Month: June 2020

For some people, the phrase “a plague of locusts” evokes only the memory of the Old Testament account of the swarms of locusts that devastated Egypt.  For many people around the world, that phrase today is now evoking genuine and immediate fear.

Earlier this year, locust swarms swept across at least ten countries in East Africa, devouring hundreds of thousands of acres of cropland.  At that time, it was projected that locust swarms could increase by 500 times and move into still more African nations.

Recent news reports indicate that the reach of locust swarms has extended well beyond east Africa.  In late May, CBS News reported that locust swarms were now attacking parts of eight western states in India.  Although such swarms typically move from Pakistan between July and October and remain concentrated in Rajasthan, “weather conditions have helped the swarms spread into neighboring states.”  Those swarms pose a tremendous threat to food supplies in the region, as a swarm of 40 million locusts can consume enough food for 35,000 people.

Pakistan too has been enduring vast devastation by locust swarms.  The Guardian reported in late May that Pakistan is suffering “the worst plague of locusts in recent history, which has caused billions of dollars in damage and led to fears of long-term food shortages.”  That plague is likely to have catastrophic effects on a country “where agriculture accounts for 20% of GDP and 65% of the population live and work in agricultural areas.”

In addition, just last week Argentina and Brazil reportedly “are monitoring the movement of a 15-square-kilometer locust swarm in Argentina’s northeast.”  So far, according to various authorities and specialists, the swarm “had not caused significant damage to crops” in either country, perhaps because predicted lower temperatures would limit the locusts’ movement.  The potential risk to crops in the region is nonetheless significant.  Argentina and Brazil “are among the world’s largest soy and corn exporters,” and growers in one Brazilian state “feared the locusts would enter the[ir] state where corn is still being harvested and wheat being grown.”  In addition, the swarms, which reportedly entered Argentina from Paraguay, are also heading toward Uruguay.

Note:  These reports indicate that locust-driven risks to regional food and feed insecurity, ranging from moderate to overwhelming, are now prevalent in multiple regions of the world.  Strategic-risk and food security-risk analysts should closely monitor further developments with these locust swarms through the balance of the summer.

On May 25, the French Anti-Corruption Agency (AFA), in partnership with the Council of Europe’s Group of States against Corruption (GRECO), the OECD, and the international Network of Corruption Prevention Authorities (NCPA), issued a report that provided global mapping of anti-corruption authorities (ACAs) around the world.  ACAs have long been an object of anti-corruption efforts around the world; Article 6 of the United Nations Convention against Corruption (UNCAC) provides that States Parties should ensure the existence of one or more bodies that prevent corruption, and other regional conventions have similarly advocated the need for anti-corruption oversight and prevention bodies.

The report was based on data provided by 171 national authorities from 114 countries and territories, including ACAs from every geographic region of the world.  It has two principal aims: “helping anti-corruption practitioners to better understand ACAs’ characteristics and needs”; and “identify[ing] common trends and challenges, and to explore concrete avenues for cooperation between, and with, ACAs.”

The report’s main conclusions included the following topics:

• Diversity of Anti-Corruption Institutional Arrangements: The report stated that “[t]here is no universally accepted model for shaping national integrity systems, but the centralized single-agency approach to the anti-corruption mandate seems to be predominant.” Of the responding authorities, 74 percent (84 of 114 countries) were responses from a single authority.
• GRECO Membership and Adoption of the OECD Anti-Bribery Convention: 43 percent of respondents were from GRECO Member States, and 48 percent were from countries that adopted the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.
• ACAs’ Power to Investigate and Prosecute: 63 percent (108) of responding ACAs responded that they were authorized to conduct investigations and/or criminal proceedings, and 79 authorities reported that they could pursue legal persons. The report, however, also said that the survey indicated “ACAs are more used to investigate and prosecute individuals for corruption than companies,” which might indicate a need “to further enforce the responsibility of legal persons for corruption in accordance with Article 2 of the OECD Anti-Bribery Convention.”
• Availability of Sanctions Mechanisms: Fewer than half (48 percent) of responding ACAs reported that they have sanction mechanisms, and those mechanisms in 56 ACAs were mainly administrative.
• Prevalence of National Anti-Corruption Strategies: A clear majority (89 percent) of respondents reported that they were involved in the creation and execution of a national strategy on anti-corruption.
• Asset and Interest Declarations: 39 percent of respondents (66 of 171) stated that their organizations were in charge of managing asset and/or interest declarations of senior public officials, but ACAs did not seem to be primarily responsible for their management.
• Obligations to Establish Codes of Conduct: 75 percent reported that their countries had an obligation to establish a code of conduct. 73 percent (125) stated that that obligation extended to the public sector, but only 17 percent (29) reported that that that obligation extended to the private sector (mostly companies).
• Risk Mapping: The survey showed “that, in comparison with codes of conduct, risk mapping is not such a widespread practice at the international level.” 56 percent said that risk mapping was an obligation in their countries, and only 12.8 percent (22) said that this obligation was applicable to both the public and private sectors, mainly to companies.
• ACAs’ Major Expectations Toward NCPA: Nearly all respondents (165 of 171) indicated that they expect more exchange of best practices between peers, and 69 percent (118) expressed interest in strengthening the exchange of operational information.
• International Directory of ACAs: 83 percent of ACA respondents stated that they wished to share their contact details with other ACAs.

Note: This report is encouraging for anti-corruption observers, to the extent it shows a significant measure of national-level commitment by numerous countries to establishing and maintaining anti-corruption authorities.  At the same time, it indicates that many countries that signed the UNCAC or regional anti-corruption conventions still have some distance to go in implementing anti-corruption prevention or oversight bodies with genuine authority, as well as anti-corruption preventive measures.  As that slowness to delegate such authority to national and subnational authorities is not likely to end soon, the ACA directory mentioned in the report may be the most promising means in the immediate future for fostering closer cooperation and good-practices and information exchanges between ACAs in multiple countries.

On June 17, the United Kingdom Financial Conduct Authority (FCA) announced that it fined Commerzbank AG (London Branch) £37,805,400 for failing to put adequate anti-money laundering (AML) systems and controls in place over a five-year period between October 2012 and September 2017.

The FCA stated that its investigation identified “failings in a number of areas.”  Those areas included three categories of failures by Commerzbank London:

• Failure to conduct “timely periodic due diligence on its clients.” This failure, according to the FCA, “resulted in a significant number of existing clients not being subject to timely know-your-client checks.” For example, by March 1, 2017, “1,772 clients were overdue updated due diligence checks. A material number of these clients were able to continue to transact with the bank’s London branch due to the implementation of an exceptions process.” That process “was not adequately controlled or overseen and which became ‘out of control’ by the end of 2016.
  • The FCA’s Final Notice in the case made clear that the backlog occurred, in part, because the bank’s first and second lines of defense tasked with carrying out key AML controls were understaffed throughout the period under review.  For example, in mid-2016, the bank’s Financial Crime Team in Compliance consisted of just 3 full-time employees; in mid-2018, after the bank acknowledged the need for a dramatic increase in the team’s staff, it increased the staffing to 42 full-time employees.
• Failure to address “long-standing weaknesses in its automated tool for monitoring money laundering risk on transactions for clients.” For example, in 2015 the bank found that 40 high-risk countries were missing, and 1,110 high-risk clients had not been added, to its transaction monitoring tool. The Final Notice further stated that that tool “was not fit for purpose, and did not have access to key information from certain of Commerzbank’s transaction systems.”
• Failure to have “adequate policies and procedures in place when undertaking customer due diligence on clients.”

As a result of these failures, the FCA determined that Commerzbank “breached Principle 3 of the FCA’s Principles for Businesses, which requires firms to have adequate risk management systems in place.”

The FCA made specific reference to the fact that Commerzbank London “was aware of these weaknesses and failed to take reasonable and effective steps to fix them despite the FCA raising specific concerns about them in 2012, 2015 and 2017.”  It also observed that these weaknesses

persisted during a period when the FCA was publishing guidance on steps firms could take to reduce financial crime risk as well as taking enforcement action against a number of firms in relation to AML controls. Despite these clear warnings, the failures continued.

At the same time, the FCA credited the bank with three actions responsive to those failures:

• Undertaking “a significant remediation exercise to bring its AML controls into compliance.” The FCA noted that a “Skilled Person” — i.e., a third party whom the FCA may engage, under the Financial Services and Markets Act (as amended), to provide views on aspects of a regulated firm’s activities if the FCA is concerned or wants further analysis — had completed work on testing the effectiveness of those enhancements.
• Conducting “an extensive look-back exercise to identify suspicious transactions during the period in question.
• Voluntarily implementing “a wide-ranging business restriction, which included temporarily stopping taking on new high-risk customers and suspending all new trade finance business activities.”

The FCA stated that because the bank agreed to resolve the matter at an early stage of the investigation, it qualified for the standard 30 percent discount; without that discount, the financial penalty would have been £54,007,800.

Note: AML compliance officers should read not only the FCA release, but the detailed 50-page Final Notice, to get a full sense of the reasons for and dimensions of the bank’s AML failures.  They also should brief senior management in their firms about the highlights of the FCA’s action, and use the case as an opportunity for benchmarking their firm’s AML programs against the AML failures and determining where their internal training might usefully be revised.

In this case, Commerzbank London was fortunate in that the FCA acknowledged that there was no evidence that the bank’s failings had occasioned or facilitated financial crime.  Any financial firm that allows similar long-term AML program failures to occur, however, cannot assume that it will be so lucky.

