Journalist and historian Philip Bowring has described the Philippines as a jigsaw state: a country of fractured geography and complex identity. Something similar may be said of its anti-corruption landscape. The Philippines’ economic growth brings the potential for social development and foreign investment, with the U.S. emerging as a key economic and security partner. At the same time, corruption has hindered its economic and social progress. Nuance, local compliance, commercial know-how and experience with the local regulatory developments will be the maps for this maze.

In this article, we attempt to jump start that skill set by assessing the corruption landscape in the Philippines, including recent economic developments and U.S. anti-corruption cases with a direct nexus to the Philippines. We then showcase how recent developments in U.S. anti-corruption laws, namely the Foreign Extortion Prevention Act (FEPA), may have implications for multi-national companies in the Philippines. We follow-up this international enforcement perspective by examining domestic anti-corruption laws and local Philippine enforcement institutions. Finally, we analyse the effects that developments in two key areas – social media adoption and whistleblower requirements – have had for the country’s anti-corruption landscape.

See “In the Crosshairs or at a Crossroads? Indonesia’s Anti-Corruption Inflection Point” (Nov. 8, 2023).

Economic and Political Promise

The Philippines has shown robust economic growth in the last decade. Annual economic growth has averaged approximately 5% per year for the last 10 years, a rate of growth comparable to or higher than other large Southeast Asian economies such as Indonesia, Malaysia and Thailand, according to the World Bank. Last year, the Philippine archipelago became one of the region’s fastest growing economies.

To sustain strong economic growth, the Philippines has implemented legislation to encourage foreign direct investment. Pursuant to amendments to the Public Service Act in April 2023, foreign ownership is now permitted in many industries in which it was previously closed. Similarly, amendments to the Foreign Investment Act, which took effect in March 2022, have eliminated restrictions for foreign ownership in many domestic market enterprises (save for several strategic industries).

The U.S. is among the Philippines’ largest foreign investors, with foreign direct investment stock amounting to $6.2 billion in 2022. The U.S. is also one of the Philippines’ strongest military allies: under the current Marcos administration, the Philippines has taken part in an increasing number of joint military exercises with the U.S. and granted increased access for the U.S. military to Philippine military facilities. At the time of writing, the U.S. Secretary of State is visiting Manila as an indicator of strong cross-Pacific relations.

Lastly, the domestic political situation has remained largely stable: the country witnessed a peaceful transition of power from former President Duterte to the current presidency of Bongbong Marcos in June 2022. Within the domestic economy, one notable aspect is the role of government-owned and controlled corporations (GOCCs). GOCCs are state-owned enterprises that operate in a wide range of sectors, including insurance, financing, charity work and gaming, with the principal intention of supporting public welfare. GOCCs receive government financial support, while being legally required to remit half their earnings to the national government. Given their government ownership, officials of GOCCs qualify as “foreign officials” under U.S. anti-corruption laws, with important implications for U.S. companies that transact with them.

See “Who Is a Foreign Official?” (Sep. 11, 2013).

Endemic Corruption

Notwithstanding the promising developments above, the Philippines continues to face a challenging corruption landscape. Its latest score of 34 out of 100 in the 2023 Corruption Perceptions Index (CPI), published by Transparency International, places it 115^th out of 180 countries surveyed – a large decline from the country’s position in 2014, when it ranked 85^th out of 175 countries. Similarly, the Global Corruption Barometer, a survey of 20,000 participants from various countries in Asia, found that 86% of Filipinos surveyed viewed government corruption as a big problem.

Analysing the causes of nationwide corruption are seldom straightforward. Observers cite reasons including the presence of local oligarchs, patronages prevalent amongst ruling bodies, suppression of dissenting voices and under funding for enforcement agencies.

The resulting perception of widespread corruption has economic implications. Analysis by the U.S. Department of Commerce suggests that the Philippines, despite the economic promise referenced, still continues to lag behind similar-sized neighbours in Southeast Asia in attracting foreign direct investment. The Philippines’ economic competitiveness ranking also declined in 2023, with the Philippines ranking 52^nd out of 64 economies surveyed by the Institute for Management Development World Competitiveness report. According to the U.S. International Trade Administration, foreign investors frequently cite corruption, as well as bureaucracy and regulatory uncertainties, as a key challenge to doing business. This perception should be challenged by the recent local legislative efforts aimed at attracting foreign investment.

FCPA Enforcement in the Philippines

While FCPA cases with a direct nexus to the Philippines are few in number, the few that exist offer useful reminders of fundamental anti-corruption compliance principles for multinational companies doing business in the country.

Failure to Conduct Pre-Acquisition Due Diligence

Datron World Communications (DWC), a provider of military and naval communications equipment, paid commissions of approximately $48,000 to its Filipino agent, in connection with the sale of $1.1 million of equipment from 1999 to 2003. The agent subsequently made cash payments to high-ranking military officials, in order to obtain business for DWC. DWC executives declined to discuss these payments with the agent despite his repeated attempts to do so, suggesting a wilful blindness to potential related impropriety.

Notably, DWC’s liability for having corruptly paid money to foreign government officials was inherited by Titan Corporation, which acquired DWC in 2001. In its complaint, the SEC alleged that Titan had failed to conduct any meaningful due diligence on Datron prior to or after its acquisition. That failure, and Titan’s own failure to implement an effective FCPA compliance program post-acquisition, resulted in the SEC finding Titan liable for DWC’s failures to prevent its agents from making improper payments.

Given the DOJ’s recent focus on post-acquisition due diligence and remediation as part of its Safe Harbor program, DWC illustrates that in the Philippines, acquisitions and divestments should be coupled with robust risk due diligence.

See “Safe Harbor Policy Seeks to Encourage Self-Reporting of Issues in M&A Transactions” (Oct. 11, 2023).

Individual Liability for Executives and Officers

Invision Technologies, a manufacturer of airport security screening machines, was found to have known of a “high probability that its foreign sales agents or distributors” made improper payments to foreign government officials in several countries, in consideration for securing local business, from 2002 to 2004. Notwithstanding this knowledge, Invision allowed its agents and distributors to proceed on its behalf, in violation of the FCPA. The countries in question included China, Thailand and the Philippines.

The Invision enforcement highlights the individual liability that may arise for senior officers involved in a company’s FCPA violations. In 2006, the SEC announced charges against David Pillor, former senior vice president for sales and marketing, and a former member of the Invision board of directors. The SEC founded its charges on emails, received by Pillor, which showed that Invision’s overseas sales agents had intended to make improper payments to foreign government officials in several Asian countries, including in the Philippines. By failing to monitor these agents, and to implement measures to prevent such conduct, Pillor was found to have aided and abetted Invision’s failure to establish internal controls sufficient to prevent violations of the FCPA.

The charges against Pillor highlight the significant personal responsibility that the U.S. enforcers ascribe to officers, directors and employees, in ensuring that their companies comply with the FCPA. They also underscore the high personal costs of being found in breach of that duty.

See “Recent Indictments Demonstrate DOJ’s Pursuit of Individuals” (Apr. 27, 2022).

Customs Risk

Emery Transnational, a Philippines-based subsidiary of international freight transportation company Con‑way Inc., made approximately $244,000 in improper payments from 2000 to 2003 to induce Philippine customs officials to violate customs regulations, settle customs disputes in Con-way’s favour and refrain from enforcing legitimate fines. In the same period, Emery Transnational made further improper payments of $173,000 to officials at fourteen state-owned airlines that conducted business in the Philippines. According to the SEC’s investigation, none of these improper payments were adequately reflected in Con-way’s books and records. Moreover, Con-way knowingly failed to implement a system of internal accounting controls that would ensure that Emery’s payments were accurately reflected in Con-way’s books and records, and that Emery would act in accordance with Con-way’s policies.

In making this omission, Con-way exemplified an FCPA violation that the SEC also uncovered with DWC and Invision, highlighting the importance of establishing internal controls sufficient to ensure that a company that is subject to the FCPA accurately records all income and expenditures – both of core business activities and of gifts, entertainment and charitable donations. These internal controls should also extend to any subsidiaries or affiliates over which the company has control.

See the Anti-Corruption Report’s three-part series on customs corruption risks: “Identifying the Problem Areas” (Oct. 21, 2015), “Four Ways to Limit the Risks of Working With Customs Brokers, Freight Forwarders and Other Third Parties” (Nov. 4, 2015), and “Should a Company Ever Pay a Facilitation Payment to a Customs Official?” (Nov. 18, 2015).

Fat Leonard Scandal Highlights Risks Relating to Foreign Persons in the Philippines

Notably, one of the most prominent cases of cross-border corruption involving the Philippines does not involve Philippine government officials at all. Instead, it involves the bribery of U.S. officials by a private individual based in Singapore.

