Solving “The Mystery of Maduro’s Gold”

Since last November, when President Trump signed an Executive Order that authorized sanctions directed at Venezuela’s gold sector, officials in Venezuelan President Nicolas Maduro’s administration have tried multiple routes to move large quantities of Venezuelan gold reserves out of the country, to relieve the considerable financial pressures on the regime.  In late January, Venezuelan authorities shipped three tons of gold to the United Arab Emirates (UAE), reportedly as the first step in a plan to fly up to 29 tons of gold reserves to the UAE and to sell them for cash in euros.  Even after plans for that larger shipment were canceled, Maduro’s team has continued to search for international gold buyers willing to risk running afoul of U.S. sanctions.

The latest chapter in this saga began on February 27, when, according to Reuters, a Venezuelan opposition leader and government sources stated that at least eight tons of gold had been removed from the Venezuelan Central Bank’s vaults.  At the time, those sources did not indicate that they knew where that quantity of gold was headed.

That mystery now appears to have been solved.  Today The Times reported that in early March, two flights from Venezuela had delivered a total of 7.4 tons of gold into Uganda.  Entebbe-based African Gold Refinery (AGR)  – the largest gold refinery in East Africa – received one shipment of 3.8 tons on March 2, and a second shipment of 3.6 tons on March 4, “neither of which are said to have passed through customs.”  When Ugandan police raided AGR on March 7, they reportedly found the March 2 shipment missing, but the March 4 shipment is now in the custody of the Ugandan central bank.

This report indicates the extreme lengths – in logistical and geographic terms — to which the Maduro regime is apparently willing to go to ensure its own survival, even at the cost of inflicting long-term damage to the nation’s economy.  The larger mystery is now whether the opposition can win control of the country before Maduro can exhaust the remaining 140 tons of gold reserves in his central bank or succeed in repatriating the 31 tons of Venezuelan gold that the Bank of England has in its vaults.

FINRA Fines Cantor Fitzgerald $2 Million for Regulation SHO Violations on Short Sales and Supervisory Failures

On March 5, FINRA announced that it had fined financial services firm Cantor Fitzgerald & Co. (Cantor) $2 million for violations of SEC Regulation SHO (Reg SHO) —  which addresses concerns regarding persistent failures to deliver and potentially abusive “naked” short selling — and supervisory failures spanning a period of at least five years, from January 2013 through December 2017.

FINRA found that, during that five-year period, “Cantor’s supervisory system, including its written supervisory procedures (WSPs), was not reasonably designed to achieve compliance with the requirements of Reg SHO.”  It specifically identified the following examples of those deficiencies and failures:

  • Use of Manual System to Supervise Reg SHO Compliance: FINRA found that in light of Cantor’s business expansion and increased trading activity – which more than doubled over just two years, from 35 billion shares in 2013 to 79 billion shares in 2014 – its use “of a predominantly manual system to supervise its compliance with Reg SHO was not reasonable.”
  • Failure to Address Deficiencies by Compliance Personnel Over Multiple Years: FINRA found that

Cantor’s compliance personnel identified red flags in 2013, 2014 and 2015 indicating that the firm had systemic issues with Reg SHO and that its supervisory systems were not reasonably tailored to its business. While Cantor made some changes, it did not adapt and enhance its supervision to address the deficiencies its personnel identified, commit additional staffing to monitoring its compliance with Reg SHO, or implement WSPs relating to its new lines of business until 2016.

  • Ineffective Enhancements: FINRA found that “Cantor’s enhancements to its supervisory systems and procedures were not fully effective. For example, Cantor failed to identify fails-to-deliver in accounts that were not monitored by its supervisory systems.”
  • Failure to Remediate Timely: FINRA also found that

Cantor failed to timely remediate issues identified by its personnel. This was not reasonable considering, among other things, the firm’s prior disciplinary history relating to Reg SHO. As a result, Cantor did not timely close-out at least 4,879 fails-to-deliver, and routed and/or executed thousands of short orders in those securities without first borrowing (or arranging to borrow) the security or issuing notice of the need for a pre-borrow to the broker-dealers for whom it cleared and settled trades.

Cantor neither admitted nor denied the findings, but consented to the entry of FINRA’s findings.  In addition, as part of the settlement, Cantor agreed to retain an independent consultant to conduct a comprehensive review of the firm’s policies, systems, procedures, and training related to Reg SHO.

