As part of what appears to be a sweep of commodities trading firms, the DOJ announced on March 1, 2024, one of its largest settlements in recent years. Swiss-based Gunvor S.A. (Gunvor or the Company) has agreed to pay over $661 million to resolve an investigation into FCPA violations related to its dealings with Ecuador’s state-owned and -controlled oil company, Petroecuador.

The settlement is “significant,” according to Fry Wernick, a partner at Vinson & Elkins and former DOJ prosecutor, both due to size of the resolution and the clear strength of the DOJ investigation. Additionally, this is “among the latest in a string of corruption cases targeting commodities trading firms (Sargeant Marine, Vitol, Glencore, Freepoint, and most recently Trafigura), which DOJ foreshadowed years ago and has come to fruition.”

The company appears to have paid a higher penalty due to its previous anti-corruption issues and its lackluster cooperation, but it still managed to avoid a compliance monitor by engaging in significant remediation. The Anti-Corruption Report spoke with experts in the field to tease out the lessons from the case.

See “SAP’s $220‑Million Settlement Offers Clues on Compliance Expectations” (Feb. 14, 2024).

Bribes to Petroecuador

According to the Statement of Facts attached to the Plea Agreement, to which the Company admitted as part of its settlement, Gunvor, a subsidiary of Gunvor Group Ltd., a multinational energy commodities trading company based in Cyprus, bribed officials in Ecuador in order to obtain or retain business.

The bribery scheme has its roots in a program of oil-backed loans sought by Petroecuador circa 2011. Through the program, Petroecuador obtained loans from other state-owned entities (SOEs) that were secured by oil products to be delivered in the future. Private trading companies – such as Gunvor – then entered into separate, related agreements, called back-to-back contracts, with the SOEs to market, sell and transport the oil products. These side contracts were lucrative and Gunvor was eager to enter into an agreement with an SOE.

Meetings in Miami

To facilitate the deal, Raymond Kohut, who worked in business development at Gunvor, met with Antonio Pere Ycaza (Pere), a consultant based in Miami who had connections to Petroecuador.

“South Florida continues to be the FCPA capital of the world,” James Koukios, a former DOJ prosecutor and current partner at Morrison & Foerster, observed. “So many FCPA cases involve illicit meetings in South Florida, laundering of funds through bank accounts in South Florida, or spending proceeds of FCPA violations in South Florida,” he said. “This case has at least the former two.”

Serving As Intermediary Between Two SOEs

At the meeting in Miami, Kohut and Pere discussed how an SOE based in Asia, referred to in the Statement of Facts only as “State-Owned Entity #1,” could enter into a relationship with Petroecuador.

It is “not the normal fact scenario” for a multinational organization to serve as an intermediary, advocating on behalf of one state-owned entity with another state-owned entity, Wernick observed. “Here, Gunvor served in many ways as the intermediary engaging other sub-intermediaries in the dirty deeds, which makes the conduct particularly egregious.”

“I don’t know of many, if any, cases offhand that involved SOEs on opposite ends of the bribery equation,” Koukios agreed, making it a fairly rare fact pattern. But, setting that aside, “the mechanics of the alleged bribery scheme are not that unusual.”

The case illustrates the importance of having “enhanced diligence processes in place when dealing with state-owned entities, whether on the buy or sell side of a transaction,” Wernick advised.

Additionally, it serves as a reminder that “even SOEs have to engage in anti-corruption-related third-party management,” Koukios said.

Funneling Bribes Through a Third-Party Intermediary

After meeting with Kohut and learning of Gunvor’s willingness, Pere met with Nilsen Arias Sandoval, a senior manager at Petroecuador, and offered to pay bribes on Gunvor’s and State-Owned Entity #1’s behalf. As a result, State-Owned Entity #1 provided loans to Petroecuador in exchange for oil products to be provided over a period of years. Gunvor then entered into a back-to-back contract with State-Owned Entity #1 to market the oil products.

Around the same time, Gunvor’s Singaporean subsidiary entered into a service agreement with Pere and his brother, Enrique Pere Ycaza (Enrique Pere), through a shell company formed in Panama called Energy Intelligence & Consulting Corp. (EIC). This arrangement was solely for the purpose of providing the Pere brothers with funds to pass along to government officials.

Third-party intermediaries such as EIC “continue to be the number one area of FCPA risk,” Koukios said.

“There are often perfectly legitimate reasons for companies to use third parties to help originate business, but third-party risk always presents the biggest risk of corruption, and it is incumbent upon companies to vet third parties carefully and to be especially careful when dealing with third parties in transactions that involve state-owned entities and high corruption-risk jurisdictions,” Wernick agreed.

The use of business origination agents such as the Pere brothers is particularly risky and of questionable utility. “Business origination agents can be called many different things in different industries, but it would be fair to say that DOJ questions the necessity of these types of third parties,” Nat Edmonds, a former DOJ prosecutor and partner at Paul Hastings, told the Anti-Corruption Report. Some companies eliminate these types of relationships and find they are not critical to long-term business success. But it is important to remain aware of the competitive landscape and whether non-U.S. competitors continue to use the business origination agents. “Unequal enforcement on corruption risks can lead to significant business impact for companies subject to U.S. enforcement if their competitors are not facing the same scrutiny,” he said.

See “Fewer Individual Charges and More Focus on Third Parties in 2023’s FCPA Enforcements” (Feb. 28, 2024).

Bribes for Information

In 2015, Gunvor expanded the scheme to involve a second Asian SOE – referred to as State-Owned Entity #2 in the Statement of Facts. Kohut and another Gunvor manager met with Petroecuador’s Arias in Bangkok, Thailand, to obtain information about the status of the contract negotiation process. The bribery scheme continued for years afterwards, with bribes often paid in exchange for confidential information.

“Historically, companies have bribed for access to confidential information about the scope and timing of contracts and tenders,” which can impact whether a contract is obtained or the contract’s terms, Edmonds explained. The FCPA is drafted to encompass bribing for any type of “business advantage,” which is defined broadly and includes this type of information.

While Gunvor used illegal means here, there are legitimate ways to obtain business-critical information. For example, “public tenders frequently allow for companies to request information to help with the bids,” Wernick noted, “but that information must be provided to all bidders to ensure a level playing field in the bid process.”

Additionally, “companies routinely work with local firms to get that type of information, which often can be observed through on-the-ground personnel or other general intelligence gathering,” according to Edmonds. “However, companies need to be careful that their local partners are not engaging in bribery to get that type of critical market intelligence.”

See “Understanding and Mitigating Risk of Organizational Conflicts of Interest for Government Vendors” (Mar. 13, 2024).

Compliance Failures

By 2018, Gunvor executives and compliance personnel knew that millions of dollars had been paid to the Pere brothers and their shell companies. Between 2018 and 2020, Gunvor personnel attempted to meet with the brothers and obtain supporting documentation. The brothers would not accommodate these requests, yet Gunvor continued to make corrupt payments to the shell companies until 2020.

“If there are concerns or gaps in documentation, companies should consider pausing payments to third parties while the outstanding documentation is gathered,” Edmonds advised. This demonstrates to enforcers that compliance is working in practice and also ensures potential misconduct is not compounded. Likewise, pausing payments helps provide “motivation for the third party to meet its contractual obligations and provide the company with the required documentation,” he added.

The brothers’ refusal to respond to requests for documentation was itself a red flag “which also could have provided a basis for stopping payments, as well as potentially for conducting an internal investigation,” Koukios said.

The Company’s failure to stop payments appears to have been a large reason why it did not receive full cooperation credit off the low-end of the Sentencing Guidelines, “which meant a penalty that was tens of millions of dollars higher than it needed to be,” Wernick said. “The Company should have acted swiftly and aggressively against the brothers’ companies and shut down further payments, especially since this also occurred at the same time that Gunvor was entering into a separate corruption resolution with Swiss authorities,” he opined. “DOJ did not look kindly upon these facts as they showed a lack of commitment to compliance and remediation by the company.”

See “Noticing Red Flags, Cultivating Company Culture Key to Compliance” (May 24, 2023).

The DOJ Builds a Strong Case

On March 1, 2024, Gunvor entered into a plea agreement with the DOJ, admitting that it had engaged in a multi-year scheme to pay money to an intermediary it knew would be used in part to bribe government officials, and it profited in an amount of more than $384 million. As a result, the Company agreed to pay $374,560,071 as a criminal monetary penalty and forfeiture in the amount of $287,138,444.

No Voluntary Disclosure, but Some Cooperation Credit

The Plea Agreement notes that the Company did not receive credit for voluntary disclosure but did receive credit for cooperating with the government’s investigation. That cooperation included providing information from its own internal investigation, making factual presentations, producing documents “while navigating foreign data privacy and criminal laws,” and translating documents.

