1. McGraw-Hill, 2011.
2. KPMG analysis based on information sourced from LexisNexis and Factiva (accessed in October 2015).
1. KPMG CEO Survey, US CEO Outlook 2105, The Growth Imperative in a More Competitive Environment, 19.
2. http://
3. http://
4. http://
5. http://
6. https://www.congress.gov/bill/111th-congress/house-bill/4173.
7. http://
8. http://
9. http://
10. http://
11. http://
12. http://
13. http://
14. https://www.sec.gov/about/secstats2015.pdf.
15. http://
16. https://www.sec.gov/about/secstats2013.pdf.
17. http://
18. http://
19. https://www.sec.gov/news/pressrelease/2015-245.html.
20. http://
21. http://
22. http://
23. “Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts,” Majority and Minority Staff Report, U.S. Senate Permanent Subcommittee on Investigations Committee on Homeland Security and Governmental Affairs, February 26, 2014.
24. file:///C:/Users/Nigel/Downloads/REPORT%20-%20OFFSHORE%20TAX%20EVASION%20(Feb%2026%202014,%208-20-14%20FINAL)%20(1).pdf.
25. http://
26. http://
27. http://
28. Fareed Zakaria, The Post-American World: Release 2.0, W. W. Norton & Company, 2011.
29. https://www.cov.com/files/Publication/446fa508-b853-4f88-a902-615eb62a28aa/Presentation/PublicationAttachment/1c4f86eb-6ce7-4115-aed6-67bd2d1e5ee6/Trends_and_Developments_in_Anti-Corruption_Enforcement_Winter_2015.pdf.
30. Wilczek, Bloomberg BNA, June 8, 2015.
31. Jaclyn Jaeger, “Petrobras Probe Means More Enforcement in Brazil,” Compliance Week, May 2015, 55.
32. David Segal, “Brazil’s Great Oil Swindle,” New York Times, Sunday Business Section, August 9, 2105.
33. Press release, Office of Public Affairs, U.S. Department of Justice, September 17, 2014.
34. https://www.sec.gov/whistleblower/reportspubs/annual-reports/owb-annual-report-2015.pdf.
35. Thomas Fox, “Still Reading Tea Leaves on FCPA Enforcement,” Compliance Week, May 2015.
36. http://
37. http://
38. Ibid.
39. http://
40. http://
41. http://
42. http://
43. http://
44. U.S. Commodity and Futures Trading Commission, Overview of the FY 2104 Budget and Performance Plan.
45. Stuart Gilleman, Financial Regulatory Forum, “‘Big data’ tools will improve regulatory oversight, FINRA’s diFlorio says,” Reuters, February 25, 2014.
46. Leslie R. Caldwell, Speech, U.S. Dept. of Justice, Assistant Attorney General for the Criminal Division, American Conference Institute 31st International Conference on the Foreign Corrupt Practices Act, November 19, 2014.
47. http://
48. http://
49. http://
50. http://
51. http://
52. http://
53. Richard Strassberg and William Harrington, “Civil Enforcement Actions: Whither the Fifth Amendment?” New York Law Journal, May 30, 2014.
54. Ibid.
55. http://
56. http://
57. http://
58. https://www.sec.gov/alj/aljdec/2015/id851ce.pdf.
59. http://
60. http://
61. http://
62. http://
63. Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Offshore Accounts: Hearing Before the Permanent Subcommittee on Investigation of the Commission on Homeland Security and Government Affairs, 113th Congress 4-5 (2104) (joint statement of James M. Cole, Deputy Attorney General and Kathryn Keneally, Assistant Attorney General, Tax Division).
64. DOJ Memorandum issued by Acting Attorney General Craig S. Morford to the United States Attorneys on March 7, 2008. It was updated on May 25, 2010.
65. F. J. Warin, M. S. Daimant, and V. S. Root, “Somebody’s Watching Me: FCPA Monitorships and How They Can Work Better,” University of Pennsylvania Journal of Business Law 13 (2011): 2, 322.
66. Skadden, Arps, “Cross-Border Investigations Update,” ibid.
67. Geoffrey P. Miller, “An Economic Analysis of Effective Compliance Programs,” New York University Law and Economics Working Papers, New York University Law School, December 2014.
68. http://
69. http://
70. http://
71. http://
72. http://
1. Money Laundering Enforcement Conference, Washington, DC, November 18, 2013.
2. Adapted from Jim DeLoach, “10 Questions to Help Shape the 2013 Risk Oversight Agenda,” NACD Directorship, January 9, 2013.
3. The Sarbanes-Oxley Act, Section 301 requires that audit committees of issuers listed on U.S. exchanges “establish procedures” for (i) receipt, retention, and treatment of complaints regarding accounting, internal accounting controls, or auditing matters; and (ii) confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters. Section 301 was codified as Exchange Act Section 10A(m), which the SEC implemented with Rule 10A-3(b)(3), which may be found at http://
4. Ethics Resource Center, “Leading Corporate Integrity: Defining the Role of the Chief Ethics & Compliance Officer (CECO),” August 2007, 18, http://
5. See commentary to Section 8B2.1 of the Federal Sentencing Guidelines for Organizational Defendants.
6. Procter & Gamble CEO Bob McDonald, Compliance Week Conference 2012.
7. 22nd Annual Ethics and Compliance Conference, October 1, 2014.
8. Both the NYSE and the NASDAQ have adopted corporate governance rules that require U.S. listed companies to adopt and disclose codes of conduct for directors, officers, and employees, and disclose any code waivers for directors or executive officers.
9. Google Code of Conduct, https://investor.google.com/corporate/code-of-conduct.html.
10. One of the minimum requirements announced by the U.S. Sentencing Guidelines for Organizational Defendants calls for the entity to use reasonable efforts and exercise due diligence to exclude individuals from positions of substantial authority who have engaged in illegal activities. See United States Sentencing Commission, Guidelines Manual, §8B2.1(b)(3), http://
11. Despite 73 percent of companies indicating they have a formal risk-based third-party onboarding process, only 45 percent have right to audit clauses in their third-party contracts, with slightly more than half (23 percent of the total) of those exercising these rights. Additionally, less than three-quarters said their companies have a formal process to identify third parties from an anti-bribery and corruption perspective. KPMG International, “Anti-Bribery and Corruption: Rising to the Challenge in the Age of Globalization,” https://assets.kpmg.com/content/dam/kpmg/pdf/2015/09/anti-bribery-corruption-2015.pdf.
12. KPMG LLP, “Integrity Survey” http://
13. Association of Certified Fraud Examiners, 2014 Report to the Nations on Occupational Fraud and Abuse, http://
14. Richard Girgenti and Ori Ben-Chorin, “Government Whistle-Blower Programs Are Here to Stay: 10 Tips to Help Ensure That Internal Reporting Programs Meet the Challenge,” Bloomberg BNA (Bloomberg Law), April 2015, http://
15. KPMG LLP, “Integrity Survey.”
16. Section 301 was codified as Exchange Act Section 10A(m), implemented by the U.S. Securities and Exchange Commission in Rule 10A-3(b)(3). See also Nasdaq Rule 5605(c)(3) and Section 303A.06 of the NYSE Listed Company Manual.
17. IBM website, “What Is Big Data,” http://
18. Marshall L. Miller, Principal Deputy Assistant Attorney General, U.S. Department of Justice, Criminal Division, The Global Investigation Review Program, September 17, 2014.
19. Marshall L. Miller, ibid.
20. These typically include the U.S. Department of Justice, the U.S. Securities and Exchange Commission, and the Office of Inspector General of Health and Human Services (OIG), the primary watchdog for healthcare providers and suppliers.
21. The term government settlement agreement is an umbrella term that describes the type of agreements that an offending organization may enter into with government enforcement entities, including, for example, deferred prosecution agreements, non-prosecution agreements, and corporate integrity agreements.
22. Institute of Internal Auditors, “The Three Lines of Defense in Effective Risk Management,” January 2013, https://na.theiia.org/standards-guidance/Public%20Documents/PP%20The%20Three%20Lines%20of%20Defense%20in%20Effective%20Risk%20Management%20and%20Control.pdf.
23. Ibid.
1. http://
http://
2. http://
3. http://
4. “Anti-Bribery and Corruption: Rising to the Challenge in the Age of Globalization,” KPMG International, September 2015.
