On March 6, 2019, the U.S. Commodity Futures Trading Commission’s (the “Commission” or “CFTC”) Enforcement Division published an advisory (the “Advisory”) which discussed the implications of self-reporting and cooperation for violations of the Commodity Exchange Act (“CEA”) that involve foreign corrupt practices. The Advisory marks the first time the CFTC has expressed its intention to investigate the use of derivatives involving foreign corrupt practices and is also indicative of regulators’ realization that in the 21st century most businesses are international and use various complex business structures that may involve the use of commodities and derivatives.
The CEA broadly prohibits fraud and manipulation in connection with any transaction involving a “commodity” that is subject to the CFTC’s jurisdiction. Specifically, it is a violation of the CEA to intentionally or recklessly employ any manipulative device, scheme or artifice to defraud in connection with a swap, an option, or a commodity future (i.e., a derivative) as well as in connection with any commodity transaction, including those traded on spot or on a forward basis. Therefore, the CEA gives the CFTC broad authority to police abusive and fraudulent trade practices in derivatives, as well as cash commodity markets.
The Advisory follows on a series of similar advisories issued by the CFTC in 2017 and incentivizes companies and individuals to self-report and remediate violations of the CEA involving foreign corrupt practices, and to cooperate fully with the CFTC following the disclosure. Should they do so, market participants not registered (or required to be registered) with the CFTC will be entitled to a presumption of no civil penalty. Registrants with the CFTC are not entitled to this presumption, however, as they already have existing obligations to report material noncompliance with the CEA, including foreign corrupt practices. However, registrants who self-report, cooperate and remediate CEA violations may still secure substantial penalty reductions.
CFTC Enforcement Director James McDonald announced the CFTC’s new enforcement policy at the American Bar Association’s Conference on White Collar Crime (the “ABA Conference”), the same day that the Advisory was issued by the CFTC. McDonald encouraged individuals with information regarding foreign corrupt practices in the commodities or derivatives markets to share such information with the CFTC’s Whistleblower’s Office. According to Director McDonald, the CFTC has awarded at least $85 million to whistleblowers since 2014.
The Advisory signals the Commission’s intention to investigate foreign corrupt practices which unfairly impact the cash commodities and derivatives markets. The basis for this assertion of jurisdiction is the CFTC’s broad authority to prevent abusive practices in commodities trading markets, particularly in those instances where a violation of the CEA and the CFTC’s rules and regulations would also demonstrate engaging in foreign corrupt practices.
At the ABA Conference, McDonald provided examples of foreign corruption that the CFTC would investigate. Notably, the CFTC will investigate bribes that are paid to secure business in foreign countries in relation to regulated activities, such as trading, advising or dealing in derivatives or cash commodities. The CFTC will also investigate corrupt practices in connection with the manipulation of benchmark interest rates, which serve as the basis for related derivatives contracts.
The Foreign Corrupt Practices Act (“FCPA”) has traditionally been enforced by the Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”), respectively, for criminal and civil offenses.
In this regard, the CFTC has clarified that it would continue to focus on subject matters that fall within its core jurisdiction (i.e., the CEA and the CFTC’s rules and regulations applicable to commodities and derivatives), but that it may now also look at corrupt practices that facilitate or induce commodities trading deals.
For example, a commodity trader who pays a bribe to secure business from a sovereign wealth fund or a foreign government may constitute a violation of both the CEA and the FCPA. In such instances, McDonald stated that the CFTC will closely coordinate with the DOJ or SEC to investigate such misconduct. Indeed, a senior DOJ official who attended the ABA Conference stated that the DOJ was looking forward to coordinating with the CFTC in cases involving foreign corrupt practices.
These developments substantially heighten the need for participants in the commodity, futures and swaps markets to adopt a proactive approach in identifying and addressing overseas corruption issues that may exist in their deal-making and business practices. This is particularly pertinent for deals which involve parties from high-risk jurisdictions.