Top 10 Enforcement Trends in 2015
May 4, 2015
By Richard H. Girgenti, KPMG Forensic Advisory Services
Corporate directors are subject to increasing scrutiny and pressure from regulators to ensure that they are fulfilling their responsibility to provide effective oversight of their company’s management of regulatory risk. The challenge that directors face in fulfilling this responsibility is daunting when one considers the speed and volume of regulatory change, the multiplicity of government enforcement agencies who in any given matter are bringing state, federal and global regulatory enforcement actions, and the increasingly aggressive tactics used by government enforcers resulting in record fines and penalties, class action law suits, lost earnings and reputation damage. Understanding the mindset of those responsible for bringing regulatory enforcement actions and the issues that they are focusing on is essential for a director to fulfill his/her responsibility of effective oversight. Below is a top 10 list for 2015 of emerging or continuing areas of regulatory enforcement and government tactics and strategies that should be top of mind for every director.
Areas of Enforcement
- Market Manipulation
On the heels of the Libor investigation, we know that government regulators, including the U.S. Department of Justice (DOJ), Securities and Exchange Commission (SEC), U.S. Commodity Futures Trading Commission (CFTC), Federal Energy Regulatory Commission (FERC) and others, have continued and expanded their investigations into other areas such as Foreign Exchange rate manipulation, commodities and derivatives.
- Anti-Bribery and Corruption
While there were eight Foreign Corrupt Practices Act (FCPA) enforcement actions in 2014 compared with 10 in 2012, penalties and settlements have skyrocketed in the past two years with roughly $692 million in penalties and settlements resulting from FCPA actions last year compared with approximately $172 million in 2013, according to the SEC. These larger fines and penalties are continuing into 2015. There also appears to be more ongoing FCPA investigations. At the same time, we are seeing an uptick in global anti-bribery and corruption enforcement actions. Additionally, we are witnessing an intensified focus by regulators on individuals and compliance gatekeepers.
- Anti-Money Laundering (AML)
Regulators, with some pressure from Congress, have been stepping up their enforcement of AML. With terrorist financing still a concern of the U.S. government and in response to political pressure, regulators have been scrutinizing banking practices, particularly around “Know Your Customer” and the monitoring of transactions for the purposes of reporting suspicious activity. Regulators are also focusing their efforts on money service businesses (MSBs), cybercurrency companies, innovative payment technologies, and retail companies offering financing. Fines, penalties and the use of monitors will continue in 2015.
- Trade Sanctions
With Russian activities in the Ukraine unclear, disarmament discussions with Iran and cyber-attacks from North Korea, the U.S. government has stepped up its use of trade sanctions and continues to use these sanctions as a tool of foreign policy and as a way to deter and punish nations engaged in global misbehavior.
- Government Fraud, Waste and Abuse
Tax cheats and those who defraud the government will remain the focus of government enforcement efforts. The DOJ Tax Division will bring to a close with resolution hundreds of matters involving the investigation of foreign bank accounts used as tax shelters by U.S. citizens. Medicare fraud, government contract fraud as well as fraud in other federal reimbursement programs, will continue to be a priority as the government seeks to recover tax dollars and deter others from unduly enriching themselves from government programs.
- Financial Reporting Fraud
The SEC has repeatedly put companies on notice over the last two years that there is a renewed focus on financial reporting fraud. This new focus will likely bear fruit in 2015 with increased enforcement activity in the area of financial reporting fraud. The adequacy of internal controls and disclosures, particularly around cyber breaches, revenue recognition practices and foreign issuers will likely all be under close scrutiny.
The risk that the above areas of enforcement brings is greatly increased by the enforcement strategies and aggressive tactics that government enforcement authorities are prepared to use. These include:
a. Expanded use of whistleblowers
In a recently released report by the SEC, Sean McKessy, Chief, Office of the Whistleblowers, commented, “Fiscal year 2014 was historic for the office (SEC) in terms of both the number and dollar amount of whistleblower awards.” In 2014, nine awards were made (nearly doubling the number made since the program began in 2010), totaling well over $31 million. Other government agencies have found whistleblower programs to be a valuable tool in their enforcement arsenal. In 2014, whistle-blowers who exposed fraud and false claims made against the government were awarded over $435 million under the False Claims Act. This trend will continue.
b. Greater and more effective use of Data & Analytics to identify wrongdoers
We already know that the agencies, such as the SEC, Financial Industry Regulatory Authority (FINRA) and U.S. Commodity Futures Trading Commission (CFTC), are using sophisticated data analytics and trade surveillance techniques to make market manipulation and insider trading cases.
c. Increased global cooperation amongst enforcement agencies
In addition to parallel enforcement actions by state and local agencies within the U.S., perhaps the most pervasive change over the last few years has been the increased cooperation amongst global regulators and government enforcers. This has been especially true in the areas of anti-bribery and corruption, anti-money laundering and market manipulation.
d. Increased use of Civil Fraud complaints and Administrative Law Judges by the SEC
In an effort to bring greater efficiency to enforcement, the SEC has increasingly turned to the use of civil fraud complaints and administrative proceedings.
e. Continued government attention on individuals within the organization, as well as the organization itself, with emphasis on gatekeepers
- Shift in industry sectors that will be the focus of enforcement
Enforcement activities will continue and expand in the financial services and health care and life sciences sectors, but will also encompass efforts in other sectors not traditionally the focus of such intense enforcement activity. These other sectors will include companies that have global operations and non-traditional financial organizations and will include new forms of payments and among others, retail and diversified industrial companies.
- Continued make use of Monitorships, deferred prosecution agreements (DPAs) and non-prosecution agreements (NPAs)
While some changes are under discussion, the use of corporate settlements and integrity agreements as a means to settle corporate fraud and misconduct in the form of DPAs and NPAs and the requirement of monitors to police these agreements, has become a staple for enforcement and will continue and likely increase in 2015.
- Compliance program scrutiny
As a condition of leniency, government enforcement agencies will scrutinize the compliance programs of organizations to evaluate the effectiveness of these programs, to identify whether the culture of the organization for integrity is strong, whether third party risk is adequately addressed, and to determine whether the internal controls have been designed and implemented to ensure that risks of misconduct within the organization have been addressed.
Enforcement Strategies and Tactics
The challenges that directors face in fulfilling their responsibilities in today’s regulatory enforcement environment are unprecedented. Understanding the enforcement priorities of government regulators is an essential starting point.
About the Author
Richard H. Girgenti is KPMG LLP’s National and Americas leader for Forensic Advisory Services. He has more than 35 years of experience conducting investigations and providing fraud risk management advisory services to public and private corporations, as well as federal and state government entities and not-for-profit organizations. Prior to joining KPMG, Richard held a number of high-level legal and law enforcement positions including having served as New York State Director of Criminal Justice and Commissioner of the Division of Criminal Justice Services, where he oversaw and coordinated the policies and initiatives of all of the state’s criminal justice agencies and worked closely with all federal and state law enforcement agencies.
KPMG LLP, the audit, tax and advisory firm, is the U.S. member firm of KPMG International Cooperative (“KPMG International”). KPMG International’s member firms have 162,000 professionals, including more than 9,000 partners, in 155 countries. KPMG Forensic Advisory Services helps organizations in their efforts to achieve the highest level of integrity and to manage the cost and risk of litigation, investigations, and regulatory enforcement actions by assisting with the prevention, detection and response to fraud, waste, abuse, and other forms of misconduct; the avoidance and resolution of disputes; and the collection, discovery and analysis of electronically stored information.