Note: In its Letter of Waiver, Acceptance and Consent, FINRA noted that Cantor had made efforts to improve its supervisory systems, including hiring a new Chief Compliance Officer (CCO) in April 2015, creating a Reg SHO working group in the fall of 2015, and seating additional compliance personnel on the trading floor.  Nonetheless, the fact that Cantor, according to the findings, continued to engage in misconduct for more than 2 ½ years after the hiring of the new CCO suggests a deeper problem with the firm’s culture of compliance during that period.

In one sense,  Cantor was fortunate that its compliance failures involved Reg SHO.  Had the program in question involved a higher-profile category of compliance, such as anti-money laundering (AML), the kinds of systematic program failures that FINRA identified could well have resulted in criminal or civil penalties amounting to tens of millions, even hundreds of millions, of dollars.

Even so, CCOs in financial services firms should regard this resolution as a reminder that each specific compliance program under his or her supervision needs to be appropriately resourced and implemented to show regulators that all of those programs are effective, and that senior management needs to understand that fact.  Regulators will not average the results of each component of a firm’s compliance program — giving, so to speak, an A to its anti-bribery program, a C to its AML program, and an F to its broker-dealer program – and conclude that each component is entitled to an overall passing grade.  Systemic, long-term supervisory failures and ignoring of red flags in any particular compliance program is virtually guaranteed to invite enforcement action by the relevant regulator or law enforcer.

Federal Reserve Permanently Bans Two Former Goldman Sachs Investment Bankers from Banking Industry for 1MDB Scheme Participation

On March 12, the U.S. Federal Reserve Board announced that it was banning two former senior investment bankers in the Goldman Sachs Group, Tim Leissner and Ng Chong Hwa (also known as Roger Ng), for their participation in a scheme to illegally divert billions of dollars from the Malaysian sovereign wealth fund 1Malaysia Development Berhad (1MDB).

The Board stated that in their capacities as senior investment bankers employed by foreign subsidiaries of Goldman Sachs, Leissner and Ng coordinated bond offerings arranged by Goldman for 1MDB in 2012 and 2013.  “The funds diverted from 1MDB,” according to the Board, “were then used for the conspirators’ personal benefit and to bribe certain government officials in Malaysia and Abu Dhabi.”

Leissner, who consented to the permanent ban, was fined an additional $1.42 million by the Board.  In 2018, Leissner had pleaded guilty to a criminal information, filed in the Eastern District of New York and unsealed in November 2018, that charged him with conspiracy to violate the Foreign Corrupt Practices Act (FCPA) and money-laundering conspiracy in connection with his participation in the scheme described above.  In connection with that plea, Leissner was also ordered to forfeit $43,700,000.

In November 2018, Ng was arrested in Malaysia pursuant to a provisional arrest warrant filed by the United States, and the U.S. Department of Justice announced the unsealing of an indictment in the Eastern District of New York against Ng and fugitive Malaysian financier Jho Low for FCPA conspiracy and money-laundering conspiracy for their roles in the above-described scheme.  In December 2018, Malaysia also indicted Ng for his role in the scheme. Ng subsequently agreed to waive extradition and to return to the United States to face the charges against him, but Malaysian Attorney General Tommy Thomas reportedly “advised the government against doing so until Ng’s cases in Malaysian courts are completed.”

Note:  The Board’s action against Leissner and Ng reflects a continuation of the more aggressive stance that it has taken on bankers’ participation in foreign bribery since the 2016 FCPA resolution with JP Morgan Securities (Asia Pacific) Limited (JP Morgan APAC).  In that latter resolution, which involved hiring of children of foreign government officials in order to obtain improper business advantages, the Board permanently barred two former JP Morgan APAC investment bankers from the industry without the bankers’ being criminally charged in the United States, and assessed a $1 million civil penalty against one of the former bankers and a $500,000 civil money penalty against the other former banker.

In this case, the Board chose to take action against Ng even before he pleaded or was found guilty of either set of criminal charges, and evidently negotiated a resolution with Leissner after his 2018 guilty plea.  There is every reason to expect that the Board will continue similar uses of its prohibition authority in future FCPA cases involving the financial sector.

Commodity Futures Trading Commission Issues Enforcement Advisory on Self-Reporting and Cooperation for Commodities Act Violations Involving Foreign Corrupt Practices

On March 6, the Commodity Futures Trading Commission (CFTC) Division of Enforcement announced that it was issuing an Enforcement Advisory “on self-reporting and cooperation for violations of the Commodity Exchange Act (CEA) involving foreign corrupt practices.”

