Why Wall Street Could Be Next Up in the FCPA Crosshairs

Financial services companies, beware: You may be the next target of the government's aggressive war on international bribery.

Federal enforcement agencies, including the Department of Justice and the Securities and Exchange Commission, have singled out specific industries in the past to root out corruption that is thought to be pervasive in the industry. Targets of such industry sweeps have included the oil and gas and pharmaceutical and medical device industries.

In a recent case demonstrating the Justice Department's willingness to expand the scope of its anti-corruption enforcement initiative to industries not typically on its radar, the agency unsealed criminal charges last month brought against two employees of U.S. broker-dealer Direct Access Partners (DAP) and a senior executive of Venezuelan state-owned bank Bandes, arising from a massive bribery scheme.

The indictment accused Tomas Clarke and Jose Alejandro Hurtado of paying at least $3.6 million in bribes to Maria de los Angeles Gonzalez de Hernandez, vice president of finance for Bandes, in exchange for directing trading business to DAP from April 2009 through June 2010. According to the allegations, Hurtado and Clarke received millions of dollars in salary, bonuses, and finder's fees, while Gonzalez received monthly kickbacks that were frequently in six-figure amounts.

For their role in the bribery scheme, Hurtado and Clarke were charged with violations of the Foreign Corrupt Practices Act. They also faced charges, along with Gonzalez, of Travel Act and money laundering violations.   

In a parallel action, the SEC filed related civil fraud charges against Clarke and Hurtado after a routine examination uncovered the illicit bribes. Andrew Calamari, director of the SEC's New York Regional Office, called the fraud “staggering in audacity and scope.”

The indictments could potentially signal a broader anti-corruption enforcement sweep of Wall Street. Mythili Raman, acting assistant attorney general for the criminal division of the Justice Department, called the case a “wake-up call to anyone in the financial services industry who thinks that bribery is the way to get ahead,” in a statement announcing the charges.

“We will not stand by while brokers or others try to rig the system to line their pockets and will continue to vigorously enforce the FCPA and money laundering statutes across all industries,” Raman added.

While federal regulators don't have any formal policy of conducting industry-wide investigations into FCPA violations, corporate lawyers say they have been known to focus on an entire industry in the past. “The big question is whether the financial services industry is next,” says Mauro Wolfe, a partner with law firm Duane Morris.  

The Justice Department is always seeking to increase its anti-corruption enforcement, generally, says Demme Doufekias, a partner with law firm Morrison Foerster. “They're always happy to spread into new industries and be creative about how they enforce the FCPA,” she says.

True, financial services firms have not traditionally fallen within the scope of the FCPA, Doufekias says, but because many banks and other firms are expanding globally, and because doing business in the financial services sector is becoming more complex, it is “much more likely that we will see more FCPA cases” involving financial firms, she says.

“The Department of Justice has made it very clear that if they're investigating you for an FCPA issue, they're going to look very closely at your compliance program and what you've done to avoid these problems.”

—Demme Doufekias,

Partner,

Morrison Foerster

Adam Hoffinger, another partner at law firm Morrison Foerster, says financial institutions are especially “ripe prey,” given the additional scrutiny they're under by other regulatory bodies, such as the Commodity Futures Trading Commission and the Financial Industry Regulatory Authority, he says.

The charges against Clarke and Hurtado mark only the latest in a handful of indictments focusing on individuals in the financial services industry. In May 2012, for example, the Justice Department and SEC charged Garth Peterson, a managing director of Morgan Stanley, with bribing a Chinese official in an effort to obtain valuable real estate properties and permits. The Morgan Stanley case was notable for the fact that the Justice Department and the SEC decided not to bring a case against Morgan Stanley because of the firm's robust FCPA compliance program.

In another case, the government charged David Pinkerton, head of AIG Global Investment, and Clayton Lewis, principal of Pharos Capital Management, for participating in a scheme to bribe senior government officials in Azerbaijan in an attempt to privatize and ultimately gain control of the State Oil Company of the Azerbaijan Republic.

The indictment against Hurtado and Clarke could also indicate that small and medium financial services firms are just as much an enforcement target as the large players in the industry. Prior to the fraud taking place, DAP reported between $15 million and $27 million in revenue, “so you're talking about a middle-market broker-dealer,” says Wolfe

UNITED STATES V. CLARKE ET AL.

The chart below provides details on the counts and charges involved in United States v. Clarke et al.

