FCPA enforcement will likely take a turn into the private equity industry. I know this is a regular claim by FCPA practitioners but we already can see the beginning of the trend.

The “princeling” investigations are ongoing and the industry is fighting back, claiming that internships awarded to family members of foreign officials were not given with corrupt intent or were not of any value (the latter is a hard claim to make).

Also, the SEC has completed 400 “presence” exams of private equity companies. The focus of many of these exams includes international activities and allocation of fees charged customers (along with other issues such as valuation).

The focus of prosecutors also has included interactions with sovereign wealth funds. No one can dispute (at least credibly) that the managers of sovereign wealth funds are “foreign officials” under the FCPA (and “public officials” under the UK Bribery Act).

While these issues are dominating the private equity risk analysis, the real looming risk for private equity funds is portfolio companies in which they maintain a controlling interest. The risk of portfolio companies requires redoubled due diligence and corruption risk mitigation.

Portfolio company risk extends to those companies in which the private equity company has a controlling interest – say a 51 percent equity interest. Many private equity funds maintain controlling equity interests and board positions. Private equity companies also have minority interests in portfolio companies but FCPA liability in these situations is questionable (extends to requiring private equity companies to make good faith efforts to cause the portfolio company to implement adequate internal controls.

In acquiring their interests in these portfolio companies, private equity funds may not have conducted a robust anti-corruption due diligence. That situation, however, is rapidly changing.

The challenge for private equity managers is to conduct a wholesale risk review of their existing portfolios. Risk-ranking techniques are critical in conducting this review, focusing on the right companies, for the right reasons. Portfolio companies operating in industries that rely heavily on government contracts or purchases, infrastructure, transportation, medical, commodities and energy companies are routine targets for anti-corruption risk reviews.

Private equity companies are modifying their pre-acquisition due diligence procedures to include anti-corruption risks. Such a review should be robust, with a calculated eye toward post-closing integration and remediation of anti-corruption compliance weaknesses.

Additionally, private equity companies have to review and revise their anti-corruption compliance programs. A top-to-bottom review usually identifies significant gaps in anti-corruption compliance, particularly in making sure that portfolio companies are communicating the private equity company’s anti-corruption compliance commitment, messages and program.

Private equity companies as owners of portfolio companies employ a variety of management strategies, from hands-on to hands-off, depending on the industry and the company. Anti-corruption compliance mandates from the private equity parent may have less relevance to a company with a far different risk profile. The key issue, however, is that the private equity company has to set a tone and a culture commitment that stretches across all of the portfolio companies. They have to make it clear that anti-corruption compliance is an important priority to the organization.

Private equity companies know how to conduct due diligence of prospective acquisitions. Adding on a layer of anti-corruption due diligence should not be difficult for private equity companies. The Goodyear case earlier this year underscored again (and again) the risks from successor liability and weak anti-corruption due diligence.

Identifying FCPA risks prior to the closing is critical for planning post-acquisition remediation. DOJ has adopted a more liberal approach to this issue than the past days of the Halliburton Opinion Letter 08-02, and companies have an obligation to remedy potential risks and violations as quickly as possible.