Subject to Inquiry

Subject to Inquiry


Government Investigations and White Collar Litigation Group
Enforcement and Prosecution Policy and Trends


binarydataBy letter to House Speaker Paul Ryan on April 28, 2016, the Supreme Court adopted two significant amendments to Rule 41 of the Federal Rules of Criminal Procedure–the rule governing search and seizure.  The amendments, if enacted, expand a federal magistrate’s jurisdiction to issue warrants for remote search and seizure of electronic records located outside of the judge’s district.  Unless Congress acts before December 1, the amendments will take effect.

Let’s start with the current rule.  Rule 41(b) defines a judge’s authority to issue a warrant, and generally limits that authority to search and seize persons or property located within the magistrate’s district.  Out-of-district searches are limited to certain enumerated events.  For example, when the property is located in the magistrate’s district but moves before the warrant is executed.   Likewise, a tracking device installed in the district may track movement outside of the district.  Another exception exists in terrorism investigations and where activities related to terrorism occurred within the magistrate’s district but evidence resides outside.

Under the current rule, federal prosecutors must seek a warrant to search and seize electronic information in the district where the data resides.  In this era of Silk Road, Tor, advanced encryption and ever-changing technology, however, identifying the location of electronic information is a challenge.  In response to these challenges, the Department of Justice (DOJ) has lobbied for two additional exceptions for out-of-district searches and seizures, both concerning electronic records.  The amendments, if enacted, would authorize a judge to issue a search and seizure warrant for electronic data inside or outside of the district where either:

  1. technology is used to conceal the location of the media to be searched; or
  1. in a computer fraud investigation, the media to be searched include protected computers that have been damaged and are located in five or more districts.

Critics say the amendments are tantamount to law enforcement hacking, and greatly expand the government’s substantive, not procedural, authority under Rule 41.  For example, a judge in Virginia could authorize federal agents to search a computer located in California, or even Thailand for that matter, so long as the location of the computer is unknown.  The potential for international application may also conflict with current diplomatic arrangements, including existing Mutual Legal Assistance Treaties between the U.S. and foreign nations.

The amendments, critics also suggest, could impact anyone using routine and legitimate privacy tools to protect their electronic data.  For example, many businesses use Virtual Private Networks (VPNs) to connect remote offices or to allow employees to remotely access the corporate intranet.  The use of VPNs, which also increase privacy and security, has been cautioned as an example of technological “concealment” arguably suggested by the proposed changes.

In response to strong opposition – including from the world’s largest technology companies – the DOJ counters that the amendments don’t create a new right to search or otherwise alter existing statutory or constitutional requirements.  Rather, the amendments address only permissible venue.  This is a critical distinction as the amendment process utilized by the Judicial Conference Advisory Committee on Criminal Rules is reserved for rules of practice and procedure.  Substantive changes, on the other hand, are the purview of congressional lawmaking.

The technologies central to this issue are undoubtedly complex, and the potential implications of the amendments are not fully realized.  It is evident, however, that the amendments may not pass quietly.  At least one member of Congress, Sen. Ron Wyden (D-Oregon), has called for Congress to reject the changes.  Whether Congress heeds the call and requires further debate remains to be seen.

Compliance, Financial Institution Regulation

CFPB Announces Plan to Promulgate Key Mortgage Disclosure Rule

Mortgage Loan Agreement

Consumer Financial Protection Bureau (CFPB) Director Richard Cordray recently informed several banking and other industry groups that the Bureau plans to introduce a proposed rule to address concerns related to CFPB mortgage disclosure requirements.

In an April 21, 2016 letter to several key industry groups, Cordray stated that the CFPB received feedback on the Know Before You Owe rule and began drafting a notice of proposed rulemaking.  The Know Before You Owe rule is designed to help consumers understand their loan options, shop for the mortgage that is best for them, and avoid costly surprises during closing.  The program combines four disclosure forms under the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) into two new forms – the Loan Estimate and the Closing Disclosure – and requires that consumers have three days to review the Closing Disclosure before closing on a mortgage.  Such changes are designed to avoid overlapping and inconsistent information under the requirements of TILA and RESPA, which tend to confuse consumers and burden lenders and settlement agents.  The changes were proposed as part of a wider program by the CFPB to restore “confidence and common sense” to the U.S. mortgage market, according to Bureau officials.

The CFPB hopes to release the proposal in July, and is meeting regularly to determine how best to implement the rule.  Because the rule applies to a significant number of financial institutions and lenders, the CFPB desires a smooth transition for those affected, and has asked for continued feedback from the financial services industry to make that a reality.

