Already an IBA member? Sign in for a better website experience

New Tools for Old Targets: Anti-Corruption Enforcement by the United States Under the Biden Administration

Tuesday 3 August 2021

Jessica Ortiz
MoloLamken, New York
jortiz@mololamken.com

Lisa Bohl
MoloLamken, Chicago
lbohl@mololamken.com

Lauren Dayton
MoloLamken, New York
​​​​​​​ldayton@mololamken.com

Introduction

On the campaign trail, United States’ President Biden asserted that ‘combating corruption [is] a core national security interest’ and vowed to ‘lead efforts internationally to bring transparency to the global financial system’.[1] Now his administration has the opportunity to put that campaign promise into action and it has several new tools at its disposal. Legislation passed just before President Biden’s inauguration and the US Commodity Futures Trading Commission’s recent first enforcement action of a foreign-corruption scheme promises to shape the administration’s anti-corruption enforcement priorities.

The Kleptocracy Asset Recovery Rewards Act

The Kleptocracy Asset Recovery Rewards Act (KARRA), passed on 1 January 2021 as part of the 2021 National Defense Authorization Act,[2] creates a three-year pilot programme to reward whistleblowers for providing information about foreign-government corruption. Specifically, the programme permits the US Treasury Department to award up to US$5m to anyone who provides information leading to the restraint, seizure, forfeiture or repatriation of funds ‘linked to foreign government corruption and the proceeds of that corruption’ held at a financial institution in the United States (including the US branch of a foreign financial institution) or in the possession of a US person. The law defines ‘foreign government corruption’ to mean corruption under the United Nations Convention Against Corruption,[3] which covers bribery, embezzlement, money laundering, ‘concealment’ and obstruction of justice (although the Convention does not define those terms). The law invites the Treasury Department to establish procedures for exactly what types of actions can lead to rewards.

As under the US Securities and Exchange Commission’s (SEC) whistleblower programme, a whistleblower under KARRA must provide the information to the Treasury Department, under penalty of perjury, to be eligible for a reward. Under the law, the Treasury Department can generally award no more than US$25m in a single fiscal year.

The law also permits the Treasury Department to take certain measures to protect whistleblowers and their families, although it does not contain an express confidentiality provision or an anti-retaliation provision. Government employees (whether US or foreign) who identify stolen assets as part of their official duties are not eligible for the award, and the Treasury Department may deny or reduce the amount of the award if the whistleblower participated in the underlying corruption. The Treasury Department must write an annual report describing stolen assets in the US or held by US persons and the Treasury Department’s attempts to identify and recover other stolen assets, including its interactions with international financial institutions.

While KARRA will provide another tool for the Biden administration’s foreign anti-corruption efforts, the US$450,000 initial funding for fiscal year 2021 (to be supplemented with any stolen assets that are recovered) and the US$25m annual cap on awards to be issued means it is likely to be a relatively modest programme compared to the SEC’s, which has already announced more than US$167m in awards in 2021,[4] and which awarded a record US$114m to a single whistleblower in October 2020.[5] The lack of confidentiality and anti-retaliation provisions in KARRA may also reduce incentives for whistleblowers to provide information. However, unlike the SEC’s programme, which requires whistleblowers to furnish ‘original’ information[6] not known to the SEC that leads to a successful prosecution, KARRA makes eligible anyone who provides any information ‘leading to’ the restraint, seizure, forfeiture, or repatriation of funds, which may encourage those with information to come forward.

It is also worth noting that the contours of both the eligibility requirements and the protections offered may change once the Treasury Department implements regulations for the programme as called for under the statute. The SEC announced its first whistleblower award approximately one year after its programme first launched in 2011,[7] so it may be several more months before we know more about the Biden administration’s focus on the programme and its efficacy. KARRA attempts to replicate the SEC’s successful approach to gathering information about financial crimes and gives US regulators another tool to fight foreign corruption.

The ‘Engel List’

Another of President Biden’s campaign platform initiatives was a plan to ‘build security and prosperity in partnership with the people of Central America’.[8] Among the priorities listed in the plan was ‘put[ting] corruption at the heart of US policy in Central America’. The Biden administration now has one more tool to accomplish this: the ‘Engel List’, one component of the United States-Northern Triangle Enhanced Engagement Act enacted in December 2020.[9] The Engel List is an annual public report identifying foreign persons whom the President, on recommendation of the US State Department, determines have knowingly engaged in ‘significant corruption’, obstructed investigations of corruption or who have undermined the democratic process in the Northern Triangle countries (El Salvador, Guatemala and Honduras). Congress created the Engel List based on its view that corruption in the Northern Triangle damages those countries’ economies, that it is carried out in many cases by people from other countries, and that sanctions on wrongdoers will benefit both the Northern Triangle and the wrongdoers’ countries as well.

