Paris associate Alexis Downe is the author of “Séparer et rapprocher… Voyage au pays des comparatistes” [PDF] published by Jurisprudence – Revue critique in August 2020.
Los Angeles partner Benyamin Ross, New York associate Mark Mixon Jr. and Los Angeles associate Reginald Glosson are the authors of “Court of Chancery Considers Bundled Assets and Rights of First Refusal,” [PDF] published by Delaware Business Court Insider on July 29, 2020.
The coronavirus (COVID-19) pandemic has affected the current economic environment and impacted companies’ short- and long-term liquidity. Historically low interest rates and the U.S. Federal Reserve programs aimed at mitigating the impact of the pandemic on the U.S. economy have led to unprecedented levels of corporate debt refinancing.
Please join our panel as they discuss recent developments in liability management, including raising capital in combination with debt tender offers, restructuring existing debt in exchange offers, and the anticipation of other debt repurchase programs, in order to reduce interest payments, enhance liquidity and manage debt maturities.
View Slides (PDF)
PANELISTS:
Andrew L. Fabens is a partner in the New York office of Gibson, Dunn & Crutcher. Mr. Fabens is Co-Chair of Gibson Dunn’s Capital Markets Practice Group and is a member of Gibson Dunn’s Securities Regulation and Corporate Governance Practice Group. Mr. Fabens advises companies on long-term and strategic capital planning, disclosure and reporting obligations under U.S. federal securities laws, corporate governance issues and stock exchange listing obligations. He represents issuers and underwriters in public and private corporate finance transactions, both in the United States and internationally. His experience encompasses initial public offerings, follow-on equity offerings, investment grade, high-yield and convertible debt offerings and offerings of preferred, hybrid and derivative securities. In addition, he regularly advises companies and investment banks on corporate and securities law issues, including M&A financing, spinoff transactions and liability management programs.
Stewart McDowell is a partner in the San Francisco office of Gibson, Dunn & Crutcher. She is a member of the firm’s Corporate Transactions Practice Group, Co-Chair of the Capital Markets Practice Group. Ms. McDowell’s 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. The Recorder has named Ms. McDowell as a “Women Leader in Tech Law” for four years in a row. She is ranked by Chambers USA for Capital Markets: Debt & Equity (California). She was also named a “Top Woman Lawyer” by the Daily Journal in 2017. Ms. McDowell is a member of the California State Bar and the New York Bar Association.
James J. Moloney is a corporate partner resident in the Orange County office of Gibson Dunn and serves as Co-Chair of the firm’s Securities Regulation and Corporate Governance Practice Group. He is also a member of the firm’s Corporate Transactions Practice Group, focusing primarily on securities offerings, mergers & acquisitions, friendly and hostile tender offers, proxy contests, going-private transactions and other corporate matters. Mr. Moloney was the principal draftsman of Regulation M-A, a comprehensive set of rules relating to takeovers and shareholder communications, that was adopted by the Commission in October 1999. Mr. Moloney advises a wide range of listed public companies on reporting and other obligations under the securities laws, the establishment of corporate compliance programs, and continued compliance with corporate governance standards under the securities laws and stock exchange rules. He advises public company boards and committees of independent directors in connection with mergers, stock exchange proceedings, as well as SEC and other regulatory investigations.
Rodrigo Surcan is an associate in the New York office of Gibson, Dunn & Crutcher. He is a member of Gibson Dunn’s Capital Markets, Energy and Infrastructure, Financial Institutions, Global Finance, Latin America, Securities Regulation and Corporate Governance Practice Groups. Mr. Surcan’s practice focuses primarily on representing corporate and investment banking clients in public and private corporate finance transactions. His experience encompasses domestic and cross-border (including Latin American) public and private debt and equity offerings, including SEC registered and Rule 144A/Regulation S offerings, private placements, high yield and high grade debt offerings, senior, subordinated and secured offerings, project bonds, IPOs, follow-on and secondary equity offerings, MTN programs, block trades, tender offers, consent solicitations and exchange offers.
Dallas associate Bennett Rawicki is the author of “Numerosity Analysis Fix Can Improve Class Cert. Decisions,” [PDF] published by Law360 on July 28, 2020.
Los Angeles partner Michael Dore is the author of “Privacy Rights after Carpenter,” [PDF] published by Los Angeles Lawyer in its July/August 2020 issue.
This update provides an overview and summary of key class action developments during the second quarter of 2020 (April through June).
Part I discusses two significant decisions addressing Rule 23’s commonality and predominance requirements.
Part II analyzes a decision from this past quarter relating to equitable restitution, an oft-discussed issue in consumer class actions.
Part III covers recent decisions on the injury-in-fact requirement for Article III standing in class actions after Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016)—a subject of ongoing coverage in these class action alerts.
I. Federal Circuit Courts Continue to Emphasize the Rigorous Analysis Required at the Class Certification Stage
This past quarter, the Ninth and Third Circuits issued two decisions that emphasized the need for district courts to conduct a rigorous analysis in assessing whether Rule 23’s commonality and predominance requirements are satisfied.
The Ninth Circuit in Grodzitsky v. American Honda Motor Co., 957 F.3d 979 (9th Cir. 2020), issued a significant ruling that makes clear that district courts must assess expert testimony submitted in support of class certification under Daubert. Id. at 984. The district court in Grodzitsky had denied class certification on commonality grounds because the plaintiffs could not establish that an alleged defect in defendant’s vehicles was common to all putative class members. Id. Although plaintiffs offered expert testimony to support the existence of a common defect, the district court excluded that testimony under Daubert, finding deficiencies in the expert’s methodology and a lack of supporting studies or testing to corroborate the expert’s conclusions. Id. In affirming the district court’s denial of class certification, the Ninth Circuit held that the court had properly applied Daubert at the class certification stage, and that the exclusion of the expert’s testimony was fatal to certification given the “rigorous analysis” of commonality that the court was required to undertake. Id. at 986–87.
In another expert-focused class certification ruling, the Third Circuit in In re Lamictal Direct Purchaser Antitrust Litigation, 957 F.3d 184 (3d Cir. 2020), emphasized that Rule 23 requires a rigorous analysis of competing expert evidence. The plaintiffs there alleged that an agreement between two drug manufacturers to settle a patent dispute was an impermissible “reverse payment agreement” that violated antitrust laws. Id. at 189. Notwithstanding the complexity of individual factors relevant to the amount that a particular direct purchaser actually paid for the drugs, the plaintiffs relied on an expert’s model using an “average hypothetical price” to establish that the entire class suffered a competitive injury; the district court then relied on this model to certify a class of all companies that purchased drugs from the defendants. Id. at 193–94. The Third Circuit reversed the order granting class certification, holding that the district court abused its discretion by assuming that “averages are acceptable” to prove that “common issues predominated by a preponderance of the evidence.” Id. at 194. To the contrary, relying on averages without conducting the requisite analysis was not acceptable because that could “mask individualized injury.” Id.
The Third Circuit specifically rejected plaintiffs’ argument that the Supreme Court had held in Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct. 1036 (2016), that so-called “representative” evidence was sufficient to satisfy Rule 23’s predominance requirement unless “no reasonable juror could believe the common proof at trial.” Lamictal, 957 F.3d at 191–92. The Third Circuit emphasized that Tyson Foods was grounded in a special rule for certain actions under the Fair Labor Standards Act, and thus did not relieve plaintiffs in an antitrust action of their obligation to “prove their claim is capable of common proof by a predominance of the evidence” at the class certification stage. Id. at 192.
II. The Ninth Circuit Addresses the Availability Equitable Remedies in Consumer Class Actions Litigated in Federal Court
In an important decision addressing California’s consumer protection laws, the Ninth Circuit held in Sonner v. Premier Nutrition Corp., 962 F.3d 1072 (9th Cir. 2020), that federal courts cannot entertain equitable claims when an adequate legal remedy exists, even when state law would permit issuance of equitable relief. This is a potentially significant limitation on consumer class actions brought in, or removed to, federal courts within the Ninth Circuit.
The plaintiff in Sonner brought a putative class action against a dietary supplement manufacturer. The operative complaint alleged false advertising and demanded injunctive relief and restitution under California’s Unfair Competition Law (“UCL”) and Consumers Legal Remedies Act (“CLRA”), as well as damages under the CLRA. After the class was certified and after the plaintiff defeated the defendant’s motion for summary judgment, the plaintiff filed an amended complaint and dropped her CLRA damages claim to avoid a jury trial. The district court dismissed the claim for equitable restitution on the ground that the plaintiff “failed to establish that she lacked an adequate legal remedy for the same past harm for which she sought equitable restitution.” Id. at 1075–76.
The plaintiff argued that “state law alone decides whether she must show a lack of an adequate legal remedy before obtaining restitution . . . [and] the California legislature abrogated the state’s inadequate-remedy-at-law doctrine for claims seeking equitable restitution under the UCL and CLRA.” Id. at 1076. But the Ninth Circuit disagreed, holding that “federal courts must apply equitable principles derived from federal common law to claims for equitable restitution under [the UCL and CLRA].” Id. at 1074.
The Ninth Circuit went on to apply the Supreme Court’s decision in Guaranty Trust Co. of New York v. York, 326 U.S. 99 (1945), which held that because state law cannot expand a federal court’s equitable powers, “even if a state authorizes its courts to provide equitable relief when an adequate legal remedy exists, such relief may be unavailable in federal court because equitable remedies are subject to traditional equitable principles unaffected by state law.” Sonner, 962 F.3d at 1078–79. According to the Ninth Circuit, “the strong federal policy protecting the constitutional right to a trial by jury[,]” which the adequate-remedy-at-law doctrine is meant to vindicate, “outweighs [the] procedural interest” afforded by the CLRA and UCL. Id. at 1079.
Applying these principles, the Ninth Circuit concluded that the plaintiff failed to make a showing of an inadequate legal remedy because she sought “the same sum in equitable restitution [under the UCL] as she requested in damages [under the CLRA] to compensate her for the same past harm.” Id. at 1081.
III. Courts Wrestle with Article III Standing in Putative Class Actions
Over the past four years, the federal courts of appeals have issued a steady stream of decisions interpreting and applying the Supreme Court’s landmark Article III standing decision in Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016), to putative class actions. (For recent coverage of post-Spokeo decisions, please see the following quarterly updates: First Quarter 2020 Update on Class Actions, Year-End and Fourth Quarter 2019 Update on Class Actions, and Third Quarter 2019 Update on Class Actions). This past quarter was no exception, with two decisions finding that plaintiffs had Article III standing under Spokeo.
First, the Ninth Circuit held that even temporary financial loss can create an injury-in-fact for Article III purposes. In Van v. LLR, Inc., 962 F.3d 1160 (9th Cir. 2020), the plaintiff alleged that she was injured when, as a result of a related lawsuit, the defendant refunded certain improperly charged sales taxes (approximately $531) but failed to pay interest on the refunded funds (alleged to equal $3.76). The defendant moved to dismiss for lack of Article III standing, arguing that the plaintiff could not establish injury-in-fact because she had received a full refund of the tax charges and “her claim for interest alone was insufficient to establish standing.” Id. at 1161. The Ninth Circuit rejected this argument, holding that “the loss of a significant amount of money . . . for a substantial amount of time . . . is not too trifling to support standing.” Id. at 1162. The court likewise rejected the defendant’s argument that the lost time value of money, standing alone, was too speculative an injury to support Article III standing. Id. at 1162–63.
Second, the Seventh Circuit in Bryant v. Compass Group USA, Inc., 958 F.3d 617 (7th Cir. 2020), held that the alleged collection of an employee’s fingerprints without first obtaining her written consent, as required by the Illinois Biometric Information Privacy Act, was sufficiently concrete for Article III standing. Applying Spokeo, the Seventh Circuit reversed the district court’s ruling to the contrary, and emphasized that an injury need not be “tangible” in order to satisfy Article III’s concreteness requirement. Id. at 620. According to the Seventh Circuit, the plaintiff had not only alleged a concrete “invasion of her private domain,” but also an informational injury, insofar as information was withheld from her and “impaired her ability to use the information in a way the statute envisioned.” Id. at 624. The Seventh Circuit, however, held that the company’s failure to make its biometric retention schedule available to the public was not an injury-in-fact because the statutory duty to disclose was owed to the public generally, and the plaintiff therefore “did not suffer a concrete and particularized injury.” Id. at 626.
The following Gibson Dunn lawyers contributed to this client update: Christopher Chorba, Theane Evangelis, Kahn Scolnick, Bradley Hamburger, Michael Holecek, Lauren Blas, Wesley Sze, Emily Riff, and David Rubin.
Gibson Dunn attorneys are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Class Actions or Appellate and Constitutional Law practice groups, or any of the following lawyers:
Theodore J. Boutrous, Jr. – Co-Chair, Litigation Practice Group – Los Angeles (+1 213-229-7000, [email protected])
Christopher Chorba – Co-Chair, Class Actions Practice Group – Los Angeles (+1 213-229-7396, [email protected])
Theane Evangelis – Co-Chair, Class Actions Practice Group – Los Angeles (+1 213-229-7726, [email protected])
Kahn A. Scolnick – Los Angeles (+1 213-229-7656, [email protected])
Bradley J. Hamburger – Los Angeles (+1 213-229-7658, [email protected])
© 2020 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
The Senior Managers and Certification Regime (“SMCR”) has applied to Financial Conduct Authority (“FCA”)-solo regulated firms since 9 December 2019. Individuals from across firms will no doubt remember the level of engagement required to prepare firms for the SMCR. Over six months on from implementation, firms are testing their SMCR implementation and assessing what is required to ensure continued compliance. This client alert:
- provides a brief overview of the key changes that firms should have already implemented;
- summarises key lessons from the FCA’s approach to enforcement of the regime against the banks; and
- details the steps that firms should be undertaking prior to the extended deadline of 31 March 2021.
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Reminder of key changes
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Lessons from the FCA’s approach to the SMCR relating to banks
In undertaking an assessment of their firm’s implementation of SMCR, clients find it helpful to review the implementation issues encountered by banks and, in particular, the FCA’s review into the embedding of the SMCR in the banking sector. There are several points arising from the review of particular interest.
Dividing line between non-executive and executive directors
Some non-executive directors expressed concern that the regime expected too much from the board. They perceived a risk that the line between a non-executive and executive could become blurred as board members become more involved in operations of the business.
The FCA clarified, however, that the SMCR does not seek to redefine the roles of non-executives. In particular, it does not expect non-executives to act more like executive directors. Indeed, it views the oversight role of non-executive directors and their ability to challenge management as a key safeguard for the interests of firms’ stakeholders. The FCA did note that, especially in larger firms, the responsibilities of SMF non-executive directors are often likely to be considerable.
Meaning of “reasonable steps”
The FCA stated that a number of senior managers expressed concern around understanding the meaning of “reasonable steps” in the context of their business. In response to this, the FCA pointed to guidance in its Decision Procedure and Penalties Manual. In determining what would constitute taking “reasonable steps” to avoid a contravention occurring or continuing, the FCA will consider, amongst other things:
- such steps that a competent senior manager would have taken at that time and in all the circumstances;
- whether the senior manager exercised reasonable care when considering the information available to them;
- the nature, scale and complexity of the firm’s business; and
- whether the senior manager took reasonable steps to (i) ensure that any delegation of their responsibilities, where this was itself reasonable, was to an appropriate person with the necessary capacity, competence, knowledge, seniority and skill; and (ii) oversee the discharge of the delegated responsibility effectively.
However, the FCA noted that it is not possible nor helpful to provide an exhaustive list to cover every situation. It stressed that appropriate controls and processes are an important part of senior managers doing what they reasonably can to prevent misconduct, although they need to “think more broadly and…create an environment where the risk of misconduct is minimised, for example through nurturing healthy cultures”.
The SMCR and firm culture are intrinsically linked. SMCR implementation gave firms an opportunity to also take stock of their own culture, whereas before the SMCR arrived, culture was perhaps fairly low down on the agenda for some firms.
In its feedback on the review, the FCA does specifically discuss its findings relating to firms’ culture. Whilst it reported that firms have struggled to find appropriate ways of measuring culture, it was noted that many firms described a stronger tone and ownership from the top – there was a change in the level of detail, clarity and quality of conversations on culture and expected behaviours. All of the firms talked about the work they had done to create a culture of challenge, escalation and providing a safe environment for staff to raise issues.
Certification
The FCA noted that whilst there were positive developments, such as firms having widened their approach to assessment of staff beyond solely technical skills, most firms could not demonstrate the effectiveness of their assessment approach, use of subjective judgement or how they ensure consistency across the population.
There is no harm in solo-regulated firms taking the opportunity now to take a look at their certification procedures to ensure that they are sufficient (particularly given that firms still have time before the first certificates need to be issued for certified staff – see “Next steps for firms prior to 31 March 2021” below).
Conduct rules
In its findings, the FCA specifically flagged that the main weaknesses identified in the review related to the implementation of the conduct rules. Three key issues were particularly troubling to the FCA:
- evidence suggested that firms had not sufficiently tailored their conduct rules training to staff’s job roles;
- there was insufficient evidence to be confident that firms have clearly mapped the conduct rules to their values, to “bring the conduct rules to life”; and
- firms were often unable to explain what a conduct rule breach looked like in the context of their business.
This is a clear signal to solo-regulated firms to ensure that they focus on ensuring proper implementation of the conduct rules. Indeed, the FCA states that it will increase its supervisory focus here. As noted below, firms are required to train all remaining staff on the conduct rules prior to them coming into force. Crucially, it is particularly evident from the FCA’s findings that such training be as tailored as possible.
Enforcement action to date
There has only been once successful enforcement action under the banking SMCR regime. This related to James Staley, the Chief Executive of Barclays Group (in May 2018). Mr Staley was fined a total of £642,430 for failing to act with due skill, care and diligence in the way he acted in response to a letter containing various allegations, received by Barclays in June 2016.
Whilst the FCA, therefore, has been relatively quiet from an enforcement perspective to date, firms should not be drawn into a false sense of security. This is particularly the case given that the extension of the regime brought within scope a significant number of firms (approximately 47,000). Additionally, a number of these firms are also more likely to be viewed as “low hanging fruit” by the FCA – some firms will perhaps have less sophisticated governance procedures in place (meaning potentially more breaches) and it will be much easier for the FCA to identify the decision-making processes of these solo-regulated firms when it is investigating breaches.
Post-31 March 2021, therefore, we anticipate an increase in enforcement action from the FCA against solo-regulated firms, as we move away from the implementation phase of the SMCR (indeed, we understand that there are currently a number of enforcement actions under way within the Enforcement Division and, therefore, we can expect related final notices in due course).
Next steps for firms prior to 31 March 2021
Initially, the rules set out below were set to apply as from 9 December 2020. On 30 June 2020, however, the FCA announced that, in light of the COVID-19 pandemic, the deadline for solo-regulated firms to undertake the first assessment of the fitness and propriety of their certified persons has been delayed until 31 March 2021.
In order to make sure that various SMCR deadlines remain consistent, the FCA also stated that intends to consult on extending the deadline for the following requirements from 9 December 2020 to 31 March 2021:
- the date the conduct rules come into force for non-senior managers; and
- the deadline for submission of information about directory persons to the register.
Firms should continue with their programmes of work in these areas and, if they are able to certify staff earlier than March 2021, they should do so. The FCA emphasised that firms should not wait to remove staff who are not fit and proper from certified roles.
The FCA will still publish details of certified employees of solo-regulated firms on the financial services register from 9 December 2020 and, where firms can provide this information before March 2021, they are encouraged to do so.
The below summary assumes (as will almost certainly be the case) that the deadlines discussed will indeed be extended.
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Certification process
FCA Directory
Conduct rules
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Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Financial Institutions practice group, or any of the following:
Michelle M. Kirschner – London (+44 (0)20 7071 4212, [email protected])
Martin Coombes – London (+44 (0)20 7071 4258, [email protected])
Chris Hickey – London (+44 (0)20 7071 4265, [email protected])
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Despite the global pandemic, lawmakers have continued their efforts to regulate systems using artificial intelligence (“AI”), although progress has notably slowed in the second quarter of 2020. Nonetheless, we observed a steady stream of proposed federal legislation seeking to bolster research of and development in AI, cybersecurity, data protection, and science and technology more broadly. These bills primarily sound in national policy measures and privacy rules that indirectly bear on AI, the use of AI during interviews, facial recognition, and legislative efforts to create commissions to study AI and develop future regulatory approaches. In addition, proposed legislation has also been increasingly focused on establishing standards, guidelines, and best practices for researchers and industry leaders alike. While many federal bills languish in Congress, a state-based patchwork of laws continues to deepen its roots and grow.
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Table of Contents
I. U.S. Federal Legislation & Policy
II. State Legislation And Regulation
IV. European Commission’s Assessment List for Trustworthy AI
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I. U.S. FEDERAL LEGISLATION & POLICY
A. National AI Research Resource Task Force Act, H.R. 7096 and S. 3890
On June 4, 2020, House Representatives Anna G. Eshoo (D-CA), Anthony Gonzalez (R-OH), and Mikie Sherrill (D-NJ) introduced the National AI Research Resource Task Force Act in the House and Senators Rob Portman (R-OH), and Martin Heinrich (D-NM) introduced the Act in the Senate.[1] The overarching purpose of the bill is to “convene a group of technical experts across academia, government, and industry to develop a detailed plan for how the U.S. can build, deploy, govern, and sustain a national AI research cloud.”[2]
The bill would establish a task force composed of twelve members selected from among technical experts in artificial intelligence—4 from the federal government, 4 from higher education, and 4 from private organizations.[3] The task force would “develop a coordinated roadmap and implementation plan for establishing and sustaining a national artificial intelligence research resource,” creating a plan for ownership and administration of artificial intelligence as well as a model for governance and oversight. The bill emphasizes the importance of: (a) assessing and finding solutions to barriers to the dissemination and use of high-quality government data sets; (b) assessing security requirements and recommending a framework for managing access controls; (c) assessing privacy and civil liberties requirements; and (d) developing a plan for sustaining the national AI research resource. The task force would produce an initial report within 6 months of being appointed and a final report within 3 months thereafter.
B. National Artificial Intelligence Initiative Act (“NAIIA”) of 2020, H.R. 6216[4]
On March 12, 2020, Representatives Eddie Bernice Johnson (D-TX) and Frank Lucas (R-OK) of the U.S. House Committee on Science, Space, and Technology introduced the NAIIA, a bipartisan federal bill aimed at establishing “a federal initiative to accelerate and coordinate Federal investments and facilitate new public-private partnerships in research, standards, and education in artificial intelligence.”[5] The bill is co-sponsored by fourteen members of the House Committee on Science, Space, and Technology.
The text of the bill notes that “[t]here is a lack of standards and benchmarking for artificial intelligence systems that academia can use to evaluate the performance of these systems before and after deployment.” To that end, the bill establishes a National Artificial Intelligence Initiative to evaluate AI initiatives and U.S. competitiveness. The bill also allocates $1.2 billion between 2021 and 2025 to carry out an AI research and development program, $4.8 billion to the National Science Foundation, and $391 million to the National Institute of Standards and Technology to create performance benchmarks for AI systems, a framework to assess the trustworthiness of AI systems, and data sharing best practices. These programs would provide AI developers with guidelines for designing AI systems and inform future legislation and regulatory actions.
C. Securing American Leadership in Science and Technology Act of 2020 (“SALTA”), H.R. 5685
On January 28, 2020, Representative Frank Lucas (R-OK) and 12 Republican cosponsors, introduced the SALTA, a bill broadly focused on “invest[ing] in basic scientific research and support technology innovation for the economic and national security of the United States.” Representative Lucas emphasized the underlying need for this legislation stemmed from the growing competition from China, which has increased its public research and development funding, as well as the generational challenge of global warming.[6] The purpose of the bill is to “ensure the continued leadership of the United States in science and technology” through several key efforts with respect to the development of AI and the Internet of Things (“IoT”).
The bill would have the National Institute of Standards and Technology (“NIST”) promote U.S. “innovation and industrial competitiveness by advancing measurement science, standards and technology in ways that enhance economic security and improve Americans’ quality of life.” NIST would have a key role in “a broad range of cutting-edge scientific endeavors” including machine learning, AI, cybersecurity, and quantum science and engineering. In addition, the Secretary of Energy would be tasked with “supporting the development of artificial intelligence and data science,” which would include “the implementation of scientific testing to support the development of trustworthy and safe artificial intelligence and data systems” as well as “the development and publication of new cybersecurity tools, encryption methods, and best practices for artificial intelligence and data science.”
The bill would implement a similar approach to IoT and require the Secretary of Energy to “support the expanded connectivity, interoperability, and security of interconnected systems and other aspects of the internet of things” by developing new tools and technologies, convening experts to develop recommendations for standards, guidelines, and best practices, and publishing new cybersecurity tools, encryption methods, and best practices for IoT security.
D. Ethical Use of Facial Recognition Act, S. 3284
On February 12, 2020, Senator Jeff Merkley (D-OR) introduced the Ethical Use of Facial Recognition Act, co-sponsored by Senator Cory Booker (D-NJ).[7] The bill would prohibit any federal officer, employee, or contractor from engaging in particular activities with respect to facial recognition technology without a warrant until a congressional commission recommends rules to govern the use and limitations of facial recognition technology for government and commercial uses. The prohibited activities include: setting up a camera to be used with facial recognition, accessing or using information obtain from facial recognition, or importing facial recognition to identify an individual in the U.S. Victims of violations of the bill would be permitted to bring a civil action for injunctive or declaratory relief in federal court. The bill would also prohibit state or local governments from investing in, purchasing, or obtaining images from facial recognition technology.
E. Artificial Intelligence for the Armed Forces Act
On June 17, 2020, Senators Martin Heinrich (D-NM) and Rob Portman (R-Ohio), co-founders of the Senate AI Caucus, introduced the bipartisan “Artificial Intelligence for the Armed Forces Act” to help strengthen the Department of Defense’s (DoD) AI capacity by bolstering the number of AI and cyber professionals within it.[8]
The bill would require the Director of the Joint AI Center to report directly to the Secretary of Defense. In addition, the Secretary of Defense would be tasked with developing a training and certification program to better enable the DoD’s human resources workforce to recruit AI and cyber professionals, as well as issuing guidance on how the DoD can better use its authority to onboard AI professionals.
F. Exposure Notification Privacy Act, S. 3861
On June 1, 2020, a bipartisan bill titled Exposure Notification Privacy Act (“ENPA”), S. 3861, was introduced by Senators Maria Cantwell (D-WA) and Bill Cassidy (R-LA) and co-sponsored by Senator Amy Klobuchar (D-MN).[9] The ENPA aims to regulate contact tracing apps in the wake of efforts to combat the spread of COVID-19. Two similar acts were introduced in April and May of this year, but were not bipartisan.[10] Health, privacy, and technology experts and advocacy groups have supported the ENPA.[11]
The ENPA is focused upon implementing robust privacy safeguards, giving users control over their data, and preventing the misuse of user data. The bill applies to companies operating “automated exposure notification services,” which are defined as “a website, online service, online application, mobile application, or mobile operating system that is . . . designed, in part or in full, specifically to be used for, or marketed for, the purpose of digitally notifying, in an automated manner, an individual who may have become exposed to an infectious disease (or the device of such individual, or a person or entity that reviews such disclosures).” Accordingly, these companies must obtain “affirmative express consent” from the user to be enrolled in the service, provide a privacy policy in a “conspicuous and readily accessible manner,” collaborate with Public Health Officials, establish data security practices, and regularly delete data.
G. FINRA White Paper on AI
On June 12, 2020, the Financial Industry Regulatory Authority (“FINRA”), released a white paper on artificial intelligence defining the scope of AI as it pertains to the securities industry, identifying areas in which broker-dealers are evaluating or using AI, and regulatory considerations for AI-based tools.[12] FINRA’s intent was for the white paper to serve as a starting point for an ongoing dialogue about the use of AI in the securities industry. Accordingly, FINRA requested comments on all areas covered by the paper.
The key areas in which the white paper contemplates AI being deployed are customer communications, investment processes, operational functions such as compliance and risk management, and administrative functions. FINRA notes that firms employing AI-based applications may “benefit from reviewing and updating their model risk management frameworks to address the new and unique challenges AI models may pose.” Notably, FINRA Rule 3110 requires firms to supervise activities relating to AI applications to ensure that the functions and outputs of the application are properly understood and in line with the firm’s legal and compliance requirements. In addition, FINRA Rule 2010 requires firms to observe high standards of commercial honor and just and equitable principles of trade in the context of their AI applications. As such, FINRA recommends that firms review their data for potential biases and adopt data quality benchmarks and metrics as part of a comprehensive data governance strategy. We stand ready to assist companies interested in providing comments to FINRA or with respect to the implementation of data governance strategies.
II. STATE LEGISLATION AND REGULATION
A. California[13]
1. A.B. 2269
A.B. 2269, “the Automated Decision Systems Accountability Act of 2020,” continues to progress through the California state legislature.[14] The bill would require any business that uses an “automated decision system” (“ADS”) to “continually test for biases during the development and usage of the ADS, conduct an ADS impact assessment on its program or device to determine whether the ADS has a disproportionate adverse impact on a protected class ….” ADS is defined broadly as “a computational process, including one derived from machine learning, statistics, or other data processing or artificial intelligence techniques, that makes a decision or facilitates human decision making, that impacts persons.” If the bill passes, businesses would need to “examine if the ADS in question serves reasonable objectives and furthers a legitimate interest” compared to non-AI alternatives and include those conclusions in its impact assessment. The assessment would also need to be summarized and reported to the California Department of Business Oversight. On April 24, the bill was referred to the Committee on Privacy and Consumer Protection. We will continue to monitor A.B. 2269’s progress, since it has potentially significant consequences for a wide range of companies given that the definition of ADS, as it is currently defined, potentially implicates any computational process with an output that “impacts persons.”
2. A.B. 3119
A.B. 3119, the “Minimization of Consumer Data Processing Act,” seeks to revise the California Consumer Privacy Act (“CCPA”) by broadening the CCPA definition of “sell” “to mean sharing for monetary or other valuable consideration.”[15] On May 4, 2020 the Committee on Privacy and Consumer Protection released an amended version of the bill. “Share” under the bill would be defined broadly, including “renting, releasing, disclosing, disseminating, making available, transferring, or otherwise communicating orally, in writing, or by electronic or other means ….” This broad scope could shift AI technologies within the purview of the CCPA, even if they do not think they “sell” consumer information in the traditional sense. The bill, if enacted, would also flip the consumer right to opt-out into a requirement for businesses to obtain opt-in consent from consumers, meaning that a business would not be permitted to share a consumer’s personal information unless she has specifically opted-in and consented to that sharing. We will closely monitor this bill, which has the potential to grant additional rights to consumers—and additional obligations to companies—under CCPA.
B. Massachusetts, S.B. 1876 and H.B. 2701
Like other states, Massachusetts has recently renewed its efforts to study AI. Bills S.B. 1876 and H.B. 2701 will create a 20-member commission, which will be tasked with “studying and making recommendations relative to the use by the commonwealth of automated decision systems that may affect human welfare, including but not limited to the legal rights and privileges of individuals.” The bill aims to make the state government’s use of AI more transparent to ensure that “individuals are aware of the use of the systems and understand their related … rights.” On May 11, 2020 the Committee on House Rules recommended the bill ought to pass and referred it to the House Committee on Ways and Means.[16] If the bill passes, the commission will deliver its findings publically to the governor this December.[17]
C. Maryland, H.B. 1202
On May 5, 2020, Maryland passed H.B. 1202, banning the use of “a facial recognition service for the purpose of creating a facial template during an applicant’s interview for employment,” unless the interviewee signs a waiver. The bill’s definitions of the technology is directly aimed at AI: “’facial template’ means the machine–interpretable pattern of facial features that is extracted from one or more images ….”[18] The legislation appears to address a concern for potential hiring discrimination that may be borne out of these automated systems, akin to Illinois’ Artificial Intelligence Video Interview Act (effective January 1, 2020), or “AI Video Act,” which similarly required applicants to be notified and consent to the use of AI video analysis during interviews.[19]
D. Washington, S.B. 6280
At the beginning of this quarter, Washington Governor Jay Inslee approved S.B. 6280, which would curb governmental use of facial recognition. The new law requires bias testing, training to safeguard against potential abuses, and disclosure when the state of Washington or its localities would employ facial recognition. Governor Inslee also partially vetoed the law, eliminating a provision which would establish a legislative task force that would provide recommendations regarding the potential abuses, safeguards, and efficacy of facial recognition services.[20] Businesses have less than a year to comply as the law becomes effective on July 1, 2021.
III. AUTONOMOUS VEHICLES
A. Prospects Dim For Federal Action on AVs During COVID-19 Pandemic
As federal lawmakers focus on the response to the COVID-19 pandemic and other pressing issues, time is running out to pass a comprehensive AV bill in the current Congressional term.[21] Although AVs are proving useful during the crisis to deliver food and medical supplies, there does not appear to be concerted effort to push legislation forward at the moment, even though the House Energy and Commerce and the Senate Commerce Committees have been working since last year to draft and distribute bill texts to stakeholders for feedback.[22] Some lawmakers, however, concerned with China’s pace of advancement, are turning to industry groups for help. On May 12, 2020, Senate Commerce Committee Chairman Roger Wicker (R-Miss.) and House Energy and Commerce Committee ranking member Rep. Greg Walden (R-Ore.) sent a letter to industry groups emphasizing that China is using the COVID-19 crisis to “gain the upper hand in automotive innovation” and requesting input on how Congress could help to advance self-driving cars.[23]
B. The National Highway Traffic Safety Administration (NHTSA) Launches New Automated Vehicle Initiative to Improve Safety, Testing, and Public Engagement
On June 15, 2020, NHTSA announced a new Department initiative to improve the safety and testing transparency of AVs, the Automated Vehicle Transparency and Engagement for Safe Testing (AV TEST) Initiative.[24] Nine companies and eight states have agreed to participate in this voluntary initiative so far. The participating companies are Beep, Cruise, Fiat Chrysler Automobiles, Local Motors, Navya, Nuro, Toyota, Uber, and Waymo. The states are California, Florida, Maryland, Michigan, Ohio, Pennsylvania, Texas, and Utah.
The purpose of the AV TEST Initiative is to share information concerning the safe development and testing of AVs. In addition to “creating a formal platform for Federal, State, and local government to coordinate and share information in a standard way,” the Department is also creating a public-facing platform where companies and governments can choose to share on-road testing locations and testing activity data, such as vehicle types and uses, dates, frequency, vehicle counts, and routes.[25] The Department is also planning to host nationwide meetings in a bid to promote public engagement and understanding of AVs.[26]
Although the AV TEST Initiative may provide welcome centralization, some safety advocates are critical of the Department’s voluntary approach and failure to develop minimum performance standards.[27]
C. NHTSA Releases Report on Federal Motor Vehicle Safety Standards Considerations (“FMVSS”) For AVs
NHTSA released research findings on twelve FMVSS related to vehicles with automated driving systems—6 crash avoidance standards and 6 crashworthiness standards.[28] Specifically, the project evaluated options regarding technical translations of FMVSS, including the performance requirements and the test procedures, and related Office of Vehicle Safety Compliance (OVSC) test procedures, that may impact regulatory compliance of vehicles equipped with automated driving systems. The report evaluated the regulatory text and test procedures with the goal of identifying possible options to remove regulatory barriers for the compliance verification of ADS-dedicated vehicles (ADS-DVs) that lack manually operated driving controls. The regulatory barriers considered are those that pose unintended and unnecessary regulatory barriers, because the technical translation process does not change the performance standards of the FMVSS being considered.[29]
D. The Federal Communications Commission (“FCC”) Granted Applied Information a Nationwide License for Connected Vehicle Dedicated Short Range Communications (“DSRC”) Radio Operation
The FCC granted Applied Information, Inc. (“Applied”) a nationwide Intelligent Transportation Service (ITS) license in the 5.9 GHz spectrum band that authorizes Applied to provide DSRC for the infrastructure and in vehicles.[30] The license enables Applied to provide vehicle to infrastructure (V2I) connected vehicle communications for the transportation infrastructure, including traffic signals, school zone safety beacons and other electronic traffic control and information devices.
E. Washington, HB 2676
At the state level, Washington’s HB 2676, which establishes minimum requirements for the testing of autonomous vehicles, went into effect on June 11, 2020. The bill requires companies testing AVs in Washington to report certain data regarding those tests to the state’s Department of Licensing and to carry $5 million minimum in umbrella liability insurance.[31]
IV. EUROPEAN COMMISSION’S ASSESSMENT LIST FOR TRUSTWORTHY AI
As we noted in our 2019 Artificial Intelligence and Automated Systems Annual Legal Review, in April 2019, the EC released a report from its “High-Level Expert Group on Artificial Intelligence” (“AI HLEG”): the EU “Ethics Guidelines for Trustworthy AI” (“Ethics Guidelines”).[32] The Ethics Guidelines lay out seven ethical principles “that must be respected in the development, deployment, and use of AI systems.”
On the July 17, 2020, the AI HLEG presented its final “Assessment List for Trustworthy AI,” a tool intended to help companies “self-assess” and identify the risks of AI systems they develop, deploy or procure, and implement the Ethics Guidelines in order to mitigate those risks.[33] A previous version of the Assessment List was included in the April 2019 Ethics Guidelines, and this final Assessment List represents an amended version following a piloting process in which over 350 stakeholders participated. The Assessment List is designed as a flexible framework that companies can adapt to their particular needs and the sector they operate in in order to minimize specific risks an AI system might generate. The Assessment List proposes a tailored series of self-assessment questions for each of the seven principles for trustworthy AI set out in the AI HLEG’s Ethics Guidelines (Human Agency and Oversight; Technical Robustness and Safety; Privacy and Data Governance; Transparency; Diversity, Non-Discrimination and Fairness; Societal and Environmental Well-being; and Accountability. The AI HLEG recommends that the tool be used by a “multidisciplinary team.”
Prior to self-assessment, the AI HLEG also recommends that organizations perform a fundamental rights impact assessment (“FRIA”) to establish whether the artificial intelligence system respects the fundamental rights of the EU Charter of Fundamental Rights and the European Convention on Human Rights. As noted in our February 2020 legal update “EU Proposal on Artificial Intelligence Regulation Released,” the EC is also currently developing its own comprehensive legislation and policies, focused on “trustworthy AI,” to govern AI at EU level, and we will continue to closely monitor developments in this space.
_______________________
[1] H.R. 7096 (2020), available here; S. 3890 (2020), available here.
[2] Congresswoman Anna G. Eshoo, Preeminent Universities and Leading Tech Companies Announce Support for Bipartisan, Bicameral Bill to Develop National AI Research Cloud (June 29, 2020), available at https://eshoo.house.gov/media/press-releases/preeminent-universities-and-leading-tech-companies-announce-support-bipartisan.
[3] The bill has gained the support of leading technology firms and research universities including: IBM, Microsoft, Amazon Web Services, Google, Mozilla, OpenAI, Johns Hopkins University, University of Pennsylvania, Carnegie Mellon University, and Princeton University.
[4] H.R. 6216, National Artificial Intelligence Initiative Act of 2020, available at https://science.house.gov/imo/media/doc/AI_initiative_SST.pdf.
[5] House Committee on Science, H.R. 6216, the National Artificial Intelligence Initiative Act of, 2020, available at https://science.house.gov/imo/media/doc/AI%20One%20Pager_clean.pdf.
[6] Comm. Sci. Space & Tech., Lucas Introduces Comprehensive Legislation to Secure American Leadership in Science and Technology (Jan. 29, 2020), available at https://republicans-science.house.gov/news/press-releases/lucas-introduces-comprehensive-legislation-secure-american-leadership-science.
[7] S. 3284, available at https://www.congress.gov/bill/116th-congress/senate-bill/3284.
[8] Martin Heinrich, Heinrich, Portman Introduce Bipartisan Legislation to Strengthen Department of Defense’s Artificial Intelligence Capacity (June 17, 2020), available here.
[9] S. 3861, Exposure Notifications Privacy Act, available here.
[10] See S. 3663, COVID-19 Consumer Data Protection Act; S. 3749, Public Health Emergency Privacy Act.
[11] See Maria Cantwell, Cantwell, Cassidy, and Klobuchar Introduce Bipartisan Legislation to Protect Consumer Privacy, Promote Public Health for COVID-19 Exposure Notification Apps (June 1, 2020), available at https://www.cantwell.senate.gov/news/press-releases/cantwell-cassidy-and-klobuchar-introduce-bipartisan-legislation-to-protect-consumer-privacy-promote-public-health-for-covid-19-exposure-notification-apps.
[12] FINRA, Artificial Intelligence (AI) in the Securities Industry (June 20), available at https://www.finra.org/sites/default/files/2020-06/ai-report-061020.pdf.
[13] Note also that the California Consumer Privacy Act (“CCPA”), California’s omnibus privacy law, became enforceable on July 1, 2020. While not directly focused on AI, automated systems enterprises that transact with personal information should monitor whether they fall within the purview of the California law. For more information on legal developments with respect to data privacy, please see Gibson Dunn’s recent and forthcoming legal updates on CCPA, and on a new proposed privacy law, the California Privacy Rights Act (“CPRA”).
[14] A.B. 2269, 2019-2020 Reg. Sess. (Cal. 2020).
[15] A.B. 3119, 2019-2020 Reg. Sess. (Cal. 2020).
[16] H.B. 2701 (May 11, 2020), available at https://malegislature.gov/Bills/191/H2701.
[18]H.B. 1202(a)(3).
[19] For more details, please see Gibson Dunn’s Artificial Intelligence and Automated Systems Legal Update (1Q20).
[20]Letter from Jay Inslee, Governor of the State of Washington, to The Senate of the State of Washington (March 31, 2020), available at https://crmpublicwebservice.des.wa.gov/bats/attachment/vetomessage/559a6f89-9b73-ea11-8168-005056ba278b#page=1.
[21] Maggie Miller, Action on Driverless Cars Hits Speed Bump as Congress Focuses on Pandemic (May 20, 2020), available at https://thehill.com/policy/technology/498863-action-on-driverless-cars-hits-speed-bump-as-congress-focuses-on-pandemic.
[23] Letter from Roger Wicker and Greg Walden to Industry Groups (May 12, 2020), available at https://republicans-energycommerce.house.gov/wp-content/uploads/2020/05/Wicker-Walden-letter-to-Auto-Stakeholders-5-12-2020.pdf.
[24] U.S. Dep’t of Transp., U.S. Transportation Secretary Elaine L. Chao Announces First Participants in New Automated Vehicle Initiative to Improve Safety, Testing, and Public Engagement (June 15, 2020), available at https://www.nhtsa.gov/press-releases/participants-automated-vehicle-transparency-and-engagement-for-safe-testing-initiative.
[25] U.S. Dep’t of Transp., AV TEST Initiative, available at https://www.nhtsa.gov/automated-vehicles-safety/av-test.
[26] U.S. Dep’t of Transp., AV TEST Initiative Launch Remarks (June 15, 2020), available at https://www.nhtsa.gov/speeches-presentations/av-test-initiative-launch-remarks
[27] See, e.g., Keith Laing, Michigan, Fiat Chrysler Join Federal Self-Driving Car Initiative, The Detroit News (June 15, 2020), available at https://www.detroitnews.com/story/business/autos/2020/06/15/michigan-fiat-chrysler-join-federal-self-driving-car-initiative/3194309001/
[28] Blanco, M., Chaka, M., Stowe, L., Gabler, H. C., Weinstein, K., Gibbons, R. B., Fitchett, V. L. (2020, April). FMVSS considerations for vehicles with automated driving systems: Volume 1 (Report No. DOT HS 812 796). National Highway Traffic Safety Administration, available at https://www.nhtsa.gov/sites/nhtsa.dot.gov/files/documents/ads-dv_fmvss_vol1-042320-v8-tag.pdf.
[30] FCC Grants Applied Information Nationwide License for Connected Vehicle DSRC Radio Operation, Business Wire (June 3, 2020), available at https://www.businesswire.com/news/home/20200603005457/en/FCC-Grants-Applied-Information-Nationwide-License-Connected
[31] HB 2676, Washington State Legislature, available at https://apps.leg.wa.gov/billsummary/?BillNumber=2676&Year=2020&Initiative=false.
[32] AI HLEG, Ethics Guidelines for Trustworthy AI, Guidelines (Apr. 8, 2019), available at https://ec.europa.eu/newsroom/dae/document.cfm?doc_id=60419.
[33] AI HLEG, Assessment List for Trustworthy Artificial Intelligence (ALTAI) for Self-Assessment (Jul. 17 2020), available at https://ec.europa.eu/digital-single-market/en/news/assessment-list-trustworthy-artificial-intelligence-altai-self-assessment.
The following Gibson Dunn lawyers prepared this client update: H. Mark Lyon, Frances Waldmann, Haley Morrisson, Tony Bedel, and Emily Lamm.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Artificial Intelligence and Automated Systems Group, or the following authors:
H. Mark Lyon – Palo Alto (+1 650-849-5307, [email protected])
Frances A. Waldmann – Los Angeles (+1 213-229-7914,[email protected])
Please also feel free to contact any of the following practice group members:
Artificial Intelligence and Automated Systems Group:
H. Mark Lyon – Chair, Palo Alto (+1 650-849-5307, [email protected])
J. Alan Bannister – New York (+1 212-351-2310, [email protected])
Ari Lanin – Los Angeles (+1 310-552-8581, [email protected])
Robson Lee – Singapore (+65 6507 3684, [email protected])
Carrie M. LeRoy – Palo Alto (+1 650-849-5337, [email protected])
Alexander H. Southwell – New York (+1 212-351-3981, [email protected])
Christopher T. Timura – Washington, D.C. (+1 202-887-3690, [email protected])
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, [email protected])
Michael Walther – Munich (+49 89 189 33 180, [email protected])
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Los Angeles partner Theodore J. Boutrous Jr. is the author of “Trump’s lawsuit against Bolton will fail,” [PDF] published by The Washington Post on June 18, 2020.
Washington, D.C. partner Joshua Lipshutz and San Francisco associates Warren Loegering and Zach Tan are the authors of “Supreme Court quietly eliminates critical constitutional protections,” [PDF] published by the Daily Journal on July 20, 2020.
I. Introduction: Themes and Notable Developments
A. Impact of the Pandemic on Securities Enforcement
The first half of 2020 will undoubtedly be most remembered for the impact of the pandemic on every aspect of our lives, both personal and professional. To be sure, the pandemic has had a profound effect on the economy and financial markets. As we know from prior crises, financial shocks give rise to a host of regulatory risks for public companies and market participants and lead the SEC to shift its attention to identifying and investigating indicators of potential securities law violations. History teaches us that unprecedented market volatility, fast moving economic events, and dislocations create substantial challenges for compliance, and that there is a significant increase in the risk of an investigation. As the impact of the pandemic continues today, this heightened investigative risk is compounded by unique challenges of remote work arrangements and the diminished ability for direct oversight and interaction.
Similarly, the pandemic had a significant impact on the SEC’s enforcement program. Among other things, the pandemic caused the Enforcement Division to recalibrate priorities to address emerging risks, resulted in a number of enforcement actions against parties seeking to take advantage of the crisis, and required an adaptation of the investigative process to a remote work environment. Despite the pandemic, the Commission also continued to institute enforcement actions in its traditional areas of focus that had been in the pipeline since before the quarantine.
1. Enforcement Priorities and Regulatory Risks Arising from the Pandemic
Shortly after the nation implemented quarantine protocols in March, the co-directors of the SEC Enforcement Division took the unusual step of issuing a cautionary statement emphasizing “the importance of maintaining market integrity and following corporate controls and procedures” during this crisis. The SEC cited as examples the heightened risk of insider trading (“in these dynamic circumstances, corporate insiders are regularly learning new material nonpublic information that may hold an even greater value than under normal circumstances”) and the need to be mindful of disclosure controls (“protect against the improper dissemination and use of material nonpublic information”).[1]
Six weeks later, in a speech in May, Enforcement Co-Director Steven Peikin provided insights on the Division’s enforcement priorities in light of the pandemic.[2] In response to the pandemic, the Enforcement Division formed a Coronavirus Steering Committee, comprised of leadership from the Home and Regional Offices, the specialized units, and the Office of Market Intelligence, to identify areas of potential misconduct and coordinate the Division’s response to pandemic-related issues. Among the issues receiving heightened regulatory scrutiny are:
- Insider Trading and Market Manipulation: The rapid and dramatic impact of the pandemic on the financial performance of companies increases the potential for trading that could be perceived as attributable to material nonpublic information. The Steering Committee is working with the Division’s Market Abuse Unit to monitor announcements in industries particularly impacted by the pandemic and to identify potentially suspicious market movements.
- Accounting Fraud: As with other financial crises, the pandemic is likely to expose previously undisclosed financial reporting issues, as well as give rise to rapidly evolving financial reporting and disclosure challenges. The Steering Committee is on the lookout for indications of potential disclosure and reporting misconduct. In particular, the Steering Committee is reviewing public filings with an eye toward disclosures that appear out of step with companies in similar industries. The Committee is also looking for accounting that attempts to inaccurately characterize preexisting financial statement issues as coronavirus related.
- Asset Management: Asset managers confront unique challenges created by the pandemic, including with respect to valuations, liquidity, disclosures, and the management of potential conflicts among clients and between clients and the manager. The Steering Committee is working with the Division’s Asset Management Unit to monitor these issues, including failures to honor redemption requests, which could reveal other underlying asset management issues.
- Complex Financial Instruments: As with prior financial crises, the pandemic may reveal risks inherent in various structured investment products. The Steering Committee is working with the Division’s Complex Financial Instruments Unit to monitor complex structured products and the marketing of those products to investors.
- Microcap Fraud: The Steering Committee is working with the Division’s Microcap Fraud Task Force and Office of Market Intelligence, and has suspended trading in the securities of over 30 issuers relating to allegedly false or misleading claims related to the coronavirus.
As we discussed in our prior alerts in March and May on these issues, by understanding the issues that can give rise to regulatory scrutiny, and consulting with counsel on how to navigate unique challenges, issuers and financial institutions can both lower the risk of being in a regulatory spotlight and resolve regulatory inquiries more efficiently.
