Month: September 2019

On September 17, The Times reported that the Chinese government “was responsible for a cyberattack on Australia’s national parliament and the three biggest political parties” before the May 2019 general election.  According to a report by Australian’s national signals-intelligence and cryptologic agency, the Australian Signals Directorate (ASD), the cyberattack

was orchestrated by China’s Ministry of State Security although the attackers used sophisticated techniques to try to conceal their identity. It was suspected that the attackers were looking for information that could prove useful if they were trying to influence or compromise members of parliament.

The ASD report was shared with at least the United States and the United Kingdom, according to Reuters sources.  Previously, in February 2019 Australian Prime Minister Brian Morrison had delivered a statement to the Australian House of Representatives reporting on “a malicious intrusion into the Australian Parliament House computer network” and that “the networks of some political parties – Liberal, Labor and the Nationals – have also been affected.”  But in the aftermath of the ASD report, the Reuters sources said, the Australian Government had decided “not to publicly blame China, as it was concerned it could hurt Australia’s commercial interests.”

Note:  Although China has long been recognized for its use of cyber espionage to support its strategic development goals, Russia thus far has received the lion’s share of global publicity for online efforts to interfere with other countries’ elections.  The Times report, however, provides further evidence — along with prior reports of Chinese interference in the 2018 Taiwan election (through social media, disinformation, and funding of candidates), and use of fake accounts in 2019 to foment political discord in Hong Kong — that China has chosen to emulate Russia in incorporating interference in foreign elections as a legitimate strategy to advance its foreign-policy and strategic interests, at least in the Asia-Pacific region.

Moreover, those prior efforts involved territories over which China has long asserted jurisdiction.  There is no comparable justification for it to interfere in other sovereign nations’ electoral processes.  Countries in and beyond the Asia-Pacific region should therefore regard further electoral interference — whether by state agencies or purportedly non-state actors — as a basis for concerted responses in multiple diplomatic and multilateral channels.

On September 13, the Nederlandse Vereniging van Banken (NVB, or Dutch Banking  Association) issued a press release (in Dutch and English) that announced a banking-industry initiative to enhance cooperation in the fight against money laundering.  The release stated that five Dutch banks — ABN AMRO, ING, Rabobank, Triodos Bank, and de Volksbank—are seeking “to set up an organisation that will monitor payment transactions: Transaction Monitoring Netherlands (TMNL).”

The NVB prefaced its comments about this initiative by recognizing that “[i]n their gate-keeping role, Dutch banks have an important function in protecting the integrity of the Dutch financial system,” and that “the banks are continually monitoring customer transactions with the aim of combating money laundering and the financing of terrorism.”  It noted that this initiative, which “the banks are actively supporting,” stems from the Money Laundering Action Plan that Dutch Minister of Finance Wopke Hoekstra and Minister of Justice and Security Ferdinand Grapperhaus outlined in July 2019.

Over the next six months, the NVB explained, it and the five banks will study whether the TMNL “is feasible given the technical and legal challenges involved.”   In light of the 68,000 unusual transactions that the banks reported to the Dutch Financial Intelligence Unit (FIU) in 2018 – 15,000 of which the FIU deemed suspicious – it stated that

[t]he banks are determined not to cooperate in money laundering in any way whatsoever. As part of their social responsibility, the banks are actively working on improving the effectiveness of their transaction monitoring in order to significantly increase the return from identification, detection, prosecution and conviction of criminal conduct. The combining of transactions effected by the various banks is expected to make it easier to spot flows of criminal funds.

The NVB also made clear that in connection with this initiative, the participating banks “are specifically looking for cooperation” with the FIU, the Dutch Openbaar Ministerie (Public Prosecution Service),  the Dutch Fiscale Inlichtingen- en Opsporingsdienst (FIOD, or Fiscal Information and Investigation Service),   and ministries.

Note:  This initiative is one that authorities across Europe and beyond – especially the United States – should follow closely over the next six months.  The financial sector is well aware that the current global regime for monitoring transactions for anti-money laundering and terrorist financing (AML/TF) basically consists of tens of thousands of unconnected  “stovepipes,” in which financial institutions review only their internal transactions without reference to potentially relevant transactions that other financial institutions are identifying.  The joint initiative between the NVB and Dutch banks offers a promising opportunity to see whether a more coherent approach to AML/TF transaction monitoring can be devised in conformity with national and European Union legal requirements.

On September 11, Judge Edward Chen of the U.S. District Court in San Francisco sentenced StarKist Co. to a criminal fine of $100 million – the statutory maximum — and a 13-month term of probation for its role in a criminal conspiracy to fix prices for canned tuna in the United States.  StarKist also agreed to cooperate in the U.S. Department of Justice’s continuing investigation of canned-tuna price-fixing.

In October 2018, StarKist pleaded guilty to a one-count information, charging it with a criminal violation of the Sherman Act.  The information stated that from at least November 2011 through at least December 2013, StarKist and others conspired to fix, raise, and maintain canned-tuna prices by “engag[ing] in conversations and discussions and attend[ing] meetings with representatives of other major packaged-seafood-producing firms,” “agree[ing] and reach[ing] mutual understandings during these conversations, discussions, and meetings, to fix, raise, and maintain the prices of packaged seafood sold in the United States,” and “negotiat[ing] prices with customers and issu[ing] price announcements for packaged seafood in accordance with the agreements and mutual understandings reached.”

StarKist had sought a reduction in the fine on the basis of its financial circumstances.  The Justice Department’s Antitrust Division opposed that reduction, and Judge Chen found “that StarKist had not proven that its financial circumstances justified a lower criminal fine.”  StarKist issued a release in which StarKist President and CEO Andrew Choe stated that the company has cooperated with the Department during the course of its investigation and accepts responsibility, and that “[w]e have addressed the necessary actions required in this agreement and we will continue to strengthen related compliance best practices.”

Note: This sentence should provide corporate compliance officers with an opportunity to remind senior executives in their companies that compliance with antitrust laws needs to be treated as seriously as compliance with other high-visibility financial crimes laws, such as the Foreign Corrupt Practices Act and money laundering.  Under the Sherman Act, price-fixing, bid-rigging, and other conspiracies in restraint of trade can be criminally prosecuted, with sentences as high as fines of $100 million per violation for companies and sentences of up to 10 years’ imprisonment and $10 million fines for individuals.

The fine against StarKist is by no means the highest in Sherman Act corporate prosecutions.  As of June 12, according to an Antitrust Division list, 146 corporate cases involving Sherman Act violations had resulted in criminal fines of $25 million or more, including 32 cases with fines of $100 million or more.

Moreover, the Antitrust Division’s pursuit of criminal Sherman Act violations is not limited to a few industries.  Its record shows that it has prosecuted cases in dozens of industries over the years, including air and marine transportation, bread, capacitors, construction, explosives, fine arts auctions, foreign currency exchange, industrial diamonds, and vitamins.  Every company and financial firm therefore needs to have an antitrust-compliance program that can pass muster under the Department’s new Evaluation of Corporate Compliance Programs in Criminal Antitrust Investigations.

On September 9, U.S. Securities and Exchange Commission (SEC) Chairman Jay Clayton gave a speech at the Economic Club of New York.  While some of his remarks addressed recent SEC initiatives and current market issues that the SEC is monitoring, Clayton also cited “the undesirable effects of a continuing lack of global coordination and commitment” in combating foreign corruption.  In particular, he charged that “many other countries, including those that have long had similar offshore anti-corruption laws on their books, do not enforce those laws.”

Clayton first cited the SEC’s substantial record in enforcing the Foreign Corrupt Practices Act, noting that it “has brought nearly 80 FCPA cases in the past five years alone, involving alleged misconduct in more than 60 countries.”  But he cautioned that

we must face the fact that, in many areas of the world, our work may not be having the desired effect.  Why?  In significant part, because many other countries, including those that have long had similar offshore anti-corruption laws on their books, do not enforce those laws.

Clayton also contrasted the “unique enforcement posture” of the United States with two observations: (1) “the fact that U.S. jurisdiction generally is limited to areas where U.S. and U.S.-listed companies do business”; and (2) “the reality that there are countries where the business opportunities are attractive but corruption is endemic, and the potential for undesirable results becomes clear.”  He cited game-theory economists in identifying “the strong incentives for other countries not to enforce vigorously offshore corruption laws against their companies.”  For “a hypothetical country with business promise, but endemic corruption,” Clayton argued,

when this cooperative, anti-corruption strategy is being pursued by others, the benefits of playing a non-cooperative strategy are great, particularly if your company is the only one who is “cheating”—your company “wins” the lucrative offshore business with no competition.

Clayton commented that “the response to this observation has long been to acknowledge the need for greater international cooperation and cite a few isolated indicia of improvement,” but added that “[s]peaking for myself, I have not seen meaningful improvement.”

Clayton assured the audience that he does not intend to change the SEC’s FCPA enforcement posture.  At the same time, he stated that “[w]e should . . . recognize that we are acting largely alone and other countries are incentivized to play, and I believe some are in fact playing, strategies that take advantage of our laudable efforts.”  He said that when he engages with his international counterparts “on matters where common, cooperative enforcement strategies are essential,” he is mindful that “globally-oriented laws, with no, limited or asymmetric enforcement, can produce individually unfair and collectively suboptimal results.”

Note: Clayton’s remarks on anti-corruption are unusually critical for a senior U.S. official, whose agency constantly depends on smooth and harmonious relationships with its counterparts around the world, to make publicly.  Since the SEC has not previously publicized its dissatisfaction or frustration with the general state of foreign countries’ commitment to combating corruption, Clayton’s remarks may be surprising in some quarters – which may have been precisely the effect he intended.

Those remarks, however, do not indicate how Clayton thinks that state of affairs might be changed.  It is interesting to note that elsewhere in his speech, as he was advocating increasing the attractiveness of public capital markets, Clayton cited a seminal article by Professor George Akerlof, The Market for Lemons.  In that article, as Clayton noted,

Akerlof explained why, for a long time, the used car market included mostly bad used cars—or “lemons.”  Because you could not tell a good used car from a bad used car, buyers assumed all used cars were bad and priced them accordingly.  In turn, because buyers offered only “bad car” pricing, sellers offered mostly bad used cars.  This problem has been partially solved by incentive alignment and information gap bridging techniques, including enforceable used car guarantees.

One could argue that Akerlof’s analysis could be applied to countries with endemic corruption.  If key executives and legislators in those countries are themselves beneficiaries of that corruption, they have no incentive other than to stymie meaningful anti-corruption laws or to offer only weak laws and withhold enforcement resources from the agencies that could enforce those laws.  As Akerlof observed, “The presence of people in the market who are willing to offer inferior goods tends to drive the market out of existence . . . .”

One general approach that Akerlof offered to counteract the effects of quality uncertainty was “counteracting institutions.”  While Akerlof’s citations of such institutions – which included seller guarantees, brand-name goods, and licensing of professionals – were most pertinent to the used-car market, it is not difficult to conceive of other kinds of “counteracting institutions” that could be directed at the market for anti-corruption laws.

Ordinarily, as Akerlof stated, “the difficulty of distinguishing good quality from bad is inherent in the business world.”  Today, however, the information costs associated with finding examples of sound anti-corruption regimes are negligible.  Numerous countries have adopted and implemented comprehensive anti-corruption laws that can serve as models for other countries.

The greater problem is the identification or creation of “counteracting institutions” that can directly address the other asymmetries in the “market” for anti-corruption laws.  To counteract the effects of quality uncertainty in regimes afflicted with high-level endemic corruption, it is clear that those counteracting institutions must include other countries willing to exert sustained pressure on those regimes.  Whether the United States is willing to undertake such an effort, by itself or with like-minded countries, is far from clear at the moment.

On September 10, President Donald Trump issued an Executive Order (Executive Order) directed at modernizing sanctions to combat terrorism.  The Executive Order amends Section 1 of Executive Order 13224, which President George W. Bush issued on September 24, 2001 to establish sanctions with regard to persons who commit, threaten to commit, or support terrorism.

