38 minute read
PULSE
New Administration, New Trends For the White Collar Space
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Parvin Moyne and Claudius Modesti, partners with Akin Gump Strauss Hauer & Feld, share their thoughts on the white collar space under new administration, recent increased activity in cases, and the industries they believe will be the subject of regulatory focus.
What trends in the white collar space are we experiencing at this time? What is surprising you and what has been expected?
Parvin Moyne: With the new administration, 2021 has seen new leadership at the DOJ and many financial regulators, including the SEC, and a shift in enforcement priorities. We are already seeing a significant uptick in investigations and prosecutions of individuals and companies for a wide-range of financial crimes, including fraud, corruption and AML offenses. Not surprisingly, given the surge of government spending to address the economic consequences of the pandemic, the DOJ has been particularly focused on fraud related to COVID-19 relief programs. However, we are also seeing a focus on fraud and corruption more broadly. One interesting development we are seeing is a focus on the accuracy of company disclosures beyond traditional financial metrics, such as disclosures related to environmental impact, governance and board diversity.
Claudius Modesti: To Parvin’s point, the SEC issued a number of directives that indicate more regulatory oversight in areas including climate and environmental, social and governance (ESG) disclosure and investment management, and special purpose acquisition companies (SPACs). As a follow through to the directive on SPACs, SEC enforcement brought a significant action related to a proposed merger between a SPAC, Stable Road Acquisition Company and a privately held target
In the last few years, both the government and companies have built up their data analytics capabilities and automated market surveillance with an eye toward identifying potentially illegal manipulative trading. – Parvin Moyne
company, Momentus. The SEC alleged that disclosures in the SPAC’s registration statement and other public statements were misleading as they misstated key testing results relating to the target’s technology and omitted disclosures as to certain national security risks related to the target’s CEO.
We are also seeing regulators pursue new and expansive theories of liability. For example, the SEC recently brought an enforcement action against a biopharmaceutical executive under a new theory of insider trading called “shadow trading.” Shadow trading is a form of insider trading that involves the use of confidential information gained as an insider from one company to purchase stock of another company in the same industry. If the SEC has success with this litigation and theory of insider trading liability, we expect to see similar cases in the future.
Why is the docket particularly active right now?
Moyne: For one thing, as noted, with the new administration there is a new focus and energy being directed at white collar cases. The DOJ and the SEC have said they plan to aggressively pursue actions against individuals and corporations and we are seeing that happen. It is also the case that periods of financial volatility, which may provide incentives or opportunity for misconduct, tend to be followed by an increase in white collar investigations. Lastly, the government has become better equipped to manage the disruptions caused by the pandemic, and we are seeing prosecutors and regulators handling a backlog of cases that had been stalled or delayed due to pandemic-related shutdowns.
Modesti: The changing of the guard at DOJ and the SEC has already gained traction in terms of renewed enforcement activity. Each agency likely will receive increased resources over the next several years, which will expand their capacity to investigate and prosecute additional matters. Main Justice has seen its leadership confirmed in many instances and new U.S. Attorneys are in the cue to be confirmed, all of which will have white collar prosecution as an important element of their enforcement agendas. Gary Gensler is the new chair of the SEC. Under the Obama administration, he was the chairman of the CFTC and was instrumental in drafting and implementing the Dodd-Frank Act’s provisions regulating derivatives and swaps markets. During his time as chairman, the CFTC brought a record number of enforcement actions and levied a record amount of fines for financial institutions. Chair Gensler has communicated his intent to pursue securities law violators who are “playing with working families’ savings.” Finally, there is an expectation that DOJ, the SEC and other regulators are going to invest more in technology for the detection and prosecution of fraud. Those investments require time to be deployed but they likely are on the horizon.
How have your practices been adjusting to new trends and increased general activity?
Moyne: One area of focus for the DOJ and financial regulators over the last few years has been market manipulation. In the last few years, both the government and companies have built up their data analytics capabilities and automated market surveillance with an
eye toward identifying potentially illegal manipulative trading. I am currently representing defendants in two charged cases involving allegations of market manipulation and fraud. The first is a DOJ prosecution against former traders for allegedly engaging in “spoofing,” which occurs when a trader places an order with the intent to cancel the order prior to execution. The second is a CFTC enforcement action brought against a former trader in which the CFTC claims the trader manipulated the price of an interest-rate swap to make the transaction more profitable for the trader’s employer. In both of these cases, the conduct happened years ago when laws, regulations and industry practices were very different, but the DOJ and the CFTC are trying to impose today’s standards. My involvement in these matters helps inform my counsel to clients on what best practices to institute now understanding that these practices may be scrutinized with a different lens at some future point in time.
