There are multiple ways to deal with an issue which can provide known and unforeseen benefits. Today we celebrate one of those as it was on this day in 1944, that President Franklin Roosevelt signed the GI Bill into existence. The primary purpose of the GI Bill was to avoid a relapse into the Great Depression after the war ended, provide GIs with a smoother economic transition back into US society and, most particularly, to prevent a repeat of the Bonus March of 1932, when 20,000 unemployed veterans and their families flocked in protest to Washington. The destruction of their makeshift camp and dispersal of the Bonus Marches was a black eye on the Hoover administration and contributed to his defeat in 1932.

However, the GI Bill ended up achieving much more than even these laudable goals. An entire generation of returning GIs (including my father) went to college on the GI Bill. Before the war, only 10-15% of US males went to college but the GI Bill opened this educational opportunity up with interest loans, business loans and unemployment compensation. In many ways the American economic miracle of the last half of the 20th century was fueled by this signature government effort.

I thought about the numerous effects of the GI Bill in the context of the fight against bribery and corruption. The Foreign Corrupt Practices Act (FCPA) is well known as a supply side law focusing on the bribe payor’s conduct. It criminalizes the offer to or bribe of a foreign government official or employee of a state-owned enterprise. Yet for every bribe paid there are multiple parties involved and multiple illegal acts engaged in by a number of these parties. Put simply, the money must go somewhere. While it is possible to hide millions of dollars in illegal bribe payments between your mattresses or in false wall of your home as recently occurred in Nigeria where CNN reported, “The Nigerian anti-corruption unit discovered more than $43 million in US dollars at an upscale apartment in Lagos”, where the money was ““neatly arranged” inside cabinets hidden behind wooden panels of a bedroom wardrobe.” Of course, there were reports earlier this year of the discovery of $9.7MM, in fireproof safe in a house owned by Dr. Andrew Yakubu who was the former Group Managing Director of the Nigeria National Petroleum Corporation (NNPC).

More typically money is laundered the more traditional way, through a bank. Rebecca R. Ruiz, reporting in a New York Times (NYT) article, entitled “Banker Admits to Money Laundering in FIFA Case”, discussed former Swiss banker, Jorge Luis Arzuaga, a former managing director at the Swiss bank Julius Baer, who pled guilty last week to money laundering conspiracy in conjunction with the ongoing FIFA corruption scandal. Arzuaga admitted to arranging the transfers of more than $25 million in bribes and other corrupt payments from 2010 to 2015 for corrupt FIFA officials. This is the first guilty plea in the plethora of service providers who facilitated the massive corruption scandal engaged in by FIFA officials. His former employer, the bank Julius Baer, which is under an unrelated Deferred Prosecution Agreement (DPA) for helping wealthy Americans evade taxes, is also under investigation for its role in helping corrupt FIFA officials to launder money obtained through illegal bribery and corruption.

Arzuaga’s money laundering was for one of the defendants who has pled guilty, the Argentinian sports marketing firm Torneos y Competencias and Julio Grondona, a longtime FIFA and Argentine soccer association official who died in 2014. Being a professional Swiss banker, Arzuaga was quite diligent in the services he provided. Ruiz noted, “The indictment said Mr. Arzuaga also arranged for money in accounts held by Mr. Grondona to be distributed to his heirs after his death.”

In a statement, Richard Weber, chief of the Internal Revenue Service (IRS) criminal investigation division said “We are pursuing the bad actors — including soccer officials, sports marketing companies, financial institutions and their bankers — who have intentionally and criminally violated the law by laundering illegal proceeds. Prospective private bankers and relationship managers should take note of Mr. Arzuaga’s conviction and think twice about the consequences of conspiring to launder money.”

Azuaga’s guilty plea not only opens a new front in the FIFA corruption scandal but also shines a light on services providers who help illegal actors. If bankers can be prosecuted, what about others who might facilitate such conduct? This expansion of the FIFA corruption scandal may portend a new and most welcome chapter in anti-corruption enforcement.

Combatting corruption with other tools, the Wall Street Journal (WSJ) reported last week, in an article entitled “U.S. Lawsuit Links $2.2 Billion Deal to Malaysian 1MDB Scandal”, the Department of Justice (DOJ) filed suit involving a $2.2 billion purchase of a US energy company, Coastal Energy by the Abu Dhabi sovereign wealth fund. The allegation is that $50 million of the purchase price was provided by Jho Low, who is alleged to have been involved in the looting of the 1MDB fund. Reports indicate that for his $50 million contribution to the purchase price, a shell company controlled by Low received recompense in the amount of $350 million one week later. In a lawsuit, seeking forfeiture of the proceeds of the sale, the DOJ dryly noted, “The commercial basis for this nearly immediate 600% return on investment is not immediately apparent.”