2. Enforcement Actions Related to the Pandemic
The SEC has brought several enforcement actions against parties allegedly seeking to take advantage of the pandemic. These cases have typically involved allegations that a company, or those trading in a company’s securities, have made false or misleading statements about the company’s ability to supply scarce protective or testing products in response to the pandemic. It will take much longer to assess whether the crisis leads to enforcement actions based on more nuanced financial reporting, disclosure, or trading conduct.
In late April, the SEC filed an action against a company and its CEO alleging the defendants issued false and misleading press releases about the company’s ability to supply large quantities of N95 masks.[3] According to the SEC’s complaint, the company issued a press release in February stating that it was in the process of solidifying its mask supply chain, and another press release in March stating that it had a large number of masks on hand. In a subsequent March press release, the company admitted it never had any masks available to sell. The SEC’s complaint alleged that the company never had the masks, any orders for them, or any contracts with companies that could supply them.
In May, the SEC filed actions against two different companies for allegedly misleading investors in their press releases concerning COVID-19 product offerings.[4] According to the first complaint, a bioscience company’s press release incorrectly stated that the company had begun shipping home finger-prick COVID-19 tests when the tests neither shipped nor were intended for home use. In a second action, the SEC alleged that a company and its CEO issued a misleading press release announcing a multinational public-private partnership to sell thermal scanning equipment to detect individuals with fevers when, in fact, the company had neither an agreement to sell the product nor a government partnership.
In June, the SEC also filed actions alleging market manipulations by parties allegedly using the pandemic as a means to inflate the price of companies’ securities. In one action, the SEC alleged that a trader manipulated the stock of a biotechnology company through misleading statements in an online investment forum, including assertions that the company had developed an approved COVID-19 blood test.[5] The complaint also alleged that the defendant spoofed orders on the company’s stock to create the appearance of high demand. In a second action against five Canadian citizens, the SEC alleged that the defendants fraudulently inflated microcap companies’ stock through misleading statements such as a claim that one of the companies could make medical facemasks and that another had automated kiosks for retail use. The complaint also alleged that the defendants enabled the companies’ control persons to anonymously sell company stock and evade registration requirements.[6]
3. Investigative Process in a Remote Work Environment
Despite the pandemic, the Commission’s Enforcement program has continued to conduct investigations, albeit with accommodations for the realities of remote work situations.
In his speech in May, Co-Director Peikin noted that the Division staff continued to remain engaged despite the new challenges of a remote work environment. The Division staff was directed to work with defense counsel and others to reach reasonable accommodations concerning document production, testimony, interviews, and counsel meetings, given the challenges of the pandemic, but Mr. Peikin also cautioned that the staff will need to protect potential claims and won’t agree to an indefinite hiatus in investigations or litigations. In particular, Mr. Peikin noted that in instances where defense counsel does not agree to tolling agreements, the Division will consider recommending that the Commission commence an enforcement action, despite an incomplete investigative record, and will rely on civil discovery to further support its claims.
B. Supreme Court Ruling on Disgorgement
In June 2020, the Supreme Court in Liu v. S.E.C. issued a major decision regarding the scope of the SEC’s power to obtain disgorgement of ill-gotten gains in litigated cases.[7] Liu did not, as some had hoped, do away with disgorgement in litigated actions entirely. Instead, while leaving lower courts to fill in the precise contours, the Supreme Court articulated three guiding principles for determining the availability and scope of SEC disgorgement: first, disgorgement should benefit “wronged investors” rather than “the public at large”; second, courts may hold parties liable only for their own profits, not others’ profits; and third, disgorgement cannot exceed actual gains and must instead be limited to “net profits” after deducting “legitimate expenses.”[8]
Liu arose from a 2016 enforcement action alleging misappropriation of millions of dollars of investors’ funds under the guise of constructing a cancer-treatment center that would have qualified the investors for EB-5 immigration status. In assessing the district court’s award of disgorgement to the SEC, the Supreme Court held that “a disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is … permissible under [15 U.S.C.] § 78u(d)(5),” the statute authorizing the SEC to seek equitable relief.[9] The Court provided general guidelines for lower courts to consult in crafting disgorgement awards consistent with this holding.
First, the Court emphasized that disgorgement must be for the benefit of investors, noting that it “must do more than simply benefit the public at large by virtue of depriving a wrongdoer of ill-gotten gains.”[10] In many cases—for example, where there are no apparent investor victims or it is infeasible to distribute the funds to harmed individuals—the SEC deposits disgorged funds with the Treasury. The Court raised doubts about this practice, opining, “It is an open question whether, and to what extent, that practice … satisfies the SEC’s obligation to award relief ‘for the benefit of investors’….”[11]
Second, the Court emphasized “the common-law rule requiring individual liability for wrongful profits,” while noting that “[t]he historic profits remedy … allows some flexibility to impose collective liability.”[12] Thus, while there could potentially be “liability for partners engaged in concerted wrongdoing,” like the married petitioners in Liu, joint-and-several liability was “seemingly at odds with the common-law rule.”[13]
Third, the Court explained that disgorgement must not exceed a party’s ill-gotten gains, and, therefore, “courts must deduct legitimate expenses before ordering disgorgement.”[14] In assessing whether expenses were legitimate (and hence deductible), even if incurred in connection with a fraudulent scheme, the Court distinguished legitimate expenses that “have value independent of fueling a fraudulent scheme”—for example, possibly the lease payments and cancer-treatment equipment in Liu—from “‘inequitable deductions’ such as for [the alleged fraudsters’] personal services.”[15]
It is unclear how significantly Liu’s guidelines will impact SEC enforcement actions going forward. In particular, the Supreme Court left open the question of whether, and under what circumstances, the SEC is permitted to deposit disgorged funds into the Treasury where, as is often the case, it is infeasible to distribute funds to injured investors (if any exist). The SEC may try to sidestep this issue by finding new ways to benefit investors—for example, by depositing disgorgement proceeds into investor protection funds rather than the Treasury. Meanwhile, the Court’s guidance regarding the deductibility of legitimate expenses that “have value independent of fueling a fraudulent scheme” will, in at least some cases, likely result in a broader set of deductible expenses, thereby shrinking the “net profits” eligible for disgorgement.
Even if Liu significantly constrains the SEC’s disgorgement authority, the Commission could pivot to minimize its impact. First, it is unclear the extent to which Liu’s guiding principles apply to disgorgement in administrative proceedings, where there is express statutory authority for the remedy. The SEC may therefore decide to bring more administrative cases and avoid the judicial forum. Additionally, the SEC may increasingly rely on its statutory authority to pursue civil penalties to make up for any shortfall in disgorgement. As a result, Liu may have the effect of altering the mix (but not the amount) of monetary remedies the SEC seeks.
C. Commissioner and Senior Staffing Update
During the first half of 2020, there were a number of leadership changes, several of which reflect the advancement of lawyers with many years of experience in the Division of Enforcement to positions of senior leadership.
As we previewed in our Year-End Enforcement Alert, Commissioner Robert Jackson stepped down in February 2020 to return to teaching at NYU Law School. In June, President Trump nominated Caroline Crenshaw to fill the vacancy. Ms. Crenshaw has worked at the Commission since 2013, most recently as counsel to Commissioner Jackson. Previously, Ms. Crenshaw worked as counsel to former Democratic Commissioner Kara Stein, a position also once held by current Democratic Commissioner Allison Herren Lee. Before joining the Commission, Ms. Crenshaw worked in private practice on investigations defense. Ms. Crenshaw is also a judge advocate in the U.S. Army Judge Advocate General’s Corps. Until Ms. Crenshaw is confirmed, the Commission will operate with four Commissioners: Chairman Jay Clayton, along with Commissioners Hester Peirce, Elad Roisman, and Lee (currently the only Democrat).
Other changes in the senior staffing of the Commission include:
- In February, Paul Montoya was appointed Associate Regional Director in the SEC’s Chicago Office. As Associate Regional Director, Mr. Montaya co-heads the Enforcement program for the Office, along with Associate Regional Director Kathryn Pyszka. Mr. Montoya has worked at the SEC since 1997, including most recently as an Assistant Regional Director in the Chicago office, where he supervised staff in the Asset Management Unit.
- Also in February, Kelly Gibson was appointed Director of the SEC’s Philadelphia Office. She was most recently Associate Regional Director in the Philadelphia office, and has worked at the SEC since 2008, including working in the Market Abuse Unit.
- In June, Jennifer Leete was named Associate Director in the SEC’s Division of Enforcement. Ms. Leete has worked at the SEC since 1999, most recently as an Assistant Director. She succeeds Antonia Chion who retired in February 2020.
With the election approaching in November, one should expect a number of additional changes over the remainder of the year at senior levels of the Commission. In June, President Trump proposed Chairman Clayton as the U.S. Attorney for the Southern District of New York. However, in view of the events surrounding the nomination, it appears unlikely that the appointment will receive Senate consideration before the election.
D. Whistleblower Awards
The last six months have reflected two distinct trends in the Commission’s whistleblower program—an increase in the number of whistleblower complaints, as well as an increase in the number and size of whistleblower awards.
First, as a result of the pandemic, the Commission has noted a marked increase in the number of whistleblower tips. In the two months of quarantine, from mid-March to mid-May, the Enforcement Division triaged more than 4,000 whistleblower tips, a 35% increase over the same period in 2019. As the pandemic continues to impact businesses through the remainder of this year, including by affecting financial reporting, disclosure, and trading, one should expect the increased pace of whistleblower complaints to continue. This puts a premium on companies’ ability to demonstrate their response to internal complaints that could presage a whistleblower report to the government.
The second notable trend has been the increased number and size of whistleblower awards in the first half of this year. During the first half of 2020, the SEC awarded a total of nearly $115 million to 15 separate whistleblowers.
Most notably, in June, the SEC announced the single largest whistleblower payment in the program’s history—$50 million to an individual who reported what the SEC described as “detailed, firsthand observations” of company misconduct which resulted in an enforcement action that returned funds to harmed investors.[16] In April, the SEC awarded over $27 million, the seventh-largest award in the program’s history, to a whistleblower for information that uncovered violations occurring domestically and abroad.[17] Also in April, the SEC awarded over $18 million to a whistleblower who provided information that helped initiate an enforcement action which allowed investors to recover “millions of dollars in losses.”[18]
Other significant whistleblower awards granted during the first half of this year include:
- Two awards in January of $277,000 and $45,000 respectively to two whistleblowers in connection with separate fraudulent retail investment schemes.[19]
- An award in February of over $7 million for sustained cooperation that led to a successful enforcement action.[20]
- Four awards in March—a $1.6 million payment for information that revealed securities law violations;[21] $570,000 and $94,000 payments for assistance that resulted in several enforcement actions;[22] and a $450,000 payment for assistance from a compliance professional who first reported internally and waited the required 120 days before reporting to the SEC.[23]
- Two awards in April: one for $2 million for information the SEC deemed “vital” and difficult to uncover without the individual’s cooperation;[24] and a second for nearly $2 million for what the SEC described as “critical evidence of wrongdoing” provided by a whistleblower who suffered hardship as a result of first raising concerns within their organization.[25]
- An award in May of nearly $2 million for information that led to a successful enforcement action and allowed for an asset freeze that prevented disgorgement of ill-gotten investor funds.[26]
- Two awards in June, including a $700,000 payment for information that resulted in asset recovery for investors[27] and a $125,000 payment for information and assistance which helped the SEC and another agency bring enforcement actions against the perpetrator of a fraudulent securities offering.[28]
In total, as of the end of June 2020, the Commission has paid out approximately $501 million to 85 individuals since the whistleblower program began.[29] Because whistleblower awards relate to prior enforcement actions, the recent awards are unrelated to the pandemic. However, the number and size of the recent awards reflect the strong incentives such awards provide to would-be whistleblowers.
II. Public Company Cases
A. Accounting Fraud and Internal Controls
1. Disclosures Cases
In February, the SEC announced a settled order against a global alcohol producer for failing to disclose trends affecting its key performance indicators.[30] The SEC alleged that the producer reported high organic net sales growth and organic operating profit growth without mentioning its pattern of shipping products in excess of distributor demand. According to the settled order, the company allegedly pressured distributors to buy products in excess of demand in order to meet internal sales targets despite declining market conditions, and the resulting increase in shipments enabled the company to meet performance targets and to report higher growth in certain performance indicators. The order also alleged that the company failed to disclose the trends that resulted from shipping products in excess of demand, the positive impact the over-shipping had on sales and profits, and the negative impact that the increase in inventory would have on future growth. The SEC’s order notes that the producer did not report these trends because it did not have adequate procedures in place to consider whether the company needed to disclose them.[31] Without admitting or denying the findings in the SEC’s order, the producer agreed to pay a $5 million civil penalty to settle the action.
In June, the SEC announced a settled action against an insurance company for failing to fully disclose benefits provided to its former CEO.[32] The company allegedly did not report over $5.3 million worth of personal expenses over five years even after the company had been made aware of the inaccuracies. Without admitting or denying the findings, the company consented to the SEC’s cease-and-desist order and to a $900,000 civil penalty.
2. Financial Reporting
In February, the SEC instituted a settled action against a financial institution for allegedly misleading representations concerning the success of its cross-selling business strategy.[33] According to the settled order, the cross-sell metric reflected accounts and services that were unused and unauthorized by customers, and that had been opened through sales practices inconsistent with the company’s disclosure of a needs-based selling model. Without admitting or denying the allegations, the firm agreed to cease and desist from future violations and to pay a civil penalty of $500 million for distribution to investors. The settlement was part of a broader resolution with the Department of Justice.
Also in February, the SEC filed an action against a parent company, two of its former executives, and its energy subsidiary for allegedly making misleading statements about the subsidiary’s nuclear power plant expansion.[34] According to the complaint, which was filed in federal court in South Carolina, the defendants represented that the company was on track in its plan to build two plants and receive nearly $1 billion in tax credits, even though they knew the company was behind schedule and the plan was eventually abandoned.
3. Cases against Independent Auditors
In May, the SEC instituted settled administrative actions against three former audit partners at an international accounting firm based on allegations that they improperly shared answers to internal training exams and attempted to cover up the misconduct during an internal investigation.[35] The settled order alleged that one former partner requested a second former partner to text him images of exam questions, and during the firm’s internal investigation, the first former partner deleted the texts and encouraged the other former partner to follow suit. The third former partner also allegedly shared exams and answers within his team. Without admitting or denying the findings, the former partners agreed to suspensions on appearing or practicing before the SEC as accountants with the right to apply for reinstatement after durations of three years for the first former partner, two for the second, and one for the third.
III. Broker-Dealers
A. Suitability
In February, the SEC instituted a settled action against two subsidiaries of a broker-dealer relating to supervision of investment advisers and registered representatives who recommended certain investments—single-inverse ETFs—to retail investors.[36] The SEC’s administrative order alleged that the broker-dealer’s policies and training were not reasonably designed to prevent and detect potentially unsuitable recommendations of single-inverse ETFs. Consequently, certain employees allegedly recommended clients buy and hold those securities, despite the risk associated with holding such investments for longer than one day. Without admitting or denying the SEC’s findings, the firm agreed to pay a $35 million penalty to be distributed to clients.
B. Trade Execution
In May, the SEC instituted a settled administrative action against an agency broker-dealer for routing certain customer orders in a manner inconsistent with representations in marketing materials as to how customer orders would be routed to market centers for execution.[37] According to the SEC’s order, the firm represented that customer orders would be routed to market centers through the firm’s smart order router based on execution price and liquidity factors. However, during the relevant period, the firm had entered into arrangements to route orders to unaffiliated broker-dealers (who had more favorable, high-volume pricing arrangements with market centers) to determine routing of the orders to market centers. Without admitting or denying the SEC’s allegations, the firm agreed to pay a $5 million penalty. The SEC’s order also recognized the firm’s cooperation, including retaining an outside expert to analyze the large volume of data related to customer orders and executions.
C. Fees
In May, the SEC instituted a settled action against a broker-dealer based on allegations that the firm provided allegedly misleading information about its “wrap fee” program to customers.[38] “Wrap fee” programs offer accounts in which clients pay an asset-based fee for a bundle of investment advisory and brokerage services, including trade execution services. According to the SEC’s order, the firm marketed the program as providing investment advice, trade execution, and other services for a single fee, but it allegedly directed certain wrap fee clients’ trades to third-party broker-dealers for execution, which in some instances resulted in clients incurring additional trade execution fees. Without admitting or denying the allegations, the firm agreed to pay a $5 million penalty for distribution to affected clients.
D. Record-Keeping
In the first half of this year, the SEC instituted settled enforcement actions against two separate broker-dealers for deficiencies in trading information—known as “blue sheet” data—that the firms provided to the SEC in response to requests.[39] SEC staff routinely requests blue sheet data from broker-dealers in a variety of investigations or regulatory inquiries. In both of the enforcement actions, the errors in the data that the broker-dealers provided were the result of undetected coding errors in the process for identifying data for production to the SEC. In both actions, the broker-dealer firms consented to violations of the record-keeping provisions of the Securities Exchange Act, Section 17(a)(1) and Rules 17a-4(j) and 17a-25. The firms agreed to pay penalties to the SEC of $3.2 million and $1.55 million, respectively.
Notably, in both settlements, the SEC required the respondent broker-dealer firms to admit to the findings in the settled order, even as both orders acknowledged the firms’ remedial actions and cooperation in the investigations; admissions have become a standard practice in blue sheet cases brought by the SEC.
IV. Investment Advisers
A. Risk Management
In January, the SEC instituted partially settled enforcement actions against a New York-based investment advisory firm, the firm’s president, and a senior portfolio manager for allegedly misleading representations concerning the management of risk in a mutual fund managed by the advisory firm.[40] The advisory firm and president settled the action; the portfolio manager is contesting the allegations. According to the SEC’s order and complaint, during a three-month period, from December 2016 to February 2017, the fund managed by the advisory firm lost approximately 20% of its value when markets moved against the fund’s positions. The SEC’s settled order against the firm and the president alleged that the advisory firm represented that it maintained risk parameters, but that the firm breached those parameters and did not take corrective action to avoid losses. The SEC’s pending complaint against the portfolio manager alleges that he represented to investors that he employed a risk management strategy involving safeguards to prevent losses of more than 8%, but that in fact such safeguards did not limit losses. Without admitting or denying the SEC’s findings, the advisory firm and president agreed to implement remedial compliance measures and to pay disgorgement and interest of approximately $9 million and penalties of $1.3 million by the advisory firm and $300,000 by the president.
B. Pre-Release ADRs
In 2020, the SEC has continued its initiative, commenced in 2018, focused on practices related to American Depositary Receipts (“ADRs”). ADRs are U.S. securities that represent foreign shares of a foreign company, and they typically require foreign shares in the same quantity to be held in custody at a depositary bank.[41] “Pre-released” ADRs are a variation that are issued without the deposit of foreign shares. Instead, they require that a customer either already owns the number of shares in equal amounts to the number of shares represented by the ADR or that the broker receiving the shares has an agreement with a depository bank.
In February, the SEC instituted its fifteenth action involving pre-released ADRs. In that settled action, the SEC’s order alleged that the broker-dealer improperly borrowed pre-released ADRs from other brokers when it should have known that the brokers did not own the corresponding foreign shares.[42] The order also alleged that the broker-dealer failed to reasonably supervise its securities lending desk personnel concerning the borrowing of pre-released ADRs from these brokers. Without admitting to or denying the allegations, the firm agreed to pay disgorgement and interest of approximately $400,000 and a penalty of approximately $180,000.
C. Share Class Disclosure
In April, the SEC instituted the final three actions the Enforcement Division intends to recommend under the Division’s Share Class Selection Disclosure Initiative, a program which provided advisers an opportunity to self-report failures to fully disclose conflicts of interest in selecting mutual fund share classes. Under the program, self-reporting advisers were eligible for standardized settlement terms that included disgorgement of fees, but did not include a penalty.[43] These latest settled orders related to two advisers who self-reported by the deadline and consented to violations of Section 206(2) of the Advisers Act and one who reported shortly after the deadline and consented to violations of Sections 206(2) and 206(4) of the Advisers Act and agreed to pay a $10,000 penalty.
D. Policies and Procedures to Prevent Misuse of MNPI
In May, the SEC instituted a settled administrative action against a Los Angeles-based private equity investment adviser firm based on allegations that the firm failed to implement and enforce policies and procedures reasonably designed to prevent the misuse of material nonpublic information under the particular circumstances in which the firm had a senior employee on the board of a portfolio company while also trading in the public securities of the portfolio company.[44] Notably, the settled order did not allege that the firm engaged in any trading while in possession of material nonpublic information. Even though the firm conducted its trading during the portfolio company’s open trading windows, and the firm’s compliance department had approved the firm’s trades, the SEC’s order alleged that the firm did not require its compliance staff to inquire or document sufficiently whether the board representative or other members of the investment team were in possession of material nonpublic information relating to the portfolio company. Without admitting or denying the allegations, the firm agreed to pay a $1 million penalty.
E. Misrepresentation
In May, the SEC filed a complaint and a request for appointment of a receiver against a Florida-based investment advisory firm alleging that the firm improperly inflated revenue data in order to increase asset values and performance metrics.[45] The complaint also alleged that the firm misrepresented monthly returns and investment balances, which, in turn, resulted in the payment of inflated management fees to the firm. The court granted the SEC’s request for appointment of a receiver, and the litigation is ongoing.
V. Ratings Agencies
In May, the SEC instituted a settled action against a credit rating agency for allegedly violating two conflict of interest rules—Rule 17g-5(c)(8)(i) and Section 15E(h)(1) of the Securities Exchange Act of 1934—designed to separate credit ratings and analysis from sales and marketing efforts.[46] According to the SEC’s settled order, analysts responsible for analyzing and rating the credit of companies also participated in sales and marketing efforts targeted at the same companies the analysts were responsible for rating, creating an impermissible conflict of interest. Additionally, the SEC alleged that the credit rating agency failed to maintain sufficient written policies and procedures to separate the firm’s analytical and business development functions. Without admitting or denying the findings, the credit rating agency agreed to pay a $3.5 million penalty and agreed to conduct training and implement changes to its internal controls, policies, and procedures related to the charged provisions.
VI. Cryptocurrency
In the first half of 2020, the Commission continued to bring enforcement actions in the area of cryptocurrency and other digital assets. Some of the enforcement actions were based on alleged failures to comply with the requirement to register an offering of assets deemed to be securities; other actions included allegations of fraud in the offer and sale of digital assets; and one case concerned a celebrity endorsement of an initial coin offering (ICO) without disclosure of compensation received by the celebrity.
A. Registration Cases
In February, the SEC instituted a settled action against a blockchain technology company for conducting an unregistered offering of digital tokens, which the SEC determined to be investment contracts, i.e., securities.[47] Citing to the Supreme Court’s decision in SEC v. W.J. Howey Co.,[48] as well as the SEC’s Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO,[49] the SEC’s order alleged that a purchaser of the digital tokens would have had a reasonable expectation of obtaining a future profit based on the company’s representations and efforts to build its business, including through its use of the ICO fund proceeds to develop a data marketplace for data sets relating to digital assets. In total, the offering raised approximately $45 million. Without admitting or denying the SEC’s findings, the company has agreed to return the funds raised to investors via a claims process, register the tokens as securities, file periodic reports with the SEC, and pay a $500,000 penalty.
In May, the SEC instituted a settled action against a blockchain technology company for conducting an unregistered ICO which raised over $25 million by selling Consumer Activity Tokens to approximately 9,500 investors.[50] During the offering, the company emphasized its expectation that the tokens would increase in value and took steps to make the tokens available for trading on third-party digital asset trading platforms after the ICO. The company planned on using the ICO funds to develop a blockchain-based search platform for targeted consumer advertising. Without admitting or denying the SEC’s findings, the company agreed to pay disgorgement and interest of approximately $29 million and a penalty of $400,000. Additionally, the company removed the Consumer Activity Tokens from all digital asset trading platforms and does not plan to continue development of the search platform.
B. Fraud Cases
In January, the SEC commenced an action against two individuals and two businesses, alleging violations of the antifraud and securities registration provisions of the federal securities laws in connection with the sale of digital assets.[51] The complaint alleged that in marketing and selling digital asset securities to raise funds for a blockchain technology they were developing, the defendants misrepresented that the technology was being tested by 20 hedge funds, when in reality they had sent a prototype to 12 hedge funds, none of which used the prototype. Additionally, the complaint alleged that one of the individual defendants used a fake identity when marketing the digital securities to conceal his criminal record. In a parallel action, the U.S. Attorney’s Office for the District of New Jersey announced criminal charges against the individual who misrepresented his identity to investors.
In February, the SEC filed an action against an individual alleging violations of the antifraud provisions of the federal securities laws based on misrepresentations about the profits purportedly earned from trading digital assets.[52] The complaint alleged that the defendant misrepresented to investors, comprised mainly of physicians, that he had developed a proprietary algorithm that enabled him to generate extraordinary profits trading cryptocurrencies. Additionally, the complaint alleged that the defendant misrepresented the amount of assets he had under management and used investor funds to pay for personal expenses. In parallel actions, the U.S. Attorney’s Office for the Southern District of New York and the Commodity Futures Trading Commission brought criminal and civil actions against the defendant.
In March, the SEC filed an action against three individuals alleging violations of the antifraud and securities registration provisions of the federal securities laws in connection with an ICO. The complaint alleged that the individuals conducted an unregistered ICO—raising more than $4.3 million from more than 150 investors—and made fraudulent representations to investors regarding the risk and value of the digital assets being offered.[53] The complaint also alleged that the individuals never distributed the digital assets to the investors and instead used investor funds to pay personal expenses and funnel proceeds to two other parties.
C. Failure to Disclose Compensation for Endorsement
In February, the SEC instituted a settled action against a celebrity for allegedly violating the anti-touting provisions of the federal securities laws.[54] The celebrity promoted an investment in an ICO but failed to disclose payments he received from the issuer for the endorsements. The endorsements included posts on the celebrity’s public social media accounts and a press release. Without admitting or denying the SEC’s findings, the celebrity agreed to pay disgorgement of the promotional payments of $157,000 he had received, as well as a $157,000 penalty and agreed not to promote any securities, digital or otherwise, for three years.
VII. Offering Frauds
In the first half of 2020, the SEC continued to bring a substantial number of enforcement actions to enjoin offering frauds, particularly those that targeted retail investors, including seniors.
A. Ponzi-Like Schemes
In January, the SEC filed three cases alleging fraudulent securities offerings that amounted to Ponzi-like schemes. In the first, the SEC alleged that an individual fraudulently raised at least $75 million from more than 500 investors through unregistered securities offerings, promising investors a perpetual guaranteed rate of return on their investments, which he claimed to be channeling into the purchase or creation, marketing, and maintenance of revenue-generating websites.[55] The complaint, which the SEC filed in federal court in Chicago, alleges that, in reality, the defendant used investors’ funds to pay investor returns and his own personal expenses, including mortgage payments and private school tuition for his family. The Court granted a temporary restraining order and preliminary injunction, ordered an asset freeze and other emergency relief against the defendant, and appointed a receiver for the defendant’s company.[56]
In the second case, the SEC filed an action against two individuals and their companies, alleging that they conducted a fraudulent securities offering that raised almost $5 million from retail investors.[57] The complaint, which the SEC filed in federal court in California, alleges that the defendants solicited investments in a holding company they controlled, purporting that the funds would be used to operate a Washington-licensed recreational marijuana company. Instead, the complaint alleges, the defendants used the investors’ funds to support their own lavish lifestyles.
In the third case, the SEC filed an action against a California couple alleging a fraudulent securities offering that raised almost $1 billion from seventeen investors, including major institutional investors, between 2011 and 2018.[58] According to the complaint, which the SEC filed in federal court in Sacramento, the defendants solicited investments from wealthy investors by offering securities in the form of investment contracts through their two solar generator companies. The complaint alleged that the defendants promised investors tax credits, lease payments, and profits from the operation of mobile solar generators but never manufactured the majority of the promised generators and instead used investor funds to pay other investors and for personal expenses. The defendants consented to permanent injunctions, with monetary relief to be determined by the court.
In the first half of 2020, the SEC filed two actions alleging investment frauds that targeted retail investors, including senior citizens. In February, the SEC filed an action against a Florida-based private real estate firm and its CEO and Managing Director, alleging the defendants fraudulently raised more than $170 million from at least 1,100 investors.[59] According to the complaint, the defendants represented to investors that they would receive between 8% and 10% annual interest on their investments, and that their investment would be used to purchase undervalued real estate. The SEC alleges that, in reality, the defendants invested less than half of the funds in properties and used the remainder on personal expenses and to repay investors in another fund. The court granted the SEC’s request for emergency relief, including an accounting and the appointment of a receiver over the primary and relief defendants.
In a second case, in May, the SEC filed an action against a California investment adviser alleging he conducted a Ponzi scheme targeting senior citizens in Southern California.[60] The complaint alleges that the defendant raised more than $5.6 million from at least 35 investors by marketing securities in another of his companies and by promising investors between 3% and 10.5% returns on so-called “private annuity contracts.” According to the complaint, the defendant did not invest the funds in any securities but rather used the funds to pay promised returns to other investors and to settle investor fraud lawsuits. The court ordered an asset freeze, an accounting, and appointment of a temporary receiver.[61] The U.S. Attorney’s Office for the Central District of California also filed a criminal complaint against the defendant.
B. Microcap Stock Fraud
In January, the SEC filed a pair of complaints against six individuals in the U.S., Canada, and Europe alleging fraudulent and unregistered stock offerings in at least 45 microcap companies that raised over $35 million.[62] The complaints allege that the defendants conducted two schemes: one to secretly dump large quantities of microcap stock while fraudulently transferring and hiding the source of funds used to promote the stocks, and another to sell and then manipulatively trade millions of unregistered shares of a microcap stock while artificially inflating its price and dumping the shares into the market. The U.S. Attorney’s Office for the Southern District of New York announced parallel criminal charges.
C. Affinity-Based Offering Frauds
In January, the SEC filed a settled action against a Pennsylvania man for allegedly conducting a decade-long fraud, which raised approximately $60 million in investments from Amish and Mennonite community members.[63] According to the SEC’s complaint, the defendant, who provided accounting and investment services to fellow Amish and Mennonite community members, solicited investments from his clients and promised to invest the funds in business and real estate loans to other members of the religious community but instead funneled a large percentage of the investments into his personal investment projects, which failed and left him unable to repay investors. The settlement provided for injunctive relief and the return of ill-gotten gains plus prejudgment interest. In February, the defendant also pleaded guilty to criminal charges of conspiracy and fraud brought by the U.S. Attorney’s Office for the Eastern District of Pennsylvania.
Also in the first half of 2020, the SEC filed two actions against individuals alleging investment frauds that targeted senior retail investors’ retirement funds. In the first action, in March, the SEC filed a complaint alleging that a Russian national, through a number of companies he owned, raised over $26 million from retail investors, many of them older investors looking to invest their retirement savings. According to the complaint, the defendant used internet ads linked to spoofed websites of 24 actual legitimate financial firms to lure investors to invest in fictitious Certificates of Deposit.[64] The U.S. Attorney’s Office for the District of New Jersey announced parallel criminal charges.
In the second action, in June, the SEC filed a complaint alleging that a securities broker based in Nashville, Tennessee, defrauded two seniors of nearly $1 million over the course of four years.[65] According to the complaint, after acting as the senior investor’s registered representative for more than three decades, the defendant made unauthorized sales of securities from the investor’s account and transferred the proceeds of those sales into his own bank account using falsified wire transfer forms. The complaint further alleged that, after the first investor’s death in March 2019, the defendant stole funds from another senior’s brokerage account in similar fashion. The U.S. Attorney’s Office for the Middle District of Tennessee also filed parallel criminal charges.
D. Misuse of Client Funds
In March, the SEC filed charges, and obtained an asset freeze and other emergency relief, against a Florida-based investment adviser and its managing member in connection with an alleged fraudulent unregistered securities offering.[66] The SEC’s complaint alleged that the investment adviser made misrepresentations to investors about a purported hedge fund including assurances that investor funds were deposited into a sub-fund, which was purportedly invested in U.S.-listed products and 90% hedged using listed options. According to the complaint, the investment adviser instead directed a significant part of investor funds to a private start-up company owned by a managing member.
In May, the SEC filed an action against the owner of a film distribution company for allegedly violating the antifraud provisions of the federal securities laws.[67] The SEC’s complaint alleged that the individual diverted funds he received from an investment management company, which were meant to support his film distribution business, to a sham company and then used the investor funds to pay personal expenses. The SEC is seeking disgorgement, civil penalties, and permanent injunctive relief. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York filed criminal charges against the individual.
______________________
[1] Public Statement, “Statement from Stephanie Avakian and Steven Peikin, Co-Directors of the SEC’s Division of Enforcement, Regarding Market Integrity” (Mar. 23, 2020), available at https://www.sec.gov/news/public-statement/statement-enforcement-co-directors-market-integrity.
[2] See May 12, 2020 Keynote Address: Securities Forum West 2020, available at https://www.sec.gov/news/speech/keynote-securities-enforcement-forum-west-2020.
[3] SEC Press Release, SEC Charges Company and CEO for COVID-19 Scam (Apr. 28, 2020), available at https://www.sec.gov/news/press-release/2020-97.
[4] SEC Press Release, SEC Charges Companies and CEO for Misleading COVID-19 Claims (May 14, 2020), available at https://www.sec.gov/news/press-release/2020-111.
[5] SEC Press Release, SEC Charges California Trader Engaged in Manipulative Trading Scheme Involving COVID-19 Claims (June 9, 2020), available at https://www.sec.gov/news/press-release/2020-128.
[6] SEC Press Release, SEC Charges Microcap Fraud Scheme Participants Attempting to Capitalize on the COVID-19 Pandemic (June 11, 2020), available at https://www.sec.gov/news/press-release/2020-131.
[7] 140 S. Ct. 1936 (2020).
[8] See also Barry Goldsmith et al., Supreme Court Reins In, But Does Not Overturn, SEC’s Disgorgement Authority, New York Law Journal (June 25, 2020), available at https://www.law.com/newyorklawjournal/2020/06/25/supreme-court-reins-in-but-does-not-overturn-secs-disgorgement-authority/, for a discussion of the implications of Liu.
[9] 140 S. Ct. at 1940.
[10] Id. at 1948.
[11] Id.
[12] Id. at 1949.
[13] Id.
[14] Id. at 1950.
[15] Id.
[16] SEC Press Release, SEC Awards Record Payout of Nearly $50 Million to Whistleblower (June 4, 2020), available at https://www.sec.gov/news/press-release/2020-126.
[17] SEC Press Release, SEC Awards Over $27 Million to Whistleblower (Apr. 16, 2020), available at https://www.sec.gov/news/press-release/2020-89.
[18] SEC Press Release, SEC Awards Over $18 Million to Whistleblower (Apr. 28, 2020), available at https://www.sec.gov/news/press-release/2020-98.
[19] SEC Press Release, SEC Awards Whistleblowers Whose Information Helped Stop Fraud (Jan. 22, 2020), available at https://www.sec.gov/news/press-release/2020-15.
[20] SEC Press Release, SEC Awards More Than $7 Million to Whistleblower (Feb. 28, 2020), available at https://www.sec.gov/news/press-release/2020-46.
[21] SEC Press Release, SEC Awards Over $1.6 Million to Whistleblower (Mar. 23, 2020), available at https://www.sec.gov/news/press-release/2020-69.
[22] SEC Press Release, SEC Awards Over $570,000 to Two Whistleblowers (Mar. 24, 2020), available at https://www.sec.gov/news/press-release/2020-71.
[23] SEC Press Release, SEC Awards $450,000 to Whistleblower (Mar. 30, 2020), available at https://www.sec.gov/news/press-release/2020-75.
[24] SEC Press Release, SEC Awards Approximately $2 Million to Whistleblower (Apr. 3 2020), available at https://www.sec.gov/news/press-release/2020-80.
[25] SEC Press Release, SEC Issues $5 Million Whistleblower Award (Apr. 20, 2020), available at https://www.sec.gov/news/press-release/2020-91.
[26] SEC Press Release, SEC Awards Almost $2 Million to Whistleblower (May 4, 2020), available at https://www.sec.gov/news/press-release/2020-100.
[27] SEC Press Release, SEC Awards Almost $700,000 to Whistleblower (June 19, 2020), available at https://www.sec.gov/news/press-release/2020-138.
[28] SEC Press Release, SEC Awards $125,000 to Whistleblower (June 23, 2020), available at https://www.sec.gov/news/press-release/2020-141.
[29] Id.
[30] SEC Press Release, SEC Charges Global Alcohol Producer with Disclosure Failures (Feb. 19, 2020), available at https://www.sec.gov/news/press-release/2020-36.
[31] Administrative Proceeding File No. 3-19701, In the Matter of Diageo plc (Feb. 19, 2020), available at https://www.sec.gov/litigation/admin/2020/33-10756.pdf.
[32] SEC Press Release, Insurance Company Settles SEC Charges for Failing to Disclose Executive Perks (June 4, 2020), available at https://www.sec.gov/news/press-release/2020-127.
[33] SEC Press Release, Wells Fargo to Pay $500 Million for Misleading Investors About the Success of Its Largest Business Unit (Feb. 21, 2020), available at https://www.sec.gov/news/press-release/2020-38.
[34] SEC Press Release, SEC Charges South Carolina Energy Companies Former Executives With Defrauding Investors (Feb. 27, 2020), available at https://www.sec.gov/news/press-release/2020-44.
[35] SEC Press Release, SEC Charges Three Former KPMG Audit Partners for Exam Sharing Misconduct (May 18, 2020), available at https://www.sec.gov/news/press-release/2020-115.
[36] SEC Press Release, SEC Charges Wells Fargo in Connection with Investment Recommendation Practices (Feb. 27, 2020), available at https://www.sec.gov/news/press-release/2020-43.
[37] SEC Press Release, SEC Charges Bloomberg Tradebook for Order Routing Misrepresentations (May 6, 2020), available at https://www.sec.gov/news/press-release/2020-104.
[38] SEC Press Release, SEC Charges Morgan Stanley Smith Barney with Providing Misleading Information to Retail Clients (May 12, 2020), available at https://www.sec.gov/news/press-release/2020-109.
[39] SEC Press Release, Cantor Fitzgerald Agrees to Pay $3.2 Million to Settle Charges for Providing Deficient Blue Sheet Data (Apr. 6, 2020), available at https://www.sec.gov/news/press-release/2020-81; SEC Press Release, SG Americas to Pay $3.1 Million to Settle Charges of Providing Deficient Blue Sheet Data (June 24, 2020), available at https://www.sec.gov/news/press-release/2020-142.
[40] SEC Press Release, SEC Charges Portfolio Manager and Advisory Firm with Misrepresenting Risk in Mutual Fund (Jan. 27, 2020), available at https://www.sec.gov/news/press-release/2020-21.
[41] SEC Press Release, ABN AMRO Clearing Chicago Charged with Improper Handling of ADRs (Feb. 6, 2020), available at https://www.sec.gov/news/press-release/2020-29.
[42] Admin. Proc. File No. 3-19693, In the Matter of ABN AMRO Clearing Chicago LLC (Feb. 6, 2020), available at https://www.sec.gov/litigation/admin/2020/34-88139.pdf.
[43] SEC Press Release, SEC Orders Three Self-Reporting Advisory Firms to Reimburse Investors (Apr. 17, 2020), available at https://www.sec.gov/news/press-release/2020-90.
[44] SEC Press Release, Private Equity Firm Ares Management LLC Charged with Compliance Failures (May 26, 2020), available at https://www.sec.gov/news/press-release/2020-123.
[45] SEC Press Release, SEC Obtains Receiver Over Florida Investment Adviser Charged with Fraud (May 12, 2020), available at https://www.sec.gov/news/press-release/2020-110.
[46] SEC Press Release, SEC Orders Credit Rating Agency to Pay $3.5 Million for Conflicts of Interest Violations (May 15, 2020), available at https://www.sec.gov/news/press-release/2020-112.
[47] SEC Press Release, ICO Issuer Settles SEC Registration Charges, Agrees to Return Funds and Register Tokens As Securities (Feb. 19, 2020), available at https://www.sec.gov/news/press-release/2020-37.
[48] 328 U.S. 293 (1946).
[49] Exchange Act Rel. No. 81207 (July 25, 2017).
[50] SEC Press Release, Unregistered $25.5 Million ICO Issuer to Return Money for Distribution to Investors (May 28, 2020), available at https://www.sec.gov/news/press-release/2020-124.
[51] SEC Press Release, SEC Charges Convicted Criminal Who Conducted Fraudulent ICO Using a Fake Identity (Jan. 17, 2020), available at https://www.sec.gov/news/press-release/2020-12.
[52] SEC Press Release, SEC Charges Orchestrator of Cryptocurrency Scheme Ensnaring Physicians (Feb. 11, 2020), available at https://www.sec.gov/news/press-release/2020-32.
[53] SEC Press Release, SEC Emergency Action Stops Digital Asset Scam (Mar. 20, 2020), available at https://www.sec.gov/news/press-release/2020-66.
[54] SEC Press Release, Actor Steven Seagal Charged With Unlawfully Touting Digital Asset Offering (Feb. 27, 2020), available at https://www.sec.gov/news/press-release/2020-42.
[55] SEC Press Release, SEC Obtains Emergency Asset Freeze, Charges Businessman With Operating a Ponzi-Like Scheme (Jan. 14, 2020), available at https://www.sec.gov/news/press-release/2020-10.
[56] SEC Litigation Release, SEC Obtains Preliminary Injunction Against Businessman for Operating a Ponzi-Like Scheme (Mar. 6, 2020), Litigation Release No. 24760, available at https://www.sec.gov/litigation/litreleases/2020/lr24760.htm.
[57] SEC Press Release, SEC Files Charges Against Scheme to Sell Fictitious Interests in Marijuana Company (Jan. 21, 2020), available at https://www.sec.gov/news/press-release/2020-14.
[58] SEC Press Release, SEC Charges Husband and Wife with Nearly $1 Billion Ponzi Scheme (Jan. 24, 2020), available at https://www.sec.gov/news/press-release/2020-18.
[59] SEC Press Release, SEC Charges Real Estate Company and Executives With Defrauding Retail Investors, Obtains Emergency Relief (Feb. 18, 2020), available at https://www.sec.gov/news/press-release/2020-35.
[60] SEC Press Release, SEC Shuts Down Fraudulent Investment Adviser Targeting Senior Citizens (May 22, 2020), available at https://www.sec.gov/news/press-release/2020-120.
[61] SEC Litigation Release, SEC Obtains Preliminary Injunction Against Fraudulent Investment Adviser Targeting Senior Citizens, Litigation Release No. 24831 (June 9, 2020), available at https://www.sec.gov/litigation/litreleases/2020/lr24831.htm.
[62] SEC Press Release, SEC Charges Six Individuals in International Microcap Fraud Schemes (Jan. 2, 2020), available at https://www.sec.gov/news/press-release/2020-1.
[63] SEC Press Release, SEC Brings Charges Against Fraud Targeting Amish and Mennonite Investors (Jan. 31, 2020), available at https://www.sec.gov/news/press-release/2020-26.
[64] SEC Press Release, SEC Charges Russian National for Defrauding Older Investors of Over $26 Million in Phony Certificates of Deposit Scam (Mar. 13, 2020), available at https://www.sec.gov/news/press-release/2020-61.
[65] SEC Press Release, SEC Charges Broker Who Defrauded Seniors Out of Almost $1 Million (June 12, 2020), available at https://www.sec.gov/news/press-release/2020-132.
[66] SEC Press Release, SEC Halts Fraudulent Offering by Florida Investment Adviser (Mar. 10, 2020), available at https://www.sec.gov/news/press-release/2020-56.
[67] SEC Press Release, SEC Charges Owner of Film Distribution Company with Defrauding Publicly Traded Fund (May 22, 2020), available at https://www.sec.gov/news/press-release/2020-122.
The following Gibson Dunn lawyers assisted in the preparation of this client update: Mark Schonfeld and Tina Samanta.
Gibson Dunn is one of the nation’s leading law firms in representing companies and individuals who face enforcement investigations by the Securities and Exchange Commission, the Department of Justice, the Commodities Futures Trading Commission, the New York and other state attorneys general and regulators, the Public Company Accounting Oversight Board (PCAOB), the Financial Industry Regulatory Authority (FINRA), the New York Stock Exchange, and federal and state banking regulators.
Our Securities Enforcement Group offers broad and deep experience. Our partners include the former Director of the SEC’s New York Regional Office, the former head of FINRA’s Department of Enforcement, the former United States Attorneys for the Central and Eastern Districts of California, and former Assistant United States Attorneys from federal prosecutors’ offices in New York, Los Angeles, San Francisco and Washington, D.C., including the Securities and Commodities Fraud Task Force.
Securities enforcement investigations are often one aspect of a problem facing our clients. Our securities enforcement lawyers work closely with lawyers from our Securities Regulation and Corporate Governance Group to provide expertise regarding parallel corporate governance, securities regulation, and securities trading issues, our Securities Litigation Group, and our White Collar Defense Group.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work or any of the following:
Securities Enforcement Practice Group Leaders:
Richard W. Grime – Washington, D.C. (+1 202-955-8219, [email protected])
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Please also feel free to contact any of the following practice group members:
New York
Zainab N. Ahmad (+1 212-351-2609, [email protected])
Matthew L. Biben (+1 212-351-6300, [email protected])
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Washington, D.C.
Stephanie L. Brooker (+1 202-887-3502, [email protected])
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Patrick F. Stokes (+1 202-955-8504, [email protected])
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Winston Y. Chan (+1 415-393-8362, [email protected])
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Charles J. Stevens (+1 415-393-8391, [email protected])
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Michael D. Celio (+1 650-849-5326, [email protected])
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Robert C. Blume (+1 303-298-5758, [email protected])
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The COVID-19 pandemic made this an unprecedented Term at the Supreme Court. The Court heard telephonic oral arguments in May, issued opinions well into July, and deferred ten cases until the October 2020 Term. Despite all of this, the Court’s business docket continued largely uninterrupted.
Gibson Dunn has previously published its annual Round-Up of all the Court’s decisions in the Term just ended, with a preview of next Term. A copy is available here. This summary focuses on the decisions most directly affecting business litigation.
Business Docket:
The Supreme Court decided a number of significant business cases this Term. Among those cases were several notable categories:
- Seven cases involved intellectual property issues, most of which focused on trademark or copyright questions.
- Four cases presented significant questions of administrative law or the constitutionality of administrative agencies.
- Four cases involved labor and employment issues.
- Three cases involved the Employee Retirement Income Security Act (ERISA).
- Three cases involved environmental law issues.
Throughout the Term, Gibson Dunn’s Appellate and Constitutional Law Practice Group prepared short, same-day client alerts summarizing nineteen of the Court’s most significant business decisions. We provide copies of each of them here.
Spotlight on Gibson Dunn:
Four different Gibson Dunn attorneys argued a total of five cases at the Supreme Court this Term. Ted Olson argued Financial Oversight and Management Board for Puerto Rico v. Aurelius Investment, LLC, and Department of Homeland Security v. Regents of the University of California. Miguel Estrada argued Comcast Corp. v. National Association of African American-Owned Media. Matthew McGill argued Opati v. Republic of Sudan. And Amir Tayrani argued Monasky v. Taglieri. No other firm had more lawyers present oral arguments this Term.
Looking Ahead:
The Supreme Court already has granted a number of significant business cases for the 2020 Term. The Court will tackle cases involving copyright, personal jurisdiction, ERISA preemption, the constitutionality of the Patient Protection and Affordable Care Act, the constitutionality of the Federal Housing Finance Agency, and the constitutionality of Delaware’s constitutional provision requiring partisan balance in the Delaware judiciary, among other important issues.
As always, Gibson Dunn’s Appellate and Constitutional Law Practice will monitor the Court’s work and report on significant business decisions that affect our clients. We look forward to another interesting Supreme Court Term beginning in October 2020.
The summary of decisions most directly affecting business litigation 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 [email protected] | Mark A. Perry +1 202.887.3667 [email protected] |
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Learn about the April 28, 2020 action by the U.S. Government and how it can affect your company even if you do not directly deal in the military sector.
- What is new about this rule and what is the U.S. Government objective?
- What is the scope of the rule?
- What is a military end use?
- What is a military end user?
- How do the recent FAQs provide clarity?
- What are the penalties for violating the rule?
- What does my company need to do to avoid penalties and business disruption?
- What are the ramifications of the June 24 Dept. of Defense decision to name 20 Chinese entities as affiliated or controlled by the PRC military?
Hear from our lawyers in Washington, D.C. and Beijing on these developments and what we can expect in the future. The discussion was held in both English and Mandarin Chinese.
View Slides (PDF)
PANELISTS:
Judith Alison Lee is a partner in the Washington, D.C. office and Co-Chair of the firm’s International Trade Practice Group. Ms. Lee is a Chambers ranked leading International Trade, Export Controls, and Economic Sanctions lawyer practicing in the areas of international trade regulation, including USA Patriot Act compliance, economic sanctions and embargoes, export controls, and national security reviews (“CFIUS”). Ms. Lee also advises on issues relating to virtual and digital currencies, blockchain technologies and distributed cryptoledgers.
Fang Xue is a partner and Chief Representative of the Beijing office. Ms. Xue is a Chambers ranked leading lawyer in Asia-Pacific for China-based Corporate M&A work. She has represented Chinese and international corporations and private equity funds in cross-border acquisitions, private equity transactions, stock and asset transactions, joint ventures, going private transactions, tender offers and venture capital transactions, including many landmark deals among those.
R.L. Pratt is an associate in the Washington, D.C. office and a member of the firm’s International Trade Practice Group. Mr. Pratt counsels clients on compliance with U.S. economic sanctions, export controls (ITAR and EAR), foreign investment, and international trade regulatory issues and assists in representing clients before the departments of State (DDTC), Treasury (OFAC and CFIUS), and Commerce (BIS).
