FSA clamps down on corruption in private equity

Blackstone Group is just one of the investors to come under regulators' radar in the US in recent weeks. The world's largest private equity firm is one of several funds that are currently being investigated by the US Securities and Exchange Commission to establish whether they violated bribery laws in their dealings with sovereign wealth funds. Linked to a broader Foreign Corrupt Practices Act investigation of the banking industry, at first glance the situation appears to have little bearing on investment activity here in the UK. Yet the implementation this April of the British version of the FCPA, the UK Bribery Act - which goes above and beyond the scope of its American counterpart - could have a potentially grave impact on private equity firms on this side of the Atlantic.

"The Bribery Act is going to prevent firms from providing any kind of facilitation payments or corporate hospitality over and above certain levels," explains Nicola Green, senior associate at financial services regulatory consultancy Bovill. "It is a concern for private equity firms because they sit at the head of the chain of liability, associated with so many individuals who could potentially be involved in corrupt activity - their colleagues, portfolio companies, industry partners and service providers. They could even find themselves criminally liable."

So, with two months to go until the Act comes into force, what should private equity firms be doing to protect themselves? Having a proper procedure in place is key, says Green. "Investors need to make sure that everyone is fully aware of the implications of any back-handers. Extra due diligence may need to be carried out to fully ascertain the history of portfolio companies and ensure they haven't been involved in grease payments." A written protocol could also prove useful if the FSA starts asking questions. Though few specific guidelines have been issued on the subject thus far, showing regulators that precautionary measures have been taken could be half the battle won.

Worryingly, however, for the UK market, some firms could instead choose to relocate and focus their deals overseas to avoid being hampered by domestic legislation. Though the government argues that the Act brings the UK in line with the policies of other countries, as well as the Organisation for Economic Co-operation and Development (OECD), others maintain that the legislation in fact goes beyond that of other jurisdictions and could end up stifling local business. "There are cases where deals simply don't go through without grease payments. If the UK can't facilitate them, it may lose out," warns Green. "That's the reason the government has agreed to review the legislation under its growth review."

What no-one yet knows is the extent to which the Act will be policed. But the zest with which the Serious Fraud Office established a bribery department and staffed it with numerous new recruits suggests that Act regulators do have the resources to show the industry they mean business. Green urges caution before it's too late: "Private equity firms must give some thought to what the Act means for them. It will be no surprise if the most high-profile firms are targeted and made an example of."

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