The Discreet Science
United Technologies Fined $75 Million for Chinese Helicopter Caper
United Technologies agreed to pay a $75 million fine yesterday under a deferred prosecution agreement over Pratt & Whitney Canada’s violation of US Arms Control laws. The company helped the Chinese build an attack helicopter.
In an email that the Justice Department said was sent on Sept. 12, 2001, Pratt Canada’s export manager cautioned that the company had to be careful that the helicopter program with China not be presented as military. [...]
By 2004, executives in the U.S. offices of Pratt and United Technologies became aware of the possible breaches.
“I would say the ’2 seat version’ is code for an attack helicopter,” a United Technologies legal official wrote in an email. “This has the possibility to be very controversial…Any concerns?”
One of the key features of the story is how the violation came to light. An outside organization conducted its own research on the company’s activities which pushed Pratt Canada to reveal the problems to the US government:
The companies only disclosed the breach to the U.S. authorities in July 2006 after a Scandinavian group that offers advice on socially responsible investing raised the issue with United Technologies, saying they were “carrying out in-depth research,” according to an email cited by the Justice Department.
The Justice Department said the company’s disclosures between July and September 2006 contained a number of false statements, including that officials at UTC and its two units companies were unaware the Z-10 program was military in nature.
Under a deferred prosecution agreement, United Technologies will pay $20.7 million to the Department of Justice and another $55 million to the State Department for hundreds of other arms export law violations that turned up in the wake of the Chinese helicopter investigation. Up to $20 million of that can be suspended if applied to compliance measures.
All of this underscores our continuing emphasis on developing a First to Know capability within your organization. Disclosures made voluntarily carry much greater weight with regulators.
International AML Watchdog Updates “Black List”
The Financial Action Task Force (FATF) added Ecuador, Yemen and Vietnam to the “black list,” a list of those countries that are high risk and non-cooperative in the global fight against money laundering and terrorist financing. The black list identifies jurisdictions with strategic deficiencies in their anti-money laundering and counter terrorist financing controls. Ecuador, Yemen and Vietnam join a list of 18 others.
Among the worst countries identified on the blacklist are Iran and the Democratic Republic of Korea. FATF is “call[ing] on its members and other jurisdictions to apply counter-measures to protect the international financial system from the on-going and substantial money laundering and terrorist financing risks” that emanate from these nations.
FATF is an intergovernmental anti-money laundering organization that combats money laundering and terrorist financing worldwide. The United States is one of the 33 nations that are members of the organization, which has developed a series of recommendations recognized as the international standard.
One jurisdiction that benefitted from the updated list was the Philippines, which FATF moved to its “gray list” which singles out countries that are making sufficient progress in their action plans. The Philippines had previously been on the “dark gray list” and would have slipped down into the black list if significant measures had not been taken. Other countries added to the gray list were Afghanistan, Albania and Kuwait.
No matter which list these countries appear on, the international financial community recognizes that all of these jurisdictions need significant improvement in the area of anti – money laundering and anti-terrorist financing controls. If you provide services or products to clients in any of these jurisdictions, you must ensure you have done an adequate, updated risk assessment to include the geographic risk. In addition, these companies should be considered a high-risk geography and as such transactions to and from should be appropriately monitored to identify potentially suspicious behavior.
K2 can work with you to mitigate these risks by assisting in developing and executing an enterprise wide risk assessment that measures inherent and residual risks for customer, products, services, geography and transactions. K2 also has subject matter experts that can assist in reviewing your current transaction-monitoring environment to ensure the proper risk assessments, parameters and thresholds are implemented.
Lessons Learned from ING’s OFAC Violations & $619m Payout
On June 12th, the largest settlement was made between a bank and authorities over a clear violation of U.S. economic sanctions. ING Bank is paying a record $619 million dollar settlement after a joint investigation between the Department of Justice (DOJ) and the Manhattan District Attorney’s Office (DA) identified the bank moving billions of dollars through the U.S. financial system on behalf of Cuban and Iranian clients.
