Much remains to be seen about the COVID-19 pandemic, but one thing is certain: US congressional oversight of the public and private sector’s response – including, most particularly, the unprecedented federal spending on response efforts – will dominate Capitol Hill’s attention for many years. Indeed, the US House of Representatives has already made oversight an institutional priority and committee chairs are initiating inquiries into the myriad of issues arising from the pandemic. Though COVID-19 oversight is in its very early stages, we outline below what Congress has done to date and forecast on the shape of Hill oversight for the balance of 2020 and beyond.
According to the European Commission, fraud offences against the European Union (EU) budget cost the EU and its member states over €1 billion in losses in 2018, in addition to the annual losses of around €150 billion resulting from VAT fraud. With current criminal enforcement efforts across the EU apparently failing to effectively tackle such offences, the EU established the European Public Prosecutor’s Office (EPPO) to act as an independent and decentralized office with the power to investigate and prosecute crimes against the EU budget, such as fraud, corruption, misappropriation and cross-border VAT-related fraud.
Set to become fully operational in November 2020, based in Luxemburg, with its funding for 2020 increased by nearly 50%, the EPPO is expected to ramp up prosecutions of corporate crime concerning the EU’s financial interests and facilitate the recovery of misused EU funds. Previously, only national authorities could investigate and prosecute such offences within the scope of their own borders.
Patrick Linehan, Zoe Osborne, Brittany Prelogar, Katherine Dubyak, and Jefferson Klocke co-authored an article titled “Considerations For Conducting Remote Internal Investigations” for Law360. The article, published April 3, discusses some of the legal and practical considerations in conducting remote investigations as the world grapples with containing the spread of COVID-19.
UK law enforcement is not immune to the unprecedented levels of business disruption caused by COVID-19. While not all agencies have published specific guidance on how they propose to operate and conduct enforcement investigations during this crisis (including, for example, Her Majesty’s Revenue & Customs, the Serious Fraud Office, and the National Crime Agency), a number have. These include:
The Financial Conduct Authority (the FCA)
The FCA has issued a number of guidance notes to firms. The FCA has stressed that it expects firms to take ‘reasonable steps’ to ensure they can meet the current challenges thrown up by the COVID-19 crisis including by providing support and service to their customers (such as facilitating access to cash). The FCA also reiterated firms’ obligations under the FCA’s Principles, including Principle 11, which provides that “a firm…must disclose to the FCA appropriately anything relating to the firm of which that regulator would reasonably expect notice.” In particular, firms must disclose to the FCA if they are in financial difficulty. Other guidance from the FCA includes:
- Guidance as to which staff are “key workers” and essential to the continued functioning of the UK financial system, relevant to which children can continue in-class schooling;
- Guidance as to who may be considered to be essential for the purposes of work-related travel / physical meetings; and
- Guidance about the certification and operation of senior managers under the Senior Managers Regime (including that firms should allocate responsibilities that enable them to best deal with the risks being faced, and does not require a single senior manager to be responsible for the firm’s COVID-19 response).
Listed companies have also been afforded extra time –two months – to complete their financial statements. The FCA also issued guidance for consumers, as well as specific information for general insurance firms. Click here for further information. While there has been some slowdown in the pace of investigations, the FCA enforcement teams appear to be moving forward with their investigations, albeit with some sympathy to requests for additional time to respond to letters and document requests.
The Prudential Regulation Authority (the PRA)
The PRA has published a statement in which it set out the delays it will accept in respect of Solvency II harmonized regulatory reporting. It also published a separate statement on its revised approach to value at risk (VAR) back-testing, confirming that “…in order to mitigate the possibility of procyclical market risk capital requirements through the automatic application of a higher VAR multiplier we will allow firms – on a temporary basis – to offset increases due to new exceptions through a commensurate reduction in risks-not-in-VAR (RNIV) capital requirements.”
