What Barclays’ Africa Pullout Means for De-Risking Phenomenon

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By Lalita Clozel
March 24, 2016

WASHINGTON — In a recent decision to reduce its Africa presence, Barclays emphasized the regulatory costs of maintaining operations on the continent. But compliance professionals see the move as yet another marker of the de-risking phenomenon as global banks continue to pull out from emerging markets around the world.

Earlier this month, Barclays said in its annual report that it would lower its 62.3% ownership stake in Barclays Africa Group down to a “non-controlling, non-consolidated position.” The British banking giant also said it was separately investigating Absa Bank, the large South African bank that Barclays acquired in 2005, for a series of potentially fraudulent advance foreign exchange transfers.

Some compliance professionals praised Barclays for what appeared to be a prompt response to a potential anti-money-laundering situation, but others said the decision to downsize so significantly in an emerging region is just another lost opportunity to make a mark in fast-growing markets around the world.

De-risking “leads institutions to making wholesale decisions rather than making decisions on a case-by-case basis,” said Chrisol Correia, the director of LexisNexis Risk Solutions’ global anti-money-laundering office. “This is potentially a significant impediment to banks’ profitability.”

A spokesperson for Barclays told American Banker that the two announcements were not related. But the bank, which was fined nearly $2.4 billion by regulators last year for its involvement in the rigging of foreign exchange markets and is the target of several ongoing investigations, probably took regional risks into account in its decision, experts say.

“You get out of something either because you can’t manage the risks or the dollars don’t make sense based on what you have to do to manage” the risks, said John Byrne, executive vice president at the Association of Certified Anti-Money Laundering Specialists. “Until things change, sadly the safer thing to do is to exit.”

In the report, Barclays noted that despite performing strongly, its African arm did not bring in enough revenue to justify the costs of doing business there, because of the strains of capital requirements and taxes on debt.

“Barclays has been in Africa for over 100 years,” the bank said. “But we face a regulatory environment where we carry 100% of the financial responsibility for Barclays Africa, and receive only 62% of the benefits.”

But observers said de-risking appeared to play a hand in the bank’s decision, especially in light of concerns about possible fraud at Absa Bank, and the move to draw down its presence on the continent is similar to decisions by other banks to depart emerging markets.

There is a “general de-risking phenomenon that’s occurring because of AML-related concerns,” said Eric Lorber, a senior associate at the Financial Integrity Network. The Barclays case, he added, is a “perfect microcosm of a major bank having to deal with all these different elements.”

After the revelation of possible fraud at Absa, experts said Barclays probably gauged the regional risk of maintaining operations on the continent against other recent regulatory hits the company has taken.

Other recent moves by global banks to pull out of certain regions includes the decision last year by Bank of America and other institutions to begin to cut off their correspondent relationships with the largest bank in Belize. Following that move, only two out of five domestic banks in the country have retained correspondent banking relationships with the U.S., a February Moody’s report found.

And Iran has complained that despite the recent lift of nuclear sanctions from the U.S. and European Union, many large banks still refuse to conduct business there, because of lingering U.S. concerns related to terrorism funding.

In the U.S., regulators have insisted that they are not telling banks to divest from certain regions or businesses; those are cost-and-benefit analyses firms do themselves, they say. “We don’t make those decisions. Banks make those decisions,” Comptroller of the Currency Thomas Curry told reporters after announcing earlier this month that the agency might publish guidance on best practices for de-risking.

In some cases, regulators have urged banks to stay involved in regions they are afraid to touch, like Iran. Prime Minister David Cameron recently rebuked Barclays’ moratorium on customers transacting with Iranian firms. In a letter to Barclays CEO Jes Staley, Cameron said the bank has acted “in opposition to the policy of the UK government,” according to The Times.

Yet others say large banks should be commended for quickly acting when they recognize a potential anti-money-laundering problem or other reputational risk.

“Given how quickly [Barclays] noticed this and how quickly the bank responded, you can look at that as a win” for AML awareness, said Tammy Eisenberg, the vice president of product development at the AML consulting firm NextAngles. She said the financial sector has become increasingly sensitive to reputational damage since the financial crisis, preferring to proactively avoid violations rather than let the problems snowball.

“It can send a strong message about a bank’s values,” Eisenberg said.

But she added that the moves bear their own costs for the local economies that lose an avenue to the international banking infrastructure.

“It’s just not a decision that’s made lightly,” Eisenberg said. “It impacts customers, it impacts local economies [and] employees that are stationed out there.”

Some experts have argued that international banks’ departure from certain regions has created a void that can benefit criminals.

“When the banks do this they create more of a black market for these international transactions,” said Andrew Ittleman, a partner at Fuerst Ittleman David & Joseph. “In a lot of ways it creates money laundering problems of its own.”

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Coral Gables’ Gibraltar Private Bank fined $4 million for Rothstein-related issues

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By Carol Marbin Miller
February 25, 2016

Federal regulators have fined Gibraltar Private Bank and Trust Company of Coral Gables a total of $4 million for violations of the U.S. Bank Secrecy Act, alleging in two separate complaints that the bank regularly failed to report activities consistent with money laundering.

The U.S. Treasury Department’s Financial Crimes Enforcement Network imposed a $1.5 million penalty. It accuses the Miami-Dade bank of failing to timely file 120 “suspicious activity reports,” or SARs, that corresponded to nearly $558 million in financial transactions during the years 2009 to 2013. Gibraltar’s failure to file the reports, the government said, may have helped former Fort Lauderdale attorney Scott Rothstein reap $1.2 billion in a Ponzi scheme that landed him a 50-year federal prison sentence.

“We may never know how that scheme might have been disrupted had Gibraltar more rigorously complied with its obligations under the law,” Jennifer Shasky Calvery, director of the financial crimes enforcement network, said in a written statement. “This bank’s failure to implement and maintain an effective [anti-money laundering] program exposed its customers, its banking peers, and our financial system to significant abuse.”

In a separate but “coordinated” action, regulators said, the federal Office of the Comptroller of the Currency, or OCC, issued a $2.5 million civil monetary penalty against Gibraltar Thursday. In 2014, the OCC placed Gibraltar under a consent order. The OCC’s penalties flow from a May 2010 investigation by the OCC’s predecessor, the Office of Thrift Supervision, that found widespread “failure” to file reports of suspicious activity, court records say.

Gibraltar’s chairman and CEO, Adolfo Henriques, did not return calls from the Miami Herald Thursday.

The fines, announced Thursday, add to other recent woes at the bank. Late last week, the bank’s founder and former CEO, Steven D. Hayworth, sued the bank in Miami’s federal court, alleging that the bank made Hayworth a scapegoat for the Rothstein Ponzi scheme scandal, forcing his departure, and breaching their obligations to him under contract. Rothstein, who was convicted of fraud in 2010, was a bank investor.

Hayworth left the bank in 2012. Current chairman Henriques joined the bank in 2011 as vice chair and was promoted when Hayworth departed.

Under federal banking law, financial institutions must “establish and implement an effective anti-money laundering compliance program as required by the [Bank Secrecy Act] and its implementing regulatations,” federal regulators wrote in a court filing assessing the penalty. “Gibraltar failed to establish and maintain adequate internal controls to assure ongoing compliance, and it did not provide adequate training for appropriate personnel.”

Gibraltar’s missteps were discovered in May 2010, the pleading says, when the then-Office of Thrift Supervision conducted an examination of the bank’s records. Four investigations conducted from 2011 through 2014 identified similar “significant deficiencies” in the bank’s compliance with reporting requirements. Flooded with a “large volume” of suspicious activity “alerts” — many of them “false positives” — the bank became unable to identify which banking activities were truly high risk, the pleading says.

Though Gibraltar had been warned that its monitoring system was deficient as early as 2010, the court record says, the deficiencies were “not fully rectified until mid-2014.”

“This FinCEN assessment shows how critical it is to have an anti-money laundering compliance program that actually works and that can withstand government scrutiny, as opposed to one that’s just something a bank has down on paper, which is exactly the type of programs that Ponzi schemers and other white collar criminals look to take advantage of,” said Andrew Ittleman, founder and partner at Fuerst, Ittleman, David and Joseph, who concentrates his practice in the areas of White Collar Criminal Defense and Anti-Money Laundering Compliance.

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Gibraltar hit with regulatory action for secrecy act and anti-money laundering violations

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By Nina Lincoff
February 25, 2016

Coral Gables-based Gibraltar Private Bank & Trust has been hit with two separate penalties related to Bank Secrecy Act and anti-money laundering compliance, regulators announced Thursday.

The announcements follow litigation earlier this week against the bank, which has $1.6 billion in assets as of Dec. 31.

The penalties are the latest incidents linked to Scott Rothstein’s $1.2 billion Ponzi scheme. Rothstein, an investor in Gibraltar, is serving 50 years behind bars.

The Financial Crimes Enforcement Network said that the “grounds exist” for a $4 million civil penalty against Gibraltar for “willful anti-money laundering compliance violations.” The bank admitted to facts outlined by FinCEN, according to the regulatory document.

