In recent years, the U.S. government has vigorously pursued financial institutions that knowingly violated sanctions targeting rogue regimes.  Since January 2009, the Department of Justice and the Treasury’s Office of Foreign Assets Controls (“OFAC”) have brought a series of actions against European banks for violating U.S. financial sanctions.  Four banks have paid criminal penalties totaling over 1.6 billion dollars after acknowledging moving money through the U.S. from sanctioned countries.  The U.S. is now imposing tough new sanctions against businesses that aid Iran.  In light of the seriousness of the Iranian threat, one can expect that any business that ignores the sanctions will be subject to harsh treatment by the government’s enforcement agencies.

 On July 1, 2010, President Obama signed into law H.R. 2194, the “Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010” (“CISADA” or “the Act”).    CISADA follows and builds upon the recently-passed United Nations Security Council Resolution 1929, which imposed sanctions upon Iran for its ongoing illicit nuclear activities.  CISADA amends the Iran Sanctions Act and strengthens the sanctions regulations targeting Iran that are administered by OFAC.

 While U.S. companies have been prohibited from providing goods or services to Iran for some time, recently there has been increased attention focused on foreign companies, including overseas subsidiaries of U.S. companies, with substantial business ties to Iran’s energy sector.  The revenue from energy exports drives Iran’s economy and its ability to fund its nuclear program.  Deterring investments in Iran’s energy sector is therefore considered an important part of U.S. efforts to prevent Iran from acquiring nuclear weapons. 

Legislation passed in 1996 authorized the President to impose sanctions on any foreign entity that invested $20 million or more in Iran’s energy sector, but no Administration has used the power.  CISADA ratchets up the pressure on those doing business in Iran in several ways.  First, the Act now requires the imposition of sanctions and broadens the categories of transactions that trigger sanctions, focusing on companies that sell refined petroleum to Iran or assist Iran in developing its own domestic refining capacity.  While the President continues to have the power to waive the imposition of sanctions on foreign companies, there must be a determination that the waiver is “necessary to the U.S. national interest,” a higher standard than previously existed.  The Act also includes a waiver mechanism that the President may use to avoid sanctioning an overseas business if the government with primary jurisdiction over the business is “closely cooperating” with the United States in its efforts against Iran.

In response to the attention focused on foreign companies with substantial business ties to Iran, a number of state and local governments, universities, and pension and mutual funds have decided to divest from companies with significant operations in Iran.   The Act provides a legal framework by which state and local governments and certain other investors can carry out divestment.  Among other things, the Act recognizes the authority of state and local governments to divest from companies involved in investments of $20 million or more in Iran’s energy sector and sets standards for them to do so.  The Act also provides a safe harbor for changes of investment policies by private asset managers, and it expresses the sense of Congress that divestments do not constitute a breach of fiduciary duties under ERISA.

In addition to targeting the Iranian energy sector, the Act imposes significant new obligations and restrictions on financial institutions.  Pursuant to the Act, the Treasury Department has now issued regulations that prohibit, or impose strict conditions on, the opening or maintenance in the U.S. of a correspondent or payable-through account by a foreign financial institution that Treasury finds knowingly assists key Iranian banks or the Islamic Revolutionary Guard Corps (“IRGC”).  In a sign of the urgency felt within the government on all matters Iran-related, Treasury completed the regulations within half the time allotted under the Act.  They were released on August 16, 2010 and can be found here: http://edocket.access.gpo.gov/2010/2010-20238.htm.  Treasury intends to publish the names of the foreign financial institution subject to the prohibition in an appendix to the regulations.  A domestic bank that opens a prohibited account and the foreign bank that “attempts,” or “causes” the account to be opened both face substantial civil and criminal penalties. The regulations also make clear that foreign subsidiaries of U.S. financial institutions may not engage in any transaction with Specially Designated Nationals (http://www.treas.gov/offices/enforcement/ofac/sdn/) that are agents or affiliates of the IRGC. 

There is another set of regulations still to come:  Under the Act, Treasury must issue regulations that will require U.S. banks that maintain correspondent or payable-through accounts in the U.S. for foreign banks to take steps to ensure that the foreign banks are not engaging in prohibited activities through the accounts.  The Act does not set a time within which this set of regulations is to be issued, but one assumes they will be out soon.  Given the circumstances, banks subject to these regulations should pay close attention.

