Beware of pay-offs to foreign officials
If you’re seeking an asset management mandate from a foreign government agency or if a private equity investee of yours is pursuing a foreign government license or contract, beware of a dangerous pitfall that could cost your firm and its principals dearly.
It’s called the Foreign Corrupt Practices Act (FCPA) and it bans U.S. firms from paying foreign officials to obtain or retain business. The term ‘foreign officials’ covers just about anyone employed by a foreign government or government-controlled enterprise, including sovereign wealth funds and state pension plans.
Adopted in 1977, the FCPA is a strict liability statute. In other words, the payment of a bribe to a foreign official by any employee or agent of a U.S. firm (or of a multinational doing business in the U.S.) in order to gain an unfair business advantage automatically results in liability for the firm and for those of its principals who participated directly in (or deliberately ignored) the unlawful payment. The statute also reaches the parents of subsidiaries engaging in the bribery of foreign officials and private equity funds that control portfolio companies guilty of the illegal practice.
Under the FCPA, no amount of payment is too small and anything of value counts. Moreover, having an adequate compliance program is no defense to an FCPA violation, and violators are subject to both criminal and civil penalties, which can be harsh and include imprisonment. The only available protection against an FCPA allegation is that the payment in question is expressly permitted under the written laws of the foreign country.
U.S. businessmen are frequently asked to grease official palms in order to win or retain foreign contracts or procure foreign government approvals. Bribe requests can take many forms other than cash, such as lavish travel and entertainment, the hiring of relatives and possibly even preferential redemption treatment by a hedge fund. U.S. businessmen may also be able to show that such payments to government officials are commonly made by their non-U.S. competitors and therefore effectively put them out of the market.
Nevertheless, recent enforcement actions under the FCPA have demonstrated that the Department of Justice (DOJ), which imposes the statute’s criminal sanctions, and the SEC, which administers its civil penalties, consider the FCPA among their top priorities. Both agencies now cooperate closely with one another and with foreign agencies that subscribe to anti-corruption enforcement. In fact, the DOJ does not recognize ‘international double jeopardy’ under the FCPA, and would bring an action against a suspected FCPA violator which was being prosecuted simultaneously in a foreign country for the same behavior. Similarly, successor companies in mergers and acquisitions can be found liable for FCPA violations previously committed by the acquired entities.
Don’t be surprised to see an upward trend in FCPA penalties and enforcement actions as the DOJ and SEC vigorously pursue their anti-corruption campaigns, bolstered in no small part by the whistleblowing bounty now offered under Dodd-Frank. Although no U.S. money managers or private equity firms have thus far run afoul of the FCPA, just make sure that your outfit is not the first.