LawFlash

CFTC Announces Self-Reporting Guidance on Foreign Corrupt Practices

March 11, 2019

Practitioners active in derivative markets regulated by the Commodity Futures Trading Commission (CFTC) are well familiar with the US Court of Appeals for the Eighth Circuit’s proclamation in 1971 that “[t]he methods and techniques of manipulation are limited only by the ingenuity of man.”[1] It should not come as too much of a surprise, therefore, that a recent advisory published by the CFTC’s Division of Enforcement (Division) and comments of the division director have highlighted the CFTC’s attention toward investigating potential violations of the Commodity Exchange Act (CEA) that involve foreign corrupt practices. On March 6, CFTC Director of Enforcement James M. McDonald addressed this very issue in remarks before the ABA National Institute on White Collar Crime. At the same time, the Division issued an Enforcement Advisory providing guidance on how the CFTC will treat instances of self-reporting and cooperation concerning CEA violations that also involve foreign corrupt practices.

In remarks at the ABA forum, Mr. McDonald reiterated that the CFTC remains committed to investigating and bringing enforcement proceedings regarding violations of the CEA that arise from foreign corrupt practices. For example, he explained that bribes could be employed to obtain business in connection with CFTC-regulated derivatives trading or advisory activities. He also observed that corrupt practices could be used to manipulate benchmarks that serve as the basis for related derivatives contracts, or that false reporting of prices to benchmark publishers could be the product of corruption.

In any of those instances, the CFTC’s jurisdiction over commodity derivatives such as futures, options, and swaps enables the CFTC to investigate whether advising, trading, or dealing of those products is being undertaken in a way that is in violation of the CEA. However, those instances (or other similar instances of misconduct involving foreign corruption) may also implicate compliance with the Foreign Corrupt Practices Act (FCPA). Mr. McDonald commented that, to the extent that FCPA violations have implications on markets in the United States, they are ripe for CFTC enforcement. As a result, the CFTC intends to cooperate and coordinate with both the US Securities and Exchange Commission (SEC) and the US Department of Justice (DOJ) to ascertain whether FCPA violations also implicate the CEA. Therefore, the CFTC intends to work closely with its DOJ and SEC enforcement partners to ensure that any investigations are properly coordinated and “are appropriately aimed at identifying and eliminating any gaps” in investigative and regulatory frameworks.

As part of this coordination with DOJ and the SEC, Mr. McDonald also announced the Division’s issuance of an Enforcement Advisory on Self Reporting and Cooperation for CEA Violations Involving Foreign Corrupt Practices (Advisory). The Division explained that it will provide enforcement relief in certain instances where violations of the CEA involve foreign corrupt practices. Specifically, the Division advised that it intends to apply a presumption to recommend no civil monetary penalty in circumstances where a company or individual that is not registered (or required to be registered) with the CFTC voluntarily self-reports a CEA violation involving foreign corrupt practices so long as the self-report is followed by full cooperation during the investigation and “appropriate” remediation. In addition, the Division must also determine that aggravating factors involving the nature of the offender and seriousness of the offense must not exist in order for the presumption to apply. The Advisory explains that the Division will evaluate the following circumstances in order to determine whether aggravating factors exist that warrant revocation of the no civil monetary penalty presumption: (i) whether executive or senior-level management of the company was involved; (ii) whether the misconduct was pervasive within the company; or (iii) whether the company or individual has previously engaged in similar misconduct.[2] Although the Division may recommend no civil monetary penalty if these criteria are satisfied, it is important to remember that the Division would still require payment of all disgorgement, forfeiture, and restitution resulting from the alleged misconduct.

Importantly, the Division’s presumption is limited only to companies or persons that are not required to register with the CFTC. Under the CEA, companies or persons that are required to register with the CFTC (i.e., CFTC registrants) have an independent reporting obligation that requires reporting of issues involving material noncompliance. This separate existing reporting obligation would encompass CEA violations arising from foreign corrupt practices. As a result, the Division determined that a presumption of no civil monetary penalty should not apply. Instead, CFTC registrants that comply with their existing obligation to report material noncompliance (including CEA violations arising from foreign corrupt practices) can be subject to a Division recommendation of a “substantial reduction” in civil monetary penalty.

Both Mr. McDonald’s comments and the CFTC’s Advisory reflect the CFTC’s continued focus on aggressive investigation of allegations of CEA violations. For the first time in nearly five years, the CFTC is operating with a full complement of five commissioners. Further, the Division noted in its most recent annual report that over 80 cases were filed in 2018, which is the third highest number of cases in CFTC history. In those efforts, the CFTC continues to view its whistleblower program as a valued source of investigative referrals. Indeed, on March 4 the CFTC announced a whistleblower award of more than $2 million to be paid to an individual in an action brought by both the CFTC and another federal regulator. To date, the CFTC has awarded more than $85 million to whistleblowers, which the CFTC associates with sanction orders exceeding $675 million. These award announcements confirm CFTC Chairman Christopher Giancarlo’s remarks in October 2018 that “[o]ur goal to incentivize more whistleblowers to come forward appears to be working.” Indeed, as we look forward into 2019 and beyond, Mr. McDonald noted at the ABA forum that “as always, our Whistleblower Office remains open and ready for business.”

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[1] 452 F.2d 1154, 1163 (8th Cir. 1971).

[2] The Advisory notes that these circumstances are illustrative. The Division will also evaluate “other things;” the Advisory is silent as to what other circumstances may be considered.