Research: Trends & Conclusions

From a new kind of FCPA RICO case to France’s double jeopardy conundrum, the lawyers we spoke to have picked out trends that may have gone unnoticed by others. But before turning to the future and what it may bring, it’s worth reviewing the year just gone. Last year was certainly a busy one for investigations lawyers and enforcement agencies alike...

Sanctions joined the enforcement premier league in June last year, when BNP Paribas was fined US$9 billion by US authorities for violating sanctions against Iran, Cuba and Sudan. Ross Denton at Baker & McKenzie in London told GIR of the effect that the fine had on lawyers working in sanctions: “We felt in awe of the FCPA and antitrust lawyers, who had to deal with such big fines. But BNP Paribas’ penalty dwarfed all of those.” Only Bank of America’s US$9.5 billion settlement in March with the Federal Housing Finance Agency for mis-selling residential mortgage-backed securities exceeded the French bank’s fine.

Last year was also a year of firsts. Canada secured its first trial conviction under the country’s foreign bribery laws. In May, Ottawa businessman Nazir Karigar was sentenced to three years in prison for conspiring to bribe foreign officials at Air India to win a US$100 million security contract. Karigar failed to win the contract, and prosecutors were unable to show that any money was exchanged as part of the bribery scheme. But the Ontario Superior Court in Ottawa ruled that there was sufficient evidence demonstrating that Karigar intended to bribe foreign officials.

The European Securities Markets Authority (ESMA) completed its first investigation in June, criticising credit-rating agency Standard & Poor’s weak internal controls after it incorrectly sent out an e-mail saying France’s rating had been downgraded. The Serious Fraud Office (SFO) even secured its first UK Bribery Act convictions at the year’s close. As part of a fraudulent investment scheme offering a stake in Cambodian plantations of Jatropha trees, which are used in biofuels, Stuart Stone bribed Gary West nearly £200,000 to arrange the payment of false sales invoices totalling £3 million. However, as the conviction was of individuals, the elusive corporate scalp is still yet to be taken.

In 2014, some familiar themes returned from the previous year. Calls for more individuals to be prosecuted remained commonplace. Mark Branson, the head of Switzerland’s Financial Markets Supervisory Authority, told an audience of bankers in October that the regulator is actively targeting individuals as previous efforts to sanction institutions had failed to deter serious misconduct.

There was also a push worldwide to introduce tougher white-collar legislation. Following a critical report by the Financial Action Task Force (FATF), Japan’s cabinet approved new anti-money laundering legislation in October. The law aims to bring Japan in line with FATF recommendations, and will require financial institutions to report transactions when they suspect criminal activity. In 2014, Ukraine’s parliament also passed wide-ranging anti-corruption laws, paving the way for the country to set up a new anti-bribery agency, the National Anti-Corruption Bureau. Not to be outdone, the Dutch also beefed up their anti-corruption legislation, doubling the maximum possible sentence for money laundering and bribery in July, as well as raising the upper corporate fine limit to 10 per cent of a company’s annual turnover.

However, it was sanctions – more than any other economic crime enforcement area – that saw the greatest legislative change in 2014. Throughout the year, US and EU sanctions policy continued to become less a blunt instrument to bludgeon errant countries and unlucky bystanders, and more a subtle tool for targeting specific companies and individuals. Ross Denton at Baker & McKenzie in London told GIR: “They have realised that they need sanctions that do not harm their economies. So now they are almost hitting a laser spot.”

Such complex, sector-specific sanctions rules have made life difficult for companies. The US Treasury’s Office of Foreign Assets Control (OFAC) 50 per cent regulation has caused particular trouble. Previously, if one blocked entity had a 50 per cent or greater stake in another company, than the subsidiary would also be blocked. However, in August OFAC amended this rule, saying it will now look at ownership on an aggregated basis. So, if the sum of the stakes held in a subsidiary company by various blocked companies equals 50 per cent or more, it will be blocked. This puts a burden on businesses, which must now ascertain the identity, not only of the majority owner, but also of many smaller, secondary owners.

Compliance officers face many new difficulties across the board, in cybersecurity, anti-bribery and sanctions. HSBC revealed in August that it spends nearly US$800 million a year on compliance. Citigroup co-president, Jamie Forese, predicted in September that the finance industry will spend US$10 billion annually in “the near future” combating money laundering.

Lawyers say the demand for thorough investigations will remain strong in 2015. With an expected busy year ahead, the question remains, what should one look out for in the coming 12 months?

Fighting talk from the SFO: contesting privilege claims in the courts

The SFO was rather vocal in 2014. The agency made a series of public pronouncements, telling companies to refrain from making too many privilege claims and urging them to submit self-incriminating self-reports.

