FCPA Compliance and Ethics Blog

September 25, 2012

After the White Whale – Enforcement of AML Laws Against Companies for Traded Goods

Whenever you look at the Top Ten Foreign Corrupt Practices Act (FCPA) settlements of all-time, the figures can look pretty high. However, this summer has seen some absolutely astronomical fines and penalties agreed to by financial institutions for violations of Anti-Money Laundering (AML) laws and regulations. Since May we have seen the following financial institutions agree to the resulting fines and penalties:

AML Penalty Box of Settlements

Bank

Amount (all in USD$ MM)

Date of Settlement

ING Bank $619 June 2012
Royal Bank of Scotland $500 May 2012
Standard Chartered $340 August 2012
Barclays $298 August 2012
Total $1,757

So for all you sports fans keeping score at home that is $1.757 billion in fines and penalties. And this amount does not even include the grand-daddy of them all, HSBC, which has reserved $700MM for its own fine. Some commentators have speculated that the HSBC fine may exceed One Billion Dollars alone.

In an article in the Financial Times (FT), entitled “We all must clean up our act on money laundering”, reporter John Cassara noted International Monetary Fund (IMF) estimates that world-wide money laundering can be as high as $3.5 trillion annually. While traditional criminal enterprises had used banks to wash dirty money into clean money, after 9/11, the US government saw money-laundering as a security issue. One of key issues in the Standard Chartered enforcement action by the New York state Department of Financial Services was its financial dealings with banks in Iran.

But the problem is simply beyond financial institutions. Cassara writes that there are three generally recognized ways to launder money: (1) via financial institutions; (2) bulk cash smuggling across borders; and (3) via traded goods. The US approach to fighting money laundering in financial institutions is to demand transparency and require due diligence not only on customers but on transactions as well. But money launderers will move to where they see the least resistance in the financial system. So if banks ramp up their internal compliance systems, criminal enterprises and terrorists will move to the old fashioned method of smuggling money across borders to money laundering via traded goods.

Indeed in an article in the Wall Street Journal (WSJ) last week, entitled “U.S. Seeks to Patch Laundering Net”, Jeffery Sparshott reported that the US Treasury Department’s Financial Crimes Enforcement Network, known as FinCen, “are proposing to enlist companies across the financial sector – and possibly beyond – as a front-line defense against money laundering.” These new rules “may eventually extend the rules to mortgage lenders, casinos, gemstone dealers and others…in a bid to deter criminal activity and terrorist financing and stop firms from taking on shell companies without knowing ownership details.” If FinCen extends the most robust regulations beyond traditional financial institutions, it would seem to me that the next logical step would be to extend such regulations to non-financial commercial operations.

However, we have recently seen examples of criminals using method three (3) above to engage in money laundering; that being via traded goods. One recent example is a process whereby teams of money launderers working for cartels use dollars to purchase a commodity from the US and then export the commodity to Mexico or Colombia. A key is that “Paperwork is generated that gives a patina of propriety” which means that drug money is given the appearance of legitimate proceeds from a legitimate commercial transaction. One Immigration and Customs official interviewed said, “It’s such a great scheme. You could hide dirty money in so much legitimate business, and they do. You can audit their books all day long and all you see is goods being imported and exported.”

Another scheme involved even more sophisticated tactics such as “overvaluing and undervaluing invoices and customs declarations.” There is even a new term “trade-based money-laundering” which is being used to denominate the schemes. It was reported that in another recent operation, which was estimated to launder over $1MM every three weeks, money launderers were exporting from the US to Mexico polypropylene pellets that are used to make plastic. However, the money-launderers inflated the value declared on the high-volume shipments and this eventually attracted suspicion of US bank investigators, “who shut down the export operation by discontinuing letters of credit that the suspected launderers were using.” One official noted, “You generate all this paperwork on both sides of the border showing that the product you’re importing has this much value on it, when in reality you paid less for it. Now you’ve got paper earnings of a million dollars and the million dollars in my bank account – it’s legitimate. It came from this here, see?”

What can companies do to protect themselves from inadvertently running afoul of AML laws?  Just as transactional based due diligence and internal controls are mandatory components of a FCPA minimum best practices compliance program; they should be used in transactions with customers or other third parties. In addition to due diligence on agents, distributors or others in the sales distribution chain, companies need to perform due diligence on those to whom they sell. Know Your Customer (KYC) rings true not just for financial institutions but for companies engaged in other forms of commercial operations. If a new customer approaches your company, you should investigate them beyond simply running a Dun & Bradstreet Report to check their credit-worthiness. You need to investigate their background to see if they really are in a business which would use your products.

There is also the issue of how you will be paid for the sale of your widgets. If someone from Mexico suddenly comes to your business and wants to buy widgets with cash, this needs to send up a huge Red Flag. It would seem just as unlikely if a customer with a relatively low net worth would come to you and seek to purchase a high cost product with cash. If such an eventuality happened this should also raise a very large Red Flag.

Even if you are not being paid in cash, but are being paid via wire transfer, you should check the source of the wire funds. If the money comes from a bank or other financial institution which is on a sanctions list, you need to tread very carefully. In another article in the FT, entitled “Taken to the Cleaners”, the piece ended by comparing the problem of money laundering with a sucker fish which attaches itself to a whale. It may not be noticed as it is “submerged and discreet” but it is “hard to capture as it can just swim off elsewhere.”

So perhaps the white whale analogy may need to be reconsidered. Or perhaps, just as Captain Ahab kept searching for the white whale;  as criminals continue to probe for structural weakness to exploit in the area of money laundering; as regulators respond with more, greater and broader regulations; companies will need to increase and refine their own processes and procedures.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2012

August 17, 2012

Settling with Multiple International Regulators: What Has Standard Chartered Wrought?

“Tell me what can a poor boy do; ‘Cept for sing for a rock ‘n’ roll band?”

As a teenager I often pondered those lyrics and wondered if Mick Jagger was really a closet radical who was ready to “let his freak flag fly” (to cross-mix musical metaphors) and take to the streets to protest as was so often done in the 1960s. That Stones lyric popped into my head more than once over the past week when I was trying to sort out the story of Standard Chartered Bank (SBC) and the New York state Department of Financial Services (DFS) in the context of an international company subject to many different international regulators. Quite simply, what is a poor company to do when it is being investigated by multiple regulatory agencies or government departments in many different countries and with even further differentiated jurisdictions within the same country, such as the role of the (DFS) and the US Department of Treasury or Federal Reserve?

Companies and Regulators-waiver of privilege and negotiations

This question clearly came up in the context of the SBC anti-money laundering (AML) fine announced earlier this week. In addition to the UK Financial Services Authority (FSA), SBC was under investigation by several US federal authorities including the Department of Treasury, Department of Justice (DOJ), Federal Reserve and Federal Bureau of Investigation (FBI). Who and how does an entity under investigation communicate? In an article in the Huffington Post, entitled (appropriately enough) “Standard Chartered May Have Burned Itself By Waiving Attorney-Client Privilege In Probe”, reporters Aruna Viswanatha and Andrew Longstreth wrote that SBC “appears to have been burned by a decision to waive attorney-client privilege, a move that usually helps appease U.S. authorities.”

In addition to the waiver issue, how does an institution negotiate with several over-lapping jurisdictions or multiple regulators within one jurisdiction? The Financial Times (FT), in an op-ed piece entitled “StanChart rushes to unsettling deal”, said that “If banks are to be clear about their responsibilities and obligations, regulators have to establish coherent norms and processes.” The piece went on to opine that it would “be perverse” if the DFS is applauded for “going it alone” even though the FT acknowledged that the DFS was “right to raise questions over the legality of wire-stripping”.

Regulators and Regulators-who’s on first?(International Division)

What about the relationship between international regulators, is it now damaged? In a Wall Street Journal (WSJ) article, entitled “Trans-Atlantic Tensions Increase”, Dana Cimilluca and Victoria McGrane reported that “the special relationship between the financial authorities in the U.S. and U.K. is going through a rough patch.” To underscore this point, they noted that after the DFS went public, the Governor of the Bank of England “chastised” US regulators. However, this chastisement did not sit well with all on this side of the pond. In another WSJ article entitled “Bank Deal Rankles Regulators” Liz Rappaport quoted Neil Barofsky, former special inspector general in the US Treasury Department, who believes, “The FSA should stop griping about other regulators and focus on overseeing London’s banks”.