On June 11, the Ontario Securities Commission announced that a panel of the Commission authorized the publication of a Commission staff report regarding the 2019 collapse of crypto asset trading platform QuadrigaCX (Quadriga).  The Commission stated that the collapse, which occurred after the sudden death of its co-founder and CEO Gerald Cotton, “caused massive losses for 76,000 investors from Canada and around the world, who collectively lost at least $169 million. Approximately 40 per cent of these investors were Ontarians.”

The Commission staff’s key conclusion was that Quadriga’s collapse resulted from a massive fraud by Cotton. As the Commission put it,

Cotten opened accounts under aliases and credited himself with fictitious currency and crypto asset balances, which he traded with unsuspecting Quadriga clients.  Cotten sustained real losses when the price of crypto assets changed, thereby creating a shortfall in assets available to satisfy client withdrawals.  Cotten covered this shortfall with other clients’ deposits – in effect, operating a Ponzi scheme.  Staff calculated that the bulk of the $169 million in client losses – approximately $115 million – arose from Cotten’s fraudulent trading.

The Commission staff also determined “that Cotten misappropriated millions in client assets to fund his lavish lifestyle.”  “In its final months,” they noted, “Quadriga had almost no assets left and was operating like a revolving door—new client deposits were immediately re-routed to fund other clients’ withdrawals.”

Note: This report is likely the most complete account of Quadriga’s operations and collapse that will be available for some time.  Over a ten-month period, the Commission staff – owing in part to the fact that Quadriga did not maintain proper business records — analyzed trading and blockchain data, as well as records from third-party payment processors, banks, and other crypto asset trading platforms, interviewed key witnesses, and collaborated with numerous regulatory agencies in Canada and other countries.  In particular, to determine how Cotten managed Quadriga client assets, the staff analyzed “platform data relating to more than 368,000 client accounts and over six million individual transactions, as well as thousands of Quadriga-related emails.”

In view of the fact that Cotton is deceased and Quadriga bankrupt and subject to a court-supervised distribution process, a full accounting of what happened with Quadriga is as much satisfaction as most investors and the general public are likely to get.  Compliance officers in the financial sector should review the report in detail, to see how Cotten was able to maintain and expand the scheme through Quadriga over an extended period until his death.  Crypto investors should also read the report closely, for two reasons: (1) as a general cautionary tale; and (2) as a means of learning the kinds of red flags that should prompt prospective investors to shy away from other high-risk crypto asset trading platforms, especially if those platforms assert that they are not subject to registration with securities or commodities regulators.

On June 3, the U.S. Department of Justice announced that it had obtained an indictment against four current and former senior executives from two major broiler chicken producers, for conspiring to fix prices and rig bids for broiler chickens under section 1 of the Sherman Act.  (Broiler chickens are chickens raised for human consumption and sold to grocers and restaurants.)

According to the indictment in this case, from at least as early as 2012 until at least early 2017, two executives of a Colorado-headquartered chicken supplier — Jayson Penn, the President and Chief Executive Officer, and Roger Austin, a former Vice President – and two executives of a Georgia-headquartered broiler chicken producer — Mikell Fries, the President and a member of the board, and Scott Brady, a Vice President – participated in a conspiracy to fix prices and rig bids for broiler chickens across the United States.

The indictment specifically alleged that the four defendants and other unidentified coconspirators participated in a network that they used to pursue the following aims:

• “to reach agreements and understandings to submit aligned, though not necessarily identical, bids and to offer aligned, though not necessarily identical, prices, and price-related terms, including discount levels, for broiler chicken products sold in the United States”;
• “to participate in conversations and communications relating to nonpublic information such as bids, prices, and price-related terms, including discount levels, for broiler chicken products sold in the United States with the shared understanding that the purpose of the conversations and communications was to rig bids, and to fix, maintain, stabilize, and raise prices and other price-related terms, including discount levels, for broiler chicken products sold in the United States”; and
• “to monitor bids submitted by, and prices and price-related terms, including discount levels, offered by, Suppliers and co-conspirators for broiler chicken products sold in the United States.”

It also sets forth sequences of emails that appear to demonstrate ongoing discussions between the defendants relating to pricing for dark chicken meat and wings, and to dark meat and chicken-on-the-bone supplies.  It further alleged the defendants’ discussions of protecting, and thereafter acting to protect, the purpose and effectiveness of the conspiracy, through sequences of emails.

Note: This indictment is noteworthy because these four defendants, in the Department’s words, “are the first to be charged in an ongoing criminal investigation into price fixing and bid rigging involving broiler chickens.”

Because price-fixing and bid-rigging are core criminal violations under the Sherman Act, antitrust compliance officers should brief senior executives in their firms about this indictment, and include information from the indictment in antitrust-compliance training materials.  Those briefing and training materials should include examples of the types of alleged email exchanges between the executives, to show the kinds of words and actions that the Antitrust Division is likely to consider highly probative of executives’ knowledge of and participation in price-fixing and bid-rigging.