International Financial Law Prof Blog

Editor: William Byrnes
Texas A&M University
School of Law

Saturday, February 6, 2021

BEA News: Gross Domestic Product, 4th Quarter and Year 2020

Real gross domestic product (GDP) increased at an annual rate of 4.0 percent in the fourth quarter of 2020 (table 1), according to the "advance" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 33.4 percent.

The GDP estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see "Source Data for the Advance Estimate" on page 4). The "second" estimate for the fourth quarter, based on more complete data, will be released on February 25, 2021.

Real GDP: Percent change from preceding quarter, Q4 '20

Real GDP: Percent change from preceding quarter

The increase in real GDP reflected increases in exports, nonresidential fixed investment, personal consumption expenditures (PCE), residential fixed investment, and private inventory investment that were partly offset by decreases in state and local government spending and federal government spending. Imports, which are a subtraction in the calculation of GDP, increased (table 2).

COVID-19 Impact on the Fourth-Quarter 2020 GDP Estimate
The increase in fourth quarter GDP reflected both the continued economic recovery from the sharp declines earlier in the year and the ongoing impact of the COVID-19 pandemic, including new restrictions and closures that took effect in some areas of the United States. The full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate for the fourth quarter of 2020 because the impacts are generally embedded in source data and cannot be separately identified. For more information, see the Technical Note.

The increase in exports primarily reflected an increase in goods (led by industrial supplies and materials). The increase in nonresidential fixed investment reflected increases in all components, led by equipment. The increase in PCE was more than accounted for by spending on services (led by health care); spending on goods decreased (led by food and beverages). The increase in residential fixed investment primarily reflected investment in new single-family housing. The increase in private inventory investment primarily reflected increases in manufacturing and in wholesale trade that were partly offset by a decrease in retail trade.

Current‑dollar GDP increased 6.0 percent at an annual rate, or $309.2 billion, in the fourth quarter to a level of $21.48 trillion. In the third quarter, GDP increased 38.3 percent, or $1.65 trillion (tables 1 and 3). More information on the source data that underlie the estimates is available in the Key Source and Data Assumptions file on BEA's website.

The price index for gross domestic purchases increased 1.7 percent in the fourth quarter, compared with an increase of 3.3 percent in the third quarter (table 4). The PCE price index increased 1.5 percent, compared with an increase of 3.7 percent in the third quarter. Excluding food and energy prices, the PCE price index increased 1.4 percent, compared with an increase of 3.4 percent.

Personal Income

Current-dollar personal income decreased $339.7 billion in the fourth quarter, compared with a decrease of $541.5 billion in the third quarter. The decrease in personal income was more than accounted for by decreases in personal current transfer receipts (notably, government social benefits related to the winding down of CARES Act pandemic relief programs) and proprietors' income that were partly offset by increases in compensation and personal income receipts on assets (table 8).

Disposable personal income decreased $372.5 billion, or 8.1 percent, in the fourth quarter, compared with a decrease of $638.9 billion, or 13.2 percent, in the third quarter. Real disposable personal income decreased 9.5 percent, compared with a decrease of 16.3 percent.

Personal saving was $2.33 trillion in the fourth quarter, compared with $2.83 trillion in the third quarter. The personal saving rate—personal saving as a percentage of disposable personal income—was 13.4 percent in the fourth quarter, compared with 16.0 percent in the third quarter. Additional information on factors impacting quarterly personal income and saving can be found in "Effects of Selected Federal Pandemic Response Programs on Personal Income."

GDP for 2020

Real GDP decreased 3.5 percent in 2020 (from the 2019 annual level to the 2020 annual level), compared with an increase of 2.2 percent in 2019 (table 1).

The decrease in real GDP in 2020 reflected decreases in PCE, exports, private inventory investment, nonresidential fixed investment, and state and local government that were partly offset by increases in federal government spending and residential fixed investment. Imports decreased (table 2).

The decrease in PCE in 2020 was more than accounted for by a decrease in services (led by food services and accommodations, health care, and recreation services). The decrease in exports reflected decreases in both services (led by travel) and goods (mainly non-automotive capital goods). The decrease in private inventory investment reflected widespread decreases led by retail trade (mainly motor vehicle dealers) and wholesale trade (mainly durable goods industries). The decrease in nonresidential fixed investment reflected decreases in structures (led by mining exploration, shafts, and wells) and equipment (led by transportation equipment) that were partly offset by an increase in intellectual property products (more than accounted for by software). The decrease in state and local government spending reflected a decrease in consumption expenditures (led by compensation).

The increase in federal government spending reflected an increase in nondefense consumption expenditures (led by an increase in purchases of intermediate services that supported the processing and administration of Paycheck Protection Program loan applications by banks on behalf of the federal government). The increase in residential fixed investment primarily reflected increases in improvements as well as brokers' commissions and other ownership transfer costs.

Current-dollar GDP decreased 2.3 percent, or $500.6 billion, in 2020 to a level of $20.93 trillion, compared with an increase of 4.0 percent, or $821.3 billion, in 2019 (tables 1 and 3).

The price index for gross domestic purchases increased 1.2 percent in 2020, compared with an increase of 1.6 percent in 2019 (table 4). The PCE price index also increased 1.2 percent in 2020, compared with an increase of 1.5 percent. Excluding food and energy prices, the PCE price index increased 1.4 percent, compared with an increase of 1.7 percent.

Measured from the fourth quarter of 2019 to the fourth quarter of 2020, real GDP decreased 2.5 percent during the period (table 6). That compared with an increase of 2.3 percent during 2019.

The price index for gross domestic purchases, as measured from the fourth quarter of 2019 to the fourth quarter of 2020, increased 1.3 percent during 2020. That compared with an increase of 1.4 percent during 2019. The PCE price index increased 1.2 percent, compared with an increase of 1.5 percent. Excluding food and energy, the PCE price index increased 1.4 percent, compared with an increase of 1.6 percent.

February 6, 2021 in Economics | Permalink | Comments (0)

Friday, February 5, 2021

Emotet Botnet Disrupted in International Cyber Operation

Emotet Malware Infected More than 1.6 Million Victim Computers and Caused Hundreds of Millions of Dollars in Damage Worldwide

The Justice Department today announced its participation in a multinational operation involving actions in the United States, Canada, France, Germany, the Netherlands, and the United Kingdom to disrupt and take down the infrastructure of the malware and botnet known as Emotet. Additionally, officials in Lithuania, Sweden, and Ukraine assisted in this major cyber investigative action.

“The Emotet malware and botnet infected hundreds of thousands of computers throughout the United States, including our critical infrastructure, and caused millions of dollars in damage to victims worldwide,” said Acting Deputy Attorney General John Carlin. “Cyber criminals will not escape justice regardless of where they operate. Working with public and private partners around the world we will relentlessly pursue them while using the full arsenal of tools at our disposal to disrupt their threats and prosecute those responsible.”

According to an unsealed search warrant affidavit, Emotet is a family of malware that targets critical industries worldwide, including banking, e‑commerce, healthcare, academia, government, and technology. Emotet malware primarily infects victim computers through spam email messages containing malicious attachments or hyperlinks. Emails were designed to appear to come from a legitimate source or someone in the recipient’s contact list. Once it has infected a victim computer, Emotet can deliver additional malware to the infected computer, such as ransomware or malware that steals financial credentials. Ransomware, in particular, has increased in scope and severity in the past year, harming businesses, healthcare providers, and government agencies even as the country has struggled to respond to the pandemic. 

“The coordinated disruption of Emotet was a great success for the FBI and our international partners,” said FBI Director Christopher Wray. “The FBI utilized sophisticated techniques, our unique legal authorities, and most importantly, our worldwide partnerships to significantly disrupt the malware. The operation is an example of how much we can achieve when we work with our international law enforcement partners to combat the cyber threat. The FBI remains committed, now more than ever, to imposing risk and consequences on cyber criminals to put an end to this type of criminal activity.”

The computers infected with Emotet malware are part of a botnet (i.e., a network of compromised computers), meaning the perpetrators can remotely control all the infected computers in a coordinated manner. The owners and operators of the victim computers are typically unaware of the infection.

“Cybercrime transcends physical and political boundaries and costs U.S. citizens and businesses billions each year,” said U.S. Attorney Matt Martin of the Middle District of North Carolina. “That was certainly true with Emotet. Now, more than ever, international collaboration is an imperative as we employ a technically and legally sophisticated approach to thwart cybercriminals in whatever corner of the globe they are found. This investigation will be a paradigm for effective international law enforcement cooperation directed at global cybercrime, and we applaud the FBI and the international law enforcement partners who contributed to the effort to take down this global threat.”

According to the affidavit, in 2017, for example, the computer network of a school district in the Middle District of North Carolina was infected with the Emotet malware. The Emotet infection caused damage to the school’s computers, including but not limited to the school’s network, which was disabled for approximately two weeks. In addition, the infection caused more than $1.4 million in losses, including but not limited to the cost of virus mitigation services and replacement computers. From 2017 to the present, there have been numerous other victims throughout North Carolina and the United States, to include computer networks of local, state, tribal, and federal governmental units, corporations, and networks related to critical infrastructure.

“The Emotet malware quickly elevated to one of the top cyber threats in the world,” said Special Agent in Charge Robert R. Wells of the FBI Charlotte Field Office. “The strong relationships with international law enforcement partners were critical to the success of this FBI investigation which began with a small North Carolina school system that did the right thing and quickly contacted their local FBI office for help.”

According to the U.S. Cybersecurity & Infrastructure Security Agency (CISA), Emotet infections have cost local, state, tribal, and territorial governments up to $1 million per incident to remediate. More information about the malware, including technical information for organizations about how to mitigate its effects, is available from CISA here: https://us-cert.cisa.gov/ncas/alerts/TA18-201A.

According to the affidavit, foreign law enforcement agents, working in coordination with the FBI, gained lawful access to Emotet servers located overseas and identified the Internet Protocol addresses of approximately 1.6 million computers worldwide that appear to have been infected with Emotet malware between April 1, 2020, and Jan. 17, 2021. Of those, over 45,000 infected computers appear to have been located in the United States.

Foreign law enforcement, working in collaboration with the FBI, replaced Emotet malware on servers located in their jurisdiction with a file created by law enforcement, according to the affidavit. This was done with the intent that computers in the United States and elsewhere that were infected by the Emotet malware would download the law enforcement file during an already-programmed Emotet update. The law enforcement file prevents the administrators of the Emotet botnet from further communicating with infected computers. The law enforcement file does not remediate other malware that was already installed on the infected computer through Emotet; instead, it is designed to prevent additional malware from being installed on the infected computer by untethering the victim computer from the botnet.

The scope of this law enforcement action was limited to the information installed on infected computers by the Emotet operators and did not extend to the information of the owners and users of the computers.

According to the affidavit, in coordination with foreign law enforcement officials, FBI personnel also gained lawful access to an Emotet distribution server located overseas and identified several servers worldwide that were used to distribute the Emotet malware. These servers were typically compromised web servers belonging to what appear to be unknowing third parties. The perpetrators uploaded the Emotet malware to the servers through unauthorized software applications. Victims who clicked on spam email messages containing malicious attachments or hyperlinks would then download the initial Emotet malware file from a distribution server.

In addition, according to the affidavit, FBI personnel notified more than 20 U.S.-based hosting providers that they hosted more than 45 IP addresses that had been compromised by the perpetrators associated with the Emotet malware and botnet. FBI Legal Attachés further notified authorities in more than 50 countries that hosting providers in their respective jurisdictions hosted hundreds of IP addresses that were compromised by Emotet.

The U.S. Attorney’s Office for the Middle District of North Carolina, the FBI Charlotte Division, and the Criminal Division’s Computer Crime and Intellectual Property Section (CCIPS) conducted the operation in close cooperation with Europol and Eurojust who were an integral part of coordination and messaging, and investigators and prosecutors from several jurisdictions, including the Royal Canadian Mounted Police, France’s National Police and Judicial Court of Paris, Germany’s Federal Criminal Police and General Public Prosecutor’s Office Frankfurt/Main, Lithuanian Criminal Police Bureau, Netherlands National Police and National Public Prosecution Office, Swedish Police Authority, National Police of Ukraine and Office of the Prosecutor General of Ukraine, and the United Kingdom’s National Crime Agency and Crown Prosecution Service. The Justice Department’s Office of International Affairs and the U.S. Department of the Treasury Financial Crimes Enforcement Network (FinCEN) also provided significant assistance. CCIPS Senior Counsel Ryan K.J. Dickey and Assistant U.S. Attorneys Eric Iverson and Anand Ramaswamy of the Middle District of North Carolina led the U.S. efforts.

More information about the operation is available by clicking: Eurojust/Europol. In addition, the Dutch National Police have created the following website to check whether your email address has been compromised by the administrators of Emotet: https://www.politie.nl/emocheck.

February 5, 2021 in AML | Permalink | Comments (0)

Thursday, February 4, 2021

2.2 Million Fraud Reports from Consumers in 2020 to FTC

The Federal Trade Commission received more than 2.1 million fraud reports from consumers in 2020, according to newly released data, with imposter scams remaining the most common type of fraud reported to the agency.

Online shopping was the second-most common fraud category reported by consumers, elevated by a surge of reports in the early days of the COVID-19 pandemic. Internet services; prizes, sweepstakes, and lotteries; and telephone and mobile services rounded out the top five fraud categories.

Consumers reported losing more than $3.3 billion to fraud in 2020, up from $1.8 billion in 2019. Nearly $1.2 billion of losses reported last year were due to imposter scams, while online shopping accounted for about $246 million in reported losses from consumers.

Just over a third of all consumers who filed a fraud report with the FTC—34 percent—reported losing money, up from just 23 percent in 2019.

The FTC’s Consumer Sentinel Network is a database that receives reports directly from consumers, as well as from federal, state, and local law enforcement agencies, the Better Business Bureau, industry members, and non-profit organizations. This year, the FTC welcomed the data contributions of the FBI’s Internet Crime Complaint Center, the Florida Department of Agriculture and Consumer Services, and the Connecticut Department of Consumer Protection. Twenty-five states now contribute to Sentinel. Reports from around the country about consumer protection issues are a key resource for FTC investigations that stop illegal activities and, when possible, provide refunds to consumers.

Consumer Sentinel Network Data Book 2020 - 4.7 million reports. Top Three Reports (1. Identity Theft 2. Imposter Scams 3. Online Shopping and Negative Reviews.  2.2 million fraud reports.  34% reported a loss.  $3.3 billion total fraud losses.  $311 median loss.  Source: Federal Trade Commission.  FTC.gov/exploredata.Sentinel received more than 4.7 million reports in 2020; these include the fraud reports detailed above, as well as identity theft reports and complaints related to other consumer issues, such as problems with credit bureaus and banks and lenders. In 2020, there were nearly 1.4 million reports of identity theft, received through the FTC’s IdentityTheft.gov website, about twice as many as in 2019.

Of the identity theft reports received in 2020, 406,375 came from people who said their information was misused to apply for a government document or benefit, such as unemployment insurance. That represents a tremendous increase from 2019, when the number was 23,213.