In August, for example, SFO director David Green talked to The Times about privilege claims arising from internal investigations. He told the newspaper that internal investigations “churned up” the crime scene. “The report itself may tend to minimise the problem one way or another,” he said. “Later claims of legal privilege on witness statements taken by the external lawyers can be questionable.” 

Meanwhile, in October, SFO general counsel Alun Milford criticised companies that disclose information already known to the media. Only disclosures that directly harm the reporting company count as cooperation and increase the likelihood of a deferred prosecution agreement, he said. Spurious self-reports may actually be deemed uncooperative, Milford added.

The general counsel also spoke about the office’s view on privilege in September. Milford criticised privilege claims that “amount to a strategy of deliberate obstruction”, and said it was difficult for the SFO to ascertain the accuracy of witness statements when the original account given during the initial internal investigation remains inaccessible.

Rod Fletcher at Herbert Smith Freehills in London thinks the SFO will challenge privilege claims more aggressively in the future. “During 2014 they have stated repeatedly that they will litigate what they see as unjustifiable claims of privilege,” he said. “We should therefore expect that during 2015 the SFO will take proceedings at some stage to challenge assertions of privilege.”

The problem of double jeopardy in France

Novel interpretations of the “ne bis in idem” legal doctrine are set to dominate French white-collar prosecution in 2015. An amendment to French law by the Paris Criminal Court of First Instance, as well as a recent decision by the European Court of Human Rights (ECHR), have afforded defendants far greater double jeopardy protections in France.

In March, the ECHR confirmed that those who have already suffered administrative sanctions are immune from subsequent criminal prosecution for the same misconduct. This ruling, known as Grande Stevens, applies to all of the Council of Europe’s 47 member states, but it has proved particularly problematic for France, where a number of prior market manipulation cases brought by the Financial Markets Authority (AMF), France’s financial markets regulator, may cause ongoing criminal prosecutions to be abandoned.

So far, Grande Stevens has had a limited impact in France, but Grégoire Bertrou at Skadden Arps Slate Meagher & Flom in Paris says the ruling will have a more noticeable effect in 2015 and beyond. He told GIR that the country’s Constitutional Court will soon decide whether the current legal system of allowing dual administrative and criminal prosecutions is constitutional. The Skadden counsel thinks the court will be reluctant to censor existing French financial markets law, and so will say the current system is constitutional, leading to inevitable ECHR appeals from defendants. These petitions will probably be successful, Bertrou says, forcing reform of double jeopardy protections in France. Aware of this possibility, France’s Ministry of Justice and the AMF have already started talks about a potential overhaul of the present system and the introduction of a new court, the Financial Market Tribunal.

What’s more, the country is facing a dual, or perhaps more fittingly a “double” double jeopardy conundrum. Historically the rulings of foreign courts have held no jurisdiction in France if the misconduct in question occurred on French territory. In other words, the rule of double jeopardy fails to offer protection in such cases.

However, the Paris Criminal Court of First Instance has reversed this principle in two recent decisions. In July 2013, the court ruled that oil company Vitol’s 2007 guilty plea in the US for paying bribes in Iraq prevented further prosecution for the same misconduct in France. Similarly, in June 2014 the French prosecution of British lawyer Jeffrey Tesler was ruled inadmissible by the Paris court as Tesler had already pleaded guilty to FCPA violations in the US and served a 21-month prison sentence. The French court ruled that the lawyer could no longer be guaranteed a fair trial in France. Bertrou says if this ruling is confirmed on appeal it will be a “major criminal law development”.

Bertrou also predicts that the prickly issue of double jeopardy will crop up in 2015 during the French prosecution of Total over alleged corruption in Iran. The oil company has already settled with the US authorities to the tune of US$398 million for paying bribes to win oil and gas contracts in Iran. Indeed, Alstom’s US FCPA settlement makes the slim prospect of a French prosecution seem ever more unlikely. In December, the French engineering group agreed to give the US Department of Justice US$772 million to settle claims that it paid more than US$75 million in bribes to government officials around the world.

More FCPA foreign official challenges in 2015

Last year saw some major FCPA enforcement actions, beginning with Alcoa’s dual SEC–DoJ US$384 million settlement in January and ending with Avon agreeing to pay out US$135 million. However, some of the most interesting developments were not the hefty fines, but rather the handful of cases that led to high-level judicial scrutiny of the FCPA: a rare occurrence owing to the preponderance of settlement agreements in the US.

The FCPA appellate court ruling that really had compliance officers sitting up was the Eleventh Circuit’s decision in Esquenazi, which provided a multi-factor definition of “government instrumentalities”. The ruling in May was the first appeals court decision on the subject.