The WSJ article went on to note, the lawsuit “provided detailed allegations that in 2013 and 2014 funds allegedly stolen from 1MDB were funneled via a series of bank accounts and shell companies to partly finance the purchase of Coastal Energy, a Houston firm controlled at the time by legendary Texas oilman Oscar Wyatt Jr. The lawsuit seeks to seize proceeds from the Coastal deal, but not Coastal assets.” Additionally, “The Justice Department is interested in the Coastal deal because it says the $50 million Mr. Low invested originally came from 1MDB. The Justice Department on Tuesday moved to seize London property that it says was bought with some of the $350 million proceeds of the Coastal deal. The Justice Department has questioned people involved in the deal in recent months, according to people familiar with the investigation.”

The asset forfeiture lawsuit is also interesting as it shows that companies must now not only know with whom they are doing business but the source of money which forms the basis of a transaction. This had been a well-known requirement in banking around KnowYourCustomer (KYC) and investigations of business partners and sales agents. However, this new approach for acquisitions of organizations should put all compliance professionals and business advisors on notice as to the provenance of the funds involved and the ownership structure of purchasers.

 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2017

yellow-submarineAl Brodax died in late November. If that name does not conjure up images of Apple Bonkers, Snapping Turks, the dreaded Flying Glove and Blue Meanies, let me explain why it should. Brodax was the producer of the film version of Yellow Submarine. The reason he was the producer was somewhat odd. The Beatles had made two films, A Hard Day’s Night and Help, for United Artists but after these two cinematic efforts they had lost interest in this genre. Brodax presented the final film as an option to them to fulfill their contractual obligation, in a manner that would require virtually no participation from the lads from Liverpool. For this stroke of insight, we are all enriched.

Enrichment is the theme for today’s post as it is personal and illegal enrichment which seems to be the continuing message from the 1MDB scandal involving the disgraced Malaysian sovereign wealth fund. In an article in the Wall Street Journal (WSJ), entitled “Abu Dhabi Sovereign-Wealth Fund Gets Entangled in 1MDB Scandal”, Bradley Hope and Nicolas Parasie reported on how the 1MDB scandal continues to expand across the globe and ensnare more people and entities.

Recently, the International Business Times reported that the Monetary Authority of Singapore (MAS) has issued a proposed ban on the former top dealmaker for Goldman Sachs in Southeast Asia, Tim Leissner, for his role in the scandal. Leissner was the Goldman Sachs client relationship manager for 1MDB and headed up three major bond issuances raising over $6bn for the wealth fund. However, it was not these activities that caused MAS to act to ban Leissner. It was his issuance of an unauthorized letter, sent on Goldman Sachs letterhead, providing a reference to a financial institution in Luxemburg for a person who has become associated with the scandal, Mr. Jho Low. The letter attested that Goldman Sachs had performed due diligence on Low and no red flags appeared in his background. According to the MAS, “These statements were untrue and were made by Mr Leissner with Goldman’s knowledge or consent.”

The WSJ piece reported on how the Abu Dhabi sovereign wealth fund, IPIC, was involved in transferring monies out of 1MDB to various shell companies across the globe. It all began in 2009 “the emirate would invest $1 billion in Malaysia’s real-estate, hospitality and energy businesses via the 1MDB state fund. Abu Dhabi handed the energy part of this plan to IPIC. Instead of contributing money, however, IPIC supplied a guarantee on $3.5 billion of 1MDB bonds, making them easier to sell.” In exchange for its guarantee, “1MDB agreed to pay $1.4 billion of what was called “collateral” to IPIC’s Aabar unit.” According to sources familiar with the transaction, it was done without IPIC Board approval.

You might see where this is going as the WSJ reported, “The $1.4 billion of 1MDB money never reached Aabar, the Justice Department said, but instead was paid to a firm with a name nearly identical to Aabar’s that Mr. Al Qubaisi and Aabar’s CEO, an American named Mohamed Badawy Al Husseiny, had set up in the British Virgin Islands. From that offshore firm, the Justice Department alleged in its July lawsuits, the diverted 1MDB cash was distributed to intermediaries, which sent it on to still other intermediaries, until hundreds of millions of dollars reached Mr. Najib, his stepson and others.”

Also most interesting was the flow of the money, as illustrated below:

From Blackstone Asia Real Estate Partners, the US “Justice Department alleged in its July lawsuits, the diverted 1MDB cash was distributed to intermediaries, which sent it on to still other intermediaries, until hundreds of millions of dollars reached Mr. Najib, his stepson and others.