Modesti: Accounting and disclosure cases have been a main staple of SEC enforcement, as well as DOJ securities fraud prosecutions, and our practice is engaged in several matters in this area. As to accounting and disclosure enforcement, it is too early to tell how exactly chair Gensler’s investor protection agenda will play out. Financial reporting investigations take more time to develop and depend heavily on restatements and whistleblowers as sources for the investigations. Certainly, chair Gensler’s pronouncements suggest he will use all the tools at his disposal to rigorously enforce federal securities laws. First, he and his fellow Democratic SEC Commissioners are in the process of replacing the chair and other members of the Public Company Accounting Oversight Board (PCAOB), who are appointed by the SEC. The general expectation is that new leadership at the PCAOB will enhance its regulatory activity, in particular, its inspections and enforcement functions. Second, chair Gensler is committed to enforcing the three-year deadline under the Holding Foreign Companies Accountable Act (HFCAA) to delist China-based companies listed on U.S. exchanges over a lack of U.S. access to their auditors in China. The HFCAA was signed into law by the Trump administration and it appears the Biden administration is following through on its requirements. The three-year deadline still provides the U.S. and Chinese governments with room for negotiations—negotiations I was involved in as Director of Enforcement at the PCAOB—but this is the first time the United States has set a specific deadline to reach an agreement on U.S. access.
What industries are experiencing the highest impacts?
Moyne: There are a few additional areas that we expect to be the subject of regulatory focus:
• Accounting: There is a correlation between a market downturn and accounting enforcement. In those periods
Parvin Moyne is a partner with Akin Gump Strauss Hauer & Feld. She represents individuals, financial institutions and public and private companies in government investigations, white collar criminal and regulatory defense matters, internal investigations and complex commercial litigation. Reach her at pmoyne@akingump.com. Claudius Modesti is a partner with Akin Gump Strauss Hauer & Feld. His practice offers extensive enforcement experience across a broad range of capital market regulatory and corporate governance matters, including representing corporations, accounting and other professional firms and investment firms. Reach him at cmodesti@akingump.com.
of downturn, investors seek redemptions which can cause or expose problems. Fund managers may be tempted to exaggerate performance or investment returns to ward off redemption requests or to engage in valuation frauds. For public companies, in a downward business cycle, assets on the balance sheet may become impaired and, depending on the circumstances, that could trigger a restatement, to be followed by an SEC investigation. In response, the SEC and DOJ will be focused on traditional earnings manipulation (revenues, expenses, net income, EPS) as well as manipulation of non-GAAP metrics.
• SPACs: The SEC has also recently been focusing on SPACs, or blank check companies. SPACs are shell companies which offer private companies a path to the public securities markets instead of an IPO. Earlier this year, the SEC issued a number of pronouncements about the risks posed by the increase of SPAC offerings.
Modesti:
• Meme stocks: In late January, GameStop’s stock price rose nearly 2000 percent as a result of a huge volume of trading by retail investors motivated by online message boards, and with the goal of taking on large alternative investment funds that held short positions in the stock. This new market dynamic has posed a challenge for market participants and regulators alike. As a result of wild swings in prices, online brokerage firm Robinhood suspended trading in shares of GameStop and other stocks for a period of time in February while it replenished its liquidity with clearing brokers. The price volatility as well as the trading restrictions are now the subject of Congressional hearings, criminal and civil investigations and dozens of civil actions. GameStop continues to experience price swings—most recently, it was trading in the $200s. Time will tell how these criminal and civil investigations will turn out and whether the SEC and other regulators insist on rule-making to address some of the risks associated with this new market dynamic. Financial reporting investigations take more time to develop and depend heavily on restatements and whistleblowers as sources for the investigations.
– Claudius Modesti
• Cryptocurrency: We also expect SEC chair Gensler to be active in the cryptocurrency space. He has written extensively about cryptocurrencies and has been a vocal advocate for treating most digital assets as securities. At the same time, enforcement of the federal securities laws in the cryptocurrency space likely will not let up given how the market is evolving and continues to attract significant interest from investors.
What else can you share with our readers?
Moyne: I think we are going to see a continued increase in enforcement actions and prosecutions against companies and individuals for white collar offenses. It will be important to follow these developments and to continually assess policies and practices to ensure that they are consistent with legal requirements and expectations.
