Holland & Knight and SECond Opinions Welcome Peter Hardy
We take a break from our regular programming to introduce you, our readers, to new Holland & Knight Partner Peter Hardy, a former federal prosecutor and national thought leader on the subject of anti-money laundering (AML), money laundering and criminal tax law. Peter recently joined our Philadelphia office and took time from his busy schedule to answer a few questions about his practice.
Jessica Magee: Peter, welcome to Holland & Knight. We love it here and hope you will, too. What drew you to the firm, and how are you settling in?
Peter Hardy: Thank you, Jessica. I am thrilled to be at Holland & Knight. Although I am grateful for all of the wonderful colleagues and opportunities that I have enjoyed throughout the years, I was drawn to Holland & Knight for several specific reasons. It's a very sophisticated international firm with a deservedly great reputation and excellent practice groups in many overlapping areas. My practice involves an unusual combination of several relatively niche areas: anti-money laundering and Bank Secrecy Act (BSA) regulatory work, tax fraud and tax controversy work, and more general white collar defense and internal investigations work. It's rare to find a firm that has a top-tier practice in any one of those areas, much less in all of these areas simultaneously – and with an impressive emphasis on Latin America as well. My practice is also going to benefit from the firm's complementary knowledge in sanctions and trade embargo issues, securities enforcement defense, litigation, bank regulatory work, private wealth, digital assets and other areas. Now that I am here, I am genuinely happy to discover that not only are people incredibly smart and skilled, which was not surprising, but they are also very nice. Holland & Knight has been very welcoming to me, and the lateral partner integration program is excellent.
JM: You have a tremendous background of experience. I know today you advise companies and individuals facing allegations of fraud whether involving tax, mortgage, money laundering, securities or other issues. Before that, however, you served as a federal prosecutor with a wide and varied docket. Tell us a little about your years in public service and how you draw on those experiences to inform how you engage with the government on behalf of clients.
PH: I served as a prosecutor for 11 years – first, at the Criminal Section of U.S. Department of Justice (DOJ) Tax Division in Washington, D.C., and then as an Assistant U.S. Attorney in the Eastern District of Pennsylvania. Like anyone else in those positions, I learned a lot. One thing I learned is that one of the primary drivers of any good prosecutor – arguably, the main driver – is the following question: Do I have enough admissible evidence so that I feel confident that I can prove my case at trial? It's an obvious question that can be hard to answer in practice. A good prosecutor, or good special agent, ultimately will acknowledge that if the admissible facts just aren't there, then there is no prosecutable case, regardless of any personal antipathy toward the target of an investigation or how much time has been invested in the investigation. Clients sometimes want the government to understand and acknowledge that the client "really is" a decent person or company. I get that impulse, which is very human, and it can be an important piece of advocacy. But if a client is truly in the government's crosshairs, as opposed to a client who is more in the periphery of the government's case or is viewed by the government as an ally, that more emotional approach sometimes can lead to distractions and diminishing returns. If forced to choose one thing, I want the government to understand that it cannot successfully prove its case in front of a jury or judicial fact finder and that it should expend its limited resources on other, more promising cases. Because that's typically what the government actually cares about.
So I try to focus on the facts and communicate a steady willingness to go to trial if necessary to test any theories against those facts. Generally speaking, the more complicated the case is, the more critical it is for the defense to have a command of the full universe of the facts and communicate that universe to the government to try to deter the government from cherry-picking selected facts that suit its theory and ignoring "inconvenient" facts that undermine its theory. As with all decision-making, tunnel vision, group-think and other cognitive biases can be problems during prosecutorial decision-making. I also will acknowledge the government's points, as appropriate, because such conversations need to be two-way streets if they are to be meaningful and authentic.
One concern shared by many in the defense bar is that trials have become less and less common in the federal criminal justice system. Consequently, sometimes it can be more difficult to have an effective discussion about the evidence and likelihood of success at trial because the person you are talking to, respectfully, may not have faced the rigors and uncertainties of trial – at least not in a complicated financial fraud case – and, therefore, may harbor overly confident assumptions and pursue overly broad theories. If so, it can be hard to have meaningful debate. That can be a stressful and frustrating situation because no client wants to be indicted or forced to be a civil litigant in order to have the "opportunity" of trying to show at trial that the government is wrong.