Count(s)

Charge

Defendant(s)

Maximum Penalties

One

Conspiracy to Violate

the Foreign Corrupt

Practices Act

Tomas Clarke;

Alejandro Hurtado

Five years in prison; three years of

supervised release; fine of the

greatest of $250,000 or twice the

gross gain or loss; $100 special

assessment; restitution.

Two

Violation of the Foreign

Corrupt Practices Act

Alejandro Hurtado

Five years in prison; three years of

supervised release; fine of the

greatest of $250,000 or twice the

gross gain or loss; $100 special

assessment; restitution.

Three

Violation of the Foreign

Corrupt Practices Act

Tomas Clarke

Five years in prison; three years of

supervised release; fine of the

greatest of $250,000 or twice the

gross gain or loss; $100 special

assessment; restitution.

Four

Conspiracy to Violate

the Travel Act

Tomas Clarke;

Alejandro Hurtado;

Maria Gonzalez

Five years in prison; three years of

supervised release; fine of the

greatest of $250,000 or twice the

gross gain or loss; $100 special

assessment; restitution.

Five

Violation of the Travel

Act

Alejandro Hurtado;

Maria Gonzalez

Five years in prison; three years of

supervised release; fine of the

greatest of $250,000 or twice the

gross gain or loss; $100 special

assessment; restitution.

Six

Violation of the Travel

Act

Tomas Clarke

Five years in prison; three years of

supervised release; fine of the

greatest of $5,000,000 or twice the

gross gain or loss; $100 special

assessment; restitution.

Seven

Conspiracy to Commit

Money Laundering

Tomas Clarke;

Alejandro Hurtado;

Maria Gonzalez

20 years in prison; three years of

supervised release; fine of the

greatest of $500,000 or twice the

value of the property involved in the

transaction; $100 special

assessment; restitution.

Eight

Money Laundering

Alejandro Hurtado;

Maria Gonzalez

20 years in prison; three years of

supervised release; fine of the

greatest of $500,000 or twice the

value of the property involved in the

transaction; $100 special

assessment; restitution.

Nine

Money Laundering

Tomas Clarke

20 years in prison; three years of

supervised release; fine of the

greatest of $500,000 or twice the

value of the property involved in the

transaction; $100 special

assessment; restitution.

Source: Justice Department.

What that means on a practical level is that FCPA enforcement could prove particularly vexing for small and mid-size financial services entities that have foreign officials as clients and who engage business with foreign-owned or foreign-controlled companies.

Generally, you'd expect that the large players in the industry would have robust FCPA policies and procedures, Wolfe says, “but as you trickle down to the smaller entities, they may not have the resources and may not fully appreciate the risks in the same way that some of the larger players do.”

Adding to those compliance challenges are the various cultural nuances that companies encounter on a day-to-day basis. In order to do business in a global economy, companies “need to walk a very fine line between being able to do what's good for business and what is culturally acceptable, while at the same time not running afoul of laws that govern them in the United States,” says Hoffinger.

Proactive Measures

Companies in the financial services industry can take several proactive measures to identify and minimize their FCPA risks.

Conduct a risk analysis. Broker-dealers that do business with foreign companies would be well-advised to understand whether the entities with which they do business interact in any way with foreign officials. “Understanding those relationships is going to put you on notice as to whether an FCPA violation may be involved or not,” says Doufekias.

Additionally, financial services firms should know the broker dealer's history of trading with foreign clients and should understand the relationship between the broker-dealer and the business: “How long has the client been involved with the broker-dealer? What kind of trading is involved? Has trading been consistent?” says Wolfe. Pay attention to any sudden spikes in trading activity and know when to ask questions about suspicious volumes of activity, he adds.

Practice due diligence. “Third-party liability is one of the prime liabilities for FCPA cases,” says Brian Dickerson, a partner with law firm Roetzel. Thus, it's prudent to do full due diligence on your third parties, foreign finders, and intermediaries, he advises.

“If you're using an offshore account, that has to raise a red flag,” says Dickerson.  Financial institutions that don't do full due diligence are the ones that are most vulnerable to an FCPA violation, he says.

Develop an anti-corruption compliance program. Take care to ensure that anti-corruption measures are tailored to the financial firm's specific risks and nature of business, says Wolfe. Provide training to employees and have them certify their obligations and knowledge of the FCPA. It will also be prudent to get certifications from your third parties to ensure they're in compliance with the FCPA as well, he says.

“The Department of Justice has made it very clear that if they're investigating you for an FCPA issue, they're going to  look very closely at your compliance program and what you've done to avoid these problems,” says Doufekias. A company that has controls in place to prevent or detect wrongful conduct will be in a much better position than a company that discovers a problem and then creates a compliance program after the fact.