Shuo Josh Zhang is an associate in the Washington, D.C. office and a member of the Litigation, International Trade, and White Collar Defense and Investigations Practice Groups. Mr. Zhang has experience representing tech clients across various industries in FCPA defense and investigations, export control compliance matters, CFIUS due diligence and compliance matters, and international arbitration.
As the world reels from the COVID-19 pandemic and certain sectors of the economy struggle, False Claims Act (“FCA”) enforcement and litigation has largely plodded along during the first six months of 2020—and some areas reflect increasing activity. At the same time, the federal government’s stimulus efforts are sowing seeds for potentially significant future enforcement efforts, and the dire economic and employment landscape domestically may well catalyze whistleblower complaints.
As we have explained in prior alerts (available here and here), the federal government has spent record sums as part of COVID-19 stimulus and relief efforts; and whenever the government spends large amounts of money, activity under the FCA—the government’s primary tool for combating fraud against the government—is sure to follow. True to form, the government has already announced that FCA enforcement related to COVID-19 funding will be a priority in the months and years ahead, and we have begun to see the first wave of fraud prosecutions and investigations related to the government’s stimulus spending.
Meanwhile, enforcement efforts that started before the recent crisis have continued. And the courts, while somewhat slowed by shutdowns that have affected every court in the country, nevertheless produced notable opinions in the last six months that deserve careful attention for any company doing business, directly or indirectly, with the federal or state governments. As detailed below, these opinions address a wide range of issues, including the scope of the FCA’s falsity element (including in relation to whether and when differences in clinical judgments can serve as a predicate for liability), the contours of other key elements of the statute (e.g., scienter and materiality), and the public disclosure bar.
Below, we begin by summarizing recent enforcement activity, then provide an overview of notable legislative and policy developments at the federal and state levels, and finally we analyze significant court decisions from the past six months. Gibson Dunn’s recent publications regarding the FCA may be found on our website, including in-depth discussions of the FCA’s framework and operation, industry-specific presentations, and practical guidance to help companies avoid or limit liability under the FCA. And, of course, we would be happy to discuss these developments—and their implications for your business—with you.
I. NOTEWORTHY DOJ ENFORCEMENT ACTIVITY DURING THE FIRST HALF OF 2020
The first few months of 2020 featured a fairly typical number of FCA resolutions announced by DOJ. Unsurprisingly, there was a clear slowdown beginning in April as many government offices (and businesses) shuttered. This slowdown has resulted in lower overall recoveries compared to the pace during the first half of prior years. In a significant departure from past years, DOJ has announced only one nine-figure settlement this year (a $145 million settlement with a health information technology developer that was implicated in an alleged kickback scheme relating to prescriptions of opioid products).
Behind the scenes, however, neither the government nor the private relators’ bar seem to have lost focus on FCA enforcement as a result of COVID-19. Ongoing investigations are moving forward. And June has already seen a slight uptick in the number of resolutions announced (although the average amounts generally have been lower than in the beginning of 2020).
As usual, the majority of FCA recoveries from enforcement actions this year have involved health care and life sciences entities, including recoveries alleging violations of the Anti-Kickback Statute (“AKS”) and the Stark Law, which generally prohibit various types of remunerative arrangements with referring health care providers. Below, we summarize these and some of the other most notable settlements thus far in 2020.
In addition to the settlements summarized below, there was also a (comparatively rare) federal jury trial under the FCA during the first half of the year. In March 2020, a federal jury found after a nine-week trial that several individuals and their affiliated companies were liable for violations of the FCA, and awarded $10.85 million in single damages (which after statutory trebling and civil penalties resulted in a judgment of more than $32 million).[1] According to the government, the defendants submitted fraudulent Medicare cost reports when they billed Medicare for compensation paid to owners and executives who did not do reimbursable work for the hospital; the U.S. Attorney for the Southern District of Mississippi called the matter “one of the most egregious cases of Medicare fraud we have litigated in the State of Mississippi.”
A. Health Care and Life Science Industries
- On January 15, a California-based manufacturer of durable medical equipment (“DME”) agreed to pay more than $37.5 million to resolve allegations that it violated the FCA by paying kickbacks to equipment suppliers, sleep laboratories, and other health care providers. The government alleged that the DME manufacturer induced patient referrals by, among other things, providing free patient outreach services and below-cost equipment and installation, as well as arranging for, and guaranteeing payments due on, interest-free loans for the purchase of its equipment. The company contemporaneously entered into a Corporate Integrity Agreement with the Department of Health and Human Services Office of Inspector General (“HHS-OIG”) that requires the company to implement additional controls around its product pricing and sales and conduct monitoring of its arrangements with referral sources.[2]
- On January 21, a patient co-pay foundation based in Virginia agreed to pay $3 million to resolve allegations that it coordinated with three pharmaceutical manufacturers to enable them to provide kickbacks to Medicare patients taking the manufacturers’ drugs. DOJ alleged that the foundation designed and operated funds that directed money from the pharmaceutical manufacturers to patients to cover co-payments for drugs sold by those companies. The settlement amount was determined based on the foundation’s ability to pay. The foundation agreed to a three-year Corporate Integrity Agreement with HHS-OIG that requires the foundation to implement measures to ensure that it operates independently and that its interactions with donors comply with the law. The Integrity Agreement also requires compliance-related certifications from the foundation’s Board of Directors, and reviews by an independent review organization. The federal government previously entered into settlements with the three pharmaceutical manufacturers related to the same allegations.[3]
- On January 27, a California-based health information technology developer entered into a deferred prosecution agreement and agreed to pay over $26 million in criminal fines and forfeit criminal proceeds of nearly $1 million, to resolve allegations that it obtained unlawful kickbacks from pharmaceutical companies in exchange for implementing clinical decision support alerts in its electronic health record software designed to increase prescriptions of the companies’ drug products. This represents the first criminal action against an electronic health records vendor. In a simultaneous civil settlement, the developer agreed to pay approximately $118.6 million to the federal government and states to resolve allegations that it accepted kickbacks from pharmaceutical companies and that it caused its users to submit false claims for federal incentive programs by misrepresenting the capabilities of its software. The civil settlement also resolved allegations that the developer obtained false certifications for its electronic health care software.[4]
- On February 19, an operator of nursing facilities in Pennsylvania, Ohio, and West Virginia agreed to pay more than $15.4 million to settle allegations that it overbilled Medicare and the Federal Employees Health Benefits Program for medically unnecessary rehabilitation therapy services. The settlement also resolves allegations that the nursing facility operator received payments for ineligible services performed by employees who were excluded from federal health care programs. The relators who filed the case will receive approximately $2.8 million as their share of the recovery. The nursing facility operator also agreed to enter into a chain‑wide Corporate Integrity Agreement.[5]
- On February 28, DOJ announced a second settlement related to the provision of unnecessary rehabilitation therapy services at nursing homes. A Tennessee-based provider of skilled nursing and rehabilitation services agreed to pay $9.5 million to settle allegations that it knowingly submitted false claims to Medicare for rehabilitation therapy services that were not reasonable, necessary, or provided by appropriately skilled personnel, and that it forged pre‑admission evaluations of patient need for skilled nursing services to Tennessee’s Medicaid Program. The two relators who filed the case will receive approximately $1.4 million and $145,000, respectively, as their share of the recovery.[6]
- On February 28, a pharmaceutical company agreed to pay nearly $11.9 million to resolve allegations that it paid kickbacks to Medicare patients through a charitable foundation. The government alleged that the company violated the AKS and thus the FCA by making payments to the foundation for the purpose of using the foundation as a conduit to pay Medicare co-pay obligations of patients taking the company’s drug. The company also entered into a Corporate Integrity Agreement with HHS-OIG that will require, among other things, reviews by an independent review organization and compliance-related certifications from the company’s executives and Board of Directors.[7]
- On March 17, a Pennsylvania doctor agreed to pay $2.8 million under the FCA and the Controlled Substances Act, as well as in civil forfeiture, relating to alleged distribution to patients of non-medically necessary drugs for which he then submitted claims to federal health care programs.[8]
- On April 6, a New Jersey chiropractor agreed to pay $2 million to resolve allegations that he billed federal health care programs for unnecessary injections and knee braces and accepted kickbacks. This resolution followed an agreement reached with seven former clinics and their owners, which we discussed in our 2019 Year-End Update.[9]
- On April 6, a Georgia-based biopharmaceutical company agreed to pay $6.5 million to resolve claims that it charged inflated prices to the U.S. Department of Veterans Affairs for human tissue graft products.[10] The company allegedly misreported its commercial pricing, enabling the company to charge inflated prices to the government.
- On April 10, a rehabilitation services company agreed to pay more than $4 million to resolve allegations that it caused three skilled nursing facilities to submit claims for reimbursement for unnecessary or inaccurately recorded time allegedly spent on rehabilitation services. The company also entered into a five-year Corporate Integrity Agreement that requires training, auditing, and monitoring relating to the conduct at issue.[11]
- On April 14, a rehabilitation company and related entities agreed to pay $10 million to resolve similar allegations that the company submitted claims to Medicare for rehabilitation therapy services that were improperly labeled as being for “Ultra High”—or the neediest—patients.[12]
- On April 15, a lab company, an associated pain clinic, and two former executives agreed to pay $41 million to resolve FCA allegations that they engaged in unnecessary urine drug testing.[13] According to the government, the defendants developed and implemented a practice of automatically ordering expensive and unnecessary testing, without any physician making an individualized determination that the tests were medically necessary for particular patients.
- On April 22, a non-profit hospital operator and affiliated physician group paid nearly $10 million to resolve allegations that they had engaged in unlawful referral arrangements in violation of the Stark Law, AKS, and FCA.[14] The hospital operator proactively self-disclosed its violations of the FCA to the government and cooperated in the investigation.
- On April 27, a North Carolina-based laboratory agreed to pay $43 million to resolve FCA allegations that the company submitted claims for tests that were not medically necessary and engaged in other improper billing and compensation methods.[15]
- On June 25, an Atlanta-based hospital system agreed to pay $16 million to resolve FCA allegations that it inappropriately billed federal health care programs for more costly inpatient care, rather than for outpatient care.[16] The government alleged that case managers overturned the judgment of treating physicians and billed Medicare and Medicaid for inpatient care despite the physicians’ recommendation that outpatient care was appropriate. The settlement also resolved allegations that the hospital system paid a commercially unreasonable sum to acquire a cardiology group in violation of the AKS.
B. Government Contracting
- On January 3, a university based in New Jersey agreed to pay more than $4.8 million to resolve allegations that it submitted false claims for payment to the Department of Veterans Affairs to receive education benefits and funds pursuant to the Post-9/11 Veterans Education Assistance Act to which the university was not entitled. Three individuals previously pleaded guilty to related criminal charges.[17]
- On January 31, two companies agreed to pay a collective $29 million to resolve FCA allegations that they rigged bidding in an auction to acquire a U.S. Department of Energy Loan. The government alleged that the companies pressured competing bidders to suppress bids during a live auction, thereby reducing the amount recovered in the auction and allowing the companies to acquire the loan for less than its fair market value. The relators who filed the case will receive approximately $5.2 million as their share of the recovery.[18]
- On February 6, the successor to a local redevelopment agency based in Los Angeles, California, agreed to pay $3.1 million to resolve allegations that its predecessor violated the FCA by allegedly failing to comply with federal accessibility laws when it financed and helped develop affordable housing using federal funds. Since the events underlying the allegations, California has dissolved all redevelopment agencies, and the party to the settlement is working to wind down the affairs of its predecessor.[19]
- On April 27, a Massachusetts university agreed to pay more than $1.3 million to resolve allegations of overcharging NIH grants.[20] The university self-disclosed concerns that one of its professors had overcharged NIH by overstating time and effort spent on statistical analysis support that the professor and her team provided to other professors on grant-related research.
II. LEGISLATIVE AND POLICY DEVELOPMENTS
A. COVID-19 Enforcement Policy
As we reported previously, DOJ has already confirmed that it will focus resources on COVID-19-related fraud. In a March 16 memorandum to all U.S. Attorneys and a March 20 press release, Attorney General William Barr announced that DOJ will prioritize the investigation and prosecution of coronavirus-related fraud schemes.[21] In addition, Attorney General Barr directed U.S. Attorneys to appoint a “Coronavirus Fraud Coordinator” in each district—responsible for coordinating enforcement and conducting public outreach and awareness—and also established a national system for whistleblowers to report suspected fraud.
Recent public remarks by DOJ Civil Division Principal Deputy Assistant Attorney General Ethan Davis—delivered in a June 28, 2020 speech—reaffirmed that the Civil Division’s Fraud Section has prioritized FCA actions involving fraud relating to COVID-19.[22] These remarks highlighted, in particular, intent to focus scrutiny under the FCA on several aspects of the stimulus funding under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), such as in connection with certifications of compliance with loan program requirements.
And DOJ has already begun taking action against COVID-19 related fraud, as promised. In one instance, DOJ filed criminal healthcare fraud charges against an officer of a medical technology company alleging in part that the defendant paid unlawful kickbacks and bundled medically unnecessary COVID-19 testing with other services billed to the government and thereby allegedly caused submission of false claims that were kickback-tainted, medically unnecessary, and/or otherwise not provided as represented.[23] Although the case involves only criminal charges, the underlying health care fraud allegations regarding unlawful billing and alleged kickbacks are what would likely form core FCA issues in a civil fraud action, and may be an indicator of what is to come.
B. Federal Legislative Developments
1. COVID-19 Legislation
There also have been several federal legislative developments thus far in 2020 that may spur FCA enforcement activities for years to come. We have covered these developments in detail in updates throughout the COVID-19 crisis (available here and here), and we summarize the key provisions here for ease of reference.
The most notable legislation is the CARES Act. The CARES Act, which is the largest emergency stimulus package in history, devotes $2.2 trillion worth of government funds to mitigate the effects of COVID-19.[24] The Act provides relief for businesses, industries, individuals, employers, and states in a number of ways, including a Small Business Administration (“SBA”) loan program offering up to $350 billion in relief, as well as economic stabilization programs to provide loans, loan guarantees, and funding for eligible industries, businesses, states, and municipalities.
DOJ has repeatedly signaled that it will devote significant resources to combating fraud related to COVID-19, including fraud involving CARES Act funds.[25] DOJ’s efforts will be complemented by the CARES Act’s creation of a new oversight committee called the Pandemic Response Accountability Committee (“PRAC”) to promote transparency and oversight of CARES Act appropriated funds.[26] The Act’s emergency appropriations included $80 million for the PRAC, which will be comprised of various agency Inspectors General to “(1) prevent and detect fraud, waste, abuse, and mismanagement; and (2) mitigate major risks that cut across program and agency boundaries.”[27]
2. Public Pronouncements Regarding DOJ’s Dismissal Authority
As in the past several years, public debate has continued in the first half of 2020 regarding DOJ’s use of its authority to dismiss FCA actions brought by qui tam relators. In a May 4, 2020 letter to Attorney General Barr, Senator Chuck Grassley (R-IA) stated that he could “confidently say,” as “the original author” of the 1986 amendments to the FCA, that the text of the FCA subjects DOJ’s dismissal decisions to judicial review.[28] As such, Senator Grassley stated, he “vehemently” disagreed with DOJ’s view, contained in a brief the Solicitor General recently filed in the Supreme Court, that DOJ’s dismissal decisions are “an unreviewable exercise of prosecutorial authority.”[29] DOJ has increasingly moved to dismiss FCA cases since January 10, 2018, when Michael Granston, then Director of the Civil Fraud Section, issued guidance on when DOJ should exercise its dismissal authority, a development we have discussed in prior updates (available here and here). It remains to be seen whether Senator Grassley’s letter will prompt any shift in DOJ’s approach.
DOJ itself has continued to make its dismissal authority a focal point of the Department’s public pronouncements. In January 2020, at the 2020 Advanced Forum on False Claims and Qui Tam Enforcement, then‑Deputy Associate Attorney General Stephen Cox emphasized that the FCA continues to be one of DOJ’s “most important tools” to fight health care, grant, financial, and government-contracting fraud.[30] He also discussed DOJ’s 31 U.S.C. § 3730(c)(2)(A) dismissal authority, noting that “if we see a qui tam action raising frivolous or non-meritorious allegations that the Department of Justice disagrees with or could not make in good faith, we should not let a plaintiff try the case on behalf of the United States.”[31] He further stated that DOJ’s “exercise of this authority will remain judicious, but we will use this tool more consistently to preserve our resources for cases that are in the United States’ interests and to rein in overreach in whistleblower litigation.”[32] This may be a signal that DOJ will become more aggressive in exercising its dismissal authority. However, it is also worth noting that Cox was recently confirmed as U.S. Attorney for the Eastern District of Texas, and another senior DOJ official, Jody Hunt, resigned from his position as Assistant Attorney General for the Civil Division effective July 3. It remains unclear whether these changes in senior DOJ personnel will beget a shift in DOJ’s approach to the exercise of its dismissal authority. We will continue to monitor and report on any such developments.
3. Final DOJ Rule Increasing Per-Claim Penalties
In late June, DOJ issued a final rule increasing FCA per‑claim penalties for the first time since 2018.[33] DOJ is required by law to adjust penalties to keep pace with inflation, and this change effectuates that mandate. Under the new penalty framework, for FCA penalties assessed after June 19, 2020 (and applicable to violations occurring after November 2, 2015), the minimum per‑claim penalty is now $11,665 (up from $11,181) and the maximum penalty is now $23,331 (up from $22,363).[34]
C. State Legislative Developments
We detailed HHS-OIG’s review and approval of state false claims statutes and other developments in state laws in our 2019 Mid-Year FCA Update and 2019 Year-End FCA Update.
As an incentive for seeking HHS-OIG approval, states can receive “a 10-percentage-point increase in their share of any amounts” recovered under the relevant laws.[35] To receive approval, state statutes must (among other requirements) contain provisions that are “at least as effective in rewarding and facilitating qui tam actions” as those in the federal FCA, and must contain civil penalties at least equivalent to those imposed by the federal FCA.[36] A similar requirement is that a given state’s statute must provide for civil penalty increases “at the same rate and time as those authorized under the [federal] FCA” pursuant to the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015.[37] Currently, the total number of states with approved statutes stands at twenty-one (California, Colorado, Connecticut, Delaware, Georgia, Hawaii, Illinois, Indiana, Iowa, Massachusetts, Montana, Nevada, New York, North Carolina, Oklahoma, Rhode Island, Tennessee, Texas, Vermont, Virginia, and Washington), while eight states have laws that have not yet been deemed to meet the federal standards (Florida, Louisiana, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, and Wisconsin).[38]
Several states also have proposed false claims act legislation in the first half of 2020. In the District of Columbia, the D.C. Council is considering a bill that would amend the District’s existing false claims act (D.C. Code Ann. § 2-381.01 et seq.) to expressly authorize tax-related false claims actions against persons who “reported net income, sales, or revenue totaling $1 million or more in a tax filing to which [the relevant] claim, record, or statement pertained, and the damages pleaded in the action total $350,000 or more.”[39] The bill would authorize treble damages for tax‑related violations, meaning District taxpayers could be liable for three times the amount not only of any taxes, but also of any interest and tax penalties.[40] Because D.C.’s current false claims statute excludes tax‑related claims from false claims liability, this bill, if passed, would represent a major policy shift.[41] The D.C. Council Committee of the Whole reported favorably on the bill on January 21, 2020, and recommended approval of the bill by the Council.[42]
The Pennsylvania legislature also is considering a false claims act bill that would enable private citizens to bring lawsuits on behalf of the state against anyone who “[k]nowingly presents or causes to be presented a false or fraudulent claim for payment or approval” or “[k]nowingly makes, uses or causes to be made or used, a false record or statement material to a false or fraudulent claim.”[43] The bill would also require the Attorney General to make recommendations to state agencies on how to prevent false claims violations from occurring.[44] The new law would empower the Pennsylvania Office of the Attorney General to enforce its provisions, including via civil investigative demands.[45] The bill largely mirrors the federal FCA and was first referred to the House Human Services Committee on May 21, 2020.[46] As of this update, it is pending review by the House Rules Committee, as the Pennsylvania General Assembly continues its 2019-2020 session.[47]
We also reported in our 2019 Mid-Year Update on a bill passed by the California Assembly, Assembly Bill No. 1270, which would alter the state’s false claim act considerably, including by amending the act to limit the definition of materiality to include only “the potential effect” of an alleged false record or statement “when it is made,” without consideration—contrary to the U.S. Supreme Court’s 2016 decision in Escobar[48]—of “the actual effect of the false record or statement when it is discovered.”[49] The amendments would also extend the act to tax-related cases where the damages pleaded exceed $200,000 and a defendant’s state-taxable income or sales exceed $500,000.[50] After the bill stalled in the State Senate, a California Assembly member (Mark Stone, D-Monterey Bay) introduced a substantially similar bill, Assembly Bill No. 2570.[51] The bill remains pending in the State Senate, which was scheduled to return from its summer recess on July 13 but on July 9 announced that the return would be delayed until July 27.[52] We will continue to monitor state legislation in these states and others for signs of further movement or revisions.
III. NOTABLE CASE LAW DEVELOPMENTS
The first half of 2020 saw a number of notable circuit court decisions, including several touching on the FCA’s reach, exploring Rule 9(b)’s heightened pleading requirements, and addressing notable topics such as litigation funding arrangements.
A. Third and Ninth Circuits Hold That Differences in Clinical Judgments May Satisfy “Falsity” Element under the FCA
One key area of developing FCA jurisprudence in recent years has been whether and when differences in medical opinions may satisfy the falsity element of FCA liability. Last year, the Eleventh Circuit held in United States v. AseraCare, Inc. that claims cannot be “deemed false” under the FCA based solely on “a reasonable difference of opinion among physicians” as to a medical provider’s clinical judgment, although the court left open the door for FCA claims where there is a showing of facts “inconsistent with the proper exercise of a physician’s clinical judgment.” 938 F.3d 1278, 1293 (11th Cir. 2019). Earlier decisions by the Tenth and Sixth Circuits, on the other hand, suggested that a mere difference of medical opinion between physicians may be sufficient in certain circumstances to show that a statement is “false” for purposes of FCA liability. United States ex rel. Polukoff v. St. Mark’s Hosp., 895 F.3d 730 (10th Cir. 2018); United States v. Paulus, 894 F.3d 267 (6th Cir. 2018).
The Third and Ninth Circuits entered the fray this year in a pair of similar decisions. First, the Third Circuit, in United States ex rel. Druding v. Care Alternatives, stated that a “physician’s judgment may be scrutinized and considered ‘false’” and that a “difference of medical opinion is enough evidence to create a triable dispute of fact regarding FCA falsity.” 952 F.3d 89, 100 (3d Cir. 2020). There, relators argued that defendants provided medically unnecessary hospice care to ineligible patients even though defendants maintained written certifications of necessity of care from a physician for each patient who was admitted to the hospice program. To prove the alleged “falsity” of the certifications, relators relied on expert testimony that the patients at issue did not, in fact, need hospice care—a conclusion disputed by defendants’ own experts. Id. at 91. The district court granted summary judgment to the defendants; because there was no evidence that any physician had certified hospice treatment was appropriate for any patient that the physician actually “believed was not hospice eligible,” the court reasoned that a mere disagreement among experts as to necessity of care could not establish that the admitting physicians’ clinical judgments were false. Id.
On appeal, the Third Circuit reversed, faulting the district court for conflating the elements of falsity and scienter, and concluding that “falsity” can be shown by mere differences in medical judgments. The court explained that a claim based on a medical conclusion regarding a patient’s care could be deemed “legally false,”—i.e., a claim that does not conform to certain regulatory requirements such as a requirement that any certification as to necessity of care be supported by a clinical diagnosis—and that in such circumstances, expert testimony would be relevant to determining falsity. Id. at 98.
Importantly, however, the Third Circuit recognized that the scienter element still serves as a “limit[ to] the possibility . . . [of] expos[ure] to liability under the FCA any time the Government could find an expert who disagreed with the certifying physician’s medical prognosis.” Id. at 96. Thus, even showing that opinions are “false” cannot serve to establish FCA liability absent evidence “that Defendant’s certifying doctor was making a knowingly false determination.” Id.
The Ninth Circuit reached a similar conclusion in Winter ex rel. United States v. Gardens Regional Hospital and Medical Center, holding that an FCA claim based on an alleged lack of medical necessity may be sufficient to survive a motion to dismiss. 953 F.3d 1108, 1117 (9th Cir. 2020). In Winter, the relator (a nurse) alleged that the defendant, a hospital provider, had “falsely certif[ied] that patients’ inpatient hospitalizations were medically necessary,” based on the relator’s opinion and on other evidence allegedly in the patients’ medical files. Id. at 1112. The district court granted defendants’ motion to dismiss, holding that because a relator “must show that a defendant knowingly made an ‘objectively false’ representation,” “a doctor’s clinical judgment cannot form the basis of an FCA suit” because “subjective medical opinions . . . cannot be proven to be objectively false.” Id.
The Ninth Circuit reversed, holding that differences in opinion may satisfy the falsity element. Like the Third Circuit, the Ninth Circuit faulted the district court for conflating scienter and falsity. Citing Druding and relying on the statutory text, the court explained that medical judgements can be “false” under the statute’s plain language, which does not “carve out an exception for clinical judgments and opinions.” Id. at 1117. The court explained that an opinion as to medical necessity may be “false,” for example, if the opinion is “dishonestly held” or is shown to be untrue by other evidence of a diagnosis in accordance with “standards of medical practice.” Id. The Ninth Circuit also disclaimed any conflict with the Eleventh Circuit’s AseraCare opinion, which it read as recognizing that clinical judgments can be false in some circumstances.
The Ninth Circuit emphasized that “falsity is a necessary, but not sufficient, requirement for FCA liability”—and that “after alleging a false statement, a plaintiff must still establish scienter” (i.e., that it was made with the requisite intent) for the statement to be actionable under the FCA. Id. at 1118. The court also cautioned, however, that at least at the pleadings stage, scienter may be “alleged generally” under Rule 9(b) and that “specific intent” to defraud is not required under the FCA. Id.
The decisions in Winter and Druding suggest that in cases premised on allegations regarding medical necessity, courts—at least in certain circuits—may allow claims based upon differences in opinions to proceed on the “falsity” element, at least under certain circumstances; but other elements (such as scienter, and materiality) still provide strong defenses. Unfortunately, this may limit defendants’ ability to secure dismissal of spurious suits at the pleading stage.
B. Fourth Circuit Rejects Qualified Immunity as a Defense to FCA Liability for Government Officials
When applicable, the doctrine of qualified immunity shields federal and state officials from damages for violating statutory or constitutional rights. The Fourth Circuit, in United States ex rel. Citynet, LLC v. Gianato, rejected qualified immunity as a defense to FCA claims under any circumstances. 962 F.3d 154, 160 (4th Cir. 2020). In Citynet, the relator alleged that certain state officials in West Virginia had defrauded the United States when obtaining federal funding to improve broadband connectivity for state residents. Defendants moved to dismiss based on qualified immunity, and although the district court deferred ruling on the merits of the defense, its decision nevertheless implicitly recognized that the doctrine “could [be] invoke[d] as a defense to claims of fraud brought under the FCA.” Id. at 156.
In an interlocutory appeal, the Fourth Circuit reversed, concluding that qualified immunity “may not be invoked as a defense to liability under the FCA.” As the court explained, the doctrine of qualified immunity is fundamentally “inconsistent” with “the FCA’s scienter requirement,” which is explicit that FCA liability “attaches only where a person has acted intentionally or recklessly.” Id. at 159. Because qualified immunity protects a government official only when the official acts “reasonably, but mistakenly,” and not when “acting intentionally or recklessly,” qualified immunity does not apply in the FCA context. Id. The court also relied on policy concerns behind application of the doctrine—namely that it is intended to protect the public interest—in rejecting its application in cases where the United States is defrauded. Id.
C. Seventh Circuit on AKS Liability
The Seventh Circuit’s recent ruling on what may constitute a “referral” subject to the AKS might have FCA implications. In Stop Illinois Health Care Fraud, LLC v. Sayeed, the relator alleged that in-home health care services providers and associated entities engaged in an illegal patient referral scheme. Under the alleged scheme, the provider purportedly purchased access to patient files from a non-profit senior care organization, in violation of the AKS and, by extension, the FCA. 957 F.3d 743, 745 (7th Cir. 2020). After a bench trial, the district court entered judgment for the defendants, concluding that there was no evidence that any remuneration was paid with the intent to induce “referrals.” Id. at 745. Among other arguments, relator argued at trial that the provider had violated the AKS when it entered into a contract with the non-profit under which it paid a monthly fee that was “intended to secure access to client information” in the non-profit’s files, which was then used by the provider to solicit business. Id.
On appeal, the Seventh Circuit held that the district court had not adequately addressed whether this “file-access theory” of liability could “constitute a prohibited referral under the Anti-Kickback Statute.” Id. at 746. The Seventh Circuit outlined that the term “referral” does not require “explicit direction of a patient to a provider” in a direct manner but rather, is to be understood as a “more inclusive” notion, to include “subtle” arrangements that involve even an “indirect means of connecting a patient with a provider.” Id. The court recognized that where a provider allegedly has provided something of value in exchange for access to files with patient information and then used that information to solicit clients, this set of facts “would allow, but perhaps not compel, a finding that [the arrangement] qualifies as a referral.” Ultimately, the Seventh Circuit remanded this “close question” for the district court to consider initially. Id.
The Seventh Circuit’s description of what could potentially constitute a “referral” subject to the AKS, and, by turn, implicate the FCA if billed to the government, may invite further theories of AKS and FCA liability in this arena.
D. Courts Continue to Interpret the FCA’s Materiality And Scienter Requirements Post-Escobar
Courts this year have continued to develop and refine jurisprudence regarding materiality, government knowledge, and scienter under the FCA in the wake the Supreme Court’s landmark decision on the implied certification theory of liability in Universal Health Services v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016). Consistent with the Supreme Court’s directive in Escobar, courts have examined whether FCA plaintiffs have adequately alleged facts to satisfy the rigorous and demanding materiality standard at the pleadings stage.
Earlier this year, the Eleventh Circuit weighed in on both materiality and scienter—as well as a challenge to a relator’s status based on a litigation funding agreement. In Ruckh v. Salus Rehabilitation, LLC, the relator alleged that a nursing home facility and related entities were misrepresenting the services they provided and also failed to comply with Medicaid requirements (e.g., by upcoding claims). No. 18-10500, — F.3d —-, 2020 WL 3467393, at *4 (11th Cir. June 25, 2020). After a jury found the defendants liable for alleged FCA violations and awarded more than $100 million in damages before trebling, the district court granted a motion to set aside the verdict, finding relators had failed to provide sufficient evidence of materiality and scienter at trial.
On appeal, the Eleventh Circuit reversed and reinstated the verdict in part. As to materiality, while the defendants argued that instances of “upcoding” and similar practices were “recordkeeping mistakes the FCA does not punish,” the court held that “the jury was not required to believe the defendants’ position” and reasonably could have found this an “implausible explanation.” Id. at 12. As to scienter, despite the district court’s observation there was no evidence of a “massive, authorized, cohesive, concerted, enduring, top-down corporate scheme,” the court of appeals held that relator’s evidence showing company management was allegedly aware of and approved the practices at issue supported the jury’s finding that the defendants acted with scienter. Id. at 12-16.
The court upheld, however, a reduction of approximately $20 million in the jury verdict relating to a subset of the claims at issue. Those claims stemmed from patient files that lacked care plans allegedly in violation of applicable regulations. Id. at 16. The Eleventh Circuit reasoned that there was “no evidence” that the government sought reimbursement for these violations once it was made aware of them; nor was there evidence it ever “declines payment for, or otherwise enforces these types of violations.” Id. Moreover, the court held that Escobar compelled a finding in defendants’ favor because there was no evidence linking the absence of care plans to any “specific representations regarding the services provided” as is required by the Supreme Court’s opinion. Id. at 16-17.
On appeal, defendants sought to disqualify the relator based on a litigation financing agreement between the relator and a litigation funding entity that required the relator to assign 4% of her interest in any potential recovery to the entity. Defendants argued that the arrangement violated the FCA. Id. at 7-9. The court rejected this argument, concluding that while the FCA “does not expressly authorize relators to reassign their right to represent the interests of the United States in qui tam actions” neither did it “proscribe[] such assignment.” Id. at 9. The court reasoned that the FCA expressly “includes a number of restrictions, including on the conduct of qui tam actions and who may serve as a relator,” and noted that prohibition on entry into a litigation funding agreement was not among those enumerated restrictions. On this basis, the court declined to “engraft[] any further limitations onto the statute.” Id. at 12.
The Tenth Circuit also addressed the issue of materiality in United States ex rel. Janssen v. Lawrence Memorial Hospital, 949 F.3d 533 (10th Cir. 2020). There, the relator alleged a hospital violated the FCA by allegedly falsely certifying (1) the accuracy of data regarding patient arrival times required to be reported by Medicare and (2) compliance with a statutory requirement to provide FCA compliance information in an employee handbook. Id. at 546. The district court granted summary judgment to the defendants on materiality, finding there was no evidence that the alleged falsehoods influenced the government’s payment decisions. Id.
The Tenth Circuit affirmed, explaining that Escobar requires materiality to be assessed by looking “to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation,” rather than the objective behavior of a reasonable person. Id. at 541. In cases alleging regulatory noncompliance, this requires looking to whether the government refused to pay in past similar instances, whether the noncompliance is minor or insubstantial, and whether compliance with the regulations at issue is a condition of payment. Id.
In rejecting the theory that recording inaccurate patient arrival times was material, the court relied on the fact that CMS was made aware of the data issue in 2014 through detailed allegations from a former employee, and “has done nothing in response and continues to pay [the] Medicare claims.” Id. at 542. The court also held that while there were “inaccuracies in [data] reporting” there were not “sufficiently widespread deficiencies” likely to affect the government’s payment decision. Moreover, the court noted that imposing FCA liability would “undermine” the separate CMS administrative program intended to handle such noncompliance. Id. at 543. As to the allegedly non-compliant employee handbooks, the court found that these were “precisely the type of garden-variety compliance issues that the demanding materiality standards of the FCA are meant to forestall.” Id. at 545. This issue, at best, was “limited” and did not represent a “wholesale failure” of the company’s compliance function (noting the defendant provided FCA training elsewhere). Id. Moreover, as with the reporting issues, the relator failed to show any likely effect of the noncompliance on the government’s payment decision. Id.
The Janssen opinion underscores that defendants can and should urge courts to rigorously enforce the FCA’s materiality requirement, lest the FCA become the “general antifraud statute and tool for policing minor regulatory compliance issues” that Escobar warned against.
By contrast, in United States ex rel. Drummond v. BestCare Laboratory Services, L.L.C., the Fifth Circuit rejected defendants’ scienter and falsity challenges. 950 F.3d 277 (5th Cir. 2020). There, a competitor-relator alleged that a clinical testing laboratory obtained millions in reimbursement for miles that its technicians never traveled. Id. at 277. The government intervened and argued, in relevant part, that the defendants sought payment for mileage driven by technicians purportedly to collect samples that were, in reality, shipped, and that the defendant counted a single shipment of multiple samples as separate mileage for each sample. Id. at 280.
On appeal, defendants argued the reimbursement practices at issue were lawful, relying on sub‑regulatory guidance in a CMS billing manual, or in the alternative, that there was a triable issue of fact as to scienter, because they had a “good faith” belief the practices were lawful based on their interpretation of the manual. Id. at 281. The Fifth Circuit rebuffed both arguments. As to the first, the court concluded that even if defendants had complied with the CMS manual, any “sub-regulatory guidance” in the manual would at best be a “policy statement” that has “no binding legal effect.” Id. at 281. As to scienter, the court held that the sub-regulatory guidance at issue—which expressly stated contractors could not bill “for miles not actually traveled by the laboratory technician”—made it clear there was “no way to read the Manual to suggest” defendants’ practices of billing for miles “not actually traveled by anyone” were lawful. Id.
E. Fifth and Eighth Circuits Explore Rule 9(b)’s Particularity Requirements in Affirming Dismissal of FCA Claims
While the Supreme Court has rejected multiple petitions to clarify the interplay of Rule 9(b) and the FCA, circuit courts have grappled with precisely how to apply Rule 9(b)’s particularity requirement in FCA cases. Rule 9(b) heightens the pleading standard for fraud claims, stating that a party “must state with particularity the circumstances constituting fraud or mistake.” Courts generally have recognized that an FCA plaintiff can satisfy Rule 9(b) either by pleading (1) representative examples of the false claims, or (2) the particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.
In United States ex rel. Benaissa v. Trinity Health, the Eighth Circuit addressed the contours of what constitutes “reliable indicia” sufficient to support a strong inference that claims were actually submitted. No. 19-1207, — F.3d. —-, 2020 WL 3455795, at *4 (8th Cir. June 25, 2020). In Trinity, the relator—a trauma surgeon who operated at the defendants’ regional hospital system—alleged that the defendants compensated five physicians for referrals in violation of the Stark Law and AKS, rather than for their skills or credentials. After the district court dismissed the claims under Rule 9(b), the relator argued on appeal that he had pleaded the particular details of a scheme paired with “reliable indicia” supporting an inference that claims were submitted. Specifically, relator pointed to his allegation that defendant derived nearly 30% of its annual revenue from Medicare reimbursements and it was likely that at least some of the claims submitted would be for services provided by those particular physicians. Id. at *3.
The Eighth Circuit disagreed, and affirmed dismissal under Rule 9(b), holding that the relator lacked “firsthand knowledge of [defendant’s] billing practices” and had not pleaded any details about those billing indicating a reliable “basis for knowledge” that fraudulent claims were submitted, such as dates and descriptions of particular services coupled with “a description of the billing system that the records were likely entered into.” Id. at *4. The court rejected the notion that its ruling constricts would-be relators to a narrow class of only those “members of the billing department or the financial services department of a hospital.” Id. Acknowledging that such “an insider might have an easier time obtaining information about billing practices,” the court observed that it and other courts have held many other types of individuals can serve as relators—including physicians, EMTs, and nurse practitioners—so long as they plead “particular and reliable indicia that false bills were actually submitted as a result of the scheme”—such as “dates that services were fraudulently provided or recorded,” and “by whom.” Id.
The Eighth Circuit’s decision makes clear that mere generalized allegations—e.g., that a company is in receipt of a large amount of Medicare reimbursement and that every submitted claim by that company relating to certain physicians was false or fraudulent—do not satisfy Rule 9(b).
In United States ex rel. Integra Med Analytics, L.L.C. v. Baylor Scott & White Health, the Fifth Circuit explored whether and when statistical evidence can satisfy pleading requirements in an FCA case. No. 19-50818, — Fed. App’x —-, 2020 WL 2787652, at *4 (5th Cir. May 28, 2020). There, the relator alleged that a short-term care hospital system and its affiliates billed Medicare for medically unnecessary treatments and engaged in upcoding. The latter theory relied primarily on allegations regarding a statistical analysis of inpatient claims data that purportedly showed that the defendant coded for certain conditions at a higher rate than other hospitals, as well as alleged statements by a former employee that he was directed to fraudulently bill. Id. at *1-2. The Fifth Circuit affirmed the district court’s dismissal, holding that the allegations failed to satisfy either the plausibility requirement of Rule 8(a) or the particularity requirement of Rule 9(b). Id. at *4.
The court held that the relator’s “statistical analysis” did not satisfy either Rule 8(a)’s or Rule 9(b)’s pleading requirements, alone or in conjunction with other allegations. The court explained that the same statistical data showed that the rate of coding for the same procedures by other hospitals increased every year until the average was “within a few percentage points” of the defendants, which was due to an industry wide trend resulting from CMS guidance encouraging hospitals to “tak[e] full advantage of coding opportunities to maximize” Medicare payments as long as supported by documentation in the medical record. Id. at *3-4. Thus, the court held, while defendant’s higher than average billing rates were “consistent with” the submission of “fraudulent Medicare reimbursement claims to the government,” they were also consistent with the defendant simply “being ahead of most [other] healthcare providers in following new guidelines from CMS.” Id. at *3. The Fifth Circuit held that the relator’s allegations regarding medically unnecessary treatments and statements by former coding employees all failed to satisfy Rule 9(b) because the allegations were conclusory and “fail[ed] to state the content of” any allegedly fraudulent directives or guidance. Id. at *5.
The Fifth Circuit cautioned that its “conclusion does not exclude statistical data from being used to meet the pleading requirements of Federal Rule of Civil Procedure 8(a) and, when paired with particular details, Rule 9(b).” Id. at *4.
F. First and Sixth Circuits Explore Application of the Public Disclosure Bar and Original Source Exception
The FCA’s public disclosure bar requires dismissal of an FCA case “if substantially the same allegations or transactions” forming the basis of the action have been publicly disclosed, including “in a Federal criminal, civil, or administrative hearing in which the Government or its agent is a party,” unless the relator is an “original source of the information.” 31 U.S.C. § 3730(e)(4).
In United States ex rel. Holloway v. Heartland Hospice, Inc., the Sixth Circuit unanimously held that relators are “agents” of the government for purposes of the above language of the public disclosure bar, such that disclosure to a relator in a federal civil case may trigger the bar. The court therefore affirmed the district court’s dismissal of a case alleging substantially the same scheme as three prior qui tam suits involving the defendant’s parent company. 960 F.3d 836 (6th Cir. 2020). In that case, the relator—a former consultant for Heartland—alleged that the defendants certified patients as eligible for hospice under Medicare regulations even when the patients were not terminally ill, thereby “leech[ing] millions of dollars from the federal government in payments for unnecessary hospice care.” Id. at 839.
The court rejected three of the four categories of potential public disclosures identified by the defendant. Id. at 841. It explained that a DOJ settlement of FCA claims and a qui tam complaint filed against other entities, both of which involved similar schemes, did not constitute public disclosures because courts do not infer industry-wide disclosure from allegations against a particular company. The court also concluded that a report by HHS-OIG finding that 4% of claims “did not meet certification of terminal illness requirements” did not constitute a prior disclosure because the report contained “no insinuation of fraud, but at most noncompliance.” Id. at 844.
But the Sixth Circuit concluded that three qui tam complaints filed against defendants’ parent company and related entities triggered the public disclosure bar. The court rejected the relator’s contention that these cases were not “public” because the government did not intervene. As the Sixth Circuit observed, a qui tam relator is the government’s agent for purposes of the public disclosure bar because the government is the real party in interest and exerts a fair amount of control over qui tam litigation. Further, the complaints “disclosed” the fraud alleged in the complaint because they “depict[ed] essentially the same scheme.”
In United States ex rel. Banigan v. PharMerica Inc., meanwhile, the First Circuit clarified the meaning of the term “original source.” 950 F.3d 134 (1st Cir. 2020). There, the plaintiffs alleged that the defendant, one of the largest long-term care pharmacy companies in the United States, provided kickbacks to incentivize nursing homes to switch residents’ prescriptions from other manufacturers’ drugs to its own antidepressants. The purported kickbacks included contractual discounts, rebates, and bonuses. The district court dismissed the case, applying the public disclosure bar.
But the First Circuit reversed. Although the circuit court agreed with the district court that an earlier FCA action involving the same scheme triggered the public disclosure bar, it concluded that the relator was an “original source of the information,” and that dismissal was therefore inappropriate. Id. at 137.
As the circuit court explained, under the version of the public disclosure bar in effect prior to the 2010 amendments to the FCA, an “original source” must have both direct and independent knowledge of the information on which his allegations are based. Id. at 136 n.1, 138. The First Circuit rejected the argument that the relator’s knowledge was not “direct” because he had learned about the scheme from others, through email and word of mouth, rather than being someone who had participated in or observed the scheme in operation directly. The court also held that the relator could still qualify as an original source, despite first learning of the scheme only as it was winding down. Id. at 140. Focusing on the statutory text, the court stated that the statute requires direct and independent knowledge only of the information on which allegations are based, not direct and independent knowledge of the fraudulent acts themselves. Similarly, the court rejected any requirement that an original source have contemporaneous knowledge of the fraud. According to the court, that position lacks textual support, and such a requirement would discourage reports of fraud. Id.
IV. CONCLUSION
We will monitor these developments, along with other FCA legislative activity, settlements, and jurisprudence throughout the year and report back in our 2020 False Claims Act Year-End Update, which we will publish in January 2021.
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[1] Press Release, U.S. Atty’s Office for the So. Dist. of MS, Federal Jury finds Defendants Guilty of Submitting False Claims to Medicare under Civil False Claims Act (March 13, 2020), https://www.justice.gov/usao-sdms/pr/federal-jury-finds-defendants-guilty-submitting-false-claims-medicare-under-civil-false.
[2] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Resmed Corp. to Pay the United States $37.5 Million for Allegedly Causing False Claims Related to the Sale of Equipment for Sleep Apnea and Other Sleep-Related Disorders (Jan. 15, 2020), https://www.justice.gov/opa/pr/resmed-corp-pay-united-states-375-million-allegedly-causing-false-claims-related-sale.
[3] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Patient Services Inc. Agrees to Pay $3 Million for Allegedly Serving as a Conduit for Pharmaceutical Companies to Illegally Pay Patient Copayments (Jan. 21, 2020), https://www.justice.gov/opa/pr/patient-services-inc-agrees-pay-3-million-allegedly-serving-conduit-pharmaceutical-companies.
[4] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Electronic Health Records Vendor to Pay $145 Million to Resolve Criminal and Civil Investigations (Jan. 27, 2020), https://www.justice.gov/opa/pr/electronic-health-records-vendor-pay-145-million-resolve-criminal-and-civil-investigations-0.
[5] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Guardian Elder Care Holdings and Related Entities Agree to Pay $15.4 Million to Resolve False Claims Act Allegations for Billing for Medically Unnecessary Rehabilitation Therapy Services (Feb. 19, 2020), https://www.justice.gov/opa/pr/guardian-elder-care-holdings-and-related-entities-agree-pay-154-million-resolve-false-claims.
[6] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Diversicare Health Services Inc. Agrees to Pay $9.5 Million to Resolve False Claims Act Allegations Relating to the Provision of Medically Unnecessary Rehabilitation Therapy Services (Feb. 28, 2020), here.
[7] See Press Release, U.S. Atty’s Office for the Dist. of MA, Sanofi Agrees to Pay $11.85 Million to Resolve Allegations That it Paid Kickbacks Through a Co-Pay Assistance Foundation (Feb. 28, 2020), https://www.justice.gov/usao-ma/pr/sanofi-agrees-pay-1185-million-resolve-allegations-it-paid-kickbacks-through-co-pay.
[8] See Press Release, U.S. Atty’s Office for the Eastern Dist. of PA, Doctor Who Pleaded Guilty to Health Care Fraud for “Goodie Bags” Agrees to Resolve Civil Fraud and Controlled Substance Liability for $2.8 Million (Mar. 17, 2020), https://www.justice.gov/usao-edpa/pr/doctor-who-pleaded-guilty-health-care-fraud-goodie-bags-agrees-resolve-civil-fraud-and.
[9] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, New Jersey Chiropractor Agrees to Pay $2 Million to Resolve Allegations of Unnecessary Knee Injections and Knee Braces and Related Kickbacks (Apr. 6, 2020), https://www.justice.gov/opa/pr/new-jersey-chiropractor-agrees-pay-2-million-resolve-allegations-unnecessary-knee-injections.
[10] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, MiMedx Group Inc. Agrees to Pay $6.5 Million to Resolve False Claims Act Allegations of False Commercial Pricing Disclosures (Apr. 6, 2020), https://www.justice.gov/opa/pr/mimedx-group-inc-agrees-pay-65-million-resolve-false-claims-act-allegations-false-commercial.
[11] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Contract Rehab Provider to Pay $4 Million to Resolve False Claims Act Allegations Relating to the Provision of Medically Unnecessary Rehabilitation Therapy Services (Apr. 10, 2020), https://www.justice.gov/opa/pr/contract-rehab-provider-pay-4-million-resolve-false-claims-act-allegations-relating-provision.
[12] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Nursing Home Chain Saber Healthcare Agrees to Pay $10 Million to Settle False Claims Act Allegations (Apr. 14, 2020), https://www.justice.gov/opa/pr/nursing-home-chain-saber-healthcare-agrees-pay-10-million-settle-false-claims-act-allegations.
[13] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Reference Laboratory, Pain Clinic, and Two Individuals Agree to Pay $41 Million to Resolve Allegations of Unnecessary Urine Drug Testing (Apr. 15, 2020), https://www.justice.gov/opa/pr/reference-laboratory-pain-clinic-and-two-individuals-agree-pay-41-million-resolve-allegations.
[14] Press Release, U.S. Atty’s Office for the Western Dist. of VA, Centra Health Inc. and Blue Ridge Ear, Nose, Throat, and Plastic Surgery, Inc. Agree to Pay Nearly $10 Million to Settle False Claims Act Allegations (Apr. 22, 2020), https://www.justice.gov/usao-wdva/pr/centra-health-inc-and-blue-ridge-ear-nose-throat-and-plastic-surgery-inc-agree-pay?_sm_au_=iVVJ1pNS4QjFZ7VjFcVTvKQkcK8MG.
[15] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Testing Laboratory Agrees to Pay Up to $43 Million to Resolve Allegations of Medically Unnecessary Tests (Apr. 27, 2020), here.
[16] See Press Release, U.S. Atty’s Office for the Northern Dist. of GA, Atlanta hospital system to pay $16 million to resolve false claims allegations (June 25, 2020), https://www.justice.gov/usao-ndga/pr/atlanta-hospital-system-pay-16-million-resolve-false-claims-allegations.
[17] See Press Release, U.S. Atty’s Office for the Dist. of NJ, Caldwell University Agrees To Pay More Than $4.8 Million To Resolve Allegations Of Violating False Claims Act (Jan. 3, 2020), https://www.justice.gov/usao-nj/pr/caldwell-university-agrees-pay-more-48-million-resolve-allegations-violating-false-claims.
[18] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Purchaser of Department of Energy Loan to Pay $29 Million to Settle Alleged Bidding Fraud (Jan. 31, 2020), https://www.justice.gov/opa/pr/purchaser-department-energy-loan-pay-29-million-settle-alleged-bidding-fraud.
