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Financial Regulatory Forum
International graft crackdown takes hold, FBI official says, citing Brazil
By
Guest Contributor
August 5, 2016
Tags:
ANTI-MONEY LAUNDERING (AML) |
FEDERAL BUREAU OF INVESTIGATIONS (FBI) |
FINANCIAL CRIMES |
GLOBAL OVERSIGHT |
KNOW-YOUR-CUSTOMER (KYC) |
RECORD KEEPING AND REPORTING |
REGULATORY OVERSIGHT |
SHARING OF INFORMATION |
SUSPICIOUS ACTIVITY REPORTS (SARS) |
U.S. FOREIGN CORRUPT PRACTICES ACT (FCPA)
The Brazil corruption scandal hitting the highest level of government is seen by many as another sign that the $1 trillion-a-year drained from the global economy through graft is unstoppable. Federal Bureau of Investigation veteran William McMurry views it differently — the country’s high-level prosecutions of public officials show that law enforcement is cracking down on bribery in places where it has long been ignored as the cost of doing business.
Investigators are sharing investigative resources in a widening circle of countries with a string of billion dollar cases that are among the largest in history. In places such as Brazil, Libya and Malaysia, they are following money trails that leads through Western banks in each of the cases, showing the need for U.S. compliance and legal teams to be on alert.
“There is undoubtedly a global push toward anti-corruption that has ever really existed even just a decade or two earlier — and you can see it in the way our cases are going and the amount of cooperation we are getting in place where traditionally we would not,” said McMurry, who heads the FBI’s New York Foreign Corrupt Practices Act unit. “Brazil is the greatest example I can think right now of what the future looks like.”
Fraud across many borders
A veteran of the FBI’s organized crime unit, McMurry refrained from discussing individual cases. But agency officials have detailed
its role in a multi-country Malaysian bribery investigation in which the bureau’s work resulted in U.S. lawsuits to seize $1 billion in tainted assets held by U.S. intermediaries.
“This fraud went on around the world,” said Special Agent Darryl Wegner, chief of the FBI’s International Corruption Unit, said in a news conference on the 1MDB case that has implicated Malaysian Prime Minister Najib Razaka. The corruption case, deemed by the FBI to be the biggest on record, put a spotlight on recent corruption schemes so large they inevitably send billions of dollars into offshore accounts and raise red flags for AML teams in government and private sectors.
“A huge catalyst for our immediate success is our outreach with foreign counterparts,” said McMurry, who said new FBI corruption teams put together last year around the country and abroad hit the ground running starting late last year and began piling up cases immediately.
U.S. Securities and Exchange Commission data recently cited foreign corruption as one of the fastest growing area of enforcement. The number of Foreign Corrupt Practices Act cases appears set to roughly double last year’s level, said Richard Girgenti, national and Americas leader for KPMG LLP’s Forensic Advisory Services. The
FCPA Blog lists 87 known cases under investigation. The number of FCPA cases declined last year, in part because the FBI was restructuring to form the new unit.
Setting up dedicated FCPA unit
McMurry took charge of a New York-based team of financial crime specialists last year to build corruption cases the way traditional FBI agents tracked drug cartels or terrorist cells. It focuses on field work and face time to build relationships with local local law enforcement and understand the business culture.
The similarities are obvious. Brazilian investigators, in Operation Car Wash, used a newly passed organized crime bill to go after high-level government bribes involving the state-owned oil giant, Petrobas. Corporate crime fighting requires the same tactics employed by organized crime investigators to understand the local business culture. They need to understand local business practice the FBI used in following small-time numbers runners and corner drug sellers in city neighborhoods to track down mob bosses. Such work requires feet on the ground, he said.
“The key is to get as many people around the globe on the same page and work as closely as we can with our foreign counterparts to fighting corruption along with us,” he said
The new dedicated-team of FCPA investigators has tripled the FBI’s resources and agents no longer are pulled away for higher-priority investigative concerns of terrorism, narcotics, and organized crime. The group also can work on cases in which the FBI can share in potential funding by recovering fines and seizing assets, the way the Financial Industry Regulatory Authority and Securities and Exchange Commission have long done.