The statute specifically lists as relevant acts: corruption related to government contracts, bribery and extortion, money laundering, and acts of violence, harassment or intimidation of corruption investigators. Those included on the list are subject to sanctions by the US, including denial or revocation of visas to enter the US or denial of citizenship.

In addition to the Engel List and its corresponding sanctions, the Act also provides for the US Department of State to create a publicly available five-year strategy to combat corruption and advance economic prosperity in the Northern Triangle. The strategy must include annually updated benchmarks tracking the strategy’s progress in key areas, one of which includes identifying and prosecuting money laundering and other financial crimes.

The Engel List is unique among US ‘list legislation’ (laws that direct the executive to create lists of designated bad actors), in targeting corruption – rather than human-rights abuses or terrorism – and doing so in a particular region of the world. The first Engel List is due to be released at the end of June 2021.

Foreign-corruption enforcement by the US Commodity Futures Trading Commission

The Biden administration may also continue the prior administration’s use of the US Commodity Futures Trading Commission (CFTC) to combat foreign corruption. In December 2020, the CFTC announced an order and settlement with Vitol Inc, which was accused of making bribes and kickbacks to employees of state-owned entities in Brazil, Ecuador and Mexico.[10] In return, Vitol received confidential information and favourable treatment in connection with oil trading. Vitol was ordered to pay over US$95m in monetary penalties and disgorgement; those penalties were offset by a portion of the fines separately imposed by the US Department of Justice (DOJ) in a related criminal case.

In that criminal case, the DOJ and Vitol entered into a deferred prosecution agreement – a mechanism whereby DOJ agrees not to proceed with charges in exchange for the defendant’s agreement to abide by certain requirements or conditions. Under that agreement, Vitol agreed to pay a criminal fine, among other things. The DOJ also credited Vitol US$45m for the penalty Vitol paid the Brazilian Ministério Público Federal in a parallel investigation conducted by the Brazilian authorities. The offsets by the DOJ and CFTC emphasised the US agencies’ goals to coordinate with each other and also with international authorities to hold companies accountable for misconduct, while avoiding duplicative penalties.[11] The CFTC called the Vitol case, which was the first brought by the agency involving foreign corruption, a ‘historic enforcement action’ that demonstrated the CFTC’s active pursuit of corruption cases that cause manipulation of the US derivatives markets. Notably, the CFTC does not have authority to pursue enforcement actions under the Foreign Corrupt Practices Act – which only the DOJ and SEC have jurisdiction to enforce and which historically has been the government’s primary foreign anti-corruption tool. Instead, the CFTC’s authority stems from the Commodities Exchange Act, which has not been traditionally used to target foreign corruption. As demonstrated by the Vitol case, however, the CFTC is beginning to use the Commodities Exchange Act’s anti-fraud and anti-manipulation provisions in new ways to target such misconduct. Whether such use holds up will likely be increasingly tested in the courts.

The criminal action against Vitol also demonstrates the CFTC’s recent efforts to coordinate enforcement actions with other agencies. In March 2019, the CFTC and DOJ announced their intent to tackle foreign corruption cooperatively and to increasingly collaborate with regulators abroad.[12] The Vitol prosecution shows that the agencies are taking that promise seriously.

There is no indication that the CFTC’s burgeoning foreign anti-corruption activities or pursuit of inter-agency cooperation will diminish during the Biden administration. Gary Gensler, President Biden’s new SEC chair, was previously the chair of the CFTC, where he led the agency to pursue record numbers of enforcement actions and fines.[13] Gensler’s connection with the CFTC and reputation as an aggressive regulator can only serve to increase cooperation between the two agencies.

It is also possible that the CFTC may seek to roll back some Trump-era rules affecting cross-border transactions. For example, in July 2020 the agency adopted a rule exempting certain foreign entities from registration requirements applicable to swap dealers and major swap participants.[14] In dissent, former CFTC commissioner Rostin Behnam expressed concern that the new rule would create enforcement exceptions for US transactions by non-US entities and for activities by foreign subsidiaries of US entities.[15] Behnam is now the acting chairman of the agency and his dissent may well become the policy of the new administration.

