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NEW YORK: An Introduction to Litigation: Specialist Firms in White-Collar Crime & Government Investigations

Contributors:
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Businesses and market participants should expect a heightened regulatory environment in 2021. Each new presidential administration brings with it substantial changes in focus, and the Biden administration appears set on increased regulatory scrutiny and enforcement in multiple areas, including financial markets, money laundering, healthcare and environmental regulation.

Already, provisions included in this year’s National Defense Authorization Act (NDAA) impose significant additional reporting requirements upon companies doing business in the United States and equip regulators with expanded tools for enforcement. These provisions set the table for future criminal, civil and regulatory actions.

In short, the Biden administration straightforwardly promises to be a regulatory-rich environment, with enforcement investigations and actions to follow.

In our view, corporate counsel and compliance departments should address these changes proactively through heightened monitoring of new legislation and regulations. In addition, before a government subpoena or inquiry is ever sent, harbingers of potential regulatory action often arrive in various forms, including customer complaints, rumors within the organization, news reports or civil actions. While, in the past, a wait-and-see posture may have been a prudent response to these signals, the arrival of the Biden administration means that in-house counsel should consider taking an earlier, strategic and more offensive approach to get ahead of inquiries from regulators.

The National Defense Authorization Act for 2021 

Each year Congress enacts the NDAA — the 'must pass' defense-spending law that funds the military. This year’s legislation includes the Corporate Transparency Act (CTA), which fundamentally changes the reporting responsibilities of many US entities, and amendments to the Securities Exchange Act of 1934 (Exchange Act).

New Rules Requiring the Disclosure of Beneficial Owners: In a groundbreaking effort to crack down on money laundering, tax evasion and terrorism financing, the CTA requires many businesses registered or actively operating in the United States to disclose ownership information to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN). Beginning in January 2022, the CTA will require new companies to report the name, date of birth, and unique identification number (such as a passport or driver’s license number) for each of the entity’s beneficial owners. Existing companies must report this data within two years. The CTA imposes civil and criminal fines and up to two years of imprisonment for non-compliance. The CTA is, however, subject to meaningful exemptions for certain entities, including: 501(c)(3) organizations; most financial service companies; and companies that report more than $5 million in revenue on tax returns, employ more than 20 people and have a physical presence in the United States.

Enhanced Enforcement Power for the SEC: In a legislative response to the Supreme Court’s decision in Liu, the NDAA also amends the Exchange Act to explicitly authorize the Securities and Exchange Commission (SEC) to pursue disgorgement. While the amendments largely affirm the Supreme Court’s limitations on disgorgement to the 'person' receiving the 'unjust enrichment', the amendments also double the time in which the SEC may seek disgorgement for the intentional violation of securities laws from 5 years to 10 years, reversing a meaningful limit that had been placed on the SEC’s ability to use disgorgement by the Supreme Court’s 2017 decision in Kokesh.

Executive Priorities 

Department of Justice (DOJ) prosecutions and fines imposed on corporations sharply decreased under the Trump administration, notwithstanding the 10-figure settlements with Goldman Sachs and Airbus. Enforcement actions by the SEC, Commodity Futures Trading Commission (CFTC), IRS and other agencies followed a similar pattern. The former administration actively promoted a less strict regulatory environment, encouraging companies and individuals to test its limits. The Biden administration promises to scrutinize those limits.

Paycheck Protection Program Fraud: The Paycheck Protection Program (PPP) will certainly be a priority in the area of federal criminal enforcement. Congress established the PPP to provide emergency monetary relief to those affected by the COVID-19 pandemic. Because of its rapid rollout, the government distributed PPP funds with little scrutiny of the initial loan applications. Since last year, most U.S. Attorneys' Offices have implemented a 'PPP Loan Fraud Coordinator' position to specifically prosecute PPP-related misconduct. The DOJ can also seek civil relief (with a much lower burden of proof) in appropriate cases.

Tax Enforcement: The Biden administration has stated its intention to impose meaningful tax increases, including on entities that have largely been able to avoid US taxes through use of offshore entities, and to substantially increase both formal and effective corporate tax rates. Paired with these initiatives is a proposed budget increase of more than $80 billion to the IRS for auditing and enforcement. Accordingly, we expect a sharp increase in the number and scope of tax audits and prosecutions.

SEC Enforcement: Changes in regulatory personnel also reflect the Biden administration’s more aggressive approach to enforcement. Gary Gensler, former Chairman of the CFTC under President Obama, will be heading the SEC. At the CFTC, Gensler overhauled the swaps market in the wake of the 2008 financial crisis and pursued market manipulation charges against five major financial institutions, resulting in $1.7 billion in penalties. With the explosion of online brokerages, cryptocurrencies and digital assets such as non-fungible tokens (NFTs), Gensler is expected to implement robust regulations to promote investor protection. While not all of Biden’s nominees for the CFTC and Federal Trade Commission (FTC) have been announced (much less confirmed), it is virtually certain that they will share with Gensler a more aggressive regulatory stance.

To sum up, while 2020 was a year of unprecedented disruption and change, the regulatory and enforcement environment in the United States for white-collar investigations and enforcement actions remained relatively benign. 2021 promises to bring increased legislation, regulatory rulemaking and enforcement, requiring an increased level of vigilance amongst corporations, in-house counsel and compliance departments.