LEGAL RISKS TO INVESTORS FROM FOREST CRIME A Legal Analysis Beyond Environmental Laws | December 2018

Executive Summary

Deforestation is not only a global environmental problem that requires strong action. It is also a risky activity to support financially. This is true across all categories of asset owners and managers in the United States and globally. Investors may not realize that they are supporting deforestation. Despite recent progress, a continued lack of transparency in sectors most at risk of illegal forest clearing, such as cattle, oil palm, soy and timber, means that investors may not know the extent of their exposure to material financial risks from deforestation through companies they invest in. This does not inoculate them, however, from the financial impacts they incur when these material risks are realized. Investors should therefore take these risks seriously. One specific material risk worthy of examination is legal risk. Not all deforestation is illegal, but the scale of illegal logging is vast – between $50 and $150 billion per year according to Interpol.1 While companies engaged in the forest, food and land sector should act in accordance with the law, asset owners and managers cannot assume that is always the case. One potential consequence is exposure to legal action for producers involved in forest crimei, companies who interact with these producers in their supply chains, or the financiers and investors who support these activities financially. Currently, efforts to combat deforestation are focused on enforcing environmental statutes, such as the Lacey Act or Endangered Species Act. The Lacey Act covers trade in illegally acquired wildlife, plants and (since 2009) harvested wood products, and the Endangered Species Act bans trade in endangered species.2 These statutes have had considerable impact in limited cases. For example, in February 2016 U.S. firm Lumber Liquidators paid over $13 million in criminal fines and forfeited assets related to illegal imports of hardwood flooring.3 NGOs and investigators are deploying considerable energy and resources to catching perpetrators of forest crime using the Lacey Act or other environmental statutes. Investors should be aware of the potential reach of the Lacey Act and the legal risks it might entail for companies they invest in. This report does not focus on environmental statutes, however, but rather the broader toolkit to which U.S. prosecutors and other U.S. enforcers and attorneys have access to pursue perpetrators of forest crime. Climate Advisers conducted a project during 2018 exploring the extent to which the full range of laws could be used to pursue forest crime (this report will term this suite of statutes “generally applicable laws”). We discovered increasing NGO scrutiny and prosecutor interest as to forest crime, and a willingness to go beyond environmental laws to redress and prevent forest crime. This is materially relevant to asset owners and managers. A first step investors should take is understanding the full suite of U.S. laws that could be relevant in cases of forest crime. We lay out the legal landscape in this report as a guide to investors to know the law, and how it might apply to their investments related to forests. Investors should take note of these legal risks before they suffer economic and reputational harm, or even incur legal liability themselves.

i This report uses the term “forest crime” to encompass a range of illegal activities related to forests, including illegal conveyance of forest concessions, illegal land clearing, deforesting protected lands, illegal labor conditions, attempt to obscure the origin of forest commodities, etc. This report focuses on instances where these activities occur outside the United States, but jurisdiction is established under U.S. law. This report examines the legal potential of various U.S. statutes, though it is non-exhaustive of potentially relevant statutes. We focus on the following laws: • Foreign Corrupt Practices Act • Travel Act • Wire and Mail Fraud • Anti-Money Laundering Laws • Conspiracy to Defraud the United States (Klein Conspiracy) • Obstruction of Justice • Securities Fraud/Shareholder Actions • Unfair Competition Laws • Dodd-Frank Act – Securities and Exchange Commission Whistleblower Law • Sanctions under the Global Magnitsky Act The report also looks at additional legal trends in the United States that are relevant for asset owners and managers concerned about the potential legal risks from forest crimes for their portfolios. Based on our examination of these statutes and their potential relevance to instances of forest crime, two key findings relevant for asset owners and managers emerge: 1. Asset owners or managers face risks from forest crime broader than exposure to environmental statutes. Legal risks could be indirect, if a company an asset owner or manager has an interest in violates the law, and its financial performance suffers as a result. The risk could also materialize directly if the asset manager itself is legally liable. 2. Because a link between forest crime and U.S. generally applicable laws exists, asset managers and owners should be diligent in reducing their potential exposures to legal action before they materialize.

Next Steps This report lays out the current suite of relevant U.S. laws in a neutral manner, subject to further legal and factual analysis. We do not assume particular laws apply in all instances, or that a law applies to any instance in particular. We defer examination of particular cases to asset owners and managers in their relationship with companies they financially support. We do urge a proactive approach from asset owners and managers to uncover these risks, however. These laws present a potential risk that, if ignored, could expose asset owners and managers to financial cost, reputational damage, or even legal liability. Finally, investors should know that the legal risks are increasing. Data is not yet fully transparent but is improving rapidly. This heightens the possibility that fact-finders can establish linkages to illegal activities. Prosecutors are increasingly motivated also, and there is growing momentum to pursue forest crime using all legal tools available – therefore, investors should act before it is too late.

Background

This report considers how a broad range of developed nation laws create potential liability in connection with deforestation and the various criminal or otherwise wrongful acts related to it (collectively, “forest crimes”) taking place in developing nations. Groundbreaking investigative non-governmental organizations (“NGOs”) have long been exposing how corruption, bribery, money laundering, fraud, land confiscation, tax evasion, forced labor, other human rights abuse, and still other illegal acts accompany and accelerate deforestation in nations such as Indonesia, Malaysia, Brazil, Peru, and Congo. This memorandum focuses on the potential that those responsible for this wrongdoing will face consequences from the laws and courts of the United States. As a background matter, enforcement of per se environmental criminal law against forest crimes has advanced appreciably over the past several years. Legally, the case resulting in a 2015 guilty plea by Lumber Liquidators, Inc. illustrated how the facts of the Lacey Act violations could be re-framed as a violation of the generally-applicable statute criminalizing false statements on the customs declaration used to import the products.4 Other U.S. laws, however, may apply to the broader universe of activities in the deforestation process and their culpable actors, including the financiers, logging and plantation companies, corrupt officials, and importers and marketers of commodities, to name just a few. The following is a summary discussion of key existing laws and trends that may lead to greater enforcement of those laws. The summary of law includes both substantive laws defining criminal prohibitions and civil wrongs, and the second-order laws and principles created to enhance or extend their enforcement. There are, naturally, many nuances and common defenses in the application of each law that would require further exploration while considering particular cases.

Existing U.S. Laws Potentially Applicable to Investors and their Investments

There are environmental laws such as the Lacey Act and the Endangered Species Act specifically aimed at combatting environmental violations. However, environmental crimes are often accompanied by other violations – bribery, money laundering, bank fraud, among others. This section provides a detailed summary of the generally applicable laws that could be applicable in instances of forest crime.

Foreign Corrupt Practices Act

• Hypothetical Example: An U.S. investor funds an agricultural commodity producer knowing that it will offer bribes to foreign officials to turn a ‘blind eye’ to illegal forest clearing. Alternatively, a foreign subsidiary of a publicly-traded U.S. agribusiness fails to prevent and regularly pays such bribes to foreign officials, and then accounts for the payments as “commissions” in entries that are consolidated into the parent’s books. Because of its global reach and robust enforcement, the U.S. Foreign Corrupt Practices Act of 1977 (“FCPA”) has major, if untested, potential in application to forest crime. As alleged in numerous NGO reports, bribery of developing country officials occurs in multiple ways along the path to deforestation -- and then after the fact, to profit from the forest’s clearance. Bribes help unscrupulous companies to obtain forest land rights, to frustrate enactment and enforcement of relevant regulatory regimes, and to export and market illegally-trafficked agricultural products. Two branches of the FCPA, the “anti-bribery provisions” and the “accounting” provisions, each with various sub-branches, have the capability to subject to prosecution bad actors who meet the law’s jurisdictional provisions and offense elements.5 The government can enforce the FCPA in a criminal action (brought by DOJ) or in a civil or administrative action in cases involving public companies (brought by the U.S. Securities and Exchange Commission, or “SEC”). There is no private right of action, although as discussed further below there are ways that private parties can plead FCPA violations into other kinds of civil actions. The first branch, consisting of the anti-bribery provisions, generally prohibits certain persons from “knowingly” authorizing, offering, or paying “anything of value,” whether directly or indirectly, to “foreign officials” corruptly in order to influence that official in his or her official capacity or to secure some improper advantage in order to obtain or retain business.6 This basic prohibition (which has certain limited exceptions and defenses) applies to the actions of: (i) companies that are issuers of securities publicly-traded on U.S. markets, and related corporate individuals and agents; (ii) other U.S. natural persons (including citizens and residents) and businesses formed or headquartered in the United States, called “domestic concerns”; and (iii) anyone committing the offense while within the territory of the United States.7 Establishing a violation requires the scheme’s use of the means and instrumentalities of U.S. commerce except in the cases of U.S. natural persons and U.S.-formed or -headquartered businesses.8 A criminal violation of these provisions by a natural person (but not a corporation) requires proof of the additional element of “willfulness,”9 i.e., meaning here having a specific intent to commit an unlawful act.10 Despite some complexity of the FCPA at its margins, there is much conduct that is straightforwardly prohibited, and only a few definitional questions merit attention in this summary as being most relevant to forest crime: • “Issuers.” Those "issuers" subject to the prohibition of bribery include not only U.S. companies publicly trading their shares on U.S. national stock exchanges or on the over-the-counter market and required to file reports with the SEC, but also foreign companies meeting those requirements, and on whose behalf U.S. banks have issued American Depositary Receipts (“ADRs”) for investors in the foreign shares.11 • U.S. Nexus. The need for a nexus between the bribery offense and the “means and instrumentalities of U.S. commerce,” though it has not been much litigated, is in the view of enforcers capable of satisfaction by bank wire transactions simply passing through correspondent accounts located in the United States, or by emails passing through U.S. servers.12 This increases the possibilities for enforcers finding jurisdiction to prosecute foreign-based issuers of securities traded on U.S. exchanges. • “Foreign Official.” The definition of a “foreign official” includes ordinary government officials of foreign countries at all levels and branches, but also persons fitting a variety of other enumerated examples within the term’s technical definition.13 These include contracted agents of those governments, candidates for foreign political offices, political parties (yes, the parties themselves), and individuals working for state “instrumentalities” including many foreign state-owned enterprises that meet certain criteria establishing their public nature.14 The broad FCPA definition of “foreign official” can thus cover a wide-ranging variety of actors involved in deforestation, including those employed by state-owned banks, political parties, and government-established industry organizations in forest land-use planning. Traditional and/or tribal authorities representing forest communities can also count as “foreign officials” to the extent they are recognized and empowered with representative or administrative authority by law.15 Finally, and perhaps somewhat obscurely, the definition of “foreign official” also includes officials of so-called “public international organizations.”16 Examples of organizations deemed part of this category in the U.S. federal regulations, and potentially relevant to deforestation and trafficking in products from deforested lands, include the Asian Development Bank, the African Development Bank, the Inter-American Development Bank, the constituents of the World Bank Group, the Customs Cooperation Council, the Food and Agricultural Organization, and still other agricultural organizations the United States has joined by treaty.17 • Purpose of Influencing an Official Act or Decision. The improper purpose element of an anti- bribery violation can be satisfied, among other ways, by the payment having the purpose of “inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality.”18 This formulation is well-suited to the complex political power structures driving deforestation, where the connection between bribe payment and official action (or inaction) is at times likened to Javanese Wayang Kulit, or shadow puppet theater.

