Spying by N.S.A. Ally Ensnared U.S. Law Firm

GIH: Finally, a situation arise that challenge legal nuances about the NSA spying, and attorney client privilege.  The philosophical question is – to what extent are attorney’s legally required, and also as a matter of service, to go in order to ensure client security?  Having a complete encryption solution would prevent 99% of NSA spying, and now issues arise such as trade disputes, which involve confidential business information.  Espionage would not be new to the NSA and intelligence apparatus in general, but this case provides and interesting case study regarding legal issues in international trade disputes, law firms, and the NSA:


The list of those caught up in the global surveillance net cast by the National Security Agency and its overseas partners, from social media users to foreign heads of state, now includes another entry: American lawyers.

A top-secret document, obtained by the former N.S.A. contractor Edward J. Snowden, shows that an American law firm was monitored while representing a foreign government in trade disputes with the United States. The disclosure offers a rare glimpse of a specific instance in which Americans were ensnared by the eavesdroppers, and is of particular interest because lawyers in the United States with clients overseas have expressed growing concern that their confidential communications could be compromised by such surveillance.

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The government of Indonesia had retained the law firm for help in trade talks, according to the February 2013 document. It reports that the N.S.A.’s Australian counterpart, the Australian Signals Directorate, notified the agency that it was conducting surveillance of the talks, including communications between Indonesian officials and the American law firm, and offered to share the information.

The Australians told officials at an N.S.A. liaison office in Canberra, Australia, that “information covered by attorney-client privilege may be included” in the intelligence gathering, according to the document, a monthly bulletin from the Canberra office. The law firm was not identified, but Mayer Brown, a Chicago-based firm with a global practice, was then advising the Indonesian government on trade issues.

On behalf of the Australians, the liaison officials asked the N.S.A. general counsel’s office for guidance about the spying. The bulletin notes only that the counsel’s office “provided clear guidance” and that the Australian agency “has been able to continue to cover the talks, providing highly useful intelligence for interested US customers.”

The N.S.A. declined to answer questions about the reported surveillance, including whether information involving the American law firm was shared with United States trade officials or negotiators.

Duane Layton, a Mayer Brown lawyer involved in the trade talks, said he did not have any evidence that he or his firm had been under scrutiny by Australian or American intelligence agencies. “I always wonder if someone is listening, because you would have to be an idiot not to wonder in this day and age,” he said in an interview. “But I’ve never really thought I was being spied on.”

A Rising Concern for Lawyers

Most attorney-client conversations do not get special protections under American law from N.S.A. eavesdropping. Amid growing concerns about surveillance and hacking, the American Bar Association in 2012 revised its ethics rules to explicitly require lawyers to “make reasonable efforts” to protect confidential information from unauthorized disclosure to outsiders.

Last year, the Supreme Court, in a 5-to-4 decision, rebuffed a legal challenge to a 2008 law allowing warrantless wiretapping that was brought in part by lawyers with foreign clients they believed were likely targets of N.S.A. monitoring. The lawyers contended that the law raised risks that required them to take costly measures, like traveling overseas to meet clients, to protect sensitive communications. But the Supreme Court dismissed their fears as “speculative.”

The N.S.A. is prohibited from targeting Americans, including businesses, law firms and other organizations based in the United States, for surveillance without warrants, and intelligence officials have repeatedly said the N.S.A. does not use the spy services of its partners in the so-called Five Eyes alliance — Australia, Britain, Canada and New Zealand — to skirt the law.

Still, the N.S.A. can intercept the communications of Americans if they are in contact with a foreign intelligence target abroad, such as Indonesian officials. The N.S.A. is then required to follow so-called minimization rules to protect their privacy, such as deleting the identity of Americans or information that is not deemed necessary to understand or assess the foreign intelligence, before sharing it with other agencies.

An N.S.A. spokeswoman said the agency’s Office of the General Counsel was consulted when issues of potential attorney-client privilege arose and could recommend steps to protect such information.

