SEC Bribery Probe Opens New Front on Wall Street Corruption
A range of companies, including energy, defense, mining, drug and technology players, have been busted in recent years for bribing foreign government officials. Why not banks? After all, cash can be as precious a commodity as gold or oil, especially in a global recession.
So it's perhaps no surprise that the SEC has opened what could emerge as a sweeping probe into whether financial firms such as Citigroup (C) and private equity firm Blackstone Group violated the Foreign Corrupt Practices Act in doing business with sovereign wealth funds. According to the WSJ, securities regulators have sent letters to as many as 10 companies in connection with the investigation:
Though the letters didn't contain specific allegations of bribery, they requested that firms retain documents and asked about the firms' dealings with sovereign-wealth funds, the people said. One person familiar with a firm that received a letter said it was brief, indicating the investigation is at the early stages....
The focus of the inquiry couldn't immediately be determined, but FCPA inquiries involve bribes paid to foreign-government officials or employees of state-owned companies to gain a business advantage. The FCPA pertains to cash as well as non-monetary gifts such as entertainment and trips.Sovereign wealth funds are essentially big pools of money that governments draw from their reserves to make investments. In recent years, such funds have steered vast sums into Wall Street banks and private equity firms. Among buyout shops, for instance, the China Investment Corporation owns a large stake in Blackstone, while Abu Dhabi funds are invested in the Carlyle Group and Apollo Global Management. Citi has raised money from sovereign funds in Kuwait, Saudi Arabia and Singapore.
The SEC inquiry represents the first time the agency has used the 1977 anti-corruption law to scrutinize financial firms, an attorney told the paper. That could open a new and dangerous front for an industry already criss-crossed with federal and state investigations into other kinds of misconduct. Since the probe is preliminary, it's hard to say what regulators will find. But what's certain is that FCPA cases can take an enormous toll on companies' finances and reputation.
In the largest anti-bribery settlement ever, German industrial and consumer products giant Siemens (SIE) agreed in 2008 to pay $1.6 billion in returned profits and fines to settle charges that it bribed government officials in doing business in Asia, Latin America, Africa and elsewhere. Other notable penalties in recent years (click on the adjoining list of the top 10 FCPA settlements, courtesy of The FCBA Blog, to expand):
- Kellog, Brown & Root/Halliburton (U.S.): Engineering firm in 2009 agreed to pay $579 million for allegedly bribing Nigerian officials to win contracts related to building natural gas facilities in the energy-rich nation.
- BAE Systems (U.K.): Defense contractor in March agreed to pay $400 million in pleading guilty to charges that it failed to comply with the FCPA's anti-bribery provisions.
- Royal Dutch Shell (Netherlands). Energy company and five oil-services firms in 2010 agreed to pay a total of $237 million for allegedly bribing African, Asian and Latin American officials on behalf of subcontractors and other customers.
- Daimler (Germany): Automaker in April agreed to pay $185 million in criminal and civil fines for allegedly bribing officials in at least 22 countries to win contracts with government customers to sell Daimler vehicles.
- Alcatel Lucent (France): Telecom gear maker in December agreed to pay $137 million for allegedly using bogus consultants to offer gifts and payments to foreign government officials to obtain business.
That bodes ill for financial firms, which like other companies ensnared in bribery allegations compete ferociously for marketshare in countries around the world. And clearly, the industry is no stranger to fraud and other misdeeds. Notably, investment banks and hedge funds have a track record of illegally splashing around money to win business handling state and municipal pension, securities trading and underwriting business, a practice known as "pay to play." As one lawyer told the Journal:
"Turning to the financial services sector opens up a vast new area of enforcement" of anti-bribery law....I'll bet. We may soon see how that pay-to-play mentality has shaped Wall Street's dealings with foreign government investors.
Related: