Foreign Corrupt Practices Act
Hedge Funds and the Foreign Corrupt Practices Act
Why do hedge fund and private equity managers need to think about the FCPA?
There are several reasons why managers need to consider FCPA issues. First, FCPA liability can present a significant economic risk from an investment perspective. The size of FCPA penalties has increased exponentially over the last decade, with resolutions in the tens, or hundreds, of millions of dollars not uncommon. Often, these penalties include disgorgement of profits attributable to the corrupt transaction. Furthermore, there are tremendous costs and expenses in responding to an FCPA investigation. Thus, from an investment risk standpoint, like any other potential liability, managers should consider whether a potential investment presents FCPA risks that, if prosecuted, could significantly diminish the value of the investment.
Second, the FCPA provides for successor liability. Particularly for private equity investors, the purchase of a controlling interest in a company with FCPA liabilities could cause the new owners to become liable for past violations.
Third, the actions of affiliated agents and business partners can create FCPA liability directly for managers. For instance, if a hedge fund manager or private equity group uses foreign agents to help secure an investment in a foreign country, and that agent paid a bribe to a local government official to gain an advantage, the managers may be liable under the FCPA.
Related to: Hedge Funds Foreign Corrupt Practices Act