Also on Thursday, the Office of the Comptroller of the Currency announced a $2.5 million civil penalty against Gibraltar for BSA violations, at the same time releasing the bank from its past consent orders. FinCEN cites the OCC’s previous findings that Gibraltar had violated BSA requirements following regulatory orders demanding that it improve its programs. Payment of $2.5 million to the OCC and $1.5 million to FINCEN will satisfy the assessment.

Gibraltar Chairman and CEO Adolfo Henriques told the Business Journal that the bank is pleased that the penalty resolves the OCC’s consent order.

FinCEN found that Gibraltar failed to implement adequate BSA and AML compliance procedures. As a result of these failures, the bank missed red flags related to Rothstein’s account including that Rothstein used his account for millions of dollars of fund transfers in large round-dollar amounts, which is indicative of a Ponzi scheme, according to FinCEN.

Gibraltar “willfully violated the BSA’s program, reporting and record-keeping requirements from February 2008 through October 2014,” according to FinCEN.

The bank failed to implement and maintain a sufficient AML program, develop an adequate customer identification program, etc., according to the regulator. Those deficiencies ultimately resulted in the failure to file 120 red-flag reports, or suspicious activity reports (SARs), related to almost $558 million in transactions.

Part of Gibraltar’s failure was due to a large volume of alerts generated by the bank’s compliance system, which meant the bank’s BSA analysts were unable to timely or adequately review all of the alerts, FinCEN said. Between August 2013 and late July 2014, Gibraltar failed to review and process almost 60 percent of its monthly alerts, it said. The regulator also found that Gibraltar closed down alerts which should have been escalated and resulted in the filing of a SAR.

“Gibraltar allowed the investigation to languish and did not file a suspicious activity report on Rothstein-related activities until after information regarding Rothstein’s activities appeared in the media,” according to FinCEN.

Gibraltar agreed that none of its attorneys, agents, partners, directors, or any person authorized to speak on the bank’s behalf make a public comment contradicting FinCEN’s assessment.

“All of these deficiencies allowed Scott Rothstein – who appeared on paper to run a successful law firm – to use the bank for purposes of operating a massive Ponzi scheme,” said Andrew Ittleman, founder and partner of Miami-based Fuerst Ittleman David & Joseph. “This sort of ‘paper’ program is all too common among regulated businesses, but as this case shows, the government is taking increasingly public steps to weed them out and bring them into actual compliance.”

The other half of Gibraltar’s Thursday regulatory discipline came from the OCC, which found that the bank failed to adequately ensure the timely filing of SAR reports after the regulator ordered it to improve compliance in 2010 and 2011.

These actions followed recent news that former Gibraltar CEO Steven Hayworthis suing the bank for $40 million in damages for breach of employment agreement and fraud .

In April 2015, Gibraltar disclosed it was under investigation from the U.S. Attorney’s Office and the Department of Justice’s Asset Forfeiture and Money Laundering Section for BSA and AML compliance.

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Practical Applications of the Yates Memorandum for the U.S. Food Industry

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The following article was written by Andrew Ittleman, Jessika Tuazon and Stephen Wagner for the January/February edition of the Food and Drug Law Institute’s Update Magazine. A full copy of the edition is available here. Fuerst Ittleman David & Joseph is a proud member of FDLI, and the firm’s lawyers frequently lecture and write on compliance and enforcement matters affecting the food, drug, biological product and dietary supplement industries. We repost the article here with FDLI’s permission.

2015 was a landmark year for the United States food industry. Fresh off the heels of finalizing significant food safety regulations in 2014, FDA took an increasingly aggressive approach to regulation and enforcement, including working closely with the Department of Justice (“DOJ”) to pursue prosecutions against companies and individual employees responsible for introducing tainted food into interstate commerce. These efforts resulted in some of the strictest penalties ever seen in adulteration cases.

This trend shows no sign of relenting, especially in light of Deputy Attorney General Sally Quillian Yates’s recent Memorandum directing DOJ personnel to focus on holding individuals accountable in all civil and criminal corporate investigations. Together, the Yates Memorandum and FDA’s recent enforcement priorities will have a substantial effect on the relationships between corporations and their employees, as well as the manner by which corporations govern themselves when faced with government investigations or prosecutions.

In this article, we explore various issues that companies and their executives and employees must address in light of this new regulatory climate. We also suggest measures that should be implemented with the best interests of both the company and its employees in mind.

Regulation and Enforcement of the Food Industry (2014-2015)

Armed with increased enforcement powers under 2011’s Food Safety Modernization Act (“FSMA”) and 2014-2015 rulemaking to finalize applicable regulations, FDA conducted multiple, highly-publicized investigations into contaminated food products. FDA moved swiftly, for example, to investigatelisteria in ice cream products manufactured by Blue Bell Creameries and Jeni’s Splendid Ice Creams resulting in the shutdown of manufacturing activities and recall of ice cream products for both companies.[i] Similarly, FDA conducted highly publicized investigations into cyclosporiasis-tainted cilantro from Puebla, Mexico,[ii] as well as contaminations of tomatoes[iii], soft cheese[iv], cucumbers[v], and various other food products.

FDA also took an increasingly assertive approach to prosecuting individuals for their roles in cases of violative food products. For instance, an investigation into cantaloupes linked to 33 deaths and 147 hospitalizations led to the sentencing of Eric and Ryan Jensen, the owners of the cantaloupe farm, to serve five years of probation, complete 100 hours of community service, and pay $150,000 in restitution. Likewise in 2015, Austin DeCoster and Peter Decoster of Quality Egg LLC pleaded guilty to one count of introducing salmonella-tainted eggs into interstate commerce and were sentenced to serve three-month prison terms followed by one year of supervised release and pay a $100,000 fine.[vi] Finally, on September 21, 2015, Peanut Corporation of America (“PCA”) executives and employees Stewart Parnell, Michael Parnell, and Mary Wilkerson were sentenced to terms of 28, 20, and 5 years in prison, respectively, for their individual roles in PCA’s introduction of salmonella-tainted peanuts into interstate commerce.[vii] Mr. Parnell’s 28-year prison sentence is regarded as the toughest penalty ever given for a corporate official in a food poisoning outbreak.

The PCA, Quality Egg, and Jensen cases stand in stark contrast to the old-form Odwalla and Sara Lee cases, in which both companies pled solely to misdemeanor FDCA violations even though they were responsible for killing and sickening dozens of people. However, given Congress’s new focus on the U.S. food supply and FDA’s apparent attention to its Congressional mandate, we expect the Government’s recent focus on individuals to be the new norm. This is especially true given a recent, dramatic change in DOJ policy.

New Focus on Individuals in Civil and Criminal Corporate Investigations

On September 9, 2015, Deputy Attorney General Yates issued a Memorandum to DOJ staff[viii] outlining changes to DOJ policies in corporate criminal investigations. The Yates Memorandum directs the government in all ongoing and future civil and criminal corporate investigations to “focus on individual wrongdoing from the very beginning of any investigation of corporate misconduct” because it will increase the likelihood of cooperation and will “maximize the chances that the final resolution of an investigation…will include civil or criminal charges against not just the corporation but against culpable individuals as well.”[ix]

In order to bring about this sea change in Justice Department policy, the Memorandum sets forth “six key steps” applicable to all investigations of corporate wrongdoing:

  1. To be eligible for any cooperation credit, corporations must provide to the DOJ all relevant facts about the individuals involved in corporate misconduct.
  2. Both criminal and civil corporate investigations should focus on individuals from the inception of the investigation.
  3. Criminal and civil attorneys handling corporate investigations should be in routine communication with one another.
  4. Absent extraordinary circumstances, no corporate resolution will provide protection from criminal or civil liability for any individuals.
  5. Corporate cases should not be resolved without a clear plan to resolve related individual cases before the statute of limitation expires and declinations as to individuals in such cases must be memorialized.
  6. Civil Attorneys should consistently focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond the individual’s ability to pay.

The Yates Memorandum[x] represents a major expansion of DOJ’s enforcement focus, especially to the extent that it raises the bar for “cooperation credit.” The Memorandum makes clear that “to be eligible for any credit for cooperation, the company must identify all individuals involved in or responsible for the misconduct at issue, regardless of their positions, status or seniority, and provide to the Department all facts relating to that misconduct.”[xi] Under this framework, companies will be under increased pressure to disclose information about individuals linked to corporate misconduct, potentially forcing companies to waive their attorney-client privilege[xii] and make other difficult decisions about what information and whose identities should be disclosed.

More profoundly, the Yates Memorandum makes clear that individuals will now be the primary focus of every government investigation into corporate misconduct, and requires prosecutors to obtain special authorizations in order to avoid charging individuals in cases of corporate wrongdoing: “If a decision is made at the conclusion of the investigation not to bring civil claims or criminal charges against the individuals who committed the misconduct, the reasons for that determination must be memorialized and approved by the United States Attorney or Assistant Attorney General[.]”[xiii] Thus, the Yates Memorandum may fairly be read to create a default rule that individuals will be charged either criminally or civilly in any case in which the company itself faces charges.