5. http://
6. https://www.unodc.org/unodc/en/treaties/CAC/. 172 countries are parties to the Convention, including the United States, the United Kingdom, Brazil, Russia, India. and China.
7. http://
8. http://
9. http://
10. http://
11. http://
12. https://www.transparency.org/
13. http://
14. http://
15. http://
16. Hughes Hubbard & Reed LLP, Winter 2015 FCPA/Anti-Bribery Alert.
17. http://
18. Ibid., 71.
19. The United Kingdom ranked fourteenth out of 175 on Transparency International’s Corruption Perceptions Index in 2014. The United States ranked seventeenth. See http://
20. http://
21. Absolute legal responsibility for an injury that can be imposed on the wrongdoer without proof of carelessness or fault.
22. http://
23. http://
24. http://
25. http://
26. https://www.gov.uk/government/speeches/a-balanced-approach-to-the-challenges-of-economic-crime.
27. http://
28. http://
29. http://
30. http://
31. http://
32. http://
33. http://
34. http://
35. http://
36. http://
37. http://
38. For a review of China’s government departments responsible for anti-corruption enforcement, see Debevoise & Plimpton LLP, FCPA Update, September 2012.
39. http://
40. http://
41. http://
42. http://
43. “A Resource Guide to the U.S. Foreign Corrupt Practices Act,” (“Guide”), http//
44. Guide, 57.
45. COSO is a joint initiative of five private-sector organizations dedicated to provide reports on the development of frameworks and guidance on enterprise risk management, internal control, and fraud deterrence. See http://
46. Guide, 58.
47. Guide, 58.
48. http://
49. IIPF Practice Guide, Auditing Anti-bribery and Anti-corruption Programs, June 2014, 7.
50. Guide, 59.
1. http://
2. Financial Crimes Enforcement Network: Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers, 31 CFR Chapter X (proposed August 25, 2015). http://
3. The NPRM allows for a 60-day comment period with publication of a final rule thereafter.
4. Remarks on financial regulation in New York City, delivered at Columbia Law School, February 25, 2015.
5. http://
6. “U.S. Vulnerabilities to Money Laundering, Drugs, and Terrorist Financing: HSBC Case History.” Permanent Subcommittee on Investigations, U.S. Senate, July 17, 2012, hearing.
7. https://
8. Quantifying the strength of the elements is challenging and at the same time fairly straightforward. Institutions typically develop a scale that measures aspects of the risk at issue. For example, the firm may rely on severity of a violation as one factor. So the risk of failing to file appropriate SARs would be the highest severity, but it could be measured against strong controls that would bring the overall risk score to a midrange level. Some firms use a high/medium/low designation of residual risk; others might use number-based ratings (e.g., a risk that carries significant consequences if mishandled, but when measured against strong controls might be designated a midrange score for residual risk).
9. The process must establish objective factors in setting these scores. Typical factors for scoring risk are the likelihood of an adverse event occurring and the severity of the consequences (dollar fine vs. exam letter findings, for example).
10. It is conceivable that data identified as high risk might be of poor quality, and the accompanying action item might call for enhancements to data collection, usage, and storage.
11. http://
12. “Customer Due Diligence Requirements for Financial Institutions,” Federal Register 79, no. 149, August 4, 2014.
13. Directive 2005/60/EC of the European Parliament and of the Council, October 26, 2005 (Third EU Money Laundering Directive), Chapter II, Section 1, Article 7.
14. OCC Bulletin 20011-12, Supervisory Guidance on Model Risk Management, 3.
1. Information about these settlements and about all of OFAC’s other enforcement actions can be found on OFAC’s website, on the Civil Penalties and Enforcement Information page (http://
2. See, for example, Statement of R. Richard Newcomb, Director, OFAC, before the U.S. Senate Committee on Governmental Affairs, July 31, 2003: “Economic sanctions are intended to deprive the target of the use of its assets and deny the target access to the U.S. financial system and the benefits of trade, transactions and services involving U.S. markets, businesses and individuals.”
3. The statute of limitations for violations of OFAC’s sanctions is five years. 28 U.S. Code §2462.
4. Under the International Emergency Economic Powers Act (IEEPA), criminal sanctions violations are punishable by a term of imprisonment of up to 20 years, and a fine of up to $1 million, per count of conviction. IEEPA underlies several of OFAC’s sanctions programs, including those relating to Iran, Sudan, Syria, terrorists, and weapons of mass destruction proliferators, as well as the 2014 Ukraine-related sanctions.
5. See, for example, OFAC Enforcement Information for December 10, 2012, relating to a global settlement with Standard Chartered Bank involving several government agencies, including the New York County District Attorney’s Office; and OFAC Enforcement Information for December 11, 2013, relating to a global settlement with Royal Bank of Scotland, involving DFS and the Federal Reserve Board of Governors.
6. See OFAC Enforcement Information for November 26, 2013, relating to a global settlement with Weatherford International involving several government agencies, including BIS.
7. http://
8. The SDN list is published on OFAC’s website. As of the date of publication of this book, there are over 5,000 parties named on the list. Entries on the list provide the name of the designated party, and where known, aliases, variant spellings, dates of birth, addresses, and other identifying information. OFAC includes as much identifying information as possible, to increase the chances that persons checking the list will be able to determine if a prospective business partner is prohibited.
9. Directive 1 applied to the financial sector, and prohibited dealing in new short-term debt (debt of longer than 90 days maturity) or new equity for sanctioned parties. Directive 2 applied to the energy sector and prohibited dealing in new short-term debt (again, of longer than 90 days maturity) for sanctioned parties. No other business dealings were prohibited.
10. http://
11. The sanctions relief granted by the P5+1 was highly specific. It involved, among other things, temporary suspension of certain sanctions involving Iran’s purchase and sale of gold and other precious metals, its automotive industry, its export of petrochemical products, and certain services associated with each of those categories. In addition, the United States agreed to temporarily suspend its efforts to reduce Iran’s crude oil exports and to enable Iran to access $4.2 billion in restricted funds.
12. OFAC also publishes and maintains a number of other lists, in addition to the SDN and SSI lists, including the Foreign Sanctions Evaders List and the Non-SDN Palestinian Legislative Council List. Companies should use a risk-based approach in deciding which lists to screen against. For the sake of simplicity, we will refer in the text only to the SDN list.
13. http://
14. http://
15. http://
16. TEOAF administers the Treasury Forfeiture Fund (TFF), which is the receipt account for the deposit of nontax forfeitures. See the TFI website.
17. http://
18. This point, and the following discussion of the focus on bad conduct and the private sector, and the use of intelligence information, is based on remarks by former Under Secretary of the Treasury Stuart Levey at “TFI@10,” an event hosted by the Center for Strategic and International Studies on June 2, 2014, reflecting on the first 10 years of TFI’s existence. See http://
19. http://
20. For violations of OFAC’s IEEPA-based programs, for example, the maximum civil monetary penalty for each violation is the greater of twice the monetary value of the transaction constituting the violation, or $250,000. 50 U.S.C. section 1705(b). For violations of programs based on the Foreign Narcotics Kingpin Designation Act, the maximum penalty per violation is $1,075,000. 21 U.S.C. section 1906(b).
21. See 31 C.F.R. 560.417.
22. See 31 C.F.R. 538.407(a). The same provision further states that “[a]ctivity of a purely clerical or reporting nature that does not further trade or financial transactions with Sudan or the Government of Sudan is not considered prohibited facilitation.”
23. The maximum monetary penalty for a single violation under an IEEPA-based sanctions program, including the Iran, Sudan, and Ukraine-related sanctions, is the greater of twice the monetary value of the transaction constituting the violations, or $250,000.
24. Enforcement Guidelines, pages 57602-04.
25. See OFAC’s Enforcement Guidelines, 31 CFR Part 501, Appendix A, pages 57601 and following, http://
26. “Voluntary self-disclosure” is defined at pages 57601–02, and “egregiousness” is explained at pages 57604–05, of the Enforcement Guidelines.