One of the others cited by the Justice Department was Jho Low, a Najib confidant who had helped to set up 1MDB. U.S. prosecutors have described Mr. Low as in the thick of the alleged fraud, helping orchestrate schemes to siphon away money.”

Just as Yellow Submarine was described by film critic Roger Ebert as “a music-based animation film for the ages” and “a freedom of color and invention that never tires” I agree with the WSJ that “Far from just a Malaysian affair, the 1MDB scandal is unfolding as potentially one of the largest international financial swindles ever.” Equally important, the 1MDB continues to provide many significant lessons for the anti-corruption and anti-money laundering (AML) compliance practitioners.

From the Leissner affair and Goldman Sachs the critical element is that any self-certification is circumspect and must be tested. Simply because someone from a reputable company uses a third party or has a relationship with a customer does not mean you can accept their word on either due diligence or a lack of red flags around the individual or third party.

The adventures of IPIC and its representatives in the 1MDB scandal provide another yet equally important lesson. That involves names of entities. You simply cannot take an entity’s name at face value, even if that name is so similar to an entity you are very familiar with in business. If you ask most US businessmen about Blackstone they would immediately think of Blackstone Group LP, a well-known US private equity firm. This is even if there is an entity named something close which is called Blackstone Asia Real Estate Partners.

These new wrinkles to the 1MDB matter also make clear that it is more than simply performing due diligence once or obtaining some type of certification on a one-time basis. The stepson of the Malaysian Prime Minister who is at the center of the 1MDB scandal, Riza Aziz, was one of the producers of the hit film, The Wolf of Wall Street. With this new information available it would appear any entity connected to this production and more importantly profits from it may come under government scrutiny. The key is to demonstrate not only compliance with relevance due diligence but that the effort is ongoing and those efforts are documented.

So as my two favorite podcasters, John Champion and Key Ray, might say, the 1MDB scandal, with an assist from Al Brodax, continues to provide “bonk bonk on the head” lessons for the compliance practitioner. If you do not understand the reference, go watch Yellow Submarine.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2016

Hugh O'BrienWyatt Earp died this week. Not the original Wyatt Earp who died in 1929 but the Wyatt Earp of my lifetime, who was actor Hugh O’Brian. O’Brien portrayed Earp in the long running television series Wyatt Earp which ran in the early 1960s and in reruns forever since. Tall and fearless, O’Brian roamed the streets of Tombstone Arizona to keep it safe for all citizens and visitors.

Yet, when I read his obituary in the New York Times (NYT), I discovered that O’Brian was more than just my memory of Wyatt Earp as he founded and ran for over 60 years the entity Hugh O’Brian Youth Leadership. O’Brian came to the attention of Nobel Peace Prize winner Albert Schweitzer who invited him to visit his mission in Africa. According to the NYT, O’Brian was so inspired by Schweitzer’s call to services that he established “a nonprofit organization that presents seminars that prepare high school students to “become positive catalysts for change.”” Since it’s founding the organization claims more than 300,000 alumni.

I thought about a different type of catalyst when I read an article in the Wall Street Journal (WSJ) by Tom Wright and Bradley Hope, entitled “Behind the 1MDB Scandal: Banks That Missed Clues and Bowed to Pressure. In their article they detailed numerous red flags that were presented to banks involved in the transfers of money from the Malaysian Sovereign Wealth fund (1MDB) to the personal accounts of multiple individuals. Moreover, the article detailed how several banks compliance functions were bullied into or stymied from using their authority to stop the illegal flow of funds out of 1MDB into numerous shell companies controlled by family members and friends of the Malaysian Prime Minister.

The article named some of the banks involved in the money transfers and they included Deutsche Bank, Citigroup, J.P. Morgan Chase, Wells Fargo and Standard Chartered. Banks which held accounts for 1MDB included AMBank, the Swiss bank BSI and Standard Chartered. While the 1MDB scandal within the banking industry is generally related to money-laundering, the WSJ article has some interesting points for the anti-corruption compliance practitioner to consider in administering a best practices compliance program under the Foreign Corrupt Practices Act (FCPA).

In one transaction detailed in the WSJ piece, a bank officer at Deutsche Bank wanted to understand why monies contractually obligated to a joint venture (JV) between 1MDB and the Saudi Arabian entity PetroSaudi were being sent to a third entity, unrelated to the JV and located in the well-known money laundering location, the Seychelles Islands. Bank officials also wanted to understand the provenance of the unrelated third party recipient of the funds, a shell company named Good Star Ltd.

