The Securities and Exchange Commission (SEC) has focused its regulatory and enforcement efforts on interactions between financial institutions, investment funds and private equity funds, and foreign sovereign wealth funds.  The SEC’s action is predicated on a legal determination that managers at the sovereign wealth funds fall under the FCPA’s definition of a “foreign official.”  

As of July 2011, sovereign wealth funds totaled $4.7 trillion under asset management, an additional $6.8 trillion is held in other sovereign investment vehicles, and $7.7 trillion in  foreign exchange reserves.  Some sovereign wealth funds are held by a central bank and others are state savings which are invested for investment return, and which are not used to manage the country’s economy.

The ten largest sovereign wealth funds are located in:  (1) United Arab Emirates; (2) Norway; (3) Saudi Arabia; (4) China (SAFE, CIC); (5) Hong Kong; (6) Singapore;  (7) Kuwait; (8) Canada; (9) Russia; and (10) Qatar. 

No court has reviewed whether the FCPA’s definition of “foreign official” applies to sovereign wealth funds, and not all sovereign wealth funds are the same.  With the court decisions in Noriega and Carson this year, the law is in flux on this question.  The industry, however, would be smart to adopt and implement robust anti-corruption compliance controls.  The risk is too high to bank on a court agreeing with an argument that sovereign wealth funds do not fall within the “foreign official” definition, even assuming that a company would get a chance to make that argument.

It is important to design controls to monitor interactions between private industry employees and sovereign wealth fund managers.  If third parties are employed to facilitate these interactions, the third parties need to be subject to due diligence review procedures and actively monitored.

The controls need to focus on areas which are ripe for abuse — marketing, business development, gifts, meals, and entertainment.   Documentation and transparency have to be the foundation of the program.  The priority areas:

1.  Third party agents — in many countries, third party agents are used because of close connections to sovereign wealth funds.  These agents are very risky and could be used to funnel bribes to government officials.  A specific due diligence review for each needs to be developed and enforced.  Red flags need to be investigated and resolved, along with written contract warranties and representations.  Another risky area is the ownership of the third party entity — government officials, or former government officials, sometimes try to hide their connection to a transaction through elaborate ownership schemes by relying on local corporate laws and mechanisms.  

2.  Gifts, meals and entertainment — government regulators are focusing on this area as a high risk for bribery.  Companies may have “wined and dined” sovereign wealth fund managers to secure business.  Strict controls are needed in this area with appropriate review by supervisory personnel.  Pre-expenditure approvals are essential for ensuring control. 

All contacts with sovereign wealth fund managers have to be recorded, managed, and monitored.   The amount of money involved in these investments and transactions is significant and creates real risks.  Employees need to be alerted and trained, supervision by compliance officials needs to be steady, and supervisory reviews by appropriate officials should be built into the compliance program.   The stakes are high and the risks are real.