This transcript was auto-generated using Adobe Premiere Pro.
00;00;01;18 - 00;00;35;20
Gregg N. Sofer
Ever wonder what is going on behind the scenes as the government investigates criminal cases? Are you interested in the strategies the government employs when bringing prosecutions? I'm your host, Gregg Sofer, and along with my colleagues in Husch, Blackwell's White Collar, Internal Investigations and Compliance team, we will bring to bear over 200 years of experience inside the government to provide you and your business thought provoking and topical legal analysis as we discuss some of the country's most interesting criminal cases and issues related to compliance and internal investigations.
00;00;37;00 - 00;00;57;22
Gregg N. Sofer
Welcome to the latest edition of The Justice Insiders. I'm Gregg Sofer your host and I'm lucky enough again to be joined by my colleague Sal Hernandez, who's the senior compliance and ethics advisor here at Husch Blackwell formerly held a very high level position at the FBI, at FBI headquarters, where he's supervised for a few years the FBI's white collar program.
00;00;57;22 - 00;01;08;13
Gregg N. Sofer
And after that went on to be the compliance officer for a major corporation here in the United States, which also had an international presence around the world. Sal, thanks for joining today.
00;01;08;26 - 00;01;09;28
Salvador Hernandez
Thanks, Gregg. Happy to be here.
00;01;11;03 - 00;01;33;12
Gregg N. Sofer
So in our never ending search for understanding what the Department of Justice is doing on the inside, we look at these cues that come out of Washington and really we look at the statements that are made by the leadership in the department. And we often say, you know, the statements are hard to interpret. We don't really know exactly what folks mean.
00;01;33;12 - 00;01;58;19
Gregg N. Sofer
But where are you? Actually, the rubber meets the road is when there's actually a case and you actually see the policies that are announced, implemented. And back in December, the middle of December, Danske Bank pled guilty to fraud related to their AML program. And I was hoping you could just give us a little bit idea about the background of that case before we try to interpret the tealeaves to see what this thing means.
00;01;59;21 - 00;02;32;16
Salvador Hernandez
Yeah, sure. Gregg, thanks. That you mentioned that in December of last year, the Department of Justice, US Department of Justice announced conviction a felony conviction, one count of fraud against Danske Bank, and it had to do with activities of the bank's sub unit in Estonia. And this goes back to a whistleblower report in 2018 that essentially brought forward not sure whether came to the department for or to the Danish government, but brought forward problems in the way the Estonian subunit was running its operation.
00;02;32;16 - 00;03;23;28
Salvador Hernandez
It was essentially pulling in nonresident money, presumably from Russia and other places in the former Soviet bloc, and then ultimately funneling about $150 million worth of that money through U.S. banks. Obviously, the US government got wind of that and initiated an investigation. And finally, after some years of investigation settled globally with Danske Bank, Danske Bank, the SCC and the Department of Justice for the three partners in that global settlement, and they imposed a fine of $2 billion against Danske Bank for essentially failure to control through its Estonian subunits their anti-money laundering provisions, which led to a lot of really bad money being essentially laundered through the bank and some of it into U.S. banking facilities
00;03;24;10 - 00;03;25;22
Salvador Hernandez
as well.
00;03;25;22 - 00;03;55;22
Gregg N. Sofer
So let's talk about a few aspects of that. What do you make of the fact, if anything, that and I read the press release from DOJ that this had been going on since February of 2014. There's not a resolution to this case until December of 2022. Just for our listeners, there's that time period unusual. Unusual. Is that something that you saw, the FBI investigation lasting that long, Anything particular that you make out of that?
00;03;55;22 - 00;04;00;18
Gregg N. Sofer
Just a tremendous amount of time it took to bring this case into a court and resolution?
00;04;01;15 - 00;04;23;26
Salvador Hernandez
It can take a while. Gregg, you know, from your own experience that some of these international cases in particular because you're here dealing with foreign governments, foreign banks, negotiating terms, the whistleblower report came in in 2018. The activity the illegal activity, though, extends far back to 2017. And from what I have read, more or less concluded in 2016.
00;04;23;26 - 00;04;44;21
Salvador Hernandez
So that whistleblower report comes in after the illegal activity has ended. So it looks like it's been going on for a long time. But the investigation itself obviously didn't even begin until the whistleblower came forward. So if you look at it in those terms, three or four years to come to a global settlement is probably not as long as you might even expect given the the actors involved.