27. The General Factors are set forth at pages 57602–04 of the Enforcement Guidelines.
28. Page 57601 of the Enforcement Guidelines.
29. See, for example, OFAC’s public announcements of its settlement with Bank of America on July 24, 2014, for violations that occurred between 2006 and 2009; its settlement with American International Group on May 8, 2014, for violations that occurred between 2006 and 2009; and its settlement with GAC Bunker Fuels on March 31, 2014, for a violation that occurred in November 2008. http://
30. Where the target makes no VSD but substantially cooperates with OFACs investigation, “the base penalty amount generally will be reduced between 25 and 40 percent.” Enforcement Guidelines, page 57606. This reduction “is intended to approximate the significant mitigation provided for voluntary self-disclosure cases in the base penalty amount itself. This reduction is intended to afford parties whose conduct was reported to OFAC by others (for example, through a blocking or reject report) the opportunity to obtain, by providing substantial cooperation, much (but not all) of the benefit they would have obtained had they voluntarily self-disclosed the apparent violation.” Ibid., Specific Responses to Comments, page 57598.
31. Where OFAC seeks to impose a penalty under the authority of the Trading With the Enemy Act (“TWEA”), its regulations provide a target with the opportunity to request a hearing before an ALJ, in which OFAC will be required to prove its case by a preponderance of the evidence. See 31 CFR subpart D, TWEA Penalties, sections 501.700 and following. OFAC’s Cuba sanctions program is predicated on TWEA, and is therefore subject to these provisions. No such procedure is provided for in any of OFAC’s other programs, all of which are predicated on authorities other than TWEA.
1. http://
2. Note that in this chapter, market power is discussed exclusively on a single firm/individual basis. It is important to note, however, that market power can also exist for a subset of firms or individuals in a market. That is, on an individual basis, each firm may not have market power, but through collusion or tacit coordination between certain firms, market power for a subset of these cooperating firms can be achieved. When this occurs, antitrust concerns, in addition to market manipulation concerns, may be raised; for the sake of brevity and clarity, we refrain from an in-depth discussion of such multifirm market power in this chapter.
3. http://
4. An example of market manipulation via the exercise of market power is Sumitomo Corporation’s attempt to corner the copper market in 1986. See In the Matter of Sumitomo Corporation, http://
5. Note that the types of fraud listed here are by no means exhaustive and are meant to illustrate prevalent types of market manipulation via fraudulent schemes.
6. An example of market manipulation through fraud is Zenergy’s reverse merger with Paradigm Tactical Products in 2009. See SEC v. Nenad Jovanovich, et al., Case No. 13-C-5513 (August 16, 2013), http://
7. In this chapter, uneconomic trading/bidding is discussed exclusively on a single firm or individual basis. Nonetheless, it is important to note that uneconomic trading/bidding can also occur if multiple firms are involved. In such situations, the uneconomic behavior would typically involve some aspect of collusion in the market, meaning that antitrust concerns may also be raised.
8. See the CFTC’s settlements with Lloyds Bank (http://
9. http://
10. Bank of International Settlements Triennial Central Bank Survey, September 2013, 4, http://
11. Bloomberg Visual Data, Forex Investigation a Global Affair, December 19, 2014, http://
12. Bloomberg Visual Data, Forex Investigation a Global Affair, May 20, 2015, http://
13. The full definition of all financial products to which the term “security” refers is given by the Securities Exchange Act of 1934, pg. 11–12. See: https://www.sec.gov/about/laws/sea34.pdf.
14. Maxwell K. Muller, “Open Market Manipulation Under SEC Rule 10b-5 and Its Analogues: Inappropriate Distinctions, Judicial Disagreement and Case Study: FERC’s Anti-manipulation Rule,” Securities Law Journal, Summer 2011, 97, http://
15. For example, insider trading charges are typically brought under Rule 10b-5 as well.
16. 17 C.F.R. § 240.10b-5.
17. 18 C.F.R. § 1c.
18. 16 C.F.R. Part 317.
19. For a comprehensive legal definition of “swap,” please refer to 7 U.S.C. §1a(47) and 17 C.F.R. 1.3.
20. http://
21. Fines from the DOJ and FTC have not been included because these agencies do not provide specific information related to the amount of fines stemming from only market manipulation. The Office of the Comptroller of the Currency (OCC) was included in 2014, due to a total of $950 million in fines stemming from the foreign exchange investigation; the OCC’s role, however, is likely to be a one-off event.
22. For the CFTC’s definition of “recklessness,” please see: CFTC Adopting Release, 76 Fed. Reg. at 41404.
23. CFTC Manipulation Rule, 17 C.F.R. Part 180.1.
24. CFTC Manipulation Rule, 17 C.F.R. § 180.2.
25. CEA section 4c(a)(5).
26. CFTC Interpretive Guidance and Policy Statement on Disruptive Practices, http://
27. http://
28. http://
29. Ibid.
30. 17 C.F.R. § 240.10b5-1(b).
31. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); see Basic v. Levinson, 485 U.S. 224, 231 (1988).
32. Thomas C. Newkirk and Melissa A. Robertson, Speech by SEC Staff: Insider Trading—A U.S. Perspective, 16th International Symposium on Economic Crime, Jesus College, Cambridge, England, September 19, 1998, http://
33. United States v. O’Hagan, 117 S. Ct. at 2207.
34. Harry S. Davis, Insider Trading and Compliance Answer Book 2014, Ch. 1, “Overview of the Law of Insider Trading,” 18.
35. United States v. O’Hagan, 117 S. Ct. at 2207.
36. https://www.sec.gov/news/speech/2008/spch021908lct.htm.
37. Ibid.
38. For an important court decision regarding tipping, see U.S. v. Newman, No. 13-1837, 2014 WL 6911278 (2d Cir. Dec. 10, 2014).
39. http://
40. Rule 14-3e, insider trading liability does not necessarily require a breach of fiduciary duty or of trust or confidence as does insider trading brought under Section 10(b) of the Securities Exchange Act of 1934.
41. 15 U.S.C. § 78j(b).
42. 17 CFR 240.10b-5.
43. 17 CFR 240.10b5-1.
44. 17 CFR 240.10b5-2.
45. 17 CFR 240.10b5-2.
46. 15 U.S. Code § 78o(g).
47. 15 U.S. Code § 80b-4a.
48. Rule 10b5-1(c) sets forth the parameters under which an individual who is aware of material nonpublic information may still transact in the security in question; satisfying these parameters can provide an affirmative defense for trading while in possession of such information. As a whole, the affirmative defenses laid out in Rule 10b5-1(c) are designed to cover situations where an individual can demonstrate that the material nonpublic information was not a factor in his or her decision to buy or sell.
49. Marc E. Elovitz and Ida. Draim, Insider Trading and Compliance Answer Book 2011-12, Ch. 21, “Protecting Firms Through Policies and Procedures, Training, and Testing,” 532.
50. Morrison Foerster, 2014 Insider Trading Annual Review, 12.
51. Ibid. 11.
1. See Audit Analytics 2010 Financial Statements, A Ten Year Comparison (May 2011).
2. http://
3. http://
4. See http://
5. GAAP includes rules, procedures, and conventions that make up accepted accounting practices.
6. May 20, 2014, http://
7. Earnings press releases often contain excerpts of financial statements, and earnings calls include financial presentations. Issuer websites publish the company’s financial information.
8. Foreign issuers file annual reports on Form 20-F and furnish quarterly reports on Form 6-K. Public companies also disseminate financial information in other SEC filings, including (1) registration statements filed in connection with capital raising efforts; (2) current reports on Form 8-K that must be filed when certain material events occur; and (3) proxy statements describing insider compensation.
9. An unqualified audit report (or so-called “clean opinion”) states than the financial statements are presented fairly in all material respects. Auditors review Forms 10-Q, but do not opine on them.
10. http://
11. TSC Ind. v. Northway, Inc., 426 U.S. 438, 449 (1976) and Basic, Inc. v. Levinson, 485 U.S. 224 (1988).
12. See SEC Staff Bulletin 99 regarding qualitative materiality factors.
13. http://
14. TSC Industries, 426 U.S. at 450.
15. The Supreme Court has defined scienter as “a mental state embracing intent to deceive, manipulate, or defraud.” See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 n. 2 (1976). See also Section 17(a)(1) of the 33 Act and Section 10(b) of the 34 Act.
16. The SEC alleged that the company’s former senior managers engineered a scheme that created more than 6,000 phony invoices and then used bogus bank statements to reflect payment of the sham invoices, resulting in more than $1 billion in fictitious cash. See http://
17. http://
18. Every Court of Appeals has held that a plaintiff may meet the scienter requirement by showing recklessness. See https://www.sec.gov/divisions/corpfin/guidance/wksi-waivers-interp.htm.