[19] See Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, CRA/LA Agrees to Pay $3.1 Million to Resolve Alleged Misuse of Federal Funds for Inaccessible Housing (Feb. 6, 2020), https://www.justice.gov/opa/pr/crala-agrees-pay-31-million-resolve-alleged-misuse-federal-funds-inaccessible-housing.
[20] Press Release, U.S. Atty’s Office for the Dist. of MA, Harvard University Agrees to Pay Over $1.3 Million to Resolve Allegations of Overcharging NIH Grants (Apr. 27, 2020), https://www.justice.gov/usao-ma/pr/harvard-university-agrees-pay-over-13-million-resolve-allegations-overcharging-nih-grants?_sm_au_=iVVJ1pNS4QjFZ7VjFcVTvKQkcK8MG.
[21] U.S. Dep’t of Justice, Memorandum from Attorney General William P. Barr (Mar. 16, 2020), https://www.justice.gov/ag/page/file/1258676/download; Press Release, Office of Pub. Affairs, U.S. Dep’t of Justice, Attorney General William P. Barr Urges American Public to Report COVID-19 Fraud (Mar. 20, 2020), https://www.justice.gov/opa/pr/attorney-general-william-p-barr-urges-american-public-report-covid-19-fraud.
[22] See Office of Pub. Affairs, U.S. Dep’t of Justice, Principal Deputy Assistant Attorney General Ethan P. Davis delivers remarks on the False Claims Act at the U.S. Chamber of Commerce’s Institute for Legal Reform (July 6, 2020), https://www.justice.gov/civil/speech/principal-deputy-assistant-attorney-general-ethan-p-davis-delivers-remarks-false-claims.
[23] United States v. Mark Schena, Indictment (Jun. 8, 2020), https://www.justice.gov/opa/press-release/file/1283931/download.
[24] See Gibson, Dunn, & Crutcher LLP, Emergency Federal Measures to Combat Coronavirus (Mar. 18, 2020), https://www.gibsondunn.com/emergency-federal-measures-to-combat-coronavirus/.
[25] See, e.g., U.S. Dep’t of Justice, Memorandum from Attorney General William P. Barr (Mar. 16, 2020), https://www.justice.gov/ag/page/file/1258676/download.
[26] See Gibson, Dunn & Crutcher LLP, Senate Advances the CARES Act, the Largest Stimulus Package in History, to Stabilize the Economic Sector During the Coronavirus Pandemic (Mar. 26, 2020) (“CARES Alert”), https://www.gibsondunn.com/senate-advances-the-cares-act-to-stabilize-economic-sector-during-coronavirus-pandemic/.
[27] Id. (quoting CARES Act Section 15010(b)(1)-(2)).
[28] See Letter from Sen. Charles E. Grassley, Chair, S. Comm. on Fin., to Hon. William Barr, Att’y Gen. 1-2 (Sept. 4, 2019), https://www.grassley.senate.gov/sites/default/files/2020-05-04%20CEG%20to%20DOJ%20%28FCA%20Dismissal%20authority%29.pdf.
[29] See id. at 1.
[30] See Stephen Cox, Deputy Assoc. Att’y Gen., Keynote Remarks at the 2020 Advanced Forum on False Claims and Qui Tam Enforcement (Jan. 27, 2020), https://www.justice.gov/opa/speech/deputy-associate-attorney-general-stephen-cox-provides-keynote-remarks-2020-advanced.
[31] Id.
[32] Id.
[33] 85 Fed. Reg. 37004 (June 19, 2020).
[34] Id. at 37006.
[35] State False Claims Act Reviews, Dep’t of Health & Human Servs.–Office of Inspector Gen., https://oig.hhs.gov/fraud/state-false-claims-act-reviews/index.asp.
[36] Id.
[37] Id.
[38] Id.
[39] DC B23-0035, 23d Council (2019-2020), https://lims.dccouncil.us/Legislation/B23-0035.
[40] See D.C. Code § 2-381.02(a) (2013).
[41] See D.C. Code § 2-381.02(d) (2013) (stating that “[t]his section shall not apply to claims, records, or statements made pursuant to those portions of Title 47 of the District of Columbia Official Code that refer or relate to taxation”).
[42] See Council of the District of Columbia, Committee of the Whole Committee Report on Bill 23-35, “False Claims Act of 2020,” http://chairmanmendelson.com/wp-content/uploads/2020/01/B23-35-False-Claims-Committee-Packet.pdf.
[43] See HB 2352 Pennsylvania General Assembly Bill Information (2019-2020), here.
[44] Id.
[45] Id.
[46] Id.
[47] Id.
[48] Universal Health Servs. v. United States ex rel. Escobar, 136 S. Ct. 1989, 2002 (2016).
[49] See AB-1270 False Claims Act, California Legislative Information (2019-2020), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200AB1270.
[50] Id.
[51] See AB-2570 False Claims Act, California Legislative Information (2019-2020) http://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200AB2570.
[52] Id.; see also Patrick McGreevy, California legislators delay return to Capitol as a lawmaker is hospitalized with COVID-19, L.A. Times (July 8, 2020), here.
The following Gibson Dunn lawyers prepared this client update: Stuart Delery, Jim Zelenay, John Partridge, Jonathan Phillips, Joseph Warin, Joseph West, Robert Blume, Ryan Bergsieker, Karen Manos, Charles Stevens, Winston Chan, Andrew Tulumello, Benjamin Wagner, Alexander Southwell, Reed Brodsky, Robert Walters, Monica Loseman, Geoffrey Sigler, Sean Twomey, Reid Rector, Alli Chapin, Meghan Dunn, Julie Hamilton and Jillian Katterhagen.
Gibson Dunn lawyers regularly counsel clients on the False Claims Act issues. Please feel free to contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following members of the firm’s False Claims Act/Qui Tam Defense Group:
Washington, D.C.
F. Joseph Warin (+1 202-887-3609, [email protected])
Stuart F. Delery (+1 202-887-3650, [email protected])
Joseph D. West (+1 202-955-8658, [email protected])
Andrew S. Tulumello (+1 202-955-8657, [email protected])
Karen L. Manos (+1 202-955-8536, [email protected])
Jonathan M. Phillips (+1 202-887-3546, [email protected])
Geoffrey M. Sigler (+1 202-887-3752, [email protected])
New York
Zainab N. Ahmad (+1 212-351-2609, [email protected])
Matthew L. Biben (+1 212-351-6300, [email protected])
Reed Brodsky (+1 212-351-5334, [email protected])
Alexander H. Southwell (+1 212-351-3981, [email protected])
Denver
Robert C. Blume (+1 303-298-5758, [email protected])
Monica K. Loseman (+1 303-298-5784, [email protected])
John D.W. Partridge (+1 303-298-5931, [email protected])
Ryan T. Bergsieker (+1 303-298-5774, [email protected])
Dallas
Robert C. Walters (+1 214-698-3114, [email protected])
Los Angeles
Timothy J. Hatch (+1 213-229-7368, [email protected])
James L. Zelenay Jr. (+1 213-229-7449, [email protected])
Deborah L. Stein (+1 213-229-7164, [email protected])
Palo Alto
Benjamin Wagner (+1 650-849-5395, [email protected])
San Francisco
Charles J. Stevens (+1 415-393-8391, [email protected])
Winston Y. Chan (+1 415-393-8362, [email protected])
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
On July 16, 2020, the Court of Justice of the European Union struck down as legally invalid the U.S.-EU Privacy Shield, which some companies have used to justify transfers of personal data from the EU to the U.S. The Court also ruled that the “Standard Contractual Clauses”(“SCCs”) approved by the European Commission, another mechanism many companies use to justify such transfers, remain valid with some caveats. The Court’s decision will force companies on both sides of the Atlantic to reassess their data transfer mechanisms, as well as the locations in which they store personal data.
This Client Alert lays out the key aspects and implications of the decision.
I. Context of the Decision
As a reminder, under the General Data Protection Regulation (“GDPR”), a transfer of personal data out of the EU may take place only if the third country ensures an adequate level of data protection, as determined by a decision of the European Commission. In the absence of an adequacy decision, the exporter may proceed to such data transfer only if it has put in place appropriate safeguards, which may be provided for by the standard contractual clauses adopted by the Commission. However, in recent years, the validity of these safeguards has been under attack, with the Court’s July 16 decision as the most recent significant milestone in that dispute. In large part these attacks have been based on concerns regarding U.S. government access to data on European residents transferred from the EU to the U.S.—concerns that became prominent following reports on government surveillance made public by former U.S. government contractor Edward Snowden.
In June 2013, Maximilian Schrems, a resident of Austria, lodged a complaint with the Irish supervisory authority, the Data Protection Commission (“DPC”) in order to prohibit the transfer of his personal data from the European subsidiary of a social media company to the parent corporation in the U.S. Schrems claimed that U.S. laws and practices do not offer sufficient protection against surveillance by U.S. authorities in relation to data transferred to the U.S. That complaint was initially rejected by the DPC on the ground that, in its Safe Harbour Decision 2000/520, the European Commission had found that the U.S. ensured an adequate level of protection. However, in an October 6, 2015 ruling (the so-called “Schrems I case”[i]), the Court declared that the Safe Harbour Decision 2000/520 was invalid.
In response, the European Commission adopted Decision 2016/1250 of July 12, 2016 on the adequacy of the protection provided by the EU-U.S. Privacy Shield (“Privacy Shield”) in order to replace the Safe Harbour Decision and to attempt to improve the guarantees afforded to the EU-U.S. data transfers.
In light of the Schrems I case, Schrems reformulated his complaint and sought the suspension/prohibition of data transfers to the U.S. based on the Standard Contractual Clauses, which had been approved by the Commission in 2010[ii].
The DPC took the view that the assessment of that complaint was conditional on the validity of the SCCs. The DPC thus brought proceedings before the Irish High Court, which in turn referred 11 questions to the Court for a preliminary ruling.
Thus, the principal issues before the Court were the viability of the SCCs and the Privacy Shield as mechanisms for the transfer of personal data from the EU to the U.S.
II. Validity of the Standard Contractual Clauses
The Court first confirmed that the GDPR applies to the transfer of personal data to a third country for commercial purposes, even if, at the time of that transfer or thereafter, that data may be processed by the authorities of the third country in question for the purposes of public security, defense and State security.
The Court found that data subjects must be afforded a level of protection essentially equivalent to that guaranteed by the EU’s omnibus privacy law, the GDPR, read in light of the EU Charter of Fundamental Rights[iii]. The Court specified that the assessment of that level of protection must take into consideration both the contractual arrangements between the data exporter and the recipient and, as regards any access by the public authorities of that third country to the data transferred, the relevant aspects of the legal system of that third country.
As to the obligations of the local supervisory authorities within the EU (i.e., the data privacy regulators in individual EU Member States) in connection with such transfer, the Court held that, unless there is a valid Commission decision regarding the adequacy of the protections provided by the country to which the personal data is transferred, and where the data exporter established in the EU has not itself suspended or put an end to such a transfer, the relevant regulator must suspend or prohibit a data transfer pursuant to the SCCs if (i) the SCCs cannot be complied with in that country, and (ii) the protection of the data transferred required by EU law cannot be ensured by other means.
Upholding the validity of the SCCs, the Court found that the SCCs make it possible (i) to ensure compliance with the level of protection required by EU law and (ii) to suspend or prohibit transfers of personal data pursuant to such clauses in the event of breach of the clauses themselves or of it being impossible to honor them. The Court’s finding hinged, in part, on the fact that the SCCs impose an obligation on both the data exporter and the data recipient to verify, prior to any transfer, whether that level of protection is complied with in the concerned third country. In addition, the SCCs require the data recipient to inform the data exporter of any inability to comply with the SCCs, the exporter then being, in turn, obliged to suspend the transfer of data and/or to terminate the contract.
Put simply, then, the Court found that the SCCs remain a valid mechanism for transfer of personal data out of the EU, though there is some uncertainty about the use of such a tool for transferring personal data to the U.S.
III. Invalidity of the Privacy Shield
In contrast to its ruling affirming the validity of the SCCs generally, the Court found that the EU-U.S. Privacy Shield is not compliant with the requirements arising from the GDPR, read in light of the EU Charter of Fundamental Rights.
The Court noted that the Privacy Shield enshrines the position that the requirements of U.S. national security, public interest and law enforcement have primacy, thus condoning interference with the fundamental rights of EU data subjects. In this regard, the Court found that the limitations on the protection of personal data arising from U.S. domestic law fail to meet the requirements of EU law, because U.S. law does not adequately limit the personal data that U.S. public authorities may access and use through surveillance programs.
In addition, the Court indicated that, although U.S. law lays down requirements with which the U.S. intelligence authorities must comply when implementing the surveillance programs in question, the relevant provisions do not grant data subjects actionable rights before the courts against the U.S. authorities. With respect the requirement of judicial protection, the Court held that the Ombudsperson mechanism[iv] referred to in the Privacy Shield does not provide data subjects with any cause of action before a body which offers guarantees essentially equivalent to those required by EU law, such as to ensure both the independence of the Ombudsperson and their power to adopt decisions that are binding on U.S. intelligence services.
Thus, the Court found that Privacy Shield is no longer a justifiable mechanism for transferring personal data from the EU to the U.S.
IV. Consequences
Given the invalidity of the Privacy Shield, companies that have to date used the Privacy Shield as a tool to transfer personal data from the EU to the U.S. should assess whether such transfers may be justified using other means. We hope that the European Data Protection Board (“EDPB”)[v] will set a grace period to find an appropriate solution with U.S. authorities and allow companies to come into compliance, as was the case after the Schrems I ruling, when a three-month grace period was put in effect.
As the Court noted, the GDPR does provide for other mechanisms under which transfers of personal data to third countries may take place. However, such mechanisms cannot easily be implemented in practice (e.g., it may be difficult to obtain data subjects’ consent).
Many companies have relied to date, and will likely continue to rely on the SCCs for making transfers outside the EU. However, companies must do more than simply adopt the SCCs: the Court specified that the controller established in the EU and the recipient of personal data outside the EU are both required to verify, prior to any transfer, whether the level of protection required by EU law is respected in the relevant third country. In particular, the application of the SCCs to transfer personal data to the U.S. may be in question, as confirmed by the Irish DPC in its statement on the judgment of the Court of Justice of the EU.
It is difficult to predict how local supervisory authorities will respond to this uncertainty regarding the SCCs. One possibility is that supervisory authorities will assess independently the level of protection of data transferred to particular third countries, including the U.S. This would trigger significant legal uncertainty, in particular in the context of the EU-U.S. transfers. Alternatively, there may be a coordinated approach from the European supervisory authorities[vi], which may also, as suggested in the Court ruling, decide to request an opinion from the EDPB, which may adopt a binding decision.
It is also worth noting that the European Commission indicated in its report dated 24 June 2020 that it is currently working, in cooperation with the EDPB, on modernizing the mechanisms for data transfers, including the SCCs. Therefore, an updated version of the SCCs and associated guidance will likely be issued in the near future, adding yet another wrinkle to this issue.
While waiting for these future clarifications and decisions, in light of the above, we recommend companies currently relying on the Privacy Shield or SCCs consult with their data protection officer or counsel to evaluate tailored ways to minimize the risks associated with continued transfers of personal data out of the EU—particularly transfers of such data to the U.S.
_______________________
[i] Judgment of the Court of 6 October 2015 – Maximillian Schrems v Data Protection Commissioner (Case C-362/14).
[ii] Commission Decision of 5 February 2010 on standard contractual clauses for the transfer of personal data to processors established in third countries under Directive 95/46/EC of the European Parliament and of the Council, as amended.
[iii] The Charter of Fundamental Rights brings together all the personal, civic, political, economic and social rights enjoyed by people within the EU in a single text.
[iv] The Privacy Shield Ombudsperson is a Privacy Shield mechanism to facilitate the processing of and response to requests relating to the possible access for national security purposes by U.S. intelligence authorities to personal data transmitted from the EU to the U.S.
[v] It is worth noting that, with respect to the Privacy Shield, in January 2019 the EDPB stated in its second annual joint review of the Privacy Shield that it “welcomes the efforts made by the US authorities and the Commission to implement the Privacy Shield, […] However, the EDPB still has a number of significant concerns that need to be addressed by both the Commission and the US authorities”.
[vi] The Irish DPC has specified that it looks forward “to developing a common position with [its] European colleagues to give meaningful and practical effect to today’s judgment”. Also, the German Federal Commissioner for Data Protection and Freedom of Information already stated that it will coordinate with its European colleagues. It is also noting the U.S. Secretary of Commerce expressed disappointment but has yet to articulate how the Department will move forward. “While the Department of Commerce is deeply disappointed that the court appears to have invalidated the European Commission’s adequacy decision underlying the EU-U.S. Privacy Shield, we are still studying the decision to fully understand its practical impacts,” said Secretary Wilbur Ross.
The following Gibson Dunn lawyers prepared this client alert: Ahmed Baladi, Ryan T. Bergsieker, James A. Cox, Patrick Doris, Penny Madden, Alexander H. Southwell, Michael Walther, Kai Gesing, Alejandro Guerrero, Vera Lukic, Sarah Wazen, Adelaide Cassanet, Clemence Pugnet and Selina Grün. Please also feel free to contact the Gibson Dunn lawyer with whom you usually work, the authors, or any member of the Privacy, Cybersecurity and Consumer Protection Group:
Europe
Ahmed Baladi – Co-Chair, PCCP Practice, Paris (+33 (0)1 56 43 13 00, [email protected])
James A. Cox – London (+44 (0)20 7071 4250, [email protected])
Patrick Doris – London (+44 (0)20 7071 4276, [email protected])
Penny Madden – London (+44 (0)20 7071 4226, [email protected])
Michael Walther – Munich (+49 89 189 33-180, [email protected])
Kai Gesing – Munich (+49 89 189 33-180, [email protected])
Alejandro Guerrero – Brussels (+32 2 554 7218, [email protected])
Vera Lukic – Paris (+33 (0)1 56 43 13 00, [email protected])
Sarah Wazen – London (+44 (0)20 7071 4203, [email protected])
Asia
Kelly Austin – Hong Kong (+852 2214 3788, [email protected])
Jai S. Pathak – Singapore (+65 6507 3683, [email protected])
United States
Alexander H. Southwell – Co-Chair, PCCP Practice, New York (+1 212-351-3981, [email protected])
Debra Wong Yang – Los Angeles (+1 213-229-7472, [email protected])
Matthew Benjamin – New York (+1 212-351-4079, [email protected])
Ryan T. Bergsieker – Denver (+1 303-298-5774, [email protected])
Howard S. Hogan – Washington, D.C. (+1 202-887-3640, [email protected])
Joshua A. Jessen – Orange County/Palo Alto (+1 949-451-4114/+1 650-849-5375, [email protected])
Kristin A. Linsley – San Francisco (+1 415-393-8395, [email protected])
H. Mark Lyon – Palo Alto (+1 650-849-5307, [email protected])
Karl G. Nelson – Dallas (+1 214-698-3203, [email protected])
Deborah L. Stein (+1 213-229-7164, [email protected])
Eric D. Vandevelde – Los Angeles (+1 213-229-7186, [email protected])
Benjamin B. Wagner – Palo Alto (+1 650-849-5395, [email protected])
Michael Li-Ming Wong – San Francisco/Palo Alto (+1 415-393-8333/+1 650-849-5393, [email protected])
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
The COVID-19 pandemic has had a seismic impact on virtually all aspects of commerce, law, and life, and enforcement of the U.S. Foreign Corrupt Practices Act (“FCPA”) is no exception. Indeed, the inherently cross-border nature of the FCPA renders it perhaps particularly susceptible to impacts—from interviews of witnesses located in foreign countries, to collecting documents from employees working from home, to remote presentations to government agencies, everything is more challenging in this environment.
But if one thing is clear from our practice, it is that the commitment of the U.S. Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”) to enforcing the FCPA has not waned. The relative numbers of FCPA enforcement actions are down—10 in the first half of 2020 versus more than twice that at this point a year ago—but we know from our own inventory of investigations and the broader enforcement landscape that DOJ, the SEC, and other global enforcers remain active and are continuing to adapt to the circumstances. From the largest coordinated foreign bribery settlement of all time, to the Second Edition of the joint DOJ/SEC FCPA Resource Guide, to updated compliance program guidance from DOJ, to a Supreme Court decision on the SEC’s authority to seek disgorgement, the first half of 2020 in FCPA enforcement provides much still to discuss.
This client update provides an overview of the FCPA as well as domestic and international anti-corruption enforcement, litigation, and policy developments from the first half of 2020.
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 Depository Receipts (“ADRs”) or American Depository 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 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 controls deficiency.
Foreign corruption also may implicate other U.S. criminal laws. Increasingly, prosecutors from the FCPA Unit of DOJ have been charging non-FCPA crimes such as money laundering, mail and wire fraud, Travel Act violations, tax violations, and even false statements, in addition to or instead of FCPA charges. Perhaps most prevalent amongst these “FCPA-related” charges is money laundering—a generic term used as shorthand for several statutory provisions that together criminalize the concealment or transfer of proceeds from certain “specified unlawful activities,” including corruption under the laws of foreign nations, through the U.S. banking system. Although this has not always been the case, DOJ now frequently deploys the money laundering statutes to charge “foreign officials” who are not themselves subject to the FCPA. It is increasingly commonplace 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 SEC, the statute’s dual enforcers, during the past 10 years.
|
| Number of FCPA Enforcement Actions Per Year* |
* As of June 30, 2020
While the COVID-19 pandemic may contribute to 2020 being a statistically anomalous year—at least within the context of the modern era of FCPA enforcement—as we have noted for several years now, increasingly “FCPA-only” enforcement statistics do not tell the whole story in international anti-corruption enforcement by U.S. prosecutors and regulators. As can be seen from the below table and graph, which include non-FCPA charges brought by DOJ’s FCPA Unit in international corruption investigations, over the last two-and-a-half years the FCPA Unit has brought nearly as many cases under related statutes, such as money laundering, than it has under the FCPA. The 10 FCPA-related enforcement actions thus far in 2020 exceed DOJ’s FCPA total for the year and continue what is now a years-long trend of substantial extra-FCPA enforcement by DOJ that shows no signs of letting up.
|
* As of June 30, 2020
2020 MID-YEAR FCPA + FCPA-RELATED ENFORCEMENT ACTIONS
Corporate Enforcement Actions
There were four corporate FCPA enforcement events in the first half of 2020, not including an early July action involving Alexion Pharmaceuticals, Inc. that will be covered in our 2020 Year-End FCPA Update.
Airbus SE
Beginning the year in corporate anti-corruption enforcement in a big way, on January 31, 2020 French-headquartered airplane manufacturer Airbus reached a multi-billion-dollar coordinated resolution with authorities in France, the United Kingdom, and the United States. The combined allegations pertain to alleged improper payments to government officials in more than a dozen countries between at least 2008 and 2015, as well as export controls-related charges in the United States. With combined penalties of more than $3.9 billion, more than $3.67 billion of which relates to the anti-corruption matters, this resolution now stands as the largest foreign bribery settlement of all time.
On the U.S. front, Airbus entered into a deferred prosecution agreement with DOJ alleging conspiracy to violate the FCPA’s anti-bribery provisions as well as conspiracy to violate the Arms Export Control Act and the International Traffic in Arms Regulations (“ITAR”). With respect to the FCPA conduct, Airbus allegedly made payments to a Chinese business partner knowing that all or part of those funds would be used to bribe Chinese officials, while on the ITAR side the company allegedly made false reports to the U.S. government to facilitate the sale or export of defense articles and services. Airbus is not a U.S. issuer, so jurisdiction for the FCPA charge was premised on employees and agents allegedly having sent emails while in the United States and participating in and providing luxury travel to the United States for foreign government officials. The FCPA-related penalty was $2.09 billion, although the vast majority of that was credited against payments to foreign regulators and ultimately Airbus agreed to pay $294.5 million for the FCPA-related conduct and $232.7 million for the ITAR-related conduct, for a total of $527.2 million to U.S. authorities.
As imposed, the larger financial penalties came from the French Parquet National Financier (“PNF”) and the UK Serious Fraud Office (“SFO”), which each entered into their own deferred prosecution agreements with Airbus. Specifically, the PNF imposed a USD-equivalent penalty of $2.29 billion for alleged improper payments in China, Colombia, Nepal, Russia, Saudi Arabia, South Korea, Taiwan, and the United Arab Emirates, while the SFO imposed a USD-equivalent penalty of $1.09 billion (made up of disgorgement, a fine, and the SFO’s costs) for alleged improper payments in Ghana, Indonesia, Malaysia, Sri Lanka, and Taiwan.
The majority of the alleged conduct appears to have involved Airbus’s former Strategy and Marketing Department, a 150-person division devoted to engagement with business partners to obtain and manage business. As a significant remediation effort, in October 2014, Airbus disbanded this group and froze all payments to business partners worldwide until confirmatory due diligence could be performed on the purpose for the payments. Each of the regulators noted Airbus’s substantial cooperation with the investigation and remediation, and it is notable that no compliance monitor will be imposed for the anti-corruption related conduct, although that may well be due to the fact that the French Agence Française Anticorruption (“AFA”) will be conducting anti-corruption audits over the next three years.
Cardinal Health, Inc.
On February 28, 2020, the SEC announced an FCPA accounting provision resolution with Cardinal Health related to the allegedly improper use of marketing funds in China. According to the SEC, Cardinal Health’s former Chinese subsidiary served as the exclusive distributor for and administered marketing accounts on behalf of a European dermocosmetic (skin care) company, formally employing the European company’s workforce through administrative HR agreements but without directly supervising or applying all of Cardinal Health’s internal controls to those employees. The European company representatives, on the payroll of Cardinal Health, allegedly directed some of the marketing funds to promote the company’s products to Chinese healthcare professionals and employees of Chinese state-owned retail entities.
Without admitting or denying the allegations, Cardinal Health consented to the entry of a cease-and-desist order to resolve FCPA books-and-records and internal controls charges and agreed to disgorge $5.4 million of profits, plus $916,887 in prejudgment interest, and pay a $2.5 million civil penalty. The SEC’s order did not impose ongoing reporting requirements on Cardinal Health and acknowledged the company’s voluntary self-disclosure, cooperation with the SEC’s investigation, and the remedial actions taken by the company, including terminating the marketing accounts and its employment contracts with the marketing employees. Cardinal Health has announced that DOJ declined to take action.
Eni S.p.A.
On April 17, 2020, the SEC announced an FCPA resolution with Italian oil company and ADR-issuer Eni relating to alleged misconduct in obtaining government oil contracts in Algeria. According to the SEC, Eni violated the FCPA’s accounting provisions because a 43%-owned subsidiary entered into four purportedly sham contracts to pay approximately €198 million to an intermediary, which directed a portion of that money to Algerian officials to assist in obtaining contracts from Algeria’s state-owned oil company.
With respect to the books-and-records charge, the SEC contended that the Eni subsidiary classified these payments as “brokerage fees” in its books and records, which then were consolidated into the books of Eni, allegedly causing Eni’s books and records to be inaccurate. With respect to the internal controls charge, the SEC acknowledged that pursuant to 15 U.S.C. § 78m(b)(6), because Eni was a minority shareholder in the subsidiary, it was required only to “proceed in good faith to use its influence, to the extent reasonable under [the] circumstances,” to cause the subsidiary to maintain a system of internal controls consistent with the FCPA. The SEC alleged that Eni failed to satisfy this standard, in part because the subsidiary’s CFO, who along with others allegedly bypassed internal controls to enter into the contracts with the intermediary, later became CFO of Eni and in that role continued to participate in and conceal the nature of the relationship with the intermediary. According to the SEC: “As the principal finance officer of Eni, [the CFO] could not have been proceeding in good faith to cause [the subsidiary] to devise and maintain sufficient internal accounting controls while simultaneously being aware of, and participating in, conduct at [the subsidiary] that undermined those controls.”
Without admitting or denying the allegations, Eni consented to the entry of a cease-and-desist order to resolve the FCPA accounting charges and agreed to disgorge $19.75 million plus $4.75 million in prejudgment interest. The disgorgement amount was calculated based on the alleged tax benefit that Eni received from its subsidiary deducting the costs of the payments to the intermediary. DOJ closed its investigation in September 2019 without taking action, approximately one year after an Italian criminal court’s acquittal of Eni and corporate officers following a trial on Italian corruption charges. Italian trial convictions of the subsidiary and certain of its former employees were overturned by the Milan Court of Appeals in January 2020.
Novartis AG & Alcon Pte Ltd
Rounding out the first half of 2020 in corporate enforcement, on June 25 DOJ and the SEC announced the year’s first joint FCPA resolution, involving Swiss pharmaceutical company and issuer Novartis, its Greek subsidiary, and a former subsidiary. The charging documents allege that between 2012 and 2016, subsidiary employees provided things of value to healthcare providers in Greece, South Korea, and Vietnam.
To resolve the SEC’s investigation, Novartis consented to the entry of an administrative cease-and-desist order charging FCPA accounting violations and agreed to pay $112.8 million in disgorgement and prejudgment interest. To resolve criminal charges of FCPA anti-bribery and books-and-records conspiracy, Novartis’s Greek subsidiary entered into a deferred prosecution agreement and agreed to pay a criminal penalty of $225 million. In addition, former Novartis subsidiary Alcon Pte Ltd entered into a deferred prosecution agreement to resolve a charge of FCPA books-and-records conspiracy and agreed to pay a criminal penalty of $8,925,000. Novartis and Alcon were given full credit for their cooperation in the investigation and their significant remedial measures. They will self-report on the status of their compliance programs over the three-year term of the agreements with DOJ and the SEC. Gibson Dunn represented Novartis and Alcon in connection with the Alcon Pte Ltd-related conduct.
Individual Enforcement Actions
There were FCPA and FCPA-related charges filed or unsealed against 15 individual defendants during the first half of 2020.
Martinelli Brothers
On June 27, 2020, a criminal complaint was filed in the U.S. District Court for the Eastern District of New York charging Luis Enrique Martinelli Linares and Ricardo Alberto Martinelli Linares, brothers and the sons of former Panamanian President Ricardo Alberto Martinelli Berrocal, with money laundering. The charging documents were unsealed on July 6, when the brothers were arrested in Guatemala pursuant to a U.S. arrest warrant. According to the allegations, the brothers served as intermediaries to set up secret bank accounts to receive and disguise $28 million in bribe payments made by Brazilian construction conglomerate Odebrecht S.A. for the benefit of President Martinelli. We covered the December 2016 FCPA resolution with Odebrecht in our 2016 Year-End FCPA Update.
Asante K. Berko
On April 13, 2020, the SEC filed a civil complaint in the U.S. District Court for the Eastern District of New York against Asante Berko, a dual U.S. and Ghanaian citizen who formerly worked for the UK subsidiary of a U.S. financial services company and issuer. The complaint charges Berko with FCPA bribery associated with his alleged participation in a scheme to pay at least $2.5 million to an intermediary with the intention that all or substantially all of that amount would be paid to Ghanaian government officials making decisions on an electrical power plant project Berko’s Turkish-based client was building. The complaint further alleges that Berko personally received $2 million in secret commissions from the Turkish client, without the knowledge or approval of Berko’s employer. There is no current indication that the U.S. financial services company will be charged, and indeed the complaint against Berko speaks at length of Berko’s circumvention of his employer’s controls, including using personal rather than company email, falsifying or failing to correct inaccurate corporate documents, and lying to company compliance and legal personnel when they asked increasingly probing questions about the transaction.
The Berko case is significant for at least two reasons. First, many of the acts described above as to Berko’s circumvention of company existing controls are in other cases argued by the SEC to be evidence of the company’s deficient internal controls. Second, even as the SEC seems to take an accommodating stance with respect to controls, it takes a very aggressive stance with respect to its agency theory of liability for the bribery charges. Berko was not an employee of the U.S. issuer, but rather a UK subsidiary, so the SEC (which has jurisdiction only over issuers and their representatives) alleged that Berko was an agent of the parent issuer because the parent allegedly exercised general control over the subsidiary and its employees, Berko was subject to the parent’s compliance policies, and certain key documents relating to the transaction were reviewed by a committee of the parent issuer. This agency theory is oft-contested, but less frequently litigated. Berko has yet to make an appearance and, according to the SEC’s complaint, is residing in Ghana.
Additional PDVSA-Related FCPA and FCPA-Related Charges
DOJ’s ongoing investigation of alleged corruption in the bidding panels of Venezuelan state-owned oil company Petróleos de Venezuela, S.A. (“PDVSA”) continued apace through the first six months of 2020. As we have been covering since our 2015 Year-End FCPA Update, DOJ now has brought numerous FCPA and FCPA-related (primarily money laundering) prosecutions associated with an alleged “pay-to-play” corruption scheme whereby businesses paid millions of dollars in bribes to PDVSA officials to influence the award of competitively-bid contracts and to secure preferential treatment in the payment of PDVSA debts.
Charges from the first half of 2020 include:
- On February 7, 2020, Texas resident and Venezuelan citizen Tulio Anibal Farias-Perez was charged and then pleaded guilty to FCPA conspiracy associated with his alleged provision of more than $500,000 in payments to PDVSA representatives through cash, wire transfers, and tickets to high-profile sporting events such as the World Series and Super Bowl in exchange for contract awards to his companies;
- On March 11 and 12, 2020, respectively, DOJ unsealed November 2019 criminal informations charging Lennys Rangel, the procurement head of a PDVSA majority-owned joint venture, and Edoardo Orsoni, the former general counsel of PDVSA, each with conspiracy to commit money laundering in connection with the alleged receipt of more than a million dollars each in cash and property in exchange for favorable treatment in PDVSA bidding processes;
- On March 20, 2020, DOJ filed a criminal information charging Venezuelan businessperson Carlos Enrique Urbano Fermin with conspiracy to commit money laundering based on Urbano’s alleged $100,000 bribe to a Venezuelan government official, via U.S. bank accounts, to forestall a local bribery prosecution of Urbano’s companies in Venezuela; and
- Also on March 20, 2020, DOJ charged another Venezuelan businessperson, Leonardo Santilli, in a criminal money laundering complaint associated with Santilli’s alleged payment of more than $9 million in bribes to receive nearly $150 million in contracts from PDVSA.
Additional Alstom S.A. Defendants Charged
In our 2019 Year-End FCPA Update, we covered DOJ’s ongoing prosecutions arising from Alstom’s alleged corrupt winning of the Taharan power plant contract in Indonesia as an example of DOJ leveraging a relatively contained, one-country fact pattern into many cases over numerous years. This phenomenon extended into 2020, when on February 18 DOJ unsealed a superseding indictment, initially filed in 2015, charging two former executives of Alstom’s Indonesian subsidiary and a former executive of Alstom agent Marubeni with conspiracy to violate the FCPA and commit money laundering. Reza Moenaf and Eko Sulianto, the former president and director of sales of Alstom’s Indonesian subsidiary respectively, were each charged with two counts of FCPA bribery, and Junji Kusunoki, the former deputy general manager of Marubeni’s Overseas Power Project Department, was charged with six counts of FCPA bribery. All three defendants also face money laundering charges, and none have yet made an appearance in court.
Seguros Sucre Defendants
On February 13, 2020, DOJ filed a criminal complaint in the Southern District of Florida charging Juan Ribas Domenech, Jose Vicente Gomez Aviles, and Felipe Moncaleano Botero with money laundering conspiracy for their alleged roles in a scheme to secure contracts with Ecuador’s state-owned insurance company, Seguros Sucre. Separately, on March 3, 2020, DOJ filed a criminal complaint charging Roberto Heinert with a related money laundering offense.
Ribas is a former Seguros Sucre chairman and Ecuadorian citizen; Gomez is an Ecuadorian businessperson who helped companies secure contracts with Seguros Sucre; Heinert is a dual U.S. and Ecuadorian citizen who worked with Gomez; and Botero is a Colombian citizen and former executive of an unnamed UK reinsurance broker’s Colombian subsidiary that worked with Seguros Sucre. According to the criminal complaints, Ribas allegedly received bribes from Gomez, Heinert, and Botero, laundered through U.S. bank accounts, in exchange for awarding a reinsurance contract for Ecuador’s Ministry of Defense, provided through Seguros Sucre. On June 11, 2020, Gomez pleaded guilty. Ribas, Heinert, and Botero are before the Court and awaiting trial dates.
2020 MID-YEAR FCPA-RELATED ENFORCEMENT LITIGATION
Following the filing of FCPA or FCPA-related charges, criminal and civil enforcement proceedings can take years to wind through the courts. A selection of prior-year matters that saw enforcement litigation developments during the first half of 2020 follows.
Hoskins’s FCPA Convictions Reversed; Money Laundering Convictions Stand
In what is arguably one of the most significant, if not longest-running, enforcement cases in FCPA history, the Honorable Janet Bond Arterton of the District of Connecticut issued her decision on the Rule 29 Motion for a Judgment of Acquittal filed by Lawrence Hoskins, whose November 2019 convictions we covered in our 2019 Year-End FCPA Update. Following a key pretrial appeal in which the Second Circuit Court of Appeals held that the government could not charge foreign national Hoskins with conspiracy or aiding and abetting an FCPA offense because he did not otherwise belong to the class of individuals that can be charged with committing a substantive FCPA violation (covered in our 2018 Year-End FCPA Update), the key FCPA question at trial was whether DOJ could prove that Hoskins was acting as an “agent” of a U.S. person (i.e., Alstom’s U.S. subsidiary). The jury seemingly answered that question in the affirmative through its verdict, convicting Hoskins on all seven FCPA counts.
But on February 26, 2020, Judge Arterton set aside the FCPA guilty verdicts and entered a judgment of acquittal, finding that the evidence presented at trial did not support a conclusion that an agency relationship existed between Hoskins and Alstom’s U.S. subsidiary. Specifically, the Court held that the evidence DOJ presented was insufficient as a matter of law to show that the U.S. subsidiary retained the ability to control Hoskins’s actions. Nonetheless, demonstrating the relative power of money laundering charges to pursue international corruption cases outside the jurisdictional reach of the FCPA, Judge Arterton left Hoskins’s four money laundering convictions intact. There, the Court rejected Hoskins’s arguments that he could not be convicted absent knowledge that U.S. bank accounts would be used, and also held that Connecticut was an appropriate venue because the transfers from Connecticut (where Alstom’s subsidiary was based) to Maryland (where the agent was based) to Indonesia (where the foreign official was based) was all part of a single, continuing transaction for purposes of the money laundering statute.
On March 6, 2020, Hoskins was sentenced to 15 months in prison and to pay a $30,000 fine in connection with the money laundering convictions, although his surrender date has been postponed to October 2020 due to the COVID-19 pandemic situation. Each of DOJ and Hoskins have appealed the unfavorable portions of Judge Arterton’s decision to the Second Circuit, making it likely that we have not heard the last from this groundbreaking case.
Inniss Convicted by Jury
Donville Inniss, the former Barbados Minister of Industry, was indicted in March 2018 for allegedly receiving $36,000 in bribes from the Insurance Corporation of Barbados Limited in exchange for agreeing to award government contracts to the insurer. According to DOJ, Inniss allegedly laundered the funds through a New York bank account in the name of a dental company owned by his friend.
Following a four-day jury trial and two hours of deliberation, on January 16, 2020, Inniss was convicted by a jury sitting in the Eastern District of New York of one count of conspiracy to commit money laundering and two counts of money laundering. Inniss has filed a Rule 29 motion for judgment of acquittal of all counts, which remains pending.
Baptiste and Boncy Granted New Trial
We reported in our 2019 Year-End FCPA Update on the June 2019 jury convictions of retired U.S. Army colonel Joseph Baptiste and former lawyer and Haitian Ambassador-at-Large Roger Richard Boncy for allegedly soliciting bribes from two undercover FBI agents who were posing as prospective investors in a proposed $84 million port development project in Haiti. Following a nine-day jury trial, they were each found guilty of one count of FCPA conspiracy and one count of Travel Act conspiracy, with Baptiste additionally convicted of violating the Travel Act and money laundering conspiracy.
But in a post-conviction setback for DOJ, on March 11, 2020, the Honorable Allison Burroughs of the District of Massachusetts granted a new trial for both Baptiste and Boncy based on the ineffective performance of Baptiste’s trial attorney. Among other things, Judge Burroughs cited that Baptiste’s lawyer did not subpoena witnesses to testify on Baptiste’s behalf and pursued an entrapment defense after being told the defense was unavailable for Baptiste. In addition to prejudicing Baptiste, Judge Burroughs found that the attorney’s performance resulted in Boncy’s own attorney “having to play an outsized role at trial rather than pursue his preferred defense strategy,” thereby also prejudicing Boncy. DOJ has appealed Judge Burroughs’s order to the U.S. Court of Appeals for the First Circuit.
Seng’s Supreme Court Challenge re McDonnell Application to FCPA Denied
We covered in our 2018 Mid-Year FCPA Update the conviction and sentencing of billionaire Ng Lap Seng on FCPA, federal programs bribery, and money laundering charges associated with his role in a scheme to pay more than $1 million in bribes to two UN officials in connection with, among other things, a plan to build a UN-sponsored conference center in Macau. In August 2019, Seng’s conviction was upheld by the U.S. Court of Appeals for the Second Circuit, which rejected his argument that DOJ failed to prove that an “official act” occurred in exchange for the bribes as required by the Supreme Court’s decision in McDonnell v. United States, instead holding that McDonnell’s official acts standard does not apply to the FCPA. Seng filed a petition for writ of certiorari in the Supreme Court, which was denied on June 29, 2020.
Lambert’s Motion for Judgment of Acquittal on Wire Fraud Charges Denied
As reported in our 2019 Year-End FCPA Update, Mark T. Lambert, the former Co-President of Transport Logistics International, was convicted in November 2019 of FCPA, wire fraud, and conspiracy charges in connection with his alleged participation in a conspiracy to make corrupt payments to an official at a Russian state-owned supplier of uranium and uranium enrichment services in return for sole-source contracts. In December, Lambert filed a motion for judgment of acquittal on the two wire fraud convictions, arguing that the government failed to prove that he made any material misrepresentations or omissions that caused injury to the Russian state-owned entity, the alleged victim of the fraud.
On February 11, 2020, the Honorable Theodore D. Chuang of the District of Maryland denied Lambert’s motion. The Court found that the evidence that Lambert actively concealed bribes from the Russian state-owned entity was sufficient, and further that the government need not prove that the Russian state-owned entity actually lost money as a result of the scheme, provided Lambert intended to deprive the entity of money. Lambert’s sentencing has been delayed due to COVID-19 complications.
Fifth Circuit Dismisses Khoury’s Appeal
Lebanese businessperson Samir Khoury has continued his attack on a more than decade-old indictment charging him with mail and wire fraud offenses arising out of the Bonny Island, Nigeria corruption scheme. As reported in our 2019 Year-End FCPA Update, after successfully persuading the Southern District of Texas to unseal the indictment in absentia, Khoury filed a renewed motion to dismiss, arguing the government had failed to prosecute the case diligently and the indictment is time-barred. The Honorable Keith P. Ellison rejected Khoury’s motion on December 6, 2019, and denied Khoury’s additional motion for a “Ruling on Constitutional Issues Not Addressed” on February 24, 2020.
In March 2020, Khoury sought appellate and mandamus relief from the U.S. Court of Appeals for the Fifth Circuit, challenging, among other things, the district court’s conclusion that any delay in prosecution was caused by Khoury’s decision to remain in Lebanon. The government moved to dismiss Khoury’s appeal, arguing that it must wait a trial, judgment, and sentencing. On May 12, 2020, the Fifth Circuit granted the government’s motion to dismiss in a per curiam order. The Fifth Circuit rejected Khoury’s petition for en banc review on July 13, 2020.
Former Banker Permanently Barred for Role in 1MDB Bond Offerings
We have been tracking for years activity related to the alleged diversion of more than $2.7 billion from Malaysian sovereign wealth fund 1Malaysia Development Berhad (“1MDB”), including actions previously taken against Malaysian businessperson Low Taek Jho and two former bankers, Tim Leissner and Roger Ng Chong Hwa, for their alleged involvement in the scheme.
On February 4, 2020, the Federal Reserve Board of Governors announced that it was permanently barring from the banking industry former banker Andrea Vella, who had responsibility for three bond offerings by 1MDB. According to the Board’s debarment order, Vella failed to fully escalate Low Taek Jho’s involvement in the offerings, which the Board claimed indicated heighted potential underwriting risks. As part of the debarment order, Vella has agreed to cooperate with the Board’s investigations into 1MDB.
Coburn and Schwartz Indictment Challenge Turned Away
As covered in our 2019 Year-End FCPA Update, former Cognizant Technology Solutions executives Gordon J. Coburn and Steven E. Schwartz face a 12-count indictment charging them with FCPA bribery, conspiracy, falsification of books and records, and circumvention of internal controls in connection with their alleged participation in a bribery scheme in India. They each promptly moved to dismiss various counts in the indictment on a number of grounds, including most notably for practitioner purposes that three counts of FCPA bribery were multiplicitous because they charged three emails associated with the same alleged bribe as three separate violations of the FCPA’s anti-bribery provisions.
On February 14, 2020, the Honorable Kevin McNulty of the District of New Jersey issued a scholarly opinion analyzing this question, which has never been squarely presented in an FCPA case. In upholding the indictment, Judge McNulty agreed with DOJ that the relevant “unit of prosecution” for FCPA bribery is making use of interstate commerce in connection with a bribery scheme; thus, the emails cited in the three counts “are permissible, if not inevitable, units of prosecution.”
Odebrecht Plea Agreement Extended
We covered Odebrecht’s coordinated anti-corruption resolution with Brazilian, Swiss, and U.S. authorities in our 2016 Year-End FCPA Update. One of the conditions of the U.S. resolution was the engagement of an independent compliance monitor for a three-year period.
The monitorship period was scheduled to conclude in February 2020. However, in a January 29 letter filed with the Eastern District of New York, DOJ announced that Odebrecht had failed to complete its obligations to “implement and maintain a compliance and ethics program,” including by allegedly “failing to adopt and implement the agreed upon recommendations of the monitor and failing to allow the monitor to complete the monitorship.” DOJ reported that Odebrecht had agreed with these contentions and to extend the monitorship until November 2020 to allow the additional time to fulfill its obligations under the extended timeline.
2020 MID-YEAR FCPA-RELATED DEVELOPMENTS
In addition to the enforcement activity covered above, the first six months of 2020 saw important developments in FCPA policy, practice, and related matters. Among the developments covered below are DOJ and the SEC issuing their first comprehensive update to the 2012 FCPA Resource Guide, DOJ providing updated guidance on how it will evaluate corporate compliance programs, the announcement of a new privilege unit within DOJ’s Fraud Section, and a Supreme Court decision on the SEC’s ability to seek disgorgement in enforcement actions.
DOJ and SEC Issue First Comprehensive Update to FCPA Resource Guide
On July 3, 2020, DOJ and the SEC published the first substantive update to their consolidated FCPA guidance, “A Resource Guide to the U.S. Foreign Corrupt Practices Act,” which was first issued in November 2012. The Second Edition to this publication—which has served as an important resource for companies and practitioners seeking to understand both enforcers’ interpretations of the FCPA and approaches for enforcing it—does not necessarily break new ground, but incorporates a number of significant developments in government guidance, relevant case law, and enforcement activity in the seven-plus years since its original publication.
Among the more significant updates in the Second Edition are the inclusion of the FCPA Corporate Enforcement Policy (see below) and other recent governmental guidance; updated guidance regarding the application of the FCPA in M&A transactions; legal updates regarding the scope of the term “agent” for assessing corporate liability, the scope of the SEC’s disgorgement authority, and the requirements for criminal violations of the FCPA’s accounting provisions. This new edition likewise includes numerous new or updated case studies and hypotheticals to further illustrate relevant FCPA concepts. For additional details regarding the Second Edition, please see our recent client alert, “U.S. DOJ and SEC Issue First Comprehensive Update to FCPA Resource Guide Since 2012.”
DOJ Issues Updated Guidance for Evaluating Corporate Compliance Programs
On June 1, 2020, DOJ issued further updates to its guidance to DOJ prosecutors about how to assess the effectiveness of corporate compliance programs when conducting investigations, making charging decisions, and negotiating resolutions. This guidance, entitled “Evaluation of Corporate Compliance Programs,” updates the prior version of the guidance published in 2019.
Among other changes, the updated guidance places increased emphasis on evaluating corporate compliance programs on a case-by-case basis relative to the individual company’s “size, industry, geographic footprint, [and] regulatory landscape” and reflects an increased focus on whether control functions are provided with sufficient resources to effectively discharge their responsibilities and have access to the data needed to properly carry out their monitoring and auditing activities. For more on the updated guidance, please see our separate client alert, “DOJ Updates Guidance Regarding Its ‘Evaluation of Corporate Compliance Programs.’”
DOJ Fraud Section to Create New Privilege Unit
So-called “taint” or “filter” teams have long been DOJ’s preferred solution to address the oft-arising issue of how to handle attorney-client and other privileged materials seized during the execution of search warrants. To prevent prosecutors from being exposed to protected information, the filter team (typically from the same DOJ Unit but not assigned to the investigation) generally is responsible for segregating protected material before providing the remaining materials to the prosecutors leading the investigation. This practice has been subject to criticism from the defense bar and courts alike, not the least of which being a decision in October 2019 by the U.S. Court of Appeals for the Fourth Circuit.
Potentially in response to this scrutiny, the Fraud Section has restructured its privilege review process by creating a new unit—the Special Matters Unit. The Special Matters Unit, which will be led by Fraud Section and Miami U.S. Attorney’s Office alum Jerrob Duffy, will oversee the privilege review team and work with the other Fraud Section litigation units, including the FCPA Unit, to establish uniform protocols regarding evidence collection and review that may implicate attorney-client and other privileges.
U.S. Supreme Court Decision Limits Disgorgement Authority in Civil Actions
As our readership knows, disgorgement of purportedly illicit profits frequently is the key driver in determining the cost of an FCPA resolution with the SEC. On June 22, 2020, the Supreme Court issued an important decision in Liu v. SEC, a closely watched case involving a challenge to the SEC’s ability to seek disgorgement in civil enforcement actions filed in federal court. This case follows the Court’s 2017 opinion in Kokesh v. SEC (discussed in our client alert United States Supreme Court Limits SEC Power to Seek Disgorgement Based on Stale Conduct), in which the Court unanimously held that disgorgement ordered in an SEC enforcement action constituted a “penalty” and was therefore subject to the five-year statute of limitations defined by 28 U.S.C. § 2462, but expressly reserved the question of whether SEC had the authority to seek disgorgement as a form of “equitable relief” in civil actions filed in federal court.
