Anti-Corruption Enforcement and State-Owned Enterprises: Understand Unique Risks and Incentivize Compliance
State-owned enterprises (SOEs, including sovereign wealth funds) are prominent players in international business. Given their ownership, SOEs have garnered scrutiny for their lack of transparency and heightened anti-corruption and anti-money laundering risk, as have individual SOE executives and other personnel who qualify as Politically Exposed Persons.
In connection with commercial activities, SOEs are not protected in most cases by sovereign immunity. Thus, SOEs can, like their privately-owned counterparts, be subject to foreign legal processes. Given the greater scrutiny around SOEs and some of the high profile enforcement actions involving them directly or indirectly (for example, the 1MDB case), anti-corruption and other compliance, as well as good governance and risk management, are essential to avoid legal, commercial, and reputational risk and loss.
This brief note, extracted from MassPoint’s earlier and extended publication on globalized anti-corruption enforcement, addresses:
- This risk of loss of confidential information for SOEs;
- The risk for SOE executives and other personnel to be prosecuted for corruption related offenses, such as for money laundering in connection with Foreign Corrupt Practices Act (FCPA) violations by parties subject to the FCPA);
- The risk of enhanced sentencing for employees of SOEs if they are treated as “government officials” under local law; and,
- Steps that SOEs can and should take to enhance their anti-corruption protocols by educating and incentivizing compliance by personnel.
- Foreign Officials Are Not Beyond the Reach of Foreign Law and Can Be Prosecuted for Bribery Related Offenses
As “foreign officials,” SOE executives and other personnel may be beyond the reach of some anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act (FCPA). Knowledge of this might give some SOE personnel a false sense of comfort. SOEs should educate their executives and other personnel, to make them aware that they are not, in the United States for example, beyond the reach of foreign laws and prosecution (absent a successful assertion of immunity; unlikely where commercial activities are concerned). In the United States, the Department of Justice has, for example, prosecuted foreign officials for FCPA-related offenses, such as money laundering.
State-Owned Enterprises Risk the Disclosure of Confidential and Sensitive Information in Connection with Anti-Corruption Enforcement Actions
In the context of U.S. government investigations, information requests and subpoenas, for example, are investigative tools. As such, they are framed to procure information that corroborates or disproves investigative theories, captures information helpful in guiding an investigation, or reveals broader wrongdoing by a targeted party or others. Thus, the counterparties or associates of a firm under investigation risk the disclosure of their information to authorities, to the extent they are relevant to an investigation (relevance here should be defined broadly). Even where such information is not indicative of wrongdoing under the investigating authority’s law, it could nevertheless be shared with authorities in the party’s home jurisdiction, particularly if it implicates illegality under local law.
For SOEs, for which utmost confidentiality is prized as a matter of policy, disclosures of information that is legally benign, but telling of an SOE’s operations, commercial activities, strategy, or government policies and practices, can have ramifications (including under domestic laws that prohibit the disclosure of SOE information, as may be the case under China’s “state secrets” law). (Relatedly, parties served with requests or subpoenas that require the disclosure of information about an SOE or other local parties or matters must take care to not violate local laws prohibiting the export of protected information, such as those regulating state secrets, privacy, or labor).
Steps to Incentivize Anti-Corruption Compliance Among State-Owned Enterprise Personnel
SOEs can and should take steps to ensure that their employees, agents, and other representatives do not violate anti-bribery laws or entity policy. Such steps should be designed to incentivize conduct that does not create direct or indirect legal, commercial, or reputational risk to the SOE, including by:
- Ensuring that their employees and representatives are aware of the personal costs of violations, such as prosecution overseas or at home.
- Educating and training employees on anti-corruption to align conduct with local law, foreign law (as relevant), and prevailing international standards. As to local law, the employees (native and expatriate) of state-owned or affiliated enterprises should know that local penalties for corrupt conduct could be enhanced precisely because of a link to an SOE.[i]
- Implementing and enforcing anti-corruption protocols that are consistent not only with applicable law and entity standards of conduct, but that are also tied to contractual obligations (e.g. employment contracts) requiring employees and others to act reasonably to maintain the confidentiality of SOE information (including by not engaging in corrupt activity that might indirectly jeopardize confidentiality). Where applicable law governing employment contracts prohibits the disclosure of “state secrets” or other protected information, SOE policies, training, and/or employment contracts should reflect such rules and describe consequences for their breach.
MassPoint’s Legal, Strategy, and Risk Management Services for State-Owned Enterprises
For more information about MassPoint’s anti-corruption, other compliance, and governance legal, strategy, and risk management services tailored for state-owned enterprises, please contact Hdeel Abdelhady.
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- Panama Papers Renew Relevance of Proposed U.S. Beneficial Ownership Rule
- Proposed U.S. Rule Requires Banks to Collect Beneficial Ownership Information
- Cross-Compliance for Financial Institutions: the Anti-Corruption-AML Nexus
- Globalized Anti-Corruption Enforcement: Direct and Collateral Consequences for Private and State-Owned Enterprises (financial institutions focus)
[i] Examples of this come from Dubai, where executives of partially state-owned firms were given enhanced prison sentences because they were deemed to be government officials. For more information on this, contact the author and see the related full publication, Globalized Anti-Corruption Enforcement: Direct and Collateral Consequences for Private and State-Owned Enterprises.