Category: Criminal Law

Supreme Court Rules Against Freezing "Untainted" Assets

In a ruling that could have far-reaching implications for criminal defendants’ right to counsel of their choice, the Supreme Court decided on March 30, 2016 that the government cannot freeze “untainted” assets that are not related to any alleged wrongdoing. Reaching this conclusion, the Court overturned an Eleventh Circuit decision affirming an order freezing a defendant’s assets that, while not obtained as a result of, or traceable to, the criminal conduct alleged, represented property of “equivalent value” to the illegal proceeds.

Writing for the majority in Luis v. United States, 578 U.S. ___ (2016), Justice Breyer, joined by Justice Roberts, Ginsburg and Sotomayor, drew a bright constitutional line, rooted in principles of property law, between tainted and untainted assets.  The Court stated that the latter “belongs to the defendant, pure and simple.  In this respect, it differs from a robber’s loot, a drug seller’s cocaine, a burglar’s tools, or other property associated with the planning, implementation, or concealing of a crime.”  Weighing these property rights, together with the “fundamental character” of a criminal defendant’s Sixth Amendment right to counsel, against the government’s stated interests, the Court reasoned that “in our view, insofar as innocent (i.e., untainted) funds are needed to obtain counsel of choice, we believe that the Sixth Amendment prohibits the court order that the Government seeks.”

The Court found further support for its decision in the fact that, absent the ability to use untainted funds to secure counsel, “[t]hese defendants, rendered indigent, would fall back upon publicly paid counsel, including overworked and underpaid public defenders” and that “increasing the government-paid-defender workload [would] render less effective the basic right the Sixth Amendment seeks to protect.”

The majority’s opinion also sought to address the concerns of the dissenting justices that, given the fungible nature of money, “sometimes it will be difficult to say whether a particular bank account contains tainted or untainted funds.”  Justice Breyer noted that “the law has tracing rules that help courts implement the kind of distinction we require in this case.”

Notably, while the petitioner’s assets in Luis had been frozen under a statute applying to violations of health care laws,” see 18 U.S.C. § 1345(a), the same statute also applies to a wide range of white collar crimes, including bank theft and bribery, as well as money laundering.

Article By Glen A. Kopp & David A. Shargel of Bracewell LLP

© 2016 Bracewell LLP

Supreme Court Rules Against Freezing “Untainted” Assets

In a ruling that could have far-reaching implications for criminal defendants’ right to counsel of their choice, the Supreme Court decided on March 30, 2016 that the government cannot freeze “untainted” assets that are not related to any alleged wrongdoing. Reaching this conclusion, the Court overturned an Eleventh Circuit decision affirming an order freezing a defendant’s assets that, while not obtained as a result of, or traceable to, the criminal conduct alleged, represented property of “equivalent value” to the illegal proceeds.

Writing for the majority in Luis v. United States, 578 U.S. ___ (2016), Justice Breyer, joined by Justice Roberts, Ginsburg and Sotomayor, drew a bright constitutional line, rooted in principles of property law, between tainted and untainted assets.  The Court stated that the latter “belongs to the defendant, pure and simple.  In this respect, it differs from a robber’s loot, a drug seller’s cocaine, a burglar’s tools, or other property associated with the planning, implementation, or concealing of a crime.”  Weighing these property rights, together with the “fundamental character” of a criminal defendant’s Sixth Amendment right to counsel, against the government’s stated interests, the Court reasoned that “in our view, insofar as innocent (i.e., untainted) funds are needed to obtain counsel of choice, we believe that the Sixth Amendment prohibits the court order that the Government seeks.”

The Court found further support for its decision in the fact that, absent the ability to use untainted funds to secure counsel, “[t]hese defendants, rendered indigent, would fall back upon publicly paid counsel, including overworked and underpaid public defenders” and that “increasing the government-paid-defender workload [would] render less effective the basic right the Sixth Amendment seeks to protect.”

The majority’s opinion also sought to address the concerns of the dissenting justices that, given the fungible nature of money, “sometimes it will be difficult to say whether a particular bank account contains tainted or untainted funds.”  Justice Breyer noted that “the law has tracing rules that help courts implement the kind of distinction we require in this case.”

Notably, while the petitioner’s assets in Luis had been frozen under a statute applying to violations of health care laws,” see 18 U.S.C. § 1345(a), the same statute also applies to a wide range of white collar crimes, including bank theft and bribery, as well as money laundering.

Article By Glen A. Kopp & David A. Shargel of Bracewell LLP

© 2016 Bracewell LLP

Continued International and Domestic Coordinated Focus on Money Laundering

On February 1st, the U.S. Drug Enforcement Agency (DEA) announced an unspecified number of arrests of Hizballah money launderers, including Mohamad Noureddine. stack of moneyThese arrests followed the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) designation of Noureddine pursuant to its counterterrorism authority. The OFAC press release for this designation identifies Noureddine as a key Hizballah money launderer. According to OFAC,  Noureddine and his company Trade Point International S.A.R.L. established a money laundering network across Asia, Europe, and the Middle East that provides bulk cash shipping and black market currency exchange services for those seeking to hide their ill-gotten gains.