Recent statements from the federal government’s top anti-money laundering (AML) official make clear that the government views AML and anti-fraud as necessarily intertwined.  Banks and other financial institutions ignore this fact at their own peril.  John Byrne and Chris Swecker hit the nail on the head when they wrote earlier this year that banks should waste no time in integrating their AML and anti-fraud capabilities. 

Money laundering is, generally speaking, conduct that involves transporting, concealing, or avoiding reporting requirements in connection with the proceeds of a Specified Unlawful Activity (SUA) or property used to facilitate an SUA.  By definition, then, money laundering requires the existence of an underlying SUA, such as fraud.  So where there is fraud, there may be money laundering.  Financial institutions risk the non-detection of money laundering whenever they withhold information about potential fraud from AML analysts.  Failing to detect money laundering exposes them to further financial losses and regulatory scrutiny. 

Even where there is no known or suspected connection between a fraudulent transaction and money laundering, banks and other financial institutions still have a legal obligation to file a Suspicious Activity Report (SAR) relating to the fraud, assuming the transaction meets a minimal threshold.  The legal obligation (as well as the voluntary option) to file a SAR must be addressed in the written AML program and is subject to regulatory oversight by AML examiners.  Thus, it seems clear that financial institutions should integrate their AML and anti-fraud capabilities.

Since September 2008, when he spoke to the Florida Bankers Association, James H. Freis, Jr., Director of the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), has been extolling the virtues of understanding the intersection of AML and anti-fraud efforts and urging financial institutions to take a landscape approach toward compliance.  Director Freis has repeatedly made the point that, especially in this economic downturn where resources are scarce, corporate compliance departments can and should combine their AML and anti-fraud resources.

Recently, in a talk to the Institute of International Bankers, Director Freis stated that a robust AML program can pay for itself through the prevention and detection of fraud.  He explained that a recent study indicated that, in 2008, banks suffered $788 million in card fraud-related losses, $1 billion in check fraud-related losses, and another $100 million in ACH fraud-related losses.  Rather than accept this nearly $2 billion in annual losses as a cost of doing business, Director Freis suggested that banks would increase their detection and prevention of fraud, and therefore significantly cut their losses due to fraud, by more closely aligning their AML and anti-fraud functions.

AML and anti-fraud efforts should also be combined for purposes of taking full advantage of FinCEN’s voluntary information sharing program, which is authorized by section 314(b) of the USA PATRIOT Act of 2001.  Section 314(b) is a program in which financial institutions (and associations of financial institutions) are protected from liability when they share information with other financial institutions that may involve possible money laundering and terrorist financing.  Because money laundering requires an SUA as a predicate, FinCEN issued guidance reminding financial institutions that information may be shared under section 314(b) if financial institutions suspect that a questionable transaction may involve the proceeds of an SUA.  By sharing information under section 314(b), financial institutions can combat money laundering and terrorist financing while saving money on fraud prevention.

Financial institutions should not wait for a significant law enforcement or regulatory action to be taken before they integrate their AML and anti-fraud efforts.  Integration is a win-win proposition and now is the time to do it.

In Grant Thornton LLP v. Prospect High Income Fund, ML CBO IV (Cayman), Ltd., et al., No. 06-0975, 2010 Tex. LEXIS 478 (Tex. Jul. 2, 2010), the Texas Supreme Court rejected multiple third party claims against auditor Grant Thornton.

The claims in this case revolved around audit reports issued by Grant Thornton regarding Epic Resorts, LLC’s (“Epic”) compliance with a bond indenture agreement.  Despite allegedly discovering direct evidence to the contrary, Grant Thornton issued reports in 1999 and 2000 confirming that Epic was in compliance with an escrow requirement in the indenture agreement.  On June 15, 2001, Epic defaulted on the bonds in question by missing a scheduled interest payment and the plaintiffs, three hedge funds, forced Epic into bankruptcy.

The court divided the claims against Grant Thornton into two categories: (1) claims brought by purchasers of securities, who indicated that they would not have purchased the securities but for Grant Thornton’s alleged misrepresentations; and (2) claims brought by holders of securities, who stated that the audit reports induced them not to sell the bonds.

