European Public Prosecutor’s Office Taking Shape for 2020 Commencement of Operations

Since 2017, when the European Union (EU) established the European Public Prosecutor’s Office (EPPO), the European law enforcement and business communities, as well as EU Member State governments,  have been watching the gradual development and implementation of the EPPO with great interest.

Although all EU Member States have their own national law enforcement agencies, and the EU has had the EU Agency for Law Enforcement Cooperation (Europol) and the EU Judicial Cooperation Unit (Eurojust) to address crimes affecting multiple Member States, the EU chose to create a Europe-wide prosecutor’s office because of two primary concerns.  First, it concluded that national criminal justice authorities were “currently not always sufficiently investigat[ing] and prosecut[ing]” criminal offenses affecting  to protect the EU’s financial interests against criminal offenses such as fraud, corruption, or serious cross-border value-added tax (VAT) fraud.  Second, it believed that “[e]xisting EU-bodies such as Eurojust, Europol and the EU’s anti-fraud office (OLAF) lack the necessary powers to carry out criminal investigations and prosecutions.”

When it established the EPPO, the EU expected that the EPPO would require a three-year build-up before it could begin operations.  That build-up appears to be on course for a November 2020 commencement of EPPO operations.  The EPPO’s structure envisions a division between strategic and operational functions, and between central- and national-level activities:

  • Strategy and Operations: For strategy, the European Chief Prosecutor and two Deputies will head the EPPO, and a College of Prosecutors – consisting of one European Prosecutor per participating Member State – who will participate in decision-making “on strategic matters to ensure coherence, consistency and efficiency within and between cases.” For operations, the EPPO will have a Permanent Chambers of three prosecutors (two European Prosecutors and either the Chief Prosecutor, a Deputy, or another European Prosecutor) who will monitor and direct investigations and prosecutions by European Designated Prosecutors (EDPs) and make operational decisions (e.g., when to bring or dismiss a case), and EDPs (at least two per participating country), who will be responsible for investigating, prosecuting, and bringing to judgment cases within the EPPO’s competence.
  • Central and National Levels: The central level will consist of the Chief Prosecutor, the Deputies, and the European Prosecutors to supervise investigations and prosecutions carried out at the national level. The national level will consist of the EDPs, who will be located in the participating Member States and “[a]s a rule” carry out the investigation and prosecution in their respective Member States.

Although the European Council and Parliament have yet to agree on the selection of the EPPO Chief Prosecutor, the EPPO has now begun hiring an estimated 117 staff members for its Luxembourg headquarters.  In addition, on May 9, the Luxembourg Government announced plans for the EPPO’s occupancy of an office building in Luxembourg City.

Note: The EPPO has made considerable progress to date in its operationalization, but EU watchers should expect that the most challenging aspects of its development lie ahead.  On the one hand, the European Commission has described the EPPO as “an independent and decentralised prosecution office of the European Union” that “will operate as a single office across all participating Member States and will combine European and national law-enforcement efforts in a unified, seamless and efficient approach.”

On the other hand, the EU Council, in Council Regulation (EU) 2017/1939, expressly contemplated “a system of shared competence between the EPPO and national authorities in combating crimes affecting the [EU’s] financial interests,” and invoked “the principle of sincere cooperation” in asserting that “both the EPPO and the competent national authorities should support and inform each other with the aim of efficiently combatting the crimes falling under the competence of the EPPO.”  It also specified that “the EPPO should be established from Eurojust, and implied there should be “a close relationship between them based on mutual cooperation.”

These two sets of aspirational statements may have been intended to be consistent.  In practice, they leave ample room for jurisdictional and operational conflicts, as the EPPO begins to take on investigation- and case-related decisionmaking that national-level law enforcement authorities have traditionally understood to be their province.  If the Council and Parliament can agree soon on a Chief Prosecutor, and overcome other sources of opposition, that official would do well to meet with national law enforcement authorities well in advance of November 2020.  The prime objective of those meetings should be to reduce suspicions and mistrust about how the EPPO intends to go about its day-to-day business, and how broadly the EPPO will define what constitutes day-to-day business.  Considering the level of tensions that have arisen just in the Chief Prosecutor section process, even that objective may prove a formidable task.

