Wednesday, May 25, 2016

Romanian Hacker “Guccifer” Pleads Guilty to Hacking Hillary Clinton's Emails

Marcel Lehel Lazar, 44, of Arad, Romania, a hacker who used the online moniker “Guccifer,” pleaded guilty today to unauthorized access to a protected computer and aggravated identity theft.

Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division, U.S. Attorney Dana J. Boente of the Eastern District of Virginia, Assistant Director in FBISeal (1)Charge Paul M. Abbate of the FBI’s Washington Field Office, Director Bill A. Miller of the U.S. Department of State’s Diplomatic Security Service (DSS) and Special Agent in Charge Brian J. Ebert of the U.S. Secret Service’s Washington Field Office made the announcement.

“Cybercriminals like Marcel Lazar believe they can act with impunity from safe havens abroad, but the Justice Department’s partnerships with law enforcement agencies around the world ensure that they can be brought to justice,” said Assistant Attorney General Caldwell.  “Lazar sought fame by hacking the private online accounts of Americans and releasing their personal information to the public; instead, he has been convicted in United States federal court.”

“Mr. Lazar will be punished for violating the personal privacy of dozens of Americans,” said U.S. Attorney Boente.  “These convictions show that cyber criminals cannot hide from justice.  The United States will vigorously pursue these offenders, wherever they may hide.”

“Marcel Lazar, who hacked under the moniker ‘Guccifer,’ has now been brought to justice before a United States court,” said Assistant Director in Charge Abbate.  “As a direct result of our global technological and investigative reach and strong international partnerships, we were able to successfully identify Guccifer and his criminal activities, and bring him to justice here in America.  The FBI will continue to relentlessly hunt down criminals in cyberspace and around the world.  I would like to commend the dedicated efforts of the agents, analysts, prosecutors and international partners who worked tirelessly to resolve this highly complex cyber investigation.”

“The success of this international investigation is the direct result of our long established partnerships with our federal and foreign law enforcement partners,” said Special Agent in Charge Ebert.  “By working with our law enforcement partners around the world, we have disrupted and brought to justice some of the most prolific transnational cyber-criminals operating around the world.  These continued partnerships will enable us to pursue cyber criminals wherever they operate.”

Lazar pleaded guilty before U.S. District Judge James C. Cacheris of the Eastern District of Virginia, who set sentencing for Sept. 1, 2016. 

In a statement of facts filed with his plea agreement, Lazar admitted that from at least October 2012 to January 2014, he intentionally gained unauthorized access to personal email and social media accounts belonging to approximately 100 Americans, and he did so to unlawfully obtain his victims’ personal information and email correspondence.  His victims included an immediate family member of two former U.S. presidents, a former member of the U.S. Cabinet, a former member of the U.S. Joint Chiefs of Staff and a former presidential advisor, he admitted.  Lazar admitted that in many instances, he publically released his victims’ private email correspondence, medical and financial information and personal photographs.

The FBI, DSS and the Secret Service investigated the case.  Senior Counsel Ryan K. Dickey and Peter V. Roman of the Criminal Division’s Computer Crime and Intellectual Property Section and Assistant U.S. Attorneys Maya D. Song and Jay V. Prabhu of the Eastern District of Virginia are prosecuting the case.  The Criminal Division’s Office of International Affairs has provided significant assistance.  The Justice Department thanks the government of Romania for their assistance in this matter.

May 25, 2016 in AML | Permalink | Comments (0)

Google, France Tax Raid, and Texas Hold'em

Reuters reported yesterday that in highly dramatic fashion the French tax authorities and IT specialists raided Google's headquarters.  I don't own Google stock. I don't live in Texas HoldemCalifornia anymore where Google has its US campus with a vast amount of jobs.  And I'm not in favor of Google's near monopoly on search (though it has accomplished this by offering a really great product and (free) work tools that make my life much easier).  

But my U.S. nationalistic eyebrows rise high on my forehead when I read the headline.  And I thought of Texas Hold'em.  Let me explain....

"Google, now part of Alphabet Inc, pays little tax in most European countries because it reports almost all sales in Ireland.  ...  If staff in countries like France finalize contracts with local clients, then the company would be obliged to report the revenues nationally and pay taxes in each country."

Prof. David Herzig (Visiting at Loyola Law, Los Angeles this summer) and I discussed for an hour yesterday whether Google may, or may not, have a PE.  Whether the activities of the Irish company in France, or the French company on behalf of the Irish company, rise to the level of a permanent establishment under the Ireland-French tax treaty will inevitably require a Court to decide.  At least, we couldn't decide and we consider ourselves reasonable minds.  

Perhaps the France authority will beat Google down to just accept a UK deal, albeit a bit higher.  But I take a contrarian perspective that will be as unpopular with my academics colleagues as my current Starbucks stance.  (see  Starbucks’ Transfer Pricing & The EU Commission Decision)

The UK Revenue, at least according to its testimony in Parliament, with a fine tooth comb, swept all of Google's operational practices and procedures, examined emails and memos, interviewed dozens of staff and executives, and after this three-year intensive investigation concluded that Google did not have breach the threshold of a PE  (at least according to the Ireland - UK tax treaty).  

I think it unlikely, albeit recognize it is plausible, that Google France may have different operational procedures, or that Google may have hoodwinked the UK revenue authorities. France, on the same set of facts, may find under its law that the treaty PE threshold has been breached whereas the UK may not (which would be a damaging finding to the EU system of Rule of Laws and to the general tax treaty system PIL, but that's another issue).

But does it require a "raid" upon another US multinational to collect the facts?  Would a disclosed subpoena have been sufficient legal protocol for both sides to then establish a time for the meeting, document collection, and interviews, in an orderly fashion.   Would a MAP request under the Ireland - France treaty with EoI not been effective?  France could have requested an EoI from the UK Revenue for the evidence gathered from the UK exhaustive investigation.  

But instead, the French government chose to organize a "raid" on a US company - equivalent of a perp arrest walk.  Obviously, the French are seeking headlines, the French President seeking votes (kicking the Americans is always a popular French vote getter)  and nationalistic social - political pressure on Google (perhaps the French will boycott the Internet).

Perhaps the PE system must be changed or its definition in treaties?  But that's not where the law stands today.  If France wants to capture more tax revenue from Google, let France change its laws to do so.  

What I see is a U.S. company, bushwacked then drug through the mud, because the French government has decided that the company under a doctrine of equity and fiscal necessity does not pay enough tax to support the French joie de vivre.  My question: What is the U.S. Treasury going to do about it?  File another "I protest" speech?  (See Will the US Impose IRC Section 891 - Double US Tax Rates - on EU Companies for State Aid Retribution?). 

A French colleague has reminded me that the "American Chicken has come home to roost".  Not Colonel Sanders.   BNP's $10 billion OFAC fines.  $10 billion fine for breaking "American OFAC rules".  Apples and Oranges my French friends.  OFAC was, at the time, clear law, that BNP clearly violated, and its chief executive team lied about violating.  It wasn't a civil tax dispute based on heavy facts.  It was a fundamental human rights matter of a bank funding  governments known for genocide and terrorism, accepted as such by the French government.  Anyway, I said then that the large US fine of BNP was merely passing on the blame to the government and pension fund shareholders - where the blame clearly did not attach.  But the French wanted to protect the executives from criminal responsibility so it cost $10 billion to do so.  The clear lesson - do not fund genocidal, terrorist regimes.  

I think BNP has something to do with this Google raid though.  The French have a long memory, and experts at diplomacy.  The French government did not fold on BNP, rather it traded on a bad hand.  It knew that the hand was a loser, and thus accomplished a trade-off to keep the executives from being hunted down like Swiss bankers.  Perhaps the Google raid is a feint - not about Google and whether it has a PE in France, but instead is a warning to the U.S. federal authorities in general about geo-politics.  

If it is the sore feelings left from BNP, then France is playing like a game of poker with a wry smile.  Will the U.S. fold, call, or up the ante.  

But in Texas we play Texas Hold 'em poker with the cards face up, not face down.  Because more information is available, we bet aggressive on a good hand but fold quickly on a bad hand.  I hope the U.S. Treasury follows Texas Hold 'em style and realizes it has a good hand.  Up the ante by languaging a bill for Section 891 Congressional input!  Up it again by conducting a couple IRS "raids" of French companies to gather evidence for a Section 482 intangibles audit.  

And once the French fold, agree to let the normal tax protocols and procedures work without political interference, domestically for tax audits, and international for policy changes.  Internationally, France and the US should work within the agreed framework of the OECD to prospectively evolve the international tax system.  "Raids" [on Google] do not help build credibility for a cooperative framework.  

May 25, 2016 in BEPS | Permalink | Comments (0)

Cyprus Orders Review for Mossack Fonseca / Panama Papers clients or relationships By All Cypriot Financial Services Regulated Companies

Within the scope of its mandate for market supervision and ensuring the compliance of Regulated Entities with the legislation in force, and acting preventively, the Cyprus Securities CySEC_Logoand Exchange Commission (‘CySEC’), wishes to inform the Regulated Entities of the following:

Following the leak of documents of Mossack Fonseca, a series of documents referred to as “Panama Papers” appeared online, that refer to a number of persons (legal and natural), which may be involved in tax evasion, corruption and/or money laundering activities.

  • Whether they maintain or maintained any relationship with the company Mossack Fonseca, either directly or with any third person acting for or representing Mossack Fonseca;
  • Whether they maintain or maintained any business relationship with customers introduced or managed by Mossack Fonseca or by any third person acting for or representing Mossack Fonseca.
  • Whether they maintain any business relationship with any other person, who appears to be included in the said documents.

Further to Circular C125, the Cyprus Securities and Exchange Commission (‘CySEC’), wishes to inform the Regulated Entities of the following:

  1. A Directive has been issued by MOKAS (attached in Greek only), which clarifies the Regulated Entities’ reporting obligations in relation to the publicly available list of persons (legal and natural) which are included into the documents of Mossack Fonseca, referred to as “Panama Papers”.
  2. Based on the above, the Regulated Entities that have identified any business relationship with persons included into the Panama Papers, are required to:
    1. Review and update their customers’ identification documents and data/information included in their economic profile,
    2. Review and thoroughly examine their customers’ activity and transactions, to determine whether suspicions over money laundering activities arise,
    3. Reassess, and where necessary, reclassify their customers’ risk categorisation in accordance to the risk based approach which they internally apply.
  3. The regulated Entities are directed to the CySEC’s Circular CI144-2014-06, with subject ‘Serious Tax Offences’, which is relevant to this issue.

May 25, 2016 in AML, GATCA, Tax Compliance | Permalink | Comments (0)

Tuesday, May 24, 2016

Penn State Law Opportunity for Dynamic Assistant Dean for Career Services!

Penn State Law seeks a seasoned professional with broad leadership and management experience to serve as Assistant Dean for Career Services. The Assistant Dean reports directly to Penn_state_law_mark the Dean and, as a key member of the law school’s management team participates in many aspects of the law school operation.

The Assistant Dean is responsible for developing and carrying out a comprehensive program of career advising, development and counseling for students and occasionally for law school alumni. To this end, the Career Services team works closely with students, faculty and staff at Penn State Law and with national and regional employers from the private and public sectors to help Penn State students pursue career aspirations. Responsibilities also include establishing office policies, supervising career services staff, coordinating efforts with other administrative departments, working with alumni groups, setting goals and planning strategies for success, and tracking and preparing statistical information on job placement. For more information about Penn State Law go to

Penn State Law has modern, state-of-the-art facilities, a faculty of outstanding scholars and dedicated teachers, and exceptional students with strong credentials and the potential to become leaders in the United States and around the world. It is located on Penn State’s University Park campus in State College, Pennsylvania. University Park is the largest of Penn State’s campuses and houses the University’s central administration, its renowned graduate and undergraduate programs, and its NCAA Division I Athletics Department. The 13-square-mile campus is home to more than 46,000 graduate, professional, and undergraduate students and more than 12,000 full-time employees (faculty and staff). University Park is pedestrian and bike friendly and features an eclectic mix of historic classroom buildings, cutting-edge, modern architecture, and beautiful urban landscape.

Often referred to as Happy Valley, State College is a quintessential college town that offers residents many of the amenities of a larger urban environment in a clean, safe, and welcoming setting. Centrally located between several major metropolitan areas, State College is within a few hours’ drive of New York, Washington, Philadelphia, Baltimore, Cleveland, and Pittsburgh. With a diverse population made up largely of Penn State faculty and staff, State College is consistently ranked among the nation’s smartest, safest, and most livable cities.

The ideal candidate will have a J.D. or LL. M. degree from an accredited law school and five to ten years of relevant experience. Previous law school Career Services or legal recruitment experience is preferred. Excellent administrative, organizational, counseling, interpersonal and oral and written communication skills are essential. Experience with computer database management systems and Microsoft Office programs is desired.

Compensation will be competitive and will depend on qualifications and experience. Interested applicants must upload a resume and a cover letter including any salary requirements.

Please forward your intereest to: Beth Kransberger, Managing Partner & Principal

ME Kransberger Consulting Group, 3930 Centre Street, Suite 105, San Diego, CA 92103 c: 858.943.9401 f: 619.677.2462

May 24, 2016 in Education | Permalink | Comments (0)

IRS Offers LB&I “Overseas Filing for US Taxpayers” Webinar Wednesday May 25 1-3pm EDT

LB&I International Individual Compliance will present the “Overseas Filing for US Taxpayers” webinar May 25 from 1-3 p.m. EDT,(18:00-2100 hours UTC-0). Irs_logo

To register and attend this webinar, use the Overseas Filing for US Taxpayers webinar link. It is recommended attendees log in 10 minutes prior to the start time.


May 24, 2016 in FATCA | Permalink | Comments (0)

Commission Publishes Notice On State Aid, Including Tax Rulings

In the context of the State aid modernisation, the Commission wishes to provide further clarification on the key concepts relating to the notion of State aid as referred to in Article EU Commission107(1) of the Treaty on the Functioning of the European Union, with a view to contributing to an easier, more transparent and more consistent application of this notion across the Union.  excerpts below about State Aid and Tax Rulings

5.4. Specific issues concerning tax measures
156. Member States are free to decide on the economic policy which they consider most appropriate and, in particular, to spread the tax burden as they see fit across the various factors of production. Nonetheless, Member States must exercise this competence in accordance with Union law.

5.4.4. Tax rulings and settlements Administrative tax rulings

169. The function of a tax ruling is to establish in advance the application of the ordinary tax system to a particular case in view of its specific facts and circumstances. For reasons of legal certainty, many national tax authorities provide prior administrative rulings on how specific transactions will be treated fiscally. This may be done to establish in advance how the provisions of a bilateral tax treaty or national fiscal provisions will be applied to a particular case or how ‘arm’s-length profits’ will be set for related party transactions where uncertainty justifies an advance ruling to ascertain whether certain intra-group transactions are priced at arm’s length. Member States can provide their taxpayers with legal certainty and predictability on the application of general tax rules, which is best ensured if its administrative ruling practice is transparent and the rulings are published.

170. The grant of a tax ruling must, however, respect the State aid rules. Where a tax ruling endorses a result that does not reflect in a reliable manner what would result from a normal application of the ordinary tax system, that ruling may confer a selective advantage upon the addressee, in so far as that selective treatment results in a lowering of that addressee's tax liability in the Member State as compared to companies in a similar factual and legal situation.

171. The Court of Justice has held that a reduction in the taxable base of an undertaking that results from a tax measure that enables a taxpayer to employ transfer prices in intra-group transactions that do not resemble prices which would be charged in conditions of free competition between independent undertakings negotiating under comparable circumstances at arm’s length confers a selective advantage on that taxpayer, by virtue of the fact that its tax liability under the ordinary tax system is reduced as compared to independent companies which rely on their actually recorded profit to determine their taxable base. Accordingly, a tax ruling which endorses a transfer pricing methodology for determining a corporate group entity’s taxable profit that does not result in a reliable approximation of a market-based outcome in line with the arm’s length principle confers a selective advantage upon its recipient. The search for a ‘reliable approximation of a market-based outcome’ means that any deviation from the best estimate of a market-based outcome must be limited and proportionate to the uncertainty inherent in the transfer pricing method chosen or the statistical tools employed for that approximation exercise.

172. This arm’s length principle necessarily forms part of the Commission’s assessment of tax measures granted to group companies under Article 107(1) of the Treaty, independently of whether a Member State has incorporated this principle into its national legal system and in what form. It is used to establish whether the taxable profit of a group company for corporate income tax purposes has been determined on the basis of a methodology that produces a reliable approximation of a market-based outcome. A tax ruling endorsing such a methodology ensures that that company is not treated favourably under the ordinary rules of corporate taxation of profits in the Member State concerned as compared to standalone companies who are taxed on their accounting profit, which reflects prices determined on the market negotiated at arm’s length. The arm’s length principle the Commission applies in assessing transfer pricing rulings under the State aid rules is therefore an application of Article 107(1) of the Treaty, which prohibits unequal treatment in taxation of undertakings in a similar factual and legal situation. This principle binds the Member States and the national tax rules are not excluded from its scope.

173. When examining whether a transfer pricing ruling complies with the arm's length principle inherent in Article 107(1) of the Treaty, the Commission may have regard to the guidance provided by the Organisation for Economic Co-operation and Development (‘OECD’), in particular the ‘OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations’. Those guidelines do not deal with matters of State aid per se, but they capture the international consensus on transfer pricing and provide useful guidance to tax administrations and multinational enterprises on how to ensure that a transfer pricing methodology produces an outcome in line with market conditions. Consequently, if a transfer pricing arrangement complies with the guidance provided by the OECD Transfer Pricing Guidelines, including the guidance on the choice of the most appropriate method and leading to a reliable approximation of a market based outcome, a tax ruling endorsing that arrangement is unlikely to give rise to State aid.

174. In sum, tax rulings confer a selective advantage on their addressees in particular where:

a) the ruling misapplies national tax law and this results in a lower amount of tax;
b) the ruling is not available to undertakings in a similar legal and factual situation; or
c) the administration applies a more ‘favourable’ tax treatment compared with other taxpayers in a similar factual and legal situation. This could, for instance, be the case where the tax authority accepts a transfer pricing arrangement which is not at arm's length because the methodology endorsed by that ruling produces an outcome that departs from a reliable approximation of a market-based outcome.

The same applies if the ruling allows its addressee to use alternative, more indirect methods for calculating taxable profits, for example the use of fixed margins for a cost-plus or resale-minus method for determining an appropriate transfer pricing, while more direct ones are available.

Download State Aid EU Commission


May 24, 2016 in BEPS | Permalink | Comments (0)

Monday, May 23, 2016

16 of the world’s largest banks must face anti-trust claim for LIBOR manipulation

16 of the world’s largest banks (“the Banks”), were on the panel of banks that determined LIBOR each business day based, in part, on the Banks’ individual submissions.  It is alleged 2nd Cir Ct Appealsthat the Banks colluded to depress LIBOR by violating the rate‐setting rules, and that the payout associated with the various financial instruments was thus below what it would have been if the rate had been unmolested.  Numerous antitrust lawsuits against the Banks were consolidated into a multi‐district litigation (“MDL”). 

We vacate the judgment on the ground that: 

(1) horizontal price‐fixing constitutes a per se antitrust violation;

(2) a plaintiff alleging a per se antitrust violation need not separately plead harm to competition; and

(3) a consumer who pays a higher price on account of horizontal price‐fixing suffers antitrust injury.

Download 2nd Cir LIBOR decision 13 banks (Twitter tip to Thomson Reuters journalist Alison Frankel, follow her on Twitter

May 23, 2016 in Financial Regulation | Permalink | Comments (0)

Profit-Shifting Structures and Unexpected Partnership Status

Prof. Jeffrey Kadet explains "Many U.S.- and foreign-based MNCs that have implemented carefully researched tax strategies to reduce their income taxes are coming under increased scrutiny. Most MNC tax Jeffrey-M-Kadet-244x300strategies involve businesses they conduct worldwide, but which are managed from the U.S."   Prof. Kadet provides the following synopsis of his attached article. 

These strategies have several factors in common:

(i) Companies established in tax havens or otherwise structured to attract little if any tax;

(ii) Intercompany agreements placing commercial risk and intangibles in such companies, thereby shifting profits to such companies;

(iii) Conduct of centralized activities and functions in the U.S. (in addition to group senior management), which are integral to and which critically benefit all MNC group members conducting that line of business (examples of such activities include product development, product sourcing, management of contract manufacturing process, management and control of internet platforms, etc.); and

(iv) No significant changes made to their business operations when tax strategies were implemented, meaning potentially that these structures lack economic substance.

This article suggests that in their haste to create these profit-shifting structures, the MNCs and their advisors may have overlooked two important weapons in the IRS’s arsenal to attack profit-shifting strategies.

First, because of the centralized activities and functions within the U.S. that are integral to the business conducted by various group members (including both U.S. and foreign group members), an MNC may inadvertently create through its actions and intercompany contracts a partnership that is recognized solely for U.S. tax purposes. Once such a partnership exists for tax purposes, the various group members become its partners and the partnership conducts the applicable worldwide line of business.

Secondly, because the partnership conducts a portion of its activities through U.S. offices and other facilities, the foreign group member partners are treated by statute as being engaged in a trade or business in the U.S. This makes them subject to U.S. taxation on their share of effectively connected income (ECI) earned by the partnership. U.S. taxation will be imposed at effective rates of 54.5% or higher. (The effective rate could be 38.25% or higher if a tax treaty applies.)

In the absence of a partnership, whether a foreign group member is engaged in a U.S. trade or business is a factual determination that may be difficult for the IRS to establish. However, to their collective detriment, MNCs whose factual situations support the existence of a partnership that conducts such a U.S. trade or business have made it a slam-dunk for the IRS to conclude that the foreign group member partner is so engaged. The U.S. tax rules are clear – if a foreign corporation is a partner in a partnership engaged in a U.S. trade or business, then that partner will be so engaged. All MNCs with this general fact pattern and their auditors should re-examine existing profit shifting structures to determine if they could withstand an IRS charge asserting both the existence of a partnership and taxable ECI. 

Download Partnerships-Profit Shifting_Koontz-Kadet

May 23, 2016 in BEPS | Permalink | Comments (0)

Sunday, May 22, 2016

Planned stakeholder input in OECD BEPS New Reports

The OECD's Committee on Fiscal Affairs consults with interested parties through a variety of means to inform its work in the tax OECD area. One important way of obtaining such input is through the release of requests for input or discussion drafts for public comment* and through public consultations.






Discussion draft Interest deductions Elements of the design and operation of the group ratio rule 6 July 2016 3 August 2016
Discussion draft Hybrid mismatch arrangements Branch Mismatch Arrangements 15 July 2016 26 August 2016
Discussion draft Interest deductions Approaches to address BEPS involving interest in the banking and insurance sectors 18 July 2016 29 August 2016

May 22, 2016 in BEPS, OECD | Permalink | Comments (0)

Saturday, May 21, 2016

Ransomware: Understanding the Threat and Exploring Solutions - Senate Hearings Transcripts

Congressional hearing and video available here

The threat from ransomware is staggering.  One ransomware scheme extorted an estimated $27 million in just its first two months.  While ransom fees are typically between $200 and Us judiciary senate committee$10,000, victims suffer additional harms due to things like lost productivity and the cost of mitigation.   

The growth in ransomware is fueled by many factors.  Our computers are still more vulnerable that we would like.  And advances in technology – such as anonymizing proxy networks and bitcoin – offer even average criminals highly sophisticated tools to avoid detection. 

Despite these challenges, law enforcement is actively working to disrupt and deter ransomware schemes.  The FBI currently has dozens of active investigations into different ransomware variants.  And this hard work has paid off.  In 2014, for example, the Department of Justice led a multi-nation effort that disrupted a highly sophisticated ransomware scheme called Cryptolocker, which had encrypted computer files on more than 260,000 computers. 

Defeating ransomware schemes, however, requires a strategy that encourages the public and private sectors to work together.  Computer owners everywhere need to improve their “digital hygiene” by taking steps like installing the latest patches and ensuring that backups are up to date.  The department has tried to assist in raising awareness by issuing public service announcements about the dangers of ransomware, and which provide tips on how to protect systems and respond to malware infections. 

In addition, we must work to disrupt the means used to distribute and profit from ransomware.  Like other malicious software, ransomware is often facilitated by botnets.  As you may know, botnets are networks of computers infected with malware, or “bots,” that criminals can control remotely to do their bidding.  They allow small groups of criminals to use hundreds – or hundreds of thousands – of infected computers to attack other victims.  As botnets grow more sophisticated, and as the threat from botnets continues to evolve, we must continually strive to ensure that our laws remain up to date and provide law enforcement with the tools and authorities it needs to address this threat. 

Congress has a significant role to play.  The Computer Fraud and Abuse Act (or CFAA) clearly makes it a crime to hack into computers to create a botnet, and of course we could bring charges against criminals who use botnets to commit other crimes.  It is not clear, however, that the CFAA also criminalizes selling or renting access to botnets, which is increasingly common among cybercriminals.  We support closing this loophole. 

In addition, federal law currently provides courts with authority to issue civil injunctions to disrupt botnets – but only if the botnet is being used to commit certain specific categories of crime.  Yet botnets are used for many types of criminal activity, such as denial of service attacks and sending phishing emails.  The administration has proposed updating the law to allow courts to issue civil injunctions to stop botnets no matter what the criminals are using them for.

While use of civil injunctions is a valuable tool, there may be circumstances in which it is preferable to seek a warrant from a court in order to disrupt a botnet.  Because of this, the department supports the Supreme Court’s recent action to amend Rule 41 of the Federal Rule of Criminal Procedure to clarify which court is the right court to consider warrant applications.  While this amendment would not change the substantive authority to authorize such a warrant, it would eliminate needless inefficiency in the process for applying for this sort of warrant.   

Excerpt of Deputy Assistant Attorney General Richard Downing Testimony before Senate Judiciary Committee

See also American Bankers Association testimony  Download 05-18-16 Blauner Testimony

There are three points I want to highlight today:

I. Botnets continue to be a significant threat to our nation’s economy and citizens;

II. The financial sector, the Administration, and federal law enforcement are taking strong action against botnets and ransomware; and

III. Congress can assist by giving prosecutors better tools to stop criminal use of botnets.

May 21, 2016 in AML | Permalink | Comments (0)

Friday, May 20, 2016

Anti-Corruption Summit: country statements

The Ministry of Justice will consult on plans to extend the scope of the criminal offence of a corporate ‘failing to prevent’ beyond bribery and tax evasion to other economic crimes.

Police and other law enforcement agencies can struggle to prosecute corporations for money laundering, false accounting, and fraud under existing common laws. FATF logo

The consultation will seek views and evidence to assess whether changes in the law could allow the courts to more effectively prosecute corporate economic crime.

Justice Minister Dominic Raab said:

The government is finding new ways to tackle economic crime and we are taking a rigorous and robust approach to corporations that fail to prevent bribery or allow the tax evasion on their behalf.

We now want to carefully consider whether the evidence justifies any further extension of this model to other areas of economic crime, so that large corporations are properly held to account.

The consultation, published this summer, will explore whether the ‘failure to prevent’ model should be extended to complement existing legal and regulatory frameworks.

The consultation follows the recent announcement by the Prime Minister to bring forward a criminal offence for corporations who fail to stop their staff facilitating tax evasion and two recent prosecutions for the offence of failure of a commercial organisation to prevent bribery on its behalf.

Statements from individual countries setting out the concrete actions they will take in order to tackle corruption.

May 20, 2016 in AML | Permalink | Comments (0)

Thursday, May 19, 2016

Orchestrator Of More Than 40 Pump And Dump Schemes And Secret Owner Of Offshore Brokerage Firm Pleads Guilty To$250 Million Money Laundering Scheme

Defendant Used Offshore Shell Companies in Belize and the West Indies to Perpetrate Numerous Schemes, Including the Manipulation of Cynk Technology Corp (CYNK)

Gregg R. Mulholland, a dual U.S. and Canadian citizen and secret owner of Legacy Global Markets S.A. (Legacy), an offshore broker-dealer and investment management company based in Panama City, Panama, and Belize City, Belize, pleaded guilty to money laundering conspiracy for fraudulently manipulating the stocks of more than 40 U.S. publicly-traded companies and then laundering more than $250 million in profits through at least five offshore law firms.  Pursuant to his plea agreement with the government, Mulholland has agreed to forfeit, among other things, a Dassault-Breguet Falcon 50 aircraft, a Range Rover Defender vehicle, two real estate properties in British Columbia, and funds and securities on deposit at more than a dozen bank and brokerage accounts.  When sentenced, Mulholland faces up to 20 years in prison. 

“Mulholland’s staggering fraud perpetrated on the investing public was built on an elaborate offshore shell game, which included his secret ownership of an offshore brokerage firm.  Justice logoThrough manipulative trading, Mulholland generated profits of more than $250 million and used a corrupt lawyer to launder the proceeds into the United States to pay his fraudulent network of stock promoters and broker-dealers,” stated United States Attorney Capers.  “We are steadfast in our commitment to protect the investing public and will vigorously prosecute those who seek to abuse the financial markets through fraudulent means.” Mr. Capers thanked the Securities and Exchange Commission (SEC), the Department of Justice’s Office of International Affairs (OIA), the Department of State’s Diplomatic Security Service (DSS), and the Financial Industry Regulatory Authority, Inc., Criminal Prosecution Assistance Group (FINRA CPAG) for their cooperation and assistance in the investigation.

“Mulholland pleaded guilty today for his role in a stock manipulation and profit hiding scheme totaling more than $250 million. Making sure our markets are fair to all investors and bringing charges against those who profit illegally remains a top priority for the FBI,” stated FBI Assistant Director-in-Charge Rodriguez.

“This investigation highlights the government’s ability and resolve to combat global money laundering, in this case, the laundering of illicit proceeds from a stock manipulation scheme,” stated IRS-CI Special Agent-in-Charge Kitchen.  “Prospective money launderers should take note of Mr. Mulholland’s conviction and think twice about the consequences of such actions.  The same holds true for individuals who attempt to criminally circumvent IRS reporting requirements regarding foreign accounts, as their actions will attract the attention of IRS-Criminal Investigation.”  

“Laundering more than a quarter of a billion dollars, this defendant used multiple schemes including manipulating the stocks of more than 40 companies in order to line his pockets at the expense of the U.S. financial system.  HSI remains committed to using its unique authorities to arrest those that seek to conceal and launder illicit proceeds, causing harm to our economy,” said Special Agent-in-Charge Melendez.

Between 2010 and 2014, Mulholland controlled a group of individuals (the Mulholland Group) who together devised three interrelated schemes to: (1) induce U.S. investors to purchase stock in various thinly-traded U.S. public companies through fraudulent promotion of the stock, concealment of their ownership interests in the companies, and fraudulent manipulation of artificial price movements and trading volume in the stocks of those companies; (2) circumvent the IRS’s reporting requirements under the Foreign Account Tax Compliance Act (FATCA); and (3) launder the fraudulent proceeds from the stock manipulation schemes to and from the United States through five offshore law firms.  Through these schemes, the Mulholland Group laundered more than $250 million in fraudulent proceeds.

To facilitate the interrelated schemes, the Mulholland Group used shell companies in Belize and Nevis, West Indies, which had nominees at the helm.  This structure was designed to conceal the Mulholland Group’s ownership interest in the stock of U.S. public companies, in violation of U.S. securities laws, and enabled the Mulholland Group to engage in more than 40 “pump and dump” schemes.  For example, this structure enabled the Mulholland Group to manipulate the stock of Cynk Technology Corp, which traded on the U.S. OTC markets under the ticker symbol CYNK.  Using aliases such as “Stamps” and “Charlie Wolf,” Mulholland was intercepted on a court-authorized wiretap on May 15, 2014, admitting to his ownership of “all the free trading” or unrestricted shares of CYNK.  Prior to this conversation between Mulholland and his trader at Legacy, there had been no trading in CYNK stock for 24 trading days.  Over the next two months, the stock of CYNK rose from $0.06 per share to $13.90 per share, a more than $4 billion stock market valuation for a company that had no revenue and no assets.    

Mulholland used the services of a U.S.-based lawyer to launder the more than $250 million generated through his stock manipulation of CYNK and other U.S. companies – directing the fraud proceeds to five law firm accounts and transmitting them back to members of the Mulholland Group and its co-conspirators.  These concealment schemes also enabled Mulholland to evade reporting requirements to the IRS.

Today’s guilty plea took place before United States District Judge I. Leo Glasser. 

The government’s case is being prosecuted by the Office’s Business and Securities Fraud Section.  Assistant United States Attorneys Jacquelyn Kasulis, Winston Paes, and Michael Keilty are in charge of the prosecution.  Assistant United States Attorney Brian Morris of the Office’s Civil Division will be responsible for the forfeiture of assets.

The charges were brought in connection with the President’s Financial Fraud Enforcement Task Force.  The task force was established to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes.  With more than 20 federal agencies, 94 U.S. attorneys’ offices, and state and local partners, it is the broadest coalition of law enforcement, investigatory, and regulatory agencies ever assembled to combat fraud.  Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state, and local authorities; addressing discrimination in the lending and financial markets; and conducting outreach to the public, victims, financial institutions, and other organizations.  Since fiscal year 2009, the Justice Department has filed over 18,000 financial fraud cases against more than 25,000 defendants.  For more information on the task force, please visit

The Defendant:

Age:  46
San Juan Capistrano, California

May 19, 2016 in AML | Permalink | Comments (0)

The Looming FATCA / CRS Cyber Security Disaster: unauthorised transfer of $951m (of which $81m could not be recovered) belonging to the National Bank of Bangladesh

Withers Law Firm reported that: SWIFT system that led to the unauthorised transfer of $951m (of which $81m could not be recovered) belonging to the National Bank of Bangladesh... FATCA_roll

"As the Panama Papers have shown, financial information can be easily stored and retrieved electronically on a global scale. Unsurprisingly, therefore, Governments have been considering the introduction of a global system for the automatic exchange of information. Although the implementation of this system has proceeded at speed, and with minimal scrutiny, it raises major questions about several issues: ..." read the full analysis at Withers Law Firm.

May 19, 2016 in AML, FATCA, GATCA | Permalink | Comments (0)

Wednesday, May 18, 2016

40 countries commit to automatically exchange information on beneficial ownership of corporations & entities

The UK Treasury has published a list of the countries that have committed to the initiative to automatically exchange information on beneficial ownership.  The following countries HM_Treasury_logo.svghave committed to the initiative to automatically exchange information on beneficial ownership. The next stage will be for the development of a global standard for this exchange.

  1. Afghanistan
  2. Anguilla
  3. Austria
  4. Belgium
  5. Bermuda
  6. Bulgaria
  7. Cayman Islands
  8. Croatia
  9. Cyprus
  10. Czech Republic
  11. Denmark
  12. Estonia
  13. Finland
  14. France
  15. Gibraltar
  16. Germany
  17. Greece
  18. Hungary
  19. Iceland
  20. Ireland
  21. Isle of Man
  22. Italy
  23. Jersey
  24. Latvia
  25. Lithuania
  26. Luxembourg
  27. Malta
  28. Mexico
  29. Montserrat
  30. Netherlands
  31. Nigeria
  32. Poland
  33. Portugal
  34. Romania
  35. Slovakia
  36. Slovenia
  37. Spain
  38. Sweden
  39. United Arab Emirates
  40. United Kingdom

free download of 118 page Lexisnexis® Guide to FATCA Compliance: Chapter 1

May 18, 2016 in GATCA, OECD | Permalink | Comments (0)

"transnational criminal enterprises and global corporate misconduct are the new normal"

Assistant Attorney General Leslie R. Caldwell Delivers Remarks

For two years, I have had the pleasure of leading the Justice Department’s Criminal Division, which includes more than 600 attorneys from 17 sections and offices.  As many of you DOJ-U-S-ATTORNEYS-OFFICEknow, the Criminal Division handles a wide variety of federal criminal matters, including fraud, public corruption, cybercrime, child exploitation, transnational organized crime, international drug trafficking, human rights violations and criminal appeals.  We also work on capacity building in the justice sector in countries throughout the world. 

At the Criminal Division, we try to focus our efforts – often in partnership with U.S. Attorneys’ Offices around the country – on issues that affect the nation as a whole.  And, as a result of this national focus, we find that we are increasingly drawn into international investigations, sometimes involving many different countries.

We are dealing with a new era of crime on a global scale.  During my first stint at the department, it was the exceptional case that involved international criminal groups or worldwide fraud schemes.  Today, transnational criminal enterprises and global corporate misconduct are the new normal.  

The increasingly international nature of crime is driven by a variety of factors.  Perhaps the most significant is the global expansion of U.S. and foreign companies and the growing interdependency of our economy and those of nations around the world.  Another major factor is the worldwide use of the Internet.  The Internet obviously has changed the world in countless positive ways.  But the Internet also allows criminals to cross borders, often anonymously, without leaving home. 

Our efforts against cross-border crime reach every corner of the Criminal Division, from cyber-crime to child exploitation to transnational organized crime.  But given the nature of this conference, I’d like to talk to you today about the Criminal Division’s efforts to meet the challenges associated with international investigations in the securities arena.

To address cross-border crime, we are forming strong coalitions with our international enforcement and regulatory partners.  Our relationships continue to evolve, but already have yielded significant successes, a couple of which I will highlight to illustrate my point.   

Collaboration is especially important when it comes to threats posed to global markets.  In the age of interconnected commerce, the adage about a butterfly flapping its wings in Brazil and causing a rainstorm in Manhattan applies as much to markets as it does to the weather.  And when someone defrauds or manipulates a market, we all get rained on, regardless where the wrongdoing happened. 

For example, this past November, two former traders with the Dutch bank Rabobank were successfully prosecuted by the Fraud Section and Antitrust Division in the Southern District of New York for manipulating LIBOR interest rates.  As you know, the British Bankers’ Association set the LIBOR rates based on submissions from a panel of 16 banks, including Rabobank, reflecting the rates those banks believe they would be charged if borrowing from other banks in a variety of currencies for various lengths of time.  Because of this process, LIBOR was considered an objective, market-based price and served as the primary benchmark for short term interest rates for several currencies, as well as the basis for countless financial products, including interest rate contracts, mortgages, credit cards and student loans.   

The defendants and their coconspirators figured out that by changing their rate submissions on behalf of Rabobank, they could manipulate LIBOR, thereby manufacturing false profits on LIBOR-based contracts held by other traders at the bank.  Their crime affected not only the counterparties to Rabobank’s own contracts – the objects of the fraud – but also untold others around the world with no connection to Rabobank.

And although the two defendants convicted at trial, along with two others who pleaded guilty, are British, the fraud also included a Japanese employee and charges remain pending against an Australian and another Japanese national.  The government’s overarching LIBOR investigation, which is continuing, has also yielded resolutions from banks in the U.S., the U.K., the Netherlands, Switzerland and Germany.

Naturally, the investigation and prosecution of this case has involved the assistance of various enforcement agencies around the world.  For example, many of the documents that identified the culpable individuals came from Rabobank itself in the Netherlands.  To obtain those documents, the Criminal Division’s Office of International Affairs used the Mutual Legal Assistance Treaty (MLAT) process to serve a subpoena on Rabobank through the Dutch Public Prosecution Service.  Both because the bank was cooperating and because the Dutch were responsive in answering questions and processing the paperwork, we obtained the documents quickly and were able to move forward with the case in short order. 

In another example of mischief in the global markets, in May 2010 the Dow Jones Industrial Average plunged 600 points in five minutes in the so-called Flash Crash.  We believe that the crash was triggered by a drop in the price of E-minis, a type of futures contract on the Chicago Mercantile Exchange based on the S&P 500 Index.  We know that the Flash Crash exposed the fragility of markets built for a pre-internet age in the era of high-frequency trading.

A British national who worked as a futures trader has been charged in federal court in Chicago with wire fraud, commodities fraud, commodities manipulation and “spoofing,” a practice of bidding or offering with the intent to cancel the bid or offer before execution.  He allegedly used an automated trading program to manipulate the market for E-minis and earned significant profits along the way.

The defendant has been arrested in the U.K. and a British court has ordered that he be extradited to the U.S. to face these charges.  That ruling is currently on appeal and we respect whatever decision the British courts ultimately reach.  Regardless of the outcome, this is another case in which international cooperation in the investigation has been invaluable.

It is also an example of how the U.S. government is working to protect markets from every angle.  While the Justice Department investigates and prosecutes the alleged wrongdoer, the Securities and Exchange Commission (SEC)  and the Commodity Futures Trading Commission have been busy modifying regulations on high-frequency trading to help markets detect fraudulent activity and shut down automatically to insulate themselves from future events like the Flash Crash.

In April of 2016, we charged two former high-ranking executives of a Boston-based financial services company with wire and securities fraud.  These individuals allegedly conspired to add secret commissions to fixed income and equity trades performed for clients of the bank’s “transition management” business, which helps institutional clients move their investments between and among asset managers or liquidate large investment portfolios. 

According to the indictment, the defendants charged these secret commissions on top of the fees the clients had agreed to pay the bank and despite written instructions that the clients were not to be charged trading commissions.  The defendants then allegedly took steps to hide the commissions from the clients and others within the bank, including compliance staff.

Although this scheme allegedly targeted institutional investors, it caused real harm.  When we talk about institutions, we tend to forget that they are comprised of actual human beings who rely on them.  The indictment alleges that the victims here include several pension funds, including British and Irish government entities.  According to the charges, this U.S. bank’s fraud took money out of the pockets of working people abroad.  That harms not only those people but our country’s reputation as a safe and trustworthy place to do business.

The crime was quintessentially transnational: it only worked because the bank was able to lure in customers abroad on the basis of its access to U.S. financial markets. For the United States to remain a world leader in the financial services market, we must ensure that our markets are fair and safe for everyone, regardless of their nationality.

International collaboration is not without its challenges.  As the saying goes, “With big cases come big problems.”  And nowhere is that more true than in cases that transcend international boundaries.  Setting aside logistical and diplomatic concerns, transnational cases include thorny investigative and prosecution issues.  For example, what happens when a foreign government undertakes surveillance that would be prohibited in the United States?  Or when one country grants immunity to an individual during an investigation?  Or when conflicting issues of privileges and immunities arise? 

Over time, the Criminal Division has gained experience and expertise in these areas and is addressing these challenges.  For example, in the LIBOR case I discussed earlier, prior to our prosecution, the two traders who went to trial in November had been compelled to make statements to the U.K.’s Financial Conduct Authority, or FCA.  Under U.K. law, failure to respond to an FCA interview could result in criminal penalties, including imprisonment.  The FCA then sent the transcripts of the two traders’ interviews to a third person, Mr. Robson, who reviewed them once and never looked at them again.  Later, Mr. Robson and the two traders were indicted in New York.  Mr. Robson pleaded guilty and testified at trial against the other two traders. 

The traders filed a motion to dismiss the indictment on Kastigar grounds, alleging, in sum, that the indictment was tainted by Mr. Robson’s review of the compelled interviews.  After trial, Judge Rakoff held an evidentiary hearing and subsequently denied the defense motion.  In short, Judge Rakoff found that the U.S. prosecutors were not exposed to the defendants’ compelled testimony and that the evidence used against the defendants derived entirely from sources untainted by their compelled testimony. 

He cited steps that the department took to shield itself from exposure, including the department’s instructions to the FCA and Mr. Robson not to share any information from the compelled interviews, the department’s strategy of interviewing witnesses before the FCA did and the department’s presentation to the FCA regarding the Fifth Amendment and Kastigar.

This is all to say that as our cases increasingly cross international borders, the Criminal Division is gaining more experience in dealing with these tricky issues.  We try to work collaboratively with our foreign counterparts to foresee future problems.  For example, last December we had a cross-border symposium with our U.K. counterparts and discussed, among other things, our respective discovery and privilege issues. 

The Criminal Division is also leveraging its collaborative relationships with foreign enforcement partners to assist corporations that are seeking to cooperate with our investigations in dealing with myriad foreign data privacy regulations.  In working with the corporations and our foreign counterparts, we are often able to find a way forward despite perceived hurdles.  On the flip side, we are leveraging these same relationships to obtain information when non-cooperative companies make invalid assertions about particular data privacy laws in an effort to shield themselves from our investigations.

The Criminal Division has made other strides to meet the challenges of the international scope of criminal activity.  We have increased our global presence and resources available to combat international crime. 

First, the department has lawyers serving as eyes and ears on the ground across the world.  We have attachés in eight countries.  They are stationed at U.S. Embassies in Bangkok, Bogota, Brussels, London, Manila, Mexico City, Paris and Rome and we have 60 resident legal advisors and 45 intermittent legal advisors around the globe.  Attachés work with U.S. prosecutors and law enforcement personnel as well as with foreign authorities in their assigned countries or regional areas on operational matters relating to criminal investigations and prosecutions, including requests for the return of fugitives and requests for mutual legal assistance. 

We also recently placed Criminal Division prosecutors with Eurojust in The Hague and INTERPOL in France.  We are exploring the possibility of embedding prosecutors with other foreign law enforcement as well, including the U.K. Financial Conduct Authority and the U.K. Serious Fraud Office and they in turn are considering whether to embed a representative here in the U.S.  These types of positions will help to facilitate information-sharing, improve cooperation on investigations and build even stronger relationships with our law enforcement partners in other countries.

The department also has increased the resources available to the Office of International Affairs, or OIA, whose workload has increased exponentially in the last few years.  We have been actively hiring additional attorneys and professional staff for OIA’s Mutual Legal Assistance Treaty Modernization Project. 

We hope to continue expanding our ability to help our overseas counterparts and our U.S. prosecutors.  For example, OIA has been instrumental in helping obtain evidence from numerous countries in the pending FIFA soccer federation prosecution in the Eastern District of New York, as well as the cases I mentioned previously.  We’ve also created a cyber-unit in OIA that is dedicated to responding to and executing requests for electronic evidence from foreign authorities – requests that have increased by 1,000 percent over the last decade.  Of course, mutual legal assistance cannot be our only means of obtaining evidence that may be stored overseas, but our efforts to improve our bilateral relationships and our own MLAT response are essential in a world of increasingly global crime.

Collaboration and coordination among multiple regulators in cross-border matters is the future of major white collar criminal enforcement.  It is also a fact that in many cases multiple regulators each seek to prosecute companies and individuals or to share in a corporate resolution, sometimes for what essentially amounts to the same or closely related conduct.  We recognize that this raises legitimate questions about fairness. 

As to companies, we hear your concerns about regulatory “piling on.”  We agree that there can be significant unfairness when a company is asked by different regulators to pay for the same misconduct over and over again.  Different prosecutors and regulators obviously have different legitimate interests.  And companies that voluntarily operate in multiple countries certainly know that by doing so, they subject themselves to those countries’ laws and regulatory schemes.  That said, we are trying to address this concern so that companies are not punished unfairly. 

For example, in 2015 Deutsche Bank’s U.K. subsidiary, DB Group Services (UK) Limited, pleaded guilty to wire fraud for its role in manipulating the LIBOR.  The parent company, Deutsche Bank AG, entered into a three-year deferred prosecution agreement.  The company admitted its role in manipulating LIBOR and participating in a price-fixing conspiracy. 

The department imposed a total penalty of $775 million and required Deutsche Bank to retain a corporate monitor for three years.  This was the largest penalty imposed by the department to date in the LIBOR investigation and is also the first time in a LIBOR case that the department has imposed a monitor on a bank.

But the penalty was only $775 million – and I don’t say that lightly – because of other financial penalties imposed at the same time.  As part of the deferred prosecution agreement, Deutsche Bank also agreed to pay $344 million as a result of a U.K. Financial Conduct Authority action, $800 million as a result of a Commodity Futures Trading Commission action and $600 million as a result of a New York Department of Financial Services action.

Now some will say, “The department is only willing to share with regulators and foreign countries because it demands a pot of money big enough to share.”  But that’s not fair.  In these cases, we calculated the total criminal sanctions that were appropriate based on the offense conduct and other factors and then reduced the share payable to the U.S. to account for penalties imposed by other countries or by regulators for the same conduct.

And in assessing the total financial penalties imposed on corporate defendants, the department does not only consider the fines and forfeiture figures.  The department also considers the totality of the penalties imposed on a defendant.  This may include compliance monitors, which we recognize can be a significant financial burden on a corporation. 

Individual criminal defendants also are affected by the increasingly international scope of white collar cases, as well as the enhanced appetite among our foreign counterparts for prosecuting white collar crime.  We recognize the potential for unfairness that exists when multiple enforcement agencies propose to bring multiple criminal prosecutions against the same individual for essentially the same misconduct.

While not all systems are like our own, with our double jeopardy and Fifth Amendment protections, we work with our counterparts to make sure that charging decisions relating to individuals are the most fair and sensible ones under the circumstances.  And as we and our counterparts work together more frequently and better understand our respective systems, we are having those conversations earlier, so that individuals are much less likely to be caught in the middle of last minute turf battles over where and by whom a prosecution should be brought.

We make these considerations because they are fair and appropriate – but we also firmly believe that efforts to increase our transparency and consistency will result in increased accountability, as foreign authorities are more likely to collaborate; companies are more likely to cooperate; and both individual and corporate resolutions will be reached more quickly.

In the age of global markets, securities crimes have become truly international problems.  The Criminal Division is working to meet the challenges of investigating and prosecuting complex, international cases with difficult legal issues. 

The department does not seek to be the world’s global police force.  But we can – and I believe we should – lead by example: by vigorously investigating and prosecuting international crime when it violates U.S. laws and by sustaining and increasing our commitment to international collaboration in our nations’ shared struggle to safeguard our markets, our networks and our citizens.  We must do so to enforce our nation’s laws and keep our citizens safe.  Indeed, in today’s world, anything less would be unacceptable. 

May 18, 2016 in Financial Regulation | Permalink | Comments (0)

Tuesday, May 17, 2016

W-8 BEN and W-8BEN-E Panama Papers & FinCEN's Final CDD/CIP Rule Requiring US Corporate Beneficial Ownership Published Herein

This month I will discuss the important topic for the anti-money laundering compliance officer, wherein the AML systems overlap with the requirement for tax compliance, and that tax compliance requirement requires tax self certification from each customer of a financial institution.

I will provide insight about five topics:

  1. The Panama Papers FATCA_roll
  2. FATCA and its related reporting and tax self-certification forms, such as the W-8 series
  3. The OECD Common Reporting Standard, also known by the acronym CRS, differences with FATCA that compliance officers should be aware of
  4. The FinCEN Proposed Rule of 2014 regarding Customer Due Diligence Requirements for Financial Institutions, and finally
  5. The Incorporation Transparency and Law Enforcement Assistance Act of 2016, that in essence seeks to push FinCEN to issue the final rule of the above topic

For a detailed analysis of the overlapping AML and tax compliance issues, an analysis of the W-8 self-certification forms, and suggested guidance for developing or amending a financial institutions internal W-8 policy, see my free SSRN FATCA 118-page download.

Below I explore the impact of the Panama Papers on the compliance officer, as well as offer guidance to navigate the intricacies of self-certification.  It is well understood that AML compliance now includes tax compliance.  This relationship is explicitly understood by compliance officers because of the nearly 100 non-prosecution agreements against Swiss financial institutions the past five years, and also because FATCA explicitly requires the overlapping use of the AML system for tax compliance purposes.  It bears mentioning that the FBAR – FinCEN 101 Form – is an AML form but its enforcement is by the IRS, and it has become the primary tool to punish non tax compliance and obtain confiscation of assets related thereto.


To grossly simplify the impact of FATCA, FATCA has pushed the burden of collection and  validation of tax identification self-declarations for U.S. purposes unto all financial institutions and financial firms of the 244 countries and dependencies of the world recognized by the United States.  That is – pursuant to FATCA and its accompanying regulations, nearly all financial institutions, both U.S. and foreign ones, must obtain a signed tax self-declaration from the owner or owners of an account.  Foreign individual must fill in and sign a Form W-8BEN and foreign entities a Form W-8BEN-E.  U.S. taxpayers must complete and sign a Form W-9.

In addition to the FATCA requirement to collect signed tax self certification forms, over 100 countries governments have agreed to require a similar tax self certification form be collected pursuant to the OECD developed Common Reporting Standard.  In general, financial institutions are now combining the U.S. form requirements with those of the OECD to create one form to collect the information necessary to comply with both.

Ironically, the U.S. has not accepted to be liable to collect the same information that it has mandated from every other country.  However, as a result of the impact of the now infamous Panama Papers, 2016 will see this situation change.  The change will come in the form of FinCEN soon finalizing its 2014 proposed rule that US financial institutions begin to collect information on the ultimate beneficial owners of accounts.  The FinCEN final rule will require that U.S. financial institutions look through any legal persons or relationships such as corporate entities and trusts, until the final individual owner or owners are identified and their information collected to share with the US treasury.  U.S. Treasury in turn will share these beneficial owners and their information with foreign governments – automatically.  This soon-to be enacted FinCEN rule has popular support in Congress as evidenced by the February 26 “Incorporation Transparency and Law Enforcement Assistance Act (ITLEA) proposed in both the House and Senate.”

Moreover, the European Union is now working to establish an international protocol that will allow foreign government and even public access to such beneficial ownership information, probably starting in 2017.  It’s a brave new, transparent world for compliance officers of financial firms.


The form W-8BEN-E and its OECD equivalent, at 12 pages, can be quite difficult for many taxpayers or their representatives to complete and correspondingly for compliance officers to validate.  These forms are requiring substantial time of compliance officers and are leading to many mistakes.  To put the numbers in perspective, industry is currently estimating that 900 million tax self-certifications need collecting and validating by compliance officers around the world by 2018 when nearly all the old forms on file and in data systems will have expired.  My two colleagues on this webinar today are practitioners and will have a couple very busy years ahead of them helping clients manage these compliance risks.

As renown chef Emiril LaGasse of New Orleans says: “Let’s take it up a notch!”  The United States Treasury has agreed with over 100 countries through intergovernmental agreements (called IGAs) that allow variances in definitions for completing the required tax self certification forms.  These variances are contained not in the IGA itself but in foreign revenue department’s “controlling” guidance, which adds another level of complexity and thus challenge for compliance officers.

Since the original 10 pages of the year 2010 enactment of FATCA, the U.S. government has issued 2,000 pages of regulations and guidance in the form of the actual FATCA regulations, FATCA notices, the instructions for the new W-8 series, the 112 new IGAs and the 2 new FATCA competent authority agreements called CAAs, and then compliance officers need to be aware of the equivalent amount of pages for the OECD CRS and foreign government guidance.  The amount of reading is mind boggling, even for me – an academic.

Why so long?  What do these 2,000 plus pages contain?  Let me provide you an example.  The determination of the status of an entity for FATCA purposes is proving to be difficult because FATCA contains 129 new terms that can apply to this determination, many terms requiring definitions within the regulations to explain what a term means and how it should be applied by a compliance officer.

Panama Papers

Let me now pivot to refer to the April release of the millions of documents known as the Panama Papers. At the heart of the Panama Papers is a Panamanian law firm and company service provider Mossack Fonseca.  The United States Federal Prosecutor for New York has announced that he has already launched several investigations based on the released data. Instead of Mossack Fonseca’s alleged involvement in its client laundering of corruption or other criminal activities like the proceeds of the UK’s Great Train Robbery, I want to discuss  the tax compliance issues that will soon come to light as the investigations continue.

Tax Compliance Measured by FBARs, Foreign Income Exclusion & Foreign Income Tax Credits

The United States is a self-reporting and assessment system whereby each year 150 million taxpayers fill in their 1040 with their worldwide income.  It is reasonably estimated by various government sources such as the state department and the Treasury department that 10 million of these taxpayers have reporting obligations regarding either their foreign income and / or their foreign accounts.

Unfortunately, less than 20% of Americans with international income or asset exposure are compliant with at least filing the dreaded, but very simple, FBAR form that requires reporting of signatory authority over accounts if the collective balance exceeds $10,000.

Only approximately 800,000 FBARs were filed for the year 2012 for that group of potentially 10 million American taxpayers.  With so little FBAR reporting, it’s no wonder that Congress and the IRS suspect that hundreds of billions of American’s foreign income goes unreported on the 1040 each year.   Absent alternative information sources, the IRS does not have a scalable method to verify 1040s and select for audit the returns of potential tax evaders.

This past week I examined the year 2013 IRS tax statistics which confirm the continuing low tax compliance rate.  By example, US persons only filed 470,000 returns claiming the foreign-income exclusion.  But the US State Department estimates that more than 7 million US persons reside overseas.  One could look at this low number and interpret it to mean that far less than 10% of Americans living overseas claim to have employment income.

Here’s another startling IRS statistic to compare against the 800,000 FBAR filings.  7.5 million Americans claimed a foreign tax credit on their return, in the total amount of over $20 billion dollars.  The tax credit requires either owning foreign assets or earning foreign income.  But less than one million Americans filed the FBAR.  And recall – the FBAR is required to be filed even if a US person only has signatory authority on an account and is not the owner of the account.  If 3 board members are signatory on a foreign account that breaches the FBAR reporting requirement, then all 3 must file an FBAR.

I won’t belabor this point further but to say that it is clear that substantial non-compliance remains.  Swiss banks were prosecuted for sometimes assisting, and sometimes just turning a blind eye, to the beneficial owners of accounts who were not tax compliant with their filing obligations including the FBAR and the Form 1040.  Now with FATCA, all taxpayers with foreign assets must also file a Form 8938 which is somewhat more encompassing than the FBAR form.

It is worth noting for the audience, in case some are thinking “this discussion of tax compliance does not apply to me” that the 2005 Supreme Court decision of Pasquatino established precedent that U.S. prosecutors may hold criminally liable the U.S. intermediary, by analogy a bank, of a transaction that evades foreign tax.   So while I am focusing on US tax reporting obligations because most of the customers of our audience are US customers, financial institution compliance officers must also be aware of the foreign tax reporting obligations of their customers as well and ensure proper capture and sharing of the requisite tax self certification forms.

Tax Self Certification Forms

Which brings me to tax self-certification forms such as the W-8 series and W9.

In the infamous words of Ronald Reagan, “Trust but Verify”, the US tax system is not just based upon self-reporting.  The United States Congress has deputized financial institutions’ compliance officers to leverage their AML systems to become information collectors and verification auditors.

I want to introduce three W-8 series benchmarks that have been collected by my FATCA research colleague, Haydon Perryman, who has served as the Director of Compliance for several tier-one financial institutions.  Compliance officers listening right now will be very interested to learn that:

Firstly, when the IRS Qualified Intermediary regime (known as the “QI” regime) was introduced in the early 2000s to require foreign financial institution compliance officers to report on their US clients – at that time, only 20% of W8s were fit for purpose. Based on our research, we know that as of 2015 that only 35% of W8s are fit for purpose – not a substantial increase over a decade, leading the IRS to question the veracity of financial institution compliance officers.

Secondly, we know from interviews with large financial institutions that on average it requires between 5 and 7 months for a financial institution to obtain a new W8 from a pre-existing customer.  And only then can the validation process begin.

Finally, the IRS estimates the time to complete the new W8-BEN-E is 12 hours and 40 minutes of record keeping and another 8 hours and 16 minutes preparing and sending the form.  That’s 21 compliance hours BEFORE verification begins as to the information within the form against the AML system maintained by the financial institution.

We must apply these metrics to the customer base for whom the compliance officer of a large institutions must reach out to.  Firstly, obtaining W8s or W9s and their equivalent substitutes under an IGA, secondly validating those withholding certificates, and thirdly repeating this process in the 65% of the cases where the W8 submission turns out to be ‘invalid’, multiplied by at least 21 hours – I can appreciate the size and scale of the challenge for our industry’s compliance officers.

Amazingly, a 2015 large survey by Paystream Advisors found that 71 percent of respondents did not have an automated system for collecting, validating and managing W-8 and W-9 forms.  If this survey information resonates with you, I suggest you call Simon and open a dialogue about what it will take to bring your department into the modern age of big data.

The IRS estimates that 400,000 – 500,000 foreign financial institution should register on its FATCA portal to obtain a IRS issued Global Intermediary Identification Number also known as a GIIN.  However, after two years of the compliance requirement to register, as of May 1, 2016 the IRS GIIN list contains less than 200,000 registrations from 226 countries and jurisdictions. Did the IRS over-estimate the number of financial firms in the world?  No.

We know that based on the Legal Entity Identifier, also known as the LEI, that all firms involved in the securities markets must obtain, there is a significant difference from the number of Legal Entity Identifiers issued versus GIINs issued.  The number of LEIs and GIINs issued should be relatively close, but as of May 1, 2016 over 436,127 entities from 189 countries had obtained Legal Entity Identifiers, twice as many than obtained GIINs.  Are foreign financial firms deciding not to comply with the US FATCA?  And are the US compliance officers listening to this webinar today taking their compliance obligations seriously when interacting with these firms?

I’ll refer to one more data set.  The same Paystream Advisors FATCA survey of 2015 concluded that a substantial portion of U.S. paying entities still do not understand the impact of FATCA upon their payments to foreign payees.  Of the payors surveyed, 61 percent replied that their foreign payees are not classified as Foreign Financial Institutions for compliance purposes.

Yet, when responding to questions about the nature of the foreign payees’ businesses, 66 percent replied their payees accept deposits as banking and financial businesses, 13 percent trade, manage or invest financial assets and hold financial assets on behalf of others, 12 percent act as a holding company in connection with an investment vehicle, and 10 percent qualify as foreign regulated insurance companies.

Consequently, a majority of US compliance officers have internally misclassified their foreign payees and probably have incorrectly completed W-8BEN-Es on file.

Common Reporting Standard

Moving on – February 13 of last year the OECD released the Standard for Automatic Exchange of Financial Account Information Common Reporting Standard, known by the two acronyms of CRS and GATCA for Globalized FATCA.

The CRS calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. It sets out the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.

Part I of the OECD report gives an overview of the standard whereas part II contains the text of the Model Competent Authority Agreement (CAA) and the Common Reporting and Due Diligence Standards (CRS) that together form the “standard”.

Almost 100 countries, including Panama, but not yet the United States have agreed to implementation of this automatic exchange of information between their jurisdictions.

What are the main differences between the OECD’s CRS and the US’ FATCA that impact a compliance officer on the AML side of the house?

The CRS starts with the premise of a fully reciprocal automatic exchange system for financial information of accountholders, whereas the FATCA started one-sided with the information flowing being one way to the U.S.  CRS removes U.S. tax specificities, the two most substantial being that the CRS is based on determining a beneficial owner’s residence whereas FATCA initially was primarily concerned with determining whether an accountholder was a U.S. person, and if not, the account was ignored. CRS has standardized terms, concepts and approaches instead of allowing countries to negotiate variances in definitions by signing an IGA.

FinCEN's New Customer Due Diligence Rules and Identification of Ultimate Beneficial Owners of Corporations

With my remaining minutes, let me turn to the FinCEN proposed rule of June 30, 2014, that should soon be finalized this year.

The new FinCEN rule will amend existing Bank Secrecy Act (BSA) regulations to help prevent the use of anonymous companies to launder the proceeds of illegal activity in the U.S. financial sector.  The Panama Papers points to the widespread use of Delaware and Nevada companies in this regard, and many news organizations have reported that the U.S. is the last bastion of secrecy because it does not necessarily require banks or company service providers in the U.S.A. to know the ultimate beneficial owner of state incorporated business associations.

The final rule will strengthen the customer due diligence obligations of banks and other financial institutions such as including brokers or dealers in securities, mutual funds, futures merchants, and commodities brokers.

The proposed amendments will probably add a new requirement that these entities know and verify the identities of the real people, that is the ultimate beneficial owners who own, control, and profit from the companies they service.  FinCEN has stated that this information will be used to provide reciprocity under the FATCA IGA agreements to foreign governments.

The amended required Customer Due Diligence by US Financial Institutions includes a new emphasis in the four core Customer due diligence elements:

  1. identifying and verifying the identity of customers;
  2. identifying and verifying the beneficial owners of legal entity customers;
  3. understanding the nature and purpose of customer relationships; and
  4. conducting ongoing monitoring to maintain and update customer information and to identify and report suspicious transactions.

The proposed requirement to identify and verify the identity of beneficial owners is addressed through the proposal of a new requirement for covered financial institutions to collect beneficial ownership in a standardized format. FinCEN provided the sample form with its proposed announcement.  Pursuant to FATF standards and the CRS requirement, US financial institutions will have to identify and verify any individual who owns 25 percent of more of a legal entity, and an individual who controls the legal entity.

The primary impact here regards the second element that requires financial institutions to identify and verify the beneficial owners of legal entity customers.  FinCEN proposes a new requirement that financial institutions identify the natural persons who are beneficial owners of legal entity customers, subject to limited exemptions.

The definition of “beneficial owner” proposed herein requires that the person identified as a beneficial owner be a natural person (as opposed to another legal entity). A financial institution must satisfy this requirement by obtaining at the time a new account is opened a standard certification form directly from the individual opening the new account on behalf of the legal entity customer.

Financial institutions would be required to verify the identity of beneficial owners consistent with their existing CIP practices.  However, FinCEN has provided a loophole under the proposed rule in that it does not require that financial institutions verify that the natural persons identified on the form are in fact the actual ultimate beneficial owners. Thus, Panamanian corporate service provider power of attorneys may still be used for nefarious means.

In other words, the requirement focuses on verifying the identity of the beneficial owners, but does not require the verification of their status as beneficial owners.

In order to identify the beneficial owner, a covered financial institution must obtain a certification from the individual opening the account on behalf of the legal entity customer (at the time of account opening).  The form requires the individual opening the account on behalf of the legal entity customer to identify the beneficial owner(s) of the legal entity customer by providing the beneficial owner’s:

  • name,
  • date of birth,
  • address and
  • social security number (for U.S. persons).

For foreign persons, financial institutions must verify the authenticity of the certification with a –

  • a passport number and country of issuance, or
  • other similar identification number (name, date of birth, address, and social security number (for U.S. persons), etc.), according to the same documentary and non-documentary methods the financial institution may use in connection with its customer identification program (to the extent applicable to customers that are individuals), within a reasonable time after the account is opened.

A financial institution must also include procedures for responding to circumstances in which it cannot form a reasonable belief that it knows the true identity of the beneficial owner, as described under the CIP rules.

The proposed definition of “beneficial owner” includes two independent prongs:

(a) an ownership prong and

(b) a control prong.

A covered financial institution must identify each individual under the ownership prong (i.e., each individual who owns 25 percent or more of the equity interests), in addition to one individual for the control prong (i.e., any individual with significant managerial control).

If no individual owns 25 percent or more of the equity interests, then the financial institution may identify a beneficial owner under the control prong only. If appropriate, the same individual(s) may be identified under both criteria.

Risk Weighting of Accounts

Firstly, accounts are risk weighted. Institutions develop their own risk weighting matrix benchmarked to their regulators risk matrices and alternative sources such as IGO like the FATF (or acquire it by other means such as license one from an AML solutions provider written into a data management system or for small institutions it may be as simple as a printed manual developed by the banker association).

By example, an institution is approached by Mr. Smith to open an account for Corporation X located in a foreign country, with an initial deposit of $100,000. Let’s assume that the institution is pleased to expand its business footprint and receive a sizeable deposit, that is, its protocols do not close the door on his type of account. The institution’s CIP will contain different silos of risk that attributes of this scenario fit into. Attribute A: customer relationship. If Mr. Smith is not a long term customer of the institution, then the protocol may shift to an enhanced due diligence protocol for new customers. Attribute B: foreign company. The institution may have a protocol for in-state corporate accounts, another for out-of-state corporate accounts, and yet others for foreign corporations depending on country of location (e.g. UK, BVI, or Ghana) and underlying business, each protocol ratcheting up the required documentation and verification-diligence. Attribute C: size of deposit.

Moreover, the institution may have unique protocols to it that fit into certain risk weighting. A long term customer, Mr. Smith, enters the institution to open this account, out of the ordinary for this customer. Protocol may require enhanced questioning based on fraud / scams typologies alerts received from regulators, police authorities or IGO sources whereby unsuspecting customers may be the target of criminal organizations (e.g. unknown relative inheritance scams, agency for trading company).

Accounts, once open, move from the CIP protocols to the monitoring protocols. Such protocols depend on the size of the institution, and may be handled via a data management system, or for a credit union, the local staff. The protocol employed for the monitoring once again depends on the account risk weighting applied.

FinCEN will publish its Final Rule tomorrow (see my blog post FinCEN’s Final CDD/CIP Rule Requiring US Corporate Beneficial Ownership Published Herein – link below this response). The ultimate beneficial owner presented by the Final Rule and the use of Power of Attorneys presents a challenge for a financial institution. The Final Rule, in my initial reading (I just downloaded it last night but will write a deep analysis for my AML and my FATCA treatises) allows the institution, on self- certification by the POA (that is probably a trustee) to list the trustee on the FinCEN New Form A: “If a trust owns directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, 25 percent or more of the equity interests of a legal entity customer, the beneficial owner … shall mean the trustee.”

Let’s say that the POA acts on behalf of a clearly defined and identifiable PEP, such as a prime minister or president of a country. If the institution had identified that the account opener was just a POA, and then drilled down to identify the PEP, then obviously certain risk weighting would apply for EDD, and potentially additional protocols regarding documentation, verification, and other diligence, and these protocols would impact account maintenance protocols. Such additional EDD requires resources, and thus small institutions may simply “close the door” on accounts that fall into this silo. The FinCEN rule does not require the institution to exceed the required DD for a given type of account, but an institution pursuant to its internal risk management (consideration of potential negative publicity, consideration of potential regulatory action and fines, consider of corporate character) may do so. And nefarious actors do not tell the truth on self-certification forms.

How an institution establishes and calibrates its risk management systems is actually a course that we are currently building at Texas A&M University Law in association with the Mays Business School Department of Finance. We hope to have the requisite state and regulatory approval to begin considering applications of risk managers this summer for a January 2017 semester start. More on that risk management program as it develops.

Download FinCEN 2016 Final Rule  

Beneficial Ownership Information Sharing Among Countries and the Public

My last comment regards the new collecting and sharing of corporate beneficial ownership information globally.  The European Union has already agreed that it will automatically share corporate ultimate beneficial ownership among the countries, and it is likely that this will be adopted by the OECD and thus become a global protocol.  However, it is possible, based on current proposals in the EU, that such information may be fully accessible to the public as well going forward.

Be sure to download my free SSRN 118-page FATCA chapter for Lexis.

May 17, 2016 in AML, FATCA, GATCA, Tax Compliance | Permalink | Comments (0)

Monday, May 16, 2016

Wolf in Sheep's Clothing? First Official Act of Brazil's New President Temer Eliminates the Anti-Corruption Agency!

FCPA Blog reports that: The first formal act of Brazil’s interim president has been a Provisional Measure that completely dissolves Brazil’s main anti-corruption enforcement agency, the Flag_of_BrazilComptroller General (CGU).  President Michel Temer will replace the anti-corruption agency with a "transparency" ministry.  A ministry reports directly to the President who can then control its agenda.  Many Brazil local pundits have expressed dismay that Temer would execute so blatant an act as to eliminate the anti-corruption agency.  As his first order of business, it sets a dismal tone of what is (not) to come.  Click on the Brazil flag to read more from FCPA Blog ....

See previous stories about Brazil's Acting President Michel Temer at President Dilma Rousseff Suspended for Corruption, Law Professor Michel Temer Takes Over Despite His Conviction Last Week in Petrobras Scandal

May 16, 2016 in AML | Permalink | Comments (1)

Sunday, May 15, 2016

CFPB Amends Rules to Protect Consumers Applying For and Closing on a Mortgage Loan

2013 Integrated Mortgage Disclosure Rule Under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z)

Sections 1098 and 1100A of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) direct the Consumer Financial Protection Bureau (CFPB) s to publish CFPB_Logo rules and forms that combine certain disclosures that consumers receive in connection with applying for and closing on a mortgage loan under the Truth in Lending Act (Regulation Z) and the Real Estate Settlement Procedures Act (Regulation X).

Consistent with this requirement, CFPB amended Regulations X and Z to establish new disclosure requirements and forms in Regulation Z for most closed-end consumer credit transactions secured by real property. In addition to combining the existing disclosure requirements and implementing new requirements imposed by the Dodd-Frank Act, the final rule provides extensive guidance regarding compliance with those requirements.  

For a plain English explanation for the public and for real estate professionals, see here.


May 15, 2016 | Permalink | Comments (0)

Saturday, May 14, 2016

Bahrain, Lebanon, Nauru, Panama and Vanuatu have now committed to the international standard of automatic exchange of financial account information to tackle tax evasion and avoidance

The OECD and the Global Forum on Transparency and Exchange of Information for Tax Purposes announced today that Bahrain, Lebanon, Nauru, Panama and Vanuatu have now OECD committed to share financial account information automatically with other countries.
With these new commitments, 101 jurisdictions around the world have committed to implement information sharing in accordance with the Common Reporting Standard developed by the OECD and G20 countries and endorsed by the Global Forum in 2014.  The latest commitments call for beginning such exchanges in September 2018.
“We are now seeing an unstoppable movement toward information sharing, on the basis of a single common standard developed by the OECD and endorsed by the international community,” OECD Secretary-General Angel Gurría said.
“These political commitments to join the fight against tax evasion must be turned into practical reality, through implementation of the standards and actual exchange of information. Actions must now speak louder than words.
“I urge those countries that have not yet done so to sign the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and the Multilateral Competent Authority Agreement we have developed to enable as many countries as possible to benefit from this new more transparent environment,” Mr Gurría said.
The Global Forum is monitoring the implementation of tax transparency standards to ensure the effective and timely delivery of the commitments made, the confidentiality of information exchanged and to identify areas where support is needed. It is also assisting its developing country members  to ensure that they can also receive the benefits of the ongoing global move to automatic exchange of financial account information.
Lebanon has just joined the Global Forum, bringing membership to 133 jurisdictions. The European Union fully participates in Global Forum work.

May 14, 2016 in GATCA, OECD | Permalink | Comments (0)

Friday, May 13, 2016

Yates Discusses Yates Memo at the New York City Bar Association White Collar Crime Conference

Remarks excerpt of Deputy Attorney General Sally Q. Yates ...

In looking at your agenda, I saw that a little earlier this morning you had a panel discussion on what was described as the “cascading effects of the Yates Memo.”  First, I have to tell you DOJ-U-S-ATTORNEYS-OFFICE how disconcerting it is to hear something described as the “Yates Memo.”  I call it the Individual Accountability Policy, but I may have long since lost that battle.  But at the risk of talking this policy to death, I thought I would give you our perspective on it – why we did it and how it’s working so far in practice. 

First, I want to make clear that holding individuals accountable for corporate wrongdoing has always been a priority for the Department of Justice, both for the leadership of the department and for the line prosecutors who work the cases.  And that’s because we all know how important it is to the success of our enforcement efforts.  The bad acts of individuals have grave consequences, from the loss of jobs to the corruption of government officials, from the foreclosure of homes to the destruction of financial security and economic confidence.  So holding accountable the people who committed the wrongdoing is essential if we are truly going to deter corporate misdeeds, have a real impact on corporate culture and ensure that the public has confidence in our justice system.  We cannot have a different system of justice – or the perception of a different system of justice – for corporate executives than we do for everyone else.

But as I and others at DOJ have said before, these cases do have a special set of challenges, challenges that can impede our ability to identify the responsible parties and to bring them to justice.  It is not easy to disentangle who did what within a huge corporate structure – to discern whether anyone had the requisite knowledge and intent.  Blurred lines of authority make it hard to identify who is responsible for individual business decisions and it can be difficult to determine whether high-ranking executives, who appear to be removed from day-to-day operations, were part of a particular scheme.  There are often massive numbers of electronic documents and for corporations that operate worldwide, there are restrictive foreign data privacy laws and a limited ability to compel the testimony of witnesses abroad. I imagine that all of you here have witnessed these dynamics firsthand.

It was because of these two competing concepts – that, on the one hand, we believe it’s critical to hold individuals accountable and on the other, doing so poses real world challenges – that we convened a working group of lawyers from all across the department – both litigating components and U.S. Attorney’s Offices – to take a look at what we’re doing and how we’re approaching our corporate matters.  The goal was to ensure that we’re doing everything we can to overcome the barriers that I just mentioned and hold accountable those who are responsible for corporate wrongs.  In some areas, we identified best practices that were being followed in certain parts of the department and that we concluded should apply department-wide.  In others, we decided to make some changes and add new policy requirements.  And the Individual Accountability Policy was the end product of those discussions.

I will confess that I haven’t read every single client alert that has gone out since this policy was issued, but from what I have read, the reaction in the corporate defense bar seems to be everything from “The sky is falling,” to “Nothing has changed.”  As I’ve said before, the truth, as it often is, is somewhere in the middle.  The policy was certainly designed to change practices, both within the department and outside the department.  And even though many of the concepts underlying the policy have long been part of the department’s approach to these matters, we felt that it was important to say it explicitly, so everyone will know how the department is operating.

