Several enforcement actions resulting from violations of the Foreign Corrupt Practices Act over the past year have elicited much debate over the government’s arguably expanding application of the term “anything of value.” These enforcement trends on their own offer some valuable guidance for the compliance community.
First, a review of the statute is in order: When enacting the FCPA, Congress recognized that bribes can take many forms. Thus, the FCPA clearly states that it prohibits the offer or authorization of payment or promise or payment of money, gifts, or “anything of value to a foreign official” if the intent is to improperly influence the official to take action or obtain an improper advantage for the purpose of obtaining or retaining business.
The term “anything of value” means precisely that: anything of value. The real debate concerns the scope of “anything of value” where the government brings an action for what they describe to be “intangible benefits.” FCPA cases that have garnered a healthy amount of discussion in this area have centered on two key areas: improper hiring practices and charitable donations.
Improper hiring-practice cases. Compliance officers looking for a real-world example of hiring practices that will trigger an FCPA enforcement action don’t have to look any further than JPMorgan. JPMorgan in November 2016 agreed to pay a total of more than $264 million in sanctions resulting from the firm’s referral hiring practices.
In that case, the SEC charged JPMorgan with violations of the anti-bribery, books and records, and internal accounting controls provisions of the FCPA related to its hiring of relatives and friends of government officials and executives at Chinese state-owned entities in order to obtain business from those entities.
Recognizing the FCPA risk, JPMorgan’s legal and compliance team created a review process that included a “Sons & Daughters” questionnaire seeking the reasons for referral hires, the merits of such candidates apart from the referral, and the expected benefit, if any, to JPMorgan expected from the referral hire. The review became a mere formality, however, when employees began providing inaccurate or incomplete answers to secure approval for hires without revealing the links to business as a result of the hires.
“Indeed, in some instances, questionnaires were modified so that certain referral hires linked to business would be approved, even though the initial draft of the questionnaire made clear the direct link to business that would result from the hiring,” Andrew Ceresney said of the JPMorgan case during a keynote speech at the International Conference on the FCPA in November.
JPMorgan even kept a spreadsheet to track the revenues it received from clients whose referrals were rewarded with jobs under the Sons & Daughters program, “which demonstrated JPMorgan’s view that the foreign officials were indeed influenced to take action,” Ceresney noted. Not a single referral hire request was denied.
The JPMorgan resolution is just the latest example of a company that has resolved charges for FCPA violations related to the hiring of foreign government officials’ relatives. In March 2015, wireless telecommunications maker Qualcomm reached a $7.5 million settlement with the SEC to resolve charges that it violated the FCPA by offering and providing full-time employment and paid internships primarily for the sons and daughters of Chinese government officials to obtain business (commonly referred to as “Princeling” cases).
And in a third hiring-practices case, Bank of New York Mellon in August 2015 reached a $14.8 million settlement with the SEC for providing internships to three family members of two senior government officials affiliated with a Middle Eastern sovereign wealth fund with which BNY Mellon was seeking to maintain and expand its business.
Compliance dilemmas. “What I think you can draw from these [princeling] cases is that if the government sees something it doesn’t like and thinks is inappropriate in some way, they will stretch the statute in some cases,” says Philip Urofsky, a partner in the litigation group at law firm Shearman & Sterling.
In all three cases—JP Morgan, Qualcomm, and BNY Mellon—enforcement authorities repeatedly emphasized that the hires were made without following the companies’ standard hiring procedures and that documentation showed that the candidates were not qualified. But what about those circumstances in which referral candidates are qualified and have the same high-quality education as other job candidates without the foreign official connection?
“Some have asked whether these hiring practices cases tread too far into hiring decisions made by institutions, which are complex and typically based on many factors. I think the facts of [JPMorgan’s] case ... put to rest any such claim.”
Andrew Ceresney, Director, SEC Division of Enforcement
It’s certainly not unusual for an official to make a hiring referral. “That has to be a red flag, but it may not be a disqualifying red flag,” Urofsky says. “Companies here in the United States make that decision all the time.”
Therein lies the thorny compliance issue for compliance and HR personnel alike: When does giving a job to a government official’s friend or relative distort that official’s decision making? How can compliance and HR personnel arrive at that conclusion? Exactly under what circumstances is it OK to hire a government official’s friend or relative?
