by Joshua A. Naftalis and Melissa Kelley
Left to right: Joshua A. Naftalis and Melissa Kelley (Photos courtesy of Pallas Partners LLP)
2023 was another busy year in the U.S. white-collar and regulatory enforcement areas. As we begin 2024, a few of the Government’s recent enforcement policies and priorities should be kept front of mind: (1) the Department of Justice’s (DOJ) focus on corporate criminal enforcement; (2) DOJ’s related prioritization of sanctions evasion and anti-foreign bribery enforcement; (3) the U.S. Securities and Exchange Commission’s (SEC) and the Commodity Futures Trading Commission’s (CFTC) diverging policies on “no-admit/no-deny” settlements; and (4) the cryptoasset space.
1. DOJ Corporate Criminal Enforcement
In 2023, DOJ reaffirmed its earlier commitment to prosecuting corporate crime at both the company and individual level, as set forth in Deputy Attorney General Lisa Monaco’s September 15, 2022 memorandum, “Further Revisions to Corporate Criminal Enforcement Policies Following Discussions with Corporate Crime Advisory Group.” As part of that focus, we saw a drumbeat of DOJ policies designed to encourage and reward self-reporting and cooperation.
On January 17, 2023, DOJ’s Criminal Division released its “Corporate Enforcement and Voluntary Self-Disclosure Policy.” This policy was notable because it expands what had previously been known as the Foreign Corrupt Practices Act (FCPA) Corporate Enforcement Policy also to include “all other corporate criminal matters handled by the Criminal Division.” It provides that “when a company has voluntarily self-disclosed misconduct to the Criminal Division, fully cooperated, and timely and appropriately remediated,” in accordance with the policy, “there will be a presumption that the company will receive a declination absent aggravating circumstances involving the seriousness of the offense or the nature of the offender.”
A few weeks later, on February 22, 2023, DOJ released a complimentary policy, “United States Attorneys’ Offices Voluntary Self-Disclosure Program.” This policy too offered the carrot of more lenient treatment when a company self-discloses criminal conduct: “Companies that voluntarily self-disclose misconduct to the [United States Attorney’s Office] pursuant to this policy will receive resolutions under more favorable terms than if the government had learned of the misconduct through other means.”
On October 4, 2023, DOJ Deputy Attorney General Monaco announced a “New Safe Harbor Policy for Voluntary Self-Disclosures Made in Connection with Mergers & Acquisitions.” Under this policy, “acquiring companies that promptly and voluntarily disclose criminal misconduct within the Safe Harbor period, and that cooperate with the ensuing investigation, and engage in requisite, timely and appropriate remediation, restitution, and disgorgement . . . will receive the presumption of a declination.”
Notably, DOJ’s commitment to tackling corporate crime and providing incentives to self-disclosure have continued in 2024, with a focus on individuals. On January 10, 2024, the U.S. Attorney’s Office for the Southern District of New York (SDNY) rolled out a first-of-its-kind whistleblower program that offers individuals who self-report financial fraud or public corruption a path to a non-prosecution agreement. As detailed in our earlier memo, the SDNY’s policy is not a true whistleblower program, as it lacks the anonymity protections and financial incentives of those offered by the SEC, the CFTC, and the U.S. Department of the Treasury. While the policy is significant in setting forth a path to a non-prosecution agreement (which, of course, is valuable), it remains to be seen whether the policy will materially affect how and when individuals self-report crimes in practice.
Another DOJ policy relates to DOJ’s related emphasis on compliance. On March 3, 2023, DOJ rolled out a “Pilot Program Regarding Compensation Incentives and Clawbacks,” as part of its efforts to “to deter criminal conduct, incentivize the development and implementation of effective compliance programs, and promote ethical corporate cultures.” The program provides that, “when entering into criminal resolutions, companies will be required to implement compliance-related criteria in their compensation and bonus system and to report to the Division about such implementation during the term of such resolutions.” In addition, the program also directs prosecutors “to consider possible fine reductions where companies seek to recoup compensation from culpable employees and others who both (a) had supervisory authority over the employee(s) or business area engaged in the misconduct and (b) knew of, or were willfully blind to, the misconduct.”
Taken together, these policies make clear that DOJ will continue to prioritize the prosecution of financial crimes and reward companies and individuals who self-report and emphasize compliance in 2024. The benefits of self-reporting and a culture of compliance are certainly valuable carrots that companies, individuals, and their counsel must consider.
2. DOJ’s Related Focus on National Security, Sanctions, and Foreign Bribery
In parallel with DOJ’s emphasis on corporate criminal enforcement, DOJ continued to underscore its parallel focus on the areas of national security, sanctions evasion, and foreign bribery enforcement.
Deputy Attorney General Monaco first highlighted the prioritization of sanctions enforcement in June 2022, commenting that “sanctions are the new FCPA” shortly after the outbreak of the war in Ukraine. The Deputy Attorney General reaffirmed this focus on March 2, 2023, when she announced DOJ’s commitment of additional resources to the National Security Division to prosecute corporate crime. Noting that “corporate crime and national security are overlapping to a degree never seen before,” the Deputy Attorney General announced that the National Security Division “will be elevating its attention to corporate crime through an infusion of personnel and expertise.” As a result, we believe that DOJ will continue to devote resources to prosecuting sanctions evasion, export control violations, and money laundering.
