Over the past few years, the U.S. Department of Justice ("DOJ") and the Securities and Exchange Commission ("SEC") have substantially increased enforcement of the anti-bribery provisions of the U.S. Foreign Corrupt Practices Act of 1977 ("FCPA"), imposing record criminal fines and civil penalties. Recently, the DOJ and the SEC launched an inquiry into possible FCPA violations in the U.S. bank and private equity industries, particularly pertaining to their dealings with sovereign wealth funds.
Entities that seek investments from foreign government-owned entities, such as sovereign wealth funds or state-owned pension plans, are exposed to the risk of violating the FCPA's anti-bribery provisions. Because sovereign wealth funds are owned by foreign governments, all of their directors, officers and employees qualify as foreign officials under the FCPA. As a result, a private investment fund that makes payments, or offers gifts or entertainment, to an employee at a sovereign wealth fund in order to secure an investment in their fund could face criminal prosecution and civil liability under the FCPA. Individual employees of the fund could also face the same consequences.
In recent weeks, the SEC has reportedly sent letters of inquiry to approximately ten different financial firms. The letters, which are part of an industry-wide sweep, focus on those firms' involvement with sovereign wealth funds. According to reports, the letters do not contain allegations of bribery, but ask about recipients' connections to sovereign wealth funds and request that the firms retain documents related to their dealings.
In FCPA investigations, it is customary for the DOJ and SEC to communicate and coordinate in order to fully examine the scope of the violation and to effectively enforce the regulations. Cross-border regulation and increased cooperation between the DOJ, SEC and national law enforcement and regulatory authorities has substantially increased the risk of multi-national, coordinated enforcement actions for financial firms.
In light of the recent DOJ and SEC investigations, financial institutions and entities that have had business dealings with sovereign wealth funds should proactively assess any potential FCPA issues. In addition, banks and financial institutions that provide financing to private equity funds that count sovereign wealth funds among their investors should be aware of risks associated with such funds.
Normally, the DOJ and the SEC will begin an industry probe with certain high-profile companies and then expand the inquiry throughout the industry to cover mid-size and smaller entities, along with private individuals. With this in mind, banks, financial institutions and private funds doing business with foreign government officials and/or foreign government-owned entities should consider examining their anti-bribery policies and procedures to ensure compliance with the FCPA.