Why it matters: This month we highlight three recent instances where the federal enforcement agencies have announced settlements, prosecutions and orders in their continued efforts to "follow the money" down the twin rabbit holes of bribes payments and money laundering. The SEC announced settlements in three Foreign Corrupt Practices Act cases in the first week of February 2016 while the DOJ successfully prosecuted the founder of Liberty Reserve, a now defunct virtual currency service that was allegedly "once used by cybercriminals around the world to launder the proceeds of their illegal activity." In addition, the Treasury Department's Financial Crimes Enforcement Network (FinCEN) issued "Geographic Targeting Orders" aimed at uncovering the identities of individuals who launder money through shell companies via all-cash high-end residential real estate deals in New York and Florida. Read on for a recap.

Detailed discussion: In the first two months of 2016, the SEC settled three Foreign Corrupt Practices Act (FCPA) cases and the DOJ successfully prosecuted the founder of the alleged cybercriminal money laundering service Liberty Reserve. In addition, FinCEN issued "Geographic Targeting Orders" aimed at uncovering the identities of individuals who launder money via anonymous, all-cash residential high-end real estate deals in New York and Florida. We recap these enforcement agencies' latest efforts to "follow the money" for you here.

SEC: In the first week of February 2016, the SEC announced three FCPA resolutions of note:

  • "Golf in the morning and beer-drinking in the evening"—SciClone Pharmaceuticals agreed to pay $12.8 million to settle FCPA charges in connection with bribes paid to healthcare professionals in China: On February 4, 2016, the SEC announced that California-based SciClone Pharmaceuticals, Inc. (SciClone) agreed to pay $12.8 million to settle charges that its Chinese subsidiaries paid bribes to healthcare professionals employed at state health institutions in China in order to increase sales. According to the SEC's order, an SEC investigation found that, between 2005 and 2010, employees of SciClone's China-based subsidiaries gave "items of value," including money, gifts, expensive trips and meals, golf expeditions and lavish hospitality, to the healthcare professionals (as one SciClone rep said, "luring them with the promise of profit"), which resulted in several million dollars in sales of SciClone's pharmaceutical products to China's state health institutions. Also, according to the SEC's order, when SciClone learned in 2008 of a potential FCPA issue relating to one of its third-party consultants, it conducted an internal investigation into that consultant. Yet, the SEC found, a broader investigation into its third-party hiring practices was not conducted. The SEC found that bribes were improperly reflected as legitimate business expenses in SciClone's books and records and that SciClone "failed to devise and maintain a sufficient system of internal accounting controls and lacked an effective anti-corruption compliance program." Without admitting or denying the SEC's findings, SciClone consented to the SEC's order and agreed to pay over $9.4 million in disgorgement of sales profits plus $900,000 in prejudgment interest and a $2.5 million penalty. In addition, the SEC's order states that SciClone has "taken steps to improve its internal accounting controls and to create a dedicated compliance function," including "(1) hiring a compliance officer for its China operations; (2) undertaking an extensive review of the policies and procedures surrounding employee travel and entertainment reimbursements; (3) substantially reducing the number of suppliers providing third-party travel and event planning services; (4) improving its policies and procedures around third-party due diligence and payments; (5) incorporating anti-corruption provisions in its third-party contracts; (6) providing anti-corruption training to its third-party travel and event planning vendors; (7) disciplining employees (and their managers) who violate SciClone's policies; and (8) creating an internal audit department and compliance department." SciClone further agreed in the Order to provide the SEC with status reports for the next three years on its remediation and implementation of anticorruption compliance measures. In a separate press release, SciClone announced that the DOJ had ended its related investigation and declined to pursue the matter further. 

    See here to read the SEC's 2/4/16 Order entitled "In the Matter of SciClone Pharmaceuticals, Inc.," respectively.
  • Individual accountability under the FCPA—airline executive agreed to pay $75,000 to settle charges in connection with "potential" improper payments to Argentinean union officials: Also on February 4, 2016, the SEC announced that Ignacio Cueto Plaza (Cueto), the CEO of South America-based LAN Airlines, agreed to settle charges that he violated the FCPA when he authorized "improper payments to a third-party consultant who may have passed some money to union officials in the midst of a dispute between the airline and its unionized employees in Argentina." According to the SEC's order, an SEC investigation found that Cueto authorized a "sham" consulting agreement (never signed) pursuant to which $1.15 million was wired to a Virginia-based brokerage account in order for the "consultant" to "undertake a study of existing air routes in Argentina." The SEC found that Cueto "knew no such study would be performed" and that, instead, the "consultant" was hired to help settle a labor dispute in Argentina, using the $1.5 million if necessary to bribe union officials "to abandon their threats … and to get them to accept a wage increase lower than the amount asked for in negotiations." Without admitting or denying the SEC's findings, Cueto agreed to the SEC's order that he violated the internal accounting controls, books and records, and false records provisions of the Securities Exchange Act of 1934 and agreed to pay a $75,000 penalty. The order also requires Cueto to certify his compliance with the airline's policies and procedures by, among other things, attending anticorruption training. 

