Subject to Inquiry

Subject to Inquiry

The Latest on Government Inquiries and Enforcement Actions

Government, Regulatory & Criminal Investigations Group
CFPB, Financial Regulation

The CFPB’s Controversial New Narrative Complaint Policy

Law-books-iStock_000002891011LargeOn March 19, 2015, the Consumer Financial Protection Bureau (CFPB) issued a new consumer complaint policy that gives individual complainants the ability to provide narrative versions of their complaints about a company, product or service.  While the CFPB has been accepting consumer complaints since its inception in 2011, historically, the Consumer Complaint Database has provided only a limited amount of basic information about a complaint and a company’s response, and there has been no option to share a narrative submission.  To date, the CFPB has handled more than 558,800 such complaints, with mortgage and debt collection concerns being the most frequently raised issues by consumers.

According to a CFPB press release, the rationale behind the new policy is that “narratives provide a first-hand account of the consumer’s experience, and adding the option to share them will greatly enhance the utility of the database.”  The press release goes on to say that “narratives will provide context to complaints, spotlight specific trends, and help consumers make informed decisions. The narratives may encourage companies to improve the overall quality of their products and services, and more vigorously compete over good customer service.”

Some details on the new policy include the following:

  • Consumer opt-in option. As of March 19, 2015, after a consumer submits a complaint online, there will be an option for that consumer to check a box and “opt in” to sharing the complaint’s narrative. The CFPB will not publish any narratives for at least 90 days after the policy’s publication in the Federal Register in order to give companies an opportunity to familiarize themselves with this new system and their ability to respond to consumer complaints.  Consumers also can opt out at any time.
  • Confirmed relationship with the financial institution. In order to be eligible for publication, a narrative must meet several requirements, one of which is that the consumer must have a “confirmed relationship” with the financial institution. Specifically, the commercial relationship will be “confirmed by the company before any complaint data is disclosed in the Consumer Complaint Database.”
  • Personal identification materials scrubbed. The CFPB will scrub narratives of all personal information, including names, addresses, social security numbers and other such personal identifiers.
  • Company responses. The CFPB will disclose the consumer narrative when the company provides its public-facing response, or after the company has had the complaint for 60 calendar days, whichever comes first. Companies can select from a set list of structured response options to address the consumer’s narrative complaint. Companies are under no obligation to offer public responses; however, a company will have up to 180 days after a consumer complaint is routed to it to select an optional, public response.  The CFPB states that it generally plans to adopt a company’s recommended response, but it reserves to right to “assess whether there are good-faith bases for the recommend[ed response].”

This new policy is controversial and will certainly have an impact on McGuireWoods’ clients in the consumer financial space.  As industry commentators have observed, complaints likely will take on an unwarranted level of credibility by virtue of their appearing on the CFPB’s website.  Unverified narrative complaints also pose a serious reputational risk for consumer financial services companies.  Further, clients may be exposed to increased litigation as consumer rights groups and the class-action litigators look to these narratives in order to help them identify “trends” of illegal activity.  Moreover, because companies are limited in the manner in which they can respond, they may have difficulty combating false or disparaging narratives.  To the extent that companies want to limit or eliminate narrative responses through settlement, the CFPB has indicated that it will “look disfavorably upon agreements that require a consumer to withdraw his or her consent to have a narrative published as a condition of settlement.”

CFPB, Financial Regulation

CFPB Launches Inquiry into the Credit Card Industry

Last week, the Consumer Financial Protection Bureau (CFPB) announced it is seeking public comment from consumers on how the credit card market is functioning following several initiatives imposed by the Credit Card Accountability Responsibility and Disclosure Act of 2009, H.R. 627 (CARD Act), which amended various provisions of the Truth in Lending Act, 15 U.S.C § 1601, et. seq. The passage of the CARD Act was intended to “establish fair and transparent practices related to the extension of credit” in the credit card market. The CARD Act requires credit card issuers to assess a consumer’s ability to pay prior to extending credit, limits the types of fees credit card companies could charge consumers and restricts certain marketing efforts.