In January 2015, Leonard Francis, a Malaysian national known as “Fat Leonard,” pleaded guilty in a U.S. federal court to presiding over a years-long corruption scheme involving his Singapore-based firm, Glenn Defense Marine Asia (GDMA). GDMA supplied food and fuel to vessels in the region, including to U.S. Navy ships at ports across Asia. In his plea, Francis admitted to having bribed “scores” of U.S. Navy officials with cash, services from prostitutes and lavish hotel stays. In return for such bribes, U.S. Navy officials permitted GDMA to overcharge for hundreds of visits by U.S. Navy vessels in Asian ports, including in the Philippines and Thailand. Francis’s subsequent cooperation with U.S. authorities secured the convictions of many defendants, including many Navy officials.

The “Fat Leonard” case highlights the risk of corrupt activity that may arise from the increased military co-operation now taking place between the U.S. and the Philippines. More broadly, it highlights how U.S. and other multinational organisations, doing business in the Philippines, must implement compliance policies to ensure that their own employees and directors do not receive or solicit corrupt inducements, in addition to not paying or offering them.

The above compliance risk appears particularly relevant for U.S. or multinational companies in a position to award significant economic benefits to a local Philippine party. Examples include companies considering a significant capital investment into the Philippines, or a large acquisition of domestic goods or services. In sum, the liberalisation of the Philippine economy to foreign investment brings both economic promise and anti-corruption risks. The need to implement robust compliance policies for U.S. companies is heightened by a key development in U.S. anti-corruption law.

U.S. Foreign Extortion Prevention Act

In December 2023, U.S. President Joe Biden signed into law the FEPA, an anti-bribery law described by one advocate as “the most consequential foreign bribery law in nearly half a century.” The FEPA makes it unlawful for foreign government officials to demand or accept bribes from any U.S. citizen, company or resident, in exchange for performing or omitting any official act. In stating this prohibition, the FEPA complements the FCPA, which criminalises the offer or provision of bribes by U.S. persons to foreign officials.

With respect to the definition of U.S. persons, the FEPA adopts the same framework as the FCPA: a bribe must have been demanded or accepted by an issuer of U.S. securities; a U.S. domestic concern, including a U.S. citizen or business entity; or any person acting in the territory of the U.S.

With respect to foreign officials, however, the FEPA adopts a broader definition. In addition to the FCPA’s definition of “any official or employee of a foreign government or any department, agency, or instrumentality thereof,” or “any person acting in an official capacity,” the FEPA adds, amongst other terms, “any senior foreign political figure.” This term is defined to include senior executives of government-owned commercial enterprises, as well as their affiliated businesses, family members or close associates. In the Philippines context, the reference to government-owned enterprises makes clear that executives of GOCCs, along with their family members and associates, are included in the FEPA definition of “foreign official.”

In short, following the passage of the FEPA, U.S. companies must take particular care in transacting with GOCCs – or with other state-owned enterprises or government agencies – in the Philippines or other emerging markets. For U.S. companies in the Philippines, the FEPA, in conjunction with the FCPA, highlights the importance of a strong anti-corruption compliance program: one that, amongst other features, performs adequate due diligence of all interactions involving foreign government officials and provides robust employee training on the risks of such transactions.

This appears particularly true in the Philippines: given the close ties between the U.S. and the Philippines, cross-border collaboration on FCPA or FEPA cases may be more likely than where such alliances are less strong.

See “The Foreign Extortion Prevention Act: Key Changes to U.S. Anti-Corruption Regime Reverberate Well Beyond America’s Borders” (Jan. 31, 2024).

Domestic Anti-Corruption Enforcement in the Philippines

The Philippines has established a wide array of anti-corruption enforcement bodies. These include the Office of the Ombudsman, responsible for investigating wrongdoing by public officials or government employees, including those in GOCCs, and the Commission on Audit, responsible for examining and auditing the accounts, revenues and expenditures of funds or property owned by the Philippine government. These and other bodies seek to enforce a domestic anti-corruption framework composed of various laws and standards, including the Anti-Graft and Corrupt Practices Act of 1960, the Code of Conduct and Ethical Standards for Public Officials and Employees, the Anti-Plunder Act of 1991, the Anti-Money Laundering Act of 2001 and the Anti-Red Tape Act of 2007.

Central to Philippine anti-corruption domestic enforcement efforts is the Sandiganbayan, a specialized appellate court tasked with prosecuting cases involving graft and corruption among public officials. Empowered to hear and decide on such cases, it has the power to impose penalties on public officials found guilty of corruption offenses. On the international stage, the Philippines actively collaborates with entities like the United Nations Office on Drugs and Crime, the United Nations Convention Against Corruption and Asia-Pacific Economic Cooperation to bolster its anti-corruption endeavours.

Despite this complex legal framework and variety of anti-corruption measures, however, perceived corruption remains endemic. Thus far, attempts at eradicating corruption – such as the creation of the Presidential Anti-Corruption Commission, recently abolished by President Marcos – have had a limited effect. Possible causes include the lack of adequate funds to support enforcement efforts and the inherent difficulty of combating prevalent corruption.

Social Media Use and the Facilitation of Fraud and Corruption

The Philippines boasts a vibrant online community, ranking at the upper end of global social media usage. Filipinos spend an average of 4.1 hours daily devoted to platforms like Facebook and Messenger, making them among the most active users in South-East Asia. Facebook enjoys 96% user penetration in the Philippines, while its companions or peers – Messenger, Tik Tok and Instagram – follow at 92%, 77% and 72%, respectively, according to online media monitoring company Meltwater.

Usage of peer-to-peer mobile payment applications is also prevalent in the Philippines. The largest mobile wallet provider, GCash, which enables instantaneous payments between individuals, has over 76 million users, out of a national population of 114 million, according to Statista, a global data and business intelligence platform.

The extensive adoption of digital platforms means that they have extended far beyond their social origins, becoming powerful business tools for small-scale enterprises and individuals. In doing so, however, digital platforms may also facilitate corruption, money laundering and fraud-related conduct. The anonymity offered by social media accounts allows individuals to assume fake identities, which may facilitate fraud and corruption schemes. For example, the proliferation of multiple accounts may frustrate the efforts of government or corporate investigators to track the social media communications and related financial transactions of a given individual. Moreover, recent features in popular messaging apps, such as disappearing messages in Viber, Telegram and WhatsApp, add to the potential difficulties faced by investigators, since critical communications records are now more likely to disappear by default.

Lastly, in the Philippines, as elsewhere in Southeast Asia, industrial-scale forced cyber-scam centres have emerged as a growing problem. The Philippines National Police Chief recently identified cyber scamming as one of the fastest growing crimes in the Philippines. The Philippines’ strong affinity for social media platforms thus provides not only mechanisms to facilitate corruption – it also exposes an expanding online population to growing risks of fraud and scams.

See “Messaging Apps Come Under Increasing Regulatory Scrutiny” (Jun. 7, 2023).

Whistleblowing Framework and Culture in the Philippines

There is no overarching whistleblowing framework in the Philippines. However, companies in certain sectors are subject to whistleblower-related requirements or recommendations.

Pursuant to Memorandum Circular No. 2016-02, GOCCs are required by law to maintain a whistleblower system, and to provide a link on their websites to the whistleblowing portal of the Governance Commission for GOCCs (GCG), the government body with policymaking and regulatory oversight for GOCCs. While it is reassuring that GOCCs are required to provide a link to this centralised whistleblowing portal, it is difficult to analyse the overall efficacy of this arrangement, due to a lack of public data relating to the volume of whistleblower reports received and resolved.

For Publicly Listed Companies (PLCs), the Philippines SEC sets out its whistleblowing expectations, in the Code of Corporate Governance for Public Companies and Registered Issuers (the Code). Recommendation 15.3 of the Code states that it is the responsibility of the board of each PLC to establish a suitable framework for whistleblowing, in which employees may communicate their concerns about illegal conduct without fear of retaliation. Based on a presentation issued by the Philippines SEC in 2023, approximately 89% of PLCs have now implemented a whistleblowing framework. Again, however, no public data is available regarding the volume of whistleblower reports that PLCs routinely receive, nor how they are resolved.

Notwithstanding the lack of data, these legal requirements or recommendations represent a positive step. As observed in other jurisdictions, a robust whistleblowing framework is an important part of strong corporate governance, providing, an early warning system to surface reports of misconduct in the organisation, including of corruption or fraud. Further measures to strengthen the legal framework and corporate culture relating to whistleblowing would be a welcome development.

See the Anti-Corruption Report’s two-part series on the DOJ’s intention to launch a whistleblower program: “What Will It Look Like?” (Mar. 27, 2024), and “What Does It Mean for Whistleblowers?” (Apr. 10, 2024).

 

Nick Williams heads Hogan Lovells’ Asia Pacific litigation, arbitration and employment practice. His practice focuses on the life sciences, financial services and energy sectors. In the investigations space, he works with clients in relation to compliance, bribery and corruption issues across a broad range of industries.

Khushaal Ved is a U.S. and U.K. admitted regulatory, internal investigations and compliance counsel at Hogan Lovells. He assists clients with regulatory and internal investigations, and counsels on preventative compliance. He has particular expertise in the pharmaceutical, medical devices, energy and entertainment industries.