In a deferred prosecution agreement (DPA), ING admitted that on nearly 20,000 occasions between the early 1990s and 2007, it systematically violated both New York State and U.S. law by intentionally manipulating financial and trade transactions to remove references to Iran and Cuba. This is a practice that is more commonly referred to as “stripping.”
According to the DPA, ING’s conduct caused U.S. correspondent banks to process transactions that their OFAC filters would have otherwise caught and either blocked or rejected. The conduct happened at ING bank locations around the world, with the knowledge, approval and encouragement of senior corporate managers and legal and compliance departments.
The ING case is a clear illustration of something that OFAC/AML compliance officers need to heed: these types of investigations remain on the forefront of state and federal prosecutors’ offices.
The Manhattan DA and the DOJ have secured 1.8 billion dollars in settlements on stripping cases since 2009. These prosecutions have resulted in DPAs with Barclays (a $298 million penalty in 2010), Credit Suisse (a $536 million penalty in 2009) and Lloyds Bank (a $350 million penalty in 2009).
The government is not going to rest on its laurels. And the trend suggests, these types of prosecutions will only increase. It is not uncommon for a prosecutor’s investigation of one bank—foreign or domestic—to generate evidence that leads to opening an investigation into another bank. Although it was determined in the above cases that the U.S. correspondent banks were unaware of the criminal activity, problems could arise if prosecutors discover that a given correspondent bank did not have an adequate filter system or training program in place.
Furthermore, OFAC has demonstrated that it is widening its net from banks to others in the financial services arena. Just weeks ago, on May 21st, OFAC reached a $25 million dollar settlement with Genesis Asset Managers, LLP (“GAM”) for GAM’s alleged violation of the U.S sanctions against Iran in August 2007. This was the first case involving an investment fund and manager. It is doubtful that it will be the last.
Whether you are a financial institution or an investment fund, the above cases underscore the importance of understanding your OFAC requirements and having a sound OFAC compliance program. Sanctions violations, whether intended or unintended, can expose your organization to large civil fines, criminal prosecution and reputational damage.
K2 has the expertise and the technology to provide comprehensive products and services tailored to your specific institution. These include: designing a sanctions program that establishes appropriate filtering parameters and developing investigative protocols to clear or escalate potential OFAC violations; assistance with vendor selection; and independently investigating historical transactions to ascertain whether they violated OFAC requirements. K2 can work with your team to mitigate these risks.
Gupta Conviction Shows the Importance of K2 Analytics
The conviction of Rajat Gupta on insider trading charges late last week represents a significant change in the nature of the government’s approach to insider trading cases. The jury was presented with a pattern of activities—phone records, trading logs and witness statements—that told a compelling story even if though there was no direct evidence tying Gupta to the trades or any personal profit.
It took the government four years and countless man hours to assemble the timeline that destroyed Gupta’s reputation and dismantled his personal American-dream story.
K2 Intelligence has developed and launched K2 Analytics to provide corporate and private clients with a superior capability to any other platform available to private clients for assembling a narrative from internal data and outside news sources. K2 Analytics can create from communications records and news sources the same type of convincing timeline that was so determinative in the Gupta trial.
The New York Times points out that the jury was predisposed to Gupta and reluctant to convict:
“We looked at him and what he had done professionally,” said [Rich] Lepkowski, of Ossining, N.Y., who turned 51 today. “We were hoping he would walk out of this courthouse.” [...]
“On the counts we convicted, we felt there was enough circumstantial evidence that any reasonable person could make that connection,” Mr. Lepkowski said.
Of course, if someone as prominent and seemingly above reproach as Rajat Gupta is found to have violated the confidentiality of the board room, the Financial Times is right to ask:
So how many other board members of S&P 500 companies are out there, talking as openly about confidential information as Gupta? It seems improbable that he was the only one.