New York Court Enjoins Cryptocurrency Firms iFinex, Bitfinex, and Tether from Fraudulent Practices

On April 24, the New York State Supreme Court (New York County) entered an ex parte order granting preliminary injunctive relief against cryptocurrency exchange Bitfinex, Bitfinex’s owner iFinex, and various corporate entities connected with the cryptocurrency tether.

The order stated that the court was granting injunctive relief “because alleged fraudulent practices of [the defendant companies] threaten continued and immediate injury to the public and that the potential dissipation of [those companies’] assets would render a judgment directing restitution or disgorgement ineffectual.”  The order also directed the defendant companies to produce an extensive array of documents, including various financial records, documents concerning Bitfinex users, accounts, clients, or customers and tether holders in New York, and “[i]dentification of all New York and United States customers of Bitfinex whose funds were provided to Crypto Capital and the amount of any such outstanding funds.”

This order stems from  an investigation by the New York State Attorney General’s Office (NYAG) into Bitfinex and tether that began in 2018.  Filings by the NYAG in connection with the order explained that Bitfinex, as a cryptocurrency trading platform,

allows New Yorkers to purchase and trade virtual currencies, including the so-called “tether” stablecoin, a virtual currency the companies long claimed was “backed 1-to-1” by U.S. dollars held in cash reserve.

The filings explain how Bitfinex no longer has access to over $850 million dollars of co-mingled client and corporate funds that it handed over, without any written contract or assurance, to a Panamanian entity called “Crypto Capital Corp.,” a loss Bitfinex never disclosed to investors.  In order to fill the gap, executives of Bitfinex and Tether engaged in a series of conflicted corporate transactions whereby Bitfinex gave itself access to up to $900 million of Tether’s cash reserves, which Tether for years repeatedly told investors fully backed the tether virtual currency “1-to-1.”

According to the filings, Bitfinex has already taken at least $700 million from Tether’s reserves.  Those transactions – which also have not been disclosed to investors – treat Tether’s cash reserves as Bitfinex’s corporate slush fund, and are being used to hide Bitfinex’s massive, undisclosed losses and inability to handle customer withdrawals.  The Office’s filings further detail how the companies obfuscated the extent and timing of these corporate transactions during the Office’s investigation.

Previously, in 2018 Bitfinex had maintained that the $850 million was deposited with Crypto Capital Corp. “and then, through no fault of Bitfinex’s, seized by government authorities in the U.S., Poland and Portugal.”

In its public response to the court order, Tether made three principal assertions.  First, the NYAG’s court filings  “were written in bad faith and are riddled with false assertions, including as to a purported $850 million ‘loss’ at Crypto Capital.”  Second, the $850 million entrusted to Crypto Capital “are not lost but have been, in fact, seized and safeguarded.” Third, “[b]oth Bitfinex and Tether are financially strong – full stop.”

At a May 6 hearing, New York State Supreme Court Justice Joel Cohen criticized the injunction as “vague, open-ended and not sufficiently tailored to precisely what the AG has shown will cause imminent harm,” adding, “I think it’s both amorphous and endless.”  Accordingly, Justice Cohen gave the parties one week to agree on what the scope of the injunction should be.

Note: The developments to which the Supreme Court’s order relates provide a concrete example of why the financial sector remains exceedingly wary of cryptocurrency firms and exchanges.  Bitfinex and Tether Ltd., both of which iFinex controls, have reportedly been the target of scrutiny by the U.S. Department of Justice and the Commodity Futures Trading Commission for more than a year — in part because of allegations that both companies were involved in efforts to manipulate the price of Bitcoin in 2017.  As for Crypto Capital, it has reportedly been “slowly emerging as the central bank of the crypto industry,” facilitating banking services to cryptocurrency firms and exchanges (including Bitfinex) even as traditional financial institutions shy away from cryptocurrency business..

