Will the Panama Papers Lead to Criminal Charges Against U.S. Taxpayers?

The massive Panama Papers leak has attracted attention to the use of offshore business entities and implicated 2,400 U.S.-based clients of Mossack Fonseca. U.S. taxpayers with offshore assets should be wary of increased scrutiny by federal regulators, which may lead to criminal cases brought by U.S. Department of Justice.

In this update we detail the civil and criminal liabilities for failing to report offshore income and the current prosecutorial landscape in connection with the release of the Panama Papers.


DOJ Brings Largest Kleptocracy Asset Recovery Action For Over $1 Billion Misappropriated From 1MDB

1MDBIn the largest action brought under the Kleptocracy Asset Recovery Initiative, the DOJ seeks to recover over $1 billion in assets bought with laundered funds misappropriated from 1Malaysia Development Berhad (“1MDB”), a Malaysian sovereign wealth fund. 1MDB was created by the Malaysian government to promote economic development through international partnerships and foreign direct investment. The fund was allegedly controlled by “Malaysian Official 1,” who was not named by the DOJ but widely believed to be Malaysia’s Prime Minister Najib Razak. Najib and his associates are alleged to have misappropriated more than $3.5 billion from the fund from 2009 through 2015, $1 billion of which is alleged to have been laundered through the United States though a series of complex transactions and fraudulent shell companies with bank accounts located in Singapore, Switzerland, Luxembourg, and the United States.

The DOJ alleges that the conspiracy occurred in three principal phases. The first phase involved a joint venture between 1MDB and PetroSaudi International, a private Saudi oil extraction company. The joint venture was allegedly used to transfer funds from 1MDB to a Swiss bank account controlled by Najib’s associate who, in turn, transferred funds to Najib and others involved in the conspiracy. The second and third phases involved bond offerings arranged and underwritten by Goldman Sachs in 2012 and 2013, the funds from which were transferred to bank accounts of shell companies controlled by Najib and his associates. The misappropriated funds were used to buy real estate, artwork, and interests in companies in the United States, including an interest in Red Granite Pictures, which financed the production of The Wolf of Wall Street.

According to The Guardian, Najib responded to the Malaysian government’s investigation by clamping down on free speech, firing the country’s attorney general, suspending the work of the parliamentary accounts committee handling the investigation, and authorizing martial law. Despite Najib’s control in his home country, the DOJ’s action “should send a message to kleptocrats and other criminals that the United States is not a safe haven for their stolen property,” according to remarks by Assistant Attorney General Leslie Caldwell.

The DOJ’s Kleptocracy Asset Recovery Initiative was created in 2010 to combat large-scale foreign official corruption and to recover public funds. The Initiative is run out of the DOJ’s Asset Forfeiture and Money Laundering Section of the Criminal Division and draws on civil forfeiture laws to recover assets linked to criminal acts.

SEC Charges Private Fund Administrator with Gatekeeping Failures

The Securities and Exchange Commission (SEC) recently announced an administrative settlement with Apex Fund Services (US) Inc., a firm providing administrative services to private funds, based on its alleged failure to heed red flags and correct faulty accounting by two private equity managers.

The SEC alleged that, in carrying out its contractual fund administration functions, Apex missed or ignored clear indications of fraud perpetrated by two private fund managers, making Apex a “cause” of that fraud under Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder.

In charging Apex in connection with ClearPath and EquityStar’s violations, the SEC is highlighting its expectation that fund administrators live up to their “gatekeeper” responsibilities and take affirmative action to ensure that fund records provide accurate information about the value and existence of fund assets.

In this update, we offer background on the SEC’s action and consider the resulting warning it sends to all gatekeepers: the SEC will use negligence-based securities laws to hold service providers responsible, especially where indications of fraud are ignored.


DOJ’s Increased Focus on Environmental Criminal Cases

Recently, John C. Cruden, DOJ’s Assistant Attorney General in charge of the Environmental and Natural Resources Division (ENRD), which oversees DOJ’s environmental litigation, voiced a heightened commitment to enforcing environmental laws through criminal prosecution.  In the May-June 2016 issue of The Environmental Forum, in a piece presented alongside a separate article entitled “Time for Environmental Crimes,” Cruden emphasized the following:

Without adequate enforcement, our environmental laws have little meaning, and fail to serve their purpose . . . .  I believe criminal prosecutions can and should address and deter egregious conduct that imperils public health and the environment.  The [ENRD] has responded in an exceptional fashion, strategically increasing our criminal enforcement work.

Considering the source, this is a remarkable statement.  ENRD, the division within DOJ tasked with handling diverse environmental and natural resources litigation, primarily brings civil enforcement actions.  Within ENRD, however, is the Environmental Crimes Section (ECS), an office comprised of specialized attorneys who are entirely separate from DOJ’s Criminal Division and who oversee prosecution of environmental criminal statutes.  In comparison with the breadth of civil enforcement responsibilities undertaken by ENRD’s other offices, ECS has had a relatively narrow mandate.  So what does it mean when the head of ENRD, an agency primarily focused on civil litigation, forecasts that ENRD is “increasing” its “criminal enforcement work?” Continue Reading

Silicon Valley in the Cross-Hairs

SEC and DOJ Targeting Fraud Involving Pre-IPO Companies

Historically regulators have been reluctant to interfere with the complex world of pre-IPO  financing and private market transactions, which tend to involve the most sophisticated investors.  However, several recent public statements make it clear that both the U.S. Department of Justice (DOJ) and the U.S. Securities and Exchange Commission (SEC) are focused on finding fraud and other civil and criminal violations at private Silicon Valley companies.  Citing multiple ongoing investigations, Northern California representatives from both the DOJ and the SEC boldly predicted a notable increase in criminal prosecutions (DOJ) and civil enforcement actions (SEC) within the next year. Continue Reading

Second Circuit Reverses $1.27B Penalty Under FIRREA

On May 23, 2016, the Second Circuit presented a significant setback to the Department of Justice (DOJ) by reversing a $1.27 billion penalty against Bank of America and Countrywide Loans.  As we’ve posted before, in October 2012, DOJ filed a civil suit against Bank of America and Countrywide based on mortgages sold to Fannie Mae and Freddie Mac.  The Government alleged that Countrywide had a program named “the Hustle” or “High-Speed Swim Lane,” which rewarded the speed of processing residential mortgage loans regardless of their quality.  This, according to the Government, resulted in thousands of fraudulent or defective loans that were subsequently sold to Government Sponsored Entities (GSEs) such as Fannie Mae and Freddie Mac.  Although Countrywide started the program in August 2007, the program continued after Bank of America purchased Countrywide in 2008.   Continue Reading

Three Key Challenges To the Future of SEC Enforcement

SEC SealSince the financial crisis, the Securities and Exchange Commission’s enforcement activity has been the subject of much attention and debate. But depending on the results of pending litigation and agency proposals, the SEC’s enforcement activities could change significantly. Three key areas of potential change include insider trading, the SEC’s use of in-house tribunals, and enforcement resources.

1. Insider Trading Prosecutions.

As discussed in a prior post, in United States v. Salman, the Ninth Circuit affirmed that the requisite “personal benefit” for insider trader liability is established where an “insider makes a gift of confidential information to a trading relative or friend.” In so holding, the Ninth Circuit rejected the Second Circuit’s narrower holding in United States v. Newman that a “personal benefit” may only be inferred from a personal relationship where the exchange of information “represents at least a potential gain of a pecuniary or similarly valuable nature.”

The Supreme Court has granted certiorari in Salman to potentially resolve the circuit split regarding the “personal benefit” element of insider trading liability. (Notably, while the government filed a petition for certiorari in Newman, the Supreme Court denied it prior to granting Salman’s petition.) Earlier this month, Salman filed his brief in the Supreme Court, and the case is scheduled to be addressed during the Supreme Court term starting October 2016. The Supreme Court’s decision in United States v. Salman will undoubtedly affect the number and type of insider trading cases the SEC pursues, and will provide crucial guidance about the contours of insider trading liability.
Continue Reading

DOJ’s Focus on Food Safety and Corporate Executives

food safetyOn April 29, 2016, Dole Foods Company announced that the Department of Justice (DOJ) had launched an investigation concerning listeria outbreaks at certain Dole plants.  The investigation comes on the heels of a number of high profile DOJ probes into outbreaks of food-related illnesses, most recently Blue Bell Creameries, and continues the DOJ’s recent trend towards aggressive pursuit of food safety violations and criminal charges against corporate executives.

The federal Food, Drug, and Cosmetic Act (FDCA) creates a strict liability criminal offense arising from the introduction of adulterated food into interstate commerce.  The DOJ may elect to pursue misdemeanor or felony charges based on the nature and seriousness of the violation and the scope of the outbreak.  If the outbreak is a first-time offense or is the result of an unintentional violation, then the DOJ is more likely to pursue misdemeanor charges.  If, on the other hand, the company responsible for the outbreak has repeatedly violated the FDCA or has introduced the adulterated food intentionally or knowingly, the DOJ has not hesitated to bring felony charges.  Importantly, both companies and individual executives may face liability for outbreaks, and company executives may be held vicariously liable and face criminal charges even if they were unaware of the contamination. Continue Reading

DOJ Seeks to Boost Voluntary Disclosures Through FCPA Pilot Program

In a move that follows long-standing complaints from the corporate community and the FCPA defense bar concerning the Government’s vague assurances of “cooperation credit” in FCPA resolutions for self-reporting companies, on April 5, 2016, DOJ officials announced a new one-year FCPA “pilot program” that outlines a concrete set of standards defining what constitutes cooperation and what credit companies can expect to earn for that cooperation.  Rumors of the program first emerged in late 2015, amid DOJ officials acknowledging a desire to motivate companies to voluntarily self-disclose FCPA-related misconduct, to fully cooperate with the DOJ’s Fraud Section, and to remediate flaws in their controls and compliance programs.   Continue Reading

Anti-Corruption Efforts Taking Center Stage in Central America

Central AmericaIn late 2015 and early 2016, Central American countries such as Panama, Guatemala, and Honduras have seen a sharp rise in anti-corruption sentiment, and in turn, investigation and enforcement. In these and other Central American countries, public outrage over alleged graft, bribery, and abuses of power at the highest levels of government has all but forced control of and accountability for corruption to the forefront of national agendas, and by all indications, the news and attention that anti-corruption issues have received in Central America will remain high for the foreseeable future.

In Panama, for instance, former President Ricardo Martinelli was accused of inflating contracts worth $45 million to purchase dehydrated food for a government social program, using public funds to run an illegal political espionage ring, and accepting kickbacks from foreign military contractors. After the allegations surfaced, Panamanian labor union members marched on the presidential palace in Panama City, the Panamanian Electoral Tribunal stripped Martinelli of his constitutional immunity, and the Panamanian Supreme Court appointed a special prosecutor to investigate the allegations. Although Martinelli fled the country shortly after the allegations surfaced, he now faces charges related to the political espionage allegations. Continue Reading