In September 2016, a U.S. hedge fund entered into a settlement with the U.S. Securities and Exchange Commission (SEC) to resolve multiple violations of the Foreign Corrupt Practices Act (FCPA).
The $39 billion firm is the first hedge fund U.S. officials have charged under the FCPA, as both the SEC and Department of Justice (DOJ) increase their scrutiny of the methods financial services firms are using to invest in natural resources and sovereign wealth funds overseas.
The FCPA prohibits U.S. companies or those doing business in the U.S. from making payments or giving gifts to foreign officials in exchange for business, whether directly, or through intermediaries.
Firms can avoid criminal and civil penalties under the Act by training employees to recognize, avoid and address potential violations with Thomson Reuters’ online FCPA training course.
Globalization attracts investors to overseas investments
Until recently, only oil companies have been subject to bribery investigations related to natural resources.
Globalization, however, has led to more banks and hedge funds seeking investments from government-owned funds in oil-rich countries, as well as investment opportunities in nations with valuable natural resources, often in regions at a higher risk for corruption.
Recognizing this, in 2011, the SEC launched an inquiry into the transactions and business practices of the private equity and hedge fund industry.
Hedge fund focus of first criminal FCPA case for natural resource investments
It was during the course of this inquiry that the SEC detected misconduct at the hedge fund in question, leading to the first criminal foreign-bribery case against a major financial firm for investments in natural resources and sovereign wealth funds.
According to the SEC, the firm used an intermediary with ties to high-level officials to make over $100 million in bribes to secure investment opportunities in the Congo.
Likewise, the firm utilized an agent to broker an agreement in which it paid a $3.75 million “finder’s fee” to Libyan officials through a shell company after Libya’s sovereign wealth fund, the Libyan Investment Authority, made a $300 million investment into the firm’s managed funds.
U.S. officials also arrested a firm intermediary who the SEC claims provided cash and gifts to officials in Chad, Niger and Guinea to help the firm secure mining rights and other investment opportunities.
The SEC alleged the firm’s lax attitude towards compliance led it to ignore red flags and corruption risks in its African ventures and employ intricate schemes to secure business and profits in the region.
In addition to violations of the anti-bribery provisions of the Securities Exchange Act of 1934, regulators also charged the firm with violating the books and records provisions of the Act by falsely recording the bribes and inaccurately depicting the purpose of its managed investor funds.
Finally, the SEC claims the firm’s failure to maintain adequate policies and procedures to detect or prevent the bribes violated the Act’s internal controls requirements.
Fund agrees to record fine and regulatory oversight
The firm agreed to pay the SEC nearly $200 million in fines and disgorged profits, as well as a $213 million criminal penalty in a parallel Department of Justice (DOJ) proceeding, making the total of $413 million the fourth largest FCPA penalties ever assessed.
It also agreed to the appointment of an independent monitor and entered into a deferred prosecution agreement that will dismiss the criminal bribery charges if the firm follows the terms of the agreement for three years.
Reputational and financial consequences include the loss of approximately $5.5 billion in investor funds so far this year.
SEC may have more to come following 2011 inquiry
The SEC could have more enforcement actions in the works based on the 10 separate inquiry letters it issued in 2011.
As a result, the private equity and hedge fund industry — with its complex transactions involving multiple forms of ownership and third-party arrangements, — should ensure compliance is a top priority.
Due diligence is paramount for confirming the beneficial ownership of all parties and establishing the risks involved in each transaction.
Thereafter, firms must ensure the application of risk mitigation strategies to protect against corruption risks, including careful documentation of all expenditures and payments to and from all parties.
Fostering a culture of compliance in which all employees understand the importance of compliance and how to fulfill regulatory obligations is vital for mitigating bribery and corruption risks.
Thomson Reuters has a variety of tools available to help employees recognize and respond appropriately to corrupt activities, including online Anti-Bribery and Anti-Corruption and FCPA training courses, as well as our Microlearning Suites for reinforcing key compliance concepts between annual trainings.