On January 10, 2020, the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice released for public comment draft Vertical Merger Guidelines, which would replace the Non-Horizontal Merger Guidelines originally published by the agencies in 1984.

Vertical mergers combine two or more companies that operate at different levels of the same supply chain. According to the draft Vertical Merger Guidelines, the principles and analytical framework used to assess horizontal mergers also apply to vertical mergers, and thus, the new guidelines are intended to be read in conjunction with the agencies’ 2010 Horizontal Merger Guidelines. Common issues such as defining relevant product and geographic markets, evaluating entry considerations, treatment of a failing firm, and partial ownership acquisitions are addressed in the Horizontal Merger Guidelines, while the draft Vertical Merger Guidelines address distinct considerations raised by vertical mergers.

The draft Vertical Merger Guidelines do not appear to signal an intent to increase scrutiny of vertical mergers or a change in enforcement priorities. Rather, FTC Chairman Joseph Simons and Assistant Attorney General Makan Delrahim emphasized that the new guidelines are intended to more accurately describe current agency practice and provide greater transparency on how the agencies approach vertical mergers.

The Commission vote to publish the draft Vertical Merger Guidelines was 3-0-2, with Commissioners Rebecca Kelly Slaughter and Rohit Chopra abstaining. Public comments on the draft can be submitted to the agency by February 11, 2020. Although the guidelines may be modified after public comments are received, major changes are unlikely. If they are finalized without major changes, these guidelines are likely to govern the agencies’ analysis, practice, and enforcement decisions with respect to vertical mergers for years to come.

Highlights

Related Products and Relevant Markets: The draft guidelines describe how for analytical purposes the agencies normally will identify one or more relevant markets in which a vertical merger may substantially lessen competition. The agencies also will identify one or more “related products” – that is, products or services that are “vertically related to the products or services in the relevant market and to which access by the merged firm’s rivals affects competition in the relevant market.” A “related product” could be an input, a means of distribution, or access to customers.
Safe Harbor: The draft guidelines state that the agencies are unlikely to challenge a vertical merger where the parties to the merger have less than 20 percent share in the relevant market and the related product is used in less than 20 percent of the relevant market. The agencies stress that these thresholds are not bright line rules. Mergers involving shares above these thresholds do not necessarily raise competitive concerns, and shares below these thresholds might raise competitive concerns, depending on the circumstances.
Unilateral Effects: The draft guidelines outline two ways in which vertical mergers could have unilateral anticompetitive effects – that is, ways in which the merger could increase the ability or incentive of the merged firm to increase prices or reduce output on its own. First, a vertical merger could allow the merged firm to weaken a competitor by foreclosing that rival from or raising the rival’s costs to access a related product, such as a necessary input or distribution channel. Second, a vertical merger could diminish competition by giving the merged firm access to competitively sensitive information of its upstream or downstream rivals, causing the merged firm to moderate its competitive response.
Coordinated Effects: The draft guidelines also explain how a vertical merger could make a market more vulnerable to coordination by weakening or eliminating a maverick firm that would otherwise thwart anticompetitive coordination. Alternatively, according to the draft guidelines, a vertical merger might facilitate anticompetitive coordination by giving the merged firm access to competitively sensitive information.
Elimination of Double Marginalization: When two vertically related firms merge, the merged firm is often able to profitably reduce its downstream prices. The draft guidelines acknowledge that this reduction, called the elimination of double marginalization (“EDM”), benefits both the merged firm and buyers of the downstream product or service. The draft guidelines put the burden on the merging parties to demonstrate whether and how the merger eliminates double marginalization, but states that the agencies will not challenge a merger if the net effect of the EDM means the merger is not likely to be anticompetitive.
Efficiencies: The draft guidelines acknowledge that to the extent a vertical merger combines complementary assets, it has the potential to create other efficiencies that may benefit consumers. The agencies will evaluate those claimed efficiencies using the approach outlined in the Horizontal Merger Guidelines.

Potential Implications

As noted above, the release of draft Vertical Merger Guidelines does not signal increased enforcement of the antitrust laws with respect to vertical mergers. The 1984 Non-Horizontal Merger Guidelines were widely considered to be woefully out of date and did not reflect modern antitrust analysis. The draft guidelines reflect the agencies’ effort to provide merging parties and their representatives with greater transparency as to the analytical framework they use today.

For example, much of the agencies’ recent enforcement regarding vertical mergers focused on allegations that the vertical merger would foreclose rivals, although that theory is not discussed in the 1984 Guidelines. The draft guidelines include for the first time a description of how vertical mergers can harm competition by enabling the merged firm to foreclose rivals from necessary supply or distribution channels or raise its rivals costs for those products or services. This reflects DOJ’s theory of harm in its unsuccessful challenge of AT&T’s merger with Time Warner, where it alleged that the acquisition would provide AT&T with the ability and incentive to raise the cost of Time Warner programming to its competitors (other video programming distributors).

In discussing the theories regarding foreclosure and raising rivals costs, the draft guidelines introduce the term “related product.” According to the draft guidelines, for example, an input or distribution channel is “related” if a rival’s access to that product or service affects competition in the relevant market. It does not appear that the agencies intend the “related product” concept to support a separate theory of harm. Rather, it is discussed solely in the context of the foreclosure and raising rivals costs theories It remains to be seen how the agencies will identify related products in practice, and in particular how they will determine whether access to a potentially related product affects competition in the relevant market.

The draft guidelines also eliminate some theories outlined in the 1984 Non-Horizontal Merger Guidelines, including the theory that a vertical merger could raise barriers to entry by effectively requiring new rivals to simultaneously enter the upstream and downstream markets. The draft guidelines also eliminate reference to vertical mergers harming competition by enabling the merged firm to evade rate regulation.

As noted above, the draft guidelines provide a potentially useful “safe harbor” for cases in which the merged firm has less than 20 percent share of the relevant market and the related product is used in less than 20 percent of the relevant market. This threshold, however, is substantially lower than the safe harbor applied by the European Commission, which is unlikely to challenge a vertical merger if the merged firm has less than 30 percent share in the relevant and related markets.

The draft Vertical Merger Guidelines do not reference remedies and it is not clear whether or how these new guidelines will impact the agencies’ consideration of remedies. Even when vertical mergers have the potential to harm competition, they also often yield substantial efficiencies. Historically, the agencies have sought to resolve concerns with vertical mergers while preserving those efficiencies. In its 2011 Policy Guide to Remedies, the DOJ stated that it would consider tailored conduct remedies to prevent potential harms of vertical mergers while still allowing efficiencies to be realized. In 2018, however, the DOJ withdrew the 2011 Guide, leaving in place the 2004 Policy Guide, which strongly disfavors conduct remedies in favor of structural remedies like divestiture.

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work in the Antitrust and Competition Practice Group, or the following authors:

Kristen C. Limarzi – Washington, D.C. (+1 202-887-3518, [email protected])
Adam Di Vincenzo – Washington, D.C. (+1 202-887-3704, [email protected])

Please also feel free to contact any of the following practice group leaders and members:

Antitrust and Competition Group:

Washington, D.C.
D. Jarrett Arp (+1 202-955-8678, [email protected])
Adam Di Vincenzo (+1 202-887-3704, [email protected])
Scott D. Hammond (+1 202-887-3684, [email protected])
Kristen C. Limarzi (+1 202-887-3518, [email protected])
Joshua Lipton (+1 202-955-8226, [email protected])
Richard G. Parker (+1 202-955-8503, [email protected])
Cynthia Richman (+1 202-955-8234, [email protected])
Jeremy Robison (+1 202-955-8518, [email protected])
Chris Wilson (+1 202-955-8520, [email protected])

New York
Eric J. Stock (+1 212-351-2301, [email protected])
Lawrence J. Zweifach (+1 212-351-2625, [email protected])

Los Angeles
Daniel G. Swanson (+1 213-229-7430, [email protected])
Samuel G. Liversidge (+1 213-229-7420, [email protected])
Jay P. Srinivasan (+1 213-229-7296, [email protected])
Rod J. Stone (+1 213-229-7256, [email protected])

San Francisco
Rachel S. Brass (+1 415-393-8293, [email protected])

Dallas
Veronica S. Lewis (+1 214-698-3320, [email protected])
Mike Raiff (+1 214-698-3350, [email protected])
Brian Robison (+1 214-698-3370, [email protected])
Robert C. Walters (+1 214-698-3114, [email protected])

Brussels
Peter Alexiadis (+32 2 554 7200, [email protected])
Attila Borsos (+32 2 554 72 11, [email protected])
Jens-Olrik Murach (+32 2 554 7240, [email protected])
Christian Riis-Madsen (+32 2 554 72 05, [email protected])
Lena Sandberg (+32 2 554 72 60, [email protected])
David Wood (+32 2 554 7210, [email protected])

Munich
Michael Walther (+49 89 189 33 180, [email protected])
Kai Gesing (+49 89 189 33 180, [email protected])

London
Patrick Doris (+44 20 7071 4276, [email protected])
Charles Falconer (+44 20 7071 4270, [email protected])
Ali Nikpay (+44 20 7071 4273, [email protected])
Philip Rocher (+44 20 7071 4202, [email protected])
Deirdre Taylor (+44 20 7071 4274, [email protected])

Hong Kong
Kelly Austin (+852 2214 3788, [email protected])
Sébastien Evrard (+852 2214 3798, [email protected])

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

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I. Introduction: Themes and Notable Developments

A. Behind and Beyond the Enforcement Numbers

This year, the SEC’s review of the performance of the Enforcement Division has de-emphasized the statistics and focused more on qualitative measures of its performance. As Chairman Clayton noted in his December testimony to the Senate Banking Committee, “purely quantitative measures alone cannot adequately measure the effectiveness of Enforcement’s work, which can be evaluated better by assessing the nature, quality and effects of each of the Commission’s enforcement actions with an eye toward how they further the agency’s mission.”[1]

With that said, this fiscal year saw a spike in the number of enforcement actions – the number of standalone enforcement actions increased to 526 from 490 the prior year, and the amount of financial remedies obtained also increased to $4.3 billion from $3.9 billion the prior year. However, an unstated reason to avoid focus on statistical metrics could be that looking behind the numbers reveals that the increase is attributable to a one-time Mutual Fund Share Class Disclosure Initiative, a group of cases in which investment advisers were encouraged to self-report issues associated with the selection of fee-paying mutual fund share classes when a lower or no-cost share class of the same fund was available. Consequently, the apparent increase is more likely an anomaly than a trend.[2]

As in prior years under this administration, the SEC’s Enforcement Division this year continued to focus on cases impacting retail investors and on cyber-related cases, including initial coin offerings and other digital assets. Given this current administration continues for at least another year, one should not expect dramatic changes in the focus of the Enforcement Division next year.

After several years of a freeze on hiring, during which staffing numbers declined due to attrition, this year’s budget did provide the Enforcement Division with additional hiring authority. However, although headcount for Enforcement (as well as the Commission generally) increased slightly from the prior year, staffing is still well below its peak in 2016.

One positive trend note to look for in the coming year is an increased focus on reducing the duration of investigations. The Enforcement Division’s Annual Report notes that on average investigations that result in enforcement actions take an average of two years, and that the more complex accounting and disclosure cases take an average of three years. This does not include investigations that do not result in any enforcement action, which can remain open even longer, leaving those subject to investigations in an indefinite state of uncertainty. While it is encouraging that the Enforcement Division is taking steps to shorten the duration of investigations, it will remain to be seen whether the Commission is able to achieve any meaningful success in this regard.

B. Insider Trading Developments

On December 30, 2019, the Second Circuit issued a significant opinion in United States v. Blaszczak that heightens the risk of investigation and prosecution in certain types of insider trading cases.[3] In Blaszczak, a Center for Medicare & Medicaid Services (“CMS”) employee, a “political intelligence” hedge fund consultant, and two hedge fund employees were charged in an insider trading scheme whereby confidential “predecisional” CMS information regarding planned changes to medical reimbursement rates was allegedly disclosed via the consultant to the hedge fund employees, who then directed their hedge fund to short stocks of healthcare companies that would be hurt by the reimbursement rate changes. After trial, a jury verdict found the defendants not guilty of insider trading under Title 15 (the Securities Exchange Act provision prohibiting securities fraud), which required that the defendants knew that the tipper received a personal benefit, but found the defendants guilty under Title 18 (a criminal securities fraud provision added in the 2002 Sarbanes-Oxley Act to the wire fraud statute), which did not require a personal benefit to the tipper. On appeal, the Second Circuit considered two primary issues: (1) whether the requirement in insider trading cases brought under Title 15 that the tipper receive a personal benefit and the tippee have knowledge of that personal benefit applied to the Title 18 criminal securities fraud provision; and (2) whether confidential predecisional government information constituted government “property,” a necessary element for the convictions.

Reasoning that the Securities Exchange Act and Sarbanes-Oxley securities fraud provisions were rooted in different purposes, the Second Circuit refused to extend the Title 15 personal benefit requirement to the Title 18 securities fraud and wire fraud provisions. In addition, the Second Circuit, in a 2-1 decision, held that confidential government information may constitute government “property,” analogizing it to “confidential business information” that the Supreme Court had previously held to be property. The Second Circuit therefore affirmed the convictions. Blaszczak heightens the risk of DOJ investigation and prosecution in the subset of insider trading cases where there is limited-to-no-evidence of personal benefit to the tipper or the downstream tippee’s knowledge of the personal benefit. The decision makes it more likely that prosecutors will routinely bring Title 18 securities fraud and wire fraud charges in conjunction with Title 15 charges, especially given the continually evolving case law regarding what constitutes a “personal benefit.” Blaszczak also heightens the risk of both SEC and DOJ investigations in cases involving trading while in possession of a wide range of confidential executive agency information, whether obtained directly from a government employee or, as was the case in Blaszczak, from a consultant with access to government employees.

For further information on the Blaszczak decision and its implications, please see our separate Client Alert, “United States v. Blaszczak: Second Circuit Ruling Heightens Risks of Insider Trading Investigations and Prosecutions.”

C. Legislative Developments

On December 9, 2019, the US House of Representatives overwhelmingly passed the Insider Trading Prohibition Act (the “Act”), 410 to 13, which, if enacted, would codify a ban on insider trading. See H.R. 2534 116th Cong. § 16A. The Act amends the Securities Exchange Act of 1934 (15 U.S.C. § 78a et seq.), the securities fraud provisions of which courts have previously interpreted to prohibit insider trading. The Act, which is currently pending in

the Senate, largely adopts existing insider trading caselaw and theories of liability. In its current form, the Act does not amend the criminal securities fraud provision 18 U.S.C. § 1348, which, similar to the Securities Exchange Act, courts have interpreted to prohibit insider trading.

Section (a) of the Act would prohibit trading securities while aware of “material, nonpublic information relating to [a security], or any nonpublic information… that has, or would reasonably be expected to have, a material effect on the market price of [the security]” if the person “knows, or recklessly disregards, that such information has been obtained wrongfully” or that the transaction “would constitute a wrongful use of such information.” Id. § 16A(a). Section (b) would prohibit anyone who would be prohibited from trading under section (a) from “communicat[ing] material, nonpublic information relating to such security…to any other person if” (1) the other person trades “any security. . . to which such communication relates” or “communicates the information to another person who makes or causes such a purchase, sale, or entry,” and (2) “the purchase, sale, or entry . . . is reasonably foreseeable.” Id. § 16A(b).

The Act applies to information that is “obtained wrongfully” or where use would be “wrongful.” It clarifies that “trading while aware of material, nonpublic information . . . or communicating material nonpublic information. . . is wrongful only if the information has been obtained by, or its use would constitute. . . (A) theft, bribery, misrepresentation, or espionage (through electronic or other means); (B) a violation of any Federal law protecting computer data or the intellectual property or privacy of computer users; (C) conversion, misappropriation, or other unauthorized and deceptive taking of such information; or (D) a breach of any fiduciary duty, a breach of a confidentiality agreement, a breach of contract, a breach of any code of conduct or ethics policy, or a breach of any other personal or other relationship of trust and confidence for a direct or indirect personal benefit (including pecuniary gain, reputational benefit, or a gift of confidential information to a trading relative or friend).” Id. § 16A(c)(1). In addition, the Act has a “knowledge requirement” mandating that the person “was aware, consciously avoided being aware, or recklessly disregarded that such information was wrongfully obtained, improperly used, or wrongfully communicated,” although the person is not required to know “whether any personal benefit was paid or promised.” Id. § 16A(c)(2).

This is not the first time Congress has considered a statutory definition of insider trading. Advocates of such legislation argue that a statutory definition will bring clarity to an area of the law developed through decades of judicial interpretation of a general anti-fraud statute. However, since the House bill, like similar prior attempts a legislation, generally seeks to embody existing legal theories, critics argue that such attempts do little to simplify a complex and nuanced set of issues and actually risks adding vagueness and uncertainty. Moreover, despite significant support for the bill in the House, there appears to be little enthusiasm in the Senate for pursuing such legislation, particularly in the final months before the next election.

D. Litigation Developments

Looming over the Enforcement Division in the coming year will a case before the Supreme Court which presents the question of whether the SEC is authorized to pursue one of its mainstay remedies — disgorgement of so-called ill-gottten gains — in enforcement actions in federal district court. There is no statute which expressly authorizes the SEC to obtain disgorgement in these federal enforcement actions, unlike in administrative proceedings where there is specific authority for the SEC to seek disgorgement. Rather, the securities laws enumerate certain statutorily defined penalties that the SEC may recover in appropriate circumstances. Nevertheless, historically, federal courts have ordered disgorgement as an equitable remedy. In its 2017 decision in Kokesh, the Supreme Court held that the remedy of disgorgement constituted a penalty and therefore was subject to the 5-year statute of limitations on penalties. The Enforcement Division estimates that as of the end of the 2019 fiscal year, the 5-year statute of limitations put beyond the SEC’s reach $1.1 billion in alleged ill-gotten gains. In a footnote to the Kokesh decision, the Court noted that the case did not present, and the Court would not decide, whether the SEC is authorized to obtain disgorgement.

In November, the Supreme Court granted certiorari in Liu v. SEC, in which a defendant in an enforcement action was ordered to pay disgorgement as part of a final judgment entered by the district court. Before appealing to the Ninth Circuit, the Supreme Court decided Kokesh. The appellant argued to the Ninth Circuit that, in light of the decision in Kokesh that disgorgement is a penalty, and there is no statutory authorization for the SEC to seek disgorgement as a penalty, the SEC lacks authority to seek disgorgement. The Ninth Circuit affirmed the District Court’s disgorgement order based on pre-Kokesh precedent and the fact that Kokesh had expressly declined to address the question. The issue is now squarely before the Supreme Court. If the Supreme Court disallows disgorgement, the SEC’s enforcement program will be significantly weakened, that is, unless Congress steps in with a legislative solution to authorize the disgorgement remedy expressly.

E. Commissioners and Senior Staffing Update

During the latter half of 2019, 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.

On July 8, Allison Lee was sworn in as the fifth Commissioner, bringing the Commission back to its full complement of five Commissioners. As we noted in our Mid-Year Alert, Commissioner Lee replaces prior Democratic Commissioner Kara Stein. Commissioner Lee previously served at the Commission for over a decade, including as counsel to Commissioner Stein, as well as a Senior Counsel in the Complex Financial Instruments Unit of the Division of Enforcement.

A change in the other Democratic Commissioner, Robert Jackson, also appears to be on the horizon. For several months there have been reports that Commissioner Jackson would be stepping down soon to return to teaching at NYU Law School. (Although Commissioner Jackson’s term formally ended in June 2019, Commissioners may continue for another 18 months.) According to media reports shortly before the end of the year, Senator Chuck Schumer proposed to the White House that Caroline Crenshaw, an attorney currently working for Commissioner Jackson, be nominated as his replacement. Crenshaw has been employed at the SEC since 2013, and, like Commissioner Lee, previously worked under Democratic commissioner Kara Stein. Crenshaw is also a judge advocate in the U.S. Army Judge Advocate General’s Corps.[4]

Other changes in the senior staffing of the Commission include:

In September, Monique Winkler was appointed Associate Regional Director in the SEC’s San Francisco Office. As Associate Regional Director, Ms. Winkler oversees the Enforcement program for the San Francisco Office. Ms. Winkler has worked at the SEC since 2008, including working in the Enforcement Division’s Public Finance Abuse Unit.
In October, Katharine Zoladz was appointed Associate Regional Director in the SEC’s Los Angeles Office. As Associate Regional Director, Ms. Zoladz, co-heads the Enforcement program for the Office, along with Associate Regional Director Alka Patel. Ms. Zoladz has worked at the SEC since 2010, including working in the Asset Management Unit.
In November, Chief Administrative Law Judge Brenda Murray retired after 50 years of federal service, including 25 years as Chief Administrative Law Judge.
In December, Kristina Littman was appointed Chief of the Enforcement Division’s Cyber Unit. Ms. Littman has worked at the SEC since 2010, including working in the Enforcement Division’s Market Abuse Unit and Trial Unit, and most recently, as counsel to Chairman Clayton.

F. Whistleblower Awards and Cases

The SEC’s whistleblower program continues to provide significant financial awards to whistleblowers. As of the end of 2019, the SEC has awarded a total of approximately $390 million to 71 individual whistleblowers. This is a reminder of the powerful financial incentive the program provides to would-be whistleblowers. In fiscal year 2019, the SEC received over 5,200 whistleblower tips. The size of whistleblower payments, in addition to the volume of tips coming through the whistleblower office, emphasize the importance of a company’s response to internal complaints from employees who could become whistleblowers. Maintaining a record of investigating internal complaints can put a company in a position to respond to SEC inquiries if and when the government comes calling.

In the second half of 2019, the SEC granted several whistleblower awards that were significant, though not on the scale of the largest awards that have been awarded since the program began. As always, the Commission discloses little substantive information on the basis for the award. In July, the SEC announced a $500,000 award to an overseas whistleblower whose reporting helped the Commission bring a successful enforcement action.[5] In August, the SEC awarded over $1.8 million to a whistleblower whose cooperation included giving sworn testimony and reviewing documents, among other assistance in an investigation of conduct committed overseas.[6] And in November, the SEC awarded collectively $260,000 to three whistleblowers—themselves harmed investors—who jointly provided a tip that led to an enforcement action alleging a scheme targeting retail investors.[7]

The Commission also brought another action for violation of the anti-retaliation provision of the whistleblower law. In November, the SEC amended its complaint in a pending enforcement action against an online auction portal and its CEO to add allegations that the defendants unlawfully sought to prohibit investors from reporting misconduct to the SEC and other governmental agencies.[8] In its original complaint against the company and its CEO, the SEC had alleged that the defendants engaged in a fraudulent securities offering based on false statements to investors and had misappropriated over $6 million of investor proceeds. According to the amended complaint, the defendants attempted to resolve investor allegations of wrongdoing by conditioning the return of investor money on the investors signing agreements prohibiting them from reporting potential securities law violations to law enforcement, including the SEC. The complaint is pending in the U.S. District Court for the Southern District of New York.

G. Emerging Interest in Use of Big Data by Investment Managers

For years now we have been counseling clients on managing the regulatory and compliance risks arising from the use of alternative data or big data in portfolio management. The procurement and use of such data raises a number of potential compliance issues – both under the securities laws as well as data privacy laws – not unlike the risks presented by the use of other third party data sources such as expert networks. Years before regulators and prosecutors began bringing insider trading cases based on the use of expert networks, the SEC’s Compliance Examination program had begun asking investment advisers about their use of expert networks and the policies and procedures advisers employed to promote compliance with the securities laws. This year we have observed the SEC’s Examination staff adding to certain of their request lists requests for information about the adviser’s use of alternative data and related compliance policies and procedures. The Examination staff can use such information to learn about the various forms of alternative data managers are using, understand the range of compliance and diligence practices being employed, potentially formulate guidance in the form of a risk alert, or, in certain cases, refer matters to Enforcement for further investigation. The Examination staff’s heightened scrutiny also mirrors interest from other regulators, legislators and the media in this fast-evolving and potentially risky area. In sum, the focus of the Examination staff on fund managers’ use of alternative data emphasizes the importance of having in place policies and procedures for the on-boarding of big data providers, training of investment professionals in the risks, and ongoing monitoring of such providers on a periodic basis.

H. Cryptocurrency

In the latter half of 2019, the SEC continued its cyber focus, bringing multiple enforcement actions in the cryptocurrency space, in large part centered on initial coin offerings (“ICOs”). Commissioner Peirce has been critical of the Commission’s approach to crypto-related issues, and has advocated for clarifying regulation rather than a “parade of enforcement actions” as a means to provide guidance to the market. In a speech in November 2019, Commissioner Peirce argued that, “the lack of a workable regulatory framework has hindered innovation and growth.” In particular, Commissioner Peirce advocated a “non-exclusive safe harbor period within which a token network could blossom without the full weight of the securities laws crushing it before it becomes functional.” It remains to be seen whether these views will influence that regulatory approach to offerings of crypto-currencies and other digital assets.[9] In the meantime, the parade marches on, as the discussion of recent cases below reflects.

In September, the SEC settled an action against a blockchain technology company for allegedly conducting an unregistered ICO.[10] According to the SEC, the company failed to register the ICO—which had raised several billion dollars’ worth of digital assets between June 2017 and June 2018—as a securities offering and did not otherwise seek an exemption from registration requirements, in violation of the registration provisions of the federal securities laws. Without admitting or denying the SEC’s findings, the company agreed to pay a $24 million civil penalty and to a cease-and-desist order.

A few weeks later, the SEC announced an emergency action against a mobile messaging company and its subsidiary in connection with an alleged unregistered ICO.[11] The SEC filed a complaint against the two companies in the Southern District of New York alleging that they failed to register their securities—digital tokens called “Grams”—and therefore also failed to provide investors with information about their investments. The SEC sought and obtained a temporary restraining order in order to stop the then-ongoing ICO. The litigation remains pending; the parties are currently engaged in discovery and additional briefing is due in January. The Court has ordered that the companies refrain from the offering, selling, or distribution of Grams until conclusion of the preliminary injunction hearing, which has been scheduled for mid-February 2020.

In December, the SEC filed another action in the Southern District of New York, charging the founder of a digital-asset issuer and the issuer itself with defrauding investors in connection with an ICO.[12] The complaint alleges that the founder conducted a fraudulent unregistered securities offering, making misrepresentations to investors and failing to create a functional platform for online shopping profiles as promised would be done with funds raised in the ICO. The founder also allegedly misappropriated funds from the ICO for his own personal use, according to the SEC. The founder and company have not yet answered the SEC’s complaint.

Also in December, the SEC brought settled charges against a blockchain technology company for failing to register an ICO that began after the Commission’s 2017 DAO Report was issued.[13] The company allegedly sold unregistered digital tokens to investors in the U.S. and through foreign resellers without placing restrictions on resale to U.S. investors. In settling the charges without admitting or denying the findings, the company agreed to a $250,000 penalty, a cease-and-desist order, and to return funds used to purchase tokens to investors who submit a claim.

II. Public Company Cases

A. Accounting Fraud and Internal Controls

The SEC brought several accounting fraud cases involving filed complaints against public companies and executives in the second half of 2019. Notably, several of the Commission’s actions against individuals were not settled, thus adding to the Enforcement Division’s litigation docket for the coming year.

In July, the SEC filed a complaint in federal court in Chicago alleging that the former CEO and two former sales executives of an engine manufacturing company had committed accounting fraud by overstating the company’s revenues by nearly $25 million.[14] According to the SEC, the executives fraudulently recorded revenue on sales that were not yet complete, that the customer had not agreed to accept, and for which the company falsely inflated the price. The executives allegedly worked to conceal the fraud by misleading and withholding key information from the company’s accountants and outside auditor. The complaint sought permanent injunctions and penalties, as well as disgorgement and prejudgment interest from one of the sales executives and an officer-and-director bar and clawback of incentive-related compensation from the CEO.

In September, the SEC filed a complaint in federal court in Indianapolis charging two former executives of a trucking company with accounting fraud, books and records violations, and reporting violations.[15] The complaint alleged that the former president and COO and former CFO participated in a scheme to buy and sell trucks at prices much higher than their fair market value, leading to the company overstating its income and earnings per share. According to the complaint, the executives tried to conceal the alleged overvaluing by lying to the company’s auditor about whether the prices were determined independently and their roles in the transactions. The SEC is seeking injunctions, monetary penalties, and officer-and-director bars. The company settled related accounting fraud charges in April 2019.

The SEC in November charged a biotech company and three former executives with antifraud, reporting, books and records, and internal control violations for allegedly misstating revenue and attempting to cover it up.[16] The complaint alleged that the company’s former CEO and COO entered into undisclosed side arrangements with distributors that allowed the distributors to return product and conditioned payment obligations on end-user sales, leading to the company prematurely recognizing sales revenue and overstating revenue growth. According to the SEC, the two former executives, along with the CFO, covered up this arrangement for years, including by misleading outside auditors and lawyers. The company agreed to settle for a $1.5 million penalty, without admitting or denying wrongdoing; the litigation against the executives remains pending.

In early December, the SEC charged a brand-management company and three of its former executives with accounting fraud.[17] According to the complaint, the former CEO and COO created fictitious revenue that caused the company to meet or beat analysts’ estimates for two quarters and allowed the executives to profit substantially on stock sales. In related charges, the SEC alleged that the company recognized false revenue and manipulated its earnings; concealed distressed finances of licensees; and failed to recognize more than $239 million in impairment charges for three brands. And it alleged that the company and its former CFO caused the company to overstate its net income by hundreds of millions of dollars by failing to recognize certain losses, disclose transactions to temporarily improve licensees’ finances, and test for impairment. Without admitting or denying the allegations, the company agreed to pay a $5.5 million penalty, while the former COO agreed to a permanent officer-and-director bar as well as disgorgement and prejudgment interest of more than $147,000 and a penalty to be determined later, and the former CFO agreed to disgorgement and prejudgment interest of almost $50,000 and a penalty of $150,000. The litigation against the former CEO remains ongoing.

B. Misleading Disclosures

In addition to the accounting-related cases discussed above, the SEC also pursued cases based on misleading disclosures made by public companies in the latter half of the year.

Misleading Metrics

In August, the SEC announced settled charges against a publicly-traded real estate investment trust and simultaneously filed a complaint against four former executives, alleging that over a two-year period they fraudulently adjusted a certain non-GAAP metric in an effort to hit the company’s growth targets.[18] The complaint alleged that the executives misled investors and analysts by manipulating the company’s same property net operating income (SP NOI) metric in various ways, including by only selectively recognizing income, incorporating income the company had said was excluded, and making the company’s growth appear stronger by lowering the prior year’s SP NOI. The company paid a $7 million penalty to settle the charges without admitting or denying liability. Two of the executives also agreed to partial judgments with monetary relief to be determined in the future.

In September, the SEC announced settled fraud charges against an information and media analytics firm and its former CEO for allegedly overstating revenue and misstating certain performance metrics after entering into a series of non-monetary transactions.[19] According to the SEC’s orders, the company—at the direction of the CEO—was negotiating for and exchanging sets of data without cash consideration and then recognizing inflated revenue on those non-monetary transactions based on the fair value of the data, which itself was increased. As part of the alleged scheme, the SEC contended that both the company and CEO misled investors by making false statements about the company’s customer base and product, and that the CEO lied to accountants in an effort to exceed revenue targets for seven consecutive quarters. Without admitting or denying the SEC’s findings, the company and CEO agreed to settle for a combined penalty of $5.7 million, with the CEO also reimbursing the company $2.1 million in incentive-based compensation and profits from stock sales.

Executive Perks

In September, the SEC settled actions against an automobile manufacturer, its former CEO, and its former director relating to charges that the company made false financial disclosures when it omitted disclosure of approximately $140 million in executive benefits.[20] The SEC alleged that the company’s CEO, with substantial assistance from the charged director and others in the company, worked to conceal more than $90 million in executive compensation from disclosure. The individuals also allegedly made efforts to increase the CEO’s retirement account by approximately $50 million each year. Without admitting or denying the charges, the company agreed to a $15 million civil penalty and, along with the individuals charged, agreed to cease and desist from future violations of the anti-fraud provisions of federal securities laws. In addition, the company’s CEO agreed a $1 million civil penalty and a 10-year officer and director bar while the director settled charges for a $100,000 penalty, a five-year officer and director bar, and a five-year suspension from practicing or appearing before the Commission as an attorney.

Other Disclosures and Omissions

In July, the SEC settled charges with a social media platform relating to allegations that the company made misleading disclosures regarding the risk of misuse data.[21] Specifically, the SEC alleged that for approximately two years, the company framed its data misuse disclosure as a hypothetical, staying that “data may be improperly accessed, used or disclosed,” when the company allegedly knew that a third-party had misused its users’ data. Without admitting or denying the allegations, the company agreed to pay $100 million to settle the action.

In September, the SEC announced it had settled charges with a Silicon Valley-based issuer for allegedly failing to disclose a revenue management scheme in violation of the antifraud and reporting provisions of the federal securities laws.[22] The SEC alleged the issuer misled investors when it engaged in a scheme to “pull-in” sales to the current quarter in order to meet publicly-issued revenue guidance. The practice allegedly concealed from investors a decline in consumer demand, a loss of market share, and reduced future sales. Without admitting or denying the charges, the issuer agreed to pay a $5.5 million.

Also in September, the SEC announced settled charges against a pharmaceutical company for allegedly failing to disclose or accrue for losses relating to a Department of Justice (“DOJ”) investigation into the company’s classification of its largest revenue and profit generating product.[23] The DOJ investigation began in 2014 and lasted nearly two years. The SEC’s complaint alleged that before October 2016 when it announced a $465 million settlement with the DOJ, the company did not adequately disclose to investors the potential losses caused by the investigation. Without admitting or denying the SEC’s allegations, the company agreed to a $30 million penalty.

On the same day, the SEC settled charges against a Michigan-based automaker and its parent company for allegedly misleading investors about the number of new vehicles sold to U.S. consumers each month.[24] The SEC alleged that between 2012 and 2016, the automaker falsely reported uninterrupted monthly year-over-year sales growth in company press releases. The SEC alleged that the company’s growth streak had been broken in September 2013 and the company inflated vehicle sales by reporting fake sales and by reporting older sales as current ones. Without admitting or denying the charges, the two companies agreed to jointly and severally pay a $40 million civil penalty.

C. Private Company Cases

Finally, the SEC brought the following financial reporting and disclosure cases against private companies in the second half of 2019:

In September, the SEC announced it settled charges against a multinational direct-to-consumer sales company relating to allegedly false and misleading statements about the company’s business model in China.[25] The SEC alleged that between 2012 and 2018, the company’s quarterly and annual SEC filings inaccurately described the company’s payment structure in China as different from that used in other countries, when in fact the compensation paid in China was similar to that paid in other countries. This description, the SEC alleged, prevented investors from fully evaluating the risk to the company’s stock. Without admitting or denying the SEC’s charges, the company agreed to pay a $20 million penalty and to cease and desist from future violations of the antifraud and reporting provisions of the federal securities laws.

In November, the SEC filed amended fraud charges against four former executives of a private healthcare advertising company relating to misleading disclosures about the company’s success.[26] The SEC’s amended complaint, filed in federal court in Chicago, alleges that the four former executives violated the antifraud provisions of the federal securities laws by misrepresenting the company’s successes by manipulating third-party studies on its product and by overstating the company’s revenue in its 2015 and 2016 financial statements by $14.3 million and $30 million, respectively. The SEC alleges that these misleading disclosures allowed the company to raise approximately $487 from a private offering. The SEC is seeking disgorgement, penalties, injunctive relief, and officer and director bars. The U.S. Attorney’s Office for the Northern District of Illinois and Fraud Section of the Department of Justice announced parallel criminal charges against the four former executives and against two former employees not named in the SEC action.

III. Investment Advisers and Funds

In a November 2019 speech, Enforcement Co-Director Stephanie Avakian, outlined issues in the investment adviser area that are drawing investigative interest from the Enforcement Division.[27] Not surprisingly, the Enforcement Division views as a success its Share Class Selection Disclosure Initiative as it has resulted in 95 enforcement actions. (Commissioner Peirce has not been as complimentary and has questioned the merits of such aggregation of cases.[28]). Following on the conflict and disclosure themes of the Initiative, Director Avakian explained that the Commission is investigating other circumstances in which an investment adviser may be conflicted by financial incentives that may affect the adviser’s recommendations to clients. As examples, Director Avakian cited revenue sharing, cash sweep arrangements, and unit investment trusts (UITs) as circumstances that may present conflicts of interest and therefore are a growing focus of the Commission’s enforcement efforts. In each of these circumstances, the adviser’s financial interest could be impacted by investment choices for the client. In addition, Director Avakian discussed the Enforcement Division’s recently announced Teachers Initiative to examine the compensation and sales practices of third-party administrators of teacher retirement plans to identify potential conflicts of interest. In closing, Director Avakian emphasized that advisory firms should be proactive in identifying potential conflicts and ensuring adequate disclosure to clients. The enforcement actions discussed below from the latter half of 2019 reflect the Commission’s focus advisers’ identification, management and disclosure of conflicts of interest.

In July, the SEC instituted a settled action against a Massachusetts-based investment adviser and its principal based on allegations that the company failed to disclose to clients conflicts of interest in connection with recommendations to invest in certain securities.[29] According to the SEC, the company concealed the substantial financial incentives offered to it by the company in which it invested client money, resulting in over $7 million in client investments over the course of approximately two years. The SEC further alleged that the investment adviser and its principal concealed this arrangement in its regulatory filings. Additionally, the principal misused investor funds for his personal benefit. Without admitting or denying the findings in the SEC’s order, the company and the principal agreed to pay over $1 million in disgorgement and prejudgment interest, as well as a $275,000 penalty, and the principal agreed to a permanent bar from the securities industry.

In September, the SEC filed suit in federal district court in Illinois against an Illinois-based hedge fund adviser, as well as its top two executives, charging the defendants with violations of the antifraud provisions of the federal securities laws.[30] The SEC’s complaint alleges that the defendants manipulated valuation models, which artificially inflated the value of its investments, and in turn resulted in misstatements of historical performance and caused investors to overpay fees. Moreover, the SEC alleges that its exam staff discovered the valuation problems, but the defendants then endeavored to hide their actions from the company auditor and investors. The SEC seeks permanent injunctions and civil penalties.

In November, the SEC filed suit in federal district court in New York against a New York-based investment adviser in connection with its alleged concealment of losses and its sale of $60 million in bogus loan assets.[31] The SEC’s complaint alleges that the investment adviser falsified its records to hide the fact that there was no repayment of defaulted loans and that any supposed new loans were fictitious. The SEC further alleges that the firm induced clients into buying these false new loan assets by providing clients with doctored documents, including a forged credit agreement. In connection with settlement, the SEC revoked the firm’s registration and the firm’s assets are preliminarily frozen. Any future monetary relief, including but not limited to disgorgement, will be determined at a later date.

In December, the SEC filed suit in federal district court in Sacramento, California against a California-based investment adviser firm and its owner in connection with their alleged defrauding of hundreds of retirees by recommending certain investments without disclosing their conflicts of interest.[32] According to the SEC’s complaint, by concealing any conflicts of interest, the firm and its owner were able to reap millions of dollars in compensation and other benefits. Further, the firm owner had a radio show, in which he touted his expertise and simultaneously hid past charges brought against him by the SEC, with the effect of misleading prospective investors. The SEC’s complaint seeks injunctions, as well as disgorgement and civil penalties.

IV. Brokers and Financial Institutions

A. Rule Violations and Internal Systems Deficiencies

In the latter half of 2019, the SEC brought a number of cases against broker-dealers relating to inadequate SEC rule compliance and failures of internal systems.

In August, the SEC brought settled charges against a New York City headquartered broker-dealer for deficient review of over-the-counter (“OTC”) securities in violation of Rule 15c2-11, which requires that a broker-dealer have a reasonable basis for believing that information made available by the issuer of the securities is accurate.[33] The SEC’s order alleged that the broker-dealer made markets in OTC securities while delegating responsibility for rule compliance to a compliance associate who had no formal training or trading experience, resulting in allegedly deficient reviews. Without admitting or denying the SEC’s findings, the broker-dealer agreed to a penalty of $250,000.

In September, the SEC announced charges against two broker-dealers for providing the SEC with incomplete and deficient securities trading information known as “blue sheet data.”[34] The SEC’s order alleged that both broker-dealers provided blue sheet submissions which reflected millions of inaccurate or missing entries over a period of several years, largely due to undetected coding errors. The broker-dealers admitted the findings in the SEC’s orders and agreed to censures and penalties of $2.7 million and $1.95 million respectively to settle the charges.

In December, the SEC brought settled charges with two trading firms for rule violations in connection with a tender offer.[35] Specifically, the SEC’s orders alleged that the trading firms violated the “short tender rule” in connection with a partial tender offer by tendering more shares than their net long positions in the security. The SEC’s orders alleged that, because the tender offer was oversubscribed, the trading firms’ actions resulted in the firms unfairly receiving shares in the offer at the expense of other tender offer participants. Without admitting or denying the findings, the trading firms agreed to pay disgorgement and penalties totaling approximately $300,000 and $200,000 respectively.

Finally, as part of its ongoing initiative into American Depositary Receipt (“ADR”) practices (resulting in settlements exceeding $431 million), the SEC in December announced settled charges against a multi-national financial services firm relating to the handling of ADRs—U.S. securities that represent foreign shares of a foreign company and require corresponding foreign shares to be held in custody at a depositary bank.[36] The SEC’s order alleged that the firm borrowed ADRs from other brokers when it should have known that those brokers did not own the corresponding foreign shares required to support the ADRs. Without admitting or denying the findings, the firm agreed to pay nearly $4 million in disgorgement, interest, and penalties. The SEC’s order noted that the settlement represented the SEC’s fourteenth enforcement action relating to ADRs.

B. Retail Investors

As part of its ongoing focus on protecting retail investors, in September 2019, the SEC brought settled charges against three subsidiaries of a national financial services firm for charging excessive fees and commissions on retail accounts.[37] The SEC’s order alleged that the firm (i) did not perform reviews of advisory accounts that had no trading activity for at least one year, resulting in unsuitable advisory fees being charged to these accounts; and (ii) misapplied pricing data to certain unit investment trusts (“UITs”) in advisory accounts, resulting in excess fees charged on UITs. The SEC’s order also alleged with respect to UITs that the firm made unsuitable recommendations to sell UITs prior to maturity (and to then purchase new UITs), resulting in excess commissions being charged to retail customers. Without admitting or denying the findings, the firm agreed to pay approximately $12 million in disgorgement to retail investors, and also agreed to a $3 million penalty. The SEC’s order noted that it took into account remedial efforts and cooperation undertaken by the firm.

V. Insider Trading, Market Manipulation and Regulation FD

A. Insider Trading

In the second half of 2019, the SEC brought a number of insider trading cases and won a trial on insider trading charges relating to a previously-filed complaint.

In July, the SEC brought insider trading charges against a former accountant of a life sciences company and her close friend, seeking injunctive relief along with disgorgement and penalties.[38] The complaint alleges that the accountant leaked confidential revenue information to the friend in exchange for extravagant gifts, while the friend purchased securities using accounts held by several associates to conceal his identity. The scheme was discovered using advanced trading analytics software. The matter is being litigated, and parallel charges were filed by the U.S. Attorney’s Office for the Southern District of New York.

In August, the SEC charged an investment banking analyst with insider trading, alleging that the analyst purchased securities after learning about a potential transaction his employer was advising on.[39] The complaint alleges that the analyst reaped nearly $100,000 in profits, and seeks disgorgement of the gains, plus penalties and injunctive relief. The matter is being litigated, and parallel charges were filed by the U.S. Attorney’s Office for the Southern District of New York.

In August, an Atlanta federal court jury returned a verdict finding a New Jersey based securities broker liable for insider trading in advance of three transactions relating to charges that the SEC brought in 2016.[40] The broker was found guilty of violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934, as well as Rules 10b-5 and 14e-3. The jury held that the broker received information surrounding each transaction from an employee at an accounting firm, traded on the information, and passed it to a friend of his to do the same. The employee and the other trader were also charged, but previously settled their cases.[41]

In December, the SEC announced a settlement with a former United States congressman, his son, and his friend.[42] The trio were charged with insider trading, and previously pleaded guilty to related criminal charges. The defendants agreed to disgorgement and injunctive relief, and the former congressman was permanently barred from acting as an officer or director of a public company.

Also in December, the SEC charged a ring of five friends who are accused of repeatedly trading on confidential earnings information of a Silicon Valley cloud-computing company.[43] The group allegedly procured the information from one member’s IT administration position at the company, who used his credentials to access and pass along the information. The group used “carefully tailored cash withdrawals” to avoid detection, but were discovered using SEC data analysis tools. The matter is being litigated, and parallel charges have been filed by the U.S. Attorney for the Northern District of California. Notably in the criminal case, two of the individuals have been charged with violating 18 U.S.C. § 1348, a relatively recent securities fraud provision added by the Sarbanes-Oxley Act in 2002.[44] This charge may become more routine following the Second Circuit’s recent majority opinion in United States v. Blaszczak, which held that there is no “personal benefit” requirement in insider trading cases charged under this provision. This result is different from charges under the traditional Section 10(b) of the Exchange Act, where in Dirks v. SEC, the Supreme Court had held that tippers are only liable where they breach a fiduciary duty to the company’s shareholders, and they only breach such a duty where they “personally will benefit, directly or indirectly, from [their] disclosure. Absent some personal gain, there has been no breach of duty to stockholders.”

B. Market Manipulation

In November, a New York federal court jury found a Ukrainian trading firm and two individuals liable for their roles in an unlawful trading scheme.[45] The SEC originally filed the complaint in March 2017. The evidence demonstrated that the defendants engaged in a “layering scheme” involving placing and canceling orders to artificially adjust a stock price. They also engaged in cross-market manipulation by buying and selling stocks to impact options prices. The jury found all three defendants liable on all counts.

C. Regulation FD

In August, the SEC announced settled charges against a Florida-based pharmaceutical company relating to violations of Regulation FD based on its alleged sharing of material, nonpublic information with sell-side research analysts without also disclosing the same information to the public.[46] The SEC’s order alleged that on two separate occasions in 2017, the company selectively shared material information with analysts about the company’s interactions with the FDA, and that at the time of these disclosures, the company did not have policies or procedures regarding compliance with Regulation FD. The pharmaceutical company consented to the SEC’s order without admitting or denying the findings and was ordered to pay a penalty of $200,000 and cease and desist from future violations.

________________________

[1] Testimony of Chairman Jay Clayton before the U.S. Senate Committee on Banking, Housing, and Urban Affairs (Dec. 10, 2019), available at https://www.banking.senate.gov/imo/media/doc/Clayton%20Testimony%2012-10-191.pdf.

[2] See D. Michaels, Focus on Sale of Higher-Fee Mutual Funds Fuels 30-Year High for SEC Enforcement Actions, Wall St. J. (Nov. 6, 2019), available at https://www.wsj.com/articles/focus-on-sale-of-higher-fee-mutual-funds-fuels-30-year-high-for-sec-enforcement-actions- 11573043400.

[3] 2019 WL 7289753 (2d Cir. Dec. 30, 2019).

[4] Reuters, Exclusive: White House expected to nominate SEC lawyer for Democratic commissioner seat – sources (Dec. 20, 2019), available at https://www.reuters.com/article/us-usa-sec-nominations-exclusive/exclusive-white-house-expected-to-nominate-sec-lawyer-for-democratic-commissioner-seat-sources-idUSKBN1YO2CN.

[5] SEC Press Release, SEC Awards Half-Million Dollars to Overseas Whistleblower (July 23, 2019), available at https://www.sec.gov/news/press-release/2019-138.

[6] SEC Press Release, SEC Awards More Than $1.8 Million to Whistleblower (Aug. 29, 2019), available at https://www.sec.gov/news/press-release/2019-165.

[7] SEC Press Release, SEC Awards Over $260,000 to Whistleblowers for Their Help in Spotting Securities Fraud (Nov. 15, 2019), available at https://www.sec.gov/news/press-release/2019-238.

[8] SEC Press Release, SEC Charges Issuer and CEO with Violating Whistleblower Protection Laws to Silence Investor Complaints (Nov. 4, 2019), available at https://www.sec.gov/news/press-release/2019-227.

[9] Commissioner Hester M. Peirce, Broken Windows: Remarks Before the 51st Annual Institute on Securities Regulation (Nov. 4, 2019), available at https://www.sec.gov/news/speech/peirce-broken-windows-51st-annual-institute-securities-regulation.

[10] SEC Press Release, SEC Orders Blockchain Company to Pay $24 Million Penalty for Unregistered ICO (Sept. 30, 2019), available at https://www.sec.gov/news/press-release/2019-202.

[11] SEC Press Release, SEC Halts Alleged $1.7 Billion Unregistered Digital Token Offering (Oct. 11, 2019), available at https://www.sec.gov/news/press-release/2019-212.

[12] SEC Press Release, SEC Charges Founder, Digital-Asset Issuer With Fraudulent ICO (Dec. 11, 2019), available at https://www.sec.gov/news/press-release/2019-259.

[13] SEC Press Release, Issuer Settles Unregistered ICO Charges, Agrees to Return Funds and Register Tokens (Dec. 18, 2019), available at https://www.sec.gov/news/press-release/2019-267.

[14] SEC Press Release, SEC Charges Engine Manufacturing Company Executives with Accounting Fraud (July 19, 2019), available at www.sec.gov/news/press-release/2019-137.

[15] SEC Press Release, SEC Charges Trucking Executives with Accounting Fraud (Dec. 5, 2019), available at www.sec.gov/news/press-release/2019-253.

[16] SEC Press Release, SEC Charges Biotech Company and Executives with Accounting Fraud (Nov. 26, 2019), available at www.sec.gov/news/press-release/2019-243.

[17] SEC Press Release, SEC Charges Iconix Brand Group and Former Top Executives with Accounting Fraud (Dec. 5, 2019), available at www.sec.gov/news/press-release/2019-251.

[18] SEC Press Release, SEC Charges Brixmor Property Group Inc. and Former Senior Executives with Accounting Fraud (Aug. 1, 2019), available at www.sec.gov/news/press-release/2019-143.

[19] SEC Press Release, SEC Charges Comscore Inc. and Former CEO with Accounting and Disclosure Fraud (Sept. 24, 2019), available at www.sec.gov/news/press-release/2019-186.

[20] SEC Press Release, SEC Charges Nissan, Former CEO, and Former Director with Fraudulently Concealing from Investors More than $140 Million of Compensation and Retirement Benefits (Sept. 23, 2019), available at https://www.sec.gov/news/press-release/2019-183.

[21] SEC Press Release, Facebook to Pay $100 Million for Misleading Investors About the Risks It Faced From Misuse of User Data (July 24, 2019), available at https://www.sec.gov/news/press-release/2019-140.

[22] SEC Press Release, SEC Charges Silicon Valley-Based Issuer With Misleading Disclosure Violations (Sept. 16, 2019), available at https://www.sec.gov/news/press-release/2019-175.

[23] SEC Press Release, Mylan to Pay $30 Million for Disclosure and Accounting Failure Relating to EpiPen (Sept. 27, 2019), available at https://www.sec.gov/news/press-release/2019-194.

[24] SEC Press Release, Automaker to Pay $40 Million for Misleading Investors (Sept. 27, 2019), available at https://www.sec.gov/news/press-release/2019-196.

[25] SEC Press Release, Herbalife to Pay $20 Million for Misleading Investors (Sept. 27, 2019), available at https://www.sec.gov/news/press-release/2019-195.

[26] SEC Press Release, SEC Charges Former Top Executives of Healthcare Advertising Company With $487 Million Fraud (Nov. 25, 2019), available at https://www.sec.gov/news/press-release/2019-241.

[27] Speech, What You Don’t Know Can Hurt You (Nov. 5, 2019), available at https://www.sec.gov/news/speech/speech-avakian-2019-11-05.

[28] Speech, Reasonableness Pants (May 8, 2019), available at https://www.sec.gov/news/speech/speech-peirce-050819.

[29] SEC Press Release, SEC Charges Investment Adviser With Fraud (July 1, 2019), available at https://www.sec.gov/news/press-release/2019-115.

[30] SEC Press Release, SEC Charges Hedge Fund Adviser and Top Executives With Fraud (Sept. 30, 2019), available at https://www.sec.gov/news/press-release/2019-201.

[31] SEC Press Release, SEC Revokes Registration of Adviser Engaged in $60 Million Fraud (Nov. 26, 2019), available at https://www.sec.gov/news/press-release/2019-244.

[32] SEC Press Release, SEC Charges Recidivist Investment Adviser With Defrauding Retirees (Dec. 19, 2019), available at https://www.sec.gov/news/press-release/2019-274.

[33] SEC Press Release, SEC Charges Broker-Dealer with Violations of Gatekeeping Provisions Aimed at Protecting Investors (Aug. 14, 2019), available at https://www.sec.gov/news/press-release/2019-151.

[34] SEC Press Release, Two Broker-Dealers to Pay $4.65 Million in Penalties for Providing Deficient Blue Sheet Data (Sept. 16, 2019), available at https://www.sec.gov/news/press-release/2019-177.

[35] SEC Press Release, SEC Charges Broker-Dealers With Illicitly Profiting in Partial Tender Offer (Dec. 18, 2019), available at https://www.sec.gov/news/press-release/2019-268.

[36] SEC Press Release, Jefferies to Pay Nearly $4 Million for Improper Handling of ADRs (Dec. 9, 2019), available at https://www.sec.gov/news/press-release/2019-256.

[37] SEC Press Release, Raymond James Agrees to Pay $15 Million for Improperly Charging Retail Investors (Sept. 17, 2019), available at https://www.sec.gov/news/press-release/2019-151.

[38] SEC Press Release, SEC Charges Accountant and Friend in $6.2 Million Insider Trading Scheme (Jul. 10, 2019), available at https://www.sec.gov/news/press-release/2019-126.

[39] SEC Press Release, SEC Charges Investment Banking Analyst with Insider Trading (Aug. 12, 2019), available at https://www.sec.gov/news/press-release/2019-149.

[40] SEC Press Release, SEC Wins Jury Trial Against Broker Charged with Insider Trading (Aug. 14, 2019), available at https://www.sec.gov/news/press-release/2019-152.

[41] SEC Litig. Rel. No. 24554, SEC Obtains Final Judgment Against Former Accounting Firm Partner (Aug. 2, 2019), available at https://www.sec.gov/litigation/litreleases/2019/lr24554.htm.

[42] SEC Press Release, Former Congressman and Two Others Settle Insider Trading Charges (Dec. 9, 2019), available at https://www.sec.gov/news/press-release/2019-257.

[43] SEC Press Release, Silicon Valley IT Administrator and Friends Charged in Multimillion Dollar Insider Trading Ring (Dec. 17, 2019), available at https://www.sec.gov/news/press-release/2019-261.

[44] DOJ Press Release, Two South Bay Residents Indicted For Securities Fraud Relating To Palo Alto Networks, Inc. (Dec. 17, 2019), available at https://www.justice.gov/usao-ndca/pr/two-south-bay-residents-indicted-securities-fraud-relating-palo-alto-networks-inc.

[45] SEC Press Release, SEC Wins Jury Trial in Layering, Manipulative Trading Case (Nov. 12, 2019), available at https://www.sec.gov/news/press-release/2019-236.

[46] SEC Press Release, SEC Charges TherapeuticsMD With Regulation FD Violations (Aug. 20, 2019), available at https://www.sec.gov/news/press-release/2019-156.

The following Gibson Dunn lawyers assisted in the preparation of this client update: Mark Schonfeld, Tina Samanta, Amy Mayer, Jaclyn Neely, Zoey Goldnick, Erin Galliher, Zachary Piaker, Brandon Davis.

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.

Securities Enforcement Practice Group Leaders:
Richard W. Grime – Washington, D.C. (+1 202-955-8219, [email protected])
Barry R. Goldsmith – New York (+1 212-351-2440, [email protected])
Mark K. Schonfeld – New York (+1 212-351-2433, [email protected])

Please also feel free to contact any of the following practice group members:

Washington, D.C.
Stephanie L. Brooker (+1 202-887-3502, [email protected])
Daniel P. Chung (+1 202-887-3729, [email protected])
Stuart F. Delery (+1 202-887-3650, [email protected])
Patrick F. Stokes (+1 202-955-8504, [email protected])
F. Joseph Warin (+1 202-887-3609, [email protected])

San Francisco
Winston Y. Chan (+1 415-393-8362, [email protected])
Thad A. Davis (+1 415-393-8251, [email protected])
Charles J. Stevens (+1 415-393-8391, [email protected])
Michael Li-Ming Wong (+1 415-393-8234, [email protected])

Palo Alto
Michael D. Celio (+1 650-849-5326, [email protected])
Paul J. Collins (+1 650-849-5309, [email protected])
Benjamin B. Wagner (+1 650-849-5395, [email protected])

Denver
Robert C. Blume (+1 303-298-5758, [email protected])
Monica K. Loseman (+1 303-298-5784, [email protected])

Los Angeles
Michael M. Farhang (+1 213-229-7005, [email protected])
Douglas M. Fuchs (+1 213-229-7605, [email protected])

On December 18, 2019, the staffs of the Division of Swap Dealer and Intermediary Oversight (“DSIO”),[1] the Division of Market Oversight (“DMO”)[2], and the Division of Clearing and Risk (“DCR”)[3] of the Commodity Futures Trading Commission (“CFTC”) each released no-action letters (collectively, the “CFTC Letters”) that provide relief to market participants in connection with the industry-wide initiative to transition swaps that reference the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates (“IBORs”) to swaps that reference alternative risk-free reference rates.[4]

The CFTC Letters respond to a request by the Alternative Reference Rates Committee (“ARRC”)[5] on behalf of its members subject to certain CFTC regulations to address issues that will result from amendments made by market participants to their swap documentation to either (i) include fallback language to address what will happen when LIBOR or another IBOR ceases to exist (or is deemed to be non-representative by the benchmark administrator or relevant authority in a jurisdiction) (“Fallback Amendment”) or (ii) convert LIBOR and other IBOR-linked uncleared swaps to an alternative reference rate, like SOFR, prior to the cessation of such IBORs (“Replacement Rate Amendment”).[6] The amendments to swap documentation would likely be viewed as material amendments that would trigger the same requirements as “new” swaps, meaning that each swap may trigger uncleared margin, clearing, business conduct and other requirements and should be analyzed accordingly. The ARRC sought clarification and relief from such requirements so that market participants could make such amendments without facing costly and onerous requirements applied to their existing swaps.

The CFTC Letters provide helpful relief to swap market participants with respect to the LIBOR transition in connection with several areas, including the swap dealer de minimis exception, uncleared swap margin, swap dealer business conduct standards, swap trading relationship documentation, portfolio reconciliation, confirmations, eligible contract participants (“ECPs”), the end-user clearing exception, clearing and trade execution requirements; however, the relief in the CFTC Letters does not cover certain requirements (e.g., there is no relief for reporting requirements),[7] and there are some areas of uncertainty that remain and are likely to impact certain swap market participants.

In this alert we discuss, for the relief granted in each of the CFTC Letters, the issue, no-action relief position, as well as the impacts and remaining areas of concern and uncertainty that may require further consideration and analysis.

I. DSIO Letter

A. Scope of Relief

The DSIO Letter applies to the amendment of uncleared swaps that reference USD LIBOR, another IBOR or other reference rates that are phased-out or become impaired[8] (collectively, “Impaired Reference Rates” or “IRRs”). DSIO notes that defining IRRs in this manner will permit a market participant to make more than one amendment to the same swap or portfolio of swaps before settling on “an alternative benchmark that adequately meets the counterparties’ commercial needs.”[9] The amendments may be achieved by (i) adherence to a protocol issued by the International Swaps and Derivatives Association (“ISDA”), (ii) contractual amendment between counterparties or (iii) execution of new contracts in replacement of and immediately upon termination of existing contract(s) (i.e., “contract tear-ups”).

DSIO limits the scope of relief to amendments of legacy uncleared swaps that reference an IRR solely to “(i) include new fallbacks to alternative reference rates triggered only by permanent discontinuation of an IRR or determination that an IRR is non-representative by the benchmark administrator or the relevant authority in a jurisdiction; or (ii) accommodate the replacement of an IRR” (each, a “Qualifying Amendment”); however, a Qualifying Amendment does not include any amendment that (i) extends the maximum maturity of a swap or portfolio of swaps, or (ii) increases the total effective notional amount of a swap or the aggregate total effective notional amount of a portfolio of swaps.[10] DSIO recognizes that Qualifying Amendments may require a number of ancillary changes to existing trade terms to conform to different market conventions used for the alternative reference rate (e.g., reset dates, fixed/floating leg payment dates, day count fractions, etc.).

B. No-Action Positions, Potential Concerns and Other Considerations

1) Swap Dealer De Minimis Calculation

Issue: Entities that actively manage their swap dealing activities to stay below the swap dealer de minimis threshold of $8 billion may be reluctant to transition away from IRRs voluntarily and early if amendments and modifications made to accommodate either a Fallback Amendment or a Reference Rate Amendment will need to be included in the calculation.

No-action position: DSIO provides no-action relief to any person that excludes a swap from the swap dealer de minimis calculation that references an IRR solely to the extent that such swap would be included as a consequence of a Qualifying Amendment.[11]

Potential concerns and other considerations: Non-swap dealers that engage in swap dealing activities will need to (i) rely on the no-action relief provided in the DSIO Letter in order to preclude such swaps from being counted and (ii) modify their swap dealer de minimis calculation methodology accordingly to account for this subset of swaps that will not be counted.

2) CFTC Uncleared Swap Margin Requirements

Issue: Uncleared swaps entered into prior to the relevant compliance date of the CFTC Margin Rule (set forth in CFTC regulation 23.161) (“CFTC Margin Rule Legacy Swaps”) are not subject to the provisions of the CFTC Margin Rule. However, if a CFTC Margin Rule Legacy Swap is amended after the compliance date applicable to a swap dealer and its counterparty, it would cause such CFTC Margin Rule Legacy Swaps to be brought into compliance with the CFTC Margin Rule which would likely have a materially adverse effect to the parties of the swap.

No-action position: DSIO provides no-action relief to swap dealers for a failure to comply with the CFTC Margin Rule[12] solely to the extent such compliance would be required as a consequence of a Qualifying Amendment CFTC Margin Rule Legacy Swaps. Additionally, DSIO provided no-action relief for those swap dealers that use basis swaps to accomplish the necessary transition rather than amending individual swaps.[13]

Potential concerns and other considerations: As discussed above, this no-action position regarding uncleared swaps is necessary because amendments to CFTC Margin Rule Legacy Swaps after the relevant compliance date would cause such swaps to be brought into scope for purposes of compliance with the CFTC Margin Rule. Further, it aims to be consistent with the Prudential Regulators’ Proposed LIBOR Amendments.

3) Swap Dealer Business Conduct Requirements

Issue: Swap dealers are subject to numerous business conduct standards when dealing with their counterparties (“Counterparty BCS”).[14] To the extent that a swap dealer’s existing swap is amended as a result of a Fallback Amendment or a Reference Rate Amendment, it would be treated as if it were a new swap and therefore the swap dealer would need to comply with all Counterparty BCS for that swap.[15]

No-action position: DSIO provides no-action relief to swap dealers for a failure to comply with the Counterparty BCS (other than requirements to disclose material information concerning risks and characteristics of a swap pursuant to CFTC regulation 23.431(a)) solely to the extent such compliance would be required as a consequence of a Qualifying Amendment to an uncleared swap.

Potential concerns and other considerations:

Risk Disclosures and Provision of Material Information: DSIO makes clear that there is no relief provided with respect to CFTC Regulation 23.431(a) and that swap dealers must provide material information concerning risks and characteristics of a swap to their counterparties “at a reasonably sufficient time prior to entering into the swap.”[16] In this regard, DSIO notes that pursuant to the IRR transition, counterparties to swap dealers will be moving from familiar reference rates to newly created alternative reference rates. Accordingly, DSIO explains that swap dealers “should be required to provide material information about such new rates in order for counterparties to better understand what they are stepping into.”[17]

As a result, questions arise relating to what swap dealers should include in such disclosures to their counterparties and the timing of such disclosures (e.g., the determination of “reasonably sufficient time”). With respect to the timing, any such disclosures would likely need to occur in advance of the swap dealer agreeing to a Fallback Amendment or Reference Rate Amendment with a counterparty, including adhering to a multilateral protocol (e.g., an ISDA protocol).

ECP Status: The DSIO Letter provides relief from a swap dealer’s obligation under CFTC regulation 23.430 to verify a counterparty’s ECP status. However, pursuant to Commodity Exchange Act (“CEA”) Section 2(e) it is unlawful for “any person … to enter into a swap” (other than a swap entered into on a designated contract market) that is not an ECP. None of the CFTC Letters provide any relief from this requirement under CEA Section 2(e) and, as a result, there would be a potential violation of CEA Section 2(e) for the counterparty and increased contractual risk in the event that a counterparty that was an ECP when a swap was originally entered into, is no longer an ECP when a Fallback Amendment or Replacement Rate Amendment occurs.[18]

4) Swap Confirmation Requirements

Issue: Swap dealers are required to confirm amendments to swaps within certain timeframes; however, it is expected that most market participants will adhere to a multilateral protocol (e.g., an ISDA protocol) which enables multiple swaps to be legally amended and confirmed simultaneously. However, there is uncertainty under CFTC regulation as to whether a swap dealer would need to issue new confirmations that are amended via such multilateral protocol.

No-action position: DSIO provides no-action relief to swap dealers for a failure to comply with the CFTC’s confirmation requirements under CFTC regulation 23.501 provided that the Qualifying Amendment is accomplished pursuant to a multilateral protocol (i.e., not a bilateral amendment between counterparties) and solely to the extent that such compliance would be required as a result of a Qualifying Amendment to an uncleared swap.

Potential concerns and other considerations:

Limited to amendment by multilateral protocol: DSIO makes clear that relief from the confirmation requirements is only available to a swap dealer’s uncleared swaps that are amended pursuant to a multilateral protocol. Accordingly, swap dealers will need to ensure that any bilateral amendment for a Fallback Amendment or a Reference Rate Amendment with a counterparty satisfies the requirements of CFTC regulation 23.501.

5) Swap Trading Relationship Documentation (“STRD”)

Issue: CFTC regulation 23.504(a)(2) requires that swap dealers enter into STRD prior to entering into any “swap transaction” which includes amendments to uncleared swaps entered into prior to the date a swap dealer was required to be in compliance with the STRD rule (“STRD Legacy Swaps”). Accordingly, a Fallback Amendment or a Reference Rate Amendment would cause an STRD Legacy Swap to lose its status as such and would require a swap dealer to enter into documentation to comply with the STRD requirements.

No-action position: DSIO provides no-action relief to swap dealers for a failure to comply with the STRD requirements under CFTC regulation 23.504 solely to the extent such compliance would be required as a consequence of a Qualifying Amendment to STRD Legacy Swaps.

6) Reconciliation

Issue: The CFTC’s portfolio reconciliation rules require swap dealers to resolve discrepancies of material terms of their swaps with other swap dealers “immediately”[19] and with non-swap dealer counterparties “in a timely fashion.”[20] Since swap dealers and their counterparties may book Fallback Amendments and Reference Rate Amendments at different times and these timeframes may not be met during the transition, notwithstanding that the counterparties are engaging in reconciliation in good faith.

No-action position: DSIO provides no-action relief to swap dealers for a failure to comply with the discrepancy resolution timing requirements under CFTC regulations 23.502(a)(4) and (b)(4) solely to the extent such compliance would be required as a consequence of a Qualifying Amendment to an uncleared swap.

7) End-User Exceptions and Exemptions from the CFTC Margin Rule

Issue: Some end-user counterparties may question whether a swap still qualifies as an instrument “used to hedge or mitigate commercial risk as prescribed in [CFTC] regulations 50.50(c) and 50.51(b)(2)” in the event that the reference rate on the swap for which the exception or exemption is elected is different from the rate on the underlying loan, debt instrument or other agreement or commercial arrangement.[21] Because a Fallback Amendment or a Reference Rate Amendment would trigger “new” swap requirements, the swap would need to be analyzed for its qualification for the end-user exception at the time of such amendment. If a swap was determined not to be used for “hedging or mitigating commercial risk” in light of the rate mismatch with the underlying commercial arrangement, then it would not qualify for the end-user exception from clearing (in CFTC regulation 50.50) or for the exemption for cooperatives (in CFTC Regulation 50.51).

End-users that qualify for an exception from clearing will qualify for an exclusion from the CFTC Margin Rule pursuant to CFTC regulation 23.150(b). If an end-user no longer qualifies for an exception from clearing, then it would not be permitted to rely on this exclusion.[22]

The language defining “hedging or mitigating commercial risk” in the context of the end-user exception is broad and a swap that references a commercial arrangement with a different reference rate may still qualify under that definition; however, there may be situations where such qualification is uncertain.

No-action position: DSIO explains that to “alleviate any question” regarding whether one or more swaps will still qualify as instruments used to “hedge or mitigate commercial risk as prescribed in CFTC regulations 50.50(c) and 50.51(b)(2),”[23] it is providing relief for swap dealers for a failure to comply with the CFTC Margin Rule with respect to a swap entered into with an entity electing an exception or exemption pursuant to the requirements of CFTC regulations 50.50(c) or 50.51(b)(2), if the following three conditions are met:

(i) the swap is an uncleared swap referencing an IRR that qualified as a swap used to hedge or mitigate commercial risk pursuant to CFTC regulation 50.50(c) or 50.51(b)(2) at the time of execution;

(ii) compliance with the CFTC Margin Rule would be required solely as a consequence of a Qualifying Amendment to such swap, or, with respect to the commercial arrangement for which the swap qualified as a swap used to hedge or mitigate commercial risk, solely as a consequence of an amendment to such commercial arrangement solely for the purpose of: (a) including new fallbacks to alternative reference rates triggered only by permanent discontinuation of an IRR or determination that an IRR is non-representative by the benchmark administrator or the relevant authority in a jurisdiction; or (b) accommodating the replacement of an IRR; and

(iii) such swap or the commercial arrangement for which the swap qualified as a swap used to hedge or mitigate commercial risk is amended prior to December 31, 2021, such that the swap again qualifies as a swap used to hedge or mitigate commercial risk pursuant to CFTC regulation 50.50(c) or 50.51(b)(2).[24]

Potential concerns and other considerations:

Relief is Time-Limited: This end-user related relief is only available until December 31, 2021, however, given the uncertainty around the transition and fallback terms of underlying commercial arrangements (e.g., an end-user may have a commercial arrangement with fallback language that uses the last published rate), it is possible that relief may be needed after December 31, 2021.

Similar relief not provided by the Prudential Regulators: While DSIO is providing no-action relief to swap dealers with respect to compliance with the CFTC Margin Rule, the Prudential Regulators have not included such a provision in the Prudential Regulators’ Proposed LIBOR Amendments or otherwise. Accordingly, there is question as to how the Prudential Regulators will view the available exclusion from the uncleared swap margin rules for swaps with end-users that qualify for the end-user exception from clearing and that are relying on no-action relief provided under the DSIO Letter and DCR Letter to continue to qualify for the end-user exception during the transition.

Financial entity status: While the relief addresses the impact of mismatches between an uncleared swap and an underlying commercial arrangement that may cause a swap to not be considered to “hedge or mitigate commercial risk,” there is no relief granted in the event that a counterparty’s financial entity status changes from a non-financial entity at the time the swap was originally entered into to a financial entity at the time of the Fallback Amendment or Reference Rate Amendment.[25] Without such relief, such legacy swaps may need to be cleared and may be subject to the CFTC Margin Rule when trading with swap dealers.

Captive finance and small bank exemptions: No relief is provided in a situation where a captive finance company no longer meets the 90/90 test under CEA Section 2(h)(7)(C)(iii) or where a small bank exceeds the $10 million threshold under CFTC regulation 50.50(d). Without such relief, the legacy swaps of such entities whose status changes may need to be cleared and be subject to the CFTC Margin Rule when trading with swap dealers.

8) ECP Status

Issue: Some individuals identify themselves as ECPs because the purposes of their swaps are “to manage the risk associated with an asset or liability owned or incurred or reasonably likely to be owned or incurred” by the individual in the conduct of the individual’s business. In the event that a Fallback Amendment or a Reference Rate Amendment leads to a temporary mismatch, such individuals may question whether they continue to qualify as an ECP.

No-Action Position: DSIO explains that to “alleviate any question” it is providing no-action relief to any individual for failure to qualify as an ECP pursuant to CEA Section 1a(18)(A)(xi) which provides that an individual can qualify as an ECP based on a swap’s purpose “to manage the risk associated with an asset or liability owned or incurred” by the individual in the conduct/operation of the individual’s business, solely to the extent such status is relevant as a consequence of a Qualifying Amendment to an uncleared swap.[26]

Potential concerns and other considerations:

No relief for dollar thresholds of ECP provisions: There is no relief provided by DSIO or the other Divisions in the event that the individual cannot satisfy the dollar thresholds to qualify as an ECP at the time of a Qualifying Amendment. Accordingly, an individual whose amounts invested on a discretionary basis fall below the dollar thresholds in CEA Section 1a(18)(A)(xi) at the time of a Qualifying Amendment may not qualify as an ECP and may therefore be viewed to violate CEA Section 2(e).

No relief for entities: While DSIO provides relief for individuals from mismatches that may occur between the rates referenced in an “asset or liability owned or incurred” and the swaps used to hedge that the risk of such asset or liability, neither DSIO nor the other Divisions provide parallel relief for entities from CEA Section 1a(18)(A)(v)(III)(bb). Additionally, DSIO does not provide relief for entities that may fall below the dollar thresholds for entities in the ECP provisions. Accordingly, there may be some question for entities that had been relying on this section to qualify as an ECP at the time of a Qualifying Amendment.

9) End-User Documentation

Issue: Swap dealers must obtain documentation from an entity claiming the end-user exception or exemption so that the swap dealer has a reasonable basis to believe the counterparty is hedging or mitigating commercial risk. As a result of a Fallback Amendment or Reference Rate Amendment, a swap dealer may be required to obtain such documentation under CFTC regulation 23.505(a)(4).

No-action position: DSIO provides no-action relief to swap dealers for a failure to obtain documentation that an entity is “hedging or mitigating a commercial risk” (as required under CFTC regulation 23.505(a)(4)) from an entity for which it has previously obtained such documentation, solely to the extend such would be required as a consequence of a Qualifying Amendment to an uncleared swap.

Potential concerns and other considerations:

Other end-user exception documentation requirements: To the extent that a swap dealer has not obtained representations from its counterparty regarding its end-user status either through an annual filing, protocol or other representation, a Fallback Amendment or Reference Rate Amendment could trigger a requirement to once again obtain such information. For example, if there were legacy swaps entered into before clearing requirements became effective, a swap dealer would likely be required to obtain such information from a counterparty prior to entering into a Fallback Amendment or Reference Rate Amendment.

End-user exception election: Many swap dealers have received standing end-user exception elections from their end-user counterparties that indicate that for each swap for which the end-user exception is elected. However, for those swaps where there is not a standing end-user exception election in place and a counterparty would need to rely on the end-user exception, pursuant to CFTC regulation 23.505(a)(2), a swap dealer may need to ensure that the counterparty elects not to clear the amended swap prior to the occurrence of a Fallback Amendment or Reference Rate Amendment.

II. DCR Letter

A. Scope

The DCR Letter applies to uncleared swaps that would have been subject to the interest rate swap (“IRS”) clearing requirement under CEA Section 2(h)(1)(A) and CFTC regulation 50.4(a) but for the fact that such swaps were entered prior to the date on which the counterparties were required to begin complying with the relevant IRS clearing requirement (“Uncleared Legacy IRS”),[27] that are amended as a result of an amendment of fallback provisions (or addition of contractual terms)[28] “to modify the process for selecting the new floating rate term of an IRS that is not available because the rate is unavailable, permanently discontinued, or determined to be non-representative by the benchmark administrator or the relevant authority in a particular jurisdiction” (a “IRS Fallback Amendment”).[29] The relief in the DCR letter would not be available if the IRS Fallback Amendment (i) extends the maximum maturity of an Uncleared Legacy IRS; or (ii) increases the total effective notional amount of an Uncleared Legacy IRS. The relief granted under the DCR Letter would permit such IRS Fallback Amendments to be achieved through a multilateral protocol or through bilateral amendment.

The DCR Letter is limited with respect to Uncleared Legacy IRSs to which it is applicable by specifying the LIBOR rates and risk-free fallback rates to which it applies. In particular, the DCR Letter would permit the following rates and fallback rates that may serve as replacement for the floating LIBOR rates or rates using LIBOR for input:

Currency and IBOR Floating Rate	Permissible Risk-Free Reference Fallback Rate
GBP LIBOR	SONIA
CHF LIBOR	SARON
JPY LIBOR	TONA
USD LIBOR	SOFR
SGD SOR – VWAP	SORA

The DCR Letter does not apply to swaps that have been voluntarily submitted for clearing and does not apply if the original counterparties to the Uncleared Legacy IRS change. The relief under the DCR Letter is also time-limited and will expire on December 31, 2021.

B. No-Action Positions, Potential Concerns and Other Considerations

(1) Uncleared Legacy Swaps

Issue: The execution of an IRS Fallback Amendment to an Uncleared Legacy IRS would cause the counterparties to treat such amendment as a “new” swap and would trigger an analysis to determine whether the swap is required to be cleared or subject to an exception.

No-action position: Until December 31, 2021, DCR provides no-action relief for any person that fails to comply with the swap clearing requirements of CEA Section 2(h)(1)(A) and CFTC regulation 50.2 with respect to an Uncleared Legacy IRS that references: USD LIBOR, JPY LIBOR, GBP LIBOR, CHF LIBOR or SGD SOR and is amended by adding a Fallback Amendment for the sole purpose of changing the existing floating rate to: SOFR, TONA, SONIA, SARON or SORA, respectively, in the event that the existing floating rate is unavailable, permanently discontinued or has been determined to be non-representative by the benchmark administrator or relevant authority in a jurisdiction.

Further, persons wishing to take advantage of this relief must satisfy the all of the following conditions:

The swap meets the definition of the term “Uncleared Legacy Swaps”[30] as described in the DCR Letter and is not required to be cleared under CEA Section 2(h)(1)(A) and Part 50 of the CFTC’s regulations because it was entered into before an applicable compliance date and has not been voluntarily submitted for clearing to a derivatives clearing organization; and
Each amended “Uncleared Legacy Swap” must:
1. Have the same counterparties as the original swap that is amended;
2. Have the same maximum maturity as the original swap that is amended; and
3. Be amended for the sole purpose of changing the floating rate fallback provisions.[31]

Potential concerns and other considerations:

Scope of risk-free reference fallback rates is limited: The DCR Letter only contemplates the fallback to explicit permissible risk-free reference rates (e.g., for USD LIBOR only SOFR is contemplated). Additional relief will need to be sought from DCR in the event that counterparties wish to switch to another risk-free rate.

Relief is Time-Limited: This relief is only available until December 31, 2021, however, given the uncertainty around the transition and fallback terms, relief may be needed after that date.

(2) Relief regarding the end-user exception and exemptions

Issue: This relief coincides with the relief provided for end-users under the DSIO Letter and described in detail in Section I(B)(7) above. Some end-users may question whether a temporary mismatch between the floating rates referenced in commercial arrangements and the rates referenced in their swaps could cause the swaps to not qualify as hedging or mitigating commercial risk and therefore potentially cause the swaps to not qualify for the end-user exception or exemption from clearing.

No-action position: Until December 31, 2021, DCR provides no-action relief for an entity that qualifies for an exception or exemption under CFTC regulations 50.50(c) or 50.51(b)(2) for a failure to clear a swap pursuant to CFTC regulation 50.2 if:

(i) Such swap is an uncleared swap that references a floating rate that qualified as a swap to hedge or mitigate commercial risk as defined in CFTC regulation 50.50(c);

(ii) One or more of the following occurs: (a) such swap or relevant commercial agreement is amended by execution of a Fallback Amendment (or similar contractual provision in a commercial agreement); or (b) an existing fallback provision in a commercial agreement is activated because the floating rate is unavailable, permanently discontinued, or has been determined to be non-representative by the benchmark administrator or the relevant authority in a jurisdiction; or (c) a commercial agreement is amended for the sole purpose of changing the existing floating rate to an applicable risk-free rate; and

(iii) Prior to December 31, 2021, the commercial arrangement documentation and/or the uncleared swap documentation is amended such that the uncleared swap again qualifies as a swap used to hedge or mitigate the commercial risk of such entity pursuant to CFTC regulation 50.50(c) or 50.51(b)(2).[32]

Potential concerns and other considerations:

Please see the discussion in Section I(B)(7) above as those issues and concerns are relevant in the context of the relief provided under the DCR Letter.

In addition, the DCR Letter explains that “[w]ith regard to the last condition, DCR notes that because both commercial end-users and cooperatives are subject to an ongoing obligations [sic] under CFTC regulations to maintain eligibility to elect an exception or exemption from the clearing requirement, such entities should plan to amend the reference rate provisions in both swap documentation and commercial documentation so that the rates referenced are aligned again as soon as practical, but no later than December 31, 2021.”[33] This intent of this statement is unclear given that (i) end-users do not have an ongoing obligation with respect to a swap since eligibility for an exception or exemption from clearing is determined at execution and (ii) DCR is specifically referencing the “last condition” which only discusses the “hedge or mitigate commercial risk” requirement under CFTC regulation 50.50(c) and 50.51(b)(2).

III. DMO Letter

A. Scope

The DMO Letter applies to all swaps that are amended by a Fallback Amendment or a Replacement Rate Amendment or that are created to transition swaps or swap portfolios from IBOR to a new risk-free rate (“New RFR Swaps”). However, there are some limitations on the risk-free rates that can be included in the amended or new swaps (described below). Notably, the DMO Letter does not place a restrictions on the use of a Fallback Amendment or Replacement Rate Amendment relating to changes to the maturity or notional amount in the same manner as the DSIO Letter and the DCR Letter. The relief under the DMO Letter is also time-limited and will expire on December 31, 2021

B. No-Action Positions, Potential Concerns and Other Considerations

Issue: Swaps that are (i) subject to the mandatory clearing requirement and (ii) made available to trade on a swap execution facility (“SEF”), exempt SEF or designated contract market (“DCM”), must be executed on a SEF, exempt SEF or DCM and must be executed pursuant to the CFTC’s regulations regarding SEFs or DCMs.

No-action position: Until December 31, 2021, DMO provides no-action relief to any person for failure to comply with the trade execution requirement under CEA Section 2(h)(8) (i.e., the trade execution requirement), with respect to an IBOR-linked swap that is a New RFR Swap or is amended by a Fallback Amendment or Replacement Rate Amendment, for the sole purpose of accommodating the replacement (including ancillary changes) of the applicable IBOR with a risk-free rate that has been identified by a national level committee or working group in response to the Financial Stability Board’s Official Sector Steering Group’s report and recommendation that central banks and supervisory authorities should work together with market participants to identify and implement risk-free rates.[34]

Potential concerns and other considerations:

Relief is Time-Limited: This relief is only available until December 31, 2021, however, given the uncertainty around the transition and fallback terms, relief may be needed after that date. This relief will work in tandem with the relief in the DCR Letter.

______________________

[1] CFTC Letter No. 19-26, DSIO, “No-Action Positions to Facilitate an Orderly Transition of Swaps from Inter-Bank Offered Rates to Alternative Benchmarks” (Dec. 17, 2019) (“DSIO Letter”).

[2] CFTC Letter No. 19-27, DMO, “Staff No-Action Relief from the Trade Execution Requirement to Facilitate an Orderly Transition from Inter-Bank Offered Rates to Alternative Risk-Free Rate” (Dec. 17, 2019) (“DMO Letter”).

[3] CFTC Letter No. 19-28, DCR, “Staff No-Action Relief from the Swap Clearing Requirement for Amendments to Legacy Uncleared Swaps to Facilitate Orderly Transition from Inter-Bank Offered Rates to Alternative Risk-Free Rates” (Dec. 17, 2019) (“DCR Letter”).

[4] In July 2017, the U.K. Financial Conduct Authority (“FCA”), which regulates the ICE Benchmark Administration Limited, the administrator of ICE LIBOR, announced that it would only seek commitments from banks to continue to contribute to LIBOR through the end of 2021, but that the FCA would not compel or persuade contributions beyond such date. See The Future of LIBOR, Speech by Andrew Bailey, Chief Executive of the UK FCA (July 27, 2017), available at https://www.fca.org.uk/news/speeches/the-future-of-libor.

[5] The ARRC is a group of diverse private market participants convened and run by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York to help ensure successful transition from U.S. dollar (“USD”) LIBOR to the recommended alternative Secured Overnight Financing Rate (“SOFR”). More information about the ARRC is available here: https://www.newyorkfed.org/arrc.

[6] The CFTC staff’s no-action relief follows proposed regulations and guidance issued by the U.S. Department of Treasury (“Treasury”) regarding tax consequences. Gibson Dunn’s Client Alert regarding Treasury’s proposal is available here: https://www.gibsondunn.com/treasury-releases-guidance-on-transition-from-libor-to-other-reference-rates/. Additionally, the prudential regulators have proposed rules to provide relief from uncleared swap margin rules related to LIBOR cessation. See Margin and Capital Requirements for Covered Swap Entities, 84 Fed. Reg. 59,970 (Nov. 7, 2019) (“Prudential Regulators’ Proposed LIBOR Amendments”). The DSIO Letter aims to harmonize with the relief with respect to uncleared swap margin requirements provided in the Prudential Regulators’ Proposed LIBOR Amendments.

[7] The CFTC Letters do not provide relief from reporting requirements under Parts 43 or 45 of the CFTC’s regulations.

[8] The relief in the DSIO Letter also applies to other IRRs in addition to IBORs which include “conversions away from (i) any other interest rate that the parties to a swap reasonably expect to be discontinued or reasonably determines has lost its relevance as a reliable benchmark due to a significant impairment; or (ii) any other reference rate that succeeds any of the foregoing (the IBORs and any other rate meeting either of the foregoing criterion ….” DSIO Letter at 3-4.

[9] DSIO Letter at 4.

[10] DSIO Letter at 8. These limitations are aimed at harmonizing with the Prudential Regulators’ Proposed LIBOR Amendments.

[11] DSIO Letter at 9-10.

[12] See Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 81 Fed. Reg. 636 (Jan. 6, 2016) (the “CFTC Margin Rule”). The CFTC Margin Rule is codified in CFTC regulations 23.151-159 and 23.161. See 17 CFR §§ 23.150-159, 161.

[13] With respect to basis swaps, DSIO will not recommend the CFTC take an enforcement action against a swap dealer for failure to comply with the CFTC Margin Rule with respect to a basis swap that: (1) references only one or more CFTC Margin Rule Legacy Swaps; (2) is entered into solely to achieve substantially the same effect as would be obtained by an amendment to the referenced CFTC Margin Rule Legacy Swap(s) to accommodate the replacement of an IRR; and (3) does not have the effect of extending the maximum maturity or increasing the aggregate total effective notional amount of the CFTC Margin Rule Legacy Swaps that are referenced. DSIO Letter at 12.

[14] See 17 CFR §§ 23.400 through 23.451, § 23.701. See also, Business Conduct Standards for Swap Dealers and Major Swap Participants with Counterparties, 77 Fed. Reg. 9734 (Feb. 17, 2012).

[15] These existing swaps may be swaps that were entered into by a swap dealer before the Counterparty BCS rules were effective or after they were effective.

[16] DSIO Letter at 14.

[17] DSIO Letter at 14.

[18] Swap dealers should also consider if there may be any regulatory risk for “aiding and abetting” a counterparty that is no longer an ECP, particularly in the event that the swap dealer knew or should have known that such counterparty was no longer an ECP.

[19] CFTC regulation 23.502(a)(4).

[20] CFTC regulation 23.502(b)(4).

[21] DSIO Letter at 17.

[22] We note that many end-users that are eligible for an exception or exemption from clearing would likely not be considered “financial end users” as defined in CFTC regulation 23.151 and therefore would not be subject to the CFTC Margin Rules in any event.

[23] DSIO Letter at 17-18. The use of the phrase “[t]o alleviate any question in this regard” by DSIO (and also by DCR in the DCR Letter) suggests that end-users may determine that the swap still qualifies as hedging or mitigating commercial risk under CFTC regulation 50.50(c) in which case they would not need to rely on this no-action relief.

[24] DSIO Letter at 17-18. While this relief in the DSIO Letter is only available for swap dealers from the requirements under CFTC regulation 23.151, comparable relief is provided for end-users with respect to the requirements of CFTC regulations 50.50(c) and 50.5(b)(2) in the DCR Letter.

[25] For example, financial entity status could change because an entity’s registration status changes or because they become predominantly involved in activities that are financial in nature pursuant to CEA Section 2(h)(7)(C)(i)(VIII).

[26] DSIO Letter at 19.

[27] See 2012 IRS Clearing Requirement, 77 Fed. Reg. 74284 (Dec. 13, 2012). Swap dealers, major swap participants and active funds were required to comply beginning on March 11, 2013, while all other financial entities were required to clear beginning on June 10, 2013, except for accounts managed by third-party investment managers, as well as ERISA pension plans, which required to begin clearing on September 9, 2013.

[28] The amendment to contractual terms is limited solely to situations where the underlying swap documentation is not based on the 2006 ISDA Definitions, which contains fallback provisions.

[29] DCR Letter at 4-5.

[30] The DCR Letter states that “Uncleared Legacy Swaps” “refer to uncleared swaps that would have been subject to the IRS clearing requirement under CFTC regulation 50.4(a), but for the fact that such swaps were entered into before the application of the 2012 clearing requirement as set forth under CFTC regulation 50.5[] and relevant implementation phasing dates.” DCR Letter at 8. However DCR does not specifically define the term “Uncleared Legacy Swaps,” yet it does define the term “Uncleared Legacy IRS” as “swaps that were executed prior to the compliance date on which swap counterparties were required to begin centrally clearing interest rate swaps (IRS) pursuant to the CFTC’s swap clearing requirement and thus were not required to be cleared and have not been cleared.” DCR Letter at 1.

[31] DCR Letter at 11-12.

[32] DCR Letter at 13.

[33] Id.

[34] DMO Letter at 6.

The following Gibson Dunn lawyers assisted in preparing this client update: Jeffrey Steiner and Erica Cushing.

Matthew L. Biben – New York (+1 212-351-6300, [email protected])
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, [email protected])
Stephanie Brooker – Washington, D.C. (+1 202-887-3502, [email protected])
Arthur S. Long – New York (+1 212-351-2426, [email protected])
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, [email protected])
Erica N. Cushing – Denver (+1 303-298-5711, [email protected])

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

As we do each year, we offer our observations on new developments and recommended practices to consider in preparing the Annual Report on Form 10‑K. In particular, given the U.S. Securities and Exchange Commission’s (the “SEC”) latest enforcement actions and recent adoption of amendments impacting disclosures in Form 10‑K,[1] there are a number of important substantive and technical considerations that registrants should keep in mind when preparing their 2019 Forms 10‑K.

I. Substantive Considerations

A. Management’s Discussion & Analysis

As discussed in our prior client alert,[2] registrants that provide financial statements covering three years in their public filings are no longer required to include in the Management’s Discussion and Analysis (“MD&A”) section a discussion of the earliest year if: (i) such discussion was already included in any other of the registrant’s prior filings that required compliance with Item 303 of Regulation S‑K; and (ii) registrants identify the location in the prior filing where the omitted discussion can be found. For example, when a registrant files its 2019 Form 10‑K with financial statements for fiscal years 2017, 2018, and 2019, the registrant can omit from its MD&A the discussion comparing its operating results and financial condition for fiscal year 2017 (typically presented as a comparison of 2018 to 2017), and instead only discuss its operating results and financial condition for fiscal years 2018 and 2019 and refer the reader to the MD&A in the 2018 Form 10‑K where the 2017 discussion may be found. The registrant may refer to any filing with the SEC that included a 2017 discussion pursuant to Item 303 of Regulation S‑K, which could be an initial public offering (“IPO”) registration statement, a Form 10 for a spin-off, or a variety of other filings.

To date, many companies are not taking advantage of this rule change. As of December 31, 2019, of the 91 S&P 500 companies that have filed a Form 10‑K since these MD&A changes went into effect in April 2019, 52 companies (57%) discussed three years of financial information (including a comparative discussion between 2017 and 2018) in the MD&A, while 39 (43%) companies omitted the comparative discussion of the third year,[3] although 14 of these companies[4] (15%) included charts or tables in the MD&A that set forth three years of financial information but omitted a comparative discussion between 2017 and 2018.[5] Generally, the larger S&P 500 companies we looked at have chosen not to omit discussion of the earliest of the three years from the MD&A. Of the 23 companies with market capitalizations over $50 billion that have filed Forms 10‑K since the change went into effect: 14 companies provided and discussed three years of financial information in the MD&A; five companies[6] provided three years of financial information, but omitted a comparative discussion between 2017 and 2018; and four companies[7] took full advantage of the new rules and provided and discussed only the two most recent years of financial information in the MD&A. The instruction requires registrants to disclose the location of the prior discussion, but does not require that the prior discussion be incorporated by reference or hyperlinked. Most registrants have tended to include the statement identifying the location of the prior disclosure at the beginning of the MD&A, the beginning of the Results of Operation section, or the end of the Results of Operation section.

Regardless of whether discussing three years or only two years in the MD&A, registrants should remain mindful of the need to review their discussion of the earlier years to determine whether anything has come to light since the time of the original disclosure that would make the original disclosure incomplete or inaccurate to an extent that would be material. For example: Are there material trends that were not manifest at the time of the original disclosure that are now known and would be important to understanding the results of operations and financial condition of the registrant? Are there forward-looking statements that were made in the discussion of results of operations and financial condition for the earliest year that have subsequently been proven to be inaccurate? Have any material operations been discontinued? Have any accounting changes taken effect that would make the discussion from the earliest year materially inaccurate or incomplete? At the risk of stating the obvious, registrants who determine to discuss all three years in their MD&A should not simply restate their prior disclosures if doing so would result in a material misstatement or omission. If a registrant has determined to address only the most recent two years in its MD&A but determines it advisable to comment on an aspect of its third-year financial results, it often may be able to do so without repeating the entire MD&A discussion covering its third-year results.

B. Prepare for Critical Audit Matter Disclosures in Auditor’s Report

For large accelerated filers whose fiscal year ends December 31, the 2019 Form 10‑K filing will be the first annual filing that will require the registrant’s auditor to include new disclosures in its audit report about critical audit matters (“CAMs”) that the auditor identifies during the course of the audit.[8] The audit standard, AS 3101,[9] requires that for each CAM communicated in the auditor’s report, the auditor must: (i) identify the CAM; (ii) describe the principal considerations that led the auditor to determine that the matter is a CAM; (iii) describe how the CAM was addressed in the audit; and (iv) refer to the relevant financial statement accounts or disclosures that relate to the CAM. Despite the Public Company Accounting Oversight Board’s (“PCAOB”) instruction that CAMs be highly tailored and avoid boilerplate, based on the CAMs that have been published to date, it appears that audit firms are developing somewhat standardized language for certain types of CAMs. As reflected in guidance from the PCAOB, it is expected that one or more CAMs will be identified in connection with each audit.[10] As noted in our previous client alert, registrants should engage with their auditors to avoid unwelcomed surprises when the Form 10‑K filing deadline nears.[11] For example, registrants should consider possible scenarios where the new standard might put the auditor in a position of having to make disclosures of original information, and prepare in advance for how to address such situations. Since CAMs will typically address a topic that also is discussed in financial footnotes or MD&A, registrants should make sure that their language is consistent with the discussion in the CAM.

C. Review Risk Factors with a Focus on Disclosure of Hypothetical Events

In the past year, the SEC announced two enforcement cases in which it alleged that statements in a company’s risk factors were materially misleading. In both cases, the SEC focused on statements that phrased an event or contingency as a hypothetical, and alleged that at the time of the disclosure the situation was no longer hypothetical (regardless of whether it was clear at the time that there would be a material consequence). For example, in SEC v Mylan NV,[12] the SEC alleged that the statement, “a governmental authority may take a position contrary to a position we have taken, and may impose or pursue civil and/or criminal sanctions” was materially misleading since at the time a government agency had informed Mylan that it believed Mylan was misclassifying EpiPen as a generic drug, a position that Mylan was disputing. The SEC claimed that “Instead of disclosing that [the government agency] disagreed with Mylan’s classification of EpiPen, Mylan misleadingly presented a potential risk that [an agency] could disagree” and that Mylan’s “hypothetical phrasing created the impression that [the government agency] had not yet taken a position on Mylan’s classification of EpiPen.” In announcing an earlier similar enforcement case, the SEC’s press release stated that public companies’ disclosures must be “accurate in all material respects, including not continuing to describe a risk as hypothetical when it has in fact happened.”[13]

These settlements indicate that risk factor disclosure should be revisited regularly and treated as “living” as much as the rest of the filing, including the MD&A. Registrants should thoroughly review their risk factor disclosures in their upcoming Form 10‑K so that the disclosures do not speak about events hypothetically (g., “could” or “may”) if those events have occurred or are occurring. If a risk has manifested itself, that factual event should be appropriately reflected in the body of the risk factors. Registrants should be careful with how they describe significant events (e.g., material cyber breaches, material events impacting operating results) as well as more routine items (e.g., fluctuations in demand, inventory write-downs, customer reimbursement claims, intellectual property claims, poorly performing investments, and tax audits). If a risk involves a situation that arises from time to time, then it may be preferable to refer to the consequences of such situation as a material contingency, instead of referring to the situation as a hypothetical contingency.

D. Review Substantive Content of Risk Factors

Registrants should also make sure the content of their risk factors is up to date and reflects risks presented by current events and conditions. There are a few areas in particular about which the SEC has stated that it expects to see risk disclosures.

Intellectual Property and Technology Risks Associated with Foreign Operations. On December 19, 2019, the Division of Corporation Finance (the “Division”) of the SEC released CF Disclosure Guidance: Topic No. 8 (Intellectual Property and Technology Risks Associated with International Business), which reminds registrants of their risk disclosure obligations in light of the wide array of evolving risks stemming from the global and technologically interconnected nature of today’s business environment.[14] Registrants, particularly those that conduct business in certain foreign jurisdictions, house technology, data, and intellectual property abroad, or license technology to joint ventures with foreign partners, should review the guidance, including the list of questions it poses to help registrants assess the sufficiency of their disclosures regarding these type of risks.
Environmental Risks. The SEC remarked in late 2018 that investors are continuing to increase their focus on the “long-term investment risks and benefits associated with” environmental, social and governance (“ESG”) matters. To address this growing investor appetite, registrants have added disclosures in the risk factors section of their Forms 10‑K to address ESG matters. A 2019 study by the National Association of Corporate Directors showed that 66% of companies in the Russell 3000 Index discussed ESG risk, including, among other factors, climate change and water scarcity risks.[15] Given the increase in ESG disclosures by registrants, the SEC has followed suit by beginning to pay particular attention to the substance and presence of such disclosures, which registrants should keep in mind when addressing ESG risk factors in their Forms 10‑K.[16]
Privacy-Related Risks. With the enactment of the California Consumer Protection Act (“CCPA”), which went into effect on January 1, 2020, the SEC revitalized its focus on privacy-related risks. Indeed, the World Privacy Forum recently advised the SEC that most registrants face some type of data privacy risk today, likening data privacy risk’s importance to that of environmental risks.[17] Given the public discourse regarding data privacy risks along with recent legislative enactments, registrants should review their privacy-related risk factors and disclose material data privacy risks, including risks associated with the CCPA, and re-evaluate any disclosures or risks associated with the EU General Data Protection Regulation.
LIBOR Transition Risks. In July 2019, the SEC issued a statement regarding the expected cessation of LIBOR after December 31, 2021.[18] The industries most likely to be impacted by the discontinuation of LIBOR include real estate, banking and insurance industries. The SEC noted that registrants should review their risk factor disclosures related to the expected discontinuation of LIBOR. To date, however, we have seen relatively few risk factors addressing LIBOR transition risks. In addition to a general review of financing and hedging arrangements that may reference LIBOR, registrants should evaluate whether significant commercial relationships have LIBOR-related terms. Registrants also should consider the fact that the cessation of LIBOR may take place over several reporting periods, which means that it may be appropriate to address in MD&A liquidity discussions any mitigating steps they have taken to date as well as addressing risks from any remaining exposures.
International Trade Risks. As the international trade climate remains fluid, the SEC has increased its focus on sanctions disclosures in registrants’ public filings. The Wall Street Journal noted that at least 42 public companies received comment letters from the SEC in 2018 regarding their business activity in areas subject to sanctions.[19] More recently, the SEC sent comment letters to QUALCOMM Inc.[20] and Paypal Holdings Inc.[21] regarding their sanctions-related disclosures. Registrants should consider their activities in areas subject to sanctions and review their related risk factor disclosures to ensure such risks are accounted for and adequately described.
Brexit-Related Risks. As mentioned by Division Director Bill Hinman in March 2019, registrants should consider whether Brexit exposes them to risks such as those associated with the application of new or different regulatory schemes, supply chain disruptions, customer loss, and currency exchange rate fluctuations. Registrants also should review existing material contracts for contractual risk and consider financial statement impacts such as inventory write-downs, long-lived asset impairments, and assumptions underlying fair value measurements.[22]
Cybersecurity Risks. In February 2018, the SEC issued guidance regarding registrants’ cybersecurity disclosures in their public filings.[23] In particular, the SEC emphasized that registrants should (i) consider the materiality of cybersecurity risks, (ii) avoid boilerplate language regarding such risk, and (iii) focus on timely disclosures when a registrant becomes aware of a cybersecurity incident or risk. In addition, the SEC noted that registrants have a duty to correct and update any prior disclosure that the registrant determines was untrue or omitted necessary material facts that would otherwise make the disclosure misleading.
Industry-Specific Risks. Registrants should be mindful of unique risks presented to the industry or industries in which they operate, whether those arise from political developments, commodity prices, competitive dynamics, regulatory changes, international events or some other source.

E. Consider Whether Ongoing Governmental Investigations Require Accrual or Disclosure

Registrants are reminded to consider any ongoing governmental investigations or lawsuits concerning the registrant and whether an investigation or lawsuit may require accrual or disclosure under Accounting Standard Codification 450 (“ASC 450”) in light of the Mylan[24] In the fall of 2014, the Department of Justice (“DOJ”) began investigating Mylan for claims under the False Claims Act. As the DOJ’s investigation continued to gain traction, Mylan did not disclose the existence of the investigation and did not accrue any amount for the potential loss until Mylan announced that it had settled the matter in October 2016 for $465 million.

As alleged in the SEC’s complaint, pursuant to ASC 450, public companies facing possible material losses from a lawsuit or government investigation must (i) disclose the loss contingency if a loss is reasonably possible and (ii) record an accrual for the estimated loss if the loss is probable and reasonably estimable. Mylan, however, failed to disclose or accrue for the loss relating to the DOJ investigation despite the investigation continuing to gain traction over the two-year period. As a result, Mylan agreed to pay $30 million to settle charges that its public filings were false and misleading due to its failure to include timely disclosure regarding the DOJ’s investigation.

The Mylan case serves as an important reminder that registrants must continually monitor the facts surrounding governmental investigations and lawsuits to evaluate material business risks and timely disclose and account for loss contingencies that can materially affect their financial condition or results of operations.

F. Review Description of Property

The SEC’s amendments to Item 102 of Regulation S‑K provide that registrants are now only required to describe a physical property to the extent the property is material to such registrant’s business, which contrasts with the previous requirement to disclose “principal” plants, mines, and other “materially important” physical properties.[25] Revisions to Item 102 also clarify that it may be appropriate to provide property disclosures on a collective basis rather than on an individual basis. This presents registrants with a good opportunity to revisit some disclosures that may have remained static for several years.

G. Consider Impact of New Accounting Standard for Current Expected Credit Loss (“CECL”)

In November 2019, the SEC’s Office of the Chief Accountant (“OCA”) and the Divisions of Corporation Finance (“CF”) issued a staff accounting bulletin, SAB 119, to align certain portions of prior staff interpretative guidance with the relevant concepts of the Financial Accounting Standards Board (“FASB”) new expected credit loss standard for registrants engaged in lending activities.[26] As noted in SAB 119, OCA and CF staff believe many of the concepts from SAB 102 continue to be relevant under the expected credit loss model. Applicable registrants should consider the new guidance and be prepared to disclose appropriate implementation-related disclosures, including regarding the sufficiency of their controls over allowances for credit losses, in the event this accounting standard is adopted. Further, as calendar-year filers generally were required to adopt the new accounting standard for CECL on January 1, 2020, these registrants, per SAB 78, should discuss progress toward implementation of the new standard and the expected effects of adoption, particularly if implementation of this new standard is expected to be material.

H. Revisit Prior Language to Remove Immaterial Information

Over the years, registrants’ annual reports tend to accumulate disclosures that were added for a specific reason, but no longer convey material information. For example, disclosure may have been added to address old comment letters from the SEC or events that had a material impact on the registrant at a time in the past when circumstances were different. In speeches and other venues, SEC officials and staff have encouraged registrants to take a hard look at their filings to determine whether disclosures are still material in light of the registrant’s current situation.

II. Technical Rule Changes

A. Cover Page

As discussed previously in our Securities Regulation and Corporate Governance Monitor,[27] registrants should update the cover page of their upcoming Form 10‑K to accurately reflect the SEC’s recently announced Form 10‑K cover page changes:[28]

Interactive Data Files. With the SEC eliminating the requirement that Interactive Data Files be posted on a registrant’s website, the 2019 Form 10‑K cover page should likewise remove any reference to “posting” Interactive Data Files on the Company’s website.
Trading Symbol. The registrant must now disclose on its Form 10‑K cover page its trading symbol on the applicable public stock exchange (e.g., Nasdaq or NYSE) for each security registered pursuant to Section 12(b) of the Exchange Act, including any preferred stock or debt that is Section 12(b) registered.
Section 16(a) Delinquencies. In light of the SEC’s amendments to Item 405 relating to Section 16 reporting, the SEC eliminated the requirement to include the checkbox on the cover page of Form 10‑K relating to Section 16(a) delinquencies.
Smaller Reporting Company Parenthetical. As discussed previously in our Securities Regulation and Corporate Governance Monitor, due to the recent change in the definition of “smaller reporting company,” the SEC removed the parenthetical on Form 10‑K cover pages that states “(do not check if smaller reporting company)” under Non-accelerated filer.[29]

B. Section 16 Compliance

While disclosures about Section 16 reporting delinquencies are typically included in a registrant’s proxy statement and incorporated by reference in their Forms 10‑K, it is still important to note the impact of the SEC’s amendments to Item 405, particularly where the Form 10‑K references the sections of the proxy statement that is incorporated by reference. The SEC’s amendments require that registrants change the disclosure heading required by Item 405(a)(1) from “Section 16(a) Beneficial Ownership Reporting Compliance” to “Delinquent Section 16(a) Reports.” Under the new instructions to Item 405, registrants are encouraged to exclude that heading altogether if there are no reportable Section 16(a) delinquencies.

C. Exhibit-Related Items

The SEC also adopted amendments that impact the technical disclosure requirements concerning exhibits.

Location of Exhibit Index. Under Item 601(a)(2), the exhibit index to Form 10‑K should be relocated such that it appears before the signature pages.[30] This is now required for all public filings that include exhibits pursuant to Item 601.
New Description of Securities Exhibit. Item 601(b)(4) now requires that registrants provide a brief description of all securities registered under Section 12 of the Exchange Act (i.e., the information required by Item 202(a) through (d) and (f)) as an exhibit to their Forms 10‑K.[31] Previously, this disclosure was only required in registration statements. The securities covered by this exhibit are the same as those required to be listed on the cover of the Form 10‑K. Although many registrants will be able to pull much of the content for this exhibit from prior registration statements, registrants with multiple classes of listed securities (e.g., typical Euro-denominated debt securities) should allot ample time to provide this description as this may be a significant undertaking.In this regard, it is important to note that in the context of the SEC’s review and comment of prospectuses for IPOs, the SEC has focused on the terms of and disclosures regarding exclusive forum jurisdiction and related provisions that address the remedies available to securityholders.[32] Registrants that have exclusive forum provisions in their organizational documents should bear these comments in mind when preparing the description of securities exhibit.
New Procedural Rules for Exhibits. Several of the rules related to exhibits have been modernized, so registrants will want to consider whether they can take advantage of any of these changes in their 2019 Form 10‑K. The following discussion highlights the more notable changes.
- Registrants need only to disclose material contracts to be performed in whole or in part at or after the filing of their Forms 10‑K. Previously, there was a two-year lookback period with respect to material contracts for most filers, which often resulted in filing copies of stale terminated contracts. (See Item 601(b)(10)(i) of Regulation S‑K.)[33]
- Registrants may omit entire schedules or similar attachments to exhibits, unless the schedules or attachments contain material information that is not otherwise disclosed in the exhibit or SEC filing. (See Item 601(a)(5) of Regulation S‑K.)[34] Exhibits relying on this provision must contain a list briefly identifying the contents of the omitted schedules or other attachments unless the exhibit already includes information that conveys the subject matter of the omitted material. Registrants are no longer required to state that they will furnish a copy of the omitted schedules or attachments to the SEC upon request (which was typically done through a notation in the exhibit index); they are simply required to furnish a copy to the SEC if requested.
- For exhibits being filed, registrants should consider redacting (i) sensitive information in acquisition agreements or material contracts and/or (ii) personally identifiable information as there is no longer a need to file a confidential treatment request in either case. (See Item 601(b)(10) and Item 601(a)(6) of Regulation S‑K.)[35]
- Lastly, for Exhibit 101 and 104, registrants must ensure that their exhibit index disclosures are consistent with the SEC’s recent CD&Is on interactive data.[36] Specifically, Exhibit 101 must include the word “inline,” and Exhibit 104 must include the word “inline” and “should cross-reference to the Interactive Data Files submitted under EX-101.” (See Instruction 1 to paragraphs (b)(101)(i).

D. Incorporation by Reference

Hyperlinking. Rule 12b-23(d) of the Exchange Act now requires thatinformation incorporated by reference in a registrant’s Form 10‑K must include a hyperlink to the location of such information.[37] As a practical matter, because hyperlinks were already required for exhibits and registrants likely have not incorporated other information into the Form 10‑K by reference to their previous filings, this change may not require any revisions.
D&Os, Promoters, and Control Persons. Registrants that elect not to repeat disclosure in their proxies or information statements regarding the identities and backgrounds of directors, executive officers, promoters and control persons that are already disclosed in such registrant’s Form 10‑K (See Item 401 of Regulation S‑K) must include such disclosure under the heading “Information about our Executive Officers” in Part I of such registrant’s Form 10‑K (previously “Executive Officers of the Registrant.”)

E. Other Reminders

Disclosure Update and Simplification. Registrants should continue to ensure compliance with the technical amendments made to Regulation S‑K and Regulation S‑X in 2018.[38] These technical amendments eliminated duplicative, overlapping, outdated or unnecessary provisions in light of subsequent changes to SEC disclosure requirements, GAAP, and technological developments.
Proposed Changes to Regulation S‑K. In August 2019, the SEC proposed amendments to modernize the description of business, legal proceedings, and risk factor disclosures that registrants are required to make pursuant to Regulation S‑K.[39] If adopted, registrants will be required to, among other things, provide additional disclosure regarding human capital resources, group risk factors by topic under relevant headings, and, if the risk factors exceed 15 pages, add a risk factor summary. While the public comment period for these proposed amendments has ended and the SEC could publish final rules at any time, we do not expect final rules to be adopted before the deadlines of the 2019 Form 10‑K. That being said, registrants may consider expanding upon their human capital disclosure or grouping their risk factors under relevant headings in their 2019 Forms 10‑K.

______________________

[1] Available at https://www.sec.gov/rules/final/2019/33-10618.pdf.

[2] Available at https://www.gibsondunn.com/sec-continues-to-modernize-and-simplify-disclosure-requirements.

[3] For ease of reference, these statistics refer to issuers with fiscal years ending in 2019 as providing financial statements covering fiscal years 2017, 2018, and 2019. Further, references to the third year refer to fiscal year 2017.

[4] Such companies are Analog Devices Inc., Apple Inc., Atmos Energy Corp., Cisco Systems, Coty Inc., Estee Lauder Companies Inc., Maxim Integrated Products, Inc., Oracle Corp., Raymond James Financial Inc., Skyworks Solutions, TransDigm Group Inc., Varian Medical Systems Inc., Walgreens Boots Alliance, Inc., and Western Digital Corp.

[5] The 25 companies that included only two years of financial information and a comparative discussion between 2017 and 2018 in their MD&A are ABIOMED, Inc., Air Products & Chemicals, Inc., Broadridge Financial Solutions, Inc., Cooper Companies, Inc., D.R. Horton Inc., Darden Restaurants, Inc., Deere & Co., DXT Technology Co., Inc., Electronic Arts Inc., General Mills, Inc., H&R Block, Inc., Helmerich & Payne, Inc., J.M. Smucker Co., Inc., KLA Corp., Inc., News Corp., Inc., NIKE, Inc., Parker-Hannifin Corp., Inc., Procter & Gamble Co., Qorvo, Inc., ResMed Inc., Symantec Corp., Inc., Sysco Corp., Inc., Tapestry, Inc., TE Connectivity Ltd., and Westrock Co.

[6] Such companies are Apple Inc., Cisco Systems, Inc., Estee Lauder Companies Inc., Oracle Corp., and Walgreens Boots Alliance, Inc.

[7] Such companies are Air Products & Chemicals, Inc., Deere & Co., NIKE, Inc., and Procter & Gamble Co.

[8] This new requirement applies to audits of fiscal years ending on or after June 30, 2019 for large accelerated filers. It will only apply to the audits of accelerated filers, non-accelerated filers, and smaller reporting companies for fiscal years ending on or after December 15, 2020. Emerging growth companies are exempt.

[9] Available at https://pcaobus.org/Standards/Documents/Implementation-of-Critical-Audit-Matters-The-Basics.pdf.

[10] Although the PCAOB expects that this will be the case in most audits to which the CAM requirements apply, there also may be audits in which the auditor determines there are no CAMs. See https://pcaobus.org/Standards/Documents/Implementation-of-Critical-Audit-Matters-The-Basics.pdf.

[11] Available at https://www.gibsondunn.com/pcaob-adopts-new-model-for-audit-reports.

[12] Available at https://www.sec.gov/litigation/complaints/2019/comp-pr2019-194.pdf.

[13] Discussed at https://www.sec.gov/news/press-release/2019-140.

[14] Available at https://www.sec.gov/corpfin/risks-technology-intellectual-property-international-business-operations.

[15] Available at https://blog.nacdonline.org/posts/esg-risks-trickle-into-financial-filings.

[16] Discussion at https://news.bloomberglaw.com/bloomberg-law-analysis/analysis-tracking-secs-evolving-approach-to-esg-disclosures.

[17] Available at https://www.worldprivacyforum.org/2019/10/wpf-advises-sec-regarding-data-risk-factors-and-disclosures.

[18] Available at https://www.sec.gov/news/public-statement/libor-transition.

[19] Available at https://www.wsj.com/articles/sec-questions-more-companies-about-sanctions-disclosures-11567018243.

[20] Available at https://sec.report/Document/0001728949-19-000062.

[21] Available at https://sec.report/Document/0001633917-19-000166.

[22] Available at https://www.sec.gov/news/speech/hinman-applying-principles-based-approach-disclosure-031519.

[23] Available at https://www.sec.gov/rules/interp/2018/33-10459.pdf.

[24] Discussed at https://www.sec.gov/news/press-release/2019-194.

[25] Available at https://www.ecfr.gov/cgi-bin/text-idx?SID=ad78279c826005efc3f7b98259940f3c&mc=true&node=se17.3.229_1102&rgn=div8.

[26] Available at https://www.sec.gov/oca/staff-accounting-bulletin-119.

[27] Available at https://www.gibsondunn.com/sec-continues-to-modernize-and-simplify-disclosure-requirements.

[28] Discussed at https://www.sec.gov/info/smallbus/secg/fast-act-modernization-and-simplification-of-regulation-S‑K.

[29] Available at https://www.securitiesregulationmonitor.com/Lists/Posts/Post.aspx?ID=334.

[30] Available at https://www.ecfr.gov/cgi-bin/text-idx?SID=ad78279c826005efc3f7b98259940f3c&mc=true&node=se17.3.229_1601&rgn=div8.

[31] Available at https://www.ecfr.gov/cgi-bin/text-idx?SID=ad78279c826005efc3f7b98259940f3c&mc=true&node=se17.3.229_1601&rgn=div8.

[32] See, for example, https://www.sec.gov/Archives/edgar/data/1718224/000000000019014928/filename1.pdf.

[33] Available at https://www.ecfr.gov/cgi-bin/text-idx?SID=ad78279c826005efc3f7b98259940f3c&mc=true&node=se17.3.229_1601&rgn=div8.

[34] Available at https://www.ecfr.gov/cgi-bin/text-idx?SID=ad78279c826005efc3f7b98259940f3c&mc=true&node=se17.3.229_1601&rgn=div8.

[35] Available at https://www.ecfr.gov/cgi-bin/text-idx?SID=ad78279c826005efc3f7b98259940f3c&mc=true&node=se17.3.229_1601&rgn=div8 and https://www.ecfr.gov/cgi-bin/text-idx?SID=ad78279c826005efc3f7b98259940f3c&mc=true&node=se17.3.229_1601&rgn=div8.

[36] Available at https://www.securitiesregulationmonitor.com/Lists/Posts/Post.aspx?ID=375.

[37] Available at https://www.govinfo.gov/content/pkg/CFR-2014-title17-vol4/pdf/CFR-2014-title17-vol4-sec240-12b-23.pdf.

[38] Discussed at https://www.gibsondunn.com/wp-content/uploads/2018/08/sec-streamlines-disclosure-requirements-as-part-of-its-overall-disclosure-effectiveness-review.pdf.

[39] Discussed at https://www.securitiesregulationmonitor.com/Lists/Posts/Post.aspx?ID=372.

Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work in the Securities Regulation and Corporate Governance and Capital Markets practice groups, or any of the following practice leaders and members:

Securities Regulation and Corporate Governance Group:
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, [email protected])
James J. Moloney – Orange County, CA (+ 949-451-4343, [email protected])
Lori Zyskowski – New York (+1 212-351-2309, [email protected])
Brian J. Lane – Washington, D.C. (+1 202-887-3646, [email protected])
Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, [email protected])
Michael A. Titera – Orange County, CA (+1 949-451-4365, [email protected])

Capital Markets Group:
Andrew L. Fabens – New York (+1 212-351-4034, [email protected])
Hillary H. Holmes – Houston (+1 346-718-6602, [email protected])
Stewart L. McDowell – San Francisco (+1 415-393-8322, [email protected])
Peter W. Wardle – Los Angeles (+1 213-229-7242, [email protected])

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Since the end of World War II, Germany’s foreign policy and economic well-being were built on three core pillars: (i) a strong transatlantic alliance and friendship, (ii) stable and influential international institutions and organizations, such as first and foremost, the EU, but also others such as the UN and GATT, and, finally, (iii) the rule of law. Each of these pillars has suffered significant cracks in the last years requiring a fundamental re-assessment of Germany’s place in the world and the way the world’s fourth largest economy should deal with its friends, partners, contenders and challengers. A few recent observations highlight the urgency of the issue:

The transatlantic alliance and friendship has been eroding over many years. A recent Civey study conducted for the think tank Atlantic-Brücke showed that 57.6% of Germans prefer a “greater distance” to the U.S., 84.6% of the 5,000 persons polled by Civey described the German-American relationship as negative or very negative, while only 10.4% considered the relationship as positive.
The current state of many international institutions and organizations also requires substantial overhaul, to put it mildly: After Brexit has occurred, the EU will have to re-define its role for its remaining 27 member states and its (new) relationship with the UK, which is still the fifth-largest economy on a stand-alone basis. GATT was rendered de facto dysfunctional on December 10, 2019, when its Appellate Body lost its quorum to hear new appeals. New members cannot be approved because of the United States’ veto against the appointment of new appeal judges. The UN is also suffering from a vacuum created by an attitude of disengagement shown by the U.S., that is now being filled by its contenders on the international stage, mainly China and Russia.
Finally, the concept of the rule of law has come under pressure for some years through a combination of several trends: (i) the ever expanding body of national laws with extra-territorial effect (such as the FCPA or international sanction regulations), a rule-making trend not only favored by the U.S., but also by China, Russia, the EU and its member states alike, (ii) the trend – recently observed in some EU member states – that the political party in charge of the legislative and executive branch initiates legislative changes designed to curtail the independence of courts (e.g. Poland and Hungary), and (iii) the rise of populist parties that have enjoyed land-slide gains in many countries (including some German federal states) and promulgate simple solutions, not least by cutting corners and curtailing legal procedures and legal traditions.

These fundamental challenges occur toward the end of a period of unprecedented rise in wealth and economic success of the German economy: Germany has reaped the benefits of eight decades of peace and the end of the Cold War after the decay of the Soviet Union. It regained efficiencies after ambitious structural changes to its welfare state in the early years of the millennium, and it re-emerged as a winner from the 2008 financial crisis benefiting (among others) from the short-term effects of the European Central Bank’s policy of a cheap Euro that mainly benefits the powerful German export machine (at the mid- and long-term cost to German individual savers).

The robust economy that Germany enjoyed over the last decade resulted in record budgets, a reduction of public debt, a significant reduction in unemployment, and individual consumption at record levels. Therefore, the prospects of successfully addressing the above challenges are positive. However, unless straight forward and significant steps are identified and implemented to address the challenges ahead, the devil will be in the detail. The legislative changes across all practice areas covered in this year-end update are partly encouraging, partly disappointing in this respect.

It is impossible to know whether the new laws and regulations will, on balance, make Germany a stronger and more competitive economy in 2020 and beyond. Healthy professional skepticism is warranted when assessing many of the changes suggested and introduced. However, we at Gibson Dunn are determined and committed to ensuring that we utilize the opportunities created by the new laws to the best benefit of our clients, and, at the same time, helping them in their quest to limit any resulting threats to the absolute minimum.

As in prior years, in order to succeed in that, we will require your trust and confidence in our ability to support you in your most complicated and important business decisions and to help you form your views and strategies to deal with sophisticated German legal issues in times of fundamental change.

Your real-world questions and the tasks you entrust us with related to the above developments and changes help us in forming our expertise and sharpening our focus. This adds the necessary color that allows us to paint an accurate picture of the multifaceted world we are living in, and on this basis, it will allow you to make sound business decisions in the interesting times to come. In this context, we are excited about every opportunity you will provide us with to help shaping our joint future in the years to come.

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Corporate, M&A
Tax
Financing and Restructuring
Labor and Employment
Real Estate
Compliance and Litigation
Antitrust and Merger Control
Data Protection
IP & Technology

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1. Corporate, M&A

1.1 ARUG II – New Transparency Rules for Listed German Corporations, Institutional Investors, Asset Managers, and Proxy Advisors

In November 2019, the German parliament passed ARUG II, a long awaited piece of legislation implementing the revised European Shareholders’ Rights Directive (Directive (EU) 2017/828). ARUG II is primarily aimed at listed German companies and provides changes with respect to “say on pay” provisions, as well as additional approval and disclosure requirements for related party transactions, the transmission of information between a corporation and its shareholders and additional transparency and reporting requirements for institutional investors, asset managers and proxy advisors.

“Say on pay” on remuneration of board members; remuneration policy and remuneration report

In a German stock corporation, shareholders determine the remuneration of the supervisory board members at a shareholder meeting, whereas the remuneration of the management board members is decided by the supervisory board. Under ARUG II, shareholders of German listed companies must be asked to vote on the remuneration of the board members pursuant to a prescribed procedure. First, the supervisory board will have to prepare a detailed remuneration policy (including maximum remuneration amounts) for the management board, which must be submitted to the shareholders if there are major changes to the remuneration, and in any event at least once every four years. The result of the vote on the policy will only be advisory except that the shareholders’ vote to reduce the maximum remuneration amount will be binding. With respect to the remuneration of supervisory board members, the new rules require a shareholder vote at least once every four years. Second, at the annual shareholders’ meeting, the shareholders will vote ex post on the remuneration report which contains the remuneration granted to the present and former members of the management board and the supervisory board in the previous financial year. Again, the shareholders’ vote, however, will only be advisory. Both the remuneration report and the remuneration policy have to be made public on the company’s website for at least ten years.

The changes introduced by ARUG II will not apply retroactively and will not therefore affect management board members’ existing service agreements, i.e. such agreements will not have to be amended in case they do not comply with the new remuneration policy.

Related party transactions

German stock corporation law already provides for various safeguards to protect minority shareholders in transactions with major shareholders or other related parties (e.g. the capital maintenance rules and the laws relating to groups of companies). In the future, for listed companies, these mechanisms will be supplemented by a detailed set of approval and transparency requirements for related party transactions. In particular, transactions exceeding certain thresholds will require prior supervisory board approval, provided that a rejection by the supervisory board can be overruled by shareholder vote, and a listed company must publicly disclose any such material related party transaction, without undue delay over media channels providing for European-wide distribution.

Communication / Know-your-Shareholder

Listed corporations will have the right to request information on the identity of their shareholders, including the name and both a postal and electronic address, from depositary banks, thus allowing for a direct communication line, also with respect to bearer shares (“know-your-shareholder”). Furthermore, depositary banks and other intermediaries will be required to pass on important information from the corporation to the shareholders and vice versa, e.g. with respect to voting in shareholders’ meetings and the exercise of subscription rights. Where there is more than one intermediary in a chain, the intermediaries are required to pass on the respective information within the chain.

Increased transparency requirements for institutional investors, asset managers and proxy advisors

Institutional investors and asset managers will be required to disclose their engagement policy (including how they monitor, influence and communicate with investee companies, exercise shareholders’ rights and manage actual and potential conflicts of interests). They will also have to report annually on the implementation of their engagement policy and on their voting decisions. Institutional investors will also have to disclose to which extent key elements of their investment strategy match the profile and duration of such institutional investors’ liabilities towards their ultimate beneficiaries. If they involve asset managers, institutional investors also have to disclose the main aspects of their arrangements with them. The new disclosure and reporting requirements, however, only apply on a “comply or explain” basis, i.e. investors and asset managers may choose not to comply with the transparency requirements provided that they give an explanation as to why this is the case.

Proxy advisors will have to publicly disclose on an annual basis whether and how they have applied their code of conduct based again on the “comply or explain” principle. They also have to provide information on the essential features, methodologies and models they apply, their main information sources, the qualification of their staff, their voting policies for the different markets they operate in, their interaction with the companies and the stakeholders as well as how they manage conflicts of interests. These rules, however, do not apply to proxy advisors operating from a non-EEA state with no establishment in Germany.

Entry into force and transitional provisions

The provisions concerning related party transactions already apply. The rules relating to communications via intermediaries and know-your-shareholder information will apply from September 3, 2020. The “mandatory say on pay” resolutions will only have to be passed in shareholder meetings starting in 2021. The remuneration report will have to be prepared for the first time for the financial year 2021. It needs to be seen whether companies will already adhere to the new rules prior to such dates on a voluntary basis following requests from their shareholders or pressure from proxy advisors. In any event, both listed companies as well as the other addressees of the new transparency rules should make sure that they are prepared for the new reporting and disclosure requirements.

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1.2 Restatement of the German Corporate Governance Code – New Stipulations for the Members of the Supervisory Board and the Remuneration of the Members of the Board of Management

A restatement of the German Corporate Governance Code (Deutscher Corporate Governance Kodex, “DCGK” or the “Code”) is expected for the beginning of 2020, after the provisions of the EU Shareholder Rights Directive II (Directive (EU) 2017/828 of the European Parliament and of the Council of May 17, 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement) were implemented into German domestic law as part of the “ARUG II” reform as of January 1, 2020. This timeline seeks to avoid overlaps and potentially conflicting provisions between ARUG II and the Code.

In addition to structural changes, which are designed to improve legal clarity compared to the previous 2017 version, the new Code contains a number of substantial changes which affect boards of management and supervisory boards in an effort to provide more transparency to investors and other stakeholders. Some of the key modifications can be summed up as follows:

(a)   Firstly, restrictions on holding multiple corporate positions are tightened considerably. The new DCGK will recommend that (i) supervisory board members should hold no more than five supervisory board mandates at listed companies outside their own group, with the position of supervisory board chairman being counted double, and (ii) members of the board of management of a listed company should not hold more than two supervisory board mandates or comparable functions nor chair the supervisory board of a listed company outside their own group.

(b)   A second focal point is the independence of shareholder representatives on the supervisory board. In this context, the amended DCGK for the first time introduces certain criteria which can indicate a lack of independence by supervisory board members such as long office tenure, prior management board membership, family or close business relationships with board members and the like. However, the Government Commission DCGK (Regierungskommission Deutscher Corporate Governance Kodex) (the “Commission”) has pointed out that these criteria should not replace the need to assess each case individually.

Furthermore, at least 50% of all shareholder representatives (including the chairperson) shall be independent. If there is a controlling shareholder, at least two members of the supervisory board shall be independent of such controlling shareholder (assuming a supervisory board of six members).

(c)   A third key area of reform focuses on the remuneration of members of the board of management. Going forward, it is recommended that companies should determine a so-called “target total remuneration”, i.e. the amount of remuneration that is paid out in total if 100 percent of all previously determined targets have been achieved, as well as a “maximum compensation cap”, which should not be exceeded even if the previously determined targets are exceeded. Under the new Code, the total remuneration of the management board should be “explainable to the public”.

(d) Finally, the Commission has decided to simplify corporate governance reporting and put an end to the parallel existence of (i) the corporate governance report under the Code and (ii) a separate corporate governance statement contained in the management report of the annual accounts. Going forward, the corporate governance statement in the annual financial statements will be the core instrument of corporate governance reporting.

In recent years, governance topics have assumed ever increasing importance for both domestic and foreign investors and are typically a matter of great interest at annual shareholders’ meetings. Hence, we recommend that (listed) stock corporations, in a first step, familiarize themselves with the content of the new recommendations in the Code and, thereafter, take the necessary measures to comply with the rules of the revised DCGK once it takes effect . In particular, stock corporations should evaluate and disclose the different mandates of their current supervisory board members to comply with the new rules.

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1.3 Cross-Border Mobility of European Corporations Facilitated

On January 1, 2020 the European Union Directive on cross-border conversions, mergers and divisions (Directive (EU) 2019/2121 of the European Parliament and of the Council of November 27, 2019) (the “Directive”) has entered into force.

While a legal framework for cross-border mergers had already been implemented by the European Union in 2005, the lack of a comparable set of rules for cross-border conversions and divisions had led to fragmentation and considerable legal uncertainty. Whenever companies, for example, attempted to move from one member state to another without undergoing national formation procedures in the new member state and liquidation procedures in the other member state, they were only able to rely on certain individual court rulings of the European Court of Justice (ECJ). Cross-border asset transfers by (partial) universal legal succession ((partielle) Gesamtrechtsnachfolge) were virtually impossible due to the lack of an appropriate legal regime. The Directive now seeks to create a European Union-wide legal framework which ultimately enhances the fundamental principle of freedom of establishment (Niederlassungsfreiheit).

The Directive in particular covers the following cross-border measures:

The conversion of the legal structure of a corporation under the regime of one member state into a legal structure of the destination member state (grenzüberschreitende Umwandlung) as well as the transfer of the registered office from one member state to another member state (isolierte Satzungsitzverlegung);
Cross-border division whereby certain assets and liabilities of a company are transferred by universal legal succession to one or more entities in another member state which are to be newly established in the course of the division. If all assets and liabilities are transferred, at least two new transferee companies are required and the transferor company ceases to exist upon effectiveness of the division. In all cases, the division is made in exchange for shares or other interests in the transferor company, the transferee company or their respective shareholders, depending on the circumstances.
The Directive further amends the existing legal framework for cross-border merger procedures by introducing common rules for the protection of creditors, dissenting minority shareholders and employees.
Finally, the Directive provides for an anti-abuse control procedure enabling national authorities to check and ultimately block a cross-border measure when it is carried out for abusive or fraudulent reasons or in circumvention of national or EU legislation.

Surprisingly, however, the Directive does not cover a cross-border transfer of assets and liabilities to one or more companies already existing in another member state (Spaltung durch Aufnahme). In addition, the Directive only applies to corporations (Kapitalgesellschaften) but not partnerships (Personengesellschaften). Member states have until January 2023 to implement the Directive into domestic law.

Through this legal framework for corporate restructuring measures, it is expected that the Directive will harmonize the interaction between national procedures. If the member states do not use the contemplated national anti-abuse control procedure excessively, the Directive can considerably facilitate cross-border activities. Forward looking member states may even consider implementing comparable regimes for divisions into existing legal entities which are currently beyond the scope of the Directive.

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1.4 Transparency Register: Reporting Obligations Tightened and Extended to Certain Foreign Entities

The Act implementing the 5th EU Anti-Money Laundering Directive (Directive (EU) 2018/843) which amended the German Anti-Money Laundering Act (Geldwäschegesetz, GwG) with effect as of January 1, 2020 (see below under section 6.2) also introduced considerable new reporting obligations to the transparency register (Transparenzregister), which seeks to identify the “ultimate beneficial owner”.

Starting on January 1, 2020, not only associations incorporated under German private law, but also foreign associations and trustees that have a special link to Germany must report certain information on their „beneficial owners“ to the German transparency register. Such link exists if foreign associations acquire real property in Germany. Non-compliance is not only an administrative offence (potential fines of up to EUR 150,000), but the German notary recording a real estate transaction must now check actively that the reporting obligation has been fulfilled before notarizing such transaction and must refuse notarization if it has not.

Foreign trustees must in addition report the beneficial owners of the trust if a trust acquires domestic real property or if a contractual partner of the trust is domiciled in Germany. Reporting by a foreign association or trustee to the German transparency register is, however, not required if the relevant information on the beneficial owners has already been filed with a register of another EU member state. Additional requirements apply to foreign trustees.

In addition, the reporting obligations of beneficial owners, irrespective of their place of residence, towards a German or, as the case may be, foreign association, regarding their interest have been clarified and extended. Associations concerned must now also actively make inquiries with their direct shareholders regarding any beneficial owners and must keep adequate records of these inquiries. Shareholders must respond to such inquiries within a reasonable time period and, in addition, must also notify the association pro-actively, if they become aware that the beneficial owner has changed as well as duly record any such notification.

Furthermore, persons or entities subject to the GwG obligations (“Obliged Persons”) inspecting the transparency register to fulfil their customer due diligence requirements (e.g. financial institutions and estate agents) must now notify the transparency register without undue delay of any discrepancies on beneficial ownership between entries in the register and other information and findings available to them.

Finally, the transparency register is now also accessible to the general public without proof of legitimate interest with regard to certain information about the beneficial owner (full legal name of the beneficial owner, the month and year of birth, nationality and country of residence as well as the type and extent of the economic interest of the beneficial owner). As in the past, however, the registry may restrict inspection into the transparency register, upon request of the beneficial owner, if there are overriding interests worthy of protection. In return for any disclosure, starting on July 1, 2020, beneficial owners may request information on inspections made by the general public (in contrast to inspections made by public authorities or Obliged Persons such as, e.g. financial institutions, auditing firms, or tax consultants and lawyers).

Although reporting obligations to the transparency register were initially introduced more than 2.5 years ago, compliance with these obligations still seems to be lacking in practice. Therefore, any group with entities incorporated in Germany, any foreign association intending to acquire German real estate and any individual qualifying as a beneficial owner of a domestic or foreign association should check whether new or outstanding inquiry, record keeping or reporting obligations arise for them and take the required steps to ensure compliance.

In this context, we note that for some time now the competent administrative enforcement authority (Bundesverwaltungsamt) has increased its efforts to enforce the transparency obligations, including imposing fines on associations that have failed to make required filings. It is to be expected that they will further tighten the reins based on this reform.

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1.5 UK LLPs with Management Seat in Germany – Status after Brexit?

As things stand at present the British government is pushing to enact its Withdrawal Agreement Bill (the “WAB”) to ensure that it can take the UK out of the EU on January 31, 2020. Pursuant to the WAB such withdrawal from the EU is not intended to result in a so-called “Hard Brexit” as the WAB introduces a transition period until December 31, 2020 during which the European fundamental freedoms including the freedom of establishment would continue to apply.

Freedom of establishment has, over the last decade in particular, resulted in German law recognizing that UK (and other EU) companies can have their effective seat of management (Verwaltungssitz) in Germany rather than the respective domestic jurisdiction. Until the end of the transition period, UK company structures such as UK Plc, Ltd. or LLP will continue to benefit from such recognition.

But what happens thereafter if the EU and the UK (or, alternatively, Germany and the UK) do not succeed in negotiating particular provisions for the continued recognition of UK companies in the EU or Germany, respectively? From a traditional German legal perspective, such companies will lose their legal capacity as a UK company in Germany after the transition period because German courts traditionally follow the real or effective seat theory (Sitztheorie) and thus apply German corporate law to the companies in question rather than the incorporation theory (Gründungstheorie) which would lead to the application of English law.

There would be a real risk that UK companies that have their effective management seat in Germany would have to be reclassified as a German company structure under the numerus clausus of German company structures. For some company structures such as the “LLP” German law does not have an equivalent LLP company structure as such, and reclassifying it as a German law limited partnership would not work either in most cases due to lack of registration in the German commercial register. In short, the only alternative for future recognition of a UK multi-person LLP, under German law, may be a German civil law partnership (GbR) or in certain cases a German law commercial partnership (OHG), with all legal consequences that flow from such structures, including, in particular, unlimited member liability. The discussion on how to resolve this issue in Germany has focused on a type of German partnership with limited liability (Partnerschaftsgesellschaft mit beschränkter Haftung, PartGmbB), that has only limited scope. A PartGmbB is only open to members of the so-called liberal or free professions such as attorneys or architects. In addition, the limitation of liability in a PartGmbB applies only to liability due to professional negligence and risks associated with the profession, and would thus not benefit their members generally.

Unless UK companies with an effective seat of management in Germany opted to risk reliance on the status quo – in the event there is no new framework for recognition after the transition period – affected companies should either change their seat of management to the UK (or any other EU jurisdiction that applies the incorporation theory) and establish a German branch office, or, alternatively, consider forming a suitable German legal corporate structure before the end of the transition period at the end of December 2020.

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1.6 The ECJ on Corporate Agreements and the Rome I Regulation

In its decision C-272/18, of 3 October 2019, the European Court of Justice (ECJ) further clarified the scope of the EU regulation Rome I (Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (the “Rome I Regulation”) on the one hand, and international company law which is excluded from the scope of the Rome I Regulation on the other hand. The need for clarification resulted from Art. 1 para. 2 lit f. of the Rome I Regulation pursuant to which “questions governed by the law of companies and other bodies, corporate or unincorporated, such as the creation, by registration or otherwise, legal capacity, internal organization or winding-up of companies and other bodies […]” are excluded from the scope of the Rome I Regulation.

The ECJ, as the highest authority on the interpretation of the Regulation, held that the “corporate law exception” does not apply to contracts which have shares as object of such contract only. According to the explicit statement of the Advocate General Saugmandsgaard Øe, this also includes share purchase agreements which are now held to be within the scope of the Rome I Regulation. This exception from the scope of the Rome I Regulation is thus much narrower than it has been interpreted by some legal commentators in the past.

The case concerned a law suit brought by an Austrian consumer protection organization (“VKI”) against a German public instrument fund (“TVP”), and more particularly, trust arrangements for limited (partnership) interests in funds designed as public limited partnerships. The referring Austrian High Court had to rule on the validity of a choice of law clause in trust agreements concerning German limited partnership interests between the German fund TVP, as trustee over the investors’ partnership interests, and Austrian investors qualifying as consumers, as trustors. This clause provided for the application of German substantive law only.

VKI claimed that this clause was, under Austrian substantive law, not legally effective and binding because pursuant to the Rome I Regulation, a contract concluded by a consumer with another person acting in the exercise of his/her trade or profession shall either be governed by the law of the country of the consumer’s habitual residence (in this case Austria) and/or, in the event the parties have made a choice as to the applicable law, at least not result in depriving the consumer of the protection offered to him/her by his/her country of residence. The contractual choice of German law could not therefore, in VKI’s view, deprive Austrian investors of rights guaranteed by Austrian consumer protection laws. TVP, on the other hand, argued that the Rome I Regulation was not even applicable as the contract in question was an agreement related to partnership interests and, thus, to corporate law which was excluded from the scope of the Rome I Regulation.

The ECJ ruled that the relevant corporate law exclusion from the scope of the Rome I Regulation is limited to the organizational aspects of companies such as their incorporation or internal statutes. In turn, a mere connection to corporate law was ruled not to be sufficient to fall within the exclusion. Sale and purchase agreements in M&A transactions, or as in the matter at hand trust arrangements, are therefore covered by the Rome I Regulation.

The decision provides that the choice of law principle of the Rome I Regulation is, subject to the restrictions imposed by the Regulation itself for particular groups such as consumers and employees, applicable in more cases than considered in the past with respect to corporate law related contracts.

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1.7 German Foreign Direct Investment – Further Rule-Tightening Announced for 2020

Restrictions on foreign investment is increasingly becoming a perennial topic. After the tightening of the rules on foreign direct investment in 2017 (see 2017 Year-End German Law Update under 1.5) and the expansion of the scope for scrutiny of foreign direct investments in 2018 (see 2018 Year-End German Law Update under 1.3), the German Ministry of Economy and Energy (Bundesministerium für Wirtschaft und Energie) in November 2019 announced further plans to tighten the rules for foreign direct investments in Germany in its policy guideline on Germany’s industrial strategy 2030 (Industriestrategie 2030 – Leitlinien für eine deutsche und europäische Industriepolitik).

The envisaged amendments to the German Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung, AWV) relate to the following three key pillars:

Firstly, by October 2020, the German rules shall be adapted to reflect the amended EU regulations (so-called EU Screening Directive dated March 19, 2019). This would be achieved, inter alia, by implementing a cooperation mechanism to integrate other EU member states as well as the EU Commission into the review process. Further, the criteria for public order or security (öffentliche Ordnung oder Sicherheit) relevant to the application of foreign trade law is expected to be revised and likely expanded to cover further industry sectors such as artificial intelligence, robotics, semiconductors, biotechnology and quantum technology. The threshold for prohibiting a takeover may be lowered to cover not only a “threat” but a “foreseeable impairment” of the public order or security (as contemplated in the EU directive).

Secondly, if the rules on foreign direct investments cannot be relied on to block an intended acquisition, but such acquisition nonetheless affects sensitive or security related technology, another company from the German private sector may acquire a stake in the relevant target as a so-called “White Knight” in a process moderated by the government.

Thirdly, as a last resort, the strategy paper proposes a “national fallback option” (Nationale Rückgriffsoption) under which the German state-owned Kreditanstalt für Wiederaufbau could acquire a stake in enterprises active in sensitive or security-related technology sectors for a limited period of time.

Even though the details for the implementation of those proposals are not yet clear, the trend towards more protectionism continues. For non-EU investors a potential review pursuant to the rules on foreign direct investment will increasingly become the new rule and should thus be taken into account when planning and structuring M&A transactions.

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2. Tax – German Federal Government Implements EU Mandatory Disclosure Rules

On December 12, 2019 and December 20, 2019, respectively, the two chambers of the German Federal Parliament passed the Law for the Introduction of an Obligation to report Cross-Border Tax Arrangements (the “Law”), which implements Council Directive 2018/822/EU (referred to as “DAC 6”) into Germany’s domestic law effective as of July 1, 2020.

DAC 6 entered into force on June 25, 2018 and requires so-called intermediaries, and in some cases taxpayers, to report cross-border arrangements that contain defined characteristics with their national tax authorities within specified time limits. The stated aim of DAC 6 is to provide tax authorities with an early warning mechanism for new risks of tax avoidance.

The Law follows the same approach as provided for in DAC 6. The reporting obligation would apply to “cross-border tax arrangements” in the field of direct taxes (e.g. income taxes but not VAT). Cross-border arrangements concern at least two member states or a member state and a non-EU country. Purely national German arrangements are – contrary to previous drafts of the Law – not subject to reporting.

(a)   Reportable cross-border arrangements must have one or more specified characteristics (“hallmarks”). The hallmarks are broadly scoped and represent certain typical features of tax planning arrangements, which potentially indicate tax avoidance or tax abuse.

(i)    Some of these hallmarks would result in reportable transactions only if the “main benefit test” is satisfied. The test would be satisfied if it can be established that the main benefit that a person may reasonably expect to derive from an arrangement is obtaining a tax advantage in Germany or in another member state. Hallmarks in that category are, inter alia, the use of substantially standardized documentation or structures, the conversion of income into lower taxed categories of revenue or payments to an associated enterprise that are tax exempt or benefit from a preferential tax regime or arrangement.

(ii)   In addition, there are hallmarks that would result in reportable transactions regardless of whether the main benefit test is satisfied. Hallmarks in this category are, for example, assets that are subject to depreciation in more than one jurisdiction, relief from double taxation that is claimed more than once, arrangements that involve hard-to-value intangibles or specific transfer pricing arrangements.

(b)   The primary obligation to disclose information to the tax authorities rests with the intermediary. An intermediary is defined as “any person that promotes, designs for a third party, organizes, makes available for implementation or manages the implementation of a reportable cross-border arrangement.” Such intermediary must be resident in the EU or provides its services through a branch in the EU.

Typical intermediaries are tax advisors, accountants, lawyers, financial advisors, banks and consultants. When multiple intermediaries are engaged in a cross-border arrangement, the reporting obligation lies with all intermediaries involved in the same arrangement. However, an intermediary can be exempt from reporting if he can prove that a report of the arrangement has been filed by another intermediary.

In the event an intermediary is bound by legal professional privilege from reporting information, the intermediary would have to inform the relevant taxpayer of the possibility of waiving the privilege. If the relevant taxpayer does not grant the waiver, the responsibility for reporting the information would shift to the taxpayer. Other scenarios where the reporting obligation is shifted to the taxpayer are in-house schemes without involvement of intermediaries or the use of intermediaries from countries outside the EU.

(c)   Reporting to the tax office is required within a 30-day timeframe after the arrangement is made available for implementation or when the first step has been implemented. The report must contain the applicable hallmark, a summary of the cross-border arrangement including its value, the applicable tax provisions and certain information regarding the intermediary and the taxpayer. The information will be automatically submitted by the competent authority of each EU member state through the use of a central directory on administrative cooperation in the field of direct taxation.

(d) The reporting obligations commence on July 1, 2020. However, the Law also has retroactive effect: for all reportable arrangements that were implemented in the interim period between June 24, 2018 and June 30, 2020 the report would have to be filed by August 31, 2020.

Penalties for noncompliance with the reporting obligations are up to EUR 25,000 while there are no penalties for noncompliance with such reportable arrangements for the interim period between June 25, 2018 and June 30, 2020.

Since, as noted above, the reporting obligation can be shifted to the client as the taxpayer and the client will then be responsible for complying with the reporting obligations, taxpayers should consider establishing a suitable reporting compliance process. Such process may encompass sensitization for and identification of reportable transactions, the determination of responsibilities, the development of respective DAC 6 governance and a corresponding IT-system, recording of arrangements during the transitional period after June 24, 2018, robust testing and training as well as live operations including analysis and reporting of potential reportable arrangements.

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3. Financing and Restructuring

3.1 EU Directive on Preventive Restructuring Framework – Minimum Standards Across Europe?

On June 26, 2019, the European Union published Directive 2019/1023 on a preventive restructuring framework (Directive (EU) 2019/1023 of the European Parliament and of the Council of June 20, 2019) (the “Directive”). The Directive aims to introduce standards for “honest entrepreneurs” in financial difficulties providing businesses with a “second chance” in all EU member states.

While some member states had already introduced preventive restructuring schemes in the past (e.g. the UK scheme of arrangement), others, like Germany, stayed inactive, leaving debtors with the largely creditor-focused and more traditional tools set forth in the German Insolvency Code (Insolvenzordnung, InsO). By contrast, the Directive now seeks to protect workers and creditors alike in “a balanced manner”. In addition, a particular focus of the Directive are small and medium-sized enterprises, which often do not have the resources to make use of already existing restructuring alternatives abroad.

The key features of the Directive provide, in particular:

The preventive restructuring regime shall be available upon application of the debtor. Creditors and employee representatives may file an application, but generally the consent of the debtor shall be required in addition;
Member states are required to implement early warning tools and to facilitate access to information enabling debtors to properly assess their financial situation early on and detect circumstances which may ultimately lead to insolvency;
Preventive restructuring mechanisms must be set forth in domestic law in the event there is a “likely insolvency”. Debtors must be given the possibility to remain in control of the business operations while restructuring measures are implemented to avoid formal insolvency proceedings. In Germany, it will be a challenge to properly distinguish between the newly introduced European concept of “likely insolvency” which is the door opener for preventive restructuring under the Directive and the existing German legal concept of “imminent illiquidity” (drohende Zahlungsunfähigkeit) which under current insolvency law enables German debtors to proceed with a voluntary insolvency filing;
A stay of individual enforcement measures for an initial period of four months (with an extension option of up to a maximum of 12 months) must be provided for, thus putting debtors in a position to negotiate a restructuring plan. During this time period, the performance of executory contracts cannot be withheld solely due to non-payment;
Minimum requirements for a restructuring plan include an outline of the contemplated restructuring measures, effects on the workforce, as well as the prospects that insolvency can be prevented on the basis of such measures;
Restructuring measures contemplated by the Directive are wide ranging and include a change in the composition of a debtor’s assets and liabilities, a sale of assets or of the business as a going concern, as well as necessary operational changes;
Voting on the restructuring plan is generally effected by separate classes of creditors in each case with a majority requirement of not more than 75%.
Cross-class cram down will be available subject to certain conditions including (i) a majority of creditor classes (including secured creditors) voted in favor and (ii) dissenting creditors are treated at least equal to their pari passu creditors (or better than creditors ranking junior). In addition, the restructuring plan must be approved by either a judicial or administrative authority in order to be binding on dissenting voting classes. Such approval is also required in the event of new financing or when the workforce is reduced by more than 25%.

Member states have until July 17, 2021 to implement the Directive into domestic law (subject to a possible extension of up to one year), but considering the multiple alternative options the Directive leaves to member states, discussions on how to best align existing domestic laws with the requirements of the Directive have already started.

Ultimately, the success of the Directive depends on the willingness of the member states to implement a truly effective pre-insolvency framework. The inbuilt flexibility and variety of structuring alternatives left to the member states can be an opportunity for Germany to finally enact an out-of-court restructuring scheme beyond the existing debtor in possession (Eigenverwaltung) or protective shield (Schutzschirm) proceedings which, however, currently kick in only at a later stage of financial distress after an insolvency filing has already been made.

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3.2 Insolvency Contestation in Cash Pool Scenarios

One of the noticeable developments in the year 2019 was that inter-company cash-pool systems have increasingly come under close scrutiny in insolvency scenarios. There were several decisions by the German Federal Supreme Court (Bundesgerichtshof, BGH), the most notable one probably a judgment handed down on June 27, 2019 (case IX ZR 167/18) in a double insolvency case where the respective insolvency administrators of an insolvent group company and its insolvent parent and cash pool leader were fighting over the treatment of mutually granted upstream and downstream loans during the operation of a group-wide cash management system that saw multiple loan movements between the two insolvent debtors during the relevant pre-insolvency period.

Under applicable German insolvency contestation laws (Insolvenzanfechtung), the insolvency administrator of the insolvent subsidiary has the right to contest any shareholder loan repayments or equivalent payments made to its parent as shareholder and pool leader within a period of one year prior to the point in time when the insolvency filing petition is lodged. The rationale of this rule is to protect the insolvent estate and regular unsecured trade creditors from pre-insolvency payments to shareholders who in an insolvency would only be ranked as subordinated creditors. The contestation right – if successful – allows the insolvency administrator to claw back from shareholders such earlier repayments to boost the funds available for distribution in the insolvency proceedings.

In cases such as the one at hand where the cash pool was operated in a current account system resulting in multiple cash payments to and from the pool leader, the parent’s potential exposure could have grown exponentially if the insolvency administrator of the subsidiary could have simply added up all loan repayments made within the last year, irrespective of the fact that the pool leader, in turn, regularly granted new down-stream loan payments to the subsidiary as and when liquidity was needed.

In one of the main conclusions of the judgment, the BGH confirmed the calculation mechanism for the maximum amount that can be contested and clawed back in scenarios such as this: The court, in this respect, does not simply add up all loan repayments in the last year. Instead, it uses the historic maximum amount of the loans permanently repaid within the one-year contestation period as initial benchmark and then deducts the outstanding amounts still owed by the insolvent subsidiary at the end of the contestation period. Interim fluctuations, where further repayments to the pool leader occurred, are deemed immaterial if they have been re-validated by new subsequent downstream loans. Consequently, the court limits the exposure of the pool leader in current account situations to the balance of loans, not by way of a simple addition of all repayments.

In a second clarification, the BGH decreed that customary, arm’s length interest charged by the pool leader to the insolvent subsidiary for its downstream loans and then paid to the shareholder as pool leader are not qualified as a “payment equivalent to a loan repayment”, because interest is an independent compensation for the downstream loan, not capital transferred to the lender for temporary use.

Beyond the specifics of the decision, the increased focus of the courts on cash pools in crisis situations should cause larger groups of companies that operate such group-wide cash management systems to revisit the underlying contractual arrangements to ensure that participating companies and the pool leader have adequate mutual early warning systems in place, as well as robust remedies and/or withdrawal rights to react as early as possible to the deterioration of the financial position of one or several cash pool participants. Even though the duration of the one-year contestation period will often mean that even carefully and appropriately drafted cash pooling documentation cannot always preempt or avoid all risk in a later financial crisis, at least, the potential personal liability risks for management which go beyond the mere contestation risk can be mitigated and addressed this way.

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4. Labor and Employment

4.1 De-Facto Employment – A Rising Risk for Companies

A widely-noticed court decision by the Federal Social Court (Bundessozialgericht) (judgment of June 4, 2019 – B12 R11 11/18 R) on the requalification of freelancers as de-facto employees has potentially increased risks to companies who employ freelancers.

In this decision, the court requalified physicians officially working as “fee doctors” in hospitals as de-facto employees, because they were considered as integrated into the hospital hierarchy, especially due to receiving instructions from other doctors and the hospital management. While this decision concerned physicians, it found wide interest in the general HR community, as it tightened the leeway for employing freelancers. This aspect is particularly important for companies in Germany, as there is a war for talent, particularly with respect to engineers and IT personnel. These urgently sought-after experts are in high demand and therefore often able to dictate the contractual relationships. In this respect, they often prefer a freelancer relationship, as it is more profitable for them and gives them the opportunity to also work for other (even competing) companies.

Against the background of this decision, every company would be well advised to review very thoroughly, whether a “freelancer” is really free of instructions regarding the place of work, the working hours, and the details of the work to be done. Otherwise, the potential liability for the company – both civil and criminal – is considerable if freelancers are deemed to be de-facto employees.

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4.2 New Constraints for Post-Contractual Non-Compete Covenants

A recently published decision by the Higher District Court (Oberlandesgericht) of Munich has restricted the permissible scope of post-contractual non-compete covenants for managing directors (decision of August 2, 2018 – 7 U 2107/18). The court held that such restrictions are only valid if and to the extent they are based upon a legitimate interest of the company. In addition, their scope has to be explicitly limited in the respective wording tailored to the individual case.

This court decision is important, because, unlike for “regular” employees, post-contractual non-compete agreements for managing directors are not regulated by statutory law. Therefore, every company should, in a first step, carefully review whether a post-contractual non-compete is really necessary for the relevant managing director. If it is deemed to be indispensable, the wording should be carefully drafted according to the above-mentioned principles.

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4.3 ECJ Judgments on Vacation and Working Hours

The European Court of Justice (ECJ) has handed down two employee-friendly decisions regarding (a) the forfeiture of entitlement to vacation and (b) the control of working hours (case C-684/16, judgment of November 6, 2018 and case C-55/18, judgment of May 14, 2019).

According to the first decision, employee vacation entitlement cannot simply be forfeited due to the lapse of time, even if such a forfeiture is stipulated by national statutory law. Rather, the employer has an obligation to actively notify employees of their outstanding entitlement to vacation and encourage them to take their remaining vacation.

In the other decision, the ECJ demanded that the company establish a system to control and document all the working hours of its employees, not only those exceeding a certain threshold.

In practical terms of the German economy, not all companies currently have such seamless time control and documentation systems in place. However, until this ECJ judgment is implemented into German statutory law, companies cannot be fined solely based upon the ECJ judgment. Thus, a legislative response to this issue and the court decision must be awaited.

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5. Real Estate

5.1 Real Estate – Rent Price Cap concerning Residential Space in Berlin

On November 26, 2019, the Berlin Senate (the government of the federal state of Berlin) passed a draft bill for the “Act on Limiting Rents on Berlin’s Residential Market” (Gesetz zur Mietenbegrenzung im Wohnungswesen in Berlin), the so-called Berlin rent price cap (Mietendeckel). It is expected that this bill will be adopted by the Berlin House of Representatives (the legislative chamber of the federal state of Berlin) and come into force in early 2020, with certain provisions of the bill having retroactive effect as of June 18, 2019.

This bill shall apply to residential premises in Berlin (with a few exceptions) that were ready for occupancy for the first time before January 1, 2014. The three key instruments of this bill are (a) a rent freeze, (b) the implementation of rent caps and (c) a limit on modernization costs that can be passed on to the tenant.

(a)   The rent freeze shall apply to all existing residential leases and shall freeze the rent at the level of the rent on June 18, 2019 (or, if the premises were vacant on that date, the last rent before that date). This rent freeze also applies to indexed rents and stepped rents. As of 2022, landlords shall be entitled to request an annual inflation related rent adjustment, however, capped at 1.3% p.a.. Prior to entering into a new residential lease agreement, the landlord must inform the future tenant about the relevant rent as at June 18, 2019 (or earlier, as applicable).

(b)   Depending on the construction year and fit-out standards (with / without collective heating / bathroom), initial monthly base rent caps between EUR 3.92 and EUR 9.80 per square meter (m²) shall apply. These caps shall be increased by 10% for buildings with up to two apartments. Another increase of EUR 1 per m² shall apply with respect to an apartment with “modern equipment”, i.e. an apartment that has at least three of the following five features: (i) barrier-free access to a lift, (ii) built-in kitchen, (iii) “high quality” sanitary fit-out, (iv) “high quality” flooring in the majority of the living space and (v) low energy performance (less than 120 kWh/(m²a). The bill does not contain a definition of what constitutes “high quality”.

For new lettings after June 18, 2019 and re-lettings after this bill has come into force, the rent must not exceed the lower of the applicable rent caps and the rent level as of June 18, 2019 (or earlier, as applicable). If the agreed monthly rent as of June 18, 2019 (or earlier) was below EUR 5.02 per m², the re-letting rent may be increased by EUR 1 per m² up to a maximum monthly rent of EUR 5.02 per m².

Once the act has been in effect for nine months, the tenants may request the public authorities to reduce the rent of all existing leases to the appropriate level if the rent is considered “extortionate”, i.e. if the rent exceeds the applicable rent cap level (subject to certain surcharges / discounts for the location of the premises) by more than 20% and it has not been approved by public authorities. The surcharges / discounts amount to +74 cents per m² (good location), -9 cents per m² (medium location) and –28 cents per m² (simple location).

(c)   Modernization costs shall only be passed on to tenants if they relate to (i) measures required under statutory law, (ii) thermal insulation of certain building parts, (iii) measures for the use of renewable energies, (iv) window replacements to save energy, (v) replacement of the heating system, (vi) new installation of elevators or (vii) certain measures to remove barriers. Such costs can also only be passed on to tenants to the extent that the monthly rent is not increased by more than EUR 1 per m² and the applicable rent cap is not exceeded by more than EUR 1 per m². To cover the remaining modernization costs, landlords may apply for subsidies under additional subsidy programs of the state of Berlin. Any rent increase due to modernization measures is to be notified to the state-owned Investitionsbank Berlin.

Breaches of the material provisions of this bill are treated as an administrative offence and may be fined by up to EUR 500,000 in each individual case.

Many legal scholars consider the Berlin rent price cap unconstitutional (at least, in parts) for infringing the constitutional property guarantee, the freedom of contract and for procedural reasons. In particular, they raise concerns about whether the state of Berlin is competent to pass such local legislation (as certain provisions deviate from the German Civil Code (BGB) as federal law) and whether the planned retroactive effect is permissible. The opposition in the Berlin House of Representatives and a parliamentary faction on the federal level have already announced that they intend to have the Berlin rent cap reviewed by the Berlin’s Regional Constitutional Court (Verfassungsgerichtshof des Landes Berlin) and the Federal Constitutional Court (Bundesverfassungsgericht). In light of the severe potential fines, landlords should nonetheless consider compliance with the provisions of the Berlin rent price cap until doubts on the constitutional permissibility have been finally clarified.

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5.2 Changes to the Transparency Register affecting Real Property Transactions

Certain aspects of the act implementing the 5th EU Anti-Money Laundering Directive (Directive (EU) 2018/843) which amended the German Anti-Money Laundering Act (GwG) are of particular interest to the property sector. We would, therefore, refer interested circles to the above summary in section 1.4.

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6. Compliance and Litigation

6.1 German Corporate Sanctions Act

German criminal law so far does not provide for corporate criminal liability. Corporations can only be fined under the law on administrative offenses.

In August 2019, the German Federal Ministry of Justice and Consumer Protection (Bundesministerium der Justiz und für Verbraucherschutz) circulated a legislative draft of the Corporate Sanctions Act (Verbandssanktionengesetz, the “Draft Corporate Sanctions Act”) which would, if it became law, introduce a hybrid system. The main changes to the current legal situation would eliminate the prosecutorial discretion in initiating proceedings, tighten the sentencing framework and formally incentivize the implementation of compliance measures and internal investigations.

So far, German law grants the prosecution discretion on whether to prosecute a case against a corporation (whereas there is a legal obligation to prosecute individuals suspected of criminal wrongdoing). This has resulted not only in an inconsistent application of the law, in particular among different federal states, but also in a perceived advantageous treatment of corporations over individuals. The Draft Corporate Sanctions Act now intends to introduce mandatory prosecution of infringements by corporations, with an obligation to justify non-prosecution under the law. The law as currently proposed would also apply to criminal offenses committed abroad if the company is domiciled in Germany.

Under the current legal regime, corporations can be fined up to a maximum of EUR10 million (in addition to the disgorgement of profits from the legal violation), which is often deemed insufficient by the broader public. The Draft Corporate Sanctions Act plans to increase potential fines to a maximum of 10% of the annual—worldwide and group-wide—turnover, if the group has an average annual turnover of more than EUR100 million. Additionally, profits could still be disgorged.

The Draft Corporate Sanctions Act would also introduce two new sanctions: a type of deferred prosecution agreement with the possibility of imposing certain conditions (e.g. compensation for damages and monitorship), and a “corporate death penalty,” namely the liquidation of the company to combat particularly persistent and serious criminal behavior.

The Draft Corporate Sanctions Act would also allow the prosecutor to either refrain from pursuing prosecution or to positively take into account in the determination of fines the existence of an adequate compliance system. If internal investigations are carried out in accordance with the requirements set out in the Draft Corporate Sanctions Act (including in particular: (i) substantial contributions to the authorities’ investigation, (ii) formal division of labor between those conducting the internal investigation, on the one hand, and those acting as criminal defense counsel, on the other, (iii) full cooperation, including full disclosure of the investigation and its results to the prosecution, and (iv) adherence to fair trial standards, in particular the interviewee’s right to remain silent in internal investigations), the maximum fine might be reduced by 50%, and the liquidation of the company or a public announcement might be precluded.

It is unclear under the current legal regime whether work product created in the context of an internal investigation is protected against prosecutorial seizure. The Draft Corporate Sanctions Act wants to introduce a clarification in this respect: only such documents will be protected against seizure that are part of the relationship of trust between the company as defendant and its defense counsel. Therefore, documents used or created in the preparation of the criminal defense would be protected. Documents from interviews in the context of an internal investigations, however, would only be protected in case they stem from the aforementioned relationship between client and defense counsel. Interestingly, and as mentioned above, the draft law requires that counsel conducting the internal investigation must be separate from defense counsel if the corporation wants to claim a cooperation bonus. How this can be achieved in practice, in particular in an international context where criminal defense counsel is often expected to conduct the internal investigation and where the protection of legal privilege may depend on this dual role, is unclear. In particular here, the draft does not seem sufficiently thought-through, and both the legal profession and the business community are voicing strong opposition.

Overall, it is doubtful at the moment that the current government coalition, in its struggle for survival, will continue to pursue the implementation of this legislative project as a priority. Therefore, it remains to be seen whether, when, and with what type of amendments the German Corporate Sanctions Act will be passed by the German Parliament.

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6.2 Amendments to the German Anti-Money Laundering Act: Further Compliance Obligations, including for the Non-Financial Sector

On January 1, 2020, the Act implementing the 5th EU Anti-Money Laundering Directive (Directive (EU) 2018/843) became effective. In addition to further extending the scope of businesses that are required to conduct anti-money laundering and anti-terrorist financing procedures in accordance with the German Anti-Money Laundering Act (Geldwäschegesetz, GwG), in particular in the area of virtual currencies, it introduced new obligations and stricter individual requirements for persons or entities subject to the GwG obligations (“Obliged Persons”). The new requirements must be taken into account especially in relation to customer onboarding and ongoing anti-money laundering and countering terrorist financing (“AML/CTF”) compliance. The following overview provides a summary of some key changes, in particular, concerning the private non-financial sector, which apply in addition to the specific reporting obligations to the transparency register already described above under section 1.4.

The customer due diligence obligations (“KYC”) were further extended and also made more specific. In particular, Obliged Persons are now required to collect proof of registration in the transparency register or an excerpt of the documents accessible via the transparency register (e.g. shareholder lists) when entering into a new business relationship with a relevant entity. In addition, the documentation obligations with regard to the undertaken KYC measures have been further increased and clarified. Further important changes concern the enhanced due diligence measures required in the case of a higher risk of money laundering or terrorist financing, in particular with regard to the involvement of “high-risk countries”.
Obliged Persons must now also notify the registrar of the transparency register without undue delay of any discrepancies on beneficial ownership between entries in the transparency register and other information and findings available to them.
Obliged Persons must register with the Financial Intelligence Unit (FIU), regardless of whether they intend to report a suspicious activity, as soon as the FIU’s new information network starts its operations, but no later than January 1, 2024.
In accordance with the findings of the First National Risk Assessment, the duties for the real estate sector were significantly extended and increased. Real estate agents are now also subject to the AML/CTF risk management requirements of the GwG and are required to conduct customer due diligence when they act as intermediaries in the letting of immovable property if the monthly rent amounts to EUR 10,000 or more. Furthermore, notaries are now explicitly required to check the conclusiveness of the identity of the beneficial owner before notarizing a real estate purchase transaction in accordance with section 1 of the German Federal Real Estate Transfer Tax Act (Grunderwerbsteuergesetz) and may even be required to refuse notarization, see also section 1.4 above on the transparency register.
In an effort towards a more uniform EU-wide approach with regard to politically exposed persons (“PEPs”), EU member states must submit to the EU Commission a catalogue of specific functions and offices which under the relevant domestic law justify the qualification as PEP by January 10, 2020. The EU Commission will thereafter publish a consolidated catalogue, which will be binding for Obliged Persons when determining whether a contractual partner or beneficial owner qualifies as PEP with the consequence that enhanced customer due diligence applies.
Furthermore, the new law brought some clarifications by changing or introducing definitions, including in particular a new self-contained definition for the term “financial company”. For example, the legislator made clear that industrial holdings are not subject to the duties of the GwG: Any holding companies which exclusively hold participations in companies outside of the credit institution, financial institution or insurance sector do not qualify as financial companies under the GwG, unless they engage in business activities beyond the tasks associated with the management of their participations. That said, funds are not explicitly excluded from the definition of financial companies – and since their activities generally also include the acquisition and sale of participations, it is often questionable whether the exemption for holding companies applies.
Another noteworthy amendment concerns the group-wide compliance obligations in section 9 of the GwG: the amended provision now distinguishes (more) clearly between obligations applicable to an Obliged Person that is the parent company of a group and the other members of the group.

The amendments to the GwG have further intensified the obligations not only for the classical financial sector but also the non-financial sector. Since the amendments entered into force on January 1, 2020, the relevant business circles are well advised to review whether their existing AML/CTF risk management system and KYC procedures need to be adjusted in order to comply with the new rules.

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6.3 First National Risk Assessment on the Money Laundering and Terrorist Financing Risk for Germany – Implications for the Company-Specific Risk Analyses

The first national risk assessment for the purposes of combatting money laundering and terrorist financing (“NRA”) was finally published on the website of the German Federal Ministry of Finance (Bundesministerium der Finanzen) on October 21, 2019 (currently in German only). When preparing their company-specific risk analyses under the GwG, Obliged Persons must now take into consideration also the country-, product- and sector-specific risks identified in the NRA.

Germany as a financial center is considered a country with a medium-high risk (i.e. level 4 of a five-point scale from low to high) of being abused for money laundering and terrorist financing.

The NRA identifies, in particular, the following key risk areas: anonymity in transactions, the real estate sector, the banking sector (in particular, in the context of correspondent banking activities and international money laundering) and the money remittance business due to the high cash intensity and cross-border activities.

With regard to specific cross-border concerns, the NRA has identified eleven regions and states that involve a high risk of money laundering for Germany: Eastern Europe (particularly Russia), Turkey, China, Cyprus, Malta, the British Virgin Islands, the Cayman Islands, Bermuda, Guernsey, Jersey and the Isle of Man. Separately, a medium-high cross-border threat was identified for Lebanon, Panama, Latvia, Switzerland, Italy and Great Britain, and a further 17 countries were qualified as posing a medium, medium-low or low threat with regard to money laundering.

The results of the NRA (including the assessment of cross-border threats in its annex 4) need to be taken into consideration by Obliged Persons both of the financial and non-financial sector when preparing or updating their company-specific risk analyses in a way that allows a third party to assess how the findings of the NRA were accounted for. Obliged Persons (in particular, if supervised by the BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht) or active in other non-financial key-risk sectors), if they have not already done so, should thus conduct a timely review, and document such a review, of whether the findings of the NRA require an immediate update to their risk assessment or whether they consider an adjustment in the context of their ongoing review.

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7. Antitrust and Merger Control

7.1 Antitrust and Merger Control Overview 2019

Germany’s antitrust watchdog, the German Federal Cartel Office (Bundeskartellamt), has had another very active year. On the cartel enforcement side, the Bundeskartellamt concluded several cartel investigations and imposed fines totaling EUR 848 million against 23 companies or associations and 12 individuals from various industries including bicycle wholesale, building service providers, magazines, industrial batteries and steel. As in previous years, leniency applications continue to play an important role for the Bundeskartellamt‘s antitrust enforcement activities with a total of 16 leniency applications received in 2019. With these applications and dawn raids at 32 companies, it can be expected that the agency will have significant ammunition for an active year in 2020 in terms of antitrust enforcement.

With respect to merger control, the Bundeskartellamt reviewed approximately 1,400 merger filings in 2019. 99% of these filings were concluded during the one-month phase 1 review. Only 14 merger filings (i.e. 1% of all merger filings) required an in-depth phase 2 examination. Of those, four mergers were prohibited and five filings were withdrawn – only one was approved in phase 2 without conditions, and four phase 2 proceedings are still pending.

In addition, the Bundeskartellamt has been very active in the area of consumer protection and concluded its sector inquiry into comparison websites. The agency has also issued a joint paper with the French competition authority regarding algorithms in the digital economy and their competitive effects. For 2020, it is expected that the Bundeskartellamt will conclude its sector inquiry regarding online user reviews as well as smart TVs and will continue to focus on the digital economy. Furthermore, the Bundeskartellamt has also announced that it is hoping to launch the Federal Competition Register for Public Procurement by the end of 2020 – an electronic register that will list companies that have been involved in serious economic offenses.

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7.2 Competition Law 4.0: Proposed Changes to German Competition Act

The German Federal Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie) has compiled a draft bill for the tenth amendment to the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen, GWB) that aims at further developing the regulatory framework for digitalization and implementing European requirements set by Directive (EU) 2019/1 of December 11, 2018 by empowering the competition authorities of the member states to be more effective enforcers and to ensure the proper functioning of the internal market. While it is not yet clear when the draft bill will become effective, the most important changes are summarized below.

(Super) Market Dominance in the Digital Age

Various amendments are designed to help the Federal Cartel Office (Bundeskartellamt) deal with challenges created by restrictive practices in the field of digitalization and platform economy. One of the criteria to be taken into account when determining market dominance in the future would be “access to data relevant for competition”. For the first time, companies that depend on data sets of market-dominating undertakings or platforms would have a legal claim to data access against such platforms. Access to data will also need to be granted in areas of relative market power. Giving up the reference to “small and medium-sized” enterprises as a precondition for an abuse of relative or superior market power takes into account the fact that data dependency may exist regardless of the size of the concerned enterprise.

Last but not least, the draft bill refers to a completely new category of “super dominant” market players to be controlled by the Bundeskartellamt, i.e. undertakings with “paramount significance across markets”. Large digital groups may not have significant market shares in all affected markets, but may nevertheless be of significant influence on these markets due to their key position for competition and their conglomerate structures. Before initiating prohibitive actions against such “super dominant” market players, the Bundeskartellamt will have to issue an order declaring that it considers the undertaking to have a “paramount significance across markets”, based on the exemplary criteria set out in the draft bill.

Rebuttable Presumptions

Following an earlier decision of the German Federal Supreme Court (Bundesgerichtshof, BGH), the draft bill suggests introducing a rebuttable presumption whereby it is presumed that direct suppliers and customers of a cartel are affected by the cartel in case of transactions during the duration of the cartel with companies participating in the cartel. The rebuttable presumption is intended to make it easier for claimants to prove that they are affected by the cartel. Another rebuttable presumption shall apply in favor of indirect customers in the event of a passing-on. However, there is still no presumption for the quantification of damages.

Another procedural simplification foreseen in the draft bill is a lessening of the prerequisites to prove an abuse of market dominance. It would suffice that market behavior resulted in an abuse of market dominance, irrespective of whether the market player utilized its dominance for abusive purposes.

Slight Increase of Merger Control Threshold

The draft bill provides for an increase of the second domestic turnover threshold from EUR 5 million to EUR 10 million. Concentrations would consequently only be subject to filing requirements in the future if, in the last business year preceding the concentration, the combined aggregate worldwide turnover of all the undertakings concerned was more than EUR 500 million, and the domestic turnover of, at least, one undertaking concerned was more than EUR 25 million and that of another undertaking concerned was more than EUR 10 million. This change aims at reducing the burden for small and medium-sized enterprises. The fact that transactions that provide for an overall consideration of more than EUR 400 million may trigger a filing requirement remains unchanged.

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7.3 “Undertakings” Concept Revisited – Parents Liable for their Children?

Following the Skanska ruling of the European Court of Justice (ECJ) earlier this year (case C-724/17 of March 14, 2019) , the first German court decisions (by the district courts (Landgerichte) of Munich and Mannheim) were issued in cases where litigants were trying to hold parent companies liable for bad behavior by their subsidiaries.

As a reminder: In Skanska, the ECJ ruled on the interpretation of Article 101 of the Treaty on the Functioning of the European Union (TFEU) in the context of civil damages regarding the application of the “undertakings” concept in cases where third parties claim civil damages from companies involved in cartel conduct. The “undertakings” concept, which the ECJ developed with regard to the determination of administrative fines for violations of Article 101 TFEU, establishes so-called parental liability. This means that parent entities may be held liable for antitrust violations committed by their subsidiaries, as long as the companies concerned are considered a “single economic unit” because the parent has “decisive influence” over the offending company and is exercising that influence. The Skanska case extends parental liability to civil damages cases.

The decisions by the two German courts in Mannheim and Munich denied a subsidiary’s liability for its parent company, or for another subsidiary, respectively.

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While some companies are still busy implementing the requirements of the General Data Protection Regulation (the “GDPR”), the German Conference of Federal and State Data Protection Authorities has increased the pressure in October 2019 by publishing guidelines for the determination of fines in privacy violation proceedings against companies (the “Fining Concept”). Even though the Fining Concept may seem technical at first glance, it has far-reaching consequences for the fine amounts, which have already manifested in practice.

The Fining Concept applies to the imposition of fines by German Data Protection Authorities within the scope of the GDPR. Since the focus for determining fines is on the global annual turnover of a company in the preceding business year, it is to be expected that fines will increase significantly. For further details, please see our client update from October 30, 2019 on this subject.

In the past few months, in particular after the Fining Concept was published, several German Data Protection Authorities already issued a number of higher fines. Most notably, in November 2019 the Berlin Data Protection Authority imposed a fine against a German real estate company in the amount of EUR 14.5 million (approx. USD 16.2 million) for non-compliance with general data processing principles. The company used an archive system for the storage of personal data from tenants, which did not include a function for the deletion of personal data. In December 2019, another fine in the amount of EUR 9.5 million (approx. USD 10.6 million) was imposed by the Federal Commissioner for Data Protection and Freedom of Information against a major German telecommunications service provider for insufficient technical and organizational measures to prevent unauthorized persons from being able to obtain customer information.

Many German data protection authorities have announced further investigations into possible GDPR violations and recent fines indicate that the trend towards higher fine levels will continue. This development leaves no doubt that the German Data Protection Authorities are willing to use the sharp teeth that data protection enforcement has received under the GDPR – and leave behind the rather symbolic fine ranges that were predominant in the pre-GDPR era. This is particularly true in light of the foreseeable temptation to use the concept of “undertakings” as developed under EU antitrust laws, which may include parental liability for GDPR violations of subsidiaries in the context of administrative fines as well as civil damages. For further details on the concept of “undertakings” in light of recent antitrust case law, please see above under Section 7.3.

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9. IP & Technology

On April 26, 2019, the German Trade Secret Act (the “Act”) came into effect, implementing the EU Trade Secrets Directive (2016/943/EU) on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure. The Act aims at consolidating what has hitherto been a potpourri of civil and criminal law provisions for the protection of trade secrets and secret know-how in German legislation.

Besides an enhanced protection of trade secrets in litigation matters, one of the most important changes to the pre-existing rules in Germany is the creation of a new and EU-wide definition of trade secrets. Trade secrets are now defined as information that (i) is secret (not publicly known or easily available), (ii) has a commercial value because it is secret, (iii) is subject to reasonable steps to keep it secret, and (iv) there is a legitimate interest to keeping it secret. This definition therefore requires the holder of a trade secret to take reasonable measures to keep a trade secret confidential in order to benefit from its protection. To prove compliance with this requirement when challenged, trade secret holders will further have to document and track their measures of protection. This requirement goes beyond the previous standard pursuant to which a manifest interest in keeping an information secret would have been sufficient. There is no clear guidance yet on what is to be understood as “reasonable measures” in this respect. A good indication may be the comprehensive case law developed by U.S. courts when interpreting the requirement of “reasonable efforts” to maintain the secrecy of a trade secret under the U.S. Uniform Trade Secrets Act. Besides a requirement to advise recipients that the information is a confidential trade secret not to be disclosed (e.g. through non-disclosure agreements), U.S. courts consider the efforts of limiting access to a “need-to-know” scope (e.g. through password protection).

Another point that is of particular importance for corporate trade secret holders is that companies may be indirectly liable for negligent breaches of third-party trade secrets by their employees. Enhanced liability risks may therefore result when hiring employees who were formerly employed by a competitor and had access to the competitor’s trade secrets.

Reverse engineering of lawfully acquired products is now explicitly considered a lawful means of acquiring information, except when otherwise contractually agreed. Previously, reverse engineering was only lawful if it did not require considerable expense. To avoid disclosing trade secrets that form part of a product or object by surrendering prototypes or samples, contracts should provide for provisions to limit the acquisition of the trade secret.

In a nutshell, companies would be well advised to review their internal policies and procedures to determine whether there are reasonable and sufficiently trackable legal, technical and organizational measures in place for the protection of trade secrets, to observe and assess critically what know-how is brought into an organization by lateral hires, and to amend contracts for the surrender of prototypes and samples as appropriate.

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The following Gibson Dunn lawyers assisted in preparing this client update: Birgit Friedl, Marcus Geiss, Silke Beiter, Stefan Buehrle, Lutz Englisch, Daniel Gebauer, Kai Gesing, Franziska Gruber, Selina Gruen, Dominick Koenig, Markus Nauheim, Mariam Pathan, Annekatrin Pelster, Wilhelm Reinhardt, Sonja Ruttmann, Martin Schmid, Sebastian Schoon, Benno Schwarz, Dennis Seifarth, Ralf van Ermingen-Marbach, Milena Volkmann, Michael Walther, Finn Zeidler, Mark Zimmer and Caroline Ziser Smith.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. The two German offices of Gibson Dunn in Munich and Frankfurt bring together lawyers with extensive knowledge of corporate, financing and restructuring, tax, labor, real estate, antitrust, intellectual property law and extensive compliance / white collar crime and litigation experience. The German offices are comprised of seasoned lawyers with a breadth of experience who have assisted clients in various industries and in jurisdictions around the world. Our German lawyers work closely with the firm’s practice groups in other jurisdictions to provide cutting-edge legal advice and guidance in the most complex transactions and legal matters. For further information, please contact the Gibson Dunn lawyer with whom you work or any of the following members of the German offices:

General Corporate, Corporate Transactions and Capital Markets
Lutz Englisch (+49 89 189 33 150), [email protected])
Markus Nauheim (+49 89 189 33 122, [email protected])
Ferdinand Fromholzer (+49 89 189 33 170, [email protected])
Dirk Oberbracht (+49 69 247 411 503, [email protected])
Wilhelm Reinhardt (+49 69 247 411 502, [email protected])
Birgit Friedl (+49 89 189 33 122, [email protected])
Silke Beiter (+49 89 189 33 170, [email protected])
Annekatrin Pelster (+49 69 247 411 502, [email protected])
Marcus Geiss (+49 89 189 33 122, [email protected])

Finance, Restructuring and Insolvency
Sebastian Schoon (+49 69 247 411 505, [email protected])
Birgit Friedl (+49 89 189 33 122, [email protected])
Alexander Klein (+49 69 247 411 505, [email protected])
Marcus Geiss (+49 89 189 33 122, [email protected])

Tax
Hans Martin Schmid (+49 89 189 33 110, [email protected])

Labor Law
Mark Zimmer (+49 89 189 33 130, [email protected])

Real Estate
Peter Decker (+49 89 189 33 115, [email protected])
Daniel Gebauer (+49 89 189 33 115, [email protected])

Technology Transactions / Intellectual Property / Data Privacy
Michael Walther (+49 89 189 33 180, [email protected])
Kai Gesing (+49 89 189 33 180, [email protected])

Corporate Compliance / White Collar Matters
Benno Schwarz (+49 89 189 33 110, [email protected])
Michael Walther (+49 89 189 33 180, [email protected])
Mark Zimmer (+49 89 189 33 130, [email protected])
Finn Zeidler (+49 69 247 411 504, [email protected])
Markus Rieder (+49 89189 33 170, [email protected])
Ralf van Ermingen-Marbach (+49 89 18933 130, [email protected])

Antitrust
Michael Walther (+49 89 189 33 180, [email protected])
Jens-Olrik Murach (+32 2 554 7240, [email protected])
Kai Gesing (+49 89 189 33 180, [email protected])

Litigation
Michael Walther (+49 89 189 33 180, [email protected])
Mark Zimmer (+49 89 189 33 130, [email protected])
Finn Zeidler (+49 69 247 411 504, [email protected])
Markus Rieder (+49 89189 33 170, [email protected])
Kai Gesing (+49 89 189 33 180, [email protected])
Ralf van Ermingen-Marbach (+49 89 18933 130, [email protected])

International Trade, Sanctions and Export Control
Michael Walther (+49 89 189 33 180, [email protected])
Richard Roeder (+49 89 189 33 122, [email protected])

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Our clients frequently inquire about precisely when U.S. money laundering laws provide jurisdiction to reach conduct that occurred outside of the United States. In the past decade, U.S. courts have reiterated that there is a presumption against statutes applying extraterritorially,[1] and explicitly narrowed the extraterritorial reach of the Foreign Corrupt Practices Act (“FCPA”)[2] and the wire fraud statute.[3] But the extraterritorial reach of the U.S. money laundering statutes—18 U.S.C. §§ 1956 and 1957—remains uncabined and increasingly has been used by the U.S. Department of Justice (“DOJ”) to prosecute crimes with little nexus to the United States. Understanding the breadth of the money laundering statutes is vital for financial institutions because these organizations often can become entangled in a U.S. government investigation of potential money laundering by third parties, even though the financial institution was only a conduit for the transactions.

This alert is part of a series of regular analyses of the unique impact of white collar issues on financial institutions. In this edition, we examine how DOJ has stretched U.S. money laundering statutes—perhaps to a breaking point—to reach conduct that occurred outside of the United States. We begin by providing a general overview of the U.S. money laundering statutes. From there, we discuss how DOJ has relied on a broad interpretation of “financial transactions” that occur “in whole or in part in the United States” to reach, for instance, conduct that occurred entirely outside of the United States and included only a correspondent banking transaction that cleared in the United States. And while courts have largely agreed with DOJ’s interpretation of the money laundering statutes, a recent acquittal by a jury in Brooklyn in a case involving money laundering charges with little nexus to the United States shows that juries occasionally may provide a check on the extraterritorial application of the money laundering statutes—for those willing to risk trial. Next, we discuss three recent, prominent examples—the FIFA corruption cases, the 1MDB fraud civil forfeitures, and the recent Petróleos de Venezuela, S.A. (“PDVSA”) indictments—that demonstrate how DOJ has increasingly used the money laundering statutes in recent years to police corruption and bribery abroad. The alert concludes by illustrating the risks that the broad reach of the money laundering statutes can have for financial institutions.

1. The U.S. Money Laundering Statutes and Their Extraterritorial Application

In 1980, now-Judge Rakoff wrote that “[t]o federal prosecutors of white collar crime, the mail fraud statute is our Stradivarius, our Colt 45, our Louisville Slugger, our Cuisinart—and our true love.”[4] In 2020, the money laundering statutes now play as an entire string quartet for many prosecutors, particularly when conduct occurs outside of the United States.

Title 18, Sections 1956 and 1957 are the primary statutes that proscribe money laundering. “Section 1956 penalizes the knowing and intentional transportation or transfer of monetary proceeds from specified unlawful activities, while § 1957 addresses transactions involving criminally derived property exceeding $10,000 in value.” Whitfield v. United States, 543 U.S. 209, 212-13 (2005). To prosecute a violation of Section 1956, the government must prove that: (1) a person engaged in a financial transaction, (2) knowing that the transaction involved the proceeds of some form of unlawful activity (a “Specified Unlawful Activity” or “SUA”),[5] and (3) the person intended to promote an SUA or conceal the proceeds of an SUA.[6] And if the person is not located in the United States, Section 1956 provides that there is extraterritorial jurisdiction if the transaction in question exceeds $10,000 and “in the case of a non-United States citizen, the conduct occurs in part in the United States.”[7] The word “conducts” is defined elsewhere in the statute as “includ[ing] initiating, concluding, or participating in initiating, or concluding a transaction.”[8] Putting it all together, establishing a violation of Section 1956 by a non-U.S. citizen abroad requires:

Figure 1: Applying Section 1956 Extraterritorially

Section 1957 is the spending statute, involving substantially the same elements as Section 1956 but substituting a requirement that a defendant spend proceeds of criminal activity for the requirement that a defendant intend to promote or conceal an SUA.[9]

a. “Financial Transaction” and Correspondent Banking

Although the term “financial transaction” might at first blush seem to limit the reach of money laundering liability, the reality is that federal prosecutors have repeatedly and successfully pushed the boundaries of the types of value exchanges that qualify as “financial transactions.” As one commentator has noted, “virtually anything that can be done with money is a financial transaction—whether it involves a financial institution, another kind of business, or even private individuals.”[10] Indeed, courts have confirmed that the reach of money laundering statutes extends beyond traditional money. One such example involves the prosecution of the creator of the dark web marketplace Silk Road. In 2013, federal authorities shut down Silk Road, which they alleged was “the most sophisticated and extensive criminal marketplace on the Internet” that permitted users to anonymously buy and sell illicit goods and services, including malicious software and drugs.[11] Silk Road’s creator, Ross William Ulbricht, was charged with, among other things, conspiracy to commit money laundering under Section 1956.[12] The subsequent proceedings focused in large part on the meaning of “financial transactions” as used in Section 1956 and specifically, whether transactions involving Bitcoin can qualify as “financial transactions” under the statute. Noting that “financial transaction” is broadly defined, the district court reasoned that because Bitcoin can be used to buy things, transactions involving Bitcoin necessarily involve the “movement of funds” and thus qualify as “financial transactions” under Section 1956.[13]

In addition to broadly interpreting “financial transaction,” DOJ also has taken an expansive view of what constitutes a transaction occurring “in part in the United States”—a requirement to assert extraterritorial jurisdiction over a non-U.S. citizen.[14] One area where DOJ has repeatedly pushed the envelope involves correspondent banking transactions.

Correspondent banking transactions are used to facilitate cross-border transactions that occur between two parties using different financial institutions that lack a direct relationship. As an example, if a French company (the “Ordering Customer”) maintains its accounts at a French financial institution and wants to send money to a Turkish company (the “Beneficiary Customer”) that maintains its accounts at a Turkish financial institution, and if the French and Turkish banks lack a direct relationship, then often those banks will process the transaction using one or more correspondent accounts in the United States. An example of this process is depicted in Figure 2.

Figure 2: Correspondent Banking Transactions[15]

Although correspondent banking transactions can occur using a number of predominant currencies, such as euros, yen, and renminbi, U.S. dollar payments account for about 50 percent of correspondent banking transactions.[16] Not only that, but “[t]here are indications that correspondent banking activities in US dollars are increasingly concentrated in US banks and that non-US banks are increasingly withdrawing from providing services in this currency.”[17] As a result, banks in the United States play an enormous role in correspondent banking transactions.

Given the continued centrality of the U.S. financial system, when confronted with misconduct taking place entirely outside of the United States, federal prosecutors are often able to identify downstream correspondent banking transactions in the United States involving the proceeds of that misconduct. On the basis that the correspondent banking transaction qualifies as a financial transaction occurring in part in the United States, prosecutors have used this hook to establish jurisdiction under the money laundering statutes. Two notable examples are discussed below.

i. Prevezon Holdings

The Prevezon Holdings case confirmed DOJ’s ability to use correspondent banking transactions as a jurisdictional hook for conduct occurring overseas. The case arose from an alleged $230 million fraud scheme that a Russian criminal organization and Russian government officials perpetrated against hedge fund Hermitage Capital Management Limited.[18] In 2013, DOJ filed a civil forfeiture complaint alleging that (1) the criminal organization stole the corporate identities of certain Hermitage portfolio companies by re-registering them in the names of members of the organization. Then, (2) other members of the organization allegedly filed bogus lawsuits against the Hermitage entities based on forged and backdated documents. Later, (3) the co-conspirators purporting to represent the Hermitage portfolio companies confessed to all of the claims against them, leading the courts to award money judgments against the Hermitage entities. Finally, (4) the representatives of the purported Hermitage entities then fraudulently obtained money judgments to apply for some $230 million in fraudulent tax refunds.[19] DOJ alleged that this fraud scheme constituted several distinct crimes, all of which were SUAs supporting money laundering violations. DOJ then sought forfeiture of bank accounts and real property allegedly traceable to those money laundering violations.

The parties challenging DOJ’s forfeiture action (the “claimants”) moved for summary judgment on certain of the SUAs, claiming that those SUAs, including Interstate Transportation of Stolen Property (“ITSP,” 18 U.S.C. § 2314), did not apply extraterritorially. The district court rejected claimants’ challenge to the ITSP SUA. The court held that Section 2314 does not, by its terms, apply extraterritorially.[20] Nevertheless, the court found the case involved a permissible domestic application of the statute because it involved correspondent banking transactions. Specifically, the court held that “[t]he use of correspondent banks in foreign transactions between foreign parties constitutes domestic conduct within [the statute’s] reach, especially where bank accounts are the principal means through which the relevant conduct arises.”[21] In support of this holding, the court described U.S. correspondent banks as “necessary conduits” to accomplish the four U.S. dollar transactions cited by the government, which “could not have been completed without the services of these U.S. correspondent banks,” even though the sender and recipient of the funds involved in each of these transactions were foreign parties.[22] The court also rejected claimants’ argument that they would have had to have “purposefully availed” themselves of the services of the correspondent banks, on the basis that this interpretation would frustrate the purpose of Section 2314 given that “aside from physically carrying currency across the U.S. border, it is hard to imagine what types of domestic conduct other than use of correspondent banks could be alleged to displace the presumption against extraterritoriality in a statute addressing the transportation of stolen property.”[23]

ii. Boustani

The December 2019 acquittal of a Lebanese businessman on trial in the Eastern District of New York marks an unusual setback in DOJ’s otherwise successful efforts to expand its overseas jurisdiction by using the money laundering statutes and correspondent banking transactions.

Jean Boustani was an executive at the Abu Dhabi-based shipping company Privinvest Group (“Privinvest”).[24] According to prosecutors, three Mozambique-owned companies borrowed over $2 billion through loans that were guaranteed by the Mozambican government.[25] Although these loans were supposed to be used for maritime projects with Privinvest, the government alleged that Boustani and his co-conspirators created the maritime projects as “fronts to raise as much money as possible to enrich themselves,” ultimately diverting over $200 million from the loan funds for bribes and kickbacks to themselves, Mozambican government officials, and Credit Suisse bankers.[26] According to the indictment, Boustani himself received approximately $15 million from the proceeds of Privinvest’s fraudulent scheme, paid in a series of wire transfers, many of which were paid through a correspondent bank account in New York City.[27]

Boustani did not engage directly in any activity in the United States, and he filed a motion to dismiss arguing that, with respect to a conspiracy to commit money laundering charge, as a non-U.S. citizen he must participate in “initiating” or “concluding” a transaction in the United States to come under the extraterritorial reach of 18 U.S.C. § 1956(f).[28] Specifically, he argued that “[a]ccounting interactions between foreign banks and their clearing banks in the U.S. does not constitute domestic conduct . . . as Section 1956(f) requires.”[29] In response, prosecutors argued that Boustani “systematically directed $200 million of U.S. denominated bribe and kickback payments through the U.S. financial system using U.S. correspondent accounts”[30] and that such correspondent banking transactions are sufficient to allow for the extraterritorial application of Section 1956.[31]

The court agreed with the government’s position. In denying the motion to dismiss, the court held that correspondent banking transactions occurring in the United States are sufficient to satisfy the jurisdictional requirements of 18 U.S.C. § 1956(f).[32] It cited to “ample factual allegations” that U.S. individuals and entities purchased interests in the loans at issue by wiring funds originating in the United States to locations outside the United States and that Boustani personally directed the payment of bribe transactions in U.S. dollars through the United States, describing this as “precisely the type of conduct Congress focused on prohibiting when enacting the money laundering provisions with which [Boustani] is charged.”[33]

The jury, however, was unconvinced. After a roughly seven-week trial, Boustani was acquitted on all charges on December 2, 2019.[34] The jurors who spoke to reporters after the verdict said that a major issue for the jury was whether or not U.S. charges were properly brought against Boustani, an individual who had never set foot in the United States before his arrest.[35] The jury foreman commented, “I think as a team, we couldn’t see how this was related to the Eastern District of New York.”[36] Another juror echoed this sentiment, adding, “We couldn’t find any evidence of a tie to the Eastern District. . . . That’s why we acquitted.”[37]

The Boustani case illustrates that even if courts are willing to accept the position that the use of correspondent banks in foreign transactions between foreign parties constitutes domestic conduct within the reach of the money laundering statute, juries may be less willing to do so.

b. Using “Specified Unlawful Activities” to Target Conduct Abroad

Another way in which the U.S. money laundering statutes reach broadly is that the range of crimes that qualify as SUAs for purposes of Sections 1956 and 1957 is virtually without limit. Generally speaking, most federal felonies will qualify. More expansively, however, the money laundering statutes include specific foreign crimes that also qualify as SUAs. For example, bribery of a public official in violation of a foreign nation’s bribery laws will qualify as an SUA.[38] Similarly, fraud on a foreign bank in violation of a foreign nation’s fraud laws qualifies as an SUA.[39] In addition to taking an expansive view of what constitutes a “financial transaction” and when it occurs “in part in the United States,” DOJ also has increasingly used the foreign predicates of the money laundering statute to prosecute overseas conduct involving corruption or bribery. This subsection discusses a few notable recent examples.

i. FIFA

In May 2015, the United States shocked the soccer world when it announced indictments of nine Fédération Internationale de Football Association (“FIFA”) officials and five corporate executives in connection with a long-running investigation into bribery and corruption in the world of organized soccer.[40] Over a 24-year period, the defendants allegedly paid and solicited bribes and kickbacks relating to, among other things, media and marketing rights to soccer tournaments, the selection of a host country for the 2010 FIFA World Cup, and the 2011 FIFA presidential elections.[41] The defendants included high-level officials in FIFA and its constituent regional organizations, as well as co-conspirators involved in soccer-related marketing (e.g., Traffic Sports USA), broadcasting (e.g., Valente Corp.), and sponsorship (e.g., International Soccer Marketing, Inc.).[42] Defendants were charged with money laundering under Section 1956(a)(2)(A) for transferring funds to promote wire fraud, an SUA.[43] Two defendants were convicted at trial.[44] The majority of the remaining defendants have pleaded guilty and agreed to forfeitures.[45]

One of the defendants, Juan Ángel Napout, challenged the extraterritorial application of the U.S. money laundering statutes. At various points during the alleged wrongdoing, Napout served as the vice president of FIFA and the president of the Confederación Sudamericana de Fútbol (FIFA’s South American confederation).[46] Napout was accused of using U.S. wires and financial institutions to receive bribes for the broadcasting and commercial rights to the Copa Libertadores and Copa America Centenario tournaments.[47] He argued that the U.S. money laundering statutes do not apply extraterritorially to him and that, regardless, this exercise of extraterritorial jurisdiction was unreasonable.[48] The district court rejected these arguments, concluding that extraterritorial jurisdiction was proper because the government satisfied the two requirements in 18 U.S.C. § 1956(f): the $10,000 threshold and conduct that occurred “in part” in the United States.[49] Notably, at trial, the jury acquitted Napout of the two money laundering charges against him but convicted him on the other three charges (RICO conspiracy and two counts of wire fraud).[50] At the same trial, another defendant, José Marin, was charged with seven counts, including two for conspiracy to commit money laundering. Marin was acquitted on one of the money laundering counts but convicted on all others.[51]

ii. 1MDB

The 1MDB scandal is “one of the world’s greatest financial scandals.”[52] Between 2009 to 2014, Jho Low, a Malaysian businessman, allegedly orchestrated a scheme to pilfer approximately $4.5 billion from 1 Malaysia Development Berhad (“1MDB”), a Malaysian sovereign wealth fund created to pursue projects for the benefit of Malaysia and its people.[53] Low allegedly used that money to fund a lavish lifestyle including buying various properties in the United States and running up $85 million in gambling debts at Las Vegas casinos.[54] The former Prime Minister of Malaysia, Rajib Nazak, also personally benefited from the scandal, allegedly pocketing around $681 million.[55] Additionally, his stepson, Riza Aziz, used proceeds from the scandal to fund Red Granite Pictures, a U.S. movie production company, which produced “The Wolf of Wall Street,” among other films.[56]

In 2016, DOJ filed the first of a number of civil forfeiture actions against assets linked to funds pilfered from 1MDB, totaling about $1.7 billion.[57] As the basis of the forfeiture, DOJ asserted a number of different violations of the U.S. money laundering statutes on the basis of four SUAs.[58]

In March 2018, Red Granite Pictures entered into a settlement agreement with the DOJ to resolve the allegations in the 2016 civil forfeiture action.[59] On October 30, 2019, DOJ announced the settlement of a civil forfeiture action against more than $700 million in assets held by Low in the United States, United Kingdom and Switzerland, including properties in New York, Los Angeles, and London, a luxury yacht valued at over $120 million, a private jet, and valuable artwork.[60] Although neither Red Granite Pictures nor Low challenged the extraterritoriality of the U.S. money laundering statute as applied to their property, the cases nevertheless serve as noteworthy examples of DOJ using its authority under the money laundering statutes to police political corruption abroad.

iii. PDVSA

To date, more than 20 people have been charged in connection with a scheme to solicit and pay bribes to officials at and embezzle money from the state-owned oil company in Venezuela, Petróleos de Venezuela, S.A.[61] The indictments charge money laundering arising from several SUAs, including bribery of a Venezuelan public official.[62]

Many of the defendants have pled guilty to the charges, but the charges against two former government officials, Nervis Villalobos and Rafael Reiter, remain pending.[63] In March 2019, Villalobos filed a motion to dismiss the FCPA and money laundering claims against him on the basis that these statutes do not provide for extraterritorial jurisdiction.[64] As to the money laundering charges, he argued that “[e]xtraterritorial jurisdiction over a non-citizen cannot be based on a coconspirator’s conduct in the United States,” and that extraterritorial application of the money laundering statute would violate international law and the due process clause.[65] As of this writing, the court has not ruled on the motion.

2. The Risks to Financial Institutions

The degree to which the U.S. money laundering statutes can reach extraterritorial conduct outside the United States has important implications for financial institutions. Prosecutions of foreign conduct under the money laundering statutes frequently involve high-profile scandals, as shown above. Financial institutions are often drawn into these newsworthy investigations. In the wake of the FIFA indictments, for instance, “[f]ederal prosecutors said they were also investigating financial institutions to see whether they were aware of aiding in the launder of bribe payments.”[66] Indeed, more than half a dozen banks reportedly received inquiries from law enforcement related to the FIFA scandal.[67]

At a minimum, cooperating with these investigations is time-consuming and costly. The investigations can also create legal risk for financial institutions. In the United States, “federal law generally imposes liability on a corporation for the criminal acts of its agents taken on behalf of the corporation and within the scope of the agent’s authority via the principle of respondeat superior, unless the offense conduct solely furthered the employee’s interests at the employer’s expense (for instance, where the employee was embezzling from the employer).”[68] And prosecutors can satisfy the intent required by arguing that individual employees were “deliberately ignorant” of or “willfully blind” to, for instance, clearing suspicious transactions.[69]

The wide scope of potential corporate criminal liability in the United States is often surprising to our clients, particularly those with experience overseas where the breadth of corporate liability is narrower than in the United States. As one article explained, the respondeat superior doctrine is “exceedingly broad” as “it imposes liability regardless of the agent’s position in the organization” and “does not discriminate” in that “the multinational corporation with thousands of employees whose field-level salesman commits a criminal act is as criminally responsible as the small corporation whose president and sole stockholder engages in criminal conduct.”[70]

Given the breadth of corporate criminal liability, DOJ applies a 10-factor equitable analysis to determine whether to impute individual employee liability to the corporate employer. These 10 factors are the “Principles of Federal Prosecution of Business Organizations,” and are often referred to by the shorthand term “Filip Factors.” The factors include considerations such as the corporation’s cooperation, the pervasiveness of the wrongdoing, and other considerations meant to guide DOJ’s discretion regarding whether to pursue a corporate resolution.[71] They are not equally weighted (indeed, there is no specific weighting attached to each, and the DOJ’s analysis will not be mathematically precise). Financial institutions should continually assess, both proactively and in the event misconduct occurs, the actions that can be taken to ensure that they can persuasively argue that, even if there is legal liability under the doctrine of respondeat superior, prosecution is nevertheless unwarranted under the Filip Factors.

3. Conclusion

In recent years, DOJ has expansively applied the money laundering statutes to reach extraterritorial conduct occurring almost entirely overseas. Indeed, a mere correspondent banking transaction in the United States has been used by DOJ as the hook to prosecute foreign conduct under the U.S. money laundering statutes. Because of the extraordinary breadth of corporate criminal liability in the United States, combined with the reach of the money laundering statutes, the key in any inquiry is to quickly assess and address prosecutors’ interests in the institution as a subject of the investigation.

____________________

[1] Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010).

[2] United States v. Hoskins, 902 F.3d 69 (2d Cir. 2018). Although the Second Circuit rejected the government’s argument that Hoskins could be charged under the conspiracy and complicity statutes for conduct not otherwise reachable by the FCPA, id. at 97, he was nevertheless found guilty at trial in November 2019 on a different theory of liability: that he acted as the agent of Alstom S.A.’s American subsidiary. See Jody Godoy, Ex-Alstom Exec Found Guilty On 11 Counts In Bribery Trial, Law360 (Nov. 8, 2019), https://www.law360.com/articles/1218374/ex-alstom-exec-found-guilty-on-11-counts-in-bribery-trial.

[3] See, e.g., United States v. Elbaz, 332 F. Supp. 3d 960, 974 (D. Md. 2018) (collecting cases where extraterritorial conduct not subject to the wire fraud statute).

[4] Jed S. Rakoff, The Federal Mail Fraud Statute (Part I), 18 Duq. L. Rev. 771, 822 (1980).

[5] Many of the SUAs covered by Section 1956 are incorporated by cross-references to other statutes. See 18 U.S.C. § 1956(c)(7). All of the predicate acts under the Racketeer Influenced and Corrupt Organizations Act, for instance, are SUAs under Section 1956. 18 U.S.C. § 1956(c)(7)(a). One commentator has estimated that there are “250 or so” predicate acts in Section 1956. Stefan D. Cassella, The Forfeiture of Property Involved in Money Laundering Offenses, 7 Buff. Crim. L. Rev. 583, 612 (2004). Another argues this estimate is “exceptionally conservative.” Charles Doyle, Cong. Research Serv., RL33315, Money Laundering: An Overview of 18 U.S.C. § 1956 and Related Federal Criminal Law 1 n.2 (2017).

[6] See, e.g., Fifth Circuit Pattern Jury Instructions (Criminal Cases) Nos. 2.76A, 2.76B, available at http://www.lb5.uscourts.gov/viewer/?/juryinstructions/Fifth/crim2015.pdf; Ninth Circuit Manual of Model Criminal Jury Instruction Nos. 8.147-49, available at http://www3.ce9.uscourts.gov/jury-instructions/sites/default/files/WPD/Criminal_Instructions_2019_12_0.pdf.

[7] 18 U.S.C. § 1956(f).

[8] 18 U.S.C. § 1956(c)(2).

[9] See, e.g., Fifth Circuit Pattern Jury Instructions (Criminal Cases) No. 2.77; Ninth Circuit Manual of Model Criminal Jury Instruction No. 8.150.

[10] Stefan D. Cassella, The Money Laundering Statutes (18 U.S.C. §§ 1956 and 1957), The United States Attorneys’ Bulletin, Vol. 55, No. 5 (Sept. 2007); see also 18 U.S.C. § 1956(c)(4)(i) (definition of “financial transaction”).

[11] United States v. Ulbricht, 31 F. Supp. 3d 540, 549-50 (S.D.N.Y. 2014).

[12] Id. at 568-69.

[13] Id. Ultimately, Ulbricht was convicted and his conviction was affirmed on appeal. See United States v. Ulbricht, 858 F.3d 71 (2d Cir. 2017). The Second Circuit did not address the district court’s interpretation of the term “financial transactions” under Section 1956.

[14] 18 U.S.C. § 1956(f)(1).

[15] International Monetary Fund, Recent Trends in Correspondent Banking Relationships: Further Considerations, at 9 (April 21, 2017), https://www.imf.org/en/Publications/Policy-Papers/Issues/2017/04/21/recent-trends-in-correspondent-banking-relationships-further-considerations.

[16] Id.

[17] Bank for International Settlements Committee on Payments and Market Infrastructures, Correspondent Banking, at 12 (July 2016), https://www.bis.org/cpmi/publ/d147.pdf.

[18] See generally Bill Browder, Red Notice: A True Story of High Finance, Murder, and One Man’s Fight for Justice (2015). The alleged scheme was discovered by Russian tax lawyer Sergei Magnitsky, who was arrested on specious charges and died after receiving inadequate medical treatment in a Russian prison. In response to Magnitsky’s death, the United States passed a bill named after him sanctioning Russia for human rights abuses. See Russia and Moldova Jackson–Vanik Repeal and Sergei Magnitsky Rule of Law Accountability Act of 2012, Pub. L. 112–208 (2012).

[19] Second Amended Complaint at 10-12, United States v. Prevezon Holdings Ltd., No. 13-cv-06326 (S.D.N.Y. Oct. 23, 2015), ECF No. 381.

[20] United States v. Prevezon Holdings Ltd., 251 F. Supp. 3d 684, 691-92 (S.D.N.Y. 2017).

[21] Id. at 692.

[22] Id. at 693.

[23] Id.

[24] Stewart Bishop, Boustani Acquitted in $2B Mozambique Loan Fraud Case, Law360 (Dec. 2, 2019), https://www.law360.com/articles/1221333/boustani-acquitted-in-2b-mozambique-loan-fraud-case.

[25] Superseding Indictment at 6, United States of America v. Boustani et al., No. 1:18-cr-00681 (E.D.N.Y. Aug. 16, 2019), ECF No. 137.

[26] Id. at 6-7.

[27] Id. at 33.

[28] Motion to Dismiss at 35-36, United States of America v. Boustani et al., No. 1:18-cr-00681 (E.D.N.Y. June 21, 2019), ECF No. 98.

[29] Id. at 36.

[30] Opposition to Motion to Dismiss at 38, United States of America v. Boustani et al., No. 1:18-cr-00681 (E.D.N.Y. July 22, 2019), ECF No. 113.

[31] Id. at 34-35 (citing United States v. All Assets Held at Bank Julius (“All Assets”), 251 F. Supp. 3d 82, 96 (D.D.C. 2017).)

[32] Decision & Order Denying Motions to Dismiss at 14, United States of America v. Boustani et al., No. 1:18-cr-00681 (E.D.N.Y. Oct. 3, 2019), ECF No. 231.

[33] Id. at 15-16; see also All Assets, 251 F. Supp. 3d at 95 (finding correspondent banking transactions fall within U.S. money laundering statutes because “[t]o conclude that the money laundering statute does not reach [Electronic Fund Transfers] simply because [defendant] himself did not choose a U.S. bank as the correspondent or intermediate bank for his wire transfers would frustrate Congress’s intent to prevent the use of U.S. financial institutions ‘as clearinghouses for criminals’”). In United States v. Firtash, No. 13-cr-515, 2019 WL 2568569 (N.D. Ill. June 21, 2019), the defendant recently moved to dismiss an indictment on grounds including that correspondent banking transactions do not fall within the scope of the U.S. money laundering statute. The court has sidestepped the argument for now, concluding that this argument “does not support dismissal of the Indictment at this stage” because “the Indictment does not specify that the government’s proof is limited to correspondent bank transactions.” Id. at *9.

[34] Stewart Bishop, Boustani Acquitted in $2B Mozambique Loan Fraud Case, Law360 (Dec. 2, 2019), https://www.law360.com/articles/1221333/boustani-acquitted-in-2b-mozambique-loan-fraud-case.

[35] Id.

[36] Id.

[37] Id.

[38] 18 U.S.C. § 1956(c)(7)(B)(iv). In United States v. Chi, 936 F.3d 888, 890 (9th Cir. 2019), the Ninth Circuit recently rejected the argument that the term “bribery of a public official” in Section 1956 should be read to mean bribery under the U.S. federal bribery statute, as opposed to the article of the South Korean Criminal Code at issue in that case.

[39] 18 U.S.C. § 1956(c)(7)(B)(iii).

[40] U.S. Dep’t of Justice, Attorney General Loretta E. Lynch Delivers Remarks at Press Conference Announcing Charges Against Nine FIFA Officials and Five Corporate Executives (May 27, 2015), https://www.justice.gov/opa/speech/attorney-general-loretta-e-lynch-delivers-remarks-press-conference-announcing-charges.

[41] Superseding Indictment at ¶¶ 95-360, United States v. Hawit, No. 15-cr-252 (E.D.N.Y. Nov. 25, 2015), ECF No. 102.

[42] See, e.g., id. at ¶¶ 30-93.

[43] See, e.g., id. at ¶ 371.

[44] Press Release, U.S. Dep’t of Justice, High-Ranking Soccer Officials Convicted in Multi-Million Dollar Bribery Schemes (Dec. 26, 2017), https://www.justice.gov/usao-edny/pr/high-ranking-soccer-officials-convicted-multi-million-dollar-bribery-schemes.

[45] U.S. Dep’t of Justice, FIFA Prosecution United States v. Napout et al. and Related Cases, Upcoming Court Dates, https://www.justice.gov/usao-edny/file/799016/download (last updated Nov. 5, 2019).

[46] Superseding Indictment, supra note 41, at ¶ 41.

[47] Superseding Indictment, supra note 41, at ¶¶ 376-81, 501-04.

[48] Memorandum of Law in Support of Defendant Juan Angel Napout’s Motion to Dismiss All Charges for Lack of Extraterritorial Jurisdiction, at 3-4, Hawit, supra note 41, ECF No. 491-1.

[49] United States v. Hawit, No. 15-cr-252, 2017 WL 663542, at *8 (E.D.N.Y. Feb. 17, 2017).

[50] United States v. Napout, 332 F. Supp. 3d 533, 547 (E.D.N.Y. 2018).

[51] Id. On appeal, Napout challenged the extraterritoriality of the honest-services wire-fraud statutes, a case currently pending before the Second Circuit. See United States of America v. Webb et al., No. 18-2750 (2d. Cir. appeal docketed Sept. 17, 2018), Dkt. 107. Marin did not raise the extraterritoriality of the money laundering statute on appeal. Id., Dkt. 104.

[52] Heather Chen, Mayuri Mei Lin, and Kevin Ponniah, 1MDB: The Playboys, PMs and Partygoers Around a Global Financial Scandal, BBC (Apr. 2, 2019), https://www.bbc.com/news/world-asia-46341603; see generally Tom Wright & Bradley Hope, Billion Dollar Whale: The Man Who Fooled Wall Street, Hollywood, and the World (2018).

[53] Complaint at 6, United States v.“The Wolf of Wall Street,” No. 2:16-cv-05362 (C.D. Cal. July 20, 2016), ECF No. 1, https://www.justice.gov/archives/opa/page/file/877166/download.

[54] Complaint, supra note 53, at 37.

[55] Najib 1MDB Trial: Malaysia Ex-PM Faces Court in Global Financial Scandal, BBC (Apr. 3, 2019), https://www.bbc.com/news/world-asia-47194656. In the aftermath of the scandal, Nazak was voted out of office and currently faces trial in Malaysia. Id.

[56] Complaint, supra note 53, at 63-65.

[57] Complaint, supra note 53; Rishi Iyengar, ‘Wolf of Wall Street’ Maker Settles US Lawsuit for $60 Million, CNN Business (Mar. 7, 2018), https://money.cnn.com/2018/03/07/media/wolf-wall-street-red-granite-1mdb-settlement/index.html.

[58] See Complaint, supra note 53, at 132.

[59] Consent Judgment of Forfeiture, No. 2:16-cv-05362 (C.D. Cal. Mar. 8, 2018), ECF No. 143. As a part of the settlement, Red Granite Pictures agreed to forfeit $60 million. Id. at 5.

[60] See United States v. Any Rights to Profits, Royalties and Distribution Proceeds Owned by or Owed Relating to EMI Music Publishing Group, Stipulation and Request to Enter Consent Judgment of Forfeiture, No. 16-cv-05364 (C.D. Cal. Oct. 30, 2019), ECF No. 180; Press Release, U.S. Dep’t of Justice, United States Reaches Settlement to Recover More Than $700 Million in Assets Allegedly Traceable to Corruption Involving Malaysian Sovereign Wealth Fund (Oct. 30, 2019), https://www.justice.gov/opa/pr/united-states-reaches-settlement-recover-more-700-million-assets-allegedly-traceable.

[61] See Indictment, United States v. De Leon-Perez et al., No. 4:17-cr-00514 (S.D. Tex. Aug. 23, 2017), ECF No. 1; Press Release, U.S. Dep’t of Justice, Two Members of Billion-Dollar Venezuelan Money Laundering Scheme Arrested (July 25, 2018), https://www.justice.gov/opa/pr/two-members-billion-dollar-venezuelan-money-laundering-scheme-arrested.

[62] Criminal Information at 1-2, United States v. Krull, No. 1:18-cr-20682 (S.D. Fla. Aug. 16, 2018), ECF No. 23; Criminal Complaint at 6, United States v. Guruceaga, et al., No. 18-MJ-03119 (S.D. Fla. July 23, 2018), ECF No. 3.

[63] Press Release, U.S. Dep’t of Justice, Former Venezuelan Official Pleads Guilty to Money Laundering Charge in Connection with Bribery Scheme (July 16, 2018), https://www.justice.gov/opa/pr/former-venezuelan-official-pleads-guilty-money-laundering-charge-connection-bribery-scheme-0.

[64] See Defendant’s Motion to Dismiss at 9-24, United States v. Villalobos, No. 4:17-cr-00514 (S.D. Tex. Mar. 28, 2019), ECF No. 123.

[65] See id. at 21-35.

[66] Gina Chon & Ben McLannahan, Banks face US investigation in Fifa corruption scandal, Financial Times (May 27, 2015); see also Christie Smythe & Keri Geiger, U.S. Probes Bank Links in FIFA Marketing Corruption Scandal, Bloomberg (May 27, 2015).

[67] Christopher M. Matthews & Rachel Louise Ensign, U.S. Authorities Probe Banks’ Handling of FIFA Funds, Wall St. Journal (July 23, 2015).

[68] Fed. Ins. Co. v. United States, 882 F.3d 348, 368 (2d Cir. 2018).

[69] See, e.g., Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754, 769 (2011); United States v. Florez, 368 F.3d 1042, 1044 (8th Cir. 2004).

[70] Philip A. Lacovara & David P. Nicoli, Vicarious Criminal Liability of Organizations: RICO as an Example of a Flawed Principle in Practice, 64 St. John’s L. Rev. 725, 725-26 (1990).

[71] See U.S. Department of Justice, Principles of Federal Prosecution of Business Organizations (Aug. 28, 2008), https://www.justice.gov/sites/default/files/dag/legacy/2008/11/03/dag-memo-08282008.pdf.

The following Gibson Dunn attorneys assisted in preparing this client update: M. Kendall Day, Stephanie L. Brooker, F. Joseph Warin, Chris Jones, Jaclyn Neely, Chantalle Carles Schropp, Alexander Moss, Jillian Katterhagen Mills, Tory Roberts, and summer associates Beatrix Lu and Olivia Brown.

Gibson Dunn has deep experience with issues relating to the defense of financial institutions. For assistance navigating white collar or regulatory enforcement issues involving financial institutions, please contact the Gibson Dunn lawyer with whom you usually work, any of the leaders and members of the firm’s Financial Institutions, White Collar Defense and Investigations, or International Trade practice groups, or the following authors in the firm’s Washington, D.C., New York, and San Francisco offices:

M. Kendall Day – Washington, D.C. (+1 202-955-8220, [email protected])
Stephanie Brooker – Washington, D.C.(+1 202-887-3502, [email protected])
F. Joseph Warin – Washington, D.C. (+1 202-887-3609, [email protected])
Jaclyn Neely – New York (+1 212-351-2692, [email protected])
Chris Jones* – San Francisco (+1 415-393-8320, [email protected])
Chantalle Carles Schropp – Washington, D.C. (+1 202-955-8275, [email protected])
Alexander R. Moss – Washington, D.C. (+1 202-887-3615, [email protected])
Jillian N. Katterhagen* – Washington, D.C. (+1 202-955-8283 , [email protected])

Please also feel free to contact any of the following practice group leaders:

Financial Institutions Group:
Matthew L. Biben – New York (+1 212-351-6300, [email protected])
Stephanie Brooker – Washington, D.C. (+1 202-887-3502, [email protected])
Arthur S. Long – New York (+1 212-351-2426, [email protected])

White Collar Defense and Investigations Group:
Joel M. Cohen – New York (+1 212-351-2664, [email protected])
Charles J. Stevens – San Francisco (+1 415-393-8391, [email protected])
F. Joseph Warin – Washington, D.C. (+1 202-887-3609, [email protected])

International Trade Group:
Ronald Kirk – Dallas (+1 214-698-3295, [email protected])
Judith Alison Lee – Washington, D.C. (+1 202-887-3591, [email protected])

*Mr. Jones and Ms. Katterhagen Mills are not yet admitted in California and Washington, D.C., respectively. They are practicing under the supervision of Principals of the Firm.

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

For emerging markets around the globe, 2019 was a microcosm of the decade that preceded it: high-profile corruption scandals, grass-roots anti-graft movements, record-breaking enforcement actions, and historic legislative changes. Headline-grabbing scandals in Latin America, for example, sparked mass protests and toppled political leaders. Fundamental reforms to anti-graft laws and agencies in China resulted in enforcement actions against companies amidst an escalating trade war with the United States. In India, a simmering public broadly believes that aggressive anti-graft initiatives have yet to meet expectations. This past year, multinational enforcement actions stemming from conduct in Africa resulted in eye-popping monetary settlements. In Russia, police used mass arrests in an attempt to quell civil unrest sparked by corruption at the highest levels of the government.

Join our team of experienced international anti-corruption attorneys to learn more about how to do business in Russia, Latin America, China, India and Africa without running afoul of anti-corruption laws, including the Foreign Corrupt Practices Act (“FCPA”).

Topics to be discussed:

An overview of FCPA enforcement statistics and trends for 2019;
The corruption landscape in key emerging markets, including recent headlines and scandals;
Lessons learned from local anti-corruption enforcement in Latin America, China, India, Africa, and Russia;
Key anti-corruption legislative changes in Latin America, China, India, Africa, and Russia; and
Mitigation strategies for businesses operating in high-risk markets.

View Slides (PDF)
Listen to Audio (MP3) – Audio file is available for download and replay at your convenience, without MCLE credit.

To read the latest about the Foreign Corrupt Practices Act, please visit our 2019 Year-End FCPA Update,

PANELISTS:

Kelly Austin Partner-in-Charge of Gibson Dunn’s Hong Kong office and a member of the firm’s Executive Committee. Ms. Austin’s practice focuses on government investigations, regulatory compliance and international disputes. She has extensive experience in government and corporate internal investigations, including those involving the FCPA, anti-money laundering, securities, and trade control laws. Ms. Austin also regularly guides companies on creating and implementing effective compliance programs.

Joel Cohen Trial lawyer and former federal prosecutor, Mr. Cohen is a partner in Gibson Dunn’s New York office, Co-Chair of the firm’s White Collar Defense and Investigations Group, and a member of its Securities Litigation, Class Actions and Antitrust & Competition Practice Groups. He has been lead or co-lead counsel in 24 civil and criminal trials in federal and state courts, and he is equally comfortable in leading confidential investigations, managing crises or advocating in court proceedings. Mr. Cohen’s experience includes all aspects of FCPA/anticorruption issues, in addition to financial institution litigation and other international disputes and discovery.

Benno Schwarz German-qualified partner in Gibson Dunn’s Munich office and a member of the firm’s International Corporate Transactions and White Collar Defense and Investigations Practice Groups. Mr. Schwarz has many years of experience in the area of corporate anti-bribery compliance, especially issues surrounding the enforcement of the US FCPA and the UK Bribery Act as well as Russian law.

Patrick Stokes Litigation partner in Gibson Dunn’s Washington, D.C. office and member of the firm’s White Collar Defense and Investigations, Securities Enforcement and Litigation Practice Groups. Mr. Stokes is a former head of DOJ’s FCPA Unit, where he managed DOJ’s enforcement program and all criminal FCPA matters. His practice includes internal corporate investigations, government investigations, compliance reviews, enforcement actions regarding corruption, securities fraud, and financial institutions fraud.

F. Joseph Warin Partner in Gibson Dunn’s Washington, D.C. office, Chair of the office’s Litigation Department, and Co-Chair of the firm’s White Collar Defense and Investigations Practice Group. Mr. Warin is regarded as a top lawyer in FCPA investigations, FCA cases, and special committee representations. He has handled cases and investigations in more than 40 states and dozens of countries in matters involving federal regulatory inquiries, criminal investigations and cross-border inquiries by dozens of international enforcers, including the UK’s SFO and FCA, and government regulators in Germany, Switzerland, Hong Kong, and the Middle East.

Oliver Welch Associate in Gibson Dunn’s Hong Kong office and a member of the firm’s White Collar Defense and Investigations and Litigation Practices. Mr. Welch has extensive experience representing clients throughout the Asia region on a wide variety of compliance and anti-corruption issues, including FCPA matters. He counsels multi-national corporations on global anti-corruption compliance programs and controls, and assists in drafting anti-corruption compliance policies, procedures, and training materials.

On June 18, 2019, the Securities Investment Business (Amendment) Law, 2019 (the “Amendment Law”) entered into force in the Cayman Islands, significantly amending the Securities Investment Business Law (2019 Revision) (“SIBL”), including by requiring non-U.S. sponsors with Cayman Islands fund managers or investment advisers to re-register such entities with the Cayman Islands Monetary Authority (“CIMA”).[1] Further, non-U.S. sponsors that have made Form ADV filings with the U.S. Securities and Exchange Commission (the “SEC”) should promptly consider whether to update the disclosures in their Form ADV filings. To elaborate:

The Amendment Law affects persons registered as “excluded persons” under SIBL (“Excluded Persons”). Excluded Persons include entities incorporated or registered in the Cayman Islands that carry on “securities investment business” (as defined under SIBL) but satisfy the requirements for one of the exemptions set out in SIBL from the need to obtain a full license under SIBL.[2] Prior to the enactment of the Amendment Law, non-U.S. fund sponsors that operate fund manager or investment adviser entities in the Cayman Islands typically registered such managers/advisers as Excluded Persons.
Under SIBL before the Amendment Law, Excluded Persons were required only to register as “excluded persons” with CIMA but not to obtain a full license. Under SIBL as amended by the Amendment Law (the “Amended SIBL”), subject to certain limited exceptions, Cayman Islands fund managers and investment advisers currently registered as Excluded Persons will have to apply to CIMA for registration as “registered persons” under the Amended SIBL (“Registered Persons”).[3] The deadline to re-register with CIMA as a Registered Person is January 15, 2020.[4]
Non-U.S. sponsors with Cayman Islands fund managers or investment advisers required to re-register as Registered Persons need to consider the implications on the disclosures in their Form ADV filings with the SEC under the U.S. Investment Advisers Act of 1940, as amended. In particular, a fund manager or investment adviser that has indicated in its response to Item 1.M of Form ADV that it is not registered with a foreign financial regulatory authority should consider changing the response to indicate that it has become registered with a foreign financial regulatory authority (i.e., CIMA) since the ADV filer will become subject to additional regulatory supervision and oversight following its re-registration as a Registered Person.
Changing this response requires a Form ADV amendment to be filed “promptly” after the change has occurred. Therefore, Form ADV amendments should be filed upon CIMA approval of the filing to become a Registered Person under the Amended SIBL, rather than waiting until the next annual Form ADV up date.

____________________

[1] It is worth noting that only Cayman Islands “fund managers” are required in addition to comply with the Cayman Islands International Tax Co-operation (Economic Substance) Law, 2018 (the “Economic Substance Law”). “Fund managers” are persons “managing securities belonging to another person in circumstances involving the exercise of discretion” within the meaning of Schedule 2 of SIBL, as amended by the Amendment Law, that are within SIBL’s ambit. A discussion of the implications of the Economic Substance Law on fund managers falls outside of the scope of this briefing.

[2] The most common of the six exemptions from having to obtain a full license under SIBL (which are set out in Schedule 4 of SIBL) is for persons that carry on “securities investment business” for (a) a “sophisticated person” (as defined in SIBL), (b) a “high net worth person” (as defined in SIBL) or (c) a company, partnership or trust (whether or not regulated in the Cayman Islands as a mutual fund) of which the shareholders, unit holders or limited partners are one or more persons falling within (a) or (b).

[3] Under the Amended SIBL, Registered Persons will be subject to additional supervision and inspection by CIMA that previously applied only to those entities that were fully licensed under SIBL (“Licensees”) but not to Excluded Persons under SIBL (e.g., obtaining CIMA approval before commencing securities investment business). However, Registered Persons will not be subject to the full scope of CIMA supervision and oversight as Licensees and will not be required to comply with certain regulations under the Amended SIBL.

[4] The registration process for Registered Persons is currently taking about 10 weeks (and may take longer if the documents submitted as part of the registration application are defective or if CIMA chooses to ask questions). Applicants must allow sufficient time for this registration process when considering when to hold the first closing of the related fund (assuming the applicant is required to provide services to the fund immediately following the first closing).

The following Gibson Dunn lawyers assisted in preparing this client update: John Fadely and Albert Cho.

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, the authors, or any of the following leaders and members of the firm’s Investment Funds practice group:

Chézard F. Ameer – Dubai and London (+971 (0)4 318 4614, [email protected])
Albert S. Cho – Hong Kong (+852 2214 3811, [email protected])
John Fadely – Hong Kong (+852 2214 3810, [email protected])
Jennifer Bellah Maguire – Los Angeles (+1 213-229-7986, [email protected])
Y. Shukie Grossman – New York (+1 212-351-2369, [email protected])
Edward D. Sopher – New York (+1 212-351-3918, [email protected])
C. William Thomas, Jr. – Washington, D.C. (+1 202-887-3735, [email protected])
Gregory Merz – Washington, D.C. (+1 202-887-3637, [email protected])

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

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In 2019, the drumbeat favoring corporate non-prosecution agreements (“NPAs”) and deferred prosecution agreements (“DPAs”)[1] kept time, and we are continuing to see these agreements used frequently by prosecutors to resolve complex corporate enforcement actions. Despite perennial scrutiny, NPAs and DPAs have withstood political vicissitudes and the comings and goings of administrations and agency heads; they have weathered the test of time and we have seen them become more sophisticated year over year as regulators and practitioners alike learn from past agreements and hone key language to achieve desired results. This has led not only to template language used repeatedly by certain units of the U.S. Department of Justice (“DOJ” or the “Department”), but also an expansion of NPAs and DPAs to other agencies.

In this client alert, the twenty-first in our series on NPAs and DPAs, we: (1) report statistics regarding NPAs and DPAs from 2000 through 2019; (2) discuss the recent return of DPAs to the political spotlight; (3) overview the Commodity Futures Trading Commission’s (“CFTC’s”) new Enforcement Manual and its implications for NPAs and DPAs; (4) discuss developments in DOJ corporate enforcement policy; (5) summarize 2019’s publicly available federal corporate NPAs and DPAs; and (6) survey recent developments in DPA regimes abroad.

Chart 1 below shows all known corporate NPAs and DPAs from 2000 through 2019.

Chart 1

Chart 2 reflects total monetary recoveries related to NPAs and DPAs from 2000 through 2019. At nearly $7.8 billion, recoveries associated with NPAs and DPAs in 2019 came close to the approximately $8 billion in total recoveries in 2018, and far outstrip total recoveries in 2017. Total 2019 recoveries also exceeded the average annual recovery from 2005-2018, of approximately $4.56 billion.

Chart 2

DOJ entered into seven NPAs and DPAs this year addressing allegations of violations of the Foreign Corrupt Practices Act (“FCPA”). These agreements included the third-largest resolution overall in 2019, a DPA with Swedish telecommunications company Ericsson that imposed a total of nearly $1.1 billion in monetary obligations. Together, the seven FCPA-focused resolutions imposed a total of approximately $2.8 billion, or about 36% of total monetary recoveries this year. Only one of the FCPA resolutions involved a voluntary self-disclosure by the settling company, and four of the seven agreements imposed independent compliance monitors. For a more detailed analysis of this year’s FCPA resolutions, see our 2019 FCPA Year-End Update.

DPAs Back in Political Crosshairs

In April 2019, Senator Elizabeth Warren (D-Mass.) introduced proposed legislation expanding criminal liability to negligent executives of large corporations that enter into DPAs or NPAs.[2] Under the Corporate Executive Accountability Act, executives may be criminally liable if they are negligent with regard to the conduct of companies with more than $1 billion in annual revenue that: (1) are found guilty of or plead guilty to a crime; (2) enter into a DPA or NPA regarding any criminal allegations; (3) enter into a settlement with any state or federal regulator for any civil law violation that affects the health, safety, finances, or personal data of at least 1% of the population of any state or of the United States; or (4) commit a second civil or criminal violation while operating under a civil or criminal judgment, DPA, NPA, or other state or federal settlement.[3] Punishments under the Corporate Executive Accountability Act would include up to a year in jail, or up to three years for a repeat violation. Senator Warren is known for being a frequent and outspoken critic of the use of NPAs or DPAs, arguing they are used to soften the blow for corporations implicated in corporate wrongdoing and act as “get-out-of-jail cards.”[4] Senator Warren views the existence of DPAs, and the difficulty of proving that any individual executive had “knowledge” of corporate wrongdoing by their employer, as reasons why no CEO of a major bank has gone to jail for conduct related to the 2008 financial crisis.[5] Thus, the Corporate Executive Accountability Act requires only a finding of “negligence” to impose liability.[6] Along with the Corporate Executive Accountability Act, Senator Warren also re-introduced the Ending Too Big to Jail Act—covered in our 2018 Mid-Year Update—which requires judicial oversight of DPAs between DOJ and financial institutions; requires DOJ to post on its website both DPAs and the terms and conditions of any agreements between the subject companies and independent compliance monitors; and limits courts’ discretion to approve DPAs absent a finding that the agreement is in the “public interest.”[7] As Senator Warren seeks to advance her bid for the 2020 Democratic presidential nomination, we will continue to monitor public discourse about the use and oversight of NPAs and DPAs.

Normalization of Corporate NPAs and DPAs Across Agencies

On May 8, 2019, the U.S. Commodity Futures Trading Commission (“CFTC”) Division of Enforcement issued its first public Enforcement Manual. The Enforcement Manual provides a broad overview of the CFTC and its Division of Enforcement, the CFTC’s investigative process, and the tools available to the CFTC in pursuing or settling enforcement actions, including DPAs and NPAs.[8] The Enforcement Manual, which tracks language in the SEC Enforcement Manual, states that DPAs typically will require that the company cooperate “truthfully and fully in the CFTC’s investigation and related enforcement actions,” enter into a long-term tolling agreement, comply with express prohibitions or undertakings during the period of deferred prosecution, and agree to “either admit or not to contest” the underlying facts that the CFTC could assert to establish a violation of the Commodity Exchange Act.[9] Unlike the SEC, however, the CFTC does not include a lengthy list of terms that “a [DPA] should generally include.”[10]

The Enforcement Manual states that NPAs will be utilized in “generally very limited” circumstances and will require—again, tracking the SEC Enforcement Manual—truthful and full cooperation with the CFTC’s investigation and related enforcement actions, as well as compliance “under certain circumstances” with “express undertakings”.[11] Of course, we know from experience that, despite the SEC’s pronouncements in its own Enforcement Manual—from which the relevant portions of the CFTC Enforcement Manual are drawn—the SEC heavily favors administrative action over NPAs and DPAs. To date, the CFTC has not issued any corporate NPAs or DPAs, and time will tell whether the CFTC follows the SEC’s lead and continues to favor administrative proceedings over NPAs and DPAs.

The CFTC’s Enforcement Manual devotes significant attention to self-reporting, cooperation, and remediation, including a policy that the Division of Enforcement will consider a “substantial reduction from the otherwise applicable civil monetary penalty” if a company or individual self-reports, fully cooperates, and remediates.[12] With respect to FCPA matters, the CFTC Enforcement Manual distinguishes between companies that are required to register with the CFTC, and those that are not. For the former, the Division of Enforcement will recommend, absent aggravating circumstances, a resolution with no civil monetary penalty in a case where a company makes a voluntary disclosure, fully cooperates, and appropriately remediates.[13] Companies and individuals who are required to register with the CFTC are not eligible to take advantage of the presumption of no civil monetary policy, but the Division of Enforcement will recommend a “substantial reduction” in the penalty.

Developments in DOJ Corporate Enforcement Policies Regarding FCPA and National Security Matters

2019 witnessed additional developments in DOJ’s corporate enforcement policy.

DOJ updated its FCPA Corporate Enforcement Policy (the “FCPA Policy”) in four key areas. First, DOJ changed its policy—originally put forth in December 2017—of requiring companies that self-disclose misconduct to prohibit their employees from “using software that generates but does not appropriately retain business records or communications” to receive full remediation credit.[14] That policy was widely interpreted as covering the use of ephemeral messaging platforms such as WhatsApp. With the changes announced in March 2019, the policy no longer strictly prohibits the use of ephemeral messaging platforms and instead now requires companies seeking remediation credit to “implement[] appropriate guidance and controls on the use of personal communications and ephemeral messaging platforms . . . to appropriately retain business records or communications or otherwise comply with the company’s document retention policies or legal obligations.”[15]

Second, DOJ codified its position that there will be a presumption of a declination where “a company undertakes a merger or acquisition, uncovers misconduct by the merged or acquired entity through thorough and timely due diligence or, in appropriate instances, through post-acquisition audits or compliance integration efforts, and voluntarily self-discloses the misconduct.”[16]

Third, DOJ revised the requirement for receiving full cooperation credit after making a self-disclosure. Now, the FCPA Policy states that to receive cooperation credit, a company must disclose “all relevant facts known to it at the time of the disclosure, including as to any individuals substantially involved in or responsible for the misconduct at issue.”[17] These changes reflect then Deputy Attorney General Rod J. Rosenstein’s statement in 2018 that “investigations should not be delayed merely to collect information about individuals whose involvement was not substantial, and who are not likely to be prosecuted.”[18] The revisions to the FCPA Policy also included a footnote acknowledging that “a company may not be in a position to know all relevant facts at the time of a voluntary self-disclosure, especially where only preliminary investigative efforts have been possible. In such circumstances, a company should make clear that it is making its disclosure based upon a preliminary investigation or assessment of information, but it should nonetheless provide a fulsome disclosure of the relevant facts known to it at that time.”[19] Notably, the revisions also involved modifying language in the previous policy that required a self-disclosing company to identify to the Department opportunities “to obtain relevant evidence not in the company’s possession and not otherwise known to the Department” that the company is or should be aware of.[20] The revised FCPA Policy now states that a self-reporting company must simply identify relevant evidence of which it is actually aware.[21]

Finally, DOJ also relaxed its policy on de-confliction—that is, the deferral, at the request of DOJ, of investigative steps a company otherwise wishes to take in its internal investigation. The previous policy required that a self-disclosing company seeking full cooperation credit agree to de-confliction “where requested.”[22] The FCPA Policy now states that DOJ will only request de-confliction where “requested and appropriate.”[23] Additionally, in a new footnote, the FCPA Policy states that DOJ will not “take any steps to affirmatively direct a company’s internal investigation.”[24]

DOJ’s National Security Division also revised its policy (the “NSD Policy”) regarding voluntary disclosures of export control and sanctions violations to more closely resemble the FCPA Policy.[25] The changes are detailed in our client alert titled “DOJ National Security Division Released Updated Guidance on Voluntary Self-Disclosures,” and several significant changes warrant mention here.

First, the NSD Policy now applies to financial institutions.[26] Additionally, the NSD Policy now includes a presumption that companies that voluntarily self-disclose export control or sanctions violations to the Counterintelligence and Export Control Section, fully cooperate, and timely and appropriately remediate will receive an NPA and will not be fined if there are no aggravating factors. If aggravating factors do exist warranting a different criminal resolution (such as a DPA or guilty plea) but the company otherwise satisfies the above criteria, DOJ will recommend at least a 50% reduction in the fine otherwise available under the alternative fine statute,[27] and will not impose a monitor if the company has implemented an effective compliance program by the time of resolution.[28] However, even a company that receives an NPA will still be required to pay applicable disgorgement, forfeiture, and/or restitution.[29]

Second, in another parallel to the FCPA Policy revisions, the NSD Policy now grants a presumption of an NPA where “a company undertakes a merger or acquisition, uncovers misconduct by the merged or acquired entity through thorough and timely due diligence or, in appropriate instances, through post-acquisition audits or compliance integration efforts, and voluntarily self-discloses the misconduct.”[30]

Third, the revisions to the NSD Policy follow the changes to the FCPA Policy on voluntary self-disclosure credit: to qualify for a credit, a company must disclose “all relevant facts known to it at the time of the disclosure, including as to any individuals substantially involved in or responsible for the misconduct at issue.”[31] Additionally, the revised NSD Policy includes a footnote mirroring footnote 1 in the FCPA Policy, stating that “a company may not be in a position to know all relevant facts at the time of a voluntary self-disclosure, especially where only preliminary investigative efforts have been possible. In such circumstances, a company should make clear that it is making its disclosure based upon a preliminary investigation or assessment of information, but it should nonetheless provide a fulsome disclosure of the relevant facts known to it at that time.”[32]

Fourth, the NSD—like the Fraud Section—also modified its policy on de-confliction. The NSD Policy now states that the Department will only request de-confliction where “appropriate.”[33] Additionally, in a footnote, the NSD Policy says the Department will not “take any steps to affirmatively direct a company’s internal investigation.”[34]

Finally, as it relates to remediation, the NSD Policy now requires companies to conduct root cause analyses to address and remediate the underlying causes of the conduct at issue.[35] Moreover, the NSD Policy now includes guidance addressing ephemeral messaging mirroring the FCPA Policy: a company must “implement[] appropriate guidance and controls on the use of personal communications and ephemeral messaging platforms that undermine the company’s ability to appropriately retain business records or communications or otherwise comply with the company’s document retention policies or legal obligations.”[36]

2019 Corporate NPAs and DPAs

Avanir Pharmaceuticals (DPA)

On September 26, 2019, Avanir Pharmaceuticals (“Avanir”), a pharmaceutical manufacturer, entered into a DPA with the U.S. Attorney’s Office for the Northern District of Georgia to resolve allegations that it had paid kickbacks to a physician to induce prescriptions of its drug Nuedexta.[37] As part of the DPA, which has a term of three years, Avanir consented to the filing of a one-count Information alleging that Avanir violated the Anti-Kickback Statute by: (1) paying a doctor to become a high prescriber of Nuedexta to beneficiaries of federal health care programs, (2) offering that doctor financial incentives to write additional Nuedexta prescriptions for beneficiaries of federal health care programs, and (3) inducing the doctor to recommend that other physicians prescribe Nuedexta to beneficiaries of federal health care programs.[38] The DPA required Avanir to pay a monetary penalty in the amount of $7,800,000, and forfeiture in the amount of $5,074,895.[39] In light of a parallel civil settlement (described below), the DPA did not require additional restitution to be paid by the company.[40]

Although Avanir did not receive voluntary self-disclosure credit in the DPA, the company did otherwise receive full credit for its cooperation with the government’s investigation.[41] The DPA noted its extensive remedial measures (including terminating, or permitting to resign in lieu of termination, multiple employees, at various levels of the organization, including senior executives), and enhancements to its compliance program.[42] In determining that an independent compliance monitor was unnecessary, DOJ cited these considerations, as well as the fact that Avanir had entered into a Corporate Integrity Agreement with the Department of Health and Human Services, Office of the Inspector General (“HHS OIG”), which required the engagement of an independent review organization (“IRO”).[43]

In a parallel civil settlement, Avanir also resolved allegations that it violated the civil False Claims Act (“FCA”) by paying kickbacks to long-term care providers and engaging in false and misleading marketing of Nuedexta, all in an effort to induce the physicians to prescribe the drug for off-label uses.[44] The FCA settlement required Avanir to pay $95,972,017 to the U.S. government, and $7,027,983 to resolve state Medicaid claims.[45]

The civil settlement resolved allegations, among others, that between October 29, 2010, and December 31, 2016, Avanir provided remuneration in the form of money, honoraria, travel, and food to certain physicians and other health care professionals to induce them to write prescriptions for Nuedexta.[46] Contemporaneous with the civil settlement, Avanir entered into a five-year Corporate Integrity Agreement with HHS OIG. The agreement requires, among other things, that Avanir implement additional controls around its interactions with physicians and conduct internal and external (through an IRO) monitoring of promotional and other activities.[47]

Baton Holdings LLC / Bankrate, Inc. (NPA)

On March 5, 2019, DOJ reached an NPA with Baton Holdings, LLC, the successor in interest of Bankrate, Inc., to resolve allegations of accounting fraud. The misconduct occurred prior to Bankrate’s acquisition by Red Ventures Holdco, LP, the ultimate parent company of Baton Holdings LLC.[48]

Although the company did not receive self-disclosure credit, DOJ credited Bankrate’s Audit Committee for, two years into the investigation, hiring new outside counsel, ordering an independent internal investigation, and cooperating fully.[49] Under the leadership of the Audit Committee, the company engaged in extensive remedial measures, including termination of employees who engaged in or were aware of misconduct, and issuance of restated financial statements.[50] Further, the company committed to continued improvements in its compliance and reporting programs.[51]

The NPA has a three year term, with a possible one-year extension, and no provision for early termination.[52] In addition to a monetary penalty of $15.54 million, Baton Holdings agreed to pay $15 million in disgorgement of profits and prejudgment interest to the SEC, and $13 million in restitution to shareholders via a third-party claims administrator.[53] The NPA did not impose a monitor, but Baton Holdings agreed to designate knowledgeable employees to provide information to DOJ upon request, including disclosure of “credible evidence or allegations and internal or external investigations.”[54]

Celadon Group, Inc. (DPA)

On April 25, 2019, Celadon Group, Inc. (“Celadon”), a transportation company headquartered in Indianapolis, Indiana, entered into a DPA with DOJ’s Criminal Division Fraud Section and the U.S. Attorney’s Office for the Southern District of Indiana to resolve allegations that it had misled investors and falsified books and records.[55] As part of the DPA, which has a term of five years, Celadon consented to the filing of a one-count Information charging the company with conspiracy to commit securities fraud and to “knowingly and willfully falsify the books, records and accounts of the Company.”[56] The DPA resolves allegations that between June 2016 and October 2016, Celadon conspired with a wholly owned subsidiary, Quality Companies LLC (“Quality”), in a scheme that “resulted in Celadon falsely reporting inflated profits and inflated assets to the SEC and the investing public through Celadon’s financial statements.”[57] Ultimately, the DPA alleges, Celadon used falsified invoices reflecting inflated truck values to “hide millions of dollars of losses from investors when reporting its financial condition.”[58]

Although Celadon did not voluntarily disclose the conduct, a “relevant consideration” for entering into the DPA was that, “after learning of the allegations of misconduct by Company officials, the Company retained an external law firm to conduct an independent investigation, and ultimately notified [DOJ] of its investigation and intent to fully cooperate.”[59] The DPA also credits Celadon with engaging in “significant remedial measures,” including that “(i) the Company no longer employs or is affiliated with any of the individuals known to the Company to be implicated in the conduct at issue . . .; (ii) the Company created the new position of Chief Accounting Officer reporting directly to the Chief Financial Officer; (iii) the Company hired an experienced Internal Audit staff member reporting directly to the Company’s Internal Audit Manager; and (iv) the Company enhanced its compliance program . . . .”[60] On the same day DOJ announced the Celadon DPA, it also announced it had reached a guilty plea with the former president of the Celadon subsidiary that included counts of conspiracy to commit securities fraud, to make false statements to auditors, and to falsify the company’s books, records, and accounts.[61]

Pursuant to the DPA, Celadon agreed to pay approximately $42.2 million in restitution to victims of the offense, in addition to the “cost of the administration of all restitution claims by a third party claims administrator.”[62] Unusually for a resolution lacking in voluntary disclosure credit, the company did not have to pay a fine or further financial penalty beyond the approximately $42.2 million in victim restitution.

On December 5, 2019, the SEC charged two of Celadon’s former top executives for their participation in the alleged conduct.[63] Less than a week after the executives were charged, Celadon filed for Chapter 11 bankruptcy protection, citing “legacy and market headwinds” as well as the “significant costs associated with a multi-year investigation into the actions of former management, including the restatement of financial statements.”[64]

ContextMedia Health LLC (NPA)

On October 17, 2019, ContextMedia Health LLC (“ContextMedia”), a digital provider of medical information and advertising in doctors’ offices, entered into an NPA with DOJ and the U.S. Attorney’s Office for the Northern District of Illinois.[65] The agreement was secured by Gibson Dunn and resolved allegations that from 2012 to 2017, former executives and employees of ContextMedia defrauded clients—most of which were pharmaceutical companies—by falsely inflating the numbers of physicians it told those clients they would reach by placing advertisements on ContextMedia’s network.[66]

ContextMedia admitted that former executives invoiced clients as if advertising campaigns had been delivered in full, when in reality the company under-delivered the campaigns because its advertising network did not reach all of the physicians that ContextMedia represented it did.[67] To conceal the under-deliveries, former employees allegedly falsified records to make it appear the company was delivering advertising content to the number of in-office devices its clients were promised their advertisements would reach.[68] Former executives and employees also allegedly inflated metrics measuring the frequency with which patients engaged with devices receiving the clients’ advertising content.[69]

The NPA noted that ContextMedia no longer employs the former executives and employees who were involved in the alleged wrongdoing, and the company has made significant improvements to address and improve the reliability of reporting on advertising campaign delivery, including by hiring third parties to audit all of its advertising campaigns.[70] Based on these improvements and the strength of the company’s enhanced compliance program, DOJ determined that a compliance monitor was not necessary and did not impose a fine.[71]

ContextMedia’s obligations under the agreement have a term of three years.[72] Under the terms of the NPA, the company committed to compensating its pharmaceutical clients up to a cumulative amount of $70 million, approximately $65.5 million of which the company had already returned through a combination of cash payments and in-kind services and the remaining $4.5 million of which will be set aside to cover any future claims for restitution made by ContextMedia’s clients.[73]

Dannenbaum Engineering Corporation (DPA)

On November 22, 2019, Dannenbaum Engineering Company (“DEC”) and its parent company, Engineering Holding Corporation (“EHC”), entered into a three-year DPA with DOJ’s Public Integrity Section and the U.S. Attorney’s Office for the Southern District of Texas. The government alleged that DEC violated the Federal Election Campaign Act (“FECA”).[74] As part of the resolution, DEC agreed to pay a monetary penalty of $1.6 million.

According to the DPA’s Statement of Facts, from at least March 2015 through April 2017, DEC and EHC made $323,300 in illegal conduit contributions through various employees and their family members to federal candidates and their committees.[75] The DPA alleges that DEC corporate funds were used to advance or reimburse employee monies for these contributions, and that the object of the alleged scheme was for DEC, its CEO, and a former employee to gain access to and potentially influence various candidates for federal office, including candidates for President, the Senate, and the House of Representatives.[76]

DOJ listed several factors on which it based the resolution, including DEC’s cooperation with the government investigation, the “thorough” internal investigation DEC conducted, and its remedial measures. The remedial measures included, among others: (1) resignation by the CEO and departure of the one other employee who allegedly engaged in misconduct; (2) the restructuring of the company’s board to ensure that the former CEO cannot control it; (3) ending all politically related payments to its employees; (4) the hiring/designation of a full-time Chief Governance and Compliance Officer, and the engagement of an independent company to design a new compliance program; and (5) the creation of a whistleblower email system and training program for employees.[77]

Ericsson (DPA)

On November 26, 2019 DOJ and the U.S. Attorney’s Office for the Southern District of New York entered into a three-year DPA with Telefonaktiebolaget LM Ericsson (“Ericsson”), a multinational telecommunications company headquartered in Sweden, for conspiring to violate the FCPA. Ericsson’s subsidiary Ericsson Egypt Ltd. (“Ericsson Egypt”) also pled guilty to one count of conspiracy to violate the anti-bribery provisions of the FCPA.[78] The DPA alleged that Ericsson paid bribes to high-level government officials in Djibouti and committed violations of the FCPA’s books and records and internal controls provisions to disguise payments in Djibouti, China, Vietnam, Indonesia, and Kuwait over the course of 17 years.[79]

The DPA imposed a total criminal penalty of $520,650,432, which includes a $9,520,000 criminal fine Ericsson agreed to pay on behalf of Ericsson Egypt. The total penalty reflects an aggregate discount of 15% off the bottom of the U.S. Sentencing Guidelines fine range.[80] Ericsson also settled a related investigation by the SEC by agreeing to pay $458,380,000 in disgorgement and $81,540,000 in prejudgment interest.[81] The approximately $1.1 billion in total monetary obligations imposed on Ericsson make this matter the third-largest FCPA settlement reached to date. The Ericsson DPA is the largest agreement of 2019 (measured by total dollar value) to require an independent compliance monitor. The DPA imposed a three-year independent compliance monitor, citing the fact that Ericsson “has not yet fully implemented or tested its compliance program.”[82] Ericsson also agreed to “implement rigorous internal controls” and “cooperate fully with the [g]overnment in any ongoing investigations.”[83] Among the factors DOJ considered in entering into the DPA was the fact that although Ericsson had “inadequate anti-corruption controls and an inadequate anti-corruption compliance program” during the relevant period, Ericsson enhanced its compliance program and controls in the course of DOJ’s investigation.[84] DOJ did not give Ericsson full cooperation credit because the company “did not disclose allegations of corruption with respect to two relevant matters, produced certain relevant materials in an untimely manner, and did not timely and fully remediate, including by failing to take adequate disciplinary measures with respect to certain executives and other employees involved in the misconduct.”[85]

Fresenius Medical Care AG & Co. KGaA (NPA)

On March 28, 2019, Fresenius Medical Care AG & Co. KGaA (“Fresenius”), “a German-based provider of medical products and services,” entered into an NPA with DOJ’s Criminal Division, Fraud Section, and the U.S. Attorney’s Office for the District of Massachusetts to resolve criminal and civil claims relating to Fresenius’s alleged violations of the FCPA through “participation in various corrupt schemes to obtain business in multiple foreign countries.”[86] Specifically, Fresenius admitted to making improper payments to “publicly employed health and/or government officials to obtain or retain business in Angola and Saudi Arabia.” Furthermore, DOJ alleged that in certain foreign countries, “Fresenius knowingly and willfully failed to implement reasonable internal accounting controls over financial transactions and failed to maintain books and records that accurately and fairly reflected the transactions.”[87]

The NPA notes that Fresenius received voluntary disclosure credit “because it voluntarily and timely disclosed to the Department the conduct described in the Statement of Facts [attached to the NPA].”[88] The company also received partial credit for its cooperation with DOJ, including, among other things: “conducting a thorough internal investigation; making regular factual presentations to the Department; . . . [and] collecting, analyzing, and organizing voluminous evidence and information from multiple jurisdictions for the Department.”[89]

Fresenius also engaged in remedial measures, according to the NPA, including: (1) terminating the employment of at least ten employees who were involved in or failed to detect the admitted misconduct; “(2) enhancing its compliance program, controls, and anti-corruption training; (3) terminating business relationships with the third party agents and distributors who participated in the misconduct described in the Statement of Facts; (4) adopting heightened controls over the selection and use of third parties, to include third party due diligence; and (5) withdrawing from consideration of pending public contracts potentially related to the misconduct described in the Statement of Facts.”[90]

Under the NPA, which has a term of three years, Fresenius “agree[d] to pay a monetary penalty in the amount of $84,715,273” and to pay “disgorgement and prejudgment interest in the amount of $147 million,” toward which DOJ credited Fresenius’s disgorgement to the SEC.[91] The monetary penalty reflected a discount of 40% off of the bottom of the U.S. Sentencing Guidelines fine range.[92]

Fresenius agreed “to an independent compliance monitor for a term of two years, followed by self-monitoring for the remainder of the Agreement.”[93] It also agreed to cooperate with DOJ and “any other domestic or foreign law enforcement and regulatory authorities and agencies, as well as with Multilateral Development Banks, in any investigation of the Company, its parent company or its affiliates, or any of its present or former officers, directors, employees, agents, and consultants, or any other party.”[94] The NPA also acknowledges that Fresenius must comply with relevant data privacy laws, among other applicable laws and regulations, and it requires the company to provide DOJ with “a log of any information or cooperation that is not provided based on the assertion of law, regulation, or privilege.”[95] This is in keeping with DOJ’s public statements that, under the FCPA Corporate Enforcement Policy, the “company bears the burden of establishing the prohibition” on disclosing information.[96] DOJ has expressed an expectation that “a cooperating company will work to identify all available legal means to provide” requested data.[97]

On October 21, 2019, German prosecutors confirmed they are conducting an investigation based on findings in the NPA.[98]

Heritage Pharmaceuticals (DPA)

On May 30, 2019, Heritage Pharmaceuticals Inc. (“Heritage”), and the Antitrust Division of DOJ entered into a DPA.[99] The Heritage DPA secured by Gibson Dunn is the Antitrust Division’s first DPA with a company other than a financial institution and the only DPA to provide protection from criminal prosecution for all of the company’s current officers, directors and employees.

The Heritage DPA resolved allegations that from about April 2014 until at least December 2015, Heritage participated in a criminal antitrust conspiracy with other companies and individuals engaged in the production and sale of generic pharmaceuticals, a purpose of which was to fix prices, rig bids, and allocate customers for glyburide, a medicine used to treat diabetes.[100] The agreement requires Heritage to cooperate fully with the ongoing investigation and pay a $225,000 criminal penalty.[101] In return, the prosecution of Heritage is deferred for a period of three years.[102] Heritage’s resolution with the DOJ does not require the imposition of a corporate monitor.

DOJ noted the agreement was based on a variety of facts and circumstances, including the fact that a criminal conviction would have potentially exposed Heritage to mandatory exclusion from federal health care programs.[103]

Heritage has agreed to resolve all civil claims relating to federal health care programs arising from its conduct.[104] In a separate civil resolution, Heritage agreed to pay $7.1 million to resolve allegations under the FCA related to the alleged price-fixing conspiracy.[105]

For additional information regarding the Antitrust Division’s latest guidance on DPAs, and particularly the role that corporate compliance programs will play in securing a DPA, please see our recent client alert, “DOJ Antitrust Division Will Now Consider DPAs for Companies Demonstrating ‘Good Corporate Citizenship.’”

HSBC Private Bank (Suisse) SA (DPA)

On December 10, 2019, HSBC Private Bank (Suisse) SA (“HSBC Switzerland”), a private bank headquartered in Geneva, entered into a DPA with DOJ’s Tax Division and the U.S. Attorney’s Office for the Southern District of Florida.[106] The agreement resolved allegations that HSBC Switzerland conspired with U.S. taxpayers to evade taxes.[107] As part of the DPA, which has a term of three years, HSBC Switzerland consented to the filing of a one-count Information charging the bank with conspiracy to (1) defraud the United States for the purpose of impeding the lawful collection of federal income taxes, (2) file false federal income tax returns, and (3) evade federal income taxes, all in violation of 18 U.S.C. § 371.[108]

Specifically, DOJ alleged that from at least 2000 through 2010, HSBC Switzerland “used Swiss bank secrecy to conceal the accounts of U.S. clients from the U.S. tax authorities.”[109] This included the provision of a number of traditional Swiss banking services, such as numerical and coded names for accounts, prepaid debit and credit cards to allow U.S. clients to withdraw funds remotely “without a clear paper trail back to their undeclared accounts in Switzerland,” and hold-mail services in which the bank would not send any account documents to U.S. account holders.[110] HSBC Switzerland bankers also assisted U.S. clients with creating entities that were incorporated in offshore tax havens and opening accounts in the names of nominee entities and trusts.[111]

Pursuant to the DPA, HSBC Switzerland agreed to pay a total of $192,350,000 to the United States, consisting of restitution of the approximate unpaid pecuniary loss to the United States that allegedly resulted from the conduct, forfeiture of the approximate gross fees paid to HSBC Switzerland by U.S. taxpayers with undeclared accounts at the bank, and a monetary penalty.[112] Notably, the monetary penalty portion of the resolution reflected a discount of 50% off of the bottom of the U.S. Sentencing Guidelines fine range.[113] DOJ considered that HSBC self-reported its conduct, performed a thorough internal investigation, and extensively cooperated with the government as mitigating factors in support of the lower penalty.[114] The DPA did not impose a monitor or regular self-reporting requirement.[115]

Hydro Extrusion USA LLC (DPA)

On April 23, 2019, Hydro Extrusion USA, LLC, formerly known as Sapa Extrusions Inc. (“SEI”), entered into a three-year DPA for mail fraud after an extensive investigation by the National Aeronautics and Space Administration (“NASA”) Office of Inspector General, FBI’s Portland Field Office, and the Defense Criminal Investigative Service (“DCIS”).[116] At the same time, SEI’s direct subsidiary, Hydro Extrusion Portland, Inc., formerly known as SAPA Profiles Inc. (“SPI”), agreed to plead guilty to one count of mail fraud in connection with the same criminal activity and to pay restitution in the amount of $34.1 million and a forfeiture money judgment in the amount of $1.8 million.[117] The resolutions were entered after the two companies admitted to providing customers, including U.S. government contractors, with falsified certifications from altered tensile test results for nearly two decades.[118] The tests were designed to ensure the consistency and reliability of aluminum extruded at the companies’ facilities in Oregon, and the falsified results therefore allegedly resulted in the sale of aluminum that did not meet contract specifications for use on rockets for NASA and missiles provided to the Department of Defense’s Missile Defense Agency.[119]

A number of factors contributed to DOJ’s criminal resolution with the companies. The DPA noted that Hydro Extrusion USA LLC and SPI “received full credit for their cooperation with the United States’ investigation and the Civil Division’s parallel civil investigation.”[120] That cooperation included “conducting an independent internal investigation and making regular factual presentations to the United States; facilitating witness interviews of current and former SPI employees; collecting, analyzing, and organizing voluminous evidence and information for the United States; providing counsel for certain witnesses; and responding to the United States’ requests for evidence and information.”[121] Moreover, the companies received significant credit for “their engagement in extensive remedial measures to address the misconduct, including the termination and severance of employees who were involved, the implementation of state-of-the-art equipment to automate the tensile testing process, company-wide audits at all U.S. tensile labs, increased resources devoted to compliance, and revamping internal quality controls and quality audit processes.”[122] In entering the DPA, the government also considered SPI’s ongoing negotiations with DOJ’s Civil Division, Commercial Litigation Branch, Fraud Section, “to resolve its civil liability for related civil claims, including under the federal False Claims Act.”[123]

Hydro Extrusion USA’s extensive remediation efforts, the state of its compliance program, and its agreement to periodic self-reporting, led DOJ to determine that an independent compliance monitor was unnecessary.[124] However, the companies did not receive more significant mitigation credit, either in the penalty or the form of resolution, because the companies did not voluntarily self-disclose the full extent of their misconduct to the Department.[125]

Insys Therapeutics, Inc. (DPA)

Insys Therapeutics, Inc. (“Insys”) entered into a five-year DPA with the U.S. Attorney’s Office for the District of Massachusetts on June 5, 2019, to resolve federal criminal charges arising from Insys’s payment of kickbacks and other unlawful marketing practices related to its promotion of Subsys, a sublingual fentanyl spray DOJ described as a “powerful, but highly addictive opioid painkiller.”[126] DOJ alleged that between August 2012 and June 2015, Insys used sham “speaker programs” as a vehicle for paying bribes and kickbacks to physicians and other medical practitioners in exchange for prescribing Subsys to their patients, in many instances where the drug was not medically necessary.[127] As part of the resolution, Insys’s wholly owned operating subsidiary, Insys Pharma, Inc. (“Insys Pharma”), pled guilty to five counts of mail fraud.[128]

As part of the DPA, Insys agreed to pay a $2 million criminal fine and to forfeit $28 million, representing its unlawful proceeds from the mail fraud scheme.[129] Additionally, Insys agreed to pay $195 million as part of a related FCA settlement, bringing its total penalty amount to $225 million.[130] Insys also agreed to “cooperate fully with the United States . . . in any federal investigation, trial, or other proceeding of its current and former officers, agents, and employees” arising from this investigation or otherwise related the company’s sales, promotion, and marketing practices related to Subsys.[131] This cooperation obligation may prove significant given that eight Insys executives have been convicted for crimes related to the illegal marketing of Subsys, five of whom, including company founder John Kapoor, were convicted at trial for racketeering conspiracy in May.[132] Insys also agreed to fully comply with federal law related to the marketing, sale, and distribution of pharmaceutical products, to continue implementing its associated compliance policies, procedures, and controls, and to abide by all of the terms of its Corporate Integrity Agreement and associated civil Settlement Agreement with HHS OIG.[133]

The Corporate Integrity Agreement sets forth detailed undertakings regarding the structure, content, and oversight of Insys’s corporate compliance program and the commissioning of an annual independent review process,[134] as well as: (1) a requirement that Insys establish a program allowing for clawback of up to three years of executive incentive-based compensation;[135] (2) restrictions on research grants and charitable donations;[136] and (3) a requirement that Insys divest Subsys and an associated product and cease all business activities related to opioids within 12 months.[137] The Settlement Agreement required payment of a $195 million civil penalty over a five-year period.[138] The OIG reserved the right to exclude Insys from participating in federal health care programs in the event of a material breach of the Corporate Integrity Agreement or a default in its payment obligations under the Settlement Agreement.[139]

Less than a week after entering this resolution, on June 10, 2019 Insys filed for Chapter 11 bankruptcy protection, claiming it could not keep up with its obligations due to the combination of significantly declined sales amid enhanced scrutiny of opioid prescriptions and its costs associated with the DOJ investigation and numerous associated civil lawsuits brought by municipalities seeking damages from Insys’s alleged contributions to the opioid epidemic.[140] Since then, Insys has filed a recovery plan providing for tiered treatment of claims, including DOJ’s claim based on the $225 million settlement.[141] The plan has not yet been confirmed, and it is not yet clear how much of the settlement amount DOJ would actually receive under the plan.

LLB-Verwaltung (Switzerland) AG (NPA)

In July 2019, DOJ’s Tax Division entered into an NPA with LLB-Verwaltung (Switzerland) AG (“LLB-Switzerland”), a private Swiss bank, to resolve allegations that LLB-Switzerland and certain of its employees, including members of management, conspired with an independent Swiss asset manager and with U.S. clients to conceal the clients’ assets and incomes from the IRS through various means, including using Swiss bank secrecy and nominee companies set up in tax-haven jurisdictions.[142] The NPA’s Statement of Facts noted that during 2009, “the Bank held nearly $200 million” in assets for 93 U.S. clients despite allegedly knowing that many of these clients had brought undeclared funds to LLB-Switzerland, and despite knowing of an investigation then being conducted by the U.S. government into similar conduct at another Swiss bank.[143] LLB-Switzerland’s parent, Liechtensteinische Landesbank, AG (“LLB-Vaduz”), reached a separate agreement with DOJ in 2013 through the DOJ Tax Swiss Bank Program (covered extensively in our 2015 Mid-Year and Year-End Updates), that excluded LLB-Switzerland from the resolution.[144]

The NPA, which has a term of four years, imposed a penalty of $10,680,554.[145] The DOJ Tax Division entered into the Agreement, in part, based on factors including: “(a) [LLB-Switzerland’s] disclosure of the Conduct, including how LLB-Switzerland structured, operated, and supervised its cross-border business for accounts owned and/or controlled by U.S. persons; (b) [LLB-Vaduz’s] termination of the banking activities by LLB-Switzerland and the return of LLB-Switzerland’s banking license to [the Swiss Financial Market Supervisory Authority (“FINMA”)] in December 2013; and (c) [LLB-Switzerland’s] cooperation with the Tax Division as well as the cooperation of LLB-Vaduz” in the investigation.[146] Additionally, DOJ noted LLB-Switzerland’s “comprehensive” remediation efforts since 2012, which included the bank’s termination of all cross-border business with U.S. clients and of its relationship with the Swiss asset manager.[147] LLB-Switzerland also closed and surrendered its banking license, as noted above, and dismissed the managers and employees implicated in the investigation.[148]

Lumber Liquidators (DPA)

In March 2019, the DOJ Fraud Section, U.S. Attorney’s Office for the Eastern District of Virginia (E.D. Va.), and Lumber Liquidators entered into a DPA in connection with a criminal information charging the company with securities fraud.[149] The agreement capped a multiyear investigation initiated following a March 1, 2015, 60 Minutes segment that claimed laminate floors Lumber Liquidators sold did not comply with California Air Resource Board (“CARB”) regulations because they contained an unacceptably high amount of formaldehyde.[150]

According to the DPA, Lumber Liquidators filed a false and misleading Form 8-K with the SEC, affirming that it complied with CARB regulations while failing to disclose material facts, the day after the 60 Minutes segment aired.[151] The DPA alleged that Lumber Liquidators had failed to include in its 8-K that the company’s products had failed its own tests for CARB compliance and that the company had discontinued its relationship with a supplier due to compliance concerns.[152]

Lumber Liquidators paid DOJ a total penalty of $33 million, including a criminal fine of approximately $19 million, and approximately $14 million in forfeiture. The DPA is for a three-year period.[153] The agreement reflects the company’s cooperation and remedial efforts, which included offering consumers in-home testing for installed flooring, implementing new policies and procedures regarding CARB compliance, and terminating all employees involved in the wrongdoing who did not resign.[154]

The company entered into a separate resolution with the SEC through which it agreed to pay more than $6 million in disgorgement of profits and prejudgment interest.[155]

Merrill Lynch Commodities, Inc. (NPA)

On June 25, 2019, Merrill Lynch Commodities, Inc. (“Merrill Lynch”) entered into a three-year NPA with DOJ’s Fraud Section.[156] The agreement binds Merrill Lynch, which operates a global commodities trading business, as well as its parent company, Bank of America Corporation.[157]

The agreement resolved allegations that Merrill Lynch’s precious metals traders deceived other market participants by manipulating U.S. commodities markets with false and misleading information.[158] Specifically, from about 2008 to 2014, its traders allegedly created the false impression of increased supply or demand by placing orders for precious metals future contracts on the market that they intended to cancel before execution (a practice known as “spoofing”).[159] That spoofing purportedly induced other market participants “to buy or to sell precious metals futures contracts at prices, quantities, and times that they likely would not have otherwise.”[160]

The NPA states that Merrill Lynch agreed to pay “combined appropriate criminal fine, forfeiture, and restitution amounts” of $25 million. Merrill Lynch also committed to report evidence or allegations of similar misconduct to DOJ.[161] The NPA noted that Merrill Lynch received credit for its cooperation with DOJ’s investigation and engaged in remedial measures before the investigation began, “including enhancing their compliance program and internal controls designed to detect and deter spoofing and other manipulative conduct.”[162] Based on these factors, DOJ determined that an independent compliance monitor was unnecessary.[163]

On the same day the parties entered into the NPA, the CFTC announced a separate settlement with Merrill Lynch to end parallel civil proceedings.[164] Merrill Lynch agreed to pay $25 million to the CFTC, including a civil penalty of $11.5 million, as well as restitution and disgorgement for which it received a credit for restitution and disgorgement paid to DOJ.[165]

Edward Bases and John Pacilio, two former precious metals traders employed by Merrill Lynch, were also indicted last year in connection with the alleged spoofing.[166] The litigation is pending in the U.S. District Court for the Northern District of Illinois.[167]

Microsoft Magyarország Számítástechnikai Szolgáltató és Kereskedelmi Kft. (Microsoft Hungary) (NPA)

On July 22, 2019, DOJ announced an FCPA resolution with the Hungarian subsidiary of leading technology company Microsoft, relating to alleged violations of the FCPA’s books-and-records and internal controls provisions.[168] These allegations involved Microsoft’s subsidiary allegedly making improper payments to government officials through third parties.[169] To resolve the DOJ matter, Microsoft’s Hungarian subsidiary entered into a three-year non-prosecution agreement and paid a criminal fine of $8,751,795.[170] The DOJ awarded a 25% cooperation credit to Microsoft Hungary for its substantial cooperation and extensive remedial measures.[171] Microsoft’s Hungarian subsidiary was not required to retain a monitor, but will report on its compliance program efforts and enhanced internal control policies and procedures for the three-year non-prosecution period.[172]

In a parallel resolution with the SEC, parent company Microsoft consented to the entry of a cease-and-desist order and agreed to pay $16,565,151 in disgorgement plus prejudgment interest, in connection with alleged conduct in Hungary, Turkey, Saudi Arabia, and Thailand. For additional details, please see our 2019 Year-End FCPA Client Alert.

Mizrahi Tefahot Bank Ltd., United Mizrahi Bank Switzerland Ltd., and Mizrahi Tefahot Trust Co. Ltd. (DPA)

On March 12, 2019, the DOJ’s Tax Division and U.S. Attorney’s Office for the Central District of California entered into a DPA with Mizrahi-Tefahot Bank Ltd., (“Mizrahi-Tefahot”) and its subsidiaries, United Mizrahi Bank (Switzerland) Ltd. (“UMBS”) and Mizrahi Tefahot Trust Company Ltd. (“Mizrahi Trust Company”).[173] In the Gibson Dunn negotiated DPA, Mizrahi-Tefahot admitted responsibility, “under United States respondeat superior law,” for the actions of “[c]ertain private bankers, relationship managers, and other employees of [MTB Entities] with similar levels of responsibility” which had, from 2002-2012, allegedly enabled U.S. customers to evade U.S. tax obligations by disguising and failing to report the customers’ ownership and control of assets held at all three entities.[174]

The DPA involved payment terms totaling $195 million, of which $53 million was restitution; $24 million was disgorgement; and $118 million was a penalty.[175] The agreement notes that a potentially “higher penalty” was “mitigat[ed]” by the fact that Mizrahi-Tefahot “conducted an internal investigation and engaged in concomitant efforts to provide information and materials . . . derived from that investigation to U.S. authorities.”[176]

The agreement describes a comprehensive internal investigation, which involved, among other things, reviewing “millions of e-mails from three countries,” producing over 560,000 pages of documents to the government, providing translations for various documents, conducting internal interviews and proffering the substance of those interviews to the government, and presenting the results of the internal investigation to the government.[177]

The DPA will remain in place for a two-year period.[178]

Mobile TeleSystems PJSC (DPA)

On March 7, 2019, DOJ announced the Mobile TeleSystems (“Mobile TeleSystems”) DPA, which involved allegations that Mobile TeleSystems conspired to violate the anti-bribery, books and records, and internal controls provisions of the FCPA.[179] Mobile TeleSystems’ Uzbek subsidiary, Kolorit Dizayn Ink LLC (“Kolorit”), pled guilty to anti-bribery and books and records violations.[180] According to DOJ, the companies allegedly paid bribes to Gulnara Karimova, the daughter of former president of Uzbekistan Islam Karimov, in exchange for the ability to conduct business in Uzbekistan.[181] Between the DPA and an SEC settlement announced the day before, Mobile TeleSystems and Kolorit agreed to pay a total of $950 million in civil and criminal penalties.[182] In indictments announced the same day as the DPA, Karimova and Bekhzod Akhmedov, the former CEO of another Mobile TeleSystems subsidiary, were charged with money laundering violations, and money laundering and FCPA violations, respectively.[183] According to the press release announcing the indictments, the amount that Karimova allegedly received in bribes is the largest ever paid to any individual FCPA defendant.[184] The Mobile TeleSystems DPA highlights DOJ’s continued emphasis on prosecuting individuals, even in the wake of the recent curtailment of the Yates Memorandum’s requirement of blanket disclosure of relevant individuals by companies hoping for cooperation credit.[185]

While only the fifth-largest NPA or DPA by dollar value in 2019, the Mobile TeleSystems DPA is the second-largest agreement in 2019 to impose an independent compliance monitor.[186] Consistent with its prior practice of imposing monitorships where it believes companies’ compliance programs are immature, DOJ’s agreement with Mobile TeleSystems explains it is imposing a monitor “because the Company [i.e., Mobile TeleSystems] has not yet fully implemented or tested its compliance program.”[187] The Mobile TeleSystems DPA also marks the second monitorship to be imposed in recent years against a foreign telecommunications company over bribery allegations concerning Uzbekistan. DOJ’s 2016 DPA with VimpelCom Limited imposed a three-year monitorship on that company in a case that involved overlapping factual allegations and nearly as much in criminal and civil penalties as the Mobile TeleSystems case did.[188] The largest agreement in 2019 under which a monitor was imposed was the Ericsson DPA, which is discussed further above.

Two additional notable features of the Mobile TeleSystems DPA relate to the nature and size of the company’s total monetary penalty under the U.S. Sentencing Guidelines (“USSG”). First, the penalty was nearly 25% higher than the bottom end of the guideline range dictated by the USSG.[189] In setting forth the facts and circumstances that DOJ believed warranted this upward deviation and the nature and size of the resolution more broadly, the DPA noted (among other things) that Mobile TeleSystems “did not receive voluntary disclosure credit . . . because it did not voluntarily and timely self-disclose . . . the conduct described in the Statement of Facts,” and that while Mobile TeleSystems “ultimately provided” DOJ with “all relevant facts known to it,” the company “did not receive additional credit for cooperation and remediation . . . because it significantly delayed production of certain relevant materials, refused to support interviews with current employees during certain periods of the investigation, and did not appropriately remediate.”[190]

The second notable feature of Mobile TeleSystems’ total penalty is the fact that DOJ’s USSG analysis relied primarily on the value of the alleged bribes, and not on any alleged profit Mobile TeleSystems made as a result of the payments.[191] Unlike other FCPA cases that have involved some amount of profit realized from the alleged improper payments, Mobile TeleSystems’ conduct “result[ed] in no realized pecuniary gain to the Company” because “the Uzbek government expropriated the Company’s telecommunications assets in Uzbekistan.”[192] Only if profits surpassed the value of the alleged bribes would the USSG calculation have required that the profit figure, rather than the value of the bribe, dictate the penalty level.[193] Because the value of the alleged bribe here was larger than the base fine that the USSG would have otherwise provided for were profit used as a starting point, the result was a significant increase over the penalty DOJ could have otherwise sought from Mobile TeleSystems.[194]

For additional analysis regarding the Mobile TeleSystems DPA and other FCPA-related agreements, see Gibson Dunn’s 2019 Year-End FCPA Update.

Monsanto Company (DPA)

On November 21, 2019, the U.S. Attorney’s Office for the Central District of California (C.D. Cal.), acting as Special Attorney in the District of Hawaii,[195] announced a two-year DPA with the agrochemical and biotechnology company Monsanto, in connection with a criminal information charging the company with storing a banned pesticide.[196] Monsanto also agreed to plead guilty to spraying the pesticide.[197] The case is the result of an investigation by the U.S. Environmental Protection Agency (EPA), Criminal Investigation Division.[198]

According to the DPA, Monsanto continued spraying and storing the pesticide Penncap-M in Hawaii after the EPA issued a cancellation order in 2013 prohibiting all sale or use of the pesticide.[199] After the cancellation order, the pesticide had to be managed as “acute hazardous waste” in compliance with the Resource Conversation and Recovery Act (RCRA), which required a permit for storage or transportation of the pesticide.[200] According to the DPA, from 2013 through 2014 Monsanto stored and transported the pesticide without the required permit.[201]

The resolution required Monsanto to pay $10.2 million, including a fine of $6.2 million and $4 million in community service payments to Hawaiian government entities.[202] The DPA provides that the community services payments will be used for various purposes, including the creation of a pesticide disposal program by the Hawaii Department of Agriculture.[203] The agreement also requires that Monsanto develop and implement an environmental compliance program for all of its Hawaii sites and retain a third-party environmental compliance auditor.[204] The auditor will conduct “audits every six months of all of [Monsanto’s] locations in Hawaii in order to determine whether or not [Monsanto] is in full compliance with RCRA and FIFRA [the Federal Insecticide, Fungicide, and Rodenticide Act].”[205]

Reckitt Benckiser Group (NPA)

On July 11, 2019, Reckitt Benckiser Group plc (“RB Group”), a global consumer goods conglomerate headquartered in Slough, England, entered into an NPA with DOJ’s Consumer Protection Branch and the U.S. Attorney’s Office for the Western District of Virginia. The NPA resolved the investigation of RB Group related to the marketing, sale, and distribution of Suboxone in the United States by its former subsidiary Reckitt Benckiser Pharmaceuticals Inc., which spun off from RB Group in 2014 and is now a separate company known as Indivior.[206] Indivior was indicted on April 9, 2019 for alleged fraud in connection with the promotion and sale of Suboxone Film, an opioid used to treat opioid addiction.[207] The NPA with RB Group resolved potential liability “based on the subject matter” of that indictment.[208] The NPA imposed monetary obligations on RB Group of $1.4 billion – by total dollar value, the RB Group NPA is the largest resolution reached in 2019.

According to the Indivior indictment, Indivior promoted Suboxone Film as less-divertible and less-abusable and safer around children, families, and communities than other buprenorphine drugs, even though such claims have never been established.[209] The Indivior indictment further alleged that Indivior used its “Here to Help” internet and telephone program to connect patients to doctors it knew were prescribing Suboxone to more patients than allowed by federal law, at high doses, and in a careless and clinically unwarranted manner.[210] The Indivior indictment alleged substantial costs to the government as a result of the company’s conduct.[211]

As part of the NPA, which has a term of three years, RB Group agreed that neither RB Group nor any affiliated entity will manufacture, distribute, or sell in the United States any Schedule I, II, or III controlled substance, as defined in the Controlled Substances Act, during the term of the NPA.[212] Moreover, RB Group agreed to fully cooperate with all investigations and prosecutions by DOJ related, in any way, to Suboxone.[213] The agreement did not impose an independent compliance monitor or a self-reporting obligation on RB Group.

The $1.4 billion in monetary obligations imposed by the NPA consisted of a $700,000,000 payment pursuant to a Civil Settlement Agreement; a $647,000,000 payment for forfeiture of alleged proceeds; a $50,000,000 payment to resolve claims by the Federal Trade Commission;[214] and a $3,000,000 payment to the Virginia Medicaid Fraud Control Unit’s Program Income Fund.[215] Notably, the government did not impose a criminal penalty on RB Group.

The Civil Settlement Agreement resolved six qui tam actions filed in the Western District of Virginia and the District of New Jersey alleging that RB Group engaged in fraudulent marketing of Suboxone and promoted the drug to physicians it knew were prescribing the drug illegitimately.[216] As a result, the government alleged, RB Group caused false claims for Suboxone to be submitted to government health care programs.[217]

Republic Metals Corporation (NPA)

In an NPA announced on April 17, 2019, the United States Attorney’s Office for the Southern District of Florida and Republic Metals Corporation (“RMC”), a gold refinery based in Miami, Florida, resolved allegations regarding RMC’s role in an ongoing investigation concerning alleged money laundering and Bank Secrecy Act violations in the gold importation and refining industry.[218] Little information is available on the nature of DOJ’s concerns regarding RMC, and on the precise allegations in the broader investigation, as the parties expressly agreed in the NPA—at RMC’s request—to keep the agreement’s statement of facts confidential “absent a court order.”[219] While such a provision is not unheard of in negotiated resolutions, it is rare absent special circumstances, and here may reflect the fact that RMC is currently subject to a Chapter 11 bankruptcy proceeding filed in November 2018.[220] The NPA provided that RMC and the government “may disclose” the agreement publicly without its attachments,[221] but RMC’s motion for bankruptcy court approval of the NPA, which attached the NPA itself, was originally filed completely under seal.[222] However, the bankruptcy court determined “that certain information pertaining to the Motion should be made public consistent with the importance of transparency in public proceedings,”[223] and accordingly ordered disclosure of the NPA without attachments.[224] The NPA did not impose a penalty on RMC.[225]

Notably, DOJ granted RMC “full credit for its voluntary cooperation” with the government’s investigation, and explicitly noted that the information RMC produced to the government “tended to show that the Company has made significant efforts to create a culture of proper compliance” and “has been corroborated by other evidence.”[226] The NPA also cited RMC’s remediation efforts and “the state of its compliance program” as factors informing the government’s decision not to impose a monitor.[227] Among RMC’s remediation efforts was its termination, prior to being aware of the government’s investigation, of “several suppliers who ultimately proved suspicious” and which RMC had hired not because it intended to violate the anti-money laundering (“AML”) laws, but because of an alleged failure in the company’s compliance controls.[228]

Rick Weaver Buick GMC, Inc. (Pretrial Diversion Agreement)

On January 15, 2019, Rick Weaver Buick GMC, Inc. (the “Dealership”) entered into an agreement with the U.S. Attorney’s Office of the Western District of Pennsylvania to resolve allegations of wire fraud and conspiracy to commit wire fraud.[229] According to the indictment incorporated into the agreement and originally handed down in August 2017, the Dealership and three individual defendants defrauded auto loan providers by using straw purchasers to buy vehicles from the Dealership at inflated prices.[230]

Pursuant to the agreement, which has a term of three years, the Dealership agreed to an annual independent audit of its business operations and books, as well as an independent monitor for the term of the agreement.[231] The Dealership also agreed to undertake remedial efforts, including conducting employee training on ethics and amending its policies and procedures relating to the integrity of its company-wide ethics and compliance program.[232]

Under the agreement, the Dealership paid full restitution in the total amount of approximately $143,794 under the agreement to five financial institutions.[233] The Dealership also paid a monetary penalty of $400,000.[234]

The agreement is notable for several reasons. First, it was styled as an Agreement for Pretrial Diversion, which has a deferring effect like that of a DPA but which is more traditionally used in prosecutions of individuals.[235] As such, the agreement does not contain other customary features of corporate DPAs, such as a discussion of the company’s cooperation with the government’s investigation. Second, the agreement was reached over two years after the Dealership was originally indicted, which stands in contrast to the vast majority of DPAs reached before the government has filed charges.

Rising Pharmaceuticals, Inc. (DPA)

On December 13, 2019, Rising Pharmaceuticals, Inc. (“Rising”) and the Antitrust Division of DOJ entered into a DPA to resolve allegations that from at least April 2014 until at least September 2015, Rising participated in a criminal antitrust conspiracy with other companies and individuals engaged in the production and sale of generic pharmaceuticals.[236] The alleged purpose of the conspiracy was “to suppress and eliminate competition by agreeing to allocate customers for and to stabilize, maintain, and fix prices of Benazepril HCTZ,” a generic drug used to treat hypertension.[237] As part of the DPA, Rising consented to the filing of a one-count Information in the Eastern District of Pennsylvania charging the company with conspiracy to suppress and eliminate competition in violation of the Sherman Act.[238]

The agreement imposed $1.5 million in criminal penalties and $438,066 in restitution.[239] The DPA has a term of three years but will end earlier if the ongoing Chapter 11 bankruptcy cases of Rising and several related entities are closed before three years have elapsed.[240] The DPA does not impose a formal monitoring or reporting requirement on Rising, but the agreement does require prompt reporting of any “credible evidence or allegations of criminal violations” of which Rising learns.[241]

In a separate civil resolution, Rising agreed to pay approximately $1.1 million to resolve allegations under the FCA related to the alleged price-fixing conspiracy.[242] This amount was offset in the calculation of the criminal restitution in the DPA. The payment of the monetary obligations imposed by the resolutions will be subject to certain levels of pro rata treatment under the reorganization plan in the Chapter 11 bankruptcy.[243]

In entering into the DPA, the Antitrust Division considered that “Rising provided substantial, timely cooperation with the United States’ investigation,” including disclosing information regarding additional alleged antitrust violations other than those detailed in the DPA.[244] The DPA also cited to the fact that “Rising’s cooperation has allowed the United States to advance its investigation into criminal antitrust conspiracies among other manufacturers of generic pharmaceuticals,” and to Rising’s agreement to pay restitution.[245] Lastly, the DPA also stated that a conviction or guilty plea of Rising would likely result in a substantial delay of the ongoing bankruptcy proceedings.[246]

Rochester Drug Co-Operative (DPA)

As part of the federal government’s continued efforts to combat the opioid crisis, on April 23, 2019, the U.S. Attorney’s Office for the Southern District of New York announced a DPA with Rochester Drug Co-Operative (“RDC”).[247] The DPA resolved criminal allegations that RDC conspired to distribute controlled substances in violation of the Controlled Substances Act (“CSA”), conspired to defraud the Drug Enforcement Administration (“DEA”), and knowingly failed to file suspicious order reports with DEA.[248] A separate consent judgment agreed to by the parties resolved allegations that RDC committed civil violations of the CSA’s suspicious order reporting requirements.[249] RDC agreed to pay $20 million in civil forfeiture in satisfaction of its obligations under both the criminal and civil resolutions.[250]

The DPA is notable for several reasons. First, it is one of only three agreements from 2019 to carry a term of at least five years,[251] which is longer than that typically imposed by DPAs and NPAs. The agreement also includes an option for a one-year extension at the government’s sole discretion.[252] The agreement also imposes an independent monitor, but the monitorship carries only a three-year term. Second, whereas a typical DPA or NPA gives the company the opportunity to provide a written response within 30 days of any determination by the government that the company has breached the agreement,[253] the RDC DPA affords the “opportunity to make a presentation” in response to such a determination, without explicitly imposing a timeframe for doing so.[254] Third, the DPA imposes significant compliance undertakings on RDC—for example, by requiring that the company’s board “establish and maintain a standing Controlled Substances Compliance Committee (the ‘CSCC’),” and by imposing detailed rules for the CSCC’s formation, composition, and activities.[255] For example, the DPA requires that the CSCC “report regularly to the full Board on compliance issues, and . . . regularly review the reports from, and interact with, the Independent Monitor [imposed by the agreement],”[256] and that the CSCC monitor the company’s compliance program and spearhead updates to the program.[257] The agreement also provides that “the CSCC, as well as the full Board, shall have access to timely legal advice, and shall be regularly advised by counsel regarding all aspects of RDC’s compliance with the [CSA], its implementing regulations, and this Agreement.”[258] While it is common for a DPA to commit a company to providing its employees with compliance guidance, the explicit requirement of legal advice to RDC’s board represents a rare and substantial level of involvement by the government in corporate governance in the wake of a DPA.

Samsung Heavy Industries Company Limited (DPA)

On November 22, 2019, DOJ and the U.S. Attorney’s Office for the Eastern District of Virginia entered into a three-year DPA with Samsung Heavy Industries Company Ltd. (“SHI”), an engineering company based in South Korea, for conspiring to violate the anti-bribery provisions of the FCPA.[259] This was the second DPA in 2019 concerning alleged FCPA violations related to projects involving Brazil’s state-owned energy company Petróleo Brasileiro S.A. – Petrobras.

SHI agreed to pay a criminal penalty totaling $75,481,600 – half of which it will pay to the United States, and the other half of which it will pay to Brazilian authorities with which SHI entered into MOUs and leniency agreements.[260] If SHI fails to pay the Brazilian authorities within a year of the execution of the DPA, that half will also be paid to the United States.[261]

In reaching the decision to defer prosecution, DOJ considered among other factors SHI’s “significant remedial measures,” which included increasing the headcount of its compliance function, enhancing its anti-corruption policies, and imposing heightened due diligence requirements for engaging third-party vendors.[262] DOJ noted that an independent monitor was not necessary because of these measures and the company’s agreement to make yearly compliance reports to DOJ for the term of the DPA.[263] DOJ also noted that SHI did not receive full cooperation credit because it did not meet “reasonable deadlines imposed by” DOJ and caused delays in reaching a resolution.[264] The total criminal penalty reflects a 20% reduction off the bottom of the U.S. Sentencing Guidelines range,[265] rather than the 25% reduction usually associated with full cooperation credit in the absence of voluntary self-disclosure.

Standard Chartered Bank (DPA)

On April 9, 2019, DOJ’s Money Laundering and Asset Recovery Section (“MLARS”) and the U.S. Attorney’s Office for the District of Columbia announced the amendment of their 2012 DPA with Standard Chartered Bank (“SCB”) over alleged sanctions violations.[266] The amended DPA, together with an amended agreement with the New York County District Attorney’s Office, imposes approximately $1.01 billion in additional penalties on SCB.[267] In conjunction with the amended agreements, one former employee of SCB’s Dubai operation pled guilty to conspiracy allegations, and an Iranian national, who previously engaged in business with SCB, was indicted on similar charges.[268] Notably, the agreement demonstrates that DOJ may credit a company’s remediation and compliance efforts,[269] even while perceiving it as a “repeat corporate offender.”[270] An earlier amendment of the 2012 DPA imposed a three-year compliance monitorship, which ended on March 31, 2019, and which DOJ and SCB agreed was unnecessary to extend.[271] The 2019 amended DPA marks the conclusion of a DOJ investigation commenced in 2014, before the term of the 2012 DPA had elapsed, on the basis of “new information” DOJ had learned “through an unrelated investigation.”[272] The information concerned alleged violations “which took place after the time period specified in the Factual Statement incorporated into the 2012 DPA.”[273] The amended DPA further alleges that the violations were known to SCB during the government’s initial investigation.[274] The amended SCB DPA suggests that DOJ will not hesitate to pursue additional penalties where it believes that an existing resolution was reached on the basis of an incomplete record.

Tower Research Capital LLC (DPA)

On November 6, 2019, Tower Research Capital LLC (“Tower”), a New York-based financial services firm, entered into a DPA with DOJ and the U.S. Attorney’s Office for the Southern District of Texas to resolve criminal charges concerning three former traders who allegedly engaged in unlawful trading activity in U.S. commodities markets.[275] Specifically, DOJ alleged that from approximately March 2012 until December 2013, three traders who were employees of Tower engaged in spoofing by fraudulently placing orders to buy and sell futures contracts traded on the Chicago Mercantile Exchange and the Chicago Board of Trade with the intent to cancel those orders before execution.[276] According to the DPA, these orders were “intended to, and did, inject false and misleading information about the genuine supply and demand” for these futures contracts into the markets, causing other market participants to make trading decisions that they otherwise likely would not have made.[277]

Although Tower did not voluntarily disclose the conduct, the Company otherwise received full credit for its cooperation with the investigation, including by conducting an internal investigation, voluntarily making employees available for interviews, and making factual presentations to DOJ.[278] Tower also undertook “extensive remedial measures” beginning in early 2014, including terminating the traders involved, enhancing the company’s compliance program and internal controls, and making changes to senior management and the company’s corporate governance structure.[279]

As part of the DPA, Tower agreed to pay a total of approximately $67.4 million, which comprises $24.4 million in criminal penalties, $10.5 million in disgorgement, and approximately $32.6 million in victim compensation payments.[280] Simultaneously with the DPA, Tower entered into a separate settlement with the CFTC to end parallel civil proceedings.[281] Tower agreed to pay $67.4 million to the CFTC, including a civil monetary penalty, disgorgement, and restitution, with all amounts to be offset by payments made to DOJ. According to the CFTC, this is “the largest monetary relief ever ordered in a spoofing case.”[282]

For the three-year term of the DPA with DOJ, Tower is obligated to review and modify its corporate compliance program “to ensure that it maintains an effective compliance program that is designed to deter and detect violations of” the Commodity Exchange Act and commodities fraud statute.[283] Pursuant to this obligation, Tower agreed to make periodic annual reports to DOJ detailing its remediation efforts and proposals to improve its compliance program.[284]

The three traders involved in the alleged spoofing were all charged criminally in the Southern District of Texas for their roles in the alleged scheme.[285] Kamaldeep Gandhi and Krishna Mohan pled guilty in 2018 to conspiracy to engage in wire fraud, commodities fraud and spoofing, and criminal charges against Yuchun (Bruce) Mao are still pending.[286]

UniCredit Bank Austria (NPA)

On April 15, 2019, DOJ MLARS and the U.S. Attorney’s Office for the District of Columbia entered into a three-year NPA with UniCredit Bank Austria (“UniCredit BA”), a financial institution headquartered in Vienna, Austria and part of the UniCredit Group, for violating U.S. economic sanctions laws and regulations.[287] UniCredit BA has also entered into an NPA with the New York County District Attorney’s Office for violating New York state law.[288]

As part of the federal NPA, UniCredit BA admitted that it conspired with certain customers to violate the International Emergency Economic Powers Act (“IEEPA”) from at least around 2002 to around 2012 by processing payments to or through the United States involving persons prohibited under IEEPA from accessing the U.S. financial system.[289] In particular, according to the NPA, beginning in 2002, and up through and including 2012, UniCredit BA knowingly and willfully processed 16 transactions worth at least $20 million through the United States involving persons located or doing business in Iran and other countries subject to U.S. economic sanctions, and willfully caused financial services to be exported from the United States to sanctioned customers in Iran and elsewhere in violation of U.S. sanctions laws and regulations.[290]

UniCredit BA agreed to forfeit $20 million, the amount of proceeds obtained by UniCredit BA in violation of the IEEPA.[291] However, the NPA credited $20 million in payments made by UniCredit BA in connection with a concurrent settlement with the New York State Department of Financial Services (“DFS”).[292] Additionally, UniCredit BA represented that it has implemented and will continue to implement a U.S. sanctions compliance program designed to prevent and detect violations of U.S. economic sanctions.[293]

DOJ explained that the penalty amount reflected UniCredit BA’s thorough internal investigation and cooperation with DOJ in its investigation, as well as its remedial efforts. Specifically, UniCredit BA received credit “for its cooperation with [DOJ’s] investigation, including conducting a thorough internal investigation, making regular factual presentations to the Offices, voluntarily making employees available for interviews, producing documents to the Offices consistent with applicable data privacy laws, and collecting, analyzing, and organizing voluminous evidence and information for the Offices.”[294] DOJ also noted that UniCredit BA had enhanced its U.S. sanctions compliance program and, based on those remediation efforts, DOJ determined that an independent compliance monitor was unnecessary.[295]

In addition to UniCredit BA’s NPA, UniCredit Bank AG (“UCB AG”), a financial institution headquartered in Munich and also part of the UniCredit Group, agreed to enter a guilty plea with DOJ for conspiring to violate the IEEPA and to defraud the United States by processing hundreds of millions of dollars of transactions through the U.S. financial system on behalf of an entity designated as a weapons of mass destruction proliferator and other Iranian entities subject to U.S. economic sanctions.[296] According to DOJ, “over the course of almost 10 years, UCB AG knowingly and willfully moved at least $393 million through the U.S. financial system on behalf of sanctioned entities, most of which was for an entity the U.S. Government specifically prohibited from accessing the U.S. financial system.”[297]

Pursuant to the guilty plea, UniCredit Group banks will pay total financial penalties of approximately $1.3 billion. The plea agreement, which has been approved by the court, provides that UCB AG will forfeit $316,545,816 and pay a fine of $468,350,000. UniCredit SpA, which is the parent entity of both UCB AG and UCB BA, has agreed to ensure that UCB AG and BA’s obligations are fulfilled. As part of a coordinated settlement, UniCredit Group entities also entered into agreements with the Office of Foreign Assets Control (“OFAC”), the Federal Reserve Board (“Federal Reserve”), and DFS under which they will pay additional penalties of approximately $660 million. In particular, UniCredit agreed to pay approximately $611 million to OFAC, which will be satisfied in part by payments to DOJ and the Federal Reserve; approximately $158 million to the Federal Reserve; and $405 million to DFS.[298] Finally, UCB AG entered into a separate guilty plea in New York state court for violating New York state law and agreed to forfeit $316 million as part of a deal with the Manhattan District Attorney’s Office (“DANY”).[299] DOJ has agreed to credit up to $468,350,000 in payments made in connection with the concurrent resolutions with the Federal Reserve, DFS, and DANY towards the criminal fine, which represents the full criminal fine amount.[300]

Unitrans International Inc. (NPA)

On December 4, 2019, DOJ announced that Unitrans International Inc. (“Unitrans”), a privately held Virginia defense contracting company, agreed to pay $45 million to resolve criminal obstruction charges and civil FCA allegations.[301] The allegations arose out of a contract awarded by the U.S. Defense Logistics Agency (“DLA”) in 2012 for the provision of material and logistical support to U.S. troops in Afghanistan.[302] The contract was awarded to Anham FZCO (“Anham”), an associated Dubai Free Zone company incorporated under the laws of the United Arab Emirates.[303] Unitrans, an associated company, provided logistical services to Anham.[304] According to DOJ, officers of Unitrans facilitated the illegal transportation of goods across Iran which Anham then used in its performance of the DLA contract in Afghanistan.[305] DOJ alleged that certain officers of Unitrans and Anham obstructed proceedings before DLA, and the related FCA suit alleged that Unitrans and Anham fraudulently induced DLA to award the contract by knowingly and falsely certifying compliance with U.S. sanctions against Iran.[306]

As part of the resolution, Unitrans entered into an NPA with DOJ and agreed to pay $31.5 million as a combined criminal monetary penalty and victim compensation payment.[307] Under the civil settlement, Unitrans agreed to pay $27 million, half of which will be deemed satisfied by Unitrans’s payment of $13.5 million of its monetary obligations under the NPA.[308] Together, the two resolutions imposed a total of $45 million in monetary obligations.[309]

DLA separately entered into an administrative agreement with Anham in May 2019,[310] and DOJ entered into NPAs with three Anham officials who were previously indicted in relation to the alleged scheme.[311]

Zurich International Life Limited and Zurich Life Insurance Company Limited (NPA)

On April 25, 2019, DOJ’s Tax Division announced an NPA with Zurich Life Insurance Company Limited (“Zurich Life”), an insurance carrier headquartered in Zurich, Switzerland, and Zurich International Life Limited (“Zurich International”), an insurance carrier focusing on the international expatriate market based in Isle of Man (collectively, “Zurich”).[312]

According to DOJ, from January 1, 2008 through June 30, 2014, “Zurich issued or had certain insurance policies and accounts of U.S. taxpayer customers[] who used their policies to evade U.S. taxes and reporting requirements.”[313] After DOJ initiated its Swiss Bank Program—covered in more detail in our 2015 Mid-Year Update and our 2015 Year-End Update—Zurich conducted an internal review of its non-U.S. operating companies’ sales of life insurance, savings, and pension products, to identify policies or accounts with a possible U.S. nexus.[314] Once accounts and policies with a possible U.S. nexus had been identified, Zurich contacted the relevant customers to evaluate their compliance and encourage them to participate in an IRS voluntary disclosure program.[315]

Zurich contacted DOJ in July 2017 to self-report the findings of the internal review.[316] Following this voluntary disclosure, Zurich conducted a full investigation and reported substantial findings to DOJ’s Tax Division.[317] Zurich also coordinated closely with the Swiss Federal Department of Finance to ensure that the bank could provide full disclosures to DOJ.[318]

Under the NPA, Zurich Life and Zurich International agreed to cooperate in any related criminal or civil proceedings, to implement controls to stop misconduct involving undeclared U.S. accounts, and to pay a $5,115,000 penalty.[319]

International DPA Developments

United Kingdom

In 2019, the UK Serious Fraud Office (“SFO”) entered its fifth and sixth DPAs since the introduction of the country’s DPA program in February 2014. The July 4, 2019 DPA with Serco Geografix Limited (“SGL”) marked the first DPA since the agreements entered with Tesco Stores Limited (“Tesco”) in April 2017 and Rolls-Royce PLC (“Rolls-Royce”) in January 2017. And the DPA with Güralp Systems Ltd, confirmed on December 20, 2019, came after a series of closures of long-lasting investigations.

The closure of a number of high-profile SFO investigations suggests that the SFO may be refocusing its efforts on new investigations, under the leadership of Director Lisa Osofsky, who began her five-year term in late August 2018. Further, the recently published guidance on corporate cooperation may suggest a renewed focus by the SFO on encouraging early self-reporting.

Investigation Closures

Rolls-Royce

In January 2017, Rolls-Royce entered into a DPA with the SFO and agreed to the largest penalty ever levied by the SFO in a bribery matter.[320] In February 2019, the SFO announced its decision to close the Rolls-Royce investigation without pursuing any individual prosecutions.[321] The 2017 DPA remains in force with continuing obligations on Rolls-Royce including to make annual payments until 2021. If the schedule expected by the Compliance Terms has been adhered to, the compliance remediation required will have been completed.

GlaxoSmithKline

At the time of the February Rolls-Royce announcement, the SFO also announced the closure of a long-running investigation into the “commercial practices” of pharmaceutical company GlaxoSmithKline.[322]

In a statement announcing the closure of the Rolls-Royce and GlaxoSmithKline investigations, SFO Director Lisa Osofsky remarked: “After an extensive and careful examination I have concluded that there is either insufficient evidence to provide a realistic prospect of conviction or it is not in the public interest to bring a prosecution in these cases.”[323] The statement released by the SFO noted that under Osofsky’s leadership, the SFO has closed additional cases that were not announced to the public.[324]

Unaoil

In June 2019, the SFO closed its three-year bribery investigation of high-ranking executives of the oil-sector consultancy company Unaoil who were being investigated for paying bribes to secure contracts in the energy industry.[325] The SFO declined to comment on the closure of the investigation into the individuals, which marked the third major closure of an investigation by the SFO in 2019 and prompted criticism from some anti-corruption observers.[326] However, on October 30, 2019, it was announced that two of these executives had pleaded guilty in March 2019 in the United States.[327] The SFO prosecution and investigation of Unaoil continues.[328]

DPAs Announced in 2019

Güralp Systems Ltd.

On December 20, 2019, the SFO announced a DPA with Güralp Systems Ltd. (“Güralp”), a manufacturer of seismic instrumentation, to resolve charges of (1) conspiracy to make corrupt payments and (2) failure to prevent bribery by employees, both arising from alleged corrupt payments made to a South Korean public official between 2002 and 2015.[329] The SFO announced the agreement after the founder and two former executives of Güralp were acquitted of charges of conspiracy to make corrupt payments following a ten-week trial.

This DPA ended a four-year SFO investigation commenced after Güralp self-reported the findings of an internal investigation initiated by its newly appointed executive chairman. Self-reporting and cooperation were key considerations in the SFO’s decision to enter a DPA with Güralp. As Director Osofsky said, “[t]he DPA is a result of Güralp Systems Ltd’s timely self-reporting and full cooperation, and holds the company to account whilst also promoting positive changes in corporate culture[.]”[330] The judgment approving the DPA also agreed that Güralp’s current senior management “has done all that it can to remedy the position and to co-operate with prosecuting authorities in two jurisdictions.”[331] The cooperation included agreeing not to interview employees.

Under the terms of the five-year DPA, Güralp will provide the SFO with annual reports regarding implementation of its compliance program and pay disgorgement of gross profits of £2,069,861 (approximately $2.5 million) over the term of the agreement.[332] Although the conduct carried a potential penalty of £4 million (approximately $5.2 million), the Crown Court at Southwark considered that a penalty of that amount “or any sum remotely near to it [] would put GSL out of business.”[333] Thus, the DPA imposed no financial consequences other than disgorgement paid on a flexible schedule. In deciding to approve the penalty-free DPA, the Crown Court found that (1) the management of the company had changed completely, (2) the individuals responsible for the corrupt payments were no longer associated with the company, (3) the current management was cooperating to the full extent possible, (4) Güralp had not previously or otherwise engaged in criminal conduct, (5) Güralp investigated and self-reported the misconduct, and (6) most of Güralp’s workforce was innocent and did not deserve to be forced out of business due to conduct by a small number of former senior employees and officers.[334] The Crown Court also considered the unique nature of Güralp’s seismological expertise, noting that if Güralp was forced out of business by a fine it could not pay, its closure would cause “some deleterious effect on agencies around the world.”[335] Further analysis of this agreement is available here.

Serco Geografix Ltd.

On July 4, 2019, the Southwark Crown Court approved a DPA with Serco Georgrafix Ltd (“SGL”), a wholly owned subsidiary of Serco Group PLC (“Serco” or “Group”), a leading global provider of outsourced services to governments.[336] The DPA resolved charges of fraud and false accounting committed between 2010 and 2013 and marks the fifth DPA entered since the UK introduced DPAs. SGL, a government services company, allegedly misled the UK Ministry of Justice regarding Serco’s profits from a contract for electronic monitoring services.[337]

SGL agreed to pay a penalty of £19.2 million (about $24 million) and to reimburse the SFO’s investigation costs of £3.7 million (over $4.6 million).[338] The payments supplement £12.8 million (about $16 million) in compensation that Serco paid to the UK Ministry of Justice in 2013 as part of a £70 million (about $88 million) civil settlement.[339] The penalty was reduced by 50% to account for Serco’s self-reporting and subsequent cooperation.

The term of the DPA is three years.[340] During that time, under the terms of the agreement, SGL must cooperate with enforcement and regulatory authorities, report evidence of fraud, and improve, and report annually on, its compliance program.[341] Although not a party to the DPA, Serco similarly agreed to cooperate on an ongoing basis with authorities, report evidence of fraud to the authorities, strengthen its Group-wide compliance functions, and report annually to the SFO on its Group-wide assurance program.[342] In the judgment approving the DPA, Mr. Justice William Davis emphasized that the commitments made by Serco “are a key component of the DPA,” without which “it is very unlikely that the goals of a DPA could have been achieved in the circumstances of this case.”[343] He highlighted that “[t]his is the first occasion on which undertakings of the kind made by Serco Group PLC have been [made] by a parent company in relation to a DPA entered into by one of its subsidiaries.”[344]

The right to initiate DPA negotiations rests with the SFO, not the company under investigation. The SFO offered SGL a DPA based on several factors, including SGL’s (1) prompt and voluntary self-disclosure, (2) agreement not to conduct employee interviews, (3) past and future cooperation, (4) lack of recidivism, (5) payment of the financial penalty, and (6) payment of the SFO’s investigation costs.[345] The SFO also considered Serco’s (1) cooperation and compliance commitments, (2) significant remedial efforts, (3) commitment that SGL would not be dissolved for the three-year term, and (4) agreement to implement specific compliance programming.[346] The remedial efforts included (1) company-wide compliance programs, (2) complete turnover in senior management, (3) “numerous forms of internal and external examination, analysis, detailed review, and audits,” and (4) disgorgement and compensation paid to the UK Ministry of Justice in December 2013.[347]

Notably, the judgment touched on cooperation and waiver of privilege. At the SFO’s request, Serco and its subsidiaries did “not engage in any internal inquiry by way of interviewing witnesses during the criminal investigation.”[348] Rather, an independent law firm conducted a comprehensive document review and reported its findings to the SFO. The judgment states that Serco provided “[s]ome waiver of privilege” related to accounting materials, and credits Serco’s proactive disclosure of information and developments as “very substantial” cooperation.[349] The SFO has given mixed messages regarding whether the “full cooperation” requirement for DPA eligibility necessitates waiver of privilege. In August 2019, the SFO published a new section of its Operational Guidance entitled “Corporate Co-operation Guidance” with the goal of providing clarity to companies regarding what they can expect if they decide to self-report. Further coverage of the Corporate Co-operation Guidance is available here.

The DPA concludes the SFO’s six-year investigations into SGL and other Serco companies. On December 16, 2019 the SFO announced that it had charged two Serco senior executives with fraud and false accounting.[350] Further analysis of the SGL DPA is available here.

Tesco Stores Limited

January 2019 marked the conclusion of the SFO’s cases against three former directors at Tesco, who were charged with false accounting.[351] As we previously reported in our 2017 Mid-Year Update, Tesco entered into a DPA in April 2017 to resolve allegations that it engaged in financial misreporting and agreed to pay £129 million in penalties, cooperate with the SFO’s investigation, and implement an ongoing compliance program throughout the three-year term of the DPA. In December 2018, the Crown Court at Southwark found that two of the former Tesco directors had no case to answer.[352] At a hearing for the third director in January 2019, the SFO offered no evidence, resulting in an acquittal on all charges.[353] Shortly thereafter, in January 2019, the SFO published the full terms of the Tesco DPA, which was previously unavailable to the public pending the resolution of the individual trials.[354] The published DPA revealed the underlying facts behind the SFO investigation, which centered on charges that Tesco, through its now acquitted three former directors, allowed and encouraged false accounting in order to reach accounting targets.

The judgment approving the DPA also revealed that Tesco agreed to a limited waiver of privilege over relevant materials. The inclusion of privilege waivers in recent DPAs suggests that willingness to consider waiver of privilege may be an important consideration for the SFO when determining whether to enter an agreement. In the judgment, the limited waiver of privilege was cited as one piece of evidence of Tesco’s cooperation, in addition to the company’s agreement not to conduct employee interviews, voluntary disclosure of relevant material, provision of mailbox accounts of former employees without filtering contents for privileged or out-of-scope items, and facilitation of evidence collection.[355] Further, the judgment cited significant changes to Tesco’s leadership structure as a factor favoring adoption of the DPA.[356] Additionally, the judgment highlighted a number of “tangible remedial measures,” including simplification of reporting lines, the re-launch of an externally run whistleblowing service, increased compliance headcount, a re-launched Code of Business Conduct, implementation of expensive technology services to support the compliance program, and adoption of a new commercial buying model which reduced the emphasis on back margin, the type of commercial income that the SFO alleged Tesco improperly inflated.[357] In addition to noting Tesco’s leadership changes and cooperation, the judgment also noted that (1) this was Tesco’s first incidence of misconduct, and (2) severe repercussions for Tesco could also risk harm to innocent third parties and the UK supermarket and food industry, thus presenting a public interest factor weighing against prosecution.[358]

Canada

Quebec engineering company SNC-Lavalin’s efforts to resolve fraud and bribery charges against it through a DPA ended with a guilty plea by the company’s construction division, and resulted along the way in a political scandal reaching the Office of the Prime Minister. SNC-Lavalin was accused of paying approximately 47.7 million Canadian dollars (approximately $36.4 million using current conversion rates) in bribes to Libyan officials between 2001 and 2011.[359] If it had been convicted, the company could have faced a ten-year ban on receiving federal government contracts under Canada’s “integrity regime.”[360] In October 2018, after the federal director of public prosecutions ruled that the case was not suited for a DPA, the company’s market value fell by roughly 2.2 billion Canadian dollars (approximately $1.7 billion).[361]

In February 2019, former Canadian attorney general Jody Wilson-Raybould testified to the House of Commons justice committee that she was pressured by Prime Minister Justin Trudeau’s aides to resolve the charges through a DPA.[362] As attorney general, she had the power to overrule the federal director of public prosecutions and direct the prosecution to negotiate a DPA. The former attorney general testified that individuals from the Prime Minister’s Office, the Privy Council Office, and the office of the Minister of Finance engaged in a “consistent and sustained effort” to politically interfere with her exercise of prosecutorial discretion.[363]

In March 2019, Canada’s Federal Court rejected SNC-Lavalin’s application for a review of the prosecutor’s decision not to negotiate a DPA.[364] Following a preliminary hearing in May 2019, a Quebec court judge ruled that there was enough evidence against SNC-Lavalin for the trial to move forward.[365] The company issued a press release stating that it will “vigorously defend itself and plead not guilty to the charges.”[366] On December 18, 2019, SNC-Lavalin’s subsidiary SNC-Lavalin Construction Inc. pled guilty and “admitted to paying 127 million Canadian dollars [approximately $97.3 million] in bribes to Libyan officials to secure contracts in that country.”[367] Pursuant to the plea, a fine of 280 million Canadian dollars (approximately $214 million) was imposed.[368] According to a statement by the company, prosecutors have withdrawn all charges against SNC-Lavalin Group Inc. and SNC-Lavalin International Inc., the parent company’s international marketing division.[369] Pursuant to the probation order imposed as part of the construction subsidiary’s plea, the parent company must engage an independent compliance monitor for a period of three years.[370] According to the company, it “does not anticipate that the guilty plea by [its] construction subsidiary . . . will affect the eligibility of SNC-Lavalin Group companies to bid on future projects that are aligned with the SNC-Lavalin Group’s newly announced strategic direction.”[371]

If SNC-Lavalin had entered into a DPA, it would have been the first agreement under Canada’s fledgling Remediation Agreement Regime, which took effect in September 2018. Please see our 2017 Year-End and 2018 Mid-Year Updates for additional information regarding the Canadian DPA regime.

Brazil

Braskem SA

At the end of May 2019, Braskem SA (“Braskem”), the largest petrochemical company in Brazil and Latin America, announced that it agreed to pay 2.87 billion reais (approximately $745.25 million) by 2025 in a leniency deal to settle corruption charges related to Brazil’s “Operation Car Wash.” The agreement was the first of four leniency deals reached in 2019 related to “Operation Car Wash.” The “Operation Car Wash” investigation has been covered in detail in our 2016, 2017, and 2018 Year-End FCPA updates.[372] The other agreements are described below.

Brazil’s Office of the Comptroller-General (“CGU”) and Office of the General Counsel of the Federal Government (“AGU”) have the power to enter into leniency agreements with corporate entities to resolve civil liability under the Clean Companies Act.[373] To be eligible for a leniency agreement, similar to NPAs in the United States, companies must admit liability, cease engaging in illicit conduct, and effectively cooperate with the investigation and any administrative proceedings.[374] Companies subject to a leniency agreement must implement a compliance program, submit to an external audit, and pay applicable fines and damages.[375] The agreement covers the same conduct underlying the global settlement between Braskem and the Brazilian Federal Prosecution Office, the DOJ, the SEC, and the Swiss Office of the Attorney General executed in December 2016.[376]

Camargo Corrêa S.A.

At the end of July 2019, the CGU and AGU announced that engineering group Camargo Corrêa S.A. (“Camargo”) agreed to pay 1.396 billion reais (approximately $344 million) by January 2038 to settle allegations that the company entered into fraudulent construction contracts involving public resources and was unjustly enriched as a result.[377] The settlement amount includes 905.9 million reais (approximately $223 million) received from the alleged fraud, 330.3 million reais (approximately $81.4 million) totaling the value of the alleged bribes, a 36.2 million reais (approximately $9 million) administrative fine, and a 123.6 million reais (approximately $30.5 million) civil sanction under Brazil’s administrative misconduct law.[378] The agreement also obligates Camargo to improve its compliance program, with a focus on preventing improper conduct and prioritizing ethics and transparency in the conduct of its business.[379]

The agreement is not the first settlement Camargo and Brazilian authorities have reached related to “Operation Car Wash.” In January 2017, Camargo sought plea agreements for 40 of its executives,[380] and in August 2015, it agreed to pay 700 million reais (approximately $173 million) to Brazilian state-owned companies in damages related to bribery and price-fixing practices.[381]

Engevix Group

On November 12, 2019, the CGU and AGU announced a 516.3 million reais (approximately $127 million) leniency agreement with Brazilian construction company Engevix Group (“Engevix”), now known as Nova Participações, to settle charges related to bribes the company allegedly paid to win construction contracts.[382] Engevix cooperated with “Operation Car Wash” by providing evidence of conduct by over 100 individuals and entities.[383]

Under the agreement, Engevix will pay the value of the alleged bribes, which totaled 315.84 million reais (approximately $78 million); 105 million reais (approximately $26 million) in disgorgement; and 95.44 million reais (approximately $23 million) in administrative and civil fines.[384] The payments will be made in installments until 2046.[385] The agreement also requires Engevix to improve its compliance program by preventing improper conduct and promoting ethics and transparency throughout the company.[386]

OAS S.A.

Two days after CGU and AGU announced the agreement with Engevix, they announced another leniency agreement related to “Operation Car Wash.” Construction company OAS S.A. (“OAS”) agreed to pay 1.92 billion reais (approximately $473 million) by 2047 to settle bribery charges.[387] The settlement is the third largest of its kind and the ninth leniency agreement related to “Operation Car Wash.” OAS cooperated with the investigation by providing evidence of conduct by more than 304 individuals and 184 entities.[388]

Under the settlement agreement, OAS must pay 720.14 million reais (approximately $177 million), the amount of the alleged bribes; 800.37 million reais (approximately $197 million) in disgorgement; and 404.79 million reais (approximately $99 million) in administrative and civil fines.[389] The agreement also obligates OAS to improve its compliance program, including by implementing an ISO 37.001 certification.[390]

France

On June 26, 2019, the French National Financial Prosecutor (“PRF”) and the French Anti-Corruption Agency (“AFA”) published guidelines (the “PRF-AFA Guidelines”)[391] on the corporate settlement mechanism in France known as a Judicial Public Interest Agreement (convention judiciaire d’intérêt public, or “CJIP”). France’s Law on Transparency, Fight Against Corruption and Modernization of Economic Life (Loi relatif à la transparence, à la lutte contre la corruption et à la modernisation de la vie économique) (“Sapin II”)[392] created the CJIP procedure, which gives prosecutors the power to offer a company suspected of committing a covered offense the opportunity to settle the case without formal prosecution.[393] Prosecutors may offer a CJIP to a company suspected of having committed corruption, bribery, tax fraud or laundering of the proceeds of tax fraud.[394] The implementation of Sapin II and the first CJIPs entered into under the law were covered in our 2016 and 2017 Year-End Updates and 2018 Mid-Year Update.

The PRF-AFA Guidelines are the first joint guidelines issued by the PRF and AFA, and they are the first guidelines directed at compliance officers, companies, and individuals subject to enforcement actions. Previously, on January 31, 2018 and March 21, 2019, the French Ministry of Justice issued guidance to prosecutors regarding the CJIP process.[395]

The stated purpose of the PRF-AFA Guidelines is to encourage corporate wrongdoers to cooperate with judicial authorities by providing an element of predictability to the CJIP process.[396] The guidelines outline the facts and circumstances relevant to the PRF in considering whether to enter into CJIPs in cases involving allegations of bribery or corruption, as well as guidance on what terms to apply in any agreements that are negotiated. The guidelines do not extend to other crimes like tax evasion.

The PRF-AFA Guidelines cover (1) prerequisites to enter a CJIP;[397] (2) determination of fines;[398] (3) compliance program obligations;[399] (4) international coordination;[400] and (5) compliance with the French Blocking Statue (discussed further below).[401]

Prerequisites for Entering a CJIP

The PRF-AFA Guidelines clarify that a company may enter into informal discussions with a prosecutor to express a willingness to enter a CJIP.[402] Although in practice companies have done so since the implementation of Sapin II, under the law itself only prosecutors were given authority to initiate a CJIP.

Additional prerequisites for a CJIP, as outlined by the PRF-AFA Guidelines, include the absence of prior sanctions for corruption or bribery; the implementation of an efficient compliance program, if one is required by law;[403] cooperation in the criminal investigation; and implementation of an internal investigation.[404] Voluntary and timely self-reporting is not required, but it is looked upon favorably when prosecutors are considering a CJIP and determining the amount of the financial penalty.[405] An initiative by the company to compensate alleged victims even before the proposal to enter into a CJIP is also considered as a positive factor.[406]

The PRF-AFA Guidelines discuss the necessity, conduct, and conditions of internal investigations in detail and note that a company must submit a report to the prosecutor, describing the investigation’s findings in detail.[407] The report must identify relevant witnesses and provide reports of the interviews, as well as the documents on which those reports rely. More generally, a company that has conducted an internal investigation must produce the relevant documents in its possession.

The PRF-AFA Guidelines acknowledge that relevant documents may be subject to attorney-client privilege if the investigation is conducted by a lawyer.[408] However, the Guidelines note that not all evidence appearing in an investigative report is necessarily privileged, and a client may nevertheless choose to waive the privilege. If a company refuses to disclose certain documents, prosecutors will determine if the refusal is justified in light of the applicable rules. If there is a disagreement between the prosecutor and company regarding privilege, the prosecutor may consider the refusal to disclose the information at issue as a lack of cooperation.

Determination of Fines

Under Sapin II, the amount of the fine imposed under a CJIP is proportionate to the benefits derived from the misconduct, up to a limit of 30% of the legal entity’s average annual turnover calculated over the previous three years.[409] The PRF-AFA Guidelines state that where accounting data is available, the financial benefit should be calculated on the basis of the profit generated from performance of the relevant contracts, less the expenses directly related to the contracts.[410] The guidelines enumerate several categories of costs that are excluded from these deductions, including: overheads “not exclusively related” to the relevant project; research and development costs; depreciation and amortization provisions; and the amounts of the alleged bribes.[411]

The PRF-AFA Guidelines state that a company subject to a CJIP procedure should communicate its cost accounting, as well as all forecast documents relating to the relevant contracts, to allow prosecutors to assess the expected benefits of the contracts.[412]

The PRF-AFA Guidelines also enumerate the aggravating and mitigating factors taken into account by prosecutors when determining fines. The aggravating factors are: corruption of a public official; failure to implement an anti-corruption compliance program under Sapin II, if statutorily required; past convictions or sanctions in France or abroad for corruption-related offenses; use of company resources to conceal the corruption; and repeated or systemic corruption.[413] The mitigating factors are: self-reporting prior to the commencement of a criminal investigation; “excellent” cooperation and a “complete and effective” internal investigation; a preexisting, efficient compliance program and/or the implementation of corrective measures; and voluntary implementation of a compliance program, in the absence of a legal obligation to do so.[414]

Compliance Program Obligations

In addition to a financial penalty, the CJIP may require a company to implement a compliance program. The PRF determines whether to impose such an obligation, after consulting with the AFA.[415] The AFA is then responsible for supervising the implementation of the program. An appendix to the PRF-AFA Guidelines outlines the five steps of AFA supervision, which are: (1) an initial audit; (2) formulation of an action plan on the basis of the findings of the initial audit; (3) validation of the action plan; (4) validation of the main tools of the company’s anti-corruption program, and the performance of targeted audits; and (5) a final audit.[416] Together, the estimated durations of all five stages total just over three years.[417] The AFA must update the PRF at least once a year on the status of implementation of the compliance program and any difficulties encountered by AFA or the company.[418] A company’s failure to implement the program and pay the associated expert monitoring fees may be grounds for rescission of a CJIP.[419]

International Coordination

The CJIP allows the PRF to coordinate its response with the prosecution authorities of different countries dealing with the same offenses.[420] The determination of the financial penalty may be discussed with foreign prosecuting authorities in order to assess the overall fines and penalties paid by a company. If a compliance program is required under a CJIP, the PRF-AFA Guidelines acknowledge that it is preferable to appoint one monitoring body. If the company facing charges has its registered office or operating base in France or conducts all or part of its business activities in France, the French Code of Criminal Procedure requires that the AFA be the monitoring body.[421]

Compliance with French Blocking Statute

Article 1 of Law No. 68-678 of July 26, 1968 (the “French Blocking Statute”) makes it a criminal offense, under certain conditions, to communicate to foreign public authorities information which may harm the economic interests of France.[422] When a French company is subject to an anti-corruption compliance program ordered by a foreign authority, the AFA is responsible for ensuring that the information shared with the foreign authority complies with the French Blocking Statute.[423]

The PRF-AFA Guidelines state that when a company suspects or detects the commission of a transnational incident of corruption during the course of implementing a compliance program imposed upon it by a foreign authority, the company must inform the AFA of the incident before reporting it to the foreign authority.[424] The AFA will assess whether reporting the incident to a foreign authority would violate the French Blocking Statute. The AFA will update the PRF regarding the potential disclosure to the foreign authority to allow the PRF to assess whether the detected offense falls within its jurisdiction.[425]

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APPENDIX: 2019 Non-Prosecution and Deferred Prosecution Agreements

The chart below summarizes the agreements concluded by DOJ in 2019. The SEC has not entered into any NPAs or DPAs in 2019. 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 2019

Company	Agency	Alleged Violation	Type	Monetary Recoveries	Monitoring & Reporting	Term of DPA/ NPA (months)
Avanir Pharmaceuticals	N.D. Ga.	Anti-Kickback Statute	DPA	$115,874,895	No	36
Baton Holdings LLC	DOJ Fraud	Fraud (Accounting)	NPA	$43,540,000	Yes	36
Celadon Group, Inc.	DOJ Fraud; S.D. Ind.	Fraud (Securities)	DPA	$42,245,302	Yes	60
ContextMedia Health LLC	DOJ Fraud; N.D. Ill.	Fraud (Wire)	NPA	$70,000,000	Yes	36
Dannenbaum Engineering Corp.	DOJ Public Integrity; S.D. Tex.	FECA	DPA	$1,600,000	No	36
Fresenius Medical Care AG & Co. KGaA	DOJ Fraud; D. Mass.	FCPA	NPA	$231,715,273	Yes	36
Heritage Pharmaceuticals Inc.	DOJ Antitrust	Antitrust	DPA	$7,325,000	No	36
HSBC Private Bank (Suisse) SA	DOJ Tax; S.D. Fla.	Tax Evasion; Fraud (Tax)	DPA	$192,350,000	No	36
Hydro Extrusion USA, LLC, f/k/a Sapa Extrusions, Inc.	DOJ Fraud; E.D. Va.	Fraud (Mail)	DPA	$46,945,100	Yes	36
Insys Therapeutics, Inc.	D. Mass.	Fraud (Mail)	DPA	$225,000,000	No	60
LLB Verwaltung (Switzerland) AG	DOJ Tax	Fraud (Tax)	NPA	$10,680,555	No	48
Lumber Liquidators Holdings, Inc.	E.D. Va.; DOJ Fraud	Fraud (Securities)	DPA	$33,000,000	Yes	36
Merrill Lynch Commodities, Inc.	DOJ Fraud	Fraud (Commodities)	NPA	$25,000,000	Yes	36
Microsoft Magyarország Számítástechnikai Szolgáltató és Kereskdelmi Kft. (Microsoft Hungary)	DOJ Fraud; S.D.N.Y.	FCPA	NPA	$25,316,946	Yes	36
Mizrahi Tefahot Bank Ltd.; United Mizrahi Bank (Switzerland) Ltd.; Mizrahi Tefahot Trust Company Ltd.	DOJ Tax; C.D. Cal.	Fraud (Tax)	DPA	$195,000,000	No	24
Mobile TeleSystems PJSC	DOJ Fraud; S.D.N.Y.	FCPA	DPA	$850,000,000	Yes	36
Monsanto Company	C.D. Cal.	Environmental (RCRA)	DPA	$10,200,000	Yes	24
Reckitt Benckiser Group plc	DOJ Consumer Protection; W.D. Va.	Fraud (Health Care; Mail; Wire)	NPA	$1,400,000,000	No	36
Republic Metals Corporation	S.D. Fla.	AML	NPA	$0	No	36
Rick Weaver Buick GMC, Inc.	W.D. Pa.	Fraud (Wire)	DPA	$543,794	Yes	36
Rising Pharmaceuticals, Inc.	DOJ Antitrust	Antitrust	DPA	$3,043,207	No	36
Rochester Drug Co-operative, Inc.	S.D.N.Y.	Narcotics (conspiracy)	DPA	$20,000,000	Yes	60
Samsung Heavy Industries	DOJ Fraud; E.D. Va.	FCPA	DPA	$75,481,600	Yes	36
Standard Chartered Bank	DOJ MLARS; D.D.C.	Sanctions	DPA	$1,012,210,160	Yes	24
TechnipFMC plc	DOJ Fraud; E.D.N.Y.	FCPA	DPA	$296,184,000	Yes	36
Telefonaktiebolaget LM Ericsson	DOJ Fraud; S.D.N.Y.	FCPA	DPA	$1,060,570,432	Yes	36
Tower Research Capital LLC	DOJ Fraud; S.D. Tex.	Fraud (Commodities)	DPA	$67,493,849	Yes	36
Unicredit Bank Austria AG	DOJ MLARS; D.D.C.	Sanctions	NPA	$1,378,728,678	Yes	36
Unitrans International Inc.	DOJ Fraud; E.D. Va.	Obstruction of Justice	NPA	$45,000,000	No	Unknown
Walmart Inc.	DOJ Fraud; E.D.Va.	FCPA	NPA	$282,646,421	Yes	36
Zurich International Life Limited and Zurich Life Insurance Company Limited	DOJ (Tax)	Fraud (Tax)	NPA	$5,115,000	No	48

[1] 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 532 agreements initiated by the DOJ, and 10 initiated by the U.S. Securities and Exchange Commission (“SEC”).

[2] Press Release, Elizabeth Warren, Senator Warren Unveils Bill to Expand Criminal Liability to Negligent Executives of Giant Corporations (April 3, 2019), https://www.warren.senate.gov/newsroom/press-releases/senator-warren-unveils-bill-to-expand-criminal-liability-to-negligent-executives-of-giant-corporations.

[3] Corporate Executive Accountability Act, S. 1010, 116th Cong. § 1 (2019), https://www.congress.gov/bill/116th-congress/senate-bill/1010.

[4] Senator Elizabeth Warren, The Unfinished Business of Financial Reform, Remarks at the Levy Institute’s 24th Annual Hyman P. Minsky Conference, 4 (Apr. 15, 2015), http://www.warren.senate.gov/files/documents/Unfinished_Business_20150415.pdf.

[5] Elizabeth Warren, Summary of the Corporate Executive Accountability Act (April 3, 2019), https://www.warren.senate.gov/imo/media/doc/2019.4.1%20Corporate%20Executive%20Accountability%20Act%20Summary.pdf.

[6] Id.

[7] Ending Too Big to Jail Act, S. 1005, 116th Cong. § 1 (2019), https://www.govtrack.us/congress/bills/116/s1005.

[8] CFTC Enforcement Manual, §§ 7.2.2-.3.

[9] Id. § 7.2.2; SEC Enforcement Manual, § 6.2.2.

[10] SEC Enforcement Manual, § 6.2.2.

[11] CFTC Enforcement Manual, § 7.2.3; SEC Enforcement Manual, § 6.2.3.

[12] Id. § 7.1.2.

[13] The aggravating circumstances that the CFTC considers align with several of DOJ’s Filip Factors: executive or senior management involvement, pervasive misconduct within the company, and prior history of misconduct.

[14] U.S. Dep’t of Justice, Corporate Enforcement Policy (November 2017 Version) [hereinafter “2017 FCPA Policy”].

[15] U.S. Dep’t of Justice, Corporate Enforcement Policy (November 2019 Update), https://www.justice.gov/jm/jm-9-47000-foreign-corrupt-practices-act-1977 [hereinafter “FCPA Policy”].

[16] Id.

[17] Id. (emphases added).

[18] Rod J. Rosenstein, Deputy Attorney General, “Deputy Attorney General Rod J. Rosenstein Delivers Remarks at the American Conference Institute’s 35th International Conference on the Foreign Corrupt Practices Act” (Nov. 29, 2018), https://www.justice.gov/opa/speech/deputy-attorney-general-rod-j-rosenstein-delivers-remarks-american-conference-institute-0.

[19] FCPA Policy, supra note 15, n.1.

[20] 2017 FCPA Policy, supra note 15.

[21] FCPA Policy, supra note 15.

[22] 2017 FCPA Policy, supra note 15.

[23] FCPA Policy, supra note 15 (emphasis added).

[24] Id. at n.2.

[25] U.S. Dep’t of Justice, Export Control and Sanctions Enforcement Policy for Business Organizations (December 2019 Update), https://www.justice.gov/nsd/ces_vsd_policy_2019/download [hereinafter “NSD Policy”].

[26] The NSD Policy eliminated the original footnote 3, which stated that “[b]ecause financial institutions often have unique reporting obligations under their applicable statutory and regulatory regimes, this Guidance does not apply to financial institutions.”

[27] 18 U.S.C. § 3571(d).

[28] NSD Policy, supra note 25 at 2.

[29] Id. at 2–3.

[30] Id. at 3 n.7.

[31] Id. at 3.

[32] Id. at 3 n.8.

[33] Id. at 4.

[34] Id. at 4 n.9.

[35] Id. at 5.

[36] Id. at 6.

[37] Press Release, U.S. Dep’t of Justice, Pharmaceutical Company Targeting Elderly Victims Admits to Paying Kickbacks, Resolves Related False Claims Act Violations (Sept. 26, 2019), https://www.justice.gov/usao-ndga/pr/pharmaceutical-company-targeting-elderly-victims-admits-paying-kickbacks-resolves [hereinafter “Avanir Press Release”].

[38] Id.

[39] Deferred Prosecution Agreement, United States v. Avanir Pharmaceuticals, Inc., Case No. 1:19-CR-00369, (October 2, 2019) [hereinafter “Avanir DPA”].

[40] Avanir DPA at 9.

[41] Avanir DPA at 4.

[42] Id.

[43] Avanir Press Release; Corporate Integrity Agreement between the Office of Inspector General of the Department of Health and Human Services and Avanir Pharmaceuticals, Inc. (Sept. 25, 2019), https://oig.hhs.gov/fraud/cia/agreements/Avanir_Pharmaceuticals_Inc_09252019.pdf [hereinafter “Avanir CIA”].

[44] Avanir Press Release.

[45] Id.

[46] Id.

[47] Avanir Press Release; Avanir CIA at 12.

[48] Non-Prosecution Agreement, Bankrate Criminal Investigation (March 5, 2019), https://www.gibsondunn.com/wp-content/uploads/2019/07/Baton-Holdings-NPA.pdf [hereinafter “Bankrate NPA”].

[49] Bankrate NPA at 1-2.

[50] Id.

[51] Id.

[52] Id. at 3.

[53] Id. at 5.

[54] Id. at 3-4.

[55] Press Release, U.S. Dep’t of Justice, Celadon Group, Inc. Enters into Corporate Resolution for Securities Fraud and Agrees to Pay $42.2 Million in Restitution (April 25, 2019), https://www.justice.gov/opa/pr/celadon-group-inc-enters-corporate-resolution-securities-fraud-and-agrees-pay-422-million [hereinafter “Celadon Press Release”].

[56] Deferred Prosecution Agreement, United States v. Celadon Group, Inc., No. 19-CR-0141 (April 25, 2019), at B-1 [hereinafter “Celadon DPA”].

[57] Id. at 4.

[58] Celadon DPA, supra note 56 at 7.

[59] Id. at 3.

[60] Id. at 4.

[61] Petition to Enter Plea of Guilty and Plea Agreement, United States of America v. Danny Ray Williams, 1:19-cr-00138, ¶ 1 (Apr. 22, 2019).

[62] Id. at 8.

[63] Press Release, Sec. & Exch. Comm’n, SEC Charges Trucking Executives With Accounting Fraud (Dec. 5, 2019), https://www.sec.gov/news/press-release/2019-253.

[64] Vi Ryckaret, Indiana Trucking Company Files for Bankruptcy, Cutting 4,000 Jobs After Two Executives Accused of Fraud, South Bend Tribune (Dec. 9, 2019), https://www.southbendtribune.com/news/local/celadon-group-files-for-bankruptcy-cutting-jobs-after-two-executives/article_992a39c9-0b8d-58a2-a4f9-b47ac2cd17a7.html.

[65] Press Release, U.S. Dep’t of Justice, Outcome Health Agrees to Pay $70 Million to Resolve Fraud Investigation (Oct. 30, 2019), https://www.justice.gov/opa/pr/outcome-health-agrees-pay-70-million-resolve-fraud-investigation [hereinafter “ContextMedia Press Release”].

[66] Id.

[67] Non-Prosecution Agreement, ContextMedia LLC (Oct. 17, 2019), Attach. A at 2 [hereinafter “ContextMedia NPA”]; ContextMedia Press Release.

[68] ContextMedia Press Release.

[69] Id.

[70] ContextMedia NPA at 2-3.

[71] Id. at 3.

[72] Id. at 4.

[73] ContextMedia Press Release.

[74] Press Release, U.S. Dep’t of Justice, Houston Engineering Corporation Enters into Corporate Resolution and Agrees to Pay $1.6 Million Fine (Nov. 22, 2019), https://www.justice.gov/opa/pr/houston-engineering-corporation-enters-corporate-resolution-and-agrees-pay-16-million-fine [hereinafter “DEC Press Release”].

[75] Deferred Prosecution Agreement, United States v. Dannenbaum Engineering Corporation & Engineering Holdings Corporation (S.D. Tex Nov. 22, 2019) [hereinafter “DEC DPA”].

[76] DEC Press Release.

[77] DEC DPA at 4-7, 10.

[78] Press Release, U.S. Dep’t of Justice, Ericsson Agrees to Pay More than $1 Billion To Resolve Foreign Corrupt Practices Act Case (Dec. 6, 2019), https://www.justice.gov/usao-sdny/pr/ericsson-agrees-pay-more-1-billion-resolve-foreign-corrupt-practices-act-case [hereinafter “Ericsson Press Release”]; Ericsson Egypt Ltd. Guilty Plea (Nov. 26, 2019).

[79] Telefonaktiebolaget LM Ericsson Deferred Prosecution Agreement ¶ 4, ¶ 116 [hereinafter “Ericsson DPA”]; Ericsson Press Release, supra note 78.

[80] Ericsson DPA, supra note 79, ¶ 7.

[81] Id. ¶ 4.

[82] Id. ¶ 4, ¶ 10.

[83] Ericsson Press Release, supra note 78.

[84] Ericsson DPA ¶ 4(d).

[85] Id. ¶ 4(c).

[86] Press Release, U.S. Dep’t of Justice, Fresenius Medical Care Agrees to Pay $231 Million in Criminal Penalties and Disgorgement to Resolve Foreign Corrupt Practices Act Charges (April 25, 2019), https://www.justice.gov/opa/pr/fresenius-medical-care-agrees-pay-231-million-criminal-penalties-and-disgorgement-resolve [hereinafter “Fesenius Press Release”].

[87] Id.

[88] Non-Prosecution Agreement, Fresenius Medical Care AG & Co. KGaA, No. 19-CR-0141 (February 25, 2019), at 1 [hereinafter “Fresenius NPA”].

[89] Id.

[90] Id. at 2.

[91] Id. at 6.

[92] Id. at 3.

[93] Id. at 2.

[94] Id. at 3.

[95] Id.

[96] Speech, Deputy Assistant Attorney General Matt Miner Delivers Remarks at The American Bar Association, Criminal Justice Section Third Global White Collar Crime Institute Conference (June 27, 2019) https://www.justice.gov/opa/speech/deputy-assistant-attorney-general-matt-miner-delivers-remarks-american-bar-association.

[97] Id.

[98] Ian P. Johnson, German Prosecutors Probe Dialysis Firm Fresenius, Deutsche Welle (Oct. 21. 2019), https://www.dw.com/en/german-prosecutors-probe-dialysis-firm-fresenius/a-50922473.

[99] Deferred Prosecution Agreement with Heritage Pharmaceuticals, Inc. (June 11, 2019) [hereinafter “Heritage DPA”].

[100] Press Release, U.S. Dep’t of Justice, Pharmaceutical Company Admits to Price Fixing in Violation of Antitrust Law, Resolves Related False Claims Act Violations (May 31, 2019), https://www.justice.gov/opa/pr/pharmaceutical-company-admits-price-fixing-violation-antitrust-law-resolves-related-false [hereinafter “Heritage Press Release”].

[101] Heritage DPA, supra note 99, at 4–7.

[102] Id. at 3.

[103] Heritage Press Release, supra note 100.

[104] Heritage DPA, supra note 99, at 4.

[105] Heritage Press Release, supra note 100.

[106] Press Release, U.S. Dep’t of Justice, Justice Department Announces Deferred Prosecution Agreement with HSBC Private Bank (Suisse) SA (Dec. 10, 2019), https://www.justice.gov/opa/pr/justice-department-announces-deferred-prosecution-agreement-hsbc-private-bank-suisse-sa.

[107] Id.

[108] Deferred Prosecution Agreement, United States v. HSBC Private Bank (Suisse) SA, No. 19-CR-60359 (Dec. 10, 2019), at 1 [hereinafter “HSBC Switzerland DPA”].

[109] Information, United States v. HSBC Private Bank (Suisse) SA, No. 19-CR-60359 (Dec. 10, 2019), at 3.

[110] Id. at 4–5.

[111] Id. at 5–6.

[112] HSBC Switzerland DPA, supra note 108, at 2–3.

[113] Id. at 3.

[114] Id.

[115] Id. at 5–7.

[116] Press Release, U.S. Dep’t of Justice, Aluminum Extrusion Manufacturer Agrees to Pay Over $46 Million for Defrauding Customers, Including the United States, in Connection with Test Result Falsification Scheme (April 23, 2019), https://www.justice.gov/opa/pr/aluminum-extrusion-manufacturer-agrees-pay-over-46-million-defrauding-customers-including [hereinafter “Hydro Extrusion Press Release”].

[117] Deferred Prosecution Agreement, United States v. Hydro Extrusion USA, LLC, No. 19-CR-124 (E.D. Va. April 23, 2019) [hereinafter “Hydro Extrusion DPA”].

[118] Hydro Extrusion Press Release, supra note 116.

[119] Id.

[120] Hydro Extrusion DPA, supra note 117, at 4.

[121] Id.

[122] Hydro Extrusion Press Release, supra note 116.

[123] Hydro Extrusion DPA, supra note 117, at 3.

[124] Hydro Extrusion DPA, supra note 117, at 5-6.

[125] Hydro Extrusion DPA, supra note 117, at 4.

[126] Press Release, U.S. Dep’t of Justice, Opioid Manufacturer Insys Therapeutics Agrees to Enter $225 Million Global Resolution of Criminal and Civil Investigations (June 5, 2019), https://www.justice.gov/opa/pr/opioid-manufacturer-insys-therapeutics-agrees-enter-225-million-global-resolution-criminal [hereinafter “Insys Press Release”].

[127] Id.

[128] Deferred Prosecution Agreement, United States v. Insys Therapeutics, Inc., No. 19-CR-10191 (D. Mass. June 5, 2019), at 3 [hereinafter “Insys DPA”].

[129] Id.

[130] See Insys Press Release, supra note 126.

[131] Insys DPA at 6, supra note 128.

[132] See Insys Press Release, supra note 126.

[133] Insys DPA, supra note 128, at 7-8.

[134] Corporate Integrity Agreement, Insys Therapeutics, Inc. (June 5, 2019) at 4-18 [hereinafter “Insys Corporate Integrity Agreement”].

[135] Id. at 20, App. C.

[136] Id. at 26-36.

[137] Id. at 50.

[138] Settlement Agreement, Insys Therapeutics, Inc. (June 5, 2019), ¶ 1 [hereinafter “Insys Settlement Agreement”].

[139] Insys Corporate Integrity Agreement at 49-52; Insys Settlement Agreement, supra note 138, ¶¶ 17-19.

