DOJ Focuses on Corporate Crime Involving Sanctions Evasion, Export Controls Violations and Similar Economic Crimes

Key Points

• On March 2, 2023, DOJ announced that its NSD would hire more than 25 new prosecutors to investigate and prosecute sanctions evasion, export controls violations and similar economic crimes. Consistent with recent policy changes designed to “invigorate corporate criminal enforcement,” DOJ also announced that among these new hires would be NSD’s first-ever Chief Counsel for Corporate Enforcement.
• DOJ also announced a new Pilot Program on Compensation Incentives and Clawbacks, which will require companies resolving allegations of criminal conduct with the DOJ to develop compliance-promoting criteria within their compensation and bonus systems and will provide fine reductions to companies who seek to claw back compensation from corporate wrongdoers.
• That same day, the Departments of Justice, Commerce and Treasury jointly issued, for the first time ever, collective guidance on compliance with sanctions and export controls, particularly with respect to Russia. The guidance focuses on evasion by third party intermediaries.
• On March 1, 2023, DOJ released a Revised Memorandum on Selection of Monitors in Criminal Division Matters, which further implements DOJ policy announced in October 2021 providing that federal prosecutors will no longer apply any general presumption against requiring an independent compliance monitor.
• Taken together, DOJ’s announcement, the Joint Compliance Note, and the Revised Memorandum demonstrate the U.S. government’s surging of resources to address the intersection of corporate crime and national security. We expect to see an uptick in investigative activity and enforcement actions in this area and encourage companies to maintain strong compliance programs that address possible vulnerabilities arising from corporate compensation programs and establish procedures to follow in the event of a potential violation.

DOJ Announcements

Emphasis on National Security Matters

On March 2, Deputy Attorney General (DAG) Lisa Monaco delivered a speech at the American Bar Association National Institute on White Collar Crime in which she described the National Security Division’s (NSD’s) new efforts to focus on corporate crime through an infusion of personnel and expertise. These efforts include hiring a Chief Counsel for Corporate Enforcement and more than 25 new prosecutors. We expect the new prosecutors to join NSD’s Counterintelligence and Export Control Section, which supervises the investigation and prosecution of cases affecting national security, foreign relations and the export of military and strategic commodities and technology. DAG Monaco also promised “significant announcements in some significant cases in the coming weeks” related to corporate crime in the national security space.

Self-Disclosure of Misconduct, Corporate Compensation Reforms and Monitors

DAG Monaco underscored two new areas of focus for the Department of Justice (DOJ) more broadly: a cross-department approach to promoting voluntary self-disclosure and analyzing how compensation structures can foster responsible corporate behavior. With respect to voluntary self-disclosures, DAG Monaco emphasized that the pathway to the best resolution of a corporate criminal conduct will involve prompt voluntary self-disclosure. With respect to compensation structures, she announced the DOJ’s first-ever Pilot Program on Compensation Incentives and Clawbacks, which will have two principal components. First, every corporate resolution involving the DOJ’s Criminal Division will now include a requirement that the resolving company develop compliance-promoting criteria within its compensation and bonus system. Second, the Criminal Division will provide fine reductions to companies who seek to claw back compensation from corporate wrongdoers.

On March 1, 2023, DOJ released the Revised Memorandum, which clarifies how DOJ selects monitors, articulates conflict of interest obligations associated with serving as a monitor, emphasizes the importance of diversity and inclusion in monitor positions and establishes the following ten non-exhaustive factors that DOJ will consider when determining the need for a monitor:

1. Whether the corporation voluntarily self-disclosed the underlying misconduct in a manner that satisfies the particular DOJ component’s voluntary self-disclosure policy.
2. Whether, at the time of the resolution and after a thorough risk assessment, the corporation has implemented an effective compliance program and sufficient internal controls to detect and prevent similar misconduct in the future.
3. Whether, at the time of the resolution, the corporation has adequately tested its compliance program and internal controls to demonstrate that they would likely detect and prevent similar misconduct in the future.
4. Whether the underlying criminal conduct was long-lasting or pervasive across the business organization or was approved, facilitated or ignored by senior management, executives or directors (including by means of a corporate culture that tolerated risky behavior or misconduct, or did not encourage open discussion and reporting of possible risks and concerns).
5. Whether the underlying criminal conduct involved the exploitation of an inadequate compliance program or system of internal controls.
6. Whether the underlying criminal conduct involved active participation of compliance personnel or the failure of compliance personnel to appropriately escalate or respond to red flags.
7. Whether the corporation took adequate investigative or remedial measures to address the underlying criminal conduct, including, where appropriate, the termination of business relationships and practices that contributed to the criminal conduct, and discipline or termination of personnel involved, including with respect to those with supervisory, management or oversight responsibilities for the misconduct.
8. Whether, at the time of the resolution, the corporation’s risk profile has substantially changed, such that the risk of recurrence of the misconduct is minimal or nonexistent.
9. Whether the corporation faces any unique risks or compliance challenges, including with respect to the particular region or business sector in which the corporation operates or the nature of the corporation’s customers.
10. Whether and the extent to which the corporation is subject to oversight from industry regulators or is receiving a monitor from another domestic or foreign enforcement authority or regulator.