While the NYAG investigation, and the related litigation, are likely to run for some time, an apparently related case may reveal additional details about the disputed $850 million.  On April 30, the United States Attorney’s Office for the Southern District of New York announced the arrest of Arizona businessman Reginald Fowler on charges of bank fraud and operating an unlicensed money transmitting business, as well as the unsealing of an indictment against Fowler and co-conspirator Ravid Yosef, who remains at large.

The United States Attorney’s Office alleged that

FOWLER and YOSEF, who worked for several related companies that provided fiat-currency banking services to various cryptocurrency exchanges (the “Crypto Companies”), allegedly participated in a conspiracy in which FOWLER made numerous false and misleading statements to banks to open bank accounts that were used to receive deposits from individuals purchasing cryptocurrency, and in which FOWLER and YOSEF falsified electronic wire payment instructions to conceal the true nature of a voluminous cryptocurrency exchange business.  Hundreds of millions of dollars flowed through the Crypto Companies’ accounts from banks located across the globe.

The indictment also contains forfeiture allegations that include detailed references to the government’s 2018 seizures of funds in bank accounts held by Fowler and Global Trading Solutions LLC.  The cryptocurrency news website The Block recently reported that Fowler owned Global Trading Solutions, and that Global Trading Solutions was an agent for Crypto Capital.  In addition, Bloomberg reported that federal prosecutors, in a May 1 filing, stated that “interviews conducted during their investigation have ‘corroborated in part’ that companies affiliated with [Fowler] may have failed to return $851 million to an unnamed client . . . .”

If the Justice Department can obtain a plea and prompt cooperation from Fowler, that could expedite both federal and state investigations of Bitfinex and Tether.  In the meantime, even as Bitfinex has seen a withdrawal of at least $430 million from its cold wallets after the NYAG announcement, it reportedly plans “to raise up to $1 billion from investors to shore up its financials through an initial exchange offering.  Time – and the market, and the judicial process – will tell.

Irish Companies Registration Office Launches Beneficial-Ownership Registry Website

On April 26, the Companies Registration Office Ireland (CRO) announced that it had launched its new website for the Registry of Beneficial Ownership (RBO).  The CRO, which servs as  the central repository of public statutory information on Irish companies and business names, stated that the new RBO is “the central repository of statutory information required to be held by relevant entities in respect of the natural persons who are their beneficial owners/controllers, including details of the beneficial interests held by them.”

“Relevant entities,” for purposes of the RBO, fall into two categories: (1) companies that formed and registered under the Irish Companies Act 2014, or an existing company within the meaning of that Act; and (2) industrial and provident societies (I&Ps) registered under the Irish Industrial and Provident Societies Acts 1893 to 2018.  Those entities will be required to file their beneficial-ownership data with the RBO through an on-line portal that will open on the new RBO website on June 22.  After that date, according to the CRO, companies and I&Ps will have five months to file their RBO data “without being in breach of their statutory duty to file.”

Breach of that duty, however, can result in significant sanctions.  The Times reported that a company that fails to properly keep a beneficial-ownership register or to comply with requests from authorities can be fined up to €500,000, while an individual who knowingly or recklessly provides information that is “false in a material particular” can receive a custodial sentence of up to 12 months’ confinement.

Note: The new RBO is one of the measures that the Irish Government has been pursuing – with some prodding from the European Commission — to combat white-collar crime, including anti-money laundering (AML) related measures.  Like other European Union (EU) Member States, Ireland is obligated to comply with the EU’s Fourth AML Directive. That Directive requires, among other things, that financial institutions identify beneficial owners as part of their customer due diligence, that corporate and other legal entities incorporated within their territory obtain and hold adequate, accurate, and current information on their beneficial ownership, and that each Member State hold such beneficial-ownership information in a central register.

