FCPA Compliance and Ethics Blog

August 19, 2015

BNY Mellon Settles First Sons and Daughters (and Nephews) FCPA Hiring Matter – Part I

Prince and PrincessYesterday the Securities and Exchange Commission (SEC) announced a resolution with Bank of New York Mellon Corporation (BNY Mellon) for violations of the Foreign Corrupt Practices Act (FCPA). This was the first enforcement action around the now infamous Princesslings and Princelings investigations where US companies hired the sons and daughters of foreign government officials to curry favor and obtain or retain business.

While JPMorgan Chase has garnered the most attention around this issue, probably because of its notorious spreadsheet tracking of sons and daughters hires to develop business in China, there are multiple US companies under scrutiny for similar conduct. The FCPA Blog has reported that Credit Suisse, Goldman Sachs, Morgan Stanley, Citigroup, and UBS are all under investigation by the SEC for their hiring practices around the sons and daughters of foreign government officials. BNY Mellon has the honor of being the first company to reach resolution on this issue.

This is an important issue for many companies going forward and since this is the initial enforcement action on this issue, I am going to take a deep dive into the matter over the next couple of days. Today, I will discuss the facts of the case and tomorrow I will discuss not only the lessons to be learned from this FCPA enforcement action but also how the Chief Compliance Officer (CCO) or compliance practitioner can use those facts to graft a hiring program around the sons and daughters of foreign government officials which will not violate the FCPA.

In its Press Release, the SEC noted, “The Securities and Exchange Commission today announced that BNY Mellon has agreed to pay $14.8 million to settle charges that it violated the Foreign Corrupt Practices Act (FCPA) by providing valuable student internships to family members of foreign government officials affiliated with a Middle Eastern sovereign wealth fund.” Andrew J. Ceresney, Director of the SEC Enforcement Division, was quoted in the Press Release as stating, “The FCPA prohibits companies from improperly influencing foreign officials with ‘anything of value,’ and therefore cash payments, gifts, internships, or anything else used in corrupt attempts to win business can expose companies to an SEC enforcement action. BNY Mellon deserved significant sanction for providing valuable student internships to family members of foreign officials to influence their actions.” Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit, said, “Financial services providers face unique corruption risks when seeking to win business in international markets, and we will continue to scrutinize industries that have not been vigilant about complying with the FCPA.”

The Cease and Desist Order (Order) entered found that BNY Mellon violated the anti-bribery and internal controls provisions of the Securities Exchange Act of 1934.  BNY Mellon, “Without admitting or denying the findings, the company agreed to pay $8.3 million in disgorgement, $1.5 million in prejudgment interest, and a $5 million penalty. The SEC considered the company’s remedial acts and its cooperation with the investigation when determining a settlement.”

The underlying facts and BNY Mellon’s conduct as laid out in the Order provide some clear guidance for the CCO or compliance practitioner regarding what will be a violation of the FCPA in terms of hiring sons, daughters and close family relatives going forward. It should be noted that two of the hires were sons of foreign governmental officials and one was a nephew. However, the first important lesson under this enforcement action is around the parties involved. Although not identified by country, the foreign governmental entity involved was a Middle Eastern Sovereign Wealth Fund. If there was any question as to whether foreign sovereign wealth funds were covered under the FCPA, that answer is now clear, they are covered. All corporate actions should be cloaked with this knowledge going forward.

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 employee was quoted as saying, ““I want more money for this. I expect more for this. . . . We’re doing [Official X] a favor.”
  • Yet another employee was quoted as saying, “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).”
  • Finally, to demonstrate the nefarious nature of the arrangement and lack of transparency in the entire process, this final BNY Mellon employee said, ““[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.”

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.”

When it came to hiring Official Y’s son there were some equally damning communications at BNY Mellon that were featured in the Order.

  • The BNY Mellon sovereign wealth fund relationship manager said, “that granting Official Y’s request was likely to “influence any future decisions taken within [the Middle Eastern Sovereign Wealth Fund].”
  • The same person also worried aloud that if BNY Mellon did not hire the son, it “might well lose market share to a competitor as a result.”
  • He went on to write ““Its [sic] silly things like this that help influence who ends up with more assets / retaining dominant position.”
  • Finally, he noted that to accede to Official Y’s request was the “only way” to increase business share.

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, these three individuals were provided with “bespoke internships 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 penalty was also interesting. As set out in the order BNY Mellon agreed to the following penalty amount: “disgorgement of $8,300,000, prejudgment interest of $1,500,000 and a civil money penalty in the amount of $5,000,000, for a total payment of $14,800,000.” The SEC noted the cooperation efforts of the bank in stating, “Respondent acknowledges that the Commission is not imposing a civil penalty in excess of $5,000,000 based upon its cooperation in a Commission investigation.” Further, BNY Mellon engaged in extensive remediation. The Order stated, “Prior to the investigation by the Commission of the Interns, BNY Mellon had begun a process of enhancing its anti-corruption compliance program including: making changes to the Anti-Corruption Policy to explicitly address the hiring of government officials’ relatives; requiring that every application for a full-time hire or an internship be routed through a centralized HR application process; enhancing its Code of Conduct to require that every year each employee certifies that he or she is not responsible for hiring through a non-centralized channel; and requiring as part of a centralized application process that each applicant indicate whether she or a close personal associate is or has recently been a government official, and, if so, additional review by BNY Mellon’s anti-corruption office is mandated.”

Tomorrow I will look at lessons learned for the CCO and compliance practitioner and how you can avoid the missteps of BNY Mellon in your hiring program going forward.

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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