I expect you’re familiar with the six steps set out in the policy, but the substance bears repeating:

We now require a company to provide all the facts about individual conduct in order to qualify for any cooperation credit.  We have sought to increase coordination between the criminal and civil sides of our house and require all our attorneys to focus on individual liability from the very beginning of an investigation.  We will initiate civil proceedings against a bad corporate actor, even if that individual may not have the financial resources to satisfy a large money judgment.  And we have shifted the presumption on what a corporate resolution looks like:  now, our attorneys must get approval if they decide not to bring charges against individuals and may not release individuals from civil or criminal liability except under the rarest of circumstances. 

After we announced the individual accountability policy, it was the threshold cooperation credit requirement that received the most attention.  But, as I’m sure many of you would agree, the notion that a cooperating company must relate facts about the conduct of individuals within the corporation is nothing new.  The principles of federal prosecution of business organizations had long provided that companies that want cooperation credit should identify who did what.  That concept has been repeated by department officials over and over again for the last several years in just about every speech given on corporate fraud.  But despite all that, we found that we still got passive voice, “Mistakes were made,” presentations from defense counsel, without identifying who made what mistakes.  Companies were still expecting to get cooperation credit, even though they hadn’t really advanced the ball at all in determining who did what.  And sometimes, companies still got credit for cooperation even though they hadn’t provided what is most valuable to us – the facts about individuals.  So, we decided to make that information a threshold factor.  While the requirement to provide all facts about individuals isn’t new, what has changed is the consequence of not doing it. 

But let me be clear – this does not mean companies are required to conduct overly broad investigations or embark on a years-long, multimillion dollar investigation every time a company learns of misconduct, or what I’ve heard described as “boiling the ocean.”  On the contrary, we expect companies to carry out a thorough investigation tailored to the scope of the wrongdoing.  Nor will a company be disqualified from receiving cooperation credit simply because it didn’t have all the facts lined up on the first day it began talking with us.  Rather, we expect that cooperating companies will continue to turn over the information to the prosecutor as they receive it.  The determination of the appropriate scope and how to proceed is always case specific – it’s not possible to lay out hard and fast rules.  Which is why, we’ve reiterated that if a company’s counsel has questions regarding scope, they should do what many defense lawyers do now – contact the prosecutor directly and talk about it.  Already, based on reports on the ground, firms are doing just that.

You should also know that counsel for the company is not required to serve up someone to take the fall in order for the corporation to get cooperation credit – a hypothetical person sometimes referred to as the “vice president in charge of going to jail.”  Our goal is not to collect corporate heads.  Our goal is to get to the bottom of who did what and if there are culpable individuals, hold them accountable.  The week after the policy issued, I spoke to department prosecutors and said that if a company conducted an appropriately tailored investigation and truly did everything they could reasonably be expected to do to determine who did what, but simply can’t figure it out, they are not precluded from receiving cooperation credit.  We don’t want this to be the exception that swallows the rule. We’re going to pressure test your investigation to ensure that you’re not using a purported obstacle as an excuse, but there is always a good faith element to everything the department does and that includes the Individual Accountability Policy. 

Likewise, we don’t expect a company to make a legal conclusion about whether an employee is culpable, civilly or criminally.  We just want the facts.  Our goal is to uncover the truth.  We will make our own judgment about whether any action has criminal or civil exposure.

And finally – this is one thing I want to put to bed right now – there is nothing in the Individual Accountability Policy that requires companies to waive attorney-client privilege or in any way rolls back protections already in place.  The policy specifically requires only that companies turn over all relevant non-privileged information.  We’re asking for the facts.  And we have always asked for the facts.  The only difference now is that companies cannot – in the name of privilege or otherwise – pick and choose which facts to provide if they want credit for cooperation.  But, of course, if there is a valid claim of privilege as to a relevant fact, we expect that it will be brought to the prosecutor’s attention.

Since we issued the policy eight months ago, lots of people have been opining about what it’s going to mean and what will happen as a result.  But what we’re seeing so far is that there are two different worlds.  There is the world of client alerts and bar articles, where the cascading cavalcade of terribles is laid out in startling terms.  And then there is the world of real life - of real cases and real lawyers.  And right now, those worlds are very different. 

So let me spend a few minutes on how implementation of the policy is going so far.  First, we’ve read some predictions that companies will no longer cooperate with the government as a result of the policy.  That has never made a lot of sense to me, that rather than providing all the facts about who did what within a company, the company would decide to forego the substantial benefits accorded cooperation and just roll the dice. That seems a particularly risky calculus, especially for a publicly traded company.  While it’s always possible that a company will make that calculus, I am not aware of any company that has refused to cooperate because of the new policy requirements.  On the contrary, from what I’m told by our folks, companies are not only continuing to cooperate, they are making real and tangible efforts to adhere to our requirement that they identify facts about individual conduct, right down to providing what I’m told are called “Yates Binders” – an unnecessary term if you ask me – that contain relevant emails of individuals being interviewed by the government.

Moreover, to my knowledge, no one has told us that they will be forced to waive privilege in order to comply with the policy.  I previously invited members of the white collar defense bar to let me know if this is not the case and that offer still stands.  I have yet to receive a report about a privilege waiver, but I continue to invite you all to bring forward any specific examples of unintended consequences of the policy.

And it’s not just that we haven’t seen the dire predictions come to pass.  We’ve affirmatively been hearing that our new approach is causing positive change within companies.  Compliance officers have said that our focus on individuals has helped them steer officers and employees within their organizations toward best practices and higher standards.  That’s exactly what we had hoped for.  After all, it is much better to deter bad conduct from happening in the first place than to have to punish it after the fact.

Just as the policy does not seem to have brought about the end of western civilization from the companies’ perspective, it’s not business as usual at DOJ either.  In fact, in just the few months since the release of the policy, I can tell you that we’re seeing a shift in how we approach cases at the department, both on the criminal side and the civil side.

On the criminal side, our lawyers aren’t just talking about the potential culpability of individuals at the time they are resolving an investigation, they are thinking about individuals from the investigation’s very beginning.  I’ve seen it firsthand as we have sat around my conference table and I’ve been briefed on significant new matters.  The first thing the lawyers briefing me discuss is what we are doing to identify the individuals involved and what the company is doing during the course of its cooperation to meet its obligation to provide all the facts about individual conduct.

This is not to say that the department wasn’t focused on individuals before.  We most certainly were.  But the knowledge of our prosecutors that their supervisors are intently focused on the question of what evidence of individual culpability can be developed is leading to a more uniform, systematic and sustained focus on individuals. Now, this kind of culture shift takes time; it doesn’t happen all at once.  And our intensified focus on individuals from the inception of an investigation is not expected to result in a flurry of individual indictments overnight.  But that was never the goal.  The goal of this policy is to do everything we can to ensure that if there are culpable individuals, we are holding them accountable.  The policy is not yet one year old.  We’re already seeing changes in how our criminal prosecutors conduct their investigations. 

On the civil side, the philosophical shift embedded in our policy is even more pronounced.  Historically, our civil lawyers have focused their efforts on recovering the most money possible for the public fisc, which generally meant focusing on the corporate actor.  If an individual was potentially civilly liable, but that potential liability wouldn’t add significantly to the overall amount of money that could be recovered, we deployed our resources elsewhere – to places where we had a greater likelihood of bringing in additional dollars.  But now, the focus of our civil enforcement efforts has broadened.  We recognize that our obligation is about more than recovering the most money from the greatest number of companies.  It’s also about deterrence, about stopping fraud from happening in the first place and about redressing misconduct of those responsible.  There is a real deterrent value in the prospect of being named in a civil suit or having a civil judgment.  And this kind of deterrence can change corporate conduct.  So we have asked our civil attorneys to look at the same factors we consider on the criminal side, like the nature and seriousness of the offense, the offender’s role and any past history of misconduct.  Ability to pay is one of the factors considered, but it’s no longer the determinative factor in deciding whether to bring an action in the first instance. 

The shift to include individuals in our focus on the civil side has an important strategic benefit as well.  Complex corporate fraud cases often begin as civil investigations.  If the civil investigation is focused just on the company, documents are reviewed and interviews conducted just with an eye toward corporate liability and it’s just about impossible to go back at the end of the investigation and unwind all that to determine if there are individuals who should be held accountable, either civilly or criminally.  That’s why our shift to focus on individuals’ right from the inception of an investigation is so important.

In addition to these big picture changes, the Individual Accountability Policy has led different corners of the Justice Department to announce new component-level policies focused on individuals.  For example, the Antitrust Division has recently announced that it is revamping its procedures to ensure that each of its criminal offices systematically identifies all potentially culpable individuals as early in the investigative process as possible.  Antitrust prosecutors are taking a hard look at which individuals are “carved in” – and thus receive protections against prosecution – and “carved out” of a corporate agreement.  Now, after the new policy, they are erring on the side of “carving out,” in order to ensure that those individuals most responsible for wrongdoing are not given a pass.

Similarly, as many of you know, the FCPA Unit of the department’s Fraud Section recently announced an 12-month pilot program, under which companies must voluntarily self-disclose, fully cooperate, including by providing facts about individuals and remediate in order to be eligible for certain defined levels of credit for their efforts.  This pilot helps put into practice not only the Individual Accountability Policy’s threshold requirement for cooperation, but also the revisions to the U.S. Attorney’s Manual I announced in November that separates the concept of self-disclosure from that of cooperation.  Those revisions account for the difference between a company raising its hand and voluntarily disclosing misconduct and a company simply agreeing to cooperate once it gets caught.  We made this this change to emphasize that while the concepts of voluntary disclosure and cooperation are related, they are distinct factors to be given separate consideration in charging decisions.  To recognize the significant value of early, voluntary self-reporting, prompt voluntary disclosure by a company – or the lack thereof – is now an independent factor that will be weighed as we evaluate charging decisions.

And it is not just the Justice Department that is doing new things.  Our agency and regulatory partners are also making changes as they sharpen their focus on individual accountability.  For example, for the first time in more than 20 years, the Financial Crimes Enforcement Network (FinCEN) sued to enforce a civil penalty against an individual and to bar that individual from participating in the affairs of a financial institution.  That case resulted in the first court decision to interpret FinCEN’s authority to impose individual liability for anti-money laundering program violations.  Even our friends in Congress are listening – a new bill was introduced that will target individuals at financial institutions responsible for money laundering.

I’ll leave you with this.  Change is hard.  As a career prosecutor, I know that what both prosecutors and defense attorneys crave is certainty.  It’s easier to interact with one another when everyone agrees on the rules of the road.  And I get that our Individual Accountability Policy has changed those rules – slightly in some places and more significantly in others.  I also understand those changes may result in some temporary uncertainty, as both prosecutors and defense attorneys adjust to the new expectations.  But equilibrium will return.  A new normal will exist.  And with it, I expect that both the reality – and the perception – of how the Justice Department treats individual corporate wrongdoers will have been strengthened.  There is one system of justice – one in which wrongdoers can and must be held accountable based on facts and evidence, not on position or title, power or wealth.  This notion, of equal justice under law, has always been and will continue to be, the Justice Department’s fundamental mission.

May 13, 2016 | Permalink | Comments (0)