In 2020, the FTC introduced ReportFraud.ftc.gov, an updated platform for filing reports with the agency. The FTC uses the reports it receives through the Sentinel network as the starting point for many of its law enforcement investigations, and the agency also shares these reports with about 2,800 law enforcement users around the country. While the FTC does not intervene in individual complaints, Sentinel reports are a vital part of the agency’s law enforcement mission.

A full breakdown of reports received in 2020 is now available on the FTC’s data analysis site at ftc.gov/exploredata. The data dashboards there breakdown the reports across a numbers of categories, including by state and metropolitan area, as well as exploring a number of subcategories of fraud reports.

February 4, 2021 in AML | Permalink | Comments (0)

Thursday, January 28, 2021

Gross Domestic Product, 4th Quarter and Year 2020

Real gross domestic product (GDP) increased at an annual rate of 4.0 percent in the fourth quarter of 2020 (table 1), according to the "advance" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 33.4 percent.

The GDP estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see "Source Data for the Advance Estimate" on page 4). The "second" estimate for the fourth quarter, based on more complete data, will be released on February 25, 2021.

Real GDP: Percent change from preceding quarter, Q4 '20

Real GDP: Percent change from preceding quarter

The increase in real GDP reflected increases in exports, nonresidential fixed investment, personal consumption expenditures (PCE), residential fixed investment, and private inventory investment that were partly offset by decreases in state and local government spending and federal government spending. Imports, which are a subtraction in the calculation of GDP, increased (table 2).

COVID-19 Impact on the Fourth-Quarter 2020 GDP Estimate
The increase in fourth quarter GDP reflected both the continued economic recovery from the sharp declines earlier in the year and the ongoing impact of the COVID-19 pandemic, including new restrictions and closures that took effect in some areas of the United States. The full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate for the fourth quarter of 2020 because the impacts are generally embedded in source data and cannot be separately identified. For more information, see the Technical Note.

The increase in exports primarily reflected an increase in goods (led by industrial supplies and materials). The increase in nonresidential fixed investment reflected increases in all components, led by equipment. The increase in PCE was more than accounted for by spending on services (led by health care); spending on goods decreased (led by food and beverages). The increase in residential fixed investment primarily reflected investment in new single-family housing. The increase in private inventory investment primarily reflected increases in manufacturing and in wholesale trade that were partly offset by a decrease in retail trade.

Current‑dollar GDP increased 6.0 percent at an annual rate, or $309.2 billion, in the fourth quarter to a level of $21.48 trillion. In the third quarter, GDP increased 38.3 percent, or $1.65 trillion (tables 1 and 3). More information on the source data that underlie the estimates is available in the Key Source and Data Assumptions file on BEA's website.

The price index for gross domestic purchases increased 1.7 percent in the fourth quarter, compared with an increase of 3.3 percent in the third quarter (table 4). The PCE price index increased 1.5 percent, compared with an increase of 3.7 percent in the third quarter. Excluding food and energy prices, the PCE price index increased 1.4 percent, compared with an increase of 3.4 percent.

Personal Income

Current-dollar personal income decreased $339.7 billion in the fourth quarter, compared with a decrease of $541.5 billion in the third quarter. The decrease in personal income was more than accounted for by decreases in personal current transfer receipts (notably, government social benefits related to the winding down of CARES Act pandemic relief programs) and proprietors' income that were partly offset by increases in compensation and personal income receipts on assets (table 8).

Disposable personal income decreased $372.5 billion, or 8.1 percent, in the fourth quarter, compared with a decrease of $638.9 billion, or 13.2 percent, in the third quarter. Real disposable personal income decreased 9.5 percent, compared with a decrease of 16.3 percent.

Personal saving was $2.33 trillion in the fourth quarter, compared with $2.83 trillion in the third quarter. The personal saving rate—personal saving as a percentage of disposable personal income—was 13.4 percent in the fourth quarter, compared with 16.0 percent in the third quarter. Additional information on factors impacting quarterly personal income and saving can be found in "Effects of Selected Federal Pandemic Response Programs on Personal Income."

GDP for 2020

Real GDP decreased 3.5 percent in 2020 (from the 2019 annual level to the 2020 annual level), compared with an increase of 2.2 percent in 2019 (table 1).

The decrease in real GDP in 2020 reflected decreases in PCE, exports, private inventory investment, nonresidential fixed investment, and state and local government that were partly offset by increases in federal government spending and residential fixed investment. Imports decreased (table 2).

The decrease in PCE in 2020 was more than accounted for by a decrease in services (led by food services and accommodations, health care, and recreation services). The decrease in exports reflected decreases in both services (led by travel) and goods (mainly non-automotive capital goods). The decrease in private inventory investment reflected widespread decreases led by retail trade (mainly motor vehicle dealers) and wholesale trade (mainly durable goods industries). The decrease in nonresidential fixed investment reflected decreases in structures (led by mining exploration, shafts, and wells) and equipment (led by transportation equipment) that were partly offset by an increase in intellectual property products (more than accounted for by software). The decrease in state and local government spending reflected a decrease in consumption expenditures (led by compensation).

The increase in federal government spending reflected an increase in nondefense consumption expenditures (led by an increase in purchases of intermediate services that supported the processing and administration of Paycheck Protection Program loan applications by banks on behalf of the federal government). The increase in residential fixed investment primarily reflected increases in improvements as well as brokers' commissions and other ownership transfer costs.

Current-dollar GDP decreased 2.3 percent, or $500.6 billion, in 2020 to a level of $20.93 trillion, compared with an increase of 4.0 percent, or $821.3 billion, in 2019 (tables 1 and 3).

The price index for gross domestic purchases increased 1.2 percent in 2020, compared with an increase of 1.6 percent in 2019 (table 4). The PCE price index also increased 1.2 percent in 2020, compared with an increase of 1.5 percent. Excluding food and energy prices, the PCE price index increased 1.4 percent, compared with an increase of 1.7 percent.

Measured from the fourth quarter of 2019 to the fourth quarter of 2020, real GDP decreased 2.5 percent during the period (table 6). That compared with an increase of 2.3 percent during 2019.

The price index for gross domestic purchases, as measured from the fourth quarter of 2019 to the fourth quarter of 2020, increased 1.3 percent during 2020. That compared with an increase of 1.4 percent during 2019. The PCE price index increased 1.2 percent, compared with an increase of 1.5 percent. Excluding food and energy, the PCE price index increased 1.4 percent, compared with an increase of 1.6 percent.

*          *          *

Next release, February 25, 2021 at 8:30 A.M. EST

January 28, 2021 in Economics | Permalink | Comments (0)

Friday, January 8, 2021

Boeing Charged with 737 Max Fraud Conspiracy and Agrees to Pay over $2.5 Billion

The Boeing Company (Boeing) has entered into an agreement with the Department of Justice to resolve a criminal charge related to a conspiracy to defraud the Federal Aviation Administration’s Aircraft Evaluation Group (FAA AEG) in connection with the FAA AEG’s evaluation of Boeing’s 737 MAX airplane.

Boeing, a U.S.-based multinational corporation that designs, manufactures, and sells commercial airplanes to airlines worldwide, entered into a deferred prosecution agreement (DPA) in connection with a criminal information filed today in the Northern District of Texas. The criminal information charges the company with one count of conspiracy to defraud the United States. Under the terms of the DPA, Boeing will pay a total criminal monetary amount of over $2.5 billion, composed of a criminal monetary penalty of $243.6 million, compensation payments to Boeing’s 737 MAX airline customers of $1.77 billion, and the establishment of a $500 million crash-victim beneficiaries fund to compensate the heirs, relatives, and legal beneficiaries of the 346 passengers who died in the Boeing 737 MAX crashes of Lion Air Flight 610 and Ethiopian Airlines Flight 302.

As Boeing admitted in court documents, Boeing—through two of its 737 MAX Flight Technical Pilots—deceived the FAA AEG about an important aircraft part called the Maneuvering Characteristics Augmentation System (MCAS) that impacted the flight control system of the Boeing 737 MAX. Because of their deception, a key document published by the FAA AEG lacked information about MCAS, and in turn, airplane manuals and pilot-training materials for U.S.-based airlines lacked information about MCAS.

Boeing began developing and marketing the 737 MAX in or around June 2011. Before any U.S.-based airline could operate the new 737 MAX, U.S. regulations required the FAA to evaluate and approve the airplane for commercial use.

In connection with this process, the FAA AEG was principally responsible for determining the minimum level of pilot training required for a pilot to fly the 737 MAX for a U.S.-based airline, based on the nature and extent of the differences between the 737 MAX and the prior version of Boeing’s 737 airplane, the 737 Next Generation (NG). At the conclusion of this evaluation, the FAA AEG published the 737 MAX Flight Standardization Board Report (FSB Report), which contained relevant information about certain aircraft parts and systems that Boeing was required to incorporate into airplane manuals and pilot-training materials for all U.S.-based airlines. The 737 MAX FSB Report also contained the FAA AEG’s differences-training determination. After the 737 MAX FSB Report was published, Boeing’s airline customers were permitted to fly the 737 MAX.

Within Boeing, the 737 MAX Flight Technical Team (composed of 737 MAX Flight Technical Pilots) was principally responsible for identifying and providing to the FAA AEG all information that was relevant to the FAA AEG in connection with the FAA AEG’s publication of the 737 MAX FSB Report. Because flight controls were vital to flying modern commercial airplanes, differences between the flight controls of the 737 NG and the 737 MAX were especially important to the FAA AEG for purposes of its publication of the 737 MAX FSB Report and the FAA AEG’s differences-training determination.

In and around November 2016, two of Boeing’s 737 MAX Flight Technical Pilots, one who was then the 737 MAX Chief Technical Pilot and another who would later become the 737 MAX Chief Technical Pilot, discovered information about an important change to MCAS. Rather than sharing information about this change with the FAA AEG, Boeing, through these two 737 MAX Flight Technical Pilots, concealed this information and deceived the FAA AEG about MCAS. Because of this deceit, the FAA AEG deleted all information about MCAS from the final version of the 737 MAX FSB Report published in July 2017. In turn, airplane manuals and pilot training materials for U.S.-based airlines lacked information about MCAS, and pilots flying the 737 MAX for Boeing’s airline customers were not provided any information about MCAS in their manuals and training materials. 

On Oct. 29, 2018, Lion Air Flight 610, a Boeing 737 MAX, crashed shortly after takeoff into the Java Sea near Indonesia. All 189 passengers and crew on board died. Following the Lion Air crash, the FAA AEG learned that MCAS activated during the flight and may have played a role in the crash. The FAA AEG also learned for the first time about the change to MCAS, including the information about MCAS that Boeing concealed from the FAA AEG. Meanwhile, while investigations into the Lion Air crash continued, the two 737 MAX Flight Technical Pilots continued misleading others—including at Boeing and the FAA—about their prior knowledge of the change to MCAS.

On March 10, 2019, Ethiopian Airlines Flight 302, a Boeing 737 MAX, crashed shortly after takeoff near Ejere, Ethiopia. All 157 passengers and crew on board died. Following the Ethiopian Airlines crash, the FAA AEG learned that MCAS activated during the flight and may have played a role in the crash. On March 13, 2019, the 737 MAX was officially grounded in the U.S., indefinitely halting further flights of this airplane by any U.S.-based airline.

As part of the DPA, Boeing has agreed, among other things, to continue to cooperate with the Fraud Section in any ongoing or future investigations and prosecutions. As part of its cooperation, Boeing is required to report any evidence or allegation of a violation of U.S. fraud laws committed by Boeing’s employees or agents upon any domestic or foreign government agency (including the FAA), regulator, or any of Boeing’s airline customers. In addition, Boeing has agreed to strengthen its compliance program and to enhanced compliance program reporting requirements, which require Boeing to meet with the Fraud Section at least quarterly and to submit yearly reports to the Fraud Section regarding the status of its remediation efforts, the results of its testing of its compliance program, and its proposals to ensure that its compliance program is reasonably designed, implemented, and enforced so that it is effective at deterring and detecting violations of U.S. fraud laws in connection with interactions with any domestic or foreign government agency (including the FAA), regulator, or any of its airline customers.

The department reached this resolution with Boeing based on a number of factors, including the nature and seriousness of the offense conduct; Boeing’s failure to timely and voluntarily self‑disclose the offense conduct to the department; and Boeing’s prior history, including a civil FAA settlement agreement from 2015 related to safety and quality issues concerning the Boeing’s Commercial Airplanes (BCA) business unit. In addition, while Boeing’s cooperation ultimately included voluntarily and proactively identifying to the Fraud Section potentially significant documents and Boeing witnesses, and voluntarily organizing voluminous evidence that Boeing was obligated to produce, such cooperation, however, was delayed and only began after the first six months of the Fraud Section’s investigation, during which time Boeing’s response frustrated the Fraud Section’s investigation.

The department also considered that Boeing engaged in remedial measures after the offense conduct, including:  (i) creating a permanent aerospace safety committee of the Board of Directors to oversee Boeing’s policies and procedures governing safety and its interactions with the FAA and other government agencies and regulators; (ii) creating a Product and Services Safety organization to strengthen and centralize the safety-related functions that were previously located across Boeing; (iii) reorganizing Boeing’s engineering function to have all Boeing engineers, as well as Boeing’s Flight Technical Team, report through Boeing’s chief engineer rather than to the business units; and (iv) making structural changes to Boeing’s Flight Technical Team to increase the supervision, effectiveness, and professionalism of Boeing’s Flight Technical Pilots, including moving Boeing’s Flight Technical Team under the same organizational umbrella as Boeing’s Flight Test Team, and adopting new policies and procedures and conducting training to clarify expectations and requirements governing communications between Boeing’s Flight Technical Pilots and regulatory authorities, including specifically the FAA AEG. Boeing also made significant changes to its top leadership since the offense occurred.

The department ultimately determined that an independent compliance monitor was unnecessary based on the following factors, among others: (i) the misconduct was neither pervasive across the organization, nor undertaken by a large number of employees, nor facilitated by senior management; (ii) although two of Boeing’s 737 MAX Flight Technical Pilots deceived the FAA AEG about MCAS by way of misleading statements, half-truths, and omissions, others in Boeing disclosed MCAS’s expanded operational scope to different FAA personnel who were responsible for determining whether the 737 MAX met U.S. federal airworthiness standards; (iii) the state of Boeing’s remedial improvements to its compliance program and internal controls; and (iv) Boeing’s agreement to enhanced compliance program reporting requirements, as described above.

January 8, 2021 | Permalink | Comments (0)

Thursday, January 7, 2021

Barbados deposits its instrument of ratification for the Multilateral BEPS Convention

Barbados deposited its instrument of ratification for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (Multilateral Convention or MLI), which now covers over 1700 bilateral tax treaties, thus underlining its strong commitment to prevent the abuse of tax treaties and base erosion and profit shifting (BEPS) by multinational enterprises. For Barbados, the MLI will enter into force on 1 April 2021.

With 95 jurisdictions currently covered by the MLI, the ratification by Barbados now brings to 60 the number of jurisdictions which have ratified, accepted or approved it. The Multilateral Convention became effective on 1 January 2021 for over 600 treaties concluded among the 60 jurisdictions, with an additional 1200 treaties to become effectively modified once the MLI will have been ratified by all Signatories.

The text of the Multilateral Convention, the explanatory statement, background information, database, and positions of each signatory are available at http://oe.cd/mli.

January 7, 2021 in BEPS | Permalink | Comments (0)

Tuesday, December 22, 2020

U.S. International Transactions, 3rd Quarter 2020

Current Account Deficit Widens by 10.6 Percent in Third Quarter

Current Account Balance, Third Quarter

The U.S. current account deficit, which reflects the combined balances on trade in goods and services and income flows between U.S. residents and residents of other countries, widened by $17.2 billion, or 10.6 percent, to $178.5 billion in the third quarter of 2020, according to statistics released by the U.S. Bureau of Economic Analysis. The revised second quarter deficit was $161.4 billion.

The third quarter deficit was 3.4 percent of current dollar gross domestic product, up from 3.3 percent in the second quarter.

The $17.2 billion widening of the current account deficit in the third quarter mostly reflected an expanded deficit on goods that was partly offset by an expanded surplus on primary income.

Quarterly U.S. Current Account and Component Balances
Coronavirus (COVID-19) Impact on Third Quarter 2020 International Transactions
All major categories of current account transactions increased in the third quarter of 2020 following notable declines in the second quarter, reflecting the resumption of trade and other business activities that were postponed or restricted due to COVID-19. In the financial account, most of the currency swaps between the U.S. Federal Reserve System and foreign central banks that remained at the end of the second quarter were ended in the third quarter, contributing to the continued U.S. withdrawal of deposit assets abroad and the continued U.S. repayment of deposit and loan liabilities. A record level of net shipments of U.S. currency abroad to meet the demand for U.S. currency by foreign residents increased U.S. currency liabilities, partly offsetting the net repayment of U.S. deposit liabilities. The full economic effects of the COVID-19 pandemic cannot be quantified in the statistics because the impacts are generally embedded in source data and cannot be separately identified. For more information on the impact of COVID-19 on the statistics, see the technical note that accompanies this release.

Current Account Transactions (tables 1-5)

Exports of goods and services to, and income received from, foreign residents increased $99.4 billion, to $796.0 billion, in the third quarter. Imports of goods and services from, and income paid to, foreign residents increased $116.6 billion, to $974.5 billion.

Quarterly U.S. Current Account Transactions

Trade in Goods (table 2)

Exports of goods increased $68.4 billion, to $357.1 billion, and imports of goods increased $94.4 billion, to $602.7 billion. The increases in both exports and imports reflected increases in all major categories, led by automotive vehicles, parts, and engines, mainly parts and engines and passenger cars.

Trade in Services (table 3)

Exports of services increased $2.8 billion, to $164.8 billion, mainly reflecting an increase in charges for the use of intellectual property, mostly licenses for the use of outcomes of research and development, that was partly offset by a decrease in travel, primarily education-related travel. Imports of services increased $6.5 billion, to $107.7 billion, mainly reflecting increases in charges for the use of intellectual property, mostly licenses for the use of outcomes of research and development; in transport, primarily sea freight transport; and in travel, primarily other personal travel.

Primary Income (table 4)

Receipts of primary income increased $26.8 billion, to $238.7 billion, and payments of primary income increased $11.9 billion, to $190.6 billion. The increases in both receipts and payments mainly reflected increases in direct investment income, primarily earnings.

Secondary Income (table 5)

Receipts of secondary income increased $1.4 billion, to $35.3 billion, reflecting an increase in private transfers, mostly private sector fines and penalties, that was partly offset by a decrease in general government transfers, mainly government sector fines and penalties. Payments of secondary income increased $3.7 billion, to $73.5 billion, reflecting increases in private transfers, primarily private sector fines and penalties, and in general government transfers, mostly international cooperation.

Capital Account Transactions (table 1)

Capital transfer receipts increased $0.3 billion, to $0.4 billion, in the third quarter, reflecting the U.S. Department of State’s sale of a property in Hong Kong.

Financial Account Transactions (tables 1, 6, 7, and 8)

Net financial account transactions were −$221.1 billion in the third quarter, reflecting net U.S. borrowing from foreign residents.

Financial Assets (tables 1, 6, 7, and 8)

Third quarter transactions decreased U.S. residents’ foreign financial assets by $73.0 billion. Transactions decreased other investment assets, mostly currency and deposits, by $288.1 billion. Transactions in deposits included a net withdrawal by the U.S. Federal Reserve of $203.0 billion from deposits abroad related to the ending of currency swaps. Transactions increased direct investment assets, mostly equity, by $71.1 billion; portfolio investment assets, mostly equity securities, by $142.2 billion; and reserve assets by $1.8 billion.

Liabilities (tables 1, 6, 7, and 8)

Third quarter transactions increased U.S. liabilities to foreign residents by $172.0 billion. Transactions increased direct investment liabilities, both equity and debt, by $70.5 billion and portfolio investment liabilities, mostly equity securities, by $147.5 billion. Transactions decreased other investment liabilities, mostly loans, by $46.0 billion.

Financial Derivatives (table 1)

Net transactions in financial derivatives were $24.0 billion in the third quarter, reflecting net lending to foreign residents.

Updates to Second Quarter 2020 International Transactions Accounts Balances

Billions of dollars, seasonally adjusted
  Preliminary estimate Revised estimate
Current account balance −170.5 −161.4
    Goods balance −219.3 −219.5
    Services balance 54.4 60.9
    Primary income balance 29.2 33.2
    Secondary income balance −34.9 −35.9
Net financial account transactions −82.6 −206.6

*  *  *

Next release: March 23, 2021 at 8:30 A.M. EDT

December 22, 2020 in Economics | Permalink | Comments (0)

Monday, December 21, 2020

Germany and Pakistan deposit their instrument of ratification for the Multilateral BEPS Convention and other updates

Germany and Pakistan have deposited their instrument of ratification for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (Multilateral Convention or MLI), which now covers almost 1700 bilateral tax treaties, thus underlining its strong commitment to prevent the abuse of tax treaties and base erosion and profit shifting (BEPS) by multinational enterprises. For Germany and Pakistan, the MLI will enter into force on 1 April 2021.

With 95 jurisdictions currently covered by the MLI, today’s ratification by Germany and Pakistan now brings to 59 the number of jurisdictions which have ratified, accepted or approved it. The Multilateral Convention will become effective on 1 January 2021 for over 600 treaties concluded among the 59 jurisdictions, with an additional 1200 treaties to become effectively modified once the MLI will have been ratified by all Signatories.

In addition, Switzerland notified in relation to Article 35(7)(a)(i) of the MLI the confirmation of the completion of its internal procedures for the entry into effect of the provisions of the MLI with respect to its treaties with the Czech Republic and Lithuania in accordance with Article 35(7)(b) of the MLI.

The text of the Multilateral Convention, the explanatory statement, background information, database, and positions of each signatory are available at http://oe.cd/mli.

December 21, 2020 in BEPS, OECD | Permalink | Comments (0)

Saturday, December 19, 2020

OECD publishes information on the state of implementation of the hard-to-value intangibles approach by members of the Inclusive Framework on BEPS

The OECD has published jurisdiction-specific information on the implementation of the hard-to-value intangibles ("HTVI") approach. To date, 40 jurisdictions have provided information on whether their domestic legal system provides for transfer pricing rules aimed at transactions involving HTVI.

The publication of this information is part of the monitoring process of the implementation of the HTVI approach agreed by the OECD/G20 Inclusive Framework on BEPS, whereby participating jurisdictions report on their legislation and administrative practices relevant to the application of the HTVI approach. Importantly, this information provides tax administrations, taxpayers and other stakeholders with a better understanding of the extent to which the HTVI approach has been adopted and applied in practice by countries around the world, with the aim to reduce misunderstandings and disputes between governments. The information published today was provided by those countries to which the information relates.

The HTVI approach was the outcome of the work done under Action 8 of the Action Plan on Base Erosion and Profit Shifting, which is found in the 2015 Final Report for Actions 8-10, Aligning Transfer Pricing Outcomes with Value Creation and it was formally incorporated into the OECD Transfer Pricing Guidelines (Guidelines), as Section D.4 of Chapter VI. The HTVI approach protects tax administrations from the negative effects of information asymmetry by ensuring that they can consider ex post outcomes as presumptive evidence about the appropriateness of ex-ante pricing arrangements. At the same time, the approach permits taxpayers to rebut such presumptive evidence by demonstrating the reliability of the information supporting the pricing methodology adopted at the time the controlled transaction took place. In 2018, the HTVI approach was supplemented with a new annex to Chapter VI of the Guidelines that contains guidance that would ensure a common understanding and practice among tax administrations on how to apply adjustments resulting from the application of the HTVI approach.

Further information on the state of jurisdictions’ transfer pricing legislation and practices can be found in the Transfer Pricing Country Profiles.

William Byrnes’ two-volume 4th Edition Practical Guide to U.S. Transfer Pricing (2021 version forthcoming December 2020) is revised and updated annually to help multinationals cope with the U.S. transfer pricing rules and procedures, taking into account the international norms established by the Organisation for Economic Co-operation and Development (OECD). It is also designed for use by tax administrators, both those belonging to the U.S. Internal Revenue Service and those belonging to the tax administrations of other countries, and tax professionals in and out of government, corporate executives, and their non-tax advisors, both American and foreign.  Professor Byrnes organizes the sixty leading industry advisors form the contributing subject matter expert team that analyzes the highly technical issues faced by tax and risk management counsel, translating them into actionable strategy.

“As the transfer pricing treatise’s primary author, I take an active role in working with each of my subject matter experts within the chapters, as well as developing and cultivating additional subject matter tax experts to contribute to the expansion of country-based and industry-based chapters. I organize the law, create an interpretive framework, clarifies the role of legal rules and the enforcement institutions, and demonstrate what ‘the law’ requires. Moreover, I ensure the most up to date analysis and risk strategy for a business navigating the complexity of intra-group transfer pricing among multiple taxing jurisdictions.” William Byrnes

December 19, 2020 in BEPS | Permalink | Comments (0)

Friday, December 18, 2020

China-Based Executive at U.S. Telecommunications Company Charged with Disrupting Video Meetings

Defendant Coordinated with the People’s Republic of China to Target Dissidents and Disrupt Meetings

A complaint and arrest warrant were unsealed today in federal court in Brooklyn charging Xinjiang Jin, also known as “Julien Jin,” with conspiracy to commit interstate harassment and unlawful conspiracy to transfer a means of identification.  Jin, an employee of a U.S.-based telecommunications company (Company-1) who was based in the People’s Republic of China (PRC), allegedly participated in a scheme to disrupt a series of meetings in May and June 2020 held to commemorate the June 4, 1989 Tiananmen Square massacre in the PRC.  The meetings were conducted using a videoconferencing program provided by Company-1, and were organized and hosted by U.S-based individuals, including individuals residing in the Eastern District of New York.  Jin is not in U.S. custody.

“No company with significant business interests in China is immune from the coercive power of the Chinese Communist Party,” said Assistant Attorney General for National Security John C. Demers.  “The Chinese Communist Party will use those within its reach to sap the tree of liberty, stifling free speech in China, the United States and elsewhere about the Party’s repression of the Chinese people.  For companies with operations in China, like that here, this reality may mean executives being coopted to further repressive activity at odds with the values that have allowed that company to flourish here.”

“The FBI remains committed to protecting the exercise of free speech for all Americans.  As this complaint alleges, that freedom was directly infringed upon by the pernicious activities of Communist China’s Intelligence Services, in support of a regime that neither reflects nor upholds our democratic values,” said FBI Director Christopher Wray. “Americans should understand that the Chinese Government will not hesitate to exploit companies operating in China to further their international agenda, including repression of free speech.” 

“The allegations in the complaint lay bare the Faustian bargain that the PRC government demands of U.S. technology companies doing business within the PRC’s borders, and the insider threat that those companies face from their own employees in the PRC,” said Acting United States Attorney Seth D. DuCharme.  “As alleged, Jin worked closely with the PRC government and members of PRC intelligence services to help the PRC government silence the political and religious speech of users of the platform of a U.S. technology company.  Jin willingly committed crimes, and sought to mislead others at the company, to help PRC authorities censor and punish U.S. users’ core political speech merely for exercising their rights to free expression.  The charges announced today make clear that employees working in the PRC for U.S. technology companies make those companies—and their users—vulnerable to the malign influence of the PRC government.  This Office will continue working tirelessly to protect against threats to the free expression of political views and religious beliefs, regardless whether those threats come from inside or outside the United States.”

Mr. DuCharme and Mr. Demers also extended their thanks and appreciation to Company-1 for its cooperation in the government’s ongoing investigation.

According to the complaint, Jin served as Company-1’s primary liaison with PRC law enforcement and intelligence services.  In that capacity, he regularly responded to requests from the PRC government for information and to terminate video meetings hosted on Company-1’s video communications platform.  Part of Jin’s duties included providing information to the PRC government about Company-1’s users and meetings, and in some cases he provided information – such as Internet Protocol addresses, names and email addresses – of users located outside of the PRC.  Jin was also responsible for proactively monitoring Company-1’s video communications platform for what the PRC government considers to be “illegal” meetings to discuss political and religious subjects unacceptable to the Chinese Communist Party (CCP) and the PRC government.

As alleged in the complaint, between January 2019 to the present, Jin and others conspired to use Company-1’s systems in the United States to censor the political and religious speech of individuals located in the United States and around the world at the direction and under the control of officials of the PRC government.  Among other actions taken at the direction of the PRC government, Jin and others terminated at least four video meetings hosted on Company-1’s networks commemorating the thirty-first anniversary of the Tiananmen Square massacre, most of which were organized and attended by U.S.-based participants, such as dissidents who had participated in and survived the 1989 protests.  Some of the participants who were unable to attend these meetings were Company-1 customers in Queens and Long Island, New York who had purchased subscriptions to Company-1’s services, and therefore entered into service agreements with Company-1 governed by its Terms of Service (TOS). 

Jin, officials from the PRC government and others allegedly collaborated to identify meeting participants and to disrupt meetings hosted on Company-1’s U.S. servers, at times creating pretextual reasons to justify their actions to other employees and executives of Company-1, as well as Company-1’s users themselves.  In particular, in May and June 2020, Jin and others acted to disrupt meetings held on the Company-1 platform to discuss politically sensitive topics unacceptable to the PRC government by infiltrating the meetings to gather evidence about purported misconduct occurring in those meetings.  In fact, there was no misconduct; Jin and his co-conspirators fabricated evidence of TOS violations to provide justification for terminating the meetings, as well as certain participants’ accounts.  Jin then tasked a high-ranking employee of Company-1 in the United States to effect the termination of meetings and the suspension and cancellation of user accounts.

As detailed in the complaint, Jin’s co-conspirators created fake email accounts and Company-1 accounts in the names of others, including PRC political dissidents, to fabricate evidence that the hosts of and participants in the meetings to commemorate the Tiananmen Square massacre were supporting terrorist organizations, inciting violence or distributing child pornography.  The fabricated evidence falsely asserted that the meetings included discussions of child abuse or exploitation, terrorism, racism or incitements to violence, and sometimes included screenshots of the purported participants’ user profiles featuring, for example, a masked person holding a flag resembling that of the Islamic State terrorist group.  Jin used the complaints as evidence to persuade Company-1 executives based in the United States to terminate meetings and suspend or terminate the user accounts of the meeting hosts. 

PRC authorities took advantage of information provided by Jin to retaliate against and intimidate participants residing in the PRC, or PRC-based family members of meeting participants.  PRC authorities temporarily detained at least one person who planned to speak during a commemoration meeting.  In another case, PRC authorities visited family members of a participant in the meetings and directed them to tell the participant to cease speaking out against the PRC government and rather to support socialism and the CCP.

The charges in the complaint are allegations, and the defendant is presumed innocent unless and until proven guilty.  If convicted of both charged conspiracies, Jin faces a maximum sentence of ten years in prison. 

The investigation into this matter was conducted by the FBI’s Washington Field Office.  The government’s case is being handled by the Office’s National Security and Cybercrime Section.  Assistant U.S. Attorneys Alexander A. Solomon, Richard M. Tucker, David K. Kessler and Ian C. Richardson are in charge of the prosecution, with assistance from Trial Attorney Scott A. Claffee of the National Security Division’s Counterintelligence and Export Control Section.

December 18, 2020 in AML | Permalink | Comments (0)

Thursday, December 17, 2020

15 Named In $26 Million International Trade Fraud Scheme

A federal grand jury in Houston, Texas, has returned a criminal indictment against eight individuals, while a related civil complaint has charged 14 individuals and one company relating to international trade fraud violations stemming from a decade-long scheme involving tires from China. Download Stamped Indictment

Law enforcement arrested Zheng “Miranda” Zhou, 53, of Missouri City, and Kun “Bruce” Liu, 40, of Sugar Land, yesterday. They made their initial appearances in Houston federal court today, at which time the criminal indictment was unsealed. 

Also charged in the indictment are Qinghua “Shirley” Song, 44, of Jurupa Valley, California; and Chinese residents Yue “Joanna” Peng, 42, Li “Cathy” Chen, 38, Xin “Devin” Zhang, age unknown, Shaohui “Jasper” Jia, 40, and Deng “David” Yongqiang, 36. They are all considered fugitives and warrants remain outstanding for their arrests.

The Department of Justice’s Civil Division also filed a civil complaint Dec. 11 alleging trade fraud in the U.S. Court of International Trade. The complaint names the eight criminal defendants and six other individuals - Xiaozhen “Jenny” Zhang, 34, Di “Terry” Wang, 34, Liang “Leon” Yu, 49, Lin “Leo” Zhang, 37, Jinbing “David” Wang, 36, and Minglian “Bill” Li, 28, as well as Houston area company Winland International Inc., dba Super Tire Inc. David Wang is a resident of New Jersey, while the remaining civil defendants reside in China.

“The Civil Division, through the Department of Justice’s Trade Fraud Task Force (TFTF), will continue to partner with U.S. law enforcement agencies and U.S. Attorneys’ Offices to aggressively investigate and pursue individuals and companies who attempt to evade U.S. customs laws and target the U.S. manufacturing base with unfair trade practices,” said Acting Assistant Attorney General Jeffery Bossert Clark. “We recognize the importance of ensuring that U.S. manufacturers are competing on a level playing field.” 

“China and its industries want to rob, replicate and replace American made good and technology,” said U.S. Attorney Ryan K. Patrick for the Southern District of Texas. “Illegally importing and dumping these goods is one way to systemically weaken American competitors. Whether direct espionage by the Chinese government or trade fraud like in this case, we will continue to investigate and prosecute every case we can.”

The indictment and complaint allege the defendants conspired to avoid anti-dumping duties associated with off-the-road (OTR) and light vehicle and truck (LVT) tires from China. Working through and with Winland, individuals allegedly imported OTR and LVT tires from companies that were subject to anti-dumping duties associated with Chinese tire manufacturers who had engaged in unfair trade practices in the United States. 

The complaint further alleges U.S.-based defendants conspired with defendants in China to obtain falsified invoices and entry records of Chinese tire companies that were subject to a lower duty rate than the actual manufacturers of these tires. Defendants submitted these falsified records to U.S. Customs officials when importing tires into the United States, so that Winland could avoid paying the higher duty rates, according to the allegations. The indictment and complaint also allege they used these falsified records to understate the value of these tires, further lowering the amount Winland owed in duties.

The value of these tires allegedly exceeded $20.9 million and resulted in the deprivation to the United States of more than $6.5 million in import duties.

“For more than a decade, Zhou and her co-conspirators are alleged to have sought to gain an unfair competitive advantage at the expense of U.S. companies and consumers through a series of schemes in violation of fair trade practices and U.S. import regulations,” said Special Agent in Charge Mark B. Dawson of Immigration and Customs Enforcement’s Homeland Security Investigations (HSI) - Houston. “Working closely with our U.S. and foreign law enforcement partners, and in coordination with the National Intellectual Property Rights Coordination Center, we were able to uncover these alleged deceptive practices leading to the criminal indictment and imposition of almost $21 million in civil penalties.”

“Customs and Border Protection (CBP) takes its trade mission of protecting the U.S. economy very seriously as we strive to maintain fair trade and preserve American jobs from predatory practices,” said CBP’s Director of Detroit Field Operations Christopher Perry. “These civil penalties and criminal indictments should serve as a warning to those who attempt to defraud our government and do harm to our economy and American businesses.”

The Houston Trade/Revenue Interdiction and Enforcement Team conducted the collaborative investigation along with CBP’s Automotive and Aerospace Center of Excellence and Expertise with the assistance of U.S. Citizenship and Immigration Services.

December 17, 2020 in AML | Permalink | Comments (0)

Monday, December 14, 2020

Former CEO and Founder of Technology Company Pleads Guilty to Investment Fraud Scheme

The former chief executive officer (CEO) and co-founder of Trustify, Inc. (Trustify), a privately-held technology company founded in 2015 and based in Arlington, Virginia, pleaded guilty today to his involvement in a fraud scheme resulting in millions of dollars of losses to investors.    

According to admissions made in connection with the plea agreement, beginning in 2015,  Boice fraudulently solicited investments in Trustify, a privately held technology start-up company that connected customers with private investigators.  Boice raised approximately $18.5 million from over 90 investors by, among other things, falsely overstating Trustify’s financial performance.  Despite representing to investors that their funds would go towards operating and growing Trustify’s business, Boice diverted at least $3.7 million for his own benefit and to fund his lifestyle.  This included the purchase of a home in Alexandria, Virginia, travel by private jet, and furnishing a seaside vacation home.         

December 14, 2020 in AML | Permalink | Comments (0)

Thursday, December 10, 2020

Maryland Lawyer Charged with Defrauding Financial Institutions and Other Entities to Obtain Control over $12.5 Million of Somali Sovereign Assets

A Maryland lawyer was charged in an 11-count indictment for his alleged role in a scheme to fraudulently obtain control of more than $12.5 million that was held by financial institutions on behalf of the Somali government, to improperly take part of those funds for fees and expenses, and to launder a portion of those funds to accounts for the benefit of his co-conspirators. Download Schulman Indictment

Acting Assistant Attorney General Brian C. Rabbitt of the Justice Department’s Criminal Division, U.S. Attorney Robert K. Hur of the District of Maryland, Special Agent in Charge Jennifer C. Boone of the FBI’s Baltimore Field Office, and Special Agent in Charge Kelly Jackson of the IRS-Criminal Investigation’s Washington D.C. Field Office made the announcement.

Jeremy Schulman, 47, of Bethesda, Maryland, was charged in an indictment filed in the District of Maryland with one count of conspiracy to commit mail fraud, wire fraud and bank fraud; three counts of wire fraud; one count of mail fraud; one count of bank fraud; one count of conspiracy to commit money laundering; and four counts of money laundering. 

The indictment alleges that from 2009 to 2014, Schulman conspired with others to fraudulently obtain control of financial assets held on behalf of the Somali government around the world and enrich himself and his co-conspirators by taking a portion of those assets in fees and expenses. 

To effectuate this scheme, Schulman and others allegedly created false documents regarding Schulman’s authority to recover assets on behalf of the Somali government.  Schulman presented these allegedly false documents to a federally insured bank and other institutions.  In addition to using forged and fraudulent documents, Schulman also allegedly made material misrepresentations and concealed material information from these banks and institutions regarding his authority to act on behalf of the Somali government. 

As a result of this scheme, Schulman, his co-conspirators, and the law firm where Schulman was a shareholder ultimately obtained control of approximately $12.5 million of frozen Somali funds.  Schulman caused his law firm to improperly retain more than $3.3 million of the Somali funds while remitting the rest to the Somali government.  Schulman received hundreds of thousands of dollars of additional compensation from his law firm based on the revenue from the scheme, and allegedly engaged in further fraud and money laundering to cause a portion of the funds retained by his law firm to be wired to accounts for the benefit of his co-conspirators.  

December 10, 2020 in AML | Permalink | Comments (0)

Tuesday, December 8, 2020

Vitol Inc. Agrees to Pay over $135 Million to Resolve Foreign Bribery Case

Vitol Inc. (Vitol), the U.S. affiliate of the Vitol group of companies, which together form one of the largest energy trading firms in the world, has agreed to pay a combined $135 million to resolve the Justice Department’s investigation into violations of the Foreign Corrupt Practices Act (FCPA) and to resolve a parallel investigation in Brazil. 

The resolution arises out of Vitol schemes to pay bribes to officials in Brazil, Ecuador, and Mexico.  Vitol has also agreed to disgorge more than $12.7 million to the Commodity Futures Trading Commission (CFTC) in a related matter and to pay the CFTC a penalty of $16 million related to trading activity not covered by the deferred prosecution agreement with the department. 

“Over a period of 15 years, Vitol paid millions of dollars in bribes to numerous public officials – in three separate countries – to obtain improper competitive advantages that resulted in significant illicit profits for the company,” said Acting Assistant Attorney General Brian C. Rabbitt of the Justice Department’s Criminal Division.  “Today’s coordinated resolution with Brazil, along with our first coordinated FCPA resolution with the CFTC, underscores the department’s resolve to hold companies accountable for their crimes while, at the same time, avoiding unnecessarily duplicative penalties.”

“Vitol paid bribes to government officials in Brazil, Ecuador and Mexico to win lucrative business contracts and obtain competitive advantages to which they were not fairly entitled,” said Acting U.S. Attorney Seth D. DuCharme of the Eastern District of New York.  “The United States Attorney’s Office for the Eastern District of New York will continue to hold accountable companies and individuals that attempt to defy U.S. law to the detriment of honest competitors.” 

“This resolution demonstrates the FBI's commitment to investigate foreign corruption and hold accountable those who circumvent laws for financial gain at the expense of American consumers,” said Assistant Director in Charge Kristi K. Johnson of the FBI’s Los Angeles Field Office. “We'll continue to work with our partners to root out corruption, whether it occurs domestically or abroad, to ensure trust on the international playing field.”

Vitol entered into a deferred prosecution agreement with the department in connection with a criminal information filed today in the Eastern District of New York charging the company with two counts of conspiracy to violate the anti-bribery provisions of the FCPA.  The case is assigned to Senior U.S. District Judge Eric N. Vitaliano. 

Pursuant to its agreement with the department, Vitol’s total criminal penalty is $135 million.  The department will credit $45 million – approximately one third of the total criminal penalty – against the amount that Vitol will pay to resolve an investigation by the Brazilian Ministério Público Federal for conduct related to the company’s bribery scheme in Brazil.   

As part of the deferred prosecution agreement, Vitol Inc. and Vitol S.A., another company within the Vitol group of companies, have agreed to continue to cooperate with the department in any ongoing investigations and prosecutions relating to the conduct, including of individuals; to enhance their compliance programs; and to report to the department on the implementation of their compliance programs.

According to the company’s admissions and court documents, between 2005 and 2014, Vitol and its co-conspirators paid bribes of more than $8 million to at least four officials at Brazil’s state-owned and controlled oil company Petróleo Brasileiro S.A. – Petrobras (Petrobras).  Vitol paid these bribes in exchange for receiving confidential Petrobras pricing and competitor information.  Vitol concealed the scheme through the use of intermediaries and a fictitious company that facilitated the payments to offshore accounts and, ultimately, to the Petrobras officials.

Vitol also admitted that from 2011 to 2014, it bribed at least five other Petrobras officials in exchange for receiving confidential pricing information that Vitol used to win fuel oil contracts with Petrobras.  During that scheme, a consultant acting on behalf of Vitol engaged in back-channel negotiations with a Houston-based Petrobras official.  The parties would then hold staged negotiations, ultimately settling on the pre-arranged price that allowed for bribes to be paid from Vitol to the Petrobras officials.  Several of the co-conspirators communicated using alias email accounts and code names, including “Batman,” “Tiger,” “Phil Collins,” “Dolphin,” “Popeye,” and “Beb.” 

Vitol also admitted to a second conspiracy to bribe officials in Ecuador and Mexico in order to obtain and retain business in connection with the purchase and sale of oil products.  Between 2015 and July 2020, Vitol agreed to offer and pay more than $2 million in bribes to officials in Ecuador and Mexico.   

In furtherance of this bribery scheme, Vitol and its co-conspirators entered into sham consulting agreements, set up shell companies, created fake invoices for purported consulting services and used alias email accounts to transfer funds to offshore companies involved in the conspiracy – all while knowing that the funds, at least in part, would be used to pay bribes to Ecuadorian and Mexican officials.

In related matters, the department recently unsealed charges against a Houston-based former Petrobras official who received bribes in association with the scheme, and who pleaded guilty to one count of conspiracy to commit money laundering on Feb. 8, 2019, in the Eastern District of New York.  In addition, the department recently unsealed charges against one of the intermediaries involved in the Brazil scheme, who pleaded guilty on Sept. 22, 2017, to one count of conspiracy to violate the FCPA in connection with a related bribery scheme.  Both individuals are awaiting sentencing.  Further, on Sept. 22, 2020, a federal grand jury in the Eastern District of New York returned an indictment against Javier Aguilar, a Vitol trader, for his alleged role in the Ecuador scheme.

December 8, 2020 in AML | Permalink | Comments (0)

Tuesday, December 1, 2020

Venezuelan Business Executive Charged in Connection with International Bribery and Money Laundering Scheme

A dual Venezuelan-Italian citizen who controlled multiple companies via U.S. based bank accounts was charged in an indictment returned Tuesday for his role in laundering the proceeds of inflated contracts that were obtained by making bribe payments to officials at Venezuela’s state-owned and state-controlled energy company Petróleos de Venezuela S.A. (PDVSA). Download D'Amato Indictment

Acting Assistant Attorney General Brian C. Rabbitt of the Justice Department’s Criminal Division, U.S. Attorney Ariana Fajardo Orshan of the Southern District of Florida, Special Agent in Charge Anthony Salisbury of the U.S. Immigration and Customs Enforcement’s Homeland Security Investigations (HSI) Miami Field Office, and Acting Special Agent in Charge Tyler R. Hatcher of the IRS Criminal Investigation’s (IRS-CI) Miami Field Office made the announcement.

Natalino D’Amato, 61, of Venezuela, was charged in an 11-count indictment filed in the Southern District of Florida.  D’Amato was charged with one count of conspiracy to commit money laundering, four counts of international money laundering, three counts of promotional money laundering, and three counts of engaging in transactions involving criminally derived property.

The indictment alleges that, beginning in January 2013 and continuing through  December 2017, D’Amato conspired with others, including officials at joint ventures between PDVSA and various foreign companies in the oil-rich Orinoco belt of Venezuela, to launder the proceeds of an illegal bribery scheme to and from bank accounts located in South Florida.  These joint ventures were majority owned and controlled by PDVSA.  According to the indictment, D’Amato offered and paid bribes to numerous Venezuelan officials who worked at the PDVSA joint ventures in order to obtain highly inflated and lucrative contracts to provide goods and services to the PDVSA joint ventures.  The indictment further alleges that over the course of the conspiracy, companies controlled by D’Amato received approximately $160 million from the PDVSA joint ventures into accounts he controlled in South Florida.  According to the charges, D’Amato used a portion of those funds to make payments to or for the benefit of the Venezuelan officials.

The indictment also includes allegations seeking criminal forfeiture of bank accounts involved in the charged offenses, with funds totaling approximately $45 million.

December 1, 2020 in AML | Permalink | Comments (0)

Wednesday, November 25, 2020

Opioid Manufacturer Purdue Pharma Pleads Guilty to Fraud and Kickback Conspiracies

Opioid manufacturer Purdue Pharma LP (Purdue) pleaded guilty today in federal court in Newark, New Jersey, to conspiracies to defraud the United States and violate the anti-kickback statute.

Purdue pleaded guilty to an information charging it with three felony offenses: one count of dual-object conspiracy to defraud the United States and to violate the Food, Drug, and Cosmetic Act, and two counts of conspiracy to violate the Federal Anti-Kickback Statute. 

“The abuse and diversion of prescription opioids has contributed to a national tragedy of addiction and deaths, in addition to those caused by illicit street opioids,”  said Deputy Attorney General Jeffrey A. Rosen.  “Today’s guilty pleas to three felony charges send a strong message to the pharmaceutical industry that illegal behavior will have serious consequences.  Further, today’s convictions underscore the department’s commitment to its multi-pronged strategy for defeating the opioid crisis.”

“Purdue admitted that it marketed and sold its dangerous opioid products to healthcare providers, even though it had reason to believe those providers were diverting them to abusers,”  said Rachael A. Honig, First Assistant U.S. Attorney for the District of New Jersey.  “The company lied to the Drug Enforcement Administration about steps it had taken to prevent such diversion, fraudulently increasing the amount of its products it was permitted to sell. Purdue also paid kickbacks to providers to encourage them to prescribe even more of its products.”

“As today's plea to felony charges shows, Purdue put opioid profits ahead of people and corrupted the sacred doctor-patient relationship,” said Christina Nolan, U.S Attorney for the District of Vermont.  “We hope the company's guilty plea sends a message that the Justice Department will not allow big pharma and big tech to engage in illegal profit-generating schemes that interfere with sound medicine.  We hope, also, that this guilty plea will bring some sense of justice to those who have suffered from opioid addictions involving oxycodone and some vindication for families and loved ones of those who did not survive such addiction."

"This case makes clear that no company, including Purdue Pharma, whose actions harm the health and safety of the American public, is beyond the reach of law enforcement,”  said Assistant Director Calvin Shivers of the FBI's Criminal Investigative Division.  “The opioid epidemic continues to spread across the United States impacting countless Americans and harming communities. Together with our law enforcement partners, the FBI is committed to investigating and holding criminals accountable for the roles they play in fueling this crisis.”

As part of today’s guilty plea, Purdue admitted that from May 2007 through at least March 2017, it conspired to defraud the United States by impeding the lawful function of the Drug Enforcement Administration (DEA).  Purdue represented to the DEA that it maintained an effective anti-diversion program when, in fact, Purdue continued to market its opioid products to more than 100 health care providers whom the company had good reason to believe were diverting opioids.  Purdue also reported misleading information to the DEA to boost Purdue’s manufacturing quotas.  The misleading information comprised prescription data that included prescriptions written by doctors that Purdue had good reason to believe were engaged in diversion.  The conspiracy also involved aiding and abetting violations of the Food, Drug, and Cosmetic Act by facilitating the dispensing of its opioid products, including OxyContin, without a legitimate medical purpose, and thus without lawful prescriptions.

Purdue also admitted it conspired to violate the federal Anti-Kickback Statute. Between June 2009 and March 2017, Purdue made payments to two doctors through Purdue’s doctor speaker program to induce those doctors to write more prescriptions of Purdue’s opioid products.  Also, from April 2016 through December 2016, Purdue made payments to Practice Fusion Inc., an electronic health records company, in exchange for referring, recommending, and arranging for the ordering of Purdue’s extended release opioid products – OxyContin, Butrans, and Hysingla.

Under the terms of the plea agreement, Purdue agreed to the imposition of the largest penalties ever levied against a pharmaceutical manufacturer, including a criminal fine of $3.544 billion and an additional $2 billion in criminal forfeiture. For the $2 billion forfeiture, the company will pay $225 million within three business days following the entry of a judgment of conviction in accordance with the Plea Agreement.  The department is willing to credit the value conferred by the company to state and local governments under the department’s anti-piling on and coordination policy if certain conditions are met.

Purdue has also agreed to a civil settlement that provides the United States with an allowed, unsubordinated, general unsecured bankruptcy claim for recovery of $2.8 billion to resolve its civil liability under the False Claims Act.  Separately, the Sackler family has agreed to pay $225 million in damages to resolve its civil False Claims Act liability.

The criminal and civil resolutions, which were announced on Oct. 21, 2020, do not include the criminal release of any individuals, including members of the Sackler family, nor are any of the company’s executives or employees receiving civil releases.

On Nov. 17, 2020, the bankruptcy court in the Southern District of New York approved the financial terms of the global resolution with the company.  The resolution includes the condition that the company cease to operate in its current form and instead emerge from bankruptcy as a public benefit company (PBC) or entity with a similar mission designed for the benefit of the American public.  The proceeds of the PBC will be directed toward state and local opioid abatement programs.  Based on the value that would be conferred to state and local governments through the PBC, the department is willing to credit up to $1.775 billion against the agreed $2 billion forfeiture amount.  The department looks forward to working with the creditor groups in the bankruptcy in charting the path forward for this PBC to best accomplish public health goals.

The global resolution does not resolve claims that states may have against Purdue or members of the Sackler family, nor does it impede the debtors’ or other third parties’ ability to recover any fraudulent transfers.

Except to the extent of Purdue’s admissions as part of its criminal resolution, the claims resolved by the civil settlements are allegations only.  There has been no determination of liability in the civil matters.

November 25, 2020 in AML | Permalink | Comments (0)

Monday, November 23, 2020

Seven Charged in Connection with a COVID-Relief Fraud Scheme Involving more than 80 Fraudulent Loan Applications Worth Approximately $16 Million

Seven individuals across two states were charged in an indictment unsealed today for their alleged participation in a scheme to obtain approximately $16 million in forgivable Paycheck Protection Program (PPP) loans guaranteed by the Small Business Administration (SBA) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Download Aqeel Indictment

Amir Aqeel, 52, and Pardeep Basra, 51, both of Houston, Texas; Rifat Bajwa, 51, of Richmond, Texas; Mayer Misak, 40, of Cypress, Texas; Mauricio Navia, 41, of Katy, Texas; and Richard Reuth, 57, of Spring, Texas, are expected to make their initial appearances today before U.S. Magistrate Judge Andrew M. Edison.

They are all charged with conspiracy to commit wire fraud and wire fraud.  The indictment also charges Aqeel with three counts of money laundering.

Also named in the Houston indictment is Siddiq Azeemuddin, 41, of Naperville, Illinois.  He also faces charges of conspiracy to commit wire fraud, wire fraud and money laundering.  Azeemuddin will appear today before U.S. Magistrate Judge Heather K. McShain of the Northern District of Illinois. 

“These defendants allegedly participated in a scheme to capitalize on the pandemic by filing at least 80 fraudulent PPP applications and enriching themselves by $16 million, spending it on luxury items such as a Porsche and Lamborghini automobiles,” said Acting Assistant Attorney General Brian C. Rabbitt of the Justice Department’s Criminal Division.  “The department and our law enforcement partners will continue to aggressively pursue those who would seek to illegally exploit the ongoing national emergency for their own benefit.”

“Some fraudsters create the most complicated schemes to steal money from the taxpayer.  Just imagine how productive they could be if they put their creativity and effort into noble and useful work,” said U.S. Attorney Ryan K. Patrick of the Southern District of Texas.  “With the great work of so many partner agencies, we will bring to justice those who steal from the treasury.”

“Greed has no place in SBA’s programs that are intended to provide assistance to the nation’s small businesses struggling with the pandemic challenges,” said Special Agent in Charge Sharon Johnson of the SBA Office of Inspector General (OIG) Central Region.  “OIG and its law enforcement partners will relentlessly pursue fraudsters and bring them to justice.  I want to thank the U.S. Attorney’s Office and our law enforcement partners for their dedication and pursuit of justice.”

“These defendants are alleged to have defrauded a program intended to assist hardworking Americans who have been unfairly impacted as a result of this unprecedented and challenging health crisis,” said Special Agent in Charge Mark B. Dawson of U.S. Immigration and Customs Enforcement’s Homeland Security Investigations (HSI) Houston.  “HSI remains committed to working with our law enforcement partners to bring every asset to bear against anyone who seeks to take advantage of the pandemic to deliberately harm and deceive others for their own profit.”

“To support small and community banks, Federal Home Loan Banks can accept Paycheck Protection Program (PPP) loans as collateral when making loans to their members,” said Special Agent in Charge Catherine Huber of the Federal Housing Finance Agency (FHFA) OIG, Central Region. “The Office of Inspector General is proud to work with our partners in law enforcement to prevent, detect, and deter attempts to perpetrate fraud in the Federal Home Loan Bank System and steal the assistance intended for small business owners and employees under this important part of the CARES Act.”

“Today’s indictment describes significant abuse of public funds meant for struggling American businesses and families,” said Special Agent in Charge Laurie L. Younger of the Federal Deposit Insurance Corporation (FDIC) OIG.  “This alleged fraud represents substantial, egregious, and coordinated actions that undermine faith in our financial systems and programs enacted by Congress to help our nation recover from economic damage brought on by COVID-19.  We thank our law enforcement partners for their cooperation in this investigation.”

“The Treasury Inspector General for Tax Administration aggressively pursues those who endeavor to defraud programs afforded to the American people under the Coronavirus Aid, Relief, and Economic Security Act,” said J. Russell George, Treasury Inspector General for Tax Administration (TIGTA).  “We appreciate the efforts of the U.S. Department Justice and our law enforcement partners in this effort.”   

The indictment alleges all conspired to submit more than 80 fraudulent PPP loan applications by falsifying the number of employees and the average monthly payroll expenses of the applicant businesses. In support of these fraudulent loan applications, they conspired to submit, and did submit, fraudulent bank records and/or fake federal tax forms, according to the charges.  Some of the PPP loan applications were allegedly submitted on behalf of companies the defendants controlled.

Other loan applications were submitted on behalf of entities that third-parties allegedly owned, according to the indictment.  In exchange for these, several of the defendants received large kickbacks, according to the charges.

The indictment further alleges the defendants laundered a portion of the fraudulent proceeds by writing checks from companies that received PPP loans to fake employees.  Those that received checks included some of the defendants and their relatives, according to the charges.  The fake paychecks were then allegedly cashed at Fascare International Inc. dba Almeda Discount Store – a cash checking company Azeemuddin owned.

The indictment alleges that over 1,100 fake paychecks totaling more than $3 million in fraudulent PPP loan proceeds were cashed at Azeemuddin’s business.

Federal agents also executed 45 seizure warrants in conjunction with the case.  Some of items seized included a Porsche and a Lamborghini allegedly purchased with illegally obtained funds.

This is an ongoing investigation.  If the public has further information regarding this fraud, please contact the Department of Homeland Security at 1-866-DHS-2-ICE.

The CARES Act is a federal law enacted on March 29, 2020, designed to provide emergency financial assistance to the millions of Americans who are suffering the economic effects caused by the COVID-19 pandemic.  One source of relief provided by the CARES Act was the authorization of up to $349 billion in forgivable loans to small businesses for job retention and certain other expenses, through the PPP.  In April 2020, Congress authorized over $300 billion in additional PPP funding.

The PPP allows qualifying small-businesses and other organizations to receive loans with a maturity of two years and an interest rate of one percent.  PPP loan proceeds must be used by businesses on payroll costs, interest on mortgages, rent, and utilities.  The PPP allows the interest and principal on the PPP loan to be forgiven if the business spends the loan proceeds on these expense items within a designated period of time after receiving the proceeds and uses at least a certain percentage of the PPP loan proceeds on payroll expenses. 

A federal criminal indictment is merely an accusation.  A defendant is presumed innocent unless and until proven guilty beyond a reasonable doubt in a court of law.

This case was investigated by the SBA-OIG; HSI; FHFA-OIG; FDIC-OIG and TIGTA.  Trial Attorneys Louis Manzo and Della Sentilles of the Criminal Division’s Fraud Section and Assistant U.S. Attorneys Rodolfo Ramirez and Kristine Rollinson for the Southern District of Texas are prosecuting the case.

November 23, 2020 in AML | Permalink | Comments (0)

Friday, November 20, 2020

OECD Working Group on Bribery Issues Report Commending United States for Maintaining Leading Role in the Fight Against Transnational Corruption

The Working Group on Bribery of the Organisation for Economic Co-operation and Development (OECD Working Group) issued its Phase 4 Report of the United States today, announced the U.S. Departments of Justice, Commerce, State, and the Securities and Exchange Commission (SEC). 

The Phase 4 Report is part of the OECD Working Group’s peer monitoring process and focuses primarily on the United States’ enforcement of its foreign bribery statute, the Foreign Corrupt Practices Act (FCPA), and was issued following a year-long review that included a series of interviews with government, private sector, academic, and civil society experts.  In releasing the report, the 44-country OECD Working Group applauded the United States for its sustained and outstanding commitment to enforcing its foreign bribery laws. 

The report highlights the United States’ increasing foreign bribery enforcement level since the OECD Working Group’s Phase 3 Report in 2010.  As provided in the Phase 4 Report, between September 2010 and July 2019, through the Justice Department and the SEC’s efforts, the United States convicted or sanctioned 174 companies and 115 individuals for foreign bribery and related offences under the FCPA.  The report indicates that this achievement resulted from a combination of enhanced expertise and resources to investigate and prosecute foreign bribery, the enforcement of a broad range of offences in foreign bribery cases, the effective use of non-trial resolution mechanisms, and the development of published policies to incentivize companies’ cooperation with law enforcement agencies.