The Advisory states that it is intended “to provide further guidance regarding circumstances under the Division’s cooperation and self-reporting program in which it may recommend a resolution with no civil monetary penalty.”  Previously, in January 2017, the Enforcement Division had issued two Enforcement Advisories that outlined the factors that the Division would consider “in evaluating cooperation by individuals and companies in the Division’s investigations and enforcement actions.”  A third Enforcement Division Advisory in September 2017 “outlin[ed] the ways in which the Division would consider voluntary disclosures by a company or individual in the context of its broader cooperation program.” In particular, that latter Advisory specified that “[i]f the company or individual self-reports, fully cooperates, and remediates, the Division will recommend the most substantial reduction in the civil monetary penalty that otherwise would be applicable,” and explained “that, in certain circumstances, the Division may recommend a resolution with no civil monetary penalty on account of voluntary disclosure, cooperation, and remediation.”

The March 6 Advisory states that it

applies to companies and individuals not registered (or required to be registered) with the CFTC that timely and voluntarily disclose to the Division violations of the Commodity Exchange Act involving foreign corrupt practices, where the voluntary disclosure is followed by full cooperation and appropriate remediation, in accordance with the January 2017 and September 2017 Advisories.  In those circumstances, the Division will apply a presumption that it will recommend to the Commission a resolution with no civil monetary penalty, absent aggravating circumstances involving the nature of the offender or the seriousness of the offense. In its evaluation of any aggravating circumstances, the Division will consider, among other things, whether: executive or senior level management of the company was involved; the misconduct was pervasive within the company; or the company or individual has previously engaged in similar misconduct.

The Advisory also states that even if the Division were to recommend a resolution without a civil monetary penalty pursuant to that Advisory,

the Division would still require payment of all disgorgement, forfeiture, and/or restitution resulting from the misconduct at issue. In addition, the Division will seek all available remedies—including, where appropriate, substantial civil monetary penalties—with respect to companies or individuals implicated in the misconduct that were not involved in submitting the voluntary disclosure.

In his public remarks announcing the new Advisory, CFTC Enforcement Director James McDonald called attention to the strong cooperation between the CFTC, the U.S. Department of Justice, and the Securities and Exchange Commission (SEC) on enforcement matters, and characterized CEA violations carried out through foreign corrupt practices as “one type of misconduct that can undermine our domestic markets.”  He also stated that the new Advisory is intended to help in achieving “optimal deterrence in our markets.”

In explaining the new Advisory, McDonald also took care to state that

we will not pile onto other existing investigations.  When we investigate in parallel with other enforcement authorities, we will work closely with them to avoid duplicative investigative steps.  To the extent the CFTC brings an action that includes a monetary penalty, we will ensure that our penalty appropriately accounts for any imposed by any other enforcement body.  And when the CFTC imposes disgorgement or restitution, we will give dollar-for-dollar credit for disgorgement or restitution payments in connection with other related actions.

Note: The new Enforcement Advisory is of immediate significance in two respects.  First, it specifically aligns the CFTC’s approach to resolving cases of corporate misconduct to those of the Justice Department and the SEC in three respects: (a) by committing the CFTC, in foreign corrupt practices-related investigations, to the self-reporting-cooperation-remediation framework that underlies the Department’s Corporate Enforcement Policy and the SEC’s Cooperation Program; (b) by holding out the possibility that, like the Department’s discretion to decline prosecution per the Corporate Enforcement Policy, the CFTC could exercise its discretion in such investigations not to impose a civil monetary penalty in appropriate circumstances; and (c) by indicating its acceptance of the Department’s “piling-on” policy for corporate resolutions involving multiple enforcement and regulatory agencies.

Second, it sends a strong and clear signal to leading commodities firms that the CFTC is fully prepared to coordinate with the Justice Department in Foreign Corrupt Practices Act (FCPA)-related investigations, and to offer incentives for early and wholehearted cooperation in such investigations.  The timing of this signal is not accidental.  Late last year, Brazilian prosecutors publicly disclosed that they are investigating three of the world’s leading commodities firms — Vitol, Glencore, and Trafigura — for alleged bribery relating to Petrobras.  Just last month, Reuters reported that the Justice Department is investigating the two top executives of Vitol in the Americas for bribery-related conduct, and that a former U.S.-based oil trader for Petrobras, Rodrigo Garcia Berkowitz, is cooperating with U.S. authorities after Brazilian authorities charged him with participating in an alleged corruption scheme involving all three firms.

