FCPA Compliance and Ethics Blog

August 20, 2015

BNY Mellon and Lessons Learned In Hiring Family Members – Part II

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

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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