The Securities and Exchange Commission and Department of Justice have been warning companies to proceed with caution when hiring the relatives of foreign government officials, lest they run afoul of the Foreign Corrupt Practices Act.

Hiring a relative or friend of a government official does not, in itself, constitute an FCPