Germany Raids Deutsche Bank Over Dividend Arbitrage

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Deutsche Bank Frankfurt
Deutsche Bank Frankfurt

A criminal tax fraud investigation into dividend arbitrage by Germany raided Deutsche Bank’s Frankfurt headquarters in what is shaping up to be a very bad year for the German bank.

Just two days ago, its co-chief executives resigned due to investor frustration over the bank’s performance. In April, it agreed to pay a fine of $2.5 billion to resolve investigations by the U.S. and British governments into LIBOR manipulation. In May, it was fined $55 million by the SEC for misstating financial reports during the financial crisis to hide risk in its derivatives portfolio.

German officials were reportedly at the Frankfurt office throughout the morning collecting documents from the bank. “People close to the investigation” told the Wall Street Journal that it dealt with dividend arbitrage trades.

German prosecutors have been looking into the cum/ex trades because financial institutions reportedly obtained fraudulent tax benefits in the hundreds of millions of dollars. Changes in tax rules largely ended the transactions in Germany in 2011 when the loopholes were closed and they became less profitable.

The Commodity Futures Trading Commission and the Federal Reserve Bank of Richmond are both reportedly looking into matters related to dividend arbitrage. The CFTC has reportedly sent inquiries to five banks: Bank of America, Goldman Sachs, Citigroup, Deutsche Bank and Morgan Stanley. The Richmond Fed looked into the trades at Bank of America, which is within its jurisdiction since it is based in Charlotte. I haven’t seen any public media reports about Internal Revenue Service investigations in this area yet.

Bribery News: Embraer Moves Toward Settlement; Rolls Royce Investigation Expands

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Summer may be a slow time on the stock market but we’re getting a steady stream of bribery news with just two months left in the government’s fiscal year. On the FCPA front: Embraer announced that it has reserved $200 million for a settlement under the U.S. Foreign Corrupt Practices Act. Internationally: Germany and the U.K. have expanded their investigations into bribery allegations involving Rolls Royce.

Canada to Pay Some Tax Whistleblowers; Australia Report Suggests Rewards

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Although the whistleblower programs in the United States gets a lot of attention, the U.S. isn’t the only country to have a program to pay informants about corporate misconduct.

Earlier this year, Canada followed the lead of the United States and started offering rewards for tax whistleblowers. The Canada Revenue Agency will pay for tips about international tax noncompliance through its Offshore Tax Informant Program. The program allows for an award of between 5 and 15 percent when more than $100,000 in federal taxes are collected.

The initial process for providing information to Canada is a bit different than here in the United States. Submitting information to Canada starts with an initial call to their hotline to discuss the information the caller can provide. If the information is of the type that they are interested in, they provide the caller with a case number to include on the cover letter of their written submission.

International Antitrust Awards: Four countries pay for information when the United States doesn’t!

In our research, we discovered that Canada isn’t even the first country outside of the United States to pay for tips. Several members of the international community have adopted rewards programs in an area where the United States does not have one: antitrust. South Korea, United Kingdom, Hungary and Pakistan all pay informants for information about cartels engaged in price fixing. Strangely, this is an area where the United States does not pay. The United States investigated the wisdom of creating a program to pay for information about cartels, but there was substantial internal skepticism. Government employees were concerned that the prosecution could not meet the high burden of proof in a criminal case if the defendant could accuse the informant of bias because of the potential reward.

Australia May Be Next to Pay: Australian Senate Committee Recommends Corporate Regulator Explore Incentives.

The Economics References Committee (“Committee”) of the Australian Senate recently released a report on the Performance of the Australian Securities and Investments Commission (ASIC), their version of the Securities and Exchange Commission (SEC). In the report, the Committee recommended exploration of incentive-based compensation for whistleblowers either by allowing qui tam lawsuits or establishing a reward program similar to the SEC.

Because of the growth of the financial sector in Australia, the Committee examined the performance of their financial regulator. Two case studies it relied upon left it with the firm impression that ASIC had limited resources and power. These limitations may have played a role in allowing misconduct to happen at Commonwealth Financial Planning Limited (CFPL) between 2006 and 2010. The Committee also concluded that ASIC was too slow to act on information provided by whistleblowers about fraud happening at CFPL. The report spends nearly 100 pages of the roughly 500 page report on ASIC’s investigation and enforcement action against CFPL.