The WSJ reported that 1MDB’s executive director told the bank “to push through the payment or face blame if the deal goes off.” According to transcripts reviewed by the WSJ, the banker responded, “Let me just convince the compliance person. It’s a little bit sticky.” Deutsche Bank processed the transaction.

In another transaction, Good Star Ltd. sent funds to a third party, who then sent the money via an intermediary to the Malaysian Prime Minster.

At one point, 1MDB developed a scheme for vouching for monies diverted out of the fund, which were then provided to some of individuals looting the fund, including the Malaysian Prime Minister. In one instance where the Prime Minister was being given $100MM, a letter was provided, allegedly from Saud Abdulaziz Majid al Saud, who was reported to be a “minor Saudi royal.” In this letter al Saud reported that the monies were “a reward for Malaysia’s ‘good work to promote Islam around the world’”.

The letter went on to specify that the gift “should not in any event be construed as an act of corruption.” When a purported letter makes the blanket statement that monies transferred should not be considered as ‘an act of corruption’ that can only mean they are specifically an illegal, corrupt payment. Yet this same language was used in subsequent letters, all involving transfers to the Prime Minister, which eventually totaled nearly $1bn.

In another suspect scheme, the US entity Goldman Sachs “sold $3.5bn in 1MDB bonds in two offerings.” The article reported that half of the monies developed from this bond offering, “went into offshore shell companies overseen” by friends of the Malaysian Prime Minister. In an equally brazen scheme, 1MDB allegedly went into partnership with International Petroleum Investment Co. (IPIC) an Abu Dhabi sovereign wealth fund. 1MDB “told its auditors and bankers that it was sending $1.4bn to IPIC as a ‘refundable deposit’”. However the money was never received by IPIC but sent to a company with a similar name registered in the British Virgin Islands. Finally, the WSJ reported numerous conversations where one of the principals involved in the corrupt money transfer scheme, Mr. Jho Low, had several conversations discussing the need for secrecy and discretion.

How does all of this inform the anti-corruption compliance practitioner? First and foremost, the actions by several of the banks involved revolve around over-riding or work arounds to the compliance function. Companies must make clear when a transaction does not pass regulatory muster, whether that be under the FCPA or under relevant anti-money laundering (AML) strictures, the compliance function must have the authority to stop the transaction, until all red flags have been cleared.

To follow on from the above if the information presented to clear a red flag raises more red flags, the transaction is most probably illegal. When a letter concludes that a transaction “should not in any event be construed as an act of corruption” it usually means the opposite. Moreover, when such language appears in several letters justifying similar transactions and it is signed or sent by the same person it portends a bad omen. From the FCPA enforcement world, one only need consider the BHP Billiton enforcement actions, where one of the failures was the business unit cut and pastes of the same business justification for gifts, travel and entertainment provided to foreign officials around the 2008 Beijing Olympics.

The 1MDB scandal may well become the single largest looting of a sovereign wealth fund by corrupt government official’s to-date. Given the strategic importance of Malaysia and its Prime Minster to the US and its fight against global terrorism, it will be instructive see how the US efforts at forfeiture of funds and any criminal prosecutions move forward. However, with the unambiguous statements recently made by US Secretary of State John Kerry that corruption of public funds is a direct precursor to unrest and terrorism, the day may well be here when US allies must join in this prong of the fight against terrorism.

It might be time for Wyatt Earp to return to us.

 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2016

 

Show Notes for Week ending September 2, 2016

  1. The Astra Zenca FCPA settlement with the SEC, on FCPA Blog.
  2. Brazilian President Dilma Rousseff is impeached, as reported in the New York Times.
  3. The new Mexican anti-corruption law, from the FCPA Blog.
  4. Why non-financial institutions need to have anti-money laundering programs in place, from an article in Business Insider.
  5. Hallmarks 6-10 of the Ten Hallmarks of an Effective Compliance Program, as featured in the FCPA Compliance Report.
  6. Preview of Jay’s Weekend Report.

QuestionsWe had an interesting week of anti-corruption enforcement actions last week, both in the US and the UK. We have now had four Foreign Corrupt Practices Act (FCPA) enforcement actions since the announcement of the Depart Of Justice (DOJ) Pilot Program in April. I thought this would be a good time to review some of the recent enforcement actions, to see what lessons they may impart to the compliance practitioner. So this week will be dedicated to blog post dealing with enforcement. I will begin with a troubling report issued by a committee of the US House of Representative over the Department of Justice’s handling of the money laundering enforcement action against the UK bank, HSBC back in 2012.