In the instant Liu case, husband and wife Charles Liu and Xin Wang were ordered to disgorge nearly $27 million in profits and pay $8.2 million in penalties arising from a scheme in which they allegedly misappropriated funds invested with them for the purpose of building a cancer treatment center. The district court refused to permit the deduction of even legitimate business expenses from the disgorgement amount, which decision the Ninth Circuit affirmed, holding that “the proper amount of disgorgement in a scheme such as this one is the entire amount raised less the money paid back to the investors.” In an 8-1 opinion authored by Justice Sotomayor, the Supreme Court upheld the SEC’s ability to seek disgorgement as a form of equitable relief, but only provided that the disgorgement is limited to the amount of the defendants’ net profits from the wrongdoing after legitimate expenses are deducted and further that disgorgement is assessed at least partially for the benefit of victims. For more on the Supreme Court’s decision, please see our client alert, “Supreme Court Limits Disgorgement Remedy In SEC Civil Enforcement Actions.”
2020 MID-YEAR KLEPTOCRACY FORFEITURE ACTIONS
The first half of 2020 saw continued activity in the Kleptocracy Asset Recovery Initiative spearheaded by DOJ’s Money Laundering and Asset Recovery Section (“MLARS”) Unit, which uses civil forfeiture actions to freeze, recover, and, in some cases, repatriate the proceeds of foreign corruption. In particular, we have been tracking the 1MDB corruption case since it was first announced as a civil forfeiture proceeding, as covered in our 2016 Year-End FCPA Update.
On May 6, 2020, DOJ announced a settlement of its civil forfeiture cases against more than $49 million of assets acquired by Emirati businessperson Khadem al-Qubaisi, using funds allegedly misappropriated from 1MDB. The assets include sales proceeds of Beverly Hills real estate and a luxury penthouse in New York City. This was followed on July 1 by the announcement of six DOJ civil forfeiture complaints in the U.S. District Court for the Central District of California seeking the forfeiture and recovery of an additional $96 million in assets, including luxury real estate in Paris, artwork by Monet, Warhol, and Basquiat, and bank accounts in Luxembourg and Switzerland. Since July 2016, the United States has sought forfeiture of more than $1.8 billion in assets associated with 1MDB, with more than $600 million of that now returned to Malaysia.
2020 MID-YEAR PRIVATE CIVIL LITIGATION SECTION
Although the FCPA does not provide for a private right of action, civil litigants continue to pursue a variety of causes of action in connection with FCPA-related conduct. A selection of matters with developments in the first half of 2020 follows.
Shareholder Lawsuits
- Cemex S.A.B. de C.V. – On February 10, 2020, the Honorable Valerie E. Caproni of the Southern District of New York dismissed with prejudice the second amended complaint filed against Mexican building materials company and U.S. issuer Cemex for allegedly concealing a bribery scheme and then making misleading statements relating to the same. As reported in our 2019 Year-End FCPA Update, the lawsuit was filed in 2018 after an internal probe identified payments worth approximately $20 million to a Colombian company in return for land, mining rights, and tax benefits for a new cement plant. In dismissing the second amended complaint, Judge Caproni found that plaintiffs had failed to allege specific facts on which to base a securities fraud action and had failed to establish the existence of an underlying bribery scheme.
- BRF S.A. – On May 15, 2020, the U.S. District Court for the Southern District of New York preliminarily approved a $40 million settlement in a putative class action against Brazilian food processor BRF. The suit was brought in March 2018 following Brazilian investigations related to payments to allow the sale of rancid meat by circumventing safety inspections. Investors alleged that they were misled by the company after the investigation drove down the company’s stock price. BRF also had announced that it had initiated an internal investigation and was cooperating with DOJ and SEC prior to the filing of the shareholder suit. A settlement hearing is scheduled for October 2020.
Breach of Contract/Civil Fraud/RICO Actions
- Keppel Offshore & Marine Ltd. – On May 9, 2020, the Honorable Paul G. Gardephe of the Southern District of New York issued an order dismissing RICO conspiracy charges against Keppel Offshore & Marine, finding that the FCPA deferred prosecution agreement it entered with DOJ in 2017 does not constitute a criminal conviction for the purposes of the Private Securities Litigation Reform Act (“PSLRA”). Plaintiffs had argued that Keppel’s deferred prosecution agreement was a criminal conviction that qualified for a PSLRA exception for RICO claims against “any person that is criminally convicted in connection with the fraud,” but Judge Gardephe concluded that “[a] party that enters into a deferred prosecution agreement has not been convicted of a crime. Indeed, the obvious purpose of entering into a deferred prosecution agreement is to avoid a criminal conviction.” With the RICO claims dismissed, only the aiding and abetting fraud claims remain and the case is set for a pretrial conference later in July 2020.
- Citgo Petroleum Corp. – On May 26, 2020, CITGO, the Texas-based subsidiary of PDVSA, filed a complaint in the U.S. District Court for the Southern District of Texas against Jose Manuel Gonzalez Testino and his company alleging breach of contract, fraud, and RICO violations arising from Gonzalez’s violations of the FCPA. In May 2019, Gonzalez pleaded guilty to violations of the FCPA and failure to file a foreign bank account report, in connection with payments to PDVSA and CITGO officials. CITGO’s civil complaint alleges that Gonzalez bribed CITGO employees to induce CITGO to enter into a Service Contract Agreement with his company, and to win contracts under the same agreement. The complaint further alleges that Gonzalez’s conduct caused CITGO to lose millions of dollars, and seeks compensatory damages plus interest, treble damages, and punitive damages. As of the date of publication, the defendants have not filed a responsive pleading.
- Harvest Natural Resources, Inc. – As reported most recently in our 2019 Year-End FCPA Update, now-defunct Houston energy company Harvest Natural Resources filed suit in the U.S. District Court for the Southern District of Texas in 2018 alleging RICO and antitrust violations against various individuals and entities affiliated with the Venezuelan government and PDVSA. Harvest’s complaint alleged that approval for the sale of the company’s Venezuelan assets was wrongfully withheld after it refused to pay $40 million in bribes to Venezuelan officials, and that as a result, Harvest had to sell the assets to different buyers at a $470 million loss, leading to the company’s dissolution. Chief Judge Lee H. Rosenthal granted a default $1.4 billion judgment in the action against Rafael Darío Ramírez Carreño, Venezuela’s former Minister of Energy and former President of PDVSA, when Ramírez failed to appear. But on June 9, 2020, after Ramírez appeared and filed a motion to vacate the default judgment. Judge Rosenthal reopened the case, denied the motion to dismiss, and set a status conference to discuss scheduling for further proceedings.
2020 MID-YEAR INTERNATIONAL ANTI-CORRUPTION DEVELOPMENTS
International Anti-Corruption Developments Related to COVID-19
The COVID-19 pandemic has had, and continues to have, profound societal, economic, and health impacts. The frenetic pace of procurement activity around the world to acquire personal protective equipment, pharmaceuticals, and other medical products needed to combat the virus also can create heightened corruption-related risks. The following selection of recent developments illustrates steps that anti-corruption organizations around the world are taking to combat these novel corruption risks.
- On April 15, 2020, the Council of Europe’s Group of States against Corruption (“GRECO”) issued guidance to its member states regarding how to combat bribery and corruption in the healthcare sector. The risk areas identified by GRECO’s guidance include government procurement of medical supplies, bribery related to the provision of medical services, corruption of government agencies involved in overseeing the research and development of new pharmaceutical products, financial scams relating to the sale of medical products, and whistleblower protection in the healthcare sector.
- On April 22, 2020, the Organisation for Economic Co-operation and Development’s (“OECD”) Working Group on Bribery issued a statement warning that the current pandemic environment could create conditions “ripe for corruption” given the scramble to obtain needed supplies. The Working Group called on its member states to uphold their commitments under the OECD Anti-Bribery Convention, and noted that the OECD would “examine the possible impact and consequences of the coronavirus pandemic on foreign bribery, as well as solutions to help countries strengthen their anti-bribery systems.”
- On May 5, 2020, the International Monetary Fund (“IMF”) issued guidance explaining that, in addition to its existing anti-corruption measures, it was taking additional steps to ensure that emergency funding provided to governments in support of their COVID-19 responses would be used properly. These steps include asking governments to commit in letters of intent to ensure the funds are used for the purpose of responding to the crisis; assessing the extent to which it is feasible to ask member states to take additional steps to prevent bribery, corruption, and money laundering without unduly delaying disbursements; and continuing to include governance and anti-corruption measures in multi-year financing arrangements provided to member states.
Multilateral Development Banks
The first half of 2020 saw important developments concerning the World Bank’s, and increasingly other multilateral development banks’ (“MDB”), mechanisms for investigating fraud, corruption, and other sanctionable conduct connected to MDB-supported projects.
Perhaps most notably, the World Bank announced in May 2020 that Mouhamadou Diagne will become the new head of the Bank’s Integrity Vice Presidency (“INT”), a position that has been held by an acting head since the departure of Pascale Dubois in November 2019. Diagne previously served as the Bank’s Inspector General of the Global Fund to Fight Aids, Tuberculosis, and Malaria, in which role he led that organization’s investigations and audit functions. In his new role, Diagne will report directly to Bank President David Malpass rather than to an intermediary Managing Director as previously had been the case.
We also direct our readers to the Bank’s updated Sanctions Board Law Digest published in December 2019. The Sanctions Board acts as the ultimate adjudicator of sanctions sought by INT, and the Digest helpfully summarizes key takeaways from the Board’s decisions since the last update several years ago. The Digest also details the current sanctions framework, and is a valuable resource for practitioners and companies that become ensnared in the World Bank sanctions process.
Those who have dealt with INT and enforcement personnel at other MDBs may feel that the enforcers follow a fairly rigid approach in meting out sanctions. Reflecting a possible change at least one key MDB, the Head of the Office of Anti-Corruption and Integrity of the Asian Development Bank (“ADB”) wrote in responses published in the Global Investigations Review in May 2020 that the ADB’s enforcement approach to corporate and individual sanctions is becoming more flexible. He noted that the Bank’s use of debarments has decreased as its use of reprimands, cautions, and conditional-non-debarments has increased. A more nuanced assessment provides opportunity for a more proportionate sanction, which is particularly important given the significant collateral consequences that can attend an MDB debarment.
In other MDB news, the Inter-American Development Bank (“IDB”), which provides financing in Latin America, has been active on the enforcement front. In April 2020, the IDB debarred Andrade Gutierrez Engenharia S.A. (“AGE”), one of Brazil’s largest private conglomerates, and 11 of its subsidiaries for three years, in connection with alleged bribes to secure four IDB-financed contracts. The IDB credited AGE’s substantial cooperation in the case, which no doubt reflects a strategic decision by the company to address the issue holistically—two years earlier, AGE paid more than $381 million in fines to Brazilian authorities to resolve this and other conduct.
Europe
United Kingdom
SFO Publishes Guidance for Evaluating Compliance Programs
On January 17, 2020, the UK Serious Fraud Office (“SFO”) published its guidance to SFO prosecutors and investigators on how to assess corporate compliance programs. The guidance, “Evaluating a Compliance Programme,” forms part of the SFO’s Operational Handbook and states that the SFO should consider the state of an organization’s compliance program at the time of the offense and when making a charging decision (which could impact whether a deferred prosecution agreement is suitable), as well as consider how the program may change going forward. The guidance recommends framing the assessment around the six principles that the Ministry of Justice published in 2011 to guide commercial organizations in developing adequate anti-bribery compliance programs (covered in our 2011 Mid-Year FCPA Update). The January 2020 guidance provides additional insight into how the SFO will consider corporate compliance programs, and therefore is a valuable resource for organizations subject to the jurisdiction of the SFO.
Two Unaoil Defendants Convicted; Hung Jury for Third
As covered in our 2019 Year-End FCPA Update, the Monaco-based oil services company Unaoil has been at the center of a developing cluster of anti-corruption enforcement that has grown to include enforcement activity on both sides of the Atlantic. January 2020 saw the start of the London trial of three individuals—Ziad Akle, Paul Bond, and Stephen Whiteley—who were accused of conspiring to bribe an Iraqi official alongside Iraqi business partner Basil Al Jarah, who himself pleaded guilty in the UK in July 2019. Due to COVID-19, the trio’s trial was suspended for several weeks, but was one of the first criminal trials to resume in May 2020.
On July 13, 2020, guilty verdicts were announced as to Akle and Whiteley. The jury convicted the two of conspiracy to provide corrupt payments associated with the payment of over $500,000 in bribes to secure a $55 million contract from the Iraqi South Oil Company. Akle, Whiteley, and Al Jarah are due to be sentenced on July 22 and 23, 2020. The jury was unable to reach a decision as to Bond, and the SFO has indicated that it will seek a retrial. The jury actually returned the verdicts on in June, but the verdicts were held in quarantine until July 13 to give the SFO time to assess its future action.
Nigeria’s Lawsuit against Royal Dutch Shell and Eni Dismissed
In May 2020, the High Court dismissed a $1 billion lawsuit brought by the Nigerian government against oil and gas giants Royal Dutch Shell Plc and Eni S.p.A., alleging that payments made by the companies to acquire an oil exploration license were used to personally enrich Nigerian officials. The High Court found that it did not have jurisdiction over the case because the same allegations and participants feature in ongoing criminal proceedings in Italy. As covered in our 2017 Year-End FCPA Update, in December 2017 the Milan Public Prosecutor’s Office brought criminal proceedings against the companies as well as several individuals, with the Nigerian government later joining as a civil claimant in March 2018. The Italian proceedings are ongoing.
France
Sanctions Committee Renders Second Decision
On February 7, 2020, the French Anticorruption Agency’s (“AFA”) Sanctions Committee (discussed in our separate client alert, “New French Anti-Corruption Regime”) rendered its second decision. Although it did not impose a fine, despite a recommendation to do so from the AFA, the Committee compelled French mineral extraction company Imerys to update its code of conduct and accounting procedures following an investigation that identified certain potential controls weaknesses.
Ministry of Justice Issues Directive to Combat International Bribery
On June 2, 2020, the French Minister of Justice issued a directive to prosecutors regarding “criminal policy in the fight against international corruption.” Among other things, the directive calls on the French National Financial Prosecutor (“PNF”) to redouble its efforts to detect international corruption by paying special attention to “domestic and foreign press articles” that may justify in-depth investigations. Taking a page from U.S. anti-corruption efforts, the directive also encourages companies to self-disclose potential incidents of bribery to the PNF.
Germany
As reported in our 2019 Year-End German Law Update and 2019 Year-End FCPA Update, the German government is pursuing a corporate criminal liability bill that could significantly change the practice of German criminal law. Unlike in the United States and many other countries, German criminal law does not currently provide for corporate criminal liability. Corporations may be fined only for administrative offenses.
A recently updated draft of the legislation includes modest changes from the 2019 draft discussed in our previous updates. The 2020 version of the proposed bill:
- Applies only to entities conducting an economic business (i.e., does not apply to nonprofits);
- Abandons the corporate “death penalty” (i.e., liquidation of the company); and
- Clarifies that when an internal investigation significantly contributes to resolving the matter, courts “should” provide mitigation credit when calculating a fine or determining a sentence, rather than more discretionary language in the prior version, but to qualify for mitigation credit, internal investigations must satisfy certain criteria, including being conducted by counsel distinct from the corporation’s defense counsel.
Overall, the core of the bill remains unchanged, and it still includes several potentially challenging issues, such as the separate representation point noted above and the effect that cooperating with German authorities may have on privilege in foreign jurisdictions. On June 16, 2020, the Federal Government adopted the draft bill and has introduced it to Parliament.
Russia
Over the past year, arrests have been made in connection with a long-running graft scheme involving officials from Russia’s FSB (the successor to the KGB), Deposit Insurance Agency (Russia’s version of the FDIC), and other government agencies. As alleged, the scheme was perpetrated in the context of bank supervision: in exchange for allowing banks to continue operating, representatives of security services allegedly demanded payments from bank owners; and, when government regulators took over privately owned banks, the same representatives of security services and other government officials illicitly extracted cash from the distressed banks. After one former FSB colonel was arrested and charged with fraud and bribery for his involvement in the scheme, Russian criminal authorities reportedly seized more than $100 million in his possession. Another former government official (formerly of the Deposit Insurance Agency), who is alleged to have aided the former FSB colonel, fled Russia before he could be apprehended.
In addition, as we anticipated in our 2019 Year-End FCPA Update, since January 1, 2020, information about administrative anti-corruption convictions of entities, as well as entry in the public register of corporate corruption offenders, has been included in their registration profiles in the public procurement register of suppliers participating in public procurement, meaning this information is available to prospective purchasers. In the first half of 2020, 57 new entities were added to the public register of corporate corruption offenders, bringing the total number of entities in the register to just over 1,000. In a June 17, 2020 speech before the upper chamber of the Russian parliament, Russia’s Prosecutor General emphasized the importance of using the register in conducting due diligence on suppliers to prevent corruption in public procurement.
Ukraine
On May 13, 2020, the Ukrainian parliament passed into law a bill that prohibits the return of nationalized banks to their former private owners. The effect of this legislation is to prevent international aid money from being siphoned from nationalized banks into the pockets of oligarchs. This move was critical in Ukraine securing a $5.5 billion loan from the IMF to help with pandemic relief, but is seen as an affront to Ihor Kolomoisky, the prominent co-founder of PrivatBank viewed by many as a large supporter of President’s Zelensky’s election campaign. In addition, a new law that offers protections to whistleblowers and includes rewards for tips helpful to investigations of corruption cases involving a certain level of damages to the state entered into effect earlier this year.
Balancing against these positive developments on the anti-corruption front, in March 2020, the parliament fired several government officials who were viewed internationally as reformers. The dismissals included the country’s top prosecutor as well as the well-regarded heads of the customs and tax bureaus. President Zelensky in particular argued that the top prosecutor had not produced any tangible results, whereas the latter claimed that President Zelensky’s party dismissed him for proposing significant anti-corruption reforms. This comes amid perceptions that President Zelensky’s fight against corruption is stalling: a February 2020 survey indicated that many Ukrainians believe that the president is failing in his fight against corruption.
Uzbekistan
In March 2020, Uzbekistan’s Supreme Court announced that Gulnara Karimova, the daughter of Uzbekistan’s former president, was found guilty of extortion, racketeering, money laundering, and embezzlement of up to $1.6 billion of public funds, and sentenced to 13 years in prison. According to the Court, Karimova illegally purchased shares in two state-owned cement companies at artificially low prices before selling those shares abroad for a large profit. Karimova previously was convicted of tax evasion, extortion, and embezzlement in 2015, and of fraud, customs and currency violations, and money laundering in 2017, and sentenced to house arrest. After violating the terms of her house arrest, Karimova was jailed in March 2019. According to local law, the new sentence will apply from August 2015 and run concurrently with the previous sentences, effectively resulting in an additional eight years of prison time. As reported in our 2019 Year-End FCPA Update, in 2019 DOJ charged Karimova with money laundering conspiracy as part of the alleged bribery scheme in the Uzbek telecommunications sector that has ensnared several companies and individuals, and efforts reportedly are underway in several countries, including France, Latvia, Russia, and Switzerland, to recover Karimova’s allegedly ill-gotten assets.
The Americas
Brazil
As Operation Car Wash enters its seventh year and launches its 71st phase, Brazil faces a new corruption scandal. In April 2020, Brazil’s justice minister and former Operation Car Wash judge, Sérgio Moro, resigned after accusing President Jair Bolsonaro of seeking to exercise improper control over the federal police. The public prosecutor has opened a criminal investigation into Moro’s claims that Bolsonaro fired the federal police chief, Mauricio Valeixo, in order to install a chief who would permit him to interfere in corruption investigations, and that the President previously sought to replace the head of police in Rio de Janeiro, where two of his sons are under investigation.
In January 2020, Brazil’s new Anticrime Law took effect. The law, which establishes protections for whistleblowers reporting public corruption and fraud, requires the government to establish an ombudsman office to facilitate whistleblower reports, shields whistleblowers from civil or criminal liability in connection with their reports, and offers financial incentives for whistleblowers who provide information that leads to the recovery of proceeds from crimes against the public administration. Although Brazil previously had employed leniency agreements to encourage whistleblower complaints (including throughout Operation Car Wash), the new law formalizes protections and financial incentives for whistleblowing relating to public corruption, fraud in government procurement and contracts, and other crimes or misconduct that harm the public interest.
Also beginning in January 2020, companies seeking to contract with the Federal District for more than R$5 million must adopt compliance policies and procedures. The new regulations bring the Federal District in line with several other Brazilian states requiring companies to report on their compliance programs when seeking government contracts. And beginning in October 2020, companies must comply with enhanced Brazilian Central Bank regulations relating to suspicious transaction reporting, money laundering, and terrorist financing.
Ecuador
Former president Rafael Correa, living in Belgium since leaving office in 2017, was found guilty of bribery and corruption and sentenced in absentia to eight years imprisonment in April. Correa was one of 20 people, including his former vice president, accused of accepting $8 million in bribes in exchange for government contracts between 2012 and 2016. Correa has expressed interest in running for office in 2021, but the court’s sentence bars him from political office for 25 years.
Mexico
In February 2020, former Petróleos Mexicanos (“PEMEX”) CEO Emilio Lozoya Austin was arrested in Spain on a Mexican warrant for tax fraud and bribery charges associated with his alleged acceptance of more than $10 million in bribes from Odebrecht. A Spanish court agreed to extradite Lozoya to Mexico in early July. Additionally, in June 2020, Mexican prosecutors announced an investigation into a former project coordinator at PEMEX’s refinement subsidiary, Mario Alberto García Duarte, regarding alleged unexplained increases in wealth while managing contract awards to Odebrecht.
Asia
China
In January 2020, during the Fourth Plenary Session of the 19th Central Commission for Discipline Inspection, President Xi Jinping reiterated that enforcement authorities will continue to focus on combating corruption in state-owned enterprises, the financial sector, and in the healthcare sector. In the months that followed, anti-graft agencies announced several investigations, arrests, and convictions of high-level government officials at state-owned enterprises and international organizations. In May, Zhao Zhengyong, Shaanxi province’s former governor and Communist Party secretary, pleaded guilty to accepting more than $100 million in bribes, and related to the same case anti-graft authorities expelled He Jiuchang, the former chairman of one of the country’s largest oil refiners, from the Communist Party. And in January, Meng Hongwei, the former president of Interpol, was sentenced to 13 1/2 years in prison for accepting more than $2 million in bribe payments.
We also continue to see enforcement actions against high-profile executives in the financial sector. In February, the former head of state-owned China Development Bank, Hu Huaibang, was arrested for accepting bribes. In May, Chinese authorities indicted Sun Deshun, the former president of a Chinese bank, on charges of accepting bribe payments in exchange for using his position to benefit others. Authorities also have commenced multiple enforcement actions against executives of Shandong-based Hengfeng Bank following the government’s approval of a $14.21 billion bailout of the distressed lender; in December, former chairman Jiang Xiyun was sentenced to death for corruption, accepting bribes, and embezzling $108 million of the bank’s stock. Xiyun’s successor, Cai Guohua, is currently on trial for similar charges after allegedly amassing significant amounts in illicit gains during his tenure at the bank.
More recently, in June, several central government agencies issued a joint notice regarding the government’s 2020 enforcement priorities in the healthcare sector. The notice indicates that, by year-end, enforcement authorities will begin to target corruption related to academic conferences, donations, and research collaborations between doctors and pharmaceutical companies.
India
In March 2020, the newly appointed federal anti-corruption watchdog “Lokpal” opened its doors to receiving complaints with the announcement of formal procedures for complaint submissions. The Lokpal has since received 1,426 complaints, of which it claims it has disposed of 1,200. The precise nature of these cases remains unclear, as does detailed information regarding the Lokpal’s actions in response to allegations of corruption.
In February, India’s Ministry of Corporate Affairs introduced the Companies (Auditor’s Report) Order, 2020, which is intended to strengthen the corporate governance and audit framework for Indian companies. Per the order, statutory auditors must, in the course of drafting the auditor’s annual report, disclose whether they have considered any whistleblower complaints received by the company. Companies must therefore disclose details of whistleblower complaints to their statutory auditors. The order does not provide further detail on the meaning of “whistleblower complaint,” or on the level of detail companies must disclose. The order initially applied to audits of the 2019-2020 financial year; however, due to the COVID-19 pandemic, implementation has been deferred to the 2020-2021 financial year.
In May, the State Vigilance and Anti-Corruption Bureau of Himachal Pradesh arrested the state’s senior health official, Ajay Kumar Gupta, after an audio recording surfaced purportedly showing Gupta asking a supplier of COVID-19 protective equipment for a bribe. The state’s leader of the ruling Bharatiya Janata Party resigned in the days following the arrest, and opposition lawmakers in the state have called for a high-level impartial probe into allegations that party leaders may be involved in the misconduct.
Indonesia
As reported in our 2019 Year-End FCPA Update, Indonesia passed legislation in late 2019 that significantly weakened the powers of the country’s anti-corruption agency, the Corruption Eradication Commission (“KPK”). In the months that have followed, anti-corruption watchdogs have cited a decrease in investigations, arrests, and enforcement actions by the KPK as evidence of the agency’s weakened powers and independence under the new law.
Now in light of the COVID-19 pandemic, lawmakers and activists have called on the KPK to take action against corruption related to the public health emergency. In response, the KPK has created a task force to oversee certain sectors of the government’s response that are perceived to be prone to corruption, and KPK Chairman Firli Bahuri warned in April that those found guilty of corruption relating to the country’s COVID-19 relief funds may face the death penalty.
Malaysia
In February 2020, AirAsia CEO Tony Fernandes and AirAsia Group Chairman Kamarudin Meranun stepped down from their positions following bribery allegations that surfaced in connection with Airbus’s multi-billion dollar global bribery settlement with French, U.S., and UK authorities discussed above. The allegations relate to Airbus’s alleged $50 million sponsorship of a Formula 1 racing team jointly owned by two unnamed AirAsia executives. Malaysia’s Anti-Corruption Commission (“MACC”) has opened an investigation into the allegations and is reportedly working with UK authorities to gather evidence. Both executives have denied wrongdoing, and AirAsia has denied making any purchase decisions on the basis of the Airbus sponsorship.
The collapse of Malaysia’s ruling political coalition in February and the swearing in of new Prime Minister Muhyiddin Yassin has sown doubt over the government’s pursuit of enforcement actions against high-level officials in connection with the 1MDB scandal. The new government is allied with former Prime Minister Najib Razak’s political party, United Malays National Organisation (“UMNO”), and drew sharp criticism over prosecutors’ decision in May to enter into a settlement with Najib’s stepson, Riza Aziz, for his role in the scandal. Under the settlement, Riza agreed to return overseas assets worth more than $107 million; he had been charged with laundering $248 million from the government investment fund. High-profile enforcement actions against Najib and his wife, Rosmah Mansor, continue to progress. As reported in our 2019 Year-End FCPA Update, Najib faces 42 charges of corruption, abuse of power, and money laundering in five criminal cases linked to the 1MDB scandal. Prosecutors concluded the first trial against Najib in early June, and a verdict is expected in July.
South Korea
In December 2019 and January 2020, the National Assembly passed two amendments to The Act on Preventing Bribery of Foreign Public Officials in International Business Transactions. The amendments give enforcement authorities the power to conduct wiretaps in foreign bribery cases, and raise the maximum penalties for individuals and corporations convicted of foreign bribery.
In February 2020, former Korean President Lee Myung-Bak was sentenced by the Seoul High Court to a jail term of 17 years, plus more than $15 million in fines and forfeiture, associated with his March 2018 arrest on multiple charges of corruption, including bribery, embezzlement, tax evasion, and abuse of power as discussed in our 2018 Mid-Year FCPA Update.
Vietnam
In late December 2019, a Vietnamese court sentenced former Minister of Information and Communications Nguyen Bac Son to life in prison after finding him guilty of accepting $3 million in bribes from state telecommunications firm MobiFone Telecommunications Corporation in connection with MobiFone’s acquisition of digital television service Audio Visual Global JSC (“AVG”). At the trial, former MobiFone chairman Le Nam Tra confessed to accepting bribe payments from AVG, and to making payments to Son to gain his support for the acquisition. An appeals court upheld Son’s life sentence in April. The case, which also resulted in the convictions of several MobiFone and AVG executives, is part of a broader anti-corruption campaign spearheaded by Vietnamese President and Communist Party General Secretary Nguyen Phu Trong.
Middle East and Africa
Ghana
Part of the allegations related to Airbus’s multibillion dollar resolution, discussed above, involve a campaign to sell the C-295 military vehicle to the Ghanaian government. This allegedly involved payments made through various consultants to influence “Individual 1” to use his political weight in the country to secure purchase of several C-295 aircraft. A special prosecutor in Ghana has announced a formal investigation into the matter, and public reports suggest that “Individual 1” could be John Dramani Mahama, who served as Vice President of Ghana from 2009 to 2012 and as President when John Atta Mills passed away in July 2012. Mahama denies wrongdoing.
Israel
On May 24, 2020, Israeli Prime Minister Benjamin Netanyahu made his first in-court appearance in the landmark corruption trial stemming from three separate allegations of wrongdoing made by the Israeli Attorney General’s office (covered most recently in our 2019 Year-End FCPA Update). Proceedings currently are adjourned until July, but due to the current pandemic and other extenuating circumstances, the prosecution may not begin its case-in-chief for many months. Netanyahu maintains that he is innocent.
The following Gibson Dunn lawyers assisted in preparing this client update: F. Joseph Warin, John Chesley, Christopher Sullivan, Richard Grime, Patrick Stokes, Reuben Aguirre, Claire Aristide, Claire Chapla, Austin Duenas, Andreas Dürr, Helen Elmer, Julie Hamilton, Daniel Harris, Patricia Herold, Amanda Kenner, Derek Kraft, Kate Lee, Nicole Lee, Taonga Leslie, Allison Lewis, Lora MacDonald, Andrei Malikov, Megan Meagher, Jesse Melman, Steve Melrose, Caroline Monroy, Erin Morgan, Alexander Moss, Jaclyn Neely, Virginia Newman, Ning Ning, Nick Parker, Liesel Schapira, Emily Seo, Jason Smith, Pedro Soto, Laura Sturges, Karthik Ashwin Thiagarajan, Grace Webster, Oliver Welch, Ralf van Ermingen-Marbach, Jeffrey Vides, Oleh Vretsona, Alina Wattenberg, Dillon Westfall, Brian Yeh, 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 110 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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London
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Charlie Falconer (+44 20 7071 4270, [email protected])
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Paris
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Munich
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Hong Kong
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São Paulo
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As oil and gas companies enter the second quarterly reporting cycle in the current industry downturn, please join members of Gibson Dunn’s Securities Regulation and Corporate Governance, Capital Markets, Oil and Gas and Restructuring Practice Groups as they provide both practical advice and information about the latest legal developments. Specifically, the panelists discuss:
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PANELISTS:
Hillary H. Holmes is a partner in the Houston office of Gibson, Dunn & Crutcher, Co-Chair of the firm’s Capital Markets practice group, and a member of the firm’s Securities Regulation and Corporate Governance, Oil and Gas, M&A and Private Equity practice groups. Ms. Holmes advises companies in all sectors of the energy industry on long-term and strategic capital planning, obligations and issues under U.S. federal securities laws and corporate governance matters. Band 1 ranked by Chambers USA, she represents issuers, underwriters, MLPs, private investors, management teams and private equity firms in all forms of capital markets transactions. Ms. Holmes also advises boards of directors, special committees and financial advisors in M&A transactions and situations involving complex issues and conflicts of interest.
Ronald Mueller is a partner in the Washington, D.C. office of Gibson Dunn and a founding member of the firm’s Securities Regulation and Corporate Governance practice group. He advises public companies on a broad range of SEC disclosure and regulatory matters, executive and equity-based compensation issues, and corporate governance and compliance issues and practices. He advises some of the largest U.S. public companies on SEC reporting, proxy disclosures and proxy contests, shareholder engagement and shareholder proposals, and insider trading and Section 16 reporting and compliance. He also advises on many corporate governance matters, including governing documents for companies, boards, and board committees, such as bylaws and committee charters, director independence and related party transaction issues, and corporate social responsibility. Mr. Mueller worked as legal counsel to Commissioner Fleischman at the SEC.
Michael A. Rosenthal is a partner in the New York office of Gibson, Dunn & Crutcher and Co-Chair of Gibson Dunn’s Business Restructuring and Reorganization Practice Group. Mr. Rosenthal has extensive experience in reorganizing distressed businesses and related corporate reorganization and debt restructuring matters. He has represented complex, financially distressed companies, both in out-of-court restructurings and in pre-packaged, pre-negotiated and freefall chapter 11 cases, acquirors of distressed assets and investors in distressed businesses. Mr. Rosenthal’s representations have spanned a variety of business sectors, including investment banking, private equity, energy, retail, shipping, manufacturing, real estate, engineering, construction, medical, airlines, media, telecommunications and banking.
Gerry Spedale is a partner in the Houston office of Gibson, Dunn & Crutcher and a member of the firm’s M&A, Capital Markets, Oi and Gas, Securities Regulation and Corporate Governance and Private Equity practice groups. He has a broad corporate practice, advising on mergers and acquisitions, joint ventures, capital markets transactions and corporate governance. He has extensive experience advising public companies, private companies, investment banks and private equity groups actively engaging or investing in the energy industry. His over 20 years of experience covers a broad range of the energy industry, including upstream, midstream, downstream, oilfield services and utilities.
In this Tax Quarterly Update, we have outlined various UK and international tax developments which we consider to be of greatest significance since our April Tax Quarterly Update.
It will not have escaped the attention of readers that we find ourselves in very interesting times from a tax policy perspective. We are facing a confluence of factors – including the fall-out from the COVID-19 coronavirus pandemic, and continuing efforts to formulate a workable set of principles to tax the digital economy and counteract base erosion and profit shifting – which will reshape the domestic and international tax landscape for many.
Against the backdrop of economic recession, tax policy is and will continue to be at the forefront of measures to both stimulate growth and generate additional tax revenue.
On 8 July 2020, Chancellor Rishi Sunak delivered his Summer Economic Update with the primary aim of securing the UK’s economic recovery from the COVID-19 coronavirus pandemic. The tax announcements included:
- a reduction in the rate of VAT from 20% to 5% from 15 July 2020 to 12 January 2021 for certain supplies in the hospitality and tourism sectors (notably supplies of food and non-alcoholic beverages sold for on-premises consumption, hot takeaway food and hot takeaway non-alcoholic beverages, and sleeping accommodation in hotels or similar establishments); and
- a stamp duty land tax (“SDLT”) ‘holiday’ from 8 July 2020 until 31 March 2021, implemented by increasing the 0% threshold for ‘standard’ purchases of residential property by individuals from £125,000 to £500,000 (meaning that the first £500,000 of the price paid for such purchases will be free from SDLT). There are then corresponding changes to the additional residential rates for individuals buying additional dwellings and companies buying dwellings: here, the first £500,000 will now be subject to SDLT at 3%.
At the same time, we expect to see a continued focus in the UK and elsewhere on international tax measures, in particular BEPS 2.0 including the Organization for Economic Co-operation and Development’s Pillar One and Pillar Two proposals. This promises to be particularly interesting in the wider context of political and global trade implications (as to which, please see further below).
From a UK perspective, we also look forward to seeing draft legislation for inclusion in Finance Bill 2021, which the Government has now confirmed for publication on Tuesday 21 July 2020.
We hope that you find this alert useful. Please do not hesitate to contact us with any questions or requests for further information.
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Table of Contents
A. Delay to DAC 6 reporting deadlines
- BEPS 2.0
- EU proposal for new tax on large corporates
- Possible resurrection of EU FTT
- DAC 7 update & OECD publication of the “Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy”
C. UK digital services tax update
D. Key COVID-19 coronavirus tax update
- New timelines for tax policy consultations
- OECD analysis of tax treaties and the impact of the COVID-19 coronavirus pandemic
- Transfer pricing implications of COVID-19 coronavirus pandemic
- Tax status for EMI options granted to furloughed employees
- Crisis-driven changes to trading activities
- Fowler v. HMRC
- Investec Asset Finance v. HMRC
- Centrica Overseas Holdings Ltd v. HMRC
- Cape Industrial Services Limited & Robert Wiseman and Sons Limited v. HMRC
- Vermilion Holdings Ltd v. HMRC
- Blackrock Investments Management (UK) Ltd v. United Kingdom
- HMRC v. Wellcome Trust Ltd
- Sonaecom SGPS SA v. Autoridade Tributária e Aduaneira
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A. Delay to DAC 6 reporting deadlines
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As a result of the COVID-19 coronavirus pandemic, the EU has provided member states with the option to postpone the deadlines for reporting and exchanging information under DAC 6 for up to six months. Depending on the evolution of the pandemic, the possibility exists (subject to strict conditions) for the Council to extend the deferral period once, for a maximum of a further three months. The UK government has announced it will amend its own regulations to give effect to the deferral on the full six month basis. |
The EU Council Directive 2011/16 (as amended), known as DAC 6, requires intermediaries (or failing which, taxpayers) to report, and tax authorities to exchange, information regarding cross-border tax arrangements, which meet one or more specified characteristics (hallmarks), and which concern at least one EU country.
The EU Commission had, as a result of the COVID-19 coronavirus pandemic, initially proposed to defer the reporting deadlines under DAC 6 by three months, whilst affirming that the initial date of application of the rules will remain 1 July 2020. However, political agreement has now been reached by member states to postpone the filing deadlines on an optional basis by up to six months, as follows:
- for reporting “historical” cross-border arrangements (i.e. arrangements in relation to which the first step was implemented in the period from 25 June 2018 to 30 June 2020), the filing deadline would be 28 February 2021;
the operation of “30 day” reporting deadlines will be postponed from 1 July 2020 to 1 January 2021, with the effect that:
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- arrangements that become reportable in the period between 1 July 2020 and 31 December 2020 will need to be reported by 31 January 2021;
- arrangements that become reportable after 31 December 2020 will need to be reported within 30 days;
- for marketable arrangements, the first periodic report would need to be reported by the intermediary by 30 April 2021; and
- the automatic exchange of information reported between member states will be postponed from 31 October 2020 to 30 April 2021.
Although approval to defer DAC 6 has been granted by the European Council, this will not automatically change the current reporting dates within member states. This will only occur if the relevant governments positively choose to implement the deferral (for example Germany has opted not to).
Depending on the evolution of the pandemic, the amended Directive also provides for the possibility, under strict conditions, for the Council to extend the deferral period once again, for a maximum of three further months.
The UK government for its part has implemented legislation to give effect to the above deferral on the full six month basis[1]. The amended regulations take effect from 30 July 2020 and HMRC has advised no action will be taken for non-reporting during the period between 1 July and the date the amended regulations come into force.
Taxpayers and intermediaries may also draw further comfort from updated HMRC guidance[2] in respect of late filing for DAC 6 purposes, which states that difficulties arising as a result of COVID-19 coronavirus may constitute a reasonable excuse to late filing of DAC 6 reports, provided that reports and filings are made without unreasonable delay after those difficulties are resolved.
It is worth clarifying that the proposals do not affect the substantive requirements of DAC 6, only the deadlines for reporting obligations. In particular, the date on which DAC 6 will start to apply will remain 1 July 2020. Nevertheless, in member states where the deferral is approved, it will be a welcome, albeit short, relief to both taxpayers and intermediaries who should have additional time to prepare reports and put reporting procedures and staff training in place.
It is somewhat regrettable that implementation of the deferral is optional, thereby creating a risk of divergence between member states. In particular, reportable cross-border arrangements that involve multiple member states, only some of which have adopted the deferral, may (subject to the relevant country-specific conditions being met) trigger a reporting obligation with a deadline that does not reflect the deferral period adopted by other relevant member state(s). As a result, the rejection of the deferral by one member state may operate to undermine the deferral offered by others. We understand that a number of stakeholders are encouraging the European Commission to make deferral mandatory and to provide more harmonised guidance.
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In mid-June 2020, the US stepped back from negotiations relating to Pillar One of the most recent Base Erosion & Profit Shifting project (“BEPS 2.0”) of the Organisation for Economic Co-operation and Development (“OECD”) . The OECD affirmed their commitment to seeking a consensus-based solution to Pillars One and Two by the end of 2020, with the next meeting scheduled for October 2020. The EU Commission president has made it clear that if the OECD fail to secure a global accord, the EU would pursue an EU digital tax, as well as a possible minimum tax on multi-national entities (“MNEs”). |
In January 2020, 137 countries and jurisdictions (the OECD’s Inclusive Framework on BEPS 2.0, the “IF”) agreed to move ahead with a two-pillar negotiation to address the tax challenges of digitalisation and to continue working toward an agreement by the end of 2020. A detailed discussion on the various facets of the Pillar One and Pillar Two proposals is set out in our previous update on digital service tax proposals. However, for current purposes, broadly:
- Pillar One proposes changes to traditional “nexus” rules for allocating taxing rights, enabling a portion of the revenue generated from digital services to be taxed in the jurisdiction in which they are used; and
- Pillar Two (also referred to as the “Global Anti-Base Erosion” or “GloBE” proposal) relates to the possible introduction of a “global minimum tax rate”, by creating new taxing rights for jurisdictions whose taxpayers do business with low-tax jurisdictions (e.g. withholding tax rights in respect of payments to the latter).
At the January meeting, the members of IF (including the US) agreed to approach Pillar One on the basis of the broad architectural framework developed by the OECD Secretariat to facilitate progress towards consensus (the so-called “Unified Approach”). However, many outstanding issues are yet to be agreed, including the US’s controversial “safe harbour” proposal (suggesting that taxpayers could decide whether to “opt-in” to be taxed in accordance with Pillar One as currently envisaged or an alternative (as yet unspecified) basis for taxation). In respect of Pillar Two, the IF members acknowledged that significant progress had been made towards achieving the technical design of the proposal for a global minimum tax rate, but that more work needed to be done. The next OECD BEPS 2.0 meeting has been postponed by three months to October 2020. It is intended that, at this meeting, the key policy features of the solution to Pillars One and Two will be agreed.
However, in a significant twist, in June 2020, the United States stepped away from Pillar One negotiations. The US Trade Representative, Robert Lighthizer, informed the US House Ways and Means Committee that this was on the basis that the OECD “[was] not making headway” on a multilateral deal on digital services taxation. Steven Mnuchin, the US Treasury Secretary, confirmed this to a group of European finance ministers, stating that the US was taking a step back from the discussions, with talks to resume “later this year”. Regarding the GloBE proposal under Pillar Two, the Secretary noted that the US “fully supports bringing those negotiations to a successful conclusion this year.”
The head of the OECD’s tax policy centre, Pascal Saint-Amans, said that the OECD and member countries would continue to collaborate on a workable draft deal, though he admitted that it was less likely that a deal would be achieved this year. Saint-Amans also floated the possibility that Pillar One and Pillar Two could be separated so that delays in agreeing Pillar One would not prevent the conclusion of the well advanced negotiations on Pillar Two.
In the absence of direct US involvement in the BEPS 2.0 process, it is difficult to see how meaningful progress could be made in respect of Pillar One at the October meeting (or more generally). For example, one of the thorniest Pillar One issues is the risk of double taxation; if the jurisdictions in which affected companies are currently taxed do not yield taxing rights, the result is likely to be double taxation. As the taxpayers most likely to be impacted by the reforms are US technology companies, US engagement is critical to finding a workable multilateral solution.
The lack of US direct involvement and the consequential low probability of a multilateral solution means that more countries are likely to adopt unilateral measures on digital taxation, thereby resulting in a fragmented and less effective international approach. The OECD Secretary-General noted that, in the absence of a multilateral solution, unilateral national measures would inevitably be implemented and these would result in increased tax disputes and heightened trade tensions.
Even though the Pillar Two negotiations are more advanced than the Pillar One talks, there are a number of pertinent issues that have yet to be agreed upon. For example, there are ongoing discussions on the proposed inclusion of some form of investment funds carve out from any GloBE tax. This is on the basis that most investment funds are structured as tax neutral investment pooling vehicles. The absence of a targeted exemption of this kind could result in potential double taxation of income received by the fund. Ultimately, the concern with such an outcome is that the differing (and adverse) tax treatment for indirect investment (over direct investment) would dissuade investors from using fund vehicles. Inherently, this would limit (and potentially eliminate) the economic benefits that funds can offer to investors via access to global markets and a diversified portfolio.
Should OECD discussions fail to produce consensus, the EU has made clear that it is willing to fill the void with its own proposals. The acting director-general of the Directorate-General for Taxation and Customs Union, Benjamin Angel, confirmed that any European solution to digital taxation will be based on the progress made in those discussions though, the European solution will not take the form of a digital services tax. In June 2020, the EU’s economy commissioner, Paolo Gentiloni, confirmed that (in the absence of Pillar Two progress) the EU could also propose its own minimum tax on MNEs in 2021.
However, the path to implementing measures at an EU level is not necessarily more straightforward:
- Such measures would generally require the unanimous agreement of the EU Council under the special legislative procedure.
- While many EU jurisdictions would, on balance, benefit from increased revenue following the introduction of a European solution to digital taxation, some jurisdictions (notably Ireland, Sweden and Denmark) opposed (and effectively blocked) the EU’s digital services tax proposal in 2019. In addition, the US has been robust in its position that states implementing such measures will suffer economic counter-measures. For example, the US has reiterated its intention to impose trade sanctions on French products in response to the proposed French digital services tax. The French tax was suspended at the beginning of this year in exchange for a postponement of the retaliatory tariffs threatened by the US, which have recently been delayed until 6 January 2021. Some member states may therefore feel that the potential economic risks outweigh the gains.
- Given difficulties with the requirement for unanimous consent generally, there have been renewed calls for the decision-making process on taxation policy to be simplified. These have included calls (i) to move to “qualified majority voting” (“QMV”) which requires the approval of only a specified majority of the member states and EU population, and (ii) to move away from the special legislative procedure to the ordinary legislative procedure for tax law, under which the European Parliament has a decisive, rather than a consulting, role. However, any such changes would (ironically) require unanimous adoption by the Council and no opposition from any national Parliament. Whilst there is strong support for such changes in certain quarters, the reality is that they are unlikely to win the necessary unanimous support any time soon.
- There are some (very limited) existing EU legislative mechanisms which enable tax provisions to be adopted in the absence of unanimity. These include the so-called “enhanced cooperation procedure” (which allows proposals to take effect in the absence of unanimous member state consent, provided they have the support of at least nine member states and only take effect in those member states) and limited use of QMV (which currently can only be used under the ordinary legislative procedure to eliminate distortions of competition due to different tax rules in member states). However, these have rarely been used in respect of tax legislation and not with much success. For instance, the enhanced cooperation procedure was proposed in 2013 for the planned EU financial transaction tax (discussed further below).
It would appear, therefore, that the best route to a coherent international solution is for the EU to put its weight behind the BEPS 2.0 process and attempt to draw the US back to the negotiating table. Given the potential double tax risks posed by the failure of the OECD project, they may find unlikely allies in the US technology companies whose interests are likely to be best served by such US re-engagement.
II. EU proposal for new tax on large corporates
| The EU appears keen to carve a more direct role for itself in the field of taxation. In May 2020, the EU’s multi-year budget contemplated the introduction of new taxes, the proceeds of which would be added to EU, rather than member state, coffers. Proposals (which have not yet been tabled for member state approval) include a new tax on large corporates “who benefit from the single market”. |
In May 2020, the EU Commission published an outline of its next “multi-annual financial framework” for 2021-2027 (effectively, a budget for the EU for the relevant time period).[3] Typically, the framework garners attention for its proposed expenditure, with income predominately derived from member state contributions and a portion of the VAT collected by member states. On this occasion, however, the EU Commission projected that approximately 30% of its income for the period would come from new sources. In addition to income from the expansion of carbon trading, its seems that the EU intends to generate revenue from levying new taxes, the proceeds of which would be directed toward its own (rather than member states’) reserves.
One of the most significant revenue sources (estimated at €10 billion annually) was a proposed tax on companies operating in the single market with an annual revenue of €750 million or more, to be charged at a rate of 0.1% of annual revenue and to take effect around 2024. EU Commissioner Johannes Hahn noted that, due to their access to the single market, such firms have “a much bigger customer base, a seamless supply chain, in many countries the same currency and a uniform regulation. Companies save costs by simply using the single market, [such that] a modest levy for this access is…a fair deal”. However, subsequent statements from an EU spokesperson about the tax (which would be used to fund the EU’s COVID-19 coronavirus stimulus package) indicated that its form, and the rate at which it would be charged, are far from settled: “Depending on the design, whether a lump sum or a fee proportional to firms’ size, or a portion of a tax on profits, around 10 billion euros could be raised without excessively weighing on any individual firm. Ten billion euros is less than 0.2% of the turnover generated by the EU operations of those large companies.” Although the tax was discussed at the EU Council summit on 19 June 2020, no further statements have been made about its design, and no concrete proposals have been tabled for member state approval.
Despite the potential significance of the announcement, high level questions remain over the feasibility of the tax – or indeed any form of direct EU taxation – in the coming years. As discussed above, any EU-wide proposal would (based on current rules) require the unanimous backing of the member states, and the extent of member state support for the idea is not yet clear. They will be alive to the economic and fiscal difficulties to be faced at a national level in the wake of the COVID-19 coronavirus pandemic, and may be wary of additional taxes which risk impeding the recovery of national businesses, without the corresponding injection to national finances. Negotiations between member states are expected to continue over the summer.
III. Possible resurrection of European financial transaction tax
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Germany has announced that securing a pan-European financial transaction tax is one of its priorities during its current tenure as president of the EU Council. |
In April 2020, the introduction of a European financial transaction tax was included on the German agenda for its six-month term as president of the EU Council (from July to December 2020).
