It has been widely reported that the SEC recently sent letters of inquiry to several banks and private equity firms requesting that they retain documents relating to their dealings with sovereign wealth funds. This may well signal an industry-wide FCPA inquiry similar to that launched against the pharmaceutical industry, which began when many pharmaceutical companies received similar letters.
Why the Financial Services Industry?
Neither the SEC nor DOJ have confirmed whether this is an
industry-wide probe. However, financial services companies'
dealings with sovereign wealth funds are certainly a logical place
to begin a broad inquiry. Over the past several years, particularly
in light of the financial crisis in the U.S., sovereign wealth
funds have invested heavily with private equity funds and the
largest Wall Street firms. They are by definition government owned
and funded. Therefore, their employees are foreign government
officials under the FCPA, which, broadly speaking, prohibits the
paying, or offering to pay, money or anything of value, to a
foreign government official to assist in obtaining or retaining
business. The FCPA further requires companies, which are publicly
traded in the United States to accurately reflect all payments in
their books and records, and to maintain adequate FCPA internal
controls. Recent violations have resulted in fines exceeding
hundreds of millions of dollars and corporate employees and
executives have been sentenced to significant prison terms.
The FCPA provides particular challenges to the financial services
industry, and not only with respect to its dealings with sovereign
wealth funds. What many consider typical client entertainment in
the industry -- tickets to sporting events, payment of client
travel to industry conferences, gifts, lavish closing dinners, and
the like -- could be considered "something of value"
under the FCPA, and may run afoul of the statute if the client is a
foreign government official or political party official. Similarly,
allowing friends and family participation in IPO's, and other
similar benefits, for those deemed foreign government officials
would likely also be a violation.
Additionally, successor liability issues are particularly acute for
the financial services industry, as a company can literally buy
another company's FCPA liability. This is amply demonstrated by
GE's recent $23.4 million FCPA settlement with the SEC where 14
of the 18 unlawful payments for which GE was held liable were made
by subsidiaries GE purchased after the subsidiaries made the
unlawful payments. Even minority stakes in companies can lead to
FCPA liability if the investor is aware of FCPA issues or warning
signs, yet takes no action. Furthermore, financial service
companies frequently operate and invest in high corruption risk
areas, such as India, China, the Middle East and other emerging
markets, and will continue to do so at increasing levels in the
years to come. Given these and other potential pitfalls for
financial services companies, it is no surprise DOJ and the SEC
have turned their attention to the industry.
How Can Financial Services Companies Protect Themselves From Potential FCPA Exposure?
- FCPA Compliance Policy: A comprehensive and rigorous FCPA compliance policy and program are essential to preventing and detecting unlawful conduct.
- Global Implementation: Corporate FCPA compliance programs must apply not only to the U.S. entity and its employees, but also to its non-U.S. subsidiaries, and agents, sales representatives, distributors, joint venture partners, or other business affiliates in any country in which the company is doing business.
- Due Diligence Guidelines: Devise specific FCPA due diligence guidelines for acquisitions and investments focusing on sales to foreign governments as well as foreign operations and the use of agents in high risk areas. Use FCPA counsel or other experts in the FCPA, working under counsel to maintain the attorney-client privilege, who know what to look for in conducting FCPA due diligence.
- Training and Oversight: Both the compliance and due diligence programs must include robust and effective training components, together with objective reviews and audits by those knowledgeable in FCPA compliance.
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.
