Europol Official Warns of Russian and Chinese “Huge Inflows of Criminal Money” into Europe

On June 13, according to Reuters, Pedro Felicio, head of the Economic and Property Crime Unit at the European police agency Europol, stated that “huge inflows of criminal money” are principally entering Europe from Russia and China.  Felicio, whose duties include combating money laundering in Europe, said that “[t]here are billions of criminal money that are being taken out of the Russian economy,” and  “warned of the dangers of a repeat of scandals involving tainted Russian money in the Baltics . . . .”

Although he recognized that anti-money laundering (AML) oversight has improved since the Danske Bank scandal that came to public attention last year, Felicio reportedly noted that “there are still gaps particularly in the Baltic states.”  In his words, “Some of the banks in the Baltic area are very vulnerable to money laundering activities especially coming in from Russia. It has improved but it is far from being solved.”  He also commented that “It is just a matter of time until we see another scandal coming in from the area and it will probably be very similar to the scandals we have seen in the past.”

In addition, Felicio observed that while the Baltics were in the “front line” for receiving criminal proceeds, those proceeds were being invested elsewhere, particularly via real estate in London and Rome.  He cited two factors that were exacerbating the money-laundering problem in Europe: the high burden of proof in European states, and “zero cooperation from Russia in providing . . . evidence.”

Note: Felicio’s remarks should serve as a reminder to financial institutions with European operations that they need to maintain vigilance in monitoring international financial transactions that, like the funds that flowed through Danske Bank’s Estonian branch, may have their origin in nations such as Russia and China but transit through third countries as part of the layering process.  They also highlight one of the continuing challenges for the European Union in devising and implementing a more robust and effective system of AML oversight and enforcement.

North Korea Increasingly Dependent on Cyber-Based Theft for Cash

On June 19, the Financial Times reported on signs that North Korea, due to “immense economic pressure from sanctions, increasingly depends on cash from cyber-based theft.”  According to cybersecurity experts, North Korean leader Kim Jong Un’s regime

controls an army of thousands of hackers who bring in hundreds of millions of dollars annually . . . . With North Korea cut off from most trade with the outside world, the cash generated from illicit cyber-based activities is thought to have become a core revenue stream for Pyongyang and has now probably surpassed the value of sales of weapons and military services.

The reported increase in North Korean online crime “also marks the latest example of the Kim regime’s decades-long struggle to bring in cash to the country via unorthodox and illicit means, and follows reported cases of global insurance fraud and the production of counterfeit money and drugs.”  For example, in 2018 the U.S. Department of Justice unsealed charges against “a North Korean citizen, Park Jin Hyok, a member of a conspiracy backed by the North Korean government that carried out numerous computer intrusions.  Those charges alleged that the conspiracy utilized a strain of malware, ‘Brambul,’ which was also used to propagate” the Joanap botnet (i.e., “a global network of numerous infected computers under the control of North Korean hackers that was used to facilitate other malicious cyber activities”).  Subsequently, the Department announced “an extensive effort to map and further disrupt, through victim notifications, the Joanap botnet.”

While the Financial Times cautioned that “[e]stimates vary as to exactly how much money North Korea now makes from any of its illicit activities,” the Department of Justice has alleged that Park and his coconspirators stole $81 million from Bangladesh Bank in 2016 and sought to steal at least $1 billion from financial institutions.  A former U.S. National Security Agency analyst, Priscilla Moriuchi, stated that North Korean operatives “had proved to be ‘persistent, patient and skilled’.  “There was an impression that these [banking hacking operations] were opportunistic targets.  We can see they are decidedly not . . . .”

In addition, the Financial Times reported that “[a]nalysts stressed it was difficult to pinpoint what happens to the stolen cash, cryptocurrencies or gaming credits. But, one expert said, there were signs stolen cryptocurrencies were quickly laundered through several different exchanges, making them ‘virtually untraceable’.”

Note: The increasing sophistication and persistence of these North Korean-authorized cybertheft operations — coupled with the efforts of sanctioned North Korean banks to use companies to launder funds on behalf of those banks – represent serious compliance challenges for the financial sector.  Cybersecurity and compliance teams in financial firms should take this opportunity, if they have not done so recently, to review the capacity of their cybersecurity and AML programs to address these kinds of threats to their firms, and to seek additional funding if necessary from senior management.

