SEC, DOJ keep eye out for foreign corruption in PE industry

  • Och-Ziff case provides insight into future enforcement
  • Portfolio companies also subject to DOJ enforcement
  • Proskauer’s Leonard expects fees, expenses to remain priority

The recent focus of the SEC and Department of Justice on how private fund managers conduct and attract business outside the U.S. may hint at future enforcement actions, a recent report from law firm Proskauer says.

While proper accounting of private equity fees and expenses will remain an SEC priority in 2017, “the other thing we’re going to continue to see is more enforcement in the Foreign Corrupt Practices Act,” said Robert Leonard, a partner in the firm’s hedge funds group.

The act prohibits companies from making payments to foreign-government officials to obtain or retain business. The two agencies’ continued focus on foreign corruption could “also have an impact on raising money” for new PE funds, particularly because the act extends to any quasi-governmental entities or family members, Leonard added.

For example, JPMorgan Chase recently settled with the SEC for $264 million for providing jobs and internships to family members of government officials throughout the Asia-Pacific region as a means of obtaining business.

JPMorgan and the Justice Department entered a non-prosecution agreement that acknowledges responsibility for criminal conduct relating to the SEC’s findings, according to a copy of the enforcement action.

Private equity firms, particularly those that raise money from or invest in foreign entities, were put on notice after Och-Ziff Capital Management paid more than $400 million in an FCPA settlement.

The SEC and Justice agency found the firm had used “intermediaries, agents, and business partners to pay bribes to high-level government officials in Africa,” including Libyan Investment Authority officials, a September news release said.

Och-Ziff, a private asset manager whose PE strategies are backed by institutional clients like New Jersey Division of Investment, acknowledged responsibility for violating bribery and bookkeeping rules, according to the SEC’s order.

“This settlement provides important guidance for private funds,” according to the Proskauer report. “The settlement sets forth the government’s FCPA compliance expectations in great detail for this manager, and all private fund managers should follow these expectations in light of their own particular circumstances.”

Those include high-level commitments to compliance on the part of any private equity firm’s senior management — CEO Daniel Och agreed to personally pay more than $2 million to settle the case — as well as clearly outlined policies for oversight, risk-based review, enforcement and discipline, the Proskauer report says.

Of course, the FCPA applies to more than just asset managers. PE firms owning portfolio companies that regularly do business with foreign governments should ensure their management teams adhere to similar policies, Leonard said.

Beyond the Foreign Corrupt Practices Act, Leonard said he expected the SEC to continue its focus on PE fee-and-expense practices and ensuring firms properly disclose those policies to fund investors.

“Starting in 2015, then this year as well, they found a lot of people and a lot of funds — big funds — that were misallocating or [improperly] disclosing how they will do things. And if you disclose properly, you’ll be fine,” Leonard said.

He added: “It’s more complicated for PE funds and for other private fund vehicles.”

Action Item: For Proskauer’s full report, visit

Robert Leonard, partner in Proskauer’s hedge fund practice. Photo courtesy of the firm.