00;04;45;28 - 00;05;19;08
Gregg N. Sofer
And I find two of the things here, sort of part of a consistent pattern that we see both in our practice and we see as DOJ continues to bring these kind of cases, one that the case was initiated likely by a whistleblower or at least aspects of the case were initiated by the whistleblower. We've talked in the podcast before about how important it is to have a whistleblower program so that your company can get on top of these kind of problems before you suddenly become the subject of a large government investigation like this.
00;05;19;26 - 00;05;53;15
Gregg N. Sofer
The other piece is the fact that this is a branch essentially of the Danske Bank in Estonia, not exactly the largest company or country in the world. And maybe not the biggest part of their operations, although they were doing an enormous amount of business, apparently. And we've talked about that also extensively, that it's very difficult to monitor your own operations, much less the operations of your subsidiaries or other associated companies overseas or in other various different corners of the world.
00;05;53;15 - 00;06;00;12
Gregg N. Sofer
Do you have any comments on that? So I'll just from your experience, particularly your experience as a chief compliance officer of a giant international corporation?
00;06;01;13 - 00;06;26;22
Salvador Hernandez
Sure. I think what it points to most readily, Gregg, is that you're really responsible for every aspect of your business, even those that are a distance away, and that you don't necessarily believe you have a lot of control over that you even should. It's all going to come back to roost if you're a holding company, especially big corporate hoping company in this country and you've got lots of LLC, these are you, you're ultimately going to own their activities.
00;06;26;22 - 00;06;36;24
Salvador Hernandez
And I think that's what it points to for me is that a company really needs to pay attention to the far flung aspects of its of its enterprise as much as it does what happens at headquarters.
00;06;38;09 - 00;06;57;24
Gregg N. Sofer
So these are the things that are similar. If not identical to a number of other cases and settlements that we've discussed on the podcast. But there is something about this case which certainly caught your eye and I think has caught the eye of a number of other people that's a little different and maybe a groundbreaking development in.
00;06;58;14 - 00;07;31;09
Salvador Hernandez
What's really different. What caught my eye, Gregg, about this one is this global settlement includes language that I don't think we've seen before. We're used to seeing in settlement agreements, provisions now about company compliance programs. That's not unusual. Those have been in place for a while. Typically, they're under a schedule called Schedule C in the settlement agreement, and they will often cover the nature of the quality of your compliance program, What's expected of you, what the regulators or law enforcement agencies might have found that was lacking this one added another dimension.
00;07;31;22 - 00;07;57;10
Salvador Hernandez
It essentially said that going forward, Danske Bank is agreeing that it will put in place an assessment program of some kind to ensure that its executives are in fact monitoring compliance within the banks. And if they don't, that they could lose their bonuses, they could lose some amount of their executive pay if it's adjudged at some point that they have failed in that in that effort.
00;07;57;19 - 00;08;23;29
Salvador Hernandez
What they're required to do by way of basically a performance review document, they're required in an affirmative way to manage and see to the to the compliance program. And if they don't, they could lose money. And very quickly, just to make this point, I think it tracks perfectly with what we've seen department over the past year, especially regarding executive pay being used to incentivize good behavior and to disincentivize bad behavior or misconduct.
00;08;24;12 - 00;08;34;11
Salvador Hernandez
It's I don't think any mistake or frankly accident that you suddenly see written into a global resolution language that specifically addresses executive pay.
00;08;35;27 - 00;09;02;25
Gregg N. Sofer
So this sort of dovetails with, again, something we've covered on the podcast before of the DOJ recruiting and really conscripting an army of folks inside corporate America to do the work of policing themselves versus having the government have to do it from outside. And obviously compliance is a huge part of that. Department has hired and promoted into very significant positions in the department.
00;09;02;25 - 00;09;21;02
Gregg N. Sofer
Now former compliance officers, people who know this business and they must think I'm curious, agree with this, so that this is the kind of incentive that might actually make a difference because it actually hurts people in their pocketbook if they don't do what DOJ is going to demand.
00;09;21;25 - 00;09;53;27
Salvador Hernandez
I think that's exactly what this is about. Gregg, the the guidance that's come from the Department of Justice and the federal sentencing guidelines and I think as well from CC balances, that tone at the top is very important that what people at the very top say and do matters. And if you're essentially required as a leader in a company to enforce comply, it's what better way to do that than to make it attach itself to your pocketbook directly if you don't?
00;09;53;28 - 00;10;08;00
Salvador Hernandez
I think what they're saying is we believe the most important proponents of compliance or at the very top of an organization, and if we tie their their compensation to their performance, we're going to see better results and we're going to see companies that are more compliant.
