Analysis

Compliance Faced Rocky Start To 2021 As COVID Rolled On

By Al Barbarino
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Law360 (June 22, 2021, 8:53 PM EDT) -- COVID-19 remained a top concern for chief compliance officers in the first half of 2021 as they continued to confront the challenges of monitoring a remote work environment.

In March, industry experts cautioned that compliance officers were stretched desperately thin amid the pandemic, a sentiment that was backed by industry research showing that compliance and legal teams were having trouble keeping pace with investigations and audits. 

The challenges felt no less daunting as President Joe Biden issued a series of orders and memos that outlined a stiffer regulatory agenda, beginning in January with his calls for "regulations that promote the public interest." Conservatives warned this could lead to "hyper-regulation." 

Experts suggested compliance departments undertake a wholesale review of compliance policies and procedures to consider the new president's priorities, a recommendation that was renewed more recently as sweeping new anti-money-laundering rules edged closer to reality and Biden issued a memo signaling an even tougher U.S. stance on anti-corruption.

Experts say there has been a perfect storm of challenges for compliance teams to juggle. And there's been no shortage of compliance news so far this year as companies seek to navigate a radically different risk and regulatory environment.

So far, 2021 has seen key chief compliance office hires at Facebook and Tesla, big fines tied to misconduct at State Street Bank and Fiat Chrysler, significant compliance monitorship activity and a host of new regulatory proposals and power shifts across the U.S. government that will shape compliance in the second half of 2021 and beyond.

Here are some of 2021's highlights so far.

NYC Bar: Defender of CCOs

A new proposal from the New York City Bar Association asks the U.S. Securities and Exchange Commission to adopt a framework that would help clarify the agency's decision-making process for bringing enforcement actions against chief compliance officers.

The proposal is being hailed by industry experts as a potential safeguard that would quell the persistent fear of personal liability that CCOs face on a daily basis. The more structured framework would help put CCOs at ease, particularly in cases where the agency has to make judgment calls regarding whether a CCO acted in good faith, experts told Law360 recently.

The proposal lays out over a dozen factors the city bar wants regulators, in particular the SEC, to weigh. For example, it includes questions about whether a CCO's actions constituted a "wholesale failure," suggesting that enforcement actions occur only if the potential violations took place repeatedly or over long periods of time.

Among recent actions against compliance chiefs, the SEC this month announced a $20,000 settlement with the CCO of investment adviser VII Peaks Capital for allegedly causing the firm to breach its fiduciary duties when certain fees were transferred to the firm instead of a client.

The SEC and ESG

SEC Commissioner Allison Herren Lee didn't waste much time after Biden appointed her as the agency's acting chair in January to lay the groundwork for a more comprehensive and standardized environmental, social and governance disclosures regime.

As part of the push, Lee mandated a review of existing climate risk-related guidance, announced the creation of a so-called ESG task force to crack down on potential disclosure violations and asked for public feedback in crafting new rules.

Newly minted Chair Gary Gensler, a Democrat like Lee, has followed her lead. In its regulatory agenda announced this month, the SEC said it plans to propose rules addressing climate change disclosures by October.

The U.S. House is doing its part to push the agenda forward, very narrowly approving a bill this month backing the SEC's efforts. The measure faces an uphill battle in the Senate. Republican SEC Commissioner Hester Peirce, as well as numerous GOP senators, have opposed the initiatives.

Whether one is for or against the measures, their implementation would undoubtedly put additional costs and burdens on compliance departments — a concern that the Securities Industry and Financial Markets Association sought to address in a letter to the agency.

SIFMA suggested that certain requirements be phased in gradually to minimize burdens and costs on firms, and that the SEC create certain safe harbors to encourage firms to report metrics in good faith without fear of enforcement actions.

SEC Commissioner Elad Roisman, a Republican, has also offered suggestions on cutting costs associated with the potential measures.

Crypto in Focus

The SEC in March issued its annual examination priorities report, which advised regulated entities of the agency's intention to step up its focus on climate risks and digital assets. The report's crypto focus came after an array of global financial institutions, from JPMorgan Chase & Co. and Goldman Sachs to PayPal, put their weight behind the digital currency with plans to integrate the assets into their businesses.

Data from a May Cornerstone Research report suggests why increased regulatory oversight of the crypto industry could be warranted, showing large upticks in SEC crypto-related enforcement actions in the last several years and a record year for fraud-related claims in 2020.

A subsequent May report accordingly warned crypto businesses, financial institutions and chief compliance officers to get up to speed on increasingly complex crypto threats or face big fines from the U.S. Treasury Department's Office of Foreign Assets Control.

Biden, Feds Zoom In on Corruption

The U.S. Department of the Treasury's financial crimes unit in April requested input on the rollout of new anti-money-laundering rules, which in part will require the increased disclosure of so-called beneficial ownership information.

And this month, Biden gave more than a dozen government agencies 200 days to make recommendations on how to better combat corruption.

Coupled with the vulnerabilities that were amplified by the pandemic, potential increases in the regulatory scrutiny of anti-money laundering and anti-corruption practices led experts this month to urge companies to reexamine and bolster their compliance programs.

"Now is absolutely an opportune time for companies to make an assessment of their compliance program," Christopher Cestaro, who joined WilmerHale in May after serving as chief of the U.S. Department of Justice's Foreign Corrupt Practices Act unit, told Law360 earlier this month. "An effective compliance program and a strong control environment are important safeguards that can stop a violation before it happens." 

Monitor Deals

Last month's $115 million criminal settlement between State Street Corp. and the U.S. Department of Justice over a wire fraud scandal was the latest warning shot telling the financial services industry to tighten its compliance around potential illicit activity. As part of a deferred prosecution agreement, the Boston-based bank must enhance its compliance practices and hire an independent corporate compliance monitor for two years.

Fiat Chrysler, which paid a $30 million fine and pled guilty to making illegal payments and gifts in January, also struck a deal with the feds that includes a three-year compliance monitorship.

The compliance monitorship is a key tool prosecutors could come to rely on more as Biden signals a crackdown on corruption and corporate fraud.

The end of MoneyGram International's eight-year deferred prosecution agreement with the DOJ this month demonstrated that, despite being costly and burdensome, monitorships can pay off, with the company noting in an email to Law360 that it is "extremely proud of its industry-leading compliance program."

New Conductor for Whistleblowers

In April, the SEC's storied whistleblower program said goodbye to its longtime chief, Jane Norberg, after soaring to new heights following a record-breaking run. Under her tenure as chief beginning in 2016, the program issued awards totaling nearly $650 million to more than 110 individual whistleblowers, the agency said. 

Emily Pasquinelli, the whistleblower office's former deputy chief, is serving as acting chief of the office as its work continues unabated, doling out tens of millions to tipsters each month. Norberg ultimately joined Arnold & Porter last month as a partner in the firm's securities enforcement and litigation practice, where she will advise clients on all facets of whistleblower matters.

CCO Hires Abound

The year has included major CCO hires in the financial services, tech and digital assets spaces. Among those was Facebook's high-profile hire of its first-ever chief compliance officer, tapping ViacomCBS' top compliance official and ex-Bingham McCutchen LLP partner Henry Moniz to head its global compliance operations.

Jeff Horowitz, a former compliance pro with big banks like Goldman Sachs and Citigroup who made the shift to the crypto sphere years ago, jumped ship from Coinbase to join another crypto company, BitGo, as its compliance chief. Coinbase filled the vacancy in February when it hired Melissa Strait, most recently the global head of financial crimes at Stripe.

In March, David Searle, a former assistant U.S. attorney in Houston, joined Tesla as CCO as the electric vehicle maker faced a lawsuit claiming the company's former general counsel had been unable to retain independence from CEO Elon Musk.

The same month, Goldman Sachs promoted Kathryn Ruemmler, a former Latham & Watkins LLP partner and Obama administration White House counsel, as chief legal officer and general counsel. In line with her prior responsibilities, she continues to oversee compliance and the bank's conflicts resolution group.

News broke in April that the Financial Crimes Enforcement Network's director, Kenneth Blanco, was both stepping down and joining a big bank, Citigroup, as CCO of a new financial crimes unit. In another key hire, online betting and fantasy sports platform DraftKings promoted an internal candidate to the CCO spot as the industry contended with a growing web of state regulations.

There were key moves in the energy sector too. In March, Ohio-based electric company FirstEnergy Corp. added a new CCO after coming under scrutiny for its alleged role in a billion-dollar nuclear energy bailout scandal. And, in April, Citgo Petroleum Corp. nabbed a former compliance director with fellow energy giant BP to fill its CCO post.

--Additional reporting by Rachel Scharf, Dean Seal, Sue Reisinger, Dave Simpson and Michele Gorman. Editing by Jill Coffey and Bruce Goldman.

Correction: An earlier version of the story misstated the month of the Cornerstone Research report. The error has been corrected.

For a reprint of this article, please contact reprints@law360.com.

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