Government-Regulatory-and-Criminal-Investigations.jpgSection 502(a) of the CARD Act requires the CFPB to conduct a review of the consumer credit card market every two years. In addition to seeking information from consumers, the request for public comment invites credit card issuers, industry analysts, consumer advocates and other interested persons to submit information and comments on how the credit card market is functioning and on the continuing effects of the CARD Act. The CFPB has requested information on the following areas:

  • Terms of credit card agreements and practices of credit card issuers: how card issuers may have changed their pricing, marketing, underwriting or other practices, and whether those changes have benefited or harmed consumers
  • Disclosure of terms, fees and other expenses of credit card plans:       how effective current disclosures of rates, fees and other cost terms are in conveying to consumers the costs of credit card plans
  • Unfair or deceptive acts or practices in the credit card market: the extent to which unfair or deceptive acts and practices, or unlawful discrimination, still exist in the credit card market, and the frequency and effect on consumers
  • Cost and availability of credit: impact on the cost and availability of credit to non-prime borrowers, the use of risk-based pricing and development of new card products
  • Online disclosures: how card issuers ensure that consumers using paperless statements (online or mobile banking) receive effective disclosures
  • Rewards Products: whether consumers understand the rules regarding rewards programs and potential improvements
  • Grace Periods: whether consumers understand the rules governing grace periods and whether any improvements in the grace period disclosures can be made
  • Add-On Products: whether card issuers are continuing to market or permit third parties to market add-on products such as debt protection, identity theft protection, credit score monitoring and similar products
  • Fee Harvester Cards: whether card issuers are charging upfront fees that exceed 25 percent of the card’s initial credit limit
  • Deferred Interest Products: whether consumers using deferred interest promotions understand the risk of being charged retroactive interest and the impact on consumers who are assessed retroactive interest
  • Debt Collection Practices: the types of practices used in the industry to minimize losses from delinquent customers prior to charge-off and post-charge-off, how often card issuers use third-party collection agencies and how those relationships are managed, and how often accounts are sold to debt buyers
  • Ability to Pay: how the “ability to pay” standards are being implemented by card issuers in determining whether to approve an application, the amount of credit to extend and whether to increase a credit line

The CFPB published the findings of its first review of the CARD Act in October 2013. In its review, the CFPB found that the CARD Act significantly enhanced transparency for consumers with regard to the costs associated with a credit card. However, the CFPB noted that it would continue to review and monitor the above topics to determine whether additional action is warranted. The public inquiry could potentially lead to new regulations in these areas. The credit card industry should stay tuned.

Anti-Corruption, Charging, Compliance, Corporate Compliance, Dodd-Frank, DOJ Policy, Enforcement Actions, FCPA, FCPA Investigations, Non-Prosecution Agreements, Regulation, SEC, SEC Enforcement, Securities Litigation, Sentencing, UK Bribery Act, Whistleblowers, White Collar Crime

Biomet FCPA Announcement Highlights Distributor-Related Risks

Export-Controls-136333535_jpg.jpgLast week, Biomet Inc. announced in a filing with the U.S. Securities and Exchange Commission (SEC) that instead of its 2012 deferred prosecution agreement with the U.S. Department of Justice (DOJ) regarding violations of the U.S. Foreign Corrupt Practices Act (FCPA) expiring this week, the company would be monitored under it for an additional year. While the announcement is getting attention for a variety of reasons, one of the most important lessons companies can take away from it is that distributor conduct appears to have triggered the additional scrutiny. According to news reports, DOJ and SEC may have renewed their scrutiny of Biomet based, at least in part, on a whistleblower allegation that distributors had paid kickbacks to government doctors in Brazil.

FCPA liability based on the conduct of distributors is a concept companies often wrestle with when considering their anticorruption compliance risks. After all, unlike a broker, sales agent or other third party whose conduct can be tied more closely to a company and its oversight and control of their activities, distributors tend to take title to goods in a more arm’s-length fashion, and to thereafter sell on their own account with limited, and at times, no further involvement by the supplier company.

