Category Archives: Risk management

FinCEN Releases Frequently Asked Questions Regarding Customer Due Diligence and Beneficial Ownership Requirements

by David S. Cohen, Franca Harris Gutierrez, Sharon Cohen Levin, Jeremy Dresner and Michael Romais

Last week the Financial Crimes Enforcement Network (FinCEN) issued much-anticipated Frequently Asked Questions (FAQs) that provide additional guidance to financial institutions relating to the implementation of the new Customer Due Diligence Rule (CDD Rule), set to go into effect on May 11, 2018.[1] In general, the FAQs clarify certain issues that have caused implementation challenges for financial institutions. While FinCEN’s earlier guidance provided a general overview of the CDD Rule—including the purpose of the rule, the institutions to which it is applicable, and some relevant definitions—the new FAQs provide greater detail for financial institutions seeking to comply with the CDD Rule. The FAQs are meant to assist covered financial institutions in understanding the scope of their customer due diligence (CDD) obligations, as well as the rule’s impact on their broader anti-money laundering (AML) compliance. While the guidance is helpful in clarifying some of FinCEN’s expectations, the implementation challenge lies in applying the CDD Rule to a financial institution’s specific products and services.

As financial institutions work to meet the CDD Rule’s fast-approaching May 11 compliance deadline, they should pay special attention to the following key areas summarized below. Continue reading

Hacking Global Reputations

by Pat Akey, Stefan Lewellen, and Inessa Liskovich

Corporations have reputations, just like individuals. However, the costs of protecting a corporate reputation, or the costs of losing one, are not well understood. Negative reputation shocks can be costly, and recent scandals at well-known firms such as News Corp. and Volkswagen have reaffirmed the fragility of corporate reputations. However, corporations can also invest in technologies such as corporate social responsibility (CSR) to build their reputations or to provide insurance against a future reputation shock. In a recent paper, we find that negative reputation shocks are at least partially insurable through CSR and that firms actively invest in CSR as the result of a negative reputation shock. Continue reading

Maximizing Value and Avoiding Pitfalls when Purchasing Cyber Insurance

by Ian Boczko, Marshall L. Miller, and Timothy C. Sprague

In recent years, companies have heightened their focus on cybersecurity issues, dedicating substantially more resources to mitigating escalating cyber risks.  Increasingly, these efforts include purchasing some form of cyber insurance.   

Any cyber insurance policy should supplement, rather than replace, a cybersecurity risk mitigation program.  While such a policy may be a useful element of a multifaceted strategy, cyber insurance is far from a panacea.  First, the size and types of damages resulting from a catastrophic cyber incursion can exceed even significant policy limits.  Additionally, cyber insurance coverage is unlikely to extend to reputational losses or intellectual property theft.  Moreover, the cyber insurance market is relatively young and policy forms are still evolving.  Thus, cyber insurance does not have the same claims history or established understanding of policy terms that can be found in more mature insurance markets.    Continue reading

The Dodd-Frank Act’s Whistleblower Protection Provisions

by John O’Donnell, Scott Balber, and Geng Li

In 2010, in the wake of the financial crisis, Congress passed comprehensive financial regulation reform legislation known as the Dodd-Frank Act (Pub.L. 111-203). Section 922 of the Dodd-Frank Act established both a bounty award program as well as anti-retaliation protection for whistleblowers who report securities law violations.

Pursuant to the mandate of Section 922, the US Securities and Exchange Commission (“SEC”) established an Office of the Whistleblower, and implemented its final rules on the Dodd-Frank Program through a comprehensive rulemaking process that involved significant public input in May 2011. Continue reading

Deliberate Data Breaches: Consequences for Companies Just Got Even Tougher

by Kelly Hagedorn, Tracey Lattimer, Emily Bruemmer, and Jennifer Yun

In today’s world, data breaches are a regular occurrence.  The size and scale varies, and they have different causes, but those matters are irrelevant if you are a data subject affected – you just want the situation resolved and compensation for any losses you suffer.  Who should be responsible for those breaches?  Where a company has not taken sufficient steps to safeguard personal data, the answer is obvious.  But what about where a rogue employee leaks personal data with the deliberate intention of harming his employer?  The English High Court has recently decided that even in that instance, the employer is liable to data subjects.  Although there is no specific case on this point, we believe that a similar outcome would be reached in an action under US law. Continue reading

Draft GDPR Transparency Guidelines Issued: What Does Your Privacy Policy Need to Contain?

by Jeremy Feigelson, Jane Shvets, Dr. Thomas Schürrle, Ceri Chave, Dr. Friedrich Popp, and Christopher Garrett

Late last year, the Article 29 Working Party (the “Working Party”) issued detailed draft guidance (the “Guidelines”) on transparency under the EU General Data Protection Regulation (the “GDPR”), which comes into force in May 2018. These Guidelines, which will be finalized following a consultation process, contain the Working Party’s interpretation of the mandatory transparency information that must be provided to a data subject by way of privacy policy or other disclosures.