ANZ New Zealand CEO Leaves Bank After Disclosure of “Mischaracterized” Expenses

On June 17, ANZ Bank announced that the Chief Executive Officer (CEO) of its New Zealand business, David Hisco, was leaving ANZ reportedly “after concerns he ‘mischaracterised’ personal expenses including the use of corporate chauffeured cars and wine storage.”  ANZ Bank New Zealand’s Chairman (and former New Zealand Prime Minister) Sir John Key cited unspecified “’health issues’ and the board’s concern over the expenses, which were worth tens of thousands of dollars and spanned nine years.”

Key also stated, according to the Sydney Morning Herald, that Hisco “was not paying the money back to ANZ because he was ‘adamant’ he had the authority to spend it, and the bank’s main concern was not the money itself,” but that  “there had been a ‘lack of transparency’ in how the expenses were recorded in the bank’s books.”  In Key’s own words,

What is at the heart of this issue, though, is the way that that expenditure was recognised in our books, in other words, it was either in our view mis-characterised or there was a lack of transparency. So it’s not about the money itself, it’s the way it was recognised in the ANZ records . . . .

Hisco’s departure has not ended the controversy.  The New Zealand Reserve Bank is continuing to question ANZ, which the Reserve Bank regulates as a New Zealand incorporated bank, about Hisco’s hasty departure.

Note:  Ethical violations have become increasingly prevalent as a basis for CEO terminations.  A May 2019 PwC study of turnover among the top 2,500 global companies found not only that a record 18 percent of CEOs were replaced, but that 39 percent of the CEOs dismissed “had been accused of ethical lapses . . . the first time ethical lapses led the causes of CEO turnover in the study’s 19-year history.”

In ANZ’s case, the facts as reported indicate that ANZ in theory may have more than domestic regulatory concerns to take into account.  Given Sir John’s statements indicating that Hisco’s expenses were inaccurately recorded in ANZ’s books and records, ANZ should recognize that inaccurate books and records may bring the matter within the purview of the United States Securities and Exchange Commission (SEC).  Under the “books and records” provisions of the Foreign Corrupt Practices Act (FCPA), publicly traded entities – which includes foreign issuers, like ANZ, whose American Depository Receipts are traded on the over-the-counter market – can be held liable for failure to maintain accurate  records regarding the company’s transactions.

The SEC would be highly unlikely to pursue an FCPA investigation of ANZ on “mischaracterized” expenses of tens of thousands of dollars unrelated to foreign bribery.  Nonetheless, other companies whose shares or ADRs trade on U.S. securities markets should use the Hisco case as an opportunity to remind senior executives about the ethical and legal ramifications of their misrepresenting or falsely reporting the nature and basis of transactions benefiting themselves that involve company funds.

Insys Therapeutics Agrees to $225 Million Global Resolution of Criminal and Civil Investigations Into Fraudulent Marketing of Subsys, Then Declares Bankruptcy

On June 5, the U.S. Department of Justice announced that Insys Therapeutics, an Arizona-based pharmaceutical company, agreed to a global resolution to settle the federal government’s separate criminal and civil investigations into Insys’s marketing of Insys’s drug Subsys.  Under the terms of the criminal resolution, Insys agreed to enter into a five-year deferred prosecution agreement with the government, to have its operating subsidiary plead guilty to five counts of mail fraud, and to pay a $2 million fine and $28 million in forfeiture. Under the terms of the civil resolution, Insys agreed to pay $195 million to settle allegations that it violated the civil False Claims Act.

According to the Justice Department,

[b]oth the criminal and civil investigations stemmed from Insys’s payment of kickbacks and other unlawful marketing practices in connection with the marketing of Subsys. Insys’s drug Subsys is a sublingual fentanyl spray, a powerful, but highly addictive, opioid painkiller. In 2012, Subsys was approved by the Food and Drug Administration for the treatment of persistent breakthrough pain in adult cancer patients who are already receiving, and tolerant to, around-the-clock opioid therapy.

In connection with the criminal resolution, the United States Attorney’s Office in Boston filed an Information that charges Insys and its operating subsidiary with five counts of mail fraud.  The Information states that

from August 2012 to June 2015, Insys began using “speaker programs” purportedly to increase brand awareness of Subsys through peer-to-peer educational lunches and dinners. However, the programs were actually used as a vehicle to pay bribes and kickbacks to targeted practitioners in exchange for increased Subsys prescriptions to patients and for increased dosage of those prescriptions. One practitioner targeted by Insys was a physician’s assistant who practiced with a pain clinic in Somersworth, New Hampshire. During the first year that Subsys was on the market, the physician’s assistant did not write any Subsys prescriptions for his patients. In May 2013, the physician’s assistant joined Insys’s sham speaker program knowing that it was a way to receive kickbacks for writing Subsys prescriptions. After joining the sham speaker program, the physician’s assistant wrote approximately 672 Subsys prescriptions for his patients – many of which were medically unnecessary – and in turn, received $44,000 in kickbacks from Insys.