The Mortgage Bankers Association praised Cordray’s letter, stating that “the approach laid out should provide a swift path to issuing a final rule that will give lenders, the secondary market and consumers the clarity and consistency of disclosures the market needs.”  The American Bankers Association echoed this sentiment, as Chairman and CEO Rob Nichols stated that “we are particularly pleased that the notice of proposed rule-making is on a fast track, which will accelerate and strengthen strong compliance regimes.”  Nichols further stated that “many of the elements in the industry identified for clarification or amendment were developed in ABA’s compliance working group meeting, and we look forward to the opportunity to continue sharing banker feedback with the CFPB.”

Anti-Bribery and Corruption, Anti-Money Laundering, Compliance

The Anti-Corruption Summit – UK plans for further corporate criminal offences, and a host of other proposals

The UK’s Prime Minster David Cameron has just hosted the  “Anti-Corruption Summit”, a first of its kind, bringing together world leaders, business, and civil society with the goal of seeking to agree on a package of steps to:

  1. Expose corruption so there is nowhere to hide
  2. Punish the perpetrator and support those affected by corruption
  3. Drive out the culture of corruption wherever it exists

To coincide with, and resulting from the Summit, there were a number of announcements.

Significantly, the UK Government has revealed plans to consult on extending corporate criminal liability to hold companies criminally liable for failing to prevent economic crimes, such as fraud and money laundering.  This would add to the current corporate offence of failing to prevent bribery (contained in the UK’s Bribery Act), and the corporate offence of failing to prevent tax evasion, which is presently being consulted on and is likely to be brought into effect.  This revives plans that had been shelved by the Government last year.  Undoubtedly the glaring focus that the Panama Papers has brought onto the UK and Crown dependencies has got much to do with the shift in political will.

The creation of a Global Forum for Asset Recovery was announced, which will bring together governments and enforcement agencies to facilitate international efforts to recover assets.  The first Forum, to be held next year in the US, and co-hosted by the UK, will focus on discussions around returning assets to Nigeria, Ukraine, Sri Lanka, and Tunisia.

Six countries (including the UK) have committed to establishing public registers of company ownership while six more will explore doing so, and a total of thirty-one countries (including the UK) have committed to sharing information on company ownership with one another.

Eight countries (including the UK) will partner on a world-first International Anti-Corruption Coordination Centre, which will be hosted in London and run alongside the UK’s National Crime Agency and Interpol, and seek to help law enforcement agencies and prosecutors work together across borders

The UK Government published an open Government National Action Plan 2016-18 that focuses on accomplishing the UK’s ambitious aim of becoming the “most transparent government in history”.  Some of the highlights being plans to:

  • Establish a public registrar of company beneficial ownership information for foreign companies who already own or buy property in the UK, or who bid on UK central government contracts. From 30 June 2016, UK companies will have to start providing “People with Significant Control” information to the UK’s Companies House public register.
  • Enhance company disclosure regarding payments to governments for the sale of oil, gas, and minerals.
  • Develop, and publish a new Anti-Corruption Strategy that will be consulted on from May to November of this year. The last such plan was published in the UK in December 2014.
Compliance, Financial Institution Regulation

CFPB’s Proposal Marks Government’s Latest − and Largest − Step Regulating Arbitration Clauses

Government-Regulatory-and-Criminal-Investigations.jpgLast week at a field hearing in Albuquerque, New Mexico, the Consumer Financial Protection Bureau (CFPB) announced a proposed rule that would prohibit providers of certain consumer financial products and services from including arbitration provisions in consumer contracts that bar the consumer from filing or participating in a class action with respect to the product or service.  The announcement comes as no surprise − as we previously reported here, here, and here, the Bureau has forecast for more than a year its intentions to engage in rulemaking that would prohibit such clauses.

The proposed rule bans only the use of arbitration provisions precluding class actions; companies may still mandate arbitration for consumers pursuing claims individually.  For most providers that continue to use arbitration clauses, the proposed rule further requires that providers include the following language highlighting the right to pursue or join a class action: “We agree that neither we nor anyone else will use this agreement to stop you from being part of a class action case in court.  You may file a class action in court or you may be a member of a class action even if you do not file it.”  The proposed rule would also require providers using arbitration clauses to submit to the Bureau certain records from arbitration proceedings, including records relating to claims, counterclaims, the arbitration agreement and any judgment or award.