19. Nonaccountants often argue that they relied on the company’s CPAs or independent auditors for accounting interpretation or were not otherwise involved in accounting determinations.
20. Companies, large and small, have transactions with customers, suppliers, and other business partners going on every day. Some have multiple products and services and/or business locations, including many with global operations involving overseas subsidiaries. Public companies must “account” for these business transactions by recording, accumulating, and summarizing the data and then translating it into financial statements so that users can digest the information on a quarterly basis. Inevitably, due to the complexities of the financial reporting process and volumes of data, errors may occur in compiling and calculating amounts.
21. Various 2007 credit crisis–related SEC Enforcement actions in which it alleged that investors were misled regarding exposures to subprime mortgage risks. American Home misled investors about the company’s deteriorating financial condition as the subprime crisis emerged; Fannie/Freddie misled investors about the extent of each company’s holdings of higher-risk mortgage loans; and Countrywide misled investors about significant credit risks taken in efforts to build and maintain the company’s market share (http://
22. At HealthSouth, the SEC alleged that it engaged in a financial reporting fraud in which it overstated earnings by at least $1.4 billion. The founder, CEO, and chairman, Richard Scrushy, insisted that the company should make false entries to meet or exceed earnings expectations established by Wall Street analysts. http://
23. A lengthy report by Anton Valukas, the examiner in Lehman Brothers Holdings Inc., bankruptcy proceedings, highlighted an off–balance sheet scheme referred to as “Repo 105.” The scheme involved treating certain repurchase agreements as “sales” rather than “financings” to get the associated debt off Lehman’s books, thereby making its leverage appear better. Lehman’s collapse and bankruptcy precipitated the 2007 credit crisis. Although Lehman was not prosecuted for engaging in Repo 105 transactions, the Valukas report raised questions about whether Repo 105 was an improper window dressing scheme designed to artificially reduce debt levels. See the report of Anton R. Valukas, Examiner, In re Lehman Brothers Holdings Inc., et al. 3/11/10. http://
24. Fannie Mae portrayed volatile earnings as stable by booking adjustments less than required by accounting rules, resulting in the company not only exceeding Wall Street expectations, but also hitting the earnings per share targets necessary to trigger maximum bonuses. See AAER 2433 5/23/06 and http://
Diamond Foods hid the impact of higher costs it paid to nut suppliers by treating certain payments to growers as “advances” instead of inventory costs which boosted profits by improperly understating expenses (AAER 3527 1/9/14). See also http://
25. Stock options Backdating Enforcement Actions, including Broadcom, UnitedHealth Group and Comverse. SEC Enforcement investigated over 100 companies in and around 2006 regarding stock options backdating schemes that instantly provided grantees with guaranteed profits because certain grants were made retroactively without disclosure when the price had already risen. http://
In the case of Tyco, the SEC alleged that the CEO, the CFO, and the chief legal officer failed to disclose multimillion-dollar loans they received from the company that they used for personal expenses including yachts, fine art, jewelry, luxury apartments, and vacations (AAER 1627 9/12/02).
26. SEC enforcement actions are public. Financial reporting cases are assigned Accounting and Auditing Enforcement Release (AAER) numbers. The SEC has AAERs going back to 1999 on its website.
27. In the case of HealthSouth, false accounting entries were made that primarily consisted of reducing a contra revenue account, called “contractual adjustment,” and/or decreasing expenses and correspondingly increasing assets or decreasing liabilities. See http://
28. See SEC’s Report Pursuant to Section 704 of the Sarbanes-Oxley Act, page 25. In the case of AIG, the SEC alleged that AIG entered into two sham reinsurance transactions with Gen Re that had no economic substance but were designed to allow AIG improperly to add a total of $500 million in phony loss reserves to its balance sheet, which was done to quell analysts’ criticism of AIG for a prior reduction of the reserves (http://
In the case of Time Warner, the SEC alleged that it engaged in fraudulent round-trip transactions that boosted its online advertising revenue to mask the fact that it also experienced a business slowdown. See AAER 2216 3/21/05, http://
29. Under GAAP, revenue is generally not recognized until it is earned and realized (or realizable), which means that a good or service must be delivered or performed and the amounts collected or collectible. For example, accounting rules generally would not allow a company to record revenue if the customer did not yet accept the product, the seller had future performance obligations, or the sales were subject to significant future contingencies. Alternatively, if the customer did not intend to pay because it was dependent upon resale by the customer to a third party, revenue recognition would generally be inappropriate.
30. Although GAAP may permit certain bill and hold transactions, the requirements are very strict. Raytheon’s senior management held “executive review sessions,” in which they identified unfinished planes in the production process that could be “pulled forward” for a “financial delivery” to “bridge” certain “gaps” or “shortfalls” in performance targets (AAER 2449 6/28/06, http://
31. The SEC alleged that Sensormatic turned back its computer clock that recorded shipment dates (AAER 1017 3/25/98).
32. McKesson used side letters to hide contingencies, such as rights to cancel and continuing negotiations software sales (AAER 1467 10/15/01).
33. Xerox improperly shifted revenue from servicing and financing equipment leases, which was supposed to be recognized over the entire lease term, to periods earlier than permitted under GAAP (AAER 1542 4/11/02). Microstrategy assigned all the value of its software contracts to licenses, allocating nothing to servicing components, which were a substantial part of the arrangements, thus shifting all the revenue into earlier quarters (AAER 1350 12/14/00).
34. 704 Report, page 13, footnote 34. Expenses are outflows of a company’s assets resulting in purchasing goods or services or otherwise incurring certain liabilities.
35. This could occur simply by making false entries or by treating an expense, such as a repair cost, as an addition to fixed assets, which would then be depreciated over time rather than reflected as a current period expense (generally, if the cost does not extend the asset’s useful life, then accounting rules would require the cost to be expensed immediately, not capitalized). WorldCom engaged in what may be the largest capitalization scheme of all time, according to the SEC’s amended complaint alleged that WorldCom overstated its net income by approximately $9 billion by improperly capitalizing and deferring, rather than immediately expensing, line costs (AAER 1585 6/27/02).
36. Waste Management improperly deferred current period expenses by extending the estimated useful lives of the company’s garbage trucks and making unsupported increases to the trucks’ salvages values. An unusual aspect of this case was that its independent auditor, Arthur Andersen, was aware of the scheme (AAER 1532 3/26/02 and 1410 6/19/01, http://
37. United Commercial Bank delayed including newer and lower appraisals in the valuations of collateral, despite knowing that certain loans or collateral were nearly worthless (http://
A director of remediation at Ashland Oil reduced environmental reserves via large, across-the-board cuts that were undocumented and where no evidence existed that the estimates had been overstated before making arbitrary reductions (http://
38. “Big bath” charges are also a form of earnings management whereby large write-downs are booked in an accounting period when performance may already be poor and analysts have already lowered expectations, or possibly during a period when the company is doing so well that it could record the charges and still meet expectations. This “clears the road” for lower future expenses. Sunbeam padded restructuring charges and created cookie-jar reserves (AAER 1395 5/15/01). Conagra improperly used tens of millions of excess post acquisition interest reserves to offset unrelated, unplanned-for, and unreserved-for losses and transferred excess reserves to “general” reserve accounts to be used to improperly reduce current legal and environmental expenses (http://
39. Rather than record a shrinkage of its inventory, the CFO of Rite Aid made adjusting entries to lower the cost of goods sold (AAER 1579 6/21/02). MiniScribe repackaged scrap and obsolete inventory and improperly included the costs in its ending inventory (AAER 1150 1999). Sinotech lied about the value of its primary operating drilling assets, including unsuccessfully trying to get its supplier to falsely justify the inflated values (AAER 3383 4/23/12, http://
40. Enron Corporation improperly used special purpose entities in off–balance sheet arrangements in order to keep certain debt off its books (AAER 1640 10/2/02). Adelphia improperly shifted liabilities onto off–balance sheet entities (704 Report page 29 and AAER 1599 6/24/02).