Conclusion

Given these increasingly international enforcement priorities, global companies should ensure that their compliance efforts comply with standards set by the CFTC, which is likely to become an important new US regulator in the foreign anti-corruption space that has previously been dominated by the DOJ and SEC.

As a candidate, President Biden made fighting corruption a focus of his foreign policy. New tools created by Congress, and a new method of enforcement adopted by the CFTC, promise to shape the efforts of his administration in pursuing his anti-corruption platform.

 

Notes

[1] Joseph Biden, ‘Why America Must Lead Again: Rescuing U.S. Foreign Policy After Trump’, Foreign Affairs, Mar/Apr 2020, available at: www.foreignaffairs.com/articles/united-states/2020-01-23/why-america-must-lead-again, last accessed 27 May 2021.

[2] HR 6395, National Defense Authorization Act for Fiscal Year 2021, available at: https://www.congress.gov/bill/
116th-congress/house-bill/6395, last accessed 27 May 2021.

[3] ‘United Nations Convention Against Corruption’, 2004, available at https://www.unodc.org/documents/treaties/
UNCAC/Publications/Convention/08-50026_E.pdf.

[4] Previous News and Releases, US Securities & Exchange Comm’n, Washington, DC, www.sec.gov/whistleblower/
pressreleases, last accessed 28 May 2021.

[5] ‘SEC Issues Record $114 Million Whistleblower Award’, US Securities & Exchange Comm’n, Washington, DC, 22 Oct 2020, www.sec.gov/news/press-release/2020-266, last accessed 28 May 2021.

[6] ‘What is “original information”?’ US Securities & Exchange Comm’n, Washington, DC, www.sec.gov/
whistleblower/frequently-asked-questions#faq-5, last accessed 28 May 2021.

[7] ‘SEC Issues First Whistleblower Award’, US Securities & Exchange Comm’n, Washington, DC, 21 Aug 2012, www.sec.gov/news/press-release/2012-2012-162htm, last accessed 28 May 2021.

[8] ‘The Biden Plan to Build Security and Prosperity in Partnership with the People of Central America’, https://joebiden.com/centralamerica, last accessed 28 May 2021.

[9] HR 133, ‘Consolidated Appropriations Act, 2021’, available at: www.congress.gov/116/bills/hr133/BILLS-116hr133enr.pdf, last accessed 28 May 2021.

[10] ‘CFTC Orders Vitol Inc. to Pay $95.7 Million for Corruption-Based Fraud and Attempted Manipulation’, US Commodities Futures Trading Comm’n, Washington, DC, 3 Dec 2020, available at: www.cftc.gov/
PressRoom/PressReleases/8326-20, last accessed 27 May 2021.

[11] ‘Vitol Inc. Agrees to Pay over $135 Million to Resolve Foreign Bribery Case’, US Sec Exch Comm’n, 3 Dec 2020, Washington DC, available at: https://www.justice.gov/opa/pr/vitol-inc-agrees-pay-over-135-million-resolve-foreign-bribery-case, last accessed 30 May 2021.

[12] ‘CFTC Division of Enforcement Issues Advisory on Violations of the Commodity Exchange Act Involving Foreign Corrupt Practices’, US Commodities Futures Trading Comm’n, Washington, DC, 6 Mar 2019, available at: www.cftc.gov/PressRoom/PressReleases/7884-19, last accessed 27 May 2021.

[13] Chris Arnold, ‘Wall Street Insider Turned Tough Market Cop: Biden’s Pick To Head SEC’, NPR, 27 Jan 2021, available at: www.npr.org/2021/01/27/960723183/wall-street-insider-turned-tough-market-cop-bidens-pick-to-head-sec, last accessed 27 May 2021.

[14] ‘CFTC Approves Final Cross-Border Swaps Rule and an Exempt SEF Amendment Order at July 23 Open Meeting’, US Commodities Futures Trading Comm’n, Washington, DC, 23 July 2020, available at: www.cftc.gov/PressRoom/PressReleases/8211-20, last accessed 27 May 2021.

[15] ‘Dissenting Statement of Commissioner Rostin Behnam Regarding the Cross-Border Application of the Registration Thresholds and Certain Requirements Applicable to SDs and MSPs – Final Rule’, US Commodities Futures Trading Comm’n, Washington, DC, 23 July 2020, available at: www.cftc.gov/PressRoom/Speeches
Testimony/kbehnamstatement072320, last accessed 27 May 2021.