University of Kansas Professor Indicted for Fraud, Based on Failure to Disclose Conflict of Interest with Chinese University

On August 21, the United States Department of Justice announced that a federal grand jury in the District of Kansas indicted Feng “Franklin” Tao, a University of Kansas (KU) associate professor and researcher at the KU Center for Environmentally Beneficial Catalysis (CEBC) since 2014, on multiple counts of fraud, for allegedly “hiding the fact he was working full time for a Chinese university while doing research at KU funded by the U.S. government.”

According to the indictment,

in May 2018 Tao signed a five-year contract with Fuzhou University in China that designated him as a Changjiang Scholar Distinguished Professor.  The contract required him to be a full time employee of the Chinese university.  While Tao was under contract with Fuzhou University, he was conducting research at KU that was funded through two U.S. Department of Energy [DOE] contracts and four National Science Foundation [NSF] contracts.

In annual conflict of interest reports to KU that the Kansas Board of Regents require staff to file, Tao allegedly falsely reported that he had no conflicts of interest.  During his tenure at KU, he “fraudulently received more than $37,000 in salary paid for by the Department of Energy and the National Science Foundation.”

Tao is charged with one count of wire fraud and three counts of federal program fraud.  In addition, the indictment includes a forfeiture allegation in which the government seeks the recovery of salary that he received from KU since May 2018.  He is scheduled to make his initial appearance tomorrow in federal district court in Kansas City, Kansas.

Note: At first glance, it may appear unusual that the Justice Department would take the trouble to obtain an indictment against an individual for a conflict of interest involving a fairly modest amount of federal funds.  While federal fraud prosecutions involving conflicts of interest typically involve millions of dollars, the Department has occasionally prosecuted conflict-of-interest cases involving comparable or even lesser amounts of money than the Tao indictment.

Two factors may have influenced the decision to indict Tao rather than allow him the opportunity to plead guilty.  First, given his full-time position at Fuzhuo University, prosecutors may have been concerned that if no charges were pending against him, Tao would take the opportunity to flee the United States.  Second, some media have reported that the Tao indictment “is part of an FBI push to target ethnic Chinese scientists working in the U.S. who are believed to be passing secrets to China,” although neither the Justice Department announcement nor the indictment include any information to support that theory.

One oddity in the indictment concerns the forfeiture allegation.  That allegation states that, upon conviction of offenses in Counts 1 through 3, the government will seek forfeiture money judgments in amounts “equal to the amount of proceeds that the defendant obtained from the commission of” Counts One and Two.  Count 1, however, is the wire fraud count, which pertains only to Tao’s online submission of his conflict-of-interest form to KU and makes no reference to a specific amount of money.  Counts 2 and 3, on the other hand, specify the amounts of Tao’s salary, totaling $32,506, that came from NSF and DOE contracts.  This discrepancy may be resolved after Tao’s arraignment.

In any event, this case provides counsel at public and private universities with a timely opportunity to remind their staff members of their obligation to disclose all reportable conflicts of interest, and of the potential consequences for false submissions.

European Commission to Relaunch List of Countries with AML/CTF Strategic Deficiencies

On August 21, the Financial Times reported that Věra Jourová, the European Commissioner for Justice, Consumers and Gender Equality, stated that the European Commission (EC) would relaunch a list of countries with strategic deficiencies in their anti-money laundering (AML) and counter-terrorism financing (CTF) frameworks.

The EC had announced the adoption of the initial version of that AML/CTF list in February 2019.  But problems arose when the methodology that the EC used, though it reflected the criteria of the European Union’s Fifth Anti-Money Laundering Directive, resulted in the inclusion of countries such as Saudi Arabia, Guam, the United States Virgin Islands, American Samoa, and Puerto Rico.  As none of those countries, the Financial Times noted, “are named on an international blacklist prepared by the Financial Action Task Force [FATF], the global authority on money laundering,” that prompted “fierce lobbying” by Saudi Arabia and “sharp criticism” from the United States, and ultimately led to European Union Member States’ rejection of the list.  That rejection in turn led to the EC’s promise to produce a new list after close consultation with Member States.

In her interview with the Financial Times, Jourová said that she believes “we honestly did our best to have the methodology right and to have the assessment right.”  At the same time, she acknowledged that the EC had not sufficiently involved Member States in developing the list’s methodology, and had not sufficiently communicated in advance with the jurisdictions likely to be included on the list.  For those reasons, the new list would be based on a new methodology that had been developed in cooperation with Member States.

