‘You Scratch My Back’ Leads To A Fine And Penalty

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As the riders loped on by him he heard one call his name

If you want to save your soul from Hell a-riding on our range

Then cowboy change your ways today or with us you will ride

Trying to catch the Devil’s herd, across these endless skies

 The above lyrics are the closing stanza to the song “Ghost Riders in the Sky”. I thought about the advice for the cowboy to change his ways to save his soul from Hell when I read in both the Financial Times (FT) and the Wall Street Journal (WSJ) reports that Deloitte LLP (Deloitte) agreed to a one-year suspension from soliciting new consulting work from financial institutions and agreed to pay a $10MM fine to the state of New York Department of Financial Services (DFS) for its role in the Standard Chartered Bank (StanChart) money laundering scandal. StanChart was fined $340MM by the DFS for allegations of money laundering and doing business with Iran, all in violation of US laws.

The FT article, entitled “Deloitte banned for StanChart ‘violations”, by Kara Scannell, reported that this suspension and fine was the first against a consulting firm by the DFS. The DFS cited Deloitte for ““misconduct, violations of law and lack of autonomy” in its review of the anti-money laundering (AML) practices of Standard Chartered.” Indeed it its settlement with Standard Chartered, it was alleged that “Deloitte “aided” the bank’s deception in hiding transactions linked to Iran.” In one instance, the FT reported that “Deloitte removed a recommendation aimed at rooting out money laundering from a report filed with the state regulator. In an email cited in the settlement, a Deloitte partner said: “‘[W]e agreed’ to [StanChart]’s request because ‘this is too much and too politically sensitive for both [StanChart] and Deloitte. That is why I drafted the watered-down version’.”

However, the real problem was probably better articulated by Ben Lawsky, superintendent of the DFS, who the FT quoted as saying, “At times, the consulting industry has been infected by an ‘I’ll scratch your back if you scratch mine’ culture and stunning lack of independence.” The WSJ article, entitled “Deloitte Unit Gets One-Year Ban”, penned by reporters Shayndi Raice and Michael Rapoport, noted that in the DFS resolution “Deloitte also agreed to overhaul its internal safeguards and create new standards to increase its independence with respect to clients.” Deloitte itself was quoted in the FT article as saying “it looks forward to working constructively with DFS to establish best practices and procedures that are ultimately intended to become the industry standard for all independent consulting engagements under DFS’s supervision”.

The WSJ also reported that the DFS has been concerned for some time “that consultants who review, and help banks with, regulatory issues are potentially subject to conflicts of interest because they are hired and paid by the same banks whose work they are supposed to assess.” Apparently the DFS is looking to use Deloitte’s remediation as a “model to govern all consultants who do work for banks under the agency’s supervision.” This comes on the heels of the US Senate’s Banking, Housing and Urban Affairs Committee, Subcommittee on Financial Institutions and Consumer Affairs’ hearing this past April on the same issue. The hearing was entitled “Outsourcing Accountability? Examining the Role of Independent Consultants”. The hearing was adjourned with no resolution of legislation introduced as yet but Massachusetts’ junior Senator Elizabeth Warren is on the Subcommittee so I would not be surprised for something to come out of this issue.

The use of external consultants was also mentioned in a recent enforcement action under the Foreign Corrupt Practices Act (FCPA); that being the Parker Drilling Deferred Prosecution Agreement (DPA). In the DPA there were the following statements about an un-named US law firm and an un-named partner at said law firm, which were listed as an agent of Parker Drilling in connection with its FCPA issues in Nigeria.

  1. The law firm was a US limited partnership, which provided legal advice to Parker Drilling for the issue involving the FCPA violation at issue. (Paragraph 10)
  2. An unidentified “outside counsel” who provided this legal advice was a partner in the unidentified law firm. (Paragraph 11)
  3. Parker Drilling entered into an agreement with a Nigerian Agent who would “act as a consultant to [Law Firm] to provide professional assistance resolving these issues in Nigeria.” (Paragraph 33)
  4. Payment to the Nigerian Agent was made through the law firm, which received the Nigerian Agent’s invoice and then forwarded on to Parker Drilling for funding.
    “When the Nigerian Agent required funds, Parker Drilling transferred funds to Law Firm by wire, and Law Firm in turn forwarded those funds to Nigerian Agent by international wire. Nigerian Agent’s funding requests typically first went by email to the Law Firm and U.S. Outside Counsel and asked for currency transfers, often $100,000 or more at a time.” (Paragraph 34)
  5. This U.S. Outside Counsel was identified as requesting money from Parker Drilling for entertainment of the Nigerian President (Paragraph 35a); requesting money for payment to the Nigerian State Security Service and Minister of Finance tied to “winning the concession” for Parker Drilling (Paragraph 35d); advised Parker Drilling that the Nigerian Agent in question “will need $100,000 in expense advances to cover various out of pocket expenses and social events” and that the Nigerian Agent’s expenses were running “about 4000 a day per person because of the entourage entertainment.” (Paragraph 35g); and, finally, he advised Parker Drilling that the Nigerian Agent “needs another $150,000 to accomplish his objective”. (Paragraph 35h)

What does all this mean for the compliance practitioner? First of all, it drives home the need to perform due diligence on all third party providers which will provide legal or regulatory services. If there is no underlying due diligence, there can be no understanding of the background of the service provider. The Deloitte StanChart actions, the US law firm and US lawyer identified in the Parker Drilling DPA set out a couple of issues for the consideration of a compliance practitioner in dealing with third party consultants. First and foremost, be on the watch for any third party who suggests anything illegal or that even comes up close to that line. It is clearly a red flag if a third party suggests any violation of the FCPA, AML regulations or the like. Similarly, any claim that ‘this is the way business is done in [fill in the country]’ should immediately raise a red flag. Anytime a required report is ‘watered down’ it is also a clear red flag. Lastly, if your US outside counsel suggests hiring a Nigerian agent to ‘facilitate’ any legal issues, remember the primary liability is on your company, even if you only accept that legal advice, or as the lyrics suggest “cowboy change your ways today or with us you will ride” into a large FCPA or AML settlement.

Topics:  Anti-Money Laundering, Compliance, Consultation, Deferred Prosecution Agreements, Deloitte, Due Diligence, FCPA, Fines, Money Laundering, Penalties, Standard Chartered Bank

Published In: General Business Updates, Criminal Law Updates, Finance & Banking Updates, International Trade Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Thomas Fox | Attorney Advertising

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