On August 29 and 30, 2013, three defendants in the ongoing U.S. criminal prosecutions arising out of bribes allegedly paid by New York broker-dealer Direct Access Partners LLC (“DAP”) to officials employed by Venezuelan state-owned banks pleaded guilty to conspiracy, FCPA bribery, Travel Act violations, and money laundering.1 These guilty pleas raise the natural question: What difference do the additional, non-FCPA charges make?
This article analyzes the increasing use in FCPA-related matters of money laundering charges, one of the non-FCPA criminal charges brought in the DAP matter. This increase has been particularly pronounced in cases against individuals, both on the bribe-paying and bribe-receiving sides of transactions. We first address the implications of money laundering charges in FCPA cases, which include, among others, the DAP, Bodmer, and Haiti Telco cases, to identify the factors driving the increased use of such charges and their consequences, which can include longer sentences of imprisonment and forfeiture. We also explain the implications of these developments for financial institutions, which in addition to the already significant burdens of complying with the FCPA itself, and the related challenges posed by aiding and abetting and conspiracy liability, have obligations under the Bank Secrecy Act and related laws to report certain transactions. We conclude the use of money laundering charges in FCPA cases presents potentially unique risk for financial and non-financial institutions alike and provides another key reason for such institutions to devote appropriate legal, compliance, and audit resources to mitigating the risk of being caught up in an FCPA-related prosecution.
Why Charge Money Laundering in FCPA Cases?
For bribe-payers, a key incentive for prosecutors to charge money laundering in FCPA cases appears to flow from the fact that a money laundering conviction can have a potentially significant effect on a sentence of incarceration for an individual, as illustrated by the Esquenazi case now pending before the Eleventh Circuit.2 In that case, defendant Joel Esquenazi was sentenced in 2011 to 15 years for FCPA anti-bribery and money laundering offenses arising out of payments allegedly made to officials of Haiti TelCo. Esquenazi’s term of imprisonment, the longest in the history of FCPA-related criminal prosecutions, was driven by the money laundering counts on which he was convicted.3
This sentencing disparity is related to the fact that, while both FCPA charges and money laundering are criminally punishable by roughly similar fines,4 an individual may be sentenced to up to twenty years in prison on each money laundering count, but to only five years on each FCPA bribery count.5 Even bearing in mind judges’ discretion to sentence individuals to concurrent or consecutive prison terms upon a conviction on multiple counts,6 the potential 20-year sentence is a powerful threat. For bribe recipients, the impact may be even more significant. “Foreign officials” cannot be charged under the FCPA or with conspiracy to violate it. Thus, money laundering may be the only U.S. federal criminal offense with which they can be charged.7
In the case of corporations, the impact of a conviction for money laundering is potentially variable. Corporations, which cannot be incarcerated, are potentially subject to terms of probation, but those terms cannot exceed periods longer than five years, even for money laundering.8
Thus, a money laundering count against a corporation might not make a significant difference to the outcome, all else being equal. On the other hand, as most FCPA corporate prosecutions are settled, there may be larger dynamics that explain the relative paucity of money laundering charges against corporations in such matters. These could include the possible impact money laundering charges can have under various forfeiture statutes, which can include forfeiture of an entire business sufficiently “tainted” by laundered funds.9 For these and other reasons outlined below, companies may bargain hard not to be charged with, or otherwise to avoid having to acknowledge and admit, via a Non-Prosecution Agreement, money laundering crimes.
Money Laundering and the FCPA: The Bribe Payer and Bribe Receiver Cases
In 1986, nine years after it passed the FCPA, Congress enacted the Money Laundering Control Act, which made it a crime to launder proceeds derived from the commission of certain predicate crimes. The Act, a response to “the spiraling growth and pervasiveness of money laundering in the United States and the nexus between money laundering and organized crime,”10 made it a separate crime to transfer money obtained illegally through apparently legitimate channels in order to obscure its original source.11
Sections 1956 and 1957 of Title 18 of the United States Code codify the Money Laundering Control Act, and prohibit domestic and international money laundering transactions. Under Section 1956, it is unlawful to “conduct[] or attempt[] to conduct” a financial transaction with proceeds known to be derived from illegal activity.12 The statute sets forth a variety of predicate illegal acts for purposes of the money laundering statute, of which FCPA antibribery violations are one.13 In conducting the transaction, the defendant must have intended to (1) promote illegal activity, (2) evade taxes, (3) conceal or disguise proceeds from illegal activity, or (4) avoid transaction reporting requirements under state or federal law.14 Under Section 1957, it is illegal to conduct a monetary transaction in an amount greater than $10,000 with property known to be derived from criminal activity. The extraterritorial scope of Section 1957 is narrower than that of Section 1956.15 As a result, money laundering violations related to FCPA anti-bribery charges are usually charged under Section 1956.