[140] Nate Raymond, Opioid Manufacturer Insys Files for Bankruptcy after Kickback Probe, Reuters (June 10, 2019), https://www.reuters.com/article/us-insys-opioids-bankruptcy/opioid-manufacturer-insys-files-for-bankruptcy-after-kickback-probe-idUSKCN1TB15Q.

[141] Vince Sullivan, Insys Files New Ch. 11 Plan Reflecting Deal with DOJ, States, Law360 (Dec. 2, 2019), https://www.law360.com/articles/1224485/insys-files-new-ch-11-plan-reflecting-deal-with-doj-states.

[142] Press Release, U.S. Dep’t of Justice, Justice Department Announces Resolution with LLB Verwaltung (Switzerland) AG (Aug. 5, 2019), https://www.justice.gov/opa/pr/justice-department-announces-resolution-llb-verwaltung-switzerland-ag [hereinafter “LLB-Switzerland Press Release”].

[143] Non-Prosecution Agreement, LLB-Verwaltung (Switzerland) AG, Exhibit A: Statement of Facts, (July 31, 2019), ¶ 21.

[144] LLB-Switzerland Press Release, supra note 142.

[145] Id.

[146] Non-Prosecution Agreement, LLB-Verwaltung (Switzerland) AG (July 31 2019), at 2.

[147] LLB-Switzerland Press Release, supra note 142.

[148] Id.

[149] Press Release, U.S. Dep’t of Justice, Lumber Liquidators Enters into Corporate Resolution for Securities Fraud and Agrees to Pay $33 Million Penalty (Mar. 12, 2019), https://www.justice.gov/opa/pr/lumber-liquidators-enters-corporate-resolution-securities-fraud-and-agrees-pay-33-million [hereinafter “Lumber Liquidators Press Release”].

[150] Id.

[151] Deferred Prosecution Agreement, United States v. Lumber Liquidators Holdings Inc., 19-CR-52 (E.D. Va. Mar. 12, 2019), at 33-34, 39 [hereinafter “Lumber Liquidators DPA”].

[152] Id. at 39.

[153] Lumber Liquidators Press Release, supra note 149.

[154] Lumber Liquidators DPA, supra note 151, at 4.

[155] Press Release, Sec. & Exch. Comm’n, SEC Charges Lumber Liquidators with Fraud (Mar. 12, 2019), https://www.sec.gov/news/press-release/2019-29.

[156] Non-Prosecution Agreement with Merrill Lynch Commodities, Inc. (June 25, 2019) at 1–2 [hereinafter “Merrill Lynch NPA”].

[157] Id. at 7.

[158] Merrill Lynch NPA, supra note 156, Attachment A, at 4.

[159] Id. at 4-7.

[160] Id. at 4.

[161] Id. at 4–5.

[162] Id. at 1.

[163] Id. at 2.

[164] Press Release, U.S. Dep’t of Justice, Merrill Lynch Commodities Inc. Enters into Corporate Resolution and Agrees to Pay $25 Million in Connection with Deceptive Trading Practices Executed on U.S. Commodities Markets (June 25, 2019), https://www.justice.gov/opa/pr/merrill-lynch-commodities-inc-enters-corporate-resolution-and-agrees-pay-25-million [hereinafter “Merrill Lynch Press Release”].

[165] Id.

[166] Id.

[167] See United States v. Bases, No. 18-CR-48 (N.D. Ill.).

[168] Press Release, U.S. Dep’t of Justice, Hungary Subsidiary of Microsoft Corporation Agrees to Pay $8.7 Million in Criminal Penalties to Resolve Foreign Bribery Case (July 22, 2019), https://www.justice.gov/opa/pr/hungary-subsidiary-microsoft-corporation-agrees-pay-87-million-criminal-penalties-resolve [hereinafter Microsoft Hungary Press Release.

[169] Id.

[170] Id.

[171] Non-Prosecution Agreement, Microsoft Magyarország Számítástechnikai Szolgáltató és Kereskedelmi Kft. (Jul 22, 2019), at 2-3 [hereinafter MS Hungary NPA].

[172] Id. at 5.

[173] Press Release, U.S. Dep’t of Justice, Mizrahi-Tefahot Bank LTD. Admits Its Employees Helped U.S.Taxpayers Conceal Income and Assets (Mar. 12, 2019), https://www.justice.gov/opa/pr/mizrahi-tefahot-bank-ltd-admits-its-employees-helped-ustaxpayers-conceal-income-and-assets.

[174] Deferred Prosecution Agreement, Mizrahi-Tefahot Bank LTD., United Mizarhi Bank (Switzerland) LTD., Mizrahi Tefahot Trust Company LTD. (Mar. 12, 2019) at 3, 6.

[175] Id. at 5.

[176] Id. at 6.

[177] Id. at 14-15.

[178] Id. at 10-11.

[179] Press Release, U.S. Dep’t of Justice, Mobile Telesystems Pjsc and Its Uzbek Subsidiary Enter into Resolutions of $850 Million with the Department of Justice for Paying Bribes in Uzbekistan (Mar. 7, 2019), https://www.justice.gov/opa/pr/mobile-telesystems-pjsc-and-its-uzbek-subsidiary-enter-resolutions-850-million-department.

[180] Id.

[181] Id.

[182] See id.; Press Release, U.S. Sec. & Exch. Comm’n, Mobile TeleSystems Settles FCPA Violations (Mar. 6, 2019), https://www.sec.gov/news/press-release/2019-27. The combined total monetary penalty amounted to $950 million, of which DOJ credited $100 million in forfeiture extracted by the SEC.

[183] Id.

[184] Press Release, U.S. Attorney’s Office, Southern District of New York, Former Uzbek Government Official and Uzbek Telecommunications Executive Charged in Bribery and Money Laundering Scheme Involving the Payment of Nearly $1 Billion in Bribes (Mar. 7, 2019), https://www.justice.gov/usao-sdny/pr/former-uzbek-government-official-and-uzbek-telecommunications-executive-charged-bribery.

[185] See Justice Manual § 9-28.700(A) (requiring that a company seeking cooperation credit “identify all individuals substantially involved in or responsible for the misconduct at issue” (emphasis added)).

[186] Two larger settlements in 2019 both imposed self-reporting obligations. See SCB DPA ¶ 16; UniCredit NPA at Attach. D.

[187] Deferred Prosecution Agreement, United States v. Mobile TeleSystems PJSC, (Feb. 22, 2019) ¶ 4(e) [hereinafter “Mobile TeleSystems DPA”].

[188] See Press Release, U.S. Dep’t of Justice, VimpelCom Limited and Unitel LLC Enter into Global Foreign Bribery Resolution of More than $795 Million; United States Seeks $850 Million Forfeiture in Corrupt Proceeds of Bribery Scheme (Feb. 18, 2016), https://www.justice.gov/opa/pr/vimpelcom-limited-and-unitel-llc-enter-global-foreign-bribery-resolution-more-795-million.

[189] See Mobile TeleSystems DPA, supra note 187, ¶¶ 4(k), 7.

[190] Id. ¶¶ 4(a)-(c).

[191] See id. ¶ 7(b).

[192] Id. ¶ 4(j).

[193] See U.S. Sentencing Guidelines [“USSG”] § 2C1.1(d)(1)(A) (2018) (requiring that the base fine under § 8C2.4 be calculated based on “the greatest of: (A) the value of the unlawful payment; (B) the value of the benefit received or to be received in return for the unlawful payment; or (C) the consequential damages resulting from the unlawful payment”).

[194] See Mobile TeleSystems DPA, supra note 187, ¶ 7(c); USSG 8C2.4.

[195] According to DOJ, the U.S. Attorney’s Office for the District of Hawaii was recused from the investigation that led to the settlement.

[196] Press Release, U.S. Dep’t of Justice, Monsanto Agrees to Plead Guilty to Illegally Spraying Banned Pesticide at Maui Facility (Nov. 21, 2019), https://www.justice.gov/usao-cdca/pr/monsanto-agrees-plead-guilty-illegally-spraying-banned-pesticide-maui-facility [hereinafter “Monsanto Press Release”].

[197] Id.

[198] Id.

[199] Deferred Prosecution Agreement, United States v. Monsanto Company, No. 1:19-CR-00162 (D. Haw. Nov. 21, 2019), at 6 [hereinafter “Monsanto DPA”]; Exhibit B – Factual Basis, United States v. Monsanto Company, 19-CR-00162 (D. Haw, Nov. 21, 2019) [hereinafter “Monsanto Exhibit B Factual Basis”].

[200] Id. at 2.

[201] Id. at 2-4.

[202] Monsanto Press Release, supra note 196.

[203] Exhibit C – Conditions of Probation, United States v. Monsanto Company, 19-CR-00162 (D. Haw. Nov. 21, 2019).

[204] Id. at 2.

[205] Id.

[206] Non-Prosecution Agreement, United States v. Indivior Inc. et al., No. 1:19-CR-16 (July 11, 2019), ¶ 1 [hereinafter “RB Group NPA”]; see also Indivior, History, http://www.indivior.com/about/our-history/ (last visited Dec. 22, 2019).

[207] See Indictment, United States v. Indivior Inc. and Indivior PLC, No. 1:19-CR-16 (Apr. 9, 2019), ¶ 1 [hereinafter “Indivior Indictment”].

[208] RB Group NPA, supra note 206, at 2.

[209] Press Release, U.S. Dep’t of Justice, Justice Department Obtains $1.4 Billion from Reckitt Benckiser Group in Largest Recovery in a Case Concerning an Opioid Drug in United States History (July 11, 2019), https://www.justice.gov/opa/pr/justice-department-obtains-14-billion-reckitt-benckiser-group-largest-recovery-case.

[210] Id.

[211] Id.

[212] RB Group NPA, supra note 206, ¶ 9.

[213] Id. ¶ 10.

[214] A separate agreement with the FTC resolved claims that RB Group engaged in unfair methods of competition in violation of the Federal Trade Commission Act.

[215] RB Group NPA, supra note 206, ¶ 5.

[216] Settlement Agreement, U.S. Dep’t of Justice and Reckitt Benckiser Group (July 11, 2019), https://www.justice.gov/opa/press-release/file/1181846/download, at II.B, II.F.

[217] Id. at II.F.

[218] Press Release, U.S. Attorney’s Office, Southern District of Florida, United States Government and Cooperating U.S. Gold Refinery Enter an Agreement After Money Laundering Investigation (Apr. 17, 2019), https://www.justice.gov/usao-sdfl/pr/united-states-government-and-cooperating-us-gold-refinery-enter-agreement-after-money.

[219] Republic Metals Corporation Non-Prosecution Agreement [hereinafter “RMC NPA”].

[220] See Docket, In re Miami Metals I, Inc, et al., No. 18-BK-13357 (Bankr. S.D.N.Y. Nov. 2, 2018).

[221] See RMC NPA, supra note 219, at 6.

[222] Order Granting Motion for Approval of Non-Prosecution Agreement with the United States Attorney’s Office for the Southern District of Florida Pursuant to Federal Rule of Bankruptcy Procedure 9019 at 1, No. 18-13359 (Bankr. S.D.N.Y. Apr. 16, 2019).

[223] Id. (emphasis omitted).

[224] Id. at 2.

[225] See generally RMC NPA, supra note 219.

[226] RMC NPA, supra note 219, at 1-2.

[227] Id. at 2.

[228] Id.

[229] Pretrial Diversion Agreement, United States v. Rick Weaver Buick GMC Inc., No. 16-CR-00030 (Jan. 15, 2019) [hereinafter “Rick Weaver Agreement”].

[230] Superseding Indictment Mem., United States v. Rick Weaver Buick GMC Inc., No. 16-CR-00030 (Aug. 8, 2017). The Dealership was originally indicted in September 2016.

[231] Rick Weaver Agreement §§ 3–4.

[232] Id. § 2.

[233] Id. § 5.

[234] Id. § 6.

[235] See U.S. Dep’t of Justice, Justice Manual § 9.22-100 Pretrial Diversion Program (providing that “[t]he U.S. Attorney, in his/her discretion, may divert any individual against whom a prosecutable case exists and who” meets certain other criteria), https://www.justice.gov/jm/jm-9-22000-pretrial-diversion-program.

[236] Deferred Prosecution Agreement, United States v. Kavod Pharmaceuticals LLC (f/k/a Rising Pharmaceuticals, LLC, f/k/a Rising Pharmaceuticals, Inc.), No. 2:19-cr-00689 (E.D. Pa. Dec. 13, 2019) [hereinafter “Rising DPA”].

[237] Id. at 15; see also Press Release, U.S. Dep’t of Justice, Second Pharmaceutical Company Admits to Price Fixing, Resolves Related False Claims Act Violations (Dec. 3, 2019), https://www.justice.gov/opa/pr/second-pharmaceutical-company-admits-price-fixing-resolves-related-false-claims-act [hereinafter “Rising Press Release”].

[238] Rising DPA, supra note 236, at 1.

[239] Id. at 6.

[240] Rising Press Release, supra note 237.

[241] Rising DPA supra note 236, at 5.

[242] Rising Press Release, supra note 237.

[243] See Rising DPA, supra note 236, ¶¶ 9-10.

[244] Id. at 3-4.

[245] Id. at 4.

[246] Id.

[247] Press Release, U.S. Attorney’s Office for the Southern District of New York, Manhattan U.S. Attorney and DEA Announce Charges against Rochester Drug Co-Operative and Two Executives for Unlawfully Distributing Controlled Substances (Apr. 23, 2019), https://www.justice.gov/usao-sdny/pr/manhattan-us-attorney-and-dea-announce-charges-against-rochester-drug-co-operative-and.

[248] See generally Rochester Drug Co-operative Deferred Prosecution Agreement [hereinafter “RDC DPA”].

[249] See generally Consent Order, United States v. Rochester Drug Cooperative, Inc., 1:15-cv-05219 (July 8, 2015) [hereinafter “RDC Consent Judgment”].

[250] See RDC DPA, supra note 248, at ¶ 3; RDC Consent Judgment, supra note 249 ¶ 3.

[251] RDC DPA, supra note 248, ¶ 10.

[252] RDC DPA, supra note 248, ¶ 16.

[253] See, e.g., Mobile TeleSystems DPA, supra note 187, ¶ 16; RMC NPA, supra note 219, at 5.

[254] See RDC DPA, supra note 248, ¶ 18.

[255] See id. ¶¶ 19-26.

[256] Id. ¶ 23.

[257] Id. ¶¶ 24-25.

[258] Id.

[259] Press Release, U.S. Dep’t of Justice, Samsung Heavy Industries Company Ltd Agrees to Pay $75 Million in Global Penalties to Resolve Foreign Bribery Case (Nov. 22, 2019), https://www.justice.gov/opa/pr/samsung-heavy-industries-company-ltd-agrees-pay-75-million-global-penalties-resolve-foreign [hereinafter “SHI Press Release”]; Deferred Prosecution Agreement, United States v. Samsung Heavy Indus. Co. Ltd., No. 1:19-CR-328 (E.D. Va. Nov. 22, 2019), at A-4 [hereinafter “SHI DPA”].

[260] SHI DPA, supra note 259, at 7-9; SHI Press Release, supra note 259.

[261] SHI DPA, supra note 259, at 9.

[262] Id. at 3-5.

[263] Id. at 4; see also id. at D-1.

[264] Id. at 3.

[265] Id. at 5.

[266] Press Release, U.S. Dep’t of Justice, Standard Chartered Bank Admits to Illegally Processing Transactions in Violation of Iranian Sanctions and Agrees to Pay More Than $1 Billion (Apr. 9, 2019), https://www.justice.gov/opa/pr/standard-chartered-bank-admits-illegally-processing-transactions-violation-iranian-sanctions [hereinafter “SCB Press Release”].

[267] See id.

[268] Id.

[269] See Amended Deferred Prosecution Agreement, United States v. Standard Chartered Bank, No. 12-CR-262 (D.D.C., Apr. 9, 2019) ¶ 19 [hereinafter “SCB DPA”] (citing “the progress in SCB’s ongoing remediation and compliance efforts, including the comprehensive enhancement of SCB’s U.S. economic sanctions compliance program,” as justification for the parties’ agreement not to extend the prior monitorship).

[270] See SCB Press Release, supra note 266 (remarks of U.S. Attorney Jessie Liu).

[271] SCB DPA, supra note 269, ¶ 19.

[272] See SCB DPA, supra note 269 at 1.

[273] SCB DPA, supra note 269 at 1.

[274] Id., Ex. B at 3.

[275] Press Release, U.S. Dep’t of Justice, Tower Research Capital LLC Agrees to Pay $67 Million in Connection With Commodities Fraud Scheme (Nov. 7, 2019), https://www.justice.gov/opa/pr/tower-research-capital-llc-agrees-pay-67-million-connection-commodities-fraud-scheme [hereinafter “Tower Press Release”].

[276] Deferred Prosecution Agreement, United States v. Tower Research Capital LLC, No. 19-CR-819 (S.D. Tex. Nov. 6, 2019), at A-24 [hereinafter “Tower DPA”].

[277] Id. at A-25.

[278] Id. at 3.

[279] Id. at 4-5.

[280] Id. at 7.

[281] Tower Press Release, supra note 275.

[282] Press Release, U.S. Commodity Futures Trading Comm’n, CFTC Orders Proprietary Trading Firm to Pay Record $67.4 Million for Engaging in a Manipulative and Deceptive Scheme and Spoofing (Nov. 7, 2019), https://www.cftc.gov/PressRoom/PressReleases/8074-19.

[283] Tower DPA, supra note 276, at C-30.

[284] Id. at D-35.

[285] Tower Press Release, supra note 275.

[286] Id.

[287] Non Prosecution Agreement, UniCredit Bank Austria AG (April 15, 2019) at 1.

[288] Id. at 10.

[289] Id. at 10.

[290] Id. at 10-11.

[291] Id. at 4.

[292] Id.

[293] Id. at 4-5.

[294] Id. at 1.

[295] Id. at 2.

[296] Press Release, U.S. Dep’t of Justice, UniCredit Bank AG Agrees to Plead Guilty for Illegally Processing Transactions in Violation of Iranian Sanctions (April 15, 2019) https://www.justice.gov/opa/pr/unicredit-bank-ag-agrees-plead-guilty-illegally-processing-transactions-violation-iranian [hereinafter “UCB Press Release”].

[297] Id.

[298] Id.

[299] Press Release, Manhattan District Attorney’s Office, Unicredit Bank AG to Plead Guilty and Pay $316 Million to DA’s Office Related to Illegal Transactions on Behalf of Nuclear Weapons Proliferator (April 15, 2019). https://www.manhattanda.org/unicredit-bank-ag-to-plead-guilty-and-pay-316-million-to-das-office-related-to-illegal-transactions-on-behalf-of-nuclear-weapons-proliferator/.

[300] UCB Press Release, supra note 296.

[301] Press Release, U.S. Dep’t of Justice, Defense Contractor Agrees to Pay $45 Million to Resolve Criminal Obstruction Charges and Civil False Claims Act Allegations (Dec. 4, 2019), https://www.justice.gov/opa/pr/defense-contractor-agrees-pay-45-million-resolve-criminal-obstruction-charges-and-civil-false [hereinafter “Unitrans Press Release”].

[302] Id.

[303] Id.

[304] Id.

[305] Id.

[306] Id.

[307] Id.

[308] Id.

[309] Id.

[310] Administrative Agreement Between ANHAM FZCO and ANHAM U.S.A., Inc. and the Defense Logistics Agency (May 21, 2019).

[311] Unitrans Press Release.

[312] Press Release, U.S. Dep’t of Justice, Zurich Life Insurance Company Ltd. And Zurich International Life Limited Enter Agreement with U.S. Regarding Insurance Products (Apr. 25, 2019), https://www.justice.gov/opa/pr/zurich-life-insurance-company-ltd-and-zurich-international-life-limited-enter-agreement-us.

[313] Id.

[314] Id.

[315] Id.

[316] Id.

[317] Id.

[318] Id.

[319] Id.

[320] Suzi Ring and Benjamin D. Katz, Rolls to Pay $807 Million to End U.K., U.S. Bribery Probes, Bloomberg (Jan. 16, 2017), https://www.bloomberg.com/news/articles/2017-01-16/rolls-royce-will-pay-807-million-in-settlement-of-bribery-cases.

[321] Serious Fraud Office, Statements, SFO closes GlaxoSmithKline investigation and investigation into Rolls-Royce individuals (Feb. 22, 2019), https://www.sfo.gov.uk/2019/02/22/sfo-closes-glaxosmithkline-investigation-and-investigation-into-rolls-royce-individuals/.

[322] Id.

[323] Id.

[324] Id.

[325] David Pegg and Rob Evans, SFO drops investigation into trio accused of energy industry bribes, The Guardian (June 25, 2019), https://www.theguardian.com/business/2019/jun/25/sfo-drops-investigation-into-trio-accused-of-energy-industry-bribes-unaoil.

[326] Id.

[327] Press Release, U.S. Dep’t of Justice, Oil Executives Plead Guilty for Roles in Bribery Scheme Involving Foreign Officials (Oct. 30, 2019), https://www.justice.gov/opa/pr/oil-executives-plead-guilty-roles-bribery-scheme-involving-foreign-officials

[328] See Serious Fraud Office, Unaoil, https://www.sfo.gov.uk/cases/unaoil/ (last visited Jan. 6, 2019).

[329] Serious Fraud Office, News Release, Three Individuals Acquitted as SFO Confirms DPA with Güralp Systems Ltd (Dec. 20, 2019), https://www.sfo.gov.uk/2019/12/20/three-individuals-acquitted-as-sfo-confirms-dpa-with-guralp-systems-ltd/.

[330] Id.

[331] Approved Judgment, In the Matter of s.45 of the Crime and Courts Act 2013 between Serious Fraud Office and Güralp Systems Limited (Oct. 22, 2019), ¶ 35.

[332] Id. ¶¶ 39-40.

[333] Id. ¶ 34.

[334] Id. ¶¶ 27-30, 35.

[335] Id. ¶ 35.

[336] Serious Fraud Office, News Release, SFO Completes DPA with Serco Geografix Ltd. (July 4, 2019), https://www.sfo.gov.uk/2019/07/04/sfo-completes-dpa-with-serco-geografix-ltd/.

[337] Id.

[338] Id.

[339] Id.

[340] Deferred Prosecution Agreement, Serco Geografix Limited (July 2, 2019), at ¶ 4 [hereinafter “SGL DPA”].

[341] Id. ¶¶ 9-14.

[342] See SGL DPA, Attach. A.

[343] Judgment, In the Matter of s.45 of the Crime and Courts Act 2013 (April 7, 2019), https://www.judiciary.uk/wp-content/uploads/2019/07/serco-dpa-4.07.19-2.pdf [hereinafter “SGL Judgment”].

[344] Id.

[345] See SGL DPA, ¶ 5(i).

[346] Id. ¶ 5(ii).

[347] Id. ¶ 5(ii)(b).

[348] SGL Judgment.

[349] Id.

[350] Serious Fraud Office, SFO charges former Serco directors with fraud (Dec. 16, 2019), https://www.sfo.gov.uk/2019/12/16/sfo-charges-former-serco-directors-with-fraud/

[351] Serious Fraud Office, News Release, Deferred Prosecution Agreement between the SFO and Tesco published (Jan. 23, 2019), https://www.sfo.gov.uk/2019/01/23/deferred-prosecution-agreement-between-the-sfo-and-tesco-published/ [hereinafter “Tesco DPA Press Release”].

[352] Serious Fraud Office, News Release, ‘No case to answer’ ruling in case against former Tesco executives (Dec. 6, 2018), https://www.sfo.gov.uk/2018/12/06/no-case-to-answer-ruling-in-case-against-former-tesco-executives/.

[353] Tesco DPA Press Release, supra note 351.

[354] Id.

[355] Judgment, In the Matter of s.45 of the Crime and Courts Act 2013 (April 10, 2017), https://www.judiciary.uk/wp-content/uploads/2019/01/sfo-v-tesco-stores-ltd-2017-approved-final.pdf, at ¶ 38.

[356] Id. ¶¶ 53-58.

[357] Id. ¶ 60.

[358] Id. ¶¶ 61-62.

[359] Ian Austen, The Strange Story Behind the SNC-Lavalin Affair, New York Times (Feb. 15, 2019) https://www.nytimes.com/2019/02/15/world/canada/snc-lavalin-justin-trudeau.html.

[360] Andy Blatchford, SNC-Lavalin could avoid ban from federal contracts due to delay in policy update, Global News (June 1, 2019), https://globalnews.ca/news/5342074/snc-lavalin-federal-contracts-delay/.

[361] Jonathan Montpetit, SNC-Lavalin to stand trial on corruption charges, Quebec judge rules, CBC News (May 29, 2019), https://www.cbc.ca/news/canada/montreal/snc-lavalin-trial-corruption-bribery-1.5153429.

[362] Read and listen to Jody Wilson-Raybould’s latest SNC-Lavalin evidence, CBC News (March 29, 2019) https://www.cbc.ca/news/politics/wilson-raybould-committee-documents-audio-1.5077533.

[363] Id.

[364] David Ljunggren and Julie Gordon, Canada court dismisses bid by SNC-Lavalin to escape corruption trial, Reuters (March 8, 2019), https://www.reuters.com/article/us-canada-politics-snc-lavalin/canada-court-dismisses-bid-by-snc-lavalin-to-escape-corruption-trial-idUSKCN1QP1W8.

[365] Id.

[366] SNC-Lavalin, Press Release, Update on federal charges (May 29, 2019), https://www.snclavalin.com/en/media/press-releases/2019/29-05-2019 [hereinafter “SNC‑Lavalin Press Release”].

[367] Ian Austen, Corruption Case that Tarnished Trudeau Ends with SNC‑Lavalin’s Guilty Plea, N.Y. Times (Dec. 18, 2019), https://www.nytimes.com/2019/12/18/world/canada/snc-lavalin-guilty-trudeau.html; Press Release, SNC‑Lavalin (Dec. 18, 2019), https://www.snclavalin.com/en/media/press-releases/2019/18-12-2019.

[368] Id.

[369] SNC‑Lavalin Press Release, supra note 366.

[370] Id.

[371] Id.

[372] Notice to the Market, Braskem, Signing of CGU/AGU Agreement (May 31, 2019) http://www.braskem-ri.com.br/detail-notices-and-material-facts/signing-of-cguagu-agreement [hereinafter “Braskem Press Release”].

[373] Clean Companies Act 2014 (Law No. 12,846), English translation available at http://f.datasrvr.com/fr1/813/29143/Trench_Rossi_e_Watanabe_-_Brazil’s_anti-bribery_law__12846-2013.pdf.

[374] Id.

[375] Id.

[376] Braskem Press Release, supra note 372.

[377] Controladoria-Geral da União, Notícias, CGU e AGU Celebram Acordo de Leniência com a Camargo Corrêa (July 31, 2019), http://cgu.gov.br/noticias/2019/07/cgu-e-agu-celebram-acordo-de-leniencia-com-a-camargo-correa; James Thomas, Camargo Corrêa Signs Bribery Settlement in Brazil, Global Investigations Review (Aug. 1, 2019), https://globalinvestigationsreview.com/article/1195811/camargo-correa-signs-bribery-settlement-in-brazil.

[378] CGU e AGU Celebram Acordo de leniência com a Camargo Corrêa, supra note 377.

[379] Id.

[380] Brazil’s Camargo Correa Seeks New Plea Deal Over Corruption-Veja, Reuters (Jan. 14, 2017), https://www.reuters.com/article/brazil-corruption-camargo-correa/brazils-camargo-correa-seeks-new-plea-deal-over-corruption-veja-idUSL1N1F409L.

[381] Id.

[382] Controladoria-Geral da União, Notícias, CGU e AGU Assinam Acordo de Leniência com Nova Participações S.A. (Dec. 11, 2019), https://www.cgu.gov.br/noticias/2019/11/cgu-e-agu-assinam-acordo-de-leniencia-com-nova-participacoes-s-a); James Thomas, Engevix Group Signs $124 Million Leniency Agreement in Brazil, Global Investigations Review (Nov. 13, 2019), https://globalinvestigationsreview.com/article/1210879/engevix-group-signs-usd124-million-leniency-agreement-in-brazil.

[383] Thomas, supra note 361.

[384] Id.

[385] Id.

[386] Id.

[387] Controladoria-Geral da União, Notícias, CGU e AGU Assinam Acordo de Leniência com Grupo OAS (Nov. 14, 2019), https://www.cgu.gov.br/noticias/2019/11/cgu-e-agu-assinam-acordo-de-leniencia-com-grupo-oas; Reuters, Brazil Construction Firm OAS Signs $461 Mln Leniency Deal in Corruption Case (Nov. 14, 2019) https://www.reuters.com/article/oas-corruption/brazil-construction-firm-oas-signs-461-mln-leniency-deal-in-corruption-case-idUSL2N27U0VF.

[388] CGU e AGU Assinam Acordo de Leniência com Grupo OAS, supra note 387.

[389] Id.

[390] Id.

[391] French National Financial Prosecutor’s Office & French Anti-Corruption Agency, Guidelines on the Implementation of the Convention Judiciare d’Interet Public (Judicial Public Interest Agreement) (June 26, 2019), https://www.agence-francaise-anticorruption.gouv.fr/files/files/EN_Lignes_directrices_CJIP_revAFA%20Final%20(002).pdf [hereinafter “PRF-AFA Guidelines”].

[392] See Law on Transparency, Fight Against Corruption and Modernization of Economic Life, No. 2016-1691 of 9 December 2016, French Official Gazette, No. 0287 (Dec. 10, 2016), https://www.legifrance.gouv.fr/eli/loi/2016/12/9/2016-1691/jo/texte [hereinafter “Law on Transparency”].

[393] Law on Transparency at Art. 22.

[394] Id.

[395] See French Ministry of Justice, Circulaire relative à la présentation et la mise en oeuvre des dispositions pénales prévues par la loi n°2016-1691 du 9 décembre 2016 relative à la transparence, à la lutte contre la corruption et à la modernisation de la vie économique [Circular on the presentation and implementation of the penal provisions laid down by Law no 1102016-1691 of 9 December 2016 on transparency, combatting corruption and modernization of economic life], JUSD1802971C (Jan. 31, 2018), http://circulaire.legifrance.gouv.fr/index.php?action=afficherCirculaire&hit=1&r=43109; see also PRF-AFA Guidelines at 1-2.

[396] PRF-AFA Guidelines at 2.

[397] Id. at 5.

[398] Id. at. 11.

[399] Id. at 13.

[400] Id. at 15.

[401] Id.

[402] Id. at 6.

[403] If a company is not required by law to have a compliance program, the existence of such a program will be looked upon favorably by the prosecutor. Id. at 7.

[404] Id. at 7-8.

[405] Id. at 9.

[406] Id. at 11.

[407] Id. at 9.

[408] Id. at 10.

[409] Law on Transparency at Art. 22.

[410] PRF-AFA Guidelines at 11.

[411] Id. at 11-12.

[412] Id. at 12.

[413] Id. at 13.

[414] Id.

[415] Id. at 13-14.

[416] Id. at 17.

[417] See id.

[418] Id. at 15.

[419] See id. at 3, 15.

[420] Id.

[421] Id.

[422] Law No. 68-678 of July 26, 1968.

[423] PRF-AFA Guidelines at 15.

[424] Id. at 16.

[425] Id.

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On December 30, 2019, the Second Circuit issued an opinion in United States v. Blaszczak that raises the investigative and prosecutorial risk in certain types of insider trading cases in two significant respects. 2019 WL 7289753 (2d Cir. Dec. 30, 2019). First, in a departure from traditional insider trading principles under the Securities Exchange Act (“Title 15 securities fraud”), the Second Circuit held in Blaszczak that the government can prosecute insider trading under both the criminal securities fraud provisions added in the 2002 Sarbanes-Oxley Act (“Title 18 securities fraud”) and the wire fraud statutes without any proof of a “personal benefit” to the tipper—that is, the government need not allege or prove that the tipper breached a duty in exchange for a direct or indirect personal benefit, or that the downstream tippee knew of a personal benefit to the tipper. Second, in a 2-1 decision that featured a forceful dissent by Judge Amalya L. Kearse, the Second Circuit adopted an expansive definition of “property” for purposes of the wire fraud and Title 18 securities fraud statutes, holding that “predecisional” confidential government information relating to planned medical treatment reimbursement rate changes constituted government “property” necessary to bring insider trading cases under an embezzlement or misappropriation theory. These holdings heighten the risks of criminal prosecution in insider trading cases where there is limited-to-no evidence of a direct or indirect personal benefit to the tipper or that the downstream tippee knew of any personal benefit to the tipper, as well as in cases involving disclosure of nonpublic government information.

Blaszczak Factual and Procedural Background

In Blaszczak, the United States Department of Justice (“DOJ”) alleged that, between 2009 and 2014, certain Centers for Medicare & Medicaid Services (“CMS”) employees disclosed confidential information to David Blaszczak, a former CMS employee who become a “political intelligence” consultant for certain hedge funds. Blaszczak allegedly provided confidential information relating to the timing and substance of CMS’ planned changes to its reimbursement rates for certain medical treatments to employees of the healthcare-focused hedge fund Deerfield Management Company, L.P. These employees allegedly directed Deerfield to short stocks of healthcare companies that would be hurt by the planned reimbursement rate changes.

The DOJ indicted Blaszczak, one CMS employee, and two Deerfield employees for the alleged insider trading scheme, including counts for conspiracy, conversion of U.S. property, Title 15 securities fraud, wire fraud, and Title 18 securities fraud. At an April 2018 trial, the district court instructed the jury, as relevant here, that, in order to convict on the Title 15 securities fraud count, the jury had to find that a CMS employee tipped the confidential CMS information in exchange for a personal benefit and that Blaszczak and the Deerfield employees knew that a CMS insider had done so in exchange for a personal benefit. Notably, the district court refused to give this “personal benefit” instruction on the wire fraud and Title 18 securities fraud counts. On May 3, 2018, the jury returned a split verdict that, in relevant part, acquitted all defendants on the Title 15 counts, but found the defendants guilty on other counts, including conversion, wire fraud, and (except for the CMS employee) Title 18 securities fraud. The defendants appealed on a number of grounds, including that the district court erred by refusing to include the “personal benefit” test in the Title 18 jury instructions and that the confidential CMS information did not constitute CMS’ “property” supporting conviction on the wire fraud and Title 18 securities fraud counts.

Personal Benefit Requirement Does Not Apply in Title 18 cases

The Supreme Court engrafted a “personal benefit” test on to criminal or civil insider trading cases over 35 years ago in Dirks v. SEC, 463 U.S. 646 (1983). In that case, Dirks, a broker-dealer officer, had been charged by the SEC with a civil violation of the Title 15 securities fraud statutes based on his receipt of material nonpublic information (“MNPI”) from a company’s insiders regarding fraud at that company, which information he then shared with investors who later sold the company’s stock. The Supreme Court held that tippers are only liable where they breach a fiduciary duty to the company’s shareholders, and they only breach such a duty where they “personally . . . benefit, directly or indirectly, from [their] disclosure. Absent some personal gain, there has been no breach of duty to stockholders. And absent a breach by the insider, there is no derivative breach” by those who passed on or traded on the inside information. Because the insiders in Dirks did not benefit from their disclosures to Dirks, but rather “were motivated by a desire to expose the fraud,” they did not breach any fiduciary duty; Dirks thus “had no duty to abstain from use of the inside information that he obtained.”[1]

What constitutes a “personal benefit” under Dirks has been the subject of significant litigation in recent years, including the extent to which gifting of confidential information to friends or relatives satisfied the personal benefit test. Compare United States v. Newman, 773 F.3d 438, 452 (2d Cir. 2014) (vacating insider trading convictions for lack of personal benefit where government failed to prove a “meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature”), with Salman v. United States, 137 S. Ct. 420 (2016) (affirming conviction where tipper gifted confidential information to a trading relative).

In the 2002 Sarbanes-Oxley Act, Congress added a new securities fraud provision to the criminal code, 18 U.S.C. § 1348, to “supplement the patchwork of existing technical securities law violations with a more general and less technical provision, with elements and intent requirements comparable to current bank fraud and health care fraud statutes.” S. Rep. No. 107-146, at 14 (2002). The defendants in Blaszczak challenged their convictions under this Title 18 securities fraud provision, arguing that the Dirks “personal benefit” test should apply to Title 18 charges, just as it does to Title 15 charges.

In analyzing this question, the Second Circuit in Blaszczak noted that neither the Title 15 nor Title 18 securities fraud provisions include in their text a personal benefit test. “Rather, the personal-benefit test [under Title 15] is a judge-made doctrine premised on the Exchange Act’s statutory purpose … of eliminating the use of inside information for personal advantage.” (internal quotation marks omitted; emphasis in original). The Second Circuit stated that, on the contrary, “Section 1348 was added to the criminal code by the Sarbanes-Oxley Act of 2002 in large part to overcome the ‘technical legal requirements’ of the Title 15 fraud provisions.” The Second Circuit therefore concluded, “[g]iven that Section 1348 was intended to provide prosecutors with a different – and broader – enforcement mechanism to address securities fraud than what had been previously provided in the Title 15 fraud provisions, we decline to graft the Dirks personal-benefit test onto the elements of Title 18 securities fraud.” The Court also noted that the personal-benefit test did not apply to the overlapping wire fraud statute.

The Second Circuit’s decision is consistent with those of two Northern District of Georgia courts that previously examined this issue and similarly rejected a personal benefit test under Title 18 securities fraud. See United States v. Melvin, 143 F. Supp. 3d 1354 (N.D. Ga. 2015); United States v. Slawson, 2014 WL 5804191 (N.D. Ga. Nov. 7, 2014), adopted 2014 WL 6990307 (N.D. Ga. Dec. 10, 2014). While the Second Circuit appears to be the first Court of Appeals to have reached this issue, prosecutors’ ability to reach well beyond the geographic boundaries of the Second Circuit in policing the marketplace renders the Blaszczak ruling significant precedent.

Predecisional Confidential Government Information Constitutes Government Property

The defendants in Blaszczak also challenged their Title 18 convictions on the grounds that there was insufficient evidence to prove that they defrauded CMS of any “property” because a government agency’s confidential information was purportedly not “property” belonging to that agency. In assessing this question, the court analyzed two Supreme Court decisions: Carpenter v. United States, 484 U.S. 19 (1987), and Cleveland v. United States, 531 U.S. 12 (2000).

In Carpenter, a Wall Street Journal (“WSJ”) reporter and three co-conspirators were convicted of mail and wire fraud where a reporter gave his co-conspirators advance nonpublic information regarding the timing and contents of his columns on particular stocks, so they could trade in advance of his column’s publication. The defendants argued that they did not obtain any “money or property” from the victim of the fraud, the WSJ, a necessary element for their fraud convictions. The Supreme Court disagreed, explaining that, while intangible, “the publication schedule and contents of the [] column” constituted confidential business information belonging to the WSJ, and “[c]onfidential business information has long been recognized as property.”

In Cleveland, the Supreme Court analyzed whether fraudulently-obtained Louisiana state video poker licenses constituted Louisiana’s “property” for purposes of the mail fraud statute. Distinguishing Carpenter, the Supreme Court noted that “whatever interests Louisiana might be said to have in its video poker licenses, the State’s core concern is regulatory” and those interests “cannot be economic.” (emphasis in original). Because “the State did not decide to venture into the video poker business,” but instead “permit[ted], regulate[d], and tax[ed] private operators of the games,” the Court concluded that the licenses in the State’s hands did not constitute “property.”

In a 2-1 decision, the Second Circuit in Blaszczak found the confidential CMS information more analogous to the WSJ’s confidential information in Carpenter than the state licenses in Cleveland. Specifically, in contrast to the exercise of “traditional police powers” in Cleveland, the Second Circuit concluded that “CMS’s right to exclude the public from accessing its confidential predecisional information squarely implicates the government’s role as property holder, not as sovereign.” In addition, while the court did “not read Cleveland as strictly requiring the government’s property interest to be ‘economic’ in nature, the government presented evidence that CMS does have an economic interest in its confidential predecisional information,” including “that CMS invests time and resources into generating and maintaining the confidentiality of” the information. (emphasis in original). The court therefore held that, “in general, confidential government information may constitute government ‘property’ for purposes of” wire fraud and Title 18 securities fraud charges.

Judge Kearse dissented, arguing that confidential CMS information did not constitute government “property” because “CMS is not a business…; it is a regulatory agency” and, unlike in Carpenter, “information is not CMS’s ‘stock in trade.’” Given the dissent, which increases the possibility of further review either by the Second Circuit en banc or by the Supreme Court, the Second Circuit’s December 30 opinion may not be the last decision in this case.

Implications of Blaszczak

Blaszczak heightens the risk of DOJ investigation and prosecution in the subset of insider trading cases where there is limited-to-no evidence of personal benefit to the tipper or the downstream tippee’s knowledge of the personal benefit, or cases that involve the disclosure of confidential government information.

In particular, by not requiring prosecutors to prove that the tipper embezzled or stole the information in exchange for a direct or indirect personal benefit, Blaszczak heightens the risk for analysts and others who communicate with company executives, employees, and other insiders to obtain investment-relevant information without providing any benefit to those employees. Investment professionals who trade while in possession of MNPI from company insiders, as well as whistleblowers who do not receive any personal benefit, could also see heightened risks of investigation and prosecution. In fact, while Dirks’ conviction for Title 15 insider trading was reversed by the Supreme Court, an identical prosecution by the DOJ under Title 18’s wire fraud and securities fraud provisions would likely be sustained under the reasoning in Blaszczak.

Indeed, it is difficult to square Blaszczak with Dirks, where the Supreme Court explained that “[w]hether disclosure is a breach of duty … depends in large part on the purpose of the disclosure.” In fact, the Second Circuit itself commented in Newman, “Dirks counsels us that the exchange of confidential information for personal benefit is not separate from an insider’s fiduciary breach; it is the fiduciary breach that triggers liability for securities fraud under Rule 10b–5.” 773 F.3d at 447-448 (emphasis in original). With “the purpose of the disclosure” seemingly no longer relevant under Title 18 in the wake of Blaszczak, it is unclear what remains of the breach of fiduciary duty requirement in the context of Title 18 securities fraud.

Whether the DOJ will now use Title 18 to bring insider trading cases that it would not otherwise have brought in the past due to the absence of any personal benefit evidence remains unknown. But Blaszczak makes it more likely that prosecutors will routinely bring Title 18 securities fraud and wire fraud charges in conjunction with Title 15 charges, especially given the continually evolving case law regarding what constitutes a “personal benefit.” Bringing both Title 15 and Title 18 charges could also offer the jury a way to compromise with a guilty verdict only on the easier-to-prove Title 18 charges. Indeed, one need look no further than the jury verdict in Blaszczak itself, in which the jury acquitted on the Title 15 charges where there was a personal benefit instruction, but convicted on the Title 18 charges where there was no such instruction. Because Title 18 is a criminal statute, this ruling may also create the peculiar—and inequitable—situation where the government is forced to prosecute a defendant criminally due to lack of personal benefits evidence and the SEC’s inability to proceed with civil charges under Title 15. Blaszczak could therefore prompt the SEC to seek legislation creating an analogous provision to 18 U.S.C. § 1348 that does not have the “technical legal requirements” existing in Title 15 securities fraud provisions. It could also prompt the SEC to seek the removal of the personal benefit requirement from proposed insider trading legislation currently pending in Congress. See Insider Trading Prohibition Act, H.R. 2534 116th Cong. § 16A.

In addition, Blaszczak’s holding that predecisional confidential government information constitutes government property heightens the risk of both SEC and DOJ investigations in cases involving trading while in possession of confidential executive agency information, whether obtained directly from a government employee or, as was the case in Blaszczak, from a consultant with access to government employees. This could include confidential government information covering a range of issues, including for example tariff policies, budgeting decisions, military actions, evaluations of a potential merger under anti-trust law, or the calculation of job growth or unemployment figures. Analysts and investors speaking with government personnel and “political intelligence” consultants with sources inside the government should therefore be especially wary about receiving and trading even in part based on confidential government information, particularly given that the DOJ will not be required under Title 18 to prove that the government tipper received any personal benefit from disclosure of the information.

The enhanced risks and uncertainties created by the Second Circuit’s decision in Blaszczak heighten the need to consult with in-house and outside counsel whenever there is a concern that a firm, or one of its employees, may have obtained MNPI. Blaszczak also further highlights the need to review and update compliance policies and annual trainings, to be clear that the receipt of MNPI from any source and under any circumstances requires extreme care before using the information in connection with a securities transaction.

____________________

[1] In United States v. Chestman, 947 F.2d 551 (2d Cir. 1991), and subsequent cases, courts extended the Dirks breach of fiduciary duty analysis to circumstances where a tippee is found to have breached a duty as a temporary insider and trading occurs.

The following Gibson Dunn lawyers assisted in preparing this client update: Barry Goldsmith, Avi Weitzman, Reed Brodsky, Richard Grime, Joel Cohen, Mark Schonfeld and Jonathan Seibald.

Gibson Dunn lawyers are available to assist in addressing any questions you may have about this development. Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following leaders and members of the firm’s Securities Enforcement or White Collar Defense and Investigations practice groups:

New York
Matthew L. Biben (+1 212-351-6300, [email protected])
Reed Brodsky (+1 212-351-5334, [email protected])
Joel M. Cohen (+1 212-351-2664, [email protected])
Lee G. Dunst (+1 212-351-3824, [email protected])
Barry R. Goldsmith (+1 212-351-2440, [email protected])
Laura Kathryn O’Boyle (+1 212-351-2304, [email protected])
Mark K. Schonfeld (+1 212-351-2433, [email protected])
Alexander H. Southwell (+1 212-351-3981, [email protected])
Avi Weitzman (+1 212-351-2465, [email protected])
Lawrence J. Zweifach (+1 212-351-2625, [email protected])
Tina Samanta (+1 212-351-2469, [email protected])

Washington, D.C.
Stephanie L. Brooker (+1 202-887-3502, [email protected])
Daniel P. Chung (+1 202-887-3729, [email protected])
Stuart F. Delery (+1 202-887-3650, [email protected])
Richard W. Grime (+1 202-955-8219, [email protected])
Patrick F. Stokes (+1 202-955-8504, [email protected])
F. Joseph Warin (+1 202-887-3609, [email protected])

Palo Alto
Michael D. Celio (+1 650-849-5326, [email protected])
Paul J. Collins (+1 650-849-5309, [email protected])
Benjamin B. Wagner (+1 650-849-5395, [email protected])

Denver
Robert C. Blume (+1 303-298-5758, [email protected])
Monica K. Loseman (+1 303-298-5784, [email protected])

Los Angeles
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Debra Wong Yang (+1 213-229-7472, [email protected])

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

On December 30, 2019, the Securities and Exchange Commission (the “SEC”) released a statement (the “Statement”) from Chairman Jay Clayton, Chief Accountant Sagar Teotia and the Director of the Division of Corporation Finance, William Hinman, addressing the role of the audit committee in financial reporting and highlighting key reminders regarding oversight responsibilities (available here). The Statement is intended to “assist audit committees [in] carrying out their year-end work, including promoting efficient and constructive dialogue among audit committees, management and independent auditors.”

The observations included in the Statement do not introduce new requirements for audit committees, but the Statement is a helpful reminder for audit committees, management and outside auditors about audit committee practices that help to promote healthy oversight over financial reporting. Although the Statement covers a range of topics, a theme that runs through the observations is an emphasis on active engagement by the audit committee and on the benefits of clear communication among the audit committee, management and the outside auditor.

Below are the observations and reminders highlighted in the Statement. The Statement styles the first five topics as “general observations” and the last three as “more specific observations.” Although most of the observations in the Statement speak for themselves in terms of next steps and practice pointers, we have provided some additional commentary in italicized text below on a few of the topics.

Tone at the Top: The Statement emphasizes the role of the audit committee in “setting the tone for the company’s financial reporting and the relationship with the independent auditor.” As part of this, the Statement notes that it is important for the audit committee to “set an expectation for clear and candid communications to and from the auditor” and an expectation with management and the auditor that the audit committee will engage as financial reporting and control issues arise. Additionally, the Statement highlights the audit committee should proactively communicate with the independent auditor to understand the audit strategy and status, and raise questions regarding issues identified and understand the resolution of such issues.

Although “tone at the top” is an amorphous concept, this is a helpful reminder for audit committees to consider the steps they are taking to reinforce effective messaging about the need to have an environment that supports integrity in the financial reporting process. For example, as audit committees go through their own annual self-assessment processes, it would be worthwhile to incorporate this topic as an element of that process and then to evaluate and implement action steps, as appropriate, based on that self-assessment.

Auditor Independence: The Statement notes that audit committees play a critical role in an auditor’s compliance with the auditor independence rules and encourages “audit committees to consider periodically the sufficiency of the auditor’s and the issuer’s monitoring processes.” As part of this, the Statement notes that audit committees should consider the processes that are in place to facilitate the timely communication to the auditor of corporate changes and other events at the company that could affect auditor independence, including changes or events that may result in new affiliate relationships.

Periodic review of processes in place at the company to monitor auditor independence matters – such as audit committee pre-approval policy and policies for hiring former audit firm personnel – is standard practice, but this is a helpful reminder to ensure those reviews take place. In light of this observation in the Statement, audit committees also should inquire of management and the auditor to make sure the committee understands the steps that are in place to communicate to the auditor about new affiliate relationships.

GAAP: The Statement also addresses the audit committee’s role in implementing new Generally Accepted Accounting Principles (“GAAP”) standards, noting that the audit committee should promote “an environment for management’s successful implementation of new standards.” Specifically, the Statement observes that audit committees should proactively engage with management and the auditors to understand how management plans to implement new accounting standards, including “whether the plan provides sufficient time and resources to develop well-reasoned judgments and accounting policies.” The Statement also encourages audit committees to take the time to understand the processes for establishing and monitoring internal controls related to adoption and transition to new GAAP standards.
Internal Control Over Financial Reporting: In discussing the audit committee’s responsibility for overseeing internal control over financial reporting (“ICFR”), the Statement notes that audit committees should have “a detailed understanding of identified ICFR issues and engage proactively to aid in their resolution.” Additionally, the Statement observes that when there is a material weakness, audit committees should understand and monitor management’s remediation plans and emphasizes that audit committees need to set an appropriate tone that prompt, effective remediation of the material weakness is a high priority.

Here, the Statement serves as a helpful reminder that where internal control issues are “identified” for the audit committee, the committee should proactively engage in seeking to resolve the issue. Even though the Statement focuses on steps audit committees should take when a material weakness is identified, the observations about understanding and monitoring remediation plans also serve as helpful reminders to consider when significant deficiencies are identified given that management has to bring both material weaknesses and significant deficiencies to the audit committee’s attention.

Communications to the Audit Committee from the Auditor: PCAOB AS 1301, Communications with Audit Committees, requires the auditor to communicate with the audit committee regarding certain matters related to the conduct of the audit and to obtain certain information from the audit committee relevant to the audit, including matters related to certain accounting policies and practices, estimates and significant unusual transactions. The Statement reminds audit committees of this process and encourages them to be active participants in this dialogue with the auditor.
Non-GAAP Measures: The Statement encourages audit committees to actively engage in the review of non-GAAP measures and metrics to understand: how management uses them to evaluate performance; whether they are consistently presented from period to period; and the company’s related policies and disclosure controls and procedures in place for monitoring use of non-GAAP measures.
LIBOR: The Statement also discusses the audit committee’s role in monitoring risks associated with the discontinuation of LIBOR and encourages audit committees to understand how management plans to identify and address any such risks, including the “impact on accounting and financial reporting and any related issues associated with financial products and contracts that reference LIBOR.”

This observation continues the SEC’s push to have public companies focus on managing their transition away from LIBOR and identifying relevant risks. Additionally, this reminds the audit committee that it should be involved in this process and discuss the transition away from LIBOR with management. For more information on the SEC staff’s views on the LIBOR transition, see our previous blog post.

Critical Audit Matters: With respect to critical audit matters (“CAMs”), the Statement encourages audit committees to engage in a “substantive dialogue” with auditors regarding the audit and expected CAMs in order to “understand the nature of each CAM, the auditor’s basis for the determination of each CAM and how each CAM is expected to be described in the auditor’s report.”

Michael J. Scanlon – Washington, D.C. (+1 202-887-3668, [email protected])
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, [email protected])
James J. Moloney – Orange County, CA (+ 949-451-4343, [email protected])
Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, [email protected])
Michael A. Titera – Orange County, CA (+1 949-451-4365, [email protected])
Gillian McPhee – Washington, D.C. (202-955-8201, [email protected])
David C. Ware – Washington, D.C. (+1 202-887-3652, [email protected])

Thanks to associate Rob Kelley in New York for his assistance in the preparation of this client update.

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Washington, D.C. partner Kristen Limarzi is the author of “INSIGHT: Even Without Marty McFly Powers, Antitrust Regulators Generally Get It Right,” [PDF] published by Bloomberg Law on January 3, 2020.

2019 was, by many measures, the most significant year ever in Foreign Corrupt Practices Act (“FCPA”) enforcement. More than $2.6 billion in corporate fines sets a new high-water mark, driven by the two largest corporate resolutions in the statute’s history. Fifty-four FCPA enforcement actions, or 73 total cases including ancillary actions, brought by the FCPA Units of the U.S. Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”), each rank second only to 2010 in the annals of FCPA enforcement. Four FCPA and FCPA-related trials is the most ever. Add on top of this new FCPA enforcement policy guidance from DOJ, an expanding body of case law on the FCPA and related offenses, among many other developments, and there is a strong argument that international anti-corruption enforcement has never been more robust.

This client update provides an overview of the FCPA and other domestic and international anti-corruption enforcement, litigation, and policy developments from 2019, as well as the trends we see from this activity. We are privileged to help our clients navigate these challenges daily and are honored to have once again been ranked Number 1 in the Global Investigations Review “GIR 30” ranking of the world’s top investigations practices, as well as The American Lawyer’s “Litigation Department of the Year” ranking of the nation’s top litigation practices. For more analysis on the year in anti-corruption enforcement, compliance, and corporate governance developments, please join us for our upcoming complimentary webcast presentations: 10th Annual Webcast: FCPA Trends in Emerging Markets on January 8 (to register, click here) and 16th Annual Webcast: Challenges in Compliance and Corporate Governance on January 23 (to register, click here).

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 among these “FCPA-related” charges is money laundering—a generic shorthand term for several statutory provisions that together criminalize the concealment or transfer of proceeds from certain “specified unlawful activities,” including corruption under the FCPA or 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 thus increasingly commonplace for DOJ to charge the alleged provider of a corrupt payment under the FCPA and the alleged recipient with money laundering violations. DOJ has even used these foreign officials to cooperate in ongoing investigations.

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.

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

DOJ	SEC	DOJ	SEC	DOJ	SEC	DOJ	SEC	DOJ	SEC	DOJ	SEC	DOJ	SEC	DOJ	SEC	DOJ	SEC	DOJ	SEC
48	26	23	25	11	12	19	8	17	9	10	10	21	32	29	10	22	17	35	19

As impressive as these numbers are in their own right, as we noted in our 2018 Year-End FCPA Update these FCPA enforcement statistics increasingly tell only a part of the story in international anti-corruption enforcement by U.S. prosecutors and regulators. Last year, for the first time in the modern enforcement era, DOJ’s FCPA Unit brought more corruption cases under related statutes, such as money laundering, than it did under the FCPA. In 2019, criminal FCPA enforcement actions were back out in front with 35, but the additional subset of 19 FCPA-related criminal enforcement actions continued a trend of substantial extra-FCPA enforcement by DOJ. As can be seen from the below table and graph, which includes non-FCPA charges brought by the FCPA Unit in international corruption investigations, 2019 was the most prolific year in the history of foreign anti-corruption enforcement by DOJ’s FCPA Unit.

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

DOJ	SEC	DOJ	SEC	DOJ	SEC	DOJ	SEC	DOJ	SEC	DOJ	SEC	DOJ	SEC	DOJ	SEC	DOJ	SEC	DOJ	SEC
51	26	24	25	12	12	21	8	19	9	12	10	27	32	36	10	48	17	54	19

In each of our year-end FCPA updates, we seek not only to report on the year’s FCPA enforcement activity but also to distill the trends that stem from these actions. Given the long incubation period of most FCPA cases, enforcement trends often have a multi-year trajectory. 2019 was no different, as the year’s FCPA enforcement activity sounded in many of the themes we have observed over recent years. Although one could reasonably argue for the inclusion of others, we have identified six key enforcement trends for 2019 that we believe stand out from the rest:

A new high-water mark for corporate FCPA financial penalties;
FCPA clusters;
DOJ issues declinations despite aggravating factors;
SEC continues to invoke aggressive theories of FCPA liability;
DOJ continues to bring a significant number of “FCPA-related” charges; and
Several FCPA defendants go to trial.

A New High-Water Mark for Corporate FCPA Financial Penalties

We consistently advise against overreliance upon any single year’s enforcement statistics, lest aberration be confused with trend. That said, significant enforcement activity in 2019 pushed the FCPA to new limits. Four corporate FCPA enforcement actions included combined financial penalties of more than $200 million each. Two companies entered into resolutions earlier in the year for $282.6 million and $231.7 million. In other years, these might stand out as the most significant financial resolutions, but in 2019 they were overshadowed as the record for highest FCPA resolution was set two times over.

On March 6 and 7, 2019, the SEC and DOJ announced a combined $850 million FCPA resolution with Russian telecommunications company and U.S. issuer Mobile TeleSystems PJSC (“MTS”). The charges arise from the long-running investigation of alleged corrupt payments to Gulnara Karimova, daughter of the late Uzbek president, to facilitate access to the Uzbek telecom market. Similar conduct arising from the same investigation previously led to FCPA resolutions with VimpelCom Ltd. and Telia Company AB as reported in our 2016 Mid-Year and 2017 Year-End FCPA Updates, respectively. With respect to MTS, the government alleged that the company and its Uzbek subsidiary paid approximately $420 million in bribes to Karimova between 2004 and 2012 through shell companies, charities, sponsorships, and inflated prices paid to purchase shares in a company owned by Karimova.

To resolve the criminal charges, MTS entered into a deferred prosecution agreement with DOJ on charges of conspiracy to violate the FCPA’s anti-bribery and books-and-records provisions and a substantive violation of the internal controls provision, and its Uzbek subsidiary pleaded guilty to one count of conspiracy to violate the anti-bribery and books-and-records provisions. To resolve the civil charges, MTS consented to a cease-and-desist proceeding by the SEC alleging violations of the anti-bribery, books-and-records, and internal controls provisions. With offsetting credits, MTS paid $750 million to resolve the criminal FCPA charges and $100 million to resolve the civil FCPA charges, and it agreed to retain an independent compliance monitor for a three-year term.

Simultaneous with the corporate resolutions, DOJ announced unsealed indictments charging Karimova with one count of money laundering conspiracy and Bekhzod Akhmedov, a former MTS Uzbek subsidiary general director, with one count of FCPA conspiracy, two substantive FCPA violations, and one count of money laundering conspiracy. According to the indictments, in the early 2000s, the pair agreed that Akhmedov would facilitate bribe payments to Karimova, totaling more than $865 million over the course of the scheme, in exchange for her help facilitating the entry into the local telecom market for various companies. Neither defendant has yet made an appearance in U.S. court, with Karimova reportedly in Uzbek custody serving a prison term on local corruption charges.

MTS held the top spot as the largest corporate FCPA monetary resolution in history for nine months, until on December 6, 2019, DOJ and the SEC announced that Telefonaktiebolaget LM Ericsson agreed to pay more than $1 billion to resolve investigations into alleged FCPA violations in China, Djibouti, Indonesia, Kuwait, Saudi Arabia, and Vietnam. According to the charging documents, between 2000 and 2017, Ericsson allegedly entered into sham contracts with third-party agents for the payment of “corporate marketing fees” that were in reality used to facilitate corrupt payments to government officials, all with the knowledge of “high-level executives.”

To resolve criminal charges of conspiring to violate the FCPA anti-bribery, books-and-records, and internal controls provisions, Ericsson entered into a three-year deferred prosecution agreement with DOJ, pursuant to which it agreed to pay a criminal penalty of $520,650,432 and to retain a compliance monitor for three years. Ericsson’s Egyptian subsidiary also pleaded guilty to one count of conspiracy to violate the anti-bribery provisions.

To resolve the civil case with the SEC, Ericsson consented to an injunction from future violations of the FCPA’s anti-bribery, books-and-records, and internal controls provisions, and agreed to pay nearly $539,920,000 in disgorgement plus prejudgment interest, bringing the total financial resolution to $1,060,570,432. The SEC’s resolution also includes the same requirement for a compliance monitor with a three-year term.

Together with the other enforcement activity from 2019, corporate fines in FCPA cases topped $2.5 billion for the first time in the history of the statute. A chart tracking the total value of corporate FCPA monetary resolutions by year, since the advent of blockbuster fines brought in with the 2008 Siemens resolution, follows:

Chart - Total Value of Corporate FCPA Monetary Resolutions (2008-2019)

The Ericsson and MTS matters now hold the Number 1 and 2 positions on the Corporate FCPA Top 10 list, respectively, which currently reads as follows:

No.	Company*	Total Resolution	DOJ Component	SEC Component	Date
1	Ericsson	$1,060,570,432	$520,650,432	$539,920,000	12/06/2019
2	Mobile TeleSystems	$850,000,000	$750,000,000	$100,000,000	03/07/2019
3	Siemens**	$800,000,000	$450,000,000	$350,000,000	12/15/2008
4	Alstom	$772,290,000	$772,290,000	—	12/22/2014
5	KBR/Halliburton	$579,000,000	$402,000,000	$177,000,000	02/11/2009
6	Teva	$519,000,000	$283,000,000	$236,000,000	12/22/2016
7	Telia***	$483,103,972	$274,603,972	$208,500,000	09/21/2017
8	Och-Ziff	$412,000,000	$213,000,000	$199,000,000	09/29/2016
9	BAE Systems****	$400,000,000	$400,000,000	—	02/04/2010
10	Total S.A.	$398,200,000	$245,200,000	$153,000,000	05/29/2013

* Our figures do not include the 2018 FCPA case against Petróleo Brasileiro S.A. – Petrobras (“Petrobras”), even though some sources have reported the resolution as high as $1.78 billion, because the first-of-its kind resolution negotiated by Gibson Dunn offset the vast majority of payments against a shareholders’ class action lawsuit and foreign regulatory proceeding, leaving only $170.6 million fairly attributable to the DOJ / SEC FCPA resolution.

** Siemens’s U.S. FCPA resolutions were coordinated with a €395 million ($569 million) anti-corruption settlement with the Munich Public Prosecutor.

*** The combined amount of U.S., Dutch, and Swedish financial penalties was $965.6 million.

**** BAE pleaded guilty to non-FCPA conspiracy charges of making false statements and filing false export licenses, but the alleged false statements concerned the existence of the company’s FCPA compliance program, and the publicly reported conduct concerned alleged corrupt payments to foreign officials.

FCPA Clusters

A core platform of the stratospheric success of DOJ and SEC FCPA enforcement over the past 15 years is the significant leverage the agencies have employed to turn singular investigations into multiple—sometimes myriad—enforcement actions. One way to do this is to charge both the company and one or more of its employees or agents. Another is to use one entity at the center of a particular activity as a hub and then proceed out to each of the spokes—prominent examples include the “Panalpina” oil services cases of 2010 and the Petrobras “Operation Car Wash” investigation that has netted FCPA charges in each of the past four years. Yet a third method is to focus on a particular industry practice, with the “princeling” hiring of children of government officials for internships in the banking sector being a prominent recent example. Of whichever variety, the FCPA Unit prosecutors and regulators continue to follow the evidence and efficiently churn out new cases in clusters.

A great example of DOJ leveraging a relatively contained, one-country fact pattern into many cases over numerous years, extending into 2019, is Alstom S.A.’s alleged corrupt winning of the Taharan power plant contract in Indonesia. We first reported on this investigation in our 2013 Mid-Year FCPA Update, when charges were filed against former Alstom executives David Rothschild, Frederic Pierucci, William Pomponi, and Lawrence Hoskins. Corporate cases against Alstom (which extended well beyond Indonesia) and Marubeni Corporation followed the next year, as reported in our 2014 Year-End and 2014 Mid-Year FCPA Updates, respectively. In 2019, DOJ won a trial conviction of Hoskins, as covered below, but other new charges filed during the summer were against former Alstom Indonesia Country President Edward Thiessen and Regional Sales Manager Larry Puckett, each of whom had entered into plea agreements years ago, which remained non-public until their cooperation completed with testimony at Hoskins’s trial. This brings the number of defendants associated with this investigation to eight, and underscores our periodic point that even as we report on public prosecutions, there may be in any given year a number of additional cases pending under seal.

As noted above, Brazil’s Operation Car Wash is among the most prolific anti-corruption investigations of all time and a perfect example of a “hub and spoke” approach to FCPA matters. In 2019, there were four new FCPA cases that, while separate, all arose out of the same broader investigation:

On November 22, 2019, DOJ announced an FCPA resolution with Korean engineering company Samsung Heavy Industries Co. Ltd. arising from the company’s alleged provision of $20 million to an intermediary, between 2007 and 2013, while knowing that some or all of that amount would be paid to officials at Petrobras. To resolve FCPA anti-bribery conspiracy charges, Samsung Heavy Industries entered into a deferred prosecution agreement with DOJ and agreed to pay a $75.5 million criminal fine, half of which is to be credited to a parallel resolution the company reached with Brazilian authorities.
On November 20, 2019, DOJ announced the unsealing of a February indictment of Brazilian citizen Jose Carlos Grubisich, a former CEO and board member of Brazilian petrochemical company and U.S. ADS-issuer Braskem S.A. (which itself reached the first FCPA resolution arising from Operation Car Wash, together with parent company Odebrecht S.A., as covered in our 2016 Year-End FCPA Update). DOJ alleges that Grubisich directed corrupt payments, caused the falsification of Braskem’s records including by making false SOX sub-certifications, and engaged in a money laundering conspiracy. No trial date has yet been set. Grubisich, who was arrested at JFK Airport when he arrived in New York for a vacation unaware of the sealed indictment, is being held without bail while he contests DOJ’s argument that he is a flight risk.

On June 25, 2019, DOJ and Brazilian authorities announced a coordinated resolution with UK oil and gas company TechnipFMC plc related to the conduct of its predecessor companies—Technip S.A. and FMC Technologies, Inc. There were two corruption schemes alleged, one related to Brazil and Technip and the other to Iraq and FMC Technologies (covered below). For the Brazilian scheme, DOJ and Brazilian prosecutors alleged that, from 2003 to 2013, the legacy Technip business conspired with Singapore-based Keppel Offshore & Marine Ltd. (which previously resolved FCPA charges as covered in our 2017 Year-End FCPA Update) to pay more than $69 million for the ultimate benefit of officials at Petrobras, as well as $6 million in payments to Brazil’s Workers’ Party and certain party officials. To resolve the overall charges with DOJ, TechnipFMC entered into a deferred prosecution agreement and its U.S. subsidiary pleaded guilty, both in connection with charges of conspiracy to violate the FCPA’s anti-bribery provisions, and TechnipFMC agreed to pay a total penalty of more than $296 million, 70% of which will be paid to Brazilian authorities. Notably, this penalty reflects a 25% discount for TechnipFMC’s cooperation, but that discount was applied to an amount near the middle of the Sentencing Guidelines range rather than the bottom, as is more frequently the case, because of Technip’s recidivism, having previously resolved FCPA charges with DOJ and the SEC in connection with the Bonny Island, Nigeria FCPA scheme as reported in our 2010 Mid-Year FCPA Update.
Coincident with the corporate resolution with TechnipFMC, DOJ announced the guilty plea of Brazilian citizen Zwi Skornicki to a single count of conspiracy to violate the FCPA’s anti-bribery provisions. Skornicki admitted that as an agent of both TechnipFMC and Keppel Offshore & Marine, between 2001 and 2014, he participated in a scheme to pay $55 million in bribes to officials of Petrobras and the Brazilian Workers’ Party. Skornicki currently awaits a 2020 sentencing date.

As noted above, the TechnipFMC resolution also included an Iraqi component pertaining to the alleged conduct of its predecessor FMC Technologies. This would later serve as the sole basis for a case brought by the SEC on September 19, 2019, whereby the SEC alleged that, between 2008 and 2013, FMC paid nearly $800,000 in commissions to a Monaco-based oil services company while knowing that some or all of those payments would be provided to Iraqi government officials. To resolve the SEC charges, TechnipFMC consented to a cease-and-desist order enjoining future violations of the anti-bribery, books-and-records, and internal controls provisions and agreed to disgorge $5,061,906 in profits plus prejudgment interest.

