Month: January 2019

On December 19, the United States Attorney for the Southern District of New York, Geoffrey S. Berman, announced that his office had filed criminal charges under the Bank Secrecy Act (“BSA”) against U.S. broker-dealer Central States Capital Markets, LLC (“CSCM”), based on CSCM’s willful failure to file a suspicious activity report (“SAR”) regarding the illegal activities of one of its customers.  The announcement noted that the charges constitute the first criminal BSA charge ever brought against a U.S. broker-dealer.

The announcement also stated that CSCM had agreed to enter into a Deferred Prosecution Agreement (DPA) with CSCM.  Under the terms of the DPA, CSCM stipulated to the accuracy of an extensive Statement of Facts, and agreed to pay a $400,000 penalty and continue to enhance its BSA/Anti-Money Laundering (“AML”) compliance program.

The criminal charges pertained to the activities of a CSCM customer, Scott Tucker, who had been convicted at trial in 2017 along with his attorney, Timothy Muir, of racketeering, wire fraud and money laundering for their roles in perpetrating a massive payday lending scheme.  The jury found that from in or about the late 1990s through in or about 2013, through various payday-lending companies that he owned and controlled, Tucker extended short-term, high-interest and unsecured loans — commonly referred to as “payday loans” — to people around the country at interest rates as high as 700 percent or more and in violation of the usury laws of numerous states, including New York.  Tucker reportedly sought to insulate himself from applicable usury laws by entering into a series of sham relationships with certain Native American tribes (“Tribes”) in order to conceal his ownership and control of the payday-lending companies and claim the protection of tribal sovereign immunity, which is a legal doctrine that generally prevents states from enforcing their laws against Native American tribes.  In order to effectuate his scheme, Tucker assigned nominal ownership of his payday lending companies to certain corporations created under the laws of the tribes (the “Tribal Companies”).

According to the U.S. Attorney’s Office,

CSCM failed to follow its written customer identification procedures and did not act upon red flags prior to opening investment accounts for the Tribal Companies, which were in fact controlled by Tucker.  CSCM discussed opening these accounts exclusively with Scott Tucker and his brother Blaine (the “Tuckers”).  Although CSCM received account opening documents signed by tribal officials granting only Blaine Tucker authorization over the accounts, CSCM routinely dealt with and took direction from Scott Tucker concerning the management of funds in the Tribal Companies’ accounts based solely on Scott Tucker’s oral assertions that he was a “consultant” to the Tribes.  At no point did CSCM obtain written verification of Tucker’s authority over the accounts.

CSCM also disregarded red flags that were known prior to opening the accounts, failed to act on additional red flags, and failed to monitor any transactions using the AML tool that had been provided to CSCM for that purpose.  In addition, numerous suspicious transactions relating to Tucker – including 18 wire transfers totaling $40,518,000  to Tucker’s personal CSCM account — went undetected and unreported by CSCM.  Finally, even though CSCM produced documents in connection with the U.S. Attorney’s Office’s criminal investigation and was aware of the indictment against Tucker, it did not file a SAR, according to that Office, “until long after Tucker was convicted at trial.”

Note: The financial penalty associated with the CSCM DPA is only a small fraction of the nine-figure penalties that Rabobank and U.S. Bancorp agreed to pay earlier this year in connection with their own DPAs for BSA violations.  Even so, this case should provide chief compliance officers with broker-dealers with an opportunity to remind senior management that the BSA applies to more than just banks, and that their firms need to take BSA/AML obligations, including timely filing of BSA-related SARs, seriously.

The case also includes information that that reminder should convey to the Chief Executive Officer and other C-level executives.   In CSCM’s case, the U.S. Attorney’s Office specifically noted that before CSCM opened the accounts for Tucker, Tucker gave CSCM’s CEO a false and misleading explanation of the reasons for opening the accounts, and neither the CEO nor anyone else at CSCM attempted to verify Tucker’s explanation.  It also specifically stated that when CSCM was confronted with additional red flags, “CSCM, including its CEO, did not act upon these red flags” because Tucker assured CSCM that a then-pending FTC action against Tucker and the Tribal Companies for engaging in unfair business practices “would soon be resolved and all challenges brought by state regulators had been unsuccessful due to sovereign immunity.”

On December 21, Reuters reported that the Criminal Court in Paris announced that it had fined Total S.A. €500,000, in a criminal case in which Total was charged with paying $30 million to obtain access to Iranian oil fields between 1997 and 2005.  French prosecutors reportedly had sought €750,000, as well as confiscation of €250 million — equivalent to the potential benefit that Total received from the bribe – from Total.

The charges in this case dated back to 2013, when the United States Department of Justice announced that Total was the subject of the first coordinated action by French and U.S. law enforcement in a major foreign bribery case.  In brief, according to the Justice Department, in 1995 Total sought to re-enter the Iranian oil and gas market by attempting to obtain a contract with the National Iranian Oil Company to develop the Sirri A and E oil and gas fields.  Eventually, between 1995 and 2004, at the direction of an Iranian official later identified as Medhi Hashemi Rafsanjani (the son of Iran’s former president Akbar Hashemi Rafsanjani), Total corruptly made approximately $60 million in bribe payments for the purpose of inducing the Iranian official to use his influence in connection with Total’s efforts to obtain and retain lucrative oil rights in the Sirri A and E and South Pars oil and gas fields.