As written, the Yates Memorandum immediately impacts every company regulated by the U.S. government. Because companies may have to divulge confidential communications in order to obtain “cooperation credit,” such communications with employees become far more sensitive. Consequently, employees may be more hesitant than ever to participate unrepresented in internal investigations and instead choose to retain their own counsel, thus changing how companies conduct internal investigations. The Yates Memorandum may also influence the demands that individual executives and employees place upon the corporation for protection in advance of, and in the event of, government investigations.

How Companies (and Their Employees) can Protect Themselves in this New Regulatory Environment

Perhaps above all else, the Yates Memorandum calls upon companies to review their governing charters and corporate policies to ensure that they adequately set forth how the company will protect its individual executives and employees in the event of government intervention, including indemnification, advancement, and insurance for the fees and costs related to investigations, prosecutions and, potentially, fines and penalties. Below, we describe issues that companies should be mindful of and changes that they can make in the wake of the Yates Memorandum’s overhaul of Justice Department policy.[xiv]

Indemnification and Advancement

No corporation can be a success unless led by competent and energetic officers and directors. Such individuals would be unwilling to serve if exposed to the broad range of potential liability and legal costs inherent in such service despite the most scrupulous regard for the interests of stockholders. This is the rationale behind the indemnification and advancement provisions of Delaware corporate law.

Delaware Vice Chancellor Sam Glasscock, III

Hermelin v. K-V Pharmaceutical Co.
54 A.3d 1093 (Del. Ch. 2012).

Most companies indemnify their officers and directors for corporate actions in one manner or another; however, far fewer have formal policies in place. Sometimes indemnification and advancement provisions are contained in the certificate of incorporation or the bylaws, while other times they may be found in employment or director services agreements. Still other times such policies are informal or unwritten and merely offered or compelled after an investigation or unsuccessful prosecution. However, it is rare today to find a company that extends such indemnification and advancement protections beyond its officers and directors and down to its average employee.

With the government’s new focus on individuals, a patchwork of non-focused corporate policies made on an ad hoc basis are unlikely to withstand the pressure of a government investigation. On the one hand, the company may be too focused on addressing the compliance flaws that led to the government investigation to be able to address which of their employees should have their attorneys fees advanced and on what terms. On the other, the government could perceive ad hoc decision making in this context as merely “protective” of culpable employees and therefore weigh it against the company when assessing the adequacy of its cooperation.[xv] Therefore, we now describe the steps that companies can take today to solidify their indemnification and advancement policies, and better enable them to respond to government enforcement actions when they arise.

Where to Codify Indemnification and Advancement Policies?

While the corporation statutes of each state set forth certain indemnification and advancement rights and obligations applicable to domestic corporations, these obligations are typically binding only if they are incorporated into the corporation’s organizational documents or other legal instruments, such as employment contracts or policies outlined in at-will employment agreements. Placing such provisions in a company’s governance documents – as opposed to placing them in an individual’s employment agreement – avoids the potential conflicts that can arise if an employee has breached his or her employment contract. Also, many individuals may be at-will employees without any employment agreement at all.  Therefore, placing the indemnification and advancement provisions into the corporate Certificate or Bylaws[xvi] will ensure that the safety net is extended under every employee.

How to Draft Indemnification/Advancement Provisions under Delaware Law

First and foremost, companies adopting or amending indemnification and/or advancement provisions in their governance documents must ensure that the provisions are legally sufficient under the corporation laws of the company’s state of organization.  The Delaware General Corporation Law, for example, requires that a Delaware corporation’s indemnification and advancement polices have certain features.

One provision that must be in place for all Delaware companies is mandatory indemnification.  The statute requires a company to indemnify a present or former director or officer who “has been successful…in defense of any action, suit or proceeding” for “expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection” with a successful defense.[xvii]  Delaware law also establishes the standard of conduct that is generally required for indemnification. Under section 145(a) of the statute, a director, officer, or employee will be eligible for indemnification from third-party claims “if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation.”[xviii]

The Delaware statute also sets forth how the company must determine whether the individual has satisfied this standard of conduct.[xix] This determination is the lynchpin of the indemnification/advancement provisions.  Without a proper determination of an employee’s conduct, DOJ or the courts could vitiate the indemnification/advancement and leave the employee without his expected safety net. However, with a statutorily defined determination of an employee’s conduct, the company can more soundly provide its employee with the protection needed in the investigation or prosecution. Under Section 145(d) of the Delaware General Corporation Law, the determination of whether the individual has met that standard of conduct shall be made:

(1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or

(2) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, or

(3) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or

(4) by the stockholders.[xx]

We strongly recommend that only outside directors with independent ethics counsel, or an independent legal counsel make the determination of conduct.  Leaving the determination to the board of directors or the shareholders may create an inherent conflict of interest which could defeat the very purpose of the indemnification and advancement provisions.

Finally, if a company chooses to advance legal fees and expenses to its current officers or directors, Delaware law imposes the condition that a company receive “an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation.”[xxi] While all other forms and procedures of indemnification and/or advancement are permissive under Delaware law[xxii], such as indemnification of fines or monetary penalties, companies must ensure that these minimum statutory requirements are met.

Drafting Indemnification/Advancement Provisions after the Yates Memorandum

Companies updating their governance documents in the wake of the Yates Memorandum must not only ensure the legal adequacy of the indemnification and advancement provisions, but their functional adequacy as well.

For example, while most indemnification provisions have become boilerplate, many do not expressly allow for indemnification and advancementfor costs, expenses, fines, or penalties arising from investigations and prosecutions, yet this is where a company’s commitment to its employees may first be tested. Government investigations of corporate wrongdoing can take years to resolve, and during this time an individual employee may incur legal fees that he or she could never afford without the company’s assistance.

And although Delaware state law does not require companies to provide mandatory advances, companies should nevertheless consider doing so as a company policy. Specifically, Delaware’s Court of Chancery has stated that “[m]andatory advances, like indemnification, serve the salutary purpose of encouraging qualified persons to become or remain as directors of Delaware corporations, by assuring them, ex ante, that they may resist lawsuits that they consider meritless, free of the burden of financing (at least initially) their own legal defense.”[xxiii] In light of the Yates Memorandum, this “encouragement” is now potentially as critical for rank-and-file employees as for officers and directors. Providing for the advancement of defense costs, expenses, and legal fees will not only help to attract high-caliber candidates for employment, but can also help to maintain employees’ trust and confidence in the corporation, thus actually improving the company’s ability to cooperate with government investigations. 

That said, companies should also think critically about setting restrictions or conditions on indemnification or advancement. For example, borrowing the mandatory advancement language for officers and directors under Delaware law, companies may want employees to provide “undertakings” that they will repay advancements in the event that they ultimately do not qualify for indemnification. Companies may also provide coverage for civil or criminal fines or penalties but may decline to indemnify individuals who engaged in any gross negligence or willful misconduct giving rise to the action. However, in setting such limitations, companies walk a very fine line. For example, many indemnification provisions prohibit indemnification if an individual has violated any regulatory or statutory requirements, but such language would be devastating for employees of FDA-regulated businesses, as FDCA violations often do not require any proof of knowledge, bad faith or intent. One standard we recommend is taken directly from Delaware law: indemnification and advancement is provided whenever the acts or omissions of the officer, director, or employee are pursuant to company authorization (i.e., in or not opposed to the best interests of the corporation) or undertaken in good faith, with no reasonable cause to believe the person’s conduct was unlawful, regardless of whether the investigation/proceeding was terminated by settlement, judgment, or conviction.[xxiv]

Review and Update Company Insurance Coverage

Corporate insurance policies are also important in a post-Yates enforcement environment because they may mitigate costs related to government investigations. As such, companies must carefully evaluate their insurance portfolio to understand what is (and is not) covered in the event of a government investigation and/or prosecution.

Directors and Officers Liability (“D&O”) insurance policies typically offer liability coverage for company officials when corporate indemnification is not available, whether due to insolvency or legal prohibition. D&O insurance policies may also reimburse companies for indemnifying company officials. Side A coverage typically refers to policies that cover the personal liability of company directors and officers as individuals, where indemnification by the corporation is not legally required. Side B coverage typically refers to coverage for the corporation when it indemnifies directors or officers against third-party claims. While D&O policies may cover defense costs arising out of regulatory investigations or proceedings, as well as certain civil or criminal actions that may be brought against directors or officers of the company, they do not typically cover non-officer or director employees, nor any fines or penalties that result from intentional violations of the law. These deficiencies become more acute in light of the Yates Memorandum.

Due to the increase in potential expenses associated with DOJ investigations, companies should consider the adequacy of their insurance policies and evaluate how they can be updated to provide coverage for the company and individual employees. For example, corporations should consider the following issues:

– Does the company have Side A coverage?

– Which employees are covered under the policy, and what are the limits for coverage?

– How does the policy define a “claim” to trigger the coverage of defense expenses?

– Is the amount of coverage adequate? Is the coverage sufficient if claims are filed for multiple individuals and the company?

– What types of fines or penalties, if any, does the insurance policy cover?

– Does the insurance policy extend over regulatory investigations and proceedings?

– Does the insurance policy cover any liability the company may incur as a result of disclosing information about employees and their role in misconduct under investigation?

– Does the policy contain any conduct exclusions?