“Such steps could include requesting that collection or reporting by a foreign partner be limited, that intelligence reports be written so as to limit the inclusion of privileged material and to exclude U.S. identities, and that dissemination of such reports be limited and subject to appropriate warnings or restrictions on their use,” said Vanee M. Vines, the spokeswoman.

The Australian government declined to comment about the surveillance. In a statement, the Australian Defense Force public affairs office said that in gathering information to support Australia’s national interests, its intelligence agencies adhered strictly to their legal obligations, including when they engaged with foreign counterparts.

Several newly disclosed documents provide details of the cooperation between the United States and Australia, which share facilities and highly sensitive intelligence, including efforts to break encryption and collect phone call data in Indonesia. Both nations have trade and security interests in Indonesia, where Islamic terrorist groups that threaten the West have bases.

The 2013 N.S.A. bulletin did not identify which trade case was being monitored by Australian intelligence, but Indonesia has been embroiled in several disputes with the United States in recent years. One involves clove cigarettes, an Indonesian export. The Indonesian government has protested to the World Trade Organization a United States ban on their sale, arguing that similar menthol cigarettes have not been subject to the same restrictions under American antismoking laws. The trade organization, ruling that the United States prohibition violated international trade laws, referred the case to arbitration to determine potential remedies for Indonesia.

Another dispute involved Indonesia’s exports of shrimp, which the United States claimed were being sold at below-market prices.

The Indonesian government retained Mayer Brown to help in the cases concerning cigarettes and shrimp, said Ni Made Ayu Marthini, attaché for trade and industry at the Indonesian Embassy in Washington. She said no American law firm had been formally retained yet to help in a third case, involving horticultural and animal products.

Mr. Layton, a lawyer in the Washington office of Mayer Brown, said that since 2010 he had led a team from the firm in the clove cigarette dispute. He said Matthew McConkey, another lawyer in the firm’s Washington office, had taken the lead on the shrimp issue until the United States dropped its claims in August. Both cases were underway a year ago when the Australians reported that their surveillance included an American law firm.

Mr. Layton said that if his emails and calls with Indonesian officials had been monitored, the spies would have been bored. “None of this stuff is very sexy,” he said. “It’s just run of the mill.”

He and the other Mayer Brown lawyers do most of their work on the trade issues from Washington, he said. They also make occasional trips to Jakarta, Indonesia’s capital, and Geneva, where the World Trade Organization is based. Mr. Layton said most of his communications with officials in Jakarta had been done through email, while he also talked by phone with officials at the Indonesian Embassy in Washington.

The N.S.A.’s protections for attorney-client conversations are narrowly crafted, said Stephen Gillers, an expert on legal ethics at New York University’s School of Law. The agency is barred from sharing with prosecutors intercepted attorney-client communications involving someone under indictment in the United States, according to previously disclosed N.S.A. rules. But the agency may still use or share the information for intelligence purposes.

Andrew M. Perlman, a Suffolk University law professor who specializes in legal ethics and technology issues, said the growth of surveillance was troubling for lawyers. He helped create the bar association’s ethics code revisions that require lawyers to try to avoid being overheard by eavesdroppers.

“You run out of options very quickly to communicate with someone overseas,” he said. “Given the difficulty of finding anything that is 100 percent secure, lawyers are in a difficult spot to ensure that all of the information remains in confidence.”

In addition to its work on trade issues with the United States, Mr. Layton said, Mayer Brown was representing Indonesia in a dispute with Australia. He said Indonesia had been arguing that Australia’s requirements for plain packaging for tobacco products under its antismoking rules were excessive.

Economic Espionage

Even though the Indonesian issues were relatively modest for the United States — about $40 million in annual trade is related to the clove cigarette dispute and $1 billion annually to shrimp — the Australian surveillance of talks underscores the extent to which the N.S.A. and its close partners engage in economic espionage.