The CRO stresses that the RBO website itself is not open to the public.  The Times, however, reported that certain information will be made available to the public, such as the names of beneficial owners, what percentage of each company they hold, their places of birth, and their countries of residence.  Irish authorities with a legitimate interest, including Revenue Commissioners, the Irish police Garda Síochána, and the Irish Central Bank, may receive more substantial information.

“What Is the Human Cost of Work?”: Trial of France Télécom, Executives for “Moral Harassment” Begins in Paris

On May 6, an unprecedented criminal trial began in the Paris Criminal Court.  The French telecommunications company France Télécom (now known as Orange), its former Chairman, Didier Lombard, and two other former France Télécom executives are charged with “moral harassment,” a crime under French law that is defined as “frequently repeated acts whose aim or effect is the degradation of working conditions.”  Four other former and current France Télécom executives are charged with “complicity” in the conduct.

This prosecution stems from the 2004 privatization of France Télécom, which had been a state-owned monopoly.  Beginning in 2006, France Télécom executives “carried out a restructuring of the company” in which 22,000 jobs were to be eliminated over a three-year period and 14,000 workers changed jobs – some multiple times.  At the time, however, most employees reportedly “were still considered civil servants and so were protected from layoffs.”

The prosecutors’ theory of the case is that the company and Lombard, who served as Chairman and Chief Executive from 2005 to 2010, “introduced a policy of unsettling employees in order to induce them to quit.”  In particular, as reflected in the investigating magistrates’ summary of charges, executives allegedly “deliberately create[ed] a culture of anxiety among staff and attempting to push some out by isolating, intimidating and demoting them or transferring them away from their families.”  The statement of charges also referred to “multiple haphazard restructures, forcing people to move around geographically and repeatedly pushing incentives for them to resign.”

One widely reported example of senior executives’ attitudes at the time occurred at a 2006 company directors’ meeting.  In that meeting, Lombard himself stated (according to an internal company document from which Le Parisien quoted), “En 2007, les départs, je les ferai d’une façon ou d’une autre, par la porte ou par la fenêtre” (“In 2007, I will do the departures one way or the other – by the door or by the window”).

Subsequently, a tragic spate of employee suicides began at the company.  The reported number of employee suicides in 2008 and 2009 has ranged from 19 to 35.  Lombard responded by referring dismissively to a “suicide fad.”  Although he later acknowledged that he had committed “an enormous gaffe” in making that comment, Lombard stepped down as France Télécom Chairman in 2010.  Shortly thereafter, the Paris prosecutor’s office reportedly began its inquiry into the company’s human resource policies.

The trial – which the Guardian termed “the largest case in which a major company and its former directors have been brought to court to justify their treatment of staff” —  is expected to last at least two months.  If convicted, France Télécom/Orange could receive a €75,000  sanction, and the former executives could receive one year’s imprisonment and a €15,000 fine.

Note: Workplace suicide is a horrendous trend in many industries and countries around the world.  In the United States, the Centers for Disease Control (CDC) has reported that the workplace suicide rate among workers 16 to 64 years old increased 34 percent between 2000 and 2016 (i.e., from 12.9 to 17.3 per 100,000 workers), and indicated that suicide prevention strategies for workers “are needed to help mitigate rising workplace suicide rates.”

In France, Agence France Presse reported that notwithstanding France’s strong labor laws, “depression, long-term illness, professional burnout and even suicide have become increasingly common.”  One French psychologist, Marie Peze, recently asked: “In 2019, with suicides among farmers, police and nurses . . .  what is the human cost of work?”

Although the trial has just begun, it is not too soon for other companies, in France and other countries, to take account of prior reporting about the events at France Télécom and use them to review the soundness of their own employee-assistance and suicide-prevention programs.  A 2018 CDC report, for example, recommends that U.S. employers provide employees with “access to online mental health screenings and web-based tools,” “[h]elp reduce the stigma surrounding seeking assistance for mental illness,” and increase awareness of the National Suicide Prevention Lifeline.  In addition, at the conclusion of the trial, corporate-compliance teams and academicians should review the trial evidence and prepare case studies, to understand better how a major company could have initiated and implemented a process that apparently led to such tragic results.