Among the suggestions it explored to improve the office was its handling of whistleblowers. Australian law offers protection to certain private sector employees who reveal information about violations of the Corporations Act to the Australian Securities and Investments Commission. But news stories broke in 2013 about the inability of ASIC to protect whistleblowers and consumers after issues were discovered at Commonwealth Bank.

The time may be ripe for Australia to implement this. According to the research cited in the report, the public there overwhelmingly supports whistleblowers. The country is also fresh off the implementation of its Public Interest Disclosure Act (PIDA), adopted last July to protect public sector employees reporting suspected legal violations. The law went into effect earlier this year, setting procedures and protections for government employees to internally and externally disclose waste, fraud and safety issues.

Two of the concerns about the PIDA was that it didn’t cover private sector employees and didn’t provide incentives for whistleblowers to come forward. It now looks like Australia will begin the process of correcting those deficiencies.

United Kingdom Passes on Rewards For Now

Last month, the United Kingdom released its response to the Whistleblowing Framework Call For Evidence and said that it did not believe financial incentives were needed. The effect of this decision is somewhat limited. Both the Financial Conduct Authority and the Prudential Regulation Authority are still considering whether they should implement an incentive program.

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SEC Investigating Och-Ziff for FCPA Issues in African Mining

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The Securities and Exchange Commission and Justice Department are investigating possible violations of the Foreign Corrupt Practices Act (FCPA) by Och-Ziff Capital Management. According to reports, a portion of a $150 million investment in African mining in 2008 went to foreign officials in Zimbabwe.

The hedge fund is reportedly in discussions with the U.S. Government to settle its investigation into other business dealings it had from Libya to South Africa. The investigation has been going on for four years now but was only disclosed last year following a report in the Wall Street Journal. In an earnings call, the company said it was hopeful the investigation and legal expenses would be complete by the end of the year. They also said that an enforcement action was reasonably likely.

Och Ziff has run into other trouble recently as well. Last month, an adviser to Och-Ziff funds agreed to pay $4.25 million for providing inaccurate trade reporting data to prime brokers. The reporting error led to inaccuracies in both records provided to the SEC during investigations as well as the books of broker-dealers. The four brokerages relying on Oz Management data had 552 million shares inaccurately listed on their books and records. The inaccurate SEC reports stemmed from requests for market data by the Commission in connection with insider trading or manipulation investigations. In total, 14.4 million shares were incorrectly reported to the SEC. Among the issues identified was in the reporting of trades as either long or short sales.

Do you have questions about this area of the law? We have put together an informational guide for FCPA whistleblowers. If you have questions after reviewing it, one of our FCPA whistleblower attorneys will answer any remaining questions. We can assist you in reporting your evidence of bribery by a publicly traded company or other covered entity to the U.S. Government. Please contact an attorney via our contact form or call 1-800-590-4116.

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FCPA Investigation of JPM Intern Program Proceeding

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The Wall Street Journal has published a story on a document generated as part of the government’s FCPA investigation into J.P. Morgan Chase which details the hiring of family members or friends of executives in most of the major Chinese IPOs the investment bank took public in Hong Kong. The individuals were hired into the bank’s intern program, known internally as the Sons and Daughters program.

FDA Examines Drug Quality from Overseas Facilities.

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The United States Food and Drug Administration has stepped up enforcement efforts against overseas exporters of drugs to the U.S. in light of recent reports of drug quality and manufacturing issues. Facilities in India, the second largest exporter of prescription and over-the-counter drugs, have been under especially heavy scrutiny.

Last year, Ranbaxy Laboratories paid $500 million to resolve civil and criminal actions for improper manufacturing, storage and testing of generic drugs. Dinesh Thakur, a former Director & Global Head of Research Information & Portfolio Management at Ranbaxy, reported the misconduct at Ranbaxy and received $48 million from the government as a whistleblower.

