Risk Update

Financial Risk & Compliance — SRA Doubles Down on AML, US AML Evolution Analysis & Opinion, Private Equity Conflicts Analysis

‘Onslaught’ of extra AML burdens likely to increase – SRA chief” —

  • “There will be no let-up in the requirements made of law firms to prevent money laundering, the chief executive of the Solicitors Regulation Authority warned today.”
  • “Paul Philip told the Law Society’s Risk and Compliance Annual Conference that the regulator has found itself as ‘piggy in the middle’ between the profession and the government. The regulator would help in any way it can, he said, insisting that firms should not be scared of their obligations – but he suggested that pressure from the government is behind the current push.”
  • “Firms are already required to produce risk assessments to prevent money laundering, and more than a dozen firms have been fined in the past year for failing to carry these out properly. The SRA has also prosecuted firms that wrongly declared they had a compliant risk assessment. “
  • “Philip said the most common request from firms when asked how the SRA could help was to stop adding to the AML regulatory burden – but that is not going to be possible for now.”
  • “‘There is nothing we can do to stop the onslaught of regulatory requirements coming from direct legislation which we are forced to implement. Arguably we are playing catch-up as we should have been doing this sort of thing a long time ago.'”
  • “The Economic Crime Bill, currently going through parliament, will place extra reliance on the SRA to prevent money laundering and Philip said the level of bureaucracy and regulation is likely to increase. The legislation would also give the SRA unlimited fining powers for firms that have facilitated economic crime.”
  • “‘Government pressure to drive through the economic agenda is just colossal,’ added Philip. ‘If we get those powers we would expect and would wish to use them. The level of fines for economic crime, particularly in the financial sanctions era, will increase radically.'”

The Anti-Money Laundering Whistleblower Improvement Act Adds Critical Teeth to the Anti-Money Laundering Program, But There Is Still More To Do” —

  • “On December 23, 2022, Congress included the Anti-Money Laundering Whistleblower Improvement Act in the omnibus budget presented to President Biden. The Improvement Act contained several key amendments to the Anti-Money Laundering Act that bring the program more closely into alignment with other highly successful federal whistleblower programs.”
  • “But for all its strength, the AMLA of 2020 had holes. Corporate auditors and compliance professionals could not qualify as whistleblowers under the original law, despite their unique access to BSA/AML-related information. And as its critics noted from its inception, the AMLA’s missing floor on awards for successful tips severely undercut the program’s power to encourage whistleblowers. Those with information could risk their livelihood and financial stability to bring forward critical information that resulted in massive monetary sanctions, only to see minimal or nonexistent compensation for their courage. Additionally, awards were funded through Congressional appropriations bills, so even for those whistleblowers who did receive an award, FinCEN could not pay them until Congress allocated the money.”
  • “The Improvement Act patched these holes with several long-sought changes. Based on the highly successful Dodd-Frank Act (15 U.S.C. § 78u-6), the Improvement Act demonstrates clear intent by Congress to solicit increased whistleblower tips by expanding incentives and protections for those who report. First, the Act set a 10% minimum award for whistleblowers whose information leads to financial sanctions over $1 million. Second, the Act established the Financial Integrity Fund to support these awards, drawing on criminal forfeitures, fines, and victim restitution from sanctioned entities instead of relying on appropriated tax payer dollars. Third, the Act lifted restrictions on potential whistleblowers who learned of violations through their roles as compliance or audit professionals. Each of these changes further encourages potential whistleblowers to report violations within their organizations to the federal government.”
  • “In ameliorating these gaps, Congress took the extra step of expanding the AMLA to cover information uncovering violations of American sanctions laws. In addition to recognizing whistleblowers with BSA/AML violation information, the amended AML program protects and rewards whistleblowers with information relating to the International Emergency Economic Powers Act, the Trading with the Enemy Act, and the Foreign Narcotics Kingpin Designation Act. Relevant information under the AML program includes any possible violation of these laws and their regulations that has happened, is about to occur, or is ongoing.”
  • “While the 2022 amendments made critical expansions to the AMLA, the Act still has at least one glaring hole. For the whistleblowers it protects, the AMLA creates a strong shield against retaliation for engaging in protected activity. Covered whistleblowers may report violations not only to the government, but also within their organization to those with authority to “investigate, discover, [] terminate, . . . [or] take any other action to address the misconduct.” 31 U.S. Code § 5323(g)(1). However, reporting internally can and frequently does result in whistleblowers experiencing adverse retaliatory actions by their employers, including termination. The AMLA provides generous remedies for successful retaliation claims, including reinstatement, double back-pay, and attorneys’ fees. 31 U.S. Code § 5323(g)(3).”

The LPAC Strikes Back . . . When The Contract Says It Can” —

  • “Many private equity partnerships utilize a limited partner advisory committee (“LPAC”) as a mechanism to approve certain transactions, particularly those where a potential conflict of interest could exist. While Delaware corporate law provides well defined rules for how a self-interested transaction can be cleansed by disinterested directors or shareholders in the context of a corporation, the rules are less well defined when it comes to conflicts of interest for partnerships including private equity funds established as limited partnerships. The decision from In re SunEdison, Inc. demonstrates that the LPAC’s role in approving conflicted transactions remains a case-by-case, contract specific analysis.”
  • “The LPAC often acts as a decision-making body with respect to conflicts that may arise between the interests of the limited partners and the interests of the general partner. The role of an LPAC, however, can vary significantly; sometimes LPACs play a mere advisory role while others operate as a required review authority.”
  • “In re SunEdison, Inc. involved the elimination of a limited partner’s partnership interest for failure to comply with a capital call required by the limited partnership agreement. The removed limited partner filed a lawsuit alleging breach of fiduciary duty. The limited partner argued that the general partner violated the partnership agreement by extinguishing the LP interest without first obtaining approval from the LPAC. The plaintiff alleged that LPAC approval was necessary because the elimination of a partnership interest resulted in an increase to the value of each remaining partnership interest including the general partners, and was therefore a conflict of interest transaction. The general partner defended the claim by arguing that the partnership agreement’s exculpation provision eliminated otherwise applicable fiduciary duties to the extent they were not specifically incorporated in the agreement. The court considered the arguments under the motion to dismiss standard.”
  • “In determining there was no material breach, the court considered whether the agreement required LPAC approval before a partnership interest could be extinguished. The SunEdison partnership agreement contained an enumerated list that detailed what ‘conflict’ transactions required advisory committee approval. This list included transactions with fund-affiliated companies. The court determined that eliminating a limited partnership interest did not match any of the enumerated conflicts and therefore LPAC approval was not necessary. As LPAC approval was not required, the court held there was no breach of the partnership agreement, and thus no material breach (‘it is a stretch to assert even that there has been a contractual breach.’) Therefore, the court concluded the general partner had not breached its fiduciary duty.”