Against this background, DOJ also received a recent boost to its anti-foreign bribery jurisdiction. On December 22, 2023, President Joe Biden signed the Foreign Extortion Prevention Act (FEPA), which addresses the so-called “demand side” of foreign bribery, making it illegal for foreign officials to demand or accept bribes from any U.S. citizen, company, or resident in exchange for obtaining business. Of course, since the 1977 enactment of the FCPA, federal prosecutors have been empowered to go after the “supply side”—U.S. persons or entities who paid or offered bribes to foreign officials in exchange for a business advantage. It remains to be seen whether FEPA will result in more foreign bribery prosecutions.
3. SEC and CFTC No-Admit/No Deny Policies
The SEC and CFTC also announced significant policy developments in 2023 with respect to no-admit/no-deny settlements. Since 1972, the SEC has had a policy that permits companies and individuals to enter into resolutions with the SEC without admitting or denying the alleged misconduct. 17 C.F.R. § 202.5(e). While the SEC required factual admissions of wrongdoing in certain settlements in 2023, it is significant that the SEC denied a petition related to amending Rule 202.5(e). In supporting the denial of this petition, SEC Chairman Gary Gensler commented: “More than 50 years on, I think this policy has served the public and the Commission well. I believe that amending this policy in the manner proposed by the Petitioner would alter the impact of enforcement settlements if defendants could deny any wrongdoing in the court of public opinion and dismiss sanctions as the cost of doing business without the Commission being able to revive its ability to have its day in court.”
Notably, the CFTC intends to take a different tack with respect to its no-admit/no-deny policy. On October 17, 2023, CFTC Enforcement Director Ian McGinley issued an advisory designed to give enforcement staff guidance on future enforcement resolution recommendations to the CFTC. In addition to noting that the Division of Enforcement would be seeking harsher financial penalties and more corporate monitors, Director McGinley announced a change to the CFTC’s no-admit/no-deny policy: “[I]n negotiations, respondents should no longer assume that no-admit, no-deny resolutions are the default. Rather, in every negotiation, we will discuss whether admissions are appropriate.”
It will be interesting to see how these diverging policies play out in practice, particularly when the SEC and CFTC bring actions in parallel with DOJ.
4. Cryptocurrency
The cryptoasset space was a particular focus for DOJ and civil enforcement agencies in 2023, reflecting the trend of “regulation by enforcement.”
On November 2, 2023—less than a year after his indictment—FTX’s founder and CEO Sam Bankman-Fried was convicted on multiple fraud counts related to the multi-billion collapse of cryptocurrency exchange FTX and Alameda Research, an associated hedge fund. While many observers hoped that the trial in the SDNY would be a referendum of sorts on cryptocurrency, the trial revealed that a prosecution in this space isn’t much different from one of plain-vanilla corporate fraud. It is likely that the District Court will impose a lengthy sentence on Bankman-Fried, who elected to testify at trial.
A few weeks after Bankman-Fried’s conviction, on November 21, 2023, DOJ announced that cryptocurrency exchange Binance had agreed to plead guilty and pay a record fine of over $4 billion to resolve DOJ’s investigation into alleged violations relating to the Bank Secrecy Act (BSA), failure to register as a money transmitting business, and the International Emergency Economic Powers Act (IEEPA). At the same time, Binance’s founder and CEO, Changpeng Zhao (CZ), pleaded guilty to failing to maintain an effective anti-money laundering program, in violation of the BSA. While the financial penalty imposed on Binance is historic, the terms of CZ’s plea are quite favorable to him (particularly in contrast to the counts of which Bankman-Friedman was convicted). DOJ’s charges followed those brought by the CFTC and the SEC in March and June 2023, respectively. While Binance and CZ settled with the CFTC in November 2023, the SEC did not and that litigation continues.
Earlier in the year, the Government brought a number of other significant charges. In February 2023, the SEC charged Kwon Do Heyong (Do Kwon), the co-founder and CEO of Terraform Labs, with defrauding investors out of billions of dollars related to Terra USD (UST) and Luna. Shortly after that, in March 2023, the SDNY indicted Do Kwon and began to seek his extradition to the United States. Whether DOJ prevails in securing Do Kwon’s extradition remains to be seen, as he was recently extradited to South Korea. In July 2023, the SDNY indicted Alexander Mashinsky, the founder and CEO of Celsius, another cryptocurrency exchange, for various fraud schemes. And in August 2023, the SDNY indicted two co-founders of Tornado Cash, a cryptoasset mixer that facilitated anonymous transactions, with money laundering and sanctions violations.
This year is already off to a strong start in the crypto-enforcement space. In January 2024, DOJ announced the indictment of individuals for operating an alleged $1.89 billion crypto-fraud scheme involving HyperFund, and the SEC announced parallel charges. We expect more criminal and civil enforcement actions as the year progresses. At the same time, courts and regulators will continue to wrestle with how these types of assets should be treated under the securities and commodities laws.
Conclusion
This year, we anticipate continued white-collar criminal and regulatory enforcement activity. As noted, DOJ has made clear that financial and corporate criminal prosecutions remain a priority, and we expect similar aggressiveness by the SEC and the CFTC. Likewise, sanctions and foreign bribery will remain parallel areas of focus. While crypotassets were a focus in 2023 and will likely remain so in 2024, we also anticipate that that the government will pursue investigations into accounting and corporate fraud, private funds, the valuation of assets, and money laundering.
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