Broker-Dealers Cross Into FCPA Territory

bandes7The recent prosecution of two registered broker-dealers and a Venezuelan government official for FCPA violations underscores a point I often make – nothing good ever happens when the government has a reason to look around in your business.  Whether it is to inspect for safety violations or any other regulatory regime, companies run the risk that the government will find something they do not like about your business.

The case originated in an SEC examination of the broker-dealer, Direct Access Partners (“DAP”), and resulted in the criminal prosecution of two DAP employees, and a senior Venezuelan official at the Venezuelan state economic development bank, Banco Desarrollo Económico y Social de Venezuela (BANDES).

Contrary to the view of many in the FCPA Paparazzi, the current case has no relation to the earlier SEC inquiries of the financial industry relating to sovereign wealth funds.  This recent case is not the beginning of some type of financial industry sweep, and anyone who suggests that this is the beginning of some type of Wall Street sweep is only crying wolf for financial benefits.

According to the charging documents (here), the two DAP employees agreed to pay the Venezuelan official bribes in exchange for her directing BANDES’s financial trading business to Direct Access Partners.  The two employees split the revenue earned by Direct Access Partners with the BANDES official who earned monthly six-figure payments.

The SEC filed a parallel complaint against two individuals, the wife of one of the DAP employees who assisted in the funneling of money through various accounts, and the president of a Panamanian bank who funneled bribes for one of the DAP employees.bandes2

The scheme included trades with no discernible purpose other than to line the pockets of the three participants – bonds were bought from BANDES and then sold back to BANDES the same day, all to earn commissions and split the fees among themselves. The payments made to the Venezuelan official were made through intermediaries and offshore accounts, and some were made with the assistance of a DAP employee’s spouse.

The alleged facts suggest that red flags were all over and no one paid any attention to them.  Direct Access Partners is a relatively small broker-dealer (less than $30 million in revenues) and did not detect these transactions.  During the scheme, Direct Access Partners’ revenue climbed from under $30 million annually to a high of $75 million, almost five times the revenue from the year before.  Almost all of this increase was the result of the bribery scheme.  Similarly, one of the employees became the highest earner for the broker-dealer less than 12 months after joining the firm.

bandes5For broker-dealers, the case is a reminder that FCPA violations are a real and significant risk.  Policies and procedures need to be in place to protect against FCPA violations.  Employee accounts have to be monitored and audited frequently to protect against these types of schemes.  Customers have to be examined and monitored for potential corruption risks resulting from unusual trading patterns.

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1 Response

  1. Kevin L. Warmack, E.J.D. says:

    This is very much a case where the firm likely didn’t have the policies and procedures in place for a situation just like this and where the Compliance Officer didn’t do enough to prevent this from occurring. Although FINRA had provided some FCPA guidance through Regulatory Notices because of the relationship with a foreign bank or foreign entity, everything in the dealings should have been looked at with tighter scrutiny from both an AML perspective and an FCPA perspective.

    As the saying goes “You can pay me now or pay a lot later!!”