Private Fund Managers Be Aware: FCPA Enforcement Is Coming Your Way

by Proskauer Rose LLP

The increased globalization of the private investment industry has given rise to an enhanced focus by U.S. prosecutors and regulators on rooting out corrupt business activities in private equity firms and hedge funds. As private investment firms expand both their efforts to attract financing from sovereign wealth funds and their investments in emerging foreign markets, it would behoove them to implement robust compliance controls targeted at minimizing their exposure to an anti-corruption investigation.

I.  Foreign Corrupt Practices Act Enforcement

Federal investigators' anti-corruption efforts are rooted in the Foreign Corrupt Practices Act ("FCPA"), whose anti-bribery provision broadly prohibits anyone covered by the statute from corruptly giving anything of value to a foreign official for the purpose of obtaining or retaining business.[1] The FCPA also contains a set of accounting provisions, applicable to U.S. issuers only, that require them to maintain accurate books and records, and adequate internal accounting controls aimed at preventing and detecting FCPA violations. The DOJ and SEC have consistently maintained that the directors, officers, employees, and agents of state-owned or state-controlled entities, including sovereign investment funds, may qualify as foreign officials under the FCPA, because those entities are "instrumentalities" of a foreign government.[2]

During the recent economic crisis, many private investment funds sought capital from sovereign wealth funds that remained flush with cash and were seeking to expand outside of their home countries. Unsurprisingly, this shift sparked government interest in the industry, with the then-Chief of the DOJ's Fraud Section stating in 2008 that the "boom of sovereign wealth funds" is an area at the top of the DOJ's hit list. Then in 2011, the SEC sought information from ten hedge funds, private equity firms, and other financial institutions concerning their relationships with sovereign wealth funds. The message is clear: the private fund industry has joined the extractive and medical device industries as the most popular targets for FCPA enforcement investigations.

The lengths of time between publicly-known hints to the government's interest in the industry should not give private fund managers a false sense of comfort. Kara Brockmeyer, Chief of the SEC's FCPA Unit, explained at a recent conference in Washington, D.C. that FCPA investigations take a long time, in large part because of the amount of information that needs to be collected from foreign jurisdictions. Ms. Brockmeyer also acknowledged that the SEC will "look at an industry where there are risk factors [and] go out with a voluntary request to see whether there might be an issue." Such industry sweeps can have a domino effect as each successive investigation into a business may reveal damaging information about others.

II. Dangers to the Private Investment Fund Industry

Private investment funds face unique and significant anti-corruption risks through their dealings with sovereign wealth funds and other foreign government entities. Sovereign wealth funds worldwide have estimated assets topping $6 trillion, providing a tempting target for law enforcement and regulatory agencies.

Anti-corruption risks for private funds arise not only in securing funds from a foreign government-owned or -controlled entity, but also when investing funds in a foreign government-owned or -controlled asset. If a fund acquires a majority interest in a foreign company or exercises sufficient control over that company, it can be liable under traditional principles of agency for any FCPA violations committed by the company, including successor liability for any pre-acquisition FCPA violations. Even when a private fund may have only a minority ownership in such an investment, or perhaps just a single seat on the board of a foreign portfolio company, there are significant "headline risks" even if actual FCPA liability may not exist. Entering into a joint venture poses similar risks, as the DOJ and SEC will consider the joint venture's activities to be attributable to each of its members. All of this is compounded by the difficulties in determining whether an investment even involves a foreign government-owned or -controlled entity, as many sovereign wealth funds own or control entities through a chain of subsidiaries.

Many of the risks inherent in soliciting funds from or investing funds with a foreign government's entity arise from the use of third party agents to facilitate the process. Although the use of those agents may have significant benefits because of their familiarity with local markets and entities (and access to key decision-makers), agents have proven a fertile ground for FCPA investigations by the DOJ and SEC, and consistently present a key area of risk. If the agent, when soliciting an investment for the private fund, makes an unlawful payment to an individual working for a sovereign wealth fund or other government entity, the fund can be liable if there is evidence that it knew about the payment or about "red flags" indicating that the payment would be made.

III. Managing Anti-Corruption Risks

Private equity funds and hedge funds should give strong consideration to taking proactive steps to minimize their potential FCPA exposure to the greatest extent possible. The damages stemming from an FCPA investigation or conviction can be tremendous, resulting in massive fines, imprisonment for individuals, and collateral consequences that may include the appointment of an independent compliance monitor. Although every compliance program needs to be tailored to a company's particular needs and market space, a robust program should include some or all of the following components:

  • A written FCPA compliance policy and procedures that prohibit bribery (with corresponding disciplinary consequences) and provide regular anti-corruption training for employees. The policy should also create a rigorous pre-approval procedure for any employee seeking to provide a gift or payment to a foreign official.

  • A compliance officer or committee responsible for enforcing the anti-corruption policy and for engaging in periodic audits of the compliance policy and third party agents and investments for potential anti-corruption violations and compliance policy efficacy.

  • For issuers, the maintenance of accurate books and records concerning all transactions that involve gifts or payments to foreign officials, and a corresponding system of internal controls designed to ensure that accuracy.

  • Due diligence procedures for potential investments, joint ventures, and acquisitions designed to determine whether the investment fund is dealing with a sovereign wealth fund or other foreign government entity.

  • Due diligence procedures for vetting third party agents and joint venture partners to determine whether there are any red flags indicating that the intermediary might pay bribes to foreign officials, and to monitor the agent's activities and interactions with foreign officials.

  • Written agreements with third party agents and joint venture partners concerning FCPA compliance and confirming that those parties do not have any financial relationship with a foreign official. The agreement should also provide for oversight and audit of the agents' or partners' activities, and termination of the relationship in the event a violation is discovered.

  • Internal whistleblower procedures by which employees and agents can anonymously report potential FCPA violations without fear of retaliation.

Many of these measures can be incorporated into existing compliance programs (e.g., preexisting AML procedures), to minimize the burden on the private investment fund of enacting or strengthening FCPA compliance measures.

*          *          *          *

When a hedge fund or private equity fund identifies a potential FCPA violation, it should immediately consult with counsel. Simply hoping that the problem will go unnoticed poses far too great a risk in today's enforcement environment. A prompt, proactive investigation will allow managers, with counsel's assistance, to determine the best strategic course by which to minimize or eliminate FCPA liability.

[1] 15 U.S.C. §§ 78dd-1, et seq.

[2] Dep't of Justice & Sec. Exchange Comm'n, A Resource Guide to the U.S. Foreign Corrupt Practices Act, at 20 (2012).


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.

© Proskauer Rose LLP | Attorney Advertising

Written by:

Proskauer Rose LLP

Proskauer Rose LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.