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Wall Street Lawyer: FCPA Enforcement on the Rise in Private Investment Industry, Warn Lauren Resnick and Marco Molina

Articles / May 30, 2013

The Foreign Corrupt Practices Act (FCPA), write Partner Lauren Resnick and Associate Marco Molina in a recent article for Wall Street Lawyer, has become the priority enforcement tool for the U.S. government when working to ensure a level commercial field through the punishment of rule-breakers (“In the Crossfire: Why Private Equity Firms, Investment Funds & Their Managers Should Beware of the Foreign Corrupt Practices Act,” May 2013).

With private equity firms expanding into underdeveloped economies, the firms and their senior managers have opened themselves up to potential criminal liability under the FCPA. The Department of Justice and the Securities Exchange Commission have opened numerous investigations over the last decade, securing criminal convictions of individuals under the FCPA, demonstrating the newfound enforcement priority of corrupt anticompetitive activity abroad.

This should not deter hedge funds and private equity firms from growing, however, write the authors. This increased regulation should be seen as an opportunity for the private investment industry to bolster its due diligence processes, compliance programs and internal controls.

The FCPA was enacted in the 1970s to prohibit corporate bribery abroad and encourage proper bookkeeping domestically. Currently, there are more than 100 active enforcement investigations for suspected FCPA violations.

Resnick and Molina move on to discuss the FCPA and its objectives, including its books and record provisions and anti-bribery provisions. It tends to focus on specific industries, the authors write, especially those such as the private investment industry that are laden with potential FCPA-related concerns.

These risks for the private investment industry are due to both inbound and outbound activity. Inbound foreign investments in the form of sovereign wealth funds involve funds owned and operated by foreign governments. Because they are controlled by foreign entities, their employees and directors qualify as “foreign officials” under the FCPA. This has prompted an SEC investigation and should raise awareness of payments of benefits that may be acceptable in certain foreign jurisdictions but are not legal under the U.S. statute.

Outbound foreign investments pose concerns as well, as overseas investments often involve third-party agents fostering investment relationships between private investment firms and foreign governmental entities. Payments made to foreign officials can subject U.S. firms to FCPA liability. To avoid such an outcome, investors should conduct preacquisition FCPA diligence and terminate third-party relationships that may pose a problem.

To avoid extensive liability under the FCPA, investors in the private investment industry are encouraged and expected to conduct pre- and post-acquisition FCPA diligence to eliminate any potential violations. The FCPA Resource Guide, according to Resnick and Molina, informs the industry of vital components in anticorruption compliance programs and encourages companies to be proactive in their reporting of improper activity.

“Resnick and Molina conclude that risk assessment “is the bailiwick of the private investment industry,” making FCPA compliance a must for companies in that arena.

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