• “Knowledge.” A defendant’s knowledge of the aspects of a corrupt payment arrangement, as required to establish a violation of the anti-bribery provisions, can be proved based on actual knowledge or based on awareness of a “high probability” of their existence.19 This definition set forth in the text of the FCPA places in jeopardy those companies that receive from employees, agents, NGOs, the press, or other sources certain detailed, plausible information or allegations about bribery, or the risk of bribery. The allegations or risks could be in their operations or in those of the companies in which they conduct investment activity. The second branch of the FCPA, consisting of the accounting provisions, affirmatively obligates issuers of publicly-traded U.S. securities to keep accurate books, records, and accounts of transactions, and to devise, implement, and maintain an adequate system of internal controls over the disposition of corporate assets and the recordkeeping of transactions.20 Having false books and records, failing to implement internal controls, or taking affirmative steps to circumvent these requirements will subject issuers and related entities and individuals to liability.21 Criminal liability is reserved for violations of these accounting provisions that are committed knowingly and ”willfully,” meaning here that the defendant was aware of the falsification or the violation of an internal controls requirement and did not act by ignorance, mistake, or accident.22 Several aspects of the requirements for a books and records violation are particularly noteworthy in their potential application to forest crimes: • “Books and Records.” As to the types of company “books, records, and accounts” of transactions and dispositions of assets that must be accurately maintained, U.S. enforcers interpret the definition to encompass not just general ledger and accounting entries, but all manner of company and third- party documentation provided for supporting transactions.23 This means that a false invoice for services or goods could lead to a violation. • No Materiality Needed. There is no “materiality” element in a books and records violation – no minimum financial threshold.24 • Financial Reporting from Subsidiaries. To the extent that non-listed subsidiaries’ accounting entries “roll up” into the issuer’s accounts, the false accounting of the subsidiary can cause inaccuracies to occur in the parent’s accounts, incurring liability for the parent.25

• No Bribery Needed. Finally, there is no requirement in a books and records violation that the inaccurately-described transactions were, in fact, bribes. The “internal controls” requirements and penalties under the FCPA’s accounting provisions also may find application to forest crime. The legal topics most notable to forest crime are: • Type of Illegalities Addressed by Internal Controls. The issuer’s obligation to devise, implement, and maintain an adequate system of internal controls over its transactions and dispositions of assets is widely interpreted to include controls against paying illegal bribes, even though the statutory text of the accounting provisions is generic and does not specifically reference bribery or corruption. It is thus possible that circumstances would arise where controls against other illegalities relevant to deforestation could be read into issuers’ internal controls obligation. Regulators may expect companies in particular industries to have controls to prevent transactions for supply of illegally- sourced commodities, or for funding of agricultural operations using labor practices that breach basic human rights. Allegations of fraud, corruption, and obstruction in sustainability auditing practices could be investigated as evasions of internal controls. • Majority-Owned Entities. The internal controls obligation flows down a corporate group’s organization chart, unqualified, into subsidiaries, joint ventures, and portfolio companies or other entities where the issuer owns (directly or indirectly) a majority of another company.26 Under the Sarbanes-Oxley Act, senior executives make certifications as to the adequacy of internal controls and financial reporting, and these are then often sub-certified at subsidiary levels. Action against issuers for failure to control subsidiaries is common, as illustrated in the SEC’s case under the FCPA against extractives/commodities giant Alcoa, Inc., which it found had failed to conduct proper due diligence on its subsidiaries’ relationship with a supplier. In announcing the case, the SEC stated: “It is critical that companies assess their supply chains and determine that their business relationships have legitimate purposes.”27 • Non-Majority Owned Entities. Where it has 50% or less share ownership, the issuer must “proceed in good faith to use its influence, to the extent reasonable under the issuer’s circumstances,” including country-specific laws and practices, “to cause such domestic or foreign firm to devise and maintain a system of internal accounting controls.”28 This obligation as yet has been largely untested and undefined through FCPA enforcement experience. Criminal enforcement (requiring proof ”beyond a reasonable doubt“) is a distant prospect in light of the seemingly large statutory loophole based on the “issuer’s circumstances.” Still, issuers doing business year after year in countries with rampant forest crime may be challenged at least civilly on whether they have tendered a “good faith” compliance effort in light of local laws and practices. Finally, one reading of the FCPA’s accounting provisions, as yet untested by litigation, could hold even third parties liable under the prohibition that “[n]o person” shall knowingly circumvent an issuer’s internal controls or knowingly falsify an issuer’s books and records.29 In sectors tied to deforestation, this interpretation could reach down an issuer's supply chain to persons as to whom the proof of the element of knowledge is more often readily available.

Travel Act

• Hypothetical Example: U.S. investor wires funds overseas to be used by an agricultural commodity producer for bribes to a non-government official to pave the way for illegal land clearing. In a foreign bribery case, where proof is in doubt for the FCPA element that the bribe was intended for a “foreign official,” U.S. prosecutors sometimes turn to the prohibition of more generic forms of bribery through the U.S. Travel Act. The racketeering-inspired statute penalizes “[w]hoever travels in interstate or foreign commerce or uses the mail or any facility in interstate or foreign commerce, with intent to . . . promote, manage, establish, carry on, or facilitate the promotion, management, establishment, or carrying on, of” certain enumerated kinds of unlawful activity.30 The list of predicate offenses includes bribery in violation of the laws of the state in which it was committed, thus incorporating by reference state commercial bribery laws. The bribe itself need not be paid or received in the state or by a resident of the state whose law is invoked; rather, there need only be sufficient "relevant conduct" in the state that can pertain to a foreign bribery scheme, such as the bribe payor residing in, or traveling from, the state, or the use of a bank account in the state in furtherance of the scheme.31 This charging option under the Travel Act may be relevant to forest crime, for instance, where the bribe recipient is not a government official but is a forest community leader, a union official, an official of a bank lending to a developer or investor, or an auditor certifying the sustainability of operations. Another Travel Act predicate offense potentially relevant to forest crime is arson. While there is no reported case on point involving an overseas fire, the same reasoning that has been applied to a foreign bribery scheme could be extended to an arson scheme. That is, so long as there is sufficient relevant conduct within a state whose arson law describes the conduct, the Travel Act can cover the arson scheme even if it is consummated in large part overseas.32 Thus, for example, the law could apply to prosecute U.S. businesspersons who travel to foreign lands to promote clearing illegally-seized forest lands by setting fires.

