DOJA colleague recently posed that question to me. I thought it was an interesting one and although at first blush the response to me might appear self-evident, the fact that it was posed means that my view may not be universal. The more I thought about how to respond to my friend’s query, the longer my response became. So today, I begin a three-part series on why Americans should care about the Department of Justice (DOJ) bringing their indictments against the 14 named defendants who were all associated with the governing body of international soccer, the Fédération Internationale de Football Association (FIFA).

Over the weekend, I went to England to attend the wedding of my sister-in-law. My wife has numerous aunts, uncles, nieces, nephews and cousins and they all attend such family events. One of the more interesting comments I heard was from one of my wife’s cousins who said, “only America was big enough to take on FIFA” and that “you can say what you want about Americans but they get things done.” I realize the sample size may have been small to fully validate these perceptions but consider the headline from the lead editorial in the Sunday Times today which read “JUSTICE 1, FIFA O” where the Times discussed the revelations that Sepp Blatter himself is now under investigation by the US DOJ for direct involvement of the $10MM bribe paid to Jack Warner to swing his vote to award South Africa the 2010 World Cup.

The statement by my cousin-in-law presages something that is not discussed consistently about prosecutions under the Foreign Corrupt Practices Act (FCPA); that is the US government is the undisputed worldwide leader in the global fight against corruption and bribery. For all the discussion about whether it is fair or right to prosecute companies with headquarters outside the US for FCPA violations, the bottom line is if the US government did not engage in such prosecutions, no one else would do so. But these are not companies that lie outside the jurisdiction limit of US justice; these are companies that have voluntarily subjected themselves to US jurisdiction. Remember TOTAL, who howled about how unfair it was that the US government was prosecuting them? It turned out that they wired part of their bribes through the US banking system. Alstom was another company that fought the DOJ over jurisdiction. Yet it has listed securities on certain US exchanges which invoked FCPA jurisdiction, engaged in illegal conduct in the US and involved US citizens in the bribery and corruption allegations against it.

This fact of US leadership in the global fight against corruption and bribery was driven home even more so with the FIFA indictments. The Sunday Times had been investigating FIFA through investigative journalism for years. As far back as 2010, the Sunday Times published evidence that votes of FIFA executives could be purchased for votes to secure World Cup tournaments. The Sunday Times handed over wire tapes, videotapes and transcripts confirming these allegations to FIFA officials. FIFA’s response was to discipline those who had talked with reporters from the Sunday Times. Most amazingly, in May 2011 the Sunday Times provided this evidence to a British Parliamentary commission.

Did anything come about from this evidence being handed over to the UK government? A generous response might be not that we know of, as yet. This is in the face that the UK has arguably the strongest anti-corruption law on the books, the UK Bribery Act, which makes illegal the paying and receiving of bribes in both the public and private sector. So the laws are in the books in the UK, if the UK government wanted to enforce them.

The DOJ has made clear they will use all tools available to them in the fight against international corruption and bribery. For US companies or others subject to the FCPA, that means using a supply-side law, which criminalizes the conduct of the bribe payor. But there are numerous other laws that criminalize the conduct of the bribe receiver. We saw a couple of those at play with the FIFA indictments. These include money laundering and tax evasion, with tax evasion first. Ever since the conviction of Al Capone, the government has made use of laws against evading taxes on monies you are paid for criminal activity. Under FCPA cases, the companies seem to report the income from their ill-gotten gain accurately so we have not seen that tool used in FCPA prosecutions. However individuals who receive bribe payments generally do not report the income because they cannot account for receiving it for any honest or legal services. Since they do not report it, they do not pay taxes on it.

Anti-money laundering (AML) laws are an important tool in the fight against international bribery and corruption. My colleague Mike Brown, no doubt channeling his inner Woodward and Bernstein, often says that when it comes to bribery and corruption, you should “follow the money”. This is the basic truth about money laundering and why it is such an important tool in the fight against corruption. We have seen it used occasionally as an adjunct to FCPA prosecutions. Most recently was the money laundering charge against María de los Ángeles González de Hernandez, the official at a state-owned Venezuelan bank, Banco de Desarrollo Económico y Social de Venezuela (BANDES) who was paid upward of $5MM in bribes to win bond trading work. She was extradited to the US and pled guilty.

