CFTC Enforcement Announcement: Commodity Exchange Act Violations Involving FCPA

On March 6, 2019, at the American Bar Association’s (ABA) National Institute on White Collar Crime, Commodity Futures Trading Commission (CFTC) Division of Enforcement Director James McDonald announced a new Enforcement Advisory regarding guidance on self-reporting violations of the Commodity Exchange Act (CEA) carried out through foreign corrupt practices. [1] At the same time, he indicated that the CFTC is working with other enforcement agencies to consider when actions that might violate the Foreign Corrupt Practices Act (FCPA) may also violate the CEA. This suggests that the CFTC continues to explore new areas in which to apply its expanded authority over fraud and manipulation provided by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

Director McDonald’s remarks to the ABA’s Institute provided some color on the type of misconduct that would fall within the CFTC’s increased scrutiny, indicating that his examples are based on current investigations. McDonald stated that bribes could be used to secure business in connection with CFTC-regulated activities, such as trading, advising or dealing in swaps or derivatives over which the CFTC has jurisdiction. He drew particular attention to using corrupt practices to manipulate pricing benchmarks for derivatives contracts, falsely reporting prices to benchmarks that are the product of corruption or altering commodity market prices through corrupt practices that in turn could affect derivatives prices.

McDonald emphasized that while the CFTC will focus on fraud, manipulation, false reporting or other types of violations the CFTC may bring under the CEA, [2] it will coordinate with the Department of Justice (DOJ) or Securities and Exchange Commission (SEC) for misconduct it identifies that also runs afoul of the FCPA. In such instances, the CFTC will coordinate efforts with other enforcement authorities while seeking to avoid duplicate steps in parallel investigations each may bring.

The Advisory, issued the same day as McDonald’s remarks, represents the most recent step the CFTC has taken under Chairman Christopher Giancarlo’s leadership to adopt measures that incentivize a culture of compliance and ethical corporate behavior. The Advisory applies to companies and individuals that are not registered—and are not required to register—with the CFTC who voluntarily and timely self-report violations of the CEA involving foreign corrupt practices. The company or individual must fully cooperate with the Division and appropriately remediate the misconduct at issue following such disclosure. In these circumstances, and absent any aggravating factors, the Division will apply a presumption that it will not recommend a civil monetary penalty to the Commission as part of its resolution. [3]

The Advisory makes clear that the presumption of a zero monetary penalty does not extend to registered entities and individuals that self-report the same type of misconduct. Registrants have an independent obligation to report any material noncompliance issues under the CEA, which includes any foreign corrupt practices that violate the CEA. While the Division will not erase a registrant’s monetary penalty in such circumstances, it will still follow its Enforcement Advisories from 2017 that set out factors the Division will consider in evaluating cooperation and voluntary disclosures. Registrants may still receive a recommended reduction in the monetary penalties that would otherwise apply—including no penalty in certain circumstances—for timely and voluntarily self-reporting misconduct, fully cooperating with the Division of Enforcement’s investigation and appropriately remediating the misconduct at issue. [4]

A nonregistered party that voluntarily discloses may still face other penalties, too, as the Advisory presumptively dismisses only monetary penalties. The company or individual will still be required to pay all disgorgement, forfeiture and/or restitution arising from the misconduct, although McDonald noted that the CFTC will give credit for disgorgement or restitution paid in connection with related enforcement actions. In addition, the Advisory makes clear that the Division will seek all available remedies against companies or individuals implicated in misconduct identified in this Advisory who do not voluntarily disclose, including potentially substantial monetary penalties.

A theme of Director McDonald’s tenure at the CFTC has been prioritized coordination with its U.S. law enforcement partners as well as international regulators. The DOJ and SEC have actively investigated and charged companies and individuals with criminal and civil violations of the FCPA for some time, particularly over the last decade. [5] The CFTC’s apparent new focus on applying the CEA to these activities represents an interesting overlap between enforcement mechanisms as well as a further indication that the CFTC is prepared to extend its enforcement reach, particularly under what it sees as its broader fraud authority. This requires all market participants, whether trading derivatives or solely cash market products, to think about how their conduct might be subject to CFTC scrutiny through the Division’s new filter. The Advisory reinforces the importance of fostering and maintaining a strong culture of compliance and ethical behavior and in quickly identifying and remedying misconduct should it arise.

Endnotes

1U.S. Commodity Futures Trading Commission, Enforcement Advisory: Advisory on Self Reporting and Cooperation for CEA Violations involving Foreign Corrupt Practices (March 6, 2019) [hereinafter Advisory], available at https://www.cftc.gov/sites/default/files/2019-03/enfadvisoryselfreporting030619.pdf.(go back)

2Of particular interest to U.S. companies that engage in activities outside of the United States, such as energy and mining companies, is the CFTC’s antifraud and anti-manipulation authority over spot and forward commodity transactions. Pursuant to CFTC Regulation 180.1, it is unlawful for any person, directly or indirectly, in connection with any derivatives transaction or any contract of sale of any commodity in interstate commerce, to intentionally or recklessly use or employ any manipulative device, scheme or artifice to defraud or engage in any act, practice or course of business that operates or would operate as a fraud or deceit upon any person. If a U.S. company engages in a violation of the FCPA outside the United States, that is, a deceitful course of business, in connection with commodities transactions that will occur in the United States or that will affect the price of commodities in the United States, the CFTC could arguably seek to assert its investigative and enforcement jurisdiction pursuant to Regulation 180.1.(go back)

3Advisory at 1. Aggravating factors may include pervasive or repeated misconduct or misconduct involving executive or senior management.(go back)

4U.S. Commodity Futures Trading Commission, Enforcement Advisory: Updated Advisory on Self Reporting and Full Cooperation (Sept. 25, 2017); Enforcement Advisory: Cooperation Factors in Enforcement Division Sanction Recommendations for Companies (Jan. 19, 2017); Enforcement Advisory: Cooperation Factors in Enforcement Division Sanction Recommendations for Individuals (Jan. 19, 2017).(go back)

5See Sidley Austin LLP, Anti-Corruption Quarterly (Feb. 1, 2019), available at https://www.sidley.com/-/media/update-pdfs/2019/02/anticorruption-quarterly-newsletter-q4-2018.pdf; see also Sidley Austin LLP, Anti-Corruption Quarterly (Feb. 1, 2018), available at https://www.sidley.com/-/media/update-pdfs/2018/02/anticorruption-quarterly-newsletter-q4-2017.pdf.(go back)