Lessons LearnedIn yesterday’s post I reviewed the Securities and Exchange Commission (SEC) Foreign Corrupt Practices Act (FCPA) enforcement action involving the Bank of New York Mellon Corporation (BNY Mellon) around its hiring of sons and nephews of foreign governmental officials to obtain or retain business from certain foreign Sovereign Wealth Funds. I discussed the underlying facts and penalties assessed against BNY Mellon as laid out in the SEC Cease and Desist Order (the “Order”). Today I want to provide some guidance on what this enforcement action may mean for companies going forward when hiring the sons and daughters or close family relatives of foreign government officials.

The first thing to remember is there is nothing in the FCPA which prohibits the hiring of a son, daughter or close family member of a foreign government official. What the FCPA does make illegal is an action where a company “or any officer, director, employee, or agent acting on behalf of such issuer, in order to obtain or retain business, from corruptly giving or authorizing the giving of, anything of value to any foreign official for the purposes of influencing the official or inducing the official to act in violation of his or her lawful duties, or to secure any improper advantage, or to induce a foreign official to use his influence with a foreign governmental instrumentality to influence any act or decision of such government or instrumentality.” [citation omitted]

The actions of BNY Mellon were clearly designed to not simply curry favor with the foreign governmental officials involved but also to either grow the business or help to retain what the company already had in place with the un-named foreign Sovereign Wealth Fund. At this point most companies have a written FCPA compliance program in place; consisting of policies and procedures. Note, this does not mean that the compliance program is effective because for a compliance program to be effective, a company must actually be doing compliance. Many FCPA enforcement actions occur because an exception was granted to a policy or procedure and either the reason for granting the exception was inappropriate or there was no documentation as to why the exception was granted. In the case of BNY Mellon, it was the latter.

BNY Mellon offered high value, high prestige summer internship programs for “undergraduates as well as a separate summer program for postgraduates actively pursuing a Master of Business Administration (MBA) or similar degree. Admission to the BNY Mellon postgraduate internship program was highly competitive and characterized by stringent hiring standards.” The main purpose of these internships was to give BNY Mellon an opportunity to evaluate the interns as potential permanent hires to the company. There was a designated track for nomination to the internship program and internal company evaluation prior to offering candidates an intern position. In other words, there were policies and procedures around the process but BNY Mellon did not follow them.

Hiring Process

The first Red Flag, which BNY Mellon seemingly ignored in this entire process, was that each of the candidates were recommended to the firm by foreign governmental officials who held control of business relations between Sovereign Wealth Funds and the bank. Their requests that their close family relations be hired by BNY Mellon was contra to the banks own process of selecting candidates for its internship program from a exclusive group of universities and colleges in the US and UK. The Order noted, “Successful applicants had to achieve a minimum grade point average, and had to advance through multiple rounds of interviews in addition to having relevant prior work experience and a demonstrated affinity for and interest in financial services work.”

None of these indicia were present in the hiring of the foreign governmental official’s relatives at issue. There was no evidence the candidates met any of BNY Mellon’s own internal criteria for consideration to the internship program. Indeed, as the Order stated, “as recent graduates not enrolled in any degree program, the Interns did not meet the basic entrance standard for a BNY Mellon postgraduate internship.” Finally, to top it off, all three were hired sight unseen and “BNY Mellon decided to hire the Interns before even meeting or interviewing them.” 

The Internships

But BNY Mellon’s violative conduct did not stop by simply hiring the three close family relatives for its internship program. The three persons got benefits far more than simply a regular internship program. BNY Mellon designed special “Bespoke” internship programs for the three interns. As requested by their fathers and uncle, the three interns received “customized work experiences” which “were not regular undergraduate or graduate summer internships at all, but customized one-of-a-kind training programs. The internships were valuable work experience, and the requesting officials derived significant personal value in being able to confer this benefit on their family members.”

The internships were abnormally long, lasting six months, which was twice the normal length. Additionally they were “rotational in nature, meaning that Interns A, B and C had the opportunity to work in a number of different BNY Mellon business units, enhancing the value of the work experience beyond that normally provided to BNY Mellon interns.”