Jourová promised that the new assessment using the new methodology “will come with a different result.”  In particular, she “suggested the revamped list would likely name a different group of territories and allow some jurisdictions to be placed on a ‘grey list’ if they co-operate with European recommendations.”  Although FATF had been maintaining its blacklist for some time, Jourová maintained that “Europe should have its own list of risky territories — independently from FATF — to be ‘clear on the standards we want to see . . . to protect the European financial system’.”

Note: While Jourová appears to have sounded the right notes about the need to consult with Member States about the methodology, that new methodology has not yet been made available for public review.  Presumably the EC is taking greater care this time to vet the results of its assessment with the nations likely to be included on the list before issuing the list and the methodology.  If the EC is in fact planning to issue a “grey list” for countries that cooperate with the EC’s review, it may need more time to determine which countries to include on “grey” and “black” lists before publishing either list.

“Fattest Tiger” in Chinese Anti-Corruption Campaign Pleads Guilty to Accepting $64 Million in Bribes

On August 16, the Chinese news site Sixth Tone reported that on August 15, Xing Yun, former Vice Chairman of the Standing Committee of the People’s Congress of Inner Mongolia, pleaded guilty to corruption-related charges in the Dalian Intermediate People’s Court in Liaoning Province, China.

In a story that the Chinese news newspaper Southern Metropolis Daily first reported, Xing admitted to accepting bribes totaling ¥449 million ($64 million).  According to Sixth Tone, Xing “exploited positions he held between 1996 and 2016 to help others get promoted and secure government contracts. In return, he accepted staggering sums in bribes, both directly and through his relatives.”

Xing’s total of ¥449 million reportedly makes him, according to Southern Metropolis Daily’s research,

the “fattest tiger” — or high-ranking official — nabbed since President Xi launched his hallmark anti-corruption campaign in late 2012. Of the 23 disgraced provincial- and ministerial-level officials who have been caught accepting over 100 million yuan each in bribes, 19 were given either life sentences or suspended death sentences that were later commuted to life.

Even before Xing’s plea, in April 2019 the Chinese Central Commission for Discipline Inspection (CCDI) issued an official notice that stated Xing had been expelled from the Chinese Communist Party “for being ‘unscrupulous in exchanging power for money’.”  Southern Metropolis Daily reported that the wording of the CCDI notice “was notably harsher than previous government statements about corrupt officials.”

Note: Xing has not yet been sentenced, but is scheduled to be sentenced at a later date, according to the Xinhua News Agency.  If recent experience is any guide, Xing, given his former high station and volume of bribe-taking, is likely to be sentenced to life imprisonment, as former People’s Liberation Army general Fang Fenghu, former Vice Minister of State Security Ma Jian, and former party secretary of Chongqing Sun Zhengcai have been over the past 15 months.

European Central Bank Official Warns Financial Institutions About Cybersecurity Risks

On August 20, Bloomberg reported on an interview with Korbinian Ibel, a director general in the supervisory arm of the European Central Bank (ECB).  In the interview, Ibel warned, according to Bloomberg, “that banks embracing external data storage and other digital technology need to face an uncomfortable truth: there is a good chance they will get hacked.”

Ibel was quoted as saying that “[t]here will be accidents, especially in the cloud.  It is not that clouds are more vulnerable, they are actually often better protected than in-house systems, but they are seen as juicy targets.”  Ibel also commented that “[w]e see the benefits” of cloud computing,” but cautioned that “[t]he rule is that the banker is always responsible for their data and services.”  At present, Ibel observed, European banks are tending “to avoid putting ‘highly confidential data’ on public clouds.”

Ibel supported banks’ efforts to respond to changes in the digital world “by hiring tech experts, sometimes even naming them to their top management bodies.’   In his view however, those steps do not go far enough.  As he put it, “It is not enough to have one person as the IT expert. You need a common understanding at board level of the needs and risks of IT.”

Note:  Ibel’s temperate and restrained advice consistent with the temperate and moderate approach that the ECB has taken so far on emphasizing the importance of cybersecurity for the European financial sector.  So far, the ECB has essentially limited itself to providing general guidance and discreet admonitions to the financial sector about the importance of cybersecurity.  Last year, for example, the ECB published the final version of its cyber resilience oversight expectations for financial market infrastructures.

There are indications, however, that the ECB will be sending stronger signals to financial institutions that they will be expected to demonstrate the strength and effectiveness of their cybersecurity programs.  At the start of this year, Sabine Lautenschläger, Member of the ECB’s Executive Board and Vice-Chair of the ECB’s Supervisory Board, announced that ECB Banking supervision would “launch a number of on-site inspections on cyber risk in 2019,” and would “continue to monitor the situation” under its Single Supervisory Mechanism (SSM) cyber incident reporting process.  More recently, Lautenschläger was critical of financial institutions’ financial market infrastructures for “too often lack[ing] board-approved cyber resilience strategies,” having strategies that are “often not operationalized,” and operationalization that “is often not monitored.”  She also took note of “a dangerous lack of [cyber] awareness and training.”

