United States: Corporate Compliance Considerations Following The Publication Of The Engel List

On July 1, 2021, Secretary of State Antony Blinken issued a report listing 55 individuals suspected of corruption and antidemocratic conduct in Guatemala, El Salvador and Honduras. A list of this sort invites scrutiny from regulators, counterparties, shareholders and other stakeholders. It can also give rise to a number of compliance, regulatory, commercial and reputational risks for business affiliated with these individuals. Businesses and entities with potential affiliations to these individuals would be wise to assess the risks posed by these affiliations and consider taking active steps to mitigate those risks.

Central America and the Engel List

Central America has arguably received less attention from U.S. regulators with respect to anti-corruption matters than its neighbors to the north and south. For example, since 2009, there have been no fewer than 26 Foreign Corruption Practices Act (FCPA) actions concerning misconduct in Brazil, nine FCPA actions concerning misconduct in Argentina and 17 FPCA actions concerning misconduct in Mexico. In stark contrast, only two FCPA matters have targeted misconduct in Honduras, two related FCPA matters have addressed conduct in Guatemala and there has not been a single FCPA case arising from conduct in El Salvador.

These statistics begin to illustrate the historical focus of U.S. regulators and suggest that Central America, for its part, has stayed out of the limelight. A change in current, however, may be on the horizon, with recent announcements from the Biden administration evidencing its intention to focus on and invest in anti-corruption efforts in Central America:

• First, President Biden issued a memorandum highlighting the effects of corruption, declaring corruption as a "core United States national security interest" and directing interagency coordination to develop a presidential strategy to, among other initiatives, "significantly bolster the ability of the United States Government . to combat corruption."
• Second, in June 2021, Vice President Kamala Harris, during a trip to Mexico and Guatemala, announced the U.S. Department of Justice's intention to increase efforts against transactional bribery - specifically in Northern Triangle region of Central America.
• Third, in early June, Attorney General Merrick Garland announced a series of initiatives intended to combat corruption and transnational human smuggling and trafficking networks. Specifically, Attorney General Garland announced the creation of Joint Task Force Alpha, which, among other efforts, will "complement" the DOJ's efforts to combat corruption, "increasing its focus on investigations, prosecutions and asset recoveries relating to corruption in Northern Triangle Countries."
• Fourth, in December 2020, Congress passed the U.S. Northern Triangle Enhanced Engagement Act, authored by former Representative Eliot Engel, intended to ensure the United States' support in efforts to address corruption and promote democracy in the Northern Triangle.

The act seeks both to support the Northern Triangle of Central America and to strengthen the national security of the United States primarily by addressing the root causes of migration from the Northern Triangle countries. To that end, it requires the Secretary of State and U.S. Agency for International Development Administrator to devise a five-year strategy outlining efforts to advance economic prosperity, combat corruption and strengthen democratic governance, among other initiatives, in the Northern Triangle. The act also requires the secretary of state to publish a list of actors from El Salvador, Guatemala and Honduras, identified by the U.S. government, to have:

1. knowingly engaged in significant acts of corruption;
2. knowingly engaged in significant acts to obstruct investigations into acts of corruption; or
3. knowingly engaged in actions that undermine democratic processes or institutions.

This publicly available list is often referred to as the "Engel List," after the former U.S. representative who introduced the act. Individuals included on Engel List are generally prohibited from entering the United States (e.g., by revocation of an existing visa or by denial of a visa application) and may be subject to additional targeted sanctions, such as the seizure of assets in the United States.

On July 1, 2021, Secretary of State Blinken issued the highly anticipated list, which includes 55 individuals in Guatemala, El Salvador and Honduras whom the Department of State has determined, based on credible classified and non-classified information or allegations, fall into the aforementioned three categories.

• The list identifies 20 individuals from Guatemala, including high-ranking public officials who are currently in office or who previously served, two sitting justices of the Supreme Court and the Constitutional Court, various lawyers and leaders of non-governmental agencies.
• The list identifies 14 individuals from El Salvador, including high-ranking public officials, government advisors, a former judge, a former mayor and businessmen.
• The list identified 21 individuals from Honduras, including a former first lady, current and former congressmen and a former director of Inversión Estratégica de Honduras (INVEST-H).

While the list serves to publicly identify those engaged in potential misconduct, many of the listed individuals have been previously indicted or have been the subject of speculation regarding criminal activity. Nevertheless, the Engel List provides U.S. regulators with an additional hook in pursuing potential misconduct in the Northern Triangle.

