What's to Come for Investigations and Compliance Professionals: Trends for 2022

Covid-19, Environmental, Social and Governance (ESG) concerns, cybersecurity, GDPR, cryptocurrency, increased anti-corruption regulatory focus … In many ways, 2022 is shaping up to be the year where critical subjects from previous years begin to reveal their real impact and why they should be at the forefront of management boards’ minds across the world. FRA Manager, Jorge Lopes, asked colleagues about recent key events they believe will have a global impact, and to identify trends for the next year from a forensic, regulatory perspective.

Investigations
More political and regulatory impetus from the US against anti-corruption will also reach beyond its shores

Anti-corruption cases have historically been an important type of investigations in the US and globally, for example through enforcement of the Foreign Corrupt Practices Act (FCPA) in the US. While US FCPA enforcement actions in 2021 were lower than in recent years, FRA Partner Jenna Voss believes that this is an area to keep an eye on in 2022. She states, “Transparency International’s recently-released 2021 Corruption Perception Index report shows that corruption remains a challenge worldwide, and continues to threaten human rights globally. The Biden administration has clearly signalled that corruption is an area of national concern in the US, so it seems imminent that enforcement in this area will be a focus over coming years.” The Biden administration’s “US Strategy on Countering Corruption” elevates fighting corruption to a National Security Interest due to the socioeconomic damage it causes on a global scale. The US government’s strategy, which includes measures such as developing international cooperation with enforcement agencies, revising the US anti-money laundering regime, and increasing law enforcement resources, paves the way to more FCPA investigations and related enforcement actions by regulators such as the US Department of Justice (DOJ). As part of its plan to respond to corporate crime, the DOJ announced that, in order to be able to benefit from cooperation credits, companies under investigation must provide all non-privileged information about individuals potentially involved in or responsible for the misconduct in question, as opposed to information only about those substantially involved. This signals a potential increase in cases brought against individuals and a widening of the net of enforcement in 2022.

Stronger demand for accountability over Covid-19 related fraud

Last year in the US, the DOJ announced several convictions related to health care fraud, relief fraud, and kickback schemes exploiting the Covid-19 pandemic. In 2022, we expect more convictions to be announced as Covid-19 fraud continues to be an area of concern to the DOJ and Office of the Inspector General (OIG). “Since the pandemic, the government’s focus has been on managing and providing relief. At some point, this focus will shift to looking back on the funds distributed and how they were effectively used” says FRA partner Samantha Hsu.

Governments in other countries also saw other signs and reports of fraud relating to their own Covid-19 health and business relief programmes in 2021, and we should expect more resources to turn to investigations and accountability in the coming year. In the UK, the government’s efforts in tackling loan fraud will likely be a focal point of the public inquiry into the pandemic response, following criticism by the UK’s National Audit Office and a recent public resignation by a Treasury minister.

Sharper Focus on Fraud in Digital Assets

In a year where digital assets significantly increased in popularity, the US Securities and Exchange Commission (SEC) announced in November 2021 that it had seized $56 million from BitConnect over a $2 billion fraud involving digital assets. While this is the largest recovery of cryptocurrency to date, the SEC brought additional charges against other companies related to fraudulent offerings of digital assets following this matter. Given the increasing adoption of cryptocurrencies by retail investors and the SEC’s interest in a wider scope of market participants such as trading platforms that offer digital assets, we can expect increased scrutiny and prosecutions from regulators in an effort to protect investors from wrongdoing.

Disputes
Demand for accountability, volatile markets and economic recovery will drive more disputes and litigation

ESG factors such as environmental footprint, human impact and transparency are increasingly a priority for many shareholders, investors, employees and consumers. FRA partner Jerry Hansen notes, “Greenwashing, data security, diversity, equity and inclusion, and more… there are myriad factors within ESG positioned to drive an increase in litigation and disputes in 2022”. Along with the FRA disputes team, he predicts that 2022 will see companies being held accountable for their public ESG commitments, for example, as instances of greenwashing are more frequently identified and targeted by whistleblowers. Shareholder activism during the US proxy season is bound to heighten activity in the litigation and disputes arena, as will increasing concerns about human rights violations in supply chains and employee-driven complaints over working conditions, culture, diversity and inclusion.