The Financial Reporting Council (the FRC)
The FRC has issued a range of COVID-19- specific guidance, including how auditors should ensure that they continue to meet the applicable audit standards and how AGMs can be arranged and conducted during the crisis. Other guidance is aimed at corporate governance and reporting issues, including: (i) how boards can maintain and complement management information; (ii) the introduction, and monitoring, of changes due to relocation of staff and the inaccessibility of some business premises; and (iii) decisions as to whether, and when, to pay dividends. As with the FCA, the FRC enforcement teams appear to be moving forward with extant investigations, albeit at a slower pace.
The Information Commissioner’s Office (the ICO)
The ICO launched a hub that draws together various data protection related statements and documents it has published related to COVID-19. Its guidance includes general data protection advice for data controllers and how to respond to Freedom of Information Requests. The ICO confirmed: “Regarding compliance with information rights work when assessing a complaint brought to us during this period, we will take into account the compelling public interest in the current health emergency.”
The Competition and Markets Authority (the CMA)
On March 25, the CMA – relying on the exemption that businesses can coordinate where it is sufficiently beneficial to the public – published guidance that sets out the circumstances under which the CMA will not take enforcement action. Businesses can coordinate to address critical COVID-19 issues for (only) as long as it is necessary to address these critical issues where (i) it is appropriate and necessary to the supply chain, (ii) such coordination is clearly in the public interest, and (iii) the coordination benefits consumers. The CMA has, however, made it clear that it will continue to take enforcement action, including where businesses: exchange commercially sensitive information on future pricing or business strategies that is not critical to the current COVID-19 crisis; deny access to competitors in the market place; abuse their dominant position; or keep prices artificially high to the detriment of consumers. Indeed, it appears clear enforcement action will be taken against businesses that coordinate where such coordination is wider than that needed to respond to the current crisis. Click here for more details on the impact on the UK competition law regime during COVID-19.
As noted above, the Serious Fraud Office and National Crime Agency have not yet published any COVID-19 specific guidance. While investigations appear to be progressing slowly (although, perhaps not those where the next stage is interviews), prosecutions will be significantly delayed as a result of the fact the Lord Chief Justice ordered that no new jury trials may commence until further notice.
The current situation poses various challenges for conducting internal investigations, in particular for those businesses operating in the regulated sectors who may be required to progress, and report on, any investigations during the crisis. We set out some of the considerations that business may need to consider when conducting investigations remotely in our alert Considerations for Conducting Internal Investigations Remotely.
On March 4, the Financial Crimes Enforcement Network (FinCEN) of the US Treasury Department imposed a $450,000 civil money penalty against Michael LaFontaine, former chief operational risk officer at US Bank National Association (US Bank), for his alleged role in failing to prevent violations of US anti-money laundering (AML) laws and regulations that occurred during his tenure. FinCEN’s unprecedented individual enforcement action is the latest sign that US AML regulators intend to hold individual executives accountable for their roles in financial institutions’ violations of law. It serves as a reminder of the importance of strengthening compliance programs in order to minimize the likelihood of findings of individual liability.
On February 26, 2020, the US District Court for the District of Connecticut partially overturned the jury conviction of Lawrence Hoskins in United States v. Hoskins, acquitting the defendant of all Foreign Corrupt Practices Act (FCPA) counts. In doing so, the court found that the government had failed to demonstrate as a matter of law that Hoskins, a British citizen, had acted as an “agent” of Alstom Power Inc. (API), a US-based subsidiary of French multinational corporation Alstom S.A. (Alstom), and a “domestic concern” for purposes of FCPA jurisdiction. This ruling is the latest twist in a case that has dealt a series of blows to the DOJ’s expansive assertion of FCPA jurisdiction over foreign defendants. As described below, however, the DOJ still has a number of tools available to prosecute non-US defendants involved in foreign corruption.
On February 28, 2020, a jury acquitted three former Barclays executives – Roger Jenkins, Tom Kalaris and Richard Boath – of criminal fraud charges brought by the Serious Fraud Office (SFO). The charges were founded on allegations that the three had conspired to make secret payments to Qatar in exchange for the state’s provision of financial assistance to Barclays during 2008. The acquittal concludes the SFO’s investigation in the matter which began in 2012 but also, however, allowed the release of previous judgments that, among other things, shed light on the difficulties in imposing corporate criminal liability.