Ranbaxy was the largest drug manufacturer in India by revenue. Drugs from two of its facilities were banned by the FDA in 2008. Two more overseas facilities operated by Ranbaxy were banned more recently, in September 2013 and January 2014. The most recent inspection of the Toansa facility found staff retesting active pharmaceutical ingredients after they failed quality tests.

Indian drug maker Wockhardt has also had imports from two manufacturing plants suspended by the FDA in the last year, according to Bloomberg. The FDA discovered issues with quality testing at the facilities, located in Chikalthana and Waluj, during inspections.

In addition to quality testing concerns, counterfeiting has also been a major issue. Counterfeit drugs often don’t contain the active pharmaceutical ingredients which provide medical benefits to patients from the drug’s consumption. China is believed to be a large source of counterfeits but the FDA has had difficulty inspecting facilities there in the past.

Quality concerns overseas are troubling because the majority of drugs consumed in the United States now have some foreign component. Nearly 80% have active pharmaceutical ingredients from foreign countries, usually China or India, and nearly 40% are manufactured outside of the United States. The percentage is even higher when name brand prescription drugs are excluded. More than forty percent of OTC and generic pharmaceuticals are made in India.

Problems with overseas manufacturing may have developed because of disparities between domestic and foreign inspection rates. The FDA conducts strict inspections of drug manufacturing facilities in the United States every two years and has authority to conduct surprise inspections. In 2011, a GAO study found foreign drug manufacturers were inspected far less frequently. They estimated that overseas facilities were inspected once every ten years. As a result, Congress passed legislation to give the FDA broader authority to conduct inspections of drug facilities overseas. If they are refused entry for an inspection, the FDA can now block entry of drugs from the facility into the United States.

The FDA is also establishing an Office of Pharmaceutical Quality to improve the detection of quality issues in brand name, generic and over-the-counter drugs. The office will be focused on enforcing existing requirements and will not impose new quality restrictions. The interim director of the office is Janet Woodcock, director of the Center for Drug Evaluation and Research at the FDA.

These problems have also come to the attention of Congress. There is a Congressional hearing set for February 26th in order to further investigate substandard generic drugs from overseas. Cleveland Clinic doctor Harry Lever, among others, will testify about his experience with cardiology drugs manufactured in India.

The Young Law Group represents whistleblowers bringing forth claims of health care fraud under the False Claims Act. If you wish to report evidence of drug quality problems at a pharmaceutical manufacturer in the United States or abroad, please call 1-800-590-4116 or fill out the contact form for a free, confidential consultation.

International Cooperation Against Tax Avoidance Growing

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There have been a few measures put in place this year that have the potential to drastically cut offshore tax evasion.  Indeed, a few years from now, 2014 may be called a critical year in the fight against multinational tax avoidance being waged by the world’s governments.  It will take a few years for the transparency and information sharing to take hold of course, but the measures have potential.

The Foreign Account Tax Compliance Act will certainly be an important tool for the United States to collect more taxes.  Last week, we posted information about FATCA for potential whistleblowers working at foreign financial institutions. Even though there may be a “transition period” before the IRS is willing to hand down large penalties to banks that have entered into an agreement with the U.S. Government to provide information about payments and assets of U.S. account holders, the large sanctions paid by banks this year concerning mortgage misconduct and forex fraud suggest that penalties and bank withholding will be coming.

There have been other developments as well. Perhaps the one with the most immediate effect for the United States was the revision made to the tax treatment of corporate merger inversions. The Treasury Department issued rules in September to restrict inversions after a number of corporations declared their intent to relocate overseas for tax purposes after merging with a foreign company. These companies included Burger King and Pfizer.

However, there has been at least one setback.  In the final tax whistleblower rules published in August 2014, the IRS excluded penalties for violations of the FBAR reporting requirements. IRS regulations provide for rewards when the individual’s information leads to collected proceeds. According to IRS guidance, collected proceeds includes only money collected from Title 26.  Because FBAR is required under Title 31, money collected for violations is not eligible for a reward.  This should leave open the possibility of rewards under FATCA, however.