The bottom line is that only the US government has the wherewithal to engage in such a worldwide investigation and coordinate the actions of numerous of countries in providing assistance. Do you think the Swiss police would have been so involved if it was not for the US government lead in this investigation? From President Obama on down, the US government has made clear that it will lead the international fight against bribery and corruption. The FIFA indictments are yet one more indication that they will continue to do so.

But the US is no longer alone in this fight. Witness the large numbers of countries that have passed domestically and internationally focused laws against bribery and corruption. Whatever the motives behind the Chinese government prosecution of GlaxoSmithKline PLC (GSK) in China, the fact of the prosecution sent shock waves through western companies doing business in China that the old ways of bribing officials was no longer acceptable. The effect was that western companies doing business in China beefed up their compliance function and oversight of compliance. The same has been true from the burgeoning Petrobras corruption scandal in Brazil. Brazil itself has only recently enacted domestic anti-corruption legislation and it may have been the political fallout from the Petrobras corruption scandal that finally led the President of the country to accede to having the law made effective.

FIFA is the biggest sports empire in the world. The National Football League (NFL) is downright paltry when it comes to the monies, numbers and passions around international soccer. However the US government became aware of the inherent corruption at FIFA; whether through the investigative work of The Sunday Times, a whistleblower, an unrelated investigation into other criminal activities or some other means, Americans should care about the FIFA indictments because it shows the US government continues to lead the world’s fight against bribery and corruption.

Why should Americans care about the FIFA indictments? First as a measure of national pride, we have a Justice Department that has the wherewithal to take on the world’s largest sports organization, particularly one which thought itself above the law. While the US certainly did not bring the indictments against FIFA alone, it clearly was the leader in this effort to continue the fight against global corruption and bribery. For if America does not lead, others will not follow in this fight so Americans should care greatly that the DOJ is continuing to lead this fight with the laws available to it.

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, 2015

Lincoln AssassinationToday is the 150th anniversary of the first successful Presidential assassination attempt. It was on this day in 1865 that John Wilkes Booth shot President Abraham Lincoln at Ford’s Theater in Washington DC. Booth was not a lone gunman but led a group of Confederate sympathizers who attacked or planned to attack leading US government officials. Co-conspirator Lewis T. Powell burst into Secretary of State Seward’s home, repeatedly stabbing him and seriously wounding him and three others, while George A. Atzerodt, assigned to kill Vice President Johnson, lost his nerve and fled.

HSBC continues to stay in the news, unfortunately largely for the wrong reasons in the realm of anti-corruption, facilitating tax evasion and money laundering. In an article in the New York Times (NYT), entitled “HSBC Is Deemed Slow To Carry Out Changes”, reporters Jessica Silver-Greenberg and Ben Protess noted that earlier this month, federal prosecutors made a quarterly count filing as a part of their report on the bank’s Deferred Prosecution Agreement (DPA) “faulting the bank for weaknesses in spotting suspicious transactions and for enabling a corporate culture resistant to change.”

The filing itself was based upon the corporate monitor’s Michael Cherkasky’s “confidential 1000 page report submitted to prosecutors in January. That report, people briefed on the matter said, offered a more scathing assessment of the bank’s progress.” The monitor has been “evaluating HSBC’s global operations for cracks in its money-laundering controls. As such, he has reviewed the bank’s various business lines, including its sprawling operations in China.”

In the technology area, the filing noted the “bank’s technology systems, despite some improvement, still suffer from “fragmentation” and “lack of connectivity” the Justice Department filing said. With its creaky framework, the filing said, “the collection and analysis” of data could suffer.” This lack of technology to both check on customers or potential customers and then review the transactions they might engage in were a prime deficiency noted in the original 2012 enforcement action where “prosecutors found that HSBC facilitated money laundering on behalf of Mexican drug cartels, allowing at least $881 million in tainted money to course through its United States branches.”

