This alert follows on from our prior client alert of April 1, 2019, regarding the U.S. Commodity Futures Trading Commission’s (the Commission or CFTC) recent announcement in March of its intention to investigate foreign corrupt practices that affect the U.S. commodities and derivatives markets. The CFTC’s latest whistleblower alert (the Alert), which was published in May, reinforces the Commission’s message that it is determined to pursue violations of the Commodity Exchange Act (CEA) that are connected to foreign bribery.
1. The CFTC’s whistleblower program
The CFTC’s whistleblower program (the Program), which was created by the Dodd-Frank Act in 2010, provides financial incentives to individuals, or a group of individuals, who voluntarily report possible violations of the CEA that leads to a successful CFTC enforcement action and that results in monetary sanctions of over $1 million, or the successful enforcement of a related action brought by another enforcement agency.
Under the Program, whistleblowers who meet these criteria are eligible to receive between 10 and 30 percent of the collected monetary penalties. The Program also affords anti-retaliation and confidentiality protections for whistleblowers.
To date, the Commission has awarded over $90 million to whistleblowers since issuing its first award in 2014. The CFTC’s enforcement actions associated with these awards have resulted in monetary sanctions totaling more than $675 million.
2. The Alert
In May 2019, the CFTC published the Alert to advertise the Program and encourage individuals to come forward to report potential violations of the CEA, that are connected to foreign corrupt practices.
The Alert, titled “Blow the whistle on foreign corrupt practices in the commodities and derivatives markets,” describes foreign corrupt practices as including “actions that seek to improperly influence foreign officials with personal payments or rewards.”
The Alert also enumerates a non-exhaustive list of three forms of misconduct that would fall under the purview of foreign corrupt practices: (1) corrupt practices that alter the prices in commodity markets that affect related derivatives prices, (2) bribes employed to secure business in connection with regulated activities (e.g., trading, advising, or dealing in swaps or derivatives), and (3) corrupt practices, including false reporting, that manipulate benchmarks that serve as the basis for related derivatives contracts.
Notably, these forms of misconduct could arise from conduct entered into solely outside the United States.
3. The CFTC’s ongoing commitment to investigating foreign corrupt practices and to the Program
This latest Alert reinforces the Commission’s intention to investigate foreign corrupt practices, along with its ongoing commitment to the Program.
In the first half of 2019, several of the world’s largest commodity trading firms have already disclosed that they are being investigated by the CFTC for potential violations of the CEA that involve potential corrupt practices. Recent reports have also indicated that the Commission has initiated inquiries into at least two other commodities trading giants in connection with foreign corruption, although neither of the firms nor the CFTC has provided official statements in this regard. Notably, none of these firms are registered with the CFTC, reinforcing the Commission’s announcement on March 6, 2019, that it intends to investigate such misconduct by market participants, regardless of whether they are registered (or required to be registered) with the Commission.
The Alert was issued on the heels of the Commission’s issuance of several sizeable whistleblower awards over the past six months. On March 4 and May 6, 2019, the CFTC announced whistleblower awards of approximately $2 million and $1.5 million, respectively, for information that led to successful CFTC actions and related actions brought by other federal regulators. Commenting on the May 2019 award, the director of the CFTC’s enforcement division, James McDonald, stated that the award represented “a growing line of whistleblower awards that show the Commission’s continued commitment to the [P]rogram [and that] whistleblowers have become an integral part of [the Commission’s] enforcement efforts.”
Most recently, on June 24, the CFTC announced an award of approximately $2.5 million to an individual who provided information that led to a successful CFTC enforcement action. While the CFTC acknowledged the significant contributions of the whistelblower, the Commission stated that the award had been reduced due to the whistleblower’s delay in submitting information to the Commission, “which can lead to additional financial loss to customers or to the general public.” McDonald echoed this message and stated that the Commission hopes this case “illustrates the importance of reporting violations to the CFTC as soon as reasonably possible.”
The Alert underlines the CFTC’s continued focus on investigating CEA violations that involve foreign corrupt practices. Accordingly, both U.S. and foreign companies involved in commodities transactions (regardless of their CFTC registration status) should evaluate their potential exposure for foreign corruption under the CEA. As the Commission continues to encourage and incentivize individuals to come forward with relevant information regarding such misconduct, it will be increasingly important for companies operating in the commodity markets to ensure their compliance programs detect and prevent potential corruption issues in their business operations, including policies and procedures governing interactions with government officials and state-owned enterprises.