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Foreign Corrupt Practices Act – Implications for the Alternative Investment Industry

Foreign Corrupt Practices Act - Implications for the Alternative Investment Industry

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Ever since Dodd-Frank required certain funds to register with the SEC, the bright light of compliance scrutiny with the Foreign Corrupt Practices Act (FCPA) has been casting an ever longer shadow as the SEC and DOJ continue to gain experience and  insight to the operation of Private Equity funds.

FCPA was signed into law in 1977 and the Dodd Frank Wall Street Reform and Consumer Protection Act in 2010. The later requires many previously exempt Private Equity Funds (PE) to register with the SEC.  Naturally once the door had been opened to regulators, as the saying goes “the rest is history.”

The FCPA has two core provisions. The first relates to bribery of foreign officials.  The definition is broad and encompasses payments, promises to pay, the authorization of a payment to be made, or transfer of anything of value, while knowing that the transfer will find its way to a foreign official to influence them to act or not act or to simply gain an advantage in obtaining or retaining business.  This section applies to all US persons.

The second provision requires companies with securities listed on a US exchange to comply with accounting provisions.  The provisions which integrate the bribery provisions call for companies to maintain books and records and adequate internal controls.

Certainly, this is a very brief summary of the FCPA provisions.  The full act, as well as details of the act’s provisions, can be found at the Department of Justice’s web site https://www.justice.gov/criminal-fraud/foreign-corrupt-practices-act  Penalties under the act are significant and can result in the millions of dollars in fines as well as potential jail time.

The peril for the Alternative Investment Industry lies in the underlying portfolio companies as well as dealings with sovereign wealth funds and foreign pensions.  This calls for the fund to have a robust due diligence process upfront when the investment is being vetted, as well as implementing and enforcing internal controls at the portfolio company level designed to identify and vet transactions that may fall under the FCPA.

A complete discussion of due diligence and proper internal controls is well beyond the scope of this article.  However, there are some initial areas of inquiry that a fund can consider.

  • Diligence should be commensurate with the risk of the geography and industry at issue.
  • Deal documents should contain representations and warranties specific to the FCPA.
  • Monitor the cultivation and retention of client/investors in particular sovereign wealth funds and pensions.
  • Policies should be implemented that cover employees as well as contractors and other third parties.
  • Review key contacts, customers, and contracts as part of deal diligence and ongoing monitoring.
  • Monitor the identification and means to acquire the ultimate investment in markets and entities.
  • Implement training programs, with particular focus on gifts and entertainment
  • Initiate regular compliance audits
  • Provide for whistleblower provisions and protections

There is no substitute for thorough due diligence both before the deal is signed as well as after it becomes part of the portfolio.

Kenneth J. DeGraw, CPA, CFP®, CFE, Partner Kenneth J. DeGraw, CPA, CFP®, CFE, Partner
T (973) 898 9494
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To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

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