The government is surely asking itself the same question. Any organization of a significant size should be prepared to confront this issue as well.
K2 Analytics presents an opportunity for a firm of any size to interrogate its own data before the government decides to. Hidden in the massive haze of data any organization generates is important information that was previously too hard to find or expensive to unearth. K2 Analytics significantly changes that.
“K2 Analytics delivers the first private sector applications of a sophisticated toolkit of software platforms which were only available to government up until now,” says Mitch Silber, Executive Managing Director at K2 Intelligence and the former head of the NYPD’s terrorism intelligence analysis unit. “In their government forms these powerful platforms became our primary analytic and investigative tools. I’m confident that clients will be impressed by their ability to find the most hidden details with surprising speed and at a very attractive cost.”
The technology has already been used in a significant asset recovery case where K2 Analytics has been able to take telephone and cell phone records that were previously deemed impractical for investigative purposes and yielded meaningful and effective information for the client in a very short period of time.
A Conflicted Jury Finds Rajat Gupta Guilty (DealBook/NY Times)
How Many Other Rajat Guptas Are Out There? (Business Blog/Financial Times)
The Krolls Stick with the Rudins
Crain’s New York Business covers K2 Intelligence’s move to new offices in 845 Third Avenue, a building owned by the Rudin family:
“Being in a Rudin building is something we feel really comfortable with,” said Jeremy Kroll, who, together with his father, Jules, co-founded K2 Intelligence, a risk management firm, and Kroll Bond Ratings, after the original firm was sold to Marsh & McClennan in 2004. “We are a family business; They are a family business.”
The two companies will take over the entire fourth floor for 11 years in a sublease deal from The Conference Board. Asking rent for the transaction, which covers 25,000 square feet, was in the high $40-a-square-foot range. That is almost double the amount of space the two firms share at 599 Lexington Ave.
“We are just packed to the gills,” Mr. Kroll said, noting the company now has about 100 people in just 13,000 square feet of space.
The Krolls Stick with The Rudins (Crain’s New York Business)
K2 Global Consulting rebrands as K2 Intelligence
Unveiling new logo, website and name
New York June 12, 2012 – K2 Global Consulting announced today that it is rebranding itself as K2 Intelligence. The name signifies the consultancy’s focus on providing critical business intelligence for its clients, while maintaining the firm’s identity with the combination of the initials of its founders, Jules and Jeremy Kroll.
“Our branding focuses our corporate identity on the consistent theme of our work: providing deep insight across a range of client needs,” said Jeremy Kroll, CEO of K2 Intelligence. “We want our clients – and our potential clients – to grasp immediately that our goal is to offer the greatest analytic power with the speed and agility of a singularly focused firm.”
Formed in September 2009, K2 was established by senior individuals from Kroll, including Jules Kroll, seeking to work in a more versatile, less monolithic investigative arena, with greater scope for creativity and more agile development of modern solutions adapted to the increasing reliance on technology in the modern digital world.
K2 has offices in London, New York and Madrid, and a network of operatives throughout the globe.
The new K2 Intelligence can be found at: K2Intelligence.com
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About K2 Intelligence:
K2 Intelligence provides specialised risk services and solutions to corporations, sovereign nations and individuals. With offices in New York, London and Madrid, we use our expertise in transactional risk assessment, corruption and fraud investigation, due diligence, regulatory compliance and asset recovery to help clients navigate today’s increasingly complex global business environment.
K2 Intelligence’s principals, Jules B. Kroll, founder of Kroll Inc., and Jeremy M. Kroll, former managing director at Kroll Inc., have spent two generations cultivating a far-reaching network of specialists in finance, law enforcement, forensic accounting, security and legal services, allowing them to offer an unrivaled level of service to K2 Intelligence’s clients.
Media Contact:
Emily Harris
Global Strategy Group
(212) 235-6239
