Scare Tactics: Foreign Corrupt Practices Edition

In 2011, the US Department of Justice launched its first investigation into the US asset management community and its dealings with foreign sovereign funds under the Foreign Corrupt Practices Act. Asset managers fears grew... and with good reason. (Cue scary music.)


In 2011, the US government via the Department of Justice launched its first investigation into the US asset management community and its dealings with foreign sovereign funds. Why? Because the SEC had decided that sovereign fund employees should be categorized as government officials under the Foreign Corrupt Practices Act. And the FCPA forbids paying bribes to foreign government officials and employees.

Asset managers were only marginally worried.

The FCPA dates back to the 1970s and can be characterized as the U.S. government’s anti-corruption statute. It says that any person / entity with substantial business operations in the United States cannot pay (directly or indirectly) any public officials from foreign countries for the purpose of influencing policies in order to secure business.

Asset managers’ fears grew.

And what does the FCPA consider a bribe? It’s actually not all that clear. Basically, the person giving the gift needs to ask himself or herself if they’d be embarrassed if the gift were publicly disclosed. If yes, then yes. Obviously cash gifts would raise alarm bells in the DoJ, but so too could an invitation to the firm’s luxury suite at the Yankee game. Seriously.

Asset managers were terrified.

A little less than a year after the DoJ launched its investigation into US asset managers, the first academic treatment of the topic has now surfaced. Prof. Paul Rose of the Ohio State University has an interesting new paper entitled “State Capitalism and the Foreign Corrupt Practices Act”.

If you’re an American asset manager or service provider working with foreign sovereign funds, you’ll probably want to pay attention. Here’s why:

“Foreign governments act as state capitalists not just through state-owned enterprises, but also through public pension funds and sovereign wealth funds (SWFs); these funds are perhaps the next frontier for FCPA enforcement.”

Oh snap. Even the academy thinks this a problem!

Asset managers began barricading their doors and mumbling incoherent thoughts about ‘prison life’ and being ‘too pretty’.

Scared? Yeah. Well you’re on Scare Tactics ... so you can chill out and read this:

“The article concludes that although in some cases SWF and state pension fund employees would be “foreign officials” for purposes of the FCPA, in most cases the FCPA should not apply to these funds and their employees because there is no link between the employees and the type of foreign policy concern that motivated the creation of the FCPA.”

In short, it’s unlikely that US asset managers working with SWF officials would be convicted under the FCPA anyway. Though I guess that wouldn’t stop the DoJ from trying, now would it... (Cue scary music)