Amid the daily barrage of news stories from the US relating to the Robert Mueller investigation, the opioid epidemic and the U.S. Department of Justice ("DOJ") leadership changes, it can be easy to overlook significant DOJ-related developments from 2018, especially in the area of white collar criminal and civil enforcement, including several derived from memos issued by DOJ senior leadership.
Here is a look back at a few of the most notable developments that deserve a closer look.
FCPA Extraterritoriality: Second Circuit Reigns in DOJ
Despite being enacted more than 40 years ago, there is remarkably little case law on the FCPA, the primary tool used by the DOJ to prosecute bribery of foreign government officials, because most cases settle. But in August 2018, after more than a year and a half since oral argument, the U.S. Court of Appeals for the Second Circuit handed down United States v. Hoskins, a rare rebuke of the DOJ's efforts to expand the extraterritoriality of the FCPA.
Defendant Hoskins was accused of scheming to bribe Indonesian government officials in connection with a $118 million contract. Hoskins, a foreign national, worked for a U.K. subsidiary of a French company and the DOJ alleged that his co-conspirators committed various acts in furtherance of the scheme in the U.S. Because Hoskins was alleged to be a member of the conspiracy, the DOJ theorized that he could therefore be held liable even though he was not personally present in the U.S. for the alleged misconduct. The district court had dismissed the FCPA charges against Hoskins and the DOJ appealed.
The Second Circuit acknowledged that generally a defendant may be held liable for conspiracy, even though he is incapable of committing the substantive offense. The court held, however, that "the FCPA clearly dictates that foreign nationals may only violate the statute outside the United States if they are agents, employees, officers, directors or shareholders of an American issuer or domestic concern. To hold Hoskins liable, the government must demonstrate that he falls within one of those categories or acted illegally on American soil."r
It remains to be seen how the Hoskins decision will impact the DOJ's pursuit of foreign nationals in FCPA cases, given its expansive views of what constitutes an "agent," but the decision is undeniably an important development in an otherwise sparse landscape of relevant case law.
International Cooperation Versus Data Protection
Cooperation between the DOJ and overseas enforcement authorities has never appeared stronger and is particularly apparent in the context of international bribery and anti-corruption. In 2018 alone, the DOJ publicly acknowledged investigative assistance in Foreign Corrupt Practices Act, or FCPA, cases from Austria, the Bahamas, Brazil, the Cayman Islands, Croatia, Cyprus, France, Germany, Latvia, the Netherlands, Singapore, Spain, Switzerland, Turkey and the United Kingdom. Indeed, DOJ leadership recently emphasized the importance of the "upward trend of multijurisdictional white collar cases" in an October 2018 article by FCPA Unit Chief Dan Kahn. This continuing trend, Kahn wrote, "has had a significant positive impact on United States criminal cases because prosecutors are much more likely to secure evidence from overseas, and to be able to do so more quickly, when the relevant foreign authorities are themselves investigating the same or overlapping conduct and cooperating with United States authorities."
But cooperation limits may be starting to show, especially on the heels of increasingly restrictive foreign data privacy laws, blocking statutes, and state secrecy protections. Potentially most impactful is the EU's new General Data Protection Regulation, or GDPR, which came into effect in May 2018 and provides broad protection over the use and production of "personal data." Violations could result in the greater of up to 4 percent of annual revenue or 20 million (approximately $22.86 million) -- potentially existential penalties.
Companies facing the DOJ scrutiny may therefore find themselves in increasingly difficult positions. For example, consider a situation where the DOJ demands overseas records as part of corporate cooperation, but the responding company believes that compliance would subject the company -- and potentially its executives and employees -- to legal jeopardy overseas for violating data privacy laws like the GDPR.
One seldom used tool for the DOJ may be the socalled Bank of Nova Scotia subpoena, by which the DOJ can attempt to compel a company to comply, even though compliance may run afoul of foreign laws. If the DOJ begins to rely on such subpoenas, look for litigation in federal district court over how the equities should be balanced.
DOJ Guidance on Corporate Monitors
Shortly after taking the helm of the Criminal Division in July 2018, Assistant Attorney General Brian Benczkowski issued a memorandum entitled "Selection of Monitors in Criminal Division Matters," providing new guidance on the usage and selection of independent corporate monitors that superseded guidance previously issued by the DOJ in 2009. Reflecting a more business-minded approach to assessing when monitorships are necessary, the Benczkowski memo effectively eases the burden on companies emerging from criminal investigations.
While the prior 2009 guidance focused primarily on how to select a monitor, the Benczkowski memo set forth principles for determining whether a monitor should even be selected in the first place, emphasizing that "the imposition of a monitor will not be necessary in many corporate criminal resolutions," and should occur "only where there is a demonstrated need for, and clear benefit to be derived from, a monitorship relative to the projected costs and burdens." Factors that must now be considered include whether:
- The misconduct was pervasive across the business;
- The company had already sufficiently invested in and improved its compliance program and internal controls;
- Any such remediation had been tested and shown to be effective; and
- Adequate changes in corporate culture and leadership had been implemented.
The Benczkowski memo also instructed prosecutors to consider the region and industry in which a company operates, the nature of its clientele, the potential costs of a monitorship and whether the proposed scope is appropriately tailored to avoid unnecessary burdens on business operations. Once deemed necessary, the Benczkowski memo largely reiterates the same process for choosing the monitor that was already in place.