Wire and Mail Fraud

• Hypothetical Example: A U.S.-based hardwood importer sends phony documentation overseas to support an undervaluation of the price of goods exported to the U.S. to evade customs and excise taxes. Forest crime is subject to these staples of federal prosecution: Federal wire and mail fraud statutes generally prohibiting schemes or artifices” to obtain “money or property” by means of “false or fraudulent pretenses, representations, or promises,” using U.S. telecommunications or mails (including private commercial carriers) in interstate or foreign commerce.33 These statutes apply to a broad array of deceptive schemes, not just the familiar telemarketing, penny stock, or home remedy type of scams. There must be an intended or actual victim, but it could be an individual, private concern, community, or public entity. The victim may be domestic or foreign, so long as the scheme to defraud itself has sufficient ties to U.S. territory.34 For instance, the wire fraud statute has applied to a scheme to deprive a foreign government of excise tax revenue through smuggling consumer products into that country.35 The actual use of the wires or mails that took place need only have been incidental to, and reasonably foreseeable as part of, the execution of the fraud scheme – not specifically intended or central to the defendant’s scheme to defraud.36 So long as there is at least one U.S. wire or mailing act establishing jurisdiction, the statutes may cover deceptive practices that furthered deforestation or that reaped profits from the products sourced on exploited land. As an example of the latter, some timber and other commodity companies reportedly commit fraud against developing nations by “transfer pricing fraud,” i.e., under-declaring the value of goods sold to an affiliate or colluding trade partner for purposes of evading export duties and other taxes of the exporting country. International organizations estimate that transfer pricing fraud deprives developing nations of revenues in the hundreds of billions of dollars annually.37 There is a sub-species of wire and mail fraud in which the scheme is to deprive the victims of their “intangible right to the honest services” of their employees, fiduciaries, or public officials through payment to them of bribes or kickbacks.38 This theory, where causing victims a monetary or property loss is not clearly the intent of the scheme, provides yet another charging alternative to the FCPA or Travel Act. As an example, where a company has bribed an official of an industry body for (or against) an alteration to an overall forest conservation plan, the members of the industry body have been defrauded of the official's honest services but not of any money or property.

Anti-Money Laundering Laws

• Hypothetical Example: Proceeds known to be from illegal forest clearing are channeled through a U.S. financial institution and used in an investment to purchase U.S. commercial real estate. The U.S. anti-money laundering laws are designed to deprive criminals of the utilities and benefits of the U.S. financial system. Given the preeminence of the U.S. dollar as a global currency, these laws have global reach. Money laundering in connection with forest crimes could range from the use of the U.S. financial system in distributing and enjoying those crimes’ profits, to its use in promoting the commission of crimes. Liability for money laundering attaches not only to the perpetrators of the underlying crimes but also to those others complicit in allowing the tainted financial transactions to proceed, including bankers, accountants, and lawyers. Common to most of the different forms of money-laundering, discussed further below, is proof of some underlying criminal activity, in particular, one of the specified unlawful activities (“SUAs”) enumerated by statute.39 Those SUAs therein potentially most relevant to forest crimes in developing nations include the following: • Bribery in violation of the FCPA, the Travel Act, or a foreign law prohibiting bribery of a public official, or the misappropriation, theft, or embezzlement of public funds by or for the benefit of a public official. • Mail and wire fraud. • Smuggling into the United States, or falsely classifying or declaring imported goods in U.S. customs. (Note that the Lacey Act is not a listed SUA under the general money-laundering statute, though has its own criminal prohibition of purchase and sale transactions in furtherance of violations.)

• Obstruction of justice under several federal statutes. • Conspiracy to injure the property of a foreign government or subdivision or cultural site. • Destruction of property by means of fire in violation of a foreign law. • Use interstate/foreign commerce for transportation, receipt, sale, possession of stolen property, knowing that it was stolen or taken by fraud.

• Fraud by or against a foreign bank in violation of a foreign law. • Murder in violation of a foreign law. • Human trafficking. To summarize the various forms of money laundering under U.S. law that are likely to be useful against forest crime, most are crimes because the defendant conducts a U.S. financial transaction or a cross- border transfer of monetary instruments or funds, knowing that the transaction involves the “proceeds” of an SUA, also called “criminally-derived property.” The defendant need not have committed the SUA, or had any involvement in that underlying offense, so long as the defendant afterwards knowingly helped transact in the SUA proceeds.40 The defendant must do one or more of the following things in transacting with those SUA proceeds: • Conceal or disguise the source, origin, nature, ownership, or control of the proceeds.41

• Promote some SUA.42 • Attempt to avoid a reporting requirement.43 • Engage in a transaction in an amount greater than $10,000 with or through a “financial institution,” broadly defined to include even businesses such as casinos.44 For forest crime scenarios, an important example of what may legally constitute SUA “proceeds” to be laundered is the money earned by various participants in bribery. In this context, “proceeds” include the bribes received by corrupted government officials and other fiduciaries, as well as monies collected or saved by bribe-payers pursuant to contracts obtained (or retained) by corruption.45 And, though the principle is untested by litigation in a contested money laundering case, the U.S. government also has successfully recovered profits that resulted from regulatory license approvals obtained by bribery as proceeds of that offense.46 Timber or palm oil companies that bribe to obtain forest land concessions, or logging permissions, or relief from regulatory enforcement, etc., and that then conduct transactions in the U.S. financial system with their resulting earnings are engaged in separate acts of money laundering. There is another potential level to this theory of money laundering that applies to corporate acquisitions and divestitures of the crime-perpetrating businesses that have deforested developing countries. The concept of SUA proceeds may even extend to the sale price of businesses operating with revenue streams tainted by bribery and other predicate crimes. Prohibiting transactions in “criminally-derived property” may encompass where buyers and sellers bake the value of contractual or property rights originating in SUAs like bribery into the sale price of a company. It may not be controversial to suggest that if a company’s balance sheet reflects cash that had flowed into bank accounts from products harvested on corruptly-obtained forest lands, or the value of the forest land itself, then the sale of its stock would involve SUA proceeds. Commingling of “clean” and “dirty” assets in the sale of the target business would not defeat a prosecution under U.S, law;47 “‘in its classic form, the money launderer folds ill-gotten funds into the receipts of a legitimate business.’”48 This theory is consistent with Congress’s objective to prevent transactions with third parties that give criminals opportunity to spend and otherwise dispose of ill-gotten gains.49 Legal support for this theory also comes from the United Nations Convention Against Corruption (“UNCAC”), to which the United States is a party. Article 2 of UNCAC defines the “proceeds of crime” to include “any property derived from or obtained, directly or indirectly through the offence,” meaning “assets of any kind, whether corporeal or incorporeal, moveable or immovable, tangible or intangible, and legal documents or instruments evidencing title or interest in such assets.”50 A further step the government may someday take would be to charge as money laundering those financial transactions including share purchases made using financial projections in anticipation of the target business’s collection of monies pursuant to corrupt dealings, through accounts receivable, backlog orders under contracts with customers, or simply the reliable future earnings of productive land owned. Experts of the Stolen Asset Recovery (“StAR”) program run by the Organization of Economic Cooperation and Development (“OECD”) and the World Bank have issued detailed guidance on the identification and quantification of the proceeds of bribery for use in seizing and confiscating those proceeds as required under international conventions. These experts opined that transactions involving criminal proceeds include “indirect” proceeds such as “the increase in the value of a company that was awarded a lucrative contract or the value of other contracts awarded as ‘follow-ups’.”51 Under this legal theory, if a palm oil magnate corruptly develops a land bank and plant crops with 30-year yields, enters into and performs supply contracts, sells the company as valued based on those assets using the U.S. financial system, and reaps the profits, all parties to the corporate acquisition possessing the requisite knowledge of these events may be liable. Extraterritorial jurisdiction of one of the U.S. anti-money laundering laws gives it especially broad, global reach. The statute prohibiting knowingly transacting in criminally-derived property over $10,000 covers monetary transactions that either (1) take place at least in part within the territory of the United States, or (2) are committed by a “United States person,” i.e., a U.S. company or individual as defined.52 Thus, transactions largely taking place on foreign soil may still be covered if one of those conditions is met, in the former case such as by the use of New York correspondent bank accounts for dollar-denominated wire transfers between foreign banks,53 or phone calls to and from the United States.54 A lesser-known money laundering charge is where an SUA does not need to have already taken place and generated “proceeds” – but where the defendant transported, transmitted or transferred monetary instruments or funds across the U.S. border with the intent to “promote” an SUA.55 Transporting funds to promote unlawful activity can include, among other things, the wire transfer of funds out of which bribes are to be paid.56 This is another statutory provision that the government could potentially use to address transboundary forest-crime activities, e.g., timber and palm oil companies reinvesting profits into illegal operations in new regions using international, dollar-denominated wire transactions that pass through New York correspondent bank accounts. Finally, a different kind of anti-money laundering law is potentially available to prosecutors to combat forest crimes, and does not require the proof of a SUA: the law commonly known as the Bank Secrecy Act (“BSA”).57 All U.S. financial institutions, including those custodians of correspondent accounts for foreign banks, must comply with the BSA’s various recordkeeping and reporting requirements intended to help prevent and detect money laundering -- or else they face criminal and civil enforcement by the DOJ and administrative enforcement by the Department of Treasury. Individuals and entities attempting to evade BSA report requirements also face prosecution.58 An enforcement focus in recent years has been financial institutions’ failures to file a Suspicious Activity Report after red flags as to corruption and other illegal conduct. Numerous global financial institutions have settled major cases with the DOJ, entering into additional obligations to cooperate with investigators and to enhance BSA compliance, as in Rabobank NA’s settlement in recent months.59 These institutions must report suspicious activity observed while lending, underwriting, holding client accounts, and arranging corporate and trust services (e.g., forming shell companies) in the agribusiness sectors in developing nations where deforestation occurs.