Regulators and Regulators-who’s on first?(US Division)

What about the relationships between US federal and state regulators? Rappaport reported that the DFS met with all other US regulatory agencies investigating SBC conduct in April. The DFS seems to believe that it communicated that it was ready to move while the federal regulators “didn’t feel that they had got any indication from Mr. Lawsky’s office that he was going to pursue a case on his own. Rappaport quoted Mark Williams, a former Federal Reserve Bank examiner, who said that it was “unprecedented, from a regulatory perspective” for a state regulator to move without waiting for federal regulators to move fist. However, he was also quoted as saying “It will likely embolden other state banking commissioners”. But the final word, at least from the US side, may have come from Senator Carl Levin (D-Mi.) who was quoted as saying, “Holding a bank accountable for past misconduct doesn’t need to take years of negotiation over the size of the penalty. It simply takes a regulator with the backbone to act.”

What Should Wal-Mart Do?

So what does all of this mean? Certainly in the financial services sector, counsel needs to tread carefully and have a clear understanding about turning over evidence and how that evidence may be presented. Companies also need to have clear understanding of who they are negotiating with and under what conditions. For those Foreign Corrupt Practices Act (FCPA) compliance practitioners, witness the release of the letter this week by two House members, Oversight and Government Reform Committee Ranking Member Elijah E. Cummings and Energy and Commerce Committee Ranking Member Henry A. Waxman, who sent a letter to Wal-Mart Chief Executive Officer (CEO) Michael Duke regarding the company’s failure to provide Congress with information relating to the Wal-Mart bribery allegations. In the letter, they claim to have found evidence “of “questionable financial behavior” including tax evasion and money laundering in Mexico.” Further, they threaten to make “public any documents we have obtained as part of the investigation.” I probably do not need to remind the readers of this blog that Wal-Mart has announced it is conducting an internal investigation for allegations of FCPA violations in Mexico. So tell me “What can a poor boy [bank, company, fill in the blank] do?”

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2012

August 16, 2012

When to Not Use the F-Bomb? The Standard Chartered AML Settlement

I guess it is appropriate that the word “F-Bomb” will now, as of next week and for the first time, be in the mainstream Merriam-Webster’s Collegiate Dictionary. I say this while thinking about Howard Sklar’s blog post, entitled “Best.Quote.Ever”, in which he cited the following email from Standard Chartered Bank’s (SBC) Group Executive Director to its head of Compliance in New York.

You f…ing Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians?

[Ed. Note – This is a PG-rated blog so we have edited the curse word. We would note that the family G-rated New York Times (NYT) cut the entire first sentence from its reporting.]

Well, as of yesterday, SBC seems to have found the understanding that if you are going to do business, in at least the state of New York, you had better follow the rules as it agreed to pay a $340MM fine to the New York state Department of Financial Services (DFS) for breaking the law. Unfortunately, the SBC settlement was just one more in long line of settlements by banks for violations of anti-money laundering (AML) laws. In an article in the <>Wall Street Journal (WSJ), entitled “British Bank Settles Iran Money Case”, reporter Liz Rappaport cited figures from the US Department of Treasury and Justice Department regarding the largest US anti-money laundering settlements.

AML Penalty Box of Settlements

Bank Amount (all in $millions) Date of Settlement
ING Bank $619 June 2012
Lloyds TSB Bank $567 December 2009
Credit Suisse $536 December 2009
Royal Bank of Scotland $500 May 2012
Standard Chartered $340 August 2012
Barclays $298 August 2012

We also note, as reported in the WSJ, that HSBC Holding has publicly announced it “has reserved $700 million to pay fines” relating to its AML violations.

While the amount paid by SBC is low on the scale of fines paid to date, Rappaport quoted analysts as saying “the settlement is a good outcome for Standard Chartered. They say the penalty is manageable for a bank that generated nearly $4 billion in profit in the first half of 2012.” However, there were some components of this settlement that could cause SBC further pain down the line. The first, as reported in a Financial Times (FT) article entitled “StanChart settles NY claims for $340m, is that the agreement is with the state of New York regulators only. It does not cover the “US Department of Treasury, Department of Justice, Federal Reserve and Federal Bureau of Investigation” all of whom are “also probing the bank’s transactions with Iran” in long running investigations. Credit Suisse analyst Amit Goel was quoted in another WSJ article, entitled “Standard Chartered Faces a New Normal in New York”, that “We would expect the other regulators to settle in due course, and the fines may be material, but we think the aggregate cost will be below $1 billion and will not require the company to issue any additional equity.”