But perhaps the more troubling finding in the prosecutors filing was around the culture at the bank. There was not specific criticism of the tone at the top of the bank or with senior management but with the employees’ attitudes towards meeting the obligations under the DPA. The filing said that “Change at the bank was met with resistance” providing at least one example; “When presented with negative findings from auditors, the filing said, managers at the bank’s United States unit for global banking and markets “inappropriately pushed back.” Ultimately, the resistance caused an internal audit report “to be more favorable to the business than it would have been otherwise.”

Interestingly HSBC itself pushed back against the government’s filing, at least in the press. The article noted that “In response to the filing, Stuart Levey, the bank’s chief legal officer said, “The Justice Department recognized in its letter that HSBC has made material progress toward meeting the most stringent compliance standards imposed to date upon a global financial institution.” Levey also said that “the bank was continuing to meet all its obligations under the deferred-prosecution-agreement and that its leaders “are making progress toward that objective and appreciate the monitor’s ongoing work.””

Monitor Cherkasky’s report and the Department of Justice (DOJ) filing bring up a couple of interesting points for speculation. The first is the continuing dialogue and debate on the effectiveness of DPAs and whether they actually do achieve their stated goals of changing corporate culture and behavior. The NYT article said that the DOJ filing, which came under the name of the President’s Attorney General-designee, as head of the US Prosecutor’s office, comes “at a time when prosecutors are grappling with repeat offenders on Wall Street”. Moreover, “the filing underscores the Justice Department’s efforts to stem the pattern of corporate recidivism.” Just how hard should the DOJ come down on HSBC? There are other more aggressive steps the DOJ could take, even at this point. These include “extending the five-year deferred-prosecution agreement or singling out culpable employees by name.” Indeed the article cited to a recent speech by the head of the DOJ’s criminal division, Deputy Assistant Attorney General Leslie Caldwell, where she said, “the government has “a range of tools” to deal with corporate recidivism, including extending the term of a deferred-prosecution agreement while prosecutors investigate accusations of new criminal conduct.”

How about tearing up the DPA and simply criminally prosecuting the bank on the facts it admitted to in the DPA? Caldwell also spoke to that possibility when she said in the same speech, “Make no mistake: The criminal division will not hesitate to tear up a D.P.A. or N.P.A and file criminal charges where such action is appropriate and proportional to the breach.” Since parties are required to agree to facts in any DPA or Non-Prosecution Agreement (NPA) it would seem that tearing up those settlement documents and then prosecuting those companies on the underlying facts would be a relatively straightforward matter.

The other party in this debate is the Attorney General-nominee herself. While at this point it is not clear if the GOP majority will ever let her nomination come up for a vote before the full Senate, what if the Senate Judiciary Committee decides to reopen the hearings on this issue and then shoehorn it into the larger ongoing academic and FCPA Inc. debate on DPAs (and NPAs and other settlement tools). What if the FCPA testified on the “Façade of FCPA Enforcement”? What if Ted Cruz came in to ask why the DOJ is even bothering to prosecute the British banking giant?

At the time of its settlement in 2012, the HSBC fine was the largest for any bank involving money laundering. The monitor’s report and DOJ court filing demonstrate that the settlement is still controversial and the conduct engaged in by the bank many years ago may well continue to resonate up to this day and well into the future.

But the negative news for HSBC did not end with the filing of the DOJ report. As reported in the Financial Times (FT), in an article entitled “French magistrates open formal criminal probe into HSBC”, Emma Dunkley wrote that the parent entity of the bank, HSBC Holdings, “has been placed under criminal investigation by French authorities and made to post €1bn bail over allegations that its Swiss private banking arm helped clients avoid taxes.” This is separate and apart from the investigations into the company’s Swiss banking unit, which has been indicted or is under investigation “over tax evasion allegations in several other countries, including the US, Belgium and Argentina.”

In another article in the NYT, entitled “HSBC Facing Criminal Investigation in French Tax Case, Chad Bray reported that the bank apologized after released documents “showed that its employees had reassured clients that the lender would not disclose details of their accounts to the tax authorities of their home countries and discussed options to avoid paying taxes on those assets. The bank has acknowledged previous “conduct and compliance failures” in its Swiss business and has said that it has overhauled its private banking business and reduced its client base in Switzerland by 70 percent since its peak.”

