2015: The Year of FCPA Liability for Financial Institutions?
For years, we have all heard about the coming wave of FCPA enforcement against financial institutions, investment banks, private equity firms and others who interact with sovereign wealth funds overseas.
Just to remind everyone, back in 2010-2011, the SEC launched an industry investigation by issuing document requests to major banks, and investment bankers seeking information on their compliance programs and interactions with foreign officials, focusing primarily on sovereign wealth funds. After a number of articles, webinars and warnings, the issue seemed to die down.
Last year, the issue bubbled up again when JP Morgan disclosed its hiring program for relatives of foreign officials. Again, everyone took a deep breath, investigations were started and so far not much has happened.
Recently, however, we have seen evidence of the beginnings of what could become a significant trend this year. In two separate disclosures BNY Mellon has revealed that the SEC has made preliminary determinations to charge several current and former employees, as well as the company itself, with FCPA violations relating to its relationships with sovereign wealth fund clients.
In the third quarter of 2014, the SEC issued Wells notices to certain current and former employees of BNY Mellon for alleged FCPA violations for “the provision of a limited number of internships to relatives of sovereign wealth fund officials.”
In the fourth quarter of 2014, BNY Mellon received a Wells Notice for the same issue.
This is the first sign that the inquiry begun in 2010 to 2011 may be bearing fruit. For the financial services industry, investment banks and private equity funds, this is a serious turn of events. The SEC is digging through its information and making enforcement decisions. Every company on the radar screen has to prepare for the worst – and plan its responses.
For companies that have not been investigated, the SEC’s action is a clear warning to them to begin to focus on important compliance issues, conducting a meaning self-investigation and enhancing existing compliance controls.
Financial institutions, investment banks and private equity funds face real significant threats when interacting with sovereign wealth funds. Like the healthcare industry, there is no question that sovereign wealth officials are “foreign officials” under the FCPA. As a consequence, interactions with sovereign wealth fund officials have to be monitored, audited and conducted with extreme care.
One obvious area for potential abuse is gifts, meals, entertainment and travel expenditures. Sovereign wealth fund officials know they have a lot of bargaining power and they have expectations as to how they are courted by potential customers. These expectations have to be managed carefully, and controls have to be put in place that, at a minimum, require: (1) prospective approval of certain expenditures; and (2) record-keeping as to the number of meetings/interactions with specific officials, the amount spent and the purpose of each interaction.
Interestingly, the BNY Mellon case appears to focus on hiring of relatives of sovereign wealth fund officials. While I know there has been some debate as to whether such hiring programs or practices constitute the transfer of something of value to a foreign official, there are several issues of concern.
As always, I start with the focus on intent. What was the purpose of hiring the relative? What evidence is there to suggest that such hiring was intended to confer an improper benefit on the sovereign wealth official? If the intent can be negated by documentation and surrounding circumstances, the action may not violate the FCPA.
Assuming there is intent evidence for the government to cite, the issue becomes very difficult for the financial institution. If the intent evidence exists, the question then becomes whether an internship for a relative is a “thing of value” for the sovereign wealth official? The value issue is certainly debatable as to whether there is a “value” to the official (as opposed to the relative) but drawing such fine lines is something I would rather avoid altogether.
The BNY Mellon case may be the first of several to come involving financial institutions, investment banks and private equity funds. This could turn into the FCPA enforcement story for 2015. The names of the companies involved could become a who’s who in the financial sector, and the implications for the industry could be significant.
As always, the issue for the industry boils down to – do you have an effective ethics and compliance program? Let’s hope the industry responds well to this latest turn of events.