In addition to these ongoing investigations SBC will have not only an external monitor, appointed by the New York DFS, but also examiners from the DFS installed on site at the bank who “will assess the money-laundering risk controls in StanChart’s New York branch, advise on the implementation of “corrective measures” and report back to the DFS for a full two years.” I can assure SBC that having such compliance monitors, both external and from the DFS, will prove to be very disruptive to their ongoing business operations. A bank spokesman was quoted, in a WSJ article, as saying “the bank said it has no idea how intrusive the installation of monitors might be because the final details have yet to be hammered out.” Indeed.

So how about that idiotic email that started this piece. I would say that SBC needs some serious training on email etiquette. Maybe they could have Bobby Knight come in for sensitivity training? Or maybe, just maybe, they could follow the law.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2012

August 7, 2012

Anti-Money Laundering For the Non-Banking Entity

While many companies which operate under anti-bribery laws such as the UK Bribery Act or anti-corruption laws such as the US Foreign Corrupt Practices Act (FCPA), have compliance programs in place to review business relationships, I have found that one of the areas which most non-banking companies do not sufficiently focus on is anti-money laundering (AML). Money laundering is conduct designed to disguise the proceeds of criminal activity. These include making illegal or improper payments to Foreign Government Officials, the misappropriation, theft or embezzlement of public funds by any party as well as by or for the benefit of Government Officials, paying kickbacks to employees of private companies, creating a scheme to defraud third parties and, in the United States, misusing the mails (whether it is the US mail, private or commercial couriers) and the wires in interstate or international commerce. Money laundering can arise when there is an effort to evade reporting requirements by engaging in a series of funds transfers that individually are below the amount requiring disclosure. Funds may also be laundered by transfers among bank accounts or through the purchase of apparently legitimate assets. Even though they have been “laundered,” these funds still represent the proceeds of criminal activity, and knowingly receiving, transferring, transporting, retaining, using, or hiding such criminal proceeds is illegal.

Legitimate businesses may be targets for persons or entities who want to make the proceeds of criminal activity appear to be legitimate. For example, companies that offer to do business with a company may be “fronts” for money laundering or other criminal activity. Similarly, agents, customers or other parties may seek to have a company wire their fees to jurisdictions other than the ones in which they reside to avoid the laws and requirements of their home country. It is, therefore, essential for a company to “know” the parties with whom it conducts business and perform the due diligence required by the company Code with respect to all potential Business Partners, Representatives, Agents, Distributors and others in the sales chain. A company should also take care with its business relationships in the supply chain such as vendors that are viewed as high risk under the FCPA or UK Bribery Act.

So what are some of the ways a company can facilitate money-laundering? In an article in the Los Angeles Times (LAT) entitled “Cartels use legitimate trade to launder money, US and Mexico say” by Tracy Wilkinson and Ken Ellingwood, the authors described a process whereby teams of money launderers working for cartels use dollars to purchase a commodity from the US and then export the commodity to Mexico or Colombia. A key is that “Paperwork is generated that gives a patina of propriety” which means that drug money is given the appearance of legitimate proceeds from a legitimate commercial transaction. One Immigration and Customs official interviewed said, “It’s such a great scheme. You could hide dirty money in so much legitimate business, and they do. You can audit their books all day long and all you see is goods being imported and exported.”

The key is that the commodities being purchased are so innocuous that large bulk purchases will rarely, if ever, draw any official scrutiny. The goods purchased can be red tomatoes or bolts of cotton fabric. In either case, the commodity itself does not matter, as the simple fact of purchasing in the US, shipping into, and reselling in Mexico, allows the drug cartels to “transfer earnings back home to pay bills and buy new drug supplies while converting dollars to pesos in a transaction relatively easy to explain to authorities.”

There have been some interdictions in this system, however. In 2010, US authorities arrested several executives of Angel Toy company, who the government alleged were conspiring with Mexican drug cartels to launder drug money through a scheme to purchase Teddy Bears (of all things), for shipment back to and for resale in Mexico. The plan was straightforward, just under $10K of cash for each shipment of Teddy Bears, which were then resold in Mexico.

However, now money launderers use even more sophisticated tactics such as “overvaluing and undervaluing invoices and customs declarations.” There is even a new term “trade-based money-laundering” which is being used to denominate the schemes. It was reported that in another recent operation, which was estimated to launder over $1MM every three weeks, money launderers were exporting from the US to Mexico polypropylene pellets that are used to make plastic. However, the money-launderers inflated the value declared on the high-volume shipments and this eventually attracted suspicion of US bank investigators, “who shut down the export operation by discontinuing letters of credit that the suspected launderers were using.” One official noted, “You generate all this paperwork on both sides of the border showing that the product you’re importing has this much value on it, when in reality you paid less for it. Now you’ve got paper earnings of a million dollars and the million dollars in my bank account — it’s legitimate. It came from this here, see?”

