EXCLUSIVE: SEC Targets Financial Services in New FCPA Probe
By Aruna Viswanatha | January 10, 2011 9:41 am

The U.S. Securities and Exchange Commission is examining the relationship between top financial institutions and sovereign wealth funds for potential violations of a U.S. foreign bribery law, according to two people familiar with the inquiry.

The SEC last week sent letters to a handful of banks asking for information about their business with the state-owned investment funds and said it was investigating conduct that may violate the Foreign Corrupt Practices Act, which bars firms with American interests from paying bribes to foreign government officials.

The broadly-worded letters resemble similar requests for information the SEC sent last year to pharmaceutical companies, and may signal a new industry-wide sweep targeting the financial services sector.

It is not clear how many letters went out or whom they were sent to.

An SEC spokesperson did not immediately respond to a request for comment.

The financial industry has largely escaped the FCPA dragnet that has ensnared oil and gas, defense, engineering and other companies that depend on business with foreign governments.

But banks’ business with sovereign wealth funds has come under some scrutiny in the past few years.

Such funds — created by governments with budget surpluses — can run into the hundreds of billions of dollars, and competition to snag them as investment partners is fierce.

There are “huge amounts of money that they invest on a regular basis, and they are constantly presented with investment opportunities,” said Edward F. Greene, a partner at Cleary Gottlieb Steen & Hamilton LLP and sovereign wealth funds expert.

While the focus of the SEC inquiry is unclear, the agency may be examining whether improper payments or gifts exchanged hands in order to influence investment decisions.

One firm, Morgan Stanley, disclosed in 2009 in had uncovered possible violations with its operations in China.

At the time, it said it fired one of its executives from its real estate investment subsidiary and disclosed potential FCPA violations to U.S. authorities.

In a February 2009 filing with the SEC, Morgan Stanley said it “had recently uncovered actions initiated by an employee based in China in an overseas real estate subsidiary that appear to have violated” the FCPA.

According to news reports at the time, the executive was Morgan Stanley’s top real estate deal maker in China and often worked closely with an investing arm of the Chinese government.

Some of the largest sovereign wealth funds operate in China, Singapore, Kazakhstan and countries in the Middle East, including the United Arab Emirates, Saudi Arabia, Kuwait, and Qatar.

This post has been updated.

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