Investigations Insider H1 2022
Leveraging our White Collar/Investigations team's collective knowledge to bring you insightful commentary on fraud, financial crime and regulatory risks from around the world.
12 min read
Highlights from this edition:
- The UK Government passed the Economic Crime (Transparency and Enforcement) Act in March 2022 following several years of discussions around economic crime reform. The legislation, designed to increase transparency and give law enforcement enhanced powers to combat money laundering and sanctions breaches, was fast-tracked in response to events in Ukraine. However, these measures are not Russia-specific (in contrast to the UK's recent financial sanctions), but are intended to form part of a broader reshaping of the UK's economic crime landscape. The high threshold for the attribution of criminal conduct via the "identification principle" (where a corporation can only be held criminally liable if an offence can be attributed to a person who has the "directing mind and will" of the corporation at the time the offence was committed) makes it notoriously difficult to prosecute large corporate entities with complex governance structures, where decision-making power is often exercised on a collective basis. This has resulted in growing calls for reform, particularly from prosecutors such as the Serious Fraud Office ("SFO") and Crown Prosecution Service ("CPS"), predominantly focused on the expansion of the "failure to prevent" model, which was first introduced by s.7 of the UK Bribery Act in 2010 and then extended to the facilitation of tax evasion via the Criminal Finances Act in 2017, to a broad offence of "failing to prevent economic crime" encompassing crimes such as fraud, money laundering, and false accounting. While the Law Commission's long-awaited "Options Paper" has rejected the idea of this broader 'failure to prevent' offence, it does propose extending the model to fraud and recommends reforms with respect to the identification principle. While the Government has yet to set a deadline for consideration of the Options Paper, we expect to see serious consideration given to the issues raised by the Law Commission in the near future, given the Government's recognition that corporate and economic crime are now issues of national security.
- Described as the "Wild West" by US Securities and Exchange Commission ("SEC") Chairman Gary Gensler, the meteoric rise of digital assets has disrupted the traditional financial ecosystem. The wave of enforcement actions brought by federal and state regulators serves notice to both individuals and institutional players that they should proceed cautiously. In particular, cryptocurrency's reputation for enabling transactions outside of the traditional financial ecosystem has prompted concerns that it may serve as a tool for Russian actors to evade recently promulgated sanctions against the Russian Federation, sanctioned corporate entities and individuals. Recent actions taken by the US Department of Justice (“DOJ”), Treasury, Office of Foreign Assets Control ("OFAC") and Financial Crimes Enforcement Network ("FinCEN") to clarify and emphasize their efforts to enforce sanctions related to cryptocurrencies indicate that US officials are committed to enforcing federal regulations in the cryptocurrency industry, especially with respect to Russian sanctions, but their ability to identify and interdict cryptocurrency transactions remains limited. Regulators will likely increase their reliance on private actors—many of which have sophisticated technologies and more information than the federal government—to identify sanctions evaders who may try to leverage their services. It is critical that market participants review their compliance programs, carefully assess where investments now may prevent compliance risk down the road and implement robust procedures to stay ahead of any illicit activity.
- In March 2021, we published an article discussing the surge in interest and publicity surrounding "SPACs" (Special Purpose Acquisition Companies), and how US Government regulators and the securities plaintiff's bar would be watching closely as a record number of SPACs entered into "de-SPAC" transactions. A total of 610 companies completed SPAC IPOs on US stock exchanges last year – a more than a two-fold increase from 2020 – leading to increased scrutiny from regulators and securities plaintiffs. This shows no signs of abating in 2022, with high-profile enforcement action by the SEC and criminal indictments by the DOJ suggesting that the Government will not hesitate to pursue executives of post-de-SPAC companies and potentially those of SPAC sponsors. Last year private securities plaintiffs focused on SPACs, SPAC sponsors, and the targets/new public companies emerging from SPAC transactions (collectively, "SPAC Transaction Parties") and their officers and directors, filing 31 securities class actions and 14 derivative actions in 2021. We expect plaintiffs to continue to file opportunistic securities actions against SPAC Transaction Parties and officers and directors, particularly against those targeted by short seller reports or the financial media, or who announce surprise negative business or financial results soon after closing their de-SPAC transactions.