41. At Koss, the principal account and a senior accountant embezzled over $30 million by taking advantage of lax internal controls and hiding their actions by making many false journal entries (http://
42. SEC 704 Report, page 44.
43. Many SEC disclosure cases do not allege GAAP accounting violations, only false or misleading statements (or omissions) in sections of SEC filings (or other documents) that are not technically part of the financial statements. Segment reporting cases include Navistar and Paccar, in which the SEC alleged that the companies failed to comply with segment reporting requirements (AAER 3165 and 3462). Related parties—China Northeast Petroleum engaged in over one hundred undisclosed related party transactions that diverted millions in offering proceeds to insiders and their family members (AAER 3481). Classification of balances/revenue misclassification—Elan classified revenue from nonrecurring transactions as product revenue creating the false impression that revenue growth was due to drug sales in the normal course of business (http://
44. Fair presentation—Elan failed to disclose that its revenue was generated through “round-trip” transactions, in which its joint venture partners paid it license fees using money that Elan had provided, thus obscuring the true demand for technology and the company’s ability to generate license revenue in the future. It thereby misled investors about the quality of the revenue, earnings, and cash flow that it generated from its joint venture program. Edison Schools—the company failed to disclose that a substantial portion of its revenues consisted of payments that it ultimately never got. The SEC indicated that even if Edison’s accounting technically complied with GAAP, that such technical compliance would not insulate an issuer from enforcement action (AAER 1555 5/14/02). Channel stuffing—Involves accelerating revenue by selling to customers that already have a sufficient supply of inventory on hand. Unlike improper revenue recognition schemes in which accelerated revenue violates GAAP, disclosure-based channel stuffing frauds are “robbing Peter to pay Paul” omission cases as investors don’t know that future performance will suffer because the company front-loaded sales by offering discounts to customers (http://
45. While most of these investigations are done on a parallel basis with the SEC, simultaneous, but separate, cooperation and communication typically occurs. During the Enron and WorldCom investigations, accounting cases became important for criminal authorities. However, criminal cases are much harder to prove because of the higher burden of proof (“beyond a reasonable doubt” versus the lower “preponderance of the evidence” in a civil case). The lack of criminal cases involving the 2007 credit crisis illustrates the difficulties in prosecuting individuals for criminal violations when the issues involve business judgment accounting estimates and valuation judgments. Criminal prosecutors are more likely to get involved in accounting cases when they may involve willful violations and intentional acts such as obstruction, self-dealing, collusion, misappropriation, embezzlement, and bribery.
46. http://
47. There is no specialized unit for accounting fraud cases as is the case for other areas including insider trading, FCPA, and asset management, among others.
48. The SEC publishes Select SEC and Market Data each year which contains a chart listing enforcement actions by primary classification. The classification for accounting and auditing related actions is called Issuer Reporting and Disclosure. Prior to 2011, Issuer Reporting and Disclosure actions included FCPA cases, however, in 2011, the SEC began reporting FCPA cases as a separate category. The chart reflects Issuer Reporting and Disclosure statistics adjusted to exclude FCPA for 2002 through 2010. In 2015, the SEC began disclosing the number of enforcement actions that were substantive (i.e. independent actions for violations, versus non-substantive delinquent filings or actions seeking bars). The enforcement director was quoted in a news article as stating that for accounting cases in 2014, 79 of the 96 were substantive; and that in 2015, 113 out of the 134 cases were substantive. See SEC Enforcement Chief Looks Back Over the Past Year, Think Advisor, October 19, 2015. The SEC complaints and administrative orders for these actions can be found on the SEC’s website under Accounting and Auditing Enforcement Releases (AAERs).
49. http://
50. http://
51. http://
52. In 2006, the stock options backdating scandal arose after Erik Lie, a finance professor at the University of Iowa, published a study that showed an uncanny number of cases where companies granted stock options to executives just before a sharp increase in their stocks (https://www.biz.uiowa.edu/faculty/elie/Grants-MS.pdf).
53. The SEC’s Division of Economic Risk and Analysis works with Enforcement to develop analytic tools that can be used to identify potential issues.
54. SEC formed a Cross-Border Working Group that worked internally with other SEC Divisions and externally with the PCAOB and stock exchanges. The author of this chapter was a co-head of the Cross-Border Working Group.
55. http://
56. http://
57. Wall Street Journal, January 20, 2015, http://
58. http://
59. According to a November 4, 2014, Wall Street Journal article, total restatements among companies reporting to the SEC have more than halved since a 2006 peak of nearly 1,850, but the number has decreased over the past six years. Audit Analytics, a service that analyzes financial information, has reported that the severity of measures (such as the amount restated, negative impact on net income, average number of issues restated, average number accounting periods restated) has also declined.
60. At the beginning of most financial reporting investigations, unless there has been a restatement that occurred involving fictitious accounting or admissions (which rarely occur), it is generally unclear whether financial statement errors came about due to fraud.
61. The nature of the investigation conducted by the SEC will differ depending on whether a company has restated or not. If a restatement has already occurred, the focus may in large part be on establishing who was responsible and their intent, although they will be on the lookout for other material errors. If the company decides to “dig in” and vigorously defend against any allegations, the dynamics will be different because the staff will also need to establish that GAAP violations occurred.
62. A 2010 COSO report indicated that 50 percent of the companies committing accounting fraud traded on Nasdaq, 27 percent on the NYSE/Amex, and the rest OTC (bulletin board and pink sheets).
63. http://
64. See Staff Accounting Bulletins 99 regarding materiality and 108 regarding error corrections.
65. It is possible that the SEC may target violations of Section 303 of Sarbanes Oxley, which prohibits any officer or director, or person acting under their direction, to take any action to fraudulently influence, coerce, manipulate, or mislead any independent accountant.
66. While the SEC has mostly limited clawback actions to CEOs and CFOs that engaged in misconduct, in the future, the SEC may be more aggressive in seeking them from innocent officers.
1. Federal Reserve Board, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Office of Thrift Supervision, National Credit Union Administration, Federal Trade Commission, Department of Housing and Urban Development. Excluded from CFPB oversight were entities supervised by state insurance agencies, the SEC and the CFTC, as well as insurance- and securities-related products and services regulated by these agencies.
2. http://
3. Dodd-Frank Act § 1021(b) (codified at 12 U.S.C. § 5511).
4. Dodd-Frank Act § 1021(c) (codified at 12 U.S.C. § 5511).
5. http://
6. http://
7. 15 U.S. C § 45.
8. Wheeler-Lea Act of 1938, P.L. 75-447, 52 Stat. 111 (1938).
9. https://www.ftc.gov/public-statements/1980/12/ftc-policy-statement-unfairness.
10. https://www.ftc.gov/public-statements/1983/10/ftc-policy-statement-deception.
11. FTC Improvement Act of 1994—added Section 5(n) to 15 U.S.C. § 45.
12. In determining whether an act or practice is unfair, the FTC may consider established public policies as evidence to be considered with all other evidence, though such public policy considerations may not serve as a primary basis for such determination. 15 U.S.C. § 45(n).
13. http://
14. Kathlyn L. Farrell, “Managing UDAAP Compliance Risk in Financial Institutions,” Journal of Taxation and Regulation of Financial Institutions, November/December 2013, Vol27/No 2.
15. Including national banks, state member banks, state nonmember banks, federal branches, and agencies of foreign banks. 15 USC 54(f).
16. OTS authority was subsumed by the OCC following enactment of the Dodd-Frank Act.
17. This authority was subsequently repealed by the Dodd-Frank Act.
18. Subpart B of the Federal Reserve’s Regulation AA is referred to as the Credit Practices Rule and is intended to declare certain acts or practices as unlawful. It covers unfair credit contract provisions, unfair or deceptive practices involving cosigners, unfair late charges, and exemptions for states (which may be granted by the Federal Reserve Board if “the state administers and enforces a state law that provides consumers with protection equivalent to or greater than the Board’s rule”). The Dodd-Frank Act repealed the Federal Reserve Board’s rule-writing authority under the FTC Act, and the Federal Reserve Board published a proposed rule on August 27, 2014, to repeal its Regulation AA (79 FR 51115).
19. An example is dishonoring credit card convenience checks without notice. The OTS and FDIC brought enforcement actions against a credit card issuer that sent convenience checks with stated credit limits and expiration dates to customers. For a significant percentage of consumers, the issuer reduced credit lines after the checks were presented, and then the issuer dishonored the consumers’ checks.
Substantial injury. Customers paid returned-check fees and may have experienced a negative impact on credit history.
