Given the global nature of sovereign wealth funds’ (SWFs’) investments and operations, it is essential that SWFs are aware of and in compliance with the Foreign Corrupt Practices Act (FCPA) in order to facilitate business with US companies, avoid hefty fines, and mitigate reputational risk. This Insight briefly explores the ever-increasing benefits of SWFs’ implementation of robust FCPA compliance programs.
SWFs,[1] which are state-owned investment funds or entities used to achieve national objectives, have recently increased their investments in US public and private companies. Indeed, SWFs make up almost 3% of the US stock market.
The Government Pension Fund Global, a Norwegian SWF worth $1.3 trillion, owns on average 1.5% of every listed company in the world. Even the National Basketball Association’s (NBA’s) Board of Governors has adopted a policy that allows foreign funds to buy up to 20% of an NBA team, signaling the league’s openness to working with SWFs, among other international institutional investors.
By definition, SWFs operate in multiple countries and jurisdictions, aiming to use their nation’s fiscal surpluses and wealth reserves to preserve their nations’ wealth, diversify their economies, and benefit their populations.
FOREIGN CORRUPT PRACTICES ACT
Generally, the FCPA prohibits issuers, domestic concerns, and any person acting within US territory from bribing a foreign official in order to obtain business. The FCPA has two provisions: accounting and anti-bribery.
The accounting provisions, which generally apply to issuers of stock, including some issuers of American depositary receipts (ADRs), on US exchanges, establish certain internal recordkeeping and accounting controls standards relating to transparency. The anti-bribery provisions prohibit certain individuals and businesses from bribing foreign officials to obtain an unfair business advantage.[2] Depending on the specific type of FCPA violation, there can be criminal and/or civil liability for violations of the statute.[3]
ENFORCEMENT ACTIONS
Recent years have seen an increase in the number of enforcement actions against financial services firms for FCPA violations, as well as the attendant penalties. According to a Senior Investigations Counsel in the US Securities and Exchange Commission (SEC) FCPA Unit, “the global nature of the financial industry can make financial services firms vulnerable to potential FCPA actions in the future.”
The SEC and US Department of Justice (DOJ) have started to more closely scrutinize hedge funds and private equity firms’ dealings with SWFs due to the aforementioned global nature of the financial sector and the common use of intermediaries and consultants in the world of SWFs. Additionally, a top DOJ official recently indicated that an increase in FCPA enforcement actions is expected.
Two recent public cases involve the Libyan Investment Authority and 1Malaysia Development Berhard (1MDB). In both cases, the enforcement actions exemplify the potential risks and costs associated with FCPA violations in the SWF context. In 2016, the hedge fund Och-Ziff Capital Management Group (now known as Sculptor Capital Management) paid around $200 million to the SEC to settle civil charges for bribing Libyan government officials to induce the Libyan Investment Authority SWF to invest in funds managed by Och-Ziff.
Similarly, in 2020, Goldman Sachs agreed to settle an FCPA parallel action with the DOJ and SEC for a record-breaking $2.9 billion after it bribed Malaysian and other government officials with the proceeds of various bond offerings related to the 1MDB SWF. Goldman Sachs also faced fines of £96.6 million (approximately $121.5 million) from British regulators and $122 million from Singapore regulators, highlighting how coordinated resolutions among national authorities are becoming more common in these types of cases.[4]
Apart from the hefty fees for the American companies, the reputational costs to the SWFs can also be debilitating. For example, 1MDB has become a household name that is almost synonymous with kleptocracy and is still in debt as it tries to recover the embezzled money years later.
WHO CAN BE HELD LIABLE?
Importantly, the FCPA’s extraterritorial reach is far and wide. SWFs are subject to FCPA liability even if they do not have an obvious nexus to the United States. SWFs do not need to be issuers in US stock exchanges or have US subsidiaries to be liable for FCPA violations. The guilty plea entered into by Glencore International A.G., a Swiss-based mining and commodities company, in May 2022 for FCPA violations and the ensuing $700 million fine further emphasize this point.
