The recent implementation of the Qualified Domestic Limited Partner program, otherwise known as the QDLP, has made a splash at many financial news sites, but none whatsoever with their FCPA and UKBA counterparts â€“ at least not yet.
Newly launched by the Shanghai Municipal Financial Service Office (FSO), the QDLP pilot program authorized the entry of six British and American hedge funds into Chinese markets. Given the nature of the program and recent events in China, the entry of these six funds into Chinese markets may spark FCPA and UKBA regulators’ interest in the hedge fund industry.
Western hedge funds have been trying for years to gain entry to China’s closed markets. The funds selected to participate in the first round of the QDLP program were
Winton Capital, Man Group plc, Oaktree Capital Management, Och-Ziff Capital Management, Citadel and Canyon Partners. Each are permitted to raise $50 million from Chinese investors for investment in foreign securities. Entry into the QDLP program gives these few lucky funds access to an immense population of money savers who, until now, have not been able to invest directly with Western hedge funds.
After the initial phase of the pilot program, expected to last 6-18 months, other Western hedge funds will be eligible to apply to participate in the program as well. And, if the evolution of the QDLP program tracks that of a predecessor program for domestic funds, the $50 million fundraising cap likely will increase exponentially in short order.
The tantalizing prospect of access to China’s throngs of investors comes with corruption risk, however. JPMorgan Chase’s recent troubles highlight the pitfalls of doing business in China. The SEC is currently investigating whether the bank hired the children of powerful Chinese officials in order to secure underwriting opportunities and other contracts, and Chinese authorities have already issued one indictment that may be related to the matter.
Beyond the financial industry, GlaxoSmithKline provides yet another cautionary tale about competing for business success in China. The company is alleged to have bribed Chinese doctors â€“ who typically qualify as government officials â€“ to prescribe its medications.
The QDLP program presents Western hedge funds with a legal mechanism for fundraising in an otherwise closed market. But successful participation in the program requires the chosen funds to engage in high-stakes negotiations with governmental authorities and state-owned entities at several points throughout the process.
First, as a threshold matter, the funds have to apply to and be approved by government regulators in order to participate in the coveted program. Second, the chosen hedge funds must raise capital from Chinese investors. Most likely, many of the pension funds and other investment vehicles from which they will seek to raise funds have some degree of government ownership or control. Third, once the participating hedge funds have successfully raised RMB, they must seek approval from local authorities to convert the RMB to foreign currencies for investment in foreign securities abroad.
Hedge funds have been relatively unscathed by FCPA and UKBA enforcement actions thus far. Perhaps, however, their foray into China heralds the end of regulators’ neglect of the industry. Although the participating funds are well-positioned for a windfall, each phase of the QDLP program presents significant corruption risk.
Laura Billings is a Member at law firm Miller & Chevalier. She practices in the area of white collar criminal defense, with particular emphasis on complex financial crimes. She has broad experience in internal and congressional investigations, particularly those relating to criminal tax, economic sanctions and export controls, anti-money laundering (AML), and the Foreign Corrupt Practices Act (FCPA). Before joining Miller & Chevalier, Ms. Billings served for nine years as an Assistant District Attorney in the Manhattan District Attorney’s Office. Her work at that office focused on financial investigations conducted in partnership with federal and international law enforcement and regulatory entities. The cases she handled involved issues such as use of offshore bank secrecy jurisdictions to commit securities fraud, tax evasion, and money laundering; violations of the Bank Secrecy Act; illegal money remittance operations; abuses of correspondent banking relationships; and prohibited use of the U.S. financial system by foreign entities. She can be reached at firstname.lastname@example.org or 202-626-5807.