Modesti: It’s always easier to prepare in advance – consider any appropriate corrective measures or actions without the pressure of a regulator’s investigation. Audit committees should be extra vigilant in their oversight of financial reporting. Management should take the opportunity to remedy internal control deficiencies before they balloon into larger issues for a company’s financial reporting. The SEC consistently examines whether companies and investment managers have well-designed policies and procedures, which actually are followed in all material respects.
Arbitrating Energy Disputes Benefits All Parties Involved
INGEUNEAL GRAY AMERICAN ARBITRATION ASSOCIATION
Ingeuneal Gray, vice president of the American Arbitration Association (AAA®), discusses the various reasons arbitration is so effective for disputes in the energy industry.
CCBJ: What are the benefits of arbitration versus litigation in energy disputes?
Ingeuneal Gray: Arbitration allows parties to customize their dispute process. That’s a huge benefit. Arbitration of energy disputes is a fair, efficient, cost-effective process when administered properly. What I mean by that is that both parties have to recognize that this is arbitration – not litigation with an arbitration hat. And most of the time, the parties do understand that.
Arbitration really is a creature of contract, which means that it’s the parties’ process. They design the arbitration process, which has to meet their respective needs, beginning with the drafting of the alternative dispute resolution (ADR) clause and moving forward. It’s a very flexible process.
Throughout arbitration, the parties are also able to select the arbitrators who preside over their case, which is another huge benefit over litigation. Arbitration allows individuals with the necessary expertise in energy to properly rule, as opposed to a judge who handles all types of cases without a specific area of focus. In energy disputes, the parties are able to select an arbitrator who has the necessary skills and qualifications to understand, let’s say, a midstream or downstream issue in an oil and gas case, or a solar issue in an alternative renewable-energy case.
In these instances, additional time doesn’t need to be spent educating a judge or jury about the terminology or nuance of a particular kind of subject matter, as would be necessary in a court case before a judge or jury. What are some innovative solutions that have resulted from the arbitral process, and how has COVID-19 redefined the practice itself?
With respect to the energy sector, before the COVID-19 pandemic began, oil prices were already plummeting to historic lows. There were already issues there. Then when the pandemic started, projects came to a standstill or were slowed down tremendously or canceled. As a result, oil producing and exporting companies faced a decrease in energy income. In addition to all that, there were lockdowns and travel restrictions, which of course negatively impacted the energy industry. This horrible combination of events created major problems for the energy sector.
So if you would have asked me that question back in March or April of last year – to discuss the impact of the pandemic – I would have said there were major limitations placed on the industry for businesses and individuals. When the pandemic began, in many ways the world stopped and so much was unknown. Energy arbitrations were placed on hold, along with other arbitrations. Parties were requesting continuances. And that was just at the
beginning of the pandemic, and here we are a year and a half later and the pandemic isn’t over yet.
In the field of ADR, just as everywhere else, we’ve had to make significant adjustments to the way we conduct arbitrations across the world. However, despite the challenges, we’ve seen incredible adaptability and flexibility, which actually has allowed arbitration to rise to new heights. At some point, everyone realized that this crisis is not going away anytime soon. People had to figure out a way to move forward and work to resolve cases, especially in energy, which is one of those industries that whether the economy is up or down, it doesn’t matter, because there are always going to be disputes in the industry. And with the pandemic creating issues and preventing businesses from fulfilling contracts, there were even more disputes – contract breaches, terminations of contracts, disrupted supply chains due to manufacturing issues, nonperformance, force majeure, and so on. All that said, the virtual world opened up. Parties began having virtual hearings. At AAA, conducting arbitrations in the virtual world was certainly not a new concept for us, but we knew it was a complex process for many, and we were able to create guides and resources that would be helpful for the parties – something that would help ease them through the virtual hearing experience.
Fast-forward to today, and I think more and more businesses and firms are moving back to the office. But those innovative solutions that resulted from the pandemic have redefined the arbitral practice, as you suggested. Subject to changing circumstances, our AAA hearing rooms are open for in-person hearings again, but virtual hearings are still preferred by many. And I believe some forms of virtual hearings are here to stay. Moving forward, more arbitrations will go back to being held in person. However, I also think that having virtual options will allow for hybrid hearings when necessary, and in instances where the parties or witnesses and
our arbitrators are in different states or countries, that can definitely be a benefit. And it’s quite common for energy cases to be in different areas or other states or countries. Having a virtual or hybrid hearing can save on costs for the parties, since you don’t have to worry about travel expenses.
What types of strategies are being employed to bring efficiency to energy arbitrations?
