Q3 2016: Regulatory Round-Up

Alert

Weil, Gotshal & Manges

October 2016

White Collar Defense & Investigations

This round-up contains a summary by sector of certain key global regulatory developments which occurred during the third quarter of 2016. The sectors covered in this round-up include:

�� Financial Services

�� Energy

�� Cyber/Data

�� Transport

�� Sport

�� “Other”

Detail contained within is publicly available information. This Alert does not contain any legal commentary on the aforementioned.

Financial Services�� On 17 August, a former Deutsche Bank (“DB”) employee and whistleblower

refused to accept his portion of the whistleblower award ($16.5 million) from the Securities and Exchange Commission (“SEC”). The whistleblower, Ben-Artzi, provided information which enabled the SEC to fine DB $55 million in May 2015 for false accounting. Ben-Artzi rejected the award stating that the corporate fine should be paid by individual executives, not shareholders.1

�� On 21 July, the FCA published a thematic review aimed to address concerns about the operation of “dark pools” in the UK. The report concluded that trading platforms with no pre-trade transparency and where the price and volume of orders are hidden have made significant progress in addressing conflict of interest issues. The FCA has outlined certain areas in which improvements could be made, including the provision of more information about the design and operation of dark pools to users, and improving the monitoring activity of the pools.2

�� On 19 July, the new head of the FCA, Andrew Bailey, set out his vision of the regulator’s future. In his speech, Mr Bailey paid tribute to the introduction of the senior managers regime which expands the FCA’s scope of enforcement against individual executives for wrongdoings within their area of responsibility. He also stated that he wanted to implement a “cohesive yet flexible and proportionate regime” that “provides a credible deterrent for misconduct” across the industry.3

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�� On 3 July, the Market Abuse Regulation (“MAR”) and the Criminal Sanctions (Market Abuse) Directive came into force in Europe. MAR establishes a new, common regulatory framework on market abuse intended to ensure the integrity of the EU financial markets and enhance investor protection and confidence. Key changes include an extension of the civil market abuse regime to new markets and instruments, a new offence of “attempted market manipulation” and a new requirement for issuers to inform the FCA if they have delayed the disclosure of insider information.4

LIBOR/Forex�� On 20 July, HSBC’s head of global foreign exchange

cash trading and HSBC’s former head of foreign exchange cash trading were arrested by US authorities and charged with fraud for currency trades that allegedly generated profits of $8 million at the expense of a corporate client. These charges relate to the use of confidential information provided by an unnamed “victim company” to execute trades that benefited HSBC. In particular, it is alleged that the traders caused a $3.5 billion purchase of pound sterling in order to cause the price of sterling to spike, to the benefit of HSBC and at the expense of the victim company. A statement from the US attorney for the Eastern District of New York stated that “the defendants placed personal and company profits ahead of their duties of trust and confidentiality owed to their client, and in doing so, defrauded their client of millions of dollars.”5

�� On 7 July, four former Barclays employees were sentenced to a total of 17 years in prison following their convictions for manipulating US Dollar LIBOR. In passing sentence, HHJ Leonard QC stated that the culpability of the defendants was high and their behaviour showed an “absence of integrity”.6 The jury could not reach a verdict on two further co-defendants, who will be retried in February 2017.7

Money Laundering�� On 11 July, a US House of Representatives’

financial services committee published a report entitled “Too Big To Jail: Inside the Obama Justice Department’s Decision Not to Hold Wall Street Accountable”. The report found that the former US attorney general Eric Holder made the Department of Justice (“DOJ”) drop its prosecution of HSBC for money laundering and sanctions violations following an intervention from the former UK Chancellor George Osbourne and the then existing Financial

Services Authority. According to the report, Mr Holder overruled an internal recommendation by the DOJ to seek a guilty plea from HSBC over concerns that “prosecuting the bank would have serious adverse consequences on the financial system”. This decision was made in November 2012 following a letter from Mr Osbourne to the US Federal Reserve in which he expressed “the UK’s concerns regarding US enforcement actions against British banks.” Although HSBC did not face criminal charges, the bank agreed to a DPA in which it paid the DOJ $1.9 billion for allegedly allowing Mexican drug cartels to launder $881 million through its account and to settle allegations that the bank conducted business in sanctioned countries such as Iran, Burma and Cuba.8