Additionally, the Plea Agreement gives the Company credit for “imaging the phones of relevant custodians at the beginning of the Defendant’s internal investigation, thus preserving business communications sent on mobile messaging applications” for when the DOJ came knocking. “BYOD policies and local laws and regulations can make collecting phones extremely difficult, and sometimes effectively impossible,” Koukios explained, so “DOJ does seem intent on providing cooperation credit to companies who are successful in doing so.”

When it comes to providing access to witnesses, the Company’s cooperation was perhaps a little less impressive. The Plea Agreement notes that the Company arranged for the interview of a single employee based outside the U.S. “This, combined with the lack of voluntary disclosure credit and extensive use of mutual legal assistance treaty (MLAT) evidence, suggests that DOJ conducted significant investigation outside of the company’s cooperation and awareness,” Edmonds suggested.

Indeed, the DOJ’s press release announcing the settlement says that “valuable assistance” was provided by the authorities in the Cayman Islands, Colombia, Ecuador, Panama, Portugal, Singapore and Switzerland, which shows “the DOJ’s extensive coordination with global authorities,” according to Koukios.

Gunvor’s lack of voluntary disclosure probably increased the size of the financial penalties, Edmonds posited. Despite the Company’s failure to disclose, the DOJ was able to obtain information from “cooperating witnesses involved in the underlying misconduct as well as detailed financial tracing that likely included mutual legal assistance treaty requests for evidence held in multiple locations around the world,” he added, cautioning companies to be cognizant that “attempts to limit or control the spread of information are increasingly challenging in a global environment.”

See “How Companies Can Respond to the Boom in FCPA Enforcement Fueled by International Cooperation” (Oct. 30, 2019).

Credit for Remediation

The Company also received credit for taking remedial measures, many of which reflect recent DOJ priorities, such as “evaluating and updating its compensation policy to better incentivize compliance,” “implementing a risk-based communications policy that addresses the use of ephemeral and encrypted messaging applications,” and “conducting compliance culture reviews.”

Notably, the Company also eliminated the use of third-party business origination agents, a fairly significant but not unprecedented move. “DOJ has long credited companies for eliminating the use of third parties,” Koukios said, citing the recent Albemarle and SAP resolutions as examples. Whether this change will be detrimental to Gunvor’s business remains to be seen, though. “On the one hand, the use of such agents can be completely legitimate and beneficial, especially when a company is entering into a new market or a new line of business and has no prior connections,” Koukios explained. “On the other hand, such agents can outlive their usefulness, in which case eliminating them can be beneficial, both in terms of not paying unnecessary fees and in reducing FCPA risk.”

Gunvor did not only make changes, but, critically, it also pressure tested those improvements to determine whether they were effective. The Plea Agreement specifically notes that the Company tested the effectiveness of its hotline, new third-party due diligence process and payment controls. “What really strikes me is that this resolution again demonstrates that the best way for a company to avoid an independent compliance monitor is to implement remediation early so that it has time to demonstrate the effectiveness of those remedial steps through testing,” Koukios said.

See “Albemarle Resolutions Bring First Application of DOJ’s Compensation Incentives and Clawbacks Pilot Program” (Nov. 8, 2023); and “SAP’s $220‑Million Settlement Offers Clues on Compliance Expectations” (Feb. 14, 2024).

A Demerit for a History of Misconduct

While Gunvor received credit for its cooperation and remediation, the DOJ also considered its history of misconduct when coming to a resolution. The Company reached a resolution with Swiss authorities in 2019 based on a corrupt scheme to bribe officials in Congo-Brazzaville and Côte d’Ivoire to obtain oil contracts that occurred at the same time as the conduct involved here.

In October 2021, Deputy Attorney General Lisa Monaco announced that the DOJ would consider both domestic and foreign criminal, civil and regulatory misconduct when making charging decisions. “In an increasingly global enforcement world, U.S. enforcement authorities will consistently take into account enforcement by other authorities,” Edmonds observed, because U.S. authorities do not want companies gaming the international enforcement system and attempting to minimize finds by resolving different matters in different jurisdictions.

In October 2022, Monaco clarified that not all instances of prior misconduct are equally relevant or probative and that, “[i]n general, prosecutors weighing these factors should assign the greatest significance to recent U.S. criminal resolutions, and to prior misconduct involving the same personnel or management.” That stance begs the question of how much weight was given to the Swiss settlement. The deciding factor may have been that the conduct at issue in the Swiss settlement occurred at the same time as Gunvor was also bribing Ecuadorian authorities. “DOJ has long considered temporally overlapping misconduct as not being evidence of true recidivism, even if the misconduct was discovered at different times (because recidivism reflects a reversion to criminal conduct after sanction),” Koukios said.

“While a company’s history of criminal misconduct in the U.S. should be more significant than a resolution in another country, the fact that a company has a history of similar misconduct elsewhere cannot be ignored,” Wernick agreed. “It no doubt was one reason why DOJ did not see fit to provide full cooperation credit against the low-end of the U.S. Sentencing Guidelines.”

See “Compliance Lessons From SEC’s $62.2‑Million Settlement With Recidivist Philips for FCPA Violations” (Jun. 7, 2023).

A Big Settlement

All in, Gunvor will pay more than $661 million to resolve the allegations in this case – one of the largest FCPA settlements in the past three years.

Numbers Have Been Down

Corporate fines hit an all-time high in 2020 and then plummeted in the past three years. “COVID had a real impact on FCPA enforcement, as law enforcement was unable to engage in the same face-to-face meetings and investigative tactics that are critical to developing big cases,” Wernick explained. “DOJ also brought a number of individual cases that have resulted in trials being conducted, which takes up enormous prosecutorial resources and has had an apparent impact on the development of corporate cases leading to large resolutions.”

But whether this case represents a shift back to the pre-2020 days remains to be seen. “I don’t believe that you can draw any conclusions from this type of data set,” Koukios said. “Some cases will be big or small, depending on the scope of the underlying misconduct.”

Forfeiture Inflates the Numbers

In this case, the settlement numbers were driven up by Gunvor’s forfeiture of profits related to its illegal conduct.

“A recent trend that has been particularly notable to me, and what almost doubled the total monetary impact here, was DOJ’s insistence that non-issuers not only pay a criminal monetary penalty but also forfeit allegedly illicit profits,” Koukios said, noting that when issuers are involved, SEC disgorgement typically serves the same role. “Forfeiture added an extra $287 million here,” he noted, nearly doubling the criminal monetary penalty.

The forfeiture penalty could have unintended consequences when it comes to voluntary self-disclosure, Koukios warned. “Although I understand DOJ’s theory for requiring forfeiture, I do wonder what the impact will be on self-reporting by non-issuers, as the forfeiture amount would more than cancel out any potential benefit from self-reporting in many cases.”

Additionally, forfeitures just might not be a good look for DOJ. Edmonds noted that the DOJ gets to keep the forfeitures, whereas criminal penalties go directly to the U.S. general treasury fund. Unfortunately, the monetary benefit enforcement authorities realize from sizable forfeiture amounts or credit (“stats”) they may receive can lead to criticism of overly aggressive prosecution and inflated penalties, he said. “DOJ should be extremely careful that it does not lose further credibility regarding the independence of its prosecution by overplaying the role of forfeiture on these large corporate enforcement actions.”

See “FCPA Enforcement, Changes in 2023 Foretell a Busy Year Ahead” (Jan. 17, 2024).

A sweeping whistleblower program, announced by senior DOJ officials in March 2024, means whistleblowers at unlisted U.S. companies may now be eligible for monetary rewards, but what those rewards will look like may leave some whistleblowers unsatisfied.

In two speeches at the American Bar Association’s National Institute on White Collar Crime in March 2024, Deputy Attorney General Lisa Monaco and Nicole Argentieri, who was then Acting Assistant Attorney General but shortly afterwards became Principal Deputy Assistant Attorney General, head of the DOJ’s Criminal Division, announced the DOJ’s intention to develop a whistleblower reward program by summer.

The Anti-Corruption Report spoke to experts in the field – some who represent corporations and some who represent whistleblowers – to understand what this new program will mean for those seeking rewards for blowing the whistle. This second article of a two-part series considers what the program will look like for whistleblowers, including limitations on eligibility and payment amounts. Part one explored what the program will look like at the governmental level.

See “SEC and CFTC Received Record Number of Whistleblower Tips and Made a Record Award in 2022” (Feb. 15, 2023).

Clues From Other Whistleblower Programs

The whistleblower programs already launched by the SEC, the Commodity Futures Trading Commission (CFTC) and the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) were mentioned in Argentieri’s speech as helpful precedents for what the DOJ intends to build and how whistleblowers will be treated.

“The Criminal Division has successfully used whistleblower tips for years to open or advance white collar investigations. Our colleagues at the SEC, CFTC, and now at FinCEN have established programs, and we coordinate closely with them when whistleblowers provide tips that identify potentially criminal misconduct,” she said. This positions the DOJ well to design the new program, she argued.

