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Pursuing individual officers and directors responsible for criminal fraud

February 2019  |  SPECIAL REPORT: CORPORATE FRAUD & CORRUPTION

Financier Worldwide Magazine

February 2019 Issue


In the past, the notion of prosecuting an executive of a multinational corporation residing in a foreign country, especially one on the far side of the world, may have seemed remote. But two recent cases illustrate the increasingly international reach of white-collar criminal prosecutors. In many ways, the allegations underlying the Malaysian sovereign wealth fund (1MDB) scandal and the detention of Huawei chief financial officer (CFO) Meng Wanzhou have little in common. The first is a scintillating tale taken quite literally out of Hollywood. The 1MDB fraud involved a scheme that spanned four continents and ultimately prompted investigations by 10 different countries to identify and prosecute.

As for the case involving Ms Meng, allegations of sanctions violations have taken centre stage in an international power struggle between the two most powerful nations on earth. One common theme, however, is that prosecutors are making a point of pursuing criminal charges against individuals at the top of large multinational organisations. For that reason, both cases carry a simple but important warning: more than ever before, prosecutors around the world are more serious about and capable of bringing criminal charges against individual officers and directors of multinational organisations.

Tools available to prosecutors for nabbing suspects abroad

There are various means for law enforcement organisations to interdict persons suspected of crimes even when they are outside the prosecutors’ territorial jurisdiction. First, international extradition is the process by which law enforcement officers in one country request law enforcement authorities in another to detain and transfer a suspect so that they may be prosecuted back in the first country. Extradition is recognised under international law, and is dependent on the existence of an extradition treaty between the two nations. As a reference, the US has extradition treaties with more than 100 countries, including most of the developed world, but with notable exceptions such as China. When an individual is detained in one of the countries with an extradition treaty, the US can make an extradition request through diplomatic channels to that country’s law enforcement authorities to have the suspect transferred back to the US, and vice versa.

Second, law enforcement can seize assets belonging to an individual even if they are unable to detain that person. Treaties such as the UN Convention Against Corruption encourage the use of asset seizure and forfeiture as a means of prosecuting international corruption. In the US, law enforcement often turns to freezing or seizing a suspect’s funds as a powerful prosecutorial tool.

Further, US law enforcement can seize the US-based assets of a criminal target on behalf of a foreign government when proper requests are submitted by that government to the State Department pursuant to a mutual legal assistance treaty (MLAT). Similarly, US law enforcement agents can make MLAT requests to foreign governments to seize and freeze foreign-based assets which are the proceeds of US crimes. Indeed, in the US, under certain circumstances, asset forfeiture laws even permit the government to seize the assets of a foreign bank if the bank holds corresponding accounts belonging to an international fugitive.

Finally, where extradition is unavailable, nations may attempt to trap suspects abroad through misdirection to make an arrest at home or in international waters. This process, known as ‘luring’, is sanctioned under both American and international law.

1MDB

Perhaps no current news story has captured the imagination of the public (and of white-collar lawyers) like the 1MDB scandal. The excesses of the primary culprit, Malaysian financier Jho Low, which included bankrolling the Academy Award nominated motion picture, The Wolf of Wall Street, with criminal proceeds, have inspired at least one book. According to one accounting, Low is alleged to have spent upwards of $85m of Malaysian state capital on alcohol and partying in a single eight-month stretch. But underneath the eye-popping excesses lay a fairly straightforward financial heist which Low was able to obscure through layers of cross-border transactions. Only through a constellation of media reporting and international investigations were authorities able to expose the alleged fraud.

The Malaysian sovereign wealth fund was created in 2009 as a means for encouraging development in Malaysia. Low, at the time a 28-year-old novice investor with ties to then-Malaysian prime minister Najib Razak and his family, was able to establish the fund and then is alleged to have transferred hundreds of millions of state-owned dollars to a personal account. The money then went toward everything from parties with celebrities to jewellery for the prime minister’s wife to political contributions to the UMNO, Najib’s political party. The money is also alleged to have fuelled a web of kickbacks and bribes to keep the heist from being discovered.

While the size and scope of the fraud scheme is hard to imagine, with as much as $4.5bn allegedly misappropriated from the 1MDB fund, one of the most compelling aspects of the 1MDB scandal is the unprecedented number of investigations launched by various national law enforcement agencies. All told, investigations are being conducted by law enforcement in at least 10 countries stretching over four continents, including Malaysia, Australia, Hong Kong, Indonesia, Singapore, the United Kingdom and the US.