In an article in the Wall Street Journal (WSJ), entitled “Sands Probed in Money Moves”, reporters Kate O’Keefe, Justin Scheck, Alexandra Berzon and James Grimaldi, reported that US authorities are investigating Las Vegas Sands Corp. and several of its executives regarding allegations of violations of US money-laundering laws by failing to alert authorities to millions of dollars transferred to its casinos by two Las Vegas high rollers. The specific allegations involve an examination of the Sand’s “handling of money received several years ago from a Chinese-born Mexican national, Zhenli Ye Gon, later accused of drug trafficking and Ausaf Umar Siddiqui a former California executive subsequently convicted of taking illegal kickbacks.

Regarding Mr. Ye Gon, the WSJ reported that in 2006, Ye Gon “made tens of millions of dollars in transfers to Sands accounts from Mexican “casas de cambio,” which are currency-exchange firms that have been the focus of several recent money-laundering probes in the U.S., several people involved in the case said he transferred a total of around $85 million to casinos owned by Sands and other operators, court filings indicate. Prosecutors have told lawyers representing Sands employees that Mr. Ye Gon’s use of Mexican exchange houses to handle such huge transfers was a red flag.” Regarding Mr. Siddiqui, the WSJ reported that Sands received more than $100 million from Mr. Siddiqui, while he had an annual salary of $200,000 with Fry Electronics.

Transactional based due diligence and internal controls are mandatory components of a FCPA minimum best practices compliance program. In addition to due diligence on agents, distributors or others in the sales distribution chain, companies need to perform due diligence on those to whom they sell. If someone from Mexico suddenly comes to your business and wants to buy widgets with cash, this needs to send up a huge Red Flag. It would seem just as unlikely if a customer with a relatively low net worth would come to you and seek to purchase a high cost product with cash. If such an eventuality happened this should also raise a very large Red Flag.

 What Should You Look For-Red Flags

Red flags are circumstances that should alert a reasonable person that illegal or improper conduct is substantially likely to occur and, therefore, further inquiry is necessary. Red flags reflecting possible violations of anti-money laundering laws and regulations include:

1. Legitimacy of the party and/or assets are undeterminable through due diligence or independent verification;

2. The party proffers false, misleading or substantially incorrect information and documentation;

3. The party suggests transactions involving cash or insists on dealing only in cash equivalents;

4. The party refuses to disclose or to provide documentation concerning identity, nature of business, or nature and source of assets;

5. The party refuses to identify a principal or beneficial owner;

6. The party appears to be acting as an agent for an undisclosed principal or beneficial owner, but is reluctant to provide information, or is otherwise evasive, regarding the identity of the principal or beneficial owner;

7. The party is a shell company and refuses to disclose the identity of the party’s beneficial owner;

8. The party has assets that are well beyond its known income or resources;

9. The party requests that funds be transferred to an unrelated third party and is unable to provide sufficient legitimate and independently verifiable justification for such request;

10. The party requests a wire transfer to a jurisdiction other than the one in which the party is located and is unable to provide sufficient legitimate and independently verifiable justification for such request, particularly if located in an “off shore” bank secrecy or tax haven;

11. The party engages in transactions that appear to have been structured so as to avoid government reporting requirements, especially if the cash or monetary instruments are in an amount just below reporting or recording thresholds;

12. The party exhibits unusual concern about compliance with government reporting requirements;

13. The party exhibits a lack of concern regarding risks or other transaction costs;

14. The party wishes to engage in a transaction that lacks business sense, economic substance or apparent investment strategy;

15. The party lacks general knowledge of its industry or lacks adequate facilities or qualified staff to perform the required tasks or work;

16. The party requests that a transaction be processed in a manner that circumvents a company procedure or avoids company documentation requirements;

17. The party is included on list of Specially Designated Nationals, or similar lists, maintained by the US Government and the United Nations or is associated with such individuals and entities;

18. The party is located or has accounts or financial dealings in countries either identified as being non-cooperative with international efforts against money laundering by the Financial Action Task Force, or against whom the US Treasury Department has issued an advisory;

19. The party, or any person associated with the party, is or has been the subject of any formal or informal allegations (including in the reputable media) regarding possible criminal, civil or regulatory violations or infractions; and

20. The independent due diligence conducted by a company uncovers allegations that raise concerns regarding the party’s integrity.

