On 6 March 2019 the Commodity Futures Trading Commission (CFTC) Division of Enforcement released an Enforcement Advisory addressing companies and individuals not registered with, or required to be registered with, the CFTC that “timely and voluntarily disclose” to it violations of the Commodity Exchange Act that involve foreign corrupt practices. The Advisory explained that such disclosure, when combined with full cooperation and appropriate remediation as discussed in the Division’s January and September 2017 Advisories, will lead to the application of a presumption by the Division that it will recommend to the Commission a resolution with no civil monetary penalty, absent other aggravating circumstances. At the ABA White Collar Crime Institute on March 6, the enforcement chief, James McDonald, explained that the agency may investigate bribery conduct in relation to winning business trade swaps or to manipulate benchmark for related derivative contracts. McDonald explained that the CFTC’s entry into this area resulted from requests for investigation assistance from the DOJ and SEC, and the effect of such investigations on the American derivatives market.
The initial public release of this development occasioned normal and expected fanfare. We purposely elected to wait until some of the dust had settled on this announcement, and at that time, provide some initial observations and analysis on this development.
Has this changed anything?
In one sense, no. The CFTC has not been magically granted FCPA statutory enforcement authority, and remains as it has always been, the regulator of the commodities markets. However, moving beyond technical legal questions, this development is likely to impact companies in a number of ways.
First, and practically speaking, the CFTC’s entry into the foreign corruption enforcement realm has the potential to increase the complexity of foreign bribery investigations and settlement discussions. FCPA investigations involving the SEC and the DOJ, which essentially share complementary authority to enforce the provisions of the FCPA, often come down to discussions of the same type of conduct, and the debates are around connection to the US, knowledge and corrupt intent, and how the bribes were recorded among others. However, for the CFTC, the establishment of a bribe will only be the first step in the analysis. As a result, the matters will likely be resolved on separate time frames, or significant efforts will need to be expended to address all of the additional CFTC legal issues if a global resolution is going to be discussed.
Second, many foreign bribery investigations do not involve an “issuer,” and therefore, the only US law enforcement interest is whether there has been a criminal violation of the anti-bribery provisions of the FCPA. Although certainly less than ideal, that is different from also having to address a potential civil enforcement matter with the SEC, involving the books and records and internal controls provisions and a lower burden of proof. Now, with the entry of the CFTC into these cases, an entirely new world of potential civil exposure triggered by foreign bribery has arisen. Private companies of all ilks that happen to be engaged in the commodities markets and/or engaged in derivatives or commodities trading that otherwise might have been eligible for a declination from the DOJ could find themselves also having to deal with a civil regulator that can rely on a lower burden of proof in making its foreign-bribery derived case.
Third, the announcement could potentially create a new class of whistleblowers looking to take advantage of the new enforcement initiative. During his March 6 address, McDonald took special care to note that the CFTC Whistleblower Office “remains open and ready for business,” and that it “applies to CEA violations involving foreign corrupt practices, just as it does in other areas.” Just two days before McDonald’s address, the CFTC awarded over $2,000,000 to an individual whistleblower for “critical information” in a CFTC action and a related action brought by another federal regulator. In light of the fact the DOJ and SEC’s request for assistance “led to [the CFTC’s] involvement in this space,” it is clear that the CFTC is already working with other enforcement agencies to identify, prosecute, and/or regulate foreign bribery conduct affecting the American marketplace. We have seen how the SEC and DOJ work together to move FCPA cases forward. We can now expect the CFTC to add its quiver of arrows to the enforcement arsenal.
Fourth, companies that identify indicia of foreign bribery will now need to conduct an analysis of whether there is any potential impact on the commodities markets, and if so, consider a self disclosure to the CFTC. It remains to be seen, but it is doubtful, whether a company that clearly has no connection to the commodities markets that elects to voluntarily disclose to the DOJ and the SEC will also disclose to the CFTC in an abundance of caution. Still, the determination of whether a company’s foreign bribery had an impact on the commodities markets could be a difficult call to make. And the CFTC has made it clear that a company that elects to not voluntarily disclose does so at its own peril. In its recent Enforcement Advisory, the CFTC has made clear that companies or individuals who report potential bribery conduct incident to a violation of the CEA and fully cooperate in the investigation may completely avoid incurring any CFTC-imposed monetary civil penalties. The potential for zero civil penalty is intended, like the DOJ program, to incentivize companies to self-report violations.
What Legal Theories will the CFTC Employ?
The CFTC is most likely to employ fraud or manipulation theories, and allege that the bribes at issue evidence fraudulent or manipulative intent although for regulated entities it may also be able to employ theories related to recordkeeping. A provision of the CEA most likely to be used is Rule 180.1(a) and potentially Section 9(3). Under Rule 180.1(a) the CFTC prohibits the use of any manipulative device, scheme or artifice to defraud. Specifically, in relevant part, Rule 180.1 makes it illegal for any person, directly or indirectly, in connection with any swap, or contract of sale of any commodity, or contract for future delivery on or subject to the rules of any regulated exchange or trading facility, to intentionally or recklessly: (i) use or employ, or attempt to use or employ, any manipulative device, scheme, or artifice to defraud; (ii) make, or attempt to make, any untrue or misleading statement of a material fact or to omit to state a material fact necessary in order to make the statements made not untrue or misleading; or (iii) engage, or attempt to engage, in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any person. Civil violations of Rule 180.1 may be established by a preponderance of the evidence (like the SEC), unlike the criminal standard of beyond a reasonable doubt.
From an enforcement perspective, fraud has historically been difficult to rely upon as a method for prosecuting corruption, hence the creation of the FCPA. Broadly, fraud requires the making of material statements or omissions with a culpable state of mind. Practically speaking, bribery schemes often lack the making of a material statement concerning the bribe. In the absence of evidence of a statement made (for example, to an investor) about an aspect of the business that is made materially misleading by the foreign bribery, a fraud charge is an odd fit arising out of bribery-related conduct. Manipulation, unlike fraud, is not tied to a knowingly false statement and requires only recklessness on the part of the defendants. This is a significant departure from prior manipulation law, which generally required a showing of specific intent. It is further compounded by the fact that the CFTC has said that it plans to interpret the rule broadly. One scenario where foreign bribery and commodities could gain CFTC focus is where the agency can allege a bribe has been paid in order to secure some type of favorable treatment, which puts the bribing party in a position to transact business in a commodity in the market at a price that does not reflect the equilibrium of supply and demand. The CFTC’s interest in foreign bribery conduct has not, however, been explicitly limited to the FCPA focus on public bribery. It is possible that the CFTC’s lower threshold of proof of manipulative schemes since Dodd-Frank could lead to their investigation into allegations of commercial bribery activity as manipulative behavior affecting prices.
https://www.cftc.gov/sites/default/files/idc/groups/public/@lrenforcementactions/documents/ legalpleading/enfadvisorycompanies011917.pdf; https://www.cftc.gov/sites/default/files/idc/groups/public/@lrenforcementactions/documents/ legalpleading/enfadvisoryindividuals011917.pdf