The Section 1 revisions block property and interests in property and prohibit transactions with respect to the following categories of individuals and entities:

• Subsection (a)(i): Specific persons listed in the Annex to the Executive Order (see below);
• Subsection (a)(ii): Foreign persons determined by the Secretary of State, in consultation with the Secretary of the Treasury, the Attorney General, and the Secretary of Homeland Security:

“(A)  to have committed or have attempted to commit, to pose a significant risk of committing, or to have participated in training to commit acts of terrorism that threaten the security of United States nationals or the national security, foreign policy, or economy of the United States; or

“(B)  to be a leader of an entity:

“(1)  listed in the Annex to this order; or

“(2)  whose property and interests in property are blocked pursuant to a determination by the Secretary of State pursuant to this order”;

• Subsection (a)(iii): Persons determined by the Secretary of the Treasury, in consultation with the Secretary of State, the Secretary of Homeland Security, and the Attorney General:

“(A)  to be owned, controlled, or directed by, or to have acted or purported to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked pursuant to this order;

“(B)  to own or control, directly or indirectly, any person whose property and interests in property are blocked pursuant to this order;

“(C)  to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, an act of terrorism as defined in section 3(d) of this order, or any person whose property and interests in property are blocked pursuant to this order;

“(D)  to have participated in training related to terrorism provided by any person whose property and interests in property are blocked pursuant to this order;

“(E)  to be a leader or official of an entity whose property and interests in property are blocked pursuant to:

“(1)  a determination by the Secretary of the Treasury pursuant to this order; or

“(2)  subsection (a)(iv) of this section; or

“(F)  to have attempted or conspired to engage in any of the activities described in subsections (a)(iii)(A) through (E) of this section.”

• Subsection (a)(iv): “Persons whose property and interests in property were blocked pursuant to Executive Order 12947, as amended, on or after January 23, 1995, and remained blocked immediately prior to the effective date of this order.”

In addition, subsection (b) authorizes the Secretary of the Treasury

“to prohibit the opening, and prohibit or impose strict conditions on the maintaining, in the United States, of a correspondent account or payable-through account of any foreign financial institution that the Secretary of the Treasury, in consultation with the Secretary of State, has determined, on or after the effective date of this order, has knowingly conducted or facilitated any significant transaction on behalf of any person whose property and interests in property are blocked pursuant to this order.”

Pursuant to the updated Executive Order 13224, on September 10 the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) designated what the Treasury Department described as “a series of terrorist leaders, facilitators, and entities affiliated with terror groups.”  Those designated persons include “entities affiliated with HAMAS, the Islamic State of Iraq and Syria (ISIS), al-Qa’ida, and the Islamic Revolutionary Guard Corps Qods-Force (IRGC-QF).”  The Treasury Department release announcing the OFAC action listed those persons by name, and included a link showing the addition of those persons to the Specially Designated nationals (SDN) list.

The Treasury Department release also described how the amended Executive Order 13224 gives new tools to the U.S. Government “to better identify and designate perpetrators of terrorism worldwide”:

• “Contains new designation criteria that allows the U.S. Government to more efficiently target leaders or officials of terrorists groups as well as individuals who participate in terrorist training;
• “Provides for secondary sanctions against foreign financial institutions that have knowingly conducted or facilitated significant financial transactions on behalf of any person sanctioned pursuant to E.O. 13224;
• “Authorizes Treasury to prohibit a foreign financial institution that has knowingly conducted or facilitated a significant transaction with any Specially Designated Global Terrorist (SDGT) from opening or maintaining a correspondent or payable-through account in the United States;
• “Consolidates U.S. counterterrorism authorities under a single sanctions program by eliminating E.O. 12947 and combining that authority’s goal of defending the Middle East Peace Process with E.O. 13224’s global remit and expanded authorities.”

The Treasury Department further emphasized that “all property and interests in property of these targets that are in the United States or in the possession or control of U.S. persons must be blocked and reported to OFAC,” and that “all SDGTs are now subject to secondary sanctions.”

Note: The Executive Order and OFAC action represent a significant expansion of terrorism sanctions; indeed, they reflect what the Treasury Department termed “some of the furthest reaching designations of terrorists and their supporters in the past 15 years.”  Accordingly, sanctions teams in companies and financial institutions should closely read the Executive Order and the Treasury release, and act immediately to begin blocking the specific individuals and entities whom the Treasury Department listed.  Global financial institutions in particular should take note of the language addressing the application of secondary sanctions to SDGTs.