In justifying the agency’s sweeping powers, the Obama administration often emphasizes the N.S.A.’s role in fighting terrorism and cyberattacks, but disclosures in recent months from the documents leaked by Mr. Snowden show the agency routinely spies on trade negotiations, communications of economic officials in other countries and even foreign corporations.

American intelligence officials do not deny that they collect economic information from overseas, but argue that they do not engage in industrial espionage by sharing that information with American businesses. China, for example, is often accused of stealing business secrets from Western corporations and passing them to Chinese corporations.

The N.S.A. trade document — headlined “SUSLOC (Special US Liaison Office Canberra) Facilitates Sensitive DSD Reporting on Trade Talks”— does not say which “interested US customers” besides the N.S.A. might have received intelligence on the trade dispute.

Other documents obtained from Mr. Snowden reveal that the N.S.A. shares reports from its surveillance widely among civilian agencies. A 2004 N.S.A. document, for example, describes how the agency’s intelligence gathering was critical to the Agriculture Department in international trade negotiations.

“The U.S.D.A. is involved in trade operations to protect and secure a large segment of the U.S. economy,” that document states. Top agency officials “often rely on SIGINT” — short for the signals intelligence that the N.S.A. eavesdropping collects — “to support their negotiations.”

The Australians reported another instance to the N.S.A. — in addition to the one with the American law firm — in which their spying involved an American, according to the February 2013 document. They were conducting surveillance on a target who turned out to be an American working for the United States government in Afghanistan, the document said. It offered no details about what happened after the N.S.A. learned of the incident, and the agency declined to respond to questions about it.

In a statement, Ms. Vines, the agency spokeswoman, said: “N.S.A. works with a number of partners in meeting its foreign-intelligence mission goals, and those operations comply with U.S. law and with the applicable laws under which those partners operate. A key part of the protections that apply to both U.S. persons and citizens of other countries is the mandate that information be in support of a valid foreign-intelligence requirement, and comply with U.S. attorney general-approved procedures to protect privacy rights.”

The documents show that the N.S.A. and the Australians jointly run a large signals intelligence facility in Alice Springs, Australia, with half the personnel from the American agency. The N.S.A. and its Australian counterpart have also cooperated on efforts to defeat encryption. A 2003 memo describes how N.S.A. personnel sought to “mentor” the Australians while they tried to break the encryption used by the armed forces of nearby Papua New Guinea.

Most of the collaboration between the N.S.A. and the Australian eavesdropping service is focused on Asia, with China and Indonesia receiving special attention.

Australian intelligence has focused heavily on Indonesia since the Bali bombing of 2002. The attack, which killed 202 people, including 88 Australians, in a resort area popular with Australians, was blamed on the Southeast Asian Islamist group Jemaah Islamiyah.

The Americans and the Australians secretly share broad access to the Indonesian telecommunications system, the documents show. The N.S.A. has given the Australians access to bulk call data from Indosat, an Indonesian telecommunications provider, according to a 2012 agency document. That includes data on Indonesian government officials in various ministries, the document states.

The Australians have obtained nearly 1.8 million encrypted master keys, which are used to protect private communications, from the Telkomsel mobile telephone network in Indonesia, and developed a way to decrypt almost all of them, according to a 2013 N.S.A. document.

James Risen reported from Washington, and Laura Poitras from Berlin. Charlie Savage contributed reporting from Washington.

