On May 7, 2013, federal prosecutors in the Southern District of
New York unsealed criminal Foreign Corrupt Practices Act
("FCPA"), money laundering, and Travel Act charges
against two employees of Direct Access Partners, LLC
("DAP"), a New York based broker-dealer, in connection
with a "web of bribery and corruption" involving Banco de
Desarrollo Economico y Social de Venezuela ("BANDES"),
the state-owned economic development bank of
Venezuela. Prosecutors also charged Maria Gonzales, the Vice
President of Finance at BANDES - and a "foreign official"
under the FCPA - with conspiring to violate and violating the
Travel Act. In addition, DOJ brought a civil forfeiture action
seeking the forfeiture of bank account assets and properties held
by individuals associated with scheme. In releasing news
of the charges, Acting Assistant Attorney General for the Criminal
Division Mythili Raman stated that this case is a "wake-up
call to anyone in the financial services industry who thinks that
bribery is the way to get ahead." Manhattan U.S. Attorney
Preet Bharara noted that "[the SDNY] along with all of our
federal partners, is committed to holding individuals who violate
the Foreign Corrupt Practices Act to account."1 The
SEC separately brought related, non-FCPA securities fraud charges
against the two DAP employees and two other individuals involved in
the "massive kick-back scheme" involving illicit bribes
and "pay to play" arrangements with Gonzales.2
The DOJ and SEC public statements did not say what, if any, action
might be taken against DAP.
The charges arose out of a periodic SEC examination of DAP and its
Global Markets Group ("DAP Global"). According to
the SEC and DOJ, the SEC examination led to the discovery of the
fraud, which resulted in somewhere between $3.6 million and $9.1
million in improper payments to Gonzales, who oversaw BANDES'
trading with DAP. The alleged fraud was funded by inflating
the mark-ups and mark-downs DAP Global took on riskless principal
trade executions in Venezuelan sovereign or state-sponsored bonds
for BANDES, resulting in significant transaction fees for DAP
Global. Some portion of these fees was then purportedly paid
as a kick-back to Gonzales through a variety of sham "foreign
finders" and shell companies. According to the
government's charging papers, it appears that the two named DAP
Global employees, and possibly others, conspired to keep some
amount of these fees for their own personal
benefit.
Alleged Red-flags Around DAP Global's Relationship
with BANDES Included:
- Payments to unregistered "foreign finders" who were
not involved in introducing BANDES to DAP in violation of FINRA and
SEC regulations.
- Unusually high commissions to those foreign finders (one was
paid $8 million in a three-month period in 2009).
- Evidence of the bribery scheme in company emails to client and
use of personal email accounts for work-related business.
- Mark-ups and mark-downs that regularly exceeded 5% with no
justification.
- Over 60 internal fictitious "wash trades" used to
conceal trades with BANDES from DAP's clearing broker.
- Inter-positioning another broker-dealer to conceal trades with
BANDES from DAP's clearing broker.
- Two major intra-day "round-trip" transactions resulting in a $10.5 million profit to DAP and a correlative loss for BANDES.
Key Compliance Take-Aways:
- This appears to be the first time the government has publicly
noted that FCPA charges arose out of a periodic SEC examination of
a registered entity. This may cause the SEC to increase its
focus on corruption-related issues in the course of these routine
exams.
- This is one of just a handful of occasions in which DOJ has
brought criminal charges against a foreign national who qualifies
as a "foreign official" under the FCPA in connection with
an FCPA prosecution of other entities or individuals who are
actually covered by the statute. It may be particularly
meaningful here, where the foreign government official in question
was in a position to regularly interface with many broker-dealers
and financial institutions.
- These charges are consistent with a burgeoning trend of DOJ
bringing concomitant money-laundering charges based on a predicate
bribery scheme. This increasingly regular pairing puts a fine point
on the need for financial services firms to coordinate their
anti-corruption and AML controls.
- Though the risks of dealing with sovereign wealth funds have
been much discussed in connection with the government's
particular scrutiny in this area (see
WilmerHale's 2012 FCPA Year-in-Review client
alert), this case crystalizes the risks associated with
dealing with other state-owned institutional clients like central
banks and economic development banks. It also highlights the
risks in using foreign finders to attract fixed income brokerage
clients, where much focus has previously centered on the use of
finders in the investment banking context. Financial services
firms should focus compliance control efforts around these risks,
and should consider imposing heightened monitoring around these
types of client relationships.
- Although DAP is a New York based broker-dealer, much of the
alleged misconduct was directed out of the Miami branch office of
the firm. This emphasizes the need for financial services
firms to drill down centralized compliance policies, procedures and
training to its branch locations, and to ensure that those branches
are adequately supervised. In this regard, firms should
consider the incremental impact of in-person trainings.
- The alleged lack of controls and/or subversion of DAP's control environment demonstrate that, where possible, supervisory reviews of communications, mark-ups and other trade-related materials should be calibrated to corruption risks associated with the particular client at issue.
The SDNY criminal complaint can be found here, the SDNY civil forfeiture complaint here, and the SEC complaint here.
Footnotes
1. "http://www.justice.gov/opa/pr/2013/May/13-crm-515.html"
2. "http://www.sec.gov/news/press/2013/2013-84.htm
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