During his keynote speech, Ceresney attempted to diffuse some of these concerns. “Some have asked whether these hiring practices cases tread too far into hiring decisions made by institutions, which are complex and typically based on many factors,” he said. The facts in the JPMorgan case should “put to rest any such claim,” he said.
Specifically, JPMorgan’s Sons & Daughters program bypassed the firm’s normal hiring process, and many candidates “did not meet the minimum qualifications for their positions,” Ceresney stressed. “Nor did they undergo the typical rigorous multi-round interviews.”
Furthermore, JPMorgan personnel spoke openly about the tangible benefits they were getting by keeping track of the banking revenue that could be generated from the referring client in exchange for the hire. Although the outcome of each hiring practice case will depend on particular facts and circumstances, Ceresney noted, the JPMorgan matter involved “clear violations of the FCPA.”
The facts in the Qualcomm case were equally egregious. In one example, Qualcomm provided the son of a foreign official an internship and later permanent employment, even though his initial job interview resulted in a “no hire” decision because he was not a “skills match” and did not “meet the minimum requirements for moving forward with an offer,” the SEC order stated. “Those who interviewed him agreed ‘he would be a drain on teams he would join.’ ”
The overall message that JPMorgan, Qualcomm, and BNY Mellon hiring cases impart is not that companies shouldn’t provide internships or employment to relatives of government officials. Rather, the message is that, if they are going to do so, those hires require enhanced scrutiny, oversight, and monitoring.
Clearly, HR policies and procedures should be carefully followed during the hiring process, ensuring that practices comply with the FCPA, and any deviations should be justifiable and documented. Furthermore, the company should take care to ensure that referral candidates are qualified to actually do the job they’re hired for.
Below is an excerpt from a white paper published by TRACE International on “What you should know about 'anything of value' under the FCPA.”
As the U.S. government continues to interpret the phrase “anything of value” quite broadly, companies face an increasing risk of liability under the FCPA. To reduce this risk, companies should develop and implement robust compliance policies and procedures that address this rapidly developing area of enforcement. The following compliance tips will help companies to mitigate or even prevent potential FCPA violations:
Companies must keep in mind that the universe of potential bribes is virtually limitless: The government interprets the phrase “anything of value” broadly and the FCPA does not impose a minimum dollar threshold on gifts or payments. Thus, the universe of “things of value” that may constitute bribes is vast and companies must be aware of the risks associated with the provision of “things of value” to government officials. Companies must train employees to recognize traditional and non-traditional sources of bribery.
This is not the commercial sector: Many FCPA cases involve gifts and hospitality expenditures that may be legal to exchange in a private-sector setting. Any “thing of value” could be viewed as a bribe if perceived to be valuable by the recipient and given in an attempt to influence a foreign government official.
Reduce your risk: Companies may reduce the risk of potential FCPA liability by implementing robust, risk-based compliance policies and procedures. This must include comprehensive gift and hospitality and charitable donation policies as well. Companies should require employees—particularly those that interact with foreign officials—to undergo routine training to ensure they understand the expansive nature of the FCPA. Companies must also ensure that they actually follow their anti-corruption policies and procedures, as the government has treated the failure to do so harshly in recent FCPA enforcement actions.
Gifts and Hospitality Best Practices: Companies should ensure that their compliance policies and procedures reflect industry best practices with regard to gifts and hospitality. The policies should be regularly reviewed and updated to ensure they capture the lessons learned from recent enforcement actions. Companies should also implement robust tracking and accounting procedures to ensure all gifts and hospitality are monitored and documented.
Stay within the contours of the “promotional” defense: Althugh the FCPA’s allowance for reasonable and bona fide promotional expenditures is quite generous, companies must monitor any expenditures that may fall within the perimeters of this affirmative defense to ensure compliance with the statute. Indeed, companies should prohibit the payment of promotional expenses (i.e., travel, hospitality, entertainment) on behalf of foreign officials without the written approval of the company’s compliance department. Compliance professionals must ensure that any requested expenditures of this nature are reasonable and serve a legitimate business purpose.
Is that donation truly charitable?: Companies should develop and implement robust policies and procedures regarding charitable donations. Donations must be reasonable, appropriate, lawful, consistent with the company’s policies and procedures, given openly and transparently, provided without the expectation of the award or retention of business, and accurately documented in the company’s books and records. Any requests to make a charitable donation should, among other things, address the purpose of the donation and the relationship (if any) to foreign officials that may be in a position to award business to the company. Companies must conduct thorough and well-documented due diligence before making charitable donations to verify potential connections to foreign officials. Companies should also continue to monitor the charitable organization’s use of a donation to ensure that it is being used properly and for its intended purpose.
