This article is the second in a series concerning anti-corruption enforcement trends impacting companies subject to the U.S. Foreign Corrupt Practices Act of 1977 (FCPA)1, as amended. The first article, entitled "Recent Prosecutions Effectively Expand the Reach of FCPA Enforcement," appeared in the Fall 2012 Edition of the Corporate Counsel Section Newsletter for the State Bar of Texas2 and described how an increasing reliance on new prosecutorial methods, including use of the Money Laundering Control Act (MLCA),3 the Travel Act,4 and conspiracy statutes5 have enabled the U.S. Department of Justice (DOJ) and U.S. Securities and Exchange Commission (SEC) to capture conduct once thought beyond the reach of the FCPA.
In our Fall 2012 article, we previewed that U.S. authorities' expansive enforcement efforts have led to increasing regulatory scrutiny of financial institutions, entities not often targeted in the past for FCPA violations. Although relevant U.S. statutes provide varying definitions of "financial institution," the Bank Secrecy Act, just one of several U.S. anti-money laundering laws cited in our Fall 2012 article, defines financial institutions to include traditional banks as well as investment companies and loan and finance companies, among others.6 For the purpose of this article, we employ a similarly broad definition of "financial institution," exploring the potential liability and recent FCPA enforcement trends impacting traditional insured banks, as well as private equity companies, hedge funds, and other privately held financial and loan institutions. We also offer several compliance measures that financial institutions should consider to mitigate their mounting anti-corruption risks.
II. Multi-Faceted Exposure - The FCPA's Application to Financial Institutions
The FCPA prohibits U.S. companies, their subsidiaries, officers, directors or employees from directly or indirectly bribing foreign government officials for the purpose of obtaining or retaining business.7 It also requires public companies registered with the SEC to keep accurate books and records and maintain an effective system of internal controls.8
Financial institutions are doubly exposed under the FCPA. Many face potential FCPA liability for the acts of the parent firm or hedge fund, as well as for any corrupt conduct committed by the entities in which they invest. At the portfolio asset level, liability may result from conduct that occurs after the financial institution has made its investment in the relevant entity, but also could result from conduct that occurred pre-investment. Where a financial institution fails to discover an investment target's FCPA violations through pre-investment due diligence or fails to remediate issues that are discovered, successor liability for any FCPA violations may follow the investing entity.9
III. Recent FCPA Enforcement Involving Financial Institutions
In the last two years, the DOJ and SEC have actively pursued anti-corruption investigations involving some of the country's most significant financial institutions. As early as 2008, regulators forecasted their interest in the industry. Steven Tyrrell, then Chair of the DOJ Fraud Section, emphasized the DOJ's desire to investigate corrupt investments, stating that the "boom of sovereign wealth funds is an area at the top of the Justice Department's hit list."10 In November 2010, when Cheryl J. Scarboro, then Chief of the SEC's FCPA Enforcement Unit, touted the success of industry-wide FCPA sweeps in the energy and pharmaceutical sectors, her remark that "no industry is immune from [FCPA] investigation" led many to speculate that the financial services industry would be next.11
A. Canvassing the Industry – On-Going Investigation Involving Sovereign Wealth Funds
In January 2011, the SEC made good on its promise, sending letters to ten financial institutions, including U.S.-based banks, hedge funds, and private equity firms, concerning their relationship with sovereign wealth funds.12 Sovereign wealth funds, which are created, owned, and often controlled by foreign governments, are increasingly prevalent investors in U.S. enterprises and privately held funds. Because of foreign government ownership and control, sovereign wealth funds may be considered foreign government instrumentalities for the purpose of the FCPA, and interactions necessarily will involve government officials. Although few details were released about the SEC inquiry, the letters appear to have requested information about expenses incurred in connection with sovereign wealth fund investments, as well as anti-corruption measures undertaken by targeted institutions. The investigation remains on-going.