According to the DOJ’s Information Statement filed on May 24, 2022, Glencore made at least $39 million of corrupt payments to Nigerian “consulting” companies in order to bribe government officials in various West African countries using correspondent bank accounts held at financial institutions in the Southern District of New York.[5] Additionally, Glencore agents and executives, while in the territory of the United States, sent emails approving bribe payments to various companies in West Africa with the intent of bribing foreign officials.[6]
The fact that Glencore and its agents, while in US territory, “willfully and corruptly [made] use of the mails and means and instrumentalities of interstate commerce [to] commit an act in furtherance” of the bribing of a foreign official constituted a sufficient nexus to the United States to charge Glencore, a Swiss company, with a violation of the FCPA.[7]
In other words, merely sending an email while in US territory or using money stored in US bank accounts may expose SWFs to FCPA liability. Given the global reach of the US financial system, SWFs should assume that the United States is able to exercise jurisdiction for FCPA purposes even when SWFs do not directly have a presence or act in the United States.
As such, SWFs should be aware that if any of their officers, employees, or agents take any action in furtherance of a corrupt payment to influence a foreign official while in US territory, the individual and the SWF may be liable for an FCPA violation even if they are not issuers or domestic concerns.[8] Similarly, if at least one conspirator is a domestic concern or issuer or within US territory when they violate the FCPA, then this may create a nexus to an involved SWF under a theory of criminal conspiracy, thus exposing the SWF to liability.[9]
Additionally, depending on SWFs’ percentage of ownership of their respective US portfolio companies, SWFs may be vicariously liable for FCPA violations of said companies.[10] It is thus critical that SWFs conduct appropriate due diligence to determine the FCPA risk, if any, of their potential portfolio companies before investing.
NEXT STEPS FOR SWFS
Given the heightened scrutiny that American companies and financial institutions are likely to face by the DOJ and SEC when conducting business with SWFs, SWFs would benefit from developing and implementing, including receiving regular training with respect to, robust FCPA compliance programs in order to signal to the American companies and the relevant authorities that SWFs’ goals in combatting international corruption are aligned.
This is likely to encourage American companies and financial institutions to continue working with SWFs and, in competitive instances, prioritizing dealing with those SWFs that have such programs in place. Additionally, as was seen in 2008 and during the COVID-19 pandemic, SWFs tend to be contrarian investors that activate during times of economic uncertainty in the United States. The current bear market thus makes it likely that SWFs will continue to invest in US firms, which will inevitably bring more SEC and DOJ FCPA investigations.
A well-implemented FCPA compliance program by SWFs will go a long way in mitigating the risks of costly violations. According to the DOJ’s Principles of Federal Prosecution of Business Organizations, the “adequacy and effectiveness of the corporation’s compliance program at the time of the offense, as well as at the time of a charging or resolution decision[,] . . . are considered in conducting an investigation, determining whether to charge a corporation, and negotiating plea or other agreements.”[11]
Further, both the “DOJ and SEC consider the adequacy and effectiveness of a company’s compliance program at the time of the misconduct and at the time of the resolution when deciding what, if any, action to take.”[12] Thus, it is in the best interest of SWFs to implement FCPA compliance programs and examine the FCPA compliance of potential portfolio companies through targeted due diligence.
In short, not only should SWFs implement FCPA compliance programs to continue facilitating investments in and partnerships with American firms, but they should also do so to protect themselves against increasingly likely investigations that may implicate them directly.
[1] While other US laws and regulations are implicated by the investments of SWFs in US companies, such as the Committee on Foreign Investment in the United States (CFIUS), the scope of this Insight is confined to the FCPA.
[2] 2020 FCPA Resource Guide.
[3] 2020 FCPA Resource Guide.
[4] See also ABB Agrees to Pay Over $315 Million to Resolve Coordinated Global Foreign Bribery Case (describing how the DOJ coordinated with South African authorities in charging ABB, a Swiss company, in a foreign bribery case).
[5] DOJ Information Statement at 9.
[6] DOJ Information Statement at 11.
[7] DOJ Information Statement at 21.
[8] 2020 FCPA Resource Guide.
[9] Id.
[10] Id.
[11] FCPA Resource Guide at 51.
[12] FCPA Resource Guide at 57.
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