The proposed rule would apply to providers of a wide range of financial products and services, including those involved in consumer credit, debt relief and foreclosure assistance, consumer debt collection, credit reporting, checking and deposit accounts, prepaid cards, money transfer services, certain auto and auto-title loans, payday and installment loans, and student loans.  The rule would not apply to federal and state governments and their affiliates and smaller companies that provide similar products and services to fewer than 25 consumers in consecutive years.

The Bureau’s proposed rule marks the next − and perhaps largest − step in the trend of government regulation and restriction of arbitration clauses.  As we reported last week, Senators Franken and Blumenthal recently urged the Federal Communications Commission to adopt a similar ban in telecommunications contracts.  In March, the Department of Education released a proposal to prohibit schools that receive federal funding from using such clauses.  The Centers for Medicare & Medicaid Services is also considering similar restrictions in long-term care facility contracts.  Federal law already bars the use of mandatory arbitration agreements in certain transactions involving military service members, including payday loans and auto-title loans.  And, in 2013, the CFPB’s amendment to The Truth in Lending Act that banned mandatory arbitration provisions in certain mortgage loans took effect.

In remarks accompanying the announcement, Director Cordray criticized the use of mandatory arbitration in consumer contracts, stating that such clauses “leave consumers with no choice but to seek relief on their own − usually over small amounts.”  Director Cordray also cited the CFPB’s 2015 study of mandatory arbitration clauses, which he said found that class actions recover “hundreds of millions of dollars in relief to millions of consumers each year.”

The business community’s response to the CFPB’s proposal has been swift and acerbic.  Both the U.S. Chamber of Commerce and the American Bankers Association (ABA) decried the proposal as a boon to plaintiffs’ lawyers.  The U.S. Chamber of Commerce called the proposal “the biggest gift to plaintiffs’ lawyers in a half century.”  The ABA echoed that sentiment in expressing its hope that the CFPB would reverse course following the comment period and stick to its core mission “that puts consumers − not class action lawyers − first.”

These bodies also noted the inconsistency between the CFPB’s proposal and its 2015 study that touted the benefits of arbitration.  For example, the Consumer Bankers Association commented that, according to the CFPB’s study, a consumer recovers on average $5,389 through arbitration compared to $32.35 when participating in a class action.  The U.S. Chamber of Commerce fears that the CFPB’s proposal jeopardizes the future of consumer arbitrations, thereby depriving consumers of a quick and efficient way to resolve disputes.  Whether that fear proves true, the ABA noted that the proliferation of class actions will drive up companies’ costs, which will mean increased costs to consumers.  We expect the sentiments of the U.S. Chamber of Commerce and ABA will be repeated time and again and fleshed out during the comment period.

Comments to the proposed rule must be in writing and received by the CFPB within 90 days after the proposed rule is published in the Federal Register.  Comments can be submitted by email, over the Internet, or by mail or courier.  The 90-day comment period and the CFPB’s proposal that a final rule take effect 30 days after its publication in the Federal Register mean that a final rule is not expected to take effect until the middle of next year at the earliest.  Any final rule would only apply to agreements entered into more than 180 days after the rule’s effective date.


Energy Enforcement

FERC Market Manipulation Case Still Alive After Ruling in Silkman and Lincoln Paper Case

For the istock power transmitter past several years, FERC has been investigating several energy industry participants under several theories of market manipulation, discussed previously here.  Gradually, these cases have moved from administrative proceedings to U.S. district courts, which have resulted in a small handful of written opinions, none of which have fully settled the substantive questions of what qualifies as market manipulation under the Federal Power Act or what level of deference a district court is to afford a FERC civil penalty assessment upon the statutorily provided de novo review.

The recent opinion issued in FERC v. Silkman, Civ. No. 13-13054-DPW, and the related matter, FERC v. Lincoln Paper and Tissue, LLC, Civ. No. 13-13056-DPW (together “Lincoln Paper”), where FERC accused the defendants of violating the anti-manipulation rule, has not resolved these open questions either – despite FERC’s arguments to the contrary.

In Lincoln Paper, FERC found that Lincoln Paper, with Silkman’s assistance, had fraudulently set the baseline value of Lincoln Paper’s consumption to increase the credits it would receive for participating in New England’s Day-Ahead Load Response Program (“DALRP”), which essentially paid consumers for their commitment to reduce their power consumption relative to a predetermined baseline level during peak demand times.  Rather than proceed to a hearing before an administrative law judge, both Lincoln Paper and Silkman elected to receive an immediate penalty assessment, as provided for under the Federal Power Act § 31(d).[1]  FERC issued an Order Assessing Civil Penalties, and both defendants refused to pay, which prompted FERC to sue in U.S. district court to enforce its civil penalty assessment.