Lessons Can Be Drawn

“The SEC program provides payments from resolutions, and therefore may be an important model for the DOJ to consider while designing the detailed operation,” Miller & Chevalier member Daniel Patrick Wendt told the Anti-Corruption Report.

Moreover, the Department of the Treasury had a pilot program named the Kleptocracy Asset Recovery Rewards Program, Wendt also noted. “I suspect the DOJ will consider lessons learned from that effort as well, after it concluded earlier this year,” he said.

Limits to Comparisons

Whistleblower programs launched by U.S. Attorney’s Offices are less relevant, according to Wendt. The US Attorney’s Office for the Southern District of New York (SDNY) launched a whistleblower program earlier in 2024. “The programs are different in nature, as they are designed to reduce liability for people who may have knowledge of criminal actions and likely also participated in the wrongdoing and are seeking a reduced penalty or even immunity for coming forward,” Wendt explained. By way of illustration, he noted that the primary “carrot” in the SDNY program is a non-prosecution agreement, rather than a monetary reward.

Differences in the programs were also emphasized by Manatt partner Jacqueline Wolff. “The SDNY program involves reporting criminal conduct by individuals, as opposed to companies. Very different factors are at play,” she said. The difference in the cases of the SEC and CFTC programs is that “the reporting is of a civil violation, an easier standard of proof to get to a resolution that will result in a payment,” she added.

See “Whistleblowing Directive and U.A.E. Efforts Emerge As Key Anti-Corruption Trends” (Feb. 14, 2024).

Only the “First in the Door” Qualifies

In her speech, Monaco underscored that it is a “central aspect of all whistleblower programs” that, in order to be eligible for an award, the whistleblower must tell enforcers something they did not already know. “You have to be the first in the door,” she emphasized.

This is important “because the same rule applies to the Department’s VSD programs,” Monaco stressed. “When everyone needs to be first in the door, no one wants to be second – regardless of whether they’re an innocent whistleblower, a potential defendant looking to minimize criminal exposure, or the audit committee of a company where the misconduct took place,” she explained. “These incentives reinforce each other and create a multiplier effect, encouraging both companies and individuals to tell us what they know as soon as they know it.”

This helps the DOJ build the strongest criminal cases against the most culpable wrongdoers. It also sends a message to companies considering VSD, namely “knock on our door before we knock on yours,” Monaco warned.

A Sense of Urgency

Monaco’s statements highlight the DOJ’s focus on getting information and building cases quickly. “Time can be vital in matters like this. If you wait many months or even years, there is risk of spoliation, memories fading, information getting deleted on company systems,” Holland & Knight partner Michael Hantman told the Anti-Corruption Report.

Moreover, the sense of urgency in Monaco’s speech might be an attempt to draw attention to this new program and ensure that the community at large is aware of it, Hantman suggested. “One would think there are people out in the world who do not know about these programs and are sitting on valuable information,” he said.

The program will increase the pressure on companies evaluating a VSD move, Miller & Chevalier member James Tillen predicted. “The DOJ appears to be encouraging a race between corporations and their employees to report violations to the DOJ with only one winner possible.”

Listed companies, when deciding whether to disclose, are already in the situation of considering the risk that someone within or close to the company may file a report to seek a reward, Tillen observed. “Now private companies will need to factor that into their analysis as well,” he said.

Some Programs Accept Later Informers

Phillips & Cohen partner Erika Kelton told the Anti-Corruption Report that some agencies are not always so strict about the whistleblower being “first in the door.” She cited the SEC and CFTC programs, as well as an anti-money laundering (AML) whistleblower program launched in 2021 and administered by FinCEN.

“It’s the person who is not necessarily first but whose information causes an agency to open an investigation. And that does not close out people who come along later, if they provide information that significantly contributes to the enforcement. That is a wiser approach,” Kelton said. In such an arrangement, the government gets to benefit from the maximum information instead of shutting out some potential sources, she argued.

On the other hand, the DOJ can justly expect to be showered with information, Kelton predicted. The flow of whistleblower complaints that followed the Dodd-Frank provisions was remarkable, she recalled. “My firm started getting calls right off the bat. There was a pent-up demand for a program. I expect the same will happen here.”

See “Recent SEC Whistleblower Cases Focus on Repressive Language in Employment Related Agreements” (Jan. 17, 2024).

The Value Threshold Is TBD

In addition to the “first through the door” requirement, the DOJ will also limit eligibility based on the size of the penalties. Noting that both the SEC and CFTC whistleblower programs limit awards to cases where sanctions exceed $1 million, Argentieri said the DOJ also expects to establish some sort of monetary threshold “as a way of focusing our resources on the most significant cases.” However, the amount of that threshold is still to be determined. “We look forward to receiving input about what the proper threshold should be,” she said.

Given that Argentieri acknowledged the SEC and CFTC threshold of $1 million and the need for the DOJ to focus its resources on significant cases, it is likely that the threshold for the DOJ program will be “at least $1 million and possibly higher,” Tillen suggested.

The rationale for a threshold of some kind is the avoidance of staff time being spent on small matters, according to Hantman. “The government will not devote resources to a $50,000 case,” he said.

Involved People Are Excluded

Another limitation is that the new DOJ whistleblower program will only apply “to those not involved in the criminal activity itself,” Monaco emphasized.

The Right Message

It is not surprising to hear the DOJ asserting that it will not provide rewards to people who were themselves culpable, Akin partner Ryan Fayhee told the Anti-Corruption Report. “I do not have any criticism on that. If you are engaged in some misconduct, you should not be able to profit from that,” he said.

It could appear unseemly for the DOJ to provide money to wrongdoers, Wolff suggested. “The thinking may be that those people should be happy that they are not being charged,” she said.

The DOJ presumably does not want to be in the position of awarding funds to a wrongdoer, according to Wendt. “It may be a different analysis for the DOJ versus the SEC or other agencies,” he said. And defense counsel could use cross-examination to undermine the testimony of a witness who engaged in criminal activity and is in line to earn a whistleblower award for the prosecution of their fellow wrongdoers.

Ruling out whistleblowing tips from anyone with criminal involvement is the correct communication from the DOJ, Hantman affirmed. “The message from the DOJ is the right one. There can be great dangers to saying it doesn’t matter if you did wrong,” he asserted. Any other messaging from the DOJ “would incentivize folks to create the misconduct, and then profit from it on the other end,” Hantman remarked.

But Perhaps Not the Wisest Course?

But it is common to find a corporate crime situation in which lower-level employees, while technically aiding and abetting, did not devise the crime and do not stand to profit from it, Mary Inman, co‑founder and partner at Whistleblower Partners, said. Such people could be helpful whistleblowers. “One criticism of Lisa Monaco’s program is that she excludes whistleblowers who are culpable. I think that is misguided,” Inman said. She noted that under the Financial Conduct Authority (FCA)’s provisions, a person who is not an architect of a fraud can be eligible for rewards upon reporting it. “I think Lisa Monaco should be more expansive,” Inman suggested.

In most cases, a low-level administrative employee, who had minimal involvement in a scheme and who did not benefit, should not be excluded from the program, Kelton also said. “Often, those with the best information have at least some kind of involvement. But I do think there is a tipping point over which someone should not be eligible,” she said.

The SEC includes culpability as a negative factor and not a total bar to whistleblowers, Wendt pointed out. “There is a trade-off in deciding whether culpability will exclude potential whistleblowers. There is flexibility in defining culpability, so it is an issue to watch for how the DOJ will define this criterion and apply it in practice,” according to Wendt.

Additionally, given that there can sometimes be knowledge advantages to being involved in the misconduct, nuances might arise in practice. “There might be exceptions. It will be interesting to see how it works,” Hantman said.

See “Chief of SEC’s Whistleblower Office Discusses Program’s Continuing Success After Its First Decade” (May 12, 2021).

Will Whistleblowers Be Satisfied?

Payout Decisions May Underwhelm

With the DOJ maintaining discretion on which whistleblowers can receive rewards, there remains the question of whether whistleblowers will be content with those decisions. “We are highly likely to see a lot of follow-on litigation following these resolutions.” Fayhee suggested. “We see that with the FCA context. Whistleblowers are constantly disappointed.”

“This is a concern with the program being entirely agency driven rather than legislatively established,” Kelton explained. “Hopefully, at least, there will be an opportunity to seek reconsideration of any award.”

Under existing award programs, whistleblowers receive substantial proportions of any sanction amounts when a company is found culpable. The SEC program is more or less typical in paying whistleblowers a 10-30% slice, while in FCA cases it can be anywhere from 15% to 30%.

“There are whistleblowers out there who have earned $100 million plus,” Hantman noted. But there should not be an upper limit to the actual dollar amount a whistleblower is paid, no matter how valuable the case is, according to Inman. “You shouldn’t be penalized for bringing forward the biggest frauds,” she said.