Han Liang Lie is an investigations and compliance lawyer, with significant experience in conducting anti-corruption due diligence and white-collar internal investigations. Han has advised private equity and multinational companies in conducting anti-corruption, anti-money laundering and economic sanctions due diligence on target acquisitions, and in developing post-closing remediation measures.

Neal Ysart is a managing director and the forensic leader for the Philippines at Deloitte. With 40 years of investigative experience, including 16 years at Scotland Yard, he specializes in helping organizations manage sensitive situations that often require independent and confidential investigation, particularly in the areas of fraud, corruption and corporate or employee malpractice.

Continuing, and perhaps completing, a DOJ sweep of the commodities trading industry, Trafigura Beheer BV (Trafigura or the Company), a multinational commodities trader, entered into a settlement with the DOJ in March 2024 over bribery activities spanning 2003 to 2014. The Company acknowledged that former employees and agents provided bribes to officials tied to Brazilian state-owned oil company Petróleo Brasileiro (Petrobras) and will pay a total of about $127 million. The Anti-Corruption Report spoke with experts in the field about the sweep, why conduct in Angola may have been excluded from the settlement and how Trafigura’s slow remediation affected the settlement.

See “Brazil’s Anti-Corruption Setbacks Highlight Need for Effective Company Compliance Programs” (Nov. 8, 2023).

A Sweep of Commodities Trading Firms

On the same day that the Trafigura settlement was announced, the DOJ issued a separate press release touting the fruits of a years-long sweep of commodities trading firms. Altogether, this series of enforcement efforts resulted in six corporate resolutions and the convictions of 20 individuals, the release reports.

These all resulted from what the DOJ release dubbed an “investigation,” Miller & Chevalier member Matteson Ellis told the Anti-Corruption Report, emphasizing the use of the singular noun. He described as “interesting and relevant” that this DOJ release came on the same day as the one announcing the Trafigura settlement.

The long-running investigation concerned commodities trading companies that paid bribes to win business with state oil companies in several Latin American and African nations, according to the release. It was initiated in 2017 and involved the DOJ’s Criminal Division cooperating with the FBI and U.S. Attorneys’ Offices around the U.S.

The six resultant corporate resolutions saw fines, forfeitures and other penalties exceeding $1.7 billion in total. The other resolutions were identified as those involving Sargeant Marine and Vitol in 2020, Glencore in 2022, Freepoint Commodities in 2023 and Gunvor in March 2024.

The DOJ’s consistent examination of commodities traders involved in the oil business marks an interesting contrast with early enforcement of the FCPA, according to Ellis. Earlier, DOJ officials would often deny the existence of industry sweeps, he recalled. By comparison the DOJ now “seems to be promoting the fact that it is focusing on cleaning up the main players in a particular industry.”

The oil and gas industry has been the subject of more documented FCPA enforcement actions than any other, Miles & Stockbridge principal Warren Allen II told the Anti-Corruption Report.

A big part of the reason for such long-standing and intense scrutiny on the fossil fuels sector is the governmental framework that typically surrounds it, Allen pointed out. “Enforcement in this area has a long history because state-owned enterprises operate much of the market,” he explained.

See “Lessons from Glencore’s $29.6‑Million Restitution Order” (May 24, 2023).

A Straightforward Bribery Scheme

As described in the Plea Agreement, the bribery scheme here was fairly straightforward: Trafigura traders were informed that in order to do business with Petrobras, bribes would need to be paid – several cents per barrel of oil products bought or sold – to government officials at Petrobras.

Shell Companies to Conceal Bribes

Some of the bribes were paid in cash, while others were made through bank transfers. To conceal the bribe payments, Trafigura made payments through a series of shell companies, some of which were controlled by Petrobras employees.

Some 90 percent of FCPA cases involve the use of third-party agents, so contracts with these kinds of intermediaries warrant especially heightened scrutiny, according to Allen. There are several companies whose products and services help businesses enhance procurement processes by checking databases to help identify relationships that may carry risk, he noted.

“Use of a due diligence search software can be helpful, as well as the use of manual review of results from an automated search software,” Di Cillo Advogados partner Roberto di Cillo told the Anti-Corruption Report. Describing such tools as “not so new,” he noted that companies can conduct due diligence manually if a software flags more than a low-risk situation.

Companies can implement tight procurement and onboarding practices that require identifying and documenting a clear business justification for new third-party relationships and payments, Ellis said. “Companies can require risk-based due diligence on third parties to ensure they are legitimate entities, qualified to perform the services envisioned. They can create pre-approved vendor lists where companies added to the list have been vetted and determined to be legitimate and necessary to the business,” he emphasized.

FCPA enforcement authorities continue to expect companies to prioritize such third-party diligence and monitoring, according to Ellis. “FCPA enforcement authorities’ expectations have grown even more exacting in recent years,” he said, noting that they are increasingly promoting use of data analytics and other “real time” techniques to identify and address such problematic relationships.

See “Sarah Powell at Pearson on Building a Third-Party Due Diligence Process” (May 26, 2021).

Payment Scheme Continued for Years

The bribery scheme ran from 2003 to 2014, with corrupt commissions totaling about $19.7 million resulting in profits of approximately $61 million. At times, the money paid to government officials was couched as being for “consultancy services,” a classic bribery red flag, yet payments continued for years.

Companies operating in industries and markets with perceived heightened corruption risks should pay close attention to classic red flags, Allen said. These include “large payments to consultants and third-party intermediaries, and payments to accounts in jurisdictions other than where services are provided,” he clarified.

Companies could benefit from greater cooperation between compliance personnel and internal auditors to identify and address potentially problematic and high-risk payments, according to Allen. “Auditors might be relatively more likely to detect departures from market prices and other unusual transactions using anti-fraud controls, while compliance personnel can help assess whether they are actually problematic,” he explained.

Vendors that purportedly offer goods or services of the intangible or consumable variety warrant close examination, said Ellis. “Schemes are easier to hide in these areas because they usually do not require other company records, like receiving documents or inventory.”

See “Noticing Red Flags, Cultivating Company Culture Key to Compliance” (May 24, 2023).

Making the Most of Limited U.S. Touches

Notably, Trafigura is a private Swiss company doing business with a Brazilian state-owned entity. The connections to the U.S. are limited to discussions in the U.S. and transactions moving through U.S. financial institutions.

The case highlights how the FCPA permits the DOJ to pursue foreign companies over conduct occurring outside the U.S. without a very strong connection to the U.S., Calli Law partner Paul Calli told the Anti-Corruption Report.

There have been an unusually high number of FCPA resolutions lately that involve companies that are not headquartered or registered in the U.S. and not listed on a U.S. stock exchange, Ellis said. “In these cases, U.S. authorities seek other ways of establishing U.S. jurisdiction,” he explained. Here, the DOJ focused on meetings and transactions that took place in the U.S.

The case was prosecuted both by Fraud Section attorneys and Assistant U.S. Attorneys from the Southern District of Florida (S.D. Fla.). The involvement of the S.D. Fla. in prosecuting the Trafigura case reflects a “historical preference” of Brazilian corrupt officials for conducting business and taking meetings in Florida, given the large Brazilian population, di Cillo said.

In many FCPA cases, including this one, the jurisdictional link to the U.S. involves Florida as the venue for meetings or other conduct in furtherance of bribery, Ellis noted.

See “Rafoi-Bleuler Decision Narrows Agency and Jurisdiction Under FCPA and the MLCA” (Dec. 15, 2021).

DOJ Did Not Prosecute Angola Scheme

Another interesting aspect of the settlement is that it does not encompass Trafigura’s known issues in Angola, Allen suggested.

In December 2023, a release from the Office of the AG of Switzerland revealed that Trafigura was charged with corruption in Angola. Trafigura Beheer and three individuals were referred to Switzerland’s Federal Criminal Court.

Filing an indictment, the Swiss AG’s office said a former Angolan official was charged with having accepted bribes exceeding €4.3 million and $604,000 from Trafigura. This was alleged to have happened between 2009 and 2011, and to have been connected to Trafigura’s petroleum activities in Angola. The official was a former chief executive of Sonangol Distribuidora, a subsidiary of Angolan state petroleum company Sonangol. The other individuals charged were a former Trafigura Beheer COO and a former intermediary, who were involved in granting bribe payments to the Angolan official.

The official is alleged to have enabled the development of ship chartering and bunkering activities between Trafigura and Sonangol Distribuidora. Such contracts were said to have brought Trafigura profits of $143.7 million.

“The DOJ’s releases cite Trafigura’s 2006 and 2010 unrelated prior violations of U.S. and Netherlands export laws, but do not appear to make any reference to the Angola conduct,” Allen noted. Trafigura has stated its intention to defend itself against the Angola charges in Switzerland’s Federal Criminal Court, he observed, referencing a company release from December 2023.

Reviewing all this information might suggest that Trafigura’s counsel negotiated a resolution with the DOJ that excluded discussion of the Angola conduct and conclusions about the state of Trafigura’s compliance program during that period, Allen said. This would preserve the company’s ability to defend itself in the Swiss Federal Criminal Court. “If the settlement papers included conclusions on those points, the provisions of the plea agreement that preclude Trafigura from contradicting the admitted facts might have impaired the company’s ability to defend its conduct in the Swiss courts,” he explained.