Established in 1994, the OECD Working Group is responsible for monitoring the implementation and enforcement of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, the 2009 Recommendation for Further Combating Bribery of Foreign Public Officials in International Business Transactions, and related instruments.  Made up of representatives from the 44 countries that are signatories to the OECD Convention, the OECD Working Group meets four times per year, conducts peer-review country monitoring in successive phases, and publishes all of its country monitoring reports online.  The OECD Working Group has been instrumental in leading global efforts to fight bribery of foreign officials.  Further, the OECD Working Group’s law enforcement officers’ meetings serve an important role in fostering contacts between global law enforcement officials who focus on foreign bribery matters. 

The full Phase 4 Report of the United States can be found at: https://www.justice.gov/criminal-fraud/file/1337591/download.

November 20, 2020 in AML | Permalink | Comments (0)

Thursday, November 19, 2020

Consumer Financial Protection Bureau Announces Settlement with Debt Collector for Credit Reporting Violation

The Consumer Financial Protection Bureau (Bureau) today announced a settlement with Afni, Inc. (Afni) to address its violations in providing information to consumer reporting agencies (CRAs). Afni is a non-bank Illinois-based debt collector that specializes in collecting debt on behalf of telecommunications companies and furnishes information to consumer reporting agencies (CRAs) about consumers’ credit. The consent order requires Afni to take certain steps to prevent future violations and imposes a $500,000 civil money penalty.

The Bureau found that Afni furnished information to CRAs that it knew or had reasonable cause to believe was inaccurate and failed to report to CRAs an appropriate date of first delinquency on certain accounts. The Bureau also found that Afni failed to conduct reasonable investigations of disputes made by consumers both to Afni and to CRAs about furnished information and failed to conduct investigations of disputes made to Afni in a timely manner. In addition, the Bureau found that Anfi failed to send required notices to consumers about the results of such investigations and failed to establish, implement, and update its policies and procedures regarding its furnishing of consumer information to CRAs. Afni’s conduct violated the Fair Credit Reporting Act (FCRA) and its implementing rule, Regulation V and, by engaging in these violations of the FCRA and Regulation V, Afni violated the Consumer Financial Protection Act.

Under the terms of the consent order, Afni must take certain steps to improve and ensure the accuracy of its furnishing of consumer information to CRAs and its policies and procedures relating to credit reporting and dispute investigation. These required steps include conducting monthly reviews of account information to assess the accuracy and integrity of information it furnishes. Afni must also conduct monthly reviews of consumer disputes and responses to assess whether its handling of consumer disputes complies with the FCRA, Regulation V, and its own policies and procedures. The consent order also requires Afni to retain an independent consultant to conduct a review of Afni’s activities, policies, and procedures relating to furnishing information and credit reporting to ensure that its current policies, practices, and procedures regarding furnishing of consumer information to CRAs comply with the FCRA and Regulation V.

The consent order is available at: https://files.consumerfinance.gov/f/documents/cfpb_afni-inc_consent-order_2020-11.pdf 

November 19, 2020 in Financial Regulation | Permalink | Comments (0)

Wednesday, November 18, 2020

Bulletin on Risks Associated with Omnibus Accounts Transacting in Low-Priced Securities

This bulletin[1] highlights for broker-dealers various risks arising from illicit activities associated with transactions in low-priced securities[2] through omnibus accounts, particularly transactions effected on behalf of omnibus accounts[3] maintained for foreign financial institutions.[4] These risks are heightened when the identities of a foreign financial institution’s underlying customer and/or the ultimate beneficial owner[5] of the funds and securities are unknown to a broker-dealer because of the omnibus account structure.[6]

This bulletin also reminds broker-dealers of their existing obligations under the Bank Secrecy Act (“BSA”),[7] Rule 17a-8 under the Exchange Act, Section 5 of the Securities Act of 1933 (“Securities Act”) and FINRA rules, and considerations relating to the application of these obligations in the context of effecting low-priced securities transactions through omnibus accounts maintained for foreign financial institutions. In the Staff’s view, sufficiently discharging existing anti-money laundering (“AML”) obligations under the BSA requires broker-dealers to consider, among other things, the risks associated with the multiple layers of accounts through which transactions in these types of securities may have been routed.[8] Specifically, in order to sufficiently manage the heightened risks that can be associated with low-priced securities transactions effected through omnibus accounts maintained for foreign financial institutions, a broker-dealer should consider whether it is appropriate to obtain information regarding the relevant characteristics of ultimate beneficial owners of the funds and securities (e.g., the registration status of the ultimate beneficial owner, or whether it is an entity or an individual), including their identities when the risk warrants such inquiry.[9] Where the broker-dealer determines that the risks posed cannot be appropriately managed through the results of such inquiries or other risk mitigation measures, the Staff believes that broker-dealers should consider (1) refusing to open or closing the omnibus account, (2) restricting or rejecting transactions in low-priced securities effected on behalf of the customers of the foreign financial institution through such accounts, and (3) filing a Suspicious Activity Report (“SAR”) as appropriate.[10]

Key Takeaways:

  • Low-priced securities transactions in omnibus accounts maintained for foreign financial institutions can pose a particularly high risk of illicit activities, including fraud, money laundering, and unregistered securities offerings.
  • Nominee accounts and multiple foreign financial intermediaries can be used to obscure the identities of persons engaging in illicit activities.
  • Layers of anonymity and concealment can facilitate violations of the federal securities laws, such as non-exempt unregistered securities offerings, fraudulent stock promotion and manipulative trading, as well as other illicit activities.
  • Specific AML due diligence and reporting obligations apply to omnibus relationships with foreign financial institutions regardless of whether the ultimate beneficial owner of the funds and securities held in the account is a broker-dealer’s “customer” for customer identification programs (“CIP”) and CDD purposes or a “beneficial owner” for CDD purposes.[11] For example, a broker-dealer must file a SAR on a suspicious transaction, whether or not the ultimate beneficial owner who requested the transaction is considered the broker-dealer’s customer.
  • A broker-dealer’s inability to obtain information regarding the ultimate beneficial owners of funds and securities held in an omnibus account engaging in transactions that are considered higher risk (such as low-priced securities transactions) significantly increases the AML and other legal and compliance risks of the foreign omnibus account associated with those transactions.

1. What Has the Staff Been Seeing?

In the past few years, the Commission has brought a number of enforcement actions centered on allegations of unregistered securities offerings and/or schemes to defraud investors that have involved individuals and entities that allegedly concealed their control of publicly traded companies and increasingly used omnibus accounts to purchase and/or liquidate low-priced securities.[12] These scenarios often involve allegations that omnibus accounts opened at a U.S. broker-dealer by a foreign financial institution can act to shield the nature of the illicit activities by, among other things, concealing a wrongdoer’s identity. These charges collectively also involve allegations of hundreds of millions of dollars in illegal sales proceeds at the expense of U.S. retail investors. These proceeds often were quickly transferred to overseas accounts.

To illustrate the chain of events that may be associated with scenarios involving low-priced securities transactions through omnibus accounts maintained for foreign financial institutions, the Staff has outlined below a typical fact pattern. This fact pattern can vary and include various combinations of the following components and other actions:

  • Obtain Controlling Interest in an IssuerFirst, an individual or a group of individuals (“Control Group”)[13] obtains a controlling interest in an issuer by, for example, acquiring a large quantity of low-priced securities of the issuer that do not include a restrictive legend.
  • Transfer to Nominees: The Control Group typically has the low-priced securities transferred to nominees, which are commonly offshore entities with foreign owners, with no apparent purpose other than to conceal the existence of and the identity of the Control Group, who maintains control of the securities. In an effort to evade detection and identification, such as through required disclosure of the existence of the Control Group, each nominee generally holds account-level positions of less than 5% of the total issued and outstanding securities.[14]
  • Accounts are Layered through “Nested” Account Relationships: The Control Group often opens several accounts on behalf of the nominees with a series of foreign intermediaries, which in turn deposit and subsequently trade through a series of other foreign intermediaries.
    • Foreign intermediaries frequently use omnibus accounts in their names at other foreign intermediaries to execute the trades as instructed by the Control Group. All trading is ultimately controlled by and for the benefit of the Control Group, who communicates only with certain foreign intermediaries.
    • There may be several layers of foreign intermediaries handling the order flow through successive omnibus account relationships before the trades are consolidated and ultimately executed with a U.S. broker-dealer.
  • Foreign Financial Institutions Execute Trades at U.S. Broker Dealer(s): The foreign intermediaries execute trades through their omnibus accounts (which may be Delivery versus Payment/Receipt versus Payment (“DVP/RVP”) accounts) at U.S. broker-dealer(s).[15] To attempt to evade scrutiny and reduce the likelihood of raising red flags of potential suspicious activity, the Control Group may use a network of foreign financial institutions and U.S. broker-dealers to transact in the low-priced securities so that none of them has complete visibility into the total amount of securities deposited, trading volume and activity, timing of the wire transfers of sales proceeds and other information.

By spreading the securities and trading activity among nominee accounts at multiple foreign intermediaries through multiple omnibus accounts, the Control Group obfuscates the identities of the ultimate beneficial owners of the funds and securities held in the accounts.

The layers of concealment enable the Control Group to engage in a fraudulent scheme (e.g., a fraudulent promotion of the stock, pump and dump, or coordinated manipulative trading), an unregistered distribution of securities, unregistered broker-dealer activity, and/or insider trading.

2. What Contributes to the Illicit Activity?

This type of illicit activity is facilitated when information about the identities of the individuals who buy and/or sell low-priced securities is shielded by the omnibus account structure.[16] In the scenario discussed above, a U.S. broker-dealer typically knows only the identity of the foreign financial institution, and not the identity or relevant characteristics of the ultimate beneficial owner of the funds and securities associated with the illicit activity.

The Staff is concerned that this type of illicit activity, including fraud or unlawful distributions of securities, is being facilitated by U.S. broker-dealers who are not sufficiently discharging their AML and other obligations. In particular, the Staff is concerned that certain broker-dealers may be conducting insufficient due diligence on omnibus accounts held for foreign financial institutions, including insufficiently accounting for the risks associated with the nature of the foreign financial institution’s business and the markets it serves (including whether it offers services to other financial institutions and their customers) and the type, purpose, and anticipated activity of such omnibus accounts.

The Staff is also concerned that some U.S. broker-dealers may ignore red flags[17] associated with the illicit activity and fail to report known or suspected suspicious activity conducted through the accounts. Moreover, to the extent a U.S. broker-dealer’s due diligence and risk assessment of a foreign omnibus account is dependent upon the activities of another financial institution, including an affiliate, that reliance may be unreasonable.[18] For example, the other financial institution may not recognize the various risks associated with transactions in these types of securities; may be lax in its due diligence or assign ineffective risk weighting to transactions in these types of securities; or may be unfamiliar with or otherwise ignore common fact patterns of manipulation, concealment of coordinated activity and other illicit activities, including the increased risk of those activities associated with transactions involving low-priced securities.

3. What are the Staff’s Views Regarding a U.S. Broker-Dealer’s AML Obligations when Engaging in Transactions in Low-Priced Securities through Omnibus Accounts Maintained for Foreign Financial Institutions?

There are three key AML obligations that broker-dealers should consider when engaging in transactions in low-priced securities effected through omnibus accounts, particularly transactions effected on behalf of omnibus accounts maintained for foreign financial institutions: (1) AML program requirements; (2) correspondent account due diligence requirements; and (3) suspicious activity reporting obligations. Below is an overview of these obligations and the Staff’s views.[19]

Overview of AML Obligations

Among other things, the BSA requires broker-dealers to establish a risk-based AML program, including policies and procedures reasonably designed to detect and report suspicious activities (“AML Program”).[20] Specifically, a broker-dealer’s AML Program must be in writing and, among other things:

  • Establish and implement policies, procedures, and internal controls reasonably designed to achieve compliance with the applicable provisions of the BSA and implementing regulations thereunder;[21]
  • Establish and implement policies and procedures that can be reasonably expected to detect and cause the reporting of transactions required under the BSA;[22] and
  • Include appropriate risk-based procedures for conducting ongoing customer due diligence, to include, but not be limited to, the following:
    • Understanding the nature and purpose of customer relationships to be able to develop a customer risk profile; and
    • Conducting ongoing monitoring to identify and report suspicious transactions as well as, on a risk basis, to maintain and update customer information, including beneficial ownership information for legal entity customers.[23]

In addition, as part of their AML Program, broker-dealers are required to establish a written risk-based due diligence program for any “correspondent accounts”[24] established, maintained, administered or managed for foreign financial institutions (“Special Due Diligence Program”), which include omnibus accounts held for a foreign financial institution introducing transactions in low-priced securities.[25]

Specifically, the Special Due Diligence Program must include appropriate, specific risk-based policies, procedures, and controls reasonably designed to enable a broker-dealer to detect and report, on an ongoing basis, any known or suspected money laundering conducted through or involving any foreign correspondent account.[26] At a minimum, the due diligence program must include, among other things, the following:

  • An assessment of the money laundering risk posed by such correspondent account, based on a consideration of relevant risk factors, including, as appropriate:
    1. The nature of the foreign financial institution’s business and the markets it serves;
    2. The type, purpose, and anticipated activity of such correspondent account;
    3. The nature and duration of the broker-dealer’s relationship with the foreign financial institution (and any of its affiliates);
    4. The AML and supervisory regime of the jurisdiction that issued the charter or license to the foreign financial institution, and its owners if applicable, to the extent that such information is reasonably available;
    5. Information known or reasonably available to the broker-dealer about the foreign financial institution’s AML record; and
  • The application of risk-based procedures and controls to each such correspondent account reasonably designed to detect and report known or suspected money laundering activity, including a periodic review of the correspondent account activity sufficient to determine consistency with information obtained about the type, purpose, and anticipated activity of the account.[27]

The five enumerated factors must be considered with regard to each correspondent account, as relevant, although it is not expected that it will be necessary to apply each factor to every correspondent account relationship.[28] Although in some cases application of all five factors may be appropriate, a broker-dealer may apply some subset of the factors, depending upon the broker-dealer’s determination of the nature of the foreign financial institution that it is assessing and the relative money laundering risk posed by the institution.[29] Similarly, the five factors are not meant to be exhaustive, and broker-dealers are expected to consider additional factors that are relevant to the particular risk profile of the foreign financial institution being assessed.[30] As a result, a broker-dealer’s due diligence program should provide, as appropriate, for the consideration of additional factors that have not been enumerated in the rule when assessing foreign financial institutions with a unique risk profile or those that pose high risk.[31]

FinCEN has made clear to broker-dealers that the Special Due Diligence Program supplements rather than supersedes a broker-dealer’s AML Program and that in high-risk situations involving any account, an AML Program should include provisions for obtaining any necessary and appropriate information about the customers underlying such an account.[32]

Finally, under FinCEN’s SAR rule, broker-dealers are required to file a SAR if: (1) a transaction is conducted or attempted to be conducted by, at, or through a broker-dealer; (2) the transaction involves or aggregates funds or other assets of at least $5,000; and (3) the broker-dealer knows, suspects, or has reason to suspect that the transaction –

(a) involves funds or is intended or conducted in order to hide or disguise funds or assets derived from illegal activity as part of a plan to violate or evade any Federal law or regulation or to avoid any transaction reporting requirement under Federal law or regulation;

(b) is designed to evade requirements of the BSA;

(c) has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage, and the broker-dealer knows of no reasonable explanation for the transaction after examining the available facts; or

(d) involves the use of the broker-dealer to facilitate criminal activity.[33]

Staff Views Regarding Application of AML Obligations to Foreign Omnibus Accounts

The Staff believes that foreign financial institutions engaging in low-priced securities transactions on behalf of their customers through an omnibus account structure present a particularly high risk for illicit activities, including money laundering. Broker-dealers servicing these accounts are reminded that, pursuant to the Special Due Diligence Program requirements, they must assess the money laundering risks posed by their relationship with the foreign financial institution based on a consideration of the risk factors described above.