On June 10, 2022 the Law Commission published its long awaited proposals on reforming corporate criminal liability in England and Wales (the "Options Paper"). In the first article in our Options Paper series, we summarise the Law Commission's proposed options for reform with respect to the identification principle and the expansion of the failure to prevent model.
Left to their own devices: No duty arises between cryptoasset software developers / controllers and cryptoasset owners
In Tulip Trading Limited v Bitcoin Association for BSV, the High Court summarily dismissed Tulip's claim against certain bitcoin software developers and controllers, holding that cryptoasset software developers and controllers owe neither fiduciary duties nor a common law duty of care to owners, and have no obligation to assist owners in accessing their cryptoassets should control over them be lost.
US policymakers have voiced concerns that the Russian government, as well as sanctioned corporate entities and individuals, could use cryptocurrencies to evade recently promulgated sanctions against the Russian Federation and associated individuals.
There is no doubt 2022 has signalled a renewed focus on beneficial ownership transparency. White & Case partners, in collaboration with Control Risks, share their insights on legislative developments including the new Economic Crime Act.
As many of the SPACs raised in 2020 and 2021 will be seeking to complete de-SPAC transactions this year, government enforcement and private securities litigation related to those de-SPAC transactions are likely to increase in 2022. We discuss how SPAC Transaction Parties and their officers and directors can reduce the risks arising from government and securities plaintiff scrutiny.
On March 15, 2022 the UK passed the Economic Crime (Transparency and Enforcement) Act, designed to tackle economic crime and sanctions evasion. The enactment of the legislation follows several years of discussions on economic crime reform in the UK and was fast-tracked in response to the events in Ukraine.
Digital assets like cryptocurrencies have disrupted the traditional financial ecosystem, with increased enforcement action by federal and state regulators a sign that market participants should tread carefully in 2022.
The Complementary Roles of the European Public Prosecutor's Office and the European Anti-Fraud Office
In June 2021 the European Public Prosecutor's Office ("EPPO"), a body charged with investigating and prosecuting economic crimes against the financial interests of the European Union ("EU"), became the first supranational prosecution authority, joining other EU bodies engaged in anti-fraud and policy work. We provide a high-level overview of the complementary roles of the EPPO and the European Anti-Fraud Office ("OLAF") in protecting the financial interests of the EU.
The Cyberspace Administration of China (the "CAC"), in conjunction with 12 other government departments (collectively, the "Working Mechanism"), issued the New Measures for Cybersecurity Review (the "New Measures") on January 4, 2022. The New Measures amends the Measures for Cybersecurity Review (Draft Revision for Comments) (the "Draft Measures") released on July 10, 2021 and will come into effect on February 15, 2022.
Time to Revisit Insider Trading Policies: The SEC's Expansion of Insider Trading Enforcement to "Shadow Trading" Survives Motion to Dismiss
On January 14, 2022, in a closely watched decision, a federal judge in the Northern District of California denied a motion to dismiss a complaint brought by the SEC that presented a novel application of the insider trading laws on the basis of "shadow trading".
CJEU ruling on EU Blocking Regulation provides some clarifications but leaves difficult questions to national courts
The Grand Chamber of the Court of Justice of the European Union ("CJEU") has opined for the first time on the controversial 1996 EU Blocking Regulation, which prohibits EU companies from complying with certain US sanctions related to Iran and Cuba.
On October 15, 2021, OFAC issued a brochure to promote sanctions compliance in the virtual currency industry (the "Guidance") and updated two related Frequently Asked Questions (FAQs 5592 and 646). The growing prevalence of virtual currency in the global economy denotes greater exposure to sanctions risks.