It is often the case that global corruption investigations result in distinct enforcement actions in different jurisdictions based on different schemes, Ellis affirmed. “It is possible that the Swiss investigation is linked in some way to the DOJ’s investigation, as both could stem from the same set of global corruption issues and common control failures.” However, it is difficult to know exactly how the various schemes might be interlinked, and how enforcement authorities might have communicated and leveraged each aspect to build their own cases, he added.

See “Evolving Anti-Corruption Laws in Latin America” (Jan. 31, 2024).

Qualified Credit for Cooperation and Remediation

To resolve the DOJ probe, Trafigura agreed to pay a criminal fine of $80,488,040 and forfeiture of $46,510,257. The DOJ release acknowledges assistance from Brazilian Swiss and Uruguayan authorities. The DOJ is crediting up to $26,829,346 of the criminal fine against amounts Trafigura will pay Brazilian authorities.

No VSD and Qualified Cooperation Credit

While the penalties against Trafigura took account of its cooperation with the investigation, this was limited, and the DOJ’s comments on the matter were qualified.

“The most important aspect of the settlement with regards to the resulting fines seems to be Trafigura’s failure to voluntarily disclose facts to the DOJ,” di Cillo noted.

Trafigura provided updates as it proceeded through an internal investigation, presented facts to the DOJ, and facilitated interviews with employees and agents. It produced documents, some of which required it to navigate data privacy laws or provide translations, according to the Plea Agreement.

Yet there were times in the early phase of the probe when Trafigura failed to preserve or produce some evidence and documents in a timely way, and even adopted positions inconsistent with full cooperation, the Plea Agreement notes.

Not for the first time, the DOJ is sending a message on the benefits of voluntary self-disclosure (VSD) and timely and comprehensive cooperation and remediation, according to Ellis. “Trafigura was required to accept a guilty plea and only received a 10‑percent fine reduction based on a level of cooperation and remediation that DOJ perceived as limited.” Had Trafigura been timelier in cooperating and remediating, it might have been offered a deferred prosecution agreement and a greater fine reduction, he suggested.

See “Reinsurance Brokers’ Settlements Highlight Growing Emphasis on Cooperation Credit” (Dec. 20, 2023).

Some Credit for Remediation

Something working in Trafigura’s favor in the deal with the DOJ is that it conducted some remedial measures. According to the Plea Agreement, it developed and implemented enhanced, risk-based policies and procedures on matters such as anti-corruption, the use of intermediaries and consultants, third-party payments, and risk assessment pertaining to joint venture and equity investment. The company also enhanced its processes and controls associated with high-risk transactions.

Trafigura also invested extra resources into employee training and compliance testing and enhanced its processes for ongoing compliance monitoring and controls. Moreover, Trafigura proactively discontinued usage of third-party agents for business origination.

The case illustrates that using third-party agents for business origination or retention may be a perilous undertaking, unless those agents are stringently monitored, Calli said. “Clearly, companies cannot put their proverbial heads in the sand, when it comes to the use of third-party agents.”

See “Conducting Effective Third-Party Due Diligence in Latin America” (Mar. 1, 2023).

But DOJ Notes Company’s Slowness and Recidivism

While Trafigura received some credit for its remediation efforts, the DOJ noted that it was slow in carrying out disciplinary and remedial measures affecting certain employees who engaged in violations of the Company’s own policy.

The DOJ also took into account the Company’s history of misconduct, including its 2006 guilty plea for entry of goods by means of false statements, and its 2010 conviction over petroleum waste discharge in Côte d’Ivoire, which involved violations of Netherlands export and environmental laws.

See “Brazil’s Anti-Corruption Setbacks Highlight Need for Effective Company Compliance Programs” (Nov. 8, 2023).

The SEC’s ongoing sweep on electronic communications has largely resulted in enforcement actions against broker-dealers under the Securities Exchange Act of 1934 (Exchange Act). The Commission’s attention is slowly shifting, however, as the SEC’s Division of Enforcement (Enforcement) is increasingly scrutinizing investment advisers’ recordkeeping obligations under the Investment Advisers Act of 1940 (Advisers Act).

On February 9, 2024, the SEC issued a press release (Press Release) announcing charges against five broker-dealers, seven dually registered broker-dealers and investment advisers (Dually Registered), and four affiliated investment advisers. Per the Press Release, the charges were “for widespread and longstanding failures by the firms and their employees to maintain and preserve electronic communications.” The firms admitted the facts set out in their respective SEC orders (Settlement Orders) and agreed to pay total penalties exceeding $81 million.

This article summarizes the key features of the Settlement Orders and provides insights from industry experts, including where the enforcement sweep fits in the context of previous SEC efforts as to off-channel communications, the risk that excessive Enforcement efforts will dilute the SEC’s message, the questionable impact of self-reporting and how fund managers should proceed next.

See “SEC Charges 11 More Wall Street Firms With Widespread Records Failures” (Sep. 13, 2023).

Summary of Settlement Orders

In September 2021, the SEC commenced a risk-based initiative to investigate whether broker-dealers were properly retaining business-related communications exchanged on personal devices.

SEC Recordkeeping Requirements

SEC rules adopted under the Exchange Act and the Advisers Act specify the manner and length of time that certain records of broker-dealers and investment advisers must be maintained and produced promptly to SEC representatives.

Rules adopted under Section 204‑2 under the Advisers Act (including Rule 204‑2(a)(7)) (Books and Records Rule) require investment advisers to preserve in an easily accessible place originals of all communications received and copies of all written communications sent that relate to any investment recommendations made or proposed, as well as any advice given or proposed to be given.

Similarly, Section 17(a)(1) under the Exchange Act (including Rule 17a‑4(b)(4)) requires broker-dealers to preserve in an easily accessible place for at least three years originals of all communications received and copies of all communications sent relating to the firm’s broker-dealer business. Minimum recordkeeping requirements are imposed based on standards that a prudent broker-dealer should follow in the normal course of business.

The recordkeeping requirements are integral to the Commission’s (and other securities regulators’) investor protection function because the preserved records are the primary means for monitoring compliance with applicable securities laws, including antifraud provisions and financial responsibility standards.

Policies and Procedures

Review and Retention

Each of the respondents maintained policies and procedures designed to ensure business-related communications – including electronic communications – were retained in compliance with relevant recordkeeping provisions.

Personnel were also advised that they were not permitted to:

• use unapproved electronic communication methods, including on their personal devices;
• use personal email, chats or text messaging applications for business purposes; or
• forward work-related communications to unapproved applications on their personal devices.

Communications made through approved methods were monitored by the firms, subject to review and archived where appropriate, but messages exchanged via unapproved methods were not.

Supervision

The respondents also had policies and procedures that were designed to address the supervision of personnel training on each firms’ communications policies and ensure adherence to their respective books and recordkeeping requirements. Each set of policies informed personnel that electronic communications were subject to surveillance by the firm. All personnel – including supervisors – were subject to an annual self-attestation of compliance.

A common issue for each firm is that they failed to implement a system to ensure that supervisors were reasonably following the policies. There was insufficient monitoring to ensure that communications and recordkeeping policies were being followed.

Violations

Several firms had received and responded to SEC subpoenas for documents or records requests in SEC investigations. Given the firms’ failures to maintain and preserve required business records, the SEC was likely deprived of off-channel communications in various investigations. Further, the SEC initially found pervasive off-channel communications at various seniority levels of the broker-dealer and/or investment adviser firms. On broadening its investigations, however, the SEC also found that other individuals within the firms had engaged in at least some off-channel communications.

As a result, the SEC alleged the firms violated (as applicable to investment advisers or broker-dealers, respectively) Section 204 of the Advisers Act and Rule 204‑2(a)(7) thereunder, and Section 17(a) of the Exchange Act and Rule 17‑a‑4(b)(4) thereunder. In addition, the firms failed to reasonably supervise personnel with a view to preventing or detecting certain of its personnel aiding and abetting violations of the above statutory provisions and rules.

Remediation and Self‑Reporting Efforts

All Firms

In deciding to accept the settlement offers from the respondents, the SEC considered steps promptly taken by them, partly before the Commission’s inquiry, and cooperation afforded to SEC staff. The Settlement Orders specifically call out instances when firms provided their personnel with firm-issued devices or other firm-approved applications, as well as those that promoted the use of on-channel texting applications.

Huntington

In September 2023, the Huntington Investment Company, Huntington Securities Inc. and Capstone Capital Markets LLC (together, Huntington) conducted an internal investigation and contacted SEC staff to self-report about off-channel communications it had identified in relation to its businesses. Huntington cooperated with the SEC by proactively gathering communications from the personal devices of a sample of their senior personnel and responding to requests for further information. Huntington alerted SEC staff to off-channel communications at various seniority levels of its broker-dealers and also uncovered off-channel communications in its investment adviser business.