Japanese Banks Preparing for Latest FATF Evaluation of Anti-Money Laundering Implementation

On May 5, the Japan Times reported that the Japanese banking industry “will strengthen efforts to prevent money laundering,” in anticipation of the upcoming Financial Action Task Force (FATF) evaluation of Japan that is scheduled for October and November.  (The FATF is an intergovernmental body that establishes standards and promotes effective implementation of legal, regulatory, and operational measures to combat money laundering, terrorist financing and other related threats, in part through the periodic monitoring of its member nations’ progress in implementing appropriate anti-money laundering (ATF) and counter-terrorist financing (CTF) measures.)

Among other industry actions, MUFG Bank, Japan’s largest bank and a group company under Mitsubishi UFJ Financial Group Inc., reportedly “plans to terminate overseas remittances made at the counter of branch offices that bypass bank accounts,” and other Japanese banks “are likely to follow suit.”  In addition, the article stated that a number of regional banks have discontinued some forms of overseas fund transfers, and Shimane Bank, which provides commercial banking and leasing services, has discontinued “all types of overseas remittances, including services that use bank accounts.”

As for regulatory agency activity, after a number of foreign students who had bank accounts in Japan sold those accounts to make extra money and the accounts were then used “in money laundering and remittance fraud cases, the Japanese Financial Services Agency (FSA) decided to “keep all financial institutions and other businesses informed of the need to urge foreign students and workers in Japan to close their bank accounts in the nation when they return home.”

Note: The coming months will be a significant period for the Japanese financial sector in demonstrating its commitment to AML/CTF compliance, at a time when money laundering appears to be increasing in Japan.   In February, the Japanese National Police Agency reported that in 2018, police received reports of 417,465 cases of suspected money laundering or other abuse (an increase of 7,422 since 2017), and most of those reports pertained to banks and other financial institutions.  In addition, after it analyzed those reports, the NPA “provided information on 8,259 cases to investigating authorities (an increase of 1,096, or more than 15 percent, since 2017).  Furthermore, in 2018 the NPA received 7,096 reports of suspicious transactions connected with cryptocurrencies (a more than tenfold increase since the 669 cryptocurrency-related reports received in 2017).

While Japan is a FATF member and a signatory to the G7 Action Plan on Combatting the Financing of Terrorism, the government is quite conscious that in FATF’s last evaluation of Japan in 2008, FATF deemed Japan’s AML/CTF implementation insufficient.  As the Nikkei Asian Review observed, the government has been interested in repairing “its tarnished image,” particularly because Japan will soon be hosting the Group of 20 Summit and Ministerial Meetings on June 28-29.

The FSA’s recent actions regarding foreign-student accounts are not the only actions that it has taken since the start of 2018 to improve AML/CTF regulation and oversight.  For example, according to the Nikkei Asian Review,

the FSA issued anti-money laundering guidelines and directed smaller financial institutions such as regional banks and shinkin banks [cooperative regional financial institutions] to conduct emergency inspections. To close the loopholes on overseas remittances, the policy requires institutions to come up with plans to train staff.

Those guidelines made clear that the FSA expected all financial institutions to adopt a risk-based approach to AML, including verifying ”that financial institutions are following the guidelines through questioning and on-site inspections” and “order[ing] operational improvements to be made if it catches lax compliance that could invite money laundering.

In addition, last fall the FSA stated in its annual report that it had made AML measures “a top priority,“ and urged financial institutions

to take steps to halt money laundering, requiring them to identify and analyze the risks associated with certain types of transactions, such as the stated purpose of cross-border cash transfers, customer attributes and countries of origin or destination.

Even so, Japan should be prepared – not least because of the reported increases in money laundering activity – for close scrutiny by the FATF this fall.