Three Key QuestionsOne of the top academic commentators in the anti-corruption space is Matthew C. Stephenson, co-founder of the Global Anticorruption Blog. I was intrigued by Stephenson’s piece, entitled “Does an FCPA Violation Require a Quid Pro Quo? Further Developments in the JP Morgan “Sons & Daughters” Case”, where he analyzes whether there should be prosecutions under the Foreign Corrupt Practices Act (FCPA) for the hiring of family members of foreign government officials and employees of state owned enterprises, under the context of the reports that JPMorgan is in settlement discussions with the Department of Justice (DOJ) for its ‘Sons & Daughters’ hiring initiative which alleged targeted children of Chinese officials for employment to obtain favor with their parents.

I wanted to focus on Stephenson’s analysis of what he phrased as ‘three key considerations’ around analyzing the hiring of family members. He wrote, “The three key considerations, to my mind, ought to be (1) the degree of connection between the job offer and a particular official decision, or set of decisions (as distinct from general goodwill and connections); (2) the degree to which the official indicated that he very much hoped the firm would hire the relative (even if there was not enough evidence of agreement to establish a quid pro quo); and (3) the degree to which the firm relaxed its ordinary standards to hire the official’s relative.”

As most compliance practitioners are aware, there are two prior Securities and Exchange Commission (SEC) led FCPA enforcements around the hiring of family members in violation of the FCPA. These actions were involving Bank of New York Mellon (BNY Mellon) and Qualcomm. In both of these enforcement actions, I believed the key factor was No. 3; “the degree to which the firm relaxed its ordinary standards to hire the official’s relative.” I find this analysis to be the most persuasive because if a candidate does not meet your company’s minimum hiring standards, there is some other reason for making the employment offer. If that reason cannot be articulated from the business perspective, there must be some other reason. Moreover, if someone is so unqualified that employing them will negatively impact the company, there must be another very good reason to hire them, such as providing a benefit to their family member, who is a foreign official or other cover person under the FCPA.

In reviewing the enforcement actions it appears the factors Stephenson set forth are present in each Cease and Desist Order (Order). In the Qualcomm SEC enforcement action, involving the hiring of a son of an employee of a state owned enterprise in China, it was revealed in the Order that after the initial employment interview the candidate was rated as a “No Hire” because not only was he not a “skill match” for the company but he did not even “meet the minimum requirements for moving forward with an offer”. Finally, among the Qualcomm team involved in the interview process, “there was an agreement that he would be a drain (not even neutral) on teams he would join.” Yet he was offered a job as a “special favor”.

Further prongs 2 & 3 were met in the Qualcomm enforcement action. As stated in the Order, “As one Qualcomm employee noted, “We received a request from the GM of [the telecom company’s subsidiary] to help find an internship position for her daughter (currently studying in the U.S.) within QC. I discussed this with [high level official] and determined that it would be important for us to support given our cooperation with [the subsidiary].”” Moreover, in addition to the Chinese state owned employee requesting Qualcomm hire his daughter, the company expected he would reciprocate by favoring the company. The Order stated, “Qualcomm employees understood that the daughter’s “parents are [SOE 2 subsidiary] Dept. GM level and gave us great help for Q.C. new business development.””

In the BNY Mellon enforcement action, the Order noted, “Added to all of this was that none of the three individuals met the BNY Mellon requirements for its internship program; they met neither the academic or professional requirement to obtain an internship. BNY Mellon not only waived its own hiring requirements, it did not even go through the pretense of meeting with them or interviewing them. Finally, according to the Order, these three individuals were provided with “bespoke internships” that “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.”

Yet in the BNY Mellon case, it was very clear that prongs 1 & 2 of Stephenson’s formulation was met. The Order also specified how the hiring of the relatives led directly to BNY Mellon obtaining and retaining business. One foreign government official, (Official X), “made a personal and discreet request that BNY Mellon provide internships to two of his relatives: his son, Intern A, and nephew, Intern B. As a Middle Eastern Sovereign Wealth Fund department head, Official X had authority over allocations of new assets to existing managers such as the Boutique, and was viewed within BNY Mellon as a “key decision maker” at the Middle Eastern Sovereign Wealth Fund. Official X later persistently inquired of BNY Mellon employees concerning the status of his internship request, asking whether and when BNY Mellon would deliver the internships. At one point, Official X said to his primary contact at BNY Mellon that the request represented an “opportunity” for BNY Mellon, and that the official could secure internships for his family members from a competitor of BNY Mellon if it did not satisfy his personal request.”

There were clear statements by the BNY Mellon official involved that hiring this son and nephew were being done to obtain or retain business. As reported in the Order, “BNY Mellon was “not in a position to reject the request from a commercial point of view” even though it was a “personal request” from Official X. The employee stated: “by not allowing the internships to take place, we potentially jeopardize our mandate with [the Middle Eastern Sovereign Wealth Fund].” Another BNY Mellon employee was quoted as saying, ““I want more money for this. I expect more for this.””

The second foreign government official, (Official Y), “asked through a subordinate European Office employee that BNY Mellon provide an internship to the official’s son, Intern C. As a senior official at the European Office, Official Y had authority to make decisions directly impacting BNY Mellon’s business. Internal BNY Mellon documents reflected Official Y’s importance in this regard, stating that Official Y was “crucial to both retaining and gaining new business” for BNY Mellon. One or more European Office employees acting on Official Y’s behalf later inquired repeatedly about the status and details of the internship, including during discussions of the transfer of European Office assets to BNY Mellon. At the time of Official Y’s initial request, a number of recent client service issues had threatened to weaken the relationship between BNY Mellon and the European Office.”

In addition in laying out an analysis, Stephenson has provided the compliance practitioner with three easy, straightforward questions with which to begin any analysis in the hiring of a family member of foreign official or employee of a state owned enterprise. I would phrase the three questions in the following order and manner:

  1. Does the candidate meet your firm’s hiring criteria?
  2. Did the foreign official whose family member you are considering for hire demand or even suggest your company hire the candidate?
  3. Has the foreign official made or will make a decision that will benefit your company?

If the answer to the first question is No and the second two inquiries YES, you may well be in a high-risk area of violating the FCPA. You should investigate the matter quite thoroughly and carefully. Finally, whatever you do, Document, Document, and Document your investigation, both the findings and the conclusions.


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© Thomas R. Fox, 2016