Hizballah International Financing Prevention Act of 2015

Irrespective of the detention of Noureddine, foreign financial intuitions that knowingly facilitate or conduct significant financial transactions for Trade Point International S.A.R.L. may have their U.S. correspondent or payable through accounts severed. OFAC has this authority under Section 102 of the Hizballah International Financing Prevention Act of 2015, which authorizes secondary sanctions on Hizballah.

Lebanese Canadian Bank

The arrests stem from  interagency  investigations of the Lebanese Canadian Bank (LCB). U.S.  law enforcement agencies have a long history with this now defunct Hizballah-linked bank.  In February 2011, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a Notice of Proposed Rulemaking to exclude  LCB from the U.S. financial system, finding that the bank is of “primary money laundering concern.”  In response to this action, the Banque du Liban revoked LCB’s banking license in September 2011. The bank’s remaining assets and liabilities were then sold to Societé General. Two years later, LCB entered into a $102 million settlement agreement to resolve a civil forfeiture and money laundering lawsuit filed by the U.S. Attorney for the Southern District of New York.  FinCEN withdrew  its Notice of Proposed Rulemaking in September 2015, on the basis that LCB no longer exists.

Coordinated Effort to Combat Money Laundering

The success of the ongoing money laundering investigation and recent arrests were possible because of the cooperation and coordination among the following international and domestic agencies:

  • DEA Philadelphia, DEA Miami, DEA Newark, DEA New York

  • DEA Special Operations Division and DEA Bilateral Investigative Unit

  • DEA country offices in Europe

  • DEA country offices in Bogota and Cartagena, Colombia

  • S. Customs and Border Protection National Targeting Center

  • S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN)

  • S. Department of the Treasury’s Office of Foreign Assets Control (OFAC)

  • Various French, German, Italian and Belgian law enforcement agencies

  • EUROPOL

  • EUROJUST

Like the LCB investigation before it, yesterday’s arrests will likely lead to additional U.S. and international actions against money launderers around the world.

ARTICLE BY Jeremy P. Paner of Holland & Hart LLP

Copyright Holland & Hart LLP 1995-2016.

Supreme Court to Decide Whether Government can Freeze a Defendant’s Lawful Assets Pre-Conviction

Whether the government can freeze all of a defendant’s assets before trial, even where those assets are not tainted by any connection to alleged federal offenses, thereby preventing a defendant from paying for his own defense, will be decided by the U.S. Supreme Court in Luis v. United States, No. 14-419.

The federal Mandatory Victims Restitution Act of 1996 (“MVRA”) requires that defendants convicted of crimes committed by “fraud or deceit” compensate victims for the full amount of the victims’ losses. Often, however, by the time there is a conviction, criminal defendants do not have any assets to satisfy those judgments. Seeking to address this problem, the United States has invoked the Fraud Injunction Act to freeze legitimate assets pre-conviction to pay a later judgment.

The Fraud Injunction Act statute authorizes a “restraining order” against assets when a person is “alienating or disposing of property, or intends to alienate or dispose of property” that is “obtained from” or “traceable to” certain federal offenses. In such cases, the statute permits a court to prohibit the use of tainted property “or property of equivalent value” before trial to ensure that sufficient assets are available to satisfy any judgment.

In 2012, the federal government charged Sila Luis with conspiracy to commit Medicare fraud – a scheme allegedly amounting to over $45 million, stemming from claims for home health services that were neither medically necessary nor actually performed. Using the Fraud Injunction Act, the federal government asked the district court to freeze all of Luis’s assets, including those that were not even allegedly obtained through fraud, totaling approximately $15 million. The district court agreed to impose the freeze. .

Luis then requested that the district court release her untainted assets so she may retain her lawyer. The district court denied the request, explaining that, because the government could locate “only a fraction of the assets” Medicare had paid Luis’s companies, her “untainted” assets also could be frozen. The district court likened Luis’s situation to that of a bank robber indicted for stealing $100,000; That is, if the robber has already spent the allegedly stolen money which he could not use to hire his preferred lawyer in any case, he also should not be able to spend a different $100,000 he “just happens” to have to hire the lawyer he wants.

Luis appealed the district court’s decision, arguing she was being deprived of her Fifth Amendment right to due process of law and her Sixth Amendment right to counsel of her choosing. The Court of Appeals for the Eleventh Circuit, in Atlanta, upheld the district court’s denial of her request to release her legitimate assets, stating that Luis’s arguments were foreclosed by the U.S. Supreme Court’s decision in Kaley v. United States (2014) and other decisions.

In Kaley, the Supreme Court held that when the government, following a grand jury indictment, restrains tainted assets needed to retain a lawyer, the Fifth and Sixth Amendments do not require a pretrial hearing at which the defendant can challenge a grand jury’s finding of probable cause.

Luis asked the Supreme Court to review the case. The Court agreed to do so and recently heard argument. A decision is expected by next June.

Article By Ramsay C. McCullough of Jackson Lewis P.C.

Jackson Lewis P.C. © 2015

Crime Doesn’t Pay (as much as it used to) – FBI Cracks Down on Trade of Looted Syrian and Iraqi Cultural Artifacts

In support of the international crackdown on the black market trade of looted cultural artifacts, the FBI recently announced that art dealers may be prosecuted for engaging in the trade of stolen Iraqi and Syrian antiquities. Terrorist organizations such as Islamic State in Iraq and the Levant (“ISIL”) have pillaged these countries of their cultural relics for sale on the black market. Many find their way into the hands of art dealers and collectors in the Europe or even United States. In response, the FBI released an alert titled “ISIL Antiquities Trafficking” on August 25, 2015. Perhaps most strikingly, this alert warns that engaging in the purchase of these looted artifacts may constitute a violation of 18 U.S. Code § 2339A[1] for providing financial support to terrorist organizations.