The woes of HSBC continue and indeed seem to be increasing. With the fallout from the monitor’s report and other ongoing investigations the bank may be in danger of having its DPA revoked. While HSBC is not the only poster child for Banks Behaving Badly it may find itself as the first bank to have its DPA torn up and either the entity or responsible individuals criminally prosecuted for recidivist behavior.

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, 2015

Gulliver's TravelsThere was once a man named Gulliver who traveled widely and wrote a book about his adventures called Gulliver’s Tales. During his first voyage, Gulliver is washed ashore after a shipwreck and finds himself a prisoner of a race of little people, who live in the country of Lilliput. After giving assurances of his good behavior, Gulliver becomes a resident in Lilliput and becomes a favorite of the court. From there, the book follows Gulliver’s observations on the Court of Lilliput. He is also given the permission to roam around the city on a condition that he must not harm their subjects and otherwise engage in illegal, immoral or unethical conduct.

I am continually amazed at how life imitates art because if I told you the following tale you might accuse me of simply making up things to write about. Imagine there is a corporate banking Chief Executive Officer (CEO), whose company signed one of the largest Deferred Prosecution Agreements (DPA) ever a little over two years ago giving assurances of good behavior going forward. Now imagine I tell you that the same CEO has been hiding money for years in a Swiss bank account through a shell corporation for ‘his privacy’ (IE., Hiding money from the Lilliputians of this world). Unfortunately for the real Stuart Gulliver, the CEO at the banking giant HSBC, these facts are true. While his company is in yet another scandal involving its illegal conduct, while under a DPA for its past sins, it turns out the CEO was hiding approximately $7.7MM in a Swiss bank account. To compound this effort to conceal his monies, he did so through a shell Panamanian company.

Yet, just like the fictional Gulliver, the real Gulliver has a very simply explanation for this practice. According to Jenny Anderson, in an article in the New York Times (NYT) entitled “HSBC Chief Defends Swiss Bank Account Worth $7.7 Million”, Gulliver said “This has an everyday explanation to it” and said the explanation was that he was trying to hide the money so his co-workers would not know he much money he made. Or as Anderson wrote, “In an effort to protect his privacy — he was the bank’s top earner — he put the money in Switzerland to hide it from the prying eyes of his Hong Kong colleagues. But he then had to hide it from his curious Swiss colleagues, so he created an anonymous Panamanian company.”

So it turns out that Gulliver was not only trying to hide his money from his co-workers but also from the Swiss by creating a shell corporation to launder the money into before depositing it in Switzerland. Similar to those pesky Lilliputians, who might want to find out something about him that he did not want them to know, as when the fictional Gulliver agreed to not violate the law or engage in otherwise unethical conduct. Of course the real Gulliver has protested that such arrangements were not illegal at the time he engaged in them, side-stepping the question of whether his conduct was unethical (Ethical bankers, does that topic belong in the fiction section?).

Gulliver also went on a charm offensive essentially claiming that not only him but the entire banking industry in general was being picked on. Channeling his inner Mother Theresa, Gulliver was quoted in an article in the Financial Times (FT), entitled “Standards for bankers higher than for bishops, claims HSBC chief Gulliver” by Martin Arnold and George Parker, as saying “It seems to me that we are holding large corporations to higher standards than the military, the church or civil service.” While I am not quite certain as to the pay scale of UK church leaders, I am relatively certain that those in the civil service and military do not have an extra $7.7MM laying around that they need to launder through a Panamanian corporation to hide in a Swiss bank account.

The real Gulliver should have just channeled his fictional Gulliver and said that when in the land of Lilliput, you do not have to tell the Lilliputians the truth, even if you have sworn in a pesky DPA to do so. From the real Gulliver’s statement about bankers being held to higher standards, he obviously thinks that the church, military and civil service (and probably the rest of us mere mortals) have Lilliputian ethical obligations compared to him.

What does all this mean for prosecuting HSBC in the newly erupted money laundering through its Swiss subsidiary scandal? Well it is great to know your CEO has first hand knowledge of the mechanics of such activities. The appropriate UK authorities or even the US Department of Justice (DOJ) could interview the real Gulliver as a subject matter expert (SME) on not only how to hide money from your fellow employees, but also from the Swiss and even gain insight into such machinations to hide money from your own national tax authorities. The real Gulliver may be a real find for the DOJ as an expert witness, at the trial of his company for breach its DPA.