– Under what circumstances may the insurance carrier avoid coverage (e.g., the company’s financial state, failure to provide the carrier with information related to a potential claim when the company applied for coverage, etc.)?

– Does the insurance carrier offer supplemental policies to cover increased costs associated with investigations or proceedings involving non-director or officer employees?

Although the full consequences of the Yates Memorandum are not yet evident, companies should nevertheless take this opportunity to carefully review their insurance coverage to provide better protection from increased indemnification and advancements.

Conclusion

Based on FDA’s recent enforcement efforts and DOJ’s new initiative to aggressively “seek accountability from the individuals who perpetrated the wrongdoing[,]”[xxv] individuals working at every level of FDA-regulated companies must recognize that any inquiries into a company’s misconduct effectively exposes them all as potential targets of lengthy investigations or subsequent legal proceedings. In response, regulated companies must thoroughly review their governing documents and insurance policies to ensure they provide adequate protection against the realities of a new enforcement environment.

[i] See FDA, “FDA Investigates Listeria monocytogenes in Ice Cream Products from Blue Bell Creameries,” available at  www.fda.gov/Food/RecallsOutbreaksEmergencies/Outbreaks/ucm438104.htm (last accessed: Oct. 29, 2015); FDA, “Jeni’s Splendid Ice Creams Recalls All Products Because of Possible Health Risks,” available at  www.fda.gov/Safety/Recalls/ucm444451.htm (last accessed: Oct. 29, 2015).

[ii] FDA Import Alert 24-23, “Detention Without Physical Examination of Fresh Cilantro from the State of Puebla, Mexico,” available at www.accessdata.fda.gov/cms_ia/importalert_1148.html (last accessed Nov. 15, 2015).

[iii] See e.g., FDA’s Team Tomato Fights Contamination, available at www.fda.gov/ForConsumers/ConsumerUpdates/ucm359658.htm (last accessed: Nov. 15, 2015).

[iv] See e.g., FDA Investigated Listeria Outbreak to Soft Cheeses Distributed by Karoun Dairies, Inc., available at www.fda.gov/Food/RecallsOutbreaksEmergencies/Outbreaks/ucm463289.htm (last accessed: Nov. 15, 2015)

[v] See e.g., FDA Investigates Multistate Outbreak of Salmonella Poona Linked to Cucumbers, available at www.fda.gov/Food/RecallsOutbreaksEmergencies/Outbreaks/ucm461317.htm(last accessed: Nov. 20, 2015); Food Safety News, CDC Update: 4 Deaths, 767 Salmonella Cases in 36 States Linked to Cucumbers, available at www.foodsafetynews.com/2015/10/1-death-more-than-300-confirmed-salmonella-cases-in-27-states-linked-to-mexican-cucumbers/#.Vk9KpXarTcs (last accessed: Nov. 6, 2015).

[vi] DOJ, Quality Egg, Company Owner And Top Executive Sentenced In Connection With Distribution Of Adulterated Eggs, available at www.justice.gov/usao-ndia/pr/quality-egg-company-owner-and-top-executive-sentenced-connection-distribution (last accessed: Dec. 3, 2015).

[vii] DOJ, “Former Peanut Company President Receives Largest Criminal Sentence in Food Safety Case; Two Others also Sentenced for Their Roles in Salmonella-Tainted Peanut Product Outbreak,” available at  www.justice.gov/opa/pr/former-peanut-company-president-receives-largest-criminal-sentence-food-safety-case-two (last accessed: Oct. 25, 2015).

[viii] Yates Memorandum, Department of Justice, September 9, 2015, available at http://www.justice.gov/dag/file/769036/download.

[ix] Id. at 4.

[x] The U.S. Attorneys’ Manual (“USAM”) was revised to incorporate these policy objectives, including  new sections on enforcing claims against individuals in civil cases, guidelines on when to bring a criminal action against individuals, and procedures for increasing criminal and civil cooperation and referrals for parallel proceedings. See DOJ, Deputy Attorney General Sally Quillian Yates Delivers Remarks at American Banking Association and American Bar Association Money Laundering Enforcement Conference Washington, DC, available atwww.justice.gov/opa/speech/deputy-attorney-general-sally-quillian-yates-delivers-remarks-american-banking-0.

[xi] Yates Memorandum at 2 (emphasis added).

[xii] We are reminded by a former federal prosecutor who now serves on FDLI’s esteemed editorial board that the Yates Memo in no way impacts “DOJ’s policy that prohibits the government from even asking – much less forcing – targets to waive attorney-client privilege.” While this is technically true, we note the following two critical points. First, rather than remaining static, at least one United States Court of Appeals has recently described the Justice Department’s position on corporate waivers of the attorney-client privilege as “evolving” through a series of “memoranda by so many Deputy Attorneys General over so many years.” see Feinberg v. IRS, No. 15-1333, 6, n.3 (10th Cir. Dec. 18, 2015). And second, while the Yates Memorandum does not require corporate targets to waive their attorney client privilege in order to obtain cooperation credit, other Justice Department memoranda have explicitly stated that prosecutors may consider a corporation’s waiver of its privileges “both with respect to its internal investigation and with respect to communications between specific officers, directors, and employees and counsel.” See e.g. Memorandum from Larry D. Thompson, Deputy Att’y Gen., U.S. Dep’t of Justice (Jan. 20, 2003).

[xiii] Yates Memorandum at 6.

[xiv] For the purposes of this analysis, we will focus our review on the laws pertaining to companies incorporated under Delaware law. Please keep in mind that depending on the state or jurisdiction in which the company is organized, qualified, or operates, some of these protections may need to be modified to meet the requirements of applicable laws.

[xv] See e.g. Memorandum from Larry D. Thompson, Deputy Att’y Gen., U.S. Dep’t of Justice (Jan. 20, 2003); but see Memorandum from Mark Filip, Deputy Att’y Gen., U.S. Dep’t of Justice (Aug. 28, 2008).

[xvi] If a company must add sufficient indemnification or advancement provisions to its governing documents, the Bylaws may be the preferable place to do so.  Generally, under Delaware law, the Certificate of Incorporation can only be amended by the stockholders (8 Del. C. § 242(b)), while most companies’ Bylaws allow for amendment of that document by the board of directors.

[xvii] 8 Del. C. § 145(c).

[xviii] Id.

[xix] 8 Del. C. § 145(d).

[xx] 8 Del. C. § 145(d).

[xxi]  Id. Although the undertaking to repay is binding on the person seeking advancement, Delaware law does not require the undertaking to be a secured obligation.

[xxii] See generally, 8 Del. C. §§145(a) and (e).

[xxiii] In re Cent. Banking Sys., 1993 WL 183692, at *3 (Del. Ch. May 11, 1993).

[xxiv] 8 Del. C. § 145(a).

[xxv] Id. at 1.

No More Anonymity for Cash Buyers of Luxury Miami-Dade Homes

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By Carla Vianna and Celia Ampel
January 15, 2016

For international buyers purchasing luxury condominiums in Miami, new federal regulations aimed at removing secret identities on deals worth more than $1 million threatens to slow an already-lagging housing market.

What’s become routine in Miami’s cash-happy luxury housing market will get federal scrutiny with the U.S. Treasury Department peeling back a layer of secrecy on high-end deals with no names attached.

The U.S. Treasury Department’s Financial Crimes Enforcement Network issued orders Wednesday requiring title companies to disclose the names behind limited liability companies making the big-dollar home buys starting March 1 in two places — Miami-Dade County and Manhattan.

While luxury brokers are wary of the effect the order will have on their international clients, most of whom prefer anonymity when closing multimillion-dollar deals, title companies called for clarification Thursday.

Title companies must report the identity of the person primarily responsible for the purchase along with a driver’s license or other form of identification, according to the American Land Title Association. If an LLC is involved, the underwriter must provide the name, address and taxpayer identification number of all its members.

The report also must include the closing date, address, purchase price and down payment amount. The title companies are required to keep the records for five years.

The association’s CEO, Michelle Korsmo, said title companies are looking forward to helping FinCEN crack down on money laundering, but they need clarification on the orders.

Title insurance companies worry the definition of residential real estate may be murky, and they hope trusts will be excluded from FinCEN’s look at “legal entities” used as shell companies. A trust is not considered a separate legal entity under common law in several states, the group wrote FinCen in response to the orders.

“We urge FinCEN to use a reasonable and good-faith test for determining insurers’ compliance with this order,” ALTA wrote. “We believe the clarifications requested and joint education with the insurer and FinCEN should ensure that all covered transactions that the insurer is aware of will be reported; however, even with the best efforts of title insurers, there may be transactions of which the insurer is not made aware.”

The rate of cash deals in Miami is twice the national average primarily due to the volume of international buyers, according to the National Association of Realtors. About 27 percent of all U.S. housing sales were cash deals compared to about 55 percent of Miami sales in November 2015. About two-thirds of Miami condominium and 40 percent of single-family home sales were cash.

“We are seeking to understand the risk that corrupt foreign officials or transnational criminals may be using premium U.S. real estate to secretly invest millions in dirty money,” FinCEN Director Jennifer Shasky Calvery said in a statement. “Over the years, our rules have evolved to make the standard mortgage market more transparent and less hospitable to fraud and money laundering. But cash purchases present a more complex gap that we seek to address.”

