I conclude my travel themed posts from Venice by considering the revelations seen in the renovations to St. Mark’s Basilica on St. Mark’s Square. On my previous trips to Venice, the front face of the church was covered in scaffolding for renovations which were under way. On this trip, the scaffolds were gone and the front face of the Basilica revealed glorious frescos across the top of the church, immediately under the eaves. They shimmered as the fleeting sunlight popped through the clouds from time-to-time to reveal gold inlays which literally shined in the wonderful, but all too brief, sunshine. It was truly awe-inspiring to see the church with the grime and soot cleaned away to show some of its true glory.
This week I am exploring the JP Morgan Chase (JPM) and its subsidiary, JPMorgan Securities (Asia Pacific) Limited (JPM-APAC), (collectively ‘the company’) Foreign Corrupt Practices Act (FCPA) enforcement action which resulted in a Non-Prosecution Agreement (NPA) together with a penalty of $72MM from the Department of Justice (DOJ), a Cease and Desist Order (Order) from the Securities and Exchange Commission (SEC), consisting of profit disgorgement and interest of $135MM, and an agreement with the Federal Reserve Bank (Fed) for a Consent Cease and Desist Order (Fed Order) to put in place a best practices compliance program and pay a penalty of $61MM. The total fines and penalties paid by JPM for its violations of the FCPA was $268MM. Today I want to end this consideration with an exploration of what has been revealed and the lessons to be drawn for the Chief Compliance Officer (CCO) and compliance practitioner.
Pilot Program Cause and Effect
As I laid out in some detail yesterday, the FCPA Pilot Program is not only functioning but doing so clearly to the benefit of companies which comply with its requirements. Before the Pilot Program, the reasons such companies such as Hewlett-Packard (HP) and Parker Drilling received penalties below the low end of the minimum range of the US Sentencing
Guidelines was not clear from the resolution documents. That deficiency has been largely cleared up since the implementation of the Pilot Program. On top of the lower overall DOJ assessed penalty is the stunning result of a NPA achieved by JPM. While they admitted to the criminal conduct, as set out in the NPA, they skated on receiving even a Deferred Prosecution Agreement (DPA). Of course, this matter arose long before the Pilot Program came into existence which demonstrates the non-stratified approach of the DOJ in using the tools available to it, to reward companies which engage in such behavior. The Pilot Program is certainly changing the calculus for many companies and this enforcement action will be one more piece of tangible evidence the Pilot Program is working to create an incentive for greater compliance.
Hiring of Family Members of Foreign Official
One thing that this FCPA resolution decidedly does not stand for is the proposition that a company can never hire a family member of a foreign government official or employee of a state owned enterprise. Indeed, it was one JPM-APAC compliance officer (albeit a new one) in 2013 who stopped the entire Sons and Daughters program with the following reason for denying a family member a position at the company, writing, “I’m afraid from an anti bribery [sic] and corruption standpoint, we cannot create positions to accommodate client requests….”. This statement clearly shows that when an official refers a family member for hire, a red flag should go up. It also demonstrates why compliance should be involved in any FCPA high risk endeavor. If there is no position which the candidate can fill based upon their own qualifications at your company, that should be the end of the discussion, full stop (or mike drop for more dramatic effect).
Matthew C. Stephenson, in a blog post entitled “Does an FCPA Violation Require a Quid Pro Quo? Further Developments in the JP Morgan “Sons & Daughters” Case”, analyzed the question of whether there should be prosecutions under the FCPA for the hiring of family members of foreign government officials and employees of state owned enterprises. 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.”
I adapted this approach for Human Resources (HR) and the compliance practitioner with three questions to analyze re the hiring of a family member of foreign official or employee of a state owned enterprise. They can also be installed as internal controls. I would phrase the three questions in the following order and manner:
- Does the candidate meet your firm’s hiring criteria?
- Did the foreign official whose family member you are considering for hire demand or even suggest your company hire the candidate?
- 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.
As I mentioned they can be set up as internal controls. This is another example of how a company can operationalize compliance and burn it into the fabric and DNA of an organization. Further, it provides another level of oversight or “a second set of eyes” on the hiring process around hires that are high-risk under the FCPA or other anti-bribery/anti-corruption regime such as the UK Bribery Act.
More to Come?
There has now been three FCPA enforcement actions involving the hiring of family members of government officials or employees of state owned enterprises, Qualcomm Inc. and The Bank of New York Mellon, the reported JPM resolution amount will dwarf those settlements. But there may be others in the works as regulatory files indicate that other banks are under FCPA scrutiny, including Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group Inc., HSBC Holdings PLC, Morgan Stanley and UBS Group AG. So watch this space.
A Happy Thanksgiving to All!
The JP Morgan FCPA enforcement demonstrates yet again that the DOJ Pilot Program is working.Click to tweet
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© Thomas R. Fox, 2016