Since at least January 2019, Huntington had started a remediation program, including:

• strengthening its policies and procedures by investing in new technologies to improve surveillance and retention efforts;
• increasing the number of trainings on proper electronic communications practices;
• sending firm-wide reminders emphasizing the importance of complying with recordkeeping obligations;
• making an on-channel texting platform available to employees; and
• taking steps to collect and preserve off-channel communications.

Undertakings

The Settlement Orders note that before the enforcement actions, all of the firms:

• took steps to enhance their policies and procedures;
• increased training on the use of approved communication methods (including on personal devices); and
• began implementing changes to the technology available to personnel.

In addition, the firms undertook to:

• retain an independent compliance consultant (Consultant) to conduct comprehensive reviews and assessments of the firms’ policies and procedures, training, surveillance and technological solutions around electronic communications and measures;
• require the Consultant to conduct a further evaluation one year after its original report;
• require the firms’ own internal audit functions to conduct separate audits;
• notify the SEC of any discipline imposed on any personnel regarding electronic communication violations for two years after the Settlement Orders;
• preserve for at least six years from the end of the fiscal year last used (the first two years in an easily accessible place) a record of compliance with the undertakings; and
• certify in writing compliance with the undertakings.

As part of the undertakings, the firms also agreed that the Consultant’s report will be provided to the SEC as well as the firms, as well as to adopt all recommendations in the report (except in certain circumstances, and after following a specified procedure).

Sanctions

In addition to the monetary penalties set out in the table below, the SEC ordered that the firms:

• cease and desist from committing or causing any violations of Section 204 of the Advisers Act and Rule 204‑2 thereunder and Section 17(a) of the Exchange Act and Rule 17a‑4 thereunder;
• are censured; and
• comply with the undertakings they provided in the Settlement Orders.

SEC Respondents	SEC Registration Status	Failures Starting From	Penalty (Joint and Several Obligation)
Northwestern Mutual Investment Services, LLC	Dually Registered	January 2019	$16.5 Million
Northwestern Mutual Investment Management Company, LLC Mason Street Advisors, LLC	Investment Advisers
Guggenheim Securities LLC	Broker-Dealer	January 2020	$15 Million
Guggenheim Partners Investment Management LLC	Investment Adviser
Oppenheimer & Co. Inc.	Dually Registered	January 2020	$12 Million
Cambridge Investment Research Inc.v	Broker-Dealer	January 2019	$10 Million
Cambridge Investment Research Advisors Inc.	Investment Adviser
Key Investment Services LLC	Dually Registered	January 2019	$10 Million
KeyBanc Capital Markets Inc.	Broker-Dealer
Lincoln Financial Advisors Corporation	Dually Registered	January 2019	$10 Million
Lincoln Financial Securities Corporation	Dually Registered
U.S. Bancorp Investments Inc.	Dually Registered	January 2020	$8 Million
The Huntington Investment Company	Dually Registered	January 2019	$1.25 Million (self-reported)
Huntington Securities Inc.	Broker-Dealer and Municipal Adviser
Capstone Capital Markets LLC	Broker-Dealer

Key Takeaways

Progression of Enforcement Efforts

Earlier sweeps on electronic communications targeted large institutional investment banks with significant liquid securities-focused businesses and focused on rules under the Exchange Act that apply to broker-dealers, said Gibson Dunn partner Kevin Bettsteller. The recent round of Settlement Orders still focus on broker-dealers, but affiliated investment advisers are also included. The distinction is important given that the recordkeeping obligations under the Advisers Act are not as broad as those imposed on broker-dealers under the Exchange Act, observed Patterson Belknap partner H. Gregory Baker.

It remains unclear, however, whether the Settlement Orders provide a potential preview of enforcement actions against standalone investment advisers. At some level, SEC regulatory activity targeting off-channel communications of investment advisers seems almost inevitable, Bettsteller asserted. “There is already press about ongoing investigations and I’ve personally observed a number of exams of standalone advisers – private equity (PE) sponsors, real estate sponsors and others – that heavily focused on electronic communications.”

Conversely, in the broader context of a “sea swell” against regulatory rulemaking, the SEC seems cautious about pursuing off-channel communications cases against investment advisers, Baker noted. In fact, there have been signals from trade associations and large investment advisers that they are willing to challenge an expansive interpretation of the Books and Records Rule in court, if necessary, he added.

Further to that point, Bettsteller suggested that a standalone investment adviser subject only to the Advisers Act – rather than a Dually Registered entity – may be well-positioned to challenge the SEC’s off-channel communications scrutiny. “Someone with the right set of facts and an appetite for challenge may argue the point, but it would be desirable to deal with the narrowest possible circumstances.” For example, a standalone PE sponsor may argue that communications discussing a prospective portfolio company at a high level without giving advice fall outside the scope of the Books and Records Rule, he posited.

“With that said, investment advisers should still assume Enforcement will vigorously enforce the Books and Records Rule until there is an SEC statement about the actual scope of the Advisers Act rule or a binding court decision on the topic,” Baker clarified.

See “JPMorgan Fined $200 Million for Failure to Maintain Electronic Communication Records” (Mar. 2, 2022).

Sustained SEC Focus and Diluted Message

It is surprising the SEC is continuing its electronic communications sweep and enforcement actions based on historic conduct given the nature of the violations, the absence of any quantifiable harm that needs to be remediated for investors and the Commission’s statements to Congress that it has limited Enforcement resources, said Quinn Emanuel partner C. Dabney O’Riordan.

The initial group of cases in the SEC’s enforcement sweep in September 2022 sent a strong message to the industry to address the issue, O’Riordan continued. Further, off-channel communications were included in the SEC’s Division of Examinations’ priorities for 2023 and a risk alert was issued in 2018. By all accounts the private funds industry paid attention to the message being sent by the SEC and has devoted considerable resources to the area, she noted. “There is a significant risk that the SEC will undermine its own message by continuing to bring these types of cases absent new, significant violations. The message will become ‘there is nothing you can do to avoid getting charged,’ because there will invariably be slip ups.”

There may be several reasons for the SEC’s continued focus on off-channel communications beyond the policy reasons of enforcing its books and records requirements. First, off-channel communications cases are quite straightforward for the SEC to investigate and there is a model settlement order being used, so it is unnecessary to have lengthy negotiations over the language, O’Riordan observed. Also, a sweep of off-channel communications is a relatively efficient avenue of generating fines with minimal resource expenditure, Bettsteller added. “It is somewhat reminiscent of enforcement actions when the pay to play rule was nascent and most major sponsors with a large number of employees had personnel that made political contributions,” he noted.

In lieu of regulating via enforcement efforts, it would be extremely helpful for the SEC to issue a risk alert addressing a modernized, strategic and agnostic interpretation of the Books and Records Rule under the Advisers Act, Bettsteller suggested. The current Books and Records Rule speaks to essentially placing orders to buy and sell securities or giving advice to a client, but it is unclear what type of communications are within scope in the context of a PE investment. “That is a major disconnect and more clarity would greatly assist, but the SEC would probably prefer to preserve its broader approach,” he opined.

See “Loose Practices and Imprecise Recordkeeping Prompt SEC Scrutiny, Even When Investors Are Unharmed” (Jan. 3, 2024).

Dilemma of Self‑Reporting

Although the penalties were generally significant, an exception was made for respondents that self-reported. “Once again, one of these [Settlement Orders] is not like the others: Huntington’s penalty reflects its voluntary self-report and cooperation,” said Enforcement Director Gurbir S. Grewal in the Press Release.

However, Huntington receiving a lower penalty to reflect its self-reporting and cooperation seems insufficient to encourage self-reporting. First, a lower penalty may not materially increase the potential benefits of self-reporting unless the firms are able to avoid an action that must be disclosed on due diligence questionnaires, Form ADV and in other contexts, Bettsteller asserted.

Also, the SEC is subjecting self-reporting firms to all other categories of relief, including admissions and ordered undertakings, and does not make it clear what penalty would have been imposed absent the self-reporting or if some firms that self-report are not being charged at all, O’Riordan reasoned. “It would be more effective for the SEC to issue a press release noting, if applicable, that five other firms self-reported and the Commission elected not to bring enforcement actions against them, or to agree that not all the remedies in prior actions are needed for self-reporting firms,” she offered.

Finally, self-reporting is always a difficult decision, particularly when it is unclear whether a violation has occurred because of interpretive differences about the scope of communications captured under the Advisers Act, Bettsteller noted. “Certainly the SEC is trying to encourage self-reporting and I applaud that, but there is a cost-benefit to everything,” Baker added.

See “Lifecore Biomedical Declination Exemplifies 2023’s Self-Disclosure Trend” (Dec. 20, 2023).

Looking Ahead

The Settlement Orders can be used as a checklist for firms that self-identify an issue and want to remediate without self-reporting, O’Riordan said. Taking those steps will put firms in a better position should the SEC examine them in the future, as well as make it more difficult for the SEC to justify an enforcement action down the road. Independent compliance consultants can be a helpful part of that process and are particularly useful when there are specific issues to review, she noted.