Silkman and Lincoln Paper moved to dismiss, putting forward several arguments, including: that the enforcement of FERC’s penalty was barred by the five-year statute of limitations provided by 28 U.S.C. § 2462; that FERC did not have jurisdiction over programs such as the DALRP; that FERC failed to provide fair and adequate notice that the defendant’s alleged conduct was unlawful, such that the Anti-Market Manipulation rule is void for vagueness; and that Mr. Silkman is not an “entity” under the Federal Power Act.  FERC countered that the defendants had waived certain of these arguments as they failed to raise them during the administrative proceeding.

The court rejected the defendants’ arguments, ruling for FERC on all substantive matters based on the liberal pleading standards that require the court to credit the allegations of the plaintiff.  The court held that an argument not raised during the administrative proceedings could theoretically be waived but that the defendants had not done so.  However, the court ruled that the five-year statute of limitations had not begun to run against FERC until it filed the suit to enforce its civil penalty.  The court held that FERC did have jurisdiction over the DALRP program, that the defendants were on fair notice of the conduct it deemed unlawful, and that the term “entity” has already been interpreted by other courts to include a natural person such as Mr. Silkman.

In reaching these rulings, the court commented that “the court’s de novo review may gain some procedural richness in the context of an action seeking enforcement of an administrative order,” such as “the evaluation of evidence that was not a part of the agency administrative record.”[2]  The court went on to comment that the potential for added procedural richness does not alter the “fundamental nature” of the role of the district court to “ ‘review’ agency action,” and also does not alter the basic rule that a theoretical argument not raised at the appropriate time could be waived.  In addition, in the course of determining when the statute of limitations period began to run against FERC, the court held that the proceeding before FERC that resulted in a civil penalty assessment was an “adjudication” for the specific purpose of the running of the limitations period.  It remains to be seen whether this holding transfers to other contexts, such as the determination of the level of additional “procedural richness” that may be provided in the course of a court’s de novo review of the civil penalty assessment.  Notably, the standard of review of the agency proceeding to be applied by the district court has been briefed in the several FERC enforcement cases currently pending in district courts around the country.[3]  These questions have not been definitively ruled upon by any court, and the Lincoln Paper decision also avoids a direct ruling on this central question.

FERC has indicated, through its subsequent actions, that it believes, or hopes, the Lincoln Paper decision supports its position in these cases that the district court’s role is limited to a mere affirmation of its civil penalty assessment.  On the day immediately following the publication of the Lincoln Paper opinion, FERC filed the court’s order as supplemental authority in the four other civil penalty enforcement actions pending around the country, explaining that the opinion addressed several issues, including the nature of the agency proceedings before FERC. Some defendants responded, arguing that the court’s holdings do not extend beyond the distinguishable facts of that particular case.  Also, it should be noted that the Lincoln Paper court transferred the case to the U.S. District Court for the District of Maine for further proceedings, raising more questions than answers as to the ultimate determination of these issues.

McGuireWoods is monitoring these issues closely as they continue to develop.

[1] For a further explanation of FERC’s investigation procedure and the penalty assessment election, see Todd Mullins and Chris McEachran, Adjudication of FERC Enforcement Cases: See You In Court?, 36 Energy L. J. 261, 264-74 (2015).

[2] See FERC v. Silkman, Civ. Nos. 13-13054-DPW, 13-13056-DPW at 25 & n.5 (D. Mass. Apr. 11, 2016).

[3] See FERC v. City Power Marketing, LLC, Civ. No. 1:15-cv-01428 (JDB) (D. D.C.); FERC v. Powhatan Energy Fund, LLC, Civ. No. 3:15-cv-0452 (E.D. Va.); FERC v. Maxim Power Corp., Civ. No. 3:15-cv-30113 (D. Mass); FERC v. Barclays Bank, PLC, Civ. No. 2:13-cv-2093-TLN-DAD (E.D. Cal.).

Immigration and Worksite Enforcement, Sanctions, Trade Embargo, and Export Controls

The Export/Immigration Dilemma: Don’t Let OSC Catch Your HR Department Unawares

On March 31, 2016, the U.S. Department of Justice’s Office of Special Counsel for Immigration-Related Unfair Employment Practices (OSC) issued a carefully worded technical assistance letter addressing the complex interplay between U.S. immigration and export control laws in the context of hiring and applicant screening. Although it provides limited new guidance, OSC’s letter is a reminder of the pitfalls companies of all sizes face in trying to navigate the overlapping requirements of these laws.

