Canada Outlaws Facilitation Payments

Canadian flag waving with Parliament BuildingsFacilitation payments are no longer exempt under Canada’s Corruption of Foreign Public Officials Act.  On October 30, 2017, Global Affairs Canada, which manages diplomatic relations and promotes international trade, announced the end of the exemption.  This change was initiated in 2013 but delayed to give companies time to adjust their policies and procedures.  Effective October 31, 2017, even small facilitation payments that transpire, in whole or in part, in Canadian territories are illegal.  Facilitation payments made elsewhere involving a Canadian citizen, a Canadian permanent resident, or a Canadian entity are also prohibited.

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SEC Staying the Course on FCPA Enforcement

In remarks at NYU’s Program on Corporate Compliance and Enforcement, Steven Peikin, the new Co-Director of the SEC’s Enforcement Division, voiced a question that has been on the minds of many anticorruption practitioners and compliance professionals: Will the SEC continue to be committed to robust FCPA enforcement?”   “My answer to that question is simple,” Peikin said. “Yes.”

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Government Fraud Settlements Are Getting More Personal

Paying money in fraud settlement

Government fraud settlements are getting more personal. Which means the Yates memorandum is having its intended effect. Issued in 2015, the memo requires that government attorneys focus more on individual liability when resolving fraud investigations. For example, that year only 6 settlements imposed personal liability on physicians settling complaints filed under the False Claims Act. According to an analysis by Eric Topor of Bloomberg BNA (subscription required), the number of personal settlements paid by doctors has more than tripled. This year the number is up to 26; and the year is not over yet.

Personal settlements will continue. A recent post reports that Deputy Attorney General Rosenstein will review the policies created by the Yates memo when incorporating it into the United States Attorney’s Manual. Rosenstein indicated, however, that he intends to keep up pressure on individuals.

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Rosenstein Pledges Reduced Regulation, Encourages Self-Reporting

Rod Rosenstein

Deputy Attorney General Rod Rosenstein

U.S. Deputy Attorney General Rod Rosenstein pledged an enforcement environment in which businesses can thrive. In keynote remarks at the U.S. Chamber Institute for Legal Reform, he emphasized the Department of Justice’s (DOJ) commitment to “avoiding unnecessary interference in law-abiding enterprises.” Rosenstein also promoted the benefits of corporate compliance and self-reporting.

Although allegedly offering “no breaking news” about DOJ policies, Rosenstein’s vision provides insight into DOJ’s enforcement and compliance expectations. At a minimum his comments shed light on how DOJ will implement existing policies differently while he is second in charge at DOJ. These changes may dramatically impact resolution of future investigations.

Rosenstein offered apparent slights to the prior administration’s enforcement practices. For instance, he remarked that “[c]orporate enforcement and settlement demands must always have a sound basis in the evidence and the law.” DOJ “should never use the threat of federal enforcement unfairly to extract settlements.” These sentiments seem to respond to concerns expressed by those who object to DOJ’s tactics in the realm of the Foreign Corrupt Practices Act (FCPA).

Rosenstein emphasized that new DOJ leadership will reward businesses that self-report and cooperate with federal investigations. Although recognizing barriers to voluntarily disclosing internal wrongdoing, Rosenstein cited the benefits that DOJ can offer. “The Department can move forward not only to punish wrongdoers, but also to identify and implement policies that deter future crimes.” This will prevent those who compete unfairly from gaining any advantage.

A company’s choice to promptly self-report will affect DOJ’s enforcement decisions favorably. Further, DOJ “notices and evaluates carefully whether a corporate compliance program is applied faithfully.” Rosenstein acknowledged that certain compliance measures and cooperation might go beyond a company’s legal obligations. He warned, however, that a company thrives in the long term by working with, not against, the Department.

The newly established Working Group on Corporate Enforcement and Accountability will increase compliance efforts and protect those that “follow the rules.” The Working Group will offer recommendations on promoting individual accountability and corporate cooperation. Additionally, DOJ will evaluate whether the Financial Fraud Enforcement Task Force and the FCPA Pilot Program meet current needs.

Rosenstein also plans to clean up DOJ’s administrative landscape. He highlighted DOJ’s work to “reduce regulations and to control costs,” making it easier for companies to understand their obligations and comply with them. Rosenstein cited outdated and unnecessarily confusing policy guidance as a barrier to effective enforcement. He committed to updating the U.S. Attorneys’ Manual by consolidating and incorporating the outstanding policy memoranda. He also supported President Trump’s January 2017 Executive Order requiring two administrative regulations be identified for repeal for each new one proposed. Rosenstein claimed that making DOJ’s policies cleaner and more accessible will be good for DOJ as well as good for business.