The Costs

In addition to the exceptions granted in the hiring process and the internships themselves, BNY Mellon also paid out money and non-monetary benefits in a manner different to others in the internship program. The Order stated, “BNY Mellon determined, because Interns A and B had already graduated from college, that Interns A and B should be paid above the normal salary scale for BNY Mellon undergraduate interns but below the scale for postgraduate interns. Intern C was unpaid. BNY Mellon also coordinated obtaining visas for all three of the Interns so that they could travel from the Middle East to work in the countries in which they were placed. BNY Mellon paid the legal fees and filing costs related to the visas. As the BNY Mellon Asset Management employee responsible for arranging two of the three internships wrote in a contemporaneous e-mail, the internships constituted an “expensive favor” for the requesting foreign official.” Indeed the Order cited to an email from one BNY Mellon employee who wrote, “I am working on an expensive ‘favor’ for [Official X] – an internship for his son and cousin (don’t mention to him as this is not official).” Further, BNY Mellon knew the request and accommodation was unethical, if not illegal, as the same employee wrote in another email, ““[W]e have to be careful about this. This is more of a personal request . . . [Official X] doesn’t want

[the Middle Eastern Sovereign Wealth Fund] to know about it.” The same employee later directed his administrative assistant to refrain from sending email correspondence concerning Official X’s internship request “because it was a personal favor.”

Lessons Learned Going Forward

I must emphasize once again that there is nothing illegal around the hiring of a close family member of a foreign governmental official. It does however present a higher risk for indicia of bribery and corruption and violation of the FCPA. A higher FCPA risk means you need to evaluate that risk more closely and manage that risk accordingly.

The obvious starting point for any hiring of a close family member of a foreign governmental official is whether the candidate is qualified for the position. If they are not qualified it is ‘Full Stop’ at that point. In the case of BNY Mellon there was no evidence any of the candidates had the academic background, the academic credentials, leadership traits or intangible skills to meet the bank’s normal internship hiring criteria. As with any other anomaly granted in a company’s normal process, there must be a documented reason for the exception, review by appropriate authority of the exception and documentation as to why the exception was granted. None of these steps were present in the BNY Mellon matter. Put another way, if you are hiring a family member or close relative of a foreign government official for any reason other than merit, it had better be a darn good one and well-documented as to your decision-making calculus with appropriate senior management oversight.

But your risk management does not stop simply with the hiring process. If the foreign governmental official is the person who made the request for the hiring of the family member, this is a Red Flag not to be overlooked. Your analysis needs to be on the role of that foreign governmental official in awarding new business to your company or in retaining old business. If the foreign governmental official has direct or even strong indirect control over such business relation, this may present such a direct conflict of interest, this may be a risk that you cannot manage. A good rule of thumb here is whether there is full transparency in the hiring with the foreign government involved with your company. In the case of BNY Mellon, they did not want anyone in the Sovereign Wealth Fund to know BNY Mellon had hired the son or nephew. That is a clear sign transparency is lacking and someone, somewhere is engaging in unethical conduct, if not breaking the law.

Finally, if you do decide to move forward and hire the close family member, you need to assign that new hire to work not associated with the business relationship between your company and the foreign government involved. Just as in the lifecycle of third party management, managing the relationship after a contract is inked is in many ways the most critical element; the same is true in the employment relationship involving close family members of foreign government officials.

Ultimately, you need to have internal controls to ensure effective compliance going forward. You cannot have customer relationship managers making the calls on hiring which over-ride the Human Resources (HR) procedures. There must be not only HR review but also mechanisms to flag for compliance review such hires. Lastly, there needs to be sufficient senior management oversight because this is such a high-risk proposition.

I hope you have enjoyed and found this two-part series on the BNY Mellon FCPA enforcement action and the lessons learned from it useful. The SEC Order provides a clear road map to the Chief Compliance Officer (CCO), compliance practitioner, HR professional or anyone else who reads it on the steps you should take in the hiring of a close family member of a foreign government official with which you are doing business. It may take some additional effort than simply having your business unit employees make the call on who to award prestigious internships to in order to obtain or retain business but in the long run you will have a better run company for doing so. FCPA enforcement is not a game and by doing compliance will make your company a more accurtely operated  entity.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2015

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