Sometimes, of course, the evidence against your client is very strong, and the case is very unlikely to go away. If your client (whether an individual or corporation) chooses to cooperate, then they need to understand that they are "all in" and proceed accordingly.
JM: I know you are fluent in the Bank Secrecy Act and work closely to help clients comply with and address questions relating to their AML obligations, compliance systems and monitoring practices.
PH: As with so many things right now, the state of AML and countering the financing of terrorism (CFT) regulation is in flux. Certain regulations may be revised and scaled back, as we have seen with the Corporate Transparency Act in a recent flurry of remarkable events. The overlap between AML and sanctions compliance has become incredibly important, although the ground there is also shifting. But fundamentally, AML/CFT compliance is here to stay, even if it shifts over time.
Putting aside potential alterations to the text of existing rules, one of the most important questions is going to be how the day-to-day approach of front-line examiners of financial institutions will change, due to top-down changes, in regard to how they interpret and chose to enforce their perceptions of the rules. It's a question of emphasis and values. A longstanding concern about the BSA regulatory exam process has been that the exercise can prioritize more technical "check-the-box" compliance and not necessarily be tailored to channel the investigative needs of criminal law enforcement agents, which many would argue is the "real" goal of the BSA. Processes have become extremely complicated and baroque. This is why several million Suspicious Activity Reports (SARs) are now filed by financial institutions under the BSA every year in a phenomenon known as "defensive filing." Financial institutions will file SARs, which are not necessarily particularly useful to law enforcement – and it's actually hard to say which SARs are truly useful for because the government provides very little useful feedback – simply to avoid a regulator criticizing a financial institution after the fact for having "failed" to file a SAR. Defensive filings cost the financial institution valuable compliance funds, which could be better spent on other efforts, and don't as readily assist law enforcement because they can include false positives and noise. Meanwhile, many criminal schemes can continue to persist because there is an emphasis on historical reporting vs. aggressive decisions to shut down and disrupt ongoing schemes in real time.
Another major issue is the fading distinction between the AML compliance function and anti-fraud function at financial institutions. Traditionally, and generalizing greatly, "AML compliance" seeks to reduce illicit finance activity – money laundering – which harms the government and society in general. "Anti-fraud compliance" seeks to reduce fraud against the financial institution or its customers and monetary loss. Given the increasing proliferation, sophistication and speed of identity theft and technology-driven scams preying upon financial institutions and their customers, this distinction is getting harder to draw. As a practical matter, the two compliance sides of the house have to communicate constantly and effectively, even if they do not formally merge. Regardless of the government, aggrieved consumers can and will institute civil litigation.
JM: I know you've closely followed developments impacting and limiting, or perhaps even signaling, the end of the government's civil administrative law forums as we've always understood them. You just published a piece on this issue. What questions are you receiving from financial institution and securities market clients about the changes to administrative practice? If you had a crystal ball, what might you say the future holds?
PH: I was part of a team that filed the first federal district court Article II removal and supervision challenge to the SEC Administrative Law Judges system. That was over a decade ago. The filing of that lawsuit was prompted by our belief that the client would get a fair shake in federal district court but would suffer many procedural disadvantages in an administrative law court. Now, DOJ is declining to defend that same issue. I think clients – just like practitioners – are attempting to understand exactly what will be the fate of administrative law courts in a legal landscape that has seen significant change in recent years that does not appear to be coming to any end. Will their use be severely curtailed or even abandoned, or will these courts be substantially altered? Agencies already were reducing their use of administrative law courts, and that trend obviously will accelerate, although the final outcome is impossible to predict, and it may vary from agency to agency. Certainly – and consistent with the themes discussed above about admissible evidence and targeted theories of liability – agencies are going to have to be more selective as to the enforcements cases they bring because litigating certain kinds of cases in federal district court can be harder for the government, just to be plain. This, in turn, will affect negotiations during regulatory exams and investigations because regulators will need to understand that they really will need to be able to justify before a neutral arbitrator their own findings of violations or matters requiring attention. Conversely, if recent events mean that outlier enforcement cases will be abandoned and regulators will reinvest their limited resources on other cases, that also means that a true (or closer call) violator under scrutiny will face even more attention. The need for compliance is not going to disappear.
JM: Peter, thank you for sharing such valuable information with our readers. We look forward to your work with Holland & Knight on behalf of clients, as well as your contributions to the SECond Opinions blog.
