FCPA Enforcement Against Broker-Dealers: A New Headache For CCOs

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brokers7In 2010, Wall Street shuddered when it was disclosed that the SEC had launched an inquiry into financial institutions, investment banks and private equity firms for potential FCPA violations involving interactions with sovereign wealth funds.  Since the initial press reports on the investigation, nothing has happened.

DOJ’s recent criminal prosecution against three individuals from Direct Access Partners (DAP) and the Venezuelan official from BANDES, is a true shot-across-the-bow for broker-dealers, investment banks, private equity and hedge funds.

Every investment banker, broker-dealer, private equity and hedge fund needs to re-examine their compliance program to make sure they have adequately addressed potential FCPA risks.

In the BANDES case, the bribery scheme was fairly straightforward: the two traders paid bribes to the BANDES official in exchange for BANDES conducting its trades at DAP.  Emails among the parties confirmed the ongoing plot.  Trading patterns were brazen with BANDES and the traders buying and selling the same bonds more than once in the same day.

Additionally, the two traders quickly became the leading traders at the firm within one year.  And DAP’s revenue increased five-fold over three years.broker5

The facts surrounding the case beg the question – where was the chief compliance officer?  Assuming they had a chief compliance officer, the red flags were evident and should have been caught through basic controls.

Foreign Customers:  DAP did not have a system for reviewing a customer to determine whether it was a government-owned or controlled entity.  This is a basic requirement which should trigger a specific set of controls to monitor a relationship between a broker-dealer and a state-owned enterprise or potential FCPA violations.

Trading Patterns/Transaction Monitoring:  Given the number and types of trades between DAP’s brokers and the BANDES official, a basic transaction monitoring system would have identified their trading patterns for follow-up inquiry.

Revenue Growth:  A related factor is the significant increase in DAP’s revenues over a three-year period while the traders were carrying out their scheme with the BANDES official.  A CCO would have immediately examined the reasons for this significant increase in revenues and sought answers.

brokers6Sales Performance:  A CCO should have examine the two traders because of the rapid increase in annual sales.  (In general, any person, third-party agent or distributor with rapid revenue increases should be flagged for follow up).  DAP did not and clearly were comfortable with the overall increase in revenues.

The DAP case underscores significant FCPA risks which broker-dealers, investment banks, private equity and hedge funds face in the international marketplace.  It is not clear whether the message from the case has been heard by the industry.  CCOs have a lot of risks to worry about these days in response to aggressive SEC enforcement.   However, a criminal case against four individuals arising from an SEC routine examination should be an important reminder that FCPA compliance cannot be ignored.

Topics:  Broker-Dealer, Chief Compliance Officers, Compliance, Direct Access Partners, DOJ, Enforcement, FCPA

Published In: Criminal Law Updates, Finance & Banking Updates, International Trade Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Michael Volkov, The Volkov Law Group | Attorney Advertising

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