Anti-corruption watchdogs eyeing PE firms

The US Securities and Exchange Commission and the Department of Justice are increasingly investigating the majority stakeholders of companies suspected running afoul of anti-corruption laws, according to risk consultancy firm Kroll. 
 
The Foreign Corrupt Practices Act (FCPA), which bars bribery of foreign officials, requires buyout firms and their portfolio companies to establish well-documented internal FCPA compliance procedures. The procedures must show evidence GPs carried out due diligence to weed out corruption concerns during deal making.   

 
However, a number of buyout firms have had difficulty implementing effective compliance programs because the nature of “appropriate” due diligence has not been clearly defined by regulators, said Peter Turecek and Michael Varnum, two Kroll managing directors, in the firm’s latest fraud report. 
 
The directors advise firms to ratchet up due diligence procedures for regions and sectors more prone to kickbacks. Moreover the deeper a GP’s involvement in the portfolio company, the more likely regulators are to assign culpability for the company’s actions. 
 
While no buyout firm has yet been charged with a FCPA violation as a result of the actions of one of its portfolio companies, investigations are set to increase, said Kroll. Earlier this year, the SEC launched a sweep investigation to in part determine whether private equity firms violated the FCPA in connection with investments made by sovereign wealth funds. 
 
Likewise, earlier this month the DOJ successfully prosecuted its first FCPA trial. California-based Lindsey Manufacturing “is the first company to be tried and convicted on FCPA violations, but it will not be the last,” said DOJ Assistant Attorney General Lanny Breuer, in a statement. 
 
The DOJ has demonstrated leniency in some FCPA cases because of mitigating factors, “including self-reporting, past and continuing cooperation with the investigation, implementation of remedial measures (including an FCPA compliance program), and the absence of prior similar conduct”, according to the report.  
 
It’s not just the US stepping up corruption scrutiny, for developments in the UK click here.