Third Party Claims Against Auditors Brought by Purchasers of Securities

With regard to purchaser claims, the court followed the American Law Institute’s Restatement (Second) of Torts § 522 in holding that auditors’ liability is limited to “situations in which the [auditor] is aware of the nonclient and intends the nonclient to rely on the information.”  The court determined that a hedge fund that purchased bonds after Grant Thornton issued its 1999 audit report was not part of the limited group under § 522 for whose benefit and guidance Grant Thornton intended to supply the information and was thus not within Grant Thornton’s scope of liability.

Third Party Claims Against Auditors Brought by Holders of Securities

In considering the holder claims, the court decided a matter of first impression for Texas: are third party holder claims against auditors cognizable under Texas law?  The court held that a plaintiff must show a “direct communication” between the plaintiff and the auditor in order to bring a successful third party holder claim against an auditor.  The plaintiffs in this case did not have direct communications with Grant Thornton, so the court held that the claims failed as a matter of Texas law.

With the onslaught of litigation brought by the market crash, plaintiffs are reaching out more and more to third parties who interacted with failed companies.  Auditor liability in particular has been in the headlines with some frequency recently.  It will be very important going forward for auditors to pay close attention as states continue to redefine the scope of auditor liability.  For now though, in the state of Texas, auditors can breathe a little easier, knowing that ordinary investors will find it much more difficult to successfully bring third party suits against them.

Mark W. Kinghorn contributed to this post.

For the first time in years, a Member of the House faces formal ethics charges.  While the charges against Rep. Charles Rangel have caught some by surprise, perhaps the strongest signal that they were a real possibility was the growth in Rangel's legal fees over the last two years.  Last summer, Rangel topped the million dollar mark in legal fees relating to the investigations to which he has been responding.  That total is now in the neighborhood of $2 million.

What's next for Rangel is anyone’s guess.  According to the ethics committee's July 22 statement (pdf), it has formed an adjudicatory committee to make findings of fact and to determine whether there is “clear and convincing evidence” of the violations for which Rangel is charged.  Committee rules provide that, at such a hearing, the subcommittee may take evidence and testimony as it deems necessary.  Rules also provide that these hearings are usually public. 

If Rangel wants to avoid the public spectacle of a hearing before the subcommittee, there are now really only two ways that he could do so.  First, he could reach a settlement with the committee.  Eric Lipton and David Kocieniewski have reported that last week’s charges were actually a result of settlement talks breaking down.  Those talks could resume, and settlement remains a possibility. 

Second, Rangel could leave the House.  The jurisdiction of the House Ethics committee generally does not extend to former Members.  This is why, for example, the committee could not sanction former Rep. Mark Foley after its investigation regarding his alleged improprieties with House pages.  Foley left the House before the committee concluded its investigation, and the committee acknowledged in its report that this meant it had no “disciplinary authority” over him.

There are reports that the Office of Congressional Ethics is investigating eight Representatives for holding fundraisers immediately before a key House vote on financial reform last December.  Does this mean that donors now need to be careful not to make contributions while important legislation is pending?  The latest Question of Ethics has answers.

Click here to continue reading.

On July 20, 2010, the UK Ministry of Justice announced that the recently enacted Bribery Act will take effect in April 2011.  The announcement had been anticipated by UK companies and companies doing business in the UK, all of which must comply with the new Act.  The Act received the Royal Assent on April 8, 2010, just before Parliament was dissolved prior to the May 6 General Elections.

The Bribery Act stands to revolutionize the UK’s approach to anticorruption enforcement and has the attention of lawyers, law enforcement and corporate executives throughout the world.  The new legislation replaces a patchwork of existing anticorruption laws and was introduced following years of criticism of lax enforcement and more than a decade of failed efforts to pass similar legislation.  The Bribery Act is modelled closely on the U.S. Foreign Corrupt Practices Act (FCPA), but reaches beyond the FCPA in a number of notable respects. 

In announcing the April 2011 effective date of the new law, the Ministry of Justice also announced that in September 2010 it would “launch a short consultation exercise on the guidance about procedures which commercial organisations can put in place to prevent bribery on their behalf.”  The guidance will then be published “early in the New Year to allow businesses an adequate familiarisation period before the Act commences.”  This guidance is a critical next step because proof of an adequate system to prevent bribery will be a defense to the Bribery Act’s corporate strict liability offense.