The letter and previous OSC guidance documents it cites highlight several fundamental questions and points of tension that companies often fail to recognize as raising legal and compliance risks in connection with hiring processes, including:

  • When can a company worried about its export control obligations ask about citizenship, immigration status or national origin during the application and new-hire process?
  • What can a company ask?
  • What kind of documentation can a company require to demonstrate citizenship, immigration status or national origin?
  • Is a company permitted to prescreen or otherwise not hire candidates if the company would be required to obtain an export license or other authorization in order for candidates to do the job for which they are applying?

OSC’s letter does not upend the core concepts that companies are not obligated to sponsor non-U.S. persons for work-authorized immigration status or for export licenses, and can therefore refuse to hire such persons on that basis without violating anti-discrimination laws. However, it does indicate that DOJ and other government agencies will examine such situations closely, and will scrutinize any even arguably improper conduct. As a result, the letter is an important reminder that employers should implement and periodically revisit thoughtful, carefully crafted plans and structures for dealing with their screening and hiring of non-U.S. persons in order to avoid inadvertent violations and anticipate close government review.

The Regulatory Landscape – Immigration and Export Control Overlap

OSC’s guidance sits at the intersection of several legal regimes and hiring processes. First, the anti-discrimination provision of the Immigration and Nationality Act (INA, codified at 8 U.S.C. § 1324b) − which is enforced by OSC − prohibits, among other things: (1) national origin, citizenship or immigration status discrimination in hiring, firing, or recruiting or referral for a fee, and (2) unfair documentary practices (commonly known as “document abuse”) during employment eligibility verification via either the Form I-9 or E-Verify process. The risk of violation can arise whenever questions about citizenship, immigration status or national origin are raised during new-hire processes.

However, U.S. export control laws and regulations − including the International Traffic in Arms Regulations (ITAR) administered by the U.S. Department of State, the Export Administration Regulations (EAR) administered by the U.S. Department of Commerce, and the Part 810 controls administered by the U.S. Department of Energy − place restrictions on the sharing of certain technology, technical data or other information with non-U.S. persons, even if those persons are employees of a U.S. company. Companies hiring non-U.S. persons (i.e., persons other than U.S. citizens and nationals, lawful permanent residents and certain refugees and asylees) may be required to obtain “deemed export” licenses or other authorizations from one or more federal agencies if non-U.S. employees or contractors will be provided access to controlled information. This makes it imperative that employers have information about citizenship, immigration status or national origin as early in the hiring process as possible.

The issue is even more acute for employers who sponsor non-U.S. employees for visas pursuant to USCIS Form I-129, which requires the employer to complete the following certification:

With respect to the technology or technical data the petitioner will release or otherwise provide access to the beneficiary, the petitioner certifies that it has reviewed the Export Administration Regulations (EAR) and the International Traffic in Arms Regulations (ITAR) and has determined that:

1.   A license is not required from either the U.S. Department of Commerce or the U.S. Department of State to release such technology or technical data to the foreign person; or

2.   A license is required from the U.S. Department of Commerce and/or the U.S. Department of State to release such technology or technical data to the beneficiary and the petitioner will prevent access to the controlled technology or technical data by the beneficiary until and unless the petitioner has received the required license or other authorization to release it to the beneficiary.

Depending on which export control regime applies to the information to which a new hire might have access, the level of applicable controls and the corresponding need for licenses can vary dramatically. In some cases, a candidate from one country may be able to access all of the controlled information applicable to a job with no need for a license, while a candidate from another country would be able to access almost none of the same controlled information without a license. Because this variable level of control is dependent on nationality, it is vital that a company executing this certification have complete and well-verified supporting information.

Unpacking the OSC Letter

Unfortunately, OSC’s new letter does not resolve the inherent tension between avoiding discrimination based on citizenship, immigration status and national origin in hiring and firing decisions, and obtaining clear and confirmed information about citizenship, immigration status and national origin in order to ensure compliance with export control requirements. However, its careful parsing of the issue does underscore a handful of guiding principles:

  • Asking for information about citizenship, immigration status or national origin during the hiring process must be carefully managed because it is and will continue to be a potential third rail.