For energy cases, which often involve large amounts in dispute, it’s important that arbitration continues to be a fair, cost-effective process. At AAA, case managers work with the parties to help them find the best solutions for resolving their case in an efficient manner. Our time-tested rules and highly skilled arbitrators keep the process on track. Our energy arbitrators are also well-established, trained and qualified in their specified areas of expertise in the energy sector.
I am proud to say that our energy panel consists of 369 accomplished arbitrators and mediators, including attorneys, formal federal and state judges, and business owners specialized in the industry. We also offer services to keep the process as cost-efficient and effective as possible. For example, we have a streamlined threearbitrator panel option. In this scenario, when either the rules or the parties’ agreements calls for a panel of three arbitrators, the parties can agree to work with a single arbitrator first, through the preliminary and discovery stages, which helps keep the costs down a great deal. Then the full panel of three arbitrators comes together during the evidentiary hearing phase to issue the award. We also offer alternative fee-arrangement options, where the arbitrator works with the parties at a fixed or capped rate for their services on the case. That’s another way to streamline the process and keep it cost effective.
When it comes to energy-related contracts, tell us about the importance of having a well-drafted dispute arbitration clause.
It’s important to note that a dispute does not begin with the filing of a demand for arbitration. I think that’s something that sometimes gets lost. It begins with issues in the contract. The less clarity you have in the contract, the more confusion there is when a disagreement or dispute arises. That’s why it’s so important to have an effective arbitration clause. The purpose of the clause is to resolve disputes, not create them. And when disagreements occur over the meaning of something in the clause, it’s often because it failed to address the particular needs of the parties. In energy contracts, there are so many complex issues to navigate. Time and money should not be wasted on the parties trying to figure out the number of arbitrators, the location of the hearing, or even the governing law, or any other issues that could have been easily resolved during the drafting of the contract or by inserting a good arbitration clause. Especially considering that the drafting process is like the honeymoon phase, when everyone gets along.
So, when you’re working out that agreement or working through the contract or figuring out the clause, you really want make sure you have what’s important in there, and that all of the potential issues are figured out. That’s also why the AAA developed ClauseBuilder®, a free online tool to assist individuals, businesses and organizations in drafting a clear and effective arbitration and mediation clause.
Energy can be a highly specialized industry. How does the AAA ensure that its executives are armed with the appropriate skills and knowledge base?
The AAA has been in existence for almost 100 years. Since 1926, we have administered almost 7 million cases. We’ve seen just about every type of energy dispute you can imagine – and even ones that you can’t. We’ve seen it all. Our expertise in managing energy cases, combined with our rules and well-established panel of energy arbitrators, means we have the knowledge and skills to provide the necessary information, education and resources – from the drafting of the energy arbitration clause to the filing of the demand for arbitration to the issuance of the award. There has been a heated discussion about on the lack of diversity in various fields within the legal industry. What is the AAA doing to increase diversity and inclusion within the profession?
At AAA, we recognize that everyone should have the same opportunities and operate on an equal playing field, regardless of ethnicity, race or gender. Clients, businesses, government and society as a whole are best served when the legal profession and ADR reflect the communities they serve.
It’s also important that everyone who wants to utilize the services of arbitration is able to find diverse arbitrators. The world is a very diverse place, and that
diversity needs to be reflected in the people who make decisions that affect the lives of others. That’s why the AAA is so committed to diversity and inclusion.
What people might not know is that since the 1970s, the AAA has worked to make arbitration and mediation more diverse, specifically in terms of ADR professionals. For example, the AAA co-sponsored the first national women’s arbitrator development program to establish a method of recruiting and training qualified women arbitrators. The first programs to increase women and racially and ethnically diverse arbitrators were in the labor arbitration area, and they included large unions and companies as co-sponsors, along with the AAA and the Federal Mediation and Conciliation Service. And more recently, diversity efforts within the AAA have centered on recruiting diverse panelists of arbitrators and mediators to serve on cases, as well as in our education programs and to represent AAA in publications.
The AAA also has a diversity and inclusion committee, which assists with coordinating initiatives, promoting events, and collaborating with firms and organizations, in order to increase awareness on the benefits of diversity and inclusion. Our Diversity Inclusion Council Committee, which consists of legal and ADR professionals, provides advice and recommendations to the AAA on how to increase the inclusion of women, racially and ethnically diverse individuals, and other individuals and groups that historically have not been included in meaningful participation in the ADR field.
The AAA continues to build coalitions with national and local bar associations and law schools around the country, sponsoring and participating in events to provide training and create opportunities for diverse practitioners. Just to give you an idea of the results of these efforts, at the end of 2020, the active panel consisted of 27 percent women and racially and ethnically diverse individuals, and the number is steadily growing. And 51 percent of our new panel members are diverse.
The AAA also believes in educating and developing the next generation of arbitrators and mediators. One example is the Higginbotham Fellows Program, launched in 2009, which was created to increase diversity and inclusion within the field of ADR by providing training, mentoring and networking opportunities to up and coming diverse ADR professionals.
Another example is the AAA Diverse Student ADR Summit, which provides an in-depth understanding of what it really takes to become a successful arbitrator and/or mediator.
Another initiative I would like to mention is the AAA Contribution to the AAA-ICDR Foundation for Diversity and Inclusion Grants. The fund grants diverse law students and professionals with up to $2,000 of financial assistance towards participation in a degree program or fellowship in alternative dispute resolution or attendance at a well-recognized conference.
Increasing diversity and inclusion is and will remain a top priority at the American Arbitration Association.
Ingeuneal Gray is the vice president of the American Arbitration Association. With over 20 years of legal and dispute resolution experience, Ingeuneal is skillful in handling matters involving business, construction, government contracts and employment issues. She has a background in mediation, arbitration, law, psychology, and business. This background allows a practical approach to dispute prevention and resolution. Reach her at GrayI@adr.org.
Leaders in Color Series Features Civil Rights Champions
MICHAEL SLUSS
Recap the details of McGuireWoods’ first anniversary of their Leaders in Color discussion series, where three distinguished champions of civil rights joined McGuireWoods chairman, Jonathan Harmon in conversation in Washington, D.C.
Three prominent civil rights champions joined McGuireWoods chairman Jonathan Harmon for a wideranging conversation on racial and social justice issues to mark the first anniversary of the firm’s acclaimed Leaders in Color discussion series. The July 15, 2021, event was held in the firm’s Washington, D.C., office before an audience of 60 people and hundreds more who watched on a live webcast.
The panelists were Wade Henderson, noted civil rights lawyer and interim president of the Leadership Conference and Civil and Human Rights; Dr. Ronald Crutcher, president of the University of Richmond and author of “I Had No Idea You Were Black: Navigating Race on the Road to Leadership”; and Joan Trumpauer Mulholland, an activist who was confined for two months in a maximum security Mississippi prison for participating in the historic Freedom Rides.
The panelists shared personal experiences that shaped their views on racial justice and discussed voting rights, education and other challenges confronting the country in its pursuit of equality. They also offered advice for younger members of the audience, including McGuireWoods summer associates, on how to be effective and inclusive leaders.
Mulholland said she first encountered the cruelty of racial injustice as a child while visiting family in segregated Georgia, where she saw the conditions in a dilapidated school for Black students. “I knew this was not fair,” she said. “This was not treating people the way we wanted to be treated like they taught us in Sunday school.” She decided then that if she had an opportunity to advance racial equality in the South, she would “seize the moment.” She was arrested along with other Freedom Riders in Jackson, Mississippi, in 1961 and jailed in Parchman Penitentiary. She appeared at the Leaders in Color event wearing a T-shirt displaying an image of her police mugshot and the words, “This Is My Government Issued ID.”
Henderson discussed the challenge of protecting voting rights at a time when numerous states are adopting election reforms that would limit early and mail-in voting, among other changes.
“Voting is the language of democracy,” he said. “If you can be prevented from voting, you can be prevented from having a voice in our democracy.” What has changed since the voting rights struggles of 1960s, Henderson said, is the support of the business community.
Pictured Above: Jonathan Harmon, Chairman
“The business community is supporting voting rights for the country because it recognizes that democracy is an issue,” Henderson said. “I think this conversation takes place against the backdrop of dramatic changes taking place in our country.”
Crutcher, a national leader in higher education and distinguished classical musician, said “active listening” can help break down racial and cultural barriers and ease polarization. It is a practice he developed as a young cellist in a chamber orchestra and carried with him to academia.
“When you sit down with someone who has a different perspective than you to have a conversation, the goal is not necessarily to change their mind or vice versa,” he said. “The goal is to listen actively so you can have a better understanding, a deeper understanding of why that person holds their views.”
McGuireWoods launched the Leaders in Color series in July 2020, weeks after the murder of George Floyd led to protests and a renewed conversation about racial and social justice in America. Harmon asked the panelists what advice they would give to aspiring leaders who want to take up the cause they have championed so effectively. “To students who want to bring about change: act together, stay nonviolent and don’t give up,” Mulholland said. “Just keep on keeping on.”
