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Mitt Romney, Private Equity, and the FCPA

I admit it. Latin America is not my only passion. I am also a political junkie. Four years ago, I took a month’s leave from my Washington, DC law firm to trudge through the New Hampshire snow in support of my chosen candidate. I went door to door, sat in strangers’ living rooms, and stuck yard signs in thick ice. Like many, I watch today’s New Hampshire primary with great interest.

Mitt Romney’s bid has brought attention to the private equity industry. Romney’s supporters say that this background proves he understands the private sector and job creation. His opponents criticize him for getting rich off of others’ failures. The industry’s trade association yesterday released a statement in defense of its work: “While the business model has evolved over time, the fact of the matter is private equity provides capital and operational expertise to companies that are often underperforming or on the brink of failure.”

In the FCPA world, there has also been much written recently about private equity. The foreign bribery risks associated with this line of work are high. As New Hampshire voters go to the polls, it is a fitting time to add to this discussion. I highlight an issue of increasing importance that I have seen in my compliance work for the industry, one absent from much of the discourse: that is, the market rationale for FCPA compliance in private equity.

Smart FCPA attorneys like Mike Volkov [1] of Mayer Brown and Matthew Reinhard [2] of Miller & Chevalier have accurately discussed the ways that the financial services industry can be exposed. Firms can be liable for the corrupt acts of their portfolio companies if they fail to assess and work to remediate the companies’ compliance efforts. Firms that generate investments from sovereign wealth funds can run afoul of the law when they or their agents interact with fund officials. Firms can be liable for the prior corrupt acts of the companies they acquire if they fail to conduct acquisition due diligence and remediate issues discovered. Firm employees can violate the law when they or their agents interact with foreign officials while setting up deals – e.g, obtaining permits and regulatory approvals.

Law firms like Debevoise and Plimpton have provided helpful opportunities for U.S. and UK enforcement officials to describe how they see private equity. In a June 2011 speech [3], the Serious Fraud Office’s Richard Alderman described how the UK Bribery Act applies to this sector: private equity “has a responsibility . . . to ensure that the companies in which they have a shareholding operate to the right [anti-corruption] standards.” The DOJ has publicly declared that sovereign wealth funds are under FCPA watch.

Experts like Tom Fox have opined on how private equity will likely be held to the “highest common denominator [4]” by enforcement officials. In other words, the portfolio company that has in place the most advanced compliance practices will serve as the benchmark to evaluate a firm’s work to ensure compliance of the other portfolio companies.

Enforcement has started to take actions showing that the financial services industry is under watch. A year ago, the SEC sent letters of inquiry to at least ten banks and private equity firms requesting information on their dealings with sovereign wealth funds. Goldman Sachs is under investigation for a $50 million fee to the Libyan sovereign wealth fund. The hedge fund, Omega Advisors, paid a $500,000 civil penalty for bribes in an Azerbaijan privatization investment.

Two other important dynamics are at play. Both reveal a market rationale for FCPA compliance.

First, sophisticated investors in these funds are beginning to ask questions about the private equity firm’s attention to FCPA compliance. Investors know that, if a fund is not managing corruption risk, it is greatly exposed. This is giving fund managers a new reason to take compliance seriously. They need to be able to give answers.

Second, firms are learning that, if they do not work to ensure that their portfolio companies are compliant, they risk damaging the value of their portfolio. Purchasers of these companies are asking questions about their compliance programs. Purchasers are also conducting their own acquisition due diligence and requiring adoption of anticorruption compliance programs or improvements to existing programs. In my experience, firms are learning that FCPA compliance offers value beyond avoiding enforcement — fraud and corruption harms business even if law enforcement never gets involved.

The upshot is that FCPA compliance is becoming part of the “operational expertise” provided by private equity.  This is being driven both by regulators and the market.

In his campaign for President of the United States, Governor Mitt Romney has made clear that he is not a “regulatory guy.” This worldview drove his now famous “I like being able to fire people” remark. Instead, he is a “market guy.” As it so happens, now the FCPA provides both regulatory and market-based reasons for taking compliance seriously.

The FCPAméricas blog is not intended to provide legal advice to its readers. The blog entries and posts include only the thoughts, ideas, and impressions of its authors and contributors, and should be considered general information only about the Americas, anti-corruption laws including the U.S. Foreign Corrupt Practices Act, issues related to anti-corruption compliance, and any other matters addressed. Nothing in this publication should be interpreted to constitute legal advice or services of any kind. Furthermore, information found on this blog should not be used as the basis for decisions or actions that may affect your business; instead, companies and businesspeople should seek legal counsel from qualified lawyers regarding anti-corruption laws or any other legal issue. The Editor and the contributors to this blog shall not be responsible for any losses incurred by a reader or a company as a result of information provided in this publication. For more information, please contact Info@MattesonEllisLaw.com [5].

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© 2012 Matteson Ellis Law, PLLC