Private Equity and the FCPA: Time to Get Serious About Corruption

“The private equity industry is the latest target of an unprecedented explosion in Foreign Corrupt Practices Act (“FCPA”) enforcement by U.S. regulators. As the industry expands to emerging markets overseas and faces new Dodd-Frank regulations, private equity firms and hedge funds are under heightened scrutiny from the Department of Justice and the Securities and Exchange Commission. Recent developments highlight the importance — now, perhaps more than ever — of effective FCPA compliance programs for private equity firms and hedge funds, as well as their portfolio companies.” (From FCPA Regulators Set Sights On Private Equity by Lowenstein Sandler PC) 

Government regulators are turning their eye to private equity firms, which means the firms need to step up their global anti-corruption and anti-bribery compliance efforts. But what exactly is an “effective FCPA compliance program,” and what does it mean for private equity firms? From lawyers and law firms on JD Supra:

– If it looks like an improper payment, it probably is:

“The SEC reportedly is examining whether financial services firms made improper payments in soliciting investments from SWFs. Indeed, a financial services firm or private equity fund risks FCPA liability if its employees, or third-party consultants acting on its behalf, offer or make payments, gifts, or entertainment to employees of [a sovereign wealth fund].” (From FCPA: Recent Enforcement Activity Sounds Warning for Financial Services Industry by David S. Krakoff, James T. Parkinson, and Bradley A. Marcus) 

– Do your due diligence:

“… successor liability issues are particularly acute for the financial services industry, as a company can literally buy another company’s FCPA problem – an issue of great concern for private equity and venture capital firms.” (From Anti-corruption Enforcement – The New Global Reality by Venable LLP) 

– Don’t leave compliance to others:

“… a Private Equity company may allow its individual Portfolio Companies to develop their own compliance programs. This could lead, through the ‘highest common denominator’, to a charge of willful blindness, conscious disregard or deliberate ignorance.” (From Private Equity and the Highest Common Denominator by Thomas Fox) 

– Know the rules: 

“Over the past several years, particularly in light of the financial crisis in the U.S., sovereign wealth funds have invested heavily with private equity funds and the largest Wall Street firms. They are by definition government owned and funded. Therefore, their employees are foreign government officials under the FCPA…” (From Financial Services Industry- Latest FCPA Target? by Venable LLP) 

– Know who you’re dealing with: 

“…other potential sources of FCPA liability… can include an ‘offset requirements’ where ‘some percentage of contract funds is invested back into the foreign country, sometimes as a direct investment, or as a requirement to use a particular foreign component in a deal.’ The financial institution may not know who all the parties to such a transaction are, ‘thereby creating the potential for anti-corruption liability.’” (From Financial Institution Liability under the FCPA by Thomas Fox) 

See also: Building and Enhancing FCPA Compliance – 13 Step Action Plan (Jonathan Marks)

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