One thing that is clear from the Settlement Orders is that the SEC wants sponsors to be more forward-thinking about technological solutions for retaining and monitoring electronic communications, and to solicit feedback from employees on their day-to-day communication habits, Bettsteller observed. To that end, sponsors should include electronic communications in their annual compliance review. It is worth noting, however, that annual compliance reviews now need to be documented per amendments in the new private fund reforms to Rule 206(4)‑7(b) of the Advisers Act, so that gives the SEC another potential avenue to pursue an enforcement action, he said.

In addition, although legal and compliance teams are aware of their firms’ obligations, the question for registrants is how to incentivize personnel to adhere to policies and procedures, according to Baker. The greatest risk to firms is when they are investigated for conduct unrelated to electronic communications, and the SEC determines the firm has lost or failed to preserve relevant information, which is extremely serious, he emphasized. The Settlement Orders are another way for compliance professionals to change established habits and personal device usage of personnel by demonstrating the seriousness of the issue, Bettsteller offered. “Hopefully people will understand that it’s more critical than ever that all communications occur on approved platforms,” he concluded.

See “Compliance Challenges in Records Management” (Aug. 16, 2023).

The Central Asian nations of Uzbekistan, Kazakhstan, Tajikistan, Kyrgyzstan and Turkmenistan attract foreign business both because of their burgeoning consumer markets and their rich mineral reserves. Adding to the region’s fascination is its strategic location, lending it geopolitical and logistical importance as well as complexity.

In a recent TRACE webinar hosted by Dentons, partner Ulugbek Abdullaev explored the region’s global compliance landscape and highlighted areas of complexity foreign investors in the region should keep in mind to stay out of trouble. This article distills some of his insights.

See “Measures Against Russia Pose Serious Compliance Challenges” (Sep. 27, 2023).

Working With Western Sanctions

Located between Russia, Iran and China, the five nations’ traditional trade routes were little changed since their time as Soviet republics – until now.

Due to historical ties, Russia has a large influence in the region, and many supply chain routes went through it. “This changed after Western sanctions were imposed against Russia when the war in Ukraine started,” Abdullaev explained.

Sanctions in Iran also play a key role in the region. “One of the largest trading partners of Central Asia is Turkey, and Iran is between them and is the fastest inland transportation route,” Abdullaev added.

Seeking New Routes to Help Business

While the Central Asian nations are not legally bound to comply with sanctions imposed by Western powers, they have sought to honor them in the name of maintaining relationships with the U.S., U.K. and EU. “There is a political dialog between the administrations of the countries in the region and the Western countries on helping Central Asian countries to comply with sanctions in a way that would not negatively affect the national interest of each country in the region,” Abdullaev noted.

Logistically, the compliant way to transport goods between Central Asia and Turkey, the Middle East or Europe is to go through countries other than Iran. Georgia – in a strategic location linking the region to the shores of the Black Sea – is a prime example of such a pathway country.

“In general, this is working,” said Abdullaev.

As Central Asian countries receive increasing volumes of investment from international businesses, seeking out sanction-avoiding trade channels helps such companies pursue their own compliance goals.

“Big businesses involved in the region have compliance cultures,” Abdullaev observed. These large businesses are incentivized to comply with Western sanctions regimes, and the governments of the Central Asian countries follow.

Sanctions Show Up in Other Ways, Too

Another layer of sanctions risk has emerged as Western countries such as the U.S. have imposed secondary sanctions on specific entities – many of them not located in countries that are subject to sanctions. However, this has not become a major concern.

“The quantity of companies subject to secondary sanctions is not so big as to raise a red flag for foreign companies that would like to do business in the region,” Abdullaev stated.

The sanctions issue can have other dimensions, too, in Central Asia. Some companies in the region have retained historic financing agreements with Russian banks that now are under sanctions. And some companies in the region continue actively trading with Russia, while at the same time exporting their products to, or importing raw materials from, Western countries, Abdullaev pointed out. While these can raise concerns for some investors, many businesses in the region have sought out ways that ensure compliance for their Western business partners.

“The largest business employers in the region are aware of their obligations and are ready to work with their foreign counterparties in a way that would be compliant with the sanctions regime,” Abdullaev said.

See “U.S. Sanctions Against Russia Expand to Target Foreign Financial Institutions” (Feb. 14, 2024).

Good Opportunities, Evolving Regulations

Various opportunities tempt international businesses to Central Asia. The local population represents a promising market for sales of goods and services. And many businesses want to establish a local company or representative office and start investing in economic opportunities on the ground.

Two Largest Markets Make Regulatory Progress

The biggest markets in the region are Uzbekistan, with a population of around 35 million as of March 2023, and Kazakhstan with 20 million. “Uzbekistan nowadays represents one of the largest consumer markets in the region,” Abdullaev said. He also noted that the population of Kazakhstan is on an upward trend, and the country is rich in natural resources, including oil and gas.

These two nations have seen significant progress in anti-corruption efforts, while all five Central Asian countries have anti-corruption laws under which both public and private commercial bribery are criminal offenses. “The region has space to improve when it comes to anti-bribery compliance, but Kazakhstan and Uzbekistan are doing much better compared to others in the region,” he continued, noting that Kazakhstan has been the frontrunner for some time. Uzbekistan initiated its current anti-bribery regime when a new administration came into power in 2017.

Smaller populations are found in Tajikistan, with 10 million, Kyrgyzstan, with just over 7 million, and Turkmenistan, at slightly under 7 million, but the latter has one of the largest gas reserves in the world. Despite the opportunity those gas reserves represent for international business, Turkmenistan is lagging the others in terms of anti-corruption regulation and enforcement, Abdullaev said. International corruption rankings, including those of TRACE and Transparency International, give Turkmenistan among the worst scores worldwide.

FCPA Cases Years in the Past

While practical implementation varies from country to country, all the countries mentioned have anti-corruption roadmaps and their own authorities responsible for fighting corruption, according to Abdullaev. Many have signed international treaties and agreements on fighting corruption.

There are some precedents of international anti-corruption proceedings involving the region, but they are few and far between.

“Uzbekistan has the largest disclosed amounts of fines related to FCPA cases in the Central Asia region, but these were more than 10 years ago and there were three cases, all related to the telecom business,” Abdullaev said, alluding to the MTS, Telia and VimpelCom settlements, all of which related to a single $1‑billion bribery scheme. There have been no such cases since these in Uzbekistan, a country that has improved in recent years in the international rankings on corruption perception.

See “Massive Telia Settlement Indicates International Cooperation Will Continue Under New Administration” (Oct. 4, 2017).

Beware of Legal Complexity

An everyday challenge for foreign investors doing business in Central Asia is the overall legal and regulatory complexity. Regulations are ever-evolving, and transactions can be bogged down in red tape, Abdullaev noted.

This complexity varies, country-by-country, due to local laws and circumstances. In Uzbekistan, for example, laws change frequently. “The government is trying to learn, and is ready to experiment, but experimenting often has disadvantages because it creates uncertainty,” Abdullaev observed.

In Turkmenistan, by contrast, the lack of regulation drives complexity. “There are a lot of gaps in regulation where there are not detailed rules and no official guidance,” Abdullaev said. If a foreign company approaches a regulator seeking guidance, they are not legally allowed to interpret the law.

With all five countries having spent recent decades transforming to a capitalist system, having previously been subject to socialist regimes, they have achieved “differing degrees of transformation,” Abdullaev noted. Amid all the complexity, he sounded the note that “there is a changing approach and a conception of the market, compared to the state-centric regulation of business.” This translates to environments where regulations continue to evolve.

Faced with a considerable amount of bureaucracy, foreign businesses should be on guard against their local partners seeking to cut through red tape “using tools that seem simpler to them, including corrupt practices,” Abdullaev warned. One way to address these challenges is to incorporate anti-bribery clauses into all contracts and bring these to the attention of local partners. They should be warned that such practices will not be tolerated, “and there will be material consequences if these clauses are not complied with,” he said.

A few areas of particular complexity to be aware of include jurisdiction in contracts, possible complications when terminating contracts, what will happen after a corruption issue, getting cash out of the region, and the hazards of gifts and entertainment.

Determining Jurisdiction in Contracts

Foreign companies are generally free to enter into contracts with commercial intermediaries in the region. When it comes to any disputes that arise, various factors can affect whether companies can nominate foreign courts or arbitration proceedings as channels for resolving them.

The countries apply “freedom of contract” principles, meaning parties are free to agree based on their business relationship, Abdullaev explained.

All the countries in the region have national laws that give contracting parties the freedom to choose any foreign law they would like to apply to their contract. “There is no restriction that you cannot apply New York law, or any other state law, as the governing law of your contract,” Abdullaev explained, though he noted there can be special situations where local laws must apply.

Typically, foreign businesses prefer to choose international arbitration, according to Abdullaev. There is not always a mutual legal assistance treaty (MLAT) between a country in the region and the other country, such as the U.S., in which case it could be hard to enforce a U.S. court decision. “So the safest option usually is going for arbitration,” he said.

Arbitration may not work if the country in which the business is taking place is Turkmenistan, however, because it is not party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention. “If you come to Turkmenistan with an arbitral award, there is no legal ground to enforce it,” Abdullaev advised.