In addition, Insys entered into a five-year Corporate Integrity Agreement (CIA) and Conditional Exclusion Release with OIG.  The Department noted that “[b]ecause of the extensive cooperation provided by Insys in the prosecution of culpable individuals and its agreement to enhanced CIA requirements, OIG elected not to pursue exclusion of Insys at this time.” The CIA, which the Justice Department deemed “unprecedented,” includes several novel provisions.  Those include enhanced material breach provisions, designed to protect federal health care programs and beneficiaries.

Furthermore, Insys admitted to a Statement of Facts in relation to the CIA and acknowledged that the facts therein “provide a basis for permissive exclusion. OIG did not release its permissive exclusion authority, as it generally does for CIA parties in False Claims Act settlements. Instead, OIG will provide such a release only after Insys satisfies its obligations under the CIA.”

Shortly thereafter, on June 10, Insys filed for Chapter 11 bankruptcy protection, reportedly “amid mounting expenses driven by” the Department’s investigation.  Reuters stated that the Department “is now Insys’ largest unsecured creditor,” due to the criminal and civil resolution with the Department.  In a filing in the bankruptcy proceeding, Insys Chief Executive Officer Andrew Long “said that sales decline was more than Insys could withstand when coupled with the investigation and more than 1,000 lawsuits by municipal governments seeking to hold it responsible for the epidemic.”

Note:  On one level, the Insys criminal and civil resolution should be considered a significant victory for the Department of Justice in its litigation to combat the opioid crisis.  When considered with the May 2 criminal convictions of Insys funder John Kapoor and other former Insys executives for RICO conspiracy, the Insys corporate resolution appears to be a true example of a corporate criminal investigation in which both the company and responsible corporate officials were held accountable.

On another level, however, the bankruptcy filing, which took place only five days after the corporate settlement was reached, raises a serious question about the true value of the corporate settlement.  If the Department did not know, at the time of the settlement, about Insys’s plans to declare bankruptcy, Department prosecutors would have every right to be furious about the filing, which may place the Department in the status of an unsecured creditor and will likely delay the government’s receipt of at least some of the funds.  On the other hand, if the Department did know, prior to settlement, that Insys did plan to file for bankruptcy thereafter, that would create the appearance that the Department entered into the deferred prosecution agreement, knowing that actual receipt of the $255 million would be unlikely or impossible and therefore that Insys could not timely satisfy a material term of the DPA.

Although Insys has still more reasons for anxiety – for example, the drastic fall in its stock price after the bankruptcy filing and its anticipated delisting from NASDAQ as of June 19 – its decision to declare bankruptcy after the Justice Department resolution may prompt other pharma companies facing massive opioid-related litigation to consider bankruptcy more seriously as an option for forestalling or constricting potentially catastrophic damage awards.

Deputy Attorney General Rosen Extends Forbearance Period for Application of Wire Act to Non-Sports Gambling

On June 12, Deputy Attorney General Jeffrey Rosen issued a memorandum to all United States Attorneys, all Assistant Attorneys General, and the Director of the Federal Bureau of Investigation regarding the forbearance period for applying the Wire Act, 18 U.S.C. §1084(a), to non-sports gambling.

In 2018, the Department of Justice’s Office of Legal Counsel, in a reversal of that office’s 2011 memorandum on the Wire Act, had opined that three of the four clauses of the Wire Act could be applied to non-sports gambling.  On January 15, 2019, then Deputy Attorney General Rod Rosenstein issued a memorandum directing that federal prosecutors refrain from applying the Wire Act to persons whose conduct violated that Act for 90 days after issuance of the OLC opinion.  On February 28, another memorandum by Deputy Attorney General Rosenstein extended that forbearance period until June 14, 2019.

Subsequently, on June 3, the United States District Court for the District of New Hampshire issued an opinion holding that the Wire Act extended solely to sports gambling.  While the Department “is evaluating its options in response to this opinion,” Deputy Attorney General Rosen stated, the June 12 memorandum extended the forbearance period from June 14 to the later of December 31, 2019 or 60 days after entry of final judgment in the New Hampshire litigation.

Note: While the Deputy Attorney General’s memorandum does not represent any substantive change of position by the Department, its extension of the forbearance period effectively pushes potential enforcement of the Wire Act in non-sports gambling activities, including state lotteries and their vendors operating as authorized under state law, at least to 2020.