White Collar Enforcement Gains Momentum as COVID Restrictions Ease: What You Need to Know

“There’s been a slowdown during the COVID era,” Ephraim “Fry” Wernick, a V&E partner in the Government Investigations & White Collar Defense Practice Group, said during a Practising Law Institute forum on April 18, 2022. “FBI agents couldn’t knock on doors, couldn’t execute search warrants in the 2020 time frame, and people were less likely to meet in person to conduct interviews. All signs are now pointing to more robust enforcement.”

Wernick, a former federal prosecutor and assistant chief of the criminal fraud division at the U.S. Department of Justice (“DOJ”), was joined by V&E colleagues Palmina Fava, G. Zachary Terwilliger and Rebecca Fike at the event titled “White Collar Crime in a Post-Covid World: What to Expect and How to Prepare.”

Watching Changes in the FCPA and Monitorships

Passed in 1977, the Foreign Corrupt Practices Act (“FCAP”) is the oldest foreign bribery statute in the United States, Wernick explained. While former President Donald Trump’s past criticism of the law prompted considerable speculation that his administration would decline to enforce it, the opposite turned out to be true, Wernick said. Since 2016, for example, the United States and cooperating countries raked in over $20 billion in FCPA-related fines and penalties resulting from the dramatic spike in enforcement. During the law’s first 30 years, by contrast, the largest fine up until 2007 was only $21 million.

“Year after year, more companies were charged, more individuals were charged, and there were record fines,” Wernick says. The DOJ unit tasked with handling such cases grew significantly during the past eight years — from just 19 prosecutors when he joined in 2014, to 34 by the time he left in 2019 — and it is continuing to expand. Today, it has more than 40 prosecutors.

“There’s still robust hiring,” Wernick said. “President Biden and Attorney General Garland both made anti-corruption a priority, considering it a national security interest. They are really investing in the resources to bring these types of cases.”

When the government wins such a case now, however, it’s far more likely to impose a corporate monitor to prevent repeat offenses than under the Trump administration. During the Trump years, the policy was to seek monitors only when the likely benefits clearly outweighed the projected costs and burdens. Top DOJ officials have made clear that their default presumption in such cases is no longer resolving them without a monitor, the panel noted.

In December, for instance, Balfour Beatty Communities — one of the largest providers of privatized military housing to the U.S. military — was ordered to engage an independent monitor for three years after pleading guilty to major fraud against the U.S. for lying about the completion of resident-requested repairs to win performance bonuses.

From the government’s perspective, monitors are appropriate when a company’s compliance program is insufficient to ensure adherence to the law, Wernick said. Though businesses often find them to be intrusive and costly. Executives can most effectively avoid monitors by investing in strong compliance programs on the front end and regularly reinforcing their investment in compliance through effective monitoring and enhancements of the function.

Listening to Deputy Attorney General Lisa Monaco

Along with foreign bribery actions, the government’s priorities in the coming year and afterward are likely to include fraud, cybercrime and misuse of cryptocurrency, particularly in ransomware attacks in which hackers seize control of a computer network and demand payment to release it, the V&E team said, citing statements from the administration.

“We must keep pace with the threat actors who exploit innovations as fast as the marketplace produces them,” Deputy Attorney General Lisa Monaco said during a February 17, 2022 cybersecurity conference in Munich, Germany. “This is a challenge that no country can tackle alone.”

Last year, the DOJ not only set up the Ransomware and Digital Extortion Task Force but recovered $2.3 million of the money paid to hackers after the Colonial Pipeline attack. That attack disrupted gasoline distribution, leading to long lines at pumps in the U.S. and, temporarily, the comparative scarcity of fuel. “Ransomware and digital extortion — like many other crimes fueled by cryptocurrency — only work if the bad guys get paid, which means we have to bust their business models,” Monaco said.

Also in February, the DOJ announced the seizure of $3.6 billion stolen during the 2016 hack of cryptocurrency exchange Bitfinex. Two people were arrested on charges of conspiracy to commit money laundering, which carries a maximum sentence of 20 years’ incarceration, and conspiracy to defraud the U.S.

