Och-Ziff Capital Management Group, a publicly traded alternative investment and hedge fund firm, and its wholly-owned subsidiary, OZ Africa Management, will pay a combined $412 million in criminal and regulatory penalties in connection with a widespread scheme involving the bribery of officials in Africa.  

Och-Ziff will pay a criminal penalty to the Department of Justice of more than $213 million. “This case marks the first time a hedge fund has been held to account for violating the Foreign Corrupt Practices Act,” said Principal Deputy Assistant Attorney General David Bitkower.

In related proceedings, the SEC filed a cease-and-desist order against Och-Ziff and OZ Management, whereby Och-Ziff agreed to pay approximately $199 million in disgorgement to the SEC, including prejudgment interest, to settle the FCPA violations.

The case also represents another prominent example of the increasingly important role that the Internal Revenue Service-Criminal Investigation (IRS-CI) unit plays in FCPA investigations. The plea and deferred prosecution agreement (DPA) resulted from “the unraveling of complex financial transactions” orchestrated by Och-Ziff Capital Management Group and its subsidiary to facilitate illegal payments to foreign government officials, said Chief Richard Weber of the IRS-CI New York Field Office.

“IRS-CI will continue to investigate pervasive bribery schemes used by corporations in the pursuit of attractive international investment opportunities,” Weber said.

As part of the DPA, Och-Ziff agreed to implement rigorous internal controls, retain a compliance monitor for a term of three years, and cooperate fully with the Department’s ongoing investigation, including its investigation of individuals. OZ Africa pleaded guilty to a one-count criminal information, assigned to U.S. District Judge Nicholas Garaufis of the Eastern District of New York, charging the company with a conspiracy to violate the anti-bribery provisions of the FCPA.  Sentencing has been scheduled for March 29, 2017.

DRC bribery scheme

According to the companies’ admissions, Och-Ziff employees in 2007 began discussions with a businessman operating in the DRC about entering into a partnership based on special access to lucrative investment opportunities in the DRC involving the country’s diamond and mining sectors. Och-Ziff employees learned that the businessman gained access to these attractive investment opportunities by making corrupt payments to senior government officials in the DRC, the companies admitted. 

According to the plea agreement, between 2008 and 2012, Och-Ziff entered into several DRC-related transactions in conjunction with the businessman, understanding that Och-Ziff’s funds would be used, in part, to pay substantial sums of money to high-ranking DRC officials to secure access to, and preference for, the investment opportunities. In 2008, after an Och-Ziff employee was alerted that an audit of the businessman’s records revealed payments to DRC officials, that employee instructed that any references to those payments be removed from a final report of the audit, the companies admitted. 

According to the plea agreement, the businessman paid tens of millions of dollars in bribes to DRC officials in exchange for investment opportunities that resulted in more than $90 million in profits for Och-Ziff. 

When reaching a resolution, the Justice Department said it took into consideration Och-Ziff’s failure to voluntarily self-disclose the companies’ misconduct, as well as the seriousness of the conduct, “including the high value of the bribes paid to foreign officials and the involvement of a high-level employee within Och-Ziff,” the Justice Department noted. Nonetheless, the Department said it reduced the criminal penalty by 20 percent off the bottom of the U.S. Sentencing Guidelines fine range because of Och-Ziff’s cooperation with the government’s investigation.

Libya bribery scheme

Och-Ziff further admitted that, beginning in 2007, it engaged a third-party agent to assist the company in securing an investment from the Libyan Investment Authority (LIA), that country’s sovereign wealth fund, knowing the agent would need to pay bribes to Libyan officials. The agent was engaged without formal approval or any due diligence, according to court documents. 

The company admitted that, beginning in February 2007, the agent worked on behalf of Och-Ziff to obtain an asset placement from the LIA, including setting up a meeting between a senior Och-Ziff employee and the Libyan official empowered to make investment decisions for the LIA. According to court documents, in 2007, Och-Ziff received a $300 million investment from the LIA into the company’s hedge funds. 

Och-Ziff admitted that it subsequently entered into an agreement to pay the agent a “finder’s fee” of $3.75 million, knowing that all or a portion of the fees would be paid to Libyan officials in return for their assistance in obtaining the LIA’s investment. In addition, Och-Ziff admitted that it falsified its books and records and attempted to conceal and disguise the bribes paid through the agent by paying the “finder’s fee” through a sham consulting agreement.

SEC investigation

Financial firms, be warned: The SEC said it “detected the misconduct while proactively scrutinizing the way that financial services firms were obtaining investments from sovereign wealth funds overseas.”

The SEC’s subsequent investigation of Och-Ziff found that the fund used intermediaries, agents, and business partners to pay bribes to high-level government officials in Africa. According to the SEC order, the illicit payments induced the LIA sovereign wealth fund to invest in Och-Ziff managed funds.  Other bribes were paid to secure mining rights and corruptly influence government officials in Libya, Chad, Niger, Guinea, and the DRC.

The SEC order finds that Och-Ziff executives ignored red flags and corruption risks and permitted illicit transactions to proceed. “Och-Ziff engaged in complicated, far-reaching schemes to get special access and secure significant deals and profits through corruption,” said Andrew Ceresney, Director of the SEC Enforcement Division. “Senior executives cannot turn a blind eye to the acts of their employees or agents when they became aware of suspicious transactions with high-risk partners in foreign countries.”

The SEC’s order finds that Och-Ziff’s books and records did not accurately describe the true purposes for which managed investor funds were used, and the company did not have adequate internal controls to detect or prevent the bribes.

“Och-Ziff falsely recorded the bribe payments and failed to devise and maintain proper internal controls,” said Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit.  “Firms will be held accountable for their misconduct no matter how they might structure complex transactions or attempt to insulate themselves from the conduct of their employees or agents.”

Furthermore, the SEC’s order finds Och-Ziff violated the anti-bribery, books and records, and internal controls provisions of the Securities Exchange Act, and affiliated investment adviser OZ Management violated the anti-fraud provisions of the Investment Advisers Act.  Och-Ziff and OZ Management agreed to pay a total of $199 million.

The SEC order finds that Och-Ziff CEO Daniel Och caused violations in two Och-Ziff transactions in the DRC. He agreed to pay $1.9 million in disgorgement and $273,718 in interest to settle the charges.

Additionally, the SEC order finds that CFO Joel Frank caused violations in Och-Ziff transactions in Libya and the DRC. A penalty will be assessed against him at a future date. Och and Frank consented to the SEC’s order without admitting or denying the findings.

The SEC investigation remains ongoing.

Continue the conversation at Compliance Week Europe: 7-8 November at the Crowne Plaza Brussels. Join us as we look at changes in global anti-corruption regulations, slave labour risks in your supply chain, and how to detect fraud, to name just a few topics. Learn more