On July 3, 2017, the SFO charged Barclays PLC with both conspiracy to commit fraud by false representation for failing fully to disclose to the stock market deals it had reached with Qatari investors and unlawful financial assistance by providing a $3 billion loan to the Qatari state’s sovereign wealth fund. On February 12, 2018 Barclays Bank PLC also was charged with providing unlawful financial assistance. On May 21, 2018 the charges against both Barclays entities were dismissed by the Crown Court, prompting a subsequent application by the SFO to reinstate all of the charges. On October 26, 2018, the High Court dismissed the SFO’s application. Any greater understanding regarding the reasons as to why the charges were dismissed and the Court’s approach to the imposition of corporate criminal liability, however, was put on hold as both Crown Court and High Court judgments remained subject to reporting restrictions until the conclusion of the trial of the individual Barclays executives. These restrictions were lifted by Lord Justice Popplewell following the acquittal of the three executives in February 2020.
Unlike the strict liability offenses of bribery and the facilitation of tax evasion under the UK Bribery Act 2010 and Criminal Finances Act 2017, respectively, in order to establish corporate criminal liability in the UK, it is necessary to successfully invoke the “identification principle.” Specifically, a prosecutor must prove that the individuals suspected of being involved in the commission of a crime represent the “directing mind and will” of that company – or, in other words, the executives’ actions need to be considered to be those of the company.
In dismissing the charges against both Barclays entities in May 2018, Mr. Justice Jay concluded that while various individuals (including those facing individual prosecution) were authorized to conduct negotiations, they did not have authority to commit Barclays to capital raising or, if one was agreed, to agree a secret commission. He found that only Barclays’ board, or the board finance committee or group credit committee, could make that final commitment and, accordingly, those involved in negotiating the package were not the directing mind and will of Barclays.
Lord Justice Davis, providing the verdict of the High Court on November 12, 2018, considered whether the alleged dishonest acts taken in conjunction with the alleged dishonest state of mind of the relevant individuals could be attributed to Barclays so as to make the bank criminally liable – were they to be treated as Barclays’ own dishonest acts and intentions?
Among the authorities considered by Davis LJ was Tesco v. Nattrass, a 1972 case in which the House of Lords concluded that a company’s board of directors, managing director and perhaps other superior officers speak and act as the company but, unless specific functions have been delegated to them, their subordinates do not speak and act as the company. In that particular case, a chain of command was set up from the board to shop managers, but the board’s functions were not delegated to such managers and the acts and omissions of the latter did not constitute those of the company. Davis LJ considered that such a decision may result in larger companies being more readily absolved from criminal responsibility than smaller companies, since larger companies often have a more convoluted decision-making process with various layers of management. He concluded, however, that boards of large international corporations cannot be expected to know all transactions and operations and that devolved structures are put in place as a practical necessity and not to avoid corporate responsibility.
In disposing of the SFO’s application to reinstate the charges against the bank, Davis LJ viewed the various individuals as not having full discretion to act independently with regards the transactions; they were instead responsible to another person for the manner in which they discharged their duties. What autonomy they may have had was insufficient; in short, attribution of criminal culpability to Barclays would require that they had entire autonomy to do the deals in question, which they did not.
Successive directors of the SFO have long argued that the identification doctrine has set too high a threshold for the establishment of corporate criminal liability and does not take into account the reality of increasingly complex and often global corporate structures. During her tenure as SFO director, for example, Lisa Osofsky has not been shy with regards to her views on the UK legal position. In the wake of the recently announced £3 billion Airbus Deferred Prosecution Agreement, Ms. Osofsky stated that the UK has a very antiquated position with regards to fraud and has on previous occasions described herself as being hamstrung by the identification principle and the resulting gulf between SMEs and large corporations as to the conduct each might be held accountable for.