The Hans Bodmer case involving bribes allegedly paid in Azerbaijan provides a ready example from among the many cases in which money laundering charges were brought in an FCPA context.16 In 1997, the government of Azerbaijan was in the process of privatizing the State Oil Company of the Azerbaijan Republic (“SOCAR”). Frederic Bourke, Viktor Kozeny, and a consortium they formed paid bribes to Azeri officials to induce them to rig the auction for SOCAR in the consortium’s favor. Bodmer, a Swiss lawyer, represented various U.S. entities connected to the consortium, and in his capacity as an agent paid and authorized the payment of a number of bribes on its behalf.17
Bodmer was charged in a two-count indictment with conspiracies to violate the FCPA and money laundering statutes. The FCPA-related count was dismissed, on the basis that the FCPA (prior to its amendment in 1998) did not clearly apply to non-resident foreign nationals merely because they acted as agents of domestic concerns.18 The District Court held this fact did not bar prosecution for money laundering to “promote” those violations.19 Bodmer pleaded guilty to money-laundering conspiracy.20
More recently, in the DAP cases involving bribes paid to officials at Venezuela’s state-run economic development bank, the Banco de Desarrollo Economico y Social de Venezuela (“BANDES”), the government employed the same language prohibiting “promotional” international money laundering that it invoked against Bodmer. The BANDES cases involved a conspiracy by employees of a U.S. broker-dealer to bribe BANDES officials in exchange for trading business. In the informations to which the U.S. defendants pleaded guilty, the government alleged that the defendants “willfully and knowingly transported, transmitted, and transferred… monetary instruments and funds from a place in the United States to and through a place outside the United States… with the intent to promote the carrying on of specified unlawful activity,” specifically, FCPA and Travel Act violations.21 As the DOJ’s press release noted, defendants faced “a maximum penalty of five years in prison on each count except money laundering, which carries a maximum penalty of 20 years in prison.”22 Sentencings are scheduled for 2014.
The Haiti Teleco case is another example of how the DOJ uses money laundering charges in FCPA cases. Telecommunications D’Haiti S.A.M., or Haiti Teleco, is a Haitian state-owned telecommunications company that provides land-line telephone services. The case involved two Florida-based telecommunications companies that paid bribes to government officials who worked at Haiti Teleco in order to obtain various business advantages, including favorable rates and the continuation of certain contracts.23
The DOJ charged the executives of the Florida companies and the Haitian officials in the same indictment. The indictment charged FCPA violations and an FCPA conspiracy as to the executives, and charged money laundering and a money laundering conspiracy as to both the executives and the foreign officials.24 The executives and the Haitian officials, it was alleged, conducted transactions “designed, in whole and in part, to conceal and disguise the nature, the location, the source, the ownership, and the control of the proceeds” of the bribes paid in violation of the FCPA.25 One Haitian official pleaded guilty to money laundering in furtherance of the FCPA scheme, while the other official was convicted of money laundering by a jury.26 A jury convicted the executives of both the FCPA and the money laundering counts.27
The result in the Haiti Teleco cases points up the dual uses of money laundering counts in FCPA prosecutions: first, the government was able to obtain convictions of foreign officials, who could not be charged with the underlying FCPA violations, and second, the government was able to obtain additional convictions, with associated additional potential criminal sanctions, against the U.S. perpetrators of FCPA violations. As a result of the money laundering conviction, Joel Esquenazi, one of the Florida executives, was sentenced to fifteen years in prison – the longest term ever imposed in an FCPA case.28 This record sentence was driven by a money laundering sentence ordered to be served consecutively to the FCPA sentence.29
Money laundering charges are used against companies less frequently than they are against individual defendants, but some companies have been charged with – and have pleaded guilty to – money laundering. In 2010, Nexus Technologies Inc., an export company based in Pennsylvania, pleaded guilty to FCPA and money laundering charges.30 The charges stemmed from bribes Nexus and its executives paid to Vietnamese officials in exchange for valuable contracts to provide equipment and technology to Vietnamese government agencies. The bribes were routed from Nexus accounts to accounts of a shell company in Hong Kong, which Nexus and its executives used as an intermediary for payments to government officials.31 The money laundering allegations in the superseding indictment to which both the company and its executives ultimately pleaded guilty stated the transfers to the intermediary were done to “promote the carrying on of a specified unlawful activity, that is, bribery of a foreign official.”32
A money laundering conviction can carry significant financial consequences for both individuals and companies.