Luxury broker Ben Moss with ONE Sotheby’s International Realty said most Miami brokers have probably run into a situation where a thought crossed their minds: “How does this person have this kind of money?”

Sales Slipping

Miami luxury condo sales decreased nearly 15 percent in the third quarter of 2015 from the same period in 2014. In the same quarter last year, the number of $1 million-plus condo listings grew to 1,791, the Miami Association of Realtors reported.

If buyers are no longer allowed to remain anonymous, local real estate professionals say the order may do more than scare away dirty money. It may scare off South Florida’s top investors.

“There’s a good possibility that it could chill residential purchases with cash in the community,” said Marta Alfonso, a principal in the management advisory services department at accounting and consulting firm Morrison, Brown, Argiz & Farra.

Closing a luxury home deal using an LLC is the standard route most international buyers are advised to take for a variety of reasons from tax planning to shielding ownership, said William Hardin, director of the Florida International University Hollo School of Real Estate.

“This is a very normal transaction, especially if you are a foreign resident,” he said. “It’s a very legitimate use of an LLC.”

For example, the top sale in Key Biscayne in 2015 was purchased by Boca Breeze LLC for $47 million. The buyer was registered in Delaware, where corporate records do not list principals.

Florida LLCs must list owners, but some records link to untraceable Delaware LLCs.

Moss said many of his Latin American clients buying under the protective shield of an LLC have legitimate security concerns.

“Even though they’re coming to South Florida, they still feel they need to shield who they are,” he said. “Some of these people are targets in those countries. They don’t want anyone to know when they’re here or where they live when they’re here.”

Seasoned high-end buyers in Florida have learned to completely shield their names by listing an attorney or accountant as a registered agent on state Division of Corporations LLC paperwork and no corporate officers, Moss said.

“Some people are just very private,” he said. “I would imagine that they’ll keep trying to find ways to get around this.”

Alfonso speculated, “You might see an increase in activity before the requirement takes effect.”

Joseph Hernandez, a partner and chair of the real estate group at Weiss Serota Helfman Cole & Bierman in Coral Gables, said a few of his Brazilian clients struggle to move their money out of the country, and the new regulation is bound to make it tougher.

Legitimate buyers with money from legitimate sources shouldn’t have a problem, but it’s too soon to tell if this will have a chilling effect on legitimate buyers who prefer anonymity, he said.

Although Realtors require buyers to show proof of funds before a closing, they don’t necessarily track where those funds came from.

Serious Look

“In the long run, it’s a positive thing to have transparency,” Hardin said. “I would argue that transparency is an important thing for any real estate market.”

FinCEN’s announcement emphasized it chose to target title insurers because they are involved in most real estate transactions, not because of any suspicion that the companies are complicit in fraud.

“To the contrary, FinCEN appreciates the assistance and cooperation of the title insurance companies and the American Land Title Association in protecting the real estate markets from abuse by illicit actors,” the statement read.

But the new rules could hinder business for title insurance companies, Miami attorney Andrew Ittleman of Fuerst Ittleman David & Joseph said.

“If I’m the title company, I’m taking a really serious look at how much of my business this all-cash transaction is,” he said. “If I really want to keep it, I have to make a decision as to whether I’m willing to take on the enhanced risk of a transaction that is subject to a high level of government scrutiny.”

Ittleman represents clients who are targets of money laundering investigations and advises financial institutions and other businesses on anti-money laundering compliance. He noted the geographic targeting order, or GTO, is the third in the past year that FinCEN placed on Miami, likely due to its reputation as the “Silicon Valley of fraud.”

Last summer, FinCEN ordered check-cashers to look more closely at tax refund checks, and before that another order was issued for Miami businesses that export computer parts to Latin America.

What Took So Long?

Regardless of how FinCEN’s geographic targeting order is enforced, national media coverage has already put doubts in the minds of would-be cash buyers who value their privacy, Ittleman said.

“It’s as high-profile as it gets,” he said. “Even without any enforcement of the GTO, the GTO has an impact. The GTO has a chilling effect on these transactions. That’s already happened.”

But Marcos Jimenez, a McDermott Will & Emery partner and former Miami U.S. attorney, said proper enforcement will count for a lot when it comes to making a dent in money laundering.

Jimenez said enforcement would probably be similar to the process retailers use to report cash sales above $10,000 and banks’ currency transaction reports for large deposits and withdrawals.

Title insurance companies will be required to submit a form identifying the beneficial owner, and the preparer could face a federal felony charge for a violation.

Jimenez said the big question about FinCEN’s order was, “What’s taken them so long?”

“I know that people in the banking and financial world have been wondering about this for probably decades, at least 20 years,” he said. “It’s something that I think U.S. business has looked the other way about for a long time because the more money that comes in here, obviously the better it is for our economy.”

Former federal prosecutor Theresa Van Vliet agreed, saying shell companies concealing beneficial owners have been an obstacle to law enforcement investigations for years.

“Folks who have proceeds of crimes to hide have been using front people or shell companies, whether they’re in the U.S. or offshore companies, since the dawn of time,” said the Genovese Joblove & Battista attorney, who focuses her Fort Lauderdale practice on white-collar litigation and civil and compliance matters.

The focus on title insurers is a “no-brainer,” she said, and setting the threshold at $1 million will help weed out clean-money transactions. But it’s important to remember the reporting requirements are just a first step in a potential investigation.

“Just because someone pays all cash doesn’t mean they’ve done something wrong,” Van Vliet said.

“There’s a good possibility that it could chill residential purchases with cash in the community,” said Marta Alfonso, a principal in the management advisory services department at accounting and consulting firm Morrison, Brown, Argiz & Farra.

Closing a luxury home deal using an LLC is the standard route most international buyers are advised to take for a variety of reasons from tax planning to shielding ownership, said William Hardin, director of the Florida International University Hollo School of Real Estate.

“This is a very normal transaction, especially if you are a foreign resident,” he said. “It’s a very legitimate use of an LLC.”

For example, the top sale in Key Biscayne in 2015 was purchased by Boca Breeze LLC for $47 million. The buyer was registered in Delaware, where corporate records do not list principals.

Florida LLCs must list owners, but some records link to untraceable Delaware LLCs.

Moss said many of his Latin American clients buying under the protective shield of an LLC have legitimate security concerns.

“Even though they’re coming to South Florida, they still feel they need to shield who they are,” he said. “Some of these people are targets in those countries. They don’t want anyone to know when they’re here or where they live when they’re here.”

Seasoned high-end buyers in Florida have learned to completely shield their names by listing an attorney or accountant as a registered agent on state Division of Corporations LLC paperwork and no corporate officers, Moss said.

“Some people are just very private,” he said. “I would imagine that they’ll keep trying to find ways to get around this.”

Alfonso speculated, “You might see an increase in activity before the requirement takes effect.”

Joseph Hernandez, a partner and chair of the real estate group at Weiss Serota Helfman Cole & Bierman in Coral Gables, said a few of his Brazilian clients struggle to move their money out of the country, and the new regulation is bound to make it tougher.

Legitimate buyers with money from legitimate sources shouldn’t have a problem, but it’s too soon to tell if this will have a chilling effect on legitimate buyers who prefer anonymity, he said.

Although Realtors require buyers to show proof of funds before a closing, they don’t necessarily track where those funds came from.

Serious Look

“In the long run, it’s a positive thing to have transparency,” Hardin said. “I would argue that transparency is an important thing for any real estate market.”

FinCEN’s announcement emphasized it chose to target title insurers because they are involved in most real estate transactions, not because of any suspicion that the companies are complicit in fraud.

“To the contrary, FinCEN appreciates the assistance and cooperation of the title insurance companies and the American Land Title Association in protecting the real estate markets from abuse by illicit actors,” the statement read.

But the new rules could hinder business for title insurance companies, Miami attorney Andrew Ittleman of Fuerst Ittleman David & Joseph said.

“If I’m the title company, I’m taking a really serious look at how much of my business this all-cash transaction is,” he said. “If I really want to keep it, I have to make a decision as to whether I’m willing to take on the enhanced risk of a transaction that is subject to a high level of government scrutiny.”

Ittleman represents clients who are targets of money laundering investigations and advises financial institutions and other businesses on anti-money laundering compliance. He noted the geographic targeting order, or GTO, is the third in the past year that FinCEN placed on Miami, likely due to its reputation as the “Silicon Valley of fraud.”

Last summer, FinCEN ordered check-cashers to look more closely at tax refund checks, and before that another order was issued for Miami businesses that export computer parts to Latin America.

What Took So Long?

Regardless of how FinCEN’s geographic targeting order is enforced, national media coverage has already put doubts in the minds of would-be cash buyers who value their privacy, Ittleman said.

“It’s as high-profile as it gets,” he said. “Even without any enforcement of the GTO, the GTO has an impact. The GTO has a chilling effect on these transactions. That’s already happened.”

But Marcos Jimenez, a McDermott Will & Emery partner and former Miami U.S. attorney, said proper enforcement will count for a lot when it comes to making a dent in money laundering.