    See here to read the SEC's 2/4/16 Order entitled "In the Matter of Ignacio Cueto Plaza," respectively.
  • Cooperation is key in the SEC's settlement with SAP SE—company agreed to disgorge $3.7 million in sales profits to settle FCPA charges of deficient internal controls that allowed executive to pay bribes to Panamanian officials: On February 1, 2016, the SEC announced that the Germany-based software manufacturer SAP SE (SAP) agreed to pay disgorgement of $3.7 million in profits (plus approximately $190,000 in prejudgment interest) from SAP's software sales to the Panamanian government to settle FCPA charges that it maintained deficient internal controls that allowed former SAP executive Vincente E. Garcia to pay $145,000 in bribes to a senior Panamanian government official in exchange for lucrative sales contracts (in our January 2016 newsletter, we reported on the separate DOJ and SEC enforcement actions against Garcia individually that resulted in him personally disgorging over $85,000 and being sentenced to 22 months in prison in December 2015). According to the SEC's order, the bribery scheme involved providing discounts of up to 82% to SAP's Panamanian partner, who used the excessive discounts to create a "slush fund" for paying bribes to Panamanian officials on Garcia's behalf as well as to pay Garcia kickbacks. The SEC also found that the slush fund monies were improperly recorded in SAP's books and records as legitimate discounts. Without admitting or denying the SEC's findings, SAP consented to the SEC's order that SAP violated the internal controls and the books and records provisions of the FCPA. The SEC's order makes clear that the settlement reflects the credit it afforded to SAP for extensively cooperating with the SEC in the investigation, which cooperation efforts included "(i) conducting an internal investigation; (ii) voluntarily producing approximately 500,000 pages of documents and other information quickly, identifying significant documents and translating documents from Spanish; (iii) conducting witness interviews, sharing Power-Point presentations and timelines; (iv) facilitating an interview of Garcia at work at SAPI offices in Miami without alerting him to the investigation into his conduct; and (v) initiating a third party audit of the local partner." SAP also got credit from the SEC for its substantial remedial efforts, such as terminating Garcia, auditing all recent public sector Latin American transactions (whether or not they involved Garcia), conducting regular anticorruption employee training and internal audits and implementing "new policies and procedures to detect and prevent similar issues from recurring in the future." 

    See here and here to read the SEC's 2/1/16 press release entitled "SEC Charges Software Company With FCPA Violations" and the SEC's 2/1/16 Order entitled "In the Matter of SAP SE," respectively.

DOJ—Founder of Liberty Reserve pleaded guilty to money laundering through "premier" criminal virtual currency enterprise: On January 29, 2016, the DOJ announced that Arthur Budovsky (Budovsky), the founder of Liberty Reserve—alleged to be "a virtual currency once used by cybercriminals around the world to launder the proceeds of their illegal activity"—pleaded guilty to one count of conspiring to commit money laundering in the Southern District of New York. He is scheduled to be sentenced on May 6, 2016. According to the indictment filed by the DOJ against Budovsky and six other defendants, as well as Budovsky's admissions at the January 29 hearing, Budovsky specifically created Liberty Reserve in 2006 "to help users conduct anonymous and untraceable illegal transactions and launder the proceeds of their crimes." In order to evade the "scrutiny and reach" of U.S. law enforcement, Budovsky emigrated to Costa Rica (where he became a citizen in 2011 after renouncing his U.S. citizenship) and operated the service from there with the help of the codefendants. Liberty Reserve quickly became one of the "principal money-transmitting services used by cybercriminals around the world to amass, distribute, store and launder the proceeds of their illegal activity, including proceeds of investment fraud, credit card fraud, identity theft and computer hacking." By the time the U.S. government shut down Liberty Reserve in 2013, it had more than 5 million user accounts worldwide, including more than 600,000 accounts associated with U.S. users, and had processed millions of transactions through which more than $250 million in criminal proceeds was laundered. To date, four of Budovsky's codefendants have pleaded guilty, with two sentenced to prison and two awaiting sentencing. Charges remain pending against Liberty Reserve and the remaining two individual defendants who are fugitives. U.S. Attorney for the Southern District of New York Preet Bharara said in the DOJ's press release that "Arthur Budovsky founded and operated Liberty Reserve, an underworld cyber-banking system that laundered hundreds of millions of dollars in illicit proceeds for criminals around the world. The only liberty that Budovsky and Liberty Reserve promoted was the freedom to commit and profit from crime. Thanks to this truly global investigation that included cooperation from 17 countries, Liberty Reserve has been shut down, and its founder Arthur Budovsky stands convicted in an American court of law, facing the loss of his own liberty."

See here to read the DOJ's 1/29/16 press release entitled "Founder of Liberty Reserve Pleads Guilty to Laundering More Than $250 Million Through His Digital Currency Business."

FinCEN: In order to better "understand the risk that corrupt foreign officials, or transnational criminals, may be using premium U.S. real estate to secretly invest millions in dirty money" and boost efforts to "combat money laundering in the real estate sector," on January 13, 2016, FinCEN issued Geographic Targeting Orders (GTO) that would temporarily require certain U.S. title insurance companies to identify the "natural persons" behind the shell companies used to pay "all cash" (i.e., without bank financing) for high-end residential real estate purchases in the Borough of Manhattan in New York City, New York, and Miami-Dade County, Florida. FinCEN said in its release announcing the GTOs that it is concerned that such all-cash purchases "may be conducted by individuals attempting to hide their assets and identity by purchasing residential properties through limited liability companies or other opaque structures." FinCEN explained that the GTOs will require specified title insurance companies in certain circumstances to record and report to FinCEN "the beneficial ownership information of legal entities purchasing certain high-value residential real estate without external financing." FinCEN will then make the information available to law enforcement investigators as part of FinCEN's database. FinCEN said it is seeking this information through title insurance companies because title insurance is a "common feature in the vast majority of real estate transactions" and thus title insurance companies "can provide FinCEN with valuable information about real estate transactions of concern." FinCEN made clear that the "GTOs do not imply any derogatory finding by FinCEN with respect to the covered companies" and that it "appreciates the assistance and cooperation of the title insurance companies and the American Land Title Association in protecting the real estate markets from abuse by illicit actors." The GTOs will be in effect for 180 days from March 1 to August 27, 2016.

See here to read FinCEN's 1/13/16 press release entitled "FinCEN Takes Aim at Real Estate Secrecy in Manhattan and Miami."