Whether major policy changes are forthcoming remains to be seen, but from this and other recent speeches, it is clear that Rosenstein does not see the future as business as usual.






Targeting Failure to Repay As a False Claim

Hand holding pile of cash.

Contractors and providers may face false claims damages when they fail to return overpayments even though no fraud is involved. A recent civil settlement demonstrates that the government is targeting failure to repay, and it can be as costly as fraudulent billing.

Fair Warning Given

A medical practice paid nearly $450,000 to resolve an investigation, 250% more than the contested amount of $175,000. No false billing occurred. In fact, the Department of Justice conceded “credit balances often occur in a medical practice, for example, when two insurers share responsibility for a payment and one pays too much.” The government considered returning an overpayment to be a typical problem that should be resolved during account reconciliation.

The government left no doubt about its ulterior motive in settling the matter.  The acting U.S. Attorney wanted to “send a message that we will aggressively pursue those who seek to unjustly profit” from government programs. Similarly, one investigator predicted the settlement will serve as “a deterrent for others who consider similar practices.”

The Change

The strategy of targeting failure to repay builds on a change to the False Claims Act in 2009. Under the amendment, knowing failure to repay an obligation to the government within 60 days is the same as a false claim. The potential penalty is treble damages. Also, a qui tam relator can file suit in order to recover both part of the settlement and attorney’s fees. That happened to the medical practice in the settlement.

Of course, damages are not due immediately when an overpayment is received. A “knowing” failure requires identifying the overpayment, or failing to exercise reasonable diligence to identify the overpayment. A final rule allows a reasonable amount of time to identify an overpayment. The rule also establishes a six year look back period to find overpayments.

The takeaway: contractors and providers must identify overpayments and return them within 60 days.





The SEC Announces Another Seven-Figure Whistleblower Award

The Securities and Exchange Commission (SEC) last week announced a payout of more than $1 million to a whistleblower who provided information that resulted in a successful SEC enforcement action against a “registered entity” (e.g., a broker-dealer) that “impacted retail customers.” The SEC announced the award, while keeping the details of the enforcement action, the whistleblower, and the total penalty under wraps, in a redaction-filled Order Determining Whistleblower Award Claim.

Since the inception of its whistleblower program in 2011, the SEC has awarded more than $162 million to nearly 50 individuals. The SEC’s largest award to date was over $30 million in September 2014, and the average payout has been more than $3 million. According to the SEC, whistleblower tips have led to successful enforcements actions resulting in over $1 billion in monetary sanctions.

The SEC’s whistleblower program was created by the Dodd-Frank Act in 2011 to encourage those with information about securities law violations to report to the SEC. The Act established the SEC’s Office of the Whistleblower and put in place processes for fielding and investigating tips. If a whistleblower provides “high-quality original information” that leads to an enforcement action where monetary sanctions exceed $1 million, the SEC will issue a bounty equal to 10 to 30 percent of the sanctions. The program has proven highly successful at encouraging those with potentially helpful information to go to the SEC: In fiscal year 2016 alone, the Office of the Whistleblower received 4,218 tips, approximately 12 per day.

SEC ALJ Decision Shows Agency’s “Home Field Advantage” Has Its Limits

In a dense, nearly 60-page decision issued on September 27, 2017, SEC Administrative Law Judge Carol Foelak rejected all claims asserted by the SEC Enforcement Division (the “Division”) in In the Matter of Lynn Tilton, et al. The case involved a series of distressed debt funds that issued notes to institutional investors, using investor proceeds to acquire commercial debt. The Division generally charged that the funds’ manager, Lynn Tilton, and the advisory firms she controlled deceived investors by over-valuing troubled loans held by the funds and collecting excessive fees as a result. The Division also charged that Tilton and her firms falsely told investors that the funds’ periodic financial statements complied with generally accepted accounting principles (“GAAP”) when, in fact, they did not follow GAAP rules governing the fair valuation of assets. Having conducted a lengthy evidentiary hearing late last year, Judge Foelak found for Tilton and her entities on all of the Division’s claims. While the facts of the case are unique and complicated, there are several points worth highlighting.

Most significant, of course, is the total defense victory. While commentators often lament that the Division has a “home field advantage” in its in-house administrative proceedings, the outcome in Tilton suggests that that advantage may be overstated. In the course of a 14-day hearing, the Division put on nine witnesses, including three highly-credentialed experts. The evidence apparently demonstrated that Tilton made arrangements with portfolio companies to reduce their interest obligations to allow them to remain afloat; that she did not reduce the valuation of such loans as a result; that this practice had a favorable impact on her fees; and that information on the actual interest payments being made by portfolio companies, while discernible from the funds’ financial statements, was not easy to find. It is not hard to imagine a judge with a “home field” bias siding with the Division in such a case, especially given the fiduciary duties owed by investment advisers to their clients.