One of the express requirements of the GDPR relates to how businesses communicate their use of a data subject’s personal information to that data subject at the point of data collection or consent, typically via a privacy policy or notice. Getting this right is crucial. Businesses will need to examine their current privacy policies and other disclosures closely, and consider whether these need revising not just in the light of the GDPR, but also to factor in the requirements listed in the Guidelines, which elaborate on existing GDPR provisions. While the Guidelines will not be binding, data protection authorities may take a dim view of businesses which fail to comply with the Guidelines without good reason, given that representatives from all of the EU data protection authorities are part of the Working Party. Businesses that fail to comply with the information duties under the GDPR will face fines of up to the higher of 4% of annual worldwide turnover or EUR 20 million. Continue reading

Securities Fraud Class Action Suits following Cyber Breaches: The Trickle Before the Wave

by Michael S. Flynn, Avi Gesser, Joseph A. Hall, Edmund Polubinski III, Neal A. Potischman, Brian S. Weinstein, Peter Starr and Jessica L. Turner

Overview

Large-scale data breaches can give rise to a host of legal problems for the breached entity, ranging from consumer class action litigation to congressional inquiries and state attorneys general investigations.  Increasingly, issuers are also facing the specter of federal securities fraud litigation.[1]

The existence of securities fraud litigation following a cyber breach is, to some extent, not surprising.  Lawyer-driven securities litigation often follows stock price declines, even declines that are ostensibly unrelated to any prior public disclosure by an issuer.  Until recently, significant declines in stock price following disclosures of cyber breaches were rare.  But that is changing.  The recent securities fraud class actions brought against Yahoo! and Equifax demonstrate this point; in both of those cases, significant stock price declines followed the disclosure of the breach.  Similar cases can be expected whenever stock price declines follow cyber breach disclosures.  Continue reading

Roadmap to an Effective Annual Review

by Michael C. Neus

As the year ends, SEC registered investment advisers to private funds start considering how to assess their firm’s compliance culture.  The Advisers Act of 1940 requires a formal annual review of the adequacy of “written policies and procedures reasonably designed to prevent violation of securities laws.”[1]  In other words, every year Chief Compliance Officers ask themselves how they can actually demonstrate their effectiveness.

Rather than viewing this process as a comprehensive narrative report identifying all deficiencies, perhaps a more useful construct is to think of the annual review as a way of collating and assessing activity throughout the year.  Paradoxically, assembling information used throughout the year makes the process easier than attempting a comprehensive one-shot evaluation.[2]   Effective annual reviews are more like a movie than a photograph. Continue reading

Russia Considers Enhanced Whistleblower Protections

by Jane Shvets, Anna V. Maximenko, and Elena Klutchareva

Effective anti-corruption compliance programs include protections for whistleblowers that raise corruption concerns.  Article 13.3 of Russia‘s 2008 Federal Law No. 273-FZ on Counteracting Corruption (the “Anti-Corruption Law”) addressed Russian lawmakers’ expectations regarding effective compliance programs.[1]  But the law was silent on whistleblower protections.  Recently proposed legislation in Russia may help address this gap.

Even before the Anti-Corruption Law came into effect, Russian law included several provisions that could be interpreted to provide some protection for whistleblowers.  For example, Russian employment law prohibits discrimination and sets out an exhaustive list of permissible grounds for dismissing an employee for cause; firing an employee for blowing the whistle on potential corruption is not among them.  As a result, firing an employee for whistleblowing could ran afoul of Russian employment law.  In addition, the Russian government can protect individuals whose security might be threatened as a result of their participation in criminal proceedings that involve alleged corruption.  The state might, for example, provide such witnesses with physical protection, relocate them, or even give them new identities. Continue reading

Keeping Score of FIFA’s Corruption, Compliance and Efforts for Reform – Part 2

by Brandon D. Fox

Part 2 – Changing the Game Plan

In late June, FIFA, the world’s governing soccer organization, released the “Garcia Report,” chronicling the extensive corruption and conflicts of interest that occurred in FIFA’s awarding of the men’s 2018 and 2022 World Cup venues. Part 1 summarized the report’s findings. Part 2 discusses how specific steps and safeguards can mitigate the risks of misconduct and ensure cooperation among FIFA officials – and at any organization.

Leadership

FIFA’s problems started at the top.  FIFA’s investigators found an astounding number of executive committee members committed misconduct and showed disdain for the investigation.  FIFA’s failures were systemic and reflected a culture of corruption.  An organization’s culture cannot be fixed simply by strengthening rules or creating a targeted compliance program.  Indeed, these are meaningless if the leaders themselves are corrupt.  Executives must have integrity and show a commitment to everyone’s compliance with the law.  FIFA needs to identify candidates for its executive committee that have shown integrity and a dedication to complying with rules and laws. Continue reading