Pictured Above (from left to right): Wade Henderson, Dr. Ronald Crutcher, Joan Trumpauer Mulholland and Jonathan Harmon
Meena Sinfelt and Katie Matsoukas of Barnes & Thornburg’s White Collar, Compliance and Investigations team discuss President Biden’s recent Memorandum on Establishing the Fight Against Corruption as a Core United States National Security Interest, and how they’re advising their clients regarding this and related issues around compliance, whistleblowing and cybersecurity.
CCBJ: President Biden has indicated that he views global corruption as a national security threat. His June 3 memorandum on the subject establishes the fight against corruption as a core U.S. national security interest, and further states that it threatens economic equity, global antipoverty and development efforts, and democracy itself. But given that the memorandum did not specify policy changes or new programs, what areas of global corruption are you advising clients will likely get the most attention?
Katie Matsoukas: The first place you look is at the Foreign Corrupt Practices Act (FCPA) and its enforcement, both on the criminal side with the Department of Justice (DOJ) and on the civil side with the Securities and Exchange Commission (SEC). We watch carefully how the FCPA is enforced, what settlements come out and which industries are targeted – and that’s going to continue. Specifically, we’re looking at how it might be expanded. For example, the FCPA unit at the DOJ has approximately 40 or 45 prosecutors now, and I wouldn’t be surprised if it continues to grow. And as more prosecutors are added, that potentially means more strike forces or special task forces. That all seems consistent with this memorandum.
The memo is clearly focused on financial transactions. So you may see, for example, more FCPA or other enforcement with respect to banks and other institutions and companies that could have exposure there.
Meena Sinfelt: President Biden’s memo specifically talks about the freezing of assets and the recovery of stolen assets. Even though the first 200 days of this interagency review is still underway, we are advising our clients about the Corporate Transparency Act of 2019 and how it’s going to be implemented under this Administration, particularly with regard to the federal database of beneficial ownership information. We think there will very likely be increased efforts to collect financial information around anti-money laundering (AML). We have been encouraging our clients to look at their compliance programs related to all of their AML programs.
Part of the president’s focus is on bilateral coordination with partner countries as well as international institutions in multilateral bodies. Given this focus, what is the likely impact on government investigations of corporations in the United States and abroad?
Sinfelt: We believe there will be increased cooperation with global agencies. And there is a precedent that certain agencies within the United States share information with foreign law enforcement and investigative agencies. However, as seen in the Biden memo, there is now a greater emphasis on global sharing of intelligence in order to close existing gaps. We’ve already seen announcements about international cooperation surrounding cybercrime, fraud and other crimes. The memo mentions the Financial Action Task Force, for instance, as well as the World Bank and the International Monetary Fund.
It will be interesting to see how FCPA prosecutions take off – or don’t take off, for that matter. But again, we expect financial prosecutions to increase, and we believe
We have seen that U.S. law enforcement does coordinate with law enforcement in other jurisdictions worldwide. –Katie Matsoukas
there will be a focus on cybercrime and cybersecurity too. On July 19, there was an announcement by the White House regarding the cross-border sharing of information in relation to a cyber incident involving the People’s Republic of China. We think there will be requests by the government to private companies for increased sharing of information related to national security involving any type of cyber incident like this on a going-forward basis.
Matsoukas: We do already see a fair amount of international cooperation. What I mean by that is that U.S. law enforcement, for the most part, coordinates with law enforcement in other jurisdictions worldwide – and that creates certain efficiencies, because if a matter is more closely related to, say, France or the United Kingdom, those authorities can take the lead on that front. It frees up resources in the United States and abroad when you have coordination and you don’t have duplicative efforts.
I think that trend is going to continue and expand. I wouldn’t be surprised if you see efforts to get more nongovernmental organizations (NGOs) being tapped for their resources and expertise and ability to track, in particular, financial movement worldwide.
Sinfelt: Let me just add that we also think there will be a focus on any type of fraud related to COVID-19. Not only in the United States, with COVID-19-related assistance generally, but also anything related to, for example, international trade of personal protective equipment and price fixing, which could mean price-fixing cartels with a global reach.
Do you anticipate an increase in whistleblowing? And if so, what will that look like? Has the government made it easier to report fraud and corruption?
Matsoukas: We don’t think that we will necessarily see an increase in whistleblowing, because those opportunities are already out there. The opportunities for individuals to report and get rewards under the FCPA and under other governing laws already exist. But perhaps we may see higher rewards, or maybe more publicity of those whistleblowing opportunities. For instance, during the pandemic, there have been TV commercials about the U.S. Secret Service investigating COVID-19 fraud. You may see more things like that, not necessarily targeted at the general public, but targeted at compliance professionals and in-house lawyers. These people are generally already aware of the opportunities that exist for whistleblowers, but perhaps they don’t imagine the scope in which it could be relevant.