The general increase in regulators’ appetite to pursue enforcement actions will lead to more regulator-initiated investigations and, ultimately, more litigation. For example, the SEC’s Enforcement Division announced its intention to require that defendants admit to wrongdoing in order to be able to settle with the SEC, which will likely result in increased claims and actions against wrongdoers by injured parties.

FRA Partner Rob Mason highlights that the combination of rising inflation and equity markets nearing all-time highs raises the risk of a potential sell-off, which if significant enough, could trigger a wave of litigation. In such a scenario, companies that went public or raised capital near the top of the market would be particularly at risk of facing forensic scrutiny of financial statements as plaintiffs seek to recover losses. Similarly, further significant sell-offs in digital assets will likely see an increase in litigation directed at their promoters.

Finally, global M&A activity reached record highs in 2021 and is expected to remain high in 2022, naturally leading to an increase in a variety of post-closing disputes related to purchase price adjustments, reps and warranties claims, recognition of Covid-19 impact on financial statements and other related transaction provisions.

Monitorships
More corporate compliance monitors, and in more fields

“US Deputy Attorney General Lisa Monaco’s public encouragement to increase the use of independent monitorships as an enforcement tool signals more stringent measures for companies looking to enter a deal with the DOJ”, says FRA director Anushka Ram, currently involved in one of FRA’s significant monitorship engagements. Rescinding previous guidance that corporate compliance monitors would be an exception, Monaco has encouraged imposing independent monitors whenever appropriate to provide the DOJ with sufficient assurance that a company is fulfilling its compliance and disclosure obligations under a DPA or NPA. Therefore, it would not be surprising to see an increase in the use of corporate compliance monitors. FRA partner Drew Costello believes that President Biden’s strategy to tackle white-collar crime and increasing concern over climate change indicate that “we can expect to see resolutions involving greater use of independent monitors in cross-border matters involving FCPA enforcement and environmental fraud.”

At the same time, international companies should also be alert to monitorships or their equivalent emerging in other major jurisdictions. In Germany for example, where FRA founder Frances McLeod is currently an independent monitor in a DOJ monitorship, the Corporate Sanctions Act first opened the door for independent compliance monitors to be imposed as a condition for deferred prosecution agreements. Now, the recently elected government’s coalition agreement places emphasis on corporate crime by suggesting a significant review of corporate sanctioning and compliance obligations, including on level of sanctions. While this does not necessarily mean that compliance monitors will be introduced in Germany in the near future, it does make it a possibility, especially when considering the recent history of German companies involved in monitorships involving the DOJ and other US and UK regulators.

Regulatory Compliance and Risk Advisory
Meeting stringent regulation with more proactive action and robust data

Key initiatives carrying over from 2021, such as evolving ESG disclosure criteria, updates to data protection legislation and the DOJ’s focus on increasing the robustness of its enforcement activity, will drive companies to be more proactive in 2022.

“Year on year we see corporate ethics and compliance programmes, which are the best line defence in preventing problematic events and reducing the impact of regulatory action, being asked to deliver more with less”, observes FRA partner Simon Taylor. “As regulatory guidance continues to crystallize in 2022, our forensic expertise, data-driven approach and focus on delivery is better placed than ever to support companies in rising to the challenge.” He expects to see companies proactively review their compliance programs and restructure their functions to ensure adequate monitoring of potential misconduct, including that which may take place abroad. In the European Union (EU), the new Whistleblowing Directive brings further elements pertaining to whistleblower protection for companies operating across EU member states to factor into their compliance programs.

Newly-promoted FRA partner Weng Yee Ng predicts “businesses with cross-border operations, especially those operating in countries with weak anti-corruption legislation and enforcement are likely to prioritize corruption risk assessments and monitoring high-risk international transactions”. This follows the OECD’s updated anti-bribery recommendation that requires member states to hold individuals and companies liable for bribery of foreign public officials in international business transactions. “In the US, companies with a history of misconduct or currently subject to an enforcement action will be particularly exposed to regulatory scrutiny due to the DOJ’s focus on companies’ complete criminal, civil and regulatory record.”

In the UK, the FCA’s first criminal prosecution for money laundering failings resulted in a £265.8 million fine against NatWest. Days after, the agency also announced that it fined HSBC £64 million for deficient anti-money laundering processes. Weng Yee added, “these recent developments, coupled with plans to tighten the rules for companies promoting high-risk investments such as digital assets, indicate the FCA’s commitment to enhancing its supervisory role and potentially bring forth further convictions”.