Jimenez said enforcement would probably be similar to the process retailers use to report cash sales above $10,000 and banks’ currency transaction reports for large deposits and withdrawals.

Title insurance companies will be required to submit a form identifying the beneficial owner, and the preparer could face a federal felony charge for a violation.

Jimenez said the big question about FinCEN’s order was, “What’s taken them so long?”

“I know that people in the banking and financial world have been wondering about this for probably decades, at least 20 years,” he said. “It’s something that I think U.S. business has looked the other way about for a long time because the more money that comes in here, obviously the better it is for our economy.”

Former federal prosecutor Theresa Van Vliet agreed, saying shell companies concealing beneficial owners have been an obstacle to law enforcement investigations for years.

“Folks who have proceeds of crimes to hide have been using front people or shell companies, whether they’re in the U.S. or offshore companies, since the dawn of time,” said the Genovese Joblove & Battista attorney, who focuses her Fort Lauderdale practice on white-collar litigation and civil and compliance matters.

The focus on title insurers is a “no-brainer,” she said, and setting the threshold at $1 million will help weed out clean-money transactions. But it’s important to remember the reporting requirements are just a first step in a potential investigation.

“Just because someone pays all cash doesn’t mean they’ve done something wrong,” Van Vliet said.

To view original article, click here.

Real-Estate Faces New Compliance After Getting A Pass

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The skyline of lower Manhattan is seen from Brooklyn- Associated Press

The skyline of lower Manhattan is seen from Brooklyn- Associated Press

 

By Samuel Rubenfeld
January 15, 2016

A U.S. Department of Treasury order targeting secret high-end real estate buyers could represent a day of reckoning on anti-money laundering compliance for the industry, experts say.

The industry, which has until now avoided a requirement to implement anti-money laundering compliance programs, now faces its biggest challenge on that front. Though the order only increases the burden on title insurance companies, other industry players could soon find themselves needing to comply, experts said.

The geographic targeting order on Manhattan and Miami from Treasury’s Financial Crimes Enforcement Network goes into effect March 1, and it lasts about six months, but experts expect its reach to broaden. As such, Jennifer Shasky Calvery, FinCEN’s director, said in a statement and repeated in subsequent interviews that the order will “produce valuable data” that will assist and “inform our broader efforts” to fight money laundering in the real estate sector.

Experts say Treasury first needs to know where the money is coming from before it can take any further action.

“There has been such an influx of offshore money…and there’s no record of who the purchasers are of these very high-end luxury apartments,” said Seth Kaplowitz, a lecturer on finance at the San Diego State University college of business administration.

The order follows years of reporting in multiple cities, including New York and Miami, on the secrecy of real-estate transactions. It requires title insurance companies to submit to FinCEN a form identifying the beneficial owners of a corporate entity buying a luxury property entirely in cash. Under the order, a beneficial owner is anyone who has a 25% or greater interest in the entity purchasing the real-estate, and the deal has to be worth more than $1 million in Miami or $3 million in New York. The information will be stored in a FinCEN database available only to law enforcement, FinCEN said.

Anti-money laundering experts say title insurance companies are sometimes the only financial institution involved in an all-cash real-estate transaction, creating an information gap on a deal in which the high-end property is typically held by an limited liability company, or LLC, or a special-purpose entity.

“The Treasury Department is obviously attempting to fill a perceived gap in reporting,” said Matthew Schwartz, a partner at Boies Schiller & Flexner LLP.

Andrew Ittleman, a partner at Fuerst Ittleman David & Joseph PL, said FinCEN chose the March 1 start date to give title insurance companies time to develop the anti-money laundering compliance programs necessary to comply with the order. “In order to do this, they’re going to need enhanced due-diligence and enhanced record-keeping features that they’re not going to be able to implement overnight,” said Mr. Ittleman.

The real-estate industry fought for and received a temporary exemption against a mandate that it implement anti-money laundering compliance programs after the Sept. 11, 2001, attacks. That exemption hasn’t been lifted in the years since, and activists cited the FinCEN order as evidence the exemption should end.

Stefanie Ostfeld, deputy head of the U.S. office of nonprofit Global Witness, called for the order to be made permanent, for it to apply nationally and for the ownership information to be made public. “Anonymous shell companies unite all crimes that generate money,” she said, calling for Congress to require the collection of information on the beneficial owners of all U.S. companies, not just those in real estate.

Marcos Jimenez, a partner at law firm McDermott Will & Emery LLP, echoed her notion on real estate firms. “There’s no reason why the real estate industry, which is involved in transactions that are in the billions of dollars every year, should get a pass,” said Mr. Jimenez.

The order serves as a peek into the sector, said D.E. Wilson, a partner at the law firm Venable who formerly was acting general counsel at Treasury. After the initial look, expect a larger move, he said.

“This is a way for FinCEN to test whether it ought to be in this business. When it gets into an area, they get in in a limited way, and then they move fully,” said Mr. Wilson.

To view original article, click here.

How the Feds Blew a Case Against an Alleged South American Drug Money Launderer

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By Francisco Alvarado
January 14, 2016

For federal law enforcement officials, Martin Lustgarten Acherman was a prize catch in the war on drugs. Since 2007, investigators had been keeping tabs on the Miami-based businessman who maintains dual citizenship in Austria and Venezuela, methodically gathering evidence that Lustgarten was laundering tens of millions of dollars for Colombian and Mexican drug traffickers, as well as paramilitary groups, according to court documents obtained by VICE.

On April 8, 2015, authorities arrested Lustgarten in Miami after a grand jury indictment charged him with conspiracy to commit money laundering, obstruction of an official proceeding, and conspiracy to obstruct an official proceeding. His bust generated headlines heralding the dirty drug money nexus between Miami and Venezuela.

But nine months later, the case against Lustgarten suddenly unraveled as prosecutors dismissed the charges against him in what money laundering experts and former drug warriors say represents a stunning blow against the US government’s efforts to punish those who profit from the narcotics trade.

“It is very unusual for a case like this to get dismissed,” Michael Levine, a New York-based trial consultant who worked for a quarter-century as a Drug Enforcement Administration (DEA) special agent, told VICE. “It suggests to me that something was unearthed by the prosecutors that they decided to stop and not go any further with it.”

“It is a steep fall for the government to dismiss a case like this one so abruptly and so quickly,”added Charles A. Intriago, a former Miami federal prosecutor who founded the Association of Certified Anti-Money Laundering Specialists.

Calls to the lead federal prosecutor, Joseph Palazzo, were referred to a US Department of Justice spokesman in Washington DC, who did not respond to VICE’s requests for comment. A spokesman for the DEA’s New England division, which handled the criminal investigation, likewise did not return phone calls seeking comment.

Of course, E. Peter Mullane, the lead attorney for Lustgarten, says the case was dropped for a simple reason: his client is innocent. “From day one we had vigorously protested the fact that this person had been indicted for alleged offenses that he did not commit,” Mullane said in an interview. “It took approximately nine months of extensive discovery and aggressive pleadings to make this point.”

According to the feds’ indictment, Lustgarten operated companies in Hong Kong, Singapore, and Panama that provided capital loans and purchase-order financing to Venezuelan firms involved in the international trade. In Venezuela, companies like Lustgarten’s allegedly took advantage of that country’s strict controls regarding the availability of US dollars by exchanging American currency in the black market for Venezuelan bolivars at a higher rate than normal. By striking deals with Lusgarten’s companies, Venezuelan importers would have access to American cash in order to pay for consumer goods coming from outside the country.

Prosecutors argued Lustgarten was obtaining the US dollars from drug traffickers and paramilitary groups. The indictment details how the DEA Boston office seized accounts in March 2009 tied to Lustgarten’s firms at a Bank of America branch in Doral, a city largely populated by Venezuelans in Miami-Dade County. Yet Lustgarten continued to launder drug proceeds through banks in Hong Kong, Singapore, and Switzerland, according to the feds. During an April 13 detention hearing in Miami, Palazzo accused the Venezuelan-Austrian businessman of laundering between $40 million and $100 million.

“The government’s case is also very strong,” Palazzo said at the time, according to a transcript of the hearing. “Mr. Lustgarten’s arrest was the culmination of several years of investigation by a joint task force in the District of Massachusetts… Extensive wiretaps were conducted in the US and in Colombia and several search warrants were executed on Mr. Lustgarten’s emails. So there is plenty of documentary evidence supporting the charges as well.”

Palazzo also accused Lustgarten of being an unreliable confidential informant who routinely passed false information to the Boston task force investigators. “Mr. Lustgarten is basically a professional liar that has been lying to the DEA and Homeland Security and to the US Attorney’s Office in Boston for several years,” Palazzo told magistrate Judge Edwin G. Torres.

The indictment went on to name a man named Salomon Bendayan, whom Palazzo alleged controlled shell companies that worked in concert with Lustgarten’s supposedly shady businesses. Bendayan was arrested one month after Lustgarten.