The full details of the Barclays judgments will do nothing to silence critics of the identification principle and the chilling effect it apparently has on successfully prosecuting companies for certain crimes. Since the UK government published in 2017 a call for evidence on reforming criminal liability, some have argued for the creation of a new corporate criminal offence of failure to prevent economic crime. Their ranks may only grow further following a multi-year investigation into Barclays that ultimately resulted in liability for neither individuals nor the corporate itself. In the meantime, the search must continue for those individuals who represent the directing mind and will of a company.
On February 5, 2020, the UK Court of Appeal dismissed a challenge to the UK’s first Unexplained Wealth Order (UWO). Mrs. Zamira Hajiyeva, wife of the former chair of the International Bank of Azerbaijan who was sentenced to 15 years in jail in 2016 for defrauding the bank out of £2.2 billion, launched a challenge against the UK National Crime Agency’s (NCA) first ever UWO, attempting to overturn the UWO against a property in Knightsbridge, London, purchased for £11.5 million. Her arguments that the NCA mischaracterized her husband’s status as a politically exposed person (PEP) and that her husband’s conviction was the result of a “grossly unfair trial” were rejected by the Court of Appeal. This decision will likely energize and provide a boost to the NCA and other law enforcement agencies in seeking UWOs to seize ill-gotten gains in the future.
First introduced under the Criminal Finances Act 2017, UWOs require an individual respondent to explain the legitimacy of the source of funds used to acquire his or her interest in relevant property, both in the UK and abroad. Certain UK authorities can obtain UWOs against PEPs and individuals involved in serious crime outside the EEA and individuals who are, or are connected to those, involved in serious crime. To obtain a UWO from the English High Court, the interested authority need only satisfy a reasonably low threshold. It must show that:
- There are “reasonable grounds” to suspect that the respondent’s known lawfully obtained income would be insufficient to allow the respondent to obtain the relevant property; and
- That the respondent is, or is connected to, an individual who is involved in serious crime or a PEP outside the EEA.
If a respondent fails to evidence that his or her funds were clean, the interested authority may begin civil proceedings to freeze or seize the property.
In 2018, Mrs. Hajiyeva was made subject to a UWO, which required her to explain how she funded her apparently “lavish lifestyle” (she was reported to have spent £16 million in Harrods over the course of a decade) and her interests in two properties worth £22 million. In December 2019, Mrs. Hajiyeva launched a challenge at the UK Court of Appeal. She argued, amongst other things, that her husband was mischaracterized as a “central banker” and a PEP, and that the NCA’s UWO was grounded in a “grossly unfair trial” against her husband in Azerbaijan.
The Court of Appeal on 5 February 2020 dismissed Mrs. Hajiyeva’s appeal. On finding that the Azeri state owned more than 50% of the International Bank of Azerbaijan, the Court found that Mr. Hajiyev, as the chairman of a majority state-owned and ultimately state-controlled enterprise and being entrusted with a prominent public function, fell within the definition of a PEP. Therefore, as a family member of Mr. Hajiyev, Mrs. Hajiyeva was also considered a PEP. Based on evidence that Mr. Hajiyev’s and Mrs. Hajiyeva’s legitimate income would unlikely have been sufficient to fund the UK property purchases, Mrs. Hajiyeva is therefore required to explain the source of her wealth and interests in the properties. The Court of Appeal also denied Mrs. Hajiyeva’s application to appeal the judgment of the Court of Appeal.
To date, there has been limited use of UWOs. Although the Serious Fraud Office, Financial Conduct Authority, HMRC and the Crown Prosecution Service also have power to use UWOs as a tool to combat financial crime, so far, it is only the NCA that has made use of it, and that too only in the UK. 2019 saw the NCA finally ramp up the use of UWOs and supporting freezing orders, with 17 UK properties being targeted by UWOs last year.
