Banks are becoming more vulnerable to seizures of customer assets by the U.S. government, as asset forfeiture actions, an enforcement tool once reserved for drug dealers and money launderers, are increasingly being brought against legitimate companies in foreign corrupt practices cases.
To enforce the FCPA’s anti-bribery provisions, the federal government is authorized to pursue forfeiture — administratively, civilly or criminally — of the proceeds traceable to criminal violations of the FCPA. Proceeds includes any property, real or personal, tangible or intangible, that the wrongdoer would not have obtained or retained but for the crime.
For example, a company’s profits from its contract with a foreign government agency, allegedly obtained as a result of corruptly “wining and dining” the contract procurement official, could be subject to forfeiture.
When the government seeks forfeiture in a criminal proceeding, it can also pursue substitute assets — meaning any of the defendant’s property, not just the specific assets tied to the crime. Banks may, therefore, be vulnerable to having assets seized from their customers’ accounts even if the actual proceeds of the allegedly criminal conduct do not reside in the wrongdoer’s account.
A U.S. government agency can seek an administrative forfeiture with no court involvement. Notice of the forfeiture is provided by a letter or via general publication but because the property being seized most often is the account itself the bank will be aware of the seizure immediately. The bank then has a window of 30 or 35 days, depending on the method of notice, in which to make its claim. Unless a claim is filed by the bank challenging the seizure, the government can simply effect the forfeiture. If the bank files its claim with the agency, the government must pursue a criminal or civil forfeiture proceeding in court.
The civil forfeiture process is the one most likely to be used when monies in a bank account are being seized. The process begins with service on the bank of a court-ordered warrant to seize the monies in the customer’s bank account. If the money is released to the agent executing the warrant, the bank will have no recourse until the government files a complaint.
At that point, any party with an interest in the property is permitted to contest the forfeiture by filing a claim and answering the government’s complaint. The government is required to prove, by a preponderance of the evidence, that the property in issue was derived from a violation, or used to violate, the FCPA. Claimants, such as a bank lienholder, have the opportunity to assert an “innocent owner” defense, which applies if the bank’s interest was secured prior to the crime being committed.
Alternatively, if the bank’s interest in the account arose after the crime was committed, the bank can assert its innocence as a “bona fide purchaser for value” reasonably without cause to believe that the property was subject to forfeiture at the time the bank’s lien interest was acquired. Banks should, therefore, consider including in their loan documents precise, rather than general, language describing the property.
Because criminal forfeiture proceedings are directed at the convicted defendant, not the property, contesting the forfeiture determination is more difficult. Also, substitute assets are subject to forfeiture. Following a conviction, third parties have 30 days to file a petition asserting an interest in the property. The court then conducts a post-conviction ancillary proceeding similar to a civil litigation. The ancillary proceeding is the exclusive means for the bank to challenge a criminal forfeiture. It may not intervene in the criminal case, appeal a forfeiture ruling or bring an independent lawsuit on account of a property interest.
Further, the bank will be able to challenge the forfeiture only if it can prove that (a) it has a superior interest, (rather than any interest) in the property that vested before the crime was committed; or (b) it is a bona fide purchaser for value of an interest in the property and was reasonably without cause to believe that the property was subject to forfeiture at the time of the purchase.
The first basis for claiming ownership — a superior interest vesting before the crime — may be unavailable to a bank in FCPA cases, because the forfeiture provisions also provide that the government’s interest in the proceeds arises “upon the commission of the criminal act giving rise to forfeiture.” Courts have determined that the “proceeds” of a crime by definition do not exist — and therefore an interest in them cannot vest — until after the crime is committed.
Consequently, there generally can be no superior interest in the proceeds that vests before the moment of the crime, at which point the government’s interest in the proceeds vests. In an FCPA matter, because the bribe need not even be accepted to be a violation, the government’s interest vests at the moment the bribe is offered. The government will therefore have a superior interest in profits that enter the secured bank account after that offer.
The second basis — bona fide purchaser for value — may be easier to prove because the secured interest can arise after the crime was committed; to wit, long after the bribe was made. Note that a purchaser with an interest in specific property is more likely to be considered a bona fide purchaser, and unsecured creditors generally will not meet the standard.
Assuming a bank petitioner can establish that it was a bona fide purchaser for value, it must also show that it was “reasonably without cause” to believe that the property was subject to forfeiture at the time the bank’s lien was created. Courts will consider a bank’s relative sophistication and due diligence undertaken in this analysis. For a sophisticated bank, it is assumed that a certain “know your customer” due diligence has been conducted and documented before opening an account or lending money. If this due diligence produced no red flags suggesting criminal conduct, the bank should be able to assert a bona fide purchaser claim. Banks should consider training their loan officers to be able to detect red flags indicating potential FCPA, money-laundering and other violations that could result in forfeiture.
Engage the Government Early On
As soon as a bank learns that a corporate account holder is under investigation or that a civil complaint has been filed against an account holder’s assets, a dialogue can begin with government attorneys regarding the bank’s security interest. Banks should be open to providing documentation establishing the bank as an innocent owner or bona fide purchaser early in the case. Such a dialogue may save the bank aggravation down the road, as the government can be receptive to a bank’s arguments, particularly where they are supported by well-documented prior security interests and where the potential harm to the bank following a seizure could be significant.
Harold P. Reichwald, Esq., Jacqueline C. Wolff, Esq. and Jeremy R. Lacks, Esq. are lawyers at the firm Manatt, Phelps & Phillips, LLP. Reichwald is based in Los Angeles, and Wolff and Lacks are based in New York. For more information visit www.manatt.com.