Klein Conspiracy to Defraud the United States

• Hypothetical Example: A wood products producer seeks to obscure the origin of its illegally-harvested products from U.S. Customs by transshipping through a third country The general federal conspiracy statute, discussed further below as part of the concept of “derivative liability,” is the basic vehicle for holding defendants liable for conspiracy to violate other substantive provisions of federal law. However, the statute also contains alternative language for what is known as a Klein conspiracy (after a notable case), establishing a crime: “[i]f two or more persons conspire . . . to defraud the United States, or any agency thereof in any manner or for any purpose . . . .”60 Over time, the courts have given content to this “defraud clause,” so that it means not only to cheat a government agency out of money or property, but also to “interfere with or obstruct one of its lawful governmental functions by deceit, craft or trickery, or at least by means that are dishonest.”61 The best example of the applicability of such a charge to forest crime may be against those attempting somehow to obstruct or impede U.S. administration and enforcement of the Lacey Act, the customs laws, or potentially other laws. The government would not, in that instance, have to offer evidence tracing a shipment of particular products into the United States so as to constitute a substantive violation of the U.S. law. The crime could be simply, for example, a scheme to transship timber through a third country so that its country of origin is obscured if and when it reaches U.S. customs. Framing such a conspiracy under the “defraud clause,” the DOJ can take advantage of extraterritorial jurisdiction, i.e., power to prosecute acts that occurred overseas, because of the longstanding legal principle upholding “the right of the Government to defend itself against obstruction, or fraud wherever perpetrated."62

Obstruction of Justice

• Hypothetical Example: An agricultural commodities company fearing it is going to be under investigation by the FBI attempts to doctor or destroy potentially incriminating documents. Various additional U.S. laws against obstruction of justice create potential liability for forest crime and criminals. Threats and actual harm to potential witnesses, whistleblowers and activists in developing nations are reported to be at epidemic levels.63 As noted above, obstruction crimes have extraterritorial jurisdiction. These crimes typically require an intent to impede a government proceeding or investigation. The following are those obstruction offenses that can occur even before the DOJ, SEC, or other U.S. agency actually initiates an investigation or court case for the defendant to obstruct: • Witness Tampering. Different statutes prohibit endeavoring by means of bribery or using physical force or the threat of physical force, to obstruct, delay, hinder, or prevent the communication of information relating to a violation or potential of any criminal statute by any person to a federal law enforcement officer or judge.64

• Document Tampering. It is unlawful to knowingly alter, destroy, mutilate, conceal, cover up, or falsify records in order to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any U.S. department or agency, or in contemplation of any such matter.65 • False Statement to the Government. A workhorse federal statute prohibits knowingly and willfully making a material false statement, or making or using any materially false writing or document, in any matter within the jurisdiction of any branch of government of the United States.66 While often charged in connection with lies told directly to federal investigators, the offense can also be charged where the false statement is made to some other governmental or even private entity receiving federal funds or subject to federal regulation.67 Once an actual federal proceeding is commenced, there are additional prohibitions against conduct that constitutes “corruptly” communicating with, threatening, or retaliating against a witness to the proceeding.68

Other Securities Law Claims/Shareholder Strategies

• Hypothetical Example: A group of investors with shares in a large, publicly-traded U.S. consumer goods company suffers losses because the company was professing to have adequate internal controls and sustainability practices while actually overlooking corruption and forest crime in its production operations. Where publicly traded corporations are involved in forest and other environmental crimes, there are potential claims under federal and state securities laws (in addition to the FCPA issues discussed above). First, shareholders of corporations listed on U.S. exchanges may bring “derivative” suits in the name of the company against the officers and directors for losses to the company arising from some misconduct, including environmental crime or corruption among many other possibilities. While any damages would be paid to the company, a derivative suit may result in injunctive relief, force corporate governance changes, and otherwise deter irresponsible conduct. In addition, if the lawsuit results in a settlement or judgment, the attorneys’ fees and other costs of pursuing the lawsuit may be recovered. A shareholder can show standing to bring a lawsuit on the company’s behalf if: (1) the shareholder demands that the directors pursue the corporate claim and the demand is wrongfully refused; or (2) the shareholder alleges with particularity that demand is futile and should be excused.69 This rule is grounded in the principle that directors, rather than shareholders, manage the affairs of the corporation, and the decision to sue on its behalf lies within the business judgment of the board. The attorneys bringing derivative suits will often forego making demand on the board and instead will seek to demonstrate demand futility. Such a strategy is often seen as resulting from the fact that the litigation is lawyer-driven and motivated more by recovering significant attorney fees than obtaining corporate governance changes. For this reason, where investors have evidence of forest and other environmental crimes, they can make demands on the corporation to investigate, address, and remedy environmental crimes. The demand itself may influence a change in conduct. If the corporation refuses to do so, then the shareholders may bring a lawsuit on behalf of the corporation against the officers and directors. Second, the other potential type of security claims is to sue the corporation and the directors and officers for securities fraud under Section 10(b) of the U.S. Securities Exchange Act.70 The basic premise is that officers have made an untrue statement of material fact or failed to make a statement of material fact regarding violations of law. Such a claim is generally filed following the disclosure of a criminal or regulatory investigation. The theory is that the shareholders have been defrauded because the stock traded at an artificially high price based on unsustainable earnings gained from undisclosed illegal conduct. Federal courts have been resistant to the notion that a government investigation should necessarily result in a private securities fraud action. Accordingly, such claims face a substantial likelihood of dismissal at the rigorous motion to dismiss stage under the Private Securities Litigation Reform Act71 (“PSLRA”) prior to the exchange of any discovery in the case. For example, in a securities fraud action brought against Avon Products for undisclosed bribes paid to win business in China, the court dismissed the 164-page complaint for failure to plead sufficient facts to show that the officers knew about the bribes paid when they made statements about the company’s growing business in China.72 In contrast, a district court denied a motion to dismiss a complaint that Wal-Mart’s stock traded at an artificially high price because of undisclosed bribes paid in Mexico. In that case, the plaintiffs benefitted from reports in The New York Times that provided substantial detail regarding the pervasiveness of the bribery in Mexico.73 Here, a possible theory would be that a corporation artificially inflated the prices of shares through undisclosed forest crimes or misrepresented compliance. To state a claim, plaintiffs would need to plead with specificity that a company officer misstated a material fact or failed to state a material fact (e.g., we have cut costs or increased profits from illegal activity). It must further be shown that the officer acted with intent to deceive. Furthermore, there must be pleaded a connection between the statement or omission and the purchase or sale of a security, reliance on the fraud, and a loss caused by that reliance. The PSLRA imposes further pleading obligations to identify the speaker of the alleged fraudulent statement or omission, when the statements were made, and why they are fraudulent. Surviving a motion to dismiss would likely depend on access before filing to substantial evidence of misconduct and a measurable stock drop from the disclosure of the investigation of forest crimes. Finally, it should be emphasized that these are actions filed to recover losses for shareholders and not directly to influence corporate policies. Another possible theory of securities fraud arising from deforestation could adapt recent theories pursued against the oil and gas industry for the accounting of so-called “stranded assets.” In a securities class action that has survived a motion to dismiss and in a recently-filed lawsuit filed by the New York Attorney General, a major oil producer is alleged to have materially overvalued assets on its books that it knew were subject to losses due to developments in climate change policy and regulation.74 So, too, could similarly overstated agribusiness assets facing changes in policy and regulation due to deforestation risk give rise to fraud allegations. In short, derivative suits and securities fraud suits face significant challenges to success. Nonetheless, they are a potential avenue to address corporations that are involved in significant forest crime and other environmental harms.

Unfair and Deceptive Trade Practices

• Hypothetical Example: A furniture company operating in California retails supposedly “green” wood products that are actually derived through illegal means. Commercial laws against unfair and deceptive trade practices can apply to companies importing from developing countries the agricultural products that result from deforestation. These laws are both state and federal, some providing causes of action to both the government and private parties. One of the most potent laws belongs to the State of California, which has approximately the seventh largest economy in the world, a correspondingly large market for foreign imports, and elects law enforcement officials who can and do pursue an independent environmental agenda. California’s laws against unfair and deceptive trade practices are both remarkably accessible for private parties to enforce and broad in the conduct they address. As could relate to the sale of forest crime products, California’s Unfair Competition Law75 (“UCL”) provides for civil liability based on establishing that the defendant’s business acts or practices meet any one of the following three prongs:

• “Unlawful.” This prong essentially “borrows” a violation of any other violation of federal, state, or local law, regardless of the underlying law’s enforcement mechanism.76 Accordingly, a UCL violation could incorporate by reference a violation of the Lacey Act, U.S. customs laws, FCPA, Travel Act, or federal wire and mail fraud statutes, etc. The fact that a company may have believed that its actions in removing trees for its commercial activity were legal would not be a valid defense to an action based on violations of environmental laws.77 • “Fraudulent.” The standard for the fraud prong is whether the public is likely to be deceived by the business act or practice based on the expectations of a reasonable consumer.78 There is no need to show actual deception, reliance, or damage, other than as discussed below in the distinct matter of establishing a private party’s standing to sue.79 False marketing claims about the environmental quality of a product are actionable under the state's historic police powers, which are not preempted by any federal regulatory regime that may treat the claims as permissible.80 • “Unfair.” There is no clear definition of what constitutes an “unfair” business act or practice. An alleged unfairness must be tethered to some legislatively declared policy or proof of some actual or threatened impact on competition.81 Alternatively, a practice may be found to be unfair if it is immoral, unethical, oppressive, unscrupulous, or substantially injurious to consumers.82 However, the courts' different tests for competitors and consumers have repeatedly shifted.83 This legal uncertainty, while increasing the possibility of dismissal of actions reliant on this unfairness prong, also gives an opportunity for creative pleading by consumer activists and by competitors who do not engage in the same environmentally harmful practices. The public enforcement of California’s UCL is invested in the state’s Attorney General, district attorneys, and city attorneys, who are armed with the power to seek civil penalties, disgorgement of profits, and injunctive relief.84 In addition, any person or entity can bring a private cause of action against a defendant for injunctive relief or for restitution of money or property long as that private plaintiff has standing based on an actual injury from a violation of the UCL.85 Prevailing plaintiffs can recover their legal costs including attorneys’ fees if they can show their suit conferred a “significant benefit” upon the public or upon a large class of persons.86 Notwithstanding the actual-injury requirement referenced above for standing to file suit, restitution is available to absent class members without individualized proof of deception, reliance, or injury.87 It is also unlawful under federal law for companies to engage in unfair and deceptive trade practices in U.S. commerce.88 The Federal Trade Commission (“FTC”) has powers under its enacting legislation to investigate and take enforcement action against such practices, commencing administrative proceedings, or suing in court for civil penalties, injunctive relief, and “redress” to the consumer.89 However, the legal standards under the FTC Act are substantially narrower than its California counterpart -- the U.S. consumer protection law lacks in an “illegal” prong like California’s. For its “unfair” prong, the FTC Act requires “substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits” to consumers and competition.90 These laws protecting consumers and competitors have potential application where companies knowingly imported products that were produced through illegal deforestation or were illegally brought to market. The policy against unfair competition is implicated where competitors lose market share to below-market pricing that exploits illegal conditions in the product’s supply chain. Moreover, the policy against deceiving consumers is implicated where false labeling, advertising, and other forms of marketing abuse sustainability certifications or otherwise falsely claim adherence to the growing body of environmental, social, and governance (“ESG”) norms.

General Legal Principles of Derivative and Vicarious Liability Implicit in the discussion of each of the laws above are the related concepts of “derivative” and “vicarious” liability, where one person (natural, i.e., a human, or legal, i.e., a corporation, partnership, etc.) can be held liable in connection with the actions of another that is directly liable under the law. The most common example of derivative liability is from the law of conspiracy. In addition to the Klein conspiracy discussed above, it is unlawful to enter into an agreement with one or more persons to violate a “substantive” provision of law, e.g., foreign bribery under the FCPA.91 The main federal criminal conspiracy laws are the general conspiracy,92 the money laundering conspiracy,93 and the racketeering conspiracy involving an enumerated, diverse, and serious group of “predicate” crimes.94 There is also civil racketeering conspiracy (discussed in the next section). Conspiracy theory is a potent and flexible tool in U.S. law. In addition to the conspiracy offense itself, it permits charging one conspirator with the substantive offenses committed by a co-conspirator in furtherance of the illegal agreement.95 A conspiracy need not bring all co-conspirators into contact with one another, but rather may be based on an understanding of concerted action with others whose identities may be unknown to the defendant.96 Furthermore, conspiracies can be implicit agreements inferable by actions; they need not be express verbal pacts.97 The mail and wire fraud laws employ principles of “co-schemer liability” that operate like conspiracy theory.98 Finally, conspiracies and schemes can be “continuing” so as to make conduct outside the statute of limitations (in federal criminal law, typically 5 years) chargeable along with conduct that is inside the limitations period. A conspiracy or scheme may be deemed to continue as long as a defendant continues to enjoy the proceeds of the illegal agreement, although limits to this principle are emerging.99 The organizational complexity and long arc of forest crime can lead prosecutors to look to a charging theory like conspiracy that can bring into a case evidence of conduct that was dispersed across many geographies, entities, and casts of characters, and that occurred along timelines beginning many years before the case is investigated. Derivative liability also takes the form of "aiding and abetting" another to commit an offense, or "causing an act to be done" by another that would constitute an offense if done directly -- either variation subjecting a defendant to full punishment for the offense as a principal.100 Finally, an "accessory after the fact" to a known offense is one who "receives, relieves, comforts or assists the offender in order to hinder or prevent his apprehension," and is subject to up to half a principal offender's maximum punishment.101 “Vicarious” liability imputes the conduct of an agent to its principal in matters subject to the agency agreement.102 Acts of commission or omission of employees can be imputed to a corporation if they were acting within the scope of the employment and intended to act for the benefit of the corporation.103

Asset Forfeiture Given proper tracing and a U.S. nexus, the proceeds and instrumentalities of forest crimes are subject to forfeiture through the U.S. court system. U.S. law enforcement has the authority under the civil asset forfeiture laws to seize and forfeit tangible and intangible property involved in a variety of federal offenses even where the property’s owners have not been convicted of, let alone charged criminally with, the offenses. The government files suit against the property itself using the Latin phrase “in rem,” providing known and unknown potential claimants with the opportunity to challenge the forfeiture in court. While there are numerous civil asset forfeiture provisions throughout the United States Code, some specialized such as that for violations of the Lacey Act,104 there is also a general civil asset forfeiture statute.105 As potentially applicable to forest crimes, this statute authorizes forfeiture of the following: • Any property, real or personal, involved in a transaction or attempted transaction in violation of the money laundering laws.106

• Any property, real or personal, which constitutes or is derived from proceeds traceable to a violation of numerous predicate federal offenses, including but not limited to money laundering SUAs such as FCPA, Travel Act, and wire and mail fraud.107 Federal law also provides for criminal asset forfeiture of a defendant’s property, which must be based on the conviction of the defendant of a similar list of qualifying predicate offenses.108 If the crime of conviction is federal racketeering, the government can forfeit any “interest” the defendant has in any enterprise that the defendant has “established, operated, controlled, conducted, or participated in the conduct of, in violation of” the racketeering law.109 These remedies for violations of U.S. law are available for property within or outside the United States, though the U.S. government will need to issue requests for international legal assistance by treaty or convention for recovery of the latter.

Additional Legal Risks Investors May Face Under Recent Trends

In addition to the longstanding, generally-applicable legal authorities described above, there are several recent trends. These involve recent case law or statutory developments that could result in court actions to address forest crime, as well as efforts to increase financial transparency in key areas such as beneficial ownership. Asset managers and owners should be aware of these relevant developments, in addition to the statutes examined in the previous section. These descriptions are described in detail in the following section.

Pleading Civil Actions under the Racketeer Influenced and Corrupt Organizations Act and the Alien Tort Statute Recent U.S. court decisions have clarified the ability of victims of serious wrongs committed in large part overseas to bring claims for damages against their wrongdoers in U.S. court, under at least two kinds of federal civil causes of action. Though the cases had a primary effect of limiting lability, another main takeaway from them is that carefully pleaded federal civil court actions under these laws have the potential to establish liability for forest crime. The first cause of action is the civil remedy under the Racketeer Influenced and Corrupt Organizations (“RICO”) Act. The RICO statute generally prohibits participants in an “enterprise” from engaging in a “pattern” of “racketeering” activity, with the government needing to prove commission of at least two “predicate” racketeering crimes enumerated by statute. The predicate crimes include (among others) the offenses potentially relevant to forest crime discussed above as money laundering SUAs, as well as the money laundering laws themselves. The RICO Act, which provides for criminal penalties, also created a private civil cause of action that allows “[a]ny person injured in his business or property” by reason of a violation of its substantive prohibition to sue in federal district court and recover treble damages, costs, and attorney’s fees.110 In a 2016 decision, the U.S. Supreme Court held that a victim has standing to sue under civil RICO by having sustained some “domestic” injury to business or property. The Court ruled that the substantive prohibition of RICO applies to foreign conduct to the extent the predicate crimes do, although foreign victims cannot recover for wholly foreign injuries under RICO.111 Subsequent court decisions have permitted foreign plaintiffs who manage to allege at least some domestic injury to maintain a civil RICO cause of action against foreign defendants, including where there were domestic transfers of funds resulting from fraud.112 One federal court has gone beyond consideration of only domestic economic injury, to permit a RICO action to proceed on the basis of a domestic injury consisting of a deprivation of U.S. legal rights.113 Notably, the Supreme Court’s 2016 decision referenced above also left unaffected the right of the governments and citizens of foreign countries to sue in U.S. federal court for foreign damages under state or foreign law pursuant to so-called “diversity” jurisdiction.114 The second federal civil remedy available to address forest crime is under the 18th-century Alien Tort Statute (“ATS”).115 The ATS provides jurisdiction in federal court for tort suits claiming injury from violations of international law so long as the international law norm is “specific, universal and obligatory.”116 Foreign corporations are not subject to suit under the ATS.117 Examples of viable bases under international law for an ATS suit that have been upheld in court have included significant human rights abuses, such as torture, extrajudicial killings, and slavery.118 Environmental advocates continue to build theories of ATS claims for violations of customary international norms of an environmental nature, but none as yet has been recognized by U.S. courts. There remains the possibility of some other type of human rights violation that is cognizable under the ATS and that factually overlaps with the environmental crime.119 In a 2013 decision, the Supreme Court recognized federal court jurisdiction over ATS claims that arise out of overseas conduct when the claims "touch and concern the territory of the United States . . . with sufficient force.”120 Subsequently, at least some ATS litigation brought by foreign victims over foreign misconduct has against proceeded where, for instance, the suit by foreign plaintiffs was against an American company and there was alleged “extensive relevant conduct in the United States territory,” such as implicit encouragement of the foreign misconduct and a cover-up by U.S. managers.121

Bounties Payable by the SEC for Whistleblowers Reporting Violations of Securities Law Under the Dodd-Frank Act of 2010 and final implementing rules promulgated in 2011 by the SEC, whistleblowers are eligible for bounties ranging from 10% to 30% of the fines the government collects from U.S.-listed companies for violations of securities law, including the FCPA.122 A “whistleblower” rewarded by these programs can be any individual or group of individuals (inside or outside the company) who provide the SEC “original information” that leads to the government’s collection of a financial penalty.123 A whistleblower report to the SEC can also lead to parallel criminal action by the DOJ. A plaintiffs’ bar growing up around the SEC whistleblower bounty is already on the lookout for “insiders” at major U.S. corporations and financial institutions who are witness to the sophisticated ways companies attempt to evade compliance requirements.

Sanctions Authority Targeting Those Culpable for Major Corruption and Human Rights Abuse At the end of 2016, Congress passed the Global Magnitsky Act, a new sanctions law under which executive branch action can prohibit financial transactions with, and deny U.S. entry to, listed foreign officials found responsible for acts of significant corruption or human rights abuse. The scope of the sanctions authority also includes entities and individuals found to have provided “support” of a “financial” or other kind to such foreign officials.124 There is no “day in court” for parties before being sanctioned under this law; the executive branch has wide latitude to proceed in secret with designating sanctioned parties. While a sanctioned party may seek administrative reconsideration, there is little other realistic procedural recourse; judicial review has not resulted in any reported reversals of designations under the standard of “arbitrary, capricious, abuse of discretion, or not in accordance with law” that has been established under previous sanctions law.125 However, given the potential prejudice to the interests of influential businesses and individuals, one must assume the power under the Global Magnitsky Act will be reserved for especially egregious and clear cases. The current Administration has moved forward with empowering officers of the U.S. Treasury and State departments to execute the Global Magnitsky Act. Recent sanctions in 2018 included Dan Gertler and associated individuals and businesses allegedly involved with him in the “blood diamond” trade in West Africa, and in particular, in taking corrupt advantage of a United Nations certification program intended to weed out banned diamonds.126 The Treasury Department has now specifically warned financial institutions about Global Magnitsky Act exposure from dealings with corrupt and brutal officials.127 These developments present potential for the imposition of sanctions in compelling cases of forest destruction, especially those that may elude other legal remedies and defy attempts to end deforestation through compliance regimes.

Increased Traceability of Offshore Bank Accounts and Corporate Ownership Cross-border enforcement of generally-applicable laws in connection with forest crime depends on financial tracing through the web of offshore bank accounts often employed by forest criminals to pay bribes and to launder proceeds, typically using front companies. Dramatic advances are being made in the availability of information about the beneficial ownership of offshore bank accounts and corporate entities. Investigators following the money trail can more easily see through secretive corporate structures for purposes of assigning liability, recovering proceeds of crime, and advocating for the imposition of sanctions. Financial institutions are under greater than ever regulatory and peer pressure to police themselves. The improving amount of information available to investigators comes from the following sources: • Expanding Legal Requirements for Disclosure of Beneficial Ownership Information. Across the developed world, governments are instituting or proposing new legal requirements for disclosure and databasing of the beneficial ownership of bank accounts and corporate entities.128 In the United States, the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) has in recent years required title insurance companies to obtain beneficial ownership information for cash real estate transactions in certain markets such as in Florida, New York, California, and Texas popular among money-launderers, and the list of major metropolitan areas subject to these targeting orders has just recently expanded to twelve.129 This May 2018, U.S. financial institutions had to come into compliance with a 2016 rule promulgated by FinCEN requiring that banks identify beneficial owners for all new bank accounts.130 Even many jurisdictions previously considered notorious offshore havens, such as the Cayman Islands and the British Virgin Islands, have adopted new requirements under Western government pressure.131 • Inter-Governmental Cooperation. Law enforcement-to-law enforcement cooperation on cases and on mechanisms takes place both formally and informally, and both forms are by all accounts on the rise. While much of the information as to these efforts is confidential and “law-enforcement only,” the existence of working-group meetings and the legal tools such as financial intelligence unit requests and mutual legal assistance treaties are in the public domain.132 • Public/Private “Financial Intelligence Sharing Partnerships.” In structured efforts between financial institutions and regulators in the United States, United Kingdom, Australia, Hong Kong, and Canada, public and private investigators have begun recently exchanging operational information to increase the effectiveness of anti-money laundering mechanisms.133 The banks and regulators have also increased use of technology in compliance operations.134

• Global Alliances of Investigative Journalists & Data Breaches. Groups including the International Consortium of Investigative Journalists (“ICIJ”) have exploited huge caches of offshore incorporation and banking records, e.g., the Panama Papers and the Paradise Papers. Resulting exposes by journalists from ICIJ and the Organized Crime and Corruption Reporting Project (“OCCRP”) have raised public awareness of the use of offshore accounts and corporate structures to facilitate corruption, including in ways that contribute to deforestation.135 While much of the leaked data itself remains embargoed unless and until its publication, OCCRP shares findings through a “visual investigative scenario” online tool.136 The DOJ just announced its first indictments of defendants employed by or associated with the law firm that was the source of the leaked offshoring data in the Panama Papers.137 • Business Information Databases. Open-source and subscription commercial databases compile increasingly huge amounts of incorporation, governance, ownership, borrowing, compliance, news, and other public records data from around the world that is useful to tracing financial flows and identifying risky transactions. Commercial providers like Thomson-Reuters and Exiger supply increasingly sophisticated tools for filtering relevant data for investment and due diligence purposes. Civil-society funded investigative projects employ such commercial databases for non-commercial ends, such as Climate Advisers’ Radical Transparency Project using the Bloomberg Terminal to map supply chains and interconnected and collusive directorships in Indonesian palm oil companies that can contribute to illegal deforestation.138 The Rainforest Action Network also has a database of commercial financial information to provide accessible by users through an online tool to map financing of development in the forests.139

Conclusion

This report merges two areas of concern for asset managers and owners – the presence of forest crime in their investment portfolio, and the legal risks that forest crime presents in the U.S.

These risks go beyond environmental laws to include broader violations. The statutes and developments described in this report are already in place, and available to U.S. prosecutors or civil litigants to pursue. These risks also go beyond U.S. laws – forests, food and land are global businesses with global supply chains, and therefore illegal activity could infringe upon laws across many countries. Ignorance of these risks is insufficient to immunize investors from potential liability – either direct legal scrutiny, or the financial impacts of investigations into companies they do business with. The purpose of sharing this information to investors is to warn them against complacency. We believe these legal risks are significant enough to warrant examination by asset owners and asset managers. Asset managers and owners can operate with greater scrutiny and due diligence in the companies they invest in by linking their compliance with U.S. generally applicable laws with their investments relevant to forests. Doing this can weed out investments which are deemed too vulnerable to these legal risks in the context of forest crimes and illegal land practices.