The ECB understandably is concerned that it and other European banking supervisors, such as the European Union and the European Banking Authority, must “guard against the risk of duplication of effort.”  But it also needs to remain firm in stressing the importance of cybersecurity.  Having seen at firsthand the disruption that the Danske Bank scandal caused over the past year, European banks need to avoid having even one of their number suffer a data breach of the magnitude of Capital One.

GRECO Report Finds “Very Low Level of Compliance” by Germany on Corruption Prevention for Certain Officials

On August 12, the Council of Europe announced that the Council’s Group of States Against Corruption (GRECO) issued a report with regard to corruption prevention pertaining to members of parliament, judges and prosecutors in Germany.  The report found that Germany had an “overall very low level of compliance” with recommendations that GRECO had made in 2015.

In its 2015 Fourth Round Evaluation Report on Germany, GRECO made eight recommendations concerning corruption prevention pertaining to German members of parliament, judge, and prosecutors.  These recommendations addressed a range of issue including ethical principles and rules of conduct; prohibition or restriction of certain activities; supervision and enforcement; and advice, training, and awareness.  The 2019 report addressed five of those recommendations that were still pending:

  1. Improving Transparency of the Parliamentary Process: GRECO had recommended “that the transparency of the parliamentary process be further improved, e.g. by introducing rules for members of parliament on how to interact with lobbyists and other third parties seeking to influence the parliamentary process.”  GRECO credited Germany with publishing, on the website of ministries, comments received by stakeholders from the private sector and civil society on draft legislation.” It deemed that action “a significant step in improving transparency of the legislative process on side of the Federal Government.”  At the same time, GRECO pointed out “that the recommendation specifically calls for the transparency of the parliamentary process to be improved,” and that a number of the concerns GRECO has outlined in the 2015 Report “remain unaddressed.”  It found that this recommendation “remains partly implemented.”
  2. Conflict of Interest: GRECO had recommended “that a requirement of ad hoc disclosure be introduced when a conflict between specific private interests of individual members of parliament may emerge in relation to a matter under consideration in parliamentary proceedings,” and that that members of parliament “be provided written guidance on this requirement – including definitions and/or types of conflicts of interest – as well as advice on possible conflicts of interests and related ethical questions by a dedicated source of confidential counselling.” It stated that this recommendation has not been implemented since the original recommendation.
  3. Declarations of Interest: GRECO had recommended that “the existing regime of declarations of interests be reviewed in order to extend the categories of information to be disclosed,” and that “that consideration be given to widening the scope of the declarations to also include information on spouses and dependent family members.” It recognized, in a more extensive analysis, that several parts of the recommendation had been implemented, but that overall the recommendation remains partly implemented.
  4. Supervision and Enforcement: GRECO had recommended that “appropriate measures be taken to ensure effective supervision and enforcement of the current and future declaration requirements, rules on conflicts of interest and other rules of conduct for members of parliament . . . .”
  5. Transparency in Judges’ Secondary Activities: GRECO had recommended that “appropriate measures be taken with a view to enhancing the transparency and monitoring of secondary activities of judges.” It noted that the German Court of Audit had reviewed secondary activities at one high-level federal court, and that that court “improved its monitoring of secondary activities where necessary.”  It also approved of the adoption of a new code of conduct for justices of the Federal Constitutional Court, and the publication of  a new code of conduct has been adopted and that information on income received as a result of attending events or contributing to publications by justices of the Federal Constitutional Court.  As those improvements were restricted to two federal courts, GRECO concluded that the recommendation remains partly implemented.

GRECO concluded that, notwithstanding positive steps that Germany had taken with regard to some of the recommendations, “the overall very low level of compliance with the recommendations is ‘globally unsatisfactory’” within the meaning of Rule 31 of GRECO’s Rules of Procedure.  Accordingly, it asked the Head of the German delegation to GRECO to provide a report on the progress in implementing the pending recommendations no later than June 30, 2020.

Note: Germany is far from the only GRECO Member State that has been slow to implement GRECO’s recommendations.  In its most recent Annual Report, GRECO reportedly “identified a number of gaps in several countries,” including “the need for codes of conduct for ministers and other top executive functions, lobbying, managing of conflicts of interest, asset declarations, immunities and ‘revolving doors’.”  It also expressed its regret that 14 Member States, including Germany, had not yet ratified the Council of Europe’s Civil Law Convention on Corruption “despite its importance for the public, private and not-for-profit sectors in ensuring effective remedies in domestic law for people who have suffered damage as a result of acts of corruption.”