In this age of cross-border criminal activity and cross-border enforcement, companies should be aware of these techniques used to launder money. Company compliance programs need to incorporate transactional due diligence into an overall anti-corruption compliance program. You may not see multi-millions of dollars in cash come into your company as Sands did from Mr. Ye Gon and Mr. Siddiqui but you should run the basic checks as suggested by the list of Red Flags.

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A big shout out to the USA Women’s Soccer team for their win in stoppage time of Extra Time over Canada. Also a shout out to Team Canada for a great game and playing their collective hearts out in one of the best matches I have ever seen.

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This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2012

May 17, 2011

The SAR Activity Review Report: Lessons for the FCPA Compliance Practitioner

Yesterday my colleague Howard Sklar and I recorded Episode 3 in our  This Week in the FCPA series, check out our video podcast. One of the items we discussed was the release of BSA Advisory Group’s recent publication “The SAR Activity Review, Trends Tips & IssuesIssue 19, In focus: Foreign Corruption. The publication is part of the continuing dialogue among financial institutions, law enforcement officials and regulatory agencies regarding Suspicious Activity Reports (SARs) and other BSA reporting requirements and, as indicated by the title, this issue focuses on foreign corruption. It is an excellent resource for the Foreign Corrupt Practices Act (FCPA) compliance practitioner to use regarding best practice tools for due diligence.

After a lengthy statistical review of the use of SARs and other tools the publication lists some of the specific steps a financial institution should use to combat foreign corruption. Broadly speaking, they are:

  • Requiring banks to apply enhanced due diligence to bank accounts and transactions by Politically Exposed Persons (PEPs);
  • Attuning financial institutions to assess and evaluate risk so that it can be more carefully managed; and
  • Promoting transparency in all transactions.

Any of this sounding familiar?

The need for enhanced due diligence is so banks know when they are dealing with a foreign governmental official. This due diligence must include procedures “reasonably designed to detect and report transactions that may involve the proceeds of foreign corruption.” The publication provides the following list of inquiries which should be made.

  • Identify the stakeholder and any beneficial owners;
  • From this identification, determine the PEP status;
  • Obtain employment information and evaluate for industry and sector risk of corruption;
  • Review the stakeholder’s country of residence and evaluate for level of corruption;
  • Check references;
  • Obtain information on immediate family members to determine PEP status; and
  • Make reasonable efforts to review public sources of information.

Although not couched in terms of the compliance lingo “Red Flag”, the report makes it clear that simply identifying a stakeholder as a PEP does not disqualify the candidate. It means that additional investigation must be performed. Therefore, if a PEP comes up in your FCPA compliance program due diligence investigation, as an owner of a Foreign Business Partner, additional investigation must be performed to determine the relationship of this governmental official, the transaction at issue, and any potentials for conflicts-of-interest or self-dealing.

The promotion of transparency requires actual knowledge of the parties who are involved in all transactions. In addition to identifying those owners and any beneficial parties as indicated above, care should be taken to identify any shell companies which a PEP might have ownership or interest in. The report terms this as “Corporate Transparency.” This is a critical analysis which companies should take as part of their overall due diligence effort.

The publication is a very useful tool and provides several case studies of how the SAR and related information are used. These case studies are written by financial institution representatives and law enforcement officials. They all provide very useful information for the FCPA compliance practitioner on how the financial industry is combating foreign government corruption and the application of those tools to a FCPA compliance program.

This publication also brings up the idea of “compliance convergence.” Howard Sklar has discussed this term in a wide range of issues but I define it as merging of control programs, such as anti-bribery and anti-corruption, with anti-money laundering and export control. If a Company does not know with whom it is doing business, any of these three areas can put a company at risk for various forms of illegal conduct. US financial institutions are required to have very robust anti-money laundering compliance programs in place. From the publication discussed herein, it appears many industries and industrial sectors could learn many lessons from their compliance practices.

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Interested in hearing more great insight on the current FCPA compliance program best practices. Join us at the following stops this week on the World Check FCPA Tour. (Days of events corrected from yesterday, dates remain correct.)

Thursday, May 19 from 8-10 AM PDT at the Renaissance Meadowlands Hotel, in Rutherford, NJ. For information and registration details click here.

Friday, May 20 from 8-10 AM PDT at Mayflower Renaissance Washington, DC, in Washington, DC. For information and registration details click here.

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This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2011

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