Focusing on Crypto and Cybercrime

“Gone are the days, perhaps, of paper bags of cash being exchanged in the underground garage,” Fava told forum participants. “Instead crypto is demanded and exchanged.”

Fava, who leads internal and government investigations globally, says that the Biden administration’s prioritization of cryptocurrency usage in cyber-attacks acknowledges a reality that has already caught the attention of C-suites and corporate boards.

“Five years ago, the most critical issue on the minds of directors and officers was the FCPA and similar anti-corruption laws around the world that were being enforced by foreign regulators. Now, anti-corruption remains among the top three for multinational companies, but cybersecurity occupies the top spot for nearly every company. Similarly, boards are mindful of regulations around cryptocurrency and relevance of cryptos to their business,” Fava explained.

As at the DOJ, new priorities are also being identified at the Securities and Exchange Commission (“SEC”), the top U.S. regulator of publicly traded companies.

“The agency has proposed new enhanced cybersecurity disclosure obligations, which would require public companies to disclose a material cyber incident within four days of it occurring,” Fava pointed out. “As a result, companies must implement processes that will identify cyber incidents promptly and develop a game plan for alerting the legal teams responsible for determining the need for a disclosure, investigating the extent of the attack, and mitigating the exposure to the company and its stakeholders,” Fava explained.

Simultaneously, the SEC is working to tighten standards for special purpose acquisition companies (“SPACs”), publicly-traded shell companies formed to raise capital through an initial public offering with the goal of acquiring or merging with another business, following an increase in both popularity and scrutiny of their use.

Paying Close Attention to SPACs

“A lot of people have asked how much these new rules really change what is happening with SPACs and their effect in the market,” says Fike, who recently rejoined V&E after serving as Senior Counsel in the SEC’s Division of Enforcement for nearly 10 years. Fike believes that much will depend on the final versions of the proposed rules that the SEC issued on March 20, 2022.

“Generally, our takeaway is that a lot of the SPAC rules codify existing practices, and we don’t foresee a large change there. There is some expanded liability for underwriters, but I think the appetite for SPACs is still there,” states Fike. SPACs remain an enormously lucrative space, she said, and a way for emerging companies, especially in the tech industry, to gain access to the capital markets even amid the SEC’s heightened focus.

In October 2022, the agency announced a $38.8 million settlement with Akazoo S.A., which the SEC said represented itself as a lucrative music-streaming business but in reality had no paying customers and negligible revenue when it received $55 million for selling itself to a SPAC.

Reading the Government Tea Leaves

Terwilliger, who gained experience over a decades-long career in public service in which he advanced to serve as the presidentially appointed and Senate-confirmed U.S. Attorney in the prestigious Eastern District of Virginia, opened his portion of the discussion by summarizing the current state of the U.S. Attorney field offices and discussing the implications.

He pointed out that in the 94 U.S. Attorney’s Offices, there are currently only 32 Senate-confirmed attorneys in place, and that lack of leadership may have an impact in driving an agenda. Examining various budget requests can indicate a lot about DOJ’s future intentions, said Terwilliger, who pointed out that within the recent DOJ submission, there is a request for 101 criminal prosecutors and trial attorneys to be situated in Main Justice and out in the field.

The DOJ has also requested 900 additional FBI agents to support white-collar efforts and, according to Terwilliger, that’s significant. “Let’s see what happens with the budget, and with post-COVID, and then let’s see what happens when these priorities come together,” he said.

Terwilliger believes there will be a greater focus on individuals and individual accountability in corporate crime, as well as efforts to prevent recidivism. Both procurement fraud and COVID-relief fraud will be priorities, he predicts. “We will probably see the number of white collar defendants go up over the next year,” Terwilliger says.

While enforcement of corporate crimes may have slowed down during the pandemic, the team agreed, the horizon may look quite different with additional government resources, scrutiny and penalties.