It is no secret that U.S. banks and money managers compete hotly for access to the cash hoards of foreign sovereign wealth funds. Now the Securities and Exchange Commission is taking a long, hard look at just how they compete.
The SEC is interested in enforcing the Foreign Corrupt Practices Act (FCPA), a 1977 law that prohibits giving “things of value” – cash bribes or extravagant perks – to foreign officials, like sovereign wealth fund managers.
Washington has greatly intensified FCPA enforcement of late. The Justice Department moved from an average of two cases a year before 2005 to several dozen lately. SEC formed a new unit to police the law in 2009. The get-tough attitude has led to “sweeps” through various industries that are deeply immersed in emerging markets: oil and gas, pharmaceuticals, freight forwarding. Now it looks like Wall Street’s turn.
The Feds move slowly and deliberately once they have their teeth into an inquiry like this, but seldom let go without drawing some blood. A dozen or more financial services firms got letters from the SEC last year asking for details and documents on their dealings with wealth funds, lawyers and consultants who specialize in FCPA compliance say. Any legal action is “at least 12 to 18 months away,” says Manny Alas, co-leader of PricewaterhouseCoopers’ FCPA practice. Meanwhile the probe has gone “deeper and broader than everyone expected,” widening to include relations with foreign state pension funds, Alas reports.
The focus of the SEC dragnet, as is often the case with FCPA, is firms’ relationships with “third parties”: so-called consultants who peddle access to the decision makers at sovereign wealth funds and may act as a conduit for kickbacks. Corrupt placement agents tied to public officials are not unique to developing markets. Scandals have erupted around their entrée with the New York State pension fund among others.
But senior executives at global money firms tend to let country managers and salespeople in faraway lands manage their own client relationships, especially if they are yielding lucrative mandates to manage Middle Eastern or Asian government cash. Compliance officers have a plethora of other laws and regulations to worry about, and have back-burnered FCPA so long as there were no high-profile cases against defendants in the financial industry.
The SEC’s letters may start changing all that. “This is serving as a wake-up call,” says Michael Schwartz, who oversees KPMG’s FCPA practice. “We’ve seen an uptick in inquiries to our group.”
The best way to avoid government enforcement action, the experts say, is to preempt it with convincing internal compliance. In this case that means taking control of relationships with sovereign wealth fund officials and their “advisors.” A due-diligence check on third-party agents is recommended before the collaboration starts. Afterwards oit should be governed by explicit contracts and thorough documentation of all disbursements.
If that means losing some business abroad, it might be worth it. When the SEC comes after a company for FCPA violations, it seldom comes alone. The Justice Department usually tag-teams with a concurrent criminal action that may include prosecution of individual executives and hard time in a federal prison. The Justice Department filed foreign corruption charges against a record 30 businesspeople last year. That’s a number that should focus the mind.