Joel Esquenazi and Carlos Rodriguez were found guilty of FCPA violations in 2011 by a federal jury. The pair bribed an employee of a state-owned Haitian telecom company, Telecommunications D’Haiti, between 2001 and 2005. Counsel to Esquenazi and Rodriguez claimed the jury in the case were wrongly told that Telecommunications D’Haiti was a government instrumentality. They argued that only companies performing core government functions, rather than any company merely providing a public service, should be classified as an instrumentality.

The Eleventh Circuit rejected this definition in May, arguing that nothing in the FCPA limits instrumentalities to companies that perform core government functions. Instead, the court defined the term as “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.” Most importantly, for compliance officers at least, the appellate court also provided a list of factors that might prove relevant when deciding whether a company is a government instrumentality or not, such as whether the public perceive the company to be carrying out a government function, or whether the state can hire and fire the organisation’s principals.

The only problem is, the list is by no means comprehensive – and this is by the Eleventh Circuit’s own admission. Sitting Judge Richard Suhrheinrich wrote: “We do not purport to list all of the factors that might prove relevant to deciding whether an entity is an instrumentality of a foreign government. For today, we provide a list of some factors that may be relevant to deciding the issue.”

As Steven Michaels at Debevoise & Plimpton in New York notes, the Eleventh Circuit’s list is somewhat vague. “While it sets a precedent in that circuit for the telecoms sector, the issue remains how the test will work in the future or if it will apply elsewhere,” he said. “There is still a good deal of uncertainty, as this is not a straightforward test, so we can expect further challenges to the definition being used by the government.”

In fact, one such challenge is already in the works. The former chief executive of oil services company PetroTiger, Joseph Sigelman, who was charged in November 2013 for participating in a scheme to bribe a Colombian official for a US$39 million oil contract, embarked on this well-worn path in October. The indicted former CEO claims state-owned Colombian oil company Ecopetrol fails to qualify as a government body under the FCPA. Sigelman’s FCPA instrumentality challenge is unlikely to be the last: expect more in 2015 and beyond.

An end in sight for the Data Protection Umbrella Agreement?

There are a number of existing EU-US information-sharing agreements for law enforcement purposes, such as the Terrorist Finance Tracking Programme (TFTP). However, by and large the legal infrastructure for transatlantic data-sharing in criminal investigations is piecemeal. There is no enforcement equivalent of Safe Habor, the agreement which allows US companies to process information on EU citizens for commercial purposes. But change is in sight. Since March 2011, the EU and US have been negotiating an overarching agreement to protect transatlantic personal data transfers used in the detection, prosecution and investigation of criminal offences.

Unfortunately, however, talks have stalled. The majority of the umbrella scheme has been debated and agreed upon, but a remaining point of contention is whether all EU nationals should be given the right to seek judicial redress in the US if their personal data is misused. US citizens are currently able to pursue data protection complaints in the EU court system, but equal protections are not afforded to Europeans in the US.

Tanguy Van Overstraeten at Linklaters in Brussels said: “The EU-US umbrella agreement should resolve a lot of problems for investigators. But as the status of the negotiations is confidential… it is not clear when an agreement will be reached.”

A June statement from US Attorney General Eric Holder suggests a solution to the impasse may be nearing. He said: “The Obama Administration is committed to seeking legislation that would ensure… EU citizens would have the same right to seek judicial redress for intentional or wilful disclosures of protected information.” To which the EU’s former justice commissioner, Viviane Reding, replied, “Words only matter if put into law”, adding a dose of scepticism to Holder’s announcement.

If a deal is finally reached in 2015, expect increased ease of cooperation between law enforcers on both sides of the Atlantic, as well as a host of specific data-sharing programmes – like today’s Passenger Name Records scheme – which will become easier to implement under the overarching umbrella framework.

A new kind of FCPA follow-on litigation

An FCPA RICO case with a novel twist is being litigated in a California federal court. On 2 December Mexican state-owned oil company Petróleos Mexicanos, otherwise known as Pemex, filed a complaint seeking damages from technology company Hewlett-Packard (HP). Pemex is unhappy about HP paying large “influencer fees” in return for US$6 million-worth of contracts, so it is seeking restitution. Pemex claims there is “substantial evidence” that it was overcharged. It has all the hallmarks of a classic RICO FCPA case, except instead of taking the well-trodden path of accusing the defendant’s workers of wrongdoing, Pemex is laying the blame with its own employees. The oil company is arguing that a former executive, Reynaud Aveleyra, and an unnamed former chief operating officer “abandoned their relationship with Pemex and were acting solely for their own personal benefit”. Both individuals, according to the complaint, benefited from HP’s payments to companies, which they either owned or were linked to.

Jerry Bernstein at Blank Rome in New York said this RICO litigation is “definitely one to watch” in 2015. He also told GIR that Pemex’s case will be difficult to bring, as the company must first show that it is not liable for the actions of its employees. Pemex will have to prove that it failed to benefit from the two executives’ actions, and that they were acting outside the scope of their employment, he said. 

Unease about US administrative law 

GIR has reported extensively on the growing discomfort among US defence lawyers over the prevalence of SEC administrative proceedings. Many feel these proceedings give an unfair advantage to the SEC, as administrative law judges are appointed by the commission. What’s more, while the commission can take years to investigate a case, defendants in administrative proceedings are only given three or four months to prepare for a trial and have limited discovery rights. In November, two US Supreme Court justices even joined the chorus of discontent, although their gripe was somewhat different. Justices Scalia and Thomas took the unusual step of criticising the Second Circuit for using the interpretations of civil regulators, like the SEC, in criminal cases.

In a statement they wrote: “With deference to agency interpretations of statutory provisions to which criminal prohibitions are attached, federal administrators can in effect create [and uncreate] new crimes at will, so long as they do not roam beyond ambiguities that the laws contain.” This collides with the norm that the legislature – rather than enforcers – define crimes, they added.

Such deference to administrative courts, the justices wrote, also undermines the rule of lenity, which requires criminal law ambiguities to be resolved in favour of the defendant. By adopting administrative interpretations, which have no obligation to lenity, criminal courts are in effect using “a doctrine of severity”, they wrote. Justices Scalia and Thomas concluded their statement with an invitation for appeals dealing with the deference of criminal courts to administrative interpretations of the law.  

Steven Michaels at Debevoise & Plimpton believes the effects of the Supreme Court statement could be far-reaching, affecting a large swathe of white-collar practice. “The FCPA of course is one of many laws – US antitrust law is another – that have civil and criminal applications,” he said. “The government and private sector will be watching to see if and how the court acts in this area.”

Will the SEC bring its first “proper” HFT case in 2015?

The SEC did of course bring a successful case against HFT firm Athena for market manipulation in October. Except the fine was paltry – US$1 million – and there was no disgorgement. What’s more, the Athena settlement made no mention of false information, a key part of most market manipulation cases.

According to the Second Circuit in ATSI Communications v Shaar Fund (2001), which Athena’s counsel used in its defence, companies and individuals that use real market trades cannot be held liable for market manipulation. Defendants are only liable when false information has been spread, or false market orders made.

A number of lawyers told GIR that the Athena penalty was only possible because the case was settled administratively. “The SEC is finding behaviour ‘unseemly’ and bringing enforcement actions, even when the conduct is not necessarily illegal. It is trying to expand the definition of manipulation by negotiating settlements with parties that do not want the risks or expenses of litigation,” said Kevin Harnisch at Steptoe & Johnson in Washington, DC. “Traders do not generally have fiduciary duties to other market participants and therefore have no obligation to disclose their strategies or how their individual orders fit into their overall trading strategies. Unless traders are disseminating false information, manipulation can be very difficult to prove.”

It seems that if the SEC is to bring its first fully fledged case against an HFT firm for manipulating the market in 2015, it will have to show that false information was disseminated. This may prove a tricky obstacle to overcome.

2015: every bit as busy as its predecessor

The trends above are unlikely to be the full story. This year looks set to be dominated – in the business press at least – by the continuing Petrobras and FIFA sagas, while the Sony hack in late November catapulted cybersecurity into wider public consciousness. There are other important developments, however, that are unlikely to get much media coverage. Adam Golodner at Kaye Scholer in Washington, DC, told GIR that the EU’s Network and Information Security Directive is “a big deal” that has gone “largely underappreciated”, especially when compared to the EU’s much-hyped data privacy regulation. If implemented, the directive, which is in the final stages of discussion, will introduce tougher IT security rules for operators of critical market infrastructure, impose new reporting laws for cybersecurity breaches and apply novel information-sharing regulations to foster cross-border coordination against cybersecurity attacks.

The world of foreign bribery may also see some dramatic changes in 2015. Senior figures at the Organisation for Economic Development and Co-operation (OECD), which has been instrumental in combating foreign bribery and which was a driving force behind the UK’s Bribery Act, have expressed their support for international measures to tackle demand-side bribery. The head of the OECD, Angel Gurría, said in December that the organisation’s supply-side focused convention no longer adequately covers much foreign bribery. In the same month, Patrick Moulette, the head of the OECD’s anti-corruption division, told GIR that “we have to do something” to tackle demand-side bribery.

Bold pronouncements from the OECD were part of the flurry of activity that came at the end of 2014. There was also the coordindated global Forex settlement in November, a US$400 million US tax evasion settlement for Israeli Bank Leumi in December and large FCPA settlements for Avon and Alstom just before the New Year. The warning signs, whether fighting talk from the SFO or concern about US administrative law, suggest 2015 will be every bit as busy as its predecessor.

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