Because U.S. and Brazilian prosecutors investigating FCPA and other corruption-related conduct have been closely cooperating for several years, the commodities industry can expect that the U.S. FCPA investigation – if it has not done so already – will expand to encompass all three firms.  Although neither the Justice Department nor the CFTC would give any of those firms credit for self-reporting at this point, each of those firms should be weighing carefully the advantages of leniency if the firms can demonstrate full cooperation and remediation.  Given the focus on alleged corruption in Brazil, the firms have only to contrast the FCPA resolutions for three Brazilian companies — Petrobras and Odebrecht, which received a 25 percent discount from the low end of the applicable U.S. Sentencing Guidelines range based on full cooperation and remediation, and Braskem, which received only a 15 percent off the low end of the applicable Guidelines range based on what the Justice Department termed “partial cooperation” – to see that delay in cooperation with the Department and the CFTC can have substantial financial and reputational consequences.

U.S. Department of Justice Announces Charges Against Leaders of Fraudulent Cryptocurrency Scheme That Took in More Than €3.3 Billion of Investor Funds

On March 8, 2019, the United States Attorney’s Office for the Southern District of New York announced that two Bulgarian nationals, Konstantin Ignatov and Ruja Ignatova, have been charged in connection with their leadership of an  international pyramid scheme related to the marketing of a fraudulent cryptocurrency called “OneCoin.” As a result of misrepresentations that Ignatov, Ignatova, and others made about OneCoin, victims allegedly invested billions of dollars worldwide in the fraudulent cryptocurrency.

Ignatov was arrested March 6, at Los Angeles International Airport, on a criminal complaint charging him with wire fraud conspiracy.  He is the alleged current leader of OneCoin Ltd, which marketed the fraudulent cryptocurrency OneCoin.  Ignatova, reportedly known as “Cryptoqueen,” was the subject of an indictment unsealed on March 7 in the Southern District of New York, charging her with wire fraud conspiracy, wire fraud, money laundering conspiracy, securities fraud conspiracy, and securities fraud.  She was allegedly the co-founder of OneCoin Ltd., but “disappear[ed] from public view, in October 2017” and currently is listed as “at large.”

A third defendant, Mark S. Scott, was the subject of a prior indictment for his role in the scheme and was arrested in September 2018.  Scott allegedly participated with Ignatova in money laundering more than $400 million through purported investment funds holding bank accounts at financial institutions in the Cayman Islands and the Republic of Ireland.

According to the U.S. Attorney’s Office press release, OneCoin Ltd., which is still operating,

operates as a multi-level marketing network through which members receive commissions for recruiting others to purchase cryptocurrency packages.  This multi-level marketing structure appears to have influenced rapid growth of the OneCoin member network.  Indeed, OneCoin Ltd. has claimed to have more than 3 million members worldwide, including victims living and/or working within the Southern District of New York.

Among other alleged misrepresentations, OneCoin Ltd. falsely claimed that the OneCoin cryptocurrency is “mined” using mining servers that the company maintained and operated, that the value of OneCoin is based on market supply and demand, and that it had a private “blockchain” (i.e., a digital ledger identifying OneCoins and recording historical transactions).  In addition, by approximately March 2015, Ignatova and her co-founder allegedly had begun allocating to OneCoin members coins that did not even exist in OneCoin’s purported private blockchain, and referred to those coins as “fake coins.”

As a result of misrepresentations that Ignatov, Ignatova, and other OneCoin representatives allegedly made,

victims throughout the world wired investment funds to OneCoin-controlled bank accounts in order to purchase OneCoin packages.  Records obtained in the course of the investigation show that, between the fourth quarter of 2014 and the third quarter of 2016 alone, OneCoin Ltd. generated €3.353 billion in sales revenue and earned “profits” of €2.232 billion.

Note: Within the past year, the Department of Justice has prosecuted multiple individuals allegedly connected with cryptocurrency schemes, including AriseBank, Blue Bit Banc, CentraTech, My Big Coin Pay, pressICO LLC, and RECoin.  These latest charges emphasize, yet again, the importance of would-be cryptocurrency investors conducting sound due diligence before investing any funds in any purported cryptocurrency firm or investment product.  As the Securities and Exchange Commission has warned about cryptocurrency investments, “In many cases you may not know exactly who you are dealing with, where your money is going or what you are getting in return.”