In the context of low-priced securities transactions, the Staff believes that relevant risk factors that a broker-dealer is expected to consider include, without limitation, the spectrum of activities involved and the foreign financial institution’s demonstrated ability and commitment to addressing the AML, securities law and other risks associated with those activities, in addition to the five other factors enumerated. Furthermore, in the Staff’s view, a consideration of these factors in this context – particularly the nature of the foreign financial institution’s business and the markets it serves (including whether it offers services to other financial institutions and their customers, which are sometimes referred to as nested relationships) and the type, purpose, and anticipated activity of such an omnibus account – generally should include an assessment of the risks imputed to the foreign financial institution by its underlying customers.[34] With respect to transactions that involve heightened risk, the Staff believes that this should include an assessment of underlying customers at a more granular (or even individual) level.

With respect to the typical fact pattern described in section 1 of this bulletin, broker-dealers should consider, among other things, the risks associated with any nested account relationships, where its foreign financial institution customer may be requesting a transaction on behalf of one of a series of other financial institutions, one of which has the direct customer relationship with the ultimate beneficial owner. Broker-dealers should recognize that each such institution may be subject to varying degrees of regulatory obligations and oversight. As a result, customer risk assessment policies and procedures at one institution that may be sufficient if the customer is the ultimate beneficial owner may be insufficient if the customer is another financial institution acting on behalf of the ultimate beneficial owner. Accordingly, a broker-dealer’s Special Due Diligence Program should take into account whether or not the account relationship is a nested account relationship and if so, the number of layers involved. The Staff believes that varying (and increasing) levels of risk may be presented in such circumstances, and accordingly different (and increasing) levels and types of risk assessment measures and risk-based procedures and controls may be necessary. For example, a customer relationship in which the foreign financial institution customer is acting directly on behalf of the ultimate beneficial owner generally would present a different risk and require different risk-based procedures and controls than a relationship in which the foreign financial institution is acting on behalf of the ultimate beneficial owner through one or more other financial institutions. Each of these relationships present a different level of risk and requires a different level of risk assessment and risk-based procedures and controls.

In many instances, it may be difficult or impossible to obtain information about a foreign financial institution’s underlying customers, and in particular, ultimate beneficial ownership information for the funds and securities associated with an account. For example, privacy restrictions may prevent a broker-dealer from obtaining information about the foreign financial institution’s underlying customer that the broker-dealer would otherwise have considered. The Staff does not believe that these or other information access restrictions lessen the broker-dealer’s AML and other obligations. Rather, the Staff believes that these types of restrictions on beneficial ownership and other customer information generally increase the risk associated with an account, which should be taken into account in policies and procedures that the broker-dealer implements to discharge its AML and other obligations. We are aware that alternative or compensatory steps currently employed may include, among others, (1) obtaining a certification from the foreign financial institution that it has verified the identity of its customer[35] and/or the ultimate beneficial owner and that it provides the information necessary (on an anonymized basis) to assess whether the transactions are suspicious; (2) engaging in more robust monitoring of transactions introduced by the foreign financial institution; and/or (3) adjusting alert parameters. There are circumstances where these alternative or compensatory steps would be insufficient to mitigate the risks of transacting in low-priced securities.

Where the broker-dealer determines that the risks cannot be appropriately managed, particularly in the context of low-priced securities transactions, the Staff believes that a broker-dealer should consider (1) refusing to open or closing the account, (2) restricting or rejecting transactions effected on behalf of the customers of the foreign financial institution (e.g., restricting transactions to those effected on behalf of ultimate beneficial owners where the relevant characteristics of those owners are known by the foreign financial institution and communicated to the U.S. broker-dealer to a sufficient extent for the U.S. broker-dealer to conclude that there is not a heightened risk of illicit activity), and (3) filing a SAR as appropriate.

Broker-dealers are reminded that nothing under the federal securities laws or FINRA rules obligates them to accept an order where they believe that the associated compliance or legal risks are unacceptable. In light of this fact, broker-dealers should consider the consequences of facilitating transactions, regardless of whether or not they fulfill their AML obligations. For example, under certain circumstances, a broker-dealer may fulfill its AML obligations by detecting and reporting suspicious activity, but in facilitating the transactions, the broker-dealer could expose itself to liability for aiding and abetting and/or causing misconduct, including by participating in an unregistered securities offering.

Intersection with CIP and CDD Obligations. As part of their AML obligations, broker-dealers also have an obligation to establish a written CIP to verify the identities of customers seeking to open an account.[36] In addition to the CIP obligation, broker-dealers are subject to CDD requirements to identify and verify the identity of beneficial owners of their legal entity customers pursuant to FinCEN’s CDD rule.[37]

The Staff notes that, in many circumstances associated with omnibus account relationships, the broker-dealer’s “customer,” for purposes of the CIP and CDD rules, would be the foreign financial institution and not the financial institution’s underlying customer and/or the ultimate beneficial owner of the low-priced security.[38] However, it is critical for broker-dealers to remember that even when the ultimate beneficial owner is not a broker-dealer’s “customer” for CIP and CDD purposes, there are circumstances where the characteristics of that ultimate beneficial owner would need to be considered as part of the broker-dealer’s broader AML obligations.[39] As stated above, in high-risk situations, information about the underlying customers and/or the ultimate beneficial owners (whether broadly understood as the types of customers with whom the foreign financial institution typically conducts business or in more granular terms where the circumstances and related risks of the account or particular transactions require such information), would be relevant to a broker-dealer’s assessment of the money laundering risks posed by the foreign financial institution itself as part of its broader AML Program and Special Due Diligence Program.

Moreover, while the CDD rule does not require broker-dealers to collect information that identifies the underlying transacting parties (i.e., a customer’s customer) in an omnibus account, broker-dealers may determine that a foreign financial institution presents a higher risk profile and, accordingly, collect additional information to better understand the customer relationship.[40] In this vein, broker-dealers are reminded that the CDD rule requirements represent a “floor” in that it establishes a minimum course of action and, consistent with a risk-based approach pursuant to their broader AML program requirements, they may need to do more in situations of heightened risks.[41]

4. Other Risks and Related Broker-Dealer Obligations

Broker-dealers are also reminded of their obligations: (1) to conduct a reasonable inquiry when selling securities in an unregistered transaction in reliance on Section 4(a)(4) of the Securities Act, and (2) pursuant to sanctions imposed by OFAC.[42]

Reasonable Inquiry. With respect to transactions in securities, Section 5 of the Securities Act requires all offers and sales of securities in interstate commerce to be registered unless an exemption from registration is available. Section 4(a)(4) of the Securities Act provides such an exemption for “brokers’ transactions executed upon customers’ orders on any exchange or in the over-the-counter market but not the solicitation of such orders.” The Commission has stated, in connection with the Section 4(a)(4) exemption, that broker-dealers “‘have a responsibility to be aware of the requirements necessary to establish an exemption from the registration requirements of the Securities Act and should be reasonably certain such an exemption is available.’”[43] Broker-dealers “must conduct a reasonable inquiry into the circumstances surrounding the transaction before the [broker-dealers] may claim the protection of the Section 4(a)(4) broker’s exemption.”[44] A broker-dealer may claim the Section 4(a)(4) exemption if it “[a]fter reasonable inquiry is not aware of circumstances indicating that the person for whose account the securities are sold is an underwriter with respect to the securities or that the transaction is part of a distribution of securities of the issuer.”[45]

In light of the risks of illicit activities associated with transactions in low-priced securities through omnibus accounts maintained for foreign financial institutions as discussed in this bulletin, broker-dealers should consider, as part of their reasonable inquiry, whether it is appropriate to obtain information regarding the foreign financial institutions’ underlying customers and the ultimate beneficial owners of the funds and securities, and whether such information is available. In situations where a broker-dealer determines it is appropriate to obtain such information but cannot, whether because of privacy restrictions or otherwise, the broker-dealer should consider the absence of this information as part of its assessment of whether it is reasonable to proceed with the transaction.

OFAC. OFAC administers and enforces economic and trade sanctions programs that are separate and distinct from, and in addition to, the AML requirements imposed on broker-dealers under the BSA.[46] In general, OFAC regulations require broker-dealers to: block accounts and other property or property interests of entities and individuals that appear on OFAC’s List of Specially Designated Nationals and Blocked Persons or entities that are blocked by operation of law, including entities blocked because they are owned, individually or in the aggregate, directly or indirectly, 50 percent or more by one or blocked persons; block accounts and other property or property interests of governments, other entities, and individuals subject to blocking under OFAC country-based programs; and reject prohibited, unlicensed trade and financial transactions, including those involving OFAC-sanctioned countries. Broker-dealers must report to OFAC all blockings and rejections of prohibited transactions within 10 days of their being identified, and blocked property must be reported to OFAC annually.[47] In addition to the blocking sanctions described above, OFAC maintains several sanctions programs that prohibit U.S. persons, including broker-dealers, from dealings in equity and debt of, and extension of credit to, certain sanctions targets. OFAC has stated that it will take into account the adequacy of a firm’s OFAC compliance program, among other factors, when it determines the appropriate enforcement response to an apparent violation, including whether a civil monetary penalty is warranted.[48]

5. Summary

As highlighted above, the Staff is concerned about illicit activities involving low-priced securities transactions executed through omnibus accounts held in the name of foreign financial institutions. Broker-dealers should be aware of the common fact patterns and red flags associated with these transactions and appropriately account for the heightened risks of illicit activities. The Staff reminds broker-dealers of their existing risk-based AML obligations under the BSA, Exchange Act Rule 17a-8, and FINRA rules, as well as their obligations to address compliance with other legal requirements, such as Section 5 of the Securities Act and OFAC regulations. In addition to establishing risk-based AML compliance programs, broker-dealers should understand that sufficiently discharging existing AML obligations under the BSA may require, among other things, accounting for the risks associated with the multiple layers of accounts through which transactions may have been routed. Specifically, the Staff believes that in order to sufficiently manage the heightened risks associated with low-priced securities transactions effected through foreign omnibus accounts, a broker-dealer generally should inquire about the ultimate beneficial owners of the funds and securities under appropriate, risk-based circumstances.[49]

Key Red Flags from FINRA Regulatory Notice 19-18:

[1] This bulletin represents the views of the staff of the Division of Trading and Markets (“Staff”). It is not a rule, regulation, or statement of the Securities and Exchange Commission (“Commission”). The Commission has neither approved nor disapproved its content. This bulletin, like all staff guidance, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person. This bulletin was prepared by the Staff in consultation with staff from the Financial Industry Regulatory Authority (“FINRA”), the Financial Crimes Enforcement Network (“FinCEN”), and the Office of Foreign Assets Control (“OFAC”) of the U.S. Department of the Treasury.

[2] As used in this bulletin, “low-priced securities” include those securities that are sometimes referred to as “microcap stocks” or “penny stocks.” The term “microcap stock” generally refers to securities issued by companies with low or “micro” capitalizations. See Microcap Stock: A Guide for Investors (Sept. 18, 2013), available at https://www.sec.gov/reportspubs/investor-publications/investorpubsmicrocapstockhtm.html. The term “penny stock” generally refers to a security issued by a very small company that trades at less than $5 per share. See Fast Answers: Penny Stock Rules, available at https://www.sec.gov/fast-answers/answerspennyhtm.html; Section 3(a)(51) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 3a51-1 thereunder.

[3] As used in this bulletin, the term “omnibus account” refers to an account that aggregates the accounts of undisclosed customer(s) that may be carried individually on the books of a broker-dealer’s customer.

[4] A “foreign financial institution” includes, among others: (i) a foreign bank (including a foreign branch or office of a U.S. bank); (ii) a foreign branch or office of a securities broker-dealer, futures commission merchant, introducing broker in commodities, or mutual fund; (iii) a business organized under foreign law (other than a branch or office of such business in the U.S.) that if it were located in the U.S. would be a securities broker-dealer, futures commission merchant, introducing broker in commodities, or a mutual fund; and (iv) a money transmitter or dealer in foreign exchange organized under foreign law (other than a branch or office of such entity in the U.S.). See 31 C.F.R. § 1010.605(f).

[5] The Staff notes that the term “beneficial owner,” as it is defined in FinCEN’s customer due diligence (“CDD”) rule, represents a different group of individuals than those highlighted in this bulletin. See 31 C.F.R. § 1010.230(d) (focusing on the beneficial owners of the “legal entity customer” that opens an account at a covered financial institution, which would generally be, for the purposes of this bulletin, the foreign financial institution). Here, we refer to “ultimate beneficial owner” to mean the true owner of the funds and securities held in the omnibus account and who bears the essential risk of the transactions associated with suspicious or illicit activity. Use of this term or other references to beneficial ownership in this bulletin does not represent a view on, or application of, the standards for determining beneficial ownership under Exchange Act Rule 13d-3 (17 C.F.R. § 240.13d-3).

[6] “Heightened risks can arise with respect to beneficial owners of accounts because nominal account holders can enable individuals and business entities to conceal the identity of the true owner of assets or property derived from or associated with criminal activity. Moreover, criminals, money launderers, tax evaders, and terrorists may exploit the privacy and confidentiality surrounding some business entities, including shell companies and other vehicles designed to conceal the nature and purpose of illicit transactions and the identities of the persons associated with them. Consequently, identifying the beneficial owner(s) of some legal entities may be challenging, as the characteristics of these entities often effectively shield the legal identity of the owner. However, such identification may be important in detecting suspicious activity and in providing useful information to law enforcement.” Joint Release – Guidance on Obtaining and Retaining Beneficial Ownership Information (March 5, 2010) (“Beneficial Ownership Guidance”), available at https://www.sec.gov/rules/other/2010/34-61651-guidance.pdf (joint release with FinCEN, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, Office of Thrift Supervision and the Securities and Exchange Commission).

[7] The BSA is codified at 12 U.S.C. § 1829b, 12 U.S.C. §§ 1951–1959, and 31 U.S.C. §§ 5311–5314 and 5316–5332, and notes thereto, with implementing regulations at 31 C.F.R. Chapter X. See 31 C.F.R. § 1010.100(e).

