In August the Securities and Exchange Commission announced a resolution with Bank of New York Mellon for violations of the Foreign Corrupt Practices Act. This was the first enforcement action around the now infamous “Princess-lings and Princelings” investigation, where U.S. 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 developed business in China), multiple U.S. companies are under scrutiny for similar conduct. 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 simply has the honor of being the first company to reach resolution on this issue. As this was the first such enforcement action, it is something the compliance professional should be aware of and put appropriate risk management around this practice going forward.

The Facts

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 by providing valuable student internships to family members of foreign government officials affiliated with a Middle Eastern sovereign wealth fund.” Andrew Ceresney, director of the SEC Enforcement Division, was quoted 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 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.”

If any question remained about whether foreign sovereign wealth funds are covered under the FCPA, that answer is now clear: They are. All corporate actions must be cloaked with this knowledge going forward.

The cease-and-desist order entered found that BNY Mellon violated the anti-bribery and internal controls provisions of the Securities Exchange Act.  BNY Mellon—without admitting or denying the findings, as often happens—agreed to pay $8.3 million in disgorgement, $1.5 million in prejudgment interest, and a $5 million penalty.  The SEC went on to say that it “considered the company’s remedial acts and its cooperation with the investigation when determining a settlement.” Two foreign officials were involved. The order specified Official X, who sought an internship position for his son and nephew; and Official Y who sought an internship position for his son.

The order recited clear evidence from the BNY Mellon officials involved that hiring the son and nephew of Official X was 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, “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 e-mail correspondence concerning Official X’s internship request, “because it was a personal favor.”

The order also featured some equally damning communications that turned up at BNY Mellon about hiring Official Y’s son.

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.

Sovereign Wealth Funds Covered Under FCPA

The underlying facts and BNY Mellon’s conduct provide some clear guidance for the chief compliance officer regarding what will be a violation of the FCPA in the hiring of sons, daughters, and close family relatives going forward. The first important lesson under this enforcement action is around the parties. Although not identified by country, the foreign governmental entity involved was a Middle Eastern Sovereign Wealth Fund. If any question remained about whether foreign sovereign wealth funds are covered under the FCPA, that answer is now clear: They are. All corporate actions must be cloaked with this knowledge going forward.

Nothing in the FCPA prohibits the hiring of a 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.”

The actions of BNY Mellon were clearly designed not simply to curry favor with the foreign governmental officials involved, but also either to grow the business or to help to retain what the company already had in place with the un-named foreign Sovereign Wealth Fund. BNY Mellon offered high-value, high-prestige summer internship programs for “undergraduates as well as a separate summer program for post-graduates 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 is 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, and BNY Mellon did not follow them.

Lessons Going Forward

The obvious starting point for the hiring of a close family member of a foreign governmental official is whether the candidate is qualified for the position. If he or she is not, that is a full stop. In the case of BNY Mellon, there was no evidence that any of the candidates had the academic background, academic credentials, leadership traits, or intangible skills to meet the bank’s normal internship hiring criteria.

But your risk management does not stop with the hiring process. If the foreign governmental official is the person who asked for the hiring of the family member, this is a red flag not to be overlooked. Your analysis needs to focus 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 clear conflict of interest that the risk cannot be managed. 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, the company 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. It’s akin to third-party management: The ongoing 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 that override the Human Resources procedures. Not only must HR be able to review the hires; you also need mechanisms to flag such hires for compliance review. Lastly, you need sufficient senior management oversight because this is such a high-risk proposition.

There may well be several such enforcement actions ahead. Companies are now on full notice of the risk and the need to manage this risk going forward.

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