Luckily, this is the exception. The other countries in the region are party to the New York Convention, and arbitration awards are generally enforced in those countries without substantial problems, Abdullaev reassured.

If faced with such a conundrum in Turkmenistan, a company may consider seeking a legal decision in another country in the region such as Uzbekistan or Kazakhstan, Abdullaev offered. This would be enforceable in Turkmenistan, because Turkmenistan has MLATs with those neighboring countries, he explained.

Terminating Relationships With Intermediaries

Another exceptional situation that can arise in Turkmenistan is that a foreign investor may need to make goodwill compensation to a commercial intermediary after the termination of an agreement if the termination is for reasons that are not the intermediary’s fault.

This is based on the assumption that, even after the agreement is over, the foreign company continues to benefit significantly from business relationships that were built with the help of the intermediary, Abdullaev explained.

“For example, the principal may have significant benefits from relationships with new customers found by the intermediary, even after the termination of the agreement,” Abdullaev said.

This risk is not consistent throughout the region, Abdullaev stressed. Whether foreign companies must make goodwill payments with commercial intermediaries, upon termination of their agreement, varies from country to country, he said.

Companies should consider addressing this issue as part of contract negotiations, either to avoid the payments altogether or to mitigate their potential impact, Abdullaev advised.

In some countries, foreign investors may also have to disclose their compensation or fee arrangements with intermediaries. For example, Turkmenistan requires these disclosures if the foreign company’s cooperation with a commercial intermediary involves sales to the government or public procurements. Turkmenistan has a special authority named the State Control Service, to which compensation paid to intermediaries in such circumstances must be disclosed, Abdullaev said.

All the countries in the region prohibit government officials, as individuals, from having ownership interests in commercial intermediaries involved in work contracted by the government. To ensure compliance with this prohibition, investors sometimes pursue due diligence to identify whether any government officials, or their close relatives, are associated with such intermediaries.

However, no such restriction applies to government entities. They can have ownership stakes in commercial intermediaries.

See “Fewer Individual Charges and More Focus on Third Parties in 2023’s FCPA Enforcements” (Feb. 28, 2024).

No Blacklists, but Heightened Scrutiny After Issues

One thing foreign companies do not have to worry about is local debarment. Central Asian countries do not bar companies from competing for government contracts if they have a corruption history. “They do not have laws or regulations debarring or blacklisting companies that have pleaded guilty to, or been convicted of, corruption from competing in government contracts,” Abdullaev said.

However, in practice, companies seeking government contracts may be subject to added scrutiny if previous media reports have linked them with corruption enforcement actions, Abdullaev warned. “The commissioner may take into account information from different countries if the company has a former history of corruption-related enforcement cases,” he explained, even though this would not be a legal ground to exclude a company from a tendering process.

See our three-part series on detecting and mitigating corruption risk when participating in public procurements: “Understanding the Procurement Process” (May 13, 2015), “Steps to Take Prior to Entering into a Procurement Process” (May 27, 2015), and “Seven Steps to Take During and After a Procurement Process” (Jun. 10, 2015).

Foreign Exchange Getting Easier

Foreign exchange constraints have sometimes made it difficult for international companies to repatriate earnings from their operations in Central Asia.

While businesses could earn money locally in the local currency, they faced constraints because there were limits – in some cases zero – on how much they could exchange into hard currency.

“Historically, these constraints have existed throughout the region except Kazakhstan,” Abdullaev observed. In Uzbekistan, he added, there appear to have been no substantial problems in this regard since 2017, though it was an issue until then.

Turkmenistan continues to apply constraints on exchanging local currency into hard currency and repatriating earnings, Abdullaev noted.

See “An In-House Perspective on Tackling the Challenges of Compliance in Russia and the CIS” (Oct. 2, 2019).

Be Reasonable With Gifts and Hospitality

Business visitors to Central Asia might need a sensitive antenna when it comes to navigating hospitality regulations.

Regarding gifts and meals, the countries’ regulations typically do not apply a specific value limit. Instead, they take a conservative approach in which anything given with the intention of gaining reciprocal positive action could be considered bribery.

But while such is the theory, “obviously this is not matched in practice,” Abdullaev said. “Hospitality is a part of the culture, including business culture, and businesses and government entities give and take gifts all the time.”

What needs to be applied is an intuitive sense of expenses for gifts and meals being “reasonable,” Abdullaev said. “That is a wide concept, but a best practice.” Moreover, there is a convention that business meals should not be accompanied by entertainment, and no money should be physically given in hand.

The rules are clearer with regard to travel expenses. Corporate executives can have their costs of transportation, such as flight tickets, covered by a company without limitations on the amount. But when it comes to travel by governmental officials and employees, laws regulate the amount of expenses that can be compensated.

Invitations to events should be addressed to a governmental organization rather than to any individual government official, Abdullaev suggested. “That is considered to be safe and compliant with the law.”

See our three-part series on travel and entertainment corruption risks: “Five Hallmarks of an Acceptable Hospitality Expenditure” (Mar. 9, 2016), “Three Musts for a Strong T&E Policy and Five Ways a Company Can Customize Its Program” (Mar. 23, 2016), and “Internal Controls to Ensure the Program Is Working” (Apr. 6, 2016).

China and India are two extremely important markets for large global companies, but they also are two of the riskiest when it comes to bribery and corruption. Recent shifts in the legal environments in both countries further complicate the scene and require companies to be even more vigilant.

In a recent firm webinar, Gibson Dunn partners Kelly Austin and Patrick Doris and counsels Ning Ning and Karthik Ashwin Thiagarajan shared on-the-ground insights to help companies assess and mitigate their biggest risks in these important markets.

See “FCPA Cases in Asia Continue to Focus on Non-Asia-Based Companies” (Mar. 13, 2024).

Emerging Markets Present Challenging Risk Profiles

One of the great conundrums of anti-corruption compliance is that there is a strong correlation between growth markets and corruption risk, Austin observed. The places where companies see opportunities to expand commercially are also places where it is difficult to operate corruption-free.

Russia-focused sanctions have led many U.S. and European businesses to discontinue operations in Russia, but some of Russia’s neighboring markets have thrived by creating a new map of trade flows, many with new and challenging risk profiles that require significant attention, the firm stated.

Widely hailed reforms in Latin America have failed to result in meaningful enforcement actions to curb corruption, according to Gibson Dunn. Africa has seen much activity in the anti-corruption field, especially in South Africa, according to the firm’s research.

Further complicating the field, the U.S. Congress passed the Foreign Extortion Prevention Act (FEPA) in December 2023, which sits in the federal domestic bribery statute. The FEPA lays down rules on any foreign official, or a person in line to be a foreign official, accepting or agreeing to accept – directly or indirectly – anything of value.

This statute has a broader definition of who constitutes a government official and increases the pool of possible cooperating witnesses for U.S. enforcers. It includes anyone acting in an official or unofficial capacity, for or on behalf of a foreign government, in the definition of a foreign official. It also covers current or former officials, and it covers payments made for the benefit of other persons or entities, at the direction of the foreign official.

Compliance professionals should look at this law’s expanded definition of a foreign official and make sure that compliance policies reflect this new world view, Austin said, and compliance professionals should monitor FEPA prosecutions closely when publicly announced.

See “Newly Signed Foreign Extortion Prevention Act Complements FCPA” (Jan. 3, 2024).

Recent Changes in China

In 2023, there were only seven DOJ FCPA corporate enforcement actions, resulting in four deferred prosecution agreements, two declinations with disgorgements and one non-prosecution agreement. Out of a total of 14 corporate FCPA enforcement actions in 2023, including actions brought by the DOJ and the SEC, China was at the top of the list in terms of countries that gave rise to the actions, with four cases that involved business conduct in China. The figures highlight that this remains one of the highest-risk jurisdictions to do business in when it comes to corruption.

Regulation Updates

Going into effect in March 2024, an amendment to the criminal law that brings new regulations on bribery is a major legislative development in China, Ning said. Under the new law, those who make corrupt payments will receive increased penalties when certain industries are involved, like healthcare.

The amendment also criminalizes certain conduct by managers in private industry, such as making decisions on behalf of the company that benefit relatives, Ning added. This provision previously only applied to employees of state-owned enterprises.

See our two-part series on China’s State Secrets Law: “A Primer for Anti-Corruption Practitioners (Part One of Two)” (Jun. 29, 2016), and “Six Things to Consider When Engaging in Internal Investigations in China (Part Two of Two)” (Jul. 13, 2016).

Information Released on Bribery Policies and Practices

The Chinese government issued a number of policy documents in 2023 outlining its anti-corruption approach. An example is the work reported by the Central Commission for Discipline Inspection (CCDI) of the Chinese Communist Party, which called out the key sectors and focus areas for anti-corruption efforts and suggested that money laundering will increasingly be a focus as well.

Statistics produced by the Chinese government also indicated a bigger focus on corruption. There were a record number of Chinese officials investigated and punished for violations such as bribery and embezzlement in 2023. Additionally, the Chinese government released data on the number of bribe payers who were prosecuted for the first time in 2023. That number is fairly small compared to the number of officials prosecuted for corruption, likely because bribe payers are more likely to reach plea agreements than the government officials they pay. However, the number of bribe givers prosecuted in China is expected to increase in 2024 given the increased focus, Ning said.