[8] See, e.g., FinCEN, Application of the Regulations Requiring Special Due Diligence Programs for Certain Foreign Accounts to the Securities and Futures Industries, FIN-2006-G009 (May 10, 2006), available at https://www.fincen.gov/resources/statutes-regulations/guidance/application-regulations-requiring-special-due-diligence-0 (“FinCEN Special Due Diligence Guidance”); FinCEN, Frequently Asked Questions Regarding Customer Due Diligence (CDD) Requirements for Covered Financial Institutions, FIN-2020-G002 (August 3, 2020), available at https://www.fincen.gov/sites/default/files/2020-08/FinCEN%20Guidance%20CDD%20508%20FINAL_2.pdf (“FinCEN CDD Guidance”).

[9] See, e.g., Beneficial Ownership Guidance (“With respect to accounts that have been identified by an institution’s [customer due diligence] procedures as posing a heightened risk, these accounts should be subjected to enhanced due diligence (EDD) that is reasonably designed to enable compliance with the requirements of the BSA. This may include steps, in accordance with the level of risk presented, to identify and verify beneficial owners, to reasonably understand the sources and uses of funds in the account, and to reasonably understand the relationship between the customer and the beneficial owner.”); see also FinCEN CDD Guidance (“The CDD Rule does not categorically require . . . the collection of customer information from a financial institution’s clients when the financial institution is a customer of a covered financial institution. A covered financial institution may assess, on the basis of risk, that a customer’s risk profile is low, and that, accordingly, additional information is not necessary for the covered financial institution to develop its understanding of the nature and purpose of the customer relationship. In other circumstances, the covered financial institution might assess, on the basis of risk, that a customer presents a higher risk profile and, accordingly, collect more information to better understand the customer relationship.”).

[10] See 31 C.F.R. § 1010.610(d).

[11] As discussed in more detail below, as part of their AML obligations, broker-dealers are required to establish a written CIP to verify the identities of customers seeking to open an account. See 31 C.F.R. § 1023.220. In addition to CIP, broker-dealers are subject to CDD requirements to identify and verify the identity of beneficial owners of legal entity customers pursuant to FinCEN’s CDD rule. See 31 C.F.R. § 1010.230.

[12] Seee.g.SEC v. Peter DiChiara, No. 1:20-cv-11645 (D. Mass. filed Sept. 3, 2020) (settled action); SEC v. Bajic et al., No. 20-cv-00007 (S.D.N.Y. filed Jan. 2, 2020); SEC v. Morrie Tobin et al., No. 1:18-cv-12451 (D. Mass. filed Nov. 27, 2018); SEC v. Roger Knox et al., No. 18-cv-12058 (D. Mass. filed Oct. 2, 2018); SEC v. Philip Thomas Kueber, No. 15-cv-04479 (E.D.N.Y. filed Jul. 31, 2015) (settled Oct. 26, 2018).

[13] In many instances, the members of the Control Group may also be the ultimate beneficial owners of the securities associated with the fraud, either through control or ownership.

[14] For example, any person or group of persons who directly or indirectly acquires more than 5% of the outstanding shares of an issuer’s class of equity securities registered under Section 12 of the Exchange Act must file beneficial ownership reports until their holdings drop below 5%. See 15 U.S.C. § 78m(d) and 17 C.F.R. § 240.13d-1.

[15] See FINRA Regulatory and Examinations Priorities Letter (January 2015), available at https://www.finra.org/sites/default/files/p602239.pdf.

[16] The Staff notes that, while this bulletin focuses on omnibus accounts, wrongdoers can engage in illicit activities through any means that allow a nominee account holder to conceal the identity of the ultimate beneficial owner.

[17] See FINRA Provides Guidance to Firms Regarding Suspicious Activity Monitoring and Reporting Obligations, Reg. Notice 19-18, FINRA (May 6, 2019) (“Regulatory Notice 19-18”), available at https://www.finra.org/sites/default/files/2019-05/Regulatory-Notice-19-18.pdf. Key red flags relevant to this Staff bulletin from Regulatory Notice 19-18 appear at the end of the document.

[18] Seee.g., United States Senate, Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, "U.S. Vulnerabilities to Money Laundering, Drugs, and Terrorist Financing: HSBC Case History" (July 17, 2012) (highlighting the AML risks for a U.S. financial institution in providing correspondent account services to “affiliates and foreign financial institutions that face substantial AML challenges, often operate under weaker AML requirements, and may not be as familiar with, or respectful of, the tighter AML controls in the United States”), available at https://www.hsgac.senate.gov/imo/media/doc/PSI%20REPORT-HSBC%20CASE%20HISTORY%20(9.6).pdf.

[19] In the past few years, the Commission has brought a number of enforcement actions alleging violations of Section 17(a) of the Exchange Act and Rule 17a-8 thereunder in connection with a broker-dealer’s failure to discharge certain AML obligations. See, e.g., In the Matter of Interactive Brokers, LLC, Exch. Act Rel. No. 89510 (Aug. 10, 2020) (settled action) (finding a violation of Section 17(a) of the Exchange Act and Rule 17a-8 thereunder where a broker-dealer “ignored or failed to recognize numerous red flags, failed to properly investigate certain conduct as required by its written supervisory procedures, and ultimately failed to file SARs on suspicious activity” involving certain U.S. microcap securities transactions the broker-dealer executed on behalf of its customers); In the Matter of E.S. Financial Services, Inc. n/k/a Brickell Global Markets, Inc., Exch. Act Rel. No. 77056 (Feb. 4, 2016) (settled action) (finding a violation of Section 17(a) of the Exchange Act and Rule 17a-8 thereunder where a broker-dealer did not accurately collect, verify and maintain information regarding sub-account holders or other beneficial owners of corporate accounts in accordance with the broker-dealer’s customer identification procedures); In the Matter of Oppenheimer & Co., Inc., Exch. Act Rel. No. 74141 (Jan. 27, 2015) (settled action) (finding a violation of Section 17(a) of the Exchange Act and Rule 17a-8 thereunder where a broker-dealer failed to file SARs when it knew, suspected or had reason to suspect that its customer was engaging in suspicious activities, including: (1) using its brokerage account to facilitate unlawful activity by depositing into, and selling out of, its account large quantities of low-priced securities, which should have raised concerns that the customer might be participating in unregistered offerings or sales of securities in violation of Section 5 of the Securities Act and (2) depositing billions of shares of low-priced securities into its brokerage account and then simply transferring the shares to other U.S. broker-dealers without any apparent legitimate economic or business purpose).

[20] 31 C.F.R. § 1023.210. Moreover, Exchange Act Rule 17a-8 requires broker-dealers to comply with the reporting, recordkeeping, and record retention rules adopted under the BSA. See 17 C.F.R. § 240.17a-8.

[21] See 31 C.F.R. § 1023.210(b)(1); FINRA Rule 3310(b).

[22] See FINRA Rule 3310. FINRA has brought a number of enforcement actions involving allegations of a broker-dealer’s failure to establish and implement reasonably designed AML program procedures. See, e.g., BNP Paribas, FINRA Case No. 2016051105201 (Oct. 23, 2019); Aegis Capital Corp., FINRA Case No. 2013038750901 (Mar. 28, 2018); Credit Suisse Securities (USA) LLC, FINRA Case No. 2013038726101 (Dec. 5, 2016); In re Raymond James & Assocs., Inc., FINRA Case No. 2014043592001 (May 18, 2016); In re Brown Brothers Harriman, & Co., FINRA Case No. 2013035821401 (Feb. 4, 2014). As discussed below, broker-dealers must also report certain transactions involving suspicious activity by completing a SAR and filing it with FinCEN in accordance with FinCEN’s SAR rule. See 31 C.F.R. § 1023.320.

[23] See 31 C.F.R. § 1023.210(b)(5); FINRA Rule 3310(f).

[24] In this context, a “correspondent account” is defined as an account established for a foreign financial institution to receive deposits from, or to make payments or other disbursements on behalf of, the foreign financial institution, or to handle other financial transactions related to such foreign financial institution. See 31 C.F.R. § 1010.605(c)(1)(i). Further, for a broker-dealer, an “account” means any formal relationship established with a broker or dealer in securities to provide regular services to effect transactions in securities, including, but not limited to, the purchase or sale of securities and securities loaned and borrowed activity, and to hold securities or other assets for safekeeping or as collateral. See 31 C.F.R. § 1010.605(c)(2)(ii); see also 31 C.F.R. § 1010.610(a).

[25] See 31 C.F.R. § 1010.610(a); FINRA Rule 3310(b).

[26] Id. Broker-dealers are further required to establish enhanced due diligence procedures for any correspondent accounts established, maintained, administered, or managed in the United States, for foreign banks that operate under: (1) an offshore banking license; (2) a banking license issued by a country that has been designated as non-cooperative with international anti-money laundering principles or procedures; or (3) a banking license issued by a country designated by the Secretary of the Treasury as warranting special measures due to money laundering concerns. See 31 C.F.R. §§ 1010.610(b)-(c). While relevant depending on the facts and circumstances presented, these enhanced due diligence obligations are not the focus of this bulletin.

[27] See 31 C.F.R. § 1010.610(a).

[28] See FinCEN Special Due Diligence Guidance.

[29] Id.

[30] Id.

[31] Id.

[32] Id. (emphasis added).

[33] See 31 C.F.R. § 1023.320.

[34] See FinCEN Special Due Diligence Guidance (“The securities or futures firm generally is not required to look through an omnibus account to perform due diligence on any foreign financial institutions that may be underlying accountholders. However, due diligence conducted on a foreign financial institution for which an omnibus account is established or maintained should include conducting a risk-based assessment into the ‘nature of the foreign financial institution’s business and the markets it serves,’ including the nature of the foreign firm’s account base. Moreover, we expect that a securities or futures firm will conduct increased due diligence on the intermediary institution’s account base in the highest risk situations.”).

[35] With regard to a nested relationship, the certification could include, as an example, a statement that the foreign financial institution verifies the identities of its customers, and that it obtains such a certification from other financial institutions with which it does business.

[36] See 31 C.F.R. § 1023.220.

[37] See 31 C.F.R. § 1010.230; see also FINRA Rule 3310(f). As indicated, the term “beneficial owner” for CDD purposes is distinct from the term “ultimate beneficial owner” used in this bulletin.

[38] But see In the Matter of Pinnacle Capital Markets, LLC and Michael A. Paciorek, Exch. Act Rel. No. 62811 (Sept. 1, 2010) (finding that a broker-dealer’s corporate customers’ omnibus sub-account holders were “customers” for CIP purposes because the sub-account holders effected securities transactions directly and without the intermediation of the master account holders); SEC Office of Compliance Inspections and Examinations, National Exam Risk Alert, Master/Sub-accounts, Volume 1, Issue 1 (Sept. 29, 2011), available at www.sec.gov/about/offices/ocie/riskalert-mastersubaccounts.pdf (“A broker-dealer must remain cognizant of its obligations under the CIP rule with respect to master/sub-account arrangements, as there are instances when the CIP rule may require identification and verification of sub-account holders.”); FINRA Issues Guidance on Master and Sub-Account Arrangements, Reg. Notice 10-18, FINRA (April 2010), available at https://www.finra.org/sites/default/files/NoticeDocument/p121247.pdf (reminding broker-dealers that maintain master/sub-account arrangements that, “depending on the facts and circumstances of such agreements, a [broker-dealer] may be required to recognize sub-accounts as separate customer accounts for the purposes of applying FINRA rules, the federal securities laws and other applicable federal laws”).

[39] In its Notice of Proposed Rulemaking of the CDD rule, FinCEN acknowledged the illicit finance risks posed by underlying clients of intermediary customers in light of the lack of information about those clients and activities. See Customer Due Diligence Requirements for Financial Institutions, 79 Fed. Reg. 45151, 45161 (Aug. 4, 2014). While these “underlying clients” might not be subject to beneficial ownership identification requirements, financial institutions are still obligated to “monitor for and report suspicious activity” associated with intermediated accounts, including activity related to the underlying clients of the intermediated account holder. Id. In addition, “due diligence conducted on a foreign financial institution for which an omnibus account is established or maintained should include conducting a risk-based assessment into the ‘nature of the foreign financial institution’s business and the markets it serves,’ including the nature of the foreign firm’s account base.” FinCEN Special Due Diligence Guidance.

[40] See FinCEN CDD Guidance.

[41] See Customer Due Diligence Requirements for Financial Institutions, 81 Fed. Reg. 29397, 29404 (May 11, 2016).

[42] See Staff Responses to Frequently Asked Questions about a Broker-Dealer's Duties When Relying on the Securities Act Section 4(a)(4) Exemption to Execute Customer Orders (Oct. 9, 2014), available at https://www.sec.gov/divisions/marketreg/faq-broker-dealer-duty-section4.htm.

[43] In the Matter of World Trade Financial Corp., Exch. Act Rel. No. 66114 (Jan. 6, 2012) (quoting Stone Summers & Co., Exch. Act Rel. No. 9839 (Nov. 3, 1972)) (Commission opinion), petition denied, 739 F.3d 1243 (9th Cir. 2014).

[44] World Trade Financial Corporation v. SEC, 739 F.3d 1243, 1248 (9th Cir. 2014).

[45] Id. (emphasis and alteration in original) (quoting Wonsover v. SEC, 205 F.3d 408, 415 (D.C. Cir. 2000) (quoting 17 C.F.R. § 230.144)); see also id. (“The extent of the inquiry required for any given trade will vary with the circumstances. The D.C. Circuit correctly explained that: ‘An oft-quoted paragraph of a Commission release clarifies when a broker's inquiry can be considered reasonable: “The amount of inquiry called for necessarily varies with the circumstances of particular cases. A dealer who is offered a modest amount of a widely traded security by a responsible customer, whose lack of relationship to the issuer is well known to [the dealer], may ordinarily proceed with considerable confidence. On the other hand, when a dealer is offered a substantial block of a little-known security, either by persons who appear reluctant to disclose exactly where the securities came from, or where the surrounding circumstances raise a question as to whether or not the ostensible sellers may be merely intermediaries for controlling persons or statutory underwriters, then searching inquiry is called for.”’”) (quoting Wonsover, 205 F.3d at 415 (quoting Distribution by Broker-Dealers of Unregistered Securities, Exchange Act Release No. 33-4445, 1962 WL 69442, at *2 (Feb. 2, 1962)).

[46] See Opening Securities and Futures Accounts from an OFAC Perspective, OFAC (Nov. 5, 2008) (“OFAC Opening Securities and Futures Accounts Guidance”), available at https://www.treasury.gov/resource-center/international/standards-codes/Documents/securities_future_accounts_11052008.pdf.

[47] Id.seee.g., Foreign Assets Control Regulations for the Securities Industry, OFAC (April 29, 2004), available at https://www.sec.gov/about/offices/ocie/aml2007/ofac-t11facsc.pdf; Risk Factors for OFAC Compliance in the Securities Industry, OFAC (Nov. 5, 2008), available at https://www.sec.gov/about/offices/ocie/aml/ofacriskfactors110508.pdf.

[48] See OFAC Economic Sanctions Enforcement Guidelines, 31 C.F.R. Part 501 Appendix A.

[49] See, e.g., Beneficial Ownership Guidance.

November 18, 2020 in AML | Permalink | Comments (0)