Proposals for an EU-wide financial transaction tax were first mooted in 2011. The original proposal was for a tax levied on each party to certain dealings in financial instruments, such as transfers of debt and equity interests (at a rate of 0.1% of the consideration), and the entry into or modification of derivative contracts (at a rate of 0.01% of the notional amount). The tax was originally intended to apply in all member states, but only gained the support of 11 (Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain, although Estonia subsequently withdrew its support). In 2013, these states moved forward using the so-called “enhanced cooperation procedure” (described above). Nevertheless, the proposal stalled, and certain states (such as Italy and France) acted unilaterally to introduce national equivalents.
In December 2019, the proposal for an FTT was revived, when the German Finance Minister published draft legislation for its imposition by participating member states. Broadly, this iteration would apply (at a minimum rate of 0.2%) to the acquisition of shares in entities established in participating member states with a market capitalisation of €1 billion or more, if the shares were admitted to trading on a trading venue. The revised proposal included an exemption for (amongst other things) market-making activities, an optional exemption for pension funds and proposals for “mutualisation” (which guarantees participating member states a certain portion of the proceeds). Again, it did not proceed further.
It is understood that Germany’s vision for the form of an FTT is largely unchanged from last year’s proposals. However, it is unclear whether the other participating member states will agree with its scope and design, such that a consensus can be reached. In particular, statements following the EU Council meeting on 19 June suggested that the FTT was discussed as a possible means of funding the EU’s COVID-19 coronavirus recovery package (which may cut across proposed mutualisation mechanics).
Given fiscal pressures in the wake of the COVID-19 coronavirus pandemic, the proposal may perhaps receive a warmer airing on the third attempt – although member states may equally be conscious of the risk such a tax would pose to liquidity in the capital markets (at a time when it is very much needed). However the EU chooses to proceed, it is unlikely that any proposal would progress to implementation before the end of the Brexit transitional period (currently 1 January 2021). Given London’s role in European and global capital markets, the UK government is highly unlikely to have any appetite for equivalent measures.
IV. DAC 7 update & OECD publication of the “Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy”
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After a short delay, the EU Commission published a proposal for a Directive amending Council Directive 2011/16/EU (referred to as “DAC 7”) on 15 July 2020. The proposal enhances the member states’ information gathering and sharing powers in respect of income generated via digital platforms. Meanwhile, on 3 July 2020, the OECD published model rules which jurisdictions could adopt to facilitate greater transparency in the reporting of such income and the exchange of that information between jurisdictions. |
The EU Commission published a proposal for a Directive amending the European Directive on Administrative Cooperation in the Field of Taxation, Council Directive 2011/16/EU (referred to as DAC 7) on 15 July 2020. This follows completion of the public consultation on DAC 7 in April 2020. The proposal was published along with a number of other tax policy initiatives that the EU Commission intends to implement between now and 2024.
By way of reminder, the aim of DAC 7 is the fair taxation of income generated via digital platforms and it will, unlike previous versions of DAC, address VAT (in addition to direct taxes). The main problems that DAC 7 is set to tackle are:
- tax revenue losses due to some taxpayers failing to report what they earn via online platforms; and
- the weaknesses in how national tax administrations cooperate to tackle tax evasion and the inefficiencies in data exploitation.
Specifically, DAC 7 is intended to bolster the information-gathering powers of tax administrations regarding income generated via the digital platform economy, to provide for better cooperation across tax administrations, and keep business compliance costs to a minimum by providing a common EU reporting standard.
Simultaneously, the OECD has been working on a global tax reporting framework as part of a wider strategy (a) to address the tax challenges arising from the digitalisation of the economy and (b) as a basis for increasing tax transparency to develop a stable environment for the growth of the digital economy. Following the publication of the OECD 2019 report on ‘The Sharing and Gig Economy: Effective Taxation of Platform Sellers’anda consultation process earlier this year, the OECD published, on 3 July 2020, Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy (the “Model Rules”). The Model Rules seek to assist tax authorities collecting information on the income realised by those offering accommodation, transport and personal services through “platforms” (namely any software, including a website and phone applications) and to report that information to the tax authorities. In particular, (given the international nature of such platforms) the aim is to facilitate the standardisation of rules across jurisdictions.
C. UK digital services tax update
At the time of writing, UK members of Parliament have, as part of amendment papers to the Finance Bill 2019-21, proposed additions to the UK digital services tax regime. These include:
- requiring all corporate groups subject to the UK digital services tax to publish a group tax strategy, including a country-by-country report (which would include information about the group’s global activities, profits and taxes); and
- requiring the UK government to report on the digital services tax annually (which would include an annual assessment of the effect of the regime on UK tax revenues).
The UK introduced its current “country-by-country” reporting regime in 2016, to implement Action 13 of the wider OECD BEPS project and to provide a more standardised approach towards consistent high-level transfer pricing assessments. Broadly the regime requires UK-headed MNEs, or UK sub-groups of MNEs, to make annual reports to HMRC in certain circumstances, showing revenues, profits, taxes paid and certain other measures of economic activity in the jurisdictions in which they operate.[4] The above proposals for a “country-by-country” report to be prepared by those within the scope of the UK digital services tax would subject such taxpayers to the same reporting obligations. This will likely increase the compliance burden for large MNEs within the scope of the UK digital services tax, but with an otherwise limited UK presence. It is also not clear at this stage what role each of the categories of information required under such reports will play in recovering UK digital services tax and the grounds under which those reports may be shared with other tax authorities or used in scrutinising wider transfer pricing arrangements of MNEs.
The UK digital services tax is still intended to be withdrawn once the OECD reaches consensus on a common approach to update the international corporate tax rules to tax the digital economy. The above proposals may (in part) have been in response to recent action by US Treasury Secretary, Steve Mnuchin, who in June 2020 reportedly wrote to the UK, France, Italy and Spain pulling the US back from wider discussions at the OECD level (see further Section B).
For our latest Client Alert on The UK Digital Services Tax click here.
D. Key COVID-19 coronavirus tax update
I. New timelines for tax policy consultations
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HM Treasury and HMRC have set out revised timelines for the conclusion of open tax consultations, and the publication of other tax policy documents, in light of the COVID-19 coronavirus pandemic, in order to allow more time for stakeholders to provide feedback. |
The UK government has extended deadlines in respect of ten consultations and calls for evidence currently underway by three months. Jesse Norman, Financial Secretary to the
HM Treasury, said that “[c]onsulting on tax policy is crucial to good tax law. And a good consultation makes sure everyone with an interest in the subject has an opportunity to have their say …. That is why [HMRC is] extending these deadlines”.
The table below sets out the revised deadlines for some of the most significant consultations:
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Consultation |
Revised deadline |
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Tax treatment of asset holding companies in alternative fund structures |
19 August 2020 |
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Notification of uncertain tax treatment by large businesses |
27 August 2020 |
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Consultation on the taxation impacts arising from the withdrawal of LIBOR |
28 August 2020 |
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Call for evidence: raising standards in the tax market | |
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Tackling Construction Industry Scheme abuse | |
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Preventing abuse of the R&D tax relief for SMEs: second consultation | |
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Hybrid and other mismatches |
29 August 2020 |
In light of the COVID-19 coronavirus, the UK government has also delayed the publication of a number of tax policy documents announced at Budget 2020, including the following:
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Policy document |
Revised publication date |
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A summary of responses to the call for evidence on the operation of insurance premium tax |
Spring/summer |
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HMRC’s civil information powers | |
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A summary of responses to the non-UK resident SDLT surcharge consultation | |
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The call for evidence for the fundamental review of business rates | |
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The consultation on the design of a carbon emissions tax | |
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The response to the call for evidence on simplification of the VAT partial exemption and capital goods scheme |
Autumn |
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The call for evidence on disguised remuneration schemes |
Unspecified |
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The review of the UK funds regime |
Details regarding the publication date of the UK government’s first review of VAT charged on fund management fees (which was announced at Budget 2020 as part of a wider review to ensure the ongoing competitiveness and sustainability of the UK regime as it applies to the financial services sector) are also yet to be provided.
It is unclear whether the delays noted above will impact the implementation date of some of the proposals. However, given the current environment, the extensions will be welcomed by many stakeholders who are facing disruption due to the COVID-19 coronavirus and who would like the opportunity to submit their views.
II. OECD analysis of tax treaties and the impact of the COVID-19 coronavirus pandemic
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The OECD has published an analysis (the “OECD Analysis”) of how the OECD Model Convention (the “OECD Model”) may be interpreted in the context of changing circumstances arising from the COVID-19 crisis, such as the dislocation of people and activities while travel restrictions remain in place. Issues addressed include: (i) the potential creation of permanent establishments; (ii) the residence status of a company (place of effective management); (iii) cross-border workers; and (iv) potential changes to the residence status of individuals. |
The COVID-19 coronavirus pandemic has forced governments to restrict travel and implement strict quarantine requirements and it is clear that such measures raise difficult tax issues. The OECD Analysis outlines the OECD’s view as to how the OECD Model can be interpreted and applied to certain tax treaty issues arising in the context of the pandemic.
- Concerns related to the creation of permanent establishments: As a result of government restrictions, many cross-border workers are unable to physically perform their duties in their country of employment. The OECD Analysis addresses the concern that employees working from home in jurisdictions which differ from their usual place of work will create a permanent establishment (“PE”) for their employer in the former jurisdiction. According to the OECD Analysis, the temporary change of the location where employees exercise their employment because of the COVID-19 coronavirus pandemic, such as working from home, should not create new PEs for the employers pursuant to Article 5 of the OECD Model. The OECD Analysis states that a PE must have a “certain degree of permanency and be at the disposal of an enterprise in order for that place to be considered a fixed place of business through which the business of that enterprise is wholly or partly carried on”. Under Article 5(5) of the OECD Model, the activities of an individual temporarily working from home for a non-resident employer could also give rise to a dependent agent PE. The OECD Analysis states that an evaluation is required as to whether the employee performs these activities in a “habitual” way and concludes that an employee’s or agent’s activity in a particular country is unlikely to be regarded as habitual if he or she is only working at home in that country for a short period because of force majeure and/or government directives extraordinarily impacting his or her normal routine. HMRC published guidance in the International Tax Manual stating that the “existing legislation and guidance in relation to permanent establishments already provides flexibility to deal with changes in business activities necessitated by the response to the COVID-19 pandemic”.
- Concerns related to the residence status of a company (place of effective management): The OECD Analysis notes that the COVID-19 coronavirus pandemic may raise concerns about a potential change in the “place of effective management” of a company as a result of a relocation, or inability to travel, of chief executive officers or other senior executives. The concern is that such a change may alter a company’s residence under relevant domestic laws and affect the country where a company is regarded as a resident for tax treaty purposes. In the UK for example (where, for non-UK incorporated entities, the domestic test looks to the location of central management and control), HMRC has noted that it would not consider that a company will necessarily become resident in the UK because a few board meetings are held in the UK, or because some decisions are taken in the UK over a short period of time. It is not clear what HMRC will consider a short period of time, particularly as the duration of the travel restrictions is unknown. In a treaty context (where the test typically looks to the place of effective management), according to the OECD Analysis, it is unlikely that the COVID-19 coronavirus pandemic will create any changes to a company’s residence status under a tax treaty. A temporary change in the location of the chief executive officers and other senior executives is an extraordinary circumstance because of the pandemic and such change of location should not trigger a change in residency. However, the OECD Analysis does note that if, due to domestic legislation, a dual residency issue appears, it would be resolved under tie-breaker rules set out in the relevant double tax treaty.
- Concerns related to cross border workers: Article 15 of the OECD Model governs the taxation of employment income, allocating the right to tax between the employee’s state of residence and the place where their employment is performed. The OECD Analysis states that the starting point for the rule in Article 15 is that salaries, wages and other similar remuneration are taxable only in the person’s state of residence (the “resident state”) unless the “employment is exercised” in the other state (the “source state”).
- The COVID-19 coronavirus pandemic has resulted in some governments subsidising the income of employees. The OECD Analysis notes that the income received by cross-border employees in these circumstances should be attributable to the country where the employee would otherwise have worked in the absence of the crisis. In most cases, this will be the place the employee used to work prior to the COVID-19 coronavirus pandemic. The OECD Analysis states that where the source state has a taxing right, the resident state must relieve double taxation under Article 23 of the OECD Model, either by exempting the income or by taxing it and giving a credit for the source state tax.
- The OECD Analysis acknowledges that compliance difficulties may arise whereby the country where employment was formerly exercised loses its taxing right following the application of Article 15. For example, employers may have withholding obligations which are no longer underpinned by a substantive taxing right.In these circumstances, such obligations would have to be suspended and a way found to refund the tax to employees. Employees may also have new and enhanced liabilities in the other state.
HMRC has not yet indicated their approach to the above employment and source taxation issues as a result of the travel restrictions imposed in response to the COVID-19 coronavirus pandemic.
Concerns related to a change to the residence status of individuals: The final issue addressed by the OECD Analysis relates to the impact that unforeseen changes of location may have on the tax residency status of individuals. The UK statutory residence test, for example, considers the number of days an individual spends in the UK in determining their tax residency (amongst other factors). HMRC has confirmed that certain situations arising from the COVID-19 coronavirus pandemic would constitute “exceptional circumstances”, such that up to 60 days’ presence in the UK can be ignored for this purpose, while the government has also stated that in this context, special treatment will be afforded to those in the UK to assist with the response to the pandemic.[5]
- The OECD Analysis states that “it is unlikely that the COVID-19 situation will affect the treaty residence position”. However, two scenarios are noted whereby an individual’s residence status may change as a result of the COVID-19 coronavirus pandemic:
- A person is temporarily away from their home and gets stranded in the host country by reason of the COVID-19 coronavirus pandemic and attains domestic law residence there.
- A person is working in a country (the “current home country”) and has acquired residence status there, but they temporarily return to their “previous home country” because of the COVID-19 coronavirus pandemic. They may either never have lost their status as resident of their previous home country under its domestic legislation, or they may regain residence status on their return.
The OECD Analysis provides that in both scenarios, if a tax treaty is available, the treaty tie-breaker rules should solve the issue and keep the person a resident of the country he/she was before the COVID-19 coronavirus pandemic.
The application of relevant domestic law requirements will, in the first instance, determine how these issues are addressed in practice. Although there are exceptions (e.g. Ireland, Australia), many jurisdictions have yet to (and indeed may not) provide guidance to taxpayers as to how they intend to deal with the above issues as a matter of domestic law.
Recourse to treaties may operate as a second line of defence for taxpayers, should such guidance/relief not be forthcoming at a domestic level. The OECD Analysis, which broadly favours interpretations which maintain the status quo regarding allocation of taxing rights, may therefore provide some comfort to taxpayers. However, the availability of treaty relief is, in any particular case, likely to depend on the specific terms of the relevant tax treaty. Unfortunately, uncertainties are unlikely to be resolved in the short term, as issues arising now are likely to take a number of years to play out. Indeed, the pandemic may well prove to be the first true test of the more robust treaty dispute resolution mechanics (such as mandatory arbitration) which have been adopted in recent years.
III. Transfer pricing implications of COVID-19 coronavirus pandemic
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Changing circumstances caused by the COVID-19 coronavirus pandemic may lead taxpayers to question whether their existing transfer pricing policies should be revisited (and if so, how). On 3 June 2020, the OECD issued a questionnaire to companies and trade associations, asking for their input on transfer pricing issues experienced in this context (the “OECD Questionnaire”). The OECD’s intention is to use the information provided in response to guide discussions on how to best respond to such issues. Nevertheless, the OECD has noted that its existing transfer pricing guidelines continue to represent internationally agreed principles for the application of the arm’s length principle. These will, accordingly, continue to be key reference points for taxpayers in the current circumstances. |
Factors informing many MNEs’ transfer pricing policies are likely to have been impacted by the COVID-19 coronavirus pandemic. These include:
- the possibility of significant people functions being located in unexpected jurisdictions;
- possible changes to supply chains in response to shortages and travel restrictions;
- possible changes in business strategies in response to changes in consumer demands;
- the emergence of new commercial risks and changes to the significance of existing risks;
- volatility in financial markets and potential liquidity shortages; and
- a general economic downturn.
Such developments may raise questions as to whether (and if so, to what extent) these changes should be reflected in amendments to existing transfer pricing policies.
The OECD Questionnaire asked MNEs and trade associations to provide information on difficulties faced as a result of the COVID-19 coronavirus pandemic, including:
| 1. | The issues (a) causing greatest concern, together with practical examples, (b) least clearly addressed in the existing OECD guidelines, and (c) most likely to give rise to disputes with tax administrations; | |
| 2. | The types and sources of information that should be utilised as the basis for comparability analyses for 2020; and | |
| 3. | Examples of supplementary transfer pricing guidance published by national tax administrations that address any of the identified issues. |
While the OECD Questionnaire may result in the publication of additional guidance, given that transfer pricing must be assessed at the time arrangements are entered into, it may well be too late to assist MNEs in pricing arrangements being entered into presently. For the moment at least, taxpayers will have to be guided by the OECD’s existing transfer pricing guidelines – the 2017 OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the “2017 Guidelines”) and the 2020 OECD Transfer Pricing Guidelines on Financial Transactions (the “2020 Guidelines”). In this respect, the OECD has made clear that “irrespective of the underlying economic circumstances, [the 2017 Guidelines] provide guidance for the application of the arm’s length principle of which Article 9 [of the OECD Model Tax Convention] is the authoritative statement”.
The 2017 Guidelines address whether, and if so how transfer pricing analysis should take account of future events that were unpredictable at the time of the testing, stating that this question should be resolved by reference to “what independent enterprises would have done in comparable circumstances to take account of the valuation uncertainty in the pricing of the transaction”. One of the practical difficulties with such comparative analysis, however, is that the COVID-19 coronavirus pandemic presents a unique economic challenge, its impact has varied across industries and as between MNEs and there may be little (if any) comparative data on what independent enterprises would do (and are doing). The 2017 Guidelines accept that information on contemporaneous transactions may be limited, and state that in some cases taxpayers can demonstrate that they have made “reasonable efforts to comply with the arm’s length principle … based on information that was reasonably available to them at that point”. It further clarifies that differences that materially affect the accuracy of the comparison will need to be adjusted to the extent that such adjustments are reasonable and improve comparability.[6] It will therefore be more important than ever for taxpayers to document all decisions taken in relation to their transfer pricing policies.
Moreover, MNEs will have to consider whether existing transactions should be reviewed to reflect the current circumstances. Given financial market volatility and the likelihood of fewer debt transactions, this is particularly true for financial transactions. The 2020 Guidelines provide that “a transfer pricing analysis with regard to the possibilities of the borrower or the lender to renegotiate the terms of the loan to benefit from better conditions will be informed by the options realistically available to both the borrower and the lender”. If MNEs consider that there is scope to renegotiate more favorable terms on intra-group loans or delay interest payments on a temporary basis, the decision should be contemporaneously documentedand reflect that the options realistically available to both parties have been considered.
Losses may also need to be considered. The 2017 Guidelines provides that “associated enterprises, like independent enterprises, can sustain genuine losses“ due to unfavorable economic conditions. However, an independent enterprise would not be able to “tolerate losses that continue indefinitely”.[7] The COVID-19 coronavirus pandemic would certainly constitute an unfavorable economic condition. However, that alone does not justify the legitimacy and allocation of intra-group losses – the relevant test would be the consideration of what unrelated parties in the same or similar circumstances would do. This would depend on the particular facts and circumstance and would require benchmarking support – which is not readily available in the context of the pandemic. In addition to analysing the allocation of losses, MNEs are required to perform impairment testing to ensure that an entity’s assets are not carried at more than their recoverable amount. COVID-19 coronavirus has resulted in a significant change in circumstances and as such MNEs may be subject to an unscheduled impairment test which may have a consequent impact on transfer pricing policies.
Broadly, within MNEs, employees who take on more important group functions are often required to relocate to locations where the entrepreneurial group companies or companies with the most important functions are based or where there is a more beneficial regulatory environment. Certain of these employees may have returned to their home jurisdictions as a result of the lockdown restrictions. A functional and factual analysis must be undertaken to determine whether key entrepreneurial risk taking (“KERT”) functions are performed by employees in their home jurisdiction and if any profits arising from such KERT functions should be attributable to the home jurisdiction. In such circumstances, it is unlikely that the relevant group company for which such employees perform KERT functions would change (i.e. that they would begin to perform such functions for a different group company in their home jurisdiction). If so, this should not change the functional profile of the group companies and the MNE’s transfer pricing model should not be impacted.
While the current circumstances are certainly novel, the existing OECD transfer pricing guidance is general in its nature, and was intended to be capable of application in a variety of different contexts. As such, the key message for MNEs when considering whether to make any changes to transfer pricing policies as a result of the COVID-19 coronavirus pandemic is to some extent familiar – MNEs should document all decisions and create a contemporaneous audit file and ensure that their transfer pricing policies align with business strategies. This will be helpful to support any review of transfer pricing policies by tax authorities in the future.
IV. Tax status for EMI options granted to furloughed employees
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There had been a concern that furloughing employees may result in the loss of Enterprise Management Incentive (“EMI”) tax benefits. The UK government has tabled amendments to Finance Bill 2020-21 which provide that an employee having been furloughed will not result in a “disqualifying event” for the purposes of obtaining tax relief under the EMI scheme. |
Broadly, EMI options are special tax-efficient options which can be granted by certain qualifying companies without giving rise to income tax or National Insurance Contribution (“NICs”) charges on either grant or exercise (and only a charge to capital gains tax on the subsequent disposal of the shares acquired on exercise). However, to obtain these tax benefits, the relevant legislation under the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”) provides that recipients of EMI options must spend:
- at least 25 hours each week (the 25 hours requirement), or
- if less, 75% of their working time (the 75% requirement),
working as an employee for the company granting the option (or one of its qualifying subsidiaries).
There was a concern that a furloughed employee may no longer satisfy the above working time requirement. Given that furloughed employees are expressly prohibited from working for their employer for the furlough period, any such employees holding EMI options would not be able to meet the 25 hours (or 75% of working time) test. Such failure is a “disqualifying event”, meaning that any EMI options held would have lost their tax advantaged status after 90 days.
The UK government has announced that it will introduce a time limited exception for participants in EMI schemes who are not able to meet the relevant working time requirements as a result of the COVID-19 coronavirus pandemic. The proposed measure (to be included in Finance Bill 2020-21) will ensure that failure of furloughed employees to meet the current statutory working time requirement will not result in a “disqualifying event”, such that any EMI options held by furloughed employees will not lose their tax advantaged status. The proposed relief will apply from 19 March 2020 and will come to an end on 5 April 2021. If required, the relief may be extended by regulation for a further 12 months to 5 April 2022.
The proposals are welcome, and will ensure that furloughed employees holding EMI options will not be prejudiced by circumstances outside their control. It remains to be seen whether similar reliefs may be granted to other taxpayers at risk of having their tax status altered by reason of recent intervening circumstances (such as employees unexpectedly carrying out employment tasks in the UK by reason of travel restrictions, and their employees).
On 8 June, HMRC also issued a bulletin in respect of other tax advantaged share schemes:
- Save as you Earn: Where participants are unable to contribute because they are furloughed, HMRC will extend the payment holiday terms. In addition, payments of Coronavirus Job Retention Scheme (“CJRS”) to employees furloughed during the coronavirus pandemic can constitute a salary and SAYE contributions can continue to be deducted from CJRS payments.
- Share Incentive Plan: Payments of CJRS to employees furloughed during the COVID-19 coronavirus pandemic can constitute a salary and contributions can continue to be deducted from CJRS payments.
- Company Share Option Plans: HMRC will accept that where employees and full-time directors, now furloughed because of the COVID-19 coronavirus pandemic, have been granted options before the pandemic, such options will continue to constitute qualifying options on the basis the recipients were full-time directors and qualifying employees at the time of grant.
V. Crisis-driven changes to trading activities
| HMRC has updated its guidance on crisis-driven changes to trading activities for businesses. This includes guidance on temporary breaks in trading activity and the treatment of income and expenditure. The guidance confirms that a temporary pause in trading activity in response to the pandemic will not result in taxpayers being treated as having ceased to trade, provided an intention to trade remains. |
In response to the COVID-19 coronavirus pandemic, many businesses have had to adapt their activities. For example, businesses may have had to change product lines in response to changing consumer demands and/ or production difficulties, or temporarily close altogether.
Changes in trading activities, or the cessation of a trade, can cause issues from a tax perspective. For example, a trading company that has incurred losses may not be able to carry such losses forward to offset against future profits if it is found to have ceased one trade and to have started a new trade. In this respect, case law establishes that the line between making changes to an existing trade, and beginning a new one, can be fine. In one case, a taxpayer who had incurred losses brewing and selling beer adapted its business model so that the beer was instead produced by a third party, but sold by the taxpayer in the same manner. To the customers there had been no change. However, the courts found that the taxpayer had ceased one trade, and began another.[8]
Case law over the years has shown that the intention of the taxpayer and the extent and length of period during which the trade was dormant (if relevant) are critical factors in determining whether a trade continued or ceased. In one instance, due to the economic conditions at the time, a taxpayer was unable to obtain new business, despite having made persistent attempts. After more than five years some new business was obtained and the business returned to profitability. The taxpayer successfully claimed that the trade had continued throughout the five years because of attempts to seek business throughout.[9]
In light of the limitations imposed by the COVID-19 coronavirus pandemic, taxpayers will welcome recently published guidance in HMRC’s Business Income Manual on the implications of crisis-driven changes to trading activities. The guidance sets out how HMRC will apply legislation and case law in situations where a crisis (such as the COVID-19 coronavirus) has resulted in changes to normal trading activities.
The guidance confirms the following:
- A business that starts carrying on a new activity that is broadly similar to its existing trade should not be treated as commencing a separate trade. This of course will depend on the facts of each case. The guidance includes an example of a restaurant business starting to manufacture gowns and face masks, which should be treated as the commencement of a separate trade. This is compared to a business that already manufactures clothing articles starting to manufacture gowns and face masks using the same staff and premises, which should be treated as an extension of the same trade.
- Temporary breaks in trading activity will not constitute a permanent cessation of a trade for tax purposes, provided the trading activities that resume are the same as, or similar to, those before the break. For example, if a business closed its doors to customers, or otherwise ceased trading during the COVID-19 coronavirus lockdown period, but intended to continue trading after restrictions were lifted, then the trade should not be treated as having ceased. Any income and expenses relating to the gap in trading will be taken account of in the calculation of trade profits or losses (subject to the usual tax rules and case law). Where, in the end, that business does not resume, there will be a cessation of trade.
- If businesses have received donations of money to meet revenue expenditure or supplement trading income, these will be treated as trading receipts.
- Some businesses may offer partial refunds to customers during the lockdown period (for example on gym memberships or other subscription-based services). Where these are included as trade expenses in the taxpayer’s GAAP-compliant accounts they should be deductible for tax purposes, assuming that the original receipt was included in the calculation of trade profits.
Clarifications in HMRC’s guidance are welcome at a time when many businesses are adapting to survive and have, consequently, had to consider whether there has been a change or cessation of trade for tax purposes. As always, however, each case will need to be considered on its own merits.
On a related note, HMRC has now acknowledged that, in exceptional circumstances, it will consider claims for repayments of corporation tax instalments paid earlier in the current accounting period, based on losses the taxpayer anticipates it will suffer later in the period.
However, HMRC’s guidance states that “it will be extremely difficult for a company to provide adequate evidence [to support such a claim for prepayment]. Even a drastic downturn in a company’s trading environment may reverse in the later part of the period, or its position could be mitigated by the recognition of an unexpected capital gain or revenue item. All claims for anticipated losses must be examined critically and in full. The evidence required to validate such a claim should be viewed strictly as there will often be considerable doubt about the company’s profit position in future months”. It is, therefore, recommended that companies keep a detailed record of the reasoning and assumptions behind any figures submitted (including, for example, board reports, any public statements and detailed management accounts).
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For our client alerts on the legal and business implications of the COVID-19 coronavirus pandemic (including a high level summary of tax developments), please see here.
I. Fowler v. HMRC[10]
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In Fowler, the Supreme Court examined the interaction between UK national law and the double tax treaty between the UK and South Africa. Specifically, the Supreme Court concluded that certain deeming provisions in UK domestic legislation, which recharacterised employment income as trading income, did not apply for the purposes of determining the allocation of taxing rights in respect of that income under the treaty. This was because the purpose of the deeming provisions was not to adjudicate between how the States regarded the interpretation of the treaty or to alter the meaning of its terms. |
Fowler involved an analysis of where income earned by an individual should be taxed pursuant to the terms of a double tax treaty. The taxpayer was resident in South Africa for tax purposes, but worked as a professional diver in the waters off the UK. The relevant UK tax law included special deeming provisions, which provided that income earned by divers in the course of their employment was to be treated as trading income, rather than income from employment.[11]
The double taxation treaty between the UK and South Africa (the “Treaty”) provides for employment income to be taxed in the place where it is earned (i.e. here, in the UK) pursuant to article 14, but for the trading profits of individuals to be taxed only where they are resident under article 7. The taxpayer claimed that the income he earned from diving engagements was to be characterised as trading income for the purposes of the Treaty as well, and hence that the Treaty prevented HMRC from taxing the income.
The Supreme Court noted that (a) under article 3(2) of the Treaty, any terms which are not defined in the Treaty itself, are to be given the meaning which they have in the tax law of the state seeking to recover tax (i.e. the UK) (noting that there is no definition of employment in the Treaty) and (b) the relevant UK legislation provided for divers to be treated as if they were self-employed traders for income tax purposes.
Reversing the Court of Appeal’s decision, the Supreme Court held that the taxation of the taxpayer’s remuneration as trading income for UK income tax purposes did not affect its classification under the Treaty. The court concluded that nothing in the Treaty “requires articles 7 and 14 to be applied to the fictional, deemed world which may be created by UK income tax legislation. Rather they are to be applied to the real world, unless the effect of article 3(2) of the Treaty is that a deeming provision alters the meaning which relevant terms of the Treaty would otherwise have”. In this case, the relevant UK deeming provisions were of limited effect, and in their absence, there would be “no doubt that article 14, not article 7, would apply to [the taxpayer’s] diving activities, at least on the…assumption that he really was an employee.”
This case highlights the potentially limited effect of domestic deeming provisions in an international context. Taxpayers who are taxed pursuant to deeming provisions and who are seeking to rely on double tax treaties will need to carefully analyse not only the terms of the relevant treaty, but also the intended ambit of the domestic deeming provisions, to determine whether the latter affects their position under the former.
II. Investec Asset Finance Plc v. HMRC[12]
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In Investec, the Court of Appeal found that capital contributions by taxpayers to leasing partnerships in which they held an interest were not deductible. This was because the contributions were made at least partly for the purposes of the leasing partnership’s trade, and accordingly not wholly and exclusively for taxpayers’ financial trades. The court also found that the “no double taxation principle” applied, so that profits of the trade which the taxpayers were deemed to carry on as partners in the leasing partnerships were not also brought into account as profits of their financial trades. |
The two taxpayers in Investec each carried on a financial trade, which included investing in partnership interests. They invested in a number of partnerships (which were each carrying on a leasing trade) and shortly thereafter made capital contributions to the partnerships, to enable the partnerships to repay debt and purchase assets. The taxpayers intended to realise the value of partnerships’ businesses (and hence their investment) shortly after acquisition via the sale of the partnerships’ assets.
A partnership is not itself generally subject to UK corporation tax. Rather, its partners are treated as carrying on the same notional business as the partnership, and the profits of the partnership (calculated at partnership level) are attributed to its partners, in proportion to their partnership interests. Here, for example, the taxpayers were carrying on a financial trade, and a separate notional leasing trade.
Deductible expenses
Expenses can only be deducted in calculating the profits of a trade subject to UK corporation tax if they are incurred wholly and exclusively for the purposes of that trade. Case law on the subject distinguishes, in particular, between expenses incurred for the purpose of benefitting the taxpayer, and expenses incurred for the purpose of benefitting the taxpayer’s trade (with only the latter being deductible). The expenditure can benefit the taxpayer and still be deductible, but that must not have been the taxpayer’s subjective purpose in making the outlay.
In Investec, the court acknowledged that the taxpayer’s ultimate objective in making the capital contributions was “to make some money quickly” (i.e. to realise profits in their financial trades). However, “this could best be achieved” via a structure pursuant to which the taxpayers acquired interests in the partnerships rather than direct interests in the assets purchased by the partnerships, which was “vital to the [taxpayer’s] tax planning…however uninterested the banking people at [the taxpayer] may have been in that aspect of the transactions”. The partnerships’ trades were separate from the taxpayers’ financial trades. Accordingly, the court agreed with the lower courts’ conclusion that “the capital contributions were made…at least partly for the purposes of [the partnerships’] businesses, which…[were] distinct from those carried on by [the taxpayers]. This was not an incidental consequence, it was central to the way in which the … transactions were carried out.”
The case highlights that taxpayers making material payments which are intended to be deductible should actively consider and record the purposes for which the payment is being made. In particular, an ultimate purpose of (indirectly) benefitting the taxpayer’s trade may not be sufficient if there is a parallel, more immediate, purpose. Care should particularly be taken in group structures, where payments made by a taxpayer to benefit its wider group are unlikely to meet the “wholly and exclusively” threshold unless such benefit is merely an incidental consequence of the taxpayer’s purpose of benefiting its own trade.
No double taxation principle
As a matter of UK law, the income of a partnership belongs to the partners as it arises (in proportion to profit-sharing arrangements agreed between the partners). However, for tax purposes, this basic principle is somewhat complicated by the “notional trade” fiction. Case law has, accordingly, produced the so-called “no double taxation” principle, to prevent income being taxed twice as both (a) income of the partner’s notional trade and (b) income from its own (actual) trade.
In Investec, the principle was applied to prevent the leasing profits taxed as part of the taxpayers’ notional trades from also being taxed as profits of the taxpayers’ financial trades arising from the holding of partnerships interests. The court found that it did not need to reach judgment on whether (as HMRC contended) the conclusion depended on whether the receipts of the taxpayers’ financial trade (deriving from the partnerships’ leasing activities) were income or repayments of capital. For present purposes, it was sufficient that the relevant profits had already been taxed as part of its notional trade.
Nevertheless, (although precluded from raising the argument on procedural grounds) it is clear that HMRC considers both (i) the nature of receipts from partnership interests in the hands of the partner and (ii) the manner in which partnership interests are accounted for by the partner, to be material to the application of the “no double taxation” principle. Specifically, HMRC seems to consider that the principle should not apply where (despite there being no difference in economics) the receipts take a different form in the hands of the partnership and the partner (e.g. where receipts are income for the partnership, but capital for the partners, or vice versa).
Investec shows the practical difficulties arising from the “notional trade” fiction. Indeed the court went so far as to note that HMRC’s application of these provisions was “still, to put it kindly, a work in progress”. However, on a practical level, the case also appears to highlight that partnerships will be subject to the same stumbling blocks encountered by companies. This means that, for UK tax purposes, the income or capital nature of a receipt will often be (or at least be taken by HMRC to be) significant. Therefore, the form in which funds are extracted from investments may well materially influence the tax outcome.
III. Centrica Overseas Holdings Ltd v. HMRC[13]
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In Centrica, the First-tier Tribunal (“FTT”) found that advisers’ fees incurred by the taxpayer investment company in relation to a potential disposal of the assets of a subsidiary were not deductible expenses of management for the taxpayer, because the decision to make the disposal was taken by the taxpayer’s parent, rather than the taxpayer. |
The taxpayer was an intermediate holding company in the group headed by Centrica plc (“Centrica”). Centrica made a strategic decision to sell the business of the taxpayer’s Dutch subsidiary, and incurred expenses of £3.8 million over the period 2009–2011 in relation to the sale. The expenditure was recharged to the taxpayer, who claimed that £2.5 million of it constituted expenses of management deductible from its profits for UK corporation tax purposes.
The FTT held that the expenditure did not qualify as expenses of management of the taxpayer’s investment business because the taxpayer did not itself carry out any of the management activities in relation to which it was incurred. This is because, based on the facts, it was Centrica that had made all of the decisions. The group’s legal, tax and M&A teams who worked on the sale did so to give effect to Centrica’s decision to sell the subsidiary’s businesses. To the extent that the taxpayer’s directors participated in managing the process, they did so in their group capacities as Head of Tax and General Counsel. There was no evidence to show that they had taken any relevant decisions in their capacity as directors of the taxpayer or that any of the advice the taxpayer had paid for was used by them (in their capacity as the taxpayer’s directors).
This case emphasises the difficulties that can arise where the operational structure of a group does not correspond precisely to the legal structure and – once again – highlights the importance of contemporaneous and accurate record keeping.
IV. Cape Industrial Services Limited & Robert Wiseman and Sons Limited v. HMRC[14]
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In Cape, the FTT relied on the Ramsay doctrine to defeat a “double-dip leasing scheme”, intended to enable a taxpayer to claim capital allowances in respect of amounts which were more than double its expenditure. In particular, the FTT emphasised that the doctrine continues to enable courts to apply legislation by reference to the composite effect of transactions, and to ignore legal steps which lack commercial purpose. |
In Cape, the taxpayer sought to claim capital allowance in excess of its actual expenditure. This involved a scheme pursuant to which (i) the taxpayer sold plant and machinery at market value to a bank, (ii) the bank granted the taxpayer a long funding finance lease in respect of those assets and (iii) the taxpayer granted the bank a put option pursuant to which the taxpayer could be required to purchase the assets at their predicted market value on termination of the lease. Four weeks after the lease was entered into, it was terminated and the put option was exercised. The taxpayer claimed capital allowances in respect of both (i) its entry into the lease (which was cancelled out by the disposal proceeds from the sale to the bank) and (ii) its purchase of the assets pursuant to the put option (which was not offset by any disposal proceeds, as the lease was terminated for nil consideration).
The FTT decided that, on a composite approach, the scheme did not involve any real disposal or acquisition of the assets by the taxpayer. Accordingly, the taxpayer was not entitled to allowances in respect of the purchase of the assets under the put option. The transactions comprised a set of steps specifically designed to operate as a composite whole and to give rise to the legal effects that would (usually) attract allowances but which lacked any enduring commercial consequences. Although the taxpayer had given up ownership of the assets, with all of the legal and commercial effects that entailed, it did so only to generate the desired allowances and for the bare minimum of time considered necessary to achieve that result.
The scheme in this case is of mainly historical interest because legislation was introduced in 2011 to counteract it. However, the case has wider value because of the insightful analysis of the current state of the Ramsay principle of statutory interpretation.
V. Vermilion Holdings Ltd v. HMRC[15]
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In Vermilion Holdings, the Upper Tribunal (“UT”) found that in considering whether an option was granted to a director “by reason of employment” for the purposes of UK employment-related securities rules, it was not necessary that the employment was the sole (or dominant) reason for granting the option; it was sufficient that employment was a condition of the option being granted. |
In Vermilion, an individual (“X”) provided consultancy services to Vermilion Holdings Ltd (“Vermilion”). Instead of paying fees for those services, Vermilion granted an option over its shares to X’s consultancy company in 2006 (the “2006 option”). Vermilion subsequently fell into financial distress and X was appointed as a director of Vermilion as part of a broader rescue funding proposal that included an injection of new capital. During the restructuring, the now valueless 2006 option was replaced with a new option in 2007, on amended terms including a precondition that X would be the option holder instead of X’s own consultancy company (the “2007 option”).
HMRC argued that the 2007 option was an employment-related securities option as it was granted by Vermilion as X’s employer (the holding of a directorship being treated as an employment under the relevant rules). The question at issue was whether the option to acquire the shares was made available “by reason of employment” and would be treated as an “employment-related securities option”.[16] If it was, the profit on exercise of the 2007 option would be chargeable to income tax and NICs. If not, the exercise would not be taxable, with only the gain on a subsequent disposal of the shares chargeable to capital gains tax.
The FTT had previously ruled that the 2007 option was not an employment related securities option, on the basis that (as a matter of fact) the share option was granted solely as a replacement to the 2006 option. The FTT acknowledged however that the option was “made available” by Vermilion, so that a particular provision, which deems an option granted to a person by a corporate employer to be made available by reason of employment,[17] was in point. Nevertheless, the FTT considered that the deeming provision led to an anomalous and unjust result, so its application should be limited in this instance.
The UT reversed this decision finding that the 2007 option was granted by reason of employment. It was held that the 2007 option had been granted to X both:
- to replace the 2006 option (which could no longer continue in existing form); and
- as part of a package of measures conditional on the employment of X.
In applying existing case law,[18] the UT held it was not necessary that the employment was the sole (or dominant) reason for granting the option; it was sufficient that employment was a condition of the option being granted. Consequently, the 2007 option was an employment-related securities option.
Although the background facts of the case are unique, the FTT had found, perhaps surprisingly, that the 2007 option was not granted by reason of employment. Despite not considering the FTT’s approach to limiting the scope of the above-mentioned deeming provision, the UT, in reversing that decision, provides clear insight and greater certainty for taxpayers in how these provisions operate.
VI. Blackrock Investment Management (UK) Limited v. United Kingdom[19]
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The ECJ Blackrock judgment will be of interest to fund managers managing a mixture of special investment funds and other funds, as it confirmed that a single supply of management services to a fund manager (making such mixed supplies) will be subject to a single rate of VAT and will not benefit from the management exemption from VAT. |
The ECJ judgment in Blackrock will be of relevance to fund managers providing mixed supplies when monitoring and planning their VAT position. The judgment confirmed the AG’s opinion (reported in our last Quarterly Client Alert) that a single supply of management services, provided by a third-party software platform for the benefit of a fund manager of both special investment funds (“SIFs”) and non-SIFs, cannot fall within the management exemption from VAT. The entire supply was subject to standard rate VAT in this case.
To briefly recap the facts of this case: the taxpayer (“Blackrock”) provided investment advisory services to both SIFs and non-SIFs. There is a specific VAT exemption for the management of SIFs whilst the management of non-SIFs is subject to standard rate VAT. A related US entity (“Blackrock US”) provided investment management services to Blackrock in the form of an AI platform known as “Aladdin”. As Blackrock US is not established in the UK, Blackrock had to account for VAT under the reverse charge mechanism. In doing so, Blackrock considered that the Aladdin services it used for the management of SIFs should be exempt from VAT under the fund management exemption. Blackrock therefore accounted only for the tax on services used in its management of non-SIFs, apportioning the value of those services in accordance with the value of the non-SIFs under management.
The ECJ ruled that the approach taken by Blackrock was incorrect on the basis that a uniform VAT rate applied to the Aladdin services. All parties agreed that the Aladdin services constituted a single supply and the ECJ considered that this supply could not be bifurcated.
The decision highlights three key points:
| 1. | There are limited circumstances in which a single supply of services may be viewed as distinct and separate services. The Aladdin services comprised of multiple elements which were found to be equally necessary to allow investment transactions to be made under good conditions. These elements were so closely linked that they formed, objectively, a single indivisible economic supply and so they could not be artificially separated. Consequently, the Aladdin services could not be regarded as specifically for the management of SIFs. | |
| 2. | The fact that Blackrock predominantly made VAT-able supplies to non-SIFs was not a determinative factor for identifying the applicable VAT rate. Had Blackrock predominantly made VAT exempt supplies to SIFs, for example, that would not have rendered the Aladdin services exempt from VAT. | |
| 3. | The management exemption from VAT cannot be applied by apportioning consideration for a single supply of services which are used for different purposes. The exemption is defined by the nature of the services provided and not with respect to the person supplying or receiving the services. |
The consequences for taxpayers will vary depending on their VAT position and the arrangements that they have in place with third party suppliers. The decision will be of particular interest to fund managers providing mixed supplies and receiving supplies used in the management of a variety of fund types. Practically, fund managers should consider if, from a VAT perspective, their third party supplier arrangements are accurately reflected in contractual arrangements. Any contractual separation that is not artificial could avoid inadvertently missing out on the management exemption.
VII. HMRC v. Wellcome Trust Ltd (Case C-459/19)
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The Advocate General in HMRC v Wellcome Trust has opined that services provided to a UK taxable person for the purposes of its non-economic activity were, for VAT purposes, provided in the place where the recipient belonged. |
In HMRC v Wellcome Trust, the taxpayer was a legal company which was the trustee of a charitable trust. The trust (acting through the taxpayer) predominantly earned income from the holding of investments, but also made a small number of taxable supplies, which required the taxpayer (in its capacity as trustee) to be registered for VAT purposes. The AG was asked to consider the place of supply of investment management services procured by the taxpayer from investment managers based outside the EU in respect of the above-mentioned investments.
The taxpayer’s argument was a technical one, based on the wording of Directive 2006/112/EC (the “VAT Directive”).
The Directive provides that VAT applies to “the supply of services for consideration within [an EU member state] by a taxable person acting as such”. A “taxable person” is, broadly, a person carrying on an economic activity. Although the taxpayer was (as a result of the few taxable supplies it made) a taxable person, the ECJ had previously specifically ruled that the taxpayer’s activity in holding investments was not an economic activity[20].
Generally, (subject to exceptions for specific supplies), the place of supply for a supply of services to:
- a “taxable person acting as such” is the place where the recipient is established; and
- a “non-taxable person” is the place where the supplier is established.
The Directive, however, also includes a deeming rule, which specifies that ‘[f]or the purpose of applying the rules concerning the place of supply of services (a) a taxable person who also carries out activities or transactions that are not considered to be taxable supplies….shall be regarded as a taxable person in respect of all services rendered to him and (b) a non-taxable legal person who is identified for VAT purposes shall be regarded as a taxable person”.
The taxpayer considered that, as the place of supply rule for supplies for taxable persons referred to a supply to the taxpayer “acting as such”, regard must be had to whether the taxpayer received the supply in its capacity as a taxable person or a non-taxable person (i.e. whether the supply received would be used in making taxable or non-taxable supplies). The above mentioned deeming provision did not deem a taxpayer carrying on mixed activities to always be “a taxpayer acting as a taxable person”, and so did not override this requirement.
The Advocate General (“AG”) disagreed, considering that the words “acting as such” could not be considered in isolation from the purpose of the place of supply rules. Ignoring express deviations, the rules were intended to set out exhaustive rules for determining the place of supply for supplies to a taxable person (except those intended for private use). The fact that the taxpayer was a non-taxable person in relation to supplies it made did not mean that, for this purpose, it was not a taxable person in relation to supplies it received. The reverse charge mechanism did, therefore, apply.
Looking at the wording of the place of supply rules in isolation, it is possible to have some sympathy with the taxpayer’s argument. However, the case highlights that purposive interpretation has as important a role to play in a VAT context as any other – particularly in the application and meaning of key legislation such as the VAT Directive. Ironically, it is VAT’s formulaic order which necessitates recourse to a purposive interpretation: in considering whether VAT applies to a supply, one of the first steps a taxpayer must take is to determine (by reference to the self-contained place of supply rules) where the supply is made. To adopt the taxpayer’s argument would have undermined this process, by drawing a category of supplies outside the scope of VAT without even needing to consider where the supplies have been made.
VIII. Sonaecom SGPS SA v. Autoridade Tributária e Aduaneira[21]
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The AG in Sonaecom opined that the actual, rather than the intended, use of taxable supplies is determinative when considering whether input VAT is deductible. |
The case concerned a holding company, Sonaecom SGPS SA (“Sonaecom”), that both passively held shares in certain companies and supplied taxable services to other companies, i.e. a “mixed holding company”. Sonaecom intended to acquire shares in a telecommunications provider and it incurred output VAT in relation to the proposed acquisition, namely (a) consultancy services in respect of a market study and (b) commission paid to an investment bank in respect of the issuance of bonds.
Sonaecom asserted that it planned to use the capital obtained from the bond issuance to acquire the target shares and following acquisition, to provide taxable technical support and management services to the target. However, the acquisition failed to materialise, and Sonaecom used the funds from the bond issuance to make a loan to the parent company of its group. The funds were subsequently repaid by the parent, and used by Sonaecom to purchase shares in other companies.
Generally, for a taxpayer to obtain full input VAT recovery in respect of costs it incurs, the costs must be directly attributable to the provision of taxable supplies by the taxpayer. In the case of a mixed holding company, a partial deduction may be available if the costs are not directly linked to the provision of services by the taxpayer, and are instead a part of its general overheads.
The question at issue here was whether the deductibility rules in the Sixth VAT Directive[22] permitted Sonaecom to deduct VAT paid in respect of the consultancy and bond placement services on the basis of the use to which the taxpayer intended (at the time of receipt) to put the supplies received (i.e. the provision of the taxable services to the target), rather than the subsequent actual use (i.e. the exempt supply of the loan to the parent). As regards the bond expenses, in the alternative, Sonaecom argued that the expenses were part of its general overheads and that the funds from the issuance had merely been “parked” with the parent, before being returned to enable Sonaecom to continue with its general activities.
Following previous judgments of the ECJ[23], the AG opined that (a) Sonaecom had the right to full input VAT deduction in respect of expenditure incurred for the acquisition of shares in a company to which it intended to supply taxable services and (b) that this right to deduct persists, even if the acquisition does not ultimately happen.
However, crucially, the AG also opined that, where the taxpayer’s intended use is superseded by a different actual use within the relevant tax period, the latter takes priority. There was a direct and immediate link between the bond expenses (the input transaction) and the exempt loan to the parent (the output transaction). The latter precluded Sonaecom from making an input VAT deduction in respect of the bond expenses incurred on the basis of the aborted intended use. Moreover, expenses can only be considered part of general overheads in the absence of a direct and immediate link with any supply; here, there was a direct and immediate link to the exempt supply of the loan.
The case illustrates that where costs are incurred for the purposes of making taxable supplies which do not materialise, taxable persons who want to maintain their right to deduct input VAT should carefully consider the VAT impact of any subsequent use to which the funds are put. A subsequent exempt output transaction (even if only intended to be temporary) may eliminate their right to deduct VAT.
[3]] See link here.
[5] As to which, see the letter of 9 April from the Chancellor to the Chair of the
Treasury Committee.
