May 6, 2013 marked a new chapter in FCPA enforcement in the finance sector. On that day, the U.S. District Court for the Southern District of New York, at the request of the U.S. Attorney’s Office for the same judicial district (“DOJ”), unsealed criminal FCPA, Travel Act, anti-money laundering and conspiracy charges against Tomas Alberto Clarke Bethancourt (“Clarke”) and Jose Alejandro Hurtado (“Hurtado”), two employees of New York broker-dealer Direct Access Partners LLC (“DAP”), as well as against Maria de Los Angeles Gonzalez de Hernandez (“Gonzalez”), Vice President for Finance of the Economic and Social Development Bank of Venezuela (Banco de Desarrollo Económico y Social de Venezuela (“BANDES”)), an entity of the Venezuelan state.1
The same day, the New York Regional Office of the U.S. Securities and Exchange Commission (“SEC”) filed civil charges against Clarke and Hurtado, as well as against Hurtado’s wife, Haydee Leticia Pabon (“Pabon”), and Iuri Rodolfo Bethancourt (“Bethancourt”), an alleged resident of Panama and apparent relative of Clarke.2 The unsealing of the criminal action, which had been filed on March 12, 2013, and the filing of the related SEC action, followed the apparently coordinated arrest in Miami on May 3, 2013 of the three defendants in the criminal matter, including Gonzalez, the Venezuelan official.3
Although the case is still an evolving matter, the labyrinthine scheme alleged serves as a reminder to the financial services industry of the importance of periodically assessing the effectiveness and appropriateness of anti-bribery compliance programs. In this article, we summarize the government’s charges to date and identify some of the unique risks faced by financial services firms stemming from the complex transactions in which they deal and the multiplicity of government entities with mandates that can encompass anti-bribery compliance.
I. The Alleged Scheme and Charges
The criminal and civil complaints4 (together with a DOJ forfeiture action),5 allege a brazen scheme that caused the loss of tens of millions of dollars to BANDES.6 The DOJ and SEC allege that the scheme resulted in payment of millions of dollars to Gonzalez in exchange for her conniving with the charged DAP employees to create inflated bond trading profits in transactions that carried little or no economic risk to DAP, with millions more ending up in the pockets of Clarke, Hurtado, and family members; allegedly, Clarke and Hurtado, to increase their own takes, not only lied about the scope of the swindle to the Venezuelan official they were bribing but also took steps to conceal the scheme from other bond market participants, banks, and regulators.7
The defendants are alleged to have used two methods for routing payments to Gonzalez. The first involved efforts to hide the compensation paid by BANDES to DAP via “sham compensation” for the bond transactions to Hurtado (through, among other means, a purported Swiss entity controlled by Hurtado called Private Wealth Corporation S.A.), and to his thenfiancée Pabon,8 some of which was routed to Gonzalez through payments to accounts at three different Swiss banks.9
A second alleged method involved routing payments to a Panamanian company named ETC Investment, S.A. (“ETC”), of which Bethancourt was the President and as to which Clarke held a power of attorney, as an intermediary used to pay another Panamanian entity, Cartagena International, Inc., allegedly controlled by Gonzalez.10 Routing of payments from ETC to Gonzalez was also accomplished through yet another Panamanian entity, Castilla Holdings S.A., and one or more accounts at one of the Swiss banks used in the first routing scheme and an account at another bank, located in Panama.11 Profits taken by the charged DAP employees were allegedly facilitated by Clarke’s and Hurtado’s provision of false information to Gonzalez about the size of the markups and markdowns DAP was taking on bond purchases and sales for BANDES.12
The entire scheme was masked from other market participants, such as DAP’s clearing brokers, through devices such as “internal wash trades” in which multiple clearing brokers were used to conceal the ultimate purchaser of bonds being bought and sold with no underlying economic purpose, as well as the use of an “interpositioning” broker to facilitate multiple markups in price for securities at the heart of the scheme.13
The DOJ’s complaint charges Clarke and Hurtado as U.S. nationals (and therefore “domestic concerns” under 15 U.S.C. § 78dd-2) with violation of the anti-bribery provisions of the FCPA, as well as the Travel Act, federal anti-money laundering laws, and conspiracy to violate all three statutes.14 Gonzalez, who (as the bribe recipient) under established law could not be charged with violating the FCPA or conspiring to violate it, is charged with violation of the Travel Act and federal anti-money laundering statutes, and conspiracy to violate each.15 Because DAP and the DAP employees were not subject to the SEC as an “issuer,” they were not charged under the SEC’s authority to enforce the FCPA, but with multiple counts of violating Section 10(b) of the Securities Exchange Act of 1934, related SEC rules, aiding and abetting those violations, and related violations of the broker registration mandates.16
II. Preliminary Observations
Although the BANDES case is still in its infancy and the defendants have yet to have their day in court, a number of observations can be made about the potential significance of the case for the financial sector. Perhaps most importantly, as the SEC stated explicitly in its press release announcing its prosecution, the investigation into the BANDES matter “is continuing.”17 DAP itself has refused to respond to press inquiries,18 and the level of its cooperation and that of other DAP employees has not been discussed to date in government press releases.