However, the landscape of FCPA enforcement actions is littered with allegations relating to distributor misconduct. Relevant enforcement actions most often have included allegations focusing on distributors serving as conduits for bribes, or having received unusually large discounts (used to fund improper payments) without adequate related due diligence, business justification or company oversight of distributor conduct. In at least one case, the granting of an exclusive distributorship was the improper inducement itself. Issues also have arisen in connection with marketing or trade incentives, whereby distributors can earn payments based on the volume of products sold, typically with the intention that those payments be used to fund marketing activities by the distributors.

As if those enforcement actions were not enough, the DOJ’s and SEC’s Resource Guide to the U.S. Foreign Corrupt Practices Act specifically references “unreasonably large discounts to third-party distributors” as a common third-party red flag, specifically identifies distributors as a common means for concealing improper payments, and includes distributors in numerous other discussions of third-party risk and risk mitigation.

Regardless of the outcome of the Biomet matter, it should remind companies considering the anticorruption compliance risks posed by the third parties with which they interact to not discount the potential for their distributors to create liability under the FCPA and under similar anticorruption laws and regulations around the world.

Anti-Corruption, Compliance, FCPA, FCPA Investigations

The FCPA Implications of China’s Plan to Consolidate State-Owned Enterprises

ForeignCorruptChina’s recently announced plan to restructure and consolidate its state-owned enterprises (SOEs) focuses on bolstering the private sector of its economy and creating economies of scale to allow Chinese companies to better compete internationally. It also may implicate companies’ efforts to comply with the U.S. Foreign Corrupt Practices Act (FCPA), in positive and negative ways. Although the details of the restructuring plan are still unknown, the prospect of any change to China’s vast SOE network raises potentially significant considerations for legal and compliance officials dealing with the definition of “foreign official” under the FCPA. Companies operating in China need to watch this space, as significant changes to the SOE landscape could impact anti-bribery and anti-corruption policies and procedures related to business in China.

On March 5, 2015, at the opening of China’s annual parliamentary meeting, Premier Li Keqiang announced plans to move forward with a “Made in China 2025” strategy to merge and reorganize SOEs in many key industries. Railways, nuclear power plants, auto and aircraft manufacturing, and shipbuilding are likely initial targets for consolidation. Rumors also are swirling about mergers of conglomerates in the oil and telecommunications industries. The restructuring plan, which is expected to be released by the end of the month and will be implemented by the Small Leading Group for State-Owned Enterprise Reform, is expected to create asset-holding companies (perhaps like Temasek in Singapore) to oversee China’s shareholdings in the newly reorganized and consolidated companies and to ensure more economically competitive operations. China is also likely to open its doors to foreign investment as part of the plan, in industries in which foreign investors were never before allowed to participate.

Made in China 2025 was preceded by a pilot program last year, in which six large SOEs were tapped for reforms focusing on “mixed ownership” (i.e., partial privatization), transfers of management control away from political and policy-driven oversight and toward a capital management model focused purely on maximizing shareholder value, and board-centric (rather than centrally planned) appointment of senior management. This pilot program and the reforms announced this month are being viewed as a significant effort by China to make SOEs in key industries look more like − and be more internationally competitive with − Western multinationals through improved governance and increased efficiency.

The question this raises for companies seeking to ensure compliance with the FCPA and similar anti-corruption laws by their operations in China is whether consolidation of the 112 SOE portfolio currently managed by the Chinese government into 50 or fewer SOEs (as some believe is the goal) will improve transparency of government ownership or exacerbate current challenges in understanding just what businesses are owned or controlled, in whole or in part, by the government. Consolidation may bring comfort to compliance-responsible personnel, insofar as there will be fewer SOEs to track and a more recognizable management model with increased visibility into newly consolidated enterprises’ ownership and level of government control. Such information could make due diligence efforts easier and more effective.

