Commodity Futures Trading Commission Issues Enforcement Advisory on Self-Reporting and Cooperation for Commodities Act Violations Involving Foreign Corrupt Practices

On March 6, the Commodity Futures Trading Commission (CFTC) Division of Enforcement announced that it was issuing an Enforcement Advisory “on self-reporting and cooperation for violations of the Commodity Exchange Act (CEA) involving foreign corrupt practices.”

The Advisory states that it is intended “to provide further guidance regarding circumstances under the Division’s cooperation and self-reporting program in which it may recommend a resolution with no civil monetary penalty.”  Previously, in January 2017, the Enforcement Division had issued two Enforcement Advisories that outlined the factors that the Division would consider “in evaluating cooperation by individuals and companies in the Division’s investigations and enforcement actions.”  A third Enforcement Division Advisory in September 2017 “outlin[ed] the ways in which the Division would consider voluntary disclosures by a company or individual in the context of its broader cooperation program.” In particular, that latter Advisory specified that “[i]f the company or individual self-reports, fully cooperates, and remediates, the Division will recommend the most substantial reduction in the civil monetary penalty that otherwise would be applicable,” and explained “that, in certain circumstances, the Division may recommend a resolution with no civil monetary penalty on account of voluntary disclosure, cooperation, and remediation.”

The March 6 Advisory states that it

applies to companies and individuals not registered (or required to be registered) with the CFTC that timely and voluntarily disclose to the Division violations of the Commodity Exchange Act involving foreign corrupt practices, where the voluntary disclosure is followed by full cooperation and appropriate remediation, in accordance with the January 2017 and September 2017 Advisories.  In those circumstances, the Division will apply a presumption that it will recommend to the Commission a resolution with no civil monetary penalty, absent aggravating circumstances involving the nature of the offender or the seriousness of the offense. In its evaluation of any aggravating circumstances, the Division will consider, among other things, whether: executive or senior level management of the company was involved; the misconduct was pervasive within the company; or the company or individual has previously engaged in similar misconduct.

The Advisory also states that even if the Division were to recommend a resolution without a civil monetary penalty pursuant to that Advisory,

the Division would still require payment of all disgorgement, forfeiture, and/or restitution resulting from the misconduct at issue. In addition, the Division will seek all available remedies—including, where appropriate, substantial civil monetary penalties—with respect to companies or individuals implicated in the misconduct that were not involved in submitting the voluntary disclosure.

In his public remarks announcing the new Advisory, CFTC Enforcement Director James McDonald called attention to the strong cooperation between the CFTC, the U.S. Department of Justice, and the Securities and Exchange Commission (SEC) on enforcement matters, and characterized CEA violations carried out through foreign corrupt practices as “one type of misconduct that can undermine our domestic markets.”  He also stated that the new Advisory is intended to help in achieving “optimal deterrence in our markets.”

In explaining the new Advisory, McDonald also took care to state that

we will not pile onto other existing investigations.  When we investigate in parallel with other enforcement authorities, we will work closely with them to avoid duplicative investigative steps.  To the extent the CFTC brings an action that includes a monetary penalty, we will ensure that our penalty appropriately accounts for any imposed by any other enforcement body.  And when the CFTC imposes disgorgement or restitution, we will give dollar-for-dollar credit for disgorgement or restitution payments in connection with other related actions.

Note: The new Enforcement Advisory is of immediate significance in two respects.  First, it specifically aligns the CFTC’s approach to resolving cases of corporate misconduct to those of the Justice Department and the SEC in three respects: (a) by committing the CFTC, in foreign corrupt practices-related investigations, to the self-reporting-cooperation-remediation framework that underlies the Department’s Corporate Enforcement Policy and the SEC’s Cooperation Program; (b) by holding out the possibility that, like the Department’s discretion to decline prosecution per the Corporate Enforcement Policy, the CFTC could exercise its discretion in such investigations not to impose a civil monetary penalty in appropriate circumstances; and (c) by indicating its acceptance of the Department’s “piling-on” policy for corporate resolutions involving multiple enforcement and regulatory agencies.

Second, it sends a strong and clear signal to leading commodities firms that the CFTC is fully prepared to coordinate with the Justice Department in Foreign Corrupt Practices Act (FCPA)-related investigations, and to offer incentives for early and wholehearted cooperation in such investigations.  The timing of this signal is not accidental.  Late last year, Brazilian prosecutors publicly disclosed that they are investigating three of the world’s leading commodities firms — Vitol, Glencore, and Trafigura — for alleged bribery relating to Petrobras.  Just last month, Reuters reported that the Justice Department is investigating the two top executives of Vitol in the Americas for bribery-related conduct, and that a former U.S.-based oil trader for Petrobras, Rodrigo Garcia Berkowitz, is cooperating with U.S. authorities after Brazilian authorities charged him with participating in an alleged corruption scheme involving all three firms.

Because U.S. and Brazilian prosecutors investigating FCPA and other corruption-related conduct have been closely cooperating for several years, the commodities industry can expect that the U.S. FCPA investigation – if it has not done so already – will expand to encompass all three firms.  Although neither the Justice Department nor the CFTC would give any of those firms credit for self-reporting at this point, each of those firms should be weighing carefully the advantages of leniency if the firms can demonstrate full cooperation and remediation.  Given the focus on alleged corruption in Brazil, the firms have only to contrast the FCPA resolutions for three Brazilian companies — Petrobras and Odebrecht, which received a 25 percent discount from the low end of the applicable U.S. Sentencing Guidelines range based on full cooperation and remediation, and Braskem, which received only a 15 percent off the low end of the applicable Guidelines range based on what the Justice Department termed “partial cooperation” – to see that delay in cooperation with the Department and the CFTC can have substantial financial and reputational consequences.

U.S. Department of Justice Announces Charges Against Leaders of Fraudulent Cryptocurrency Scheme That Took in More Than €3.3 Billion of Investor Funds

On March 8, 2019, the United States Attorney’s Office for the Southern District of New York announced that two Bulgarian nationals, Konstantin Ignatov and Ruja Ignatova, have been charged in connection with their leadership of an  international pyramid scheme related to the marketing of a fraudulent cryptocurrency called “OneCoin.” As a result of misrepresentations that Ignatov, Ignatova, and others made about OneCoin, victims allegedly invested billions of dollars worldwide in the fraudulent cryptocurrency.

Ignatov was arrested March 6, at Los Angeles International Airport, on a criminal complaint charging him with wire fraud conspiracy.  He is the alleged current leader of OneCoin Ltd, which marketed the fraudulent cryptocurrency OneCoin.  Ignatova, reportedly known as “Cryptoqueen,” was the subject of an indictment unsealed on March 7 in the Southern District of New York, charging her with wire fraud conspiracy, wire fraud, money laundering conspiracy, securities fraud conspiracy, and securities fraud.  She was allegedly the co-founder of OneCoin Ltd., but “disappear[ed] from public view, in October 2017” and currently is listed as “at large.”

A third defendant, Mark S. Scott, was the subject of a prior indictment for his role in the scheme and was arrested in September 2018.  Scott allegedly participated with Ignatova in money laundering more than $400 million through purported investment funds holding bank accounts at financial institutions in the Cayman Islands and the Republic of Ireland.

According to the U.S. Attorney’s Office press release, OneCoin Ltd., which is still operating,

operates as a multi-level marketing network through which members receive commissions for recruiting others to purchase cryptocurrency packages.  This multi-level marketing structure appears to have influenced rapid growth of the OneCoin member network.  Indeed, OneCoin Ltd. has claimed to have more than 3 million members worldwide, including victims living and/or working within the Southern District of New York.

Among other alleged misrepresentations, OneCoin Ltd. falsely claimed that the OneCoin cryptocurrency is “mined” using mining servers that the company maintained and operated, that the value of OneCoin is based on market supply and demand, and that it had a private “blockchain” (i.e., a digital ledger identifying OneCoins and recording historical transactions).  In addition, by approximately March 2015, Ignatova and her co-founder allegedly had begun allocating to OneCoin members coins that did not even exist in OneCoin’s purported private blockchain, and referred to those coins as “fake coins.”

As a result of misrepresentations that Ignatov, Ignatova, and other OneCoin representatives allegedly made,

victims throughout the world wired investment funds to OneCoin-controlled bank accounts in order to purchase OneCoin packages.  Records obtained in the course of the investigation show that, between the fourth quarter of 2014 and the third quarter of 2016 alone, OneCoin Ltd. generated €3.353 billion in sales revenue and earned “profits” of €2.232 billion.

Note: Within the past year, the Department of Justice has prosecuted multiple individuals allegedly connected with cryptocurrency schemes, including AriseBank, Blue Bit Banc, CentraTech, My Big Coin Pay, pressICO LLC, and RECoin.  These latest charges emphasize, yet again, the importance of would-be cryptocurrency investors conducting sound due diligence before investing any funds in any purported cryptocurrency firm or investment product.  As the Securities and Exchange Commission has warned about cryptocurrency investments, “In many cases you may not know exactly who you are dealing with, where your money is going or what you are getting in return.”

Tracing the QuadrigaCX Funds: A Spenserian Perspective

On March 7, The Times reported on the efforts of professional services firm Ernst & Young to access the CA$180 million (US$133.9 million) in investor funds that Gerald Cotten, the late Chief Executive Officer of cryptocurrency exchange QuadrigaCX, had reportedly placed in an offline “cold wallet.”  Cotten, who died suddenly in India in December 2018, was believed to be the only person who knew the password or recovery key to the cold wallet.  At the behest of the Nova Scotia Supreme Court, from which QuadrigaCX sought creditor protection, Ernst & Young reviewed electronic records of funds going in and out of QuadrigaCX.

Ernst & Young reportedly has now found “that all the funds had been withdrawn in April [2018], months before Cotten died.”  It identified 14 accounts, which Cotten created using “various aliases,” that were used to trade on QuadrigaCX “and possibly to withdraw money for transfer to other exchanges” . Ernst & Young is now contacting those exchanges “to see if they can find any evidence of the money from the 14 accounts deposited with them.”

Those who entrusted their funds to Cotten – already irate that Cotten’s widow, Jennifer Robertson, this week requested reimbursement of CA$225,000 in court fees – must be both heartsick and hopeful about the Ernst & Young information.  For now, they should take comfort from Spenser’s line in The Faerie Queene: “ . . . there is nothing lost, that may be found, if sought.”  If their investments were transferred to other cryptocurrency exchanges or other financial institutions, those funds should be further traceable, and the individuals and entities who effected the transfers available for questioning – by both investors’ attorneys and law enforcement authorities.

Chinese Hackers Target 27 Universities Globally in Pursuit of Maritime Military Secrets

On March 5, the Wall Street Journal reported that Chinese hackers have targeted 27 universities in the United States and other countries “as part of an elaborate scheme to steal research about maritime technology being developed for military use,” according to cybersecurity experts and current and former U.S. officials.

A report by cyber security firm iDefense found that a total of 27 universities – including Duke University, the Massachusetts Institute of Technology, Pennsylvania State University, and other universities in Canada and Southeast Asia – had been targeted by the hackers, based on the fact that those universities reportedly “either studied underwater technology or had faculty with relevant backgrounds.”  Some of the universities reportedly have been working on underwater communications technologies, and MIT in particular “conducts research on warship design.”

The iDefense report noted that the hackers used a simple and time-tested attack technique, “sen[ding] universities spear phishing emails doctored to appear as if they came from partner universities, but they unleashed a malicious payload when opened.”  According to The Times, the hacker group in question, known variously as APT10 and Temp.Periscope, “has also tried to infiltrate computer networks of companies involved in chipmaking, advanced manufacturing and industrial processing . . . [and] is thought to be behind the [2018] theft of missile plans from a US naval contractor.”

Note: These cyberattacks on universities are only the latest manifestation of the sustained offensive that Chinese hackers have directed at the United States and other countries in pursuit of military and trade secrets and other intellectual property.  These latest reports should prompt Chief Information Security Officers and Chief Compliance Officers to take two actions:

  • First, use these attacks as illustrations in new cybersecurity warnings to employees about spear-phishing attacks and the risks to the company from opening such messages;
  • Second, update information-security due diligence for third-party providers (including law firms) and joint-venture partners with which the company is sharing sensitive data for business reasons.

Unfortunately, the increasing sophistication of Chinese hacker teams in recent years means that cybersecurity teams in companies and agencies must base their cyberdefense planning on the Red Queen’s advice: “ . . . it takes all the running you can do to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!”

BMW, Daimler, and Volkswagen May Face Fines of Up to €50 Billion for Conducting Cartel to Conceal Diesel-Emissions Cheating

Today, The Times reported that leading German automakers BMW, Daimler, and Volkswagen “are facing fines of up to €50 billion as the European Commission [(EC)] investigates claims that they conspired as a cartel to cover up their cheating on diesel emissions.”  The article cited a report that Margrethe Vestager, the EC Commissioner who oversees the Directorate-General (DG) for Competition, is preparing to send the three companies “a formal letter of complaint that would be a prelude to heavy penalties.”  Once the EC completes its work, reportedly in the spring of 2019, the penalties it could levy under EU competition law could be as much as “10 per cent of each company’s annual turnover, which last year amounted to a combined total of nearly €500 billion.”

The Times explained that “German prosecutors suspect that the car manufacturers not only systematically gamed pollution tests on their diesel engines but also colluded over at least eight years to conceal their actions from the authorities.”  According to The Times, the German business newspaper Handelsblatt obtained a substantial quantity of emails indicating “that the three carmakers were aware that their vehicles were emitting illegal levels of nitrous oxide and nitrogen dioxide at least 12 years ago.”  Although German automotive engineers had devised a method of reducing those levels by washing a cleaning fluid known as Adblue through a car engine after the combustion process, “this method turned out to be prohibitively expensive and left potentially damaging residues in the machinery.”

This reportedly led to a “crisis meeting” in Munich between representatives of the three German companies in 2007.  The representatives “allegedly made a pact to limit their use of Adblue and to cover up their tracks,” as reflected in various emails, such as:

  • An email circulated within BMW after the meeting “is said to have included a warning that its contents should ‘by no means be shown to the authorities’.”
  • In January 2008, an Audi manager “allegedly wrote to his colleagues in an email with the subject line Adblue consumption: ‘My verdict: we won’t make it without cheating’.”
  • A subsequent email in 2008 by “another senior developer at Audi apparently warned Volkswagen executives that the Adblue taskforce’s conclusions were ‘not to be mentioned in any way’ to American environmental regulators.”

Handelsblatt also stated that the three companies, seeking to expand their U.S. market share, reached an agreement to put smaller Adblue tanks in their vehicles.

Note: The DG-Competition investigation, which began in September 2018, appears to be part of a broad-based enforcement program by the EC directed at cartel behavior in the German automotive industry.  Just yesterday, the EC announced that it was fining Autoliv and TRW, two car safety equipment suppliers, a total of €368,277,000 ($416,851,000) for their participation in two cartels for the supply of car seatbelts, airbags, and steering wheels to the Volkswagen and BMW Groups.  The EC stated that because those two carmakers sell approximately three out of every ten cars bought in Europe, the cartel behavior “is likely to have had a significant effect on European customers.”

Even though Commissioner Vestager has yet to make a final decision regarding the three German automakers’ own cartel behavior, both she and the companies must be mindful that in its emissions-cheating scandal, Volkswagen paid a total of $25 billion in fines, penalties, and restitution in the United States, but nothing to authorities in Europe, where it sold nearly 14 times as many diesels.  The DG-Competition will likely have little patience with the three companies’ allegedly compounding diesel-emissions cheating with concerted action to conceal that cheating.