Under the civil forfeiture statute, any property “involved in” a money laundering transaction, or “traceable” to property involved in such a transaction, may be subject to forfeiture.33 Civil forfeiture may also be sought with respect to proceeds derived from or traceable to any offense that the money laundering statute defines as “specified unlawful activity” – a category that includes felony violations of the FCPA.34 For money laundering, criminal forfeiture is available as well.35 However, criminal forfeiture is different from civil forfeiture36 in ways that make it, in many legal as well as practical senses, a “more limited tool of law enforcement than is civil forfeiture.”37 For example, under the civil forfeiture statute, the government can – and does – seek forfeiture of property traceable to criminal activity even before the related criminal proceedings have been concluded.38 Under these statutes, a person or business that commits money laundering can be forced to forfeit significant sums. In some cases, companies have had all of their assets seized and forfeited. In 2000, the owners of two Panamanian jewelry businesses, Speed Joyeros and Argento Vivo S.A., were accused of money laundering and pleaded guilty in 2002. As the DOJ reported this month, as a result the corporate assets of the two firms were seized, forfeited in full, and shared in part with the Panamanian government.39 Under the sentencing guidelines applicable to organizations, this result – total forfeiture and cessation of business – is well within the range of expected outcomes for companies that exist for the purpose of carrying on criminal activity.40 Even for companies whose assets would not be forfeited completely, there is significant financial risk from forfeiture proceedings. In addition, by incentivizing foreign governments to assist in U.S. anti-money laundering investigations and prosecutions, the DOJ practice of sharing with such governments recoveries in forfeiture proceedings addressing the proceeds of cross-border crimes – which will include most FCPA antibribery offenses – can increase these risks.
The Bank Secrecy Act and Compliance-Related FCPA Risk for Financial Entities
The DOJ’s increasing use of money laundering charges in FCPA prosecutions may be a harbinger of increased risks for financial institutions. A wide variety of federal laws and regulations may be used to draw such firms into FCPA cases other than as mere repositories of evidence if the DOJ’s increased interest in the financial transactions that underlie such cases reveals deficient compliance practices. The DOJ may have already indicated a shift to more aggressive investigation of FCPA-related activity by the financial services industry. When the Department announced the indictments in the BANDES case earlier this year, it termed the charges “a wake-up call to anyone in the financial services industry who thinks bribery is the way to get ahead.”41 But potential risks for the financial services industry extend well beyond “basic” FCPA compliance.
In 1992, Congress amended the Bank Secrecy Act to give authority to the Secretary of the Treasury to require banks and other financial institutions to report suspicious transactions that may be connected to illegal activity and to implement anti-money laundering programs.42 The statutory and regulatory regime, which has been amended several times, most significantly in the USA PATRIOT Act, requires banks, securities broker-dealers and other classes of financial institutions to establish risk-based antimoney laundering compliance programs, including customer identification programs, and to report on suspicious activity (in “Suspicious Activity Reports,” or “SARs”), among other requirements. As a result of these requirements, banks and other financial institutions must develop sophisticated compliance procedures, and the deficiency of these procedures can lead to significant penalties in connection with bribery-related activity, even if an institution’s conduct does not aid or abet the FCPA-governed conduct or give rise to conspiracy charges related to the same.
Federal anti-money laundering law thus requires that “each financial institution shall establish anti-money laundering programs.”43 These programs must include “(A) the development of internal policies, procedures, and controls; (B) the designation of a compliance officer; (C) an ongoing employee training program; and (D) an independent audit function to test programs.”44 The anti-money laundering program requirement is implemented via regulations from a variety of agencies, including most prominently the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) and largely parallel regulations from federal functional regulators, such as the Federal Reserve and the Office of the Comptroller of the Currency in the case of banking organizations.45 The purpose of these programs is to involve financial institutions in the detection, reporting, and prevention of money laundering and other crimes involving financial transactions.