If you know that you are hiring for some positions that will not implicate export controls, or you are unsure whether a position might implicate export controls, asking applicants about their citizenship, immigration status or national origin prior to their being hired puts you at risk of violating − or at least being accused of violating − the anti-discrimination provisions of the INA. Even if you do know that a position will be subject to export controls, OSC warns that asking for information on citizenship, immigration status or national origin could raise anti-discrimination concerns. Accordingly, any hiring system that is anything other than blind to citizenship, immigration status and national origin must be designed, implemented and overseen with OSC’s guidance in mind.

To date, OSC has endorsed only two questions as safe to ask of applicants in this context:

1. Are you legally authorized to work in the U.S.?

2. Will you now or in the future require sponsorship for employment visa status (e.g., H-1B status)?

OSC does not object to asking applicants about their citizenship, immigration status or national origin if needed to comply with export controls or other federal law, but questions must be narrowly tailored to meet that purpose. This includes asking only if the position at issue is known to implicate those legal restrictions. Thus, companies asking for such information at the pre-hire stage must be careful about when and how they do so, as even the slightest appearance of selective or discriminatory hiring can generate complaints and OSC scrutiny.

  • Employers are not obligated to hire non-U.S. persons requiring export licenses in order to perform their job, but this is a narrow and disfavored exception.

If a company knows that it would be required to apply for an export license in order to hire a non-U.S. person into a particular position, it may choose not to hire that candidate. Because such a decision is based on the licensing requirement and not that person’s citizenship, immigration status or national origin, it would not be considered improper discrimination under the INA. However, companies making such hiring decisions must be cautious not to apply this exception: (1) in a potentially discriminatory fashion (e.g., not hiring candidates from certain countries but hiring them from others, even though the licensing requirements for the countries would be similar); (2) prospectively (e.g., not hiring a non-U.S. candidate for a position that does not require a license, because the next position in his or her progression through the company would); or (3) based on assumption (i.e., because a license might be required at some point in the future, versus knowing that a license will be required for the position into which the candidate would be hired).

(As a related reminder, employers also have no general obligation to sponsor a non-U.S. person for a green card, work visa or other work-authorized immigration status, but similarly must make the decision, for or against sponsorship, in a non-discriminatory manner − e.g., not based on gender or national origin.)

The careful wording of OSC’s letter is a strong signal that it disfavors companies choosing not to hire non-U.S. candidates due to export licensing requirements, and will apply close scrutiny to companies that do so if it ever investigates their hiring practices. However, that is a business decision many companies make for a variety of very good reasons, including the costs and challenges that come with applying for and managing compliance with export licenses. Companies making that decision need to conduct thoughtful, well-documented analysis of whether particular positions implicate export control considerations, before refusing to hire non-U.S. candidates on that basis.

  • You must keep employment eligibility processes separate from export compliance processes.

If a company does not maintain adequate delineation between the process for confirming employment eligibility (completion of Form I-9 or E-Verify), and the process for determining citizenship, immigration status or national origin in order to comply with export control laws, it is at risk of committing document abuse. These two processes need to be separate and distinct, and not be or appear to be integrated.

McGuireWoods’ Strategic Risk & Compliance team regularly counsels clients in connection with export control and immigration/worksite enforcement matters, drawing on resources from the firm’s Labor & Employment, Government Investigations & White Collar Litigation, and other departments. Please contact us for more information about the issues raised by the OSC letter, or any other compliance or risk management needs.

Compliance, Financial Institution Regulation

Marketplace Lenders May Be Supervised by CFPB in 2017

ThMoneye Consumer Financial Protection Bureau (CFPB) plans to begin supervising online “peer-to-peer” or “platform” lenders as soon as late 2017, according to the Wall Street Journal.

The Journal reported that this oversight is part of the agency’s previously announced intent to monitor the largest lenders offering small-dollar loans and lenders that offer loans secured by vehicle titles.  The CFPB could expand its proposed coverage by broadening the definition of “installment” lending, the report said.

In early March, the CFPB began accepting consumer complaints regarding online marketplace lenders.  It also released a consumer bulletin with tips and advice regarding online borrowing.

When it released the bulletin, the CFPB noted that millions of American consumers are receiving personal loans from online lenders.  Such lending allows borrowers to obtain loans from investors with a lending platform conducting the administrative tasks of underwriting and interacting with the borrower.

The CFPB’s bulletin emphasizes that, like “traditional” lenders such as banks, marketplace lenders are required to comply with federal and state laws, including those enforced by the CFPB and the Federal Trade Commission.  The addition of CFPB supervision authority would give the agency authority to review the data and operations of a marketplace lender without pursuing an enforcement action.