Another thing that’s related here is cooperation incentives for corporations. I think the DOJ would say that its FCPA leniency program has been successful. A good number of organizations and corporations have come forward under that program to self-report violations, because it gives them a better chance of getting more lenient treatment when it comes to a settlement.
Sinfelt: We might see increased whistleblowing related to professional service providers such as accountants, auditors or CPAs – people who enable the movement of wealth or whose job it is to help facilitate those transactions. They owe a duty of confidentiality to their clients, but also have professional responsibilities that are related to their licenses. Given the new focus on tying national security to corruption, we could
see more of these professionals seeking the safety of whistleblower protections.
How are you advising clients or individuals to prepare for this more intense focus on fraud, corruption and antitrust violations? And if organizations or individuals expect increased scrutiny, what steps should they take?
Sinfelt: First of all, no matter the administration, we always advise our clients to regularly monitor and assess the effectiveness of their compliance program. We always tell them that bad actors are going to find a way to manipulate the system. The question they need to ask is whether the components of their compliance programs are sufficient such that if a bad actor is found or a weakness is found it can be contained, reported and addressed relatively easily. Is the company engaging in active compliance efforts? Are they detecting and assessing red flags? Those are the types of things that we’re going to continue to tell our clients.
Beyond that, we like to emphasize the importance of understanding AML and know-your-customer rules. We think that increased knowledge and education is going to be really important right now. Our clients tend to get caught up in their own businesses, which is understandable, and it’s our job to inform them and educate them about how they’re going to have to start thinking about things from a broader scope, because they are required to know what the laws are in order to operate their businesses.
Matsoukas: Many companies that we deal with, when we talk about FCPA violations, they say, “Well, we’re a good company. We’ve got a compliance program. We’re not in the business of wanting to violate the FCPA. We want to do things the right way, that’s what our company is about.” And we tell them that’s great. We agree. But that’s not going to keep you safe from an FCPA violation. The FCPA requires corrupt intent, and we’ve actually found that intent is one of the easiest elements of the FCPA to prove, because the government can point to any flaw in a corporation’s compliance program, any failure to enact a piece of the program by a subsidiary – and they can use that to imply corrupt intent by the organization, even when that organization is not a “bad organization” by their own estimation.
This could be an unprecedented time for intergovernmental agencies working together.
–Meena Sinfelt
The good news is that if you do have a strong compliance program in place, one that is targeted and tailored and scaled, that’s going to increase your organization’s chances of getting out of an FCPA investigation with a declination or favorable settlement. And that’s why we encourage a routine review, at least on an annual basis, of your compliance program, because many companies don’t know that their policy is missing something or that their actions may fall under a foreign jurisdiction’s investigative authority. There’s always something that can be improved upon.
Sinfelt: Another thing I want to add is that it’s not just FCPA. As I mentioned earlier, it’s anti-money laundering. It’s the Computer Fraud and Abuse Act. When a company receives a third-party subpoena, sometimes their automatic thought is, “I’m just receiving a third-party subpoena. Obviously I’m not really involved. Do I have to comply with this?” From our point of view, we want to protect our client’s interests and their business secrets, naturally. But if the government is sending a grand jury subpoena for information, they likely have a valid reason for that. And it is really difficult to quash that subpoena. We’re always willing to try, but at the end of the day, it’s usually best to comply. We can try to narrow the scope or talk to the prosecutor and work out a way to ensure that our client’s business secrets don’t get disclosed in any public trial. But when subpoenas are received, you almost always have to comply with them.
The best way to deal with this is to have a process in place to notify in-house counsel to respond quickly or another designated person to handle the response. Ensuring your company has a chain of command in place to contact in-house counsel or outside counsel to respond to those subpoenas is essential. Ignoring or downplaying a grand jury subpoena can get your company in trouble quickly.
Which agencies do you anticipate being the most active in carrying out the Biden administration’s anticorruption mandate? What laws, in addition to the Foreign Corrupt Practices Act, do you see them zeroing in on?
Matsoukas: There’s a laundry list of agencies that could potentially touch this, but obviously the DOJ and SEC usually lead the charge in terms of anticorruption investigations. But what we have seen is that there are resources that other agencies can bring to the table. So, for example, the Department of Commerce has a great deal of information and resources and manpower to deal with import-export issues and foreign asset control, among other things.