1 Interpol, 2016, Uncovering the Risks of Corruption in the Forestry Sector, Available: https://globaltimbertrackingnetwork.org/wp- content/uploads/2017/12/INTERPOL_2016_Uncovering-the-Risks-of-Corruption-in-the-Forestry-Sector.pdf 2 Further information on the Lacey Act is available at: https://www.fws.gov/international/laws-treaties-agreements/us- conservation-laws/lacey-act.html and the Endangered Species Act at: https://www.fws.gov/international/laws-treaties- agreements/us-conservation-laws/endangered-species-act.html 3 See Press Release, U.S. Department of Justice, Office of Public Affairs, “Lumber Liquidators Inc. Sentenced for Illegal Importation of Hardwood and Related Environmental Crimes” (February 1, 2016), https://www.justice.gov/opa/pr/lumber- liquidators-inc-sentenced-illegal-importation-hardwood-and-related-environmental (last visited December 10, 2018). 4 See Press Release, U.S. Department of Justice, Office of Public Affairs, “Lumber Liquidators Inc. Pleads Guilty to Environmental Crimes and Agrees to Pay More Than $13 Million in Fines, Forfeiture and Community Service Payments” (October 22, 2015), https://www.justice.gov/opa/pr/lumber-liquidators-inc-pleads-guilty-environmental-crimes-and-agrees-pay-more-13-million (last visited June 4, 2018). 5 15 U.S.C. § 78dd-1, et seq. (FCPA anti-bribery provisions); 15 U.S.C. § 78m(b)(2), et seq. (FCPA accounting provisions). 6 E.g., 15 U.S.C. § 78dd-1(a). 7 Id. (issuers of securities publicly traded in the United States); 15 U.S.C. § 78dd-2 (domestic concerns); 15 U.S.C. § 78dd-3 (persons committing the offense while within the United States). 8 See 15 U.S.C. §§ 78dd-1(g), 78dd-2(i). 9 See 15 U.S.C. §§ 78dd-2(g), 78dd-3(e), 78ff(c). 10 United States v. Kay, 513 F.3d 432, 449-50 (5th Cir. 2007). 11 U.S. Department of Justice & U.S. Securities and Exchange Commission, A Resource Guide to the U.S. Foreign Corrupt Practices Act (hereinafter the “DOJ-SEC FCPA Guide”) 11 & n.48 (2012), https://www.justice.gov/sites/default/files/criminal- fraud/legacy/2015/01/16/guide.pdf (last visited June 4, 2018). 12 See DOJ-SEC FCPA Guide, supra note 11, at 11. 13 E.g., 15 U.S.C. § 78dd-2(h)(2)(A). 14 See DOJ-SEC FCPA Guide, supra note 11, at 20-21. 15 Marcus Fink & Barak Cohen, “Clearing Up the Murky Waters Surrounding Whether (and When) Aboriginal Community and Other Tribal Leaders Can Create FCPA Liability” (2014), https://www.perkinscoie.com/images/content/1/1/v2/112861/BNAinsights.FunkCohen.pdf (last visited June 4, 2018). 16 E.g., 15 U.S.C. § 78dd-2(h)(2)(B). 17 8 C.F.R. § 316.20(c). 18 E.g., 15 U.S.C. § 78dd-1(a)(1). 19 E.g., 15 U.S.C. § 78dd-1(f)(2). 20 15 U.S.C. § 78m(b)(2). 21 15 U.S.C. § 78m(b)(5). 22 See United States v. Lloyd, 807 F.3d 1128, 1166-67 (9th Cir. 2015). 23 See, e.g., Order Instituting Cease and Desist Proceedings, In the Matter of Orthofix International N.V., U.S. Securities and Exchange Commission 4, Administrative Proceeding File No. 3-17800 (filed February 10, 2017) (false invoices presented and approved as part of the scheme). 24 DOJ-SEC FCPA Guide, supra note 11, at 39. 25 See, e.g., Information, United States v. Panasonic Avionics Corporation 18-20, Case No. 18-CR-00118-RBW, United States District Court for the District of Columbia (filed April 30, 2018). 26 See id.; DOJ-SEC FCPA Guide, supra note 11, at 42-43. 27 Press Release, U.S. Securities and Exchange Commission, “SEC Charges Alcoa With FCPA Violations” (January 9, 2014), https://www.sec.gov/news/press-release/2014-3 (last visited June 5, 2018). 28 15 U.S.C. § 78m(b)(6). 29 15 U.S.C. § 78m(b)(5). 30 18 U.S.C. § 1952. 31 United States v. Harder, 168 F.Supp.3d 732, 743-44 (E.D. Pa. 2016) 32 Cf. id. 33 18 U.S.C. §§ 1341 (mail fraud), 1343 (wire fraud). 34 United States v. Prevezon Holdings Ltd., 122 F.Supp.3d 57, 70-71 (S.D.N.Y. 2015). 35 Pasquantino v. United States, 544 U.S. 349, 356 (2005). 36 United States v. Jinian, 725 f.3d 954, 960 (9th Cir. 2013) (summarizing wire fraud elements and rejecting requirement that defendant possess mens rea as to the wiring). 37 Sam Jones, “Tax Dodging Big Companies Cost Poor Countries Billions,” Guardian (June 2, 2015) https://www.theguardian.com/global-development/2015/jun/02/tax-dodging-big-companies-costs-poor-countries-billions-dollars (last visited June 5, 2018). 38 18 U.S.C. § 1346; Skilling v. United States, 130 S.Ct. 2896, 2928 (2010) (narrowing scope of honest services fraud statute to bribery and kickbacks). 39 18 U.S.C. § 1956(c)(7) (list of offenses including, inter alia, list of statutes at 18 U.S.C. § 1961(1) incorporated by reference). 40 United States v. Allen, 129 F.3d 1159, 1167 n.3 (10th Cir. 1997); United States v. Johnson, 971 F.2d 562, 568 (10th Cir. 1992). 41 18 U.S.C. § 1956(a)(1)(B)(i). 42 18 U.S.C. § 1956(a)(1)(A)(i). 43 18 U.S.C. § 1956(a)(1)(B)(ii). 44 18 U.S.C. § 1957.

45 United States v. Esquenazi, 752 F.3d 912, 926-29 (11th Cir. 2014) (corrupt contracts generated the “proceeds” defendant laundered); United States v. Wilkes, 662 F.3d 524, 530 (9th Cir. 2011) (same); United States v. Wyly, 193 F.3d 289, 292-93 (5th Cir. 1999) (same); United States v. Reagan, 725 F.3d 471, 484 (5th Cir. 2013) (same); United States v. Morris, 2010 WL 1049936, *3 (E.D. Ky. Mar. 19, 2010) (same). 46 See Plea Agreement & Information, United States v. Unitel LLC., Case No. 18-CR-00137-ER, United States District Court for the Southern District of New York (filed February 18, 2016). 47 United States v. Haddad, 462 F.3d 783, 792 (7th Cir. 2006). 48 Wilkes, 662 F.3d at 530. 49 See United States v. Rutgard, 116 F.3d 1270, 1291 (9th Cir. 1997); United States v. Allen, 129 F.3d 1159, 1167 n.3 (10th Cir. 1997); United States v. Johnson, 971 F.2d 562, 568 (10th Cir. 1992). 50 United Nations Convention Against Corruption, art. 2, G.A. Res. 58/4, U.N. Doc. A/RES/58/4 (Oct. 31, 2003), available at https://www.unodc.org/unodc/en/treaties/CAC/ (last visited June 9, 2018). 51 Organization of Economic Cooperation and Development & The World Bank Group Stolen Asset Recovery Program, “Identification and Quantification of the Proceeds of Bribery” 18, 43 (2012), http://www.oecd.org/daf/anti-bribery/50057547.pdf (last visited June 9, 2018). 52 18 U.S.C. § 1957(d). 53 See United States v. All Assets Held at Bank Julius Baer & Co., 571 F. Supp. 2d 1, 13-14 (D.D.C. 2008). 54 United States v. Tarkoff, 242 F.3d 991, 995 (11th Cir. 2001). 55 18 U.S.C. § 1956(a)(2)(A). 56 United States v. Bodmer, 342 F.Supp.2d 176, 189-91 (S.D.N.Y. 2004). 57 31 U.S.C. § 5311, et seq. 58 31 U.S.C. § 5322. 59 E.g., Press Release, U.S. Department of Justice, Office of Public Affairs, “Rabobank NA Pleads Guilty, Agrees to Pay Over $360 Million” (February 7, 2018), https://www.justice.gov/opa/pr/rabobank-na-pleads-guilty-agrees-pay-over-360-million (last visited June 5, 2018). 60 18 U.S.C. § 371; United States v. Klein, 247 F.2d 908, 915 (2d Cir. 1957). 61 Hammerschmidt v. United States, 265 U.S. 182, 188 (1924). 62 United States v. Bowman, 260 U.S. 94, 98 (1922). 63 Rachel Nuwer, “The Rising Murder Count of Environmental Activists,” N.Y Times (June 20, 2016), https://www.nytimes.com/2016/06/21/science/berta-caceres-environmental-activists-murders.html (last visited on June 5, 2018). 64 18 U.S.C. §§ 1510(a) (obstruction of criminal investigations), 1512 (tampering with a witness, victim, or informant). 65 18 U.S.C. § 1519. 66 18 U.S.C. § 1001. 67 United States v. Gibson, 881 F.2d 318, 322-23 (6th Cir. 1989). 68 See 18 U.S.C. §§ 1505 (obstruction of proceedings before departments, agencies, and committees), 1513 (retaliating against a witness, victim, or informant). 69 Del. Ch. Ct. R. 23.1; In re Dow Chemical Company Derivative Litigation, 2010 WL 66769 *6 (Del. Ch. January 11, 2010). 70 15 U.S.C. § 78j; 17 C.F.R. § 240.10b-5. 71 Public Law 104-67 (1995). This legislation is codified at various places in Title 15 of the United States Code. 72 City of Brockton Ret. Sys. v. Avon Prods., Inc., 2014 WL 4832321 (S.D.N.Y. Sept. 29, 2014). 73 City of Pontiac Gen. Emps. Ret. Sys. v. Wal-Mart Stores, Inc., 2014 WL 4823876 (W.D. Ark. Sept. 26, 2014). 74 See generally, Ramirez v. Exxon Mobil Corp., 3:16-cv-3111, -- F.Supp.3d --. 2018 WL 3862083 (N.D. Tex., August 14, 2018); John Schwartz, “New York Sues Exxon Mobil, Saying It Deceived Shareholders On Climate Change,” N.Y. Times (October 24, 2018), https://www.nytimes.com/2018/10/24/climate/exxon-lawsuit-climate-change.html (last visited on November 30, 2018). 75 Cal. Bus. & Prof. Code § 17200, et seq. 76 Roxana Mehrfar, “Redefining Commonality for Consumer Class Actions under California Business and Professions Code Sections 17200 and 17500,” 44 Loy. L. A. L. Rev. 353, 362-63 (2010). 77 Hewlett v. Squaw Valley Ski Corp., 54 Cal.App.4th 499, 520 (3rd Dist. 1997). 78 State Farm Fire & Casualty Co. v. Superior Court, 45 Cal.App.4th 1093, 1104 (2nd Dist. 1996). 79 Id.; 44 Loy. L. A. L. Rev. at 372-73. 80 Organic Consumers Association v. Sanderson Farms, Inc., 284 F.Supp.3d 1005, 1013 (N.D. Cal. 2018). 81 GreenCycle Paint, Inc. v. PaintCare, Inc., 250 F.Supp.3d 438, 451 (N.D. Cal. 2017). 82 Delano Farms Co. v. California Table Grape Com'n, 623 F.Supp.2d 1144, 1180 (E.D. Cal. 2009). 83 44 Loy. L. A. L. Rev. at 369-372. 84 Cal. Bus. & Prof. Code § 17202. 85 Cal. Bus. & Prof. Code §§ 17203, 17204. 86 See Cal. Civ. Proc. Code § 1021.5 (private attorney general provision for award of legal costs to certain prevailing plaintiffs); Cal. Bus. & Prof. Code § 17205 (providing that the remedies of the unfair competition law are cumulative to other remedies available under California law). 87 Mazza v. American Honda Motor Co., Inc., 666 F.3d 581, 595 (9th Cir. 2012). 88 15 U.S.C. § 45(a). 89 Federal Trade Commission, “A Brief Overview of the Federal Trade Commission's Investigative and Law Enforcement Authority” (2008), https://www.ftc.gov/about-ftc/what-we-do/enforcement-authority (last visited June 5, 2018). 90 15 U.S.C. § 45(n). 91 Note that a recent appellate court decision binding in New York, Connecticut, and Vermont has narrowed the scope of conspiracy liability for FCPA violations to those kinds of persons who can violate the law directly. See generally United States v.