The guidance is ultimately expected to set out broad guidelines that will illustrate “good practices examples, rather than detailed and prescriptive standards.”  It is also expected that courts will take into account the size and needs of a business when assessing whether its policies and procedures are adequate to satisfy the “adequate system to prevent bribery” defense during the course of a prosecution.  Bearing in mind that it may take up to several months to implement such measures from scratch or to bring existing systems up to speed, companies subject to the Bribery Act are well-advised to act now to ensure adequate protections are in place by the time the Act takes effect.  The Bribery Act’s departures from the FCPA warrant revisiting and revising even robust anticorruption compliance programs to ensure compliance with UK law. 

In an April 2009 interview, Secretary of Homeland Security Janet Napolitano sparked a contentious debate when she said: “[W]hen we find illegal workers, yes, appropriate action [will be taken], some of which is criminal, most of which is civil, because crossing the border is not a crime per se.  It is civil.”  Critics blasted Napolitano for suggesting that crossing the border illegally was not a crime.  Confusion in this area persists.

Arizona’s new immigration law brings renewed attention to the criminalization of immigration violations.  One of the law’s provisions (pdf) requires law enforcement, when making a lawful stop, to determine an individual’s immigration status where reasonable suspicion exists that he or she is “unlawfully present” in the United States.  Several of the law’s other provisions indirectly criminalize unlawful presence in the United States.  For example, the law gives law enforcement the authority to make warrantless arrests if probable cause exists that an alien has committed a removable offense.  However, even Arizona’s law enforcement officers are confused about what actions constitute a crime.  

On July 6, 2010, the U.S. Department of Justice sued Arizona on the basis that federal law preempts Arizona’s new law and thus prevents Arizona from enforcing it.  In its complaint (pdf), the Department alleges that the Arizona law effectively criminalizes the unlawful presence of aliens “even in circumstances where the federal government has decided not to impose such penalties.”  In other words, the state’s law applies criminal sanctions for unlawful presence “despite an affirmative choice by Congress not to criminalize unlawful presence.”  As the complaint further explains, under current federal law: (1) the unlawful presence of an alien alone is not criminal—only civil remedies, like removal, come into play, unless other circumstances apply; but (2) unlawful entry into the United States is criminal. 

Indeed, federal law provides for the deportation not prosecution of aliens unlawfully present in the United States (except for those previously denied admission, excluded, deported, or removed).  See 8 U.S.C. §§ 1182(a)(6)(A)(1), 1227(a)(1), 1325(a).  Entering the United States at any time or place other than as designated by immigration officers, however, is a crime, as is eluding inspection or examination by immigration officers, or using false misrepresentation and concealment when entering the United States.  8 U.S.C. § 1325(a).  Technically then, crossing the border alone is not a crime per se, but crossing the border unlawfully is.  That means an individual who enters the United States illegally could face criminal penalties for being here while a person who enters legally but stays in the United States without authorization would face only civil penalties. 

No one said immigration law isn't confusing!

FINRA recently announced that the SEC approved its proposal to expand the amount of information about brokers and former brokers available to the public through BrokerCheck on FINRA’s website.  In addition to expanding the types of information available, information regarding former brokers will be publicly available for a longer period of time under the proposal approved by the SEC. 

FINRA’s proposal will be implemented in two phases, which are scheduled to be completed by the end of this year.  BrokerCheck will be expanded as follows:

• For currently registered brokers and those that have been terminated from employment with a broker-dealer within the preceding 10 years, BrokerCheck will disclose all customer complaints, arbitrations or litigations dating back to 1999 that have not been adjudicated in more than two years or that have been settled for amounts that were lower than the reporting threshold (currently $15,000). 
• The full records for former brokers will be publicly available for ten years from the time they leave the securities industry, rather than the current two years.
• Information regarding former brokers’ criminal convictions or pleas of guilty or nolo contendere; civil injunctions or findings of involvement in a violation of any investment-related statute or regulation; and arbitration awards or civil judgments involving alleged sales practice violations reported to FINRA since 1999 will be permanently available to the public.