It is also possible that the restructuring plan will have a neutral or even negative effect, providing a less transparent view into a smaller number of now larger and more influential SOEs. Similarly, opening markets and enterprises to private investment, including foreign investment, could muddy the waters and make it more difficult to determine who or what owns or controls companies of varying sizes throughout various industries. That could be exacerbated as newly consolidated SOEs, or asset-holding companies managing portfolios of SOE investments, push investments into broad segments of the economy, creating an ever-expanding network of SOEs or SOE-affiliated entities through new public companies, joint ventures and even foreign subsidiaries. In that scenario, improved transparency at the consolidated SOE level may not carry forward to smaller entities, including otherwise private entities in which the Chinese government invests.

Regardless of the answer, there is no doubt that the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) will continue to scrutinize cases involving SOEs as “instrumentalities” of a foreign government (and therefore making any employee of an SOE a “foreign official” under the FCPA), especially in light of last year’s Esquenazi decision. That is particularly true in China, which has been and remains a focal point for significant FCPA scrutiny − as evidenced by the roughly 40 companies that were actively investigating or under investigation for potential FCPA violations in China as of January 2015.

China’s efforts to promote growth in its economy provide exciting opportunities for those wanting to invest in the country. But they are also an important reminder that China is, in many respects, a country apart in terms of the level and type of involvement its government has in individual companies and entire industries. Over the coming weeks, the Chinese government is expected to share additional details about Made in China 2025. Those announcements should help us understand how focused companies should be on the impact this latest round of SOE reform could have on China-related anti-corruption compliance efforts.


CFPB Releases Study on Use of Arbitration Clauses in Consumer Contracts

contractLast week, the Consumer Financial Protection Bureau (CFPB) released its 728-page report on the use of arbitration clauses in consumer financial products and services contracts.  The findings in the report come from a three-year study, which CFPB Director Richard Cordray called “the most comprehensive empirical study of consumer financial arbitration ever conducted.”  In addition to the roughly 1,800 consumer finance arbitration disputes filed between 2010 and 2012, the CFPB reviewed consumer finance cases filed in federal court during the same period as well as 562 consumer finance class-action suits filed in federal and state courts.

While the bureau described the study as “empirical, not evaluative,” the study is expected to lead to proposed rulemaking from the CFPB regarding arbitration clauses and, in particular, those prohibiting class-action suits.  In prepared remarks given in conjunction with the study’s release, Mr. Cordray noted some problematic features of arbitration clauses, including their chilling effect on class actions and their presence in standard-form contracts where the terms are offered on a “take it or leave it” basis.  These remarks may be an indication that change is on the way.  What is clear is that any rule changes are likely to have a widespread effect on consumers due to the prevalence of arbitration clauses.  For example, the study found that, in the credit card market alone, arbitration clauses bind as many as 80 million consumers.

The report is overflowing with statistics but some noteworthy findings include the following:

  • Many arbitrations involve merely a debt dispute.  The CFPB determined that approximately 40 percent of the arbitrations it reviewed involved only a dispute over a debt that the consumer owed the company.
  • Very few cases involved small claims.   Only approximately eight cases per year involved debt disputes of $1,000 or less, and only 25 cases per year involved affirmative claims of $1,000 or less.
  •  Most arbitration clauses include provisions allowing both the consumer and the company to bring suit in small-claims court.

The CFPB seems to be particularly concerned with the chilling impact arbitration clauses may have on class actions.  The backdrop to this concern is the Supreme Court’s decision in 2011 in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), which held that the Federal Arbitration Act of 1925 preempted state law prohibiting the enforcement of arbitration provisions preventing class actions.  Several of the study’s noteworthy findings regarding arbitration and class actions include the following:

  •  Arbitration clauses were rarely invoked to force a single lawsuit into arbitration but they were commonly used to block class actions.  In class actions against credit card issuers, for example, arbitration clauses were invoked to block class actions in approximately two-thirds of all cases.
  • Although it is possible for arbitrations to be conducted on a class basis, nearly all arbitration clauses reviewed included a provision preventing arbitration of disputes on a class basis and requiring consumers to proceed individually.
  • Most consumers interviewed in the study mistakenly believed they could participate in class actions for disputes arising out of credit card contracts.