Neither DOJ nor the SEC have indicated publicly whether any additional charges are being considered, and it is not yet known how the arrests came about. The possibility of charges against the company or others, however, cannot be ruled out.19 As stated in the SEC’s complaint, uncharged DAP employees other than Clarke and Hurtado shared in the profits of DAP’s Global Markets Group to which Clarke belonged, and DAP’s revenues “soared” in 2009, when the scheme was operating at its height; specifically, revenue increased to $75 million, five times the revenue in 2007, with the increase “almost exclusively due” to transactions related to the BANDES bond trading scheme alleged.20 In addition to others affiliated with DAP and DAP itself, the civil and criminal complaints also identify at least one other Venezuelan official as having received allegedly improper payments as part of the same or similar misconduct.21
The brazenness of the alleged scheme will undoubtedly cause many at financial institutions – large and small – to conclude that “this couldn’t happen here.” Nevertheless, the case is cause to review the reasons why anti-bribery compliance in the financial sector is a critical corporate function, and why, in particular, foreign officials with significant authority at state banking institutions are potentially risky counterparties whose interactions with company personnel must be closely scrutinized and monitored. Foreign officials operating in the public finance, banking, and investment sectors often have significant authority over multi-million dollar transactions that, at least on a short-term basis, can be a tempting target for those seeking to profit in the financial sphere. The potential complexity of financial transactions with state entities makes them acutely ripe for bribery schemes, particularly when facilitated through financial intermediaries.
This is particularly true with respect to dealings with state financial institutions in jurisdictions well-known for corruption, such as Venezuela. As press reports have emphasized, Venezuela ranked last among Latin American countries in Transparency International’s 2012 Corruption Perception Index, and ranked similarly low in the years in which the alleged corrupt scheme was running. Aside from the red flags associated with the payments to entities in Panama and Switzerland, two jurisdictions known for bank secrecy, revenues that were potentially “too good to be true” stand out as a red flag that compliance professionals have seen time and again as worthy of inquiry. These charges should further heighten sensitivity to the risks that business units performing better than expected may be doing so for the wrong reasons.
Moreover, especially in light of Dodd- Frank’s amendment to the SEC’s authority to seek injunctions against and monetary relief 22 from aiders and abettors for knowing or reckless conduct that provides substantial support to securities law violators,23 the case illustrates how banks, market makers, and other financial intermediaries are at potentially significant risk from the conduct of customers who may seek to exploit the ethical weaknesses of non-U.S. government officials whose corrupt discretionary decisions are a target of FCPA criminal and civil enforcement.
The risk that improper transactions will be detected is further heightened for the financial sector given mandatory recordkeeping requirements such as those set forth SEC Rule 17a-4(b), which requires exchange members, brokers, and dealers to “preserve for a period of not less than three years, the first two years in an easily accessible place… (4) [o]riginals of all communications received and copies of all communications sent (and any approvals thereof ) by the member, broker or dealer (including inter-office memoranda and communications) relating to its business as such.”24 While these record-keeping provisions doubtless have the effect of deterring misconduct, for employees who are foolish enough to engage in corrupt activity they virtually assure that significant evidence will be there for regulators to find when they undertake inspections.25
Finally, apart from the risks under the FCPA and related civil and criminal laws, financial institutions subject to supervision by one of the principal banking regulators, i.e., the U.S. Federal Reserve Bank, the Office of Comptroller of the Currency, or the FDIC, may find that FCPArelated violations can have unforeseen collateral consequences in the current regulatory environment. Regulators with the authority to grant or deny approval to mergers and acquisitions, for example, may seek to delay those decisions or worse if a supervised financial institution has lax controls, including controls that ought to be reasonably calibrated to prevent bribery.26
If true – and the dual DOJ and SEC prosecutions in the BANDES matter are still at the earliest stages and the allegations have yet to be tested – the allegations made in the BANDES prosecutions are an unfortunate indicator of the lengths to which some will go to reap riches from financial transactions involving the public sector. Companies and individuals who interact with foreign officials in this economic realm would do well to take note and to assure themselves that compliance systems, including regular risk assessments, training, auditing, monitoring, and discipline, are properly addressing anti-corruption risks among the many other risks facing the financial sector.