CFTC’s New Target: Foreign Corrupt Practices In Derivatives And Commodities Markets

The CFTC, led by Chairman J. Christopher Giancarlo, has announced it will prosecute violations of the Commodity Exchange Act involving foreign corrupt practices. Photographer: Andrew Harrer/Bloomberg.© 2019 Bloomberg Finance LP

US efforts to prosecute foreign corrupt practices got a big boost recently with the Commodity Futures Trading Commission’s announcement that it will prosecute companies that engage in foreign bribery affecting the derivatives and swaps markets, benchmark interest rates and other aspects of commodity markets.

Importantly, the CFTC recognizes that whistleblowers will be critical to this new enforcement agenda. In its announcement, the agency encouraged whistleblowers with information about foreign corrupt practices in the commodities or derivatives markets to step forward.

CFTC Director of Enforcement James McDonald said in a speech March 6 that the CFTC already is pursuing multiple investigations.

“. . . We recognize that US derivatives and commodity markets are interconnected with other markets around the world,” McDonald said. “And we know that misconduct outside the United States, if left unchecked, can distort prices and undermine the integrity of our markets here.”

The CFTC would coordinate its foreign corruption cases involving violations of the Commodity Exchange Act with any parallel investigations being conducted by the US Securities and Exchange Commission and the US Department of Justice. The SEC and DOJ have long prosecuted foreign bribery practices under the Foreign Corrupt Practices Act.

McDonald and a CFTC enforcement advisory emphasized the benefits of self-reporting by companies and individuals. However, McDonald also made clear that if companies do not self-report, then a whistleblower might do it for them.

“. . . Our Whistleblower Office remains open and ready for business,” he said.

The announcement comes two days after the CFTC made a $2 million whistleblower award to an anonymous individual who provided critical information through independent analysis of market data that led to an enforcement action.

The CFTC has awarded whistleblowers a total of $85 million since 2014, when it made its first award. Enforcement sanctions associated with those whistleblower awards total more than $675 million.

The CFTC whistleblower program has received nearly 2,000 reports of violations in the past five years, including a record high of 760 reports in fiscal 2018 alone. Whistleblowers are turning to the CFTC because it offers them job protection, confidentiality and rewards of 10 percent to 30 percent of the monetary sanctions collected due to their information and assistance, when the sanctions total more than $1 million.

Whistleblowers are an enormously powerful tool against corruption. Bribery practices usually are exposed by insiders who step forward to report it. That happened to Olympus Corp., which paid $646 million to the US government in 2016 to settle charges that included FCPA violations. A former company employee told the government that Olympus’s Latin American subsidiary allegedly was giving cash, personal travel and free or heavily discounted equipment to government healthcare providers in order to increase medical equipment sales in Central and South America.

In his speech, McDonald gave some examples of the kinds of cases involving foreign corruption that the CFTC would pursue.

“Bribes might be employed, for example, to secure business in connection with regulated activities like trading, advising, or dealing in swaps or derivatives,” he said. “Corrupt practices might be used to manipulate benchmarks that serve as the basis for related derivatives contracts. Prices that are the product of corruption might be falsely reported to benchmarks. Or corrupt practices in any number of forms might alter the prices in commodity markets that drive U.S. derivatives prices.”

The CFTC decision to pursue foreign corrupt practices was due to work the CFTC already was doing with the SEC and DOJ on cases that affected American derivatives markets, McDonald said.

“We know that combatting corrupt practices that impact financial markets has increasingly become a team effort,” he said.

Whistleblowers are an important part of that team.