Och-Ziff Capital Management (Och-Ziff), a publicly traded hedge fund, hasdisclosed that it is the subject of an ongoing investigation by the U.S. Department of Justice (DOJ) and Securities and Exchange Commission (SEC). The inquiry focuses on a “placement fee” Och-Ziff paid in 2007 to a London middleman - Lebanese businessman Mohamad Ali Ajami - to aid Och-Ziff in landing a deal to manage money for the Libyan Investment Authority, Libya’s sovereign-wealth fund. In addition to Och-Ziff, U.S. authorities are investigating Micheal L. Cohen, Och-Ziff’s former head of European investing, who oversaw investments in Libya and other countries in Africa.
Mr. Ajami, it is alleged, gave some of the placement fee he received from Och-Ziff to another intermediary, a Tunisian with ties both to former Libyan dictator Col. Moammar Gadhafi’s son, the now-imprisoned Saif al-Islam, and then-deputy chief of the Libyan Investment Authority, Mustafa Zarti. The U.S. government is investigating whether any portion of this placement fee violated the Foreign Corrupt Practices Act (FCPA), which prohibits, among other activities, providing anything of value to a foreign official to assist in obtaining or retaining business. For its part, Och-Ziff acknowledges the payment to Mr. Ajami. However, Och-Ziff claims it was unaware that the payment went beyond Mr. Ajamai and that Mr. Ajami assured Och-Ziff that he had complied with all laws.
Around the time of the payment of the placement fee, Och-Ziff loaned $40 million to the Magna Group, a company co-founded by Mr. Ajami, for the purpose of developing commercial real estate on the Tripoli, Libya, waterfront. Mr. Ajami’s nephew, who worked on the developments, was found guilty of corruption and sentenced to prison for conspiring with his uncle to pay bribes and forge documents.
This investigation should remind all businesses subject to the FCPA of the risks of using intermediaries when engaging in activity with the potential for contact with foreign officials. As the Organization for Economic Cooperation and Development (OECD) described in its recent analysis of the extent of foreign bribery, some three-quarters of the 427 cases of bribery analyzed involved payments through intermediaries. These intermediaries included, among others, local sales and marketing agents, distributors and local “consulting” firms.
While it may be the case that intermediaries make payments to foreign officials without the principal’s knowledge, a lack of awareness will not insulate such principals from investigation or scrutiny. Given the severe sanctions that may result from a finding of foreign bribery - including civil or criminal penalties, the implementation of a stringent compliance program and imprisonment of individuals - it is critical that entities subject to the FCPA appreciate their responsibilities when entering into arrangements with intermediaries - a primary vehicle for delivering illicit bribes, as described in detail by DOJ and SEC throughout their joint Resource Guide to the FCPA, numerous enforcement actions and other sources of guidance.
In addition to requiring compliance with U.S. and local laws and (as appropriate) the company’s code of conduct, the principal should understand the risks of contracting with a particular intermediary. Key risk factors include the countries in which the intermediary will operate on the principal’s behalf (and the risks of foreign corruption posed by those countries), the size of the company, and any historical relationship between the parties. Such risk-based diligence should also include an understanding of the reputation and relationships, if any, the intermediary has with foreign officials. Further, the principal should assess whether the services of the intermediary are in fact necessary for the transaction in question. If so, the nature of the services provided should be detailed in any contract, and the principal should seek to ensure the services are in fact being performed and that the costs of such services are commensurate with the services being provided in that marketplace. Finally, principals using intermediaries should consider performing ongoing due diligence/monitoring through some combination of the following: exercising audit rights, requesting annual compliance certifications and providing periodic training.
While no company can ensure that its counterparties will comply with all applicable laws, companies can take meaningful steps to demonstrate their commitment to compliance, which steps may make all the difference if an investigation into foreign bribery is commenced.