Blog Post 07.28.20
Podcast
Episode #12: COVID-19 Creates a Perfect Storm for Corruption and Money Laundering (Aaron Hutman)
Podcast
07.17.20
Aaron Hutman and host Joel Simon discuss the heightened global risks of corruption, fraud and money laundering relating to international business, banking and the procurement of goods and services in high demand during times of crisis.
(Editor’s note: transcript edited for clarity.)
Welcome to Pillsbury’s Industry Insights podcast where we discuss current legal and practical issues in finance and related sectors. I am Joel Simon, a finance partner at the international law firm Pillsbury Winthrop Shaw Pittman and today, I will be speaking with Aaron Hutman, a partner in Pillsbury’s international trade practice. Aaron is an established authority on some of the most important issues affecting trade, banking and investment. Helping clients understand, anticipate, and manage problems ranging from anti-money laundering and anti-corruption to investment rules and trade disputes. His clients include defense companies, private equity and hedge funds, banks, multinational corporations, energy industry participants, social media and technology leaders, startups and governments around the world.
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Joel Simon: It seems every time there is good news about something happening, either in the medical field or the procurement field, even household items, there is somehow an adjoining accusation of illegality or corruption or money laundering. What can you tell us about the current crisis that causes a surge in these types of problems?
Aaron Hutman: Absolutely. We all know the world has been turned on its head—the pandemic is global, affecting not just the United States but major economies throughout developing world. This means that you had a tremendous disruption of the normal way that we do business. For example, particularly in the early days, there were scarcity and surges in demand: masks, medicine, ventilators, and things like Purell and toilet paper were all part of that feeling of scarcity. Both in the United States but in markets around the world we have manufacturing and production. There was a lot of money chasing too few goods all of a sudden for too few markets.
When it comes to medicine or masks or items that are a necessity in a time of pandemic when money is no issue, somebody has to decide who gets what, and that is fertile ground for both official and commercial corruption. As supply chains were disrupted, companies and governments had to adapt and that left room for fraud and corruption, and then room for money laundering. We’ve had huge expenditures by governments and international organizations—the numbers are staggering. It seems every week there is a new announcement of hundreds of billions of dollars being put into the national or global economy, and it’s not only the U.S. government, but governments around the world and international organization, multilateral funding organizations. That’s a lot of money going out there, and in any procurement environment there’s room for corruption, for fraud and for mistakes but this is just “the usual” on steroids—a level we’ve never seen. And where governments try to create order amidst this chaos, and you put officials in charge, that offers even more opportunity for corruption.
Simon: It sounds to me like a perfect storm for corruption. You must be really busy these days.
Hutman: It certainly has not been a dull year. We might be working from home, but we are working around the clock. But ultimately this period in history is going to start to calm down, and there is going to be an accounting. We expect to see a wave of enforcement over the next two or maybe even more years, looking back at this period, and we want to get the word out to our contacts and our clients to pay attention, be aware of it and try to protect themselves before that lookback happens. Be on the right side of the wave. There are a lot of rules out there that people may not be aware of, and we want to make people aware of those rules and what some of the best practices are so that they can begin to inoculate, to protect themselves and take those steps now.
Simon: I know many of these rules have been in place for a long time and whenever there is a particular type of crisis, some of them get focused on more than others, but maybe you could walk us through what some of those are?
Hutman: I will start with the focus in the United States then we will take the aperture a little broader around the world. Most people are familiar with Foreign Corrupt Practices Act or FCPA and that is the anti-corruption rule in the United States with broad extraterritorial application and practice and just a huge set of tombstones of large fines that companies around the world discovered. The FCPA has both anti-bribery but then also books and records provisions that apply to issuer securities in the United States. So that traditional bribery scenario—giving something, promising something of value to a foreign official of a jurisdiction or of an organization outside of the United States with an intent to influence that official to secure an improper advantage in order to obtain or retain business—that traditional official bribery scenario, that’s the FCPA. And then there’s the need to have clear books and records and not have slush funds on the side. The books and records provision is enforced by the FCC for issues of securities in the United States, and those violations don’t necessarily have to have a material connection to the bribery. So that’s official corruption.