See “What to Expect From China’s Revised Commercial Bribery Law” (Dec. 21, 2016).

Healthcare Is a Focus

One sector receiving particular focus from the Chinese Government is healthcare. For the past five years, the Chinese government has been focused on the healthcare sector and there has been a new level of intensity in the past year, Ning explained. The National Health Commission, CCDI and 13 other central government agencies together launched an anti-corruption campaign specifically targeting corruption in the healthcare sector. Additionally, provincial and local governments published hotline information on their websites, specifically encouraging the public to report misconduct in the healthcare sector.

As a result, sponsorships, speaker fees and any fee for services involving public hospital doctors are subject to heightened scrutiny, Ning warned. Thus far, there have not been any media reports of multinational healthcare companies being investigated, but the amendment to the criminal law, and the advertising of reporting channels encouraging the general public to report, mean that there is expected to be a harsher approach to misconduct, particularly in the healthcare sector, she added.

Companies operating in the healthcare space in China should make sure to put robust controls in place to ensure that sponsorship programs, and other programs involving public hospital doctors, comply with the Chinese law, Ning advised. Companies should also routinely audit such controls to detect potential violations of their policies.

The finance and sports industries were also subjects of enforcement focus in China in 2023. In the financial sector, more than 100 executives and government officials were investigated and charged, including the former deputy governor of China’s Central Bank. In the sports sector, the government prosecuted a slew of government officials at the Chinese Football Association.

See “Compliance for M&A and Third-Party Risks in Asia” (Oct. 25, 2023).

Keep an Eye on Third Parties

Every major multinational is doing business in China, and many of them go to market through third parties, Austin said. “When you look at the vast majority of FCPA cases, they involve third parties who are acting on behalf of an entity in an emerging market,” she pointed out.

Based on lessons learned from the Clear Channel case in 2023, Gibson Dunn says that corruption risk associated with third parties should be assessed based on the nature of their government interactions, and there should be a robust third-party due diligence process.

See “Clear Channel to Pay More Than $26 Million to Resolve SEC Charges Related to Chinese Subsidiary Conduct” (Dec. 6, 2023).

Lessons Learned From Recent Cases

The 3M case, which focused on misconduct in China related to overseas trips involving foreign government officials and doctors, was cited by Ning as a good example of the types of risks that companies doing business in China can face. The case highlighted that travel expenses should have a legitimate business purpose and be reasonable in value, that third-party travel agencies should be subject to due diligence and that compliance controls should be built into the pre-approval process as well as the post-trip expense reimbursement process, she said.

Another cited example was Dutch medical-device company Koninklijke Philips Electronics’ 2023 settlement with the SEC over violations associated with the sale of medical equipment in China. The Philips case hit home the message that distributors and sub-distributors are high-risk under the FCPA, according to Ning. To mitigate this risk, companies should conduct a risk assessment focused on their distributor management program in China to understand where they face risk. This includes reviewing distributor incentive and compensation structure. Companies should also ensure that there is enhanced oversight and training for employees responsible for public tenders, which are a big part of doing business in China, she noted. There should be controls in place to detect misconduct related to distributors, such as routine distributor audits.

See “Travel and Side Trips Lead 3M to a $6.5‑Million SEC Resolution” (Oct. 11, 2023); and “Compliance Lessons From SEC’s $62.2‑Million Settlement With Recidivist Philips for FCPA Violations” (Jun. 7, 2023).

Recent Changes in India

While not involved in nearly as many FCPA cases as China, India remains a market with huge growth potential, as well as significant bribery risk, with scrutiny both from U.S. regulators and Indian authorities. India has improved marginally in global anti-corruption rankings over the last decade, but most of the efforts have been poorly executed, said Thiagarajan. Additionally, India will soon start implementing new criminal laws that were enacted in 2023, and a wide range of parties associated with a business may be held accountable under Indian regulations.

Election Among Practical Hurdles

2024 will be an important year in India, because of the national election, which tends to have an impact on prosecution and enforcement against corrupt activities across the country, Thiagarajan explained. In addition, significant amounts of cash will be spent on the election campaign. Without the necessary transparency in terms of the source of funds, despite a very recent ruling invalidating an anonymous political funding mechanism, there will be challenges for individuals and commercial organizations operating in India, he said.

See “Evolving Global Anti-Corruption Efforts: U.S., China and India” (Feb. 17, 2021).

New Laws Approved

There are a couple of criminal laws that were enacted toward the end of last year that seek to overhaul and replace existing criminal laws, namely the Indian Penal Code, the Evidence Act and the Code of Criminal Procedure, Thiagarajan said.

The offense of Criminal Breach of Trust under the Indian Penal Code, which also finds its place under the new criminal laws, is generally relevant in cases involving private fraud, Thiagarajan noted. And there is now a requirement for anybody who is aware of the occurrence of criminal breach of trust to report it to jurisdictional authorities in India. However, it is not yet clear how this will be enforced by law enforcement authorities across India, he added.

The newly enacted criminal laws also provide the police with the powers to seek the attachment of property, including real estate, which they believe to be derived as a result of a criminal activity or offense, Thiagarajan pointed out. The new laws do not contain the same level of procedural safeguards that other laws provide in relation to such attachment and forfeiture, he said.

Wide Net of Parties Potentially Accountable

Some of the legislative and regulatory developments in India could impact compliance requirements, including investigative procedures, according to Thiagarajan.

For commercial organizations and foreign companies that have subsidiaries in India, the one key takeaway is that there is liability, as a result of legislative amendments in 2018, for wrongful actions of employees and “persons associated with such organizations,” Thiagarajan cautioned. Under the Prevention of Corruption Act of 1988, this includes anyone who performs services for or on behalf of the commercial organization, which is a very wide net to cast, he noted.

A commercial organization can avoid liability for a bribe paid by somebody associated with the organization by showing that it has put in place adequate procedures designed to prevent such bribes being made, Thiagarajan continued. However, the Indian government has yet to clarify what these adequate procedures would be. In the meantime, it would be advisable for companies operating in India to align with global best practices and guidelines issued by enforcement authorities in other parts of the world, he recommended.

See our two-part series on navigating India’s evolving corruption risk landscape: “FCPA Actions” (Oct. 27, 2021); and “The Local Landscape” (Nov. 10, 2021).

Tata Case Highlights Vendor Risks

Thiagarajan pointed to the Tata Consultancy Services (TCS) case as an example of the risks in this region. TCS received a whistleblower report in June 2023 that employees had accepted bribes from staffing firms in India for directing business to them. After an investigation, TCS fired 16 employees and debarred six vendors by October 2023.

Private bribery cases are not often reported in India, so it was interesting to see how a blue-chip private company handles this type of case, noted Thiagarajan. It turned out that TCS had a rather robust whistleblower mechanism, and so it was able to get to the bottom of the case fairly quickly.

The TCS case in India highlights the need for periodic audits of the selection process of third-party vendors, and for procurement policies that are adhered to by the rank and file of the company.

See “Beam Suntory Is the Latest Victim of the Beverages Industry in India” (Jul. 25, 2018).

Ashurst has added white collar crime and investigations partner Judith Seddon to its Disputes & Investigations practice. Arriving from Dechert, Seddon will be based in the firm’s London office.

Seddon represents clients in matters relating to financial and corporate crime and in regulatory, criminal, and internal investigations and enforcement proceedings. She regularly counsels on complex SFO and Financial Conduct Authority (FCA) investigations, acting as a trusted adviser in navigating the myriad of unexpected challenges involved in managing cross-border investigations brought by international prosecuting authorities.

Prior to joining Ashurst, Seddon was a partner at Dechert.

For insights from Seddon, see “The End of the (Third Party Management) World As We Know It? (But It Might Be Fine)” (May 10, 2023); and “A Comparative Review of the SFO’s Internal Guidance on DPAs” (Dec. 16, 2020).

Cohen Milstein Sellers & Toll has announced the addition of Christina McGlosson as special counsel: Dodd-Frank whistleblower practice in Washington, D.C. She arrives from the U.S. Commodity Futures Trading Commission (CFTC).

With more than two decades of experience, McGlosson expands the firm’s whistleblower practice, representing clients in the presentation and prosecution of fraud claims before the SEC, CFTC, Internal Revenue Service and other government agencies.

McGlosson most recently served as Acting Director of the Whistleblower Office in the Division of Enforcement at the CFTC. Under her leadership, awards totaling $42 million were made to four deserving whistleblowers in September 2023 and October 2023. Prior to that, she spent more than 18 years at the SEC as, among other prominent positions, Senior Counsel to the Director of Enforcement and Senior Counsel to the Chief Economist. She helped create and structure the SEC’s Office of the Whistleblower.

See our two-part series on the DOJ’s intention to launch a whistleblower program: “What Will It Look Like?” (Mar. 27, 2024); and “What Does It Mean for Whistleblowers?” (Apr. 10, 2024).