[6] OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations
2017, OECD
Publishing, Paris at paragraph 3.47
[7] Ibid, at paragraph 1.129
[11] Specifically, section 6(5) ITEPA provides that “employment income is not charged to tax [as employment income] if it is within the charge to tax under Part 2 of the Income Tax (Trading and Other Income) Act 2005 (trading income) by virtue of section 15 of that Act (divers and diving supervisors)”. Section 15(2) provides that “the performance of the duties of employment is instead treated for income tax purposes as the carrying on of a trade in the United Kingdom”.
[12] Investec Asset Finance Plc and another v HMRC [2020] EWCA Civ 579
[14] Cape Industrial Services Limited & Robert Wiseman and Sons Limited v HMRC TC/2015/01817 TC/2015/01791
[21] Sonaecom SGPS SA v Autoridade Tributária e Aduaneira (Case C-42/19) EU:C:2020:378 (14 May 2020) (Advocate General Kokott).
[22] Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes. Specifically Articles 4(1) and (2) and 17(1), (2) and (5) of the Sixth VAT Directive were at issue.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these developments. For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the Tax Practice Group or the authors:
Sandy Bhogal – London (+44 (0)20 7071 4266, [email protected])
Benjamin Fryer – London (+44 (0)20 7071 4232, [email protected])
Panayiota Burquier – London (+44 (0)20 7071 4259, [email protected])
Bridget English – London (+44 (0)20 7071 4228, [email protected])
Fareed Muhammed – London (+44(0)20 7071 4230, [email protected])
Barbara Onuonga – London (+44 (0)20 7071 4139,[email protected])
Aoibhin O’ Hare – London (+44 (0)20 7071 4170, [email protected])
© 2020 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
Challenges and trends under the “New Normal”: COVID-19 entails many new challenges and accelerates industry trends, some of which have sporadic and some of which have a lasting impact on the compliance function.
In this (German language) WebTalk, Annette Kraus, Chief Counsel Compliance of Siemens AG, and Benno Schwarz, partner in the Munich office of Gibson, Dunn & Crutcher, discuss the latest developments and emerging trends.
Our WebTalk includes the following topics:
- New risk assessment under COVID-19
- Special challenges for the compliance function
- New authorities and players involved in COVID-19 measures
- Key take-aways
View Slides (PDF) (German)
PANELISTS:
Annette Kraus, Chief Counsel Compliance at Siemens AG
Benno Schwarz is a partner in the Munich office of Gibson, Dunn & Crutcher. He focuses on white collar defense and compliance investigations. For more than 25 years, Mr. Schwarz has advised companies on sensitive cases and investigations in the context of all compliance issues with international aspects, such as the implementation of German or international laws to prevent and avoid corruption, money laundering or avoiding economic sanctions in the corporate context. He focuses his advisory work on the planning and implementation of internal corporate as well as independent investigations both nationally and internationally, advising on the structuring, implementation and assessment of compliance management systems, and the representation of companies and their executive bodies before domestic and foreign authorities during associated criminal and administrative proceedings.
Stay-at-home orders have not prevented a significant number of corporate non-prosecution agreements (“NPAs”) and deferred prosecution agreements (“DPAs”) in the first half of 2020. At 17 agreements to date plus one NPA addendum, the year is on pace to match 2019 levels, which reflected an increase from the preceding two years. In this client alert, the 22nd in our series on NPAs and DPAs, we: (1) report key statistics regarding NPAs and DPAs from 2000 through the present; (2) consider the drop in NPAs in 2020; (3) summarize 2020’s publicly available corporate NPAs and DPAs; (4) survey the latest developments in international DPA regimes, and finally (5) outline some key considerations for companies poised to conclude NPA and DPA negotiations, including cross-border considerations and possible post-resolution consequences.
NPAs and DPAs are two kinds of voluntary, pre-trial agreements between a corporation and the government, most commonly DOJ. They are standard methods to resolve investigations into corporate criminal misconduct and are designed to avoid the severe consequences, both direct and collateral, that conviction would have on a company, its shareholders, and its employees. Though NPAs and DPAs differ procedurally—a DPA, unlike an NPA, is formally filed with a court along with charging documents—both usually require an admission of wrongdoing, payment of fines and penalties, cooperation with the government during the pendency of the agreement, and remedial efforts, such as enhancing a compliance program and—on occasion—cooperating with a monitor who reports to the government. Although NPAs and DPAs are used by multiple agencies, since Gibson Dunn began tracking corporate NPAs and DPAs in 2000, we have identified approximately 550 agreements initiated by the United States Department of Justice (“DOJ”), and 10 initiated by the U.S. Securities and Exchange Commission (“SEC”).
Chart 1 below shows all known corporate NPAs and DPAs from 2000 through 2020 to date. In 2020, DOJ also entered into one public NPA addendum.
Chart 2 reflects total monetary recoveries related to NPAs and DPAs from 2000 through 2020 to date. At approximately $5.5 billion, recoveries associated with NPAs and DPAs thus far in 2020 have already outpaced the nearly $4.7 billion in recoveries from the same period in 2019. Total recoveries so far in 2020 also are already about 1.1 times the annual average recoveries of approximately $4.8 billion in the 2005-2019 period. Depending on developments in the second half of this year, total recoveries for 2020 could well outstrip last year’s total of approximately $7.8 billion in recoveries.
DOJ’s Application of NPAs and DPAs
The Justice Manual Principles of Federal Prosecution of Business Organizations (the “Justice Manual”) describes NPAs and DPAs as an “important middle ground between declining prosecution and obtaining the conviction of a corporation.”[1] This application especially holds in situations “where the collateral consequences of a corporate conviction for innocent third parties would be significant.”[2] NPAs and DPAs can “help restore the integrity of a company’s operations and preserve the financial viability of a corporation that has engaged in criminal conduct, while preserving the government’s ability to prosecute a recalcitrant corporation that materially breaches the agreement.”[3]
Although DOJ’s Corporate Enforcement Policy articulates a presumption that a company will receive a declination under certain circumstances, DOJ has not provided public guidance regarding the factors that are likely to result in an NPA rather than a DPA. Historically, however, NPAs generally have been reserved for cases where companies have cooperated; in certain statutory schemes—notably FCPA, tax and, more recently, sanctions enforcement—where companies have self-disclosed; where companies engaged in less facially egregious conduct than might merit a DPA; and—more recently—where the company’s misconduct is also addressed by resolutions in other countries, and DOJ wishes to avoid “piling on.” Penalty and forfeiture amounts also tend to be lower for NPAs than for DPAs, but final payment amounts may be negotiated after deciding on a resolution vehicle, and the lower values may be a product of multiple factors, most notably the nature of the underlying allegations.
NPAs dating back to 2000 show a nearly even split between voluntary self-disclosure and non-disclosure cases, including the 80 NPAs negotiated pursuant to the Swiss Bank Program, for which voluntary self-disclosure was a prerequisite (banks already under investigation by DOJ Tax were expressly precluded from participating in the program).[4] Since 2000, there have been approximately 290 DOJ NPAs. If the 80 Swiss Bank NPAs are removed from the total, only approximately 45 of 210 (or 21%) cite voluntary disclosure as a reason supporting the NPA.
In contrast, approximately 45 of 255 known DOJ DPAs since 2000 cite voluntary disclosure as a factor. In recent years, in particular, DPAs have very seldom credited voluntary disclosure; since 2015, there have been only three DPAs that did so, with one involving a case where DOJ was already aware of the self-disclosed conduct, but the disclosing company resolved to disclose and implemented remedial measures before becoming aware of DOJ’s investigation.
2020 in Context
Fifteen of 17 resolutions to date this year have been DPAs (excluding an NPA addendum). As illustrated in Chart 3 below, if the trend continues, the uptick in DPAs compared to NPAs signals a sharp decline in the percentage of NPAs on an annual basis. Since 2016, the number of DPAs and NPAs have been roughly even each year. In 2015, there was a spike in the percentage of NPAs due to the 80 NPAs negotiated that year under the DOJ Tax Program.[5] Like the first half of 2020, 2019 saw a lower than average distribution of NPAs. Deciphering prosecutorial decision-making is more art than science, but the heavy slate of DPAs this year nevertheless invites the question of why we are seeing fewer NPAs.
2015 calculated including the 80 Swiss Bank Program NPAs. With the Swiss Bank NPAs removed, the 2015 percentages are 59% DPAs, and 41% NPAs.
One possibility is that voluntary disclosure is becoming a more central factor not only to achieving a declination, but also to obtaining an NPA.[6] With no voluntary disclosures announced to date in 2020, it would appear that NPAs in 2020 have not been replaced with declinations earned under DOJ’s Corporate Enforcement Policy. Nevertheless, there are certain cases that would appear—at least, from an outsider’s perspective—to have been strong contenders for NPAs in previous years.
The Propex Derivatives matter, for example, which resulted in a DPA this year, is in many ways comparable to the Merrill Lynch Commodities Inc. (“MLCI”) matter, resolved last year through an NPA. Both Propex and MLCI were accused of “spoofing,” i.e., creating a false impression of increased supply or demand by placing orders on the market that they intended to cancel before execution.[7] Neither company voluntarily self-disclosed conduct, but both received credit for cooperating with DOJ’s investigation.[8] Propex engaged an independent compliance consultant to evaluate its compliance program, and thereafter “undertook a significant enhancement of its compliance program and internal controls.”[9] MCLI also engaged in remedial measures, but without engaging an independent third party.[10] The Propex matter also had a significantly lower recovery amount than the MLCI matter, with an overall combined criminal penalty, disgorgement, and victim compensation value of $1 million, compared to MCLI’s $25 million.[11] In the Propex case, the company was tipped to the trading activity of the culpable trader, conducted an internal investigation, and allowed the trader to continue trading, although the trader made materially false statements in connection with that internal investigation.[12] It is difficult to say how heavily the unique facts of this case versus the lack of self-disclosure tipped the scales toward a DPA, but it is noteworthy that the facts could force a DPA, when—if Propex had only self-disclosed and earned more remediation credit—it would have been entitled to a presumption of a declination.[13]
The first half of 2020 could also, of course, simply be an anomalous half-year—many of the DPAs negotiated in 2020 involved high-profile misconduct and/or cited the presence of significant aggravating circumstances.[14] And three of the DPAs were negotiated with DOJ Antitrust, which—until the 2019 announcement of its DPA policy, discussed in greater detail in our alert linked here—was fairly parsimonious with DPAs and had expressly stated that it disfavors NPAs in antitrust cases.[15] Time will tell whether 2020 sees a true trend of favoring DPAs over NPAs.
2020 Agreements to Date
Airbus SE (DPA)
On January 31, 2020, France-based airplane manufacturer Airbus SE (“Airbus”) agreed to pay combined penalties of $3.9 billion to authorities in France, the United Kingdom, and the United States to resolve foreign bribery and export control charges.[16] The Airbus DPA also will be discussed in detail in Gibson Dunn’s forthcoming FCPA 2020 Mid-Year Update. The multi-jurisdictional investigation focused on allegations that, between 2008 and 2015, Airbus used third-party business partners to make improper payments to Chinese government officials, as well as nongovernment airline executives.[17] Additional allegations focused on payments to officials in Ghana, Indonesia, Malaysia, Sri Lanka, and Taiwan.[18] In the United States, the government also asserted that Airbus violated the Arms Export Control Act (“AECA”) and the International Traffic in Arms Regulations (“ITAR”) by failing to disclose political contributions, commissions or fees to the government in relation to the sale or export of defense articles and services to a foreign country.[19]
In the United States, Airbus entered into a DPA with DOJ to resolve an alleged conspiracy to violate the anti-bribery provisions of the Foreign Corrupt Practices Act (“FCPA”) and a second conspiracy to violate AECA and ITAR.[20] Pursuant to the DPA, Airbus agreed to a criminal fine of $2.3 billion, of which DOJ credited approximately $1.8 billion in payments to the French government pursuant to a parallel agreement.[21] Airbus ultimately paid over $527 million to DOJ for the FCPA and ITAR charges.[22] The Company entered a separate $10 million consent agreement with the U.S. Department of State’s Directorate of Defense Trade Controls (“DDTC”) regarding the alleged ITAR violations, pursuant to the State Department’s authority to enforce export controls.[23] Five million dollars of that sum was suspended on the condition that Airbus use the money to enact remedial compliance measures,[24] and DOJ credited the other $5 million toward the DOJ ITAR penalty.[25] In a separate civil agreement, Airbus also forfeited a bond worth €50 million traceable to the proceeds of the ITAR-related conduct.[26]
Airbus received credit for cooperating with the U.S. investigation and for taking remedial measures.[27] These measures included “separating and taking disciplinary action against former employees” involved in the alleged misconduct and enhancing its compliance program and internal controls.[28] The DPA also considered that the Company had entered into substantial resolutions with the UK Serious Fraud Office (“SFO”) and the French government’s Paquet National Financier (“PNF”).[29] Airbus received voluntary disclosure credit in relation to the alleged ITAR and AECA violations, along with credit for cooperation and remedial measures, but did not receive disclosure credit for the FCPA-related conduct because Airbus disclosed it after the SFO’s investigation became public.[30]
The Airbus resolution is also significant for what it highlights about the extent of cross-jurisdictional coordination between enforcement authorities. Outside of the United States, Airbus agreed to pay $1.09 billion pursuant to a DPA with the UK’s SFO, and over $2.2 billion pursuant to a Judicial Public Interest Agreement (“CJIP”) with the PNF.[31] The resolution with the SFO is that agency’s largest DPA to date and follows an indictment of Airbus on five counts of failing to prevent bribery under Section 7 of the Bribery Act of 2010.[32] The agreement with PNF resolved a range of charges including bribery, misuse of corporate assets, breach of trust, conspiracy to defraud, money laundering, and forgery.[33]
Increased cross-border coordination is a trend that has been growing as other countries’ enforcement regimes have continued to evolve. Assistant Attorney General Brian A. Benczkowski noted in announcing the Airbus resolution that “the Department will continue to work aggressively with our partners across the globe to root out corruption, particularly corruption that harms American interests.”[34] The DPA itself yields a notable mix of takeaways regarding coordination between sovereigns. On the one hand, DOJ premised its FCPA territorial jurisdiction on allegations that employees and agents of Airbus sent emails while in the United States and hosted foreign officials’ luxury travel at U.S. locations.[35] On the other hand, the DPA contains, among the relevant considerations for the agreement, an explicit recognition by DOJ of the limits of U.S. jurisdiction: “the Company is neither a U.S. issuer nor a domestic concern, and the territorial jurisdiction over the corrupt conduct is limited; in addition, although the United States’ interests are significant enough to warrant a resolution, France’s and the United Kingdom’s interests over the Company’s corruption-related conduct, and jurisdictional bases for a resolution, are significantly stronger, and thus the [U.S. government has] deferred to France and the United Kingdom to vindicate their respective interests as those countries deem appropriate[.]”[36] It will be interesting to follow whether future cross-jurisdictional resolutions (or even U.S.-only resolutions) contain similar statements about the limits of U.S. territorial jurisdiction or its narrower prosecutorial interests under the FCPA.
Alcon Pte Ltd (DPA)
On June 25, 2020, Alcon Pte Ltd—a former subsidiary of Novartis AG, a Switzerland-based global pharmaceutical company, and a current subsidiary of Alcon Inc., an independent multinational eye care company after its spin-off from Novartis in April 2019—entered into a three-year DPA with DOJ’s Fraud Section and the U.S. Attorney’s Office for the District of New Jersey.[37] The agreement resolved allegations that, from 2011 through 2014, Alcon Pte Ltd conspired to violate the books and records provisions of the FCPA by providing inappropriate economic benefits to Vietnamese healthcare professionals (“HCPs”).[38]
DOJ gave full credit to Alcon Pte Ltd for its cooperation, as well as Alcon Inc.’s and Novartis AG’s cooperation, with the investigation. The DPA stated that all three entities engaged in significant remedial measures, including terminating high-level executives of Alcon Pte Ltd and disciplining certain other Alcon employees, terminating the relationship with the third-party distributor, and implementing enhanced anti-corruption policies and procedures.[39] In connection with the DPA, Alcon Pte Ltd agreed to pay a penalty of $8.925 million.[40]
Alutiiq International Solutions (NPA)
On June 8, 2020, government contractor Alutiiq International Solutions, LLC (“AIS”) entered into a three-year NPA with the DOJ Fraud Section to resolve an investigation into an alleged kickback and fraud scheme tied to a multimillion-dollar U.S. government construction contract administered by the General Services Administration (“GSA”). According to the NPA, a former AIS manager received kickbacks from a subcontractor in exchange for steering work to the subcontractor.[41] The former AIS manager also allegedly billed GSA for services purportedly provided by an on-site superintendent, when there was no superintendent on site.[42] Prior to reaching the NPA with AIS, the government sought, and in May 2019 obtained, an indictment in federal court in the District of Columbia charging the former AIS manager with one count of conspiracy to violate the Anti-Kickback Act and four counts of wire fraud.[43] The former manager’s trial is scheduled for December 7, 2020.[44]
The NPA requires AIS to implement and maintain a number of corporate compliance measures, including among other measures a corporate compliance policy related to fraud, anti-corruption, procurement integrity, and anti-kickback laws, periodic risk-based reviews of the company’s compliance policies and procedures related to the relevant laws, and periodic training concerning the relevant laws.[45] Additionally, AIS has agreed to self‑report to the Fraud Section annually regarding its remediation efforts and implementation of enhanced compliance measures and internal controls.[46]
As part of the NPA, AIS has agreed to pay over $1.2 million in victim compensation payments to GSA.[47] The agreement incorporates a unique factor due to the status of AIS’s parent corporation, Afognak, as an Alaska Native Corporation. In reaching the NPA, DOJ considered the fact that almost all of Afognak’s 1,200 shareholders reside in or descend from two Alaska Native villages that qualify as distressed communities, and that “Afognak uses the entire amount of its net income for the benefit of its shareholders,” including by providing social programs and support such as elder benefits and education assistance.[48] This resolution highlights the significance of demonstrable collateral consequences.
Apotex Corporation (DPA)
On May 7, 2020, Apotex Corporation (“Apotex”), a generic pharmaceutical company, entered into a three-year DPA with DOJ’s Antitrust Division and the United States Attorney’s Office for the Eastern District of Pennsylvania.[49] DOJ alleged that from May 2013 through at least December 2015, Apotex conspired to fix the price of pravastatin, a generic cholesterol medication.[50] This resolution is the latest in a broader DOJ antitrust investigation into the generic pharmaceutical industry, which since mid‑2019 has resulted in DPAs with three other companies (including Sandoz, Inc., discussed further below), and which in late June 2020 resulted in filed charges against a fifth company.[51]
According to the terms of the DPA, Apotex agreed to cooperate in DOJ’s ongoing antitrust investigation into the generics industry.[52] The cooperation obligations set forth in the DPA are rigorous and include producing documents and using “best efforts to secure” the cooperation of “Covered Individuals”—defined as “Apotex’s current officers, directors, and employees as of the date of the signature of th[e] Agreement.”[53] Cooperation of the Covered Individuals includes not only producing documents and attending interviews, but also “participating in affirmative investigative techniques, including but not limited to making telephone calls, recording conversations, and introducing law enforcement officials to other individuals,” and testifying in judicial proceedings.[54] Apotex also agreed to continue implementing a compliance program, although the agreement does not set forth the particulars of that program.[55]
Under the DPA, Apotex agreed to pay a monetary penalty of $24.1 million.[56] In another nod to the broader context surrounding DOJ’s investigation, the DPA does not contain a provision for restitution, but rather notes “the availability of civil causes of action, and civil cases already filed against Apotex,” including a multi‑district litigation consolidated in the U.S. District Court for the Eastern District of Pennsylvania.[57] This is a notable example of DOJ leaving the pursuit of certain potential remedies up to private litigants.
The three-year DPA is subject to a one‑year extension in the event of breach.[58] However, Apotex must continue to cooperate with DOJ until “all investigations and prosecutions, whether of former employees of the Company or other individuals or entities, arising out of the conduct described in th[e] Agreement are concluded, whether or not they are concluded within the three-year period” of the DPA.[59] Although DPAs often impose cooperation obligations beyond the terms of the agreements themselves, in this context the inclusion of this language suggests that this particular DOJ antitrust investigation into the generic pharmaceuticals industry may continue for years.
Bank Hapoalim B.M. (DPA and NPA)
In late April 2020, Bank Hapoalim B.M. (“BHBM” or the “Bank”), an Israeli bank, entered into a DPA with the DOJ Tax Division and the U.S. Attorney’s Office for the Southern District of New York,[60] and an NPA with the Money Laundering and Asset Recovery Section of the U.S. Department of Justice and the United States Attorney’s Office for the Eastern District of New York.[61] Along with related agreements with the Board of Governors of the Federal Reserve System and the New York State Department of Financial Services, the April 30, 2020 DPA and NPA had total payments of approximately $904 million.
The DPA resolved allegations that the Bank conspired with U.S. taxpayers to hide assets and income in offshore accounts to evade federal income tax obligations.[62] As part of the three-year DPA, BHBM consented to the filing of a one-count information alleging that it violated federal tax laws by conspiring with U.S. customers to: (1) defraud the United States with respect to taxes; (2) file false federal tax returns; and (3) commit tax evasion.[63] In particular, the government alleged that employees of BHBM and its subsidiary Bank Hapoalim (Switzerland) Ltd. (“BHS”) helped U.S. customers open and maintain accounts with false names and identification, enabled taxpayers to evade U.S. reporting requirements for earnings on securities, provided “hold mail” services to avoid correspondence on undeclared accounts entering the United States, offered back-to-back loans to enable U.S. customers to access funds in the United States that were held in offshore accounts, and processed wire transfers or issued checks of less than $10,000 to avoid scrutiny.[64] The DPA required BHBM to pay a monetary penalty in the amount of $100,811,584, restitution in the amount of $77,877,099, and forfeiture in the amount of $35,696,929.[65] BHBM’s Swiss subsidiary, BHS, concurrently entered into a plea agreement requiring it to pay a $138,998,399 monetary penalty, $138,908,073 in restitution, and $124,628,449 in forfeiture.[66]
Although the government credited the Bank’s internal investigation, its provision of client‑identifying information to the government, and its broader cooperation in the government’s ongoing investigations, it noted that the Bank’s initial cooperation had been, in the government’s view, “deficient.”[67] Additionally, the penalties reflect deductions “in partial credit” for payments made to the Board of Governors of the Federal Reserve System and the New York State Department of Financial Services in concurrent resolutions.[68] Pursuant to the Federal Reserve cease‑and‑desist order, BHBM agreed to pay a penalty in the amount of $37.35 million.[69] Under the New York DFS consent order, BHBM and BHS agreed to pay a penalty of $220 million for violation of the New York Banking Law.[70]
The DPA is the second-largest DOJ Tax resolution to date, and also the second‑largest resolution overall thus far in 2020 (as measured by total amounts paid). Compared to the two other recent tax resolutions—HSBC Private Bank (Suisse) SA and Mizrahi Tefahot Bank (both discussed in our Year-End 2019 NPA/DPA Update)—the BHBM resolution is unique for its sheer monetary size, the parallel resolutions with the Federal Reserve and the New York DFS, and that the BHBM resolution included a guilty plea by a BHBM subsidiary.
BHBM also entered into an NPA to resolve allegations that it had assisted in laundering $20 million in bribes and kickbacks to soccer officials with Fédération Internationale de Football Association (“FIFA”).[71] The government alleged that employees of the Bank conspired with sports marketing executives and soccer officials to make bribe payments to soccer officials in exchange for broadcasting rights to soccer matches.[72] The three-year NPA required the Bank to pay a penalty of $9,329,995 and forfeit $20,733,322.[73]
In the NPA, the Bank received credit for its “exemplary” cooperation, and the NPA noted the government’s determination that “an independent compliance monitor is unnecessary.”[74] The NPA described the Bank’s “extensive” internal investigation as well as its “extensive” remedial measures, including that it will exit the private banking business outside of Israel; its closure of its Latin American subsidiary and representative offices throughout Latin America; its closure of its Miami, Florida branch; and its closure of BHS and surrender of BHS’s banking license.[75] The Bank did not receive voluntary self‑disclosure credit in the NPA.[76]
Bradken Inc. (DPA)
On June 15, 2020, Bradken, Inc. (“Bradken”), a steel supplier for submarines, entered into a three‑year DPA with the U.S. Attorney’s Office for the Western District of Washington to resolve allegations that a former Bradken employee defrauded the U.S. Navy in connection with Bradken’s provision of high-yield steel castings for use in Navy submarines.[77] According to the DPA, for 30 years, Bradken produced steel castings that had failed lab tests and did not meet the Navy’s standards.[78] The former employee allegedly falsified test results to hide that the steel had failed the tests.[79] Although Bradken’s management was not aware of the fraud until May 2017, the government alleged that when Bradken initially disclosed the conduct, it made misleading statements to the Navy that suggested that the discrepancies were not the result of fraud.[80]
The DPA credited Bradken for promptly undertaking remedial measures, including separating the employee responsible for the conduct, upgrading equipment, creating new quality control positions, and implementing new processes to enhance monitoring and control of product quality.[81] In addition, Bradken’s Board of Directors has created an Audit and Risk Committee responsible for reviewing risk and compliance processes across the company, and Bradken has agreed to provide anti-fraud training for all new employees when they are hired, followed by annual retraining.[82]
In addition to the DPA, Bradken entered into a compliance agreement with the Navy and signed a separate settlement agreement to resolve False Claims Act claims with DOJ, acting on behalf of the Navy.[83] The latter resolution agreement required Bradken to pay $10,896,924, of which $5,448,462 was restitution.[84] In this way, the Bradken DPA is a notable example of DOJ’s application of its own policy discouraging “piling on” in situations where the same conduct can be addressed by multiple DOJ components.[85]
The Bradken DPA is notable for other reasons. For example, it required Bradken to agree to a specific methodology for calculating, under the U.S. Sentencing Guidelines (“USSG”), the applicable fine range that would be used to sentence Bradken in the event it is convicted following a breach of the DPA.[86] DPAs often instead frame the USSG calculation as a matter of what the government believes the company should owe at the time of the agreement, without limiting the amount that would satisfy a later criminal penalty in the event of a breach. The Bradken DPA also required the company to publish a public statement in the Casteel Reporter, a trade publication published by the Steel Founder’s Society of America, to “educate other government contractors” on compliance issues.[87]
Chipotle Mexican Grill Inc. (DPA)
On April 21, 2020, DOJ’s Consumer Protection Branch and the U.S. Attorney’s Office for the Central District of California entered into a DPA with Chipotle Mexican Grill Inc., relating to outbreaks of foodborne illness that allegedly affected more than 1,000 people between 2015 and 2018.[88] This resolution is the result of an investigation conducted by the Food and Drug Administration (“FDA”) Office of Criminal Investigations.[89]
As part of the three-year DPA, Chipotle agreed to the filing of a two-count information charging the company with “adulterating food and causing food to become adulterated while held for sale after shipment” in violation of the Federal Food, Drug, and Cosmetic Act (“FDCA”).[90] According to the DPA, Chipotle faced “at least five food safety incidents” at its restaurants, which were the result of store-level managers allowing employees to work while sick and failing to store food at the appropriate temperatures, and which the DPA states contributed to outbreaks at five Chipotle locations between 2015 and 2018.[91]
As part of the resolution, Chipotle agreed to pay $25 million in criminal penalties over the course of four installments.[92] Typically, installment payments occur in situations in which a company demonstrates—according to a set of factors set forth in Criminal Division guidance[93]—an inability to pay the full penalty immediately. The Chipotle DPA does not provide the context of the installment payments in this instance.
DOJ listed several factors on which it based the resolution, including remedial measures Chipotle has taken to improve safety at its restaurants.[94] Such remedial measures include the development of new food safety practices and the creation of an internal corporate function focused on food safety and comprising independent food safety experts who regularly audit Chipotle’s practices and report to corporate officers.[95]
Under the DPA, Chipotle has agreed to extensive internal auditing of its food safety procedures both company-wide and at the five specific restaurant locations at issue, including via a “root cause analysis” related to the five outbreaks, a review of its current compliance with federal and state food safety laws, an evaluation of its approach to food safety audits, a review of its existing training policies and procedures for all hourly staff, and a “Hazard Analysis Critical Control Point” plan for each affected restaurant.[96] The company has also agreed to document all findings in a “comprehensive report” to the U.S. Attorney’s Office, DOJ-CPB, and the FDA, to be completed within six months of the filing of the DPA.[97]
In addition to imposing the largest fine for a food safety case, this DPA contains some provisions notable among DPAs. For example, this DPA provides that if “any Chipotle officer or employee at or senior to the rank of Field Leader (or functional equivalent) . . . knowingly violates or fails to perform any of defendant’s obligations under this agreement . . . the Government may declare this agreement breached,” relieving the government of all obligations.[98] A typical DPA breach provision requires failure by the company to comply with the agreement’s obligations, rather than by individual officers or employees.[99] Whether this feature of the Chipotle agreement signals a broader shift in policy remains to be seen.
Florida Cancer Specialists & Research Institute LLC (DPA)
On April 30, 2020, Florida Cancer Specialists & Research Institute LLC (FCS), a Florida oncology group, entered into a DPA with the DOJ Antitrust Division.[100] This resolution marks just the second major DPA entered into by the Antitrust Division since the Division’s announcement in July 2019 of a new policy making DPAs available in criminal antitrust investigations.[101]
The agreement resolves allegations that, starting in 1999, FCS conspired not to compete with other companies to provide chemotherapy and radiation treatments to cancer patients in Southwest Florida.[102] The resolution came as part of a larger investigation into market allocation and other anticompetitive conduct in the oncology industry, which is being conducted by the Antitrust Division and the FBI’s Tampa Field Office.[103]
Under the 44-month DPA[104] FCS agreed to pay a $100 million criminal penalty plus interest.[105] FCS agreed to pay the $100 million sum in five installments, beginning June 1, 2020 and ending on December 31, 2023.[106] FCS may additionally prepay the sum in full or in part at any time.[107] FCS further agreed to cooperate fully with the Antitrust Division’s ongoing investigation into the oncology industry, and to maintain an effective compliance program designed to prevent and detect criminal antitrust violations within any of FCS’s operations, including those of corporate affiliates and subsidiaries—although like other antitrust DPAs discussed in this update, the FCS DPA does not set forth particular requirements the company’s compliance program must satisfy.[108] Additionally, the agreement includes a provision under which FCS agreed not to enforce any noncompete agreements with its current or former oncologists or other employees who, during the term of the DPA, open or join an oncology practice in Southwest Florida.[109]
In a notable development, DOJ’s Antitrust Division published a “Q&A” document along with the DPA, noting the Division’s considerations in support of the resolution. Chief among those considerations were the significant collateral consequences that could redound to patients were FCS to be convicted and thus excluded from participation in Federal healthcare programs.[110] The Division specifically pointed to potential negative consequences for FCS’s “current and future patients, including patients enrolled in ongoing clinical trials, its employees, and cancer research generally.”[111] While DOJ often discusses specific corporate resolutions in speeches as examples of enforcement priorities, it is highly unusual for DOJ to issue this sort of “Q&A” document as an interpretive guide to a particular resolution. This move may signal a desire by DOJ Antitrust to explain its approach to DPAs in a context in which the Department has only recently started using them with any frequency. Of particular note are two questions and answers included in the Q&A: the fifth question regarding whether the FCS matter is “related to the generic pharmaceutical investigation” (to which DOJ responded that it is a separate investigation); and the sixth question inquiring as to the status of DOJ’s investigation into the oncology industry (to which DOJ responded that “FCS’[s] charge and DPA are the first in an ongoing investigation”).[112]
Industrial Bank of Korea (DPA)
On April 20, 2020, the U.S. Attorney’s Office for the Southern District of New York (“SDNY”) announced that the Industrial Bank of Korea (“IBK”) agreed to a two-year DPA to resolve allegations that IBK violated the Bank Secrecy Act (“BSA”).[113] Specifically, the government alleged that IBK willfully failed to establish, implement, and maintain an adequate anti-money laundering (“AML”) program at its New York branch (“IBKNY”).[114] The charges accompanying the DPA alleged that, as a result of IBK’s failure to administer an effective anti-money laundering program at IBKNY, a U.S. citizen and various co-conspirators, including several Iranian nationals, were able to transfer more than $1 billion from IBK accounts through U.S. financial institutions, including IBKNY, in violation of U.S. sanctions against Iran.[115] In 2016, the U.S. citizen was named in a 47-count indictment charging conspiracy to violate IEEPA, unlawful provision of services to Iran, money laundering, and conspiracy to commit money laundering.[116] At the time the DPA with IBKNY was concluded, the individual was in custody in the Republic of South Korea for tax violations of Korean tax law and had not yet entered a plea in the U.S. proceedings.[117] The individual’s son was sentenced in December 2018 to 30 months in prison for conspiring with the individual to commit money laundering in the same course of conduct.[118] Notably, the DPA did not include IEEPA charges.
Under the DPA, IBK agreed to pay a $51 million penalty and implement remedial measures related to its BSA, AML, and economic sanctions compliance programs.[119] IBK is required to provide SDNY with semiannual self‑reports for the duration of the agreement, describing the status of IBK’s implementation of remedial measures and its compliance with Office of Foreign Assets Control regulations.[120] IBK must also provide SDNY, upon request, with records and other documents relating to any matters described in its reports, and SDNY will have the right to interview any employee of IBK concerning any matters described in the reports.[121] Finally, IBK is required under the agreement to notify SDNY of any deficiencies or failings in its BSA/AML compliance program that any U.S. Federal or State regulators identify.[122]
In conjunction with the DPA, the New York Department of Financial Services announced a consent order with IBK, which included a separate $35 million penalty,[123] and the New York Attorney General announced an NPA, with respect to the same conduct.[124] The consent order requires compliance monitoring and oversight similar to that imposed by the federal DPA.[125]
NiSource, Inc. (DPA)
On February 26, 2020, NiSource, Inc. entered into a DPA with the U.S. Attorney’s Office for the District of Massachusetts over gas explosions that occurred on September 13, 2018 in various locations in Massachusetts, killing one person, injuring 22 others, and damaging several homes and businesses.[126] The DPA did not impose a criminal penalty on the parent company.[127]
NiSource is the parent company of Bay State Gas Company, doing business as Columbia Gas of Massachusetts (“CMA”).[128] CMA agreed to plead guilty to violating the Natural Gas Pipeline Safety Act’s minimum safety standards.[129] In particular, the government alleged that CMA failed to implement procedures to ensure the safe operation of the gas lines that ultimately exploded.[130] The plea agreement imposed on CMA a criminal fine of $53,030,116.[131]
As part of the three-year DPA, NiSource agreed to use reasonable best efforts to sell CMA or CMA’s gas distribution business and to cease and desist from any and all gas pipeline and distribution activities in the District of Massachusetts.[132] NiSource agreed to forfeit and pay a monetary penalty to the government equal to the total amount of any profit or gain from its sale of CMA and to implement and adhere to a series of recommendations the National Transportation Safety Board made following the explosions.[133] In this way, the NiSource DPA is a notable example of the compliance recommendations of an agency that itself does not have enforcement authority forming the basis of the compliance obligations imposed by a DPA. In this instance, that dynamic may be attributable to the fact that the underlying events had public safety consequences that fell within a particular agency’s expertise. This dynamic both allows DOJ to rely on such expertise to shape expectations for corporate behavior and gives additional weight to agency determinations that would otherwise only be advisory in nature.
Novartis Hellas S.A.C.I.
On June 25, 2020, DOJ announced a DPA with Novartis Hellas S.A.C.I. (“Novartis Greece”), a subsidiary of Novartis AG.[134] Novartis Greece’s three-year DPA with DOJ’s Fraud Section and the U.S. Attorney’s Office for the District of New Jersey resolved allegations that between 2012 and 2015, Novartis Greece provided improper benefits to employees of state-owned and state-controlled hospitals and clinics in Greece and, in connection with these activities, conspired to violate the FCPA’s anti-bribery and books and records provisions.[135]
The DPA stated that Novartis Greece received full credit for its and Novartis AG’s cooperation with the investigation. It also noted that Novartis Greece and Novartis AG engaged in remedial measures, such as implementing revised and enhanced policies and procedures and enhancing controls relating to sponsorships to international medical congresses and Phase IV studies.[136] Novartis Greece agreed to pay a penalty of $225 million in connection with the DPA.[137]
Pentax Medical Company (DPA)
On April 7, 2020, Pentax of America, Inc., known as Pentax Medical Company (“Pentax”), entered into a DPA with the U.S. Attorney’s Office for the District of New Jersey and the Consumer Protection Branch (“CPB”) of DOJ.[138] The three-year DPA resolved allegations concerning the distribution of misbranded medical devices in interstate commerce in violation of the FDCA.[139] As part of the resolution, Pentax agreed to pay a $40 million criminal fine and forfeit $3 million.[140]
According to the criminal complaint accompanying the DPA, Pentax allegedly shipped four types of endoscopes for 18 months without FDA-approved instructions for use.[141] The complaint charges that Pentax deliberately opted not to use FDA-approved instructions for cleaning its endoscopes, which required additional cleaning time, to avoid losing business.[142]
The government also alleged that Pentax failed to file timely reports of two infections associated with the endoscopes.[143] In relevant part, the FDCA requires that medical device manufacturers file adverse events reports “within thirty (30) days of receiving or becoming aware of information that reasonably suggests” that the manufacturer’s device “may have caused or contributed to a death or serious injury.”[144] Pentax allegedly failed to file adverse-events reports related to two incidents within the 30‑day window because its employees allegedly misunderstood the reporting requirements.[145]
Pentax received full credit for its cooperation, which included: (1) conducting a thorough internal investigation, (2) making regular factual presentations to the government, (3) proactively identifying issues and facts that were likely of interest to the government, (4) advising the government on facts and issues outside the focus of its investigation, and (5) collecting, organizing, and analyzing voluminous evidence and information for the government.[146] Pentax did not receive credit for voluntary self‑disclosure.[147]
The DPA requires Pentax to conduct, within six months of the DPA’s effective date, an audit of its instructions for use of endoscopic devices and its medical device reporting procedures, in order to determine compliance with FDA requirements.[148] The company must submit written audit findings to the FDA.[149] Pentax also must enhance its compliance training and maintain an effective compliance program.[150] Furthermore, the presidents of Pentax and the Lifecare Division of its parent, Hoya Corporation (“Hoya”), must annually certify, based on a review of Pentax’s compliance measures, that those measures satisfy the requirements of the DPA.[151] Hoya’s board of directors also must annually certify that the Pentax compliance program is effective.[152] Finally, Pentax must meet annually with the U.S. Attorney’s Office for the District of New Jersey, CPB, and the FDA to discuss the Company’s compliance with the DPA.[153]
The Pentax DPA is the larger of the two FDCA resolutions thus far in 2020 (the other being the Chipotle DPA, analyzed above). The combination of these resolutions makes 2020 the first year since 2016 with more than one FDCA-focused resolution, and together the Pentax and Chipotle DPAs represent more than twice the total recoveries associated with FDCA-focused resolutions between 2016 and the present.
Practice Fusion Inc. (DPA)
On January 27, 2020, Practice Fusion, Inc. (“Practice Fusion”), a health information technology developer based in San Francisco, entered into a three-year DPA with the U.S. Attorney’s Office for the District of Vermont.[154] The DPA, together with separate resolution agreements with DOJ’s Civil Division and various states, resolved criminal and civil investigations of alleged violations of the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b, and the civil False Claims Act, 31 U.S.C. § 3729, relating to Practice Fusion’s electronic health records software.[155] Specifically, the government alleged that Practice Fusion solicited and received kickbacks from pharmaceutical companies, including one that manufactured opioids, in return for using its software to influence physician prescribing behavior for those companies’ products.[156] Practice Fusion allegedly also caused its users to submit false claims for federal incentive payments by misrepresenting the capabilities of its software.[157]
As part of the resolution, Practice Fusion agreed to pay a total of $145 million. The payment includes (1) a criminal fine of $25,398,300, (2) forfeiture of $959,700, and (3) a civil sum of $118,642,000.[158] The Practice Fusion agreement states that the company was not required to retain an independent compliance monitor because of its “belated cooperation,” remedial efforts, agreement to appoint an oversight organization, implementation of extensive compliance obligations, and agreement to self-report to the U.S. Attorney’s Office.[159] Nevertheless, the “oversight organization” described by the agreement looks very much like a compliance monitor, with DOJ retaining the right to veto the company’s selection of the oversight organization; the organization being charged with “providing reasonable assurance that Practice Fusion establishes and maintains compliance systems, controls and processes reasonably designed, implemented and operated to ensure” compliance with the DPA; and the oversight organization providing regular reports simultaneously to the Board of Directors of Practice Fusion, and to DOJ.[160]
The DPA credited Practice Fusion for its internal investigation, regular presentations to the government, production of documents, agreement to accept responsibility, and sharing of additional evidence and information.[161] Practice Fusion also undertook remedial efforts, including making relevant modifications to its electronic records.[162] The DPA also describes what the government viewed as Practice Fusion’s initial lack of cooperation, stating that the company initially did not (1) voluntarily self-disclose wrongdoing or potential areas of concern, (2) identify individual wrongdoers, (3) disclose facts unknown to the government, or (4) accept responsibility for any wrongdoing on behalf of the company or its employees.[163] Furthermore, Practice Fusion initially maintained its innocence and sought to limit document productions in response to subpoenas.[164]
The Practice Fusion DPA contains an additional provision rarely, if ever, seen in corporate resolutions. In an apparent effort to emphasize the need for transparency and acceptance of responsibility in connection with the opioid crisis, the DPA requires Practice Fusion to publish documents related to its allegedly unlawful conduct on a publicly available website.[165] The DPA requires that the documents include “the communications, presentations, contracts, negotiations, analyses, and reports agreed to by the [government] as reflecting the relevant communications.”[166] The website currently contains over 400 documents.
Propex Derivatives Pty Ltd (DPA)
On January 21, 2020, Propex Derivatives Pty Ltd (“Propex”), a proprietary trading firm headquartered in Australia, entered into a DPA with the DOJ Fraud Section to resolve charges under the anti-spoofing statute, 7 U.S.C. §§ 6c and 13. The government alleged that, for almost four years, a Propex trader placed “thousands of large-volume orders to buy and sell” certain futures contracts while intending, at the time of the orders, to cancel them before execution (i.e., “spoofing”).[167]
The three-year DPA required a payment by Propex totaling $1 million, which included (1) a criminal monetary penalty of $462,271, (2) disgorgement of $73,429, and (3) victim compensation of $464,300.[168] In a parallel proceeding, the CFTC similarly resolved spoofing allegations with Propex for identical corresponding amounts of civil penalties, disgorgement, and restitution, respectively, and with crediting of those amounts by the amounts paid to DOJ.[169] The Propex DPA is fairly unique in imposing disgorgement in both the criminal and civil contexts. In parallel DOJ/SEC investigations, for example, the SEC often claims disgorgement and DOJ focuses on criminal penalties.
Propex received credit from DOJ for its cooperation, which included (1) voluntarily making a foreign-based employee available for an interview, (2) producing foreign documents, and (3) collecting and producing voluminous evidence and information.[170] The company also provided information regarding individuals involved in the conduct at issue.[171] Propex agreed to report annually to the Fraud Section regarding remediation and compliance measures.[172] Propex did not receive voluntary self‑disclosure credit from DOJ.[173]
Sandoz Inc. (DPA)
On March 2, 2020, New Jersey-based pharmaceutical company Sandoz Inc. entered into a DPA with DOJ’s Antitrust Division to resolve four criminal conspiracy charges related to the alleged suppression of competition in the generic drug market.[174]
Under the three-year DPA, Sandoz agreed to pay $195 million and to continuing cooperation.[175] In setting forth the rationale for a negotiated resolution, the DPA noted that a conviction of Sandoz would likely result in the company’s mandatory exclusion from all federal healthcare programs, which would lead to significant negative consequences for the company’s workforce.[176] The agreement also considered Sandoz’s timely and continuing cooperation.[177]
This DPA represents the third of four DPAs (the fourth being the Apotex DPA, discussed above) arising from the same DOJ antitrust investigation of the generic pharmaceutical industry. We detailed two of the DPAs stemming from this investigation in last year’s update. The Sandoz DPA contains provisions similar to those in the Apotex DPA concerning the lack of a need for restitution in light of available private civil causes of action, and concerning the various forms of cooperation expected by DOJ from the company and “Covered Individuals.”[178]
Union Bancaire Privée, UBP SA (NPA Addendum)
On January 2, 2020, Union Bancaire Privée, UBP SA (“UBP”), a private bank headquartered in Switzerland, entered into an addendum to a January 6, 2016 NPA with DOJ.[179] The original NPA, which was part of the Swiss Bank Program established by DOJ on August 29, 2013, arose from UBP’s disclosure of its cross-border business for U.S.-related accounts.[180] The addendum is unusual, but not unprecedented—Bank Lombard Odier & Co Ltd. signed a similar addendum in July 2018, which we covered in our 2018 Year-End Update.
After entering into the 2016 NPA—which required UBP to disclose all of its U.S.-related accounts that were open between August 1, 2008 and December 31, 2014—UBP and DOJ agreed that the population of accounts should have included 97 additional accounts.[181] UBP acknowledged that it was, or should have been, aware of many of these additional accounts at the time it signed the NPA.[182] DOJ, in turn, acknowledged the company’s full cooperation under the Swiss Bank Program, including its assistance in making requests under applicable treaties for records related to the newly identified accounts.[183]
To account for the incomplete information provided to DOJ prior to execution of the NPA, UBP agreed to pay an additional sum of $14 million.[184] The total amount paid by UBP under the NPA and the addendum is $201,767,000.[185] The addendum did not otherwise alter the terms of the 2016 NPA.[186]
Wells Fargo & Company/Wells Fargo Bank, N.A. (DPA)
In February 2020, Wells Fargo & Company, and its subsidiary, Wells Fargo Bank, N.A., agreed to pay $3 billion to resolve allegations that the Bank used so-called “cross-sell[ing]” sales practices to provide banking accounts and financial products to customers under false pretenses or without their consent.[187] The government alleged that the conduct occurred between 2002 and 2016 and took place primarily at Wells Fargo’s Community Bank, then the organization’s largest business unit and the one responsible for managing everyday banking products—such as checking and savings accounts, debit cards, and bill payment services—for individuals and small businesses.[188]
The criminal investigation focused on allegations of false bank records and identity theft associated with the sales practices discussed above. The investigation resulted in a three-year DPA.[189] The DPA required Wells Fargo to pay $3 billion, although the agreement specified that “[t]he amount remitted shall be the Criminal Penalty less any amounts Wells Fargo pays to resolve the Parallel Actions, such that Wells Fargo will pay a total of $3,000,000,000 to resolve this criminal investigation as well as both Parallel Actions.” The “Parallel Actions” were the civil action brought in 2018 by DOJ’s Civil Division and the U.S. Attorney’s Office for the Central District of California,[190] along with a separate enforcement proceeding brought by the U.S. Securities and Exchange Commission.[191] Of the $3 billion obligation imposed on the Bank, $500 million will be paid to the SEC.[192] The DPA is notable in that it simply states a criminal penalty amount without setting forth the government’s view of the appropriate penalty calculation under the U.S. Sentencing Guidelines—an approach more commonly seen in NPAs.
The DPA detailed several relevant considerations, including the long duration and seriousness of the alleged sales practices, offset by Wells Fargo’s acceptance of responsibility and its cooperation.[193] The Bank’s cooperation included commissioning an independent internal investigation that resulted in public findings, collecting and analyzing extensive data, and affording the government access to evidence and witnesses.[194] The Bank also received credit for previous resolutions of regulatory and civil actions regarding related allegations, including the Jabbari and Hefler class action resolutions, settlements with the Consumer Financial Protection Bureau (“CFPB”), the Office of the Comptroller of the Currency (“OCC”), and the City of Los Angeles, and resolutions with Attorneys General of the 50 states and the District of Colombia.[195] The DPA also noted Wells Fargo’s remedial measures, including reconstitution of its board of directors, significant management turnover including the CEO, enhancement of its compliance program and internal controls, and “[s]ignificant work to identify and compensate” customers who may have been subject to the alleged conduct.[196]
International DPA Developments
In the past few years, we have followed the global trend of countries adopting and developing DPA frameworks. As prior Mid-Year and Year-End Updates have discussed (see, e.g., our 2019 Year-End Update), several countries have implemented DPA or DPA-like regimes and have begun resolving cases using these agreements. An expanding list of countries, including Canada, France, Singapore, and the United Kingdom, allow for DPA or DPA-like agreements. Allowing for DPAs or similar agreements has also been proposed in Australia,[197] Ireland,[198] Poland,[199] and Switzerland.[200]
United Kingdom
The United Kingdom was the first country outside of the U.S. to implement a formal corporate DPA program.[201] Since the UK introduced its DPA program in 2014 through Schedule 17 of the Crime and Courts Act 2013,[202] the SFO has entered into seven DPAs with corporations: Standard Bank (2015); Sarclad (2016); Rolls-Royce (2017); Tesco (2017); Serco Geografix (2019); Guralp Systems (2019); and Airbus (2020). The Serious Fraud Office has entered into one DPA in 2020, the January Airbus DPA discussed above, and it also—just last week—received approval in principle to enter into its second DPA of the year, with G4S Care and Justice Services (UK) Ltd (“G4S C&J”).[203]
G4S Care and Justice Services (UK) Ltd
On July 10, 2020, the SFO announced that it received approval in principle to enter into a DPA with G4S C&J, a government services company, to resolve allegations that it misled the UK Ministry of Justice regarding the company’s profits from its electronic monitoring services contracts between 2011 and 2013.[204] Final approval of the settlement is expected at a July 17, 2020 hearing at the Southwark Crown Court.[205] If approved, the DPA will require G4S C&J to pay a financial penalty of £38,513,227 (about $48.4 million) and to reimburse the SFO’s costs of £5,952,711 (about $7.5 million).[206] These payments supplement £121.3 million (about $152.3 million) in compensation that G4S C&J already paid to the UK Ministry of Justice as part of a 2014 civil settlement.[207]
The SFO cited a number of factors that contributed to its decision to offer G4S C&J a DPA, including the company’s (1) disclosure of materials related to the underlying conduct; (2) substantial, “albeit delayed,” cooperation; (3) remedial efforts; and (4) agreement to undertake “an extensive programme of review, assessment, and reporting on its internal controls, policies, and procedures.”[208] Notably, G4S Plc has agreed to guarantee G4S C&J’s, its wholly-owned subsidiary’s, performance under the program review.[209]
This case was run in parallel to the SFO’s Serco Geografix investigation, which resulted in a July 2019 DPA resolving similar allegations. We covered the Serco Geografix DPA in our 2019 Year-End Update.
