Recently, the DOJ issued its first opinion release of 2014 regarding application of the FCPA. In this instance, an investment bank and securities issuer who was a majority shareholder of a foreign financial services company sought the DOJ’s opinion with regard to the bank’s purchase of the remaining minority interest from a foreign businessman who now serves as a senior foreign official. The DOJ determined that based on the facts and representations described by the requestor, the only purpose of the payment to the official would be consideration for the minority interest. The DOJ explained that although the FCPA generally prohibits an issuer from corruptly giving or offering anything of value to any “foreign official” in order to assist “in obtaining or retaining business for or with, or directing business to” the issuer, it does not “per se prohibit business relationships with, or payments to, foreign officials.” In this situation, the DOJ determined, based on numerous, fact-intensive considerations, that the transfer of value as proposed would not be prohibited under the FCPA. The DOJ found no indications of corrupt intent, citing, among other things, the proffered purpose to sever the parties’ existing financial relationship to avoid a conflict of interest, and the use of a reasonable alternative valuation model. The DOJ also determined the bank demonstrated that the parties would appropriately and meaningfully disclose their relationships before the sale closed, and that the bank would implement strict recusal and conflict-of-interest-avoidance measures to prevent the shareholder/foreign official from assisting the bank in obtaining or retaining business. As with all Opinion Releases under the FCPA, the DOJ cautioned that the opinion has no binding application to any other party.
On April 8 the U.S. Attorney for the Southern District of New York announced that a debt settlement company and its owner pled guilty to fraud charges, resolving the first criminal case referred to the DOJ by the CFPB. The DOJ alleged that from 2009 through May 2013, the company systematically exploited and defrauded over 1,200 customers with credit card debt by charging them for debt settlement services the company never provided. The DOJ claimed that the company (i) lied about and/or concealed its fees, and falsely assured customers that fees would be substantially less than those the company eventually charged; (ii) deceived customers by fraudulently and falsely promising that the company could significantly lower borrower debts when, for the majority of its customers, the company allegedly did little or no work and failed to achieve any reduction in debt; and (iii) sent prospective customers solicitation letters falsely suggesting that the agency was acting on behalf of or in connection with a federal governmental program. The company’s owner pled guilty to one count of conspiracy to commit mail and wire fraud, and one count of conspiracy to commit wire fraud, and faces a maximum sentence of 10 years in prison. The company pled guilty to one count of conspiracy to commit mail and wire fraud, and faces a fine of up to twice the gross pecuniary gain derived from the offense, and up to five years’ probation. The defendants also entered into a stipulation of settlement of a civil forfeiture action and consented to the entry of a permanent injunction barring them from providing, directly or indirectly, any debt relief or mortgage relief services in the future. The CFPB subsequently dismissed its parallel civil suit.
On March 19, the DOJ announced that Marubeni Corporation, a Japanese trading company, agreed to plead guilty to violating the FCPA by participating in a seven-year scheme to bribe high-ranking government officials in Indonesia to help the company secure a contract for a power project. The DOJ charged that to conceal the bribes, the company and a consortium partner retained two consultants purportedly to provide legitimate consulting services on behalf of the power company and its subsidiaries in connection with the project. The DOJ asserted, however, that the primary purpose for hiring the consultants was to use them to pay bribes to Indonesian officials.The eight-count criminal information against the company included one count of conspiracy to violate the anti-bribery provisions of the Foreign Corrupt Practices Act (FCPA) and seven counts of violating the FCPA. As part of its plea, the company admitted its criminal conduct and agreed to pay a criminal fine of $88 million, subject to the district court’s approval. Sentencing is scheduled for May 15, 2014. Two years ago, the company entered a deferred prosecution agreement and agreed to pay $54.6 million to resolve allegations it acted as an agent for a joint venture in a scheme to bribe Nigerian officials.
On March 17, Senator Elizabeth Warren (D-MA) and Representatives Elijah Cummings (D-MD) and Maxine Waters (D-CA) sent a letter requesting a meeting with Attorney General Eric Holder to review the findings of a recent report on the DOJ’s mortgage fraud enforcement efforts. The lawmakers state that the report raises questions about the DOJ’s “commitment to investigate and prosecute crimes such as predatory lending, loan modification scams, and abusive mortgage servicing practices.” They are seeking information from the Attorney General about steps the DOJ will take to ensure that its efforts “to identify and prosecute those responsible for fraudulent mortgage practices are equal to the harms such crimes have caused [the members’] constituents.”
On March 13, the DOJ Office of Inspector General (OIG) issued a report on its audit of the DOJ’s efforts between 2009 and 2011 to pursue alleged mortgage fraud. Of particular note, the report reveals for the first time publicly that as part of a joint effort between HUD and the DOJ related to so-called “high default lenders,” the HUD OIG provided 84 U.S. Attorney Offices (USAOs) with lender default data for potential civil investigations and approximately 40 civil investigations were opened as a result. Much of the report focuses on the DOJ’s limited ability to track its mortgage fraud enforcement efforts. The audit revealed that, as a result of those limitations, the DOJ has repeatedly used inaccurate statistics in public statements about its mortgage enforcement results. Among a series of recommendations, the DOJ OIG suggests that DOJ (i) direct all USAOs to periodically assess any monetary thresholds applied to mortgage fraud cases to ensure they are reasonably based upon the threat within their respective jurisdictions and adequately allow for non-monetary harms that result from mortgage fraud schemes, as well as ensure that law enforcement agencies in their respective districts have a clear understanding of any limiting factors being applied to such cases; (ii) develop a method to capture additional data that will allow DOJ to better understand the results of its efforts in investigating and prosecuting mortgage fraud and to identify the position of mortgage fraud defendants within an organization; and (iii) develop a method to readily identify mortgage fraud criminal and civil enforcement efforts for reporting purposes.
On March 7, the U.S. District Court for the Southern District of New York approved a stipulation and order awarding nearly $64 million to the relator in a mortgage fraud case recently settled by the federal government. Pursuant to that settlement, a mortgage lender agreed to pay a total of $614 million to resolve allegations that it violated the False Claims Act by submitting false loan-level certifications that fraudulently induced HUD and the Department of Veterans Affairs to insure ineligible mortgage loans.
On March 5, the Senate voted 47-52 on a procedural motion that would have advanced President Obama’s nomination of Debo Adegbile to serve as Assistant Attorney General, Civil Rights Division. Seven Democrats joined all voting Republicans to defeat the nomination. Mr. Adegbile’s participation in the legal representation of Mumia Abu-Jamal, who was convicted in 1981 of killing a Philadelphia police officer, reportedly played a factor in the voting.
On March 5, a group of 16 Democratic U.S. House members sent letters to the leaders of the Federal Reserve Board, the OCC, the FDIC, and the NCUA requesting that the agencies issue guidance that would provide legitimate marijuana businesses access to the federal banking system. Last November, those agencies declined to provide such guidance, stating that the DOJ and FinCEN first needed to agree on a framework to apply BSA/AML provisions to banks seeking to serve marijuana businesses. With FinCEN and DOJ having recently issued such guidance, the lawmakers renewed their push for legitimate marijuana businesses—now operating in 20 states and the District of Columbia—to have “equal access to banking services as other licensed businesses.”
On February 26, Senators Jeff Merkley (D-OR), Elizabeth Warren (D-MA), and other Democratic Senators, together with Representatives Elijah Cummings (D-MD), Maxine Waters (D-CA), and other Democratic House members, sent a letter to Attorney General Eric Holder encouraging the DOJ to “continue a vigorous review of potential payment fraud, anti-money-laundering violations, and other illegal conduct involving payments by banks and third-party payment processors.” The lawmakers highlighted a number of specific issues on which the DOJ should focus: (i) know-your-customer obligations, which they believe should include a review of whether a lender holds all required state licenses and follows state lending laws; (ii) use of lead generators, including those that auction consumer data; (iii) high rates of returned, contested, or otherwise failed debits or the regular use of remotely created checks, which they state may indicate payment fraud; and (iv) lenders’ failure to incorporate or maintain a business presence in the U.S., which they assert can be indicative of fraud and other payment system violations, including money-laundering.
On February 27, the Senate Permanent Subcommittee on Investigations (PSI) issued a report and held a hearing related to its multi-year investigation of offshore tax evasion and the DOJ’s efforts to pursue Swiss banks who allegedly aid U.S. citizens in evading taxes. The hearing and report focused on one Swiss bank alleged to have facilitated tax evasion and criticized the DOJ for its supposedly “lax enforcement” approach towards numerous Swiss banks. The report states that U.S. law enforcement authorities have failed to prosecute more than a dozen Swiss banks the PSI staff believes facilitated U.S. tax evasion, and failed to take action against the thousands of U.S. citizens who have been revealed as tax evaders. The report also criticizes Swiss officials who the PSI alleges have worked to preserve Swiss bank secrecy by intervening in U.S. criminal investigations and hampering progress. The PSI report urges the DOJ to “use all available U.S. legal means” to obtain the names of alleged tax evaders, and to hold accountable “tax haven banks that aided and abetted” in the alleged evasion. The report also states that U.S. banking regulators should “institute a probationary period of increased reporting requirements for, or to limit the opening of new accounts by, tax haven banks that enter into deferred prosecution agreements, non-prosecution agreements, settlements, or other concluding actions with law enforcement for facilitating U.S. tax evasion, taking into consideration repetitive or cumulative misconduct.” Finally, the subcommittee recommended that the Senate promptly ratify a pending U.S.-Switzerland tax treaty that would allow for increased sharing of information by the Swiss.
On February 14, FinCEN issued guidance to clarify BSA expectations for financial institutions seeking to provide services to marijuana-related businesses in states that have legalized certain marijuana-related activity. The guidance was issued in coordination with the DOJ, which provided updated guidance to all U.S. Attorneys. The FinCEN guidance reiterates the general principle that the decision to open, close, or refuse any particular account or relationship should be made by each financial institution based on its particular business objectives, an evaluation of the risks associated with offering a particular product or service, its ability to conduct thorough customer due diligence, and its capacity to manage those risks effectively. The guidance details the necessary elements of a customer due diligence program, including consideration of whether a marijuana-related business implicates one of the priorities in the DOJ memorandum or violates state law. FinCEN notes that the obligation to file a SAR is unaffected by any state law that legalizes marijuana-related activity and restates the SAR triggers. The guidance identifies the types of SARs applicable to marijuana-related businesses and describes the conditions under which each type should be filed.
On February 7, the U.S. Court of Appeals for the Ninth Circuit held that the attempted collection of past due foreclosure-related fees from a borrower in active duty military service is a violation of section 533 of the Servicemembers Civil Relief Act (SCRA). Brewster v. Sun Trust Mortg., Inc., No. 12-56560, WL No. (9th Cir. Feb. 7, 2014). The district court dismissed an active duty servicemember’s suit against the current and former servicer of his mortgage loan after the current servicer failed to remove fees associated with a foreclosure initiated, but then withdrawn, by the prior servicer. SCRA section 533 bars the “sale, foreclosure, or seizure of property” for the breach of certain obligations relating to a mortgage made before a servicemember’s military service, unless such action is pursuant to a court order or a valid SCRA waiver, and also establishes criminal penalties for a person who knowingly makes, causes to be made, or attempts to make such a prohibited sale, foreclosure, or seizure of property. On appeal, the Ninth Circuit concluded that the failure to remove the fees incidental to the previous foreclosure’s Notice of Default was a continuation of the previous “foreclosure proceeding,” and, therefore, a violation of section 533. The court did not consider whether the Notice of Default had been initially filed in violation of section 533. The court’s reasoning hinged on its reading of what the word “foreclosure” encompassed and based its interpretation on (i) a state-law statutory definition of foreclosure that the court determined included the attempted collection of foreclosure fees as part of the foreclosure proceeding, and (ii) the U.S. Supreme Court’s unambiguous requirement that courts broadly construe the statutory language of the SCRA. The court declined to determine whether SCRA allows punitive damages, as the DOJ had urged it to do in an amicus brief. The court reversed the district court’s dismissal of the borrower’s suit and remanded for further proceedings.