Hoskins, No. 16-1010-cr, 2018 WL 4038192 (2d Cir. Aug. 24, 2018). However, the government has not conceded this as being the state of the law beyond that court’s jurisdiction. 92 18 U.S.C. § 371. 93 18 U.S.C. § 1956(h). 94 18 U.S.C. § 1961, et seq. 95 Pinkerton v. United States, 328 U.S. 640, 647-48 (1946) (establishing co-conspirator liability for substantive offenses committed by co-conspirators in furtherance of the conspiracy). 96 Interstate Circuit v. United States, 306 U.S. 208, 226-27 (1939). 97 United States v. Alejandro-Montanez, 778 F.3d 352, 358 (1st Cir. 2015). 98 United States v. Lothian, 976 F.2d 1257, 1262-63 (9th Cir. 1992) (applying principles of conspiracy liability to mail and wire fraud co-schemers). 99 Compare United States v. Salmonese, 352 F.3d 608, 615 (2d Cir. 2003) (finding a continuing conspiracy based on defendant’s ongoing enjoyment of benefits from fraud) with United States v. Grimm, 738 F.3d 498, 503 (2d Cir. 2013) (rejecting a theory of continuing conspiracy based on benefits running for an indefinite duration, with no other indicia of ongoing criminality). 100 See 18 U.S.C. § 2. 101 See 18 U.S.C. § 3. 102 In re Hellenic, Inc., 252 F.3d 391, 395 (5th Cir. 2001). 103 Standard Oil Co. of Texas v. United States, 307 F.2d 120, 127-28 (5th Cir. 1962). 104 16 U.S.C. § 3374. 105 18 U.S.C. § 981. 106 18 U.S.C. § 981(a)(1)(A). 107 18 U.S.C. § 981(a)(1)(C)-(I). 108 18 U.S.C. § 982. 109 18 U.S.C. § 1963. 110 18 U.S.C. §1964(c). 111 RJR Nabisco, Inc. v. European Community, 136 S.Ct. 2090, 2110 (2016). 112 Bascunan v Elsaca, 874 F.3d 806, 820-21 (2d Cir. 2017). 113 See Tatung Co. Ltd. v. Hsu, 217 F.Supp.3d 1138, 1154-55 (C.D. Cal. 2016). 114 RJR Nabisco, 136 S.Ct. at 2109; see also 28 U.S.C. § 1332(a) (providing diversity jurisdiction in federal courts for foreign parties). 115 28 U.S.C. § 1350. 116 Sosa v. Alvarez-Machain, 124 S.Ct. 2739, 2766 (2004) 117 Jesner v. Arab Bank, PLC, 584 U.S. ____, 2018 WL 1914663 *19 (U.S. April 24, 2018). 118 See Sosa, 124 S.Ct. at 2766 (endorsing view that slavery violates a customary international norm); Kiobel v. Royal Dutch Petroleum Co., 133 S.Ct. 1659, 1665 (2013) (noting the statutory amendments under the U.S. Torture Victim Protection Act of 1991 pursuant to which ATS actions for torture and extrajudicial killings could proceed). 119 Kathleen Jawger, “Environmental Claims under the Alien Tort Statute,” 28 Berkeley J. Int'l Law 519, 534-36 (2010). 120 Kiobel, 133 S.Ct. at 1669. 121 Al Shimari v. CACI Premier Techology, Inc., 758 F.3d 516, 527 (4th Cir. 2014). 122 15 U.S.C. § 78U-6; 17 C.F.R. PARTS 240 AND 249. 123 17 C.F.R. § 240.21F-2. 124 Global Magnitsky Human Rights Accountability Act, Public Law 114–328, Sec. 1263 (2016). 125 Cf. Zevallos v. Obama, 10 F.Supp.3d 111, 126 (D.D.C. 2014) (interpreting International Emergency Economic Powers Act and quoting 5 U.S.C. § 706(2)(A)). 126 Press Release, U.S. Department of the Treasury, “United States Sanctions Human Rights Abusers and Corrupt Actors Across the Globe” (December 21, 2017), https://home.treasury.gov/news/press-releases/sm0243 (last visited June 6, 2018). 127 Samuel Rubenfeld, "U.S. Warns Banks About Human Rights Abusers, Imposes Sanctions," Wall Street J. (June 12, 2018), https://blogs.wsj.com/riskandcompliance/2018/06/12/u-s-warns-banks-about-human-rights-abusers-imposes- sanctions/?mod=hp_minor_pos11 (last visited on June 28, 2018). 128 Law Library of Congress, “Disclosure of Beneficial Ownership in Selected Countries” 1 (2017), https://www.loc.gov/law/help/beneficial-ownership/disclosure-beneficial-ownership.pdf (last visited on June 8, 2018). 129 Press Release, Financial Crimes Enforcement Network, “FinCEN Reissues Real Estate Geographic Targeting Orders and Expands Coverage to 12 Metropolitan Areas” (November 15, 2018), https://www.fincen.gov/news/news-releases/fincen-reissues- real-estate-geographic-targeting-orders-and-expands-coverage-12 (last visited on December 11, 2018). 130 81 FR 29397, Doc. No. 2016-10567 (May 11, 2016). 131 See, e.g., Cayman Islands The Beneficial Ownership (Limited Liability Companies) (Amendment) Regulations, 2018, http://www.gov.ky/portal/pls/portal/docs/1/12600382.PDF (last visited on June 8, 2018); British Virgin Islands Beneficial Ownership Secure Search System Act, 2017, https://www.vistra.com/sites/default/files/no._15_of_2017- beneficial_ownership_secure_search_system_act_2017_0.pdf (last visited on June 8, 2018); see also Government of the British Virgin Islands, “Beneficial Ownership Secure Search System Goes Live,” http://bvi.gov.vg/media-centre/beneficial-secure-search- system-goes-live (last visited on June 8, 2018). 132 U.S. Department of State and U.S. Department of Justice, “U.S. Asset Recovery Tools & Procedures: A Practical Guide for International Cooperation” 3-5 (2009), https://www.state.gov/documents/organization/276387.pdf (last visited June 5, 2018).

133 Mara Stein, “Financial Info Sharing Needs Stronger Framework, Report Says,” Wall Street J. (October 18, 2017), https://blogs.wsj.com/riskandcompliance/2017/10/18/financial-info-sharing-needs-stronger-framework-report-says/ (last visited June 8, 2018). 134 Samuel Rubenfeld, “Regulators Focus on Compliance Innovation, Technology,” Wall Street J. (April 9, 2018), https://blogs.wsj.com/riskandcompliance/2018/04/09/regulators-focus-on-compliance-innovation-technology/ (last visited June 8, 2018). 135 Scilla Alecci, ”Leaked Records Reveal Offshore’s Role In Forest Destruction” (2017), https://www.icij.org/investigations/paradise-papers/leaked-records-reveal-offshores-role-in-forest-destruction/ (last visited June 8, 2018). 136 Organized Crime and Corruption Reporting Project, Visual Investigative Scenarios, https://vis.occrp.org (last visited June 8, 2018). 137 Press Release, U.S. Department of Justice, Office of Public Affairs, ”Four Defendants Charged in Panama Papers Investigation for Their Roles in Panamanian-Based Global Law Firm’s Decades-Long Scheme to Defraud the United States,” (December 4, 2018), https://www.justice.gov/opa/pr/four-defendants-charged-panama-papers-investigation-their-roles-panamanian-based- global-law (last visited December 11, 2018). 138 Peter Graham, Gabriel Thoumi, et al., "Mining Global Financial Data To Increase Transparency and Reduce Drivers of Deforestation," World Resources Institute & Climate Advisers Working Paper (June 2018). For further information, email [email protected]. 139 Forests and Finance, http://forestsandfinance.org (last visited June 8, 2018).