Then we have rules for commercial bribery, and so the Travel Act and various state anti-bribery rules can apply to bribery even if there is no public official involved. There are criminal anti-money laundering rules, 18 USC 1956 and 1957, that provide for penalties where there are transactions that involve a property or funds that have an illicit source and where the people involved in the transaction know that there is some sort of unlawful activity but don’t necessarily have to know exactly what. In fact, there is a certain set list of predicate offences that relates to the underlying assets or property in the transaction. These can come into play because anti-corruption is one of those predicate offenses used by U.S. officials. For example, with FIFA this was a major corruption scandal, but the U.S. took the lead in prosecuting and one of the key sets of laws they used were actually anti-money laundering laws as opposed to the FCPA. Then there are wire fraud statues—anytime money is sent over the wires in interstate commerce or international commerce—and those again can be used to prosecute both anti-corruption and anti-money laundering events. For example, the Paul Manafort situation is often thought of as a money laundering scenario, but that was actually prosecuted primarily as a wire fraud.
All of these rules have the same long-arm provision—they apply to U.S. persons and companies, but they also apply to any activity in the United States or through U.S. commerce whether it is U.S. banking or even sometimes U.S. email or just a meeting that happens to occur in New York or San Francisco or Los Angeles. When people outside the United States engage in prohibited activity with people in the United States there can be conspiracy and other charges. So, when you are using representatives or you have partners outside the United States, U.S. persons and the people they interact with can become subject to U.S. jurisdictions in these ways. And then taking a step back we have rules in other countries whether it be the UK Bribery Act and then multilateral institutions.
Simon: You mentioned the individuals who act in these ways who have knowledge of what they are doing but isn’t there also a problem when people just look the other way or do nothing?
Hutman: Absolutely. That is a good question and it comes up a lot these days. So, for criminal purposes, you don’t have to knowingly walk into a situation saying I am going to bribe somebody. Very often companies find themselves in the situation where they have a representative who might be doing something wrong and the company looks the other way or doesn’t say anything. Willful blindness or deliberately not making yourself aware of facts that lurk out there can be the basis for criminal prosecution in the United States.
Simon: From a best practices standpoint, what are some things you would recommend to clients to try to shore up defenses in this area?
Hutman: You know that there is going to be a look back and a reconciliation of what’s going on. So it’s important to double down on the best practices and transaction due diligence. Know your customer, vendor screening, accounting controls. Written compliance procedures that cover anti-money laundering, anti-corruption, export control and sanctions and trade and privacy and insider trading and fraud and so forth. Your ethics plans. Your code of conduct. Take a look at those. Make sure that they are as strong as they need to be. If you need to beef them up or put in special provisions for the pandemic, for the COVID-19 situation, go ahead and do it. Get as many as you can on the books and then make sure that they’re implemented because looking back, that’s one of the things government officials are going to ask. They’re going to ask, “Did you try to do the right thing. Were you being careful? Is there documentary evidence to dispute this?” So, if you’re trying to do the right thing, make sure that you document it. Memos to file, accounting records, good records within your compliance function, whether it be reporting or internal investigations or advice that you’re giving out. Make sure that anybody who’s looking back two years from now—even if the current attorneys, senior executives or compliance officials have moved on to other companies—make sure that somebody can look back and know what the company or the organization or the individual investor was trying to do at that time.
There was a Town Hall recently with the leadership of the Department of Justice and SEC and FBI looking at any corruption abroad issues. They emphasized that they are going to enforce, that they are ready, that they’re there, they have the resources and they expect everybody to comply. But at the same time, they did say some things that made you think that they are willing to be realistic looking back as long as they understand that the company was trying to do the right thing. One example that was given by Daniel Kahn the Deputy Chief of Paduche on division overseeing SCP enforcement: If there happens to be a payment to a customs official and you can show that the goal wasn’t to obtain or retain business, you weren’t trying to [enrich] yourself, but rather the payment went to the customs official because you were just trying to get medical equipment to personnel … maybe the U.S. government would look at that differently. That’s a good example of why you need to put down what you’re intending to do so you have really had a chance to comply.
Simon: That’s great advice. Thank you for this terrific information-packed discussion on these timely international trade issues.