Of all the things that US Congress criticized former Attorney General (AG) Eric Holder over, one might think his protections of financial institutions might not have been one of them. Yet last week there was a scathing report issued, entitled “Too Big To Jail, by the GOP staff of the House of Representatives Financial Services Committee, which was discussed by Gretchen Morgenson in her New York Times (NYT) Fair Game column entitled “Kid Gloves For a Bank With Clout. The report deals with the DOJ investigation into the UK financial institution HSBC and subsequent resolution of allegations that the bank “laundered nearly $900 million for drug traffickers” and sanctioned countries.

While the report does not deal with the DOJ’s lack of prosecution of individuals from the 2008 financial crisis, it certainly provides insight into how Holder conducted such resolutions with large financial institutions and may well explain how it occurred that there were no individual prosecutions. The piece begins that even with a nearly $2bn fine, it was not “a body blow” to HSBC. Of course, there was the ubiquitous Deferred Prosecution Agreement (DPA) put in place, where the DOJ would “delay or forgo prosecution of a company if promises to change its behavior.”

While I am most generally supportive of the practice of using corporate DPAs to help enhance compliance programs, Morgenson’s article does bring up some troubling questions about how and why HSBC was able to get off with not only an agreement not to prosecute any individuals at the bank going forward, but even have individual incentives removed from the final DPA. The House report found that DOJ leadership, in the form of AG Holder, “overruled an internal recommendation to prosecute HSBC” because of concerns that prosecution of HSBC “could result in a global financial disaster.”

That final line is one we have (unfortunately) heard before. However, the NYT article also reports on how HSBC was able to “soften the deal”. The original agreement with HSBC had language which “provide no protection from prosecution for employees who ‘knowingly and willfully” processed financial transactions with countries under American sanctions”. University of Pennsylvania Law School Professor David A. Skeel, who was quoted in the piece, said, “This is one case where it looks like the government might have been able to prosecute misbehaving executives during the crisis period, yet waived its right to do so.” Not failed to do so, but waived its right to do so.

Even more inextricably, the DPA waived future penalties for bank executives who failed to comply with the DPA. Originally there were sanctions against bank executives who did not meet the compliance obligations set forth in the DPA. These sanctions were financial penalties in the form of loss of bonuses. However, in the final version this language was removed and the House report noted the DPA, “apparently leaves open the possibility for executives to get their bonuses, despite failing to meet compliance standards.”

Another troubling aspect unearthed by the House report was ‘how much influence officials at the Financial Services Authority – Britain’s top financial regulator at the time – had on the Justice Department’s process in the HSBC matter”. Morgenson quoted a Washburn University School of Law professor, Mary Kreiner Ramirez for the following, “It would seem that in making the decision with respect to HSBC, (AG) Holder gave more attention to the concerns expressed by the F.S.A than he did with respect to our own agencies.” Moreover, the FSA got the documents on apparently something close to a real-time basis as “at the time events were unfolding.”

There has been both legal and academic criticism of DPAs. However the article brings up another criticism of the settlement vehicles, which is less discussed, the internal process by which a settlement is reached. Edward J. Kane, a professor of finance at Boston College, noted, “The fact that so many of these cases are settled rather than going to court means we don’t get an airing of facts and challenges of fact.”

The Yates Memo would seem to be one response to pre-emptively address some of the concerns raised by the lack of individual prosecution. For if the DOJ now requires prosecutors to go after culpable individuals in white collar crime cases such as the HSBC money laundering prosecution or cases under the FCPA for that matter, any settlement via a DPA would not exempt out future prosecutions against culpable individuals. Further, it would also seem that the DOJ would strengthen up the compliance program components of any DPA to have appropriate financial disincentives for the lack of compliance program adherence. When you put on top of this the Yates Memo requirement that companies must dig up facts on culpable individuals and turn those facts over to the DOJ, it would seem that individuals would be more in the sights of DOJ for prosecution.

The other factor not fully explored by commentators is that DPAs, Non-prosecution agreements (NPAs) and other settlement mechanisms are the product of negotiations by the parties, i.e. the government and the company involved. In the context of FCPA resolutions with the Securities and Exchange Commission (SEC), no company is going to put facts supporting a criminal indictment or even claim of criminal conduct in a civil based Cease and Desist Order or other form of civil based resolution. To do so would open up the company to a very high degree of liability, which is not required if the DOJ declines to prosecute a company for criminal violations of the FCPA. That explains why there is never evidence of criminal liability in a resolution document if there is no criminal charge.

Yet the House report does point up some troubling questions about not only how the HSBC settlement was reached but also the lack of prosecutions against any financial institutions after the 2008 financial crisis.

 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2016