Anonymity Up to a Point

Questions remain over whether whistleblowers in this new DOJ program can be confident they will be treated with anonymity. A particular area of concern in this respect is when their tips lead to a criminal case.

“This is an issue that remains to be seen, especially if a whistleblower may play a key evidentiary role for a prosecution to go forward,” Wendt acknowledged.

In the cases of the SEC, CFTC and AML whistleblower programs, the expectation of anonymity has been an important driver in a person stepping forward with information, Kelton observed. “The discovery obligations in a criminal case raise concerns.”

On the other hand, even under the existing whistleblower provisions, there have been situations that led to criminal cases, and “we have been able to navigate that,” Kelton said.

Anonymity is very important when dealing with whistleblowers, and it is notable that the DOJ has not addressed this question when discussing the new program, Inman affirmed. If a matter goes to trial, a whistleblower will have “confidentiality up to a point,” she cautioned. However, she noted that 93% of FCPA cases do not go to trial as they are resolved with a settlement.

See “Whistleblowers’ Impact on Corporations and SEC Enforcement” (Nov. 13, 2019).

Conflicted Witnesses May Result

An interesting aspect of the DOJ adopting a whistleblower reward program is that it can result in a witness in a criminal case having an interest in the financial penalty. In this theoretical situation, that witness’ impartiality and credibility could be questioned by a defense lawyer. However, this danger is not unprecedented, and it is one that rarely occurs in practice, according to Kelton.

“Defense can question their reliability since they have a stake in the financial penalty. But it is unlikely that a whistleblower would be a witness unless their testimony is absolutely required,” Kelton explained.

“It is a rare case where you are building a case on whistleblower testimony alone,” Inman said. Moreover, she stressed that authorities can take pains to ensure that it is hard to tell where specific information comes from. Only in rare instances does specific information only come from certain people, and authorities want to conceal their sources so as not to discourage future whistleblowers, Inman explained.

For a whistleblower to stand as a key witness in a trial would be rare indeed, Hantman said. “The whistleblower says what they say, then the government does its own investigation,” he explained. In virtually any case charged by the government, that investigation would unearth plenty of other evidence from various sources.

Moreover, there could be witnesses who were direct victims, Wolff pointed out. “Financial fraud cases always have victims who testify and who are interested in the result since they are required to be compensated – and will be compensated before any whistleblower,” she said.

See “Speak-Up Technology: Can It Move the Needle on Workplace Culture?” (May 10, 2023).

Over the past several years, there has been a steady drumbeat of statements from the DOJ, the Department of Treasury (Treasury) and the Department of Commerce (Commerce), particularly the Bureau of Industry and Security (BIS), regarding the importance of sanctions and export control compliance. The enforcement actions issued by these agencies are not to be taken lightly and are likely a harbinger of even greater enforcement activity to come. Increasingly, having in place a compliance program that can identify and mitigate both sanctions and export control risks is a critical part of every company’s risk mitigation strategy.

However, establishing and maintaining an effective compliance program in an area that until recently may have seemed lower risk can be daunting. Fortunately, when it comes to sanctions and export control compliance, companies with established anti-bribery and corruption (ABC) and wider financial crime compliance programs may be further along than they realize. With a thoughtful review of existing compliance tools and processes, and considered coordination and integration in the overall approach to risk management, companies can leverage the systems and resources already in place and achieve efficiencies in their efforts to address emerging sanctions and export control risks.

In this article, we discuss the current state of play regarding sanctions and export control enforcement, including the government’s developing priorities. We then make five concrete suggestions on how to best stand up or strengthen an existing compliance program making efficient use of existing resources.

See the Anti-Corruption Report’s two-part series on New Russia Restrictions: “Agency Cooperation and Industry Focus” (Mar. 13, 2024), and “International Cooperation and Risk Mitigation” (Mar. 27, 2024).

The Lay of the Land

In January 2024, Matthew Axelrod, Assistant Secretary for Export Enforcement for BIS, warned that companies should expect penalties for export control violations to increase, particularly in light of recent actions relating to Russia and China, and noted that U.S. penalties for export control violations “could begin to approach the size of those meted out for foreign bribery.” These remarks echoed those of Lisa Monaco, Deputy Attorney General, who last year stated publicly for the second time that “sanctions are the new FCPA,” drawing a parallel between increased sanctions enforcement and the ramping up of anti-corruption enforcement in the mid‑2000s.

In addition to the comments by Axelrod and Monaco, several other recent developments reflect a renewed enforcement commitment in the export control and sanctions space. This commitment is driven in part by the war in Ukraine, ongoing anti-terrorism concerns and the current U.S. administration’s policies that view corruption and the activities of kleptocrats as a core national security issue.

Government Guidance

The DOJ and other federal agencies jointly issued two compliance notes in 2023. The Quint-Seal Compliance Note, issued in December 2023 by the DOJ, Commerce, Treasury, the Department of State and the Department of Homeland Security, urges companies operating in the maritime and transportation industries to be vigilant against sanctions and export control evasion, given increased government focus on malign actors in global supply chains. It provides practical guidance to entities operating in the maritime and transportation industries, for example, encouraging them to “institute or confirm the existence of appropriate compliance measures . . . especially when doing business in high-risk areas and categories of cargo.”

For example, the guidance recommends having risk-based sanctions and export control procedures and exercising “supply chain due diligence,” which includes requesting “accurate shipping information, including bills of lading” and reviewing open-source information. The guidance also stresses “knowing your customer” (KYC) including counterparties and screening such counterparties against relevant government lists.

In March 2023, the DOJ, Commerce and Treasury issued the Tri-Seal Compliance Note, more generally urging the private sector to self-report potential sanctions and export control violations. The Tri-Seal Compliance Note further seeks to alert companies to the incentives of voluntarily self-disclosing potential sanctions and export control violations. In the note, the Government specifically states that it is “critical that businesses work together with the U.S. Government to prevent sensitive U.S. technologies and goods from being used by our adversaries and to prevent abuse of the U.S. financial system by sanctioned individuals, entities, and jurisdictions.” To incentivize companies to work with the government, the Tri-Seal Compliance Note further states that “[a] prompt voluntary self-disclosure provides a means for a company to reduce – and, in some cases, avoid altogether – the potential for criminal liability.”

These recent guidance notes, and other similar pronouncements by the U.S. government, make clear that businesses – if they were not already – should be on notice of U.S. agencies’ (including the DOJ) increased focus on sanctions and export control evasion.

Billions in Penalties

Last year also saw notable enforcement actions, including cases against Seagate Technologies ($300,000,000 penalty), British American Tobacco ($629,891,853 penalty), Binance Holdings Limited ($4,316,126,163 penalty), and numerous individuals who were prosecuted for sanctions evasion or export control violations.

Additionally, in a recent speech at the American Bar Association National Institute on White Collar Crime, Deputy Attorney General Monaco announced the DOJ will be adding more than 25 new prosecutors focused on investigating and prosecuting sanctions and export control violations, and similar economic crimes. This will include the National Security Division’s first-ever Chief Counsel for Corporate Enforcement.

Seagate Technologies

In April 2023, BIS Imposed a $300‑million civil penalty against Seagate Technologies (Seagate), a U.S. data storage company, for alleged violations of U.S. export control laws, where the company purportedly “ordered or caused the reexport, export from abroad, or transfer (in country)” of more than 7 million foreign-produced hard disk drives to Huawei Technologies Co. Ltd. (“Huawei”) entities listed on the BIS Entity List. Seagate also apparently authorized extending lines of credit to Huawei entities totaling more than $1 billion. Seagate continued to sell to Huawei, even after its competitors had halted doing so because of Huawei’s inclusion on the Entity List. The Seagate case represents, thus far, “the largest standalone administrative penalty in BIS history.”

British American Tobacco

In April 2023, British American Tobacco, one of the world’s largest manufacturers of tobacco products, paid over $629 million and resolved an investigation into a scheme to do business in North Korea through a non‑U.S. third party. The company pled guilty and entered into a deferred prosecution agreement in connection with charges of bank fraud and conspiracy to violate the International Emergency Economic Powers Act (IEEPA). While British American Tobacco had stated in 2007 that it was no longer involved in sales of tobacco to North Korea, it allegedly continued to do business in North Korea through a third-party company, resulting in approximately $415‑million worth of U.S. dollar banking transactions. North Korean purchasers allegedly used front companies so that U.S. banks were unaware of the nexus to North Korea.

