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What Financial Services Firms Should be Doing (And Why)

Financial services firms have increasingly come under scrutiny for anti-corruption compliance. In 2011, the U.S. Securities and Exchange Commission (SEC) sent written inquiries to almost a dozen financial services, private equity, and hedge fund companies about their Foreign Corrupt Practices Act (FCPA) compliance. Now, just a few short years later (the time needed to investigate the answers), major enforcement actions have started to drop. 

ast year, Och-Ziff Capital Management Group – one of the leading names in the hedge fund industry – paid more than $400 million in fines and penalties for paying bribes related to investments in Gabon.  Earlier this year, the SEC charged two former Och-Ziff executives with violating the FCPA.  

J.P. Morgan Chase was ordered to pay $264 million in 2016 for hiring the children of influential foreign officials in China to secure lucrative banking deals. Its Hong Kong unit separately paid $72 million in the same case. Other leading names in the sector – including Citigroup, Goldman Sachs, Deutsche Bank, and HSBC have announced investigations into similar allegations.  

Six employees of a New York broker dealer firm settled charges that they bribed Venezuelan government officials in connection with the firm’s bond-trading business. They paid a combined $42.5 billion in fines. The former CEO of the broker dealer was separately sentenced to four years in prison.  

The money business has clearly come under the watchful eye of the FCPA enforcement agencies, and that is not likely to change any time soon. Faced with this intense focus, it is critical for banks and investment funds to understand their corruption risks, identify their “touch points” with foreign government officials, and implement practical controls to address them.    


Virtually every country in the world maintains some form of regulatory control over financial services companies. Most impose rigorous licensing requirements before firms  even open their doors. Once the entity is open for business, regulators perform detailed and often burdensome inspections on a periodic basis, and they require periodic filings containing masses of complex information. In some jurisdictions, revenue authorities are known to take an aggressive stance on the taxes due from foreign financial services companies. And, naturally, disputes can arise out of any of these.  

Each of these steps results in an interaction with one or more foreign government officials. All of these interactions are of course necessary, but they also present opportunities for improper conduct that savvy firms should ensure their compliance teams have foreseen. A regulator might threaten to delay a regulatory approval unless her palms are greased. A revenue official may offer to reduce the company’s tax liability if you send him to Paris for an all-expenses paid holiday.  An administrative judge could suggest that a large investment in her pet organisation would help her to more clearly see the efficacy of your firm’s position.  

Like those in any regulated industry, financial institutions, bond traders, and others in the money business should ensure that their policies and procedures prohibit giving or offering anything of value to foreign officials without expert analysis and approval. Requests to provide benefits to foreign officials – even routine business courtesies – should be subject to a compliance review to ensure that the benefits are reasonable, consistent with local law, and not a quid pro quo for preferential treatment.  


By some recent measurements, sovereign wealth funds (SWFs) worldwide have almost $6 trillion in assets under management. Securing an investment from an SWF can significantly increase a hedge fund’s liquidity. Managing even a small portion of an SWF’s investments can garner substantial fees for a financial institution. Unfortunately, the list of countries with some of the largest SWFs also reads like the bottom half of Transparency International’s Corruption Perceptions Index. Private equity and hedge funds that seek investment from SWFs based in these countries, and financial institutions seeking contracts to manage them, must exercise caution.

As noted above, some of the biggest names in international banking have come under scrutiny for offering internships or permanent employment to the daughters and sons of influential foreign officials.  The hope has been that, following up on the employment offer, mom or dad would ensure completion of an elusive regulatory approval or be inclined to look favourably on the firm’s bid for a contract to manage the country’s SWF. In many cases, the banks ignored the fact that Junior wasn’t qualified for the position and then consistently failed to do a solid day’s work. Worse still, the banks circumvented their own hiring rules to bring Junior onboard in the first place. In all of these cases, U.S. enforcement agencies have taken the position that hiring an official’s daughter or son in exchange for a business advantage violates the FCPA, particularly where hiring criteria and evaluation standards are ignored to do so.  

The obvious fix is that financial services firms should not use employment opportunities to win business from foreign government clients. Human resources personnel should have access to senior management in case they feel leaned-on by the marketing department to bend the rules in the hope of landing an important client. The organisation should have well-developed procedures that cover the hiring of interns and full-time employees, and it should live by them. If an official’s child is not qualified for a position in the firm’s trainee program, then do not hire them.  



Like everyone else doing business in international markets, the financial services industry must understand the risks attendant to working with third parties in the course of identifying and pursuing business opportunities. Financial institutions may look to outside consultants to help them establish relationships with SWFs. Venture capital and hedge funds often work with local joint venture partners or agents to find and pursue foreign investments. The benefits of engaging third parties to help secure international business are many, but these relationships carry significant corruption risks.

The FCPA imposes criminal liability for the improper conduct of third parties, and over 90% of all FCPA enforcement actions have involved third parties that engaged in corruption. To address the risks of working with third parties, financial services firms should implement robust controls over the engagement of third parties and the activities they are permitted to undertake. Firms should undertake due diligence on all third parties to ascertain their qualifications, evaluate their business ethics, and identify any connections to foreign officials and other corruption red flags. Internal finance policies should require payment to a third party via legitimate banking channels in its home jurisdiction, and any requests to deviate should be carefully screened for concerns related to money laundering and problematic secrecy. For their part, third parties should be transparent about their activities and should willingly participate in due diligence as well as ethics and compliance training.   



Venture capital and hedge funds are increasingly finding that their investments can create FCPA exposure. Under the FCPA, parent companies can be liable for the misconduct of their subsidiaries, even if they are not wholly-owned. Indeed, publicly-traded firms are strictly liable for the misconduct of any entity in which they own a stake greater than 50%, even if they are entirely unaware of – and have no reason to know about – that misconduct. This exposure means that investors should conduct through due diligence on their investment targets.

Among other things, funds should understand whether their proposed portfolio companies do business in challenging markets, hire third parties to market or promote on their behalf, and maintain effective anti-corruption controls. Evaluating a potential investment’s FCPA exposure not only helps avoid liability, it also preserves the value of the portfolio company. Undertaking an FCPA investigation is expensive, so is defending against an enforcement action and rolling out a remediation plan. A company can easily spend tens of millions – and sometimes hundreds of millions – of dollars on lawyers and accountants in the course of an enforcement action. It’s better to go into an investment with your eyes open than to be surprised by costly problems later. 



A dedication to compliance is like the old adage – a stitch in time saves nine. Financial services and investment firms should expect to remain in the FCPA cross-hairs. Taking the time and expending the effort to understand risks and impose a robust compliance program to address them can pay
significant dividends. Just look at Morgan Stanley’s experience.  

In 2012, a former executive in the bank’s Singapore operations, Garth Peterson, pleaded guilty to bribing Chinese government officials. He spent nine months in prison, but Morgan Stanley itself emerged from the case unscathed, protected by its robust compliance program. Morgan Stanley’s dedication to compliance showed that Mr. Peterson’s improper conduct was an isolated case of a rogue employee, and not the result of lax corporate controls and ethics. Instead of fines and penalties, Morgan Stanley actually received praise from the enforcement agencies. A stitch in time indeed. 

Chat further consolidation will continue. It is a well known fact that some of the banks are considering exiting the market, which does not mean the lack of interest for investing in Serbia. It is just a sign that the current level of fragmentation is unsustainable in the long run. Those who stay will be confronted with a huge challenge to act and change fast, which is the same as with all other banks around the world.   EG

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