Cross-Border Investigations Update – January 2019

This issue of Skadden's semiannual Cross-Border Investigations Update takes a close look at recent cases, regulatory activity and other key developments, including DOJ guidance on the use of corporate monitors in criminal matters, the expansion of multijurisdictional anti-corruption enforcement, a landmark U.K. appeals ruling clarifying privilege in criminal investigations and trends based on an analysis of FCPA corporate resolutions.

Recent Developments

Second Circuit Curtails Use of Conspiracy and Complicity Statutes in FCPA Actions

Revisions to Yates Memorandum Policy Announced

DOJ Memo Suggests Diminishing Use of Corporate Monitors in Criminal Matters

'China Initiative' Promises to Investigate and Prosecute Chinese Companies

Multijurisdictional Anti-Corruption Enforcement Developments

Brazil Passes Its First General Data Protection Law

Landmark Appeals Ruling Clarifies Privilege in UK Criminal Investigations

Section 2 Notices and Extraterritorial Document Requests

Compliance Investigations in China: A Partial Checklist Multinational

Where Do the US Government's FCPA Cases Come From?

Navigating Differences in Domestic Public Bribery Laws in the US, UK, Brazil and France

Enforcement Trends

France Introduces Enhanced Enforcement Framework for Prosecution of Tax Fraud

On October 23, 2018, the French Parliament introduced a new procedural framework for criminal tax fraud prosecutions whether to refer cases to public prosecutors for prosecution, and cases were brought only upon referral from both agencies. The new law requires referral in cases where (i) the amount of tax avoided exceeds €100,000 (or, in certain cases, €50,000) and (ii) the tax authority has found intentional wrongdoing by the taxpayer and imposed one of several additional statutory penalties. As public prosecutors typically have brought criminal cases in the vast majority of referrals, the new law is expected to increase the volume of prosecutions for tax fraud. The new law also increases the maximum fines that can be imposed for tax fraud, creates additional penalties for those who assist others in avoiding taxes and establishes a “tax police” unit at the French Ministry in Charge of Action and Public Accounts.

In anticipation of a higher volume of tax fraud prosecutions, the legislation also provides procedures for pretrial guilty pleas and deferred prosecution agreements (DPAs) in criminal cases involving allegations of tax fraud. While guilty pleas require admissions of guilt, DPAs do not.

UK Lawmakers Launch Investigations Into Audit Market

In November 2018, the U.K. Parliament announced that it had launched an inquiry into the nation's corporate auditing market — currently dominated by the Big Four accounting firms — in response to a series of accounting scandals that have “undermined public and investor confidence.” In October 2018, the U.K. Competition and Markets Authority announced that it was launching a “fast-track” investigation into the auditing industry, specifically addressing the question of whether a lack of competition in the sector has driven down audit quality. The UK's auditing industry has faced increasing criticism in recent months, particularly following the collapse of construction giant Carillion due to auditing failures, and accounting scandals at retail group BHS and cafe chain Patisserie Valerie.

UK's First-Ever Unexplained Wealth Order

On October 10, 2018, the High Court of Justice in England upheld its first unexplained wealth order (UWO). The order was issued against Zamira Hajiyeva, wife of the former chairman of the International Bank of Azerbaijan, who is currently serving a 15-year sentence for fraud, money laundering and embezzlement of € 2.2 billion. The U.K.'s National Crime Agency sought the UWO, a court order issued to compel an individual to reveal the source of his or her wealth under legislation enacted in January 2018 as part of the Criminal Finances Act of 2017. The goal of these orders is to pursue the assets of individuals using illegitimately obtained funds, particularly those arising from foreign corruption, to obtain U.K. property.

The issuance of the UWO is not a criminal proceeding, but where an individual fails to show a legitimate source for his or her assets, the National Crime Agency is empowered to seize them. This case has attracted media attention, given details of extravagant purchases Hajiyeva made at several prominent London retailers. The National Crime Agency has already seized jewelry belonging to Hajiyeva worth hundreds of thousands of pounds that were scheduled to be auctioned by Christie's, to prevent the sale pending the outcome of the investigation.

SFO Appoints New Director

On August 28, 2018, Lisa Osofsky began a five-year term as director of the Serious Fraud Office (SFO) in the U.K. Director Osofsky, who has both American and British citizenship, has had an extensive career prosecuting a range of white collar crimes in the U.S. She began her career at the U.S. Department of Justice (DOJ) and then worked at the FBI and an investment bank. She is the second appointee to come from the private sector in the SFO's 30-year history.

At the outset of her tenure, Director Osofsky pledged to be a “different kind” of director. She has noted that her priorities for the agency include: (i) improving cross-border coordination; (ii) improving corporate engagement; (iii) continuing the use of DPAs; (iv) increasing attention to money laundering; and (v) speeding up individual prosecutions. One of her first major strategic decisions in office was deciding not to appeal the ruling handed down by the English Court of Appeal in The Director of the Serious Fraud Office v. Eurasian Natural Resources Corporation Ltd, which reaffirmed the protection of litigation privilege in the context of criminal investigations. (The ENRC decision is discussed further in our article “Landmark Appeals Ruling Clarifies Privilege in UK Criminal Investigations,” on page 23.)

Criminal Tax Enforcement

ZKB Bankers Who Hid Money From US Revenue Service Sentenced to Probation

On November 30, 2018, two former Zürcher Kantonalbank (ZKB) bankers who pleaded guilty in August 2018 to conspiring to help U.S. taxpayers evade their U.S. tax obligations were each sentenced in the U.S. District Court for the Southern District of New York to one year of probation. While each defendant faced a sentence of 15 to 21 months under the U.S. Sentencing Guidelines, the court found that a probationary sentence was appropriate given their “minimal role” in the underlying scheme. These sentences follow a DPA that ZKB entered into in August 2018, in which the bank admitted to helping U.S. clients collectively avoid paying more than $39 million in U.S. taxes between 2002 and 2013. ZKB agreed to pay $98.5 million in connection with the DPA.

Canadian Man Gets Five-Year Term for $10 Million Tax Scheme

On August 28, 2018, Daveanan Sookdeo, a Canadian citizen, was sentenced to five years in prison for promoting a tax fraud scheme in which he and other Canadian citizens filed false tax returns with the U.S. Internal Revenue Service (IRS). As described by the court, participants in the scheme fraudulently claimed that nearly $10 million in income had been withheld by Canadian financial institutions, entitling them to tax refunds. After the co-conspirators received their refunds, they opened U.S. bank accounts to deposit the refund checks, then transferred the money back to Canada.

Sookdeo charged an upfront fee for the false documents used in the scheme, profited from a percentage of any tax refunds obtained through the scheme and personally filed nine false tax returns. He was the fifth Canadian citizen convicted in connection with this tax scheme. Sookdeo's California-based co-conspirator, Ronald Brekke, is currently serving a 12-year prison sentence for his involvement in the scheme.

DOJ Secures First-Ever Conviction for Violating FATCA

Adrian Baron, the former chief business officer and CEO of Loyal Bank, Ltd., an offshore bank with offices in Hungary, St. Vincent and the Grenadines, pleaded guilty on September 11, 2018, in the U.S. District Court for the Eastern District of New York to conspiring to defraud the United States by failing to comply with the Foreign Account Tax Compliance Act (FATCA). This was the first conviction under FATCA, a U.S. statute enacted to combat tax evasion by U.S. persons holding accounts and other financial assets offshore. The law requires certain foreign financial institutions and other foreign entities to identify their U.S. customers and to report certain information about the foreign assets of their U.S. accountholders.

As described by the court, in June and July 2017, Baron met with an undercover agent posing as a U.S. citizen involved in stock manipulation schemes. The agent explained his stock manipulation schemes, said that he wished to open corporate accounts at the bank but did not want to personally appear on any of the account opening documents, and said he needed to circumvent IRS reporting requirements under FATCA. Loyal Bank proceeded to open accounts for the agent as discussed, and neither the bank nor Baron requested or collected the information required by FATCA from the agent.

Baron, a citizen of the U.K., St. Vincent and the Grenadines, was extradited to the U.S. from Hungary in July 2018. The investigation of the case involved assistance from the City of London Police, the U.K.'s Financial Conduct Authority and the Hungarian National Bureau of Investigation, in addition to U.S. authorities.

Fraud

US Unseals Charges in 1MDB Scandal

On November 1, 2018, in a case involving the cooperation of numerous non-U.S. law enforcement authorities, federal prosecutors unsealed charges in the U.S. District Court for the Eastern District of New York against two former bankers and a Malaysian financier for allegedly conspiring to launder $2.7 billion embezzled from 1Malaysia Development...