The New York team of nine investigators includes accountants, lawyers and former compliance officers who work without interruption of local office concerns in the most important U.S. financial center. Previously, there had been no dedicated resource in New York and many cases were driven by prosecutors’ need for backup investigation.
“Untouchable” team uses tech tools
“We are embedded in the field offices so within the bureaucratic structure of the FBI it allows us to be basically untouchable in terms of being to work these cases instead being asked to work something else,” McMurry sad. His unit and ones in Washington and Los Angeles are working in concert with similar units at the SEC.
That does not mean the new “untouchable” unit is not entirely old school. It works closely with the SEC to use its vaunted data analytics team. The FBI cited its use of data analytics as a critical component in tracking down the money laundered in the Malaysian investigation.
Brazil’s
Operation Car Wash sniffed out curious small-time cash transfers between a money laundering ring using a gas station as a front. That led to an undeclared beachfront property linked to the family of former former Brazilian President Luiz Inacio Lula da Silva.
The case that began as a probe of a single gas station’s money handling eventually led to charges against Lula and the impeachment of President Dilma Rousseff. Lula and Rousseff, who was stripped of her power pending the outcome of her impeachment trial, both deny the charges against them.
“We are in an era of heightened focus on regulatory enforcement around the world, and the level of activity, the complexity and volume and speed are all growing and the tactics used by enforcement are far more sophisticated than they were ten or 15 years ago,” Girgenti said. “The FBI certainly has put more resources into the effort in support of the Justice Department’s FCPA effort and you have to believe that there are going to be more enforcement cases brought as a result of that.”
AML just the first step in FCPA probes
Stopping the flow of illicit funds is only the most visible sign of how countries coordinate anti-corruption enforcement, McMurry said. Investigators say that anti-money laundering (AML) violations often point to illicit bribe and fraud schemes. The Brazil case shows how a local AML case led to a hierarchy of corruption in the country so vast they might not have been able to go ahead without the involvement of global enforcement agencies.
“It provided a lot of top cover when they started going after the highest level of government,” he said. “So it was impossible for the targets of the investigations to couch it as some kind of political witch hunt when you’ve got the FBI and the Swiss government and all these different countries that have evidence of the same criminal activities.”
The case also illustrates the need for compliance officials to take even relatively small Suspicious Activity Reports seriously and to understand how corruption cases might eventually touch their operations.
“It sends a powerful message to compliance people that as our relationships with investigators around the world in places like Brazil where we have a strong relationship that if one one day bribery from our company is somehow being exposed in a domestic investigation in the country we are operating in there is a very good chance that it is going to be found by the FBI,where in the past it never was, ” said McMurry. of bribery in the country is somehow being exposed
“Pro-active,” tech tools
The use of shell companies to mask corruption remains a problem for law enforcement efforts, investigators say. The abusive use of shells has been exposed most recently through the Panama Papers leak of 11.5 million documents from the Panama law firm Mossack Fonseca to the International Consortium of Investigative Journalists. Those files have not been given to authorities, although the public release of an index of clients has provided potential leads for enforcement, McMurry said.
“We are very much at early phases of that, and where I think the biggest impact potentially will come is largely outside the U.S.,” he said. But eventually the information from the Mossack files may be linked to criminal schemes that could find its way into U.S. banks and assets. “At the tail end of things we will probably see a lot of connections to the U.S..”
The names in the Panama Papers are among the potential data points the agency can use to connect the dots pointing to illegal behavior. Other sources are whistleblowers, self-reports, forensic work, tips, media reports and public records. A number of initial cases have involved referrals from the Justice Departments in followups of fraud cases that pointed to corruption. “We can now look harder at those cases,” McMurry said.
The FBI unit also hopes to generate leads from companies that have been reluctant to call out bribe shakedowns amid concerns that the United States will not be committed to FCPA enforcement. “We want people to know that we are in this for the long haul,” McMurry said.
The effort is aimed at helping companies in high-risk locations compete better in a corruption-free environment. “At the onset of these squads being set up we wanted to get in front of compliance people doing outreach. They are our partners and allies” McMurry said. The end goal is “to make America stronger not weaker by putting you in a better position to do what you do because at the end of the day it should come down to people offering the best contract and the best service should get the business, not the ones who pay the most money.”
Key targets by geography and sector
With so many potential avenues to explore in a global economy rife with graft, the FBI is putting its top priorty on places and business sectors where it has the best chance of build successful cases. Those are not necessarily the hottest, high-risk geographies, McMurry said. The FCPA investigations outside the territorial United States rely on significant help from local enforcement, so it picks countries where local enforcement is most willing to assist.
“A huge catalyst for our immediate success is our outreach with foreign counterparts,” McMurry said. “It’s the logical place to start and that has paid huge dividends,” he said. The strongest U.S. relationship is with Britain, which he sees as leading other nations in global anti-corruption, in part because of its long-standing relationships to its commonwealth countries and former colonies and its far-flung financial service presence.
The FBI works most closely with those countries that have formal working
agreements with the SEC. The list includes most of the leading economies in Europe and the Latin America, including Brazil and Mexico, Australia, Japan Hong Kong and Singapore. A number of eastern European countries are involved in supervisory agreements. China and Russia are covered only by technical assistance agreements and McMurry concedes that the FBI unit will be less likely to pursue cases there.
The business sectors the agency targets are ones like telecommunications, energy, infrastructure/construction, engineering, technology, pharmaceuticals and transportation, areas in which government plays a large role. Increasingly the FBI is focusing on banks and financial intermediaries. McMurry said banks “for the most part” are playing a “very positive role” in the anti-corruption work and its ranks are filled with former FBI agents and compliance officers who “speak the same language.”
The agency watches closely in situations where new businesses are emerging and a number of companies are competing to gain a foothold, since “the companies that are breaking into a country are the ones at the biggest risk” in FCPA terms.
An FCPA case settled last week had a mix of many of the “red flags,” involving high-risk countries and government-related sector. The U.S.-listed Chilean airline, LAN, reached a $22 million
settlement with the SEC in which a Delaware shell company linked to a Virginia brokerage funneled a $1.1 million payment to an Argentine consultant via Costa Rica money laundering channels. The SEC eventually tracked the kickback to an Argentine government official with power over airline routes. It also went after individuals in the case, which will be a high priority for the FBI team.
Watching the middle man
In the LAN airline case the funds initially were paid to a consultant for what the SEC called a “bogus study” of airline routes. The case, which predates the new FBI unit, nonetheless shows the hallmarks of the group’s work. Consultants are often used as intermediaries, and the SEC cited LAN’s compliance operations for lack of due diligence in determining the consultant’s relationship with the government.
The FBI is especially concerned with individual liability.
“The most important question is who facilitated a bribe being paid and how did that happen. That gets to the heart of what we are focused on in those types of investigations, and we are not satisfied by the answer until we know the ‘who’ and if we are not satisfied we are going to keep digging.”
In the FBI, he said, “there is no usually no other solution — somebody is going to go jail or not go to jail.” McMurry conceded that this might be his organized crime background talking and that there are corruption cases that emerge in which lack of supervision and improper fund management may not result in criminal prosecutions. To be sure, the FBI anti-corruption unit is in a position to recover funds for the government through asset seizures and fines.
But the focus on individuals will add to the concern of compliance officers worried over their own liability and that of their company officers. It underlines the need for companies to carry on their own risk assessments in every location, said KPMG’s Girgenti.
Companies need to know the players and the culture they are likely to encounter and, just as important, their own employees need training and a supportive culture that encourages them to come forward when potential business partner want personal payments and favors, he said.
They need to do risk assessments and get “face time” in every geography, said McMurry, so they can learn the business culture and also how to rise above the norms if their own companies are simply accepting corruption as “the way it’s always been done.”
“The FBI wants to help create a balanced playing for our businesses in the world,” said McMurry.”I think people are really starting to understand that it’s a race to the bottom when countries are rewarding those to pay the most. It’s a model that you don’t want to participate in because it’s a dead end.”
(This article was produced by
Thomson Reuters Regulatory Intelligence and initially posted on Aug. 2. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter:
@thomsonreuters)
(Richard Satran is a financial journalist covering daily and emerging issues for Thomson Reuters Regulatory Intelligence.)