Energy�� On 5 September 2016, Russia’s Investigative

Committee announced that it was investigating one former and two current executives at T Plus, a major Russian energy company owned by Viktor Vekselberg. The allegations relate to alleged payments of over 800 million roubles ($12.3 million) to officials in the Komi region between 2007 and 2014. The investigation follows the charging of the former governor of the Komi region earlier in September for his alleged involvement in setting up and participating in an organised crime scheme and laundering 1.1 billion roubles ($17 million) of illicit funds.9

�� On 19 July, the SFO announced that it was conducting a criminal investigation into the activities of the Monaco-based oil and gas company Unaoil, its officers, its employees and its agents in connection with suspected offences of bribery, corruption and money laundering.10

�� On 17 August, the English High Court rejected a judicial review application by Soma Oil & Gas (“Soma”) to shut down an SFO corruption investigation. In the application, Soma claimed that the investigation, which started in July 2015, risked causing the company financial ruin, and that it has been fully cooperative with authorities. The investigation relates to alleged improper payments made to officials in Somalia’s Ministry of Petroleum, which granted Soma permission to explore the country for oil reserves. The court rejected the application on the basis that it had no prospect of success.11

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�� On 15 July, Dutch energy company SBM Offshore reached a settlement agreement with the Brazilian authorities, ending a corruption investigation over improper payments to Petrobras. Under the agreement, SBM Offshore will pay a total of $162.8 million to Petrobras, the Brazilian Public Prosecutor’s Office and the Brazilian Council of Control of Financial Activities. Additionally, SBM Offshore remains under the obligation to cooperate with procedures that may be conducted by the authorities against third parties. In a statement, an SMB Offshore spokesman said that the company accepts the economic sanctions, adding that it is pleased that the company is now able to “fully resume a normal business relationship with a key client, Petrobras.”12

Cyber/Data�� On 15 September, Swedish telecoms company Telia

announced that it had been contacted by the DOJ and Dutch Public Prosecutor’s Office with proposals for a settlement to settle a number of foreign bribery allegations. The claims concern alleged payments related to Telia’s entry into Uzbekistan’s telecoms market in 2007. In the statement, Chairman Marie Ehrling said that the Telia is “cooperating fully with the authorities to bring clarity to the matter” but that the figure proposed for the settlement was “very high”.13

�� On 7 September, Denmark became the first country to buy data from the Panama Papers leak, and now plans to investigate whether the 500-600 Danes who feature in the offshore archive may have evaded tax.14

�� On 9 August, the Australian Department of Justice announced the creation of a new cyber team dedicated to identifying online terrorism financing activities, money laundering and financial fraud. The new cyber team will work with Australia’s primary financial intelligence agency by using financial and cyber intelligence to investigate online payment platforms and crack down on money-laundering and criminal networks. The team was created in response to the recommendations of the Australian government’s AML/CTF Review, which was focused on delivering a modern, simplified, streamlined and strengthened regime.15

Transport�� On 9 September, former Volkswagen AG (“VW”)

employee James Liang pled guilty to conspiring to defraud US regulators and consumers and agreed

to co-operate with federal prosecutors investigating VW’s conduct. Liang is the first person to be criminally charged over the diesel emissions scandal which emerged in September 2015 when VW admitted that 11 million cars contained software that disguised vehicles’ emission levels. The charge relates to conspiracy to commit wire fraud and violate the US Clean Air Act.16

�� On 8 August, a German court ruled that it would allow a collective complaint of 277 private and institutional investors against VW over the emissions cheating scandal to proceed. The total value of these 170 pending damage claims is worth close to €4 billion. This ruling comes after VW reached a $15 billion settlement in June with US environmental authorities, state attorneys general and affected customers who received compensation for violations of environmental laws and damages after VW admitted it rigged diesel-powered vehicles to cheat on emissions tests.17

�� On 7 August, the SFO opened a criminal investigation into allegations of fraud, bribery and corruption in the civil aviation business of Airbus Group. These allegations relate to irregularities concerning third party consultants. Airbus Group has stated that it continues to cooperate with the SFO.”18

