Month: November 2019

On November 26, various media reported that the Chairman of Westpac Banking Corporation (Westpac), Lindsay Maxsted, as well as Westpac’s Chief Executive Officer (CEO), Brian Hartzer, and a Westpac senior non-executive director announced their resignations.  Hartzer’s last day as CEO is reportedly December 2, while Maxsted is expected to step down by mid-2020.

Those resignations are directly traceable to the Australian Transaction Reports and Analysis Centre (AUSTRAC)’s November 20 filing in Australia’s Federal Court for civil penalties against Westpac.  The ASUSTRAC filing charges Westpac with pertaining to some 23 million alleged violations of the Australian Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) Act 2006.

On November 24, Westpac reportedly “announced a response that included appointing an external expert to investigate its failings”  In a November 26 teleconference, however Maxsted stated that when company officials met with investors on November 25, however, investors ”made it clear they required sterner action.”

The principal reason for the intensity of adverse reaction by the public and elected officials was the AUSTRAC statement that Westpac had failed to “carry out appropriate customer due diligence on transactions to the Philippines and South East Asia that have known financial indicators relating to potential child exploitation risks.” That failure, as further described in its statement of claim, extended  to “failing to introduce appropriate detection scenarios to detect known child exploitation typologies, consistent with AUSTRAC guidance and their own risk assessments.”

In the teleconference, Maxsted admitted that as soon as he read AUSTRAC’s statement of claim, he was “horrified by what was in it,” and that details that AUSTRAC presented regarding transactions made by 12 customers were “shocking.”  He also stated that Westpac’s board and management wanted to demonstrate accountability, but that  “further turnover of the board would be ‘very dangerous’.”

N.B.:  In his teleconference, Maxsted cautioned that “we don’t want to go too far so that it’s very disruptive to the business.”  That admonition, though well-intentioned, is being overtaken by events.  Even though Westpac has announced a Response Plan that promises “immediate fixes,” “lifting our standards,” and “protecting people,” it reportedly now faces multiple investigations into the scandal by the Australian Federal Police, the Australian Securities and Investments Commission, and the Australian Prudential Regulation Authority.

This recent series of events demonstrates not only how quickly a public crisis can arise for a company, but why financial institutions need to establish and maintain effective compliance programs, such as AML/CTF, to minimize the risks of facing such crises.

On November 22, the U.S. Department of Justice announced that a U.S.-based civil engineering company, Dannenbaum Engineering Corporation (DEC), and its parent company, Engineering Holding Corporation (EHC), agreed to enter into a deferred prosecution agreement (DPA) to resolve a criminal investigation involving violations of the Federal Election Campaign Act (FECA) involving a multi-year conduit contribution scheme.  That resolution included DEC’s agreement to pay a $1.6 million fine.

The Department stated that according to the two companies’ admissions made in connection with the DPA,

from 2015 through 2017, DEC and EHC made $323,300 in illegal conduit contributions through various employees and their family members to federal candidates and their committees. DEC corporate funds were used to advance or reimburse employee monies for these contributions. DEC did not reveal to any of the federal candidates that the corporation was the true source of the contributions. The object of the scheme was for DEC, its CEO James Dannenbaum, and a former employee to gain access to and potentially influence various candidates for federal office, including candidates for the presidency as well as the Senate and House of Representatives.

The Department also stated that it reached the resolution with DEC “based on a number of factors, including DEC’s cooperation with the investigation, the internal investigation conducted and the significant remedial measures taken.”  Those remedial measures included

• DEC altering its board structure to ensure that the former CEO, Dannenbaum, “does not control the board”;
• Stopping “all politically-related payments to its employees (including, but not limited to, payments treated as “marketing advances”), which resulted in a cessation of these expenditures; and
• Hiring and/or designating a full-time chief governance and compliance officer.

The Department briefly noted that it “also took into account the companies’ inability to pay a fine,” but nonetheless obtained the $1.6 million fine.  Finally, it stated that the former CEO Dannenbaum was charged in a separate criminal information.

N.B.: Corporate compliance officers should take note of this resolution and – particularly because the 2020 Presidential election campaign is underway — use it as reminder to relevant corporate executives about the importance of adhering to the companies’ policies concerning campaign contributions.  Candidates for federal office and campaign fundraisers are not the only categories of people whom the Department can prosecute under the FECA.

On November 20, the Australian Transaction Reports and Analysis Centre (AUSTRAC) announced that it had applied to the Federal Court of Australia for civil penalty orders against a leading Australian financial institution, Westpac Banking Corporation (Westpac).  AUSTRAC stated that the requested civil penalty orders “relate to systemic non-compliance with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act).”

AUSTRAC alleged that Westpac “contravened the AML/CTF Act on over 23 million occasions,” and had two major deficiencies on its AML/CTF program: (1) “Westpac’s oversight of the banking and designated services provided through its correspondent banking relationships”; and (2) “Westpac’s oversight of its AML/CTF Program, intended to identify, mitigate and manage the money laundering and terrorism financing risks of its designated services.”  These failures in oversight, in AUSTRAC’s view, “resulted in serious and systemic non-compliance with the AML/CTF Act.”

In particular, AUSTRAC alleged five major categories of failures by Westpac:

1. Failure to appropriately assess and monitor “the ongoing money laundering and terrorism financing risks associated with the movement of money into and out of Australia through correspondent banking relationships.” In this regard, AUSTRAC asserted that Westpac “has allowed correspondent banks to access its banking environment and the Australian Payments System without conducting appropriate due diligence on those correspondent banks and without appropriate risk assessments and controls on the products and channels offered as part of that relationship.”
2. Failure to report more than 19.5 million International Funds Transfer Instructions (IFTIs) to AUSTRAC over nearly five years, for transfers both into and out of Australia. AUSTRAC described IFTIs as “a key source of information from the financial services sector that provides vital information into AUSTRAC’s financial intelligence to protect Australia’s financial system and the community from harm.”  According to AUSTRAC, the late incoming IFTIs received from four correspondent banks “alone represent over 72% of all incoming IFTIs received by Westpac in the period November 2013 to September 2018 and amounts to over $11 billion dollars.”
3. Failure to “pass on information about the source of funds to other banks in the transfer chain.” This failure, in AUSTRAC’s view, “deprived the other banks of information they needed to understand the source of funds to manage their own AML/CTF risks.”
4. Failure to “keep records relating to the origin of some of these international funds transfers.”
5. Failure to “carry out appropriate customer due diligence on transactions to the Philippines and South East Asia that have known financial indicators relating to potential child exploitation risks.” AUSTRAC specifically charged that Westpac “failed to introduce appropriate detection scenarios to detect known child exploitation typologies, consistent with AUSTRAC guidance and their own risk assessments.”

The concise statement that AUSTRAC filed with the Federal Court in this case did not specify the total amount of civil penalties that AUSTRAC is seeking.  It did state, however, that Westpac had contravened the AML/CTF Act on more than 23 million occasions, with each contravention “attracting a civil penalty between [AUD]$17 million and $21 million.”

N.B.:  AUSTRAC’s application is only the first step in the civil-penalty process for AML/CTF Act violations.  The Federal Court is responsible for deciding on the relief that AUSTRAC has requested, including declaratory relief, money penalties, and costs.

In a statement, Westpac Chief Executive Brian Hartzer conceded that the allegations were “serious and important.”  “These issues should never have occurred and should have been identified and rectified sooner,” Hartzer said, adding, “It is disappointing that we have not met our own standards as well as regulatory expectations and requirements.”

Ultimately, if Westpac continues to admit to its culpability to these program failures and cooperates with AUSTRAC, Westpac can only hope that it will reach a resolution with AUSTRAC no larger than Commonwealth Bank of Australia (CBA) did last year with AUSTRAC.  In June 2018, CBA reached an AUD$700 million resolution with AUSTRAC for “serious breaches of anti-money laundering and counter-terrorism financing (AML/CTF) laws.”

In the meantime, Hartzer and the Westpac board of directors are contending with an upsurge of community outrage that media reports of the AUSTRAC action have prompted.  The most significant factor that apparently prompted widespread public hostility is AUSTRAC’s allegation that Westpac “ought to have detected 12 customers who made almost 3000 transactions to the Philippines – including a person convicted of child exploitation and another doing deals with a person later arrested for running live child sex shows as having transfer patterns indicative of child exploitation.”  Even Australian Prime Minister Brian Morrison weighed in on the controversy, insisting that the bank have “a confident plan” to address ”the clear weaknesses they’ve had in their systems that have allowed this to take place,” and “some understanding of the accountability for when these things happen.”

