What do the Avalanche network, FIFA coins, AML violations, and a couple of Big Four accounting firms have in common? They all figured prominently in white collar enforcement actions and resolutions announced by government agencies in the last quarter of 2016. For a recap of these announcements and others that we found worthy of note, read on.
Detailed description: Here we provide a roundup of government enforcement actions announced in the last quarter of 2016 that we found to be of particular interest:
- On December 5, 2016, the DOJ announced an “unprecedented” multinational “seize, block and sinkhole” operation involving arrests and searches in four countries to dismantle a complex and sophisticated network of computer servers known as “Avalanche.” According to the DOJ, the Avalanche network, which began operations in 2010, hosted “more than two dozen of the world’s most pernicious types of malicious software and several money laundering campaigns” and led to monetary losses worldwide in the “hundreds of millions of dollars.” The DOJ said that “the Avalanche network offered cybercriminals a secure infrastructure, designed to thwart detection by law enforcement and cyber security experts, over which the criminals conducted malware campaigns as well as money laundering schemes known as ‘money mule’ schemes. Online banking passwords and other sensitive information stolen from victims’ malware-infected computers was redirected through the intricate network of Avalanche servers and ultimately to backend servers controlled by the cybercriminals. Access to the Avalanche network was offered to the cybercriminals through postings on exclusive, underground online criminal forums.” The DOJ said that several of the network’s malware victims—companies as well as a government office—were located in the Western District of Pennsylvania.
- On November 30, 2016, the DOJ announced that a Northern District of California court entered an order authorizing the IRS to serve a John Doe summons on San Francisco-based virtual currency exchanger Coinbase Inc. seeking information about U.S. taxpayers who conducted transactions in a convertible virtual currency during the years 2013 to 2015.
- On November 17, 2016, the U.S. Attorney’s Office for the S.D.N.Y. announced that Gary Tanner, a former executive at publicly traded pharmaceutical manufacturer Valeant Pharmaceuticals International, Inc. (Valeant), and Andrew Davenport, the former Chief Executive Officer of specialty mail-order pharmacy Philidor Rx Services LLC (Philidor), were arrested and charged for engaging in a “multimillion-dollar fraud and kickback scheme.” According to allegations in the criminal complaint, Tanner, among other things, used his undisclosed interest in Philidor to enrich both Davenport and himself by orchestrating a $300 million purchase by Valeant of Philidor in 2014 and using shell companies through which upfront and milestone payments to Davenport made in accordance with the purchase agreement were laundered and a portion of which were then “kicked-back” to Tanner.
- On November 16, 2016, the DOJ announced that a fourth defendant was convicted by a jury of wire fraud in connection with his involvement in a scheme to defraud software company Electronic Arts (EA) of over $16 million in the virtual in-game currency “FIFA coins.” The DOJ said that the California resident, Anthony Clark, and three co-conspirators defrauded EA, the publisher of video game FIFA Football, in which players can earn FIFA coins based on the time users spend playing FIFA Football. The DOJ said that, due to the popularity of FIFA Football, “a secondary market has developed whereby FIFA coins can be exchanged for U.S. currency.” The DOJ further said that Clark and his co-conspirators “circumvented multiple security mechanisms created by EA in order to fraudulently obtain FIFA coins worth over $16 million.” Specifically, the DOJ said that Clark and his co-conspirators “created software that fraudulently logged thousands of FIFA Football matches within a matter of seconds, and as a result, EA computers credited Clark and his co-conspirators with improperly earned FIFA coins. Clark and his co-conspirators subsequently exchanged their FIFA coins on the secondary market for over $16 million.” Clark’s three co-conspirators pleaded guilty and are awaiting sentencing.
- On October 18, 2016, the SEC announced that Ernst & Young LLP (EY) agreed to pay $11.8 million to settle charges related to failed audits of oil services company Weatherford International that allegedly used deceptive income tax accounting to inflate earnings. In addition, two EY partners agreed to suspensions to settle charges that they disregarded significant red flags during the audits and reviews. EY and the two partners consented to the SEC’s order without admitting or denying the charges. The SEC previously announced on September 27, 2016, that Weatherford International had agreed to pay $140 million to settle charges that it inflated earnings by using deceptive income tax accounting (Weatherford International neither admitted nor denied the charges). The SEC said that, when the penalties being paid by Weatherford International (plus two former employees) and EY are combined, a “total of more than $152 million will be returned to investors who were harmed by the accounting fraud.”
- On October 18, 2016, the SEC announced that Israeli bank Bank Leumi agreed to pay $1.6 million and admit wrongdoing to settle charges that it conducted unregistered U.S. cross-border business. The SEC said that, for a period of over 10 years, Bank Leumi provided investment advice and induced securities transactions for U.S. customers without registering as an investment adviser or broker-dealer as required under U.S. securities laws.
Other Enforcement Agencies
- On November 14, 2016, the Office of Foreign Assets Control (OFAC) announced that Texas-based National Oilwell Varco, Inc., and its subsidiaries Dreco Energy Services, Ltd., and NOV Elmar (collectively, “NOV”) agreed to pay a civil penalty of almost $6 million to settle alleged sanctions violations between 2002 and 2009. OFAC said that NOV’s settlement with OFAC was concurrent with NOV entering into a Non-Prosecution Agreement (NPA) with the U.S. Attorney’s Office for the Southern District of Texas pursuant to which NOV agreed to pay $25 million in criminal and civil penalties for the same conduct (the payment of which “satisfied” the penalty owed to OFAC).
- On November 4, 2016, the New York Department of Financial Services (DFS) announced that the Agricultural Bank of China Limited (Bank) and its New York branch will pay a $215 million penalty and install an independent monitor for violating New York’s AML laws. The DFS issued a consent order pursuant to which the Bank agreed to take “immediate steps” to correct violations, including engaging an independent monitor reporting directly to DFS to “address serious deficiencies within the bank’s compliance program and implement effective anti-money laundering controls.” The DFS’s investigation found “intentional wrongdoing” by the Bank, including actions by Bank officials to “obfuscate U.S. dollar transactions conducted through the New York Branch that might reveal violations of sanctions or anti-money laundering laws.” The DFS also found that the Bank “silenced and severely curtailed the independence of” the New York branch’s chief compliance officer (CCO), who tried to raise concerns to branch management and conduct internal investigations regarding suspicious activity, leading the CCO and most of the compliance department to ultimately resign in 2015.