Judge Foelak, however, dismissed all of the Division’s charges, including charges that require no proof of fraudulent intent. In so doing, she carefully parsed the disclosures in complex fund documents, took into account the sophistication of the funds’ investors, and applied a healthy dose of common sense about the expectations of investors who put their money into such vehicles. While SEC administrative proceedings certainly pose challenges for defense counsel, Tilton is a reminder that those challenges are not insurmountable.

The opinion also offers some interesting procedural takeaways. First, Judge Foelak rejected Tilton’s argument that the Division violated its “Brady” obligations by failing to disclose that it had retained its experts before bringing the case, enlisting their help in reviewing evidence and shaping the Division’s theories (which Tilton contended was evidence of witness “bias”). Distinguishing this case from one in which a purportedly neutral trial witness had been extensively involved in an underlying criminal investigation, Judge Foelak ruled that such post-investigation/pre-filing expert consultation was insufficient to impose any affirmative disclosure obligation on the Division.

Judge Foelak also rejected Tilton’s arguments that the Division violated its “Jencks” obligation to produce witness statements by withholding notes of witness interviews, observing that there was no evidence to suggest that any witness had actually “adopted or approved” such notes as reflecting their own statements. Finally, while finding that Tilton had failed to prove an affirmative defense of “reliance on accountants,” Judge Foelak noted that such reliance was nonetheless relevant to the “degree of culpability for any violations” – i.e., whether the Division had carried its own burden of proving fraudulent intent, recklessness, or negligence.

Under SEC Rules of Practice, the Division may appeal Judge Foelak’s decision to the Commission itself within 21 days. If it does so, and the Commission grants review, then it may make any findings of fact and conclusions of law that it deems to be supported by the record. One might reasonably wonder why the Division can appeal an adverse ALJ decision to the very body that authorized its enforcement action in the first place. That, however, is a much larger topic for another day.

Choice of Counsel Upheld in New Zealand – This Time

Counsel of choice is important

Client consults with attorney on courthouse steps.

When the New Zealand Serious Fraud Office (SFO) summons you to attend an interview regarding an investigation of corporate misconduct, you may be surprised to learn SFO has the power to prevent your preferred counsel from accompanying you. In fact, many international regulatory bodies can exclude an attorney from the client’s compulsory interview. If a client is caught unaware, this power can be devastating to successful resolution of the proceeding.

SFO Prevents Choice of Counsel

On October 25, 2016, John James Loughlin was summoned to appear for an interview by SFO. The interview was “compulsory” and one “where the interviewee cannot refuse to answer a question on the grounds of self-incrimination.” While he was entitled to counsel, SFO informed Mr. Loughlin his current attorney was excluded. Mr. Loughlin was a director and chairman of the Board of a giant retail company. His attorney, Mr. Corlett, also represented several other members of the Board. SFO, drawing on its implied statutory power, denied Mr. Corlett admission to the interview on the grounds that Mr. Corlett attended interviews of his other clients who were also witnesses. Therefore, he was privy to information he could inadvertently disclose to Mr. Loughlin. SFO feared this disclosure could color Mr. Loughlin’s testimony at the interview.

Choice of Counsel Allowed – This Time

In an August 2017 decision, Loughlin v. The Director of the Serious Fraud Office, the High Court of New Zealand (a court of general jurisdiction but not New Zealand’s highest court) overruled SFO’s prohibition. Mr. Corlett was permitted to attend the interview because the judge found no particular facts suggesting the attorney’s presence would prejudice the investigation.

The takeaway, however, is that SFO may compel a witness to answer questions without the advice of a trusted representative. Precedent discussed in Loughlin upheld the exclusion of the attorney. SFO’s decision to exclude an attorney is limited only by a reasonability standard. In certain circumstances, its inherent authority to challenge counsel is seemingly unquestioned. Moreover, one of the reasons SFO might seek to exclude counsel is to prevent the coordination of defenses among witnesses—even though that is precisely the reason witnesses might want to use the same counsel. Thus, SFO’s power to limit coordination is as daunting as its ability to exclude chosen counsel from a potentially case-altering, and life-altering, event.

Global Perspective Needed

In the United States, constitutional, statutory, and ethical protections benefit the client rather than the tribunal. The Sixth Amendment and US Supreme Court jurisprudence protect choice of legal representation—barring a non-waivable conflict of interest in multiple-representation criminal cases as in Wheat v. US.

It is hazardous to assume similar protections will exist in international jurisdictions. New Zealand, Ireland, and Australia, for example, all follow a similar test: strongly presuming freedom of choice of legal representation, but limited by the needs of the tribunal. Knowledgeable counsel, with global connections, can prevent the predicament of standing before government investigators without one’s counsel of choice.

Kickback Training – What It Doesn’t Cover

Refusing kickback

One individual puts up hand to stop money being handed by another person.

Effective training prepares contractors and providers to recognize more than kickbacks. The example below reveals that not all kickback violations are intuitively obvious. What seems a clear violation to those familiar with anti-kickback and false claims statutes, may seem just a straightforward business arrangement to someone unfamiliar with them. After all, what is wrong when providers perform the activities for which they are reimbursed, no one lies, and no false documents are created? Read More Continue Reading

Criminal Finances Act 2017 – New Corporate Offences of Failing to Prevent Facilitation of Tax Evasion

The United Kingdom’s National Risk Assessment of money laundering and terrorist financing in October 2015 identified three priority risks faced by the UK and concluded that a more robust enforcement response is required. These changes were to be underpinned by a partnership between the government and the private sector to effect a significant change in the law.

In April 2016, the UK government published its action plan on anti-money laundering and counter-terrorist finance, setting out the steps to address such risks and resulting in the commissioning of the Criminal Finances Act 2017 (the “Act”), which received royal assent on 27 April 2017. The Act will come into force on 30 September 2017.

The Act is intended to strengthen the UK government’s ability to confiscate the proceeds of crime; to improve the international reach of enforcement; and to extend the applicability of enforcement to also cover investigations under the Terrorism Act 2000. The Act will bring about the most significant changes to the anti-money laundering and terrorist finance regime in the UK since enactment of the Proceeds of Crime Act 2012.

We previously published an article on a widely anticipated new offence of corporate failure to prevent economic crime (which offence would have incorporated the failure to prevent fraud, money laundering and false accounting), but the Act has not included this offence.   However, the Act does include two new corporate criminal offences for the failure to prevent the facilitation of tax evasion, whether in the UK (Section 45) or abroad (Section 46).   The Act also includes provisions relating to:

  1. The seizure and forfeiture of the proceeds of crime stored in UK assets, extending the current law to include value stored in bank accounts and high-value property.
  2. “Unexplained Wealth Orders”—increased powers to require those suspected of corruption to explain the source of their funding. In order to obtain an unexplained wealth order, the value of the unexplained funds must exceed £100,000 in value and the court must be satisfied that there are reasonable grounds for suspecting that funds have been unlawfully obtained.
  3. The sharing of information between regulated companies when requested from each other or when the National Crime Agency requests that information be shared.
  4. An extension of the current moratorium period in which Suspicious Activity Reports can be investigated.
  5. Two new corporate offences of the failure to prevent facilitation of tax evasion.
  6. Disclosure Orders for money laundering investigations, extending the powers already in existence for corruption and fraud investigations.
  7. Combating the financing of terrorism so that the existing legal regime for investigations into criminal finance can also apply to investigations relating to offences under the Terrorism Act 2000.

The UK government has issued draft guidance on the new corporate offences for the failure to prevent tax evasion, and the guidance confirms the government’s belief that a “relevant body” should be criminally liable when it fails to prevent those who act for it, or on its behalf, from criminally facilitating tax evasion. The guidance defines a ”relevant body” as an incorporated body (typically a company) or partnership; ”relevant body” does not include natural persons, i.e., individuals (as opposed to legal persons, which include entities).

The new offences will be committed when a relevant organisation fails to prevent an associated person from criminally facilitating the evasion of a tax, whether the tax evaded is owed in the UK or in a foreign country. The guidance is similar to the guidance to the UK Bribery Act 2010 (“Bribery Act”), which sets out six key principles that organisations should adopt, including the following:

  1. Risk assessment;
  2. Proportionality of risk-based prevention procedures;
  3. Top level commitment: Tone from the top;
  4. Due diligence;
  5. Communication (including training); and
  6. Monitoring and review.

Organisations should start to consider now whether they have reasonable procedures in place to prevent someone acting for them (or on their behalf) from facilitating tax evasion in the UK or in a foreign country.

A “prevention procedures” defence is available to corporate bodies, similar to the “adequate procedures” defence that is available under the Bribery Act. For a corporate body to avail itself of the “prevention procedures” defence under the Act, it must prove that it had “such prevention procedures as it was reasonable in all the circumstances to expect… or [that] it was not reasonable in all the circumstances to expect [the company] to have any.”

Some businesses will not be required to put in place prevention procedures where it is considered unreasonable to do so. For smaller businesses and certain low risk industries, the guidance sets out minimal steps that should be taken nevertheless, including the release of a statement from the board proscribing the illegal activities, training of staff, and implementation of clear reporting and whistleblowing procedures.

If you are unclear on the steps that your business should take, or if you would like us to help you review or design prevention procedures, please contact a member of our team.