You’ve also got Homeland Security, which has an Office of Inspector General that’s been very involved in looking at fraud around COVID-19 issues and has resources in place to effectuate some of the mandates that are in this memorandum, given the agency’s focus on national security.
Sinfelt: Another agency that I think will help carry out these investigations domestically and abroad is the Office of Foreign Asset Control – there will be a lot of economic sanctions that can be enforced there. There’s also the Directorate of Defense Trade Controls, and the National Security Division inside DOJ, along with the Computer Crime and Intellectual Property Section. There are a whole host of DOJ sections that carry out or assist prosecutions within the DOJ that will probably start coming to the forefront more.
In his May 12 Executive Order on Improving the Nation’s Cybersecurity, President Biden said that incremental improvements will not give us the security we need. He went on to call prevention, detection, assessment and remediation of cyber incidents a top priority and essential to national economic security. What trends are you seeing in cybercrime and cybersecurity, and what do you see looming on the cyber horizon?
Sinfelt: On July 19, the White House issued a press release stating that along with the European Union and our NATO allies, the United States has been working collectively to increase information sharing regarding cyber threats, and it also unsealed criminal charges against four hackers that were related to China. So there is going to be an increased focus on the private sector and government collaboration for reporting purposes, but also international collaboration on cyber incidents, as hackers become a more serious threat here and overseas. These hackers are working at a fast pace, and there’s a surge in hacking that calls for cooperation among private corporations, government entities and international bodies in order to keep up with and get ahead of what’s happening.
Matsoukas: What we’re seeing now is an increase in the sophistication of things like phishing schemes. We hear from clients who are savvy and who do receive training on this, and yet they still have employees who get targeted by someone who’s posing as a vendor or a bank that the person typically deals with, from an email address that looks familiar. These intricate phishing schemes are sometimes difficult to detect in time to stop the money from leaving the country.
A trend that I expect to see is more and more sophistication on that front. And unfortunately so far, education and training efforts to counteract it are just not keeping up with the efforts of these criminals. We are
We have been encouraging our clients to look at their compliance programs related to all of their anti-money laundering programs.
–Meena Sinfelt
advising our clients that this is an area where they really need to focus and invest in additional education efforts.
The president’s anticorruption agenda signals that all enforcement mechanisms will be deployed. Discuss the relative importance of addressing three key areas: illicit financing, accountability for corrupt actors, and interagency and international cooperation.
Matsoukas: With respect to our existing government enforcement operations, I think those three areas are all being addressed. We have seen a great deal of attention, really since 9/11, on illicit financing sources from abroad. We’ve seen an increase in accountability for corrupt actors in the way that FCPA enforcement in our country has been elevated and escalated. More resources have been devoted to it. You’ve seen things like the Yates memo, which talks about individual culpability for corrupt actors. We’re also seeing more interagency and international cooperation.
Some of it is going to be hard. Many of these issues are tied up in the U.S.’s relations with China and Russia. That’s often where we see reports that bad actors come from. That’s where much of the illicit money and cybercrime come from.
Sinfelt: The Biden administration, I believe, is looking at how effective illicit actors have become globally because they are working cooperatively with other illicit actors around the world. What we see on the white-collar defense side is that when bad actors work together, they’re very effective. But if you follow the money, the illicit financing, you’re going to find the bad actors. So this administration may need to find additional support resources (perhaps support from the private sector), but then also build upon international cooperation and hold the bad actors accountable.
If they do use this triple-threat strategy, they will be very effective in protecting national security, which is the goal. The way that private corporations fit into this is what we’re looking at now, and how it affects their businesses. Again, it is still the initial 200-day review of what this is going to look like and how it’s going to affect our clients, so we’re going to keep on top of that. But none of us think it’s going to be status quo. And we’re watching the FCPA and the financial statutes to see how it all goes. It’s going to be an interesting time, for sure.
Meena Sinfelt is a partner with Barnes & Thornburg. She advises clients involved in government investigations by the Department of Justice (DOJ), Department of State, Department of Treasury, Congressional inquiries, the Inspector General for various federal agencies, qui tam actions, FCPA matters, and tort and contract disputes. Reach her at meena.sinfelt@btlaw.com. Kathleen Matsoukas is a partner with Barnes & Thornburg. As cochair of the firm’s White Collar, Compliance and Investigations practice and lead of the White Collar and Investigations group, she focuses on internal investigations as well as assisting corporations and individuals under investigation by government agencies, including the DOJ and the SEC. Reach her at kathleen. matsoukas@btlaw.com.