In the short run, it appears that the CFPB’s plan is to allow time for the study’s findings to be digested.  In his prepared remarks, Mr. Cordray stated that the CFPB will “begin meeting with stakeholders after they have had a chance to read our report.”  Nevertheless, it seems nearly certain that the CFPB will attempt to restrict the use of arbitration requirements in consumer contracts.  And, given the attention that the report has already received and the stakes involved for companies dealing directly with consumers, there is certain to be opposition from companies who are repeat defendants in consumer disputes.


CFPB Continues to Spotlight Consumer Reporting Agencies

Earlier this week, the Consumer Financial Protection Bureau (CFPB) released its latest supervisory report covering July 2014 through December 2014. These reports highlight the examinations, corrective measures and consumer remediation resulting from the CFPB’s supervision of consumer financial service providers. This latest report covers student loan debt collection, overdraft, mortgage origination and fair lending practices. Notably, it also reveals the CFPB’s continued focus on consumer reporting agencies (CRAs).

The CFPB’s assessment of CRAs’ compliance with dispute-handling obligations under the Fair Credit Reporting Act (FCRA) was mixed. On the one hand, it acknowledged that CRAs “enhanced” their dispute-handling systems by including:

  • online portals for consumers to submit disputes,
  • systems to forward dispute documents received from consumers via mail, and
  • improved practices for soliciting relevant dispute information from consumers.

On the other hand, the CFPB identified ongoing practices that it views as falling short of the dispute-handling requirements. These include failing to forward all relevant dispute information to furnishers and failing to update public record information. The CFPB has directed the relevant CRA(s) to develop training, policies and procedures to address these issues.

This supervisory report indicates that CRAs are not out of the spotlight yet. In fact, it comes on the heels of an announced agreement between New York state and the three major CRAs, following a years-long investigation into their practices, that requires the CRAs to provide increased protections to consumers. The agreement requires the CRAs to, among other things:

  • ease requirements to initiate disputes,
  • conduct an enhanced review of documentation submitted with consumer disputes,
  • wait 180 days to report medical debt on consumer reports, and
  • establish a working group to develop best practices for CRAs’ monitoring of furnishers and establish standards regarding the collection of public data.

For more information, read the CFPB’s latest supervisory report or the New York Attorney General’s settlement with the three major CRAs.

Compliance, Corporate Compliance, Dodd-Frank, Enforcement Actions, SEC, SEC Enforcement, Securities Litigation, Uncategorized, Whistleblowers, White Collar Crime

SEC Awards $500K to Company Officer Whistleblower

Government-Regulatory-and-Criminal-Investigations.jpgOn Monday, March 2, the Securities and Exchange Commission (SEC) announced that it will award between $475,000 and $575,000 to a corporate officer who reported “high quality, original information” about a securities fraud.

The SEC’s whistleblower program was adopted under the Dodd-Frank Act of 2010 and rewards high quality, original information that results in enforcement actions exceeding $1 million. Awards are paid through an investor protection fund financed through enforcement actions. The SEC has awarded nearly $50 million to 15 whistleblowers since the program was enacted.

Typically, officers, directors, trustees and partners who learn about a fraud from another employee are not eligible for an award under the program. However, there are three exceptions:

  1. if the officer has a reasonable basis to believe that disclosure to the SEC is necessary to prevent the entity from taking action that’s likely to cause substantial harm to the entity or investors;
  2. if the officer has a reasonable basis to believe the entity in question is engaging in conduct that would hamper an investigation (such as shredding documents); or
  3. if, as in this instance, 120 days have passed since the responsible compliance personnel had the information and they failed to adequately address the issue.

The SEC stated that this is the first whistleblower award given to an officer under the third exception.

Because the SEC is required to protect the anonymity of whistleblowers, we do not know the nature of the enforcement action or the identity of the whistleblower. The SEC has not disclosed the extent to which the officer attempted to resolve the problem internally before providing information to the agency.

This award is a reminder that anyone, even the most trusted officers of a company, may report problematic conduct to the government. A company should take prompt action to address misconduct, even when only a few people know of the conduct. It is important that companies have thorough internal compliance programs that adequately address potential violations reported by any employee or other individual.