�� On 25 July, South American airline LAN agreed to pay more than $22 million to settle civil and criminal charges under the Foreign Corrupt Payments Act following a SEC investigation. According to the SEC’s findings, LAN’s chief executive, Ignacio Cueto Plaza, approved $1.15 million in payments to be channelled to an Argentine intermediary in order to negotiate a union dispute, knowing that he would make payments to third parties who had influence over those unions. In February, the Cueto Plaza agreed to personally pay a $75,000 penalty and attend anti-corruption training without denying or admitting the charges. In this settlement, LAN also accepted a condition that it must retain an independence compliance monitor for at least 27 months. Following the agreement, the SEC announced: “this settlement, along with our prior case against the CEO shows that public companies and their executives must be truthful and forthcoming about its overseas consulting agreements or otherwise pay the consequences.”19

�� On 13 July, the freight operations company FH Bertling Ltd and seven officers were charged by the SFO for allegedly making a corrupt payment contrary to the Prevention of Corruption Act 1906.

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court’s decision to acquit Sharef of fraud charges relating to the “slush fund”, citing legal errors.24

�� On 5 September, the UK’s attorney general Jeremy Wright announced plans to consult on the extension of the criminal offence of failure to prevent bribery found in section 7 of the UK Bribery Act to economic crimes such as fraud, false accounting and money laundering.25

�� On 30 August, the SEC announced it had awarded a whistleblower $22.4 million who helped the agency uncover a ‘well-hidden fraud’. The award is the second largest award granted by the SEC to a whistleblower and follows an $80 million settlement with agricultural business company Monsanto to resolve claims that it failed to properly account for the costs of a sales rebate programme. Subsequently, the individual has identified himself in order to encourage the SEC to take action against Monsanto’s auditor.26

�� On 29 July, a senior South Korean prosecutor was charged with bribery after allegedly receiving more than $854,000 in cash and shares from the founder of Nexon, the country’s biggest online gaming company. The scandal arose after Jin Kyung-joon reported a sharp increase in his personal wealth in 2015.27

�� On 8 July, the English court approved an application by the Serious Fraud Office (“SFO”) for a second deferred prosecution agreement (“DPA”) with a UK SME (“XYZ Ltd”) that cannot currently be named due to ongoing, related legal proceedings. XYZ Ltd generated most of its revenue from exports to Asian markets and from February 2000 (before the offending occurred), it was a wholly owned subsidiary of a US LLC. XYZ Ltd was the subject of an indictment alleging conspiracy to corrupt and conspiracy to bribe, contrary to section 1 of the Criminal Law Act 1977 and failure to prevent bribery contrary to section 7 of the Bribery Act 2010. The charges relate to a series of offers and/or payments made by a number of XYZ Ltd’s employees and agents between 2004 and 2012 to secure contracts in foreign jurisdictions. Under the DPA, XYZ Ltd has agreed to continue to cooperate fully with the SFO in providing a report addressing the controls, policies and procedures relating to anti-bribery and corruption every twelve months of the DPA’s duration. In addition, XYZ Ltd agreed to pay financial orders of £6,553,085. In passing the judgment, Lord Justice Leveson stated: “[this conclusion] provides an example of the value of self-

The charge relates to the alleged bribe of an agent of the Angolan state oil company, Sonangol, made between 2005 and 2006 with the intention of furthering FH Bertling’s operations in the region. FH Bertling Ltd is a UK-based subsidiary of the German-headquartered Bertling group.20

Sport�� On 9 September, FIFA’s Ethics Committee opened

formal proceedings against former FIFA executives Sepp Blatter, Jérôme Valcke and Markus Kattner. The committee’s investigatory chamber will now investigate possible violations of the FIFA Code of Ethics in the context of salaries and bonuses paid to Mr Blatter, Mr Valcke and Mr Kattner. Blatter and Valcke are already serving ethics bans and face criminal proceedings by Swiss federal prosecutors as part of a wider investigation of corruption implicating FIFA and leading soccer officials.21

