Legg Mason Pays $34M SEC Fine For FCPA Violations

by Ike Obudulu Posted on August 27th, 2018

Washington D.C., USA: The U.S. Securities and Exchange Commission (SEC) today announced that Legg Mason Inc. will pay over $34 million to resolve an SEC charge that the company violated the Foreign Corrupt Practices Act (FCPA) in a scheme to bribe Libyan government officials.

According to the SEC’s order, between 2004 and 2010, a former Legg Mason asset management subsidiary, Permal Group Inc., partnered with a French financial services company to solicit investment business from Libyan state-owned financial institutions. These entities engaged in a scheme to pay bribes to Libyan government officials through a Libyan middleman in order to secure investments. As a result of the corrupt scheme, Legg Mason, through its Permal subsidiary, was awarded business tied to $1 billion of investments for the Libyan financial institutions, earning net revenues of approximately $31.6 million. According to the SEC’s order, the middleman used the term “cooking” to describe his ability to cause Libyan government officials to invest by any means necessary, including bribes.

“Companies must take adequate steps to identify and mitigate the risks of bribery and corruption present in their global business. Those risks are particularly acute when, as here, agents and middlemen are used as part of a company’s efforts to obtain business with government clients,” said Charles Cain, Chief of the Enforcement Division’s FCPA Unit.

The SEC’s order finds that Legg Mason violated the internal accounting controls provision of the Securities Exchange Act of 1934. Legg Mason agreed to disgorge approximately $27.6 million of ill-gotten gains plus $6.9 million in prejudgment interest to settle the SEC’s case. Legg Mason had also previously agreed to pay $33 million to the U.S. Department of Justice in sanctions resulting from the firm’s involvement in the Libyan bribery scheme.

The SEC’s investigation was conducted by Eric Heining and Paul G. Block of the FCPA Unit and Rory Alex and Martin F. Healey of the Boston Regional Office. The SEC appreciates the assistance of the Fraud Section of the Department of Justice, the U.S. Attorney’s Office for the Eastern District of New York, and the Federal Bureau of Investigation.

The Foreign Corrupt Practices Act FCPA

The Foreign Corrupt Practices Act of 1977, as amended, 15 U.S.C. §§ 78dd-1, et seq. (“FCPA”), was enacted for the purpose of making it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business.

The FCPA contains both anti-bribery and accounting provisions. The anti-bribery provisions prohibit U.S. persons and businesses (domestic concerns), U.S. and foreign public companies listed on stock exchanges in the United States or which are required to file periodic reports with the Securities and Exchange Commission (issuers), and certain foreign persons and businesses acting while in the territory of the United States (territorial jurisdiction) from making corrupt payments to foreign officials to obtain or retain business.

The accounting provisions require issuers to make and keep accurate books and records and to devise and maintain an adequate system of internal accounting controls. The accounting provisions also prohibit individuals and businesses from knowingly falsifying books and records or knowingly circumventing or failing to implement a system of internal controls.

Specifically, the anti-bribery provisions of the FCPA prohibit the willful use of the mails or any means of instrumentality of interstate commerce corruptly in furtherance of any offer, payment, promise to pay, or authorization of the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value will be offered, given or promised, directly or indirectly, to a foreign official to influence the foreign official in his or her official capacity, induce the foreign official to do or omit to do an act in violation of his or her lawful duty, or to secure any improper advantage in order to assist in obtaining or retaining business for or with, or directing business to, any person.

Since 1977, the anti-bribery provisions of the FCPA have applied to all U.S. persons and certain foreign issuers of securities. With the enactment of certain amendments in 1998, the anti-bribery provisions of the FCPA now also apply to foreign firms and persons who cause, directly or through agents, an act in furtherance of such a corrupt payment to take place within the territory of the United States.

The FCPA also requires companies whose securities are listed in the United States to meet its accounting provisions. See 15 U.S.C. § 78m. These accounting provisions, which were designed to operate in tandem with the anti-bribery provisions of the FCPA, require corporations covered by the provisions to (a) make and keep books and records that accurately and fairly reflect the transactions of the corporation and (b) devise and maintain an adequate system of internal accounting controls.

The Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) share FCPA enforcement authority.

FCPA:  What Is Covered? —The Business Purpose Test

The FCPA applies only to payments intended to induce or influence a foreign official to use his or her position “in order to assist … in obtaining or retaining business for or with, or directing business to, any person.”

This requirement is known as the “business purpose test” and is broadly interpreted. Not surprisingly, many enforcement actions involve bribes to obtain or retain government contracts.

The FCPA also prohibits bribes in the conduct of business or to gain a business advantage.67 For example, bribe payments
made to secure favorable tax treatment, to reduce or eliminate customs duties, to obtain government action to prevent competitors from entering a market, or to circumvent a licensing or permit requirement, all satisfy the business purpose test.

FCPA: Examples of Actions Taken to Obtain or Retain Business

  • Winning a contract
  • Influencing the procurement process
  • Circumventing the rules for importation of products
  • Gaining access to non-public bid tender information
  • Evading taxes or penalties
  • Influencing the adjudication of lawsuits or enforcement actions
  • Obtaining exceptions to regulations Avoiding contract termination

FCPA: The Costs of Corruption

Corruption is a global problem. In the three decades since Congress enacted the FCPA, the extent of corporate bribery has become clearer and its ramifications in a transnational economy starker.

Corruption impedes economic growth by diverting public resources from important priorities such as health, education, and infrastructure.

Corruption undermines democratic values and public accountability and weakens the rule of law. And it threatens stability and security by facilitating criminal activity within and across borders, such as the illegal trafficking of people, weapons,and drugs.

International corruption also undercuts good governance and impedes U.S. efforts to promote freedom and democracy, end poverty, and combat crime and terrorism across the globe.

FCPA: Corruption is bad for business

Corruption is also bad for business. Corruption is anti-competitive, leading to distorted prices and disadvantaging honest businesses that do not pay bribes. It increases the cost of doing business globally and inflates the cost of government contracts in developing countries.

Corruption also introduces significant uncertainty into business transactions:

Contracts secured through bribery may be legally unenforceable, and paying bribes on one contract often results in corrupt officials making ever-increasing demands.

Bribery has destructive effects within a business as well, undermining employee confidence in a company’s management and fostering a permissive atmosphere for other kinds of corporate misconduct, such as employee self-dealing, embezzlement, financial fraud, and anti-competitive behavior.

Bribery thus raises the risks of doing business, putting a company’s bottom line and reputation in jeopardy.Companies that pay bribes to win business ultimately undermine their own long-term interests and the best interests of their investors

Author

Ike Obudulu

Ike Obudulu

Versatile Certified Fraud Examiner, Chartered Accountant, Certified Internal Auditor with an MBA in Finance And Investments who has both worked for and consulted with some of the world's largest companies on main street and wall street in over 20 countries, Ike brings his extensive reporting and investigations experience to bear on his role as Chief Editor.
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