ISIL has done much to publicize its demolition of artifacts and archaeological sites in Syria and Iraq that it has condemned as un-Islamic.[2] However, behind the cameras, many of these cultural artifacts are being smuggled out of these countries and sold by ISIL on the underground market and finally reach the dealers and collectors in Europe and North America. The profits from the sale of these precious antiquities are then used by the organization to fund its operations. George Papagiannis, spokesman of UN Educational, Scientific and Cultural Organization, described the artifact trafficking as “a threat to the memory of humankind and a threat to the identities of people in these communities who are tied to these sites.”[3] Facilitating this illicit trade are the smugglers and gallery owners who provide forged documentation to allow the artifacts to enter European and American markets.[4]

Before the FBI’s issuance of the alert, United Nations and Europe had already taken steps to prevent and eliminate the trafficking of these Syrian and Iraqi cultural objects. On February 10, 2015, United Nations Security Council passed Resolution 2199 that requires all Member States to take efforts to prevent the trade of artifacts illegally removed from Syria after 2011 and from Iraq after 1990. In December 2013, the European Union Council Regulation (EU) No 1332/2013 prohibited the trade of Syrian cultural property where there are reasonable grounds to suspect that the goods were removed from Syria without the consent of their legitimate owner or in breach of Syrian law or international law.

The FBI alert follows in the footsteps of these efforts to stop the illegal trade of Syrian and Iraqi artifacts. The alert warns art dealers and collectors that they should be careful in purchasing objects from these regions and asks them for help and cooperation to spread this message out and prevent further trade. In addition, the FBI states that purchasing stolen items from these regions may result in prosecution under 18 U.S. Code § 2339A because the proceeds from such sales may provide financial support to terrorist organizations.

18 U.S.C. § 2339A was enacted to charge those who provided material support to terrorists. It provides that “whoever provides material support or resources…knowing or intending that they are to be used in preparation for, or in carrying out, a violation of [various criminal statutes related to terrorist activities]” may be charged with providing material support to terrorists. Penalties for violating 18 U.S. Code § 2339A are significant and range from a fine to life imprisonment. However, in Holder v. Humanitarian Law Project, 130 S. Ct. 2705 (2010), the Supreme Court clarified that a violation of 18 U.S.C. § 2339A requires that the donor must intend to further terrorist activity, rather than simply know that the donee is a terrorist organization. According to this holding, it seems that even if an art dealer or collector was prosecuted under 18 U.S.C. § 2339A, there would need to be a showing that the dealer or collector intended to support terrorist activity by purchasing the stolen artifacts, which in most cases, is highly unlikely.

It is unclear from FBI’s alert whether 18 U.S.C. § 2339B will be used to pursue dealers and collectors found to have bought Syrian and Iraqi stolen artifacts. Section 2339B penalizes anyone who “knowingly provides material support or resources to a foreign terrorist organization, or attempts or conspires to do so.” Unlike 18 U.S.C. § 2339A, the required mental state for a violation of § 2339B is only knowledge that the receiving organization is a designated terrorist organization, not specific intent to further the terrorist activities. In Weiss v. National Westminster Bank PLC, 768 F.3d 202, the Second Circuit Court of Appeals held that for the purposes of 18 U.S.C. § 2339B, a defendant has knowledge that an organization engages in terrorist activity if it “knows there is a substantial probability that the organization engages in terrorism but…does not care.” If the FBI elects to prosecute under 18 U.S. Code § 2339B, art market practitioners may have more cause concern. Admittedly several intermediary middle-men often separate the original terrorist looters and the final buyers, but the intermediate art dealer or the buyer might still be charged with violating 18 U.S.C. § 2339B if it should be aware of a substantial probability that the prior seller may have engaged with terrorism but takes no action.

18 U.S.C. § 2339B has been the most frequently cited statute for the government to pursue sponsors of terrorism. If the government is determined to use § 2339B to attack the trafficking of cultural property, the innocent buyer may face real legal risks if the acquired objects are proven to be looted from Iraq or Syria by ISIL. As the FBI warns in its alert, art dealers and collectors alike should do their due diligence and “check and verify provenance, importation and other documents” and report any suspicious items to the FBI.

Article By Robert A. Darwell of Sheppard, Mullin, Richter & Hampton LLP & Justin Xu
Copyright © 2015, Sheppard Mullin Richter & Hampton LLP.

[1] The statute quoted in the alert is 18 U.S. Code § 233A. However, we understand the cited statute here should be 18 U.S. Code § 2339A.

[2] Matthew Hall, How We Can Prevent ISIS From Pillaging Palmyra, the Newsweek, (June 14, 2015), available here.

[3] Julian Pecquet, Congress Deals Blow to ISIS Looting in Syria, the U.S. News (June 2, 2015), available here.

[4] CBS News, Following the trail of Syria’s looted history, (September 9, 2015), available here.