00;10;08;00 - 00;10;37;16
Gregg N. Sofer
So what do you think? I mean, it's one thing to say that you'll you won't get your bonus if you don't actually support and actually pay attention to compliance issues and monitor the people underneath you. But how is it that you actually score this? I mean, how does one implement this in a company? They obviously have gone to great lengths to co-opt great in this matter with the government.
00;10;37;16 - 00;11;05;14
Gregg N. Sofer
There's a long list of things that they did to try to cooperate with the government, including turning over documents that were not available to the U.S. government. Witnesses were made available overseas that would not necessarily been made available to the US government. So they went way out of their way to cooperate. But now going forward, they have committed essentially to changing their compliance program and specifically to making sure their executives compensation is tied to it.
00;11;05;26 - 00;11;08;10
Gregg N. Sofer
How do you how do you implement that and score it?
00;11;09;13 - 00;11;26;02
Salvador Hernandez
Well, there's the rub, Is there? I I think the message here is we're not we're not going to tell you how to do this. We're eventually going to look at how you did this. If there's another issue or in the course of our monitoring ship, we're probably going to dip into what you're doing from time to time and take a look at it.
00;11;26;02 - 00;11;52;12
Salvador Hernandez
But what do you do to ensure that this is happening? How do you write this into a performance appraisal? I don't think you're ever going to see that kind of specificity and DOJ guidance. I think companies given this are probably well advised to simply sit down, maybe take a look at the current assessment documents and tools that are used probably with H.R., and most companies see what they think they can do to actually actually effect change.
00;11;52;18 - 00;12;11;20
Salvador Hernandez
What can they do in the way of compensation? They actually get the attention of the executives within the company and then right to their end is probably going to be, I would say, across corporate America, if we start to see these, there will be as many versions of this as there are corporations on the receiving of and receiving end of this kind of instruction.
00;12;11;28 - 00;12;17;21
Salvador Hernandez
I don't I don't think we're going to know that, Gregg, until we see a little bit more of this. Again, I think this is probably the first instance of this.
00;12;18;14 - 00;12;44;20
Gregg N. Sofer
So if you're a general counsel or chief compliance officer inside of a major or even medium or small sized company, do you think this is enough, this first shot across the bow to actually include in your compliance program a provision that says, hey, we're now going to tie your compensation to the effectiveness and your particular effectiveness in abiding by promoting the compliance program?
00;12;45;10 - 00;13;08;05
Salvador Hernandez
I think if you're paying attention, this will get your attention. And it's what's interesting here is that this is the first time, again, that we think we've seen this written into a settlement agreement. But the department has been talking about this since probably August of 2022, when the deputy attorney general, Lisa Monaco, first started mentioning incentivizing and disincentivizing with executive pay and clawbacks.
00;13;08;05 - 00;13;37;16
Salvador Hernandez
And we've seen some of that already. So I think what'll happen here is companies will start to pay attention. I think it will will get some attention. And I think they will start to sit down and try to work this out. And I think that's probably the practical advice to come from this. Whatever you do, do something. Because if it is your your turn in the chute and the regulators do come knocking, they're probably given what they've heard already for the last year for the department about disincentivizing and incentivizing.
00;13;37;16 - 00;13;45;22
Salvador Hernandez
And then this the settlement agreement, they're probably going to expect that you have picked up on this and are now working towards some scheme of your role within your company.
00;13;47;03 - 00;14;13;19
Gregg N. Sofer
You mentioned clawbacks on one of our prior episodes, we talked about the fact that you could join a company and be, let's say, be the chief compliance officer, make a bunch of money, leave the company potentially even, and then have the company if something went wrong, try to claw back some of your compensation. Do you see any significant substantive difference between the kind of provision that was included in this settlement agreement and a clawback agreement?
00;14;13;19 - 00;14;26;02
Gregg N. Sofer
And do you think, generally speaking, this is going to make hiring folks in the C-suite even more difficult, where people now have yet another box that they have to check off to get a bonus?
00;14;27;00 - 00;14;50;24
Salvador Hernandez
What's different here from a clawback is that as far as I know, Gregg, I could be wrong, but I don't know that there was anything taken from anybody at Tosca. They fully cooperated. They got full cooperation credit for the effort with the efforts that they made, which you mentioned earlier. So I think this is a very forward looking process as opposed to a retrospective looking process, which tends to be what clawbacks are.
00;14;50;25 - 00;15;20;14
Salvador Hernandez
You made a mistake. You didn't do what you should have done. You made a lot of money. As a result, we can look at the McDonald's case that has been all over the newspaper lately, and we're going to take that back from it. You're not going to benefit from your lack of attention to a compliance program. So I think this is an effort to get it into a company's psyche that this should just be part of the way you run a company, that you should tie compensation to performance in the compliance area in the same way that you tie compensation to performance in every other area.