The Iraqi scheme of the TechnipFMC resolution, and specifically the use of its Monaco-based oil services company, brings us to another, developing cluster of anti-corruption enforcement that we predict will spawn FCPA cases for years to come. The Monégasque oil services company has been publicly identified as Unaoil, and its imbroglio has grown to include the guilty pleas of former CEO Cyrus Allen Ahsani, former COO Saman Ahsani, and former Business Development Director Steven Hugh Hunter. All three pleaded guilty to a single count of conspiracy to violate the FCPA’s anti-bribery provision. Hunter’s case is narrower and alleges a corruption scheme in Libya between 2009 and 2015. The charges against the Ahsani brothers are far more sweeping, and allege a scheme spanning 1999 through 2016, 27 client companies (most of which are anonymized, but Rolls-Royce PLC and SBM Offshore N.V. are named based on their prior FCPA settlements as covered in our 2017 Mid-Year and 2017 Year-End FCPA Updates, respectively), and payments to government officials in Algeria, Angola, Azerbaijan, the Democratic Republic of the Congo, Iran, Iraq, Kazakhstan, Libya, and Syria. Each of the former Unaoil executives awaits a 2020 sentencing date. We cover Unaoil developments on the other side of the Atlantic in our UK section.

The third type of FCPA enforcement cluster concerns a similar pattern of conduct that is widespread throughout an industry. A prevalent example from recent years relates to the hiring of family members of foreign government officials, which though not inherently illegal under the FCPA, does present heightened risk as it may be later perceived that the hiring was not based on the merits of the candidate but rather on the hope that it would corruptly influence the government official. We have covered numerous examples of these cases in recent years, and 2019 brings us two more.

On August 22, 2019, the SEC announced a settled cease-and-desist proceeding against Deutsche Bank AG to resolve allegations that the bank did not adequately enforce its Asia-Pacific Region hiring policy. According to the SEC, the bank continued to hire individuals linked to state-owned entities and officials, often outside the typical application process, following circulation of a compliance memo identifying potential corruption risks associated with such practices. To resolve the allegations of books-and-records and internal controls violations, Deutsche Bank agreed to pay $10.8 million in disgorgement, $2.4 million in prejudgment interest, and a $3 million civil penalty, for a total of $16,179,850.

In a similar action, on September 27, 2019, Barclays PLC consented to an SEC cease-and-desist proceeding for alleged violations of the FCPA’s accounting provisions. According to the SEC, over approximately four years, subsidiaries in the Asia-Pacific Region hired more than 100 candidates who were referred by or connected to executives at clients, both governmental and commercial. Despite policies prohibiting that provision of employment in exchange for business, Barclays allegedly did not effectively train personnel on the policies or monitor compliance with them. To resolve the allegations, Barclays agreed to pay $4.8 million in disgorgement plus prejudgment interest and a $1.5 million penalty, for a total of $6,308,726.

DOJ Issues Declinations Despite Aggravating Factors

As discussed in our 2017 Year-End FCPA Update, DOJ’s FCPA Corporate Enforcement Policy introduced a presumption that DOJ will decline to prosecute a company that voluntarily discloses FCPA-related misconduct, cooperates fully in the investigation, and appropriately remediates the misconduct. Among the Policy’s many caveats, however, is that the presumption may be overcome by certain aggravating factors, which include the involvement of executive management in the misconduct. These caveats caused many to wonder if the exceptions might swallow the rule, even as DOJ officials have assured that this is not the case. Supporting DOJ’s notion, in 2019, DOJ issued two corporate declinations in cases involving alleged misconduct by senior leadership.

The first such example came on February 15, 2019, with New Jersey-headquartered information technology services company Cognizant Technology Solutions Corp. The company settled an SEC cease-and-desist proceeding for alleged FCPA bribery, books-and-records, and internal controls violations. The SEC’s order included allegations that then-President Gordon J. Coburn and then-Chief Legal Officer Steven E. Schwartz authorized Cognizant’s construction contractor in India to make a $2 million payment to government officials to obtain permits and licenses related to the construction and operation of various Cognizant facilities in that country, and then agreed to reimburse the contractor through $2.5 million in previously rejected change orders. Without admitting or denying the allegations, Cognizant consented to the cease-and-desist proceeding and agreed to pay a $6 million civil penalty together with disgorgement and prejudgment interest of $19,167,368, as well as to self-report to the SEC on remediation and compliance matters for a two-year period.

On the same day as the SEC resolution, DOJ published a letter declining to prosecute Cognizant for the same conduct, but requiring Cognizant to disgorge $2,976,210 in additional profits allegedly earned outside of the statute-of-limitations period covered by the SEC resolution, thus making this another “declination with disgorgement” included for statistical purposes. DOJ prominently noted the company’s timely voluntary disclosure, cooperation, remedial efforts, and agreement to disgorge all benefits from the conduct as determined by a “cost avoidance calculation,” which overcame the “aggravating factor” of senior management involvement in the misconduct.

Both Coburn and Schwartz have been charged criminally by DOJ and civilly by the SEC in connection with the alleged India bribery scheme. They have pleaded not guilty and filed a motion to dismiss the criminal charges. The civil case has been stayed on DOJ’s motion, pending resolution of the criminal cases. But the SEC has not rested on its laurels, as on September 13, 2019 it brought a third case, this one against former Cognizant COO and Indian national Sridhar Thiruvengadam. The SEC alleges that Thiruvengadam caused the falsification of Cognizant’s books and records, and circumvented its internal controls, including by signing false SOX sub-certifications stating that he was unaware of any fraud involving senior management when he allegedly was aware of the India bribery scheme. Without admitting or denying the allegations, Thiruvengadam consented to the cease-and-desist order and agreed to pay a civil penalty of $50,000. DOJ has not announced criminal charges against Thiruvengadam.

The second example of DOJ issuing a public declination in an FCPA matter, despite the alleged involvement of senior management, occurred on September 26, 2019 and involves Wisconsin-based digital printing company Quad/Graphics, Inc. According to the allegations in a parallel SEC cease-and-desist proceeding, Quad/Graphics engaged in bribery schemes in Peru and China, and concealed unlawful sales to Cuba by manipulating sales records, including with the involvement of senior sales and finance executives based in the United States. To resolve the SEC’s anti-bribery and accounting provisions charges, Quad/Graphics agreed to pay a total of $9,895,334 in disgorgement, prejudgment interest, and penalties and to a one-year self-reporting period. DOJ’s declination letter did not require additional disgorgement or punitive measures beyond the SEC resolution, and thus is not counted as a separate action for statistical purposes.

SEC Continues to Invoke Aggressive Theories of FCPA Liability

The SEC showed that it will continue to employ aggressive theories of liability utilizing the FCPA’s accounting provisions, a multi-year trend that we have highlighted in our 2018 and 2017 Year-End FCPA Updates. A notable example from 2019, covered above, is the use of the FCPA’s accounting provisions to charge sanctions-related misconduct involving Quad/Graphics and its sales to Cuba. The SEC alleged that the company “falsified” its corporate books and records by referring to transactions involving Cuba’s state-owned telecommunications company without mentioning the word “Cuba” and using generic terms like “broker” and customer initials. There also have been public reports of the SEC attempting to similarly expand the FCPA’s accounting provisions to punish AML-related deficiencies, although SEC FCPA Unit Chief Charles E. Cain has downplayed those reports.

In another recent example of aggressive SEC theories on display, on May 9, 2019, the SEC announced a settled cease-and-desist proceeding alleging that Brazilian telecommunications company and U.S. ADR issuer Telefônica Brasil provided 232 tickets to 127 government officials to attend the 2014 World Cup and the 2013 Confederations Cup, worth a total of $738,000, inclusive of hospitality (~ $5,800 per official, on average). Although the SEC intimated potential corruption by quoting from various company documents suggesting that the tickets were “for relationship-building activities with strategic audiences” and that guest lists took into account “the importance of the actions that each guest has already effectively done in our favor,” there was no allegation or charge of corruption or benefit received as a result of the tickets. Rather, the alleged violations were that Telefônica Brasil lacked internal controls to prevent gifts that “might influence or reward an official decision,” and “inaccurately” recorded the expenses as “Publicity Institutional Events” and “Advertising & Publicity” rather than explicitly noting that the tickets “were given to government officials.” To settle the SEC’s books-and-records and internal controls charges, and without admitting or denying the allegations, Telefônica Brasil consented to the entry of a cease-and-desist order and agreed to pay a $4,125,000 civil penalty. To date, it does not appear that DOJ intends to bring any charges.

The SEC and DOJ initiated or unsealed FCPA charges against 30 individual defendants in 2019, including nine associated with corporate enforcement events involving Alstom (Puckett and Thiessen), Cognizant (Coburn, Schwartz, and Thiruvengadam), MTS (Akhmedov), TechnipFMC (Skornicki), Braskem (Grubisich), and Westport Fuel (Nancy Gougarty). Continuing a trend observed in our 2018 Year-End FCPA Update, DOJ’s FCPA Unit also brought a significant number of non-FCPA prosecutions against individuals, initiating an additional 19 individual prosecutions in non-FCPA actions arising out of FCPA investigations.

Increasingly pairing charges against bribe payer and bribe recipient, the non-FCPA charges in large part target foreign official bribe recipients, who under established case law cannot be charged under the FCPA but can be charged with other criminal offenses associated with the receipt of those bribes, most frequently money laundering. Another significant category of “FCPA-related” charges includes so-called “facilitators” who allegedly participated in the transfer of corrupt proceeds, but for jurisdictional, evidentiary, or other reasons are charged with money laundering rather than FCPA counts. Examples of each abound in the 2019 enforcement statistics.

One significant cluster of FCPA and FCPA-related enforcement activity continues to arise out of separate, long-running investigations of corruption tied to Venezuela’s state-owned energy company, Petróleos de Venezuela S.A. (“PDVSA”), among other departments, as follows:

On February 26, 2019, in connection with a “pay to play” bid rigging scheme, DOJ unsealed FCPA charges against Venezuelan nationals Franz Herman Muller Huber and Rafael Enrique Pinto Franceschi, respectively the president and a sales representative of a U.S.-based industrial equipment company, for FCPA, wire fraud, and money laundering charges. DOJ alleges that, between 2009 and 2013, the two defendants paid bribes to three PDVSA officials to obtain favorable bidding treatment, inside information about competitors, and preferential payment on past due invoices. Both Muller and Pinto have pleaded guilty and await sentencing, as is also the case with two of the three alleged PDVSA bribe recipients, Jose Orlando Camacho and Ivan Alexis Guedez, who were covered in our 2018 Year-End FCPA Update.
On September 4, 2019, a superseding indictment was unsealed charging Javier Alvarado Ochoa, Daisy Teresa Rafoi Bleuler, and Paulo Jorge Da Costa Casqueiro Murta with substantive and conspiracy money laundering charges, and Rafoi and Casqueiro additionally with FCPA conspiracy. The original indictment, which included Nervis Gerardo Villalobos Cardenas, Alejandro Isturiz Chiesa, and Rafael Ernesto Reiter Munoz, among others, as discussed in our 2018 Mid-Year FCPA Update, alleged that Venezuelan nationals and PDVSA officials solicited bribes and kickbacks from vendors in exchange for PDVSA contracts. The superseding indictment alleges that Alvarado (a Venezuelan national and PDVSA official) participated in the scheme, with Rafoi and Casqueiro (both Swiss-based wealth managers) laundering the proceeds through Swiss bank accounts.
Illustrating the length of these PDVSA bid-rigging corruption investigations, in June 2019 DOJ moved to unseal a 2016 criminal information charging Darwin Enrique Padron Acosta with one count of conspiracy to commit FCPA bribery and money laundering in connection with corrupt payments allegedly made to Jose Luis Ramos Castillo, a PDVSA official whose money laundering plea we first covered in our 2016 Mid-Year FCPA Update. In November 2019, Padron was sentenced on his 2016 guilty plea to 18 months incarceration and the forfeiture of more than $9 million.
In a separate Venezuelan corruption scheme, this one relating to state-owned electric company Corporación Eléctrica Nacional, S.A. (“Corpoelec”), DOJ has announced FCPA and FCPA-related charges against four defendants. On June 24, 2019, Venezuelan citizen Jesus Ramon Veroes and U.S. citizen Luis Alberto Chacin Haddad each pleaded guilty to FCPA conspiracy charges arising from an alleged scheme to pay bribes to senior Corpoelec officials in exchange for the award of contracts worth $60 million. Days later, on June 27, Luis Alfredo Motta Dominguez and Eustiquio Jose Lugo Gomez, respectively the former President and Procurement Director of Corpoelec, were indicted on money laundering charges. The underlying investigation reportedly stems from a would-be accomplice who initially was part of the scheme, but after feeling cheated out of money promised by Chacin and Veroes became a confidential witness for the U.S. government. Chacin and Veroes were each sentenced to 51-months imprisonment and agreed to disgorge more than $5 million in profits and to surrender Miami real estate, while both Motta and Lugo are currently considered fugitives. In a sign of the ever-increasing confluence of FCPA, anti-money laundering, and sanctions enforcement, the Department of Treasury’s Office of Foreign Assets Control has added Motta and Lugo to the specially designated nationals (“SDN”) list, thus prohibiting U.S. persons from engaging in business dealings with them or their assets.
Staying in Venezuela, but with yet a third, fourth, and fifth government agency, on July 25, 2019, DOJ announced an indictment of Colombian citizens Alex Nain Saab Moran and Alvaro Pulido Vargas for their alleged roles in a bribery scheme involving the Servicio Nacional Integrado de Administración Aduanera y Tributaria (“SENIAT”), Comisión de Administración de Divisas (“CADIVI”), and Guardia Nacional Bolivariana de Venezuela (“GNB”), respectively Venezuela’s Revenue Service, currency exchange authority, and National Guard. According to the indictment, after securing a government contract to build public housing, Saab and Pulido submitted fraudulent invoices to the government for reimbursement of non-existent construction materials and paid SENIAT, CADIVI, and GNB officials to facilitate payment on those invoices. Saab and Pulido, who are at large, face one count of money laundering conspiracy and seven substantive money laundering counts. Like Motta and Lugo above, neither Saab nor Pulido have yet made an appearance in U.S. court and both were designated as SDNs following the announcement of their indictment.

Another significant cluster of FCPA and FCPA-related charges arising out of Latin America concerns Ecuador’s state-owned oil company, Empresa Pública de Hidrocarburos del Ecuador (“PetroEcuador”), as follows:

On January 24, 2019, U.S. citizen Jose Luis De La Paz Roman pleaded guilty to an FCPA conspiracy charge arising from the PetroEcuador bribery scheme;
On April 4, 2019, Ecuadorian citizen and Florida resident Gustavo Trujillo pleaded guilty to a two-count information charging wire fraud and money laundering conspiracy in connection with the same scheme to launder corrupt funds as charged in the 2017 FCPA case against Ramiro Andres Luque Flores;
On May 10, 2019, DOJ announced the unsealing of an indictment charging Ecuadorian citizens Armengol Alfonso Cevallos Diaz and Jose Melquiades Cisneros Alarcon with FCPA and money laundering charges arising from millions in bribes allegedly paid to PetroEcuador officials;
Finally, in September 2019, DOJ moved to unseal money laundering conspiracy charges against former PetroEcuador executive Jose Raul de la Torre Prado and his associate Roberto Barrera, as well as filed a criminal information on similar money laundering charges against Ecuadorian / U.S. businessperson Juan Sebastian Espinoza Calderon, all of whom have pleaded guilty and await sentencing.

In a textbook example of DOJ prosecuting both the demand and supply side of bribery, on February 11, 2019, Micronesian Transportation Department official Master Halbert was arrested on money laundering conspiracy charges associated with his alleged receipt of bribes from Frank James Lyon. Lyon, a co-owner of a privately held Hawaiian engineering company, had in January pleaded guilty to conspiracy to violate the FCPA’s anti-bribery provisions and to commit federal program fraud in connection with his alleged payment of approximately $200,000 in bribes to Halbert and other Micronesian officials in order to obtain FAA-funded airport contracts from the Micronesian Transportation Department. Separately, Lyon also admitted to paying $240,000 to Hawaiian state officials in connection with federally funded state contracts. On May 13, 2019, the Honorable Susan O. Mollway of the U.S. District Court of the District of Hawaii sentenced Lyon to a 30-month prison term. Halbert pleaded guilty on April 2, 2019, and received an 18-month prison term on July 29, 2019.

Accounting for additional FCPA-related charges this year, we reported in our 2018 Year-End FCPA Update on DOJ’s August 2018 “declination with disgorgement” letter to Barbadian insurance company Insurance Corporation of Barbados Limited (“ICBL”), which followed the unsealing of a March 2018 indictment charging Donville Inniss, a former Minister of Industry and member of Parliament of Barbados, with money laundering in connection with his alleged receipt of $36,000 from ICBL in exchange for agreeing to award government contracts to the insurer. As we observed at the time, a redacted superseding indictment filed in the Inniss case made clear that DOJ had filed money laundering charges under seal against two former senior executives of ICBL. On January 18, 2019, those portions of the indictment were unsealed, showing that former CEO Ingrid Innes and former senior vice president Alex Tasker were each charged with one count of money laundering conspiracy and two counts of money laundering in connection with the $36,000 paid to Inniss. Neither Innes nor Tasker are in U.S. custody, while Inniss’s trial is scheduled to begin in January 2020 before the Honorable Kiyo A. Matsumoto in the Eastern District of New York.

On December 20, 2019, Judge Matsumoto issued a comprehensive, 71-page memorandum and order addressing a number of pretrial motions in limine in the Inniss case. Among the rulings was a denial of a motion by DOJ to find that former ICBL CEO Innes waived her attorney-client privilege over a document that she prepared for her attorney by saving it to the hard drive of her company-issued computer, without any “confidential” or “privileged” notations, and then neglecting to delete it before turning her computer in to company representatives. Among the factors the Court found important to the decision that Inniss did not waive privilege were that Innis: (1) emailed the document to her attorney using a personal email address; (2) saved the document to her local “My Documents” folder and not the company’s shared document management system; (3) did not connect her device to the company’s network after preparing the document; (4) had forgotten when surrendering her device that she had saved the document to the computer; (5) immediately objected when company representatives attempted to use the document during an interview with her; and (6) while aware that ICBL had a policy stating the company may monitor usage of company devices, as CEO was not aware of the company ever enforcing that policy. Nonetheless, Judge Matsumoto stated in her ruling that this was a close call and this stands as an important caution to executives who learn they are under investigation by company representatives.

Finally, although much of the public docket remains shrouded in under-seal filings, the outlines of another FCPA-related case may be seen in a two-page criminal information filed against Fernando Carvalho Frimm on March 15, 2019 in the U.S. District Court for the Southern District of Texas. The bare-bone allegations charge that Frimm filed a false tax return that understated his 2010 income by at least $172,538, in violation of 26 U.S.C. § 7206(1). Based on the prosecutors, judicial assignment, and publicly available information, it appears this case may be related to DOJ’s investigation of SBM Offshore as reported in our 2017 Year-End FCPA Update.

Several FCPA Defendants Go To Trial

As DOJ continues to aggressively pursue more and more individuals for alleged FCPA and FCPA-related violations, it is inevitable that more and more we will see some opt to put the government to its burden at trial. This year saw multiple individual defendants take their cases to a jury.

Lawrence Hoskins

In what was undoubtedly the FCPA trial of the year, and arguably one of the most significant in the statute’s history, UK citizen Lawrence Hoskins was convicted in the long-running case arising from the Alstom Indonesia investigation. We last discussed the Hoskins case in our 2018 Year-End FCPA Update, in the context of the Second Circuit’s significant jurisdictional decision holding that the government could not charge a foreign national with conspiracy or aiding and abetting an FCPA offense if that person did not otherwise belong to the class of individuals that can be charged with committing a substantive FCPA violation. In light of the decision, a central question at trial was whether DOJ could prove that Hoskins was acting as an “agent” of a U.S. person (e.g., Alstom’s U.S. subsidiary). On November 8, 2019, after an eight-day trial and one day of deliberations, the jury answered that question in the affirmative, convicting Hoskins on 11 of the 12 FCPA and money laundering counts.

The trial centered on allegations that Hoskins functioned as an agent of Alstom USA for the purpose of its bribing Indonesian officials. The trial judge instructed the jury that the government had to prove that the U.S. subsidiary had given Hoskins authority to take actions on its behalf and had the ability to control Hoskins’s conduct. On the evidence presented at trial, this effectively reduced to whether Hoskins was taking direction from Alstom USA executive Frédéric Pierucci, who previously pleaded guilty and served time in prison (covered in our 2014 and 2017 Year-End FCPA Updates). The government alleged that Pierucci “controlled the strategy and approach” and “called the shots” in directing Hoskins’s participation in the bribery scheme, and argued that witness testimony and email communications were more probative than corporate org charts in demonstrating the relationship between Alstom USA and Hoskins. Hoskins’s defense counsel countered that he only supported but did not take direction from Pierucci when hiring consultants in Asia and seized on the fact that only one of the government’s five witnesses had ever even met with or spoken to Hoskins.

Based on the verdict, the jury apparently accepted the government’s agency evidence. The issue will likely be afforded further consideration, however, including in connection with Hoskins’s motion for judgment of acquittal, which was filed on November 29, 2019, and any subsequent appeal. Indicative of DOJ’s use of money laundering charges to pursue individuals in FCPA cases who pose jurisdictional challenges, the jury also returned convictions on all but one of the money laundering charges against Hoskins based on evidence that he and others retained consultants to conceal payments. Sentencing is currently scheduled for March 6, 2020.

Jean Boustani

Another example of DOJ’s 360-degree approach to prosecuting foreign corruption was announced on March 7, 2019, with an unsealed indictment against conspirators in an alleged bribery scheme involving loans to the Government of Mozambique. Specifically, three former UK-based investment bankers from a Swiss financial institution that is a U.S. issuer—Andrew Pearse, Surjan Singh, and Detelina Subeva—were charged with conspiracy to violate the FCPA’s anti-bribery and internal controls provisions, as well as wire fraud, securities fraud, and money laundering conspiracy. Two former Mozambican government officials—former Minister of Finance Manuel Chang and former State Information & Security Service official Antonio do Rosario—as well as Mozambique business consultant Teofilo Nhangumele, were collectively charged with an assortment of wire fraud, securities fraud, and money laundering conspiracy charges. Two Lebanese former executives of UAE shipbuilding company Privinvest Group—Jean Boustani and Najib Allam—also were charged with similar non-FCPA offenses, marking eight defendants charged by the FCPA Unit. The indictment alleges that between approximately 2013 and 2016, the defendants organized more than $2 billion in loans to companies owned and controlled by the Mozambican government, ostensibly for the purpose of funding maritime projects for which the UAE shipbuilding company would provide services, but Boustani and Allam allegedly diverted more than $200 million of the proceeds, paying $150 million as bribes to Chang and other officials and $50 million in kickbacks to investment bankers Pearse, Singh, and Subeva.

The initial charges were unsealed in January 2019 when Boustani was arrested at JFK Airport. Three defendants have entered guilty pleas: Subeva and Singh to one count each of money laundering conspiracy, and Pearse to conspiracy to commit wire fraud. Chang was arrested in South Africa in December 2018 and reportedly is contesting extradition to the United States. Rosario and Nhangumele were both arrested in Mozambique in February 2019; they have been detained along with a reported 18 additional individuals, all of whom are expected to stand trial on local charges. DOJ intends to seek extradition of Rosario and Nhangumele. Allam reportedly remains at large.

Boustani opted for trial, and pushed for a speedy one considering that he was held without bail. Pretrial motions to dismiss on jurisdictional grounds were denied but, on December 2, 2019, a jury sitting in the U.S. District Court for the Eastern District of New York acquitted him of all three counts he faced—conspiracy to commit wire fraud, securities fraud, and money laundering. Prosecutors emphasized that some of the bribe payments came through U.S. correspondent banks, while the defense argued that Boustani could not have foreseen that money paid via foreign banks would travel through the United States and that the United States “was not the world’s policeman.” Although these arguments did not work on the Honorable William F. Kuntz II in his pretrial rulings, post-trial interviews suggest the jury had concerns with DOJ’s theory of jurisdiction.

Joseph Baptiste + Roger Richard Boncy

We reported in our 2018 Year-End FCPA Update on the superseding indictment in the case against retired U.S. Army colonel and Haitian non-profit founder Joseph Baptiste to add Roger Richard Boncy, a former lawyer of dual U.S.-Haitian citizenship who once served as Haiti’s Ambassador-at-Large, as a defendant on FCPA conspiracy, Travel Act, and money laundering conspiracy charges. According to the indictment, Boncy and Baptiste solicited bribes from two undercover FBI agents who were posing as prospective investors for a multi-million dollar port development project in Haiti. But instead of funneling the money to Haitian officials, Baptiste allegedly pocketed it. Although the trial of Baptiste nearly went forward in late 2018, in light of the superseding indictment, a joint trial for Baptiste and Boncy was scheduled for June 2019.

On June 20, 2019, following a nine-day trial, the jury returned its verdict finding Boncy and Baptiste guilty of conspiracy to violate the Travel Act and the FCPA, as well as Baptiste guilty of money laundering conspiracy. The jury did acquit Boncy of additional money laundering and Travel Act counts. On August 26, 2019, Baptiste filed a motion for judgment of acquittal, arguing in part that the prosecution failed to prove that Baptiste conspired to procure any official act through bribery, that it failed to specify sufficiently the object of the alleged conspiracy, and that it failed to establish Baptiste’s corrupt intent. Baptiste also filed a motion seeking a new trial based on ineffective assistance of counsel. A motions hearing was held on December 16, 2019, but the Court has yet to rule.

Mark T. Lambert

We reported in our 2018 Mid-Year FCPA Update on the January 2018 FCPA, wire fraud, and money laundering indictment of Mark T. Lambert, the former Co-President of Transport Logistics International, alleged to have participated in a conspiracy to make corrupt payments to a Russian state-owned supplier of uranium and uranium enrichment services in return for sole-source contracts. Lambert was scheduled to go to trial in the District of Maryland in April, and then June 2019, but during the first half of the year DOJ superseded the indictment not once but twice, changing the operative dates when the conspiracy allegedly began and when Lambert allegedly joined it.

Following these delays, a three-week trial commenced in late October, resulting in the conviction of Lambert of four FCPA counts, two counts of wire fraud, and a single count of conspiracy to violate the FCPA and commit wire fraud. The jury acquitted Lambert on two other FCPA counts and one count of money laundering. The trial featured evidence that Lambert and coconspirators attempted to conceal the payments by using fake invoices and code words, and caused Transport Logistics International to fraudulently overbill the Russian state-owned entity. On December 6, 2019, 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. Lambert’s motion is still pending as of the date of this update and his sentencing is scheduled for March 2020.

Rounding Out the 2019 FCPA Enforcement Docket

Additional 2019 FCPA enforcement actions not covered elsewhere in this update include:

Microsoft Corporation

On July 22, 2019, DOJ and the SEC announced a joint FCPA resolution with leading technology company Microsoft, relating to alleged violations of the FCPA’s books-and-records and internal controls provisions. The SEC’s allegations included alleged payments to government officials in Hungary, inadequate documentation surrounding the role of an unauthorized distributor in Turkey, and excessive hospitality and gifts to governmental and commercial customers in Saudi Arabia and Thailand. DOJ’s allegations focused more narrowly on the Hungary conduct, which involved Microsoft’s subsidiary allegedly making improper payments to government officials through third parties.

To resolve the DOJ matter, Microsoft’s Hungarian subsidiary entered into a three-year non-prosecution agreement and paid a criminal fine of $8,751,795. To resolve the SEC matter, parent Microsoft consented to the entry of a cease-and-desist order and agreed to pay $16,565,151 in disgorgement plus prejudgment interest. Microsoft received the maximum (25%) cooperation credit available for its substantial cooperation and extensive remedial measures. Microsoft also was not required to retain a monitor, but will report on its compliance program efforts for the three-year non-prosecution period.

Ugandan Adoption Case

On August 29, 2019, adoption agent Robin Longoria pleaded guilty to a one-count information charging conspiracy to violate the FCPA, wire fraud, and visa fraud stemming from an alleged plot to illicitly facilitate adoptions of children from Uganda. Longoria admitted to participating in a scheme to bribe Ugandan probation officers to recommend that certain children be placed into orphanages, then bribe Ugandan judges and court personnel to grant guardianship of these children to the adoption agency’s clients. The bribes were allegedly funded through “foreign program fees” charged to clients. Longoria’s sentencing is currently scheduled for January 8, 2020.

Juniper Networks, Inc.

Also on August 29, 2019, the SEC announced a settled cease-and-desist proceeding with California-based network technology company Juniper, alleging violations of the FCPA’s accounting provisions. According to the SEC’s order, sales employees of Juniper subsidiaries in Russia and China increased sales discounts to channel partners, and rather than pass those savings on to end customers pooled them as “common funds” at the channel-partner level. These funds were allegedly used to pay for unauthorized customer travel, including for government officials and in some cases involving falsified trip and meeting agendas. A member of senior management allegedly learned of the “common funds” in late 2009, and Juniper instructed employees to stop the practices at issue, but they nevertheless continued through 2013. To resolve the allegations, Juniper agreed to pay $11,745,018, which includes a civil penalty of $6,500,000. Juniper previously announced that DOJ had closed its investigation with no action.

Westport Fuel Systems, Inc. + Former Chief Executive Officer

On September 27, 2019, the SEC announced a settled cease-and-desist proceeding against Canadian clean fuel systems manufacturer and U.S. issuer Westport and its former CEO, Nancy Gougarty. According to the SEC, Gougarty allegedly caused Westport to violate the FCPA when she knowingly transferred shares in a joint venture to a private equity fund while knowing that a Chinese government official had an undisclosed financial interest in the fund. The SEC further alleged that Gougarty concealed the official’s financial interest from the company’s Board, and also falsely identified the joint venture interests in public SEC filings.

To resolve the charges of FCPA anti-bribery, books-and-records, and internal controls violations, Westport agreed to pay disgorgement of $2.35 million, prejudgment interest of $196,000, and a civil penalty of $1.5 million, and Gougarty agreed to pay a $120,000 penalty. Westport also will self-report to the SEC for two years.

China-Based Executives of a Multi-Level Marketing Company

On November 14, 2019, DOJ unsealed an indictment charging two Chinese citizens who formerly served as senior executives of the Chinese subsidiary of a publicly traded “multi-level marketing company” headquartered in Los Angeles. China Managing Director Yanliang “Jerry” Li and China External Affairs Head Hongwei “Mary” Yang were each charged with conspiracy to violate the FCPA’s anti-bribery, books-and-records, and internal controls provisions. Li also was charged with criminal charges of perjury and destruction of records, and was named the defendant in a separate civil complaint filed by the SEC.

According to the charging documents, Li and Yang bribed Chinese government officials to obtain direct sales licenses and stifle negative media coverage, and approved forged reimbursement requests designed to conceal the expenditures. Li also allegedly perjured himself during investigative testimony before the SEC, and purportedly installed “wiping software” on his company computer in an effort to destroy electronic records when he learned of the investigation. The company has not been identified by DOJ or the SEC.

SEC FCPA Settlement in 1MDB Case

We reported in our 2018 Year-End FCPA Update on the criminal FCPA charges against Malaysian businessperson Low Taek Jho (“Jho Low”) and former bankers Tim Leissner and Ng Chong Hwa, who collectively were alleged to have participated in diverting more than $2.7 billion from Malaysian sovereign wealth fund 1Malaysia Development Berhad (“1MDB”) for their own benefit and to make payments to officials of state-owned investment funds. On December 16, 2019, the SEC announced its own FCPA resolution with Tim Leissner only, pursuant to which he consented to the entry of a cease-and-desist order finding that he violated the FCPA’s anti-bribery, books-and-records, and internal controls provisions and agreed to disgorge $43.7 million, offset dollar-for-dollar by the prior entry of a forfeiture order in connection with his 2018 guilty plea in the criminal case. The SEC forewent a civil penalty against Leissner in recognition of the criminal case, as well as a $1,425,000 civil penalty already imposed in an associated Federal Reserve Board proceeding initiated on March 11, 2019.

Following the filing of FCPA or FCPA-related charges, the lifecycle of criminal and civil enforcement proceedings can take years to wind their way through the courts. In addition to the FCPA trials covered above, a selection of prior-year matters that saw enforcement litigation developments during 2019 follows.

DOJ Dismisses 10-Year-Old Case Against the Siriwans

In one example of the multiyear “tail” that can follow the filing of FCPA-related charges, in January 2019, DOJ dismissed a 10-year-old FCPA-related case against a former Thai government official and her daughter. As an early example of DOJ pursuing alleged FCPA bribe recipients together with alleged bribe payers, we reported in our 2011 Year-End FCPA Update that Juthamas Siriwan, the former Governor of the Tourism Authority of Thailand, and her daughter, Jittisopa Siriwan, were charged in a criminal money laundering indictment for allegedly receiving approximately $1.8 million from husband and wife film producers Gerald and Patricia Green in return for awarding the Greens’ businesses up to $14 million in contracts.

The Siriwans sought to dismiss their indictment in federal court through the special appearance of their counsel, even as they technically remained fugitives in Thailand. The Honorable George H. Wu of the U.S. District Court for the Central District of California stayed the motion pending Thailand’s decision on whether to grant DOJ’s request to extradite the Siriwans. In the years that followed, Juthamas and Jittisopa ultimately were charged and sentenced to significant prison terms in Thailand for the same conduct, leading DOJ on January 3, 2019 to file a motion to dismiss the U.S. charges, which the Court granted the next day. Thereafter, Thailand’s Appeal Court in May 2019 upheld a significant 50-year sentence for Juthamas while reducing the sentence for Jittisopa by four years to a still significant 40-year term.

Court Rejects Samir Khoury’s Motion to Dismiss 10-Year-Old Indictment

Another example of the FCPA’s long tail is Lebanese businessperson Samir Khoury’s attack on a decade-old indictment charging him with mail and wire fraud offenses arising out of the Bonny Island, Nigeria corruption scheme. In our 2018 Year-End FCPA Update, we reported that after successfully moving to unseal a 2008 indictment that he long suspected had been filed against him, Khoury moved to compel the government to produce additional evidence necessary to file a revised motion to dismiss on Speedy Trial Act and statute-of-limitations grounds.

On March 13, 2019, the Honorable Keith P. Ellison of the U.S. District Court for the Southern District of Texas ordered the government to produce descriptions of certain communications regarding its efforts to apprehend Khoury. With this information in hand, Khoury on April 19 filed a renewed motion to dismiss the indictment, arguing that the evidence shows that the government failed to prosecute the case diligently. On December 6, 2019, the Court denied Khoury’s motion, holding that the government’s delay was attributable to Khoury’s decision to remain in Lebanon and rejecting his argument that the government not seeking his extradition warranted dismissal of the charges. Although the Court believed the issue to be a close one, the Court also found that the government’s claims were not time-barred, crediting the government’s application under 18 U.S.C. § 3292 to suspend the statute of limitations to allow it to gather foreign evidence; the Court held that such applications can be filed at any time before indictment, as long as the official request is made before the statute of limitations expires, which was the case here. As of the date of publication, no further proceedings have been scheduled in this case, although Khoury has filed an additional motion for a “Ruling on Constitutional Issues Not Addressed” in the Court’s December 6 order.

District Court Rejects Dmitry Firtash’s Motion to Dismiss

As reported in our 2014 Mid-Year FCPA Update, in 2014 DOJ announced an indictment charging several foreign nationals, including Ukrainian billionaire Dmitry Firtash, with FCPA bribery and related charges in connection with an alleged scheme to bribe government officials in India to procure titanium-ore mining rights. Even as Firtash contested extradition proceedings following his arrest in Austria, in May 2017 his counsel filed a motion to dismiss the U.S. charges in absentia, as covered in our 2017 Mid-Year FCPA Update. On June 21, 2019, the Honorable Rebecca R. Pallmeyer denied the motion, which had been joined by co-defendant Andras Knopp, in a detailed 39-page opinion and order.

The Court found venue to be proper in the Northern District of Illinois given the allegation that the criminal conspiracy ultimately sought to sell the subject titanium to a U.S. company operating in Illinois, and found sufficient U.S. contacts to satisfy due process in subjecting the defendants to prosecution in the United States. Judge Pallmeyer also rejected defendants’ arguments that the FCPA conspiracy charge should be dismissed in line with the Second Circuit’s decision in United States v. Hoskins (covered in our 2018 Year-End FCPA Update), which held that the government cannot charge foreign nationals with conspiracy or aiding and abetting an FCPA offense if those persons do not otherwise belong to the class of individuals that can be charged with committing a substantive FCPA violation. The Court here held that Firtash and Knopp could be charged with aiding and abetting an FCPA offense, rejecting the defendants’ Hoskins argument, by reasoning that Hoskins relied, in part, on precedents determining the statutory limits on who can be charged with complicity liability based not only on the statute’s text, but also on its legislative history, whereas the Seventh Circuit inferred “legislative intent only from the text of the statute.” Judge Pallmeyer recognized that the Seventh Circuit might reach a different result “where the defendant’s actions are extraterritorial and the underlying statute has no extraterritorial application,” which was a significant factor in the Second Circuit’s analysis in Hoskins. Without a clear precedent from the Seventh Circuit on the effect of extraterritoriality on complicity liability, however, Judge Pallmeyer was unwilling to follow Hoskins in this case.

A further setback for Firtash followed days later when, on June 25, 2019, the Austrian Supreme Court affirmed a lower court’s decision allowing for his extradition to the United States. Although the ultimate decision will now reside with Austria’s Justice Minister, Firtash is one step closer to facing a trial in a country in which he has never before set foot.

Rolls-Royce Defendant’s Appeal Dismissed

The U.S. Court of Appeals for the Sixth Circuit dismissed an interlocutory appeal in the ongoing prosecution of Azat Martirossian that raises the oft-recurring issue in FCPA and FCPA-related prosecutions of whether a foreign-located defendant can challenge an indictment without physically submitting to the jurisdiction of a U.S. court. As covered in our 2018 Year-End FCPA Update, on May 24, 2018, Martirossian—an Armenian citizen and Chinese resident who has never been to the United States—was indicted on money laundering charges associated with the alleged Rolls-Royce bribery scheme. While he remained outside of the United States, his counsel filed a motion to dismiss the indictment in absentia, alleging the charges insufficiently alleged a U.S. nexus. On October 9, 2018, Chief Judge Edmund A. Sargus, Jr., of the U.S. District Court for the Southern District of Ohio granted DOJ’s request to hold Martirossian’s motion in abeyance “until or unless he submits to the jurisdiction of this Court.”

Following Martirossian’s interlocutory appeal and petition for a writ of mandamus to the U.S. Court of Appeals for the Sixth Circuit, on March 7, 2019 the Sixth Circuit dismissed his appeal and denied his mandamus petition. The Court concluded that the District Court’s October 2018 decision was not a final appealable order and that Martirossian did not qualify for a writ of mandamus. Writing for the Sixth Circuit, Judge Jeffrey S. Sutton observed that under the fugitive disentitlement doctrine, “If a defendant refuses to show up to answer an indictment, ignores an arrest warrant, or leaves the jurisdiction, the court may decline to resolve any objections to the indictment in his absence.” The panel concluded that Martirossian did not qualify for a writ in large part because “he has a readily available means of obtaining a ruling on his motion to dismiss the indictment”—namely, showing up to court.

**Second and Ninth Circuits Reject McDonnell Challenges to Money Laundering Convictions of Foreign Government Officials**

We covered the 2017 trial conviction of former Wall Street banker-turned-Guinean Minister of Mines and Geology, Mahmoud Thiam, in our 2017 Mid-Year FCPA Update. On August 5, 2019, the U.S. Court of Appeals for the Second Circuit affirmed Thiam’s money laundering convictions in an opinion that gives wind for the wings of DOJ’s expansive use of the statute. Writing for the Court, the Honorable John M. Walker, Jr. rejected Thiam’s argument that the jury instructions were erroneous because they did not include the “official acts” guidance of the U.S. Supreme Court decision in United States v. McDonnell. In McDonnell, the Supreme Court concluded that the definition of an “official act” for purposes of the federal bribery statute should be interpreted narrowly, such that “[s]etting up a meeting, talking to another official, or organizing an event (or agreeing to do so)—without more—does not fit [the] definition of ‘official act.’” Here, the Second Circuit held that McDonnell does not apply to money laundering charges founded, as in this case, on foreign bribery statutes that do not have the same limitations as the U.S. domestic bribery statute at issue in McDonnell. Foreign nations may define their bribery statutes more broadly, the Court said, and in all events the evidence was sufficient for the jury to find that Thiam’s actions in negotiating favorable terms for a joint venture in exchange for bribes was an “official act” even under McDonnell. On December 9, 2019, the Supreme Court declined to take up Thiam’s petition for certiorari.

On August 30, 2019, the U.S. Court of Appeals for the Ninth Circuit turned aside a challenge by Dr. Heon-Cheol Chi, a former Director of the Korea Institute of Geoscience and Mineral Resources, to his money laundering conviction that we covered in our 2017 Year-End FCPA Update. Similar to its sister circuit, the Honorable Carlos T. Bea writing for the Ninth Circuit held that it was appropriate for the trial court to refuse to graft U.S. domestic bribery precedent, under McDonnell and otherwise, onto the “bribery of a public official” under foreign law specified unlawful activity in the money laundering statute.

In addition to the enforcement activity covered above, the year saw DOJ issue important guidance on how it will administer corporate criminal enforcement, assess inability-to-pay claims, and evaluate corporate compliance programs; and another regulator—the Commodity Futures Trading Commission (“CFTC”)—signal its intention to take a seat at the table in foreign corruption matters.

DOJ Refines FCPA Corporate Enforcement Policy

On March 8, 2019, DOJ announced a number of revisions to the FCPA Corporate Enforcement Policy released in November 2017, as covered in our 2017 Year-End FCPA Update. In remarks announcing the changes, Assistant Attorney General and Criminal Division Leader Brian A. Benczkowski explained that they seek to “ensur[e] that our policies provide the right message and the right mix of incentives.” Among the most significant revisions are:

Ephemeral Messaging: One of the most confounding provisions of the original FCPA Corporate Enforcement Policy required that in order to receive full cooperation credit in any FCPA resolution, companies had to “prohibit[] employees from using software that generates but does not appropriately retain business records and communications.” The pervasive use of ephemeral messaging apps, particularly outside of the United States, led many to question the practicality of this prohibition. The revised policy now stops short of an outright ban, and directs companies to implement “appropriate guidance and controls” to ensure that employees use these services in a way providing for adequate data retention.
De-Confliction: The revised policy maintains the requirement that, to receive full cooperation credit, companies must be prepared to de-conflict interviews and other investigative steps to ensure they do not interfere with DOJ’s investigation. It adds a footnote, however, clarifying that although DOJ “may, where appropriate, request that a company refrain from taking a specific action for a limited period of time . . . the Department will not take any steps to affirmatively direct a company’s internal investigation efforts.” This mantra, which is now echoed consistently by DOJ FCPA prosecutors, is well timed in light of the prominent May 2, 2019 ruling by Chief Judge Colleen McMahon of the Southern District of New York in United States v. Connolly, which criticized the government’s purportedly excessive reliance on and coordination with outside counsel’s investigation in a non-FCPA matter.
M&A Due Diligence: Consistent with remarks by Deputy Assistant Attorney General Matthew S. Miner in July 2018 (covered in our 2018 Year-End FCPA Update), the revised policy provides that “where a company undertakes a merger or acquisition, uncovers misconduct through thorough and timely due diligence or, in appropriate instances, through post-acquisition audits or compliance integration efforts, and voluntarily self-discloses the misconduct and otherwise takes action consistent with this Policy . . . there will be a presumption of a declination in accordance with and subject to the other requirements of this Policy.” Of further interest on this topic, in June 2019, at an American Bar Association white collar crime conference in the Czech Republic, Miner stated: “[I]f a company self-discloses misconduct that was discovered in the context of a merger or acquisition, and we determine that the conduct and financial impact was de minimis, we may be open to a company’s request that we not disclose the declination.”
Significance of Aggravating Factors: In his remarks announcing the revisions to the policy, Assistant Attorney General Benczkowski clarified that the presence of one or more aggravating factors, for example the involvement of senior company management, will “not necessarily preclude a declination” where the subject company is otherwise in full compliance with the policy. DOJ’s decision in March 2019 not to prosecute Cognizant, discussed above, is consistent with this approach.

This policy was again updated in November 2019 to make clear that the obligation to disclose “all relevant facts” in order to qualify for voluntary disclosure credit applies only to those facts “known to [the company] at the time of the disclosure.” The substantive point behind this otherwise modest wording tweak is to acknowledge that companies may not always have full information at the time of a voluntary disclosure, and that DOJ encourages companies to come forward early, even before their investigations are fully concluded.

DOJ Announces Updated Guidance for Evaluating Corporate Compliance Programs

On April 30, 2019, DOJ’s Criminal Division released updated guidance to DOJ prosecutors on how to assess the effectiveness of corporate compliance programs when conducting investigations, making charging decisions, and negotiating resolutions. Reflecting DOJ’s continued focus on corporate compliance programs, this guidance, “Evaluation of Corporate Compliance Programs,” updates earlier guidance from DOJ’s Fraud Section in February 2017 (covered in our 2017 Mid-Year FCPA Update). Speaking at the GIR Live event on October 8, 2019, Assistant Attorney General Benczkowski summarized this guidance as revolving “around three questions that go to the heart of every compliance matter: First, is the compliance program well designed? Second, is the program being implemented effectively and in good faith? And third, does the compliance program work in practice?”

For more on this guidance, please see our separate Client Alert, “Updated DOJ Criminal Division Guidance on the ‘Evaluation of Corporate Compliance Programs.’”

DOJ Releases New Inability-To-Pay Guidance

On October 8, 2019, DOJ released new guidance on how prosecutors should evaluate inability-to-pay claims in criminal resolutions, titled “Evaluating a Business Organization’s Inability to Pay a Criminal Fine or Criminal Monetary Penalty.” Although the U.S. Sentencing Guidelines direct courts to consider a corporation’s financial resources in determining an appropriate monetary penalty, they lack detailed instructions about how to evaluate inability-to-pay claims, and this guidance seeks to fill that gap, at least for the Criminal Division attorneys to whom this guidance is directed.

The new guidance provides that, before DOJ will entertain any inability-to-pay claim, the parties must first agree on both the form of the criminal resolution and the amount of monetary penalty, based on the merits and without regard to the corporation’s financial condition. Then, the company must submit an “Inability-to-Pay Questionnaire.” Although completing a questionnaire has long been a requirement when claiming inability to pay, the questionnaire now seeks a number of forward-looking metrics. The answer to these questions will form the basis on which DOJ assesses inability-to-pay claims, which, according to the guidance, will often require consultation with accounting experts.

If there are serious questions that a company cannot afford the contemplated penalty, prosecutors must consider a variety of factors, including what gave rise to the company’s current financial condition. Prosecutors also should examine whether the corporation can raise alternative sources of capital to pay the penalty, as well as whether the penalty could adversely affect pension funds, prompt layoffs or production shortages, or cause it to fall below regulatory capital requirements. Not all collateral consequences are considered relevant, however. Prosecutors generally should not consider whether the penalty would harm growth, future dividends, future hiring or retention, or executive compensation.

If an inability to pay is found, prosecutors may, with the permission of the section chief, adjust the penalty downward as necessary to avoid threatening the company’s continued viability or ability to make restitution payments. Downward adjustments exceeding 25% of the contemplated penalty require approval from the Assistant Attorney General for the Criminal Division. Alternatively, DOJ may implement a payment plan over a reasonable time horizon if doing so would allow full payment of the proposed fine or penalty.

The CFTC Wades Into International Corruption Waters

In a significant development that already is having impacts on the dynamics of FCPA investigations, the CFTC’s Enforcement Division recently signaled its intent to enforce foreign bribery matters that fall within its jurisdiction. On March 6, 2019, the CFTC published an advisory on self-reporting and cooperation for “violations involving foreign corrupt practices,” and the same day Enforcement Division Director James M. McDonald delivered remarks announcing the CFTC’s intent to bring enforcement actions stemming from foreign bribery. In the ensuing months, more than one company has announced involvement in a CFTC inquiry with a potential foreign bribery nexus.

The CFTC appears focused on potential violations of the Commodity Exchange Act (“CEA”) that relate to foreign bribery. As Director McDonald signaled in his remarks, even as the CFTC does not envision itself as a third enforcer of the FCPA, in these inquiries and any future CFTC enforcement matters, the CFTC will work with the SEC and DOJ to avoid duplicate investigative steps and appropriately consider disgorgement and penalties paid to other enforcement authorities.

2019 YEAR-END LEGISLATIVE DEVELOPMENTS

The year saw several legislative developments relevant to FCPA enforcement, as follows:

Foreign Extortion Prevention Act (H.R. 4140): On August 2, 2019, a bipartisan group of representatives, including Rep. Sheila Jackson Lee (D-Tex.), Rep. John Curtis (R-Utah), Rep. Tom Malinowski (D-N.J.), and Rep. Richard Hudson (R-N.C.), introduced the Foreign Extortion Prevention Act (“FEPA”). The bill is meant to criminalize extortion by foreign officials, which would align U.S. law with similar prohibitions in other countries. The bill, which has been referred to the House Judiciary Committee’s Subcommittee on Crime, Terrorism, and Homeland Security, would amend the federal bribery statute, 18 U.S.C. § 201, to allow for criminal penalties, including up to two years’ imprisonment, for any foreign official who “directly, or indirectly, corruptly demands, seeks, receives, accepts, or agrees to receive or accept anything of value” in exchange for “being influenced in the performance of any official act” or “being induced to do or omit to do any act” in violation of their official duties. Notably, FEPA uses the same broad definition of “foreign official” as the FCPA, which would tend to facilitate parallel prosecutions of alleged bribe payers and bribe recipients. However, the placement of this prohibition under the auspices of the domestic federal bribery statute rather than the FCPA would subject the definition of “official act” to the limitations recognized by the Supreme Court’s 2016 McDonnell decision discussed above.
Countering Russian and Other Overseas Kleptocracy (H.R. 3843): On July 18, 2019, Representatives Bill Keating (D-Mass.) and Brian Fitzpatrick (R-Pa.) introduced the Countering Russian and Other Overseas Kleptocracy (“CROOK”) Act. Among other things, the bill would establish an “Anti-Corruption Action Fund,” seeded with 5% of all civil and criminal fines and penalties collected pursuant to FCPA enforcement actions. The Fund would be used to sponsor anti-corruption initiatives around the world, thus creating a mechanism for the proceeds of foreign corrupt payments to be used to fight the root causes of corruption abroad. The CROOK Act has been referred to the House Committees on Foreign Affairs and Financial Services, but no subsequent actions have been taken on the bill. Although its prospects for passage are uncertain, it reflects bipartisan consensus that U.S. involvement in countries where corruption is endemic is important to fight corruption around the world.

2019 YEAR-END KLEPTOCRACY FORFEITURE ACTIONS

There was 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.

On February 26, 2019, DOJ announced the repatriation of $6 million to the Kyrgyz Republic. The repatriation arose from funds stolen by Kurmanbek Bakiyev and his son, Maxim Bakiyev, whose regime was overthrown in 2010. The funds were identified in the insider trading prosecution of Eugene Gourevitch, a former business partner of Maxim Bakiyev. Following Gourevitch’s conviction, the Kyrgyz Republic filed a Petition for Remission with MLARS, which was granted in October 2018.

On October 7, 2019, DOJ filed a complaint in federal court seeking to recover nearly $640,000 from a U.S. bank account controlled by former Peruvian President Alejandro Celestino Toledo Manrique. The complaint alleges that Toledo earned the money by selling a property in Maryland, which he purchased using the proceeds of bribes from Brazilian construction company Odebrecht during Toledo’s presidency. Toledo, who denies the allegations, currently is fighting extradition from the United States to face criminal charges in his native Peru.

Finally, as noted above, we have been covering the 1MDB corruption case since it was first announced as a civil forfeiture proceeding in July 2016 as covered in our 2016 Year-End FCPA Update. This case came to a successful resolution for MLARS in 2019, as on October 30, they announced a settlement by which DOJ will recover more than $700 million in assets acquired by Jho Low and his family using funds allegedly misappropriated from 1MDB. With this settlement, the United States has recovered or assisted in the recovery of more than $1 billion in assets associated with 1MDB—the largest recovery to date under the Kleptocracy Asset Recovery Initiative and DOJ’s largest ever civil forfeiture.

2019 YEAR-END PRIVATE CIVIL LITIGATION SECTION

As we have been reporting for years, although the FCPA does not provide for a private right of action, private civil litigants employ various causes of action in connection with losses allegedly associated with FCPA-related conduct, often through shareholder litigation. A selection of matters with developments in 2019 follows.

Shareholder Lawsuits

Cemex S.A.B. de C.V.: On July 12, 2019, the Honorable Valerie E. Caproni of the U.S. District for the Southern District of New York dismissed a shareholder class action against Mexican building materials company and U.S. issuer Cemex, as well as several individual officers, alleging that Cemex concealed a bribery scheme and made misleading statements and omissions by not disclosing the extent of the corruption at its Colombian branch. The lawsuit was filed in 2018 following a series of disclosures that an internal probe revealed payments of approximately $20 million to a Colombian company in return for land, mining rights, and tax benefits for a new cement plant, and that the SEC and DOJ were investigating. Judge Caproni found that most of the alleged false or misleading statements or omissions were not actionable and that plaintiffs had failed to adequately plead scienter, but gave plaintiffs leave to amend. A second amended complaint has been filed and motion to dismiss briefing is final, pending a second decision by the Court.
Cobalt International Energy Inc.: On February 13, 2019, the Honorable Nancy F. Atlas of the U.S. District Court for the Southern District of Texas approved a combined $173.8 million settlement in a consolidated class action against Cobalt stemming from alleged bribery in Angola. Judge Atlas also approved an award of $43.45 million in fees for plaintiffs’ attorneys. As we reported in our 2016 Mid-Year FCPA Update, the suit was filed in November 2014 by a class of investors claiming to have lost money because Cobalt “misrepresented, and failed to disclose, the corrupted nature of its business in Angola and the true value of the Company’s Angolan oil wells.” The litigation has continued over the last five years, with the SEC and DOJ declining to charge Cobalt during that time. The company and executives named in the suit did not admit wrongdoing in resolving the suit.
General Cable: On April 30, 2019, the Honorable William O. Bertelsman of the U.S. District Court for the Eastern District of Kentucky granted another motion to dismiss in General Cable’s favor. In our 2018 Year-End FCPA Update, we covered Judge Bertelsman’s July 2018 dismissal of a putative class action alleging that General Cable had inflated its stock value by failing to disclose that employees of its foreign subsidiaries had violated the FCPA. In the Court’s most recent dismissal, which also concerned a putative class action related to General Cable’s 2016 settlement of FCPA charges, the Court concluded that one category of statements that the plaintiff identified in its suit was not materially false or misleading, and that the plaintiff failed to establish that General Cable was required to disclose a second category of information. The Court also concluded the plaintiff did not adequately plead scienter relating to the company’s knowledge of the effectiveness of its internal controls.
Mobile TeleSystems: Within days of the March 2019 FCPA resolution with DOJ and the SEC, investors in the Russian telecommunications company and U.S. issuer filed a putative class action suit relating to the alleged failure to disclose the Uzbek bribery scheme and the likelihood of resulting fines in its public filings. Plaintiffs thereafter amended the complaint to add claims that MTS’s failure to cooperate with DOJ and the SEC cost the company as much as $350 million in lost cooperation credit that could have reduced penalties in the FCPA resolution. Specifically, the investors pointed to DOJ’s statements in the deferred prosecution agreement that MTS “significantly delayed production of certain relevant materials,” “refused to support interviews with current employees during certain periods of the investigation,” and failed to “appropriately remediate” as considerations in determining a higher penalty.
OSI Systems: On May 7, 2019, the Honorable Virginia A. Phillips of the U.S. District Court for the Central District of California dismissed a putative class action alleging that OSI misled investors by concealing the dealings of its Albanian subsidiary as reported in an admitted short sellers’ report claiming that the company bribed someone by selling 49% of its subsidiary for under $5. Plaintiffs were given leave to amend, which they did in July 2019. As of the date of this publication, the motion is fully briefed and pending decision.

Civil Fraud / RICO Actions

Harvest Natural Resources, Inc.: As reported in our 2018 Mid-Year FCPA Update, in February 2018, the now-defunct Houston energy company filed suit in the U.S. District Court for the Southern District of Texas alleging RICO and antitrust violations against various individuals and entities affiliated with the Venezuelan government and PDVSA. The complaint alleged that because Harvest refused to pay $40 million in bribes to Venezuelan officials, approval for the sale of its Venezuelan assets was wrongfully withheld. As a result, Harvest had to sell the assets to different buyers at a $470 million loss, which led to the company’s dissolution. On October 29, 2018, Harvest voluntarily dismissed the case as to all defendants except Rafael Darío Ramírez Carreño, Venezuela’s former Minister of Energy and ex-President of PDVSA. After Ramirez initially failed to respond, Chief Judge Lee H. Rosenthal granted Harvest’s motion for a default judgment, which on February 13, 2019 was trebled to $1.4 billion. Ramirez has now filed a motion to set aside the default judgment and dismiss the suit, briefing for which remains ongoing.

Employee Defamation Actions

Zimmer Biomet Holdings: On October 8, 2019, the U.S. Court of Appeals for the Seventh Circuit affirmed a ruling by the U.S. District Court for the Northern District of Indiana granting Biomet’s motion for summary judgment in the defamation lawsuit initiated by Alejandro Yeatts, a former employee of the company’s Argentinian subsidiary. As reported in our 2017 Mid-Year FCPA Update, Yeatts filed a complaint in 2016 alleging that the company defamed him by improperly including him on a “Restricted Parties List” of persons with whom the company could not conduct business. The District Court held in April 2017 that the statement that Yeatts posed a “compliance risk” was an opinion that could not be proved false and therefore was not defamatory. The Seventh Circuit agreed. In the District Court opinion, Magistrate Judge Michael G. Gotsch, Sr. had further held that the statement was protected by a qualified privilege covering good-faith statements made according to a legal, moral, or social duty to those with a corresponding duty and by the qualified privilege of public interest, which covers the reporting of criminal activity to law enforcement. Because it found that the statements were not defamatory, the Seventh Circuit did not address the application of these privileges.

2019 YEAR-END INTERNATIONAL ANTI-CORRUPTION DEVELOPMENTS

Multilateral Development Bank Sanctions Follow FCPA Resolutions

DOJ and SEC FCPA investigations frequently take years to resolve, but occasionally even that is not the final chapter in enforcement. There are sometimes “tagalong” actions by other enforcers, lagging months or even years behind an FCPA enforcement event. Examples from 2019, involving the World Bank, the African Development Bank, and the Inter-American Development Bank, highlight this phenomenon.

On January 29, 2019, the World Bank announced a three-year debarment of Odebrecht S.A.’s Brazilian construction and engineering subsidiary, Construtora Norberto Odebrecht S.A. According to the World Bank, Construtora Norberto Odebrecht engaged in fraudulent and collusive practices—terms of art in the World Bank context—in connection with a Bank-financed project designed to improve water quality and flood control in Colombia. The alleged fraudulent practice involved failing to disclose fees paid to agents that helped obtain confidential information during the tender prequalification and bidding processes, while the alleged collusive practice involved attempts “to improperly influence the tendering package.” As covered in our 2016 Year-End FCPA Update, in December 2016 Odebrecht and its petrochemical subsidiary reached a multi-billion resolution with authorities in Brazil, Switzerland, and the United States. Odebrecht’s 2016 FCPA plea agreement included apparently unrelated allegations of misconduct in Colombia, as well as a now-standard provision requiring the company to cooperate fully with investigations conducted by multilateral development banks (“MDBs”) such as the World Bank. In a likely nod to this provision, the World Bank credited the contribution of “[d]isclosures from prior settlements” in its investigation, which reportedly involved review of more than 1 million documents in five languages, interviews of more than 75 witnesses, and eight forensic audits—a scale commensurate with major investigations conducted by sovereign authorities. Odebrecht filed for bankruptcy protection in Brazil in June 2019.

The MDBs routinely enforce each other’s debarments pursuant to a cross-debarment agreement. In fiscal year 2019, the World Bank recognized 33 cross-debarments from other MDBs, and imposed several debarments eligible for recognition by other MDBs. On September 22, 2019 the Inter-American Development Bank went further when it announced a six-year debarment of Construtora Norberto Odebrecht and multiple subsidiaries, and a 10-year conditional debarment on Odebrecht Engenharia e Construção S.A. and multiple subsidiaries. Like the World Bank resolution, the conduct addressed by the Inter-American Development Bank appears to be unrelated to that discussed in the 2016 FCPA plea agreement.

In another MDB debarment following an FCPA enforcement action, on March 22, 2019, the African Development Bank announced a resolution relating to alleged misconduct involving three legacy Alstom companies. As covered in our 2014 Year-End FCPA Update, in December 2014 DOJ announced criminal plea agreements with Alstom and certain subsidiaries. In the instant matter, the Bank alleged that in connection with two Egyptian power projects in 2006 and 2011, the Alstom companies paid or offered nearly €3 million to local agents at least partly to garner support from public officials. The Bank debarred two of the companies for 76 months (which can be reduced to 48 months) and the third for one year. In its press release, the African Development Bank prominently credited GE Power, which acquired the Alstom companies after the alleged misconduct occurred, for its “substantial cooperation with the investigation of the legacy cases as well as the high quality of the company’s comprehensive compliance programme.”

Although MDB enforcement unquestionably overlaps with FCPA enforcement, we remind our readers that a variety of conduct can give rise to a MDB violation, that there is a relaxed burden for proving a violation at these institutions, and that significant consequences can result from their sanctions. We direct interested readers to refer to our separate article, “Sanctionable Practices at the World Bank: Interpretation and Enforcement.”

Europe

United Kingdom

SFO Publishes Guidance for Corporate Cooperation

On August 6, 2019, the UK Serious Fraud Office (“SFO”) published “Corporate Co-operation Guidance.” Although the primary audience for this five-page internal policy is SFO prosecutors and investigators, its guidance for assessing whether a company has adequately cooperated is valuable for companies and practitioners to understand what the SFO will take into account in deciding whether to offer a deferred prosecution agreement. For an in-depth analysis of the guidance, please see our separate Client Alert, “The UK Serious Fraud Office’s latest guidance on corporate co-operation – Great expectations fulfilled or left asking for more?”

Güralp Systems DPA and Former Executives Acquitted

On December 20, 2019, the SFO announced the resolution of several cases relating to its long-running investigation of seismic measurement device manufacturer Güralp Systems Ltd. The company entered into a deferred prosecution agreement on charges of conspiracy to make corrupt payments and failure to prevent bribery arising from the payment of just over $1 million between 2002 and 2015 to Dr. Heon-Cheol Chi of the Korea Institute of Geoscience and Mineral Resources in exchange for, among other things, recommending Güralp Systems’s products to end users and setting equipment specifications to favor the company. To resolve the charges, Güralp Systems agreed to disgorge £2,069,861 in illicit profits and report to the SFO on the status of its compliance program over the five-year period of the deferred prosecution agreement. In approving the resolution, SFO Director Lisa K. Osofsky commended the company’s voluntary disclosure to both the SFO and DOJ. As discussed above and in prior updates, Dr. Chi was successfully prosecuted by DOJ on money laundering charges following Güralp Systems’s disclosure.

The SFO’s cases against former Güralp Systems executives were not as successful. Company founder Dr. Cansun Güralp, former Finance Director Andrew Bell, and former Head of Sales Natalie Pearce were all acquitted of corruption charges at trial.

Sarclad DPA and Former Executives Acquitted

In a turn of events not unlike the immediately preceding case, on July 16, 2019, the SFO announced a corporate deferred prosecution agreement with Sarclad Ltd., coincident with the acquittal of three former company executives. The corporate agreement was reached on July 6, 2016, but the identity of the company was quarantined pending investigation of potential individual defendants. We previously reported the resolution as the “XYZ Ltd.” deferred prosecution agreement, analyzed at length in our 2016 Year-End FCPA Update. The SFO alleged that the steel company engaged in corruption between 2004 and 2012—straddling passage of the Bribery Act 2010—through third-party agents in China, India, and Korea. Pursuant to the three-year deferred prosecution agreement, which has now expired, Sarclad disgorged £6,201,085 in illicit gains, paid a £352,000 fine, and reported to the SFO annually.

The individual defendants, former Managing Director Michael Sorby, former Sales Manager Adrian Leek, and former Project Manager David Justice, were all acquitted.

Alstom Investigation Concludes with Tunisia Sentencing

On November 25, 2019, Alstom Network UK Ltd. was sentenced to pay £16.4 million for its April 2018 conviction on conspiracy to corrupt in relation to bribes allegedly paid to win a Tunisian tram and infrastructure contract as reported in our 2018 Year-End FCPA Update. According to the SFO, this sentencing brings to an end a 10-year investigation involving cooperation with more than 30 countries and resulting in five convictions.

Unaoil Defendants

On July 19, 2019, the SFO announced the guilty plea of Basil al Jarah, the Iraqi partner of Monaco-based Unaoil. As reported in our 2018 Mid-Year FCPA Update, the SFO announced charges against al Jarah in May 2018 for conspiracy to pay alleged bribes to secure a $733 million contract to build two oil pipelines and oil handling facilities in Iraq. More than a year later, al Jarah pleaded guilty to conspiracy to pay bribes in violation of the Criminal Law Act 1977 and Prevention of Corruption Act 1906. Three other individuals who have been charged by the SFO, Ziad Akle, Paul Bond, and Stephen Whiteley, are scheduled to go to trial in London in January 2020.

Additional Defendants Sentenced in North Sea Oil Exploration Bribery Scheme

On January 11, 2019, three additional former FH Bertling Limited employees and one former ConocoPhillips employee received suspended sentences in connection with the alleged corrupt scheme to obtain inflated freight forwarding contracts for a North Sea oil exploration project covered in our 2017 Mid-Year FCPA Update. Newly sentenced were Colin Bagwell (nine months, £5,000 fine); Giuseppe Morreale (15 months, £20,000 fine); Stephen Emler (12 months, £15,000 fine); and Christopher Lane (six months, 28-day curfew order). Emler and Morreale also received concurrent 18- and 24-month prison terms relating to conduct in Angola, and on June 3, 2019, the SFO fined FH Bertling £850,000 for allegedly making $350,000 of bribe payments to an employee of Angola’s state-owned oil company, Sonangol, to secure $20 million worth of shipping contracts.

Former Petrofac Executive Pleads Guilty

On February 6, 2019, David Lufkin, the former Global Head of Sales for Petrofac International Limited, pleaded guilty at Westminster Magistrates’ Court to 11 counts of bribery in violation of the UK Bribery Act. The charges to which he pleaded relate to alleged corrupt payments to win more than $4.2 billion of contracts in Iraq and Saudi Arabia. Lufkin has not yet been sentenced.

Look for much more on UK white collar developments in our forthcoming 2019 Year-End United Kingdom White Collar Crime Update, to be released on January 22, 2020.

France

On the enforcement front, in December 2018, French prosecutors indicted Tsunekazu Takeda, president of Japan’s Olympic Committee, on corruption charges stemming from the bidding process that resulted in Tokyo being awarded the 2020 Summer Olympics. French authorities contend that Tokyo’s bidding committee paid more than $2 million to African Olympic Committee officials in exchange for their votes. In March 2019, Takeda, who denies the allegations, stepped down from his position and resigned from his position at the International Olympic Committee. Takeda has admitted that he approved payments of $2.1 million to a Singaporean consultant before the 2013 vote selecting Japan as the host of the 2020 Games.

Also in March 2019, French prosecutors indicted Yousel Al-Obaidly, CEO of media group beIN, on corruption charges relating to the bidding process for the 2017 and 2019 track and field world championships in London and Qatar. Al-Obaidly, who sits on the board of the French soccer club Paris Saint-Germain, has denied wrongdoing.

In July 2019, the French Anti-Corruption Agency’s (“AFA”) Sanctions Committee (which we discuss in our separate Client Alert, “New French Anti-Corruption Regime Alert”) rendered its first decision, dismissing claims against French electrical distribution company Sonepar related to allegations that the company had not satisfied five of the compliance obligations imposed by Article 17 of Sapin II. The Committee considered that Sonepar took steps following the AFA’s inspection to address the alleged breaches. As a result, it is possible for a company that has not implemented the measures imposed by Sapin II at the time of the AFA’s inspection to remediate the potential deficiencies before being judged by the Sanctions Committee.

On the policy front, on June 27, 2019, the French Parquet National Financier and Anti-Corruption Agency issued an 18-page guidance document discussing factors involved in reaching a CJIP. The guidance sets out several factors that weigh in favor of a CJIP, including implementation of a corporate compliance program, remedial measures, and cooperation. So too, according to the guidance, does a thorough internal company investigation accompanied by a disclosure of the results. With the increase in recent years in coordinated, multi-jurisdictional anti-corruption investigations and enforcement efforts, this new guidance embracing the results of internal investigations may be a step toward reducing the disparate effects of how internal investigations potentially are treated by different enforcers around the world.

Germany

As reported in our 2018 Year-End German Law Update, the German government is working on a corporate criminal liability and internal investigations 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 can only be fined under the law for administrative offenses.

