Bribery and corruption in the PE space

August 2015  |  FEATURE  |  PRIVATE EQUITY

Financier Worldwide Magazine

Despite the best efforts of regulatory bodies and internal compliance teams, bribery and corruption are still rife in the corporate world. One need only look to the allegations, resignations and potential incarcerations of executives at FIFA, the world governing body of football, in recent months to see the hugely damaging effect that bribery and corruption can have on an organisation, and the reputation of that body. The corruption allegations which are currently shrouding FIFA in uncertainty have reached such a level that in early June British prime minister David Cameron used the G7 summit to beseech the international community to launch a renewed effort to eliminate corruption wherever possible. By galvanising the world’s largest economic nations, Mr Cameron and his supporters hope to stamp out corruption and the stymieing effect it can have on global economic growth.

The poison of bribery and corruption flows through the veins of most industries and sectors. Though governments and regulatory bodies fight the good fight where they can, it would be naive to believe that malfeasance can be stamped out entirely. Regardless, regulatory developments and enforcement actions with this goal in mind continue to abound. One of the most scrutinised areas since the onset of the financial crisis has been private equity (PE). The US Securities and Exchange Commission (SEC) has brought several significant enforcement actions against PE firms, targeting fund managers for an array of compliance issues. With transparency an issue in certain areas of the PE industry, further pressure from the SEC and other regulators is likely.

Crackdown

Over the course of the last two years, the SEC has launched something of a crackdown on the PE space, focusing enforcement activity on what it believes to be undisclosed fees and expenses charged by private equity sponsors to funds or portfolio companies. The SEC has recently noted that there is “still room for improvement” in terms of the handling of fund manager’s fees and expense allocations. Though the Commission noted that the industry has made considerable progress over the last 12-18 months, there is still much work to be done. According to Marc Wyatt, the acting director of the SEC’s Office of Compliance Inspections and Examinations, “many managers” seemed to be under the impression that if investors did not raise objections to the manner in which they were charged expenses, then those costs were legitimate and legal.

While increased regulatory attention on corruption within the PE space is likely to deter potential perpetrators from behaving inappropriately, for some within the industry the cost of compliance is becoming too heavy to bear. In early June, two senior PE executives fiercely criticised the ramping up of regulatory obligations. Michael Psaros, co-founder of KPS Capital Partners, called the 2010 Dodd-Frank law an “abomination” that hinders initial public offerings, while Joseph Landy, co-chief executive of Warburg Pincus, complained of the “staggering” amount of resources firms have to devote to regulatory issues.

Work to be done

From a compliance perspective, many firms and individuals within the PE space are on the right path. Considering that the industry has only been under the purview of the SEC since 2010, the sector has made remarkable strides. However, there is much more to be done if the PE industry is to be free of bribery and corruption in the years ahead. Accordingly, it is imperative that firm take steps to ensure that they and their portfolio companies are not violating the most notable pieces of anti-bribery legislation.

Though local laws and regulations must be adhered to, firms operating internationally should also be aware of the provisions of the Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act. They should also deploy due diligence prior to and immediately after an investment and ensure that any problems uncovered are properly dealt with, and in a timely fashion. Compliance staff are obviously a must. Chief compliance officers are in place in most firms, but they must be empowered to stamp out malfeasance wherever possible. Many PE firms are in the process of further empowering their chief compliance officers, and fund’s limited partners are becoming more focused in their due diligence efforts.

Going forward

For PE firms, the transition to becoming a heavily regulated entity is likely to be a fraught and complicated process, as increasingly stringent obligations are placed on firms. Fund managers have taken some important steps on the road to compliance, but there is still much work to be done to address bribery and corruption issues in the industry. The coming months and years are likely to be a steep learning curve for many.

© Financier Worldwide

BY

Richard Summerfield