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New Cop on a Bigger Block: The CFTC Steps into Enforcement of Anti-Corruption in Commodities Markets with Vitol Settlement. – JD Supra

The Commodity Exchange Act (CEA) tasks the Commodity Futures Trading Commission (CFTC) with regulating the U.S. derivatives markets. A December 3, 2020 order filing and settling charges against Vitol Inc., required it “to pay more than $95 million in civil monetary penalties and disgorgement,” has seemingly expanded that role. The order found that Vitol had engaged in fraud and manipulation of markets through corrupt payments to foreign state-owned entities for confidential information and preferential treatment, as well as engaging in manipulative trading activity.

The Unlawful Activity by Vitol.

The activity in the Vitol case involved payments by Vitol to state-owned entities of Brazil, Ecuador, and Mexico for preferential treatment from 2005 to 2015. These payments allowed Vitol “to, among other things, rig or circumvent bidding processes for oil contracts” in these countries, which gave them an unfair advantage over competitors. Additionally in Brazil, “Vitol obtained, in addition to improper preferential treatment and access to trades, confidential information concerning the SOE’s projected supply, demand, and strategic planning related to oil products markets around the world, including U.S. markets.” Vitol also “submitted bids and purchased cargos in the trading window, in a manner and at prices intended to influence upward the level of the daily benchmark price” for multiple Platts oil benchmarks, which increased the profit that they made from the derivatives. Vitol violated Section 6(c)(1) of the CEA, 7 U.S.C. § 9 (2018), and Regulation 180.1, 17 C.F.R. § 180.1 by

(1) submitting manipulative bids and offers and otherwise engaging in manipulative trading activity relating to Platts physical fuel oil price benchmarks in order to attempt to benefit, among other positions, physical positions and related derivatives positions held on U.S. derivatives markets;

(2) using misappropriated and corruptly obtained nonpublic information material to Vitol’s transactions with the SOE or related trading, for example, through its trading of physical oil products and related derivatives contracts; and

(3) obtaining improper preferential treatment and access to trades from agents of its counterparties as a result of corrupt payments to benefit its trading of physical oil products and related derivatives contracts in the global oil markets, including in the United States, and thereby defrauding its counterparties and harming other market participants.

Specifically, these regulations “prohibit the use or attempted use of any manipulative or deceptive device, untrue or misleading statements or omissions, or deceptive practice, in connection with any swap or contract of sale of any commodity in interstate commerce, or for future delivery.” According to a CFTC press release, the Department of Justice’s Fraud Section and the United States Attorney’s Office for the Eastern District of New York pursued parallel criminal actions against Vitol for “conspiracy to violate the Foreign Corrupt Practices Act.”

The CFTC’s Jurisdiction Beyond Other Agencies.

The CFTC regulates the commodities market primarily through registering entities, taking civil actions against violators of regulations, administering an affordable and efficient adjudicatory forum for customers seeking damages, and a whistleblower program for reporting of violations. Commodities are “a physical good attributable to a natural resource that is tradable and supplied without substantial differentiation by the general public.” The commodities market regulated by the CFTC, however, includes other instruments as well, such as foreign currency transactions and swaps, which can collectively be referred to as derivatives. The regulatory jurisdiction of the CFTC is significant as it is over a global market that is the backbone of the global economy. The derivative market, traded both on public markets as well as private contracts between companies, is worth well over $200 trillion globally. The size of this market can be compared to stock exchanges, regulated by the SEC, that are valued at $25 trillion for the New York Stock Exchange and $22 trillion for NASDAQ. The CFTC has reach beyond only U.S. actors through both registration of foreign entities wishing to deal with U.S. actors as well as through cooperation with authorities in other jurisdictions.

How the Vitol Settlement Shows the CFTC’s Expanded Reach.

The CFTC’s policy of increasing enforcement of violations of the CEA through foreign corrupt payments is a significant boost to anti-corruption work done by the SEC and DOJ under the FCPA. The Vitol case shows that the CFTC will be moving to enforce bribery to secure business in connection with the commodities market; benchmark manipulation in relation to derivatives contracts; and other corrupt practices that might alter U.S. derivatives prices. The CFTC has said it intends to work with other agencies to not “pile on” with “duplicative investigations” or with remedies such as disgorgement or reimbursement. This work with other agencies was shown in the Vitol case in their work with the DOJ who brought criminal charges against Vitol under the Foreign Corrupt Practices Act.

The CFTC’s new enforcement agenda is important because the jurisdiction of the CFTA can, in some cases, reach beyond that of other agencies through jurisdiction over the large global derivatives market under the CEA and their understanding of the derivatives market to increase enforcement of anti-corruption policies along with other regulators.