Further, just think of the credibility the real Gulliver would have in negotiations with the DOJ on whether HSBC broke its promises to do business in compliance with US anti-money laundering (AML) laws when it signed its DPA back in 2012. He could go right into the meeting and say, “Lads, let me dispel any misconceptions you might have about Swiss bank accounts. They exist to hide money. At least that is how I use them personally.” He could then walk the lowly civil servants who work in the DOJ Fraud Section and who have lower standards than the whiter-than-white bankers through how the real world of money laundering works, or at least the real world of multi-millionaires who, for some reason, want to protect their own privacy.

The real Gulliver could answer yet another rhetorical question that he posed, and was reported in the FT article, when he asked, “Can I know what every one of 257,000 people is doing? Clearly, I can’t. If you want to ask the question could it ever happen again – that is not reasonable.” The real Gulliver could then go on to respond to this rhetorical flourish along the lines of the following, But I can tell you what is reasonable, to ask me if I know what I am doing and how I am doing it. I am hiding money in my Swiss bank account through a shell Panamanian company. He might even add, How brilliant is that?

Since the fictional Gulliver lived and traveled over 300 years ago, he may be distantly related to the real Gulliver of HSBC today. Nevertheless for a bank CEO to have laundered his own money through a shell corporation into a Swiss bank account ‘for privacy’ is one of those convergences where truth surely is stranger than fiction.

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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, 2015

BacallYesterday we honored Robin Williams whom we lost earlier this week. Today we honor Lauren Bacall. She will always be a part of that great team of Bogey and Bacall. Most of us were introduced to her in the movie To Have and Have Not. I thought she was one of the most sultry and sexy icons of the 40s screen sirens. As Manohla Dargis wrote in her article for the New York Times (NYT) entitled, “That Voice and the Woman Attached,” that “When she opened her mouth in “To Have and Have Not” — taking a long drag on a cigarette while locking Humphrey Bogart in her gaze — she staked a claim on the screen and made an immortal Hollywood debut. But in 1944 at the exquisitely tender age of 19, she was also projecting an indelible screen persona: that of the tough, quick-witted American woman who could fight the good fight alongside her man.” She later married Bogart and together they were certainly Hollywood, if not American royalty, going forward. And she probably did more for the art of whistling than any person on Earth.

Yesterday I wrote about the Foreign Corrupt Practices Act (FCPA) investigation into certain transactions in Venezuela by Derwick Associates (Derwick) and a US company ProEnergy Services (ProEnergy). ProEnergy supplied turbines that Derwick resold to the Venezuelan government and then installed in that country. I wondered if US companies now need to become more concerned with not only who they do business with but how their customers might be doing business. In the parlance, you may now need to ramp up your ‘Know Your Customer’ information to continue throughout a seller-purchaser relationship.

Doug Cornelius, in a post on his Compliance Building blog, entitled “Proposed Regulations on Customer Due Diligence”, discussed “The U.S. Treasury Department’s Financial Crimes Enforcement Network has proposed revisions to its customer due diligence rules. Of course, the proposed rule would affect financial institutions that are currently subject to FinCEN’s customer identification program requirement: banks, brokers-dealers, and mutual funds.” While, investment advisers and private fund managers are not specifically mentioned in the proposed new regulation, Cornelius noted, “FinCEN suggested that it may be considering expanding these customer due diligence requirements to other types of financial institutions.” In other words, this new proposed regulation would not be directly applicable to a large number of US commercial enterprises doing business outside the United States.

However, the proposed regulation did provide some insight into how US companies, not otherwise subject to it, might think about ways to approach such an inquiry. Referencing an inquiry into anti-money laundering issues (AML) Cornelius wrote that AML programs should have four elements:

  1. Identify and verify the identity of customers;
  2. Identify and verify the identity of beneficial owners of legal entity customers;
  3. Understand the nature and purpose of customer relationships; and
  4. Conduct ongoing monitoring to maintain and update customer information and to identify and report suspicious transactions.