00;15;20;22 - 00;15;46;02
Salvador Hernandez
The bottom line and the other thing that you're measuring that is associated with your your pay or your bonuses, do the same thing for compliance. And I do think that on the whole, this is probably good guidance. I think it probably will improve the posture of companies to the extent that they're paying attention or they do. Right. They didn't do executives, executives assessments because they will have no choice but to pay a little closer attention and probably to empower compliance programs.
00;15;46;14 - 00;16;07;24
Salvador Hernandez
To your question about whether or not this affects a decision as an executive to be an executive to take on that risk, I suppose I would say if you do it the way you're supposed to do it, meaning you pay attention to this as much as you pay attention to the bottom line, you're probably not in real risk, because I do believe that the department You might disagree, Gregg.
00;16;07;24 - 00;16;22;00
Salvador Hernandez
I do believe that generally the department gives credit to good faith efforts. And if they see that there is a good faith effort, if someone is ultimately inquired upon or investigated and they see you've done these things, that you've really been making a good faith effort, it's only going to work to your advantage.
00;16;23;03 - 00;16;51;07
Gregg N. Sofer
Yeah, I mean, I guess what I would say about that is sort of depends. It sort of depends on how much of a car wreck the ultimate violation is right ahead of that. I'm not sure these days with Russia and all the issues with Russia when there's, you know, hundreds of billions of dollars moving in a direction where you're they weren't really investigating where it was coming from and making representations about how carefully they were looking at that money.
00;16;51;28 - 00;17;17;17
Gregg N. Sofer
I'm not sure whether the government would give a whole lot of breaks. I don't it's also hard to tell from a deal like this how much of a break ultimately they were given for all this cooperation. We can't really see what the government ultimately first demanded or could have ultimately done. And I guess, you know, it's possible that under certain circumstances, individuals could be facing jail sentences there.
00;17;17;17 - 00;17;40;19
Gregg N. Sofer
I think obviously, if there's a good faith effort to not break the law, if the government has an intent or a center problem. But I think generally speaking, depending on how bad the damage is, how many people get hurt, how extensive the problem is, I think that would be a major factor in determining how much allowance and break essentially is given to the bad actors.
00;17;41;13 - 00;17;43;10
Salvador Hernandez
That's right. And I'm sorry. Go ahead.
00;17;43;14 - 00;17;44;02
Gregg N. Sofer
No, go ahead.
00;17;44;15 - 00;18;09;18
Salvador Hernandez
We're just going to say that importantly, I think and it's a distinction needs to be made here. We're looking at a company, a bank in this case that didn't apparently have any of these provisions in place prior to the finding that they had engaged through the Estonian subunit in some illegal activity. So, again, the thinking, I think, is that do this now and maybe you don't end up with an Estonian subunit because you are in fact paying attention if you put meaningful, meaningful requirements in in terms of performance.
00;18;09;18 - 00;18;16;13
Salvador Hernandez
I think that's what this is, is is a proactive step that perhaps you don't have the the Estonian subunit problem in the first place.
00;18;16;19 - 00;18;41;12
Gregg N. Sofer
Another question arises in the context of executive compensation and regulatory compliance. Obviously, the focus of the early DOJ efforts and certainly the focus in this particular case in the Danske Bank settlement is on the C-suite and these upper level individuals. Question is how far down the corporate ladder are these efforts ultimately going to go? Will we see, for example, compensation of middle managers come under government scrutiny?
00;18;41;24 - 00;18;48;15
Gregg N. Sofer
Will compliance play an ever larger role in the performance reviews of the junior people within an organization? What do you think about that?
00;18;49;22 - 00;19;17;07
Salvador Hernandez
I think I think in the current climate, things are moving in this direction, I believe. But I think in the current climate it's probably a bridge too far to expect that at every level in the company you'll see compliance performance metrics written into performance appraisals. But there is certainly movement in that direction because again, the belief is that most important that the team at the top is walking the walk, but that people along the way below are also doing that.
00;19;17;07 - 00;19;43;03
Salvador Hernandez
And again, the best way to motivate, incentivize behavior is by tying it to pay. That's that's the belief anyway. That's what we're operating under, what we see, things like that. So I think over time, Gregg, I think you will see more and more companies write compliance in performance in the compliance area and is in the same way that anything else is written into your performance appraisal, whether it's your ability to communicate orally, your resourcefulness, any number of things that you see in performance appraisals.