Failure to Investigate Could Mean “Game-Set-and-Match” for EB-5 Investors: SEC Case against Brother-in-Law of Tennis Star Andre Aggasi Shows Risk for Would-be Immigrant Investors

On August 25, 2015, the U.S. Securities and Exchange Commission (SEC) filed a civil fraud suit against Lobsang Dargey, a Bellevue, Washington-based real estate developer and alleged fraudster, who also happens to be a brother-in-law of tennis star Andre Agassi. Dargey had ventured into the EB-5 Program as a developer and regional center owner, securing designation by United States Citizenship and Immigration Services (USCIS) for two regional centers, Path America SnoCo and Path America KingCo. The complaint is relevant to both investors and regional centers in the EB-5 industry, as well as to lawyers advising issuers in EB-5 offerings.

SEC-logoGOLD

Dargey has now landed in hot water for engaging in fraud and deceit in the EB-5 offering process, as well as for using related Path America companies to siphon investor funds into his own pockets. The SEC has charged him for making false and misleading statements in EB-5 offering documents, alleging that since 2012 Dargey has exploited the EB-5 Program to defraud investors seeking investment returns and a lawful path to U.S. permanent residency. Among the allegations is misappropriation of $17.6 million in investor funds.

Summary of the SEC’s Complaint

The SEC alleges that Dargey, through his solely owned and controlled entity Path America, LLC, had diverted to himself and for his own personal benefit millions of dollars he had raised from Chinese nationals for EB-5 projects sponsored by Path America-owned regional centers. Path America had raised money for projects including the proposed Potala Farmers Market (a hotel, apartment and retail project in Everett, Washington), as well as the Potala Tower (a proposed 440 foot, 40-story hotel-and-apartment tower) in Seattle. Path America serves as the managing member of both USCIS designated regional centers and had unfettered control over the entire EB-5 investment process for the offerings.

In bringing the suit, the SEC also obtained a temporary asset freeze against Dargey and numerous related corporate defendants to prevent Dargey from pursuing his recently-announced plans to raise an additional $95 million from investors. According to the SEC, Dargey spent some of the siphoned funds on a $2.5 million home in Bellevue as well as at various gambling casinos. He also diverted EB-5 funds to projects that were unrelated to those disclosed in his offering documents to investors, meaning that the green card petitions pursued by EB-5 investors would be infirm.

A Path to America Fraught with Securities Fraud

The Path America case raises questions about investments buttressed by stories that seem to-good-to-be-true: Dargey left his Tibetan homeland and goat-herding profession in 1997 to pursue opportunities in the United States, as a house painter though he didn’t speak a word of English, and later rose to become a successful real estate developer. Dargey’s personal biography was almost certainly a lure to investors, and he conditioned the EB-5 market with his life story. In the media, Dargey touted his personal journey from Buddhism to capitalism, creating a background narrative for his real estate ventures and perceived success. Dargey’s story should caution investors to thoroughly examine the organizations backing the EB-5 projects in which they invest despite any personal affinity or connectivity with the background of a project promoter. Although the SEC has not directly asserted that this case involved affinity fraud, it is clear that Dargey targeted Chinese investors who may have felt an affinity with him. This is a common tactic employed by a schemer in affinity fraud.

If true, the allegations levied by the SEC make a strong case against Dargey for securities fraud, which is at the heart of the complaint. An element of any claim of securities fraud is the defendant’s state of mind, specifically, whether the defendant acted with “scienter” or “fraudulent intent.” Frequently, aggrieved investors in actions to recover their investment losses have tried to establish scienter by pointing to a defendant’s “motive and opportunity” to commit fraud. The Dargey case illustrates how control of numerous related entities involved in this EB-5 financing program may give a defendant ample “opportunity” to siphon off investor funds and commit fraud, while keeping investors in the dark about material changes to how he used investor funds. Nine different corporate entities were named as defendants in this case, and, according to the SEC’s Complaint, Dargey maintained control over all of them to such a degree that he was able to repeatedly transfer funds between the entities and into accounts that he controlled, eventually withdrawing large sums of cash which he used to gamble and purchase real estate. A quick records search on the State of Washington’s Secretary of State’s corporate records database reveals that Dargey (or a member of his executive team listed on his company website) is in fact the registered agent for each of these companies.

The Dargey case serves as a reminder to investors in EB-5 regional center projects (or any other investment vehicle) to be thorough and circumspect in evaluating the organizational structure of any enterprises set up to achieve the advertised goals, particularly where numerous inter-related projects are involved and particularly where the entire enterprise appears to be under the control of just one individual. Unlike Mr. Dargey’s rags-to-riches success story, some opportunities are just too good to be true.

Related Party Transactions Can Be Traps for Unwary EB-5 Regional Centers and Issuers

Regional centers and issuers of EB-5 investments should also consider carefully the lessons in Dargey’s case about potential SEC scrutiny of related party transactions.

USCIS designated regional centers that handle investor funds and that facilitate offerings also need to be cautious, even when they think they are doing everything properly. The SEC is showing an increased interest in the EB-5 Program, and this interest appears to be here to stay.

One hot topic is related party transactions that, when improperly concealed, keep investors in the dark about the economic relationships among multiple related entities in a deal. Disclosures about related party transactions should not be buried in a Private Placement Memo (PPM), but should be identifiable and written in clear language. If a regional center, developer and general partner are essentially one and the same party in your deal, your offering could be subject to a higher level of scrutiny later particularly with respect to whether all material disclosures were properly presented in offering documents. Related party transactions require careful and robust disclosures so that investors can evaluate the substance of potential conflicts. Such disclosures belong to the total mix of information that a reasonable investor would need to know in order to make an investment decision. The omission of such disclosures can lead to litigation later with the SEC and investors.

While transparency to investors is paramount, so too is fairness. If you are conducting an offering with related party transactions, ensure that you have a commercially reasonable basis for the economics of your deal. Also have objective controls on how investor funds are managed and spent. One practice tip is to engage an auditor that provides annual or even semi-annual or quarterly reports to investors. Even regional center owners or managers who don’t engage in criminal or egregious conduct can find the SEC knocking at the door and alleging fraud when material facts in a deal are not disclosed to investors, or when there are questions about how investor funds were handled.

Another strategic tip: hire qualified securities counsel to understand what you need to disclose in your offering documents when you have a related party transaction. What constitutes a material disclosure is complex. Suffice it to say that counsel needs to be engaged in all aspects of an offering’s preparation to guide an issuer on whether disclosures are sufficient when a deal goes to market. An omission could result in allegations or findings later that offering documents contained false or misleading statements. An omission of a material fact about related party transactions can have dire consequences including rescission in favor of investors, an SEC finding of securities fraud under Section 10(b) of the 1933 Securities Act and exposure under Rule 10b-5, one of the most important rules promulgated by the SEC with respect to securities fraud. Allegations by the SEC that an issuer or regional center has made false and misleading statements in an offering process can lead to assets being frozen and costly civil fraud litigation, particularly where the SEC can show opportunity to commit fraud through related party dealings.

How Can Regional Centers and Issuers of EB-5 Securities Mitigate Litigation Risks?

Every EB-5 regional center or issuer should consider adding a securities litigator to the offering team before introducing a deal into the marketplace. In the current climate, guidance on risk mitigation in an offering is critical. Having counsel involved early on during drafting sessions of an offering is an effective way to understand your disclosure obligations as you prepare a PPM. A securities litigator following the lifecycle of your offering – from inception of a business plan to closing of a deal – can serve as an excellent advisor to issuers in preventing problems and miscommunications with investors and government agencies. In the current climate, risk mitigation is an important component of EB-5 regional center business planning and operations.

Conclusion

The SEC is the ultimate referee in an EB-5 deal. Playing ball by the rules matters, especially when it comes to ensuring that material facts are disclosed to investors. Disclosures are the “sweetspot” of a PPM. A PPM without the right disclosures is about as effective as tennis racquet with no sweetspot. You’ve lost the match before the first serve.

If SEC litigation increases in the EB-5 realm, then we expect that otherwise lawabiding and compliant regional centers could be inadvertently swept up into costly litigation. This will be true even with regional centers who make a good faith effort to comply with the law. An SEC complaint against your regional center could seriously impede your ability to do business, even if you have the law and facts in your court. Therefore, now’s the time to add securities litigation counsel to your EB-5 team, if you haven’t done so already. Securities litigation counsel experienced in the purchase and sale of securities, the Foreign Corrupt Practices Act (FCPA), disputes with the SEC over what constitutes materiality in an offering, and other relevant areas can help you mitigate risk, protect investors and raise funds as you intended.

Article By Adam L. Sisitsky & Douglas Hauer of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
©1994-2015 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

FIVE MINUTES ON… Anti-Bribery and Corruption Laws in Europe

Anti-bribery and corruption has been a hot topic in the US for almost 40 years. The topic has historically however received much less attention within Europe. That is now changing as Europe is beginning to catch up and many European countries have already implemented anti-bribery laws much stricter than those in the US. Recent events have put the topic back on the agenda and we can expect further debate on the effectiveness and efficacy of enforcement in Europe.

The levels of perceived corruption within Europe are generally quite good. Transparency International publish an annual Corruptions Perceptions Index which shows the perceived levels of corruption in 175 countries globally. In its 2014 report, the average score across the EU and Western Europe was 66 (with 0 being highly corrupt and 100 being very clean), much better than the global average of 43. Even those countries with the lowest scores in the EU and Western Europe, being Greece, Romania and Italy, had a score of 43, consistent with the global average. Seven of the top 10 least corrupt countries are actually in Europe (Denmark, Finland, Sweden, Norway, Switzerland, Netherlands and Luxembourg).

Over the last five or so years, countries within Europe have been overhauling their existing, in many cases insufficient, anti-bribery regimes and some countries have implemented anti-bribery laws for the first time. We consider some of the specific regimes below along with their differences and similarities. The majority, if not all, are actually stricter than the laws in the US. The differences of the laws in Europe to the laws in the US have been somewhat of a surprise to many organisations who currently comply with the laws in the US and who don’t necessarily realise that they now need to enhance their practices to comply with more stringent regimes.

What’s Been Happening Across the Pond?

In the US, the Foreign Corrupt Practice Act (FCPA) came into force on 19 December 1977. The FCPA criminalises the paying or offering of a bribe to a foreign official, although the public official themselves do not commit an offence by receiving the bribe. The FCPA requires organisations to have accounting and other controls in place to prevent and detect bribery, but does not specifically require broader anti-bribery programmes. As well as US organisations, the FCPA has extraterritorial reach and catches any other organisation that uses any means of US commerce, including mails, emails, faxes, bank transactions, and similar acts.