In August 2019, the German Federal Ministry of Justice and Consumer Protection circulated a draft Corporate Sanctions Act, which, if enacted, would introduce a hybrid system. The main changes would include eliminating prosecutorial discretion in corporate matters, expanding the framework for punishing corporations, and formally incentivizing compliance measures and internal investigations. The main proposed changes to German Law that would be implemented with the Corporate Sanctions Act include:

mandatory prosecution of corporate misconduct (which currently exists only for individuals), with an obligation to justify non-prosecution, and also extending to criminal offenses committed abroad by companies domiciled in Germany;
an increase in potential maximum fines from €10 million to 10% of the annual—worldwide and group-wide—turnover, if the group has an average annual turnover of more than €100 million, in addition to disgorgement;
the introduction of two new corporate sanctions—a type of deferred prosecution agreement with the possibility to impose certain conditions (such as a monitorship), and a “corporate death penalty,” namely, the liquidation of the company; and
incentives to reward effective compliance programs and incentivize internal investigations and voluntary disclosures, including up to a 50% fine reduction.

It is doubtful whether the current government coalition will continue to view this legislation as a priority, and it therefore remains to be seen what will be passed into law and when.

Greece

In July 2019, a Greek court sentenced three former Johnson & Johnson executives, all British nationals, to seven years in prison following their convictions on fraud and money laundering charges related to allegations of improper payments to Greek healthcare professionals between 2000 and 2006—allegations that featured in the company’s 2011 FCPA resolution (covered in our 2011 Mid-Year FCPA Update). The three individuals reportedly plan to appeal.

Russia

In October 2019, the Russian Ministry of Labor issued new anti-corruption guidelines. These new guidelines extend and supplement, rather than preempt, the Ministry’s guidelines issued in 2013. The Ministry recommended that private and public organizations develop a system of incentives and sanctions, and implement anti-corruption policies in employment contracts. Additionally, the Ministry placed particular attention on the use of an algorithm for assessing corruption risks. The algorithm factors in a company’s risk profile to determine policies and standards that an organization needs to put in place. The Ministry also clarified that if an organization fails to comply with the new guidelines, authorities will issue an order to comply. Failure to satisfy such an order will result in an administrative fine of up to 100,000 RUB (~ $1,562).

In addition, entities convicted of administrative corruption offenses under Article 19.28 of the Code of Administrative Offenses—Unlawful Payments Made on Behalf of Legal Entities—are added to the public register of corporate corruption offenders, which bars them from participating in federal and municipal procurement tenders for two years from the date of conviction. 240 entities were added to the register in 2019. Beginning January 1, 2020, information about administrative anti-corruption convictions of entities will be entered into their registration profiles in the uniform register of suppliers participating in public procurement, thus making purchasers aware of the potential vendors’ past anti-corruption violations.

Spain

In October 2019, Spain’s High Court approved corruption and money laundering charges against Spanish construction company FCC in connection with payments allegedly made to Panamanian officials between 2010 and 2014. Prosecutors allege that FCC, which was part of a consortium headed by Odebrecht that won the rights to construct two metro lines in Panama, overcharged for steel and then laundered those funds through shell companies and used them to pay bribes. FCC is currently deciding whether to appeal the charges.

Sweden

In our 2017 Year-End FCPA Update, we reported that three former Telia executives—former CEO Lars Nyberg, former deputy CEO and head of Telia’s Eurasia unit Tero Kivisaari, and former general counsel for the Eurasia unit Olli Tuohimaa—had been charged with bribery in Sweden in connection with an investigation into the alleged payment of hundreds of millions of dollars to the daughter of the then-president of Uzbekistan, Gulnara Karimova. Prosecutors assert that they engineered payments of more than $300 million to Karimova between 2007 and 2010 to facilitate Telia’s entry into the Uzbek telecommunications market. This is part of the same course of conduct for which Karimova herself has been indicted on U.S. money laundering charges, as described above.

The three former Telia executives proceeded to trial in September 2018 and, on February 15, 2019, all three were acquitted by the Stockholm District Court. The court held that the prosecution failed to prove that Karimova was a foreign government official as that term is defined under Swedish law. The court rejected the prosecution’s argument that she effectively headed the telecom sector because, the court found, she held no official position in government. The court further declined to give weight to the fact that the company, Telia, admitted in U.S. court proceedings that Karimova was a foreign official.

Although prosecutors have appealed the district court’s decision, their inability to secure a conviction led Sweden to drop its claim to a $208.5 million share of the $965 million coordinated resolution that Telia reached in 2017 with authorities in the United States, the Netherlands, and Sweden. As noted in our 2017 Year-End FCPA Update, $208.5 million was designated for either the Dutch Public Prosecution Service or Swedish Prosecution Service, depending on whether Swedish prosecutors could establish corruption beyond a reasonable doubt through the individual cases. On March 19, 2019, Telia announced that it had paid that portion of the settlement to the Dutch Public Prosecution Service.

Switzerland

In another Karimova-related proceeding, on June 24, 2019, a court in Switzerland convicted a person identified only as a relative of Karimova (Swiss press articles suggest it is her ex-husband) for money laundering in connection with a scheme to hide and obscure money transfers to Karimova. The Swiss Attorney General’s office also announced the return of approximately 130 million Swiss francs (~ $133 million) that had been frozen as part of the investigation involving Karimova to the Government of Uzbekistan. According to reports, authorities are continuing a related criminal investigation into five other unnamed individuals.

In other developments, on August 12, 2019, the Geneva public prosecutor announced that it filed charges against Israeli billionaire Beny Steinmetz and two other individuals for bribery and forgery in connection with payments to Guinean officials related to a mining concession. As noted in our 2017 Year-End FCPA Update, Steinmetz reportedly is under investigation in several countries, including Israel and the United States.

On October 17, 2019, the Swiss Attorney General’s Office announced that Geneva commodities trader Gunvor was ordered to pay nearly 94 million Swiss francs (~ $94.8 million) for failing to prevent employees and agents from bribing officials to secure oil supplies in the Republic of Congo and the Ivory Coast between 2008 and 2011. Investigations into individuals reportedly are ongoing.

Ukraine

Anti-corruption developments in Ukraine have straddled the country’s recent change in administrations. In April 2019, the prior president announced the establishment of the High Anti-Corruption Court, a specialized tribunal to adjudicate corruption cases. The court began work in September 2019, handing down its first sentence in October 2019, which convicted an appellate court judge of providing false information in a state declaration on assets and income. In September 2019, the new president signed into law a constitutional amendment abolishing general immunity against prosecution for parliament members and limiting their immunity to voting and statements made during parliamentary sessions. The new president also signed into law measures governing the legal status of anti-corruption whistleblowers, providing legal protection for whistleblowers and a reward system under which whistleblowers may receive a reward of 10% of the bribe or harm caused to the state, up to 12.5 million Ukrainian hryvnias (~ $532,000), for successful corruption or corruption-related convictions involving bribes or harm caused to the state exceeding 9.6 million Ukrainian hryvnias (~ $409,000).

The Americas

Argentina

As reported in our prior updates, former President Cristina Fernández de Kirchner faces numerous corruption and money laundering investigations. Fernández’s Vialidad (“highway administration”) influence-peddling trial began in 2019 amid strong political tension and public protest. The prosecution alleges that Fernández illicitly assigned a public contract to a friend’s business. Fernández, who enjoyed limited immunity as a senator, enjoys an even higher level of immunity following the October 2019 presidential elections; despite multiple corruption probes, Argentine citizens voted to return the Peronist Party to power, electing Fernández to serve as vice president. Shortly after her election victory, in December 2019, Fernández testified at her trial, adamantly denying all allegations of wrongdoing and pointing instead to political persecution.

Brazil

The drive against corruption remains prominent in Brazil. The long-running “Operation Car Wash” investigation persists, and prosecutors continue to accumulate convictions. To date, the government has obtained more than 200 convictions, recovered $1.2 billion (R$5.05 billion), and launched 70 investigative phases. Although Operation Car Wash continued in force this past year, with the arrest of former president Michel Temer in March and the signing of a nearly $100 million dollar (R$410 million) leniency agreement with Braskem SA in May, the probe also faced renewed allegations of bias and several unfavorable court decisions. Earlier this year, a Brazilian media outlet published texts, emails, and video and audio recordings that allegedly evidence ethical breaches and improper coordination between federal prosecutors and former judge and current Justice Minister Sérgio Moro, during the prosecution of former president Luiz Inácio Lula da Silva (“Lula”).

Brazil’s Supreme Court also delivered several decisions in 2019 that prosecutors say will threaten Operation Car Wash and other anti-corruption efforts. Following a March 2019 Supreme Court decision that corruption cases involving illegal campaign contributions should be heard by electoral courts, prosecutors expressed concerns about the electoral courts’ ability to handle complex corruption cases and warned that individuals already convicted of campaign contribution-related crimes may ask the Court to annul their sentences and send their cases to electoral courts. In August, the Court overturned an Operation Car Wash conviction for the first time, ruling that former Petrobras president Aldemir Bendine, whose case was overseen by Moro, should have been permitted to make a closing argument to respond to accusations. Finally, in November 2019, former President Lula was released from prison following a decision by the Supreme Court that defendants may remain free while their appeals are pending.

Canada

As reported in our 2018 Mid-Year FCPA Update, in 2018 Canada introduced legislation allowing deferred prosecution agreements for corporate offenders. The law came into effect on September 19, 2018, and engineering and construction giant SNC-Lavalin became one of the first major companies to seek such an agreement in connection with a long-running investigation of alleged bribery of Libyan officials. The prosecution reportedly was unwilling to negotiate with the company; after Prime Minister Justin Trudeau allegedly exerted pressure on Attorney General MP Jody Wilson-Raybould to return to the bargaining table with the company, Wilson-Raybould and another cabinet member resigned. In December 2019 subsidiary SNC-Lavalin Construction Inc. pleaded guilty to one count of fraud and agreed to pay a C$280 million (~ $213.5 million) fine and also will be subject to a three-year probation order. In connection with the resolution, SNC-Lavalin agreed to engage a monitor to assess its ethics and compliance program. Former SNC-Lavalin executive Sami Bebawi also was charged for his role in the alleged scheme. Following a six-week trial, Bebawi was convicted in December 2019 on all five charges he faced, including fraud, corruption of foreign officials, and laundering proceeds of crime. In a related development, former CEO Pierre Duhaime pleaded guilty in February 2019, on the eve of his own trial, to a single breach-of-trust count related to alleged bribery to build a hospital in Montreal.

In January 2019, U.S. citizen Robert Barra and UK national Shailesh Govindia were convicted under the Corruption of Foreign Public Officials Act (“CFPOA”) in connection with the Cryptometrics matter discussed in our 2017 Year-End FCPA Update. They were charged with allegedly agreeing to bribe Indian officials, including employees of Air India. Notably, the judge explained that the CFPOA is a specific intent offense requiring evidence that the defendants knew that the bribe recipients were “foreign officials.” With respect to Barra, the judge found that the prosecution failed to prove beyond a reasonable doubt that he knew that employees of Air India—a government-owned enterprise—qualified as foreign public officials, but had no issue concluding that he understood the Indian Minister of Civil Aviation, another bribe-payment target, was a foreign public official under the CFPOA.

Chile

Chilean authorities pushed ahead with several prominent public corruption investigations in 2019. The Public Prosecutor’s Office recently pressed charges against 33 individuals accused of participating in a corruption ring within the national police force (the Carabiniers of Chile). The 3,000-page charging document accuses both civilians and former high-level officials, many of whom have been in preventive detention since 2017, of money laundering, illicit association, and misappropriation of approximately tens of millions of dollars of public funds over a decade. Meanwhile, the Chilean Supreme Court suspended three appellate judges from the Court of Appeals of Rancagua following a series of bribery accusations. Chilean authorities also are investigating another 19 officials, including judges and lawyers.

Colombia

Colombia continues to deal with follow-on investigations related to Brazilian construction company Odebrecht S.A. In December 2018, a Colombian court fined Odebrecht $250 million and banned the company from government contracts for 10 years. In April 2019, a Colombian judge ordered an investigation into the president of Colombia’s largest finance company, Grupo Aval, which also faces investigation by U.S. authorities; other Grupo Aval executives previously have been implicated in wrongdoing related to Odebrecht. And in May 2019, Colombia’s Attorney General and former Grupo Aval attorney, Néstor Humberto Martínez, resigned amid questions about his ties to Odebrecht and possible involvement in the company’s misconduct.

In August 2019, former Supreme Court president Francisco Ricaurte and the former director of Colombian healthcare services company Saludcoop, Carlos Palacino—prime suspects in two of Colombia’s top corruption scandals—were released after the prosecution failed to timely bring charges against them. Following the release, the Superior Justice Council ordered an investigation of prosecutors, attorneys, and judges to assess the role they played in the expiration of the criminal charges against Ricaurte and Palacino.

Ecuador

For years, former President Rafael Correa and his allies have faced corruption allegations, including investigations related to Odebrecht’s dealings in Ecuador. In August 2019, Ecuador’s Attorney General sought the preventative arrest and detention of Correa and other former officials implicated in the campaign finance investigation dubbed the Arroz Verde (“Green Rice”) scandal. In November 2019, the National Court of Justice of Ecuador approved and ratified an order of preventative detention against Correa and the other subjects of investigation. Correa, who is currently residing in Belgium, has denied wrongdoing.

Guatemala

As detailed in our 2018 Year-End FCPA Update, former Guatemalan President Jimmy Morales announced the termination of the mandate of the UN-backed International Commission Against Impunity (known by its Spanish acronym “CICIG”) in January 2019. Following the announcement, the Guatemalan government reportedly obstructed corruption investigations and threatened judicial independence, and members of the legislature have introduced measures that would grant amnesty to corrupt officials and release officials previously convicted of corruption. The CICIG closed on September 3, 2019, after Alejandro Giammattei—an ally of former President Morales—won the Guatemalan presidency in an August 2019 runoff election. It remains to be seen whether the current administration and legislature will champion anti-corruption efforts, but in September 2019, the Guatemalan legislature created a special committee to review and potentially reverse work done by the CICIG. In October 2019, however, Guatemala’s constitutional court issued an injunction to halt the commission’s activities.

Honduras

In late May 2019, the Fiscal Unit Against Impunity and Corruption (“UFECIC”) and Mission to Support the Fight against Corruption and Impunity in Honduras (“MACCIH”) jointly announced an investigation, called “Narco-politics,” into former Honduran President Porfirio Lobo as part of a larger inquiry into his administration. Pursuant to this investigation, UFECIC and MACCIH filed injunctions against 12 individuals, including Lobo, alleged to have been part of a money laundering scheme during Lobo’s administration.

In September 2019, Lobo’s wife and former first lady Rosa Elena Bonilla de Lobo was sentenced to 58 years in prison for misusing approximately $779,000 in international donations and public funds during her husband’s presidency (2010-14). Her associate, Saul Escobar, also was sentenced to a 48-year prison term for embezzling public funds and fraud. Bonilla and Escobar have appealed their sentences to the Honduran Supreme Court.

Mexico

Since taking office in December 2018, President Andres Manuel López Obrador has affirmed his commitment to fighting corruption. Mexico has continued to move forward with its National Anti-corruption System (“NAS”), which still has not been fully implemented despite having entered into force in July 2017. NAS includes the General Administrative Liabilities Act, which places restrictions on gifts and other compensation to public officials with no de minimis exception, an issue discussed extensively in López Obrador’s inaugural speech.

An investigation into Emilio Lozoya Austin, the former CEO of state-run oil company Petróleos Mexicanos (“PEMEX”), concluded with arrest warrants and charges of corruption, bribery, and tax fraud. The government also froze Lozoya’s bank accounts and barred him from holding public office for 10 years. Eduardo León Trauwitz, the company’s former director of security, also was indicted but has not appeared at court hearings. Alonso Ancira, the chair of AHMSA, the largest integrated steel plant in Mexico, was arrested in May on money laundering and bribery-related charges in connection with PEMEX’s $475 million purchase of an AHMSA fertilizer plant in 2013. In October 2019, former head of PEMEX Fertilizers Edgar Torres was fined $165 million in connection with the matter.

Peru

Peru—second perhaps only to Brazil—has acted decisively in reaction to the Odebrecht scandal. In February 2019, Peruvian prosecutors settled with Odebrecht, allowing the company to remain in the country in exchange for agreeing to pay a fine and share information with prosecutors. In March 2019, a similar agreement was reached with Brazilian construction firm OAS. Peru’s Odebrecht corruption probe has implicated nearly every former living president of the country, with all but one detained or under investigation in relation to the scandal. Former president Alan García reportedly committed suicide in April 2019 before he could be arrested in connection with the investigation.

President Martín Vizcarra also is attempting to pass anti-corruption legislation through negotiations with the legislature, which is controlled by opposition parties. The proposed reforms would include giving the judiciary greater authority to curtail immunities for politicians suspected of corruption.

Asia

China

The Chinese central government is sending a clear message concerning corruption in the financial sector. During the Third Plenary Session of the 19th Central Commission for Discipline Inspection (“CCDI”) in early January 2019, and a meeting of the Central Politburo of the Communist Party of China in February 2019, President Xi Jinping underscored the need to step up the anti-corruption crackdown in the financial sector. Following Xi’s speech, 2019 saw investigations into and disciplinary actions against individuals at all levels of financial institutions and regulators for corruption offenses. In May 2019, the National Supervisory Commission announced that Liu Shiyu, former chief of the China Securities Regulatory Commission, had joined a growing list of senior officials who have surrendered to anti-corruption authorities since Xi launched his anti-corruption campaign in 2012. Liu was the highest ranking government official within the securities regulator and oversaw 711 initial public offerings in China during his three-year tenure. Liu was removed from his post in October following the probe and received a relatively light punishment of two years’ probation from the Communist Party. In June 2019, the National Supervisory Commission put Xu Tie, another high-ranking government official from the China Securities Regulatory Commission, under investigation for corruption. Xu, who had retired in 2013, previously served as the deputy director in the Commission and was responsible for reviewing and approving initial public offerings.

Notable corruption-related actions against public officials outside of the financial sector include: Meng Hongwei, former Interpol President and Vice Minister of China’s Ministry of Public Security, who pleaded guilty in March to taking more than $2 million in bribes; Nur Bekri, the former head of China’s National Energy Administration and governor of Xinjiang province, who was sentenced to life imprisonment for bribery in December; Lu Wei, former head of internet censorship, who was jailed 14 years for bribery in March; and Wang Xiaoguang, former vice governor of Guizhou province, who was sentenced to 20 years in prison and fined a record $26 million in April after pleading guilty to bribery, embezzlement, and insider trading.

As we reported in our 2018 Year-End FCPA Update, last year China enacted the International Criminal Judicial Assistance Law (“ICJA Law”), which serves as a blocking statute to prohibit entities and persons in China from providing evidence to foreign investigators without prior authorization from Chinese authorities. Uncertainty remains as to how Chinese authorities will implement the ICJA Law, including the imposition of penalties for violations. But some U.S. courts already have indicated that the law does not excuse companies from producing documents in U.S. proceedings. In August 2019, the U.S. Court of Appeals for the D.C. Circuit affirmed civil contempt orders against three China-headquartered banks that resisted the production of records in response to U.S. law enforcement subpoenas, in which the lower court recognized that production might violate the ICJA Law but found that severe sanctions by the Chinese government were unlikely.

Hong Kong

Hong Kong’s Independent Commission Against Corruption (“ICAC”) and Securities and Futures Commission have stepped up collaboration to combat financial crime in the semi-autonomous region. The two agencies entered into a memorandum of understanding in August 2019, formalizing cooperation efforts that will include case referrals, joint investigations, exchanging information, and mutual assistance in investigations. Previously, the agencies had cooperated on only two investigations. One such investigation led to the June arrest of a former senior executive at the Hong Kong Exchanges & Clearing Limited for suspected corruption in approving the listing applications of two companies.

In May 2019, the ICAC charged former JPMorgan Managing Director Catherine Leung Kar-cheung with bribing the chair of a logistics company in 2010 by offering to employ the chair’s son in exchange for business. The allegations against Leung relate to the “Sons and Daughters” hiring program alleged in the bank’s 2016 FCPA resolution (covered in our 2016 Year-End FCPA Update). Leung pleaded not guilty, and trial is set to begin in February 2020.

In September, Hong Kong formally withdrew a proposed extradition bill that would have permitted the transfer of individuals suspected of criminal activity, including bribery offenses, to mainland China for investigation and prosecution. The bill sparked months-long protests that continue to weigh on the semi-autonomous region.

India

In March 2019, former Supreme Court Justice Pinaki Chandra Ghose was appointed as the first Chairperson of India’s “Lokpal,” a federal-level anti-corruption watchdog. The Lokpal and Lokayutkas Act, 2013 (“Lokpal Act”) was the culmination of a long-drawn public campaign against corruption in India, anticipated to provide a boost to anti-corruption enforcement in the country. The Lokpal Act provides for the appointment of a Lokpal at the federal level and “Lokayuktas” at the provincial level. The Lokpal and Lokayuktas are bodies mandated to inquire into and prosecute corruption complaints against public servants.

The Lokpal post remained vacant until March 2019. The Government of India had argued that it was unable to appoint the Lokpal because the Lokpal Act required that the leader of opposition be a part of the selection committee to consider and appoint the Lokpal. Because no single opposition party had managed to secure 10% of the seats in the Indian Parliament after the 2014 parliamentary elections, the Government of India claimed that no one could be appointed as the leader of opposition. Anti-corruption activists and lawyers challenged the Government of India’s inaction, and in 2017, the Supreme Court of India directed the Government of India to proceed with the appointment of the Lokpal despite the absence of the leader of opposition in the selection committee. Yet, the post remained vacant for more than a year. After another push by the Supreme Court of India in 2018, the Government of India finally began the process of appointing members to the Lokpal. The process ultimately led to the appointment of Justice Pinaki Chandra Ghose as the first Chairperson of the Lokpal, along with eight other members.

Indonesia

In September 2019, Indonesia’s House of Representatives passed a bill significantly weakening the powers of the country’s anti-corruption agency, the Corruption Eradication Commission (“KPK”). The law took effect on October 17, 2019, after 30 days of non-signature by Indonesia’s President. The amendments to the KPK Law place the formerly independent agency under the oversight of a Supervisory Board, whose members will be appointed by the President. The KPK will be required to obtain Supervisory Board approval for certain investigative activities. Critics of the amendments, which sparked nationwide protests, expressed concern that they will weaken the KPK’s ability to fight corruption in the country.

Japan

As reported in our 2018 Year-End FCPA Update, in July 2018 Japanese prosecutors indicted three executives of Yokohama-based power plant manufacturer Mitsubishi Hitachi Power Systems Inc. (“MHPS”)—Satoshi Uchida, Fuyuhiko Nishikida, and Yoshiki Tsuji—for allegedly bribing a Thai official in 2015. The scheme came to the attention of prosecutors after a self-report by MHPS, which became the first company to enter into a plea agreement in Japan for organized crime and bribery; in recognition of its cooperation, MHPS was not prosecuted. Nishikida and Tsuji, who admitted to the charges during their first hearing in December 2018, respectively received 18-month and 16-month prison terms, suspended for three years. Uchida, who denied the charges, was convicted and sentenced to 18 months imprisonment in September 2019.

Korea

In August 2019, the Supreme Court of Korea ordered retrials for former President Park Geun-hye, former Samsung Electronics Vice Chairman Lee Jae Yong, and Presidential confidante Choi Soon-sil on the grounds that the Seoul High Court had misunderstood the law on bribery in convicting the three of them in cases we reported most recently in our 2018 Year-End FCPA Update. The Supreme Court found that former President Park’s bribery charges should have been considered separately from her other charges, as required by the Public Official Election Act. The Supreme Court also overturned the High Court’s earlier finding that only the KRW 3.6 billion (~ $3 million) in equestrian training costs paid on behalf of Choi Soon-sil’s daughter were bribes. The Supreme Court additionally recognized KRW 1.6 billion (~ $1.3 million) in donations made to sports foundations organized by Choi Soon-sil and three horses worth KRW 3.4 billion (~ $2.8 million) purchased for Choi Soon-sil’s daughter. Lee Jae Yong’s retrial commenced in December 2019, with Lee’s counsel requesting high-profile witnesses to appear.

As we also reported in our 2018 Year-End FCPA Update, in July 2018, former President Park was separately convicted of illegally diverting millions of dollars from the National Intelligence Service. On appeal, the Seoul High Court acquitted her of the charge of accepting bribes from the National Intelligence Service and applied a different charge of “loss of state funds” to reduce her sentence by one year. In November 2019, the Supreme Court overturned the Seoul High Court’s judgment, determining that former President Park should also be found guilty of accepting bribes. The High Court’s retrial is likely to lead to lengthier imprisonment for former President Park, who is already serving multiple jail terms consecutively. In April 2019, former President Park filed for a suspended sentence, citing poor health. The Seoul Prosecutors’ Office dismissed her petition.

Malaysia

As we reported in our 2018 Year-End FCPA Update, in 2018 Malaysia passed the Malaysian Anti-Corruption Commission (Amendment) Act 2018 (“MACC Act”), which created liability for commercial organizations if a person associated with the organization engages in corruption. The corporate liability provision in the MACC Act comes into force in June 2020. In July 2019, Securities Commission Malaysia announced that it would implement an action plan complementing the MACC Act to strengthen corporate governance, part of which will require listed companies to institute effective anti-corruption policies.

In the meantime, Malaysian authorities continue to pursue enforcement actions and attempts to recover assets linked to the 1MDB scandal. Three trials commenced this year against Malaysia’s former Prime Minister, Najib Razak, who faces 42 charges of corruption, abuse of power, and money laundering in five criminal cases linked to the scandal. Lawyers for Najib, who has pleaded not guilty to all of the charges brought so far, have argued that Najib was a victim of the scheme.

Malaysia intends to seek return of the assets recovered by U.S. authorities, and has filed criminal charges against Goldman Sachs seeking compensation for its role. In August 2019, Malaysia’s attorney general also filed criminal charges against 17 current and former executives at Goldman Sachs. The executives, who were charged under a section of the Malaysian Capital Markets and Services Act that holds senior executives responsible for offenses committed by the firm, face up to ten years’ imprisonment, in addition to monetary penalties, if convicted.

Middle East and Africa

Israel

In late February 2019, following the police recommendations covered in our 2018 Year-End FCPA Update, Attorney General Avichai Mandelblit announced that he intended to move forward with indicting Israeli Prime Minister Benjamin Netanyahu on bribery and breach of trust charges. In November, Attorney General Mandelblit issued a 63-page indictment covering charges stemming from three investigations. The first case deals with favors Netanyahu allegedly granted to individuals who gifted him luxury items. The second case involves alleged actions to damage the competition of a domestic newspaper in exchange for positive coverage. And the third involves allegations that Netanyahu awarded business to Israeli telecom company Bezeq in exchange for favorable news coverage. Netanyahu has agreed to step down from all Ministry positions he holds except for the Premiership. The case against Netanyahu, which could take years to resolve, comes at a time of great uncertainty for the Israeli State, which is headed towards its third general election in a year.

South Africa

The High Court in South Africa rejected appeals by a French defense firm and former President Jacob Zuma to dismiss charges against them related to allegations that the company paid Zuma $34,000 a year to avoid investigation into a multibillion dollar arms deal. These charges, originally filed more than a decade ago, were reignited due to the efforts of anti-corruption groups and politicians. Both the company and Zuma may petition the Supreme Court of South Africa to dismiss the charges, but it appears that they may have to face trial.

CONCLUSION

As is our semiannual tradition, in the following weeks Gibson Dunn will be publishing a series of enforcement updates for the benefit of our clients and friends as follows:

Tuesday, January 7: 2019 Year-End Update on Corporate NPAs and DPAs;
Thursday, January 9: 2019 Year-End Developments in the Defense of Financial Institutions;
Friday, January 10: 2019 Year-End German Law Update;
Monday, January 13: 2019 Year-End False Claims Act Update;
Tuesday, January 14: 2019 Year-End Securities Enforcement Update;
Wednesday, January 15: AI & Related Technologies Q4 Update;
Thursday, January 16: 2019 Year-End UK Labor & Employment Update;
Friday, January 17: 2019 Year-End Class Actions Update;
Wednesday, January 22: 2019 Year-End UK White Collar Crime Update;
Thursday, January 23: 2019 Year-End Sanctions Update;
Monday, January 27: 2019 Year-End Cybersecurity Update (United States);
Tuesday, January 28: 2019 Year-End Cybersecurity Update (European Union);
Thursday, January 30: 2019 Year-End Securities Litigation Update;
Tuesday, February 4: 2019 Year-End AI & Related Technologies Update;
Monday, February 10: 2019 Year-End China Antitrust Update;
Tuesday, February 11: 2019 Year-End Shareholder Activism Update; and
Monday, March 16: 2019 Year-End Aerospace & Related Technologies Update.

The following Gibson Dunn lawyers assisted in preparing this client update: F. Joseph Warin, John Chesley, Christopher Sullivan, Richard Grime, Patrick Stokes, Reuben Aguirre, Brian Anderson, Claire Aristide, Shruti Chandhok, Claire Chapla, Timothy Deal, Austin Duenas, Brittany Garmyn, Julie Hamilton, Daniel Harris, Patricia Herold, Amanda Kenner, Derek Kraft, Emily Maxim Lamm, Kate Lee, Nicole Lee, Lora MacDonald, Andrei Malikov, Megan Meagher, Jesse Melman, Steve Melrose, Caroline Monroy, Erin Morgan, Alexander Moss, Jaclyn Neely, Virginia Newman, Jonathan Newmark, Nick Parker, Mariam Pathan, Liesel Schapira, Sydney Sherman, Jason Smith, Pedro Soto, Laura Sturges, Karthik Ashwin Thiagarajan, Ralf van Ermingen-Marbach, Jeffrey Vides, Milagros Villalobos, Oleh Vretsona, Caitlin Walgamuth, Alina Wattenberg, Samantha Weiss, Oliver Welch, Dillon Westfall, Brian Williamson, 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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F. Joseph Warin (+1 202-887-3609, [email protected])
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Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Palo Alto partner Lisa Fontenot and associate Cassandra Gaedt-Sheckter are the authors of “Fiduciary Duty Considerations For Boards Of Cos. Using AI,” [PDF] published by Law360 on January 3, 2020.

On December 19, 2019, in In re Tribune Company Fraudulent Conveyance Litigation, 2019 WL 6971499 (2d Cir. Dec. 19, 2019),[1] the Second Circuit held that the “safe harbor” provision in section 546(e) of the Bankruptcy Code barred claims seeking to claw back payments that Tribune Company (“Tribune”) made to public shareholders in 2007 as part of a go-private transaction. That section bars the avoidance of certain types of securities and commodities transactions that are made by, to or for the benefit of certain protected entities (each a “Covered Entity”), including a “financial institution.”[2] The Second Circuit held that Tribune constituted a financial institution pursuant to the Bankruptcy Code definition of “financial institution,” which includes the “customer” of a financial institution when the financial institution acts as the customer’s “agent or custodian … in connection with a securities contract.” The Second Circuit also reaffirmed that the safe harbor preempts claims for constructive fraudulent conveyance under state law because the claims are “in conflict with” “[e]very congressional purpose reflected in Section 546(e).”[3]

The decision is significant in the wake of the Supreme Court’s February 27, 2018 ruling in Merit Management Group, LP v. FTI Consulting, Inc., 138 S.Ct. 883 (2018), which limited the scope of the safe harbor and called into question whether the safe harbor still protects securities transactions such as those in Tribune.[4] Tribune signals that, at least in the Second Circuit, the safe harbor may still protect securities transactions where a financial institution acts as agent or custodian for the transferor or transferee as its customer.

I. Supreme Court Decision in Merit Management

Prior to Merit Management, several circuits, including the Second Circuit, held that the safe harbor protected transfers that passed through a financial institution or other Covered Entity acting as a conduit, even if neither the transferor nor the transferee was itself a Covered Entity. Merit Management rejected that theory and held that the safe harbor protects a transaction only if the transferor or the transferee of the “relevant transfer” (i.e., the “overarching” transfer sought to be avoided) was itself a Covered Entity.[5] Merit Management thus limited the scope of the safe harbor.

Merit Management expressly declined to address whether, because the Bankruptcy Code defines a “financial institution” to include the “customer” of a “financial institution” under certain circumstances,[6] the safe harbor protects a transfer made by or to a party that constitutes a protected “customer” but is not otherwise a Covered Entity.[7] That was the issue decided in Tribune.

II. Background in Tribune

In 2007, Tribune, a public company, consummated a tender offer and then went private through a merger six months later. In the tender offer, Tribune borrowed funds and transmitted the cash required to repurchase approximately 50% of its outstanding shares to Computershare Trust Company, N.A. (“CTC”), which acted as “Depositary.” CTC, on Tribune’s behalf, then accepted and held tendered shares and paid out $34 per share to tendering shareholders. In the merger, CTC acted as an “Exchange Agent” and performed essentially the same function.

One year after the merger, on December 8, 2008, Tribune and various subsidiaries commenced chapter 11 bankruptcy cases. Former creditors of Tribune obtained relief from the automatic stay in bankruptcy to bring claims seeking to avoid the payments to shareholders as a constructive fraudulent conveyance under state law. The creditors commenced lawsuits in various jurisdictions which were consolidated in a multi-district litigation in the United States District Court for the Southern District of New York.[8] Defendants moved to dismiss the claims on grounds including that they were barred by the safe harbor. The District Court dismissed the claims on different grounds but held that the safe harbor did not bar the claims because the statute expressly bars only claims brought by “the trustee” in bankruptcy, and thus it did not bar claims brought by creditors on their own behalf.[9]

The Second Circuit affirmed the dismissal, holding that the safe harbor preempted (barred) the creditors’ claims even though the safe harbor expressly refers only to claims brought by “the trustee.”[10] The creditors filed a petition for certiorari in the Supreme Court, which was pending when the Supreme Court decided Merit Management. The Supreme Court issued a statement inviting the Second Circuit to reconsider its ruling in Tribune in light of Merit Management.[11] Because the Second Circuit’s prior ruling assumed that the safe harbor applied to Tribune’s shareholder payments because the payments passed through Covered Entities (i.e., the theory that Merit Management rejected), the Second Circuit recalled the mandate to consider whether “there is an alternative basis for finding that the payments are covered.”[12]

III. Second Circuit Holds That Section 546(e) Protects Tribune’s Shareholder Payments Because Tribune Was a “Financial Institution” (i.e., Covered Entity)

As a result of Merit Management, the Second Circuit considered whether Tribune (as transferor of the payments) and/or its shareholders (as transferees) constituted Covered Entities. The Second Circuit held that the safe harbor still protected the shareholder payments because, tracking the Bankruptcy Code definition of a “financial institution,” Tribune was the “customer” of a trust company and bank, CTC, that was “acting as agent” for Tribune “in connection with a securities contract,” the tender-offer repurchase and redemption of Tribune’s shares from its shareholders.[13] The District Court had reached the same conclusion on April 23, 2019 in a related action brought by the trustee under Tribune’s chapter 11 plan.[14]

The Second Circuit’s decision rested on four premises: (1) CTC is a “financial institution” because it appears on the Office of the Comptroller of the Currency’s list of trust companies and banks; (2) Tribune was CTC’s “customer,” within the “ordinary meaning” of that term, because “Tribune retained [CTC] to act as ‘Depositary’ in connection with the LBO tender offer”; (3) CTC acted as Tribune’s “agent,” according to that term’s “common-law meaning,” because Tribune deposited funds with CTC and entrusted CTC to pay shareholders and receive their shares while Tribune “maintained control over key aspects of the undertaking”; and (4) the payments to shareholders via the tender offer and redemption were “in connection with a securities contract” based on the Bankruptcy Code’s “capacious[]” definition of a “securities contract.”[15] Thus, the Second Circuit held that the safe harbor protected the payments to all shareholders because they were made by a Covered Entity, Tribune.

The Second Circuit also reaffirmed its prior ruling that the safe harbor preempted the creditors’ claims. Rejecting the creditors’ argument that the safe harbor did not bar their claims because the safe harbor expressly applies only to “the trustee” in bankruptcy, the Second Circuit concluded that “[e]very congressional purpose reflected in Section 546(e), however narrow or broad, is in conflict with appellants’ legal theory.”[16] It reasoned that “[u]nwinding settled securities transactions by claims such as appellants’ would seriously undermine − a substantial understatement − markets in which certainty, speed, finality, and stability are necessary to attract capital.”[17]

IV. Conclusion

Whereas Merit Management raised the specter that the safe harbor under section 546(e) of the Bankruptcy Code might be limited to transactions between traditional Covered Entities (e.g., stockbrokers, banks, securities clearing agencies), Tribune demonstrates that the safe harbor may still protect securities transactions between parties that might not otherwise constitute Covered Entities (e.g., a publishing and media company such as Tribune) where a financial institution acts as agent in effectuating the transaction and the other requirements outlined above are met. Tribune’s preemption ruling is also important because it confirms that creditors cannot “end run” the safe harbor by bringing state law constructive fraudulent conveyance claims outside of a bankruptcy case.[18] However, Tribune is not binding on other circuits, and, given the decision’s focus on protecting the public markets, it remains to be seen whether courts will extend its holding to different circumstances (e.g., private securities transactions).

_______________________

[1] Gibson, Dunn & Crutcher LLP represents certain shareholders and directors in this litigation.

[2] 11 U.S.C. § 546(e).

[3] Tribune, 2019 WL 6971499, at *17.

[4] The decision is discussed in greater detail in our previous client alert. See Garza, Oscar, Rosenthal, Michael & Levin, Douglas, Supreme Court Settles Circuit Split Concerning Bankruptcy Code “Safe Harbor” (Mar. 5, 2018).

[5] 138 S. Ct. at 897.

[6] See 11 U.S.C. § 101(22)(A) (“The term ‘financial institution’ means … a Federal reserve bank, or an entity that is a commercial or savings bank, industrial savings bank, savings and loan association, trust company, federally-insured credit union, or receiver, liquidating agent, or conservator for such entity and, when any such Federal reserve bank, receiver, liquidating agent, conservator or entity is acting as agent or custodian for a customer … in connection with a securities contract … such customer[.]”) (emphases added).

[7] See 138 S. Ct. at 890 n.2 (“The parties here do not contend that either the debtor or petitioner in this case qualified as a ‘financial institution’ by virtue of its status as a ‘customer’ under § 101(22)(A)…. We therefore do not address what impact, if any, § 101(22)(A) would have in the application of the § 546(e) safe harbor.”).

[8] See In re Tribune Co. Fraudulent Conveyance Litig., Case No. 11-md-2296 (DLC) (S.D.N.Y.).

[9] See In re Tribune Co. Fraudulent Conveyance Litig., 499 B.R. 310, 320 (S.D.N.Y. 2013) (“[T]he Court concludes that Congress said what it meant and meant what it said, … as such, Section 546(e) applies only to the trustee and does not preempt the Individual Creditors’ SLCFC claims”).

[10] See In re Tribune Co. Fraudulent Conveyance Litig., 818 F.3d 98, 109-24 (2d Cir. 2016).

[11] See Deutsche Bank Tr. Co. Americas v. Robert R. McCormick Found., 138 S. Ct. 1162 (2018).

[12] Tribune, 2019 WL 6971499, at *6.

[13] Id. at *6-9.

[14] See In re Tribune Co. Fraudulent Conveyance Litig., 2019 WL 1771786 (S.D.N.Y. Apr. 23, 2019). The decision is discussed in greater detail in our previous client alert. See Garza, Oscar, Levin, Douglas & Bouslog, Matthew, S.D.N.Y. Decision May Have Significant Impact on Bankruptcy Code “Safe Harbor” for Securities Transactions (Apr. 29, 2019).

[15] Tribune, 2019 WL 6971499, at *6-9.

[16] Id. at *17.

[17] Id.; see also id. at *19 (“A lack of protection against the unwinding of securities transactions would create substantial deterrents, limited only by the copious imaginations of able lawyers, to investing in the securities market. The effect of appellants’ legal theory would be akin to the effect of eliminating the limited liability of investors for the debts of a corporation: a reduction of capital available to American securities markets.”).

[18] Although Tribune only involved constructive fraudulent conveyance claims, the decision provides a basis to argue that analogous state law claims (e.g., unjust enrichment) are also preempted.

Gibson, Dunn & Crutcher’s lawyers are available to assist with any questions you may have regarding these issues. For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Business Restructuring and Reorganization practice group, or any of the following:

Oscar Garza – Orange County, CA (+1 949-451-3849, [email protected])
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Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

Facts

The SFO alleged that three senior employees of Guralp Systems Limited (“the Company”), a UK based seismology company, conspired to corruptly make payments of approximately £1 million over a period of twelve years between 2003 and 2015 to a public official and employee of the Korea Institute of Geoscience and Mineral Resources, in return for £2 million worth of contracts. The trial of those individuals resulted in not guilty verdicts, the last of which was returned on 20 December 2019. Shortly after the announcement of those verdicts the SFO announced here for the first time that it had, on 22 October 2019, entered into a Deferred Prosecution Agreement (“DPA”) with the Company, based on the facts for which the individuals were acquitted.

It should be noted that the public official who received the bribe was convicted after a trial in California in July 2017 (https://www.justice.gov/opa/pr/director-south-koreas-earthquake-research-center-convicted-money-laundering-million-dollar).

DPA Offences

The DPA is for both an offence of conspiracy to corrupt, contrary to the Criminal Law Act 1977 and Prevention of Corruption Act 1906 and an offence of failing to prevent, contrary to the Bribery Act 2010. The choice of the conspiracy charge is explained by the fact that the conduct commenced prior to the coming into force of the Bribery Act 2010. The failing to prevent charge is in respect of that failure commencing on the date the Bribery Act came into force.

Cooperation and the Interests of Justice Test

The Court recognised the following matters as demonstrating that it was in the interests of justice for the case to be resolved by way of a DPA:

Self-reporting in circumstances where much of the evidence relied on in the DPA and trial of the individuals was volunteered by the company.
Removal of employees responsible for the alleged misconduct.
No prior corporate misconduct.
Introduction of a new compliance programme and the severing of links with distributors which presented compliance concerns.

The SFO in its application for approval of the DPA identified without elaboration further conduct that it described as demonstrating extensive cooperation:

Deferring employee interviews until the SFO was content for the interviews to proceed.
Providing material relating to the interviews.
Consulting the SFO in relation to other matters including communications with customers and suppliers.
Keeping the SFO informed of all contact with the public official and his travel arrangements.

The factors recognised by the court and the SFO are largely conventional. It should however be noted that this is the third DPA in a row where a company received credit for deferring employee interviews. The deferring of interviews is also consistent with the SFO’s Corporate Cooperation Guidance previously analysed here. Such requests will no doubt be made in future cases, albeit likely not in all. A common feature in each of the DPAs in which the SFO has required this is their ostensibly domestic nature, with a small number of persons of interest.

Terms

Of note, and unlike the five prior DPAs, there is no penalty element in this DPA. There is however a full disgorgement of profit. That disgorgement has to be paid within the five year currency of the DPA. The Court stated that both the absence of a penalty and the loose arrangement for the payment of disgorgement do not set any precedent, but are a result of the impecunious financial circumstances of the Company (paragraph 42). This is not therefore a tectonic shift in the approach to financial terms.

The judgment recognises the possibility that the disgorgement will not be paid in the five year currency of the DPA. As such the judgement suggests that a variation of the DPA may be necessary (paragraph 41). However, a DPA can only be varied in respect of “circumstances that were not, and could not have been, foreseen” (see Crime and Courts Act 2013, Schedule 17, paragraph 10(1)(b)). Here the circumstance of not being able to pay are foreseeable.

There is a compliance reporting term that requires the Company to provide annual reports to the SFO containing various compliance metrics, including the effectiveness of training. The term does not require any SFO or third party approval of the effectiveness of the training. If the SFO concludes the training to be ineffective there is no mechanism in the DPA to compel an improvement nor would the ineffectiveness amount to a breach of the DPA.

Further, the absence of a third party approval mechanism means that the SFO is effectively entering the arena as a compliance assessor. Having taken on this role, the SFO must therefore ensure that it retains resource on the case to properly receive reports and provide criticism and feedback. If the SFO is passive and future misconduct occurs as a result of inadequate training, the Company would be able to point to the lack of any SFO criticism as implicit approval and the SFO could find itself a witness in a future trial.

There is also a requirement for the company’s Compliance Officer to “co-operate generally” with the SFO. That appears at first glance to be a significant shift in enforcement policy. The term is not one however that creates any civil or criminal liability for the compliance officer. A compliance officer who felt that a request from the SFO was unreasonable and refused to comply with a request would not therefore be subject to any form of court sanction. Similarly the compliance officer’s refusal would not amount to a breach of the DPA by the Company. This term therefore looks as if it will be difficult to enforce, though in the spirit of the company’s cooperation it may not prove to be an issue.

As first used in the Serco DPA, there is a requirement to report defined future misconduct.

Conclusion

This is the second DPA resolved by the SFO this year and the second by its current Director, Lisa Osofsky. There is much about this DPA in common with its predecessors and particularly its immediate predecessor. The significant difference is the omission of a penalty, but this is case specific and explicitly stated not to set any precedent.

The recognition given by the SFO for the deferring of employee interviews has become a trend, albeit in smaller largely domestic focussed cases. It is interesting to observe however that the court did not refer to this factor in its judgment. In prior DPAs the court has adopted all the interests of justice factors advanced by the SFO in its application for the DPA. It would however be too much to infer that this factor played no role in the court’s decision making. The same judge who approved this DPA previously expressly recognised it in a prior DPA as an important demonstration of cooperation.

Companies who identify misconduct over which the SFO will have jurisdiction should approach internal investigations with care. Our view is that initial interviews and other unavoidable overt steps designed to establish whether there is anything to report are reasonable. The Director of the SFO has recognised this in a number of speeches including on April 3, 2019 where she said, “I know that companies will want to examine any suspicions of criminality or regulatory breaches – indeed they have a duty to their shareholders to ensure allegations or suspicions are investigated, assessed and verified, so they understand what they may be reporting before they report it.”

However once initial interviews, whether alone or combined with other evidence, demonstrate misconduct that would be of interest to the SFO, then further interviews or overt steps prior to self-reporting will likely fall short of the SFO’s expectations. Companies will therefore have to give careful consideration as to whether interviews should be suspended, pending consultation with the SFO.

This client alert was prepared by Sacha Harber-Kelly, Patrick Doris and Steve Melrose.

Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these developments. If you would like to discuss this alert in greater detail, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following members of the firm’s UK disputes practice.

Philip Rocher (+44 (0)20 7071 4202, [email protected])
Patrick Doris (+44 (0)20 7071 4276, [email protected])
Sacha Harber-Kelly (+44 (0)20 7071 4205, [email protected])
Charles Falconer (+44 (0)20 7071 4270, [email protected])
Allan Neil (+44 (0)20 7071 4296, [email protected])
Steve Melrose (+44 (0)20 7071 4219, [email protected])
Sunita Patel (+44 (0)20 7071 4289, [email protected])
Shruti S. Chandhok (+44 (0)20 7071 4215, [email protected])

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We are pleased to present Gibson Dunn’s seventh “Federal Circuit Year In Review,” providing a statistical overview and substantive summaries of the 115 precedential patent opinions issued by the Federal Circuit over the 2018-2019 year. This term was marked by two en banc decisions, as well as significant panel decisions in patent law jurisprudence with regard to subject matter eligibility (e.g., Athena Diagnostics, Inc. v. Mayo Collaborative Services, LLC, 915 F.3d 743 (Fed. Cir. 2019), and Cellspin Soft, Inc. v. Fitbit, Inc., 927 F.3d 1306 (Fed. Cir. 2019)), venue for patent cases (e.g., In re Google, 914 F.3d 1377 (Fed. Cir. 2019)), and the application of IPR proceedings to pre-AIA patents (Celgene Corp. v. Peter, 931 F.3d 1342 (Fed. Cir. 2019)). The issues most frequently addressed in precedential decisions by the Court over the last year were: obviousness (38 opinions); claim construction (31 opinions); infringement (20 opinions); subject matter eligibility (16 opinions); and PTO procedures (15 opinions).

Use the Federal Circuit Year In Review to find out:

The easy-to-use Table of Contents is organized by substantive issue, so that the reader can easily identify all of the relevant cases bearing on the issue of choice.
Which issues may have a better chance (or risk) on appeal based on the Federal Circuit’s history of affirming or reversing on those issues in the past.
The average length of time from issuance of a final decision in the district court and docketing at the Federal Circuit to issuance of a Federal Circuit opinion on appeal.
What the success rate has been at the Federal Circuit if you are a patentee or the opponent based on the issue being appealed.
The Federal Circuit’s history of affirming or reversing cases from a specific district court.
How likely a particular panel may be to render a unanimous opinion or a fractured decision with a majority, concurrence, or dissent.
The Federal Circuit’s affirmance/reversal rate in cases from the district court, ITC, and the PTO.

The Year In Review provides statistical analyses of how the Federal Circuit has been deciding precedential patent cases, such as affirmance and reversal rates (overall, by issue, and by District Court), average time from lower tribunal decision to key milestones (oral argument, decision), win rate for patentee versus opponent (overall, by issue, and by District Court), and other helpful metrics. The Year In Review is an ideal resource for participants in intellectual property litigation seeking an objective report on the Court’s decisions.

Gibson Dunn is nationally recognized for its premier practices in both Intellectual Property and Appellate litigation. Our lawyers work seamlessly together on all aspects of patent litigation, including appeals to the Federal Circuit from both district courts and the agencies.

Please click here to view the FEDERAL CIRCUIT YEAR IN REVIEW

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding developments at the Federal Circuit. Please contact the Gibson Dunn lawyer with whom you usually work or the authors of this alert:

Mark A. Perry – Washington, D.C. (+1 202-887-3667, [email protected])
Omar F. Amin – Washington, D.C. (+1 202-887-3710, [email protected])
Nathan R. Curtis – Dallas (+1 214-698-3423, [email protected])

Please also feel free to contact any of the following practice group co-chairs or any member of the firm’s Appellate and Constitutional Law or Intellectual Property practice groups:

Appellate and Constitutional Law Group:
Allyson N. Ho – Dallas (+1 214-698-3233, [email protected])
Mark A. Perry – Washington, D.C. (+1 202-887-3667, [email protected])

Intellectual Property Group:
Wayne Barsky – Los Angeles (+1 310-552-8500, [email protected])
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Mark Reiter – Dallas (+1 214-698-3100, [email protected])

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London partner Sandy Bhogal and associate Barbara Onuonga are the authors of “Taxing the Digital Economy,” [PDF] published in Corporate Tax 2020, 16th Edition by International Comparative Legal Guides in December 2019.

This fast-paced program explores the latest trends, structures, pitfalls and opportunities in M&A. The presentation will address pertinent topics including:

Cautionary tales for M&A dealmaking from high-profile Delaware cases;
Latest guidance on preserving pre-closing attorney-client privileged communications;
CFIUS updates;
Trends and market update for M&A activity by special purpose acquisition companies; and
M&A drafting and negotiating hot buttons.

View Slides (PDF)

PANELISTS:

Jonathan Whalen is a partner in the Dallas office of Gibson, Dunn & Crutcher LLP. He is a member of the firm’s Mergers and Acquisitions, Capital Markets, Energy and Infrastructure, and Securities Regulation and Corporate Governance practice groups. Mr. Whalen also serves on the Gibson Dunn Hiring Committee. Mr. Whalen’s practice focuses on a wide range of corporate and securities transactions, including mergers and acquisitions, private equity investments, and public and private capital markets transactions. In 2018, D CEO magazine and the Association of Corporate Growth named Mr. Whalen a finalist for the 2018 Dallas Dealmaker of the Year.

David C. Lee is a partner in Gibson Dunn’s Orange County office. Mr. Lee structures and negotiates domestic and cross-border transactions on behalf of corporations, venture capital firms, and private equity houses. His practice includes mergers & acquisitions, private placements, initial public offerings, follow-on offerings, recapitalizations, take-private transactions, hostile takeover defense, and other complex corporate transactions. Mr. Lee advises venture capital and private equity firms on their strategic investments and acquisitions throughout the investment lifecycle . He also handles equity and debt capital markets offerings on behalf of both issuers and investment banks.

Saee Muzumdar is a partner in the New York office of Gibson, Dunn & Crutcher. Ms. Muzumdar is a corporate transactional lawyer whose practice includes representing both strategic companies and private equity clients (including their portfolio companies) in connection with all aspects of their domestic and cross-border M&A activities and general corporate counseling. She has significant experience with acquisitions and divestitures of public and private entities (including both negotiated transactions and contested takeovers), venture capital investments, proxy contests, tender and exchange offers, recapitalizations, leveraged buyouts, spinoffs, carveouts, joint ventures and other complex corporate transactions.

Evan M. D’Amico is a corporate associate in the Washington, D.C. office of Gibson, Dunn & Crutcher, where his practice focuses primarily on mergers and acquisitions. Mr. D’Amico advises companies, private equity firms, boards of directors and special committees in connection with a wide variety of complex corporate matters, including mergers and acquisitions, asset sales, leveraged buyouts, spin-offs and joint ventures. He also has experience advising issuers, borrowers, underwriters and lenders in connection with financing transactions and public and private offerings of debt and equity securities.

Today, the U.S. Department of Justice (“DOJ” or the “Department”) announced changes to its policy governing the treatment of voluntary self-disclosures (or “VSDs”) in criminal sanctions and export control investigations. Critically, DOJ will now offer VSD benefits to financial institutions in such matters, generally aligning the Department’s guidance to financial institutions in this area with other enforcement policies meant to encourage corporate disclosures.

As we discussed at length last year, deciding whether to voluntarily self-disclose corporate wrongdoing to DOJ is a complex exercise, marked by potential benefits that are difficult to anticipate and quantify. DOJ’s efforts to incentivize corporate disclosures of U.S. Foreign Corrupt Practices Act (“FCPA”) violations—and thus provide more certainty for companies facing criminal prosecution—have served as a model for corporate criminal investigations in other areas. In early 2018, Acting Assistant Attorney General John Cronan announced that DOJ’s 2017 FCPA Corporate Enforcement Policy (“CEP”) would serve as non-binding guidance for corporate investigations beyond the FCPA context. Many aspects of the CEP (and its predecessor, the 2016 FCPA Pilot Program) were incorporated into the Justice Manual (“JM”) (previously known as the United States Attorneys’ Manual), which outlines the Department’s high-level approach to voluntary self-disclosures.

In a similar vein, the changes announced today by DOJ’s National Security Division (“NSD”) with respect to criminal sanctions and export control violations include the following key features:

Applies to Financial Institutions: Financial institutions are now subject to NSD’s newly issued policy (the “2019 NSD Guidance”). Accordingly, rather than relying on general DOJ guidance applicable to all business organizations—like the high-level guidance provided in the JM—financial institutions may instead rely on the requirements and assurances set forth in the 2019 NSD Guidance when evaluating the potential costs and benefits of self-disclosing export control and sanctions violations to DOJ.
Presumption of Non-Prosecution Agreement: Companies that discover a criminal export control or sanctions violation, voluntarily self-disclose the violation to DOJ, and satisfy the requirements set forth in the 2019 NSD Guidance will now benefit from a presumption that they will receive a non-prosecution agreement (“NPA”) and will not be assessed a fine, provided no aggravating factors are present.
Reduced Penalties: Where aggravating circumstances warrant an enforcement action other than an NPA, companies that otherwise satisfy all the requirements of a VSD will be eligible for at least a 50 percent reduction off the statutory base penalty—effectively capping the penalty for such companies at the dollar value of the violative transactions—and the Department will not require a monitor, provided the company has implemented an effective compliance program.
Successor Liability: In mergers and acquisitions, successor companies that uncover a criminal export control or sanctions violation by the merged or acquired entity through timely due diligence and voluntarily self-disclose the violation to DOJ also will benefit from a presumption in favor of an NPA.

To help make sense of this latest development, we provide below an overview of NSD’s prior policy regarding VSDs in the export control and sanctions area, a comparison with the Department’s guidelines in FCPA investigations, and conclude with an analysis of the changes announced today and what they mean for businesses considering whether to self-disclose.

Background

U.S. sanctions and export controls are primarily administered and enforced by U.S. regulatory agencies, including the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”), and the U.S. Department of State’s Directorate of Defense Trade Controls (“DDTC”). NSD—the DOJ office with primary responsibility for overseeing and coordinating criminal investigations related to violations of U.S. export controls and sanctions—has historically played a secondary role to civil enforcement agencies, becoming involved in enforcement matters referred to them by OFAC, BIS, or DDTC.

NSD became more forward leaning during the waning days of the Obama administration, and in 2016 published the first iteration of its “Guidance Regarding Voluntary Self-Disclosures, Cooperation, and Remediation in Export Control and Sanctions Investigations Involving Business Organizations” (the “2016 NSD Guidance”). The 2016 NSD Guidance articulated the Department’s policy of encouraging business organizations to voluntarily self-disclose criminal violations of sanctions and export controls and for the first time set forth the criteria that NSD would use in determining the potential benefits that may be offered to an organization for its self-disclosure, cooperation, and remediation efforts.

Notably, the 2016 NSD Guidance specifically exempted financial institutions from receiving the VSD benefits offered to other corporate actors in the export control and sanctions context, citing the “unique reporting obligations” imposed on financial institutions under their applicable statutory and regulatory regimes. Indeed, most U.S. financial institutions are required to file Suspicious Activity Reports (“SARs”) to the U.S. Department of the Treasury when the institution knows, suspects or has reason to suspect that a transaction by, through or to it involves illegal activity. Moreover, financial institutions must report blocked property to OFAC within ten business days from the date that the property becomes blocked or else risk violating their own sanctions compliance obligations. In recent years, DOJ has accused numerous banks of engaging in practices that involved omitting, removing, or masking references to sanctioned parties and jurisdictions so as to allow transactions to be processed through the U.S. financial system. Given the potentially enormous fines for sanctions violations—which, for large banks, can easily rise to hundreds of millions of dollars—financial institutions have strong incentives to over-comply with U.S. sanctions. As a result of their visibility into a huge volume of daily transactions and their deep aversion to sanctions-related risk, financial institutions have in effect been pressed into service as the leading edge of DOJ’s and OFAC’s sanctions enforcement efforts.

NSD has also become more heavily involved in the criminal enforcement of U.S. export controls—measures that are increasingly relied upon to combat the unauthorized transfer of sensitive, U.S.-origin technologies to adversaries such as China. From a policy perspective, these efforts appear to be driven by an interest in both denying China the technological means to engage in activities that threaten U.S. national security (such as spying on U.S. telecommunications networks), as well as blunting China’s ability to dominate the technologies of the future (such as artificial intelligence). In the face of such risks, NSD officials have also sought to incentivize disclosures from U.S. companies targeted by Chinese economic espionage.

Key Considerations

Timing

The 2019 NSD Guidance makes explicit the stringent timing requirement applicable to VSDs for a company to qualify for full mitigation credit. DOJ requires companies to submit a VSD to the relevant office of the Counterintelligence and Export Control Section (“CES”) of the NSD at substantially the same time that it submits a VSD related to the matter to the appropriate regulatory agency, whether that is DDTC, BIS, OFAC, or a combination thereof. While this timing requirement was included in the 2016 NSD Guidance, the revised policy emphasizes the point with more blunt language.

The 2016 NSD Guidance indicated that a VSD must be submitted to DOJ “within a reasonably prompt time after becoming aware of the offense,” with the burden on the company to demonstrate timeliness. In export control and sanctions cases, it is now clear that the VSD must be submitted to DOJ at substantially the same time that it is submitted to DDTC, BIS, or OFAC, as the case may be.

Timely and Appropriate Remediation

The 2019 NSD Guidance generally harmonizes the requirements for companies disclosing export control and sanctions-related violations with those applicable to FCPA-related matters. The 2016 NSD Guidance was already substantially similar to the CEP, but with several subtle divergences. For example, the 2016 NSD Guidance lacked the CEP’s root cause analysis requirement; the 2016 NSD Guidance did not require companies to conduct a “root cause” analysis to determine the causes of the underlying misconduct in the export control and sanctions context. The 2019 NSD Guidance adds the root cause analysis requirement for companies disclosing to NSD.

Another point of harmonization relates to the treatment of personal communications and ephemeral messaging systems. Under the CEP, companies are required to implement appropriate guidance and controls on the use of personal communications and ephemeral messaging platforms that undermine a company’s ability to retain relevant business records. The 2019 NSD Guidance incorporates this requirement into the export control and sanctions context.

With respect to possible sanctions violations, the 2019 NSD Guidance is also broadly consistent with OFAC’s recent guidance, titled “A Framework for OFAC Compliance Commitments.” That policy, which we described here, sets forth OFAC’s views regarding what constitutes an effective sanctions compliance program and, when violations do occur, provides transparency into how OFAC will assess the adequacy of a company’s compliance program in determining what penalty to impose. The 2019 NSD Guidance similarly includes the implementation of an effective compliance program—which NSD will now evaluate using criteria substantially similar to those described by OFAC—as one of the requirements for a company to remediate a criminal export control or sanctions violation.

Aggravating Factors

The 2019 NSD Guidance retains and lightly updates the list of aggravating factors specific to violations of export control and sanctions rules. These factors are in addition to others generally applicable to business organizations, which are mirrored in the CEP.

The 2016 NSD Guidance also listed examples of aggravating factors specific to the export control and sanctions area, the presence of which in substantial degree would result in a more stringent resolution for the company.

The updated list of aggravating factors includes:

Exports of items controlled for nuclear nonproliferation or missile technology reasons to a proliferator country;
Exports of items known to be used in the construction of weapons of mass destruction;
Exports to a Foreign Terrorist Organization or Specially Designated Global Terrorist;
Exports of military items to a hostile foreign power;
Repeated violations, including similar administrative or criminal violations in the past; and
Knowing involvement of upper management in the criminal conduct.

Benefits

The 2019 NSD Guidance provides that when a company voluntarily self-discloses export control or sanctions violations to CES, fully cooperates, and timely and appropriately remediates, there is now a presumption that the company will receive an NPA and will not pay a fine, absent aggravating factors like those described above. In cases where a different resolution—such as a DPA or a guilty plea—is warranted due to the presence of aggravating factors, but the company has otherwise satisfied all the requirements set forth in the 2019 NSD Guidance, the company can expect a reduced fine and, provided the company has implemented an effective compliance program, DOJ will not require a monitor.

Under the 2016 NSD Guidance, when a company voluntarily self-disclosed criminal violations of export controls and sanctions, fully cooperated, and provided timely and appropriate remediation, the company may have been eligible for a significantly reduced penalty, to include the possibility of (under the best case scenario) an NPA, a reduced period of supervised compliance, a reduced fine and forfeiture, and no requirement for a monitor.

Under the CEP, when a company has voluntarily self-disclosed misconduct in an FCPA matter, fully cooperated, and provided timely and appropriate remediation, there is a presumption that the company will receive a declination absent aggravating circumstances involving the seriousness of the offense or the nature of the offender. However, unlike in the FCPA context, DOJ stated today that a declination would generally not be appropriate with respect to export control and sanctions violations because of the likely harm to U.S. national security interests.

Voluntary Disclosure Considerations

DOJ’s publication of the 2019 NSD Guidance provides additional clarity for businesses confronting the challenging decision of whether to self-report. NSD should be applauded for its efforts to sync its guidance with the CEP.

Companies—including now financial institutions—can potentially enjoy the benefit of a presumption in favor of an NPA and no fine in the export control and sanctions space if they meet the requirements set out by NSD with respect to voluntary self-disclosure, cooperation, and remediation. Moreover, by bringing NSD’s guidance more closely into line with the CEP, companies and their counsel can perhaps develop a more consistent, predictable set of expectations about how DOJ’s various components will treat their VSD.

The 2019 NSD Guidance creates a more elaborate set of options for corporations, particularly financial institutions. If the disclosure path is pursued, disclosure would possibly be made to NSD, OFAC, and, for financial institutions, prudential regulators as well as potentially to the Money Laundering and Asset Recovery Section of DOJ’s Criminal Division (“MLARS”).

As before, when considering whether to self-disclose to DOJ, companies should be mindful of a number of other considerations. Today’s announcement notwithstanding, a company that discovers a potential willful export control or sanctions violation must carefully consider, among other things, the likelihood that DOJ will discover the misconduct (such as through a tip from a whistleblower or another regulator); at what stage in an investigation the misconduct should be disclosed to the government; and to what agencies the disclosure should be made and in what sequence. By taking these and other factors into account, companies that uncover export control and sanctions violations can enhance their prospects of both avoiding a full-blown criminal investigation and minimizing institutional liability to the extent possible.

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 of the leaders and members of the firm’s International Trade, Financial Institutions or White Collar Defense and Investigations practice groups, or the following authors in the firm’s Washington, D.C. office:

M. Kendall Day (+1 202-955-8220, [email protected])
Adam M. Smith (+1 202-887-3547, [email protected])
F. Joseph Warin (+1 202-887-3609, [email protected])
Stephanie L. Connor (+1 202-955-8586, [email protected])
Samantha Sewall (+1 202-887-3509, [email protected])
Scott R. Toussaint (+1 202-887-3588, [email protected])

Please also feel free to contact any of the following practice group leaders:

International Trade Group:
Ronald Kirk – Dallas (+1 214-698-3295, [email protected])
Judith Alison Lee – Washington, D.C. (+1 202-887-3591, [email protected])

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

I. Introduction: Themes and Notable Developments

A. Behind and Beyond the Enforcement Numbers

B. Insider Trading Developments

C. Legislative Developments

D. Litigation Developments

E. Commissioners and Senior Staffing Update

F. Whistleblower Awards and Cases

G. Emerging Interest in Use of Big Data by Investment Managers

H. Cryptocurrency

II. Public Company Cases

A. Accounting Fraud and Internal Controls

B. Misleading Disclosures

C. Private Company Cases

III. Investment Advisers and Funds

IV. Brokers and Financial Institutions

A. Rule Violations and Internal Systems Deficiencies

B. Retail Investors

V. Insider Trading, Market Manipulation and Regulation FD

A. Insider Trading

B. Market Manipulation

C. Regulation FD

I. DSIO Letter

II. DCR Letter

III. DMO Letter

I. Substantive Considerations

II. Technical Rule Changes

Table of Contents

1. Corporate, M&A

1.2 Restatement of the German Corporate Governance Code – New Stipulations for the Members of the Supervisory Board and the Remuneration of the Members of the Board of Management

1.4 Transparency Register: Reporting Obligations Tightened and Extended to Certain Foreign Entities

1.5 UK LLPs with Management Seat in Germany – Status after Brexit?

1.6 The ECJ on Corporate Agreements and the Rome I Regulation

1.7 German Foreign Direct Investment – Further Rule-Tightening Announced for 2020

2. Tax – German Federal Government Implements EU Mandatory Disclosure Rules

3. Financing and Restructuring

3.2 Insolvency Contestation in Cash Pool Scenarios

4. Labor and Employment

4.2 New Constraints for Post-Contractual Non-Compete Covenants

4.3 ECJ Judgments on Vacation and Working Hours

5. Real Estate

5.2 Changes to the Transparency Register affecting Real Property Transactions

6. Compliance and Litigation

6.2 Amendments to the German Anti-Money Laundering Act: Further Compliance Obligations, including for the Non-Financial Sector

6.3 First National Risk Assessment on the Money Laundering and Terrorist Financing Risk for Germany – Implications for the Company-Specific Risk Analyses

7. Antitrust and Merger Control

7.2 Competition Law 4.0: Proposed Changes to German Competition Act

7.3 “Undertakings” Concept Revisited – Parents Liable for their Children?

8. Data Protection: GDPR Fining Concept Raises the Stakes

9. IP & Technology

APPENDIX: 2019 Non-Prosecution and Deferred Prosecution Agreements

FCPA OVERVIEW

FCPA AND FCPA-RELATED ENFORCEMENT STATISTICS

2019 FCPA + FCPA-RELATED ENFORCEMENT TRENDS

A New High-Water Mark for Corporate FCPA Financial Penalties

FCPA Clusters

DOJ Issues Declinations Despite Aggravating Factors

SEC Continues to Invoke Aggressive Theories of FCPA Liability

DOJ Continues to Bring a Significant Number of “FCPA-Related” Charges

Several FCPA Defendants Go To Trial

Rounding Out the 2019 FCPA Enforcement Docket

2019 YEAR-END FCPA-RELATED ENFORCEMENT LITIGATION

DOJ Dismisses 10-Year-Old Case Against the Siriwans

Court Rejects Samir Khoury’s Motion to Dismiss 10-Year-Old Indictment

District Court Rejects Dmitry Firtash’s Motion to Dismiss

Rolls-Royce Defendant’s Appeal Dismissed

Second and Ninth Circuits Reject McDonnell Challenges to Money Laundering Convictions of Foreign Government Officials

2019 YEAR-END FCPA-RELATED POLICY DEVELOPMENTS

DOJ Refines FCPA Corporate Enforcement Policy

DOJ Announces Updated Guidance for Evaluating Corporate Compliance Programs

DOJ Releases New Inability-To-Pay Guidance

The CFTC Wades Into International Corruption Waters

2019 YEAR-END LEGISLATIVE DEVELOPMENTS

2019 YEAR-END KLEPTOCRACY FORFEITURE ACTIONS

2019 YEAR-END PRIVATE CIVIL LITIGATION SECTION

Shareholder Lawsuits

Civil Fraud / RICO Actions

Employee Defamation Actions

2019 YEAR-END INTERNATIONAL ANTI-CORRUPTION DEVELOPMENTS

Multilateral Development Bank Sanctions Follow FCPA Resolutions

Europe

**Second and Ninth Circuits Reject McDonnell Challenges to Money Laundering Convictions of Foreign Government Officials**