The Revised Memorandum bolsters our view that DOJ will increasingly require corporate monitors of companies resolving criminal allegations.

The Joint Compliance Note 

On March 2, 2021, the Departments of Justice, Commerce, and Treasury issued a Joint Compliance Note titled “Cracking Down on Third-Party Intermediaries Used to Evade Russia-Related Sanctions and Export Controls.” Modeled after Foreign Corrupt Practices Act guidance that DOJ has for years published jointly with the SEC, the Joint Compliance Note is the first time these three agencies have collectively provided guidance on enforcement trends and compliance with export controls and sanctions. The Joint Compliance Note highlights the U.S. government’s concerns about the use of third-party intermediaries or transshipment points to circumvent restrictions, disguise the involvement of Specially Designated Nationals and Blocked Persons (SDNs) or parties on the Entity List in transactions and obscure the true identities of Russian end users.

Red Flags

The Joint Compliance Note calls specific attention to financial institutions and other entities conducting business with U.S. persons or within the United States, and businesses dealing in U.S.-origin goods or services or in foreign-origin goods otherwise subject to U.S. export laws. It emphasizes the importance of an effective, compliance program tailored to the risks a business faces, such as diversion by third party intermediaries. The Joint Compliance Note includes the following list of red flags that indicate a third party intermediary may be engaged in evasion:

• Use of corporate vehicles (i.e. legal entities, such as shell companies, and legal arrangements) to obscure ownership, source of funds or countries involved.
• Reluctance by a customer to share information about the end use of a product, including reluctance to complete an end-user form.
• Use of shell companies to conduct international wire transfers, often involving financial institutions in jurisdictions distinct from company registration.
• Declining customary installation, training or maintenance of the purchased item(s).
• IP addresses that do not correspond to a customer’s reported location data.
• Last-minute changes to shipping instructions that appear contrary to customer history or business practices.
• Payment coming from a third-party country or business not listed on the End-User Statement or other applicable end-user form.
• Use of personal email accounts instead of company email addresses.
• Operation of complex and/or international businesses using residential addresses or addresses common to multiple closely-held corporate entities.
• Changes to standard letters of engagement that obscure the ultimate customer.
• Transactions involving a change in shipments or payments that were previously scheduled for Russia or Belarus.
• Transactions involving entities with little to no web presence.
• Routing purchases through certain transshipment points commonly used to illegally redirect restricted items to Russia or Belarus. Such locations may include China (including Hong Kong and Macau) and jurisdictions close to Russia, including Armenia, Turkey and Uzbekistan.

The Joint Compliance Note urges companies to conduct risk-based due diligence on, and to screen, current and new customers, intermediaries and counterparties through the Consolidated Screening List1 and OFAC Sanctions Lists.

Evasion Tactics

In addition to the list of red flage Joint Compliance Note also includes examples of alleged evasion tactics from two recent DOJ indictments:2

• Claiming that shell companies located in third countries were intermediaries or end users.
• Claiming that certain items would be used by entities engaged in activities subject to less stringent oversights.
• Dividing shipments of controlled items into multiple, smaller shipments to try to avoid law enforcement detection.
• Using aliases for the identities of the intermediaries and end users.
• Transferring funds from shell companies in foreign jurisdictions into U.S. bank accounts and quickly forwarding or distributing funds to obfuscate the audit trail or the foreign source of the money.
• Making false or misleading statements on shipping forms, including underestimating the purchase price of merchandise by more than five times the actual amount.
• Claiming to do business not on behalf of a restricted end user but rather on behalf of a U.S.-based shell company.

Conclusion

DOJ’s announcements, the Revised Memorandum and the Joint Compliance Note demonstrate the U.S. Government’s unrelenting focus on ensuring corporate compliance with sanctions and export control laws. According to Assistant Attorney General for National Security Matthew Olsen, ever since Russia’s invasion of Ukraine, a DOJ “priority has been the robust enforcement of U.S. export and sanctions laws and cracking down on efforts to evade those laws.” Last year saw numerous DOJ enforcement actions in this area involving seizures of private planes and yachts belonging to alleged Russian oligarchs and criminal charges against allegedly oligarch-affiliated service providers for sanctions violations, including charges against a former high-ranking FBI official for violating U.S. sanctions and anti-money laundering laws. We expect that DOJ will take the lessons it has learned from these cases and bring them to bear with new focus and intensity in their investigation and prosecution of corporate wrongdoing in the national security space. Companies should therefore ensure that they have effective, risk-based compliance programs in place. These programs should address corporate compensation and bonus systems in light of DOJ’s recent guidance on these issues and be designed to ensure a well-informed decision about voluntary self-disclosure in the event of a potential violation.

¹ See Consolidated Screening List, International Trade Administration, available at https://www.trade.gov/consolidated-screening-list.

² See Indictment in United States v. Orekhov, et al., Case: 1:22-cr-00434-EK (E.D.N.Y. Sept. 26, 2022) and United States v. Grinin, et al., Case 1:22-cr-00409-HG (E.D.N.Y. Dec. 5, 2022).