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By 
Emily Glazer
The whispers among employees had been around for years. They finally heard some facts during a conference call in June led by managers in Wells Fargo WFC +3.17% & Co.’s foreign-exchange operation: Some of its business customers had been cheated, according to two employees who were on the call.
An internal review showed that out of roughly 300 fee agreements based on anything from informal handshakes to emails to signed documents, only about 35 companies were charged the actual price they had been offered for currency trades handled by Wells Fargo, the employees say.
The phone call was part of a continuing cleanup that has led Wells Fargo to fire four foreign-exchange bankers and federal prosecutors to open their own investigation of the operation, people familiar with the matter have said.
“Wells Fargo remains committed to our foreign exchange business,” the bank said in a statement Monday. “If we find a problem, we fix it.” The bank said its foreign-exchange business is “under new management.”
The business is tiny compared with foreign-exchange operations at J.P. Morgan Chase & Co. and Citigroup Inc. but could become another huge headache for the San Francisco bank, still grappling with fallout from the sales-practices scandal in its retail operations. The scandal led to last year’s abrupt retirement of Wells Fargo’s chief executive, a $185 million regulatory settlement and numerous federal and state investigations, which are continuing.
Wells Fargo retail employees had to hit lofty goals to keep their jobs or get bonuses, which led some employees to open potentially 3.5 million accounts with fictitious or unauthorized customer information from 2009 to 2015.
Foreign-exchange employees got bonuses based solely on how much revenue they brought in, say more than a dozen current or former Wells Fargo employees. No other big bank in the U.S. calculated bonuses of currency traders in such a defined and individual way. Wells Fargo said Monday that it began making changes to those compensation plans earlier this year.
The bank also charged some of the highest trading fees around, according to current and former employees. For more than a decade, customers were sometimes charged anywhere from 1% to 4% on basic transactions such as converting euros to dollars and complicated trades like hedging.
Those percentages can be at least two to eight times higher than the middle-market industry average of 0.15% to 0.5%, depending on the trade, customer and volume, according to foreign-exchange bankers throughout the industry.
Wells Fargo disputes the descriptions of its foreign-exchange fees by current and former employees. The bank said Monday its fees in 2016 had a weighted average of 0.09 percentage point across all transaction sizes. Clients served by its middle-market banking team were charged a weighted average of 0.18 percentage point, according to Wells Fargo.
Some foreign-exchange bankers at Wells Fargo relied on the fact that customers often didn’t bother to double-check how much they were charged, fee levels weren’t straightforward, and complaints could be batted away, the current and former employees say.
‘Time fluctuation’
One former Wells Fargo manager says employees would tell customers who expressed surprise at the size of a trading fee that market prices were different at the moment when the transaction was executed and blame “time fluctuation” for any difference.
The bank’s foreign-exchange customers have included telecommunications firm CenturyLinkInc., vehicle-parts supplier Federal-Mogul Holdings Corp. and nonprofit groups such as the National Bone Marrow Donor Program.
Regulators have been investigating the foreign-exchange business at Wells Fargo, including a big trade involving Restaurant Brands International Inc., the owner of Burger King, Tim Hortons and Popeyes Louisiana Kitchen, according to people familiar with the matter.
A Burger King in Tokyo. The fast-food chain’s owner got a refund from Wells Fargo after disputing a trade handled by the bank.
A Burger King in Tokyo. The fast-food chain’s owner got a refund from Wells Fargo after disputing a trade handled by the bank. PHOTO: KIM KYUNG-HOON/REUTERS
The trade resulted in a loss to Restaurant Brands, people familiar with the matter have said, which led to a dispute between the Oakville, Ontario, company and the bank. The dispute centered on how bank employees handled the trade, rather than its pricing. Wells Fargo refunded about $900,000 to Restaurant Brands, people familiar with the refund say.
The foreign-exchange business’s problems run far deeper than what is known inside Wells Fargo as “the Burger King trade” or what has been previously reported. The extent of the trouble seems to have become apparent to top Wells Fargo executives earlier this year.
Small FryForeign-exchange spot contracts as apercent of a bank's total derivativesportfolioTHE WALL STREET JOURNALSource: Office of the Comptroller of the Currency
Bank ofAmericaCitigroupJ.P. MorganWells Fargo0%102030
The business was moved in early 2017 from Wells Fargo’s international division into its investment-banking and capital-markets operation. Since then, executives have changed internal systems, added more stringent rules around pricing and required more frequent compliance checks, current and former employees say.
Issues with the Burger King trade were found following those checks and customer complaints, people familiar with the matter say. The continuing internal review of Wells Fargo’s foreign-exchange operation is separate from the review sparked by the sales scandal, some of the people said.
A compliance training session in early November detailed what Wells Fargo called “approved margins” for different volumes of foreign-exchange transactions, according to an internal document reviewed by The Wall Street Journal. Employees say fee levels remain higher than industry norms, and some compensation practices aren’t due to change until next year.

