Cooperation: the key to fraud detection under Trump government?

July 2017  |  SPECIAL REPORT: WHITE-COLLAR CRIME

Financier Worldwide Magazine

July 2017 Issue


Donald Trump’s recent promises to crack down on prosecuting violent crimes have left critics anticipating a halt on white-collar crime prosecutions. The Department of Justice (DOJ) has indicated it will give a higher priority to tackling violent crimes. This is surprising given the violent crime rates in the US are among the lowest rates seen in decades, according to data from the Federal Bureau of Investigation. Trevor McFadden, a deputy assistant attorney general at the Justice Department, had said that it makes “perfect sense” to devote more resources to the fight against violent crime, and that federal prosecutors are not trying to break records with respect to white-collar crimes.

Under the Obama administration emphasis was placed on prosecuting corporations along with individual executives. But can we expect that the Trump administration will do the same, or is the US losing focus on prosecuting corporate criminals?

Despite this shift in enforcement priorities, the Trump administration does not deny that white-collar crimes are alive as ever. The DOJ will still prosecute corporate crimes, but the strategy behind the anti-fraud effort has diverted and is now focused on motivating companies and individuals to voluntarily comply with the law rather than prosecuting every company possible. Similarly, there seems to be an intention to move away from deterrence initiatives, such as substantial fines or long prison sentences, which marks a notable shift in the government’s focus.

The DOJ: internal workings

Since his election earlier this year, president Trump has made his mark by overhauling the DOJ’s white-collar crime division and firing all 46 holdover US attorneys appointed under Obama. Among those fired was Preet Bharara, the former US attorney for the Southern District of New York, known as the ‘Sheriff of Wall Street’, who led the way for prosecuting insider trading by hedge funds. In his eight years prosecuting financial crime, Mr Bharara’s office obtained $14bn on behalf of victims through recovery processes such as forfeiture or disgorgement. His termination was particularly controversial, owing not only to his prosecution record, but because Trump had endorsed him in November 2016 and publically asked him to stay on.

It is commonplace for new presidents to replace US attorneys as they are political appointments, but firing Bharara was forced, as the former prosecutor and other US attorneys refused to hand in their respective resignations and instead demanded to be fired.

The DOJ’s fraud section is adamant that it will still dedicate resources for investigating and prosecuting sophisticated and complex economic crimes throughout the country.

Anti-bribery laws: the current state of affairs

So what is next for corporate bribery, fraud and tax violations? Worry surrounding a ‘cooperative approach’, coupled with an increased focus on traditional (i.e., violent) crimes, may militate against white-collar prosecutions of both local and foreign crimes. Global scepticism about the enforcement of the Foreign Corrupt Practices Act (FCPA), the crown jewel of US anti-corruption laws, has already taken shape.

A decreased number of prosecutions under the FCPA is likely following Trump’s public denouncement of the FCPA as a “horrible law” that disadvantages American businesses.

Trump further noted in a 2012 interview with CNN that he deems prosecution of corporate crimes in places where corruption is common, like bribery originating from developing countries, as “absolutely crazy” because it places US businesses at a “huge disadvantage”. With a strong distaste for the FCPA, coupled with an increased focus on violent crimes within America’s borders, significant enforcement of actions against overseas bribery is likely not on the horizon given the current business-friendly administration and political climate.

The FCPA: international cooperation

In recent years, cooperation between the US and foreign investigators has been streamlined through implementing global anti-bribery legislation. On an international scale, countries such as Brazil, the Netherlands, the UK and India now all boast anti-bribery laws that foster cooperative criminal investigations between jurisdictions. Latin America’s largest construction company – Odebrecht – pled guilty and settled for a $2.6bn fine for corporate fraud. This win for the FCPA and the DOJ could not have been achieved without multinational efforts between Switzerland, Brazil and the US.

Another effort by the DOJ to demonstrate the impact of a cooperative approach to white-collar crime is a pilot programme encouraging corporations to confess to overseas bribery in return for more lenient punishment. This method was thought to have worked with Teva Pharmaceutical Industries Ltd., a pharmaceuticals group, which recently paid $519m to settle bribery charges. In exchange for the company’s cooperation in this proceeding, albeit following being subpoenaed by the Securities and Exchange Commission (SEC), Teva received a fine decreased by 20 percent. However, because the company was not originally forthright in its cooperative efforts, and did so following the subpoena, this decrease was far less significant than it would have been otherwise.

It is worth noting that the pilot programme was the product of the Obama administration, and while it is thought to be a step in the right direction toward mitigating and managing white-collar crime, at this point it is unclear if president Trump will take kindly to the programme and if it will be fostered by his government.

The FCPA: a lasting or fleeting effect

The FCPA is not unanimously respected and accepted. The head of the SEC, Jay Clayton, remains doubtful of any lasting positive effect of the anti-bribery laws on international cooperation. The Trump administration’s rocky relationship with other countries is no secret, and was a point of serious contention leading up to the presidential election. Trump’s preference to continually place America first does not bode well when seeking assistance from foreign countries. Global investigative cooperation could be complicated by this new unwelcoming dynamic, making enforcement of the FCPA more challenging and the act less impactful.

The new administration: distaste for corporate disclosure

Republicans have always disliked the SEC’s growing corporate disclosure requirements and now they are well-positioned to change them. The managing director at the Centre for American Progress, Andrew Green, foresees less corporate disclosure and decreased accountability under the Trump administration. This is not only troubling for the future effectiveness of the FCPA but also for long-term investors. Investors demand a stronger SEC approach to disclosure in areas like climate change, tax payments and work training. Without this disclosure, long-term investors will have a difficult time making informed decisions.

Anti-bribery laws: moving forward

Scepticism aside, 2016 marked a record year for the enforcement of the FCPA, as federal prosecutors brought in a net total of $2.3bn in penalties. Significant wins and settlements were made with companies in violation of the FCPA, such as Embraer S.A., J.P. Morgan Chase & Co. and Och-Ziff Capital Management Group LLC. Despite this success, it is unclear whether the new attorney general in the Trump administration will embrace or scrap key elements of president Obama’s white-collar judicial legacy. The record trend of 2016 could be short lived if the Trump administration follows its original plans to relax enforcement of white-collar offenders. Based on Trump’s record of inconsistent policy statements, it is still largely guesswork as to what will unfold in the sphere of corporate enforcement.

The proliferation of white collar-crimes on a global scale highlights the need for robust enforcement mechanisms. Hope remains that the US will continue its traditional policy approach of promoting public integrity, cooperation, transparency and fighting corporate corruption on an international level.

 

Jessica Lewis is an associate and Ceilidh Mulder is a summer law student at Bennett Jones. Ms Lewis can be contacted on +1 (604) 891 5160 or by email: lewisj@bennettjones.com.

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