For these reasons, other Australian banks should have their compliance teams peruse the AUSTRAC filings with care, and use AUSTRAC’s allegations as points of comparison with the state of their own AML/CTF programs.  Australian banks are still grappling with the effects of the Royal Commission report on banking sector misconduct that was released earlier this year.  They should need no further prodding to take the initiative in identifying and remediating any significant flaws in their AML/CTF programs.

On November 21, a federal grand jury in the Eastern District of Missouri indicted Haitao Xiang, a former Missouri resident, on one count of conspiracy to commit economic espionage, three counts of economic espionage, one count of conspiracy to commit theft of trade secrets and three counts of theft of trade secrets.  Xiang, a Chinese national, had worked for Monsanto and its subsidiary, The Climate Corporation, from 2008 to 2017, as an imaging scientist.

According to the indictment, Monsanto and The Climate Corporation

developed a digital, on-line farming software platform that was used by farmers to collect, store, and visualize critical agricultural field data and increase and improve agricultural productivity for farmers.  A critical component to the platform was a proprietary predictive algorithm referred to as the Nutrient Optimizer.  Monsanto and The Climate Corporation considered the Nutrient Optimizer a valuable trade secret and their intellectual property.

Assistant Attorney General for National Security John C. Demers stated that Xiang “promoted himself to the Chinese government based on his experience at Monsanto,” but did not specify when that contact with Chinese authorities occurred.  Ultimately, in June 2017, the day after he left his employment with Monsanto and The Climate Corporation, Xiang allegedly “bought a one-way plane ticket to China.  Before he could board his flight, Xiang was intercepted at the airport by federal officials who seized copies of the Nutrient Optimizer.”

N.B.: Xiang’s indictment is the latest case under the Justice Department’s China Initiative, which is targeting economic espionage and trade secret theft conducted for the benefit of the Chinese government and Chinese economic interests.  Since the start of 2018, as a Justice Department summary indicates, China Initiative cases have pursued individuals conducting espionage against companies such as General Electric, as well as multiple U.S. aviation and aerospace companies, a semiconductor company, and an unnamed global engineering firm.

The Initiative, launched in November 2018, has ten strategic goals, including (1) identifying ”priority trade secret theft cases, ensure that investigations are adequately resourced, and work to bring them to fruition in a timely manner”; (2) identifying “Foreign Corrupt Practices Act (FCPA) cases involving Chinese companies that compete with American businesses”; and (3) applying “the Foreign Agents Registration Act to unregistered agents seeking to advance China’s political agenda, bringing enforcement actions when appropriate.”

On November 20, the U.S. Department of Justice announced that after a three-week trial in the Southern District of New York, a jury convicted Akshay Aiyer of participating “in an antitrust conspiracy to manipulate prices for emerging market currencies in the global foreign currency exchange (FX) market.”  Aiyer, a former JP Morgan Chase Executive Director and FX trader, was convicted on one count under section 1 of the Sherman Antitrust Act for “conspiring to fix prices and rig bids in Central and Eastern European, Middle Eastern and African (CEEMEA) currencies, which were generally traded against the U.S. dollar and the euro, from at least October 2010 through at least January 2013.”

The evidence presented at trial established the following:

• Aiyer “engaged in near-daily communications with his co-conspirators by phone, text and through an exclusive electronic chat room to coordinate their trades of the CEEMEA currencies in the FX spot market.”
• Aiyer and his co-conspirators “manipulated exchange rates by agreeing to withhold bids or offers to avoid moving the exchange rate in a direction adverse to open positions held by co-conspirators and by coordinating their trading to manipulate the rates in an effort to increase their profits.”
• By agreeing not to buy or sell at certain times, Aiyer and the other conspiring traders “protected each other’s trading positions by withholding supply of or demand for currency and suppressing competition in the FX spot market for emerging market currencies.”
• Aiyer and his co-conspirators “took steps to conceal their actions by, among other steps, using code names, communicating on personal cell phones during work hours and meeting in person to discuss particular customers and trading strategies.”

Aiyer is reportedly scheduled to be sentenced on April 3, 2020.  The release also noted that the investigation into FX spot market collusion is ongoing.

N.B.: This is the most recent conviction stemming from the Department of Justice’s Antitrust Division investigation of collusion in the FX spot market, and apparently the first involving a conviction at trial.  Although five financial institutions and two individual former traders have already pleaded guilty in the investigation, the Antitrust Division’s success in obtaining a conviction at trial could prompt further pleas.