Financial Services Firms Must Evolve Anti-Corruption Programs in Light of Recent FCPA Settlements in Excess of $100 Million

Shawn M. Wright, Carlos F. Ortiz, and Mayling C. Blanco 

wrightsortizcblancom Global financial services firms should be aware that the DOJ and SEC are committed to identifying and investigating bribery and corruption regardless of the form it takes. With increased resources to help identify the most sophisticated bribery schemes, financial service firms must ensure that their robust anti-corruption programs take into consideration local customs and risks as well as the broad nature of “anything of value” and its interpretation by regulators.

In the past few months, the U.S. Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”) announced enforcement actions against two financial institutions stemming from violations of the Foreign Corrupt Practice Act (“FCPA”), each resulting in settlements in the hundreds of millions of dollars. In September, the DOJ and SEC announced a total payment of approximately $412 million for a hedge fund’s use of intermediates, agents, and business partners to pay bribes to high-level government officials across Africa. In November, a $264 million settlement was announced involving a major bank for hiring interns and full-time employees who were friends and family of Chinese officials in exchange for winning lucrative banking deals in China. These resolutions should remind us that no industry is immune from the reach of the FCPA and that companies should be well-aware of the customs and risks of the regions where they operate so that their compliance measures adequately address these risks.

Not Business as Usual

In the case of the hedge fund, the DOJ press release informs that the fund sought partnerships with local business entities to acquire special access to lucrative investment opportunities in the mining and diamond sectors despite knowing that access was being gained through corrupt payments to senior government officials. Per the DOJ press release, in another scheme, the fund hired a third-party agent to assist in securing certain investments in the fund knowing the agent would need to pay bribes to government officials. The payments where then omitted or concealed in the company’s financials. Andrew J. Ceresney, Director of the SEC Enforcement Division, said that “senior executives cannot turn a blind eye to the acts of their employees or agents when they become aware of suspicious transactions with high-risk partners in foreign countries.” Additionally, U.S. Attorney Robert L. Capers of the Eastern District of New York noted that when a company “position[s] itself to profit from the corruption that is sadly endemic in certain parts of Africa” it will be held accountable “for placing profits above the law.”

In the case of the bank, the DOJ press release explained that a Hong-Kong based subsidiary of the bank developed a program to hire candidates referred by clients and government officials as a way to influence the officials to award lucrative Chinese investment deals to the bank. Director Ceresny said “the bank was potentially violating the FCPA yet persisted with the improper hiring program because the business rewards and new deals were deemed too lucrative.” The scheme is estimated to have netted the bank over $35 million in profits.

Certain news sources reported that the bank may have tried to defend its practices by explaining that the hiring of well-connected employees was routine in China. However, U.S. Attorney Capers stated that “[t]he common refrain that this is simply how business is done overseas is no defense.” The New York Times reported that other major banks may be facing similar investigation over such practices in China. It is clear that the DOJ is well-aware of certain, perhaps customary, practices abroad that run counter to the FCPA’s mandate, and it will not permit custom to serve as an excuse for violation of the law.

FCPA Spares No One … Well, Almost No One

The resolution with the hedge fund was the first such resolution holding a fund accountable for FCPA violations. Similarly, the settlement by the bank is one of the first major crackdowns on a big bank for FCPA violations. Together these matters demonstrate that financial institutions are not above scrutiny. In addition, these announcements serve as an opportunity for the federal government to remind financial services firms of the government’s increased focus in this industry. In the past, it has not been uncommon for the government to focus on others in the same industry after a settlement with a major company.

This spring, included in the announcement of its Pilot Program, the DOJ also advised that it was doubling the size of investigative and prosecutorial forces. Assistant Director in charge William F. Sweeney, Jr. of FBI’s New York field office stated that the FBI recently established three squads dedicated to international corruption. He further noted the DOJ’s resolve to root out corruption regardless of where it may manifest itself and that
“[t]hose engaging in illegal acts abroad may think they’re out of sight and out of mind, but they’re wrong.”

Both the hedge fund and the bank were able to avoid criminal charges by securing deferred and non-prosecution agreements, respectively. The agreements require that the financial institutions pay to the DOJ, SEC, and in the case of the bank to the Federal Reserve, significant fines to resolve the matters. The agreements also require continued cooperation with the DOJ on any ongoing investigations, enhancement of its compliance program and internal controls, and reporting to the DOJ on the implementation of its efforts. The hedge fund also agreed to retain an independent compliance monitor for a term of three years. Despite not voluntarily and timely disclosing its misconduct, both firms were still given credit for cooperation thus underscoring the importance of cooperation.

While the hedge fund matter was accompanied by some individual accountability, to date the bank matter has not resulted in any such charges. Specifically, the hedge fund matter was accompanied by a guilty plea by a foreign national, son to a former prime minister, for conspiring to bribe a foreign government official in Africa and may result in up to five years of imprisonment. Officers of the fund, specifically the CEO and COO, also agreed to a civil settlement with the SEC, paying fines in the millions. By contrast, to date, the corporate bank settlement is not accompanied by the prosecution of any of the individual officers allegedly involved in the scheme. These results are surprising in the wake of the recent emphasis on the Yates Memo, which signaled a renewed DOJ priority for pursuing and punishing individual wrongdoers criminally, particularly officers, and not just the corporate entities. Both resolutions do require continued cooperation in any ongoing investigation, specifically including against individuals.

“Anything” Means Anything

The FCPA, generally prohibits providing “anything of value” to a foreign official to obtain or retain business. Traditionally bribe payments have been in the form of cash payments, luxurious gifts, or excessive travel and entertainment. The DOJ has recognized that the “thing” of “value” may be evolving and the schemes for payment are of increasing sophistication. As a result, DOJ remains committed to exposing and prosecuting corruption regardless of the form it takes or the complexity of the financial transactions involved.

Chief Richard Weber of the Internal Revenue Service-Criminal Investigation New York Field Office explained that the hedge fund’s resolution “agreement result[ed] from the unraveling of complex financial transactions orchestrated … to facilitate illegal payments to foreign government officials.” From the foreign national’s plea we learn that payments were masked through intermediaries or lawyers, and included payments for luxury vehicles, luxurious foreign travel, the use of private planes, and of course cash. Meanwhile, in the resolution involving the bank, the bribes took the form of prestigious internship and employment positions with the bank. There, Assistant Attorney General Caldwell said: “Awarding prestigious employment opportunities to unqualified individuals in order to influence government officials is corruption, plain and simple. This case demonstrates the Criminal Division’s commitment to uncovering corruption no matter the form of the scheme.”

Lessons Learned

Financial services firms with international operations must take every opportunity to review their anti-corruption programs, including training and policies, to ensure they comport with the mandate of the FCPA. Financial services firms are well-advised that when considering the efficacy of their programs, they should take into consideration local customs, the evolving nature of “anything of value,” and the increasing sophistication of financial transactions. Compliance programs, including trainings, should be built to address those special risks mitigating the danger that a red flag will be ignored.

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