00;19;43;15 - 00;20;09;15
Salvador Hernandez
I think your performance with respect to legal and regulatory compliance could get written in this. Interestingly, this case, this global settlement does not apparently impact in any way other folks, other than executives within the bank. It does not look like it applies to managers, manager level employees. I think the effort will always be let's start at the top, because we think that's what we're going have the greatest impact.
00;20;09;15 - 00;20;39;23
Salvador Hernandez
The people at the top are doing the right thing and insisting on it. People below very, very naturally. Listen, I'll just give you one quick story. As compliance officer in the company where I worked before, I was always happy when as compliance officer, someone in a leadership role took my role. So when it was time to talk about this thing or that thing or training that was coming out and that I needed people to get get through and complete compliance training, it was one thing to hear from me because I was the guy that had the compliance ticket, but then it was just me.
00;20;39;27 - 00;21;00;29
Salvador Hernandez
People thought they had to respond to me as the compliance officer. They were responding to the company or to the leadership. Every time a leader talks about things like this, it doubles or triples or quadruples the impact. So I always I gladly gave up my name on an email. If someone in a leadership role was willing to send that note out saying it's time to complete compliance training, I loved it.
00;21;00;29 - 00;21;05;27
Salvador Hernandez
Because then the people that received that understood that this was important to leadership, not just important to me.
00;21;07;09 - 00;21;35;16
Gregg N. Sofer
I agree with that. But I do think there will be over time, to the extent that this kind of provision is found in C-suite compensation packages, I can imagine this trickling down to lower and lower levels of employees and corporations. I mean, again, after all, if what really matters to folks is their bottom line pocketbook, you want to incentivize middle managers, you want to incentivize business leaders.
00;21;36;16 - 00;21;59;18
Gregg N. Sofer
The way to do that, arguably, is to force their compensation to align with how you want them to behave. And so I would be I'd be wary of this creeping over time further and further down the corporate ladder. It really is an amazing case. And in the end that this is the first one that we've seen that includes this kind of provision in the settlement agreement.
00;22;00;05 - 00;22;27;03
Gregg N. Sofer
If you think about it, I mean, this is a foreign bank, their Estonia branch or their Estonia operation, and you have the United States government coming in here with obviously much cooperation with folks in Denmark and with the SEC, by the way. So this is something else we've talked about a lot. The fact that it's hard to find a single agency or a large scale investigation like this anymore.
00;22;27;03 - 00;22;55;16
Gregg N. Sofer
You've got multiple U.S. agencies and often multiple foreign government agencies also looking at these large international corporate activities. But I just find it amazing that those the first one of these is this foreign bank on foreign soil operating in not exactly the most well known place in the world. And now the bonuses of the CEOs of this bank are essentially dictated by their agreement with U.S. authorities.
00;22;55;16 - 00;23;01;00
Gregg N. Sofer
It just shows you the far reaching power of the Department of Justice and the SEC in the United States.
00;23;01;19 - 00;23;35;18
Salvador Hernandez
Absolutely. This is the the long arm of the law and it's at its at its longest, I would say, and not surprisingly, in some ways. Surprisingly in some ways, because you would you would wonder, how do we get here? How do we have this kind of influence in Denmark? But if you think about the fact that this is, I think, an otherwise reputable, huge banking operation and the leverage that the Denmark or the Danish government has over Danske Bank, I'm sure that there were a lot of people in agreement that they would sort of take their medicine in order to be able to continue to operate the way they have been and that we end
00;23;35;18 - 00;23;46;25
Salvador Hernandez
up with these kinds of results, which again, we're talking about the Estonian operations of a Danish bank in the U.S. and the aspects, not the SEC, the FBI, the SEC, the Department of Justice are right in the middle of it with the Danish government.
00;23;47;12 - 00;23;48;17
Gregg N. Sofer
Yeah, pretty amazing.
00;23;48;22 - 00;23;49;11
Salvador Hernandez
Yeah.
00;23;49;11 - 00;24;05;14
Gregg N. Sofer
Thanks, Sal, as always, a keen and piercing intellectual thoughts. Much appreciate your input and thanks for all that you do. We will link to Sal’s bio in The Justice Insider's podcast notes.
00;24;06;11 - 00;24;07;27
Salvador Hernandez
Thanks for the opportunity, Gregg. Take care.
00;24;08;16 - 00;24;21;14
Gregg N. Sofer
Thanks for joining us on The Justice Insiders. We hope you enjoyed this episode. Please go to Apple Podcasts or wherever you listen to podcasts to subscribe, rate and review The Justice Insiders. I'm your host, Gregg Sofer.
00;24;21;14 - 00;24;25;01
Gregg N. Sofer
And until next time, be well.