Clearly any FCPA based due diligence would focus on point 2. Cornelius zeroed in on it when he wrote “The definition of “beneficial owner” is proposed as have two prongs”:

  • Ownership Prong: each individual who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, owns 25% or more of the equity interests of a legal entity customer, and
  • Control Prong: An individual with significant responsibility to control, manage, or direct a legal entity customer, including an executive officer or senior manager (g., a Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Managing Member, General Partner, President, Vice President, or Treasurer); or (ii) any other individual who regularly performs similar functions.

He also noted, “For identifying ownership of an entity, FinCEN has proposed a form of certification.” But he found such a “certification to be overly simplistic. It only asks for individuals with ownership in the entity. This would clearly miss ownership of the account holder by other entities who could be “bad guys.” The certification also only requires one senior officer.  That makes it too easy to appoint a straw man as executive officer to hide the underlying control by a “bad guy.”” But the FinCen proposed notice itself states “these existing core requirements are already laid out in the BSA [Bank Secrecy Act] as minimum requirements”.

I was equally interested in points 3 and 4. Under point 3, an entity subject to the regulation needs to “Understand the nature and purpose of customer relationships”. The proposed regulation further explained “to gain an understanding of a customer in order to assess the risk associated with that customer to help inform when the customer’s activity might be considered “suspicious.”” Such an inquiry could help a business to “understand the relationship for purposes of identifying transactions in which the customer would not normally be expected to engage. Identifying such transactions is a critical and necessary aspect of complying with the existing requirement to report suspicious activity and maintain an effective AML (or anti-corruption compliance) program.”

The final point 4 relates to ongoing monitoring. Once again consider the position of the US Company, ProEnergy, in the referenced FCPA investigation. What can or should it have done in the way of ongoing monitoring of its customer. The proposed regulation states “industry practice generally involves using activity data to inform what types of transactions might be considered “normal” or “suspicious.”

Furthermore, FinCEN understands that information that might result from monitoring could be relevant to the assessment of risk posed by a particular customer. The proposed requirement to update a customer’s profile as a result of ongoing monitoring (including obtaining beneficial ownership information for existing customers on a risk basis), is different and distinct from a categorical requirement to update or refresh the information received from the customer at the outset of the account relationship at prescribed periods”. Lastly the proposed regulation states, “Finally, as noted above with respect to the obligation to understand the nature and purpose of customer relationships, monitoring is also a necessary element of detecting and reporting suspicious activities”.

There does not have to be a direct bribe or other corrupt payment made by a US company to have liability under the FCPA. FCPA enforcement is littered with companies that have paid bribes through third parties. However, as the Fifth Circuit said in Kay v. US, “[W]e hold that Congress intended for the FCPA to apply broadly to payments intended to assist the payor, either directly or indirectly,” [emphasis mine]. ProEnergy would seem to be at the far edge of potential FCPA liability but if it knew, had reason to know, or even perhaps should have known about some nefarious conduct by its customer, it does not take too many steps to get to some FCPA exposure. The proposed FinCEN rules on customer due diligence for financial institutions might be a good starting point for other commercial entities to consider.

If all of the above is a bit too heavy for a Friday, well view this clip on how to whistle by clicking here.

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, 2014

Rotten Denmark“Something is rotten in the state of Denmark” is one of the signature lines from Shakespeare’s play Hamlet. I thought about that when I read a couple of recent articles in the New York Times (NYT), entitled “Questions Are Asked of Rot in Banking Culture”, by Peter Eavis and the Wall Street Journal (WSJ), entitled “Lawmakers Tell Justice Dept. to Seek Swiss Banker Extraditions”, by Joel Schectman. Eavis wrote that banks have been accused of money laundering, tax dodging, market rigging and rampant risk-taking; all of which I would add could lead to potential Foreign Corrupt Practices Act (FCPA) violations.

Banks would seem to have a different relationship with the public than energy companies. Eavis said that the “At the heart of the issue is an inviolate social contract that bankers are supposed to honor. The government agrees to protect banks from collapse, and in return, bankers are meant to uphold the highest ethics when handling other people’s money. But when law-breaking and other missteps proliferate at banks, it is a sign that the industry has stopped cleaving to the special contract, endangering taxpayers. And bad management can be a leading indicator of future financial problems at an institution.”

But more than this ‘social contract’ is regulators. The Department of Justice (DOJ) has never been shy about enforcing the FCPA against energy companies who violate the law. “Too Big To Fail” still resonates as an excuse for regulators who didn’t regulate so that they “may find it hard to convince the public that they mean business” this time around and on this issue. Eavis noted that William C. Dudley, president of the New York Fed and Thomas J. Curry, Comptroller of the Currency, have both recently spoken out about banks and their culture. But Eavis notes, “each had a reputation for being too soft on the banks.”

The regulators told Eavis that they are indeed ‘ratcheting up the pressure’ on banks. Curry was quoted as saying, “We are ratcheting up the potential consequences. This is something new.” Eavis properly asks that with some of the best legal talent money can buy for defense, who deploy strategies like refusing to turn over potential evidence to regulators” and simply having such large profits “they can easily absorb the financial penalties the government throws at them”.

Eavis notes that one continuing area of concern and an area of potential change is compensation. He states “compensation is one area where bank regulators may need to do more if they want to do more to clean up bank culture, according to critics of the industry.” This is because bank compensation practices “can reward unhealthy levels of short-term risk-taking and entice bankers into ethical lapses.”

While it is doubtful that banks would ever make changes similar to those made by GlaxoSmithKline PLC (GSK) to move away from compensation variably based upon sales to a straight salary; Eavis reports that regulators outside the US “agreed after the crisis to overhaul bankers’ pay, in part by requiring them to wait several years before they receive all of their bonuses. The hope is that bankers will behave better if they know their employers can easily take back the deferred part of their pay.”

The problem regarding compensation in US banks is that they “are still deferring much less pay than their European peers. The Fed is in charge of regulating compensation at American banks. When asked whether the pay overhaul at American banks had gone far enough, Mr. Dudley said, “There is potential to defer more compensation for longer periods of time.””

However, banks need more than simply a change in compensation to address their cultures. It really is about ethics. Interestingly this is where ‘Too Big To Fail’ comes into play. But Eavis also writes “Some banks may be so large and complex that it would be difficult for managers to maintain a clean culture across all of their operations.” Dudley was quoted as saying, “Either the firm is not too complex, you can manage it, you do know what’s going on,” he said. “Or, if you don’t know, that’s sort of raising the question whether the firm is too complex to manage.” This means “he would not allow size or complexity to be an excuse for ethical breaches.”

Although not directed at US banks and bankers, Senators Carl Levine and John McCain, who jointly lead the Senate’s Permanent Subcommittee on Investigations, channeled their inner Howard Sklar when they wrote a letter to the DOJ and urged them to “at least attempt” extradition proceedings against indicted Swiss bankers. They jointly said “Even if the extradition request is denied, it will inform both Switzerland and its citizens that the United States is ready to make full use of available legal tools to stop facilitation of U.S. tax evasion and hold alleged wrongdoers accountable.”

I felt the DOJ response was well reasoned when a spokesman said, “extradition proceedings would be a poor use of resources. Because aiding tax evasion is not considered a crime in Switzerland, the country is unlikely to honor U.S. extradition requests.” But John Carney, a former federal prosecutor who is now a partner at Baker & Hostetler LLP, believes that “an extradition request from U.S. authorities would be a powerful signal”. He was quoted as saying “It’s a shot across the bow for folks who think it could never happen,” Further, “The unsettling part for a potential defendant is the request is there and if the [Swiss] government ever changes its view, it’s one step closer to actually happening.””

I have written about Bankers Behaving Badly more than once. The litany of financial crimes they have admitted to goes on almost monthly. But when the government regulators start talking about a rotten culture; that seems to take things up a notch or two. Remember, I come from Houston, which is the epicenter of FCPA enforcement. I do not remember any government official or regulator talking about “deep-seated cultural and ethical failures” at energy companies in Houston. These public comments should certainly be a wake up call for senior management at these institutions. My advice would be to get your Chief Compliance Officer (CCO) in for a meeting ASAP and while you are at it, you may want to consider hiring a Chief Ethic’s Officer as well.

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, 2014