In connection with this industry-wide scrutiny, full service international banking institutions continue to receive attention from FCPA enforcers. Last summer, Goldman Sachs disclosed in SEC filings that the firm was responding to an investigation regarding its compliance with the FCPA.13 Reports indicate that the SEC is investigating Goldman's relationship with Libya's sovereign wealth fund. Subsequently, on September 20, 2012, a significant UK-based financial institution reported in an Interim Management Statement filed with the London Stock Exchange that the DOJ and SEC are investigating whether its "relationships with third parties who assist [the financial institution] to win or retain business are compliant" with the FCPA.14 The investigation follows British authorities' review of the institution's relationship with a Qatari sovereign wealth fund.15
B. Private Equity Firms and Hedge Funds Exposed
In contrast to publicly held banking institutions, until the recent passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act,16 private equity firms and hedge funds traditionally have not been subject to SEC reporting requirements. As a result, investigation of potential violations of the U.S. securities laws, including the FCPA, can go unreported for some time. Despite this, there is some evidence that private equity firms and hedge funds face mounting pressure from regulators concerning corruption at their portfolio companies. Investigations often involve conduct committed prior to the firm's or fund's investment or acquisition. Prominent enforcement actions following this pattern include the 2007 settlement by Omega Advisors
(Omega) in which Omega acknowledged that prior to investing in an Azerbaijani privatization program, a former employee learned of arrangements to provide Azerbaijani officials with financial interests in the venture in return for the award of privatization rights.17 More recently, the SEC announced that it would not pursue charges against Allianz SE (Allianz), a Munich-based global financial services provider, for conduct committed by German printing equipment maker manroland AG (manroland).18 Manroland is 60% owned by Allianz' private equity arm, Allianz Capital Partners. The Allianz investigation was announced in 2010, and evolved to include not only allegations of improper payments on the part of manroland, but also corruption at a joint venture in Indonesia ultimately owned by the Allianz parent company. Hardly a sign that enforcement authorities are backing away from efforts to hold investors liable, the decision by the SEC not to pursue the conduct at Allianz' portfolio asset is believed to result from difficulties the SEC faced attempting to secure evidence from Germany, coupled with the parent company's willingness to settle the Indonesian charges.19
IV. Limiting Liability By Implementing an Effective Compliance Program
In November 2012, the DOJ and SEC released the long-awaited "Resource Guide to the U.S. Foreign Corrupt Practices Act," (Guidance).20 The 120-page Guidance analyzes the FCPA and its application to subject companies and individuals and examines the agencies' approaches to FCPA enforcement. The Guidance concludes with a much anticipated overview of recent declinations by the agencies, or matters in which the DOJ and SEC have expressed their intention not to pursue an enforcement action. In each anonymized declination example, the Guidance provides that regulators considered whether the companies' internal controls and compliance programs detected the potential violation, as well as the nature of remedial compliance measures taken in deciding whether to pursue enforcement actions.
In February 2013, in a further endorsement of the view that a robust compliance program may help prevent FCPA prosecution, Jeffrey Knox, Principal Deputy Chief of DOJ's Fraud Section, stated that the agency has dedicated itself to promoting compliance programs that work, emphasizing that the declination examples included in the Guidance were real-world cases where the DOJ chose not to file charges because of companies' good processes. Acknowledging that there are circumstances in which companies present to the authorities with a violation of law, Knox stated that despite this, companies with strong compliance programs "often walk out the door with declinations."21 On February 22, 2013, at the recently concluded 2013 SEC Speaks Conference, Kara Brockmeyer, Chief of the SEC FCPA Unit, discussed the Guidance, and specifically the agencies' recommendations regarding compliance programs. Brockmeyer stated that companies would be wise to design and implement programs that address risks specific to their industries, and must continually adapt those programs to address new risks. Particular to the financial industry, where financial firms and funds often have significant internal processes to monitor financial controls, Brockmeyer advised that the most effective compliance programs merge existing financial controls with anti-corruption compliance procedures.22
A. Steps to Creating an Effective Compliance Program
The following are steps that financial institutions should consider to enhance anti-corruption compliance programs in an effort to mitigate the risk of corruption in their organizations:
1. Implement anti-corruption compliance procedures. Although not dispositive as to FCPA liability, the existence of a robust, thoughtfully tailored, and effectively implemented compliance program not only may help to identify corruption issues, but also may mitigate liability. Written policies and procedures, coupled with regular training, are an essential way to assure that a financial institution's personnel understand the standards they are expected to follow, the red flag issues necessary to detect potential issues, and the manner and method to report and investigation concerns.
2. Conduct a risk assessment. Financial institutions and private equity firms in particular, are wise to take stock of their existing portfolio, rating the assets based on apparent corruption risks such as the presence of any on-going corruption investigation or audit, the nature and location of operations, reliance on third-parties, and level of regulatory oversight and involvement. At the same time, the parent fund or firm should attempt to gauge the compliance program at the portfolio company level, through telephone or in-person interviews, questionnaires and document requests. Resources for more in-depth review could be preserved for those portfolio companies that exhibit either significant corruption risks, or present a mismatch between the perceived level or risk and strength of compliance program. Based on the review of risks and strength of compliance program, a parent fund or firm can make recommendations to help the portfolio assets strengthen their programs, thus reducing the investors' risk for liability.
3. Perform due diligence. Failure to implement robust due diligence procedures puts financial institutions at tremendous risk for FCPA liability. Pre-investment due diligence reviews necessarily are tailored to the risks presented by a potential target, but common steps include requesting FCPA questionnaires, securing third party due diligence reports, conducting telephonic or in-person interviews, and securing compliance representations and certifications. Issues that are discovered during a pre-investment due diligence reviews not only affect a decision to proceed, but also may serve as a negotiation tool, affecting price, compliance, and indemnity terms.
4. Test for program effectiveness. U.S. regulators afford little credit for "paper programs," or stock off the shelf programs that have not been tailored to meet a financial institution's needs, are ineffective to address risk, and are ignored by the organization. Regular review and monitoring of a compliance program's implementation will help a financial institution demonstrate effectiveness of the compliance program. Testing may include interviews with executives and personnel to gauge understanding of policies and procedures, auditing or accounting review of high risk transactions, and review of any hotline or other concern reporting mechanisms.