FINRA will also formalize the process to dispute the accuracy of factual information disclosed through BrokerCheck.  FINRA will review all written submissions, along with available supporting documentation, disputing the accuracy of the factual information.

While the expansion of publicly available information regarding current and former brokers will undoubtedly benefit investors, it raises potential concerns for brokers.  Customer complaints, even ones lacking merit, and other matters that brokers thought were behind them, may now come back to haunt them.  It behooves brokers and former brokers to review the accuracy of the information disclosed through BrokerCheck once FINRA’s expansion is complete.  The information may be dated, inaccurate or incomplete. 

In a November 2009 speech before the Tenth Annual Pharmaceutical Regulatory and Compliance Congress in Washington D.C., Assistant Attorney General Lanny A. Breuer put big pharma on notice that DOJ intended to aggressively investigate potential violations of the FCPA within the pharmaceutical and medical device industry.  The DOJ’s FCPA team appears to be backing that warning up with a broad investigation into drug trial-related activities occurring in foreign locations.

The focus of the investigation appears to be whether drug companies conducting clinical trials outside the United States may be offering improper inducements to influence the outcomes of those trials, either directly or through third parties.  Utilizing data from foreign clinical trials is an increasingly prevalent pattern among companies seeking approval of new drugs.  According to a June 22, 2010 report from the Department of Health and Human Services’ Office of Inspector General that may have been a trigger for this investigation, it is “estimated that between 40 percent and 65 percent of clinical trials investigating FDA-regulated products are conducted outside the United States.” The report cited a survey that found “the 20 largest United States-based pharmaceutical companies were conducting one-third of their clinical trials exclusively at foreign sites.”  It further noted that “[e]ighty percent of approved marketing applications for drugs and biologics contained data from foreign clinical trials,” with 78 percent of all subjects who participated in clinical trials enrolled at foreign sites and 54 percent of all trial sites located outside the United States.  The report was critical of the FDA’s monitoring of foreign clinical trials, and noted that the reliance on such trials appears likely to grow.  

The link to the FCPA, which prohibits bribery of foreign officials, is the expansive view the DOJ has taken as to who may be considered a “foreign official,” particularly in the context of countries where healthcare and government can be closely intertwined.  In his November speech, Mr. Breuer said “it is entirely possible, under certain circumstances and in certain countries, that nearly every aspect of the approval, manufacture, import, export, pricing, sale and marketing of a drug product in a foreign country will involve a ‘foreign official’ within the meaning of the FCPA.” 

It has been reported that a number of large drug manufacturers have already been targeted by the DOJ’s pharma initiative, with several having received letters of inquiry.  Given that Mr. Breuer has noted that a significant focus of this enforcement effort will be the investigation and prosecution of senior executives, it can be expected that many drug companies will soon be taking a fresh look at how they handle key aspects of their non-U.S. activities, including their affiliations with third-party clinical research organizations (“CROs”), due diligence for those and other third party partners and representatives, and relationships with government-affiliated or state-run academic and health care facilities.

Immigration reform has certainly become a prominent political issue of late.  Its recent thrust into the forefront of political debate is not because Congress or the Obama administration has chosen to put it there, but rather because Arizona felt the need to take action, citing the federal government's lack of enforcement.  Numerous lawsuits have been filed challenging Arizona's new immigration law, and immigration issues took center stage at the National Governors Association meeting over the weekend.  

So what does this mean for employers who are caught in the middle of a heated political debate?  Arizona's law has forced both Republicans and Democrats to focus on immigration issues whether they want to or not.  The debate over immigration reform is being driven largely by public reaction to enforcement measures implemented by states such as Arizona and by the Obama administration through ICE.    

Employers should tread carefully as parties on both sides of the political debate will continue to use enforcement measures, including raids, civil fines, debarment and criminal prosecution to push reform.  Employers, merely pawns in the larger game of chess being played, need to do everything they can to remain off the radar screen and avoid being used as an example in the ongoing political debate.  If they haven’t done so already, employers need to focus on their immigration compliance measures and ensure that their workforce, especially those in their human resources department, are complying with all company policies regarding the employment of unauthorized workers.  As more states weigh in with enforcement measures of their own, employers also need to be cognizant of the various state laws applicable to their workforce.