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Foreign-exchange trading has been a problem area for many banks. In 2015, several large U.S. and European banks agreed to multibillion-dollar settlements with U.S. regulators and pleaded guilty to criminal charges filed by U.S. authorities over alleged collusion among currency traders.
Bank of New York Mellon Corp. agreed in 2015 to pay $714 million to resolve allegations it defrauded pension funds and other clients by overcharging them on currency transactions.State Street Corp. agreed in 2016 to pay $530 million to settle similar allegations.
Both banks admitted giving some clients far worse pricing on currency transactions than the banks implied the clients would get.
The Journal reported in October that the U.S. Attorney’s Office for the Northern District of California is investigating the Restaurant Brands currency trade and has subpoenaed information from Wells Fargo.
Potential issues related to that trade also are being examined by the Federal Reserve, the Journal reported. Examiners from the Office of the Comptroller of the Currency are auditing Wells Fargo’s foreign-exchange business, according to employees at the bank. A Wells Fargo executive says the audit is “normal course of business.”

Payment Plans

Some current and former Wells Fargo employees say its charges on foreign-exchange trades encouraged employees to cheat customers.

Fees for some currency trades
Industry average
Wells Fargo
Fee: 0.15 - 0.5%
Fee: 1% - 4%
For a $10 million trade
Fee:
$100,000 - $400,000
Fee:
$15,000 - $50,000
How Wells Fargo compensated bankers
If a banker had a revenue target of $5 million
and brought in $6 million ...
Revenue target: $5 million
Revenue that exceeded target: $1 million
.. the banker would earn a bonus of $100,000,
or 10% of the $1 million
Bonus
Source: People familiar with the bank
Current and former bank employees say its pricing practices were rooted in a culture and compensation system that looked to maximize revenue. Bonuses were defined as 10% of revenues exceeding revenue targets.
If a banker’s revenue target was $5 million and the person brought in $6 million, he or she would earn a $100,000 bonus, or 10% of the additional $1 million in revenue. Bankers typically received such bonuses twice a year in cash, rather than stock, as part of a signed contract, they added.
It’s rare among foreign-exchange groups in other banks to have so-called defined-bonus plans focused on individual earnings, according to people in the industry.
After Wells Fargo moved the foreign-exchange business into its investment bank earlier this year, managers began telling employees that bonuses would become “discretionary” by the end of 2017. Under this more typical arrangement, management would decide employee bonuses, and bankers wouldn’t know exactly how much they would receive. It would be based on a variety of factors, not just revenue.
Wells Fargo has 18 foreign-exchange sales and trading offices, including in New York, San Francisco, Charlotte, N.C., London and Hong Kong. A few hundred people work in the group world-wide.
Current and former employees say Wells Fargo’s foreign-exchange customers are largely midsize businesses that don’t tend to trade in large volumes. As a result, those clients don’t have the same insight into the market as larger firms that are more-active traders.
Some Wells Fargo clients have complained to the bank. In November 2016, Ecolab Inc., a water, hygiene and energy company based in St. Paul, Minn., bought and sold currency in a so-called swap arranged by the bank, according to people familiar with the deal. These people say Wells Fargo collected 1% on one part of the $100 million deal.
Ecolab contested the fee charged by Wells Fargo on a transaction arranged by the bank.
Ecolab contested the fee charged by Wells Fargo on a transaction arranged by the bank. PHOTO:ARIANA LINDQUIST/BLOOMBERG NEWS
After Ecolab compared the full trade, including fees, to overall market prices, the company contested the bank’s fee. Wells Fargo refunded hundreds of thousands of dollars to Ecolab in December 2016, according to current and former employees.