B. Leveraging Existing Procedures for a Comprehensive Compliance Program
Attempting to implement or enhance a corporate compliance program while maintaining oversight of existing assets can be a daunting task. Many institutions faced with this challenge overlook existing internal resources and procedures that may serve a dual purpose. For example, many financial institutions are required by regulation to have Anti-Money Laundering (AML) risk assessment and screening procedures, as well as compliance measures. AML compliance programs often rely on the same processes typically found in FCPA compliance programs, including a screening component (such as "know your customer" questionnaires), training for personnel, and reporting and investigative functions. In addition, AML programs often involve a risk assessment process whereby an institution surveys its affiliates and branch units annually to asset AML compliance. Thoughtful tailoring of existing AML policies, procedures and training can work to effectively capture FCPA-related issues. In particular, expanding an annual AML risk assessment to capture FCPA compliance may allow financial institutions to more quickly identify corruption issues and compliance weaknesses that could lead to FCPA violations.
It is clear from U.S. regulators' pronouncements and the increase in investigations involving financial institutions that U.S. enforcement authorities will continue to carefully scrutinize financial institutions to evaluate their compliance with the FCPA. Financial institutions are well-advised to devote resources to creating compliance programs designed to address anti-corruption risks, and to providing training to personnel to assure that compliance expectations are understood throughout the organization.
1 15 U.S.C. §§ 78dd-1, et seq.
2 The full article is available at http://www.txcorp.org/images/customers/127149/storage/091_FCPA%20ARTICLE%20(FINAL)%20[9-12-2012]%20(VE).PDF.
3 18 U.S.C. §§ 1956-1957.
4 18 U.S.C. § 1952.
5 See e.g. 18 U.S.C. § 1956(h) (conspiracy to commit money laundering).
6 See 31 USC § 5312(a)(2).
7 15 U.S.C. § 78dd-2(a).
8 15 U.S.C. § 78dd-1(a).
9 See DOJ and SEC Guidance, A RESOURCE GUIDE TO THE U.S. FOREIGN CORRUPT PRACTICES ACT (Nov. 14, 2012), p. 27, available at http://www.justice.gov/criminal/fraud/fcpa/guidance/ (noting that "successor liability applies to all kinds of civil and criminal liabilities, and FCPA violations are no exception").
10 Nicholas Rummell, Cash Crunch Could Result in More Corruption Cases, FINANCIAL WEEK, (Oct. 7, 2008), previously available at www.financialweek.com/apps/pbcs.dll/article?AID=/20081007/REG/810079983/1036 (no longer available online).
11 See Press Release, Sec. & Exch. Comm'n, SEC Charges Seven Oil Services and Freight Forwarding Companies for Widespread Bribery of Customs Official, (Nov. 4, 2010), available at https://www.sec.gov/news/press/2010/2010-214.htm.
12 See Dionne Searcey & Randall Smith, SEC Probes Banks, Buyout Shops Over Dealings With Sovereign Funds, THE WALL ST. J., (Jan. 14, 2011), available at
13 See Goldman Sachs Group, Inc. Quarterly Report (Form 10-Q) 99 (Aug. 9, 2011); See also Samuel Rubenfeld, SEC Looks at Goldman, Others' Dealing With Libyan Sovereign Fund, WALL ST. J., (Jun. 9, 2011), available at http://blogs.wsj.com/corruption-currents/2011/06/09/sec-looks-at-goldman-others-dealing-with-libyan-sovereign-fund/?mod=google_news_blog.
14 See Barclays PLC Interim Management Statement (Sep. 30, 2012), available at http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail.html?announcementId=11380155.
15 See David Enrich and Max Colchester, Scrutiny of CFO Adds Strain Atop Barclays, WALL ST. J., (Jul. 27, 2012), available at http://online.wsj.com/article/SB10000872396390443343704577552221781046032.html.
16 PUB.L. 111–203, H.R. 4173 (Jul. 21, 2010).
17 See Dep't. of Justice, Press Release, (Jul. 6, 2007), available at http://www.justice.gov/criminal/fraud/fcpa/cases/omega-advisors/07-06-07omega-settlement.pdf.
18 Aruna Viswanatha, U.S. SEC to Limit Charges Against Allianz, REUTERS (Oct. 14, 2011), available at http://www.reuters.com/article/2011/10/14/allianz-fcpa-idUSN1E79D1DY20111014.
19 Id.; see also Sec. & Exch. Comm'n, Press Release, SEC Charges Germany-Based Allianz SE with FCPA Violations (Dec. 17, 2012), available at http://www.sec.gov/news/press/2012/2012-266.htm (note, SEC Cease and Desist Order available at same source).
20 See Endnote 9.
21 See Erica Teichert, Good Compliance Plans Halt Prosecutions: DOJ, LAW360, (Feb. 12, 2013), available at http://www.law360.com/articles/414972/good-fcpa-compliance-plans-can-halt-prosecutions-doj.
22 See Thomas Cimino and Junaid Zubairi, Highlights from SEC Speaks 2013, NATIONAL LAW REVIEW, (Feb. 26, 2013), available at www.natlawreview.com/article/highlights-securities-and-exchange-commission-sec-speaks-2013.
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