On February 10, Better Markets, a public interest non-profit organization, announced the filing of a lawsuit in the U.S. District Court for the District of Columbia challenging a November 2012 settlement obtained by the DOJ and several state attorneys general, which resolved allegations that a large bank and certain institutions it acquired misled investors in connection with the packaging, marketing, sale, and issuance of certain RMBS. The suit claims, in short, that by resolving the allegations through a civil settlement without seeking any judicial review and approval, the DOJ violated the Constitution’s separation of powers doctrine. In addition, the suit claims, the DOJ’s failure to commence a civil action (i) violated the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, and (ii) constituted an arbitrary and capricious action in violation of the Administrative Procedures Act. The complaint asks the court to declare the agreement unlawful and invalid and to issue an injunction that would prevent the DOJ from enforcing the agreement until the agreement is reviewed and approved by a court.
On February 4, the DOJ announced the filing and simultaneous settlement of a complaint by the U.S. Attorney for the Southern District of New York (SDNY) against a mortgage lender alleged to have violated the False Claims Act (FCA) by submitting false loan-level certifications to HUD that fraudulently induced HUD to insure ineligible mortgage loans. The complaint makes similar claims with respect to loans insured by the Department of Veterans Affairs (VA). This is the first FCA case brought by the SDNY to assert claims based on VA loans. Although the complaint was filed in a whistleblower qui tam case under seal in January 2013, it indicates the U.S. Attorney’s investigation of fraudulent lending practices has been on-going since 2011. In addition to allegations concerning reckless origination practices, the complaint also alleges that the lender’s underwriters manipulated the data entered into the AUS/TOTAL Scorecard system, repeatedly entering hypothetical data that lacked a factual basis with the goal of determining the lowest values that would generate an “accept/approve” recommendation. The U.S. Attorney claims this practice violated HUD guidance and encouraged fraud by both loan officers and borrowers, and also that the lender made false statements in its loan-level certifications when it falsely certified to the “integrity” of the data entered by underwriters into AUS/TOTAL. To resolve the matter, the lender agreed to pay a total of $614 million; $564.6 million to resolve the HUD claims and $49.4 million to resolve the VA claims. Consistent with the SDNY’s recent practice of requiring admissions in civil fraud cases, the settlement stipulation recites that the lender admits responsibility for certain specified allegations. The settlement also requires the lender to implement “an enhanced quality control program,” the terms of which are to be memorialized in a separate agreement still to be negotiated.
On January 27, during a speech to certified AML compliance specialists, the U.S. Attorney for the Southern District of New York, Preet Bharara, stressed BSA/AML enforcement as a top priority for his office. Mr. Bharara focused on three issues: (i) the importance of holding institutions accountable for misconduct; (ii) the need for law enforcement to stay ahead of rapidly changing markets and technologies; and (iii) organizational changes within his office to bring the needed resources to bear. With regard to enforcement against institutions, the U.S. Attorney rebutted arguments that prosecutors should focus on individuals and described the full spectrum of tools available to hold institutions accountable—ranging from pursuing criminal prosecutions to seeking monetary fines and restitution through civil actions. He stressed the need to employ the full range of tools against institutions, especially in the AML context where many of the anti-money laundering laws and BSA provisions are specifically directed at institutions. The U.S. Attorney also announced that his office’s Criminal Division’s Asset Forfeiture Unit will be renamed the Money Laundering and Asset Forfeiture Unit to reflect his office’s commitment to dedicate more physical and human resources to addressing money laundering crimes and BSA violations.