In July 2019, the NCA secured UWOs against 14 properties, six of which belonged to a Northern Irish woman suspected to be involved in paramilitary activity and cigarette smuggling and another eight properties worth £10 million owned by a businessman, Mr. Mansoor Mahmood Hussain, who apparently purchased the assets with funds raised through drug trafficking, armed robberies and the supply of firearms. In addition to securing interim freezing orders to prevent dealing with the properties, the NCA also obtained a £1.13 million Account Freezing Order on 9 January 2020 with respect to a bank account of a company linked to Mr. Hussain. The UWO against Mr. Hussain was the first to be solely based on alleged links to organised crime.
It is clear that the NCA is attempting to crack down on the alleged proceeds of crime being laundered through the UK property market, and there are reports that the Met Police is looking at lowering the threshold for obtaining a UWO so they could be used to target the assets of lower-level organised criminals. Although it remains to be seen how the NCA and other agencies will continue to use UWOs and ultimately seize the targeted properties, it is likely that the NCA will increase its applications for UWOs as a tool to clamp down on illicit finance.
Click here to read Steptoe & Johnson LLP’s 2019 FCPA/Anti-Corruption Year in Review.
US Foreign Corrupt Practices Act (FCPA) enforcement authorities announced a steady stream of individual and corporate enforcement matters throughout 2019, some with eye-popping fines. Overall, the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) reported 50 FCPA-related actions (including 31 by the DOJ and 19 by the SEC) over the course of the year. Total fines, penalties, and disgorgement imposed in corporate FCPA settlements in 2019 nearly matched the record-breaking $2.91 billion imposed in 2018 in such matters. The DOJ also announced a slew of new charges against individuals and racked up a number of trial victories in existing cases.
To read more about trends in FCPA and global anti-corruption enforcement, click here.
In December 2019, the US Department of Justice (DOJ) announced a revised policy regarding voluntary self-disclosure of export control and sanctions violations by business organizations (VSD Policy).
The VSD Policy, issued by DOJ’s National Security Division (NSD), sets forth the criteria that DOJ, through NSD’s Counterintelligence and Export Control Section (CES) and in partnership with the US Attorneys’ Offices, will now use to determine an appropriate resolution for an organization that makes a voluntary self-disclosure in export controls and/or sanctions matters. Specifically, the VSD Policy encourages business organizations – which now include financial institutions – to self-disclose to NSD “all potentially willful violations of the statutes implementing the US government’s primary export control and sanctions regime.”
The VSD Policy increases incentives for self-disclosure, as the revised policy “signals the [DOJ’s] continued emphasis on corporate voluntary self-disclosure, rewarding cooperating companies with a presumption in favor of a non-prosecution agreement and significant reductions in penalties,” according to a DOJ press release.
The requirements to receive the benefits of the voluntary self-disclosure are set forth in the revised VSD Policy and discussed in further detail below. Importantly, the VSD Policy does not affect the process for businesses to make voluntary self-disclosures to regulatory agencies, such as the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) or the US Department of Commerce’s Bureau of Industry and Security (BIS). Companies that are aware of having committed a potential US sanctions or export controls violation will need to consider the VSD Policy in the context of their interactions with other US agencies. However, given the DOJ’s requirement to disclose willful violations of US economic sanctions and export controls “[p]rior to imminent threat of disclosure or government investigation” and “[w]ithin a reasonably prompt time after becoming aware of the offense,” any company considering disclosure of regulatory violations to either OFAC or BIS will also need to decide, early in the investigation, as to whether to also disclose to the DOJ. A “wait and see” approach may no longer be advisable given the timing consideration and may, in fact, necessitate an early assessment of willful conduct by the company or its employees.
The VSD Policy was designed to more closely align the NSD guidance with recent guidance issued throughout DOJ, thereby providing increasing clarity of the factors that a company should consider in determining whether to voluntarily self-disclose. The VSD Policy supersedes DOJ’s 2016 policy titled “Guidance Regarding Voluntary Self-Disclosures, Cooperation, and Remediation in Export Control and Sanctions Investigations Involving Business Organizations” (the 2016 Guidance).