Tag Archives: commodity trading

Too Many Cooks in the Kitchen? Why Commodity Futures Trading Commission’s New Anticorruption Enforcement is Not Superfluous

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In March 2019, the Commodity Futures Trading Commission (CFTC)—the US federal regulator of commodity markets—issued a new Enforcement Advisory concerning foreign bribery in the commodities sector. According to the Advisory, the CFTC will presumptively decline to pursue civil monetary penalties against parties that timely and voluntarily self-report acts of foreign corruption that would otherwise violate the Commodities Exchange Act (CEA), so long as the self-reporting party fully cooperates, provides appropriate remediation, and there are no other aggregating factors. Of course, this Advisory implies that when these conditions are not satisfied, the CFTC will seek to impose sanctions in foreign bribery cases. And indeed, only a couple of months after the Advisory was published, the CFTC informed Glencore, a Swiss mining and trading company, that it was being investigated for corrupt practices that violated the CEA. The CFTC’s new Advisory and the Glencore investigation are a wakeup call for all market participants, especially broker-dealers and future commission merchants, that the CFTC is serious about cracking down on foreign corruption in the commodity trading sector.

This is notable because typically we think of the US addressing foreign bribery through the Foreign Corrupt Practices Act (FCPA), which is enforced by the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC). Yet while bribing foreign officials would indeed violate the FCPA, such conduct could also amount to violations of the CEA or its implementing regulations whenever commodity prices in the US are affected by the foreign corrupt practices: in such cases, the bribery could qualify as a form of prohibited fraud, false reporting, or market manipulation. For example, a commodities trader could violate CFTC regulations if it uses bribes to secure swaps or derivative contracts. Likewise, a company that paid bribes to foreign officials for purposes of monopolizing crude oil production in order to increase the commodity price and manipulate benchmarks for related derivative contracts would be in violation of the CEA’s anti-manipulation provision. The possibility of CFTC enforcement raises concerns about “piling on,” with duplicative penalties levied by separate US agencies for the same underlying conduct, but to address that concern CFTC Enforcement Director James McDonald has emphasized that the CFTC would “will give dollar-for-dollar credit for disgorgement or restitution payments in connection with other related actions.”

Of course, that only raises another question: Why not just leave the foreign bribery problem to the DOJ and SEC to address through FCPA enforcement actions? Does CFTC enforcement in the foreign bribery context really add any value? The answer to that latter question is likely yes, for at least two reasons:

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Transparentizing the Commodity Trading Sector: Why Trading Companies Must be Subject to Mandatory Payments Disclosure

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Commodity trading companies (CTCs) mainly operate as middlemen in a business model called “transit trade,” where CTCs administer the delivery chain for primary economic products (energy, metals, agriculture, etc.) from the extraction site to the ultimate buyers. Though CTCs rarely have physical possession of these commodities, the CTCs are the ones that typically build connections with foreign officials and politicians, pre-finance extraction activities by indebted governments (often through loans pledged on future commodity deliveries), and sell raw materials across the globe. Because of CTCs’ frequent interaction with foreign governments and state-owned enterprises, their complex structure, and the opacity of the commodities market, the corruption risks—particularly in the markets for “hard” commodities like oil, gas, or minerals—are especially large, as a few recent cases have highlighted (see, for example, here, here, and here). Politically exposed persons (PEPs) also take advantages of the opacity in commodity trading to launder illicit proceeds derived from corruption.

Yet in stark contrast to the focus on the corrupt activities of those companies engaged directly in extractive activities, as well as by the ultimate purchasers “upstream,” corruption by CTCs has not received much attention. This oversight should be corrected, in part by covering CTCs under the “Publish What You Pay” (PWYP) laws of their home countries—laws that usually only mandate payment disclosures relating to exploration, extraction, and processing, and that often explicitly exclude payments related to “commodity trading-related activities.” This exclusion is a mistake, as there are at least two good reasons to apply PWYP rules to CTCs: Continue reading →