Not outweighed by benefits. The card issuer later reduced credit limits based on credit reviews. Based on the particular facts involved in the case, the harm to consumers from the dishonored convenience checks outweighed any benefit of using new credit reviews.
Not reasonably avoidable. Consumers reasonably relied on their existing credit limits and expiration dates on the checks when deciding to use them for a payment. Consumers had received no notice that the checks they used were being dishonored until they learned from the payees. Thus, consumers could not reasonably have avoided the injury. CFPB Supervision and Exam Manual, October 2012. Case cited as footnote 8 on page UDAAP 4 “In re American Express Bank, FSB (Cease and Desist Order WN-09-016, and Order of Assessment of a Civil Money Penalty for $250,000, WN-09-017, June 29, 2009) OTS Docket No. 15648; In re American Express Centurion Bank (Cease and Desist Order, June 30, 2009) Docket FDIC-09-251b, available at http://
An example from a federal enforcement action involves misrepresentation about loan terms.
In 2004, the FTC sued a mortgage broker advertising mortgage refinance loans at “3.5% fixed payment 30-year loan” or “3.5% fixed payment for 30 years,” implying that the offer was for a 30-year loan with a 3.5% fixed interest rate. Instead, the FTC claimed that the broker offered adjustable rate mortgages (ARMs) with an option to pay various amounts, including a minimum monthly payment that represented only a portion of the required interest. As a result, unpaid interest was added to the principal of the loan, resulting in negative amortization.
Practice likely to mislead. The FTC claimed that the advertisements were misleading because they compared payments on a mortgage that fully amortized to payments on a nonamortizing loan with payments that increased after the first year. In addition, the FTC claimed that after application, the broker provided Truth in Lending Act (TILA) disclosures that misstated the annual percentage rate (APR) and that failed to state that the loan was a variable rate loan.
Reasonable consumer perspective. It was reasonable for consumers to believe that they would obtain fixed-rate mortgages, based on the representations.
Material representation. The representations were material because consumers relied on them when making the decision to refinance their fully amortizing 30-year fixed loans. As a result, the consumers ended up with adjustable rate mortgages that would negatively amortize if they made payments at the stated 3.5% payment rate. CFPB Supervision and Exam Manual, October 2012. Case cited as footnote 13 on page UDAAP 8. “FTC v. Chase Financial Funding, Inc., No. SACV04-549 (C.D.Cal. 2004), Stipulated Preliminary Injunction, available at http://
20. Section 1001 of the Dodd-Frank Act.
21. Section 1011 of the Dodd-Frank Act.
22. Section 1021 of the Dodd-Frank Act.
23. Section 1025 of the Dodd-Frank Act.
24. Section 1024 of the Dodd-Frank Act.
25. Section 1024 of the Dodd-Frank Act.
26. Sections 1031 and 1036 of the Dodd-Frank Act.
27. CFPB Supervision and Exam Manual, page UDAAP 5, footnote 10 references FTC Policy Statement on Deception, available at http://
28. CFPB has offices to address these groups that were mandated as part of Title X of the Dodd-Frank Act.
29. Kate Davidson, “Trying to Stay Above Politics: A Conversation with Richard Cordray,” American Banker, March 23, 2013.
30. CFPB Supervision and Examination Manual, October 2012, pages UDAAP 3 and UDAAP 7.
31. For example, the CFPB announced an enforcement action against Capital One to address the CFPB’s findings of UDAAP violations related to credit card “add-on” products. As part of the press statement, the CFPB also announced the release of two Consumer Advisories and one Compliance Bulletin (2012-06) that the CFPB stated “puts other institutions on notice that the CFPB will not tolerate deceptive marketing practices, and institutions will be held responsible for the actions of their third-party vendors.” http://
32. Became effective July 2012—though follows from NASD Suitability Rules.
33. FINRA Rule 2111 (a) http://
34. http://
35. They were: (1) Capital One Bank, July 2012, $140 million restitution, $25 million CMP, 2 million customers; coordination with OCC. (2) Discover Bank, September 2012, $200 million restitution, $14 million CMP, 3.5 million customers; coordination with FDIC. (3) American Express, October 2012, $85 million restitution, $27.5 million CMP, 250,000 customers; coordination with FDIC.
36. http://
37. The CFPB was statutorily required to establish an Office of Servicemember Affairs, an Office of Older Americans, and an Office of the Student Ombudsman.
38. www.consumerfinance.gov/
39. Some examination objectives cited here have been paraphrased. For actual wording, go to http://
40. See page 5 of CFPB Supervisory Highlights, August 2013. http://
41. CFPB Supervision and Examination Manual, v2, Compliance Management Review CMR 1.
42. http://
43. CFPB Supervision and Examination Manual, v2, Compliance Management Review, CMR 2.
44. CFPB Bulletin 2013-06, June 25, 2013, Responsible Business Conduct: Self-Policing, Self-Reporting, Remediation, and Cooperation.
45. http://
46. LIBOR scandals.
47. U.S. mortgage servicing and foreclosures actions (jointly by State AGs and prudential regulators).
48. CFPB Supervision and Examination Manual, Version 2, October 2012, page CMR 1.
49. Kathlyn L. Farrell, “Managing UDAAP Compliance Risk in Financial Institutions,” Journal of Taxation and Regulation of Financial Institutions, November/December 2013, Vol27/No 2.
50. Latham & Watkins Client Alert White Paper number 1782.
51. 12 C.F.R.1080 6 (c).
1. Henry, James S., Tax Justice Network, The Price of Offshore Revisited: New Estimates for “Missing” Global Private Wealth, Income, Inequality, and Lost Taxes, July 2012, 5, http://
2. It is a criminal offense for any person to willfully attempt to evade paying taxes. (Internal Revenue Code (IRC) 26 U.S. Code § 7201). Yet it is not illegal for individuals to use legal means to avoid paying taxes. Tax avoidance does not involve concealment or misrepresentation, whereas tax evasion is taking some form of “affirmative act . . . such as deceit, subterfuge, camouflage, concealment, attempts to color or obscure events, or make things seem other than they are.” See Internal Revenue Services (IRS) Manual, Part 25: Special Topics, Chapter 1: Fraud Handbook, Section 25.1.1.2.4, Definitions of Fraud: Avoidance vs. Evasion, January 23, 2014.
3. U.S. Senate Permanent Subcommittee on Investigations, Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts, Majority and Minority Staff Report, February 26, 2014, final August 20, 2014 (Washington, D.C.), 9.
4. “Six Corporate Executives and Six Corporate Entities Indicted for Orchestrating a $500 Million Offshore Asset Protection, Securities Fraud, and Money Laundering Scheme,” press release, September 9, 2014, on FBI’s website, http://
5. U.S. Senate Permanent Subcommittee on Investigations, Crime and Secrecy: The Use of Offshore Banks and Companies Hearings before the Permanent Subcommittee on Investigations, Sr. Hrg. 98-151, 98th Cong., 1st sess., May 15, 16, and 24, 1983, 7, https://www.ncjrs.gov/App/Publications/abstract.aspx?ID=91139.
6. U.S. Government Accountability Office (“GAO”), Report to the Committee on Finance, U.S. Senate, Tax Administration Additional Time Needed to Complete Offshore Tax Evasion Examinations, GAO-07-237 (Washington, D.C.), March 2007, 7–8.
7. U.S. Senate Permanent Subcommittee on Investigations, Tax Haven Abuses: The Enablers, the Tools, and the Secrecy, Majority and Minority Staff Report, August 1, 2006, final January 2007 (Washington, D.C.), 11, http://
8. Ibid.
9. Ibid.
10. IRS, “Abusive Offshore Tax Avoidance Schemes—Talking Points,” http://
11. U.S. GAO Report, Testimony Before the Committee on Finance, U.S. Senate, Tax Compliance Offshore Financial Activity Creates Enforcement Issues for IRS, Statement of Michael Brostek, Director Strategic Issues Team, GAO-09-478T (Washington, D.C.), March 17, 2009, 4.