The Malaysian Anti-Corruption Commission’s investigation stalled until Najib’s party lost the national election in 2018. Once in power, the opposition party restarted investigations into Najib. The new investigations saw Najib arrested and all of his assets seized by Malaysian authorities. An arrest warrant was issued for Jho Low, who remains at large.

The US Department of Justice (DOJ) began by issuing subpoenas to major western financial institutions such as JPMorgan Chase and Deutsche Bank to examine property purchases made by Najib’s stepson, a friend of Low and a central figure in the scheme. The FBI, DOJ’s investigative arm, served subpoenas on film production companies that were bankrolled by Low and Najib’s stepson. Goldman Sachs also received subpoenas for its involvement in raising money for 1MDB. The investigations resulted in seizures of hundreds of millions of dollars’ worth of assets and criminal charges against two former Goldman Sachs bankers and Jho Low.

Outside of the US and Malaysia, the following nations carried out their own enforcement activity, as outlined below.

Singapore .The Singapore government reportedly seized some $240m in assets related to 1MDB and has been cooperating with the Malaysian government to return the funds to Malaysia.

Switzerland. Low allegedly relied heavily on bank accounts in Switzerland to channel much of the wealth that was taken from 1MDB. The Swiss Office of the Attorney General announced that it froze about 400m in Swiss francs in relation to its own investigation of 1MDB. The attorney general announced the seizures during a visit to Malaysia.

UK. Political pressure in the UK mounted after a British media organisation published an exposé known as the Sarawak Report that was one of the earliest publications to draw attention to the 1MDB scandal. The UK’s Serious Fraud Office (SFO) opened an investigation into 1MDB shortly after the report was released, as many of the funds travelled through accounts controlled by the Royal Bank of Scotland.

These were just the most high-profile investigations from countries where some part of the scheme took place. To date, hundreds of millions of dollars in assets have been seized while prosecutors seek convictions of Najib, Low and their alleged co-conspirators.

Huawei CFO

Huawei is the largest private company in China, and the largest telecommunications equipment manufacturer in the world. On 1 December 2018 Huawei’s CFO, Ms Meng, was detained by Canadian authorities while changing planes at the Vancouver airport. Ms Meng was en route to Mexico from Hong Kong and only stopped in Canada to change planes. Canadian authorities detained Ms Meng because of a request by US law enforcement authorities in New York who have a pending criminal case against her. The details of the US case are largely under seal, but it has been widely reported that the case relates to alleged economic sanctions violations.

Without question, Ms Meng’s detention and pending extradition proceedings in Canada demonstrate the long-arm tactics that prosecutors have at their fingertips to pursue suspects abroad. Indeed, even though there is no extradition treaty between the US and China, she may end up being transferred to the US as a result of her hour-long layover in Canada based on the US-Canada extradition treaty.

US prosecutors have until the end of January 2019 to file a formal extradition request, which must include their evidence in support of extradition. The Canadian courts will then decide whether Ms Meng’s extradition to the US is appropriate. Matters likely to be litigated include whether the crimes with which she is charged in the US are in fact crimes in Canada. If not, then under the legal concept of “dual criminality” Canada would likely not extradite her to the US. “Dual criminality” provides that a country will only extradite a person if she is charged with conduct that would also be considered a crime in the extraditing country. If the Canadian courts decide extradition is warranted, the minister of justice still has to issue an order to surrender the individual to the requesting nation. Substantial political implications are sure to factor in at each step of the process. If extradition is granted, Ms Meng would be transferred to the US and face prosecution in federal court in New York.

Conclusion

The takeaway for international businesses is this: lax internal compliance or shoddy oversight can open the door to criminal exposure for individual corporate officers. While the cases discussed here have received heightened media coverage because of the size and scope of the underlying matters, or due to their political implications, that should in no way suggest that smaller firms need not take heed. Prosecutors from around the world will continue to use all means available to pursue individuals in whatever venues possible.

 

W. Warren Hamel and Kan M. Nawaday are partners and Stephen T. Salsbury is an associate at Venable LLP. Mr Hamel can be contacted on +1 (410) 244 7563 or by email: wwhamel@venable.com. Mr Nawaday can be contacted on +1 (212) 370 6240 or by email: kmnawaday@venable.com. Mr Salsbury can be contacted on +1 (410) 244 7470 or by email: stsalsbury@venable.com.

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