An SEC investigation involving improper payments made by financial services institutions to sovereign wealth funds could dramatically change the way U.S. money managers conduct business with SWF officials — regardless of the probe's outcome.
“All financial institutions will be looking to re-examine their compliance programs to be sure that what they're doing is what they need to be doing,” said Simeon Kriesberg, partner at Mayer Brown LLP in Washington who is not directly involved in the matter.
The probe “will likely shape the way (financial companies) approach relationships with SWFs,” Mr. Kriesberg added. “It will not eliminate those relationships, but it will make (the companies) much more careful in the way they pursue business with such funds.”
Earlier this month, the U.S. Securities and Exchange Commission sent inquiry letters to several U.S.-based companies in a preliminary investigation focusing on compliance with the Foreign Corrupt Practices Act of 1977. Details of the investigation are not known, but the letters alluded to expenses incurred in connection with investments made by sovereign wealth funds, according to sources familiar with the case who asked not to be named.
While violations could include bribery payments, they also involve any improper expenses linked to entertainment, gifts, travel and even so-called educational trips, several sources said. The investigation involving financial institutions is more likely to fall under the promotional category — which encompasses the various non-cash payments — in relation to the investments made by SWFs, according to several attorneys based in the U.K. and U.S.
“So much of the business (won by fund managers) is based on forging relationships with SWFs,” said Ashby H.B. Monk, research fellow in Oxford University's School of Geography and the Environment, Oxford, England, who has written several academic papers on sovereign wealth funds.
In order to build these relationships, attorneys said, it's not unusual for executives to entertain their clients or pay for travel expenses to promote company services. While reasonable types of these activities are not necessarily illegal for corporate clients and are often considered a necessary part of doing business overseas, the FCPA places them under much more scrutiny when dealing with factors related to developing business with government officials, said Frederic R. Miller, partner in the investigations and forensic services division of Pricewaterhouse Coopers, McLean, Va.
Mr. Miller said the investigation “will likely make a lot of companies that didn't even get the letter stand up and take notice.” While many global financial services companies already have FCPA-compliant programs in place, what executives will now focus on is “how vigorous and robust those programs are being implemented in reality,” he added.
The investigation is in the early information-gathering stage. Sources said it is likely to partly involve activities surrounding the cash injections made to financial companies struggling around the time of the collapse of Lehman Brothers Holdings Inc. in September 2008.