Top of the Class: the Uk

Much of the change in approach within Europe and indeed further afield has arguably been led by the introduction in the UK of the Bribery Act 2010 (Bribery Act), which came into force on 1 July 2011, and which is thought to be the strictest anti-bribery legislation in the world.

Similarities between the FCPA and the Bribery Act Differences between the FCPA and the Bribery Act

Territorial Reach

The Bribery Act has a wide territorial reach. It extends not only to offences committed in the UK but also to offences committed outside the UK where the person committing them has a close connection with the UK by virtue of them being a British national or ordinarily resident in the UK, a body incorporated in the UK or a Scottish partnership. For corporations, the corporate offence in the Bribery Act extends to UK as well as non-UK organisations that carry on business or part of a business in the UK. So, for example, a Spanish company that exports to the UK can be in breach of the corporate offence for bribery occurring in Spain, even though that bribery does not involve any UK connected person.

Penalties

The penalties available for breaches of the Bribery Act are severe. They include an unlimited fine, up to 10 years in prison, and orders for directors to be disqualified. Companies can also be prohibited from public procurement and the proceeds from the bribe, for example the monies gained from a contract obtained through corruption, can be confiscated. Penalties under FCPA are slightly less severe with fines being capped to US$2 million (for corporations) and imprisonment for individuals being limited to a maximum of five years.

All Bribes Are Caught, Even Business-to-Business!

Arguably the single most important difference between the Bribery Act and the FCPA is that the Bribery Act prohibits the offering or receiving of a bribe and the bribery of Foreign Public Officials. Unlike the FCPA, the Bribery Act therefore captures private (business to business) bribery and also makes it an offence to receive a bribe as well as pay/offer to pay one. Directors and senior managers can also be found guilty of an offence if their organisation commits one of these offences with their consent or connivance.

Facilitation Payments

Facilitation Payments are payments made to expedite or secure the performance of a “routine government action”. The FCPA expressly authorises such payments. In the UK, such payments are prohibited under the Bribery Act.

The Corporate Defence

The Bribery Act also introduces a corporate offence of failing to prevent a bribe being paid, for which it will be a defence for an organisation to show that it has “adequate procedures” in place to prevent such bribery. Guidance produced by the UK Ministry of Justice explains that these “adequate procedures” need to be guided by six principles: Top-level commitment; Risk assessment; Proportionate procedures; Due diligence; Communication (including training) and Monitoring and review. As stated above, FCPA only requires accounting and other controls to prevent and detect bribery, nothing broader.

Other EU Member States

Most EU Member States have enacted anti-bribery laws with heavy fines. When compared to the Bribery Act, however, such laws are generally more limited in scope and tend to focus on bribery of public officials. Most are however at least consistent with FCPA.

In France, most of the French anti-corruption provisions relevant to businesses are laid down in the French Criminal Code and relate to both the public and private sector and both the offeror and the recipient. Like the UK, the law in France also has an extraterritorial reach and will interestingly apply amongst other situations, where the victim of the bribe is a French national. Penalties for breach of French laws include imprisonment for, in some cases, up to 15 years and financial penalties including, for companies, fines of, in some cases, up to €5 million or twice the amount of the proceeds stemming from the offence. Unlike the UK, there are in France, however, no legal requirements for implementing preventive procedures.

Germany’s anti-bribery laws are contained in the Criminal Code, which prohibits offering, paying or accepting a bribe in domestic or foreign transactions. Separately, civil liability can, if certain criteria are met, attach to companies for offences committed on their behalf due to the Administrative Offences Act. Owners/managers can also be found liable in certain situations. Penalties include five years’ imprisonment (10 years’ imprisonment in severe cases involving a member/official of a public body), a criminal fine and confiscation of monies obtained from the bribe. The Criminal Code also applies to offences committed abroad. One of the key cases to be enforced in Germany was that against Siemens AG, who paid German authorities almost €600 million in fines after they were investigated for paying bribes to secure public-works contracts in a number of countries. This was in addition to fines paid in the US for breaching FCPA.

In the Netherlands, anti-corruption and bribery laws are predominantly aimed at attempts to bribe public officials. Unlike the UK, Dutch law has relatively limited jurisdictional reach. For example, a foreign non-Dutch company that has committed acts of bribery of a non-Dutch foreign official outside the Netherlands is not subject to the criminal laws of the Netherlands. The maximum penalty under Dutch law is a fine of €740,000 for each case of bribery and for individuals, imprisonment for four years (one year for private commercial bribery) and a fine of up to €74,000.

Outlook

While most Member States have clearly improved their anti-bribery regimes in recent years, what seems to be the biggest hurdle is insufficient enforcement and the considerable differences in the enforcement levels across Europe, in particular when it comes to bribery abroad. Relying on the UK (or the US) will soon stretch the already limited resources that individual countries can bring to bear. It seems that the European Union itself will take action in the foreseeable future. Certainly there would be jurisdictional concerns as regards the criminal aspects for individuals, but the Commission’s war on cartels has shown that it is well-suited to enforcing policy. Currently, however, the Commission contends itself with issues in a biannual report on corruption in each Member State.