Anti-Money Laundering, Compliance, FinCEN Guidance, Suspicious Activity Reports

FinCEN Issues Notice of Proposed Rulemaking on Andorran Bank as “Primary Money Laundering Concern”

Lamp and looking glass #24On March 10, 2015, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) named Banca Privada d’Andorra (BPA) a foreign financial institution of “primary money laundering concern,” a measure that will prohibit BPA from engaging in transactions with the U.S. financial system. Along with this announcement, FinCEN issued a Notice of Proposed Rulemaking which will require U.S. financial institutions to take special measures to curtail activity on BPA’s correspondent accounts and monitor transactions for activity involving BPA.

In its Notice of Findings, FinCEN announced that “several officials of BPA’s high-level management in Andorra have facilitated financial transactions on behalf of Third-Party Money Launderers (TPMLs) providing services for individuals and organizations involved in organized crime, corruption, smuggling, and fraud,” noting that management had “close relationships” with these TPMLs.  Andorra has taken over BPA in response to FinCEN’s determination. In addition, Spain has now intervened in the management of BPA subsidiary Banco de Madrid.

The proposed rule seeks to prohibit covered financial institutions from establishing, maintaining, administering, or managing in the U.S. any correspondent account for or on behalf of BPA. In addition, the proposed rule would require covered financial institutions to:

  • conduct special due diligence for correspondent accounts to prohibit them from engaging in transactions with BPA;
  • provide notice to foreign correspondent account holders that the covered financial institutions know or have reason to know provide services to BPA that they may not provide BPA with access to the correspondent account maintained at the covered financial institution;
  • implement appropriate risk-based procedures to identify transactions involving BPA; and
  • where there is reason to suspect use of a correspondent account to surreptitiously process transactions involving BPA, take all appropriate steps to attempt to verify and prevent such use, including if necessary terminating the correspondent account.

FinCEN has specifically invited comments on a number of these measures. In the meantime, financial institutions should take a proactive approach in monitoring correspondent accounts for BPA-related activity. While FinCEN has not specifically stated it, accounts involved in transactions with BPA would appear on their face to raise enough suspicion to warrant filing a SAR.

If you have questions about BSA/AML compliance and how this proposed rule may affect your institution, McGuireWoods can assist you. Our attorneys offer experience and skills in advising financial institutions on all areas of BSA/AML compliance.


Hearing, Report May Forecast CFPB Rulemaking on Arbitration Provisions

Section 1028 of the Dodd-Frank Wall Street Reform and Consumer Protection Act authorizes the Consumer Financial Protection Bureau (CFPB) to limit or even prohibit the use of arbitration provisions that govern future disputes between a consumer and a financial services/products provider. This issue is the focus of a CFPB field hearing scheduled for 11 a.m., March 10, 2015. Along with remarks from Agency Director Richard Cordray, the hearing will feature testimony from consumer protection groups, trade associations and the general public. The hearing will stream live from the CFPB’s website.

In conjunction with the field hearing, the CFPB likely will release a long-awaited, detailed report on this topic. That report should conclude a three-year study of the issue, which the CFPB performed under Section 1028. The CFPB released preliminary findings of its study in December 2013. As part of that release, the CFPB found that larger banks are more likely to include arbitration provisions in their credit card and checking account contracts. Around 90 percent of those arbitration provisions prohibited class proceedings in court or in arbitration. Though the 2013 preliminary findings focused on individual disputes, the final report will look further at consumer class actions.

It is widely expected that the final report and the field hearing will pave the way for proposed rulemaking from the CFPB. The scope of that potential rulemaking is unclear, though the final report and hearing may shed some light on the direction the CFPB will take. While Section 1028 does grant the CFPB broad authority to limit or prohibit the use of arbitration provisions in consumer finance agreements, there are two limitations:  first, it does not permit the CFPB to restrict a voluntary arbitration agreement entered after a dispute has arisen; and second, any regulation limiting or prohibiting the use of arbitration provisions would not be retroactive. Instead, the regulation would be forward-looking, and applicable to agreements entered 180 days after the regulation’s effective date.

News, Uncategorized

SCOTUS Narrows SOX Obstruction Statute

780536984In its recent ruling in Yates v. United States, the U.S. Supreme Court reversed a conviction under Sarbanes-Oxley’s “anti-shredding” statute, holding that it covers documents, records and only “tangible objects” similar to them – and not, as in the case at hand, fish. The petitioner, a fisherman, faced a federal felony conviction for directing a crew member to throw undersized fish overboard after a government agent told the petitioner to preserve and segregate them until returning to port. Viewed by some as an imprudently zealous prosecution, the case fueled debate over overcriminalization (see, e.g., NACDL’s amicus curiae brief and DealBook’s article on narrowing white-collar criminal statutes) and invited prognostications on other high-profile cases under this statute, and others.

The decision is important in the white-collar criminal space, however, because it reins in an expansive statute, albeit with some questions about applicability still lingering.

Passed as part of the Sarbanes-Oxley Act of 2002, 18 U.S.C. § 1519 prohibits the destruction of records, documents and tangible objects, with the intent to impede, obstruct or influence an investigation or matter within the jurisdiction of a U.S. department or agency, or in relation to or contemplation of any such matter or case. (A long list of verbs describes the prohibitory conduct in more detail: “alters, destroys, mutilates, conceals,” etc.) As we’ve warned before, the provision is powerful; within its reach is obstruction before a federal investigation has even commenced, and violation risks a 20-year prison sentence.

At issue in Yates was the definition of “tangible object”: does it include all objects or something more circumscribed? The Court voted with the latter. A plurality said the object must be one “used to record or preserve information.” Section 1519 is thus not a “general spoliation statute,” and Congress “did not intend [the term] to sweep within its reach physical objects of every kind, including things no one would describe as records, documents, or devices closely associated with them.” Examples of tangible objects under the statute would be “computers, servers, and other media on which information is stored.” Justice Alito concurred in the judgment, stating that “tangible object” must refer to “something similar to records or documents,” especially given the statute’s “filekeeping” verbs. As imprecise as that is, it at least means, as he noted, that electronic files fall within the statute.

Lower courts will have to work out what else does, which could prove nettlesome. The challenge of parsing this aspect of § 1519 was on display during oral argument, when the Justices queried petitioner’s counsel on a laundry list of potential “tangible objects” that could be covered, including: information stored in the “cloud”; tablets, laptops and other electronic devices; tangible objects not designed for storage but sometimes used that way (like a file cabinet); objects with information on them (like an identifying name); and photographs and film.

The opinion raises other questions about the statute’s scope as well. According to the dissent, § 1519 “wouldn’t normally operate” in the context of private federal court litigation because federal courts are neither agencies nor departments. The plurality, however, called this interpretation “remarkabl[e]” and said it “does not withstand examination.” Unresolved, the disagreement introduces still more uncertainty.

What is clear is that the Court pushed some conduct DOJ once charged under § 1519 out of bounds. For example, the dissent noted that a company’s altering of a cement mixer to impede an inquiry into the amputation of an employee’s fingers no longer falls within § 1519’s ambit. The plurality’s response to this criticism is, in effect: Charge something else; there are plenty of other statutes out there. Indeed, in Yates, the petitioner’s conviction under a statute prohibiting the knowing destruction of property to prevent a federal seizure still stands.

And the plurality has a good point. Even with a narrow § 1519 ruling, the federal criminal code still provides prosecutors with plenty of ammunition. Much conduct that now falls outside § 1519 after Yates could be prosecuted as obstruction of justice under 18 U.S.C. § 1505, or as conspiracy to defraud the United States by obstructing the functions of an investigating agency under 18 U.S.C. § 371. So, while Yates dealt a loss to DOJ, the immediate impact of that loss is unlikely to be widespread. Where Yates may be more impactful is over the long term, if it proves to be a harbinger of increasing judicial skepticism about overbroad criminal statutes.