Widespread reports of charges of bribery and money laundering associated with the alleged theft of billions of dollars from the Malaysian sovereign wealth fund 1 Malaysia Development Berhad (1MDB) have highlighted the anti-corruption compliance risks associated with sovereign wealth funds (SWFs). Although the staggering volume of assets these entities manage makes them appealing clients for financial institutions, they present significant compliance risks as well. This article discusses recent enforcement actions involving SWFs, anti-corruption compliance risks associated with doing business with SWFs, and ways such risks may be mitigated.

The intersection of SWFs and anti-corruption compliance

SWFs are investment vehicles created by national governments to invest their nation’s economic reserves. Some of the most prominent SWFs include Government Pension Fund Global (Norway), Abu Dhabi Investment Authority (UAE), China Investment Corporation, Kuwait Investment Authority, and SAMA Foreign Holdings (Saudi Arabia). SWFs are characterised by their vast resources – in 2018, SWFs’ total assets were estimated to be $7.45 trillion – which drive their influence in international financial markets. These enormous resources, among other things, make financial institutions eager to advise, transact with and execute trades for these entities.

As SWFs rose to prominence in the 2000s, they quickly attracted the attention of enforcement authorities. In October 2008, the US Department of Justice (DOJ) described SWFs as “an area at the top of the Justice Department’s hit list”. Then, in 2011, the US Securities and Exchange Commission (SEC) sent letters to a number of investment advisers requesting, among other things: (i) descriptions of the nature of the relationships between the firms and SWFs; (ii) information concerning assets the advisory firms managed for SWFs; (iii) copies of asset management contracts and other agreements; (iv) lists of third parties associated with the firms’ relationships with SWFs; and (v) information concerning the firms’ compliance with the US Foreign Corrupt Practices Act (FCPA).

Jan-Mar 2019 Issue

Shearman & Sterling LLP