The implications of the US Foreign Corrupt Practices Act (FCPA) may not be top-of-mind currently for most hedge fund managers. Although the FCPA’s prominence has grown substantially in recent years due to high-profile prosecutions, the risk of potential FCPA violations in hedge fund management may not be readily apparent.

FCPA enforcement has historically focused on industries such as energy, telecommunications, and defense, where large government contracts, natural resource availability, or other possible business advantages are at stake. Hedge funds’ capital raising and investment activities would appear to be quite different from these businesses, which tend to require direct interaction with government officials in bidding for, negotiating and executing large project or product-based contracts involving, for example, power plant development, hydrocarbon exploration, or the purchasing of planes or military equipment.

However, recent and ongoing developments signal intensifying enforcement, as well as the emergence of new and specific risks for hedge funds as financial activity continues to globalise. Funds that understand these exposures and establish sound anti-corruption programmes may be better equipped to avoid the serious penalties and potential reputational damage resulting from violations of the FCPA and other anti-corruption laws, including the recently enacted UK Bribery Act (UKBA).

The growing fight against corruption
The FCPA contains two primary elements. Its anti-bribery provision makes it illegal to bribe foreign officials to retain or obtain business or otherwise gain a business advantage. The definition of foreign official is broad, and includes officers and employees of non-US governments, political parties, and public international organizations such as the World Bank and the International Monetary Fund. The FCPA specifically prohibits payments to third parties, such as consultants and representatives, “while knowing” that all or part of the payment will be given to a foreign official for an impermissible purpose.[1] Direct knowledge is not necessarily required; disregarding the likelihood that all or part of a payment will be used to influence a foreign official may suffice.