Crypto, National Security and DOJ Memo Dominate Q1 Compliance Trends

Josh Black

Compliance in the first quarter of 2023 was dominated by the fallout from 2022’s crypto meltdown and continued efforts on the part of U.S. policymakers to link anti-bribery and corruption enforcement with national security concerns.

The Securities and Exchange Commission (SEC) and Department of Justice (DOJ) each issued two enforcement actions in the first quarter of 2023, according to the FCPA Clearinghouse database, with total sanctions of over $20 million.

It was also a busy quarter for regulatory developments, with new guidance from the DOJ on its Evaluation of Corporate Compliance Programs and the Financial Crimes Enforcement Network (FinCEN) on beneficial ownership information (BOI) reporting requirements that will take effect at the beginning of 2024. 

Crypto Collapse Charges

The biggest news of the quarter, however, was the addition of an FCPA charge to the list of allegations against Sam Bankman-Fried, former CEO of cryptocurrency bank FTX and trading firm Alameda, both of which collapsed late last year. A grand jury indicted Bankman-Fried, who was already facing charges including wire fraud, bank fraud and securities fraud, of transferring crypto assets to Chinese officials to unfreeze accounts in the country back in 2021.

"In or about November 2021, Samuel Bankman-Fried, a/k/a 'SBF,' the defendant, and others directed and caused the transfer of at least approximately $40 million in cryptocurrency intended for the benefit of one or more Chinese officials in order to influence and induce them to unfreeze the Accounts," the indictment stated.

Cases involving China have been a relatively small part of recent FCPA prosecutions, according to FCPA Clearinghouse, with only nine since the beginning of 2020. In contrast, nine enforcement actions in the last 12 months alone have cited bribes allegedly paid in Brazil.  

National Security Indictments 

However, China has the highest caseload overall, with 71 total enforcement actions, showing the need for ongoing vigilance.

Indeed, in a speech on March 28, Deputy Attorney-General Lisa Monaco referenced President Biden’s designation of corruption as a key national security risk and highlighted initiatives to use anti-corruption measures to shore up democracy, potentially focusing anti-bribery efforts on dictatorships that have already been sanctioned such as Russia, China, Iran and North Korea.

“Our National Security Division will be elevating its attention to corporate crime through an infusion of personnel and expertise,” Monaco said earlier in the month in a speech to the American Bar Association National Institute on White Collar Crime. That includes “more than 25 new prosecutors who will investigate and prosecute sanctions evasion, export control violations and similar economic crimes,” and the National Security Division’s first-ever Chief Counsel for Corporate Enforcement.

Of more direct relevance to chief compliance officers, the DOJ will also be issuing joint advisories with the Commerce and Treasury Departments to inform the private sector about enforcement trends and to convey the department’s expectations as to national security-related compliance. It is also encouraging compliance-promoting behavior in compensation and the use of clawbacks, as well as a new program encouraging voluntary self-disclosure.

“Let me be very very clear,” Monaco said. “I want every general counsel, every executive and board member to take this message to heart: where your company discovers criminal misconduct, the pathway to the best resolution will involve prompt voluntary self-disclosure to the Department of Justice.” 

Sanctions Continue to Ramp Up

The first quarter of 2023 also saw sanctions activity around the world accelerate, even after record-breaking numbers in 2022 following Russia’s invasion of Ukraine. Data from Diligent’s Info4C database show nearly 8,400 new records were created in three months, compared with 14,000 in 2022 as a whole.

Over half of the new records were issued by Ukraine’s presidential administration, and although individuals and entities based in Russia represented the largest share of the sanctions, 55 countries were represented, highlighting the need for companies to conduct regular due diligence checks of their suppliers and business partners around the world and not just in seemingly obvious high-risk locations.

“Even taking the robust expansion of Ukraine’s sanctions out of the picture, sanctions activities continue at a high volume,” said Oliver Windgaetter, director of the field research and investigations group at Diligent. “It’s a reminder for compliance professionals that the landscape keeps changing and regular automated screening as well as robust due diligence investigations need to stay top of mind.”

In a report earlier this year, Diligent highlighted Monaco’s pronouncement that sanctions “are the new FCPA” and that the U.S. is pouring resources into enforcement.

The U.S., European Union and other European countries have also been highly active in adding to their sanctions lists so far in 2022, with Australia, Israel and South Korea the busiest non-European states, according to the Info4C data.

Keeping Up With Compliance

In more routine developments, the DOJ’s new guidance, issued late in March, put a spotlight on the importance of a policy for personal devices and third-party messaging apps, as well as suggesting companies build a compliance element into their compensation schemes. Notably, the update suggested including deferred or escrowed pay tied to conduct standards and clawback schemes to recoup compensation from wrongdoers after their actions are exposed. That dovetails with an SEC rulemaking at the end of 2022 that required listed companies to set and disclose a policy around clawbacks — likely by next proxy season.

The DOJ also issued a memo to help guide prosecutors on when to appoint a monitor to oversee inadequate compliance programs.

According to law firm Gibson Dunn, “The recent announcements and guidance signal DOJ’s focus on incentivizing corporations with strong compliance programs that are tested, effective, adequately resourced, and fully implemented. Companies should assess their existing compliance policies and procedures to see what, if any, changes should be made (and what changes can be made under applicable laws), particularly with respect to the policies related to communication channels and platforms, employee evaluation and disciplinary actions, and compensation clawback in light of the new DOJ guidance.” 

For more on the memo, read Diligent’s in-depth analysis here

And FinCEN began laying the groundwork for beneficial ownership reporting that will be required under a 2021 law.

“The Corporate Transparency Act, through its beneficial ownership reporting requirements, provides the historic opportunity to unmask shell companies and protect the U.S. financial system from abuse by money launderers, drug traffickers, sanctioned oligarchs, and other criminals,” said Himamauli Das, Acting Director of FinCEN. “We are committed to making this transparency process as simple as possible, particularly for small businesses who may have never heard of or interacted with FinCEN before.”

Until then, and with unprecedented sanctions activity in 2022 related to the war in Ukraine, companies would be well-advised to take advantage of Diligent’s due diligence offerings, which can trace beneficial ownership and identify business partners with ties to sanctioned individuals and entities, as well as poor ESG track records.

Learn how the Diligent Policy Management and Third-Party Risk Management solutions can help your organization stay aligned with the DOJ’s Compliance Program Guidance and other emerging regulations. Request a demo today

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josh black
Josh Black

Josh Black is a Vice President at Diligent and the Editor-in-Chief of Insightia, a Diligent financial news and data company focused on shareholder activism, proxy voting, compensation and corporate governance. Josh is a frequent speaker at industry conferences and an expert for the media. His weekly newsletter on developments in shareholder activism, as well as Insightia’s monthly magazine and frequent special reports, are among the most widely read analyses of what is happening in the investment world.