Binance Holdings Limited

In November 2023, Binance Holdings Limited (Binance) pled guilty to Bank Secrecy Act (BSA) and IEEPA violations, among others. Its CEO also plead guilty to violations of the BSA. Binance, as one of the world’s largest cryptocurrency exchanges, purportedly allowed, through its exchange, money to flow to “terrorists, cyber criminals, and child abusers.” The DOJ press release on the matter stated that “Binance chose not to comply with U.S. law and failed to implement controls and procedures to prevent money laundering. Binance also did not implement controls that would have prevented U.S. customers from conducting transactions with customers in sanctioned jurisdictions….” The DOJ noted that Binance did not implement KYC protocols, transaction monitoring or tools that would prevent taking on users in sanctioned jurisdictions. Binance agreed to forfeit more than $2.5 billion and pay a criminal fine of more than $1.8 billion. It also agreed to retain an independent compliance monitor for three years and enhance its compliance program.

Five Strategies for Using Existing Compliance

Against this backdrop, many companies are working to strengthen their compliance programs to account for the increased sanctions and export control risk. As they do so, companies should look for ways to leverage their existing ABC or wider financial crime compliance program to incorporate new, or strengthen existing, sanctions and export control-related compliance measures. Such synergies can drive both efficiency and effectiveness.

While a company’s approach to compliance will always need to be tailored to its business model and risks, the elements of sanctions and export control compliance programs and ABC – and, more broadly, financial crime compliance – programs overlap in key areas. Here are five ways that companies can leverage their existing programs to mitigate sanctions and export control-related risks.

1. Coordination Is Key

Many companies may already have policies, training or resources aligned to corruption, export controls/sanctions and anti-money laundering (AML) risks. However, ABC compliance and sanctions/export control compliance are often managed by completely separate teams. Insufficient coordination across multiple compliance teams can result in a failure to share information that is of value to multiple subject matter experts.

In addition to operational efficiency, increased coordination can improve effectiveness. For instance, information sharing can help compliance personnel recognize that corruption risks often mean an increased risk of money laundering, and sanctions or export control evasion. By viewing a company’s business risk through the lens of multiple compliance disciplines, companies can utilize shared knowledge to identify and proactively prevent potential newly heightened sanctions or AML risk.

Another benefit of keeping all compliance teams in the loop is the efficiency a company can gain by managing policies, training and other compliance work across risk areas. Role-specific employee training can be combined, particularly for functions such as finance or procurement, which carry both increased ABC and sanctions risk. Company policies and procedures should address ABC, sanctions risk and export control risks holistically, especially in businesses that source products or serve customers internationally.

Consideration of contractual terms should also be coordinated. For example, when reviewing and updating ABC representations and warranties in a contract, in‑house counsel should do the same regarding sanctions clauses or end‑user statements to address new sanctions jurisdictions or export control restrictions.

See “Fostering Collaboration and Communication Between Security and Compliance” (Mar. 27, 2024).

2. Consider Merging Teams

Companies should also consider whether it makes sense to combine related compliance functions into a single group. Merging these functions into a combined team could facilitate evaluation of resources, including whether there is a need to hire personnel with specialized expertise or whether the same personnel can advise across the spectrum of ABC and/or general financial crime risk. For a company adding or integrating sanctions compliance to its existing ABC (or wider financial crime compliance) program, a combined team is likely to mean greater efficiency, a wider view of the overall risk landscape and a lower resource cost.

See “Supply Chain Regulations Call for Increasing Due Diligence” (Dec. 6, 2023).

3. Use KYC to Know Your Supply Chain, As Well

With the onset of new and ever-changing export control and sanctions-related priorities, such as those regarding Russia and its war with Ukraine, the U.S. government has focused efforts on combatting the risk of diversion of certain products to Russia, and to sanctioned Russian persons, in violation of sanctions or export control regulations. The guidance that the U.S. government has given companies, in part, is to be alert for red flags, particularly for counterparties that “use complex sales and distribution models,” and to “screen[ ] current and new customers, intermediaries, and counterparties.” This guidance reflects a continued emphasis on the importance of KYC programs, where companies learn about their customers, including end-users, and also their supply chain.

Knowing your counterparties, including entities in the upstream and downstream supply chain, is a key element of many existing ABC compliance programs. For example, strong ABC compliance teams monitor their third-party risk through screening, due diligence and data analytics technology that allow them to “know” their vendors or other parties within the company’s supply chain. This same approach can be leveraged for a full financial crime analysis (including sanctions and export control-related risk) of a company’s supply chain; indeed, some suppliers may actually have lower corruption risk but higher sanctions risk.

See the Anti-Corruption Report’s three‑part series on in‑house perspectives on third‑party due diligence: “Right‑Sizing and Risk Ranking” (May 24, 2017), “Information Gathering” (Jun. 7, 2017), and “Red Flags and Follow‑Up” (Jun. 21, 2017).

4. Data Analytics Are Your Friend

For several years the DOJ has stressed that companies should invest in data analytics when it comes to ABC risk. In her remarks at an FCPA conference late last year, then-Acting Assistant Attorney General of the Criminal Division Nicole Argentieri stated that the DOJ is actively using data to “enhance its investigations and prosecutions,” and that the DOJ “expect[s] companies to do the same” when it comes to data analytics. Keen to avoid corruption or bribery risk, many multinationals have already made, and continue to make, investments in technology and data analytics to counter corruption.

These investments in technology in the form of corruption detection tools can be leveraged in the sanctions and export control compliance arena. At the most basic level, outputs from third-party due diligence screening tools can be directly relevant to sanctions risk, for example, if a vendor is known to do business in or with sanctioned or high-risk jurisdictions. Moreover, most vendors that provide screening services can address factors relevant to both ABC and sanctions risk, enabling companies to use the same tools for third-party due diligence.

Use of the same tools may make it easier for the ABC and sanctions compliance teams to support each other with dispositioning alerts, particularly if they are already familiar with the technology. Additionally, the use of the same tools may enable companies to better identify links between ABC and sanctions-related screening data, possibly uncovering risks that may lie with shell companies or other complex distribution models used by third parties.

Lastly, data gathered from such screening tools can be leveraged in a company’s annual financial crime risk assessment to determine whether and where significant ABC and export control/sanctions risks exist in the company. Comprehensive review of such data can shed light on particular risks in certain products or services, business units or geographical sales locations.

See “Using Data Analytics to Boost Compliance Program Effectiveness” (Jun. 27, 2018).

5. Support From Senior Leadership

Given the profile of FCPA enforcement, many board members and senior executives have been attuned to ABC risk for years. By contrast, certain sanctions and export control risks have made their way into board rooms and senior leadership team discussions recently, as companies have moved to ensure compliance in light of burgeoning sanctions enforcement activity.

Yet, the expectation of U.S. regulators is clear: “[s]enior management’s commitment to, and support of, an organization’s risk-based [sanctions compliance program] is one of the most important factors in determining its success” and ultimately fosters a “culture of compliance.” In its 2019 guidance on the key elements of an effective compliance program, A Framework for OFAC Compliance Commitments, Treasury emphasized that management commitment is a vital pillar of any sanctions compliance program and ensures that such programs receive adequate resources. Management commitment also helps to “foster a culture of compliance throughout the organization” and is critical in determining whether a compliance program is successful.

C‑suite executives would thus be well-served to ensure they place due priority on sanctions and export control risks in their business. Senior leaders must understand the operational implications of not only the latest FCPA developments, but also the latest sanctions or export control enforcement cases, potential penalties and the current geopolitical landscape. This may mean ensuring that such issues are discussed at regular meetings, subject to meaningful oversight, and receive a commensurate amount of resources and attention from management.

See “Tone at the Top: Considered Crucial Factor for Successful Corporate Compliance” (May 24, 2023).

 

Joshua Drew is a member at Miller & Chevalier as well as a former federal prosecutor and CCO. He represents clients in connection with government investigations and litigation and conducts internal investigations involving potential legal and regulatory violations, often with a focus on risks related to bribery and other forms of corruption, fraud, economic sanctions and money laundering.

Laura Deegan is counsel at Miller & Chevalier and represents clients in a broad range of economic sanctions and export controls, AML and complex national security matters. She has had the unique experience of drafting and amending regulations, including framework, comprehensive regulations and amendment packages, to implement complex economic sanctions authorities. She regularly advises on compliance with U.S. economic sanctions and embargo programs and develops strategies and recommendations to implement economic sanctions authorities and authorizations as requested by internal and external parties.

In May 2022, the U.S. Court of Appeals for the Fifth Circuit held in SEC v. Jarkesy that SEC enforcement proceedings before an administrative law judge (ALJ) were unconstitutional. To preserve a key avenue for its enforcement actions, the SEC petitioned the U.S. Supreme Court to reverse the Fifth Circuit’s decision. The Supreme Court case is underway and oral arguments were recently completed. The line of questioning during the oral arguments potentially offers an indication about what the private funds industry can expect when the Jarkesy ruling is officially issued later in 2024.

To update private fund managers on the current status of Jarkesy and to provide insights into how the parties’ arguments have been received, as well as the potential outcomes and impacts of a ruling, the Anti-Corruption Report interviewed Schulte Roth partner John P. Nowak. This article contains key takeaways from the conversation.

See “Agency Power and Adjudication: The Government Seeks Supreme Court Review of Jarkesy v. SEC” (Jun. 21, 2023).

ACR:  Can you briefly summarize the relevant facts and judicial history of Jarkesy, as well as the status of the litigation?

Nowak:  Briefly, the SEC alleged that Jarkesy – the principal of an investment adviser – told investors, among other things, that the relevant fund had retained a specific accounting firm and had a prime brokerage account at a particular broker dealer, but those statements were inaccurate. The SEC brought anti-fraud charges against Jarkesy in an administrative proceeding before an ALJ, as opposed to filing a complaint in federal district court. Jarkesy took issue with the SEC’s process.

When the action was initially brought, Jarkesy attempted to make jurisdictional arguments in the U.S. District Court for the District of Columbia and, on appeal, in the U.S. Court of Appeals for the D.C. Circuit. Both courts denied Jarkesy’s motions on the basis that they did not have jurisdiction to hear his petition. The courts noted that the correct process was for Jarkesy to continue with the administrative proceeding and appeal to the Commission if unsuccessful with the ALJ. If the Commission affirmed the ALJ opinion, then Jarkesy could have his day in court at the appellate level.

The ALJ ruled against Jarkesy in the administrative proceeding. After the SEC affirmed the ALJ’s opinion, Jarkesy petitioned for review in the Fifth Circuit. A split panel in the Fifth Circuit sided with Jarkesy, determining there were constitutional violations at play. The SEC appealed to the Supreme Court.

The case is currently before the Supreme Court and oral arguments were recently completed, during which Jarkesy made three primary arguments:

1. an enforcement action in an administrative proceeding violates his right to a jury trial under the Seventh Amendment of the U.S. Constitution;
2. Congress does not have the ability to delegate authority to the SEC to determine whether to file a suit in an administrative proceeding versus a district court; and
3. the ALJs’ protections from removal violate the Appointments Clause under Article II of the U.S. Constitution.

The last two arguments are very technical from a constitutional perspective. The argument relating to a potential violation of the Seventh Amendment received a lot of attention during oral arguments and seems to be the one that most justices gravitated toward.

[See “A Jury of Your Peers: Fifth Circuit Ruling in Jarkesy v. SEC Broadly Expands the Right to a Jury Trial for SEC Actions” (Sep. 28, 2022).]

ACR:  When is the Supreme Court expected to issue a ruling in the matter?

Nowak:  It’s uncertain, but June 2024 seems a safe bet.

ACR:  Will only the SEC be impacted by the Supreme Court’s ruling, or will other federal agencies’ practices also be affected?

Nowak:  Although the case only deals directly with the SEC, the outcome could potentially impact a couple dozen other federal agencies that also use the administrative process as part of their regulatory scheme, such as:

• the Social Security Administration;
• the Commodity Futures Trading Commission;
• the FTC; and
• the Consumer Financial Protection Bureau.

One of the issues raised during oral arguments was the effect on other agencies if a decision by the Supreme Court is broad – e.g., if it goes beyond just the anti-fraud provisions of the SEC’s regulatory structure and applies to the conduct of other agencies.

Although there have been a number of challenges to the administrative process outside the SEC context, Jarkesy and other SEC cases have garnered significant attention because of the perceived overreach in SEC enforcement efforts generally. There was certainly a focus on government overreach and expansive government regulations during oral arguments. It is worth noting, however, that the SEC’s practices as to administrative proceedings are not unique.

Interestingly, within the past few years, the Commission has pulled back from litigating cases through administrative proceedings in light of the legal challenges and litigation around these issues. Instead, the SEC has been electing to file complaints in federal district court as opposed to issuing ALJ orders when there is no settlement. The perception is that the SEC is naturally weaning itself off the administrative process.

ACR:  In addition to the Seventh Amendment issue, are the other technical constitutional arguments likely to be featured in the outcome?

Nowak:  The Article II removal argument may get some traction with the court because the issue has come up previously. In the Supreme Court’s 2018 ruling in Lucia v. SEC, the issue was whether ALJs are inferior officers and must be appointed. The argument now being made in Jarkesy is a related one, so certain justices may want to pick up the torch on that issue.

However, I expect the focus to be on the Seventh Amendment right to a jury trial. Several of the justices have issues with the close parallel between the SEC’s anti-fraud provisions – specifically, Section 10(b) of the Securities Exchange Act of 1934 – and common law fraud. During oral arguments, those justices indicated that they did not necessarily see a difference between the two that would justify and support the government’s argument that SEC cases involve a public right being enforced.

ACR:  Was there anything about the tone, direction or topics covered during oral arguments that was surprising?

Nowak:  It was a very hot bench. It lasted more than two hours. I thought the justices largely indicated their leanings in the questioning. There was significant focus - and I think disagreement - on the scope and approach to the Seventh Amendment and whether individuals have a right to a jury trial in this context.

The government took the view that the argument regarding the Seventh Amendment had effectively been decided, relying on a 1977 Supreme Court case involving Atlas Roofing. It is fair to say that a few of the justices may not agree with that position and their views about expansive government regulation and potential overreach were transparent in their questioning of the government’s attorney.

ACR:  What are the possible outcomes of the Supreme Court’s ruling, and what would be their potential impact on the private funds industry?

Nowak:  There are a range of potential results with differing levels of impact, not only for the SEC but also for other agencies. There is some concern that an expansive opinion would significantly impact other regulatory agencies, so the court may decide to avoid that by narrowing its focus on, for example, the SEC’s anti-fraud provisions and the Commission’s ability to seek penalties as to those provisions in an administrative proceeding.

A narrow opinion focusing on the SEC’s ability to seek penalties in anti-fraud cases could result in the SEC continuing to use its administrative process when only equitable remedies are sought (e.g., disgorgement). If the court’s ruling is slightly more expansive, then that could significantly impact the SEC’s ability to seek penalties in other types of cases outside of anti-fraud violations.

ACR:  What are the implications for fund managers of a federal agency being forced to try matters in U.S. district courts in lieu of using administrative proceedings?

Nowak:  When considering the pros and cons of the respective SEC enforcement processes, the first question for a fund manager is whether it plans to settle or litigate. If the fund manager plans to settle, then there is really no reason to avoid the administrative process. It’s quicker and optically better because there’s a general perception that an administrative proceeding is less significant than a federal district court injunction. It is also best to avoid the possibility that the federal district court will intervene or question the settlement terms.

On the other hand, if a fund manager wants to litigate, the administrative process is not generally the best option because it has a less formal judicial process, and it is viewed as a home court for the SEC given that ALJs are principally its employees. Fund managers that want to litigate would probably choose a district court action because it provides a fairer opportunity before an impartial arbiter with a well-defined and scheduled process for filing motions, performing discovery and resolving the matter. Managers would also have access to a jury trial at the end of the day.

To be clear, not every litigated matter should be in federal district court. There might be scenarios when the optics are not in the fund manager’s favor but the law is, so it may prefer to pursue an administrative process where the ALJ has the experience and substantive knowledge to handle the case without getting tied up in the optics or bogged down by irrelevant facts that might distract a jury.

Also, fund managers pursuing district court actions need to be mindful of collateral consequences. For example, certain bad actor provisions in the federal securities laws may prohibit actors that have been enjoined by a federal district court from engaging in various conduct. Those bad actor provisions may not always apply in the same manner for administrative proceedings and a cease-and-desist order. There are not that many differences between the collateral consequences, but there are some that fund managers will want to consider.

ACR:  So, there are practical benefits and potential negative ramifications associated with any outcome issued by the Supreme Court, regardless of which side wins?

Nowak:  Exactly. At some level, the greater issue now is that fund managers cannot control which process will apply. Although unlikely, I imagine that a ruling that enabled fund managers to choose between the administrative process and a district court action would lead to less resistance to the SEC’s efforts – and would ultimately be perceived as a worthwhile win. Providing that optionality would be a fair result, and ultimately all the private funds industry is asking for is a fair process. The perceived overreach by the SEC and the fact that the process is unfair produces a visceral reaction to many things the SEC does now.

ACR:  Will the court’s ruling have any impact on previously settled SEC rulings?

Nowak:  That depends on the opinion, but I would expect it to be in line with Lucia and to primarily impact pending and appealed matters as opposed to previous SEC matters that have been completely resolved.

ACR:  So, managers that were party to resolved proceedings are unlikely to have any recourse against the SEC to have those proceedings reheard?

Nowak:  Correct, but again, it depends on the opinion.

ACR:  If the Fifth Circuit’s ruling is upheld, what is the likelihood of Congress moving forward with a statutory solution to the issue as it did when the SEC’s ability to seek disgorgement was limited by Kokesh v. SEC and Liu v. SEC?