Compliance, Financial Institution Regulation

Senators Take Steps to Ban Arbitration Clauses in Telecommunications Contracts

Government-Regulatory-and-Criminal-Investigations.jpgOn Thursday, April 28, 2016, Senators Al Franken (D-Minn.) and Richard Blumenthal (D-Conn.) proposed legislation that would ban arbitration clauses in telecommunication service contracts. The proposed bill, the Justice for Telecommunications Consumers Act of 2016, would invalidate “any agreement to arbitrate a dispute that has not yet arisen at the time of the making of [an] agreement” for mobile phone service, internet services, multichannel programming services, and other telecommunications services offered by a common carrier.

According to Sen. Franken, a longtime opponent of mandatory arbitration provisions, “[f]orced arbitration clauses are often buried in the fine print of agreements we sign each and every day–like cable, Internet, and cell phone contracts–and they strip away rights from the American consumer.”  Sen. Franken claimed in a press release that the proposed bill would “reopen the courtroom doors to Americans who have been wronged by giant corporations.”

In addition to the proposed legislation, fourteen senators—led by Senators Franken and Blumenthal—sent an open letter to FCC Chairman Tom Wheeler urging the FCC “to consider the impact of forced arbitration clauses in telecommunications contracts and to use any available tools to secure access to justice for American consumers.” According to the letter, telecommunications customers regularly complain about deceptive advertising and unauthorized fees, but are precluded from seeking relief because of arbitration agreements that frequently include class action waivers. Citing to data from a 2015 New York Times article, the Senators claimed the number of filed consumer arbitration demands is “grossly disproportionate” to the amount of claims that would be brought if consumers had access to the courtroom.

In the letter, the Senators went on to applaud the on-going efforts of other agencies, including the Consumer Financial Protection Bureau (CFPB), to address “the injustice resulting from mandatory arbitration clauses” and invited the FCC to take further action on the issue.

The proposed legislation and letter to the FCC mark the latest steps in a series of actions taken by law makers and agencies to eliminate or limit the use of arbitration agreements. As previously reported, the CFPB is currently considering banning some arbitration agreements that block consumer participation in class action lawsuits in financial services contracts. The CFPB is hosting a field hearing on arbitration in Albuquerque, New Mexico today May 5, 2016 and issued a Notice of Proposed Rulemaking seeking to ban mandatory arbitration clauses in a variety of consumer financial services contracts. The Senators’ actions on April 28th may cause the FCC to consider a similar rulemaking.

Compliance, Immigration and Worksite Enforcement

Buyer Beware: Noncompliant Electronic I-9 Software Risks Customer Company Fines

ImmigrationElectronic I-9 software can be very attractive to companies looking for efficiency and ensuring compliance. Not to mention the elimination of file drawers that once housed these voluminous paper I-9 files. However, buyers beware, not all electronic I-9 software meets the federal regulations’ requirements. And the problem for well-meaning companies: ICE will still hold the company liable for the faults of the software vendor if its technology fails to comply.

Electronic I-9 usage is a growing practice among companies both large and small. The products offered in this area come in many different forms, from stand-alone Form I-9 and E-Verify platforms, to add-ons for existing HRIS software. But not all products are created equal. While some have been developed with great care to attempt compliance with the Department of Homeland Security’s (“DHS”) regulations and guidance for electronic I-9s, others appear to have been created by software engineers with no awareness of the compliance pitfalls inherent to the Form I-9.

For example, some programs insert into the electronic I-9 additional fields requesting information that is not on the approved Form I-9. This violates the regulations, because electronic I-9s must have the same data elements and content as the paper Form I-9, and no additional elements or language may be inserted. Others require an employee to input his or her social security number, which is generally only required if a company uses E-Verify. And a review of the audit trails produced by various systems reveals a broad disparity in the volume of information captured, despite the regulations’ requirement for a record of the identity and actions of anyone who has accessed the system during a given period of time.

U.S. Immigration and Customs Enforcement (“ICE”) scrutinizes these systems to ensure the integrity of the I-9 process. One item ICE frequently inspects in an audit is the employee signature process. The electronic signature regulations have strict requirements on this issue. If the electronic I-9 platform fails to meet these requirements, even if the I-9 is otherwise fully completed, the company “is deemed to have not properly completed the Form I-9.” See 8 C.F.R. § 274a.2(i)(2). This means ICE will find a company to have committed a substantive violation for any employee whose I-9 was completed in the noncompliant system, which can result in significant penalties of $935 per violation under ICE’s penalty matrix. By way of example, for a relatively small company with 200 employees, this would total a $187,000 fine.