SFO Corporate Compliance Guidance
In January 2020, the SFO also released internal guidance on evaluating corporate compliance programs that provides additional guidance regarding when a DPA is appropriate.[210] In considering a DPA, the SFO evaluates the organization’s current compliance program.[211] However, the SFO guidance also acknowledges that a DPA may still be appropriate if an organization does not yet have a fully effective compliance program because the DPA can impose further improvements.[212] In such cases, the DPA will likely require a monitor to allow the prosecutor to assess the expected reforms while the DPA is in force.[213] The SFO guidance is similar to the Justice Manual, which also urges prosecutors to consider the adequacy and effectiveness of the corporation’s compliance program at the time of a charging decision.[214]
Canada
In Canada, Remediation Agreements (“RA”)—often referred to as DPAs—were introduced as part of the omnibus Budget Implementation Act, 2018, No. 1; the bill passed the House of Commons and Senate in June 2018 and received royal assent soon thereafter.[215] Though Canada has yet to enter into an RA, there was high-level consideration of its use for SNC-Lavalin, and alleged pressure by Prime Minister Justin Trudeau on then-Minister of Justice and Attorney General Jody Wilson-Raybould to offer SNC-Lavalin an RA rather than continue prosecution of the Quebec-based construction giant.[216] In late 2019, SNC-Lavalin pleaded guilty to fraud related to actions in Libya and did not receive an RA.[217]
In January 2020, Canada’s Director of Public Prosecutions published guidance on RAs in the Public Prosecution Service of Canada Deskbook, Section 3.21.[218] This guidance includes factors, which are drawn from statute, to be considered for evaluating the public interest in pursuing an RA.[219] The guidance explains that “an RA may only be considered in relation to a listed offence where there is a reasonable prospect of conviction” and “should only be applied in cases where a prosecution is viable.”[220] Accordingly, “a full law enforcement investigation must be undertaken.”[221] After the investigation has been reviewed by Crown counsel, “if Crown counsel is of the view that an invitation to negotiate an RA should be considered, Crown counsel shall recommend to the Chief Federal Prosecutor (‘CFP’) that consent of the [Attorney General] should be sought.”[222] In the contrary situation, “if Crown counsel is of the view that an invitation to negotiate an RA is not appropriate, Crown counsel shall notify the CFP in writing, who will in turn notify the Deputy [Director of Public Prosecutions] by providing a basic overview of the case and the reasons why an RA is not recommended.”[223] Though this guidance provides some additional detail about the prosecutorial process relevant to an RA, there is little explanation of how the factors might be weighed specifically as to an RA. Until Canadian prosecutors actually negotiate and enter into an RA, this area remains in flux.
France
France introduced Conventions Judiciaire d’Intérêt Public—that is, Judicial Public Interest Agreements (“CJIPs”)—under its 2016 anti-corruption law, Sapin II.[224] France’s Ministry of Justice has entered 11 CJIPs since late November 2017,[225] when it announced the first CJIP with HSBC Private Bank Suisse SA.[226] Two of these, including the Airbus enforcement matter discussed above, were concluded this year. On January 31, 2020, Airbus entered into a CJIP and agreed to pay a public interest fine of approximately €2 billion,[227] of a total combined global resolution value of about €3.6 billion,[228] to France. On May 11, 2020, Swiru Holding AG, a private equity company, agreed to pay a public interest fine of €1.4 million for alleged tax evasion in connection with the purchase of a French villa.[229]
On June 2, 2020, the French Ministry of Justice released a circular concerning CJIPs, which included discussion of the appropriateness of entering into a CJIP.[230] The circular indicated the need for prosecutors to proceed on a case-by-case basis when considering whether to offer a CJIP, with relevant factors including the company’s prior legal record, voluntary self-disclosure, and degree of cooperation with the investigation by managers.[231] These factors expressly reference and draw from Deputy Attorney General Sally Quillian Yates’s memorandum to all prosecutors regarding Individual Accountability for Corporate Wrongdoing (commonly known as the “Yates Memo”).[232]
Singapore
In March 2018, the Singapore Parliament passed the Criminal Justice Reform Act, which amended the Criminal Procedure Code to allow for DPAs.[233] Singapore has yet to publicly enter into a DPA.
DPA/NPA Post-Resolution Considerations
The term of a DPA or NPA is often a challenging time for companies. DPAs and NPAs typically bring with them substantial continuing disclosure and compliance obligations—with the possibility of further investigation and a DPA or NPA extension if the company fails to meet them—and the risk of follow-on litigation and additional enforcement actions abroad and domestically. We summarize here some of the key considerations of which companies should be mindful as they approach the end of an investigation and develop strategies for satisfying post-resolution compliance requirements.
Cross-Border Considerations
In recent years, NPAs and DPAs increasingly form part of complex global settlements involving international conduct and multiple coordinating enforcement jurisdictions. There are notable advantages to coordinating settlements across jurisdictions if the underlying conduct at issue is cross-border. For example, DOJ will often take into account fines paid to other international regulators when determining the appropriate monetary penalty for an NPA or DPA. Since 2018, the Justice Manual has included a policy on the coordination of parallel proceedings, which states that DOJ attorneys should “coordinate with and consider the amount of fines, penalties, and/or forfeiture paid to other federal, state, local, or foreign enforcement authorities that are seeking to resolve a case with a company for the same misconduct.”[234] This is informally known as the policy against “piling on,” and it has been expressly applied in several recent resolutions. In 2018, when Brazil-based Petróleo Brasileiro S.A. – Petrobras (“Petrobras”) entered into an NPA with DOJ to resolve allegations of FCPA violations; for example, DOJ credited the payments Petrobras made to the SEC and Brazil’s Misterio Publico Federal (“MPF”), reducing the penalty amount by 90%.[235] Similarly, in 2019, TechnipFMC plc (“Technip”) entered into a DPA with DOJ and agreed to pay a total criminal fine of over $296 million, but DOJ credited approximately $214 million that Technip agreed to pay to Brazilian authorities.[236]
In high-stakes cases, where multiple jurisdictions may be interested in pursuing an enforcement action, companies should carefully consider—involving local counsel, if appropriate—the pros and cons of voluntarily disclosing conduct locally, and encouraging a coordinated global settlement. The recent Airbus settlement is an illustrative example of a coordinated cross-border resolution. As discussed in greater detail above, on January 31, 2020, Airbus entered into parallel, multi-jurisdictional settlements with DOJ, the French government’s Paquet National Financier (“PNF”), and the UK’s Serious Fraud Office (“SFO”), valued at over $3.9 billion. In imposing a criminal penalty of more than $2.3 billion, DOJ credited nearly $1.8 billion of the over $2.2 billion in penalties imposed on Airbus by the PNF.[237] The Airbus settlement is both the largest international bribery settlement to date, and the largest DPA to date for the SFO.[238]
However, differing practices across jurisdictions, including varying degrees of protection for communications between attorneys and their clients, may also make negotiating with multiple regulators more complex. International DPA regimes vary from the U.S. in that DPAs are often only available to legal entities, limited to specific offenses, and subject to substantial oversight by the judiciary. Additionally, international regulators may impose restrictions on cooperating corporations that make negotiations in the U.S. more difficult. For example, in 2019, the SFO published new guidance on the steps companies should take to receive cooperation credit in the SFO’s charging decisions.[239] The guidance outlines similar steps to those set forth in the Justice Manual’s Principles of Federal Prosecution of Business Organizations, with a few key differences. The SFO Guidance indicates that a company may not obtain cooperation credit unless it waives privilege over witness accounts, notes, and transcripts obtained during the course of the company’s investigation.[240] In contrast, the Justice Manual states that prosecutors should not ask for privilege waivers in corporate prosecutions.[241] It remains to be seen how this difference will play out in joint investigations by DOJ and the SFO, and whether companies can cooperate effectively in both countries without foregoing cooperation credit from either agency. Facially, they could put tremendous pressure on companies to waive privilege over sensitive internal investigation material in the United States to fully comply with UK cooperation expectations. Waiver of privilege could have significant consequences in any follow-on civil litigation.
Disclosure Obligations
DPAs and NPAs commonly create a standing requirement to disclose details about newly uncovered evidence of potential violations of law. Traditionally, these provisions required only disclosure of “credible evidence” of statute-specific violations, and nearly every DPA or NPA since 2011—including every FCPA-related DPA or NPA—has included some variation of this reporting requirement, which can lead to additional criminal investigations and the unraveling of the existing agreement.[242]
Over the last few years, the standard obligation to disclose has been increasingly broadened from a requirement to report only “credible evidence” of violations of the relevant statute, to disclosure of “any evidence or allegation” of all potential criminal activity no matter how unrelated to the conduct underpinning the agreement, and whether or not based in a credible allegation. For example, this year’s Bank Hapoalim’s NPA requires the company to disclose “any evidence or allegation of a violation of U.S. federal law.”[243] For Pentax Medical Co., “any credible evidence of criminal conduct or serious wrongdoing by, or criminal investigations of, the Company [and its affiliates]” would trigger the reporting requirement.[244] Depending on how this language is interpreted, it could represent an expansive—and cumbersome—intrusion into the province of companies’ compliance functions. Rather than relying on companies to self-report truly relevant matters after reasonable follow-up, DOJ increasingly is asking for all reports so that it can decide for itself what is relevant and what is not.
Fortunately, there continues to be some variety in these terms, suggesting that DOJ has not coalesced around a single approach, and there is still room for negotiation. Recent FCPA-related DPAs and NPAs, for example, contain a provision requiring disclosure of “any evidence or allegations,” but only of FCPA-related violations,[245] and the historic “credible evidence” construction does still exist in some cases—including, notably, the DOJ Antitrust DPAs issued this year.[246] Broad disclosure obligations can be a minefield for companies given the potential for follow-on investigations and continued government inquiry into areas that previously were left to companies to investigate in the first instance, and companies should pay careful attention to these terms as investigations approach resolution.
Compliance Obligations
In 2020, DOJ has continued its practice of requiring companies entering into DPAs and NPAs to undertake compliance program enhancements. Often, as is typical of FCPA resolutions, the agreements dictate lengthy and detailed benchmark requirements for corporate compliance.[247] To enforce these requirements, DOJ has relied heavily on self-reporting, which typically involves a company providing detailed annual reports regarding remedial actions taken. Continuing a downward trend in the last several years, DOJ has not imposed any independent compliance monitors so far this year. In the Practice Fusion matter, however, the U.S. Attorney’s Office for the District of Vermont required retention of an “oversight organization.”[248] The U.S. Attorney’s Office for the District of Massachussetts also required an “in-house” monitor in connection with a subsidiary plea agreement related to the NiSource DPA described above.[249]
On June 1, 2020, DOJ released updated guidance on the “Evaluation of Corporate Compliance Programs” (the “Update”), instructing prosecutors on how to assess corporate compliance programs when conducting an investigation, in making charging decisions, and in negotiating resolutions. This updates earlier guidance from DOJ’s Fraud Section published in February 2017 (covered in our 2017 Mid-Year FCPA Update) and revised in April 2019 and June 2020. Assistant Attorney General Benczkowski noted that the Update “reflects additions based on [DOJ’s] own experience and important feedback from the business and compliance communities.”[250] Companies should expect to be evaluated against these standards throughout a self-reporting or monitoring period. For a more detailed analysis of the Update, see Gibson Dunn’s client alert on this subject.
Extensions
DPAs and NPAs typically give DOJ sole discretion to extend the resolution, including any monitorships or self-reporting obligations, for months or even years.[251] Most recently, DOJ extended the monitorship of the Brazilian construction giant Odebrecht SA, which pleaded guilty to conspiring to violate U.S. foreign bribery laws in 2016.[252] As part of its plea agreement, Odebrecht SA agreed to retain an independent compliance monitor for three years and adopt and implement a compliance and ethics program. The monitorship was set to expire in February 2020. However, in January 2020, DOJ found that the company had failed to satisfy its compliance and ethics obligations and extended the monitorship until November 2020.[253] While this occurred in the context of a plea agreement rather than an NPA or DPA, as discussed in our 2018 Year-End Update, extensions are similarly likely to occur in an NPA or DPA context.
Shareholder Litigation
DPAs and NPAs often lead to shareholder litigation in which the company’s ability to present a defense is severely limited by factual admissions in the DPA or NPA—admissions that the company is usually bound not to contest. We analyzed the implications of DPAs and NPAs for state civil litigation in detail in our 2014 Mid-Year Update. In the context of shareholder litigation, 2020 brought a breath of fresh air: in Smallen v. The Western Union Co.,[254] the Tenth Circuit affirmed the dismissal of securities fraud claims against Western Union despite the admissions in a DPA because “[a]lthough the complaint may give rise to some plausible inference of culpability on the part of Defendants,” plaintiffs had failed to plead “particularized facts giving rise to the strong inference of scienter required to state a claim under the [Private Securities Litigation Reform Act].”[255] Despite the admissions in the DPA, the court held that the plaintiff had pleaded “very few particularized allegations, if any, showing Defendants made their statements with either intent to defraud investors or conscious disregard of a risk shareholders would be misled.”[256]
APPENDIX: 2020 Non-Prosecution and Deferred Prosecution Agreements to Date
The chart below summarizes the agreements concluded by DOJ in 2020 to date. The SEC has, to date, not entered into any NPAs or DPAs in 2020. The complete text of each publicly available agreement is hyperlinked in the chart.
The figures for “Monetary Recoveries” may include amounts not strictly limited to an NPA or a DPA, such as fines, penalties, forfeitures, and restitution requirements imposed by other regulators and enforcement agencies, as well as amounts from related settlement agreements, all of which may be part of a global resolution in connection with the NPA or DPA, paid by the named entity and/or subsidiaries. The term “Monitoring & Reporting” includes traditional compliance monitors, self-reporting arrangements, and other monitorship arrangements found in settlement agreements.
| U.S. Deferred and Non-Prosecution Agreements in 2020 to Date | ||||||
| Company | Agency | Alleged Violations | Type | Monetary Recoveries | Monitoring & Reporting | Term of DPA/ NPA (months) |
| Airbus SE | DOJ Fraud; DOJ NSD; D.D.C. | FCPA; AECA; ITAR | DPA | $582,628,702 | Yes | 36 |
| Alcon Pte Ltd | DOJ Fraud; D.N.J. | FCPA | DPA | $8,925,000 | Yes | 36 |
| Alutiiq International Solutions | DOJ Fraud | Major fraud against the United States | NPA | $1,259,444 | Yes | 36 |
| Apotex Corporation | DOJ Antitrust | Antitrust | DPA | $24,100,000 | No | 36 |
| Bank Hapoalim B.M. | DOJ Tax; S.D.N.Y. | Tax | DPA | $874,270,533 | Yes | 36 |
| Bank Hapoalim B.M. | DOJ MLARS; E.D.N.Y. | AML | NPA | $30,063,317 | Yes | 36 |
| Bradken Inc. | W.D. Wash.; DOJ Civil | Major fraud against the United States | DPA | $10,896,924 | No | 36 |
| Chipotle Mexican Grill Inc. | C.D. Cal.; DOJ CPB | FDCA | DPA | $25,000,000 | Yes | 36 |
| Florida Cancer Specialists & Research Institute LLC | DOJ Antitrust | Antitrust | DPA | $100,000,000 | No | 44 |
| Industrial Bank of Korea | S.D.N.Y. | BSA | DPA | $86,000,000 | Yes | 24 |
| NiSource, Inc. / Columbia Gas of Massachusetts | D. Mass. | Natural Gas Pipeline Safety Act | DPA | $53,030,116 | No | 36 |
| Novartis Hellas S.A.C.I. | DOJ Fraud; D.N.J. | FCPA | DPA | $337,800,000 | Yes | 36 |
| Pentax of America, Inc. | D.N.J.; DOJ CPB | FDCA | DPA | $43,000,000 | Yes | 36 |
| Practice Fusion Inc. | D. Vt. | Anti-Kickback Statute | DPA | $145,000,000 | Yes | 36 |
| Propex Derivatives Pty Ltd | DOJ Fraud | Commodities violations (7 U.S.C. §§ 6c and 13) | DPA | $1,000,000 | Yes | 36 |
| Sandoz Inc. | DOJ Antitrust; E.D. Pa. | Antitrust | DPA | $195,000,000 | No | 36 |
| Union Bancaire Privée, UBP SA | DOJ Tax | Tax | NPA addendum | $14,000,000 | No | 48 (in original NPA) |
| Wells Fargo & Company / Wells Fargo Bank, N.A. | W.D.N.C.; C.D. Cal. | Falsification of bank records; identity theft | DPA | $3,000,000,000 | No | 36 |
______________________
[1] U.S. Dep’t of Justice, Justice Manual § 9-28.200.B.
[2] U.S. Dep’t of Justice, Justice Manual § 9-28.1100.B.
[4] Joint Statement by DOJ and the Swiss Federal Department of Finance, § I.A (“This Program does not apply to individuals and shall not be available to any Swiss Bank as to which the Tax Division has authorized a formal criminal investigation concerning its operations (Category 1 Bank) as of the date of the announcement of this Program.”) (Aug. 29, 2013).
[5] See our 2015 Mid-Year and Year-End Updates for a discussion of this program.
[6] Strikingly, this year, none of the 17 companies that have resolved DOJ investigations with NPAs and DPAs voluntarily self-disclosed the alleged misconduct, and only two companies—both outliers with unusual mitigating circumstances—received NPAs. The outliers include Alutiiq International Solutions, LLC (“AIS”), whose NPA cited the fact that AIS’s profits went directly to support Alaskan Native shareholders, who are residents of, or descendants of residents of, two Alaska Native villages that are severely economically disadvantaged, see Non-Prosecution Agreement, Alutiiq International Solutions, LLC (June 8, 2020), ¶ 1(g) [hereinafter “Alutiiq NPA”]; and Bank Hapoalim B.M. (“BHBM”) and Bank Hapoalim (Switzerland) Ltd. (“BHS”), which settled allegations of money laundering via NPA as part of coordinated settlements involving unrelated tax violation charges resulting in a DPA for BHBM and a guilty plea for BHS, see Press Release, U.S. Dep’t of Justice, Israel’s Largest Bank, Bank Hapoalim, Admits to Conspiring with U.S. Taxpayers to Hide Assets and Income in Offshore Accounts (Apr. 30, 2020), https://www.justice.gov/opa/pr/israel-s-largest-bank-bank-hapoalim-admits-conspiring-us-taxpayers-hide-assets-and-income (hereinafter “BHBM Tax Press Release”). Remedial measures in the BHBM matter included the extraordinary step of BHBM exiting the private banking business outside of Israel and closing all culpable branches and subsidiaries, including its Latin American subsidiary and representative offices throughout Latin America, and its Miami, Florida branch. See Non-Prosecution Agreement, Bank Hapoalim B.M. and Hapoalim (Switzerland) Ltd. criminal investigation (Apr. 30, 2020), https://www.justice.gov/opa/press-release/file/1272446/download [hereinafter “BHBM and BHS NPA”]. And BHBM and BHS similarly agreed to close BHS and surrender its banking license, and the NPA noted that BHS is in the process of closing its operations. Id. The extreme measure of effectively going out of business may have weighed in favor of unusual leniency in the context of this year’s agreements.
[7] Non-Prosecution Agreement with Merrill Lynch Commodities, Inc. (June 25, 2019), at 4-7 (hereinafter “Merrill Lynch NPA”); Deferred Prosecution Agreement, United States v. Propex Derivatives Pty Ltd, No. 20-CR-39 (N.D. Ill. Jan. 21, 2020), at 1 (hereinafter “Propex DPA”).
[8] Merrill Lynch NPA, supra note 7, at 1; Propex DPA, supra note 7, at 3.
[9] Compare Propex DPA, supra note 7, at 4 with Merrill Lynch NPA, supra note 7, at 1-2 (listing self-directed compliance program enhancements undertaken without third-party consultation).
[10] See Merrill Lynch NPA, supra note 7, at 1-2.
[11] Compare Propex DPA, supra note 7, at 7-8 with Merrill Lynch NPA, supra note 7, at 5.
[12] Propex DPA, supra note 7, at 3-4.
[13] See Press Release, U.S. Dep’t of Justice, Assistant Attorney General Brian A. Benczkowski Delivers Remarks at the 33rd Annual ABA National Institute on White Collar Crime Conference (Mar. 8, 2019), https://www.justice.gov/opa/speech/assistant-attorney-general-brian-benczkowski-delivers-remarks-33rd-annual-aba-national (“Aggravating factors . . . will not necessarily preclude a declination when the company’s actions are otherwise exemplary.”).
[14] The Apotex and Sandoz DPAs, for example, imposed record penalties. See Deferred Prosecution Agreement, United States v. Apotex Corp., No. 20-CR-169 (E.D. Pa. May 7, 2020) (hereinafter “Apotex DPA”); Deferred Prosecution Agreement, United States v. Sandoz Inc., No. 20-CR-111 (E.D.P.A, Mar. 2. 2020) (hereinafter “Sandoz DPA”). The underlying misconduct alleged in the Wells Fargo and Chipotle DPAs received heavy media attention. See Deferred Prosecution Agreement, Wells Fargo & Co. (Feb. 20, 2020), https://www.justice.gov/usao-cdca/press-release/file/1251336/download (hereinafter “Wells Fargo DPA”); Chipotle Mexican Grill, Inc. Deferred Prosecution Agreement (April 21, 2020) (hereinafter “Chipotle DPA”). And the underlying misconduct in the NiSource DPA resulted in gas explosions that killed one person and injured 22 more. See Deferred Prosecution Agreement, NiSource, Inc. (Feb. 26, 2020) (hereinafter “NiSource DPA”).
[15] See Apotex DPA, supra note 14; Sandoz DPA, supra note 14. See also Assistant Attorney General Makan Delharhim, Remarks at the New York University School of Law Program on Corporate Compliance and Enforcement (July 11, 2019) (“We will, however, continue to disfavor non-prosecution agreements (NPAs) with companies that do not receive leniency because complete protection from prosecution for antitrust crimes is available only to the first company to self-report and meet the Corporate Leniency Policy’s requirements.”).
[16] Press Release, U.S. Dep’t of Justice, Airbus Agrees to Pay Over $3.9 Billion in Global Penalties to Resolve Foreign Bribery and ITAR Case (Jan. 31, 2020), https://www.justice.gov/opa/pr/airbus-agrees-pay-over-39-billion-global-penalties-resolve-foreign-bribery-and-itar-case (hereinafter “Airbus DOJ Press Release”).
[20] Deferred Prosecution Agreement, United States v. Airbus SE, No. 1:20-CR-00021 (D.D.C. Jan. 31. 2020), https://www.justice.gov/opa/press-release/file/1241466/download (hereinafter “Airbus DPA”).
[22] Airbus DOJ Press Release, supra note 16.
[23] Press Release, U.S. Dep’t of State, U.S. Department of State Concludes $10 Million Settlement of Alleged Export Violations by Airbus SE (Jan. 31, 2020), https://www.state.gov/u-s-department-of-state-concludes-10-million-settlement-of-alleged-export-violations-by-airbus-se/.
[25] Airbus DPA, supra note 20, at 13.
[31] Airbus DPA, supra note 20, at 15.
[32] Press Release, UK Serious Fraud Office, SFO Enters Into €991m Deferred Prosecution Agreement with Airbus as Part of a €3.6bn Global Resolution (Jan. 31, 2020), https://www.sfo.gov.uk/2020/01/31/sfo-enters-into-e991m-deferred-prosecution-agreement-with-airbus-as-part-of-a-e3-6bn-global-resolution/ (hereinafter “Airbus SFO Press Release”).
[33] Judicial Public Interest Agreement, Airbus SE (Jan. 29, 2020), https://www.agence-francaise-anticorruption.gouv.fr/files/files/CJIP%20AIRBUS_English%20version.pdf.
[34] Airbus DOJ Press Release, supra note 16.
[35] See, e.g., Airbus DPA, supra note 20, at A-9–A-10.
[37] Press Release, U.S. Dep’t of Justice, Novartis Hellas S.A.C.I. and Alcon Pte Ltd Agree to Pay over $233 Million Combined to Resolve Criminal FCPA Cases (June 25, 2020), https://www.justice.gov/opa/pr/novartis-hellas-saci-and-alcon-pte-ltd-agree-pay-over-233-million-combined-resolve-criminal (hereinafter “Novartis and Alcon Press Release”).
[38] Deferred Prosecution Agreement, United States v. Alcon Pte Ltd, No. 20-CR-539 (D.N.J. June 25, 2020) (hereinafter “Alcon Pte Ltd DPA”). Gibson Dunn negotiated and secured the agreement on behalf of Alcon Pte Ltd.
[41] Alutiiq NPA, supra note 6; Press Release, U.S. Dep’t of Justice, Government Contractor Resolves Charges Relating to Fraud on General Services Administration Contract to Modernize State Department Building (June 10, 2020), https://www.justice.gov/opa/pr/government-contractor-resolves-charges-relating-fraud-general-services-administration (hereinafter “Alutiiq Press Release”).
[42] Alutiiq NPA, supra note 6, at A-4.
[43] Alutiiq Press Release, supra note 41.
[45] Alutiiq NPA, supra note 6, at 4-5.
[49] Apotex DPA, supra note 14, at 1.
[51] See Press Release, U.S. Dep’t of Justice, Fifth Pharmaceutical Company Charged In Ongoing Criminal Antitrust Investigation (June 30, 2020), https://www.justice.gov/opa/pr/fifth-pharmaceutical-company-charged-ongoing-criminal-antitrust-investigation.
[52] Apotex DPA, supra note 14, at 3.
[60] BHBM Tax Press Release, supra note 6.
[61] Press Release, U.S. Dep’t of Justice, Bank Hapoalim Agrees to Pay More Than $30 Million for Its Role in FIFA Money Laundering Conspiracy (Apr. 30, 2020), https://www.justice.gov/opa/pr/bank-hapoalim-agrees-pay-more-30-million-its-role-fifa-money-laundering-conspiracy (hereinafter “BHBM MLARS Press Release”).
[62] BHBM Tax Press Release, supra note 6.
[63] BHBM Tax Press Release, supra note 6.
[65] Deferred Prosecution Agreement, United States v. Bank Hapoalim B.M. (Apr. 22, 2020), https://www.justice.gov/opa/press-release/file/1275081/download (hereinafter “BHBM Tax DPA”).
[66] Guilty Plea Agreement, United States v. Hapoalim (Switzerland) Ltd. (Apr. 22, 2020), https://www.justice.gov/opa/press-release/file/1275086/download.
[67] BHBM Tax Press Release, supra note 6.
[68] BHBM Tax DPA, supra note 65.
[69] Settlement, In the Matter of Bank Hapoalim B.M., Nos. 20-005-B-FB, 20-005-CMP-FB (Federal Reserve Board of Directors, Apr. 30, 2020), https://www.federalreserve.gov/newsevents/pressreleases/files/enf20200430a1.pdf.
[70] Consent Order Under New York Banking Law §§ 39 and 44, In the Matter of Bank Hapoalim B.M. New York State Department of Financial Services, Apr. 30, 2020), https://www.dfs.ny.gov/system/files/documents/2020/04/ea20200430__bhbm.pdf.
[71] BHBM MLARS Press Release, supra note 61.
[73] BHBM and BHS NPA, supra note 6.
[77] Deferred Prosecution Agreement, Bradken, Inc. (June 15, 2020) (hereinafter “Bradken DPA”); Press Release, Bradken Inc. pays $10.8 million to settle False Claims Act allegations and enters into deferred prosecution agreement (June 15, 2020), https://www.justice.gov/usao-wdwa/pr/bradken-inc-pays-108-million-settle-false-claims-act-allegations-and-enters-deferred.
[78] Bradken DPA, supra note 77, at 3-4.
[83] Settlement Agreement, Bradken Inc. (May 1, 2020).
[85] See U.S. Dep’t of Justice, Justice Manual § 1-12.100; see also U.S. Dep’t of Justice, Deputy Attorney General Rod Rosenstein Delivers Remarks to the New York City Bar White Collar Crime Institute (May 9, 2018), https://www.justice.gov/opa/speech/deputy-attorney-general-rod-rosenstein-delivers-remarks-new-york-city-bar-white-collar (“Our new policy discourages ‘piling on’ by instructing Department components to appropriately coordinate with one another and with other enforcement agencies in imposing multiple penalties on a company in relation to investigations of the same misconduct.”).
[86] Bradken DPA, supra note 77, at ¶ 14(e).
[87] Bradken DPA, supra note 77, at 8.
[88] Chipotle DPA, supra note 14.
[89] Press Release, U.S. Dep’t of Justice, Chipotle Mexican Grill Agrees to Pay $25 Million Fine and Enter a Deferred Prosecution Agreement to Resolve Charges Related to Foodborne Illness Outbreaks (Apr. 21, 2020), https://www.justice.gov/opa/pr/chipotle-mexican-grill-agrees-pay-25-million-fine-and-enter-deferred-prosecution-agreement (hereinafter “Chipotle Press Release”).
[90] Chipotle DPA, supra note 14, at 2.
[93] Memorandum from Brian A. Benczkowski, Assistant Attorney General, to All Criminal Division Personnel, Evaluating a Business Organization’s Inability to Pay a Criminal Fine or Criminal Monetary Penalty (Oct. 8, 2019), https://www.justice.gov/opa/speech/file/1207576/download.
[94] Chipotle DPA, supra note 14, at 5.
[96] Chipotle DPA, supra note 14, Exhibit C: Compliance Program at 1.
[98] Chipotle DPA, supra note 14, at 9.
[99] See, e.g., Apotex DPA, supra note 14, at 10 (“If, during the Term of this Agreement, the United States determines, in its sole discretion, that Apotex … fails to cooperate … Apotex shall thereafter be subject to prosecution.”); BHBM Tax DPA, supra note 65, at 6 (“If, during the Term of the Agreement … the Bank fails to cooperate as set forth in the Agreement … the Bank and Hapoalim (Latin America) S.A. shall thereafter be subject to prosecution.”).
[100] Press Release, U.S. Dep’t of Justice, Leading Cancer Treatment Center Admits to Antitrust Crime and Agrees to Pay $100 Million Criminal Penalty (Apr. 30, 2020), https://www.justice.gov/opa/pr/leading-cancer-treatment-center-admits-antitrust-crime-and-agrees-pay-100-million-criminal (hereinafter “FCS Press Release”).
[101] For additional information on the first DPA with Heritage Pharmaceuticals Inc., see Gibson Dunn’s 2019 Year-End Update. For additional information on this policy change, see Gibson Dunn’s publication considering the Antitrust Division’s announcement, which can be found at: https://www.gibsondunn.com/doj-antitrust-division-will-now-consider-dpas-for-companies-demonstrating-good-corporate-citizenship/.
[102] Deferred Prosecution Agreement, Florida Cancer Specialists & Research Institute, LLC (Apr. 30, 2020), (hereinafter “FCS DPA”).
[103] FCS Press Release, supra note 100.
[104] FCPS DPA, supra note 102, at 3.
[110] Press Release, U.S. Dep’t of Justice, Florida Cancer Specialists & Research Institute, LLC Deferred Prosecution Agreement – Q&A (Apr. 30, 2020), https://www.justice.gov/opa/press-release/file/1272556/download.
[113] Press Release, U.S. Dep’t of Justice, Manhattan U.S. Attorney Announces Criminal Charges Against Industrial Bank Of Korea For Violations Of The Bank Secrecy Act (Apr. 20, 2020), https://www.justice.gov/usao-sdny/pr/manhattan-us-attorney-announces-criminal-charges-against-industrial-bank-korea.
[114] Deferred Prosecution Agreement, Industrial Bank of Korea (Apr. 13, 2020) (hereinafter “IBK DPA”).
[116] Press Release, U.S. Dep’t of Justice, U.S. Citizen Charged with Conspiring to Provide Unlawful Services to Iran and International Money Laundering Conspiracy (Dec. 15, 2016), https://www.justice.gov/usao-ak/pr/us-citizen-charged-conspiring-provide-unlawful-services-iran-and-international-money-1.
[117] Id.; Jonathan Stempel, Reuters, Industrial Bank of Korea settles U.S., New York criminal probes over $1 billion Iran transfer (Apr. 20, 2020), https://www.reuters.com/article/us-ibk-new-york/industrial-bank-of-korea-settles-us-new-york-criminal-probes-over-1-billion-iran-transfer-idUSKBN2221ZB.
[118] Press Release, U.S. Dep’t of Justice, Former Anchorage Resident Sentenced to Federal Prison for International Money Laundering Conspiracy (Dec. 7, 2018), https://www.justice.gov/usao-ak/pr/former-anchorage-resident-sentenced-federal-prison-international-money-laundering.
[119] IBK DPA, supra note 114, at 2.
[123] Press Release, New York Department of Financial Services, DFS Superintendent Linda A. Lacewell Announces Industrial Bank of Korea to Pay $35 Million to New York State for Violations of New York Anti-Money Laundering and Recordkeeping Laws (Apr. 20, 2020), https://www.dfs.ny.gov/press_releases/pr202004201 (hereinafter “IBK NYDFS Press Release”).
[124] Press Release, New York Attorney General’s Office, Attorney General James Announces Agreement with Industrial Bank of Korea Related to Illegal Transfer of Over $1 Billion to Iran (Apr. 20, 2020), https://ag.ny.gov/press-release/2020/attorney-general-james-announces-agreement-industrial-bank-korea-related-illegal.
[125] IBK NYDFS Press Release, supra note 123.
[126] Press Release, U.S. Dep’t of Justice, Columbia Gas Agrees to Plead Guilty in Connection with September 2018 Gas Explosions in Merrimack Valley (Feb. 26, 2020), https://www.justice.gov/usao-ma/pr/columbia-gas-agrees-plead-guilty-connection-september-2018-gas-explosions-merrimack (hereinafter “NiSource Press Release”).
[127] NiSource DPA, supra note 14.
[128] NiSource Press Release, supra note 126.
[132] NiSource DPA, supra note 14, at 2.
[134] See Novartis and Alcon Press Release, supra note 37; see also Deferred Prosecution Agreement, United States v. Novartis Hellas S.A.C.I., No. 20-CR-538 (D.N.J. June 25, 2020) (hereinafter “Novartis Greece DPA”).
[135] Novartis Greece DPA, supra note 134, at 1, 2.
[138] Deferred Prosecution Agreement, Pentax of America, Inc. (Apr. 7, 2020) (hereinafter “Pentax DPA”); Press Release, U.S. Dep’t of Justice, Pentax Medical Company Agrees to Pay $43 Million to Resolve Criminal Investigation Concerning Misbranded Endoscopes (Apr. 7, 2020), https://www.justice.gov/opa/pr/pentax-medical-company-agrees-pay-43-million-resolve-criminal-investigation-concerning.
[139] Pentax DPA, supra note 138, at 1-2.
[154] Deferred Prosecution Agreement, United States v. Practice Fusion, Inc., No. 2:20-CR-00011 (D. Vt. Jan. 27, 2020) (hereinafter “Practice Fusion DPA”); Press Release, U.S. Dep’t of Justice, Electronic Health Records Vendor to Pay Largest Criminal Fine in Vermont History and a Total of $145 Million to Resolve Criminal and Civil Investigations (Jan. 27, 2020), https://www.justice.gov/usao-vt/pr/electronic-health-records-vendor-pay-largest-criminal-fine-vermont-history-and-total-145 (hereinafter “Practice Fusion Press Release”).
[155] Practice Fusion Press Release, supra note 154.
[158] Practice Fusion DPA, supra note 154, at 4-5.
[160] Practice Fusion DPA, Ex. E, supra note 154.
[167] Propex DPA, supra note 7; Press Release, U.S. Dep’t of Justice, Propex Derivatives Pty Ltd Agrees to Pay $1 Million in Connection with Spoofing Scheme (Jan. 21, 2020), https://www.justice.gov/opa/pr/propex-derivatives-pty-ltd-agrees-pay-1-million-connection-spoofing-scheme (hereinafter “Propex Press Release”).
[168] Propex DPA, supra note 7, at 7-8.
[169] Propex Press Release, supra note 167; In re Propex Derivatives Pty Ltd, CFTC No. 20-12 (Jan. 21, 2020).
[170] Propex DPA, supra note 7, at 3.
[174] Press Release, U.S. Dep’t of Justice, Major Generic Pharmaceutical Company Admits to Antitrust Crimes (Mar. 2, 2020), https://www.justice.gov/opa/pr/major-generic-pharmaceutical-company-admits-antitrust-crimes (hereinafter “Sandoz Press Release”).
[175] Sandoz DPA, supra note 14, at 3-5, 8.
[178] Sandoz DPA, supra note 14, at 4-7, 8-9.
[179] Addendum to Non-Prosecution Agreement, Union Bancaire Privée, UBP SA (Jan. 2, 2020) (hereinafter “UBP Addendum”); Press Release, U.S. Dep’t of Justice, Justice Department Announces Addendum to Swiss Bank Program Category 2 Non-Prosecution Agreement with Union Bancaire Privée, UBP SA (Jan. 2, 2020), https://www.justice.gov/opa/pr/justice-department-announces-addendum-swiss-bank-program-category-2-non-prosecution-agreeme-2.
[180] UBP Addendum, supra note 179.
[181] Non-Prosecution Agreement, Union Bancaire Privée, UBP SA (Jan. 4, 2016); UBP Addendum, supra note 179.
[182] UBP Addendum, supra note 179.
[187] Press Release, U.S. Dep’t of Justice, Wells Fargo Agrees to Pay $3 Billion to Resolve Criminal and Civil Investigations Into Sales Practices Involving the Opening of Millions of Accounts Without Customer Authorization (Feb. 21, 2020), https://www.justice.gov/opa/pr/wells-fargo-agrees-pay-3-billion-resolve-criminal-and-civil-investigations-sales-practices.
[189] Wells Fargo DPA, supra note 14.
[190] Settlement Agreement, Wells Fargo & Co. (Aug. 1, 2018), https://www.justice.gov/opa/press-release/file/1084371/download.
[191] Press Release, Sec. & Exch. Comm’n, Wells Fargo to Pay $500 Million for Misleading Investors About the Success of Its Largest Business Unit (Feb. 21, 2020), https://www.sec.gov/news/press-release/2020-38.
[193] Wells Fargo DPA, supra note 14, at 1-2.
[197] Australian Gov’t: Attorney-General’s Dep’t, Deferred Prosecution Agreement Scheme Code of Practice Consultation (June 8, 2018), https://www.ag.gov.au/integrity/consultations/deferred-prosecution-agreement-scheme-code-practice.
[198] Colm Keena, Irish Times, The DPA Regime Recommended for Ireland Does Not Allow Deals Which Give Immunity to Particular Individuals (Oct. 26, 2018), https://www.irishtimes.com/news/crime-and-law/the-dpa-regime-recommended-for-ireland-does-not-allow-deals-which-give-immunity-to-particular-individuals-1.3675677. This DPA proposal was largely based on the UK DPA model rather than the U.S. model.
[199] Poland Gov’t Legislative Process, Draft Act on the Liability of Collective Entities for Offenses, https://legislacja.rcl.gov.pl/projekt/12312062.
[200] See Emily Casswell, Switzerland Favours US-Style DPAs, Global Investigations Rev. (May 25, 2018), https://globalinvestigationsreview.com/article/1169927/switzerland-favours-us-style-dpas.
[201] Argentina also allows for somewhat analogous “Effective Collaboration Agreements,” and Brazil allows for leniency agreements under its Anti-Bribery law.
[202] United Kingdom, Crime and Courts Act 2013 (2013 c. 22), http://www.legislation.gov.uk/ukpga/2013/22/schedule/17/enacted; see also Serious Fraud Office, Deferred Prosecution Agreements, https://www.sfo.gov.uk/publications/guidance-policy-and-protocols/deferred-prosecution-agreements/#:~:text=DPAs%20were%20introduced%20on%2024,Crime%20and%20Courts%20Act%202013 (last visited July 7, 2020).
[203] Serious Fraud Office, News Release, SFO Receives Approval in Principle for DPA with G4S Care and Justice Services (UK) Ltd (July 10, 2020), https://www.sfo.gov.uk/2020/07/10/sfo-receives-approval-in-principle-for-dpa-with-g4s-care-and-justice-services-uk-ltd/.
[210] Serious Fraud Office, SFO Operational Handbook: Evaluation a Compliance Programme (Jan. 17, 2020), https://www.sfo.gov.uk/download/evaluating-a-compliance-programme/.
[214] U.S. Dep’t of Justice, Justice Manual, § 9-28.300, Factors to be Considered, https://www.justice.gov/jm/jm-9-28000-principles-federal-prosecution-business-organizations.
[215] See Parliament of Canada, House Government Bill, An Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018 and other measures, https://www.parl.ca/LegisInfo/BillDetails.aspx?Language=E&billId=9727472&View=0.
[216] Amanda Coletta, Wash. Post, Canadian political scandal deepens as ex-justice minister testifies that Trudeau’s office pressured her in criminal case (Feb. 27, 2019), https://www.washingtonpost.com/world/the_americas/canadian-political-scandal-deepens-as-ex-justice-minister-testifies-that-trudeaus-office-pressured-her-in-criminal-case/2019/02/27/04587380-3ada-11e9-b10b-f05a22e75865_story.html.
[217] Ian Austen, N.Y. Times, Corruption Case That Tarnished Trudeau Ends With SNC-Lavalin’s Guilty Plea (Dec. 18, 2019), https://www.nytimes.com/2019/12/18/world/canada/snc-lavalin-guilty-trudeau.html.
[218] Public Prosecution Service of Canada, 3.21—Remediation Agreements, https://www.ppsc-sppc.gc.ca/eng/pub/fpsd-sfpg/fps-sfp/tpd/p3/ch21.html.
[219] The 10 public interest factors are: “a. the circumstances in which the act or omission that forms the basis of the offence was brought to the attention of investigative authorities; b. the nature and gravity of the act or omission and its impact on any victim; c. the degree of involvement of senior officers of the organization in the act or omission; d. whether the organization has taken disciplinary action, including termination of employment, against any person who was involved in the act or omission; e. whether the organization has made reparations or taken other measures to remedy the harm caused by the act or omission and to prevent the commission of similar acts or omissions; f. whether the organization has identified or expressed a willingness to identify any person involved in wrongdoing related to the act or omission; g. whether the organization—or any of its representatives—was convicted of an offence or sanctioned by a regulatory body, or whether it entered into a previous remediation agreement or other settlement, in Canada or elsewhere, for similar acts or omissions; h. whether the organization—or any of its representatives—is alleged to have committed any other offences, including those not listed in the schedule to this Part; and i. any other factor that the Crown counsel considers relevant.” Id.
[224] French Law No. 2016-1691 of December 9, 2016, https://www.legifrance.gouv.fr/affichTexte.do?cidTexte=JORFTEXT000033558528&categorieLien=id; see also French National Financial Prosecutor’s Office and French Anti-Corruption Agency, Guidelines on the Implementation of the Convention Judiciaire d’Internet Public (Judicial Public Interest Agreement), https://www.agence-francaise-anticorruption.gouv.fr/files/files/EN_Lignes_directrices_CJIP_revAFA%20Final%20(002).pdf.
[225] Republic of France AFA, La convention judiciaire d’intérêt public, https://www.agence-francaise-anticorruption.gouv.fr/fr/convention-judiciaire-dinteret-public.
[226] Republic of France Ministry of Justice, Convention judiciaire d’intérêt public between the National Financial Prosecutor of the Paris first instance court and HSBC Private Bank (Suisse) SA, https://www.agence-francaise-anticorruption.gouv.fr/files/2018-10/CJIP_English_version.pdf.
[227] Republic of France Ministry of Justice, Judicial Public Interest Agreement between The French National Prosecutor’s Office At the Paris District Court and AIRBUS SE, https://www.agence-francaise-anticorruption.gouv.fr/files/files/CJIP%20AIRBUS_English%20version.pdf.
[228] Airbus agreed to pay a fine and costs amounting to €991 million in the UK, and approximately €526 million to U.S. authorities. See Airbus SFO Press Release, supra note 32.
[229] Republic of France Ministry of Justice, Convention judiciaire d’intérêt public between the National Prosecutor of the Nice Tribunal and Swiru Holding AG, https://www.agence-francaise-anticorruption.gouv.fr/files/files/CJIP%20affaire%20SWIRU%20HOLDING%20AG.pdf.
[230] Republic of France Ministry of Justice, Circulaire de politique pénale en matière de lutte contre la corruption international (June 2, 2020), http://circulaires.legifrance.gouv.fr/pdf/2020/06/cir_44989.pdf.
[231] Id.; see also Dylan Tokar, France Moves to Embrace Fight Against Corporate Corruption, Wall St. J. (June 12, 2020), https://www.wsj.com/articles/france-moves-to-embrace-fight-against-corporate-corruption-11592003246.
[232] Deputy Attorney General Sally Quillian Yates, Memo regarding Individual Accountability for Corporate Wrongdoing (Sept. 9, 2015), https://www.justice.gov/archives/dag/file/769036/download.
[233] Republic of Singapore Government Gazette, Criminal Justice Reform Act 2018 (Apr. 20, 2018), https://sso.agc.gov.sg/Acts-Supp/19-2018.
[234] U.S. Dep’t of Justice, Justice Manual, § 1-12.100 Coordination of Corporate Resolution Penalties in Parallel and/or Joint Investigations and Proceedings Arising from the Same Misconduct, https://www.justice.gov/jm/jm-1-12000-coordination-parallel-criminal-civil-regulatory-and-administrative-proceedings.
[235] Press Release, U.S. Dep’t of Justice, Petróleo Brasileiro S.A. – Petrobras Agrees to Pay More Than $850 Million for FCPA Violations (Sept. 27, 2018), https://www.justice.gov/opa/pr/petr-leo-brasileiro-sa-petrobras-agrees-pay-more-850-million-fcpa-violations.
[236] Press Release, U.S. Dep’t of Justice, TechnipFMC Plc and U.S.-Based Subsidiary Agree to Pay Over $296 Million in Global Penalties to Resolve Foreign Bribery Case (June 25, 2019), https://www.justice.gov/opa/pr/technipfmc-plc-and-us-based-subsidiary-agree-pay-over-296-million-global-penalties-resolve.
[237] See Airbus DPA, supra note 20, at ¶ 8, ¶ 9.
[238] Airbus DOJ Press Release, supra note 16; Theo Leggett, BBC, Airbus to pay SFO €1bn in corruption settlement (Jan. 31, 2020), https://www.bbc.com/news/business-51328655.
[239] Serious Fraud Office, Corporate Co-operation Guidance (Aug. 16, 2019), https://www.sfo.gov.uk/download/corporate-co-operation-guidance/. See our client alert titled “The UK Serious Fraud Office’s latest guidance on corporate co-operation – Great expectations fulfilled or left asking for more?”
[241] U.S. Dep’t of Justice, Justice Manual, § 9-28.710 Attorney-Client and Work Product Protections, https://www.justice.gov/jm/jm-9-28000-principles-federal-prosecution-business-organizations.
[242] See, e.g., Telefonaktiebolaget LM Ericsson Deferred Prosecution Agreement (Dec. 6, 2019), https://www.justice.gov/usao-sdny/press-release/file/1224261/download (“In addition to the obligations in Paragraph 5, during the Term, should the Company learn of any evidence or allegation of conduct that may constitute a violation of the FCPA anti-bribery or accounting provisions had the conduct occurred within the jurisdiction of the United States, the Company shall promptly report such evidence or allegation to the Fraud Section and the Office.”). But see Chipotle DPA, supra note 14 (incorporating no comparable provision).
[243] BHBM and BHS NPA, supra note 6.
[244] Pentax DPA, supra note 138, at ¶ 13.
[245] See, e.g., Airbus DPA, supra note 20.
[246] See, e.g., Apotex DPA, supra note 14, at 7 (“In addition to the obligations described above, during the Term of the Agreement, should Apotex learn of credible evidence or allegations of criminal violations of United States law affecting the competitive process by Apotex, or by any present or former officers, directors, employees, or agents, Apotex shall promptly report such evidence or allegations to the United States.”); see also Sandoz DPA, supra note 14, at 7.
[247] E.g., Airbus DPA, supra note 20, Attach. C.
[248] Practice Fusion DPA, Ex. E, supra note 154
[249] Plea Agreement, United States v. Bay State Gas Company, d/b/a Columbia Gas of Massachusetts 4 ( D. Mass, Feb. 25, 2020).
[250] Dylan Tokar, Wall St. J., Justice Department Adds New Detail to Compliance Evaluation Guidance (June 1, 2020), https://www.wsj.com/articles/justice-department-adds-new-detail-to-compliance-evaluation-guidance-11591052949. For more on this guidance, please see our separate Client Alert, “DOJ Updates Guidance Regarding Its ‘Evaluation of Corporate Compliance Programs.’”
[251] E.g., NiSource DPA, supra note 14, at 5 (“The Government, in its sole discretion, will determine whether NiSource has breached the Agreement. . . . NiSource also agrees that, in the event that the Government determines, in its sole discretion, that NiSource has violated any provision of this Agreement, an extension of the Term of the Agreement may be imposed by the Government, in its sole discretion, for up to a total additional time period of twelve (12) months.”).
[252] Daniel Gallas, BBC News, Brazil’s Odebrecht Corruption Scandal Explained (Apr. 17, 2019), https://www.bbc.com/news/business-39194395.
[253] Mengqi Sun, Wall St. J., Brazil’s Odebrecht Agrees to Extend Monitorship for Another Nine Months (Feb. 4, 2020), https://www.wsj.com/articles/brazils-odebrecht-agrees-to-extend-monitorship-for-another-nine-months-11580859505.
[254] 950 F.3d 1297 (10th Cir. 2020).
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