While Lustgarten was held without bail for nine months, his defense team went to work taking apart the prosecution’s case against their client. On November 19, Lustgarten’s other lawyer Nathan P. Diamond filed a motion against Palazzo’s request to delay the trial date until February, accusing the prosecutor of stall tactics and failing to produce evidence against his client. In essence, Diamond argued Lustgarten was being denied his right to a speedy trial, pointing out that the prosecutorial team had not provided documents detailing their client’s banking transactions in seven countries.

That’s because prosecutors never obtained the documents, according to Diamond. In order for prosecutors to obtain evidence in other countries, they must first obtain permission from foreign governments to do so under what is known as a mutual legal assistance treaty agreement.

That process appears to have helped derail the feds.

In Lustgarten’s case, a request to gather evidence in Colombia was sent to that country’s government in February, but US prosecutors did not receive a response until August, five months after he had been arrested, according to Diamond’s motion, which cites a DOJ memo he apparently obtained. Prosecutors sent requests to Hong Kong officials in February, July and September, but said they did not get a reply at all, the motion states, and a request to Switzerland’s government was made in July, three months after Lustgarten’s arrest.

On November 20, Miami federal judge Marcia G. Cooke denied Palazzo’s request to delay the trial, according to Lustgarten’s court docket. About a month later, it seems like Palazzo gave up. On December 14, the US Attorney’s Office dismissed the more serious charges when Lustgarten agreed to plead guilty to a misdemeanor charge of illegally entering the US on October 12, 2011, according to court documents obtained by VICE.

Bendayan, the other man charged in the indictment, also had money laundering charges dismissed against him when he pleaded guilty to a felony count of operating an unlicensed money transmitting business.

Andrew Ittleman, a partner in the Miami law firm at Fuerst Ittleman David & Joseph who specializes in money laundering cases, said Lustgarten’s ordeal shows how difficult it is for the US government to prosecute international money laundering crime cases.

“It places a high burden on the government,” Ittleman told me. “His defense attorneys did a masterful job of holding the government to its burden of not only proving beyond a reasonable doubt, but that government would also have to do it quickly.”

The turning point in Lustgarten’s case was the prosecutor’s inability to secure cooperation from foreign countries, according to Ittleman.

“An assistant US attorney can’t just make a phone call to another country to get permission,” Ittleman said. “You need to abide by certain rules. In this case, the US government was not getting the cooperation it needed from Hong Kong, Argentina, Colombia, etc.”

Gregory D. Lee, a retired supervisory DEA agent who also provides expert witness testimony, said he was surprised investigators and prosecutors did not attempt to retrieve Lustgarten’s foreign banking documents prior to the indictment.

“Once you have somebody in custody, the clock starts ticking to go to trial,” Lee explained. “You have to anticipate these type of problems so you avoid them. When you don’t have the documents to turn over to the defense, it turns into a house of cards and it all comes tumbling down. Apparently that is what happened here.”

To view original article, click here.

Here’s Why Feds Are Targeting Cash Buyers in Miami-Dade Luxury Home Sales

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By: Carla Vianna and Celia Ampel
January 13, 2016

Setai-Miami-Beach

 

What’s become routine in Miami’s cash-happy luxury housing market is now getting federal scrutiny with the U.S. Treasury Department peeling back a layer of secrecy on $1 million deals with no names attached.

The department’s Financial Crimes Enforcement Network issued orders Wednesday requiring title companies to disclose the names behind the limited liability companies making the big-dollar deals for residential real estate in two places — Miami-Dade County and Manhattan.

The rate of cash deals in Miami is twice the national average primarily due to the volume of international buyers, according to the National Association of Realtors. About 27 percent of all U.S. housing sales were made in cash compared to about 55 percent of Miami housing sales in November 2015. About two-thirds of Miami condominium and 40 percent of single-family home sales were cash.

“We are seeking to understand the risk that corrupt foreign officials or transnational criminals may be using premium U.S. real estate to secretly invest millions in dirty money,” FinCEN Director Jennifer Shasky Calvery said in a statement. “Over the years, our rules have evolved to make the standard mortgage market more transparent and less hospitable to fraud and money laundering. But cash purchases present a more complex gap that we seek to address.”

Local real estate professionals say the order may do more than scare away dirty money. It may scare off South Florida’s top investors.

Closing a luxury residential transaction using an LLC is the standard route most international buyers are advised to take for a variety of reasons from tax planning to shielding ownership, said William Hardin, director of the Florida International University Hollo School of Real Estate.

“This is a very normal transaction, especially if you are a foreign resident,” he said. “It’s a very legitimate use of an LLC.”

Luxury broker Ben Moss with ONE Sotheby’s International Realty said many of his Latin American clients buying under an LLC’s protective shield have legitimate security concerns.

“Even though they’re coming to South Florida, they still feel they need to shield who they are,” he said. “Some of these people are targets in those countries. They don’t want anyone to know when they’re here or where they live when they’re here.”

Seasoned high-end buyers have learned to completely keep their name off the record by listing an attorney or accountant as a registered agent on state Division of Corporations LLC paperwork and no corporate officers, Moss said. Delaware corporations also hide ownership interests.

“Some people are just very private,” he said. “I would imagine that they’ll keep trying to find ways to get around this.”

The FinCEN orders will require title insurance companies to record and report the identities of cash buyers in Miami-Dade County and Manhattan from March 1 to Aug. 27. The Miami real estate community agreed it’ll have to wait and see whether the transaction volumes drops during that period.

Joseph Hernandez, a partner and chair of the real estate group at Weiss Serota Helfman Cole & Bierman in Coral Gables, said a few of his Brazilian clients struggle to move their money out of the country, and the new regulation is bound to make it tougher.

Legitimate buyers with money from legitimate sources shouldn’t have a problem, but it’s too soon to tell if this will have a chilling effect on legitimate buyers who prefer anonymity, Hernandez said.

Although Realtors require buyers to show proof of funds before a closing, they don’t necessarily track where those funds came from.

Moss said most Miami brokers have probably run into a situation where a thought crossed their minds: “How does this person have this kind of money?”

Serious Look

“In the long run, it’s a positive thing to have transparency,” Hardin said. “I would argue that transparency is an important thing for any real estate market.”

That’s the goal — find out who truly owns these properties, he said. FinCEN emphasized in its announcement that it chose to target title insurers because they are involved in most real estate transactions, not because of any suspicion that the companies are complicit in fraud.

“To the contrary, FinCEN appreciates the assistance and cooperation of the title insurance companies and the American Land Title Association in protecting the real estate markets from abuse by illicit actors,” the statement read.

But the new rules could hinder business for title insurance companies, Miami attorney Andrew Ittleman of Fuerst Ittleman David & Joseph said.

“If I’m the title company, I’m taking a really serious look at how much of my business this all-cash transaction is,” he said. “If I really want to keep it, I have to make a decision as to whether I’m willing to take on the enhanced risk of a transaction that is subject to a high level of government scrutiny.”

Ittleman represents clients who are targets of money laundering investigations and advises financial institutions and other businesses on anti-money laundering compliance. He noted the geographic targeting order, or GTO, is the third in the past year that FinCEN placed on Miami, likely due to its reputation as the “Silicon Valley of fraud.”

Last summer, FinCEN ordered check-cashers to look more closely at tax refund checks, and before that another order was issued for Miami businesses that export computer parts to Latin America.

What Took So Long?

Regardless of how FinCEN’s geographic targeting order is enforced, national media coverage has already put doubts in the minds of would- be cash buyers who value their privacy, Ittleman said.

“It’s as high-profile as it gets,” he said. “Even without any enforcement of the GTO, the GTO has an impact. The GTO has a chilling effect on these transactions. That’s already happened.”

But Marcos Jimenez, a McDermott Will & Emery partner and former Miami U.S. attorney, said proper enforcement will count for a lot when it comes to making a dent in money laundering.

Although FinCEN did not release details about how the new orders would be enforced, Jimenez said enforcement would probably be similar to the process retailers use to report cash sales above $10,000 and banks’ currency transaction reports for large deposits and withdrawals.

Title insurance companies will be required to submit a form identifying the beneficial owner, and the preparer could face a federal felony charge for a violation.

Jimenez said the big question about FinCEN’s order was, “What’s taken them so long?”

“I know that people in the banking and financial world have been wondering about this for probably decades, at least 20 years,” he said.

“It’s something that I think U.S. business has looked the other way about for a long time because the more money that comes in here, obviously the better it is for our economy.”

Former federal prosecutor Theresa Van Vliet agreed, saying shell companies concealing beneficial owners have been an obstacle to law enforcement investigations for years.

“Folks who have proceeds of crimes to hide have been using front people or shell companies, whether they’re in the U.S. or offshore companies, since the dawn of time,” said the Genovese Joblove & Battista attorney, who focuses her Fort Lauderdale practice on white- collar litigation and civil and compliance matters.

The focus on title insurers is a “no-brainer,” she said, and setting the threshold at $1 million will help weed out clean-money transactions. But it’s important to remember the reporting requirements are just a first step in a potential investigation.

“Just because someone pays all cash doesn’t mean they’ve done something wrong,” Van Vliet said.

The only downside to the order is it’s temporary, she said.

“I’d be surprised if after 180 days they don’t come up with different rules that make it a little bit longer-standing,” she said. “It’s very difficult to say you’re going to cast a net but you’re only going to leave it in the water for this long. It kind of invites people to just not go swimming for that amount of time.”