Financial institutions must also report any “suspicious activity” to regulators. Financial institutions are required to report to FinCEN “any suspicious transaction relevant to a possible violation of law or regulation.”46 Banks, which have borne these reporting requirements for longer than other types of financial institutions, must report any transaction involving an aggregate of $5,000 or more that (1) involves funds derived illegally or is intended to hide or disguise such funds; (2) is designed to evade any requirements of Bank Secrecy Act regulations, or (3) “has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage.”47 These reports typically must be made within 30 days of a transaction and their existence generally cannot be disclosed to any person or organization other than law enforcement and regulators. In addition, financial institutions and their agents that file SARs enjoy a broad safe harbor from any liability for such disclosures.48
These and other requirements49 impose a variety of duties on financial institutions to assist law enforcement in investigating and prosecuting crimes involving financial transactions. Failures to abide by these requirements can lead to significant enforcement actions against financial services institutions, as illustrated in recent settlements for deficiencies in money laundering controls outside the FCPA context: firms have incurred billions of dollars in fines and settlements in recent money laundering and Bank Secrecy Act cases. The large size of the recent financial institution settlements evokes the adage that parties bargain in the shadow of the law – and here, the possibility that a bank might even face revocation of its license to do business casts a long shadow indeed.50
Anti-money laundering compliance issues have made significant news in the past year. In December 2012, HSBC agreed to a record-setting settlement51 in which it paid $1.92 billion in forfeitures and fines because of its “blatant failure to implement proper anti-money laundering controls.”52 The DOJ alleged that the bank did not devote sufficient staff to its anti-money laundering functions and, thus, was unable sufficiently to identify and report suspicious transactions. The DOJ alleged HSBC facilitated significant financial transactions for drug cartels and money launderers.53 The HSBC settlement and deferred prosecution agreement ultimately allowed HSBC to avoid criminal prosecution, but this failure of oversight cost the bank a sum that was more than double the largest U.S. government corporate resolution in the history of the FCPA.
More recently, in September 2013, TD Bank settled claims related to its alleged failure to file SARs to alert regulators to a Ponzi scheme perpetrated by one of its customers, Florida attorney Scott Rothstein.54 The bank paid $52.5 million ($37.5 million to FinCEN and the OCC, and the remainder to the SEC) to settle charges that it “violated the federal Bank Secrecy Act by failing to uncover and report in a timely manner suspicious activities” related to the scheme.55
Although there is evidence that financial institutions increasingly have become the focus of FCPA enforcement,56 FCPA-related settlements with financial institutions have yet to dominate over other regulatory and compliance issues.57 However, increasing attention being given by prosecutors to money laundering in the FCPA context may present a risk for institutions that lack adequate internal controls. As seen above in the non-FCPA money laundering context, financial institutions face substantial risk when they serve as conduits for (and fail to file SARs regarding) monetary transactions that violate federal law. As the use of money laundering charges in FCPA cases increases, banks and other financial institutions should expect that their involvement on the wrong end of FCPA-related prosecutions may increase if their antimoney laundering programs are deficient. Financial institutions subject to anti-money laundering control requirements would therefore do well to coordinate with FCPA counsel as well as anti-money laundering experts when framing their compliance program and internal controls relating to U.S. anti-money laundering obligations.
Conclusion
As political pressures mount against bank secrecy, and press reports, social media, and other sources of evidence drive up the number of FCPA cases being investigated internally by companies within and without the financial sector, the risk of money laundering charges in addition to FCPA offenses being charged is substantial. The financial sector as well is exposed to increased parallel regulatory and enforcement risk, not only from the primary risk that banks and other institutions themselves might commit bribery, or aid, abet or conspire with others who do, but also from more elemental risk of violation of “know your customer” and suspicious activity reporting requirements.
Companies and individuals alike who are subject to the FCPA, or who might be in the position of providing financial services to those who are, would therefore be well advised to consider and weigh these risks when allocating compliance resources or evaluating particular business transactions or specific allegations of misconduct.