What Are the Risks of Being Affiliated with Individuals Included on the Engel List?

Individuals included on the list - and the entities with which they are affiliated - will likely face a host of new risks, challenges and scrutiny. As such, for business and entities operating in the Northern Triangle, one critical question emerges: What are the risks of direct or indirect affiliation with a listed individual? There are several potential risks, including:

Regulatory Risks

Any business affiliated with individuals on the Engel List may be subject to heightened regulatory scrutiny. We can expect that the U.S., empowered by the Biden Administration's recent focus on combatting corruption in Central America and by the publication of the Engel List, will be critically analyzing and aggressively questioning entities and transactions linked to the listed individuals. There is no reason to believe that this regulatory scrutiny will be limited to U.S. regulators. We have seen an increase in collaboration and cooperation between U.S. and foreign regulators over the past several years, and we expect domestic and foreign enforcement agencies to share information concerning the activities of the individuals included on the Engel List, which could lead to coordination on cross-border investigations.

Commercial Risks

Association with Engel List individuals may also give rise to several and varied commercial risks. For example, businesses may find that third parties (such as suppliers, vendors or counterparties) are reticent to transact with a company affiliated with listed individuals and may seek to terminate existing contracts or to refrain from entering new contracts, causing potential disruptions to the business and its operations. Affiliations with the relevant individuals may also trigger obligations under existing contracts (such as disclosure obligations) or may result in a breach of contract.

Commercial risks may also extend to banking relationships and potential financing requests. A business associated with a listed individual may be required to respond to inquiries from financial institutions (concerned with their own potential exposure in money-laundering or other illicit activity) and may need to provide assurances that appropriate controls are in place to mitigate the risks created by the relationship to the individual. Similarly, businesses seeking third-party financing may face challenges in securing that financing and may need to provide similar assurances about the effectiveness of the company's existing system of internal controls.

Reputational Risks

Finally, but no less important, are the reputational risks that such affiliations can pose. Reputational risks, while difficult to quantify, can impact a company's relationships with its customers, vendors/suppliers, employees, shareholders and community, among others; erode trust; make it difficult to recruit and retain talented employees; and generally cause long-term financial and operational harm.

What Steps Can a Business Take to Mitigate Those Risks?

While risks arising from associations with the listed individuals can be serious, there are steps businesses can actively take to mitigate those risks. The most effective way to mitigate these risks is to maintain an effective system of internal controls to identify and assess exposure and to address that exposure.

Understanding a company's risk is the first step to ensuring that a company has an effective system of internal controls in place. As such, a business or company with potential affiliations with individuals included on the Engel List should consider conducting a risk assessment focused on identifying potential points of contact between the company and the listed individuals. The inquiry need not be limited to the organization itself, and it may be prudent to consider subsidiaries', affiliates' and third parties' potential touch points with the relevant individuals.

To the extent points of contact are identified, it is important to evaluate the extent of the relationship with the listed individual and the level of potential authority and influence the individual had over the organization. This assessment may include, for example, identifying transactions involving the relevant individual and identifying payments made to or received from the listed individual (or entities affiliated with the individual).

Depending on the nature of the relationship with the listed individual, it may be prudent to initiate an internal investigation to understand fully any potential misconduct linked to the listed individual and to assess potential vulnerabilities in the company's existing internal control environment.

An organization affiliated with a listed individual should also consider taking remedial action to address the risk posed by the relationship. The relationship and conduct will determine the parameters of any such corrective action, which may include, for example, removing the individual from his/her role, terminating any potentially relevant contracts, taking steps to ensure that the relevant individual has no decision-making authority within the organization or otherwise creating distance between the company and the relevant individual.

Finally, association with an individual on the Engel List provides an opportunity for a company to develop or enhance its third-party management program and ensure that the program includes, for example, (1) a robust, risk-based due diligence program (for third parties and new hires); (2) procedures to monitor and oversee third-party conduct and activity; and (3) procedures to review and verify payments.

Recent activity by the Biden administration, including the enactment of the U.S. Northern Triangle Enhanced Engagement Act and the subsequent publication of the Engel List, is bringing attention to the Northern Triangle, likely increasing anti-corruption and anti-money laundering enforcement in the region. This may be an opportune time for companies operating in the region to identify potential links to the relevant individuals, evaluate related risks and proactively address them.

Originally Published by Corporate Compliance Insights.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.