Historic avoidance of FCPA cases aside, financial institutions now face close US scrutiny

When it comes to the US Foreign Corrupt Practices Act, most financial institutions have sat on the sidelines in recent years watching their commercial corporate siblings suffer aggressive pursuit by the US Department of Justice and the Securities and Exchange Commission. On the whole, they have escaped prosecution or even intense investigation even though they are often tempted to extend unlawful favors to foreign public officials for business advantages.

The investigation the Securities and Exchange Commission (SEC) is said to be conducting into the hiring by JPMorgan Chase of the children and other relatives of Chinese officials in exchange for business benefits in China may propel this issue to the fore with financial institutions that are subject to US law.

“The financial services sector is facing more of everything — more investigations in more countries, and more and greater penalties as a result,” Alexandra Wrage, President of the anti-corruption company, Trace, Inc., and the association, Trace International, in Annapolis, told ACFCS.

JPMorgan acknowledged in an August 7 quarterly report filed with SEC that it has received “a request from the SEC Division of Enforcement seeking information and documents relating to… the… employment of certain former employees in Hong Kong and its business relationships with certain clients.”

Though few details have emerged, The New York Times has reported that the probe centers on JP Morgan’s “Sons and Daughters” program by which the bank hired the offspring of prominent Chinese officials. The investigation aims to determine if they were hired to obtain a business advantage for JPMorgan, which could be a  violation of the FCPA. A spreadsheet linking persons employed through the program to business deals the bank was pursuing in China has surfaced.

JPMorgan stands to become the first major US financial institution to be charged with an FCPA violation.

“Many thought the US government was looking to go after a major financial institution for FCPA issues,” Tom Fox, Principal of Tom Fox Law, in Houston, told ACFCS. “JP Morgan may be the government’s big case.”

“It is a sign banks need to self-investigate for FCPA problems, in hiring and other areas,” he continued.

36-year- old FCPA going on all cylinders now

The FCPA, enacted in 1977, makes it unlawful for US persons and entities to make unlawful payments to foreign government officials in exchange for assistance in obtaining or retaining business.

Having largely overlooked this potent tool for nearly two decades, the SEC and US Justice Department escalated FCPA enforcement in 2000 and began a major crackdown on violations in 2007. According to the SEC, the US government imposed 38 FCPA enforcement actions on organizations and individuals in 2007 alone, doubling the 2006 total. The SEC issued 84 enforcement actions from 2007 to 2013 in so-called “industry sweeps” of various sectors including energy, defense and pharmaceuticals

Recent FCPA investigations of financial institutions and their employees may be setting the stage for another “sweep.” These are key examples of the areas in which financial institutions are vulnerable to FCPA violations.

Sovereign wealth funds, third parties pave road strewn with temptation

In October 2012, Barclays disclosed in a quarterly filing with the London Stock Exchange that it was being investigated by the SEC and US Justice Department. The investigation came on the heels of a probe by the UK Serious Fraud Office into “certain commercial arrangements” between Barclays and Qatar Holdings, a sovereign wealth fund of the Qatar Investment Authority.Sovereign wealth funds, which are investment funds created, owned or managed by foreign governments, have become a key FCPA target for US agencies because the persons who operate them are classified as foreign officials. Their growth as sources of investments for large US banks and private equity firms has put them in the crosshairs of US enforcement agencies.

In October 2008, Steven Tyrell, then Chief of the Fraud Section of the US Justice Department’s Criminal Division, told attendees at a conference that the “boom of sovereign wealth funds is an area at the top of the Justice Department’s hit list.”

Investigators eye ‘success fees’

The US government also closely eyes “success fees” paid to third parties who broker deals between US institutions and foreign officials, says an ACFCS source who asked not to be named. These third parties are said to be conduits for bribes and pose acute risks for financial institutions.

Matthew Reinhart, a lawyer at Miller Chevalier in Washington, DC, told ACFCS that these risks arise when institutions try to procure licenses or rights to conduct business as brokers or investors in foreign jurisdictions.

“In pursuing international business, institutions often come up against immense government bureaucracies,” Reinhart told ACFCS. “When they run into third party ‘fixers’ who say ‘I can get you everything you need for a flat fee,’ the institutions need to be very aware of who they’re dealing with and where their money is going.”

“It’s all about educating your workforce to understand the risks involved when you start raising capital outside the US,” he added.

Tight supervision of financial institutions sheds light on FCPA failings

Financial institutions and their employees face the same stiff penalties for FCPA violations as other organizations, but they operate in an industry has heavy government regulation.

The tight regulation of the financial industry compels institutions to self-police their operations. Financial institutions face exposure to FCPA violations through standard regulatory reviews or audits. In August, the SEC charged two Miami-based brokers at the financial services firm, Direct Access Partners (DAP), with conspiracy to violate the FCPA after misconduct surfaced in a routine audit of the firm’s account. DAP has since closed its business.

“In a regular review of the institution as a registered broker-dealer, an astute SEC auditor noticed that the transactions were not making sense,” Reinhart told ACFCS.

“That’s an FCPA risk related to operating in such a highly regulated industry. Other regulatory investigations can lead to corruption inquiries and cases,” he continued. “SEC auditors may not have had corruption on their radar screens before, but they do now.”

Sound compliance can protect against violations and prosecutions

For sound self-investigation and to avoid FCPA problems, banks must enforce a good compliance program. The US Justice Department provides guidance on compliance programs in the free 130-page Resource Guide to the U.S. Foreign Corrupt Practices Act, available here.

The guide states that the hallmarks of an effective compliance program include:

  • Commitment from senior management to combat corruption,
  • A code of conduct periodically reviewed and updated,
  • Policies and procedures that outline responsibilities in the company, detail proper internal controls, auditing practices, and documentation policies, and explain disciplinary procedures,
  • Oversight, autonomy, resources and training for employees about the program,
  • Incentives for compliance, and
  • Strong third-party due diligence procedures.

The SEC and the Justice Department “consider the adequacy of a company’s compliance program when deciding what, if any, action to take” in the event of an FCPA violation, the guide says.

“The government recognizes that even the most robust compliance program can’t solve every FCPA problem,” Reinhart told ACFCS. “Despite the best protections, sometimes you can’t stop a lone wolf.”

Note: FCPA and other corruption issues will be covered in a dynamic panel at the ACFCS 2014 International Financial Crime Conference February 5-7 at the Marriott Marquis in New York. For more information, go to www.financialcrimeconference.com.