ICE has made clear that it is an employer’s responsibility to ensure its electronic I-9 system is compliant with the law. While it may not be fair, even if the error is the vendor’s fault, the employer is the party subject to the regulations and any fines for noncompliance. Therefore, companies paying for an electronic I-9 system should employ the following measures to protect their financial and reputational interests:

  • Involve experienced immigration counsel in evaluating and selecting a compliant electronic I-9 system;
  • Beware of inexpensive software add-ons, and closely scrutinize these systems for compliance;
  • Ensure your company’s contract with an electronic I-9 vendor has a favorable indemnification clause for any fines or litigation that result from the product’s failure to conform to the electronic I-9 regulations;
  • Obtain information regarding the vendor’s financial health to ensure the indemnification clause can be enforced and collected on if it becomes necessary; and
  • Periodically review your electronic I-9 system for compliance with the regulations and developing agency guidance in this area.

Electronic I-9s can be an excellent tool to streamline the process and potentially save costs. However, companies must invest the time and resources to ensure the product they use complies with the electronic I-9 regulations, or face paying for a product that may lead to fines in the future.

Compliance, Financial Institution Regulation

Oral Arguments in PHH Case Signal Trouble for CFPB

87790287.jpgThe D.C. Circuit held oral arguments on April 12, 2016 in the case PHH Corp v. Consumer Financial Protection Bureau (CFPB), a case challenging the CFPB’s constitutionality as well as its interpretations of the Real Estate Procedures Settlement Act (RESPA), including its view that no statute of limitations applies to RESPA violations challenged by the Bureau in an administrative proceeding.   As we noted previously, CFPB Director Richard Cordray, in the Bureau’s first appellate decision, imposed a $109 million penalty on PHH for alleged RESPA violations involving improper kickbacks related to mortgage reinsurance where agreements were in place with lenders, a dramatic increase over the $6 million penalty that had been imposed by the administrative law judge at the trial level.

Several aspects of yesterday’s oral arguments signal trouble for the CFPB:

  • First, the D.C. Circuit seemed deeply concerned by the CFPB’s single-director structure.  Unlike other federal agencies governed by nonpartisan or bipartisan commissions or by a director who serves at the pleasure of the President, the CFPB is headed by a single director who is removable only “for cause.”  Moreover, the Bureau receives funding outside of Congressional appropriations, further insulating it from any effective executive or legislative supervisions.  As Judge Brett Kavanaugh pointedly observed, this arrangement concentrates huge amounts of power in one person with little oversight.  Signaling that an unconstitutional finding could be on the horizon, Judge Kavanaugh questioned to what the remedy should be if the court determined that this structure was unconstitutional.  The Bureau argued that any defect could be remedied simply by invalidating Dodd-Frank’s “for cause” requirement, such that the director would serve at the pleasure of the President.  Counsel for PHH urged the court not only to find the Bureau’s structure unconstitutional, but also to rule upon the merits of the challenge and vacate Director Cordray’s decision in the case.
  • Second, the court also seemed troubled by the Bureau’s interpretations of RESPA.  PHH has argued that it, as well as the mortgage industry as a whole, had relied upon pre-CFPB interpretations of RESPA section 8(c) by the Department of Housing and Urban Development (HUD), which it contends permitted the arrangements challenged by the Bureau in this case.  According to PHH, the CFPB turned the tables on it after the Bureau began enforcing RESPA in 2011 – and in particular with the Director’s decision in the PHH case – in a way that was unfair and violated due process.  Appearing sympathetic to this argument, Judge Kavanaugh questioned whether the CFPB gave fair notice of its interpretation, and alluded to the widespread understanding in the industry that such arrangements were legal under the prior HUD guidance.  In a colorful comment, Judge Kavanaugh analogized the CFPB’s sanction of PHH to a police officer saying “you may cross the street here,” but then giving you a $1000 ticket when you get to the other side.
  • Third, the court seemed skeptical of the Bureau’s position that no statute of limitations applies to RESPA violations challenged by the Bureau in administrative proceedings.  According to the CFPB, the statute of limitations related to RESPA does not apply to agency actions or decisions, but only applies to court or judicial proceedings.  Judge Randolph expressed skepticism with this argument, observing that in cases dating back to the 1800s, the court has said it would be an “abomination to have a federal official not bound by a statute be allowed to bring an action decades after the event.”

Although a written decision by the panel is expected this summer, it is highly likely that the disappointed party will seek review by the full D.C. Circuit, and perhaps eventually by the Supreme Court.