The United States is not the only country facing tax avoidance by large corporations. It has become an issue in the European Union, Australia, India and other nations.  Australia, for example, has more than 100 multinational corporations it believes may be underpaying taxes.

Last week, the G20 countries agreed to implement information sharing about tax avoidance by corporations and individuals by 2018.  It will not be easy.  It took the United States four years to prepare for FATCA.

The European Union may not wait for a global solution.  It is already debating the appropriate tax rules between its member states following Luxembourg.  The EU’s probe into the use of Luxembourg as a tax haven led to the release of information concerning its widespread use for tax avoidance.  More than 300 companies including Pepsi, Ikea and FedEx have used the country to avoid taxes according to information released earlier this month by the International Consortium of Investigative Journalists.

If the momentum in favor of change continues, there could be substantial progress internationally in limiting the ability of corporations to move income to tax havens to avoid paying countries with higher tax rates.

Canada Advances Securities Whistleblower Program

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The Ontario Securities Commission (OSC) has released the latest version of its proposal for rewards to securities whistleblowers in Canada. The proposal would authorize payments of between 5 and 15 percent of the total monetary sanctions imposed and/or voluntary payments made as a result of the whistleblower’s information.

BNY Mellon Fined for Internships; Ford Investigated for Russian Customs Bribes

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Bank of New York Mellon has agreed to pay $14.8 million to settle the SEC investigation into possible violations of the Foreign Corrupt Practices Act regarding internships it provided to family members of sovereign wealth fund officials.

The SEC accused BNY Mellon of hiring the family members to win or keep investment contracts involving the sovereign wealth fund assets. Their internship programs are highly competitive and the investment bank did not apply the normal rigorous process to applicants related to individuals qualifying as foreign officials under the FCPA. BNY Mellon neither admitted nor denied the charges in the settlement.

Investment banks have been under investigation since 2011 when the SEC began its industry-wide bribery investigation by seeking information from multiple banks within its jurisdiction. Goldman and Deutsche Bank have also disclosed investigations into their hiring practices.

In other FCPA news, the SEC is reportedly investigating Ford for Russian customs bribes. The SEC has joined a German investigation into bribes by U.S. automaker Ford and German freight company Schenker into suspected bribery at the port of St. Petersburg in Russia. According to Reuters, the port is known for long delays and the alleged bribes were to speed the passage of containers through Russian customs. As a U.S. issuer trading on the New York Stock Exchange, Ford must comply with the terms of the Foreign Corrupt Practices Act.

Questions about this or other FCPA issues? We have put together an informational guide for FCPA whistleblowers that may answer your question. If you have need additional information, contact one of our FCPA whistleblower attorneys. We can also assist you in reporting your evidence of bribery by a publicly traded company or other covered entity to the Securities and Exchange Commission. Please contact an attorney via our contact form or call 1-800-590-4116.

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Grassley Reintroduces Legislation for Antitrust Whistleblower Protection

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Senators Chuck Grassley and Patrick Leahy reintroduced the Criminal Antitrust Anti-Retaliation Act into the Senate. CAARA prohibits employer retaliation against employees providing information to the Department of Justice about conduct violating criminal antitrust law.

The legislation as currently written does not provide for rewards for antitrust whistleblowers. The Government has expressed concern that it will be more difficult to make their case under the criminal law with a higher burden of proof than civil cases if their star witness of the conspiracy will receive a reward. The United States already provides limited immunity to certain individuals or companies that come forward first with evidence of their participation in an antitrust conspiracy.

Internationally, several countries do provide monetary awards in this area. The United Kingdom, South Korea, Hungary and Pakistan all pay for information about price fixing cartels. A Government Acountability Office report in July 2011 found support for rewards in the United States mixed.

The bill is one of a number under consideration by Congress and the States. The Motor Vehicle Safety Whistleblower Act sponsored by Senators Thune and Nelson to incentivize auto whistleblowers has already passed the Senate. New York’s Attorney General Eric Schneiderman has also announced a proposal for the Financial Frauds Whistleblower Act to compensate whistleblowers in the banking, insurance and financial services industries.

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