Although not a watershed development, the change in tone and substance of the Benczkowski memo -- and the apparent presumption against imposing a monitor absent a showing of need and clear benefit -- should give companies some comfort that the DOJ is increasingly aware of the burdens monitors present and that their usage will now be the exception rather than the rule. In so doing, however, the memo also clearly reinforces the value of proactive implementation of compliance controls, as well as prompt remediation when issues arise to avoid the specter of a monitor's oversight.
DOJ Assistant Policy Guidance
The Brand Memo and Civil Enforcement Actions
In January 2018, then-Associate Attorney General Rachel Brand issued a memorandum to the DOJ's civil litigating units limiting the use of guidance documents in civil enforcement actions, echoing a prior pronouncement by then-Attorney General Jeff Sessions. The Brand memo precludes department attorneys from "effectively convert[ing]" nonbinding regulatory guidance into legal mandates and prevents the government from using noncompliance with agency guidance to establish violations of law. Notably, the DOJ has in the past placed emphasis on agency guidance to support enforcement actions, and the Brand memo directs prosecutors to rethink the extent to which guidance documents that opine on the permissibility of conduct at issue in a FCA qui tam action are relevant to the merits of any case.
The Granston Memo and False Claims Act Complaints
Although the volume of new False Claims Act, or FCA, qui tam complaints continues to set records, the current administration's latest policy reforms may substantially impact the DOJ's approach to handling FCA claims brought by whistleblowers and reduce related litigation.
The qui tam mechanism under the False Claims Act is one whereby someone who assists the conduct of a prosecution for fraud against the Federal Government may be entitled to receive a share of the penalty imposed. The False Claims Act not only gives the whistleblower standing to receive a share of the penalty; it gives the whistleblower an entitlement to commence proceedings in the name of the Government.
If the Government takes over the prosecution, the whistleblower then takes a `back seat' and participates in the prosecution as an interested third party, or `relator'. From this point on, the Government has control of the conduct of the proceedings and the whistleblower's entitlement to participate may be restricted at the discretion of the court.
The Government, however, has the power both to dismiss or settle the prosecution over the objections of the relator.
Also January 2018, Michael Granston, the director of the DOJ's Civil Fraud Section, issued an internal memorandum setting forth the factors DOJ attorneys should consider in evaluating whether dismissal of a qui tam action is appropriate over the relator's objection. Many of the factors detailed in the Granston memo are aimed at encouraging prosecutors to dismiss cases that could otherwise lead to unnecessary litigation by relator's counsel. As a result, government attorneys should be more willing to affirmatively dismiss cases they view as meritless even if plaintiffs' lawyers are eager to continue on.
Together, the Granston and Brand memos are an encouraging sign that the DOJ will carefully consider whether to bring FCA cases and when to move for dismissal of meritless cases going forward.
DOJ Secures First Guilty Plea in Initial Coin Offering Fraud Case
Although the majority of enforcement activity related to the thousands of recent initial coin offerings, or ICOs, is being led largely by the Securities and Exchange Commission and Commodities Futures Trading Commission, as well as drawing interest from U.S. Department of the Treasury, IRS and a number of civil and local regulators, the DOJ staked out its criminal turf by securing a first-of-its-kind guilty plea for conspiracy to commit securities fraud in connection with an ICO.
Maksim Zaslavskiy was charged with fraudulently marketing a cryptocurrency offered via an ICO that was purportedly backed by investments in real estate and diamonds and that promised high returns. In denying a motion to dismiss the indictment, the U.S. District Court for the Eastern District of New York rejected defense counsel's argument that securities laws don't apply to ICOs. By "simply labeling an investment opportunity as `virtual currency' or `cryptocurrency,'" the court observed this "does not transform an investment contract -- a security -- into a currency" and held that the relevant cryptocurrency transactions involved investment contracts falling within the ambit of securities laws. The DOJ's success in the Zaslavskiy case signals judicial receptiveness to criminal securities actions targeting ICO fraud, with
DOJ criminal enforcement activity almost certain to increase as scrutiny over ICOs and cryptocurrencies continues to intensify.
DOJ's Mixed Results in Foreign Exchange Prosecutions
Since at least 2013, U.S. and foreign law enforcement authorities have dedicated significant resources to investigating and prosecuting conduct by foreign exchange, or FX, traders. By 2018, several Wall Street banks had paid billions in fines and penalties to various government regulators stemming from these investigations, which were punctuated by five major financial institutions pleading guilty to violations of U.S. antitrust law or wire fraud in May 2015.
While the DOJ continued to pursue enforcement actions with success through late 2017 and early 2018, more recent cases signaled the challenges of bringing such prosecutions. In late 2017, the DOJ secured its first conviction of an individual coming out of its investigations into investment banking sales and trading practices. A federal jury in the Eastern District of New York, found Mark Johnson, the former HSBC global head of foreign exchange, guilty of several counts of wire fraud and conspiracy for front-running a multibillion dollar FX transaction and the bank soon thereafter entered into a deferred prosecution agreement with the department, agreeing to pay over $100 million in connection with claims that the bank front-ran multiple clients' confidential foreign exchange orders.
More recent prosecutions of other FX and precious metals traders resulted in acquittals, which may cause the DOJ to rethink its approach. Perhaps most notably, in October 2018, a federal jury rejected prosecutors' antitrust theories against a group of former FX traders, finding the defendants not guilty of all charges stemming from the traders' communications about FX benchmarks.