In her October 28, 2021 speech to the 36th ABA National Institute on White Collar Crime, Deputy Attorney General Lisa Monaco emphasized that white collar crime is a top enforcement priority for the DOJ. This announcement is consistent with expectations that the Biden administration will have a more aggressive approach to corporate crime enforcement after years of significant decline in white collar fines and prosecutions during the Trump administration.
In recent years, demands for payments in cryptocurrencies have become the ransom of choice for cyber extortionists and other online frauds. The COVID-19 pandemic and resulting public health lockdowns precipitated an explosion in such activity with record cases of cyber fraud being recorded.
Following enforcement actions imposing corporate criminal or civil liability, shareholders often bring derivative actions seeking to hold directors liable for related compliance failures by alleging they breached their fiduciary duty to monitor the affairs of the corporation.
Companies active in mainland China and the US watched with anticipation to see whether the new US Biden administration would depart from aggressive policy positions toward mainland China taken by the previous Trump administration. However, despite embracing more cautious rhetoric, the Biden administration has signalled that it intends to continue several trade policies toward mainland China established during the Trump administration. In response, mainland China has pushed through several laws to counteract the impact of US trade policies.
On August 20, 2021, the Standing Committee of the National People's Congress of the People's Republic of China ("PRC") passed the Personal Information Protection Law ("PIPL"), which will come into effect on November 1, 2021.
SEC Extends the Misappropriation Theory of Insider Trading Beyond Targets of Acquisitions to Companies "Economically Linked" to Such Targets
In a landmark action, the SEC filed a complaint alleging insider trading that expands the potential reach of insider trading law. On August 17, 2021, the SEC charged a former employee of Medivation Inc., a mid-sized oncology-focused biopharmaceutical company, with insider trading based on trades he made in advance of the company's announcement that it would be acquired by Pfizer Inc.
Recent warnings from the SEC and the US Congress could translate into more aggressive scrutiny of trading plans adopted pursuant to Rule 10b5-1 of the Securities and Exchange Act of 1934 ("Exchange Act").
We take a closer look at the liability consequences in the event of a violation of the obligations set out in the German Act on Corporate Due Diligence Obligations in Supply Chains ("LkSG" or "Act").
In an article for FT Advisor, Partner Jonah Anderson explores how rapid innovation in the financial space is being exploited by those seeking to launder money or finance terrorism (issues of national security for the UK, given London’s role in the global financial system).
Partner Jonah Anderson and Associate Lucy Rogers analyse the FCA’s recent action against a fintech firm in a piece for FintechFutures.
Partner Jonah Anderson and Associate Lucy Rogers examine the use of account freezing orders and account forfeiture orders by the FCA and other UK authorities for Compliance Monitor.
Partner Jonah Anderson has authored the Global Overview and UK chapter of the Lexology GTDT: Anti-Money Laundering 2022 publication.
Partners Anneka Randhawa and Jonah Anderson have co-authored the UK chapter of the Lexology GTDT: Anti-Corruption Regulation 2022 publication.
Karl-Jörg Xylander and Emilie Rogey explore procedural similarities and differences in the enforcement of securities laws for Global Investigations Review (reproduced with permission from Law Business Research Ltd).
Partners Kevin Bolan, Jonah Anderson and Ira Raphaelson discuss the DOJ's spotlighting of Central America as a geographic hotspot for corruption and money-laundering risks and its use of resources that target commonplace compliance subject matter, such as corrupt payments and money laundering, to address the so-called root causes of migration. The authors also offer some basic building blocks for creating an effective AML program that deals with potential law-enforcement scrutiny and compliance and overlaps with efforts to combat other compliance risks (article first published by Law360 on November 2, 2021).
Partner Jonah Anderson has authored the UK chapter of the International Comparative Legal Guide: Anti-Money Laundering 2022 publication.
In this Global Investigations Review (GIR) Special Report, Partners Virginia Romano and Tami Stark and Associates Nida Jafrani and Ben Elron provide an in depth assessment of how corporate cooperation in US enforcement proceedings has evolved, and suggest that greater clarity on DOJ and SEC expectations of cooperating companies can be critical to a successful resolution.
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