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MONEY LAUNDERING: Feds moves to strip secrecy from cash real estate deals in Miami
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By Brian Bandell
January 13, 2016

The days of mysterious shell companies plunking down millions of dollars for homes in Miami-Dade County could be over.

The Financial Crimes Enforcement Network (FinCEN) issued a temporary order that aims to end the secrecy in $1 million-plus cash deals in Miami-Dade and Manhattan to combat potential money laundering. Once the rule takes effect, title insurance companies would have to identify the natural persons behind the companies in such residential deals to law enforcement. The information likely wouldn’t be made public in court records.

Cash sales are huge in Miami-Dade. They accounted for 54.9 percent of all existing home sales in November, according to the Miami Association of Realtors. That includes 67.5 percent of all existing condo sales. These cash buyers are often foreigners. Miami Association spokeswoman Lynda Fernandez noted that all-cash luxury transactions represent only 3.6 percent of deals in the county so she doesn’t expect this to have a big impact on the overall market.

Condo developers have mostly relied on cash deals for their projects. That means the identities of scores of buyers with pre-sale contracts of over $1 million would be revealed to regulators.

Foreign buyers could be concerned that U.S. regulators would share information about their big purchases with their native countries as part of a probe, which could prevent them from hiding assets from their native governments.

In the past, criminals such as drug dealers, Ponzi schemers and corrupt foreign politicians have used dirty money to purchase Miami-Dade real estate and then had it seized by federal officials.

The Business Journal wrote a feature story on the money laundering loophole for real estate in 2013.

“It’s not exactly breaking news, film at 11. This is something that’s being going on for as long as I’ve been involved in law enforcement and beyond,” said Theresa Van Vliet, an attorney at Genovese Joblove & Battista and a former federal prosecutor in Miami. “There have been drug dealers and Ponzi schemers and racketeers that have lost houses here for years. This will make it a little easier to start to identify when those things happen cold based on a title company’s hopefully accurate reporting.”

In the Cocaine Cowboys heydays in the 1980s, law enforcement frequently followed the money in Miami to discover who the dealers were before the found the drugs, she said. Van Vliet said the names would probably be run through national and international databases of criminals and suspicious individuals and potentially shared with foreign governments if there’s a multilateral agreement.

FinCEN previously cracked down on anti-money laundering rules for residential loans and its remaining concern is preventing money laundering by individuals who attempt to hide their assets and identity with all-cash residential purchases in big cities.

“We are seeking to understand the risk that corrupt foreign officials, or transnational criminals, may be using premium U.S. real estate to secretly invest millions in dirty money,” FinCEN Director Jennifer Shasky Calvery said. “Over the years, our rules have evolved to make the standard mortgage market more transparent and less hospitable to fraud and money laundering. But cash purchases present a more complex gap that we seek to address. These GTOs (Geographic Targeting Orders) will produce valuable data that will assist law enforcement and inform our broader efforts to combat money laundering in the real estate sector.”

The GTO will start on March 1 and expire on August 27. The temporary period could be extended but the rule couldn’t be made permanent without going through an official rule-making process.

This is a bad time in the real estate cycle for this regulation to take place, said Peter Zalewski, principal of CraneSpotters.com, which tracks the South Florida new condo market. It was already becoming harder to find buyers and this should make it even tougher, he said. Immediately, the news should empower legitimate buyers to demand bargains because they think there’s less competition, and it should scare some foreign nationals that value their secrecy away from pre-construction deals, Zalewski said.

Zalewski isn’t sure that title insurers are the best companies to find buyer information because most of them are small operations that work on high volume. Most title companies don’t have the resources to verify transactions, especially if LLCs use “straw owners” instead of listing the real source of funds, Zalewski said.

As for foreign buyers, Zalewski noted they could just as easily take their money to markets like Panama that still allow secretive LLCs.

FinCEN has revealed exactly who title companies will gather buyer identifying information, said Wayne Stanley, spokesman for industry trade group American Title Association. This will apply mostly to large title insurance underwriters, he added.

The title association is waiting to hear exactly what information FinCEN wants to know about transactions, how it should be reported and the timing of that reporting, Stanley said. He’s not sure whether title companies will be forced to reject $1 million cash buyers that refuse to reveal their identities.

“I don’t think they are trying to put us in the position of being detective so on the question of how much due diligence will be required by the title agent, we aren’t sure yet,” Stanley said.

Since the Patriot Act forced financial institutions to closely examine sources of funds, many people who aim to hide assets in the United States have chosen premium real estate in big cities as the vehicle, said Lewis Cohen, a banking attorney with Cohen Nicoleau in Miami. It was only a matter of time until FinCEN addressed this, he said.

Holland & Knight attorney Andres Fernandez said the order would actually provide relief for local banks hit the hardest by compliance costs and burdens.

“The banks that maintain the accounts for the title companies will now be able to obtain beneficial ownership of those parties engaged in all cash closings,” Fernandez said. “Up until now, this has been a huge challenge, burden and gap for banks in their efforts to comply with anti-money laundering requirements.”

Cohen said that a title company probably wouldn’t prevent a deal from closing because of the GTO. However, if regulators find criminal activity, they might force the buyer to forfeit the property, he said.

“It will have a chilling effect on these kind of transactions in the real estate market,” Cohen said. “You’re putting another roadblock in the way of illegal activity so that’s the greater good the Treasury Department is trying to accomplish.”

Hal Lewis, an attorney at Pathman Lewis in Miami, doubts the FinCEN rule would hurt the real estate market because the overwhelming majority of buyers are legitimate, but he feels regulators created an overly burdensome rule for private industry.

“I have a lot of questions about why the private sector should be responsible for the job of the U.S. government here,” Lewis said. “Developers develop and sellers sell. They shouldn’t be reporting arms for the U.S. government.”

FinCEN hasn’t provided details on how the rule will work so it’s hard to know what title companies and closing agents will need to do to comply, Lewis said. The problem is that developers and sellers don’t have the tools to conduct a thorough source of funds investigation like a bank does, and that shouldn’t be their responsibility, he said. Even if the buyer signs a form saying they own the LLC, it would be hard for the seller to verify that’s accurate, Lewis said.

“I don’t like the idea where my clients become my suspects or my buyers become my suspects,” Lewis said.

Attorney Andrew Ittleman, of Fuerst Ittleman David & Joseph, noted this is the third GTO FinCEN has issued in Miami in the past year and that’s unprecedented. The other two involved anti-money laundering measuring for check cashing companies and electronics exporters.

“Targeting high value residential properties in New York and Miami, the GTO has an unbelievable high profile, and will reach far beyond title insurance companies to prospective real estate buyers,” Ittleman said. “To the extent that prospective real estate purchasers value their privacy and secrecy – even for reasons having absolutely nothing to do with money laundering – they may now seek to invest their money into other assets or in real estate in other markets.”

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FinCEN Continues Patriot Act Expansion Amid Real-Estate Order

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By Samuel Rubenfeld
January 13, 2016

The U.S. Department of Treasury’s order targeting high-end real estate buyers in Manhattan and Miami comes amid the department’s recent expansion of its authority under the Patriot Act, experts said.

Treasury’s Financial Crimes Enforcement Network, or FinCEN, on Wednesday issued a six-month geographic targeting order requiring title insurance companies to identify the real people behind companies used to make all-cash transactions involving high-end real estate in Miami and the borough of Manhattan. FinCEN said it’s moving forward with its risk-based approach to fighting money laundering in the real-estate sector, and title insurance “is a common feature in the vast majority” of real-estate transactions.

“Title insurance companies thus play a central role that can provide FinCEN with valuable information about real estate transactions of concern,” said FinCEN.

The order follows years of reporting in multiple cities, including New York and Miami, on the secrecy of real-estate transactions. A series by the New York Times NYT -3.04%explored secrecy in the Time Warner Center towers, while The Nation magazine and the Miami Herald looked at shell companies buying up real estate in Miami, including a Herald report this week on a $47 million mansion deal. (Risk & Compliance Journal has done some reporting on shell-company real-estate deals in Manhattan as well.)

Experts told Risk & Compliance Journal, though, that the order comes amid a pattern of FinCEN expanding the reach of the Patriot Act.

“This is consistent with its search for suspicious activity when trying to identify and close-off loopholes where criminals were trying to evade the banking system,” said Josh Hanna, a principal at Deloitte LLP.

FinCEN, in the past month, has imposed penalties for the first time on a card club and on a precious-metals dealer. Andrew Ittleman, a Miami-based partner at law firm Fuerst Ittleman David & Joseph, PL, said it comes as FinCEN expands the definition of what counts as a “financial institution” under its mandate.

“Over time, that term has expanded to include car dealers, diamond dealers and other companies engaged in high-value sales. Now it’s time for real estate,” he said.

Mr. Ittleman also noted that this FinCEN geographic order is the third in less than a year targeting Miami, pointing to the agency’s push against electronic exporters and check-cashers.

“Miami, for whatever reason, has been labeled as having an enhanced risk of fraud. That has clearly reached the eyes of FinCEN; they’re focusing on us,” he said.

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