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Hedge Fund Reaches $412 Million FCPA Settlement with DOJ and SEC
Practical Law Legal Update w-003-7082 (Approx. 5 pages)
Hedge Fund Reaches $412 Million FCPA Settlement with DOJ and SEC
by Practical Law Commercial Transactions
| Law stated as of 30 Sep 2016 • USA (National/Federal) |
Och-Ziff Capital Management Group LLC, a New York based hedge fund, and its African subsidiary OZ Africa Management GP LLC, have agreed to pay over $412 million to the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) for violating the Foreign Corrupt Practices Act (FCPA).
On September 29, 2016, the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) separately announced that Och-Ziff Capital Management Group LLC (Och-Ziff), a New York based hedge fund, and its African subsidiary OZ Africa Management GP LLC (OZAfrica), will pay more than $412 million to the agencies to settle charges that the companies violated the Foreign Corrupt Practices Act (FCPA). The agencies said that Och-Ziff failed to:
- Implement and maintain adequate internal accounting controls, which allowed its employees, agents, and business partners to misappropriate assets.
- Conduct due diligence on its business partners.
- Prevent bribes from being paid to government officials in the Democratic Republic of Congo (DRC) and Libya.
As part of this settlement with the DOJ and SEC:
- Och-Ziff and OZ Africa agreed to pay:
- the DOJ a criminal penalty of $213,055,689; and
- the SEC $173,186,178 in disgorgement plus $25,858,989 in interest, for a total of $199,045,167.
- Och-Ziff agreed to implement rigorous internal controls, retain a compliance monitor for three years, and cooperate fully with the DOJ's ongoing investigation.
- Och-Ziff's CEO, Daniel S. Och, agreed to pay the SEC $1.9 million in disgorgement plus $273,718 in interest.
The SEC will also later assess a penalty against Och-Ziff's CFO, Joel M. Frank.
Bribes in the DRC
In 2007, Och-Ziff began a partnership with a businessman in the DRC to gain special access to lucrative investment opportunities in the DRC's diamond and mining sectors. Between 2008 and 2012, Och-Ziff entered into several DRC-related transactions with the businessman with the understanding that Och-Ziff's funds would be used, in part, to pay substantial sums of money to high-ranking DRC officials to secure access to, and preference for, investment opportunities. The businessman paid tens of millions of dollars in bribes to DRC officials in exchange for investment opportunities that ultimately earned Och-Ziff more than $90 million in profits.
Och-Ziff admitted that when one of its employees was alerted in 2008 that an audit of the businessman's records revealed payments to DRC officials, that employee ordered the removal of any references to those payments from the final report of the audit.
Bribes in Libya
Beginning in 2007, Och-Ziff engaged a third-party agent to assist the company in securing an investment from the Libyan Investment Authority (LIA), Libya's sovereign wealth fund. Och-Ziff:
- Engaged the agent without formal approval or any due diligence.
- Knew the agent would need to pay bribes to Libyan officials.
- Ultimately paid the agent a "finder's fee" of $3.75 million, knowing that the agent would pay all or a portion of the fees to Libyan officials in return for their assistance in obtaining a $300 million investment from the LIA.
Och-Ziff admitted that it falsified its books and records and attempted to conceal and disguise the bribes paid through the agent by paying the "finder's fee" through a sham consulting agreement.
Practical Implications
This is the first time a hedge fund has been held liable for violating the FCPA and could indicate that the DOJ and SEC are paying closer attention to how financial service businesses comply with the law.
This is also one of the largest FCPA settlements of 2016 and highlights:
- The importance of:
- keeping accurate books and records, and ensuring that subsidiaries do the same;
- having an adequate FCPA compliance policy and training protocol; and
- performing due diligence and screening when hiring agents and working with business partners.
- That apart from a company facing civil and criminal penalties, its executives can also be found personally liable.
For corporations that issue US securities, the FCPA explicitly imposes recordkeeping and internal control requirements that extend to the company's foreign and domestic subsidiaries. Corporations almost never record prohibited payments accurately on their books, making every anti-bribery case a potential books and records case. Therefore, corporations that fall within the SEC's jurisdiction should implement comprehensive policies to ensure the accuracy of recordkeeping at the subsidiary level. For sample FCPA compliance policies, see Standard Documents, Foreign Corrupt Practices Act Anti-Corruption Policy and Policy for the Use of Third-party Agents Outside of the United States.
Additionally, if a company discovers that either its directors, employees, agents, or subsidiaries have violated the FCPA, the company should immediately take remedial action and consider reporting the matter to the DOJ and SEC (see Legal Update, DOJ Launches FCPA Self-Reporting Pilot Program). In this case, the DOJ's criminal penalty reflected a 20 percent reduction off the bottom of the U.S. Sentencing Guidelines fine range because Och-Ziff cooperated with the government's investigation.
For more information on the FCPA, see Practice Note, The Foreign Corrupt Practices Act: Overview and Legal Update, New FCPA Guidance Released by the DOJ and SEC.