvement Steering Council. As Executive Director, Harada assists Permitting Council member agencies in managing a portfolio of nearly $100 billion in large-scale infrastructure projects—most of which are renewable energy, coastal restoration, and electricity transmission projects. She assists Federal agencies in developing and implementing comprehensive, project-specific timetables for all required infrastructure permitting reviews and authorizations for FAST-41 covered infrastructure projects, advancing the administration’s infrastructure agenda and the nationwide transition to a clean energy economy.
Alex Herrgott is a nationally-recognized infrastructure policy and project delivery expert. In January 2021, he created The Permitting Institute, which serves as a central resource and leading advocate for accelerating investment in rebuilding, expanding, and modernizing America’s aging infrastructure while preserving our environmental, cultural, and historic resources. He served as Executive Director of the Federal Permitting Improvement Steering Council from 2018 to 2021, and previously served as the Director of Infrastructure on the Council on Environmental Quality; Deputy Staff Director of the U.S. Senate Environment and Public Works Committee; and Legislative Directorfor U.S. Senator Jim Inhofe (R-OK).
On February 15, 2023, the Securities and Exchange Commission (the “SEC”) adopted final rule changes intended to reduce risk in clearance and settlement for most broker-dealer securities transactions and proposed new rules designed to enhance safeguards for customer assets managed by investment advisers.
The new final rules amend Rule 15c6-1 under the Securities Exchange Act of 1934 (the “Exchange Act”) to shorten the standard settlement cycle for broker-dealer transactions from two business days after the trade (“T+2”) to one business day (“T+1”). The new rules also shorten the separate settlement cycle for firm commitment offerings, including initial public offerings, from T+4 to T+2, although most market participants already employ a T+2 settlement cycle for these offerings.
The rule amendments also adopt Rule 15c6-2, requiring a broker or dealer to establish, maintain and enforce written policies or enter into written agreements that ensure prompt completion of applicable allocation, confirmation or affirmation processes. To comply with the new rule, such agreements or policies must ensure that allocation, confirmation or affirmation processes be completed as soon as technologically practicable but in no case later than end of day on the trade date. Additionally, the new rules amend Rule 204-2 under the Investment Advisers Act of 1940 (the “Investment Advisers Act”) to require investment advisers to keep records for transactions subject to Rule 15c6-2 above. Finally, the new final rules adopt Rule 17Ad-27 under the Exchange Act and amend Regulation S-T to require clearing agencies that provide a central matching service to facilitate straight-through processing and submit to the SEC via EDGAR an annual report regarding straight-through processing implementation. The compliance date for these rule changes is set for May 28, 2024.
These changes come in part as a response to the unprecedented volatility associated with the so-called “meme stock craze” of 2021. Commissioner Jaime Lizárraga supported the adoption of new rules, opining that it “helps mitigate some of the risks that drove stock price volatility and significant margin calls” during that event. SEC Chair Gary Gensler also supported the rule amendments, stating: “Cosmo might say this adoption will take our plumbing from bronze to copper. I say that, taken together, these amendments will make our market plumbing more resilient, timely, orderly, and efficient.” Regarding the compliance date, he offered: “This implementation comes more than three years after key industry members first proposed shortening the settlement cycle, and a year and a quarter from now, providing sufficient time in my view for the transition.” Other commissioners pushed back on the May 2024 implementation timeline. Commissioner Mark T. Uyeda did not support the final rules, saying that that in his view the SEC is “in an imprudent rush away from a sensible transition date[.]” Along with Commissioner Uyeda, Commissioner Hester M. Pierce also advocated for a compliance date in September 2024. The changes also came with discussion that the SEC may eventually look to further reduce the settlement window. Via a statement, Commissioner Caroline A. Crenshaw said that moving to instantaneous trade processing (“T+0”) “may be both desirable and feasible in the future.”
The SEC’s proposed changes to Rule 206(4)-2 under the Investment Advisers Act would rely on authority granted by section 411 of the Dodd-Frank Act to broaden the scope of, and protections for, assets protected by the rule. While the current rule protects client “funds and securities” under the care of an investment adviser, the proposed rule would encompass any client asset in the possession of the investment adviser and any client asset that the investment adviser has authority to obtain. This move would bring numerous kinds of physical assets and all crypto-assets into the scope of the rule’s protection. Under the current rule, protected assets are covered when they are in the “custody” of an investment adviser, and the proposed changes would expand the definition of such custody to include situations where the adviser has discretion to trade those assets. While the current rule requires investment advisers to maintain client assets with a qualified custodian unless those assets are privately offered securities, the new rule would narrow that exception to situations where a qualified custodian is unavailable. Additionally, a qualified custodian would not include platforms used to trade assets like crypto, a move seemingly made to address the recent failures and struggles of major crypto-asset trading platforms. The proposed rule also requires that investment advisers title or register assets in the client’s name and avoid asset commingling and prohibits investment advisers or related persons from taking certain interests in client assets under the adviser’s custody without written consent. Finally, the proposed changes would further amend Rule 204-2 to enhance recordkeeping requirements related to covered client assets under the custody of an investment adviser. The proposed rule changes will be subject to a 60 day comment period after publication in the Federal Register.
Chair Gensler said in support of the rule that “investors working with advisers would receive the time-tested protections that they deserve for all of their assets, including crypto assets, consistent with what Congress envisioned.” Commissioner Pierce, who was the only commissioner to vote against the proposal, raised a number of objections, concluding that “[w]hile our intent is good, the result may impose costs on investors that outweigh the benefits.” Commissioner Uyeda added that the proposal “appears to mask a policy decision to block access to crypto as an asset class,” which “deviates from the Commission’s long-standing position of neutrality on the merits of investments,” even though he voted in favor of the proposal as a means to gauge the public’s reaction.
The following Gibson Dunn attorneys assisted in preparing this client update: Hillary Holmes, Harrison Tucker, Peter Wardle, and Kyle Clendenon.
Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, any of the following leaders of the firm’s Capital Markets or Securities Regulation and Corporate Governance practice groups, or the following authors:
Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com)
Harrison Tucker – Houston (+1 346-718-6643, htucker@gibsondunn.com)
Peter W. Wardle – Los Angeles (+1 213-229-7242, pwardle@gibsondunn.com)
Capital Markets Group:
Andrew L. Fabens – New York (+1 212-351-4034, afabens@gibsondunn.com)
Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com)
Stewart L. McDowell – San Francisco (+1 415-393-8322, smcdowell@gibsondunn.com)
Peter W. Wardle – Los Angeles (+1 213-229-7242, pwardle@gibsondunn.com)
Securities Regulation and Corporate Governance Group:
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com)
James J. Moloney – Orange County (+1 949-451-4343, jmoloney@gibsondunn.com)
Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com)
© 2023 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. Please note, prior results do not guarantee a similar outcome.
Decided February 22, 2023
Helix Energy Solutions Group, Inc. v. Hewitt, No. 21-984
Today, the Supreme Court held that an offshore oil rig supervisor who was paid nearly $1,000 for each day he worked was not exempt from the Fair Labor Standards Act because he was not paid a predetermined amount per week and thus was not compensated on a “salary basis” in accordance with applicable regulations.
Background: The Fair Labor Standards Act (“FLSA”) generally requires employers to pay time and a half to employees who work more than 40 hours in a week, but exempts certain bona fide executive, administrative, and professional employees from its overtime pay requirement. Implementing regulations specify that the exemption requires, among other things, that exempt employees be paid on a “salary basis,” meaning that they are paid on a weekly or less frequent basis and receive a predetermined amount for each pay period in which they perform any work. Michael Hewitt was employed as a supervisor on an offshore oil rig and worked 84-hour weeks for 28 days at a time, for which he was paid on a daily basis. He later sued his employer for overtime pay under the FLSA. The Fifth Circuit, sitting en banc, held that Hewitt was not paid on a “salary basis” and thus was entitled to overtime pay because he was not exempt under 29 C.F.R. § 541.602(a).
Issue: Whether highly compensated executive employees who are paid at daily rates are paid on a “salary basis.”
Court’s Holding:
A highly compensated executive employee who is paid at a daily rate is not paid on a “salary basis” and thus is not exempt from the FLSA under 29 C.F.R. § 541.602(a).
“The question here is whether a high-earning employee is compensated on a ‘salary basis’ when his paycheck is based solely on a daily rate…We hold that such an employee is not paid on a salary basis, and thus is entitled to overtime pay.”
Justice Kagan, writing for the Court
What It Means:
- The Court held that under the regulations, an employee is paid on a “salary basis” if the employee receives a fixed amount per week no matter how many days he has worked. The Court rejected the employer’s argument that Hewitt was paid on a salary basis because he was paid at least $963 (the daily rate) in any week in which he worked, because this was not a flat, predetermined amount fixed independently of the number of days Hewitt worked.
- The Court stated that employees paid on a daily or hourly basis can still be exempt from the FLSA’s overtime pay requirement if their employers also guarantee a weekly amount of pay that is more than $455 “regardless of the number of hours, days or shifts worked,” and “a reasonable relationship exists between the guaranteed amount and the amount actually earned.” 29 C.F.R. § 541.604(b).
- The impact of the Court’s ruling may be limited because most employees who perform executive duties and who qualify as “highly compensated employees” under the Department of Labor’s regulation are paid a fixed salary, not one based on a daily rate. The Court’s decision addressed only executive employees, but the regulation also covers administrative and professional employees.
- The Court declined to reach an argument, first raised on appeal and endorsed by Justice Kavanaugh in dissent, that the Department of Labor’s regulations were inconsistent with the FLSA’s statutory exemption for workers “employed in a bona fide executive . . . capacity.” 29 U.S.C. § 213(a)(1). In dissent, Justice Kavanaugh explained that the FLSA’s exemption “focuses on whether the employee performs executive duties,” so “it is questionable whether the Department’s regulations—which look not only at an employee’s duties but also at how much an employee is paid and how an employee is paid—will survive if and when the regulations are challenged as inconsistent with the Act.” This issue could be the subject of future litigation.
The Court’s opinion is available here.
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
Thomas H. Dupree Jr. +1 202.955.8547 tdupree@gibsondunn.com |
Allyson N. Ho +1 214.698.3233 aho@gibsondunn.com |
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Related Practice: Labor and Employment
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Katherine V.A. Smith +1 213.229.7107 ksmith@gibsondunn.com |
Related Practice: Administrative Law and Regulatory Practice
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