In 2013, in coordinated enforcement actions, the Justice Department concluded a deferred prosecution agreement with Total that involved Total’s payment of a $245.2 million monetary penalty to resolve Foreign Corrupt Practices Act charges, the United States Securities and Exchange Commission entered a cease-and-desist order against Total that required Total to pay an additional $153 million in disgorgement and prejudgment interest, and French authorities stated “that they had requested that Total, Total’s Chairman and Chief Executive Officer, and two additional individuals be referred to the Criminal Court for violations of French law, including France’s foreign bribery law.”

Since then, Total’s Chief Executive Officer (CEO), Christophe de Margerie, died in an airplane crash, and Total’s current Chairman and CEO Patrick Pouyanne recently stated that none of the other individuals under investigation were still living.  Total had contested the prosecution on the basis “that the payments had been necessary to ensure the success of the French bid” and “that, since the bribes were paid outside France, the case had no place before a French court.”

After the fine, which one media report characterized as “symbolic,” Pouyanne stated that Total would not pursue the matter further, “given the specific circumstances of this case, which has been already judged in the U.S. and in which none of the individuals can defend themselves.”  He added that anyone who knew de Margerie “knows that he would never be involved in any type of corruption.”

Note: The French Criminal Court’s fine is indeed symbolic, in two unfortunate respects.  First, while the court undoubtedly was well aware that Total had already paid nearly $400 million to U.S. authorities to resolve related charges, those payments pertained specifically to violations of United States criminal and civil law.  By levying a fine equivalent to 0.0038 percent of Total’s alleged $150 million in profits from the scheme, or 0.000054 percent of Total’s 2017 adjusted net income of $10.6 billion , the court conveyed the strong impression that it regarded Total’s violation of French criminal law as unworthy of anything more than a token sanction.

Second, the court’s token fine also could be construed as a tacit endorsement of Total’s assertion that foreign bribery was necessary to ensure the success of its bid.  Such an argument is contrary to the letter and the spirit of anti-corruption conventions that France has ratified as well as various national anti-corruption laws (including France’s 2016 Sapin II legislation), and deserves to be given short shrift in future French prosecutions under Sapin II.

On December 26, 2018, the U.S. Securities and Exchange Commission (SEC) announced that JPMorgan Chase Bank N.A. had agreed to pay more than $135 million to settle charges of improper handling of “pre-released” American Depositary Receipts (ADRs).  As the SEC explained,

ADRs – U.S. securities that represent foreign shares of a foreign company – require a corresponding number of foreign shares to be held in custody at a depositary bank.  The practice of “pre-release” allows ADRs to be issued without the deposit of foreign shares, provided brokers receiving them have an agreement with a depositary bank and the broker or its customer owns the number of foreign shares that corresponds to the number of shares the ADR represents.

As part of the SEC’s ongoing investigation into what it termed “abusive ADR pre-release practices,” the SEC order in the case found that JP Morgan Chase Bank

improperly provided ADRs to brokers in thousands of pre-release transactions when neither the broker nor its customers had the foreign shares needed to support those new ADRs.  Such practices resulted in inflating the total number of a foreign issuer’s tradeable securities, which resulted in abusive practices like inappropriate short selling and dividend arbitrage that should not have been occurring.

JPMorgan Chase Bank, without admitting or denying liability, agreed to pay disgorgement of more than $71 million in ill-gotten gains, $14.4 million in prejudgment interest, and a $49.7 million penalty, which totaled more than $135 million in monetary relief.  In addition, the SEC order stated that the bank acknowledged “that the Commission is not imposing a civil penalty in excess of $49,728,857.83 based upon its cooperation and agreement to cooperate in a Commission investigation and related enforcement action.”

Note: Although the lede of the SEC’s press release referred to “improper” actions by JPMorgan Chase Bank, a senior SEC official stated that “[w]ith these charges against JPMorgan, the SEC has now held all four depositary banks accountable for their fraudulent issuances of ADRs into an unsuspecting market” (emphasis supplied).

This resolution constitutes the eighth action against a bank or broker, and the fourth action against depositary bank, resulting from the SEC’s ongoing investigation into ADR pre-release practices.  It also involves the highest penalty of the four depositary banks that have now settled with the SEC: Citibank ($38.7 million), BNY Mellon (more than $54 million), and Deutsche Bank Trust Co. Americas (DBTCA) (nearly $73.3 million).

The order against JPMorgan Chase does not directly explain the reasons for its markedly greater total penalties.  Not surprisingly, a comparison of the four banks’ SEC orders indicates that the penalty differences are driven by differences in the banks’ net revenues from the improper transactions:

• JPMorgan Chase: That order stated that “[f]rom at least November 2011 through early 2015,” JPMorgan improperly pre-released ADRs “in thousands of transactions,” and that those improper pre-releases resulted in revenues of approximately $71 million.
• Citibank: That order stated that “[f]rom at least August 2011 through November 2016,” Citibank improperly pre-released ADRs “in thousands of transactions,” and that those improper pre-releases resulted in net revenues of approximately $20.9 million.
• BNY Mellon: That order stated that “[f]rom at least June 2011 through June 2016,” BNY Mellon improperly pre-released ADRs “in thousands of transactions,” and that those improper pre-release transactions resulted in net revenues of approximately $29 million.
• DBTCA:  That order stated that “[f]rom at least June 2011 through September 2016,” DBTCA improperly pre-released ADRs “in thousands of transactions,” and that those improper pre-releases resulted in net revenues of approximately $44.5 million.

The SEC release in this case contains no indication that the SEC’s investigation into ADR pre-release practices is anywhere near its end.