Given the extra-territorial reach discussed above, European businesses need to make sure that they are compliant with all the different antibribery laws that could affect their business. This is not only the laws in their own countries, but also the laws abroad. Many organisations acting internationally and globally are seeking compliance with the Bribery Act as compliance with the Bribery Act should be sufficient to also achieve compliance with any other anti-bribery legislation.

ARTICLE BY Rob Elvin, Louise Roberts & Tim Wünnemann of Squire Patton Boggs (US) LLP

© Copyright 2015 Squire Patton Boggs (US) LLP

New York City Mayor Signs “Ban the Box” Law

Mayor Bill DeBlasio signed a bill (Int. No. 318) that amends the New York City Human Rights Law (“NYCHRL”) to further restrict employers (with four or more employees) from inquiring into or otherwise considering an applicant’s or employee’s criminal history in employment decisions.  The new NYC law will take effect on October 27, 2015.

As we detailed in our prior post, the new NYC law prohibits employers from asking about criminal history on an initial employment application (“ban the box”) and at any time prior to extending a conditional offer of employment.  The new NYC law also forbids employers from stating on any job advertisement or other solicitation or publication that employment is conditioned or limited based on an applicant’s arrest or conviction history.

For years, before an NYC employer could take adverse action on the basis of criminal history, it had to first engage in a multi-factor analysis under Article 23-A of the New York State Correction Law to determine whether a sufficient nexus exists between the offense and position sought.  Now, under the new NYC law, before taking adverse action the employer also must:

  • furnish a written copy of the criminal history inquiry to the applicant in a form determined by the New York City Commission on Human Rights (“NYCCHR”);

  • provide a written Article 23-A analysis to the applicant in a form determined by the NYCCHR, together with “supporting documents” setting forth the basis and reasons for the adverse action; and

  • after providing the applicant with the required documentation, allow him or her at least three business days to respond and, during that time, hold the position open for the applicant.

To redress violations of the new NYC law, aggrieved applicants and employees may file a complaint with the NYCCHR or in court, with the promise of lucrative remedies under the NYCHRL.

The new NYC law does not apply where the employer must take action pursuant to any federal, state, or local law that requires criminal background checks for employment purposes or bars employment based on criminal history.  For purposes of this exception, “federal law” includes the rules or regulations of a self-regulatory organization as defined by the Securities Exchange Act of 1934 (like FINRA).  The new NYC law also excepts various public employment positions.

NYC now joins a growing number of jurisdictions across the nation that have “banned the box” and otherwise regulated employer use of criminal history in hiring and other personnel decisions.  To ensure compliance with the new NYC law, employers should start to review and, where necessary, make changes to their background check procedures and forms.

ARTICLE BY Katharine H Parker & Daniel L. Saperstein of Proskauer Rose LLP
© 2015 Proskauer Rose LLP.

US Supreme Court Ruling Impacts Jail Operations

On June 22, 2015, the United States Supreme Court issued an important decision for all North Carolina counties operating county jails in which individuals are held detainees awaiting trial. In Kingsley v. Hendrickson, No. 14-6368, the Supreme Court, in a 5-4 opinion authored by Justice Stephen Breyer, ruled that in excessive force claims brought by pretrial detainees, the plaintiff need only show the force used against him was objectively unreasonable, not that the officer subjectively intended to injure him. This case is important because the court had never before articulated what standard applies to the excessive force claims of those individuals charged, but not yet convicted, of crimes. For private citizens not charged or convicted of a crime, the standard is one of objective reasonableness (someone being arrested). For prisoners who have been convicted of a crime, the standard is higher and requires the plaintiff to show the officer subjectively intended to cause the harm. As accused but not convicted individuals, pretrial detainees fall somewhere between these two categories, and the court determined the standard applicable to their excessive force claims should be the lesser showing of objective unreasonableness.

Kingsley involved the claims of Michael Kingsley, an individual who was arrested on a drug charge and detained in a Wisconsin jail. He failed to make bail, so he was housed in the jail waiting for his trial.  One day, an officer noticed a piece of paper covering a light fixture in Kingsley’s cell.  Kingsley was ordered to remove the paper, but he refused. The officers then handcuffed him and forcibly removed him from the cell. The parties disagreed over what happened next, with Kingsley claiming the officers slammed his head into a concrete bunk and the officers claiming Kingsley resisted their efforts to handcuff him.  Everyone agreed, however, that one officer deployed his Taser to stun Kingsley for approximately five seconds. The officers left Kingsley in the cell for fifteen minutes, then returned and removed the handcuffs. Kingsley filed a lawsuit alleging the officers’ use of force was excessive.  At trial, the jury found in favor of the officers, but Kingsley appealed, arguing the jury was instructed on an incorrect standard – that of subjective reasonableness.

The Supreme Court agreed. The divided court held a jury must consider whether the force was objectively reasonable, a determination that turns on the “facts and circumstances of each particular case,” taking into account the perspective of a reasonable officer on the scene, not with the 20/20 vision of hindsight. The jury should also consider the legitimate interests a jail has in maintaining internal order and discipline. But to find an officer liable for excessive force under the U.S. Constitution, a jury need not find an officer maliciously and sadistically intended to punish or injure the detainee. Rather, the question for a jury in a pretrial detainee’s excessive force claim is simply whether the officer’s use of force was objectively reasonable, without considering the officer’s intent. This will likely lower the bar for Plaintiffs bringing 1983 claims because the jury instruction for subjective reasonableness required them to prove the officer acted maliciously and sadistically, which is often very difficult to prove. Jurors should still be instructed that 20/20 hindsight can’t be used to decide this issue, but defendants may now have a harder time presenting these cases to juries.

ARTICLE BY Caroline P. Mackie & J. Nicholas Ellis of Poyner Spruill LLP
© 2015 Poyner Spruill LLP. All rights reserved.

Real Estate Promoter Carlton Cabot Arrested – Is He the Worst Fraudster in Modern History?

The name Carlton Cabot was once synonymous with tenant in common (TIC) real estate projects. Cabot claimed to have raised hundreds of millions of dollars and public records show that he promoted approximately 18 large real estate projects nationwide.

The entire concept of TIC financed projects began in 2002 after the IRS issued a revenue ruling allowing investors to defer capital gains from the sale of real estate involving an “exchange” of properties. (These are sometimes called 1031 exchanges because of section 1031 of the Internal Revenue Code.) For the first time, the IRS said individuals could pool their gains and invest in larger projects.

Unfortunately, along with legitimate developers came a number of scam promoters. Overnight, a new industry was born. Obviously, not all TIC projects are scams but many were.

The first few years of operations saw Cabot building his empire. A golf course in Georgia, a shopping center in Green Bay and an office park in Connecticut are but a few of Cabot’s many TIC financed projects.

The pooled money of the newly created TICs was used to make a down payment and the balance was financed. The borrowers were the TICs but most were told the loans were nonrecourse meaning the lender was only looking to the value of the property and not relying on the TIC members’ credit.

Unfortunately, stockbrokers who had no understanding of the complex loan documents and tax law behind 1031 exchanges sold many of these TIC investment interests including the TIC interests behind Carlton Cabot’s projects. The brokers relied on rosy projections and glossy brochures and other slick marketing materials. Few, if any, read the 1000+ page offering documents. Much higher than average sales commissions didn’t hurt their enthusiasm, either.

Two more factors made these TIC projects the recipe for disaster. First, Carlton Cabot was the master tenant in each of the projects. That gave him the ability to collect rents on behalf of the TICs. Cabot also set up the loan documents so that the mail addressed to the TIC investors was sent to him.

By 2012, we believe that Carlton Cabot was skimming rents. Mortgage payments therefore began being missed. Had the TIC investors known these things, they could have easily cured any default and removed Cabot as the master tenant. Many of the projects had sufficient reserves that could have been used to pay a missed mortgage payment or two.

Unfortunately, Cabot didn’t tell the TICs about his misdeeds. Nor did the lenders, loan trustees or loan servicers. Instead, the TICs often received phony financial statements from Cabot. Even though defaults were occurring everywhere, the TICs had no idea.

By the time the TICs found out, the loans had been accelerated and were in serious default. The TICs went from being investors to owing tens of millions on defaulted mortgages.

The criminal complaint against Carlton Cabot and his manager Timothy Kroll claims that $17 million was stolen from the projects. The feds say some of that money went into Carlton Cabot’s pocket while some was used to pay off and silence the few investors who were beginning to ask questions. We are sure that the money wasn’t going to the mortgage payments, however.

Theft of $17 million is already a serious charge. Because the TICs were forced into default, the problem is much larger. The TICs lost not only the rent payments but also their equity in the property and their investments. For many Cabot victims, the money they lost was their life savings. Worse, they may still be on the hook for any shortfall or deficiency upon foreclosure.

Many of the investors are also quite elderly. Some have died since the various lawsuits began. For those folks, they will never see any justice. The Justice Department says both Carlton Cabot and Timothy Kroll were arrested at their homes. Both men are charged with seven felony crimes including wire fraud, securities fraud, money laundering and conspiracy. Both men face 105 years if convicted on all counts.

We suspect that absent an immediate plea, the charges will increase as the IRS and U.S. Postal Inspection Service continues its investigation.

In announcing the arrests, U.S. Attorney Preet Bharara said, “As alleged, Carlton Cabot and Timothy Kroll conspired to defraud investors out of millions of dollars by misappropriating investor funds, in part to pay for personal luxuries, and they falsified financial statements in an attempt to cover their tracks.  The investigative work of the Postal Inspection Service and the IRS put an end to the alleged scheme.”

Is there hope for investors? Maybe. Investors who purchased from a stockbroker or other financial professional may have a claim against the person who sold or recommended the investment.

Unfortunately, there was such a wave of TIC frauds that many of the broker dealers selling TIC investments are already out of business.

Investors facing foreclosure or the lost of their investment may have valid claims against the servicers, loan trustees, property managers and others who turned a blind eye or actively participated in the crimes. Suing Carlton Cabot is probably not a great idea. We suspect that getting money from him is nearly impossible. Any justice from Cabot will be had if he is convicted and forced to face his victims at sentencing.

In summary, what was once billed as the investment of a lifetime has turned into a life sentence for many victims.  Even if you lost everything, don’t give up. A good fraud recovery lawyer may be able to help defend you against suits from lenders and may even be able to get back some of your lost money from third parties.

ARTICLE BY Brian Mahany of Mahany Law
© Copyright 2015 Mahany Law