12. Ibid.
13. IRS, “Abusive Offshore Tax Avoidance Schemes—Talking Points,” http://
14. IRS defines an offshore promoter as “a person or entity who markets offshore arrangements to the public. The promoter can be financial institution, lawyer, accountant, broker, financial planner, or other individual.” See IRS, “Abusive Offshore Tax Avoidance Schemes—Glossary of Offshore Terms,” http://
15. U.S. GAO, Report to the Committee on Finance, U.S. Senate, Tax Administration Additional Time Needed to Complete Offshore Tax Evasion Examinations, GAO-07-237 (Washington, D.C.), March 2007, 7.
16. A “John Doe summons is any summons where the name of the taxpayer under investigation is unknown and therefore not specifically identified.” See IRS website, http://
17. U.S. GAO, Report to the Committee on Finance, U.S. Senate, Tax Administration Additional Time Needed to Complete Offshore Tax Evasion Examinations, GAO-07-237, (Washington D.C.), March 2007, p. 7–8; U.S. Senate Permanent Subcommittee on Investigations, Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts, Majority and Minority Staff Report, February 26, 2014, final August 20, 2014 (Washington D.C.), p. 144.
18. U.S. GAO, Report to the Committee on Finance, U.S Senate, Tax Administration Additional Time Needed to Complete Offshore Tax Evasion Examinations, GAO-07-237, (Washington D.C.), March 2007, p. 8.
19. Ibid., 9.
20. Ibid., 8.
21. 26 U.S. Code Chapter 3 and 26 U.S. Code Chapter 61.
22. U.S. Senate Permanent Subcommittee on Investigations, Tax Haven Banks and U.S. Tax Compliance, Staff Report, July 17, 2008, final September 26, 2008 (Washington, D.C.), 9, http://
23. U.S. Senate Permanent Subcommittee on Investigations, Tax Haven Banks and U.S. Tax Compliance, Staff Report, July 17, 2008, final September 26, 2008 (Washington, D.C.), p. 2, 9–15.
24. United States v. UBS AG, Case No. 09-60033-CR-COHN (S.D. Fla. 2009), Deferred Prosecution Agreement, 2/18/09 (hereafter referred to “UBS DPA”)—UBS AG paid $780 million in fines; “Swiss Bank Pleads Guilty in Manhattan Federal Court to Conspiracy to Evade Taxes,” press release, January 3, 2013, on U.S. DOJ website, http://
25. UBS DPA, 3.
26. “Credit Suisse Pleads Guilty to Conspiracy to Aid and Assist U.S. Taxpayers in Filing False Returns” press release, May 19, 2014, on DOJ website, http://
27. Ibid.; “Remarks as Prepared for Delivery by Deputy Attorney General James M. Cole Announcing Guilty Plea in Credit Suisse Offshore Tax Evasion Case Washington, D.C.,” press release, May 19, 2014, on DOJ website, http://
28. “Swiss Bank Pleads Guilty in Manhattan Federal Court to Conspiracy to Evade Taxes,” press release, January 3, 2013, on U.S. DOJ website, http://
29. The $74 million includes a 2012 forfeiture of $16.2 million from Wegelin’s correspondent bank account. “Swiss Bank Pleads Guilty in Manhattan Federal Court to Conspiracy to Evade Taxes,” press release, January 3, 2013, on U.S. DOJ website, http://
30. UBS DPA, Exhibit C, Statement of Facts; United States v. Credit Suisse AG, Plea Agreement (E.D. Va Alexandria Div. No. 1:14-CR-1:14CR2188, 2014), Statement of Facts, May 19, 2014.
31. Form W-8BEN (for individuals) and Form W-8BEN-E (for entities) are the “Certificate of Status of Beneficial Owner for U.S. Tax Withholding and Reporting,” which are completed to certify the foreign status for U.S. tax treaty benefits and U.S. tax withholding purposes.
32. UBS DPA, Exhibit C, Statement of Facts; United States v. Credit Suisse AG, Plea Agreement (E.D. Va Alexandria Div. No. 1:14-CR-1:14CR2188, 2014), Statement of Facts, May 19, 2014; and “Swiss Bank Pleads Guilty in Manhattan Federal Court to Conspiracy to Evade Taxes,” press release, January 3, 2013, on U.S. DOJ website, http://
33. UBS DPA, Exhibit C, Statement of Facts; U.S. Senate Permanent Subcommittee on Investigations, Tax Haven Banks and U.S. Tax Compliance, Staff Report, July 17, 2008, final September 26, 2008 (Washington, D.C.), 99; United States v. Credit Suisse AG, Plea Agreement (E.D. Va Alexandria Div. No. 1:14-CR-1:14CR2188, 2014), Statement of Facts, May 19, 2014; and “Swiss Bank Pleads Guilty in Manhattan Federal Court to Conspiracy to Evade Taxes,” press release, January 3, 2013, on U.S. DOJ website, http://
34. UBS DPA, Exhibit C, Statement of Facts, and United States v. Credit Suisse AG, Plea Agreement (E.D. Va Alexandria Div. No. 1:14-CR-1:14CR2188, 2014), Statement of Facts, May 19, 2014.
35. Ibid.
36. U.S. DOJ, “Offshore Compliance Initiative,” http://
37. U.S. Senate Permanent Subcommittee on Investigations, Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts, Majority and Minority Staff Report, February 26, 2014, final August 20, 2014 (Washington D.C.), 10.
38. Ibid., 10–11.
39. Ibid., 147–149.
40. Ibid.
41. 31 C.F.R. § 103.24—taxpayers must file the Report of Foreign Bank and Financial Accounts (currently Form 114, formerly known as Form TD F 90.22-1) every year with the Department of Treasury.
42. U.S. Senate Permanent Subcommittee on Investigations, Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts, Majority and Minority Staff Report, February 26, 2014, final August 20, 2014 (Washington D.C.), p. 19.
43. Ibid.
44. Ibid., citing a Subcommittee briefing by the U.S. DOJ (dated December 17, 2013).
45. Ibid., 13—“U.S.-source income refers to income that originates in the United States, such as dividends paid on U.S. stock; capital gains paid on sales of U.S. stock or real estate; royalties paid on U.S. assets; rent paid on U.S. property; interest paid on U.S. deposits; and other types of ‘fixed, determinable, annual, or periodic income.’”
46. Ibid., 14.
47. Ibid., 13.
48. “United States and Switzerland Issue Joint Statement Regarding Tax Evasion Investigations,” press release, August 29, 2013, on U.S. DOJ website, http://
49. Joint Statement Between U.S. DOJ and Swiss Federal Department of Finance, August 29, 2013, http://
50. Ibid.
51. “BSI SA of Lugano, Switzerland, Is First Bank to Reach Resolution Under Justice Department’s Swiss Bank Program,” press release, March 30, 2015, on U.S. DOJ website, http://
52. U.S. DOJ, “Tax Division Press Releases,” http://
53. U.S. DOJ, “The Tax Division’s further comments about the Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks,” June 5, 2014, 1, http://
55. “Chapter 3 contains reporting and withholding rules relating to payments of certain U.S. source income (e.g., dividends on stock of U.S. companies) to non-U.S. persons. Chapter 61 and Section 3406 address the reporting and withholding requirements for various types of payments made to certain U.S. persons (U.S. non-exempt recipients).” U.S. Treasury Department. Office of Public Affairs, “Fact Sheet: FATCA Amendments and Coordination Regulation,” February 20, 2014, https://www.treasury.gov/resource-center/tax-policy/treaties/Documents/022014%20-%20FATCA%20Fact%20Sheet.pdf.
56. U.S. Treasury Department. Office of Public Affairs, “Fact Sheet: FATCA Amendments and Coordination Regulation,” February 20, 2014, https://www.treasury.gov/resource-center/tax-policy/treaties/Documents/022014%20-%20FATCA%20Fact%20Sheet.pdf.
57. 26 U.S. Code § 1471 (d)(2)—“financial account” means, with respect to any financial institution, (a) any depository account maintained by such financial institution,(b) any custodial account maintained by such financial institution, and (c) any equity or debt interest in such financial institution [other than interests which are regularly traded on an established securities market].”
58. Aside from a few exceptions for grandfathered payments, the term “withholdable payment” generally means a payment of U.S.-source fixed determinable annual or periodic (FDAP) income, such as interest, dividends, services, and so on, which is made after June 30, 2014.
