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Issues To Consider From The Deutsche Bank Enforcement Action

This prior post [1] highlighted the SEC’s $16.2 million Foreign Corrupt Practices Act enforcement action against Deutsche Bank – the latest FCPA enforcement action focused on alleged improper internship and hiring practices primarily involving the financial services industry.

This post continues the analysis by highlighting additional issues to consider.

Timeline

The company’s FCPA scrutiny reportedly began in mid-2013. Thus, from start to finish, Deutsche Bank’s FCPA scrutiny lasted an unconscionable six years.

If the FCPA enforcement agencies want their enforcement programs to be viewed as effective and credible, they must resolve instances of FCPA scrutiny much faster. This is particularly true in the case of Deutsche Bank as the SEC stated:

“Deutsche Bank shared facts developed in the course of its own internal investigation, including certain of the violative conduct described herein. Deutsche Bank’s cooperation included: responding promptly to the Commission’s requests for information and documents; identifying issues and facts that would likely be of interest to the Commission’s staff; providing regular updates of factual findings developed during the course of its own internal investigation; and identifying key documents and providing factual chronologies to the Commission’s staff.”

No Jurisdiction

It is clear that the SEC viewed Deutsche Bank’s conduct as violating the FCPA’s anti-bribery provisions. Among other things, the SEC’s press release states that the company “hired relatives at the request of foreign officials in both the Asia-Pacific region and Russia to obtain or retain business or other benefits.”

However, in order for a foreign issuer like Deutsche Bank to violate the FCPA’s anti-bribery provisions, there must be jurisdiction and in the words of the FCPA “use of the mails or any means or instrumentality of interstate commerce corruptly” in furtherance of the bribery scheme.  There is no use of the mails or any means or instrumentality of interstate commerce alleged in the Deutsche Bank enforcement action and thus it involves “only” SEC findings that the company violated the books and records and internal controls provisions.

To?

As mentioned above, even though the SEC did not charge Deutsche Bank with FCPA anti-bribery violations, the SEC clearly viewed the conduct to be a violation of the provisions (minus the jurisdictional element mentioned above).

As highlighted in this prior post [2] titled “To,” a basic cannon of statutory construction is that all words in a statute are to be given effect so that no words are void, superfluous, or redundant. Stated differently, every word in a statute matters.

Generally speaking, the FCPA’s anti-bribery provisions prohibit the “offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value to a foreign official …”. (emphasis added).

[3]

Internship and jobs are obviously something of value offered or given to the intern or employee. But are internships and jobs something of value to an alleged foreign official?

The government at least seemed to be cognizant of the word “to” in the FCPA’s anti-bribery provisions in the BNY Mellon enforcement action (the first of the four enforcement actions over the last several years focused on internship and job opportunities) as the SEC creatively stated:

“The internships were valuable work experience, and the requesting officials derived significant personal value in being able to confer this benefit on their family members.”

Similarly, in the Deutsche Bank enforcement action, the SEC creatively stated:

“Deutsche Bank provided valuable employment to the relatives of foreign government officials in various parts of the world as a personal benefit to the officials in order to improperly influence them to assist the bank in obtaining or retaining business or other benefits.”

No-Charged Bribery Disgorgement

Even though the SEC did not find Deutsche Bank to be in violation of the FCPA’s anti-bribery provisions, it still sought disgorgement. Indeed, 80% of the $16.2 million resolution amount consisted of disgorgement and prejudgment interest. This represents yet another example of no-charged bribery disgorgement (in other words the SEC seeking a disgorgement remedy in the absence of FCPA anti-bribery charges or findings).

As highlighted in this [4] previous post (and numerous prior posts thereafter), so-called no-charged bribery disgorgement is troubling. Among others, Paul Berger (here [5]) (a former Associate Director of the SEC Division of Enforcement) has stated that “settlements invoking disgorgement but charging no primary anti-bribery violations push the law’s boundaries, as disgorgement is predicated on the common-sense notion that an actual, jurisdictionally-cognizable bribe was paid to procure the revenue identified by the SEC in its complaint.” Berger noted that such “no-charged bribery disgorgement settlements appear designed to inflict punishment rather than achieve the goals of equity.”

Statute of Limitations

The disgorgement amount is further problematic given that the Supreme Court unanimously held in Kokesh (see here [6] for the 2017 decision) that disgorgement is subject to a five year limitations period. However, as stated by the SEC, the conduct at issue occurred “between at least 2006 and 2014” in other words 5 – 13 years prior the enforcement action.

Yet once again, statute of limitations matter little when issuers cooperate and agree to resolve SEC enforcement actions in the absence of judicial scrutiny. (See here [7]). At the very least, the SEC appeared to be cognizant of statute of limitations issues as it stated under the heading “Deutsche Bank Obtained Business As A Result of Referral Hiring” as follows:

“Deutsche Bank was unjustly enriched by approximately $10,785,900 from those transactions occurring within the statute of limitations.”

No Financial Books and Records

The FCPA’s books and records provisions capture financial books and records.

The SEC has stated:

“records which are not relevant to accomplishing the objectives specified in the statute for the system of internal controls are not within the purview of the recordkeeping provision.” (emphasis added)

[T]his provision is not an independent and unrestrained mandate to the [SEC] to establish novel or unprecedented corporate recordkeeping standards; it is, rather, an integral part of Congress’ efforts to assure that the business community records transactions and assets in such a way as to maintain adequate control over them. And, this leads to two important conclusions: First, the [FCPA] does not establish any absolute standard of exactitude for corporate records. And, second, records which are not related to internal or external audits or to the four internal control objectives set forth in the [FCPA] are not within the purview of the [FCPA’s] accountingprovisions.” (emphasis added)

Likewise, in the 2012 FCPA Guidance the government stated:

“The FCPA’s accounting provisions operate in tandem with the anti-bribery provisions and prohibit off-the-books accounting. Company management and investors rely on a company’s financial statements and internal accounting controls to ensure transparency in the financial health of the business, the risks undertaken, and the transactionsbetween the company and its customers and business partners. The accounting provisions are designed to ‘‘strengthen the accuracy of the corporate books and records and the reliability of the audit process which constitute the foundations of our system of corporate disclosure.” (emphasis added).

In the Deutsche Bank enforcement action, the SEC found in summary fashion:

“Deutsche Bank employees created false books and records that concealed corrupt hiring practices and failed to accurately document and record certain related expenses …”

However, nowhere in the SEC’s 14 page administrative order is there any reference to false financial books and records in connection with the problematic internship and hiring practices. Rather, the SEC states:

“[C]ertain Deutsche Bank employees in APAC knowingly submitted false and inaccurate documentation in connection with hires, misrepresented the identify of the referral source, falsely claimed that government officials were not the referral source, and concealed the purpose of the hire.”

The only alleged false or misleading financial book or record discussed in the SEC’s order concerned a trip by Russian Referral Hire D, Referral Hire D’s Father (a Deputy Minister at a Russian government entity) and others took with Deutsche Bank Russia’s Chief Country Officer (Russia Chief). As stated by the SEC:

“Russia Chief and his wife attended a vacation with the Deputy Minister, his wife, his daughter (Referral Hire D), and others. Although the trip lacked any legitimate business purpose and was comprised solely of leisure activities including, hunting, helicopter rides, and fishing, Deutsche Bank falsely recorded the trip as a legitimate business expense.”

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