Nowak:  If the opinion is narrow and addresses only the SEC’s ability to seek penalties in connection with anti-fraud claims, I do not think Congress will necessarily jump in to modify that result. Obviously, Congress is likely to get more involved, however, if there is a broader holding that also affects other agencies.

ACR:  How should fund managers with matters currently pending with the SEC proceed in light of the upcoming Jarkesy ruling?

Nowak:  Jarkesy addresses an issue of process. That is, when you’re at the final stages of an enforcement investigation, whether a fund manager might face a district court action or administrative proceeding. That said, given the current climate, any pending matter that will be litigated will likely be pursued in a district court action, especially if penalties are sought. The SEC will not risk unnecessarily filing an administrative proceeding when it may have to undo the process following delivery of the Jarkesy ruling.

Although awareness of the broader climate can help fund managers read the agency and anticipate how it is likely to proceed, the primary concern for any fund manager in the midst of an SEC inquiry should be the substantive issues. That is, the SEC’s aggressiveness as to particular violations; its view of the facts, the dollar amounts and scope of penalties; and its approach to calculating disgorgement. Fund managers should direct most of their defense efforts toward those issues.

[See our three-part deep dive into the 2021 NDAA: “What Statute of Limitations Applies to the FCPA’s Anti-Bribery Provisions?” (Jul. 21, 2021), “What Statute of Limitations Applies to the FCPA’s Accounting Provisions?” (Aug. 4, 2021), and “Liu, Disgorgement and Implications for FCPA Investigations” (Aug. 18, 2021).]

The Corporate Transparency Act (CTA) was a lauded weapon against corruption when it was passed into law, but, with a recent decision out of the U.S. District Court for the Norther District of Alabama, its enforceability is now in question. Attorneys at Akin Gump, Maddin Hauser and Perkins Coie told the Anti-Corruption Report that the reporting mandates for corporate ownership and control is unlikely to go anywhere, in the near term, but additional law suits – and confusion – are inevitable. This article distills their impressions of the significance of recent legal filings, the likelihood of future lawsuits, possible political overtones and willingness to embrace the still-imperfect law.

See “Details Unclear as Corporate Transparency Act Heads Toward 2024 Debut” (Aug. 2, 2023).

An Injunction – For Some

The CTA came into effect in January 2021 as part of the Anti-Money Laundering Act of 2020 (AMLA), itself part of the National Defense Authorization Act. The AMLA was a monumental piece of legislation in the fight against financial fraud and terrorism, and the CTA supported these efforts by increasing beneficial ownership transparency.

Starting January 1, 2024, certain companies were mandated to provide various data points to help illuminate who their beneficial owners are. That data includes legal and trade names, address and Tax ID numbers; the name, date of birth, address and identification for any person owning or controlling 25 percent or more of the company; and identifying information for up to two responsible persons. The registry is overseen by the Financial Crimes Enforcement Network (FinCEN). On January 1, 2025 the regulation will expand to include all existing businesses unless they fall under a set of 23 exemptions.

Seeing the potential negative impact on small businesses, the non-partisan National Small Business Association (NSBA) filed suit in November 2022 against the Treasury Department (Treasury), Treasury Secretary Janet Yellen and then-acting Director of FinCEN Himamauli Das. The complaint alleged that Congress lacked the authority to mandate the disclosures required by the CTA under Article 1 of the Constitution in violation of the First, Fourth, Fifth, Ninth and Tenth Amendments.

On March 1, Judge Liles Burke of the U.S. District Court for the Northern District of Alabama issued an injunction, finding that Congress had exceeded its powers over foreign affairs and national security and the Taxing and Commerce clauses. The injunction is limited only to members of the NSBA as of March 1, approximately 65,000 businesses.

On March 11, the government filed an appeal in the 11^th Circuit challenging the District Court decision, and on March 21, the government and plaintiffs requested a joint motion for expedited treatment. The approved briefing schedule could hear oral arguments as early as June, but that is unlikely to be the end of the road as a Supreme Court hearing is likely, Jamie A. Schafer, partner at Perkins Coie told the Anti-Corruption Report.

See “Navigating the New FinCEN Beneficial Ownership Reporting Regime” (Feb. 28, 2024).

Commerce at the Crux

The NSBA’s case centers on the argument that the CTA oversteps the powers granted to Congress to regulate interstate commerce under the Constitutional Commerce Clause. The Plaintiffs argued that the simple act of incorporating is not “commerce,” and, thus, Congress lacked power to require disclosure based on incorporation. Schafer termed it an “aggressive” reading of the clause but noted that this argument also offered a “fairly easy fix” by amending the CTA to only trigger when companies engage in commerce rather than at the time of corporate formation.

“I thought it was possible [Treasury] would just decide to issue a regulatory fix,” Schafer said. However, it appears Treasury intends to go through the appellate process, “which makes more sense,” she suggested. Even if the Supreme Court were to agree that the statute is unconstitutional on the basis of the Commerce Clause, the result would be a need to exempt entities from filing if they are not engaged in commerce, which could still lead to “lots of litigation over the proper definition of ‘commerce.’” Ultimately, the definition of commerce in this context is murky, Schafer said, suggesting that even opening a bank account could be considered “engaging in commerce.”

“This particular challenge under the Commerce Clause is not something that I would see alleviating the burden of the CTA in any real way for most companies,” Schaffer predicted. “In the long term, the statute will stand in some form unless one of the other constitutional challenges prevails,” she said, adding that it will take “some time” for the matter to get through the appellate courts. Other constitutional issues raised in the lawsuit are still outstanding and were not addressed in the Federal Court decision, among them, privacy matters and states’ rights.

See “Transparency of Beneficial Ownership Clashes With U.K. Privacy Laws” (Jan. 18, 2023).

Politics at Play?

Any federal court decision in an election year is fair game for political pundits, especially a decision in a reliably Republican state. Still, Schafer said, this decision is “less political” than appearances might suggest. The CTA was passed with bi‑partisan support despite then-President Donald Trump’s veto. Furthermore, Judge Burke, who was a 2018 Trump appointee, expressed support for the CTA’s anti-money laundering efforts. The case could, in fact, be an opportunity to address the expansiveness of the Commerce Claus which is has been a hot topic in political circles.

“There is a legitimate debate to be had about how the Corporate Transparency Act is enforced, about different exemptions under the act, about different requirements in terms of what is reported, and how it’s reported,” Schafer explained. “That debate will probably go on for some time,” she predicted, noting that there is broad bipartisan support for beneficial ownership transparency. The need for transparency to combat money laundering, sanctions evasion and corruption “is something that both sides of the aisle agree with.”

See “Making Corporate Transparency a Global Norm” (Sep. 4, 2019).

Copycat Lawsuits Looming

Given the timing, it is unlikely that additional suits will lead to further injunctions prior to the January 1, 2025, effective date for broader application of the CTA, but they are certain to follow. Other trade associations are the most likely to file lawsuits, Schafer advised, pointing out that stand-alone businesses are unlikely to have the appetite to raise an individual complaint.

Businesses that are aware of the disclosure requirement view it as a costly burden, but David H. Freedman, a shareholder at Maddin Hauser, noted that his firm recently sent 1,400 electronic notifications to clients and colleagues about the CTA and the injunction; just five of them responded with questions or concerns. He posits that companies are taking a “wait and see” approach but cautions against doing so. “These cases have to travel through the court system and it’s going to take months for that to happen,” he explained, but, meanwhile, “these deadlines are going to be here and they are going to be real.”

Some organizations are making their grievances public. For example, in February 2024, the American Institute of CPAs and the Chartered Institute of Management Accountants sent a letter to Congress requesting suspension of the beneficial ownership reporting requirement until small businesses are fully informed of their obligations under the law. William Boyle, a small business owner in Maine, filed a lawsuit in March 2024 in the Maine District Court citing state sovereignty and the undue burden of the reporting requirements. Likewise, the Small Business Association of Michigan filed suit in March 2024, challenging the CTA for what it considers unlawful search and seizure for information on owners, exceeding the bounds of Congress’ legislative authority and excessive penalties. The penalty for reporting violations and unauthorized disclosures was raised this year from $500 to $591 per day, not to exceed $10,000.

A Booming New Business

Meanwhile, law firms and third parties are embracing the CTA as a boon for business. Perkins Coie, for example, announced in February 2024 the creation of a full cross-disciplinary team of 34 attorneys dedicated to CTA matters. Third-party software is also being leveraged by some companies to assist with the completion of reporting.

At the same time, some firms are declining to take on the liability. Freedman said he recently fielded a request from a real estate developer with a number of LLCs including investment companies, most of which are non-exempt under the law. Initially, the real estate developer had reached out to its accountant, but the accountant was unwilling to assist. However lucrative it might be for firms to provide initial guidance and take fees for filing what may very well be rudimentary paperwork, Freedman suggests it may be a “loss leader,” borrowing the retail term, especially if billed at a flat fee depending on the complexity of the entity structure, the number of beneficial owners and the cooperation needed.