A spokeswoman for Ecolab confirmed the details of the trade and said it was the only fee issue Ecolab had with Wells Fargo.
Fee issues arose for some Wells Fargo clients even when they had a pricing agreement. The bank agreed within the past 18 months to a specified rate with data-management firm Veritas Technologies LLC, according to bank employees. After making one trade on behalf of Veritas, Wells Fargo bankers told Veritas that the bank’s fee was 0.05 percentage point higher than the agreed rate, the employees say.
Unusually high fees
The result: The bank made an extra $50,000 on a $100 million trade, the employees say. Wells Fargo later made a refund to Veritas, according to people familiar with the matter. A Veritas spokeswoman declined to comment.
Wells Fargo’s foreign-exchange business also charged unusually high fees for trades with different currency conversions, known as “Bswift” transactions, current and former employees say.
“And if anybody did complain, it was an easy tap dance,” one former employee says. He says employees would say the pricing had been done automatically by the bank’s computer system so “there’s no accountability for the spread.”
Wells Fargo sent an internal email Nov. 2 detailing new guidelines for Bswift transactions, according to a copy of the email reviewed by the Journal. The guidelines include specific handling and pricing procedures for those trades.
The operation also charged high fees to other parts of Wells Fargo. Wells Fargo Rail, which leases locomotives and railcars, and the bank’s corporate-trust division are often charged 1% to 1.5% on currency transactions, according to current and former employees.
The bank’s foreign-exchange management often celebrated big trades and the money they made for the bank, the current and former employees say. Sara Wardell-Smith, who led the foreign-exchange group, emailed the group to hail big trades, naming clients and spelling out revenue generated. The employees say managers used to encourage employees to ring a brass bell in the San Francisco office when the bank made a lot of money on a trade.
In mid-October, the bank announced that Ms. Wardell-Smith would lead its financial institutions group in the Americas region, according to a memo reviewed by the Journal and confirmed by a bank spokeswoman.
Current employees say the move was viewed within Wells Fargo as a demotion, coming just months after Ms. Wardell-Smith had been promoted to co-lead the bank’s division focusing on trading of rates, currencies and commodities. She didn’t respond to requests for comment.
The other co-leader, Ben Bonner, now leads that group on his own and is overseeing foreign-exchange trading, a bank spokeswoman confirms.
Mr. Bonner has been working with other executives to fix the problems in the currency business, according to several current employees.
Last month, the bank sent a memo to foreign-exchange employees that instructs them not to create informal or oral pricing agreements. The memo, reviewed by the Journal, also said employees are “responsible for ensuring customers are not misled regarding” pricing.
Current and former employees say some Wells Fargo employees expressed concerns about pricing practices to top executives before the bank’s internal cleanup efforts began earlier this year. Some employees say they were reluctant to press for sweeping changes, citing what they saw happen to one manager in the foreign-exchange operation about a decade ago.
During a meeting of foreign-exchange managers in the mid-2000s, Cathy Witt said it wasn’t right to celebrate high fees by ringing a bell, people familiar with the situation say. Ms. Witt, an employee in the bank’s Chicago foreign-exchange group, warned that Wells Fargo could become known as a “bucket shop,” a derisive term for a disreputable finance firm, some of the people say.
A few weeks later, Ms. Witt was summoned to a meeting in St. Louis, told that her comments had been offensive and demoted on the spot, according to people familiar with the matter. She also was told to apologize to other managers for her unprofessional behavior, the people say. She later left the bank.
—Aruna Viswanatha contributed to this article.

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