Ensuring FCPA compliance when making hiring decisions: FCPA compliance programs should address potential human-resource risks to ensure that practices comply with the FCPA. All HR policies and procedures should be followed during a hiring process—any deviations from hiring criteria should be justifiable, documented, and transparent. Company procedures should flag candidates that may create FCPA risks. Any candidates with a relationship to a foreign official must follow company hiring procedures, meet company hiring criteria, apply (and be hired) without involvement of the foreign official, and be reviewed by internal compliance professionals to ensure compliance with the FCPA. Companies should provide training to HR employees (other personnel involved in the hiring process) to ensure they understand potential FCPA risks and are well-acquainted with internal hiring procedures and standards.
Source: TRACE International
More to come. Similar cases resulting from the Enforcement Division’s Asia Referral Hiring Sweep, which began in 2013 with the investigation of JPMorgan, are in the works. As part of this sweep, the Enforcement Division began looking at hiring practices in the Asia-Pacific region for investment banks that “based on what we perceived, in part through our investigation of JPMorgan, could be an industry-wide problem,” Ceresney said. “Enforcement’s work on the sweep is ongoing.”
Barclays in March 2015 disclosed in a securities filing that it was cooperating with the Justice Department and SEC “in relation to an investigation into certain of its hiring practices in Asia.” Just days earlier, HSBC had similarly disclosed that the SEC was investigating the bank’s “hiring practices of candidates referred by, or related to, government officials or employees of state-owned enterprises in Asia-Pacific.”
As more hiring-practice cases come to the surface, compliance and HR personnel would be wise to revisit their hiring policies to ensure they provide for adequate due diligence and keep the proper documentation necessary to refute any allegations of wrongdoing.
Charitable donations. Aside from hiring-practices cases, enforcement authorities also appear to have their sights on questionable charitable donations. The case against telecommunications company VimpelCom is notable in this respect, because it demonstrates that the intangible benefit of donating to a legitimate charity is sufficient to satisfy the “anything of value” element of the FCPA’s anti-bribery provision—albeit, the charitable donations were not the only improper payments made.
In February 2016, VimpelCom reached a $795 million settlement with U.S. and Dutch prosecutors for paying bribes to a government official in Uzbekistan to win business, making it one of the largest global foreign bribery resolutions ever. As part of that case, the SEC charged VimpelCom with violating the anti-bribery provisions of the FCPA, as well as the internal controls and books and records provisions of the FCPA.
At least $114 million in bribe payments were funneled through an entity affiliated with the Uzbek official, and at least $502,000 in bribes were disguised as charitable donations made to charities directly affiliated with the Uzbek official, the SEC said. “These payments were primarily made through sham contracts, but were also, in certain instances, made under the guise of legitimate charitable contributions or sponsorships,” the SEC complaint stated.
The Department of Justice, on the other hand, did not bring bribery charges concerning the charitable contributions, however, alleging only that VimpelCom violated the FCPA’s accounting provisions.
Although the charitable contributions in the VimpelCom case were just one aspect of the bribery allegations, the case serves as a reminder to legal, compliance, and audit teams to be especially vigilant about any charitable donations made in high-risk regions of the world.
The importance of proper due diligence and internal controls for charitable giving are described in further detail in the FCPA Resource Guide. Based on prior opinion releases addressing charitable-type donations, the Department of Justice in the Resource Guide pointed out that it has approved proposed donations, based on due diligence measures and controls including:
Certifications by the recipient regarding compliance with the FCPA;
Due diligence to confirm that none of the recipient’s officers were affiliated with the foreign government at issue;
A requirement that the recipient provide audited financial statements;
A written agreement with the recipient restricting the use of funds;
Steps to ensure that the funds were transferred to a valid bank account;
onfirmation that the charity’s commitments were met before funds were disbursed; and
On-going monitoring of the efficacy of the program.
FCPA enforcement actions with a charitable donation element should not chill companies from charitable giving; that’s not the intended message of the SEC and Department of Justice. Instead, companies should heed the message stated in the FCPA Resource Guide: “Legitimate charitable giving does not violate the FCPA. Compliance with the FCPA merely requires that charitable giving not be used as a vehicle to conceal payments made to corruptly influence foreign officials.”