The ad-hoc obligations under the law that require monitoring and reporting changes in ownership are more concerning, according to Freedman. Mandated notifications include everything from a change in a beneficial owner’s name or address to an updated ID or new passport expiration date. “Those are all little nuances that people are not going to be paying attention to,” he said. His firm is using this moment as an opportunity to start adding additional language to clients’ formation documents about complying with the law within 90 days as well as indemnification rights against those not cooperating. “At least if there’s something on paper, that drives this home a little bit.”

Nnedinma Ifudu Nweke, partner at Akin Gump, said beneficial ownership and related reporting requirements have quickly assimilated into her client responsibilities. “This is certainly a good part of my weekly workload,” she said. “Every other day I’m going through organizational charts with clients to determine which entities are in and which are out, and then figuring out the beneficial owners,” she explained. “It’s like any new requirement: Sometimes there’s a little bit of hesitation and groaning.”

However, for companies with foreign beneficial owners, the concerns about privacy and security of shared information loom loud. “They tend to be more suspicious of what will be done with their information, the safety of their information,” Nweke added, noting that many of her clients are also exempt from the requirement.

See “Progress and Challenges in Implementation of Anti-Money Laundering Act of 2020” (Jun. 21, 2023).

CTA Shortcomings Remain

As attorneys and impacted companies get more clarity on the beneficial ownership regulation, the interpretation of the law’s 23 different exemptions and rules will become more nuanced, as will the discrepancies and pain points. For example, large operating companies – those with 20 or more employees and a physical presence in the U.S. – are exempt from reporting beneficial ownership if they meet the requirement that they have filed federal income taxes for $5 million or more in sales or gross receipts. A company can file a consolidated income report as evidence of the fiscal threshold, Nweke explained, but a holding company with the same income report cannot qualify for the exemption because it does not have employees by design.

The focus for clients has been on proactive engagement in advance of the rules coming into effect for most companies in early 2025, Schafer reported. However, companies that form entities for particular holdings and projects – such as commercial real estate and energy – have been particularly burdened with the CTA filing requirements that are currently in effect. Aim for streamlined formations and clear definitions of control, she advised, so that filings – and future required updates – are simplified.

Additionally, companies should be careful about assuming they are exempt from requirements. “We advise some of the largest companies in the world, some of which are publicly traded . . . many of these companies believed they would be exempt because they meet exemptions like large operating company or public company,” Schafer explained. However, within their structures, they have joint ventures, holding companies and other entities that do not meet the employee requirements.

Guidance Forthcoming?

In the past, FinCEN has responded to questions about interpretation and ambiguity by issuing additional FAQs, a process that has already begun, Freedman noted. The current tally is 83 entries across 14 categories with the most recent update in January 2024.

The FAQs are not always as informative as some companies would wish, though. “In my experience, having dealt with federal regulators for many years, there will continue to be areas of dissatisfaction,” Nweke said.

And more customized responses are harder to get. Freedman said he has asked questions both in webinars and by email, and they go unanswered or, in the case of email, he sometimes gets what he describes as an “impersonal” response six or eight weeks later that simply circles back to an FAQ. “Those are not one-size-fits-all answers. So we get the answer and just shrug our shoulders and wonder why we even exerted the effort in sending the email, because it doesn’t really help at all,” he said.

Considering that more guidance may be coming down the pike, it may be advisable for companies to wait a little before disclosing. Schafer expects FinCEN to continue to issue more guidance, for example on trusts, so she is advising clients to take things slow. “What most practitioners like myself are telling clients is, ‘Let’s get our ducks in a row. Let’s do all of the analyses that we can but, where appropriate, let’s wait until later in the year to actually make filings so that we . . . don’t make filings that we may need to correct if the guidance is inconsistent with our current interpretation.”

Do the Best With What You Have

In the end, though, companies may have to make do with the information that is available now and comply as best they can.

“The statute is very clear that this is an entity obligation,” Freedman said. “It’s not an attorney obligation, it’s not an obligation of the beneficial owners. But the penalties are going to be coming down on the beneficial owners.” Companies can hare off on tangents about the specificities of reporting and who bears responsibility but “the focus really should be right now on just complying and everything else will fall in place,” he continued. “It may not be the news that people want to hear, but that’s the reality of it.”

See “U.K. Enhances Anti-Fraud Efforts With Economic Crime and Corporate Transparency Act” (Jan. 17, 2024).

Litigation partner Audrey Koh has joined Pillsbury, expanding the firm’s capabilities in the London market. Koh will lead the firm’s corporate investigations & white collar defense practice in the London office. She arrives from Avonhurst.

Koh’s practice focuses on corporate investigations within the financial, energy, pharmaceutical and life sciences sectors, including matters before the U.K.’s Serious Fraud Office. She works closely with corporates, senior executives and high net worth individuals on issues relating to anti-bribery statutes – such as the U.K. Bribery Act and the U.S. Foreign Corrupt Practices Act – and regularly advises on sanctions, money laundering, financial fraud, multinational regulatory investigations, ESG compliance, due diligence and related training.

Most recently a partner at Avonhurst, Koh’s background includes legal experience in the London, Singapore, Hong Kong, Moscow, Paris and Geneva markets, including building and leading white-collar teams at leading law firms. Earlier in her career, she served as an investigative lawyer for the U.K.’s Serious Fraud Office’s Bribery & Corruption Division.

For commentary from Koh, see “Dealing With the SFO After Its ‘Fundamental Failures’” (Sep. 28, 2022).

For insights from Pillsbury, see “Magyar Telekom Individual Defendants Settle Bribery Claims From 2005” (May 10, 2017).

Blank Rome has continued the expansion of its white collar defense and investigations group by adding a team of four attorneys – Bradley Henry, Kathleen Shannon, Jason Emert and Ekinsu Çebi Elkei – in New York and Washington, D.C. The foursome, which advises domestic and international clients on criminal defense and government investigations, internal investigations and compliance matters, joins from Akerman.

Henry is a partner and vice-chair of the firm’s white collar defense and investigations group in New York. He advises on U.S. economic sanctions, anti-money laundering regulations, anti-bribery and anti-corruption issues, and criminal trials. Representing clients in criminal defense and government investigation, internal investigation and compliance matters, he has tried more than 30 federal criminal jury trials in courts across the U.S.

Shannon, based in Washington, D.C., focuses her practice on white-collar defense litigation, government investigations and enforcement actions, internal investigations, cross-border disputes, and advising clients on regulatory risks as well as the design, implementation and maintenance of effective corporate compliance programs. She represents corporate and individual clients in complex criminal and civil matters, helping them navigate high-stakes matters related to U.S. laws and regulations on economic sanctions, export controls, bribery and corruption, and anti-money laundering.

Emert concentrates his practice on international litigation and arbitration, government affairs, national security and foreign relations. Based in Washington, D.C., his clients include members of Congress, diplomats, world leaders, foreign governments, and global and domestic corporations. He previously led a European-based non-governmental organization where he worked with civil society organizations, political parties and foreign governments on human rights, rule of law, democratization and free trade around the world.

Çebi Elkei’s practice centers on dispute resolution, particularly international commercial and investor-state arbitrations. She advises clients in mining and infrastructure industries in Europe, North America, the Middle East and the Commonwealth of Independent States in investment arbitration disputes under a range of arbitral rules and applicable laws. She counsels on emergency measures and the enforcement and annulment of arbitral awards in state courts around the world. She also represents corporate and individual clients in matters related to complex transnational commercial disputes and civil fraud. She is based in the firm’s Washington, D.C., office.

For insights from Blank Rome, see our three-part series on the Airbus case: “A Milestone in International Anti‑Corruption Cooperation” (Feb. 19, 2020), “Compliance Lessons” (Mar. 4, 2020), and “The Value of Cooperation” (Mar. 18, 2020).

Akin has announced that partner Katherine Goldstein has been named co-head of its white collar defense & government investigations practice in New York

Goldstein represents financial institutions, asset managers and their senior executives in government and internal investigations, criminal and regulatory enforcement proceedings, and related private litigation. She regularly advises companies, boards and individuals facing high-stakes investigations by the DOJ, SEC, Commodity Futures Trading Commission and other regulators, and conducts sensitive internal investigations. Her practice builds on her nearly dozen years as an Assistant U.S. Attorney for the Southern District of New York (SDNY), including serving as Chief of SDNY’s Securities and Commodities Fraud Task Force.

Prior to joining Akin in 2020, Goldstein was a partner at Milbank LLP.

For insights from Akin, see “U.S. Sanctions Against Russia Expand to Target Foreign Financial Institutions” (Feb. 14, 2024); and “The Evolving Crypto Regulatory Climate” (May 11, 2022).