59. U.S. Senate Permanent Subcommittee on Investigations, Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts, 17–18.
60. Ibid.
61. Ibid.
62. The financial thresholds may vary depending on joint filing or U.S. residency status. See IRS, “Do I Need to File Form 8938, Statement of Specified Foreign Financial Assets,” updated November 19, 2014, http://
63. IRC 26 U.S. Code § 1471(c).
64. Certificate of Status of Beneficial Owner for U.S. Tax Withholding and Reporting, for Entities.
65. To accomplish this scheme, the defendants created shell companies in Belize, Nevis, and West Indies that were controlled by nominees in order to conceal the companies’ true owners and their ownership in microcap securities. With this anonymity, the defendants were able to manipulate a penny stock’s price and hide the ownership of the security’s sale proceeds. See “Six Corporate Executives and Six Corporate Entities Indicted for Orchestrating a $500 Million Offshore Asset Protection, Securities Fraud, and Money Laundering Scheme,” press release, September 9, 2014, on FBI’s website, http://
66. Miriam L. Fisher, Brian C. McManus, Latham & Watkins LLP, “Bandfield Confirms Aggressive FATCA Enforcement Tactics,” Law360.com, September 16, 2014, http://
67. Ibid.
68. If a financial intuition has information or knowledge that a reasonably prudent person would question the accuracy and completeness of a W-8 Form, then the financial institution is required to conduct further due diligence. See IRS, “Instructions for the Requester of Forms W–8BEN, W–8BEN–E, W–8ECI, W–8EXP, and W–8IMY, http://
69. Rita Tricher, Paul Vieira (contributor), “Canada Banks Tally Their Tax-Compliance Tab,” Wall Street Journal, July 27, 2014.
70. Joe Harpaz, “With Clock Ticking on FATCA, Financial Firms Brace for Headaches,” Forbes, April 2, 2014, quoting Kevin Sullivan, head of North American tax operations for BNP Paribas.
71. Miriam L. Fisher, Brian C. McManus, Latham & Watkins LLP, “Bandfield Confirms Aggressive FATCA Enforcement Tactics,” Law360.com, September 16, 2014, http://
72. Ibid.
73. From 2003 to 2011, HSBC Swiss private bank division was not registered as a brokerage or advisory business with the SEC but engaged in a cross-border banking business advising U.S. taxpayers. “SEC Charges HSBC’s Swiss Private Banking Unit with Providing Unregistered Services to U.S. Clients,” press release, November 25, 2014, on SEC website, http://
74. In the Matter of HSBC Private Bank (Suisse), SA, SEC File No. 3-16288, November 25, 2014, 5–7, http://
75. “SEC Charges HSBC’s Swiss Private Banking Unit with Providing Unregistered Services to U.S. Clients,” press release, November 25, 2014, on SEC website, http://
76. Miriam L. Fisher, Brian C. McManus, Latham & Watkins LLP, “Bandfield Confirms Aggressive FATCA Enforcement Tactics,” Law360.com, September 16, 2014, http://
77. John D. McKinnon, “U.S. Initials Deal with China to Curb Offshore Tax Evasion,” Wall Street Journal, June 26, 2014.
78. Neil Maclucas, “Switzerland, EU to Share Tax Information,” Wall Street Journal, May 27, 2015.
79. OECD, “Standard for Automatic Exchange of Financial Account Information in Tax Matters,” July 21, 2014, http://
80. OECD, Global Forum on Transparency, “AEOI: Status of Commitments,” December 11, 2015, http://
81. Multilateral Competent Authority Agreement outlines the scope of information that jurisdictions will exchange, as well as the agreement to comply with the common standards of due diligence outlined by the CRS. OECD, Global Forum on Transparency, “AEOI: Status of Commitments,” December 11, 2015, http://
82. KPMG. “Automatic Exchange of Information. The Common Reporting Standard,” Publication number 131579, September 2014.
83. Ibid.
84. OECD, “Standard for Automatic Exchange of Financial Account Information in Tax Matters: Implementation Handbook,” August 7, 2015, http://
85. OECD, “Update on Voluntary Disclosure Programmes: A Pathway to Tax Compliance,” August 7, 2015, http://
86. FATF, “International Standards on Combating Money Laundering and the Finance of Terrorism and Proliferation. The FATF Recommendations,” February 16, 2012, Recommendation 3, p. 34–35 and Definitions (“Designated Categories of Offenses”), p. 112–113.
87. Alan Lau and Chua Kong Ping, KPMG, “Devil’s in the Details with Tax Cheats,” The Business Times, September 12, 2013, http://
88. Valerie Chianuri, Davis Wright Tremaine LLP, “The Fourth European Union Anti-Money Laundering Directive and its effects on financial institutions operating in the EU,” Lexology.com, August 25, 2015, http://
89. 18 U.S.C. § 1956 (c) (7).
90. FATF, “FATF Recommendations. Media Narrative,” p. 2, http://
91. Alan Lau and Chua Kong Ping, KPMG, “Devil’s in the Details with Tax Cheats,” The Business Times, September 12, 2013, http://
92. Christopher M. Matthews, “FATF Nears Proposal for Tax Evasion Coverage by AML Laws,” WSJBlogs, December 21, 2011; and Alan Lau and Chua Kong Ping, KPMG, “Devil’s in the Details with Tax Cheats,” The Business Times, September 12, 2013, http://
93. Vanessa Houlder, “Switzerland Pledges to Lift Veil on Tax Secrecy,” Financial Times, May 6, 2014; OECD, CRS by jurisdiction 2018, http://
1. http://
2. www.nationalpriorities.org/
3. http://
4. http://
5. http://
7. http://
8. http://
9. Qui tam cases are different from other types of lawsuits, such as those involving personal injuries, because the person bringing the lawsuit is not the one who has been harmed.
10. http://
11. http://
12. http://
13. https://oig.hhs.gov/fraud/enforcement/cmp/kickback.asp.
14. http://
15. CPT (Current Procedural Terminology) is a five digit numeric code that is used to describe medical, surgical, radiology, laboratory, anesthesiology, and evaluation/management services of physicians, hospitals, and other healthcare providers. HCPCS (Healthcare Common Procedure Coding System) is a standardized coding system that is used primarily to identify products, supplies, and services, such as ambulance services and durable medical equipment, prosthetics, orthotics, and supplies.
1. http://
2. http://
3. http://
4. http://
5. Routledge Kegan & Paul.
6. FDA approval of new products generally provides the manufacturer with a period of market exclusivity. There is reasonable debate about whether, in all such circumstances, the normal laws of supply and demand apply, the commercial marketplace is equipped to maintain price reasonableness, and the current market is setting prices at levels that are in the best interest of the public. The case of Gilead’s hepatitis C drugs Sovaldi and Harvoni have sharpened the debate and are a good place for the interested reader to start. This debate is outside the scope of this book, however, and is not addressed further.
7. While most of the lawsuits have settled, there are continuing issues around the difference between undiscounted “full” prices and net prices. Many manufacturers manage this risk through their government pricing groups, but further discussion of this matter is beyond the scope of this chapter.
8. http://
9. 42 U.S.C. §1320a-7b(b).
10. The Affordable Care Act clarified that “a person need not have actual knowledge of this section or specific intent to commit a violation of this section.”
11. Testimony of: Gregory E. Demske, Office of Counsel to the Inspector General, U.S. Department of Health and Human Services, “Examining the Relationship Between the Medical Device Industry and Physicians,” Hearing before the Senate Special Committee on Aging, United States Senate, February 27, 2008, page 4.
12. http://
13. A rebate paid in advance of payment for a product.
14. http://
15. https://
16. http://
17. http://
18. Health Care Fraud and Abuse: Practical Perspectives: 2nd Edition—2009 Cumulative Supplement, Ch.11.II.A.2.b., p. 436.
19. http://
20. http://
21. https://www.gsk.com/en-gb/media/press-releases/2014/gsk-china-investigation-outcome/.
22. http://
23. https://clinicaltrials.gov/ct2/about-site/history#WorldHealthOrganization.
24. http://
25. http://
26. http://
27. http://
28. See DOJ Announcement, http://
29. Life sciences sales representatives routinely visit assigned doctors in their territory. There is a certain amount of risk associated with these unsupervised discussions, and the notion of “ride alongs” pertains to having their manager and/or compliance accompany the sales representatives during the visits in order to monitor their interactions with the doctor. In companies with a robust compliance program, these ride alongs are done by compliance and the business unit. The term “manager field rides” pertains to the act of a business manager conducting the ride along instead of compliance.