Foreign Corrupt Practices Act (FCPA)

The Foreign Corrupt Practices Act is a major U.S. anti-corruption law that creates strict rules for hedge fund advisers who operate in global markets. This law has an unusually wide reach—it applies to all U.S. advisers and their employees no matter where their actions take place. Whether the bribery happens in New York or entirely overseas, U.S. hedge funds must still follow this law.

The FCPA works alongside another law called the Foreign Extortion Prevention Act. While the FCPA focuses on preventing U.S. entities from paying bribes, the companion law makes it illegal for foreign officials to demand or accept those bribes in the first place.

The FCPA casts a very wide net when defining who counts as a "foreign official." This goes far beyond just traditional government workers like ministers or regulators. The law covers every employee of foreign government agencies at any level, from local clerks to high-ranking officials across all branches of government.

The definition also includes employees of state-owned enterprises—companies that are owned or controlled by foreign governments. For example, if a foreign government owns a major oil company, all of that company's employees would be considered "foreign officials" under U.S. law. The law also covers employees of international organizations like the United Nations, members and officials of foreign political parties, and candidates running for foreign political office.

Hedge fund advisers face FCPA risks in three main areas. First, when they seek investments from sovereign wealth fundsState-owned investment funds that manage a country's reserves for long-term investment purposes. or other government-controlled investors like state pension plans, they are interacting directly with entities that employ "foreign officials." Any improper payments made to secure these investments could violate the FCPA.

Second, hedge funds face indirect risks through their portfolio investments. When a fund invests in companies that operate abroad or do business with foreign governments, those companies' actions could create liability for the fund if bribery occurs.

Third, hedge funds encounter direct compliance challenges when dealing with foreign regulators. As funds establish overseas offices or seek regulatory approvals in other countries, their interactions with foreign regulatory agencies create potential FCPA exposure.

The FCPA takes a strict approach to gifts. Any gift given to a foreign official with the intent to influence their official actions or gain an improper advantage violates the law, regardless of the gift's value. Even a small token can trigger FCPA liability if given with corrupt intent.

Hedge funds must be especially careful about providing entertainment or hospitality to foreign officials. Business meals, sporting event tickets, or travel expenses can all potentially be viewed as bribes if they are intended to influence official decision-making. For this reason, firms typically adopt detailed policies governing any interactions with foreign officials.

One of the most dangerous areas for hedge fund advisers involves the use of placement agents and other third-party intermediaries. These are outside parties who help funds raise money or conduct business on their behalf. If one of these intermediaries pays a bribe to a foreign official to secure business for the hedge fund, the fund and its employees can still be held liable under U.S. law.

The key factor is knowledge. Fund managers don't need to directly pay the bribe or even interact with the foreign official to face liability. They can be held responsible if they knew about the improper payment or if they "deliberately ignored" obvious warning signs. In legal terms, turning a blind eye to red flags that suggest a bribery scheme can be treated the same as actual knowledge.

The FCPA does provide a narrow exception for "facilitation payments"—small payments made to speed up routine government actions. However, this exception is very limited and generally applies only to non-discretionary actions that the official would perform anyway, such as processing standard paperwork, delivering mail, or providing other routine government services that don't involve discretionary decision-making.

The law also provides an affirmative defenseA legal defense strategy where the defendant acknowledges the facts but provides justification or excuse that negates criminal or civil liability. for certain reasonable business expenses that are genuinely incurred for legitimate business purposes. For example, paying for a foreign official's reasonable travel expenses to visit a company's facilities might be permissible if it serves a genuine business purpose.

Because these exceptions are so narrow and fact-specific, most hedge fund compliance policiesWritten procedures that must be reasonably designed to prevent violations of applicable laws and regulations. require employees to get prior approval before making any facilitation payments or covering business expenses for foreign officials.

Given these extensive risks, hedge fund advisers must establish comprehensive policies and procedures to ensure FCPA compliance. These policies should address all applicable anti-bribery and anti-corruption laws, not just the FCPA.

Effective compliance programs include several key elements. They must encourage employees to report potential issues and provide clear escalation proceduresPredetermined processes for handling conflicts or complex situations that require higher-level decision-making or resolution.. The policies should emphasize that reporting suspected violations will be treated confidentially whenever reasonably possible. Most importantly, the policies must include strong anti-retaliation provisionsPolicy terms that protect employees from adverse employment actions when they report suspected violations or participate in compliance investigations in good faith., ensuring that employees who report potential FCPA violations in good faith will be protected from any form of retaliation.