“Other”�� On 19 September, Ernst & Young (“EY”) was fined

$9.3 million following an investigation by the SEC into its relationships with key clients. One example of this improper relationship included a senior EY partner spending more than $100,000 on corporate entertainment for a client’s chief financial officer. In a statement, the SEC announced that: “Ernst & Young did not do enough to detect or prevent these partners from getting too close to their clients and compromising their roles as independent auditors”.22

�� On 9 September, the SFO charged three former Tesco executives for fraud and false accounting. The investigation is continuing and the SFO has not announced whether it will charge other senior Tesco executives. Tesco itself has co-operated with the investigation. The executives will appear before magistrates on 22 September.23

�� On 6 September, the German Federal Court of Justice partially overturned the 2014 acquittal of a former Siemens AG board member for charges in connection with a historic bribery scandal. Uriel Sharef stood trial in Munich for three counts of fraud for his alleged involvement in the payment of bribes totalling $14.2 million in Latin American and for allegedly failing to close out a $35 million utilisation payment fund. Sharef was acquitted in 2014 when the Munich court held that he was not involved in the ordering of bribes and had not known that the fund still existed. However, in its latest ruling, the Federal Court of Justice overturned the Munich

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25. http://www.bloomberg.com/news/articles/2016-09-05/u-k-government-to-open-talks-on-new-criminal-laws-for-companies

26. https://www.sec.gov/news/pressrelease/2016-172.html

27. https://www.ft.com/content/70b2be64-555e-11e6-9664-e0bdc13c3bef

28. https://www.sfo.gov.uk/2016/07/08/sfo-secures-second-dpa/

report and co-operation along with the introduction of appropriate compliance mechanisms, all of which can only improve corporate attitudes to bribery and corruption.”28

1. https://www.ft.com/content/9edb953a-655e-11e6-8310-ecf0bddad227#axzz4HmXZhVDw

2. https://www.fca.org.uk/news/press-releases/fca-publishes-thematic-review-dark-pools

3. https://www.fca.org.uk/news/speeches/chief-executive-speaks-apm-about-recent-work-and-future-challenges

4. http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32014R0596

5. https://www.justice.gov/opa/pr/global-head-hsbc-s-foreign-exchange-cash-trading-desks-arrested-orchestrating-multimillion

6. https://www.sfo.gov.uk/2016/07/07/convicted-libor-manipulators-sentenced/

7. https://www.sfo.gov.uk/cases/libor-barclays/

8. http://financialservices.house.gov/news/documentsingle.aspx?DocumentID=400908

9. http://en.sledcom.ru/news/item/1065053/

10. https://www.sfo.gov.uk/2016/07/19/unaoil-investigation/

11. http://www.bloomberg.com/news/articles/2016-08-17/soma-loses-u-k-court-bid-to-force-sfo-to-end-corruption-probe

12. http://www.sbmoffshore.com/?press-release=leniency-agreement-signed-brazilian-authorities-petrobras-sbm-offshore

13. http://www.teliacompany.com/en/newsroom/news/news/press-releases/2016/9/the-u.s.-and-dutch-authorities-present-proposed-settlement-amount/

14. https://www.theguardian.com/news/2016/sep/07/panama-papers-denmark-becomes-first-country-to-buy-leaked-data

15. https://www.ministerjustice.gov.au/Mediareleases/Pages/2016/ThirdQuarter/New-cyber-team-to-target-terrorism-financing-and-financial-crime.aspx

16. https://www.ft.com/content/04322dcc-76a3-11e6-b60a-de4532d5ea35

17. http://www.wsj.com/articles/german-court-allows-lawsuits-against-volkswagen-to-move-forward-1470664803

18. https://www.sfo.gov.uk/2016/08/08/airbus-group-investigation/

19. https://www.sec.gov/news/pressrelease/2016-151.html

20. https://www.sfo.gov.uk/cases/f-h-bertling-ltd/

21. http://www.fifa.com/governance/news/y=2016/m=9/news=investigatory-chamber-of-the-independent-ethics-committee-opens-formal-2831503.html

22. https://www.sec.gov/news/pressrelease/2016-187.html

23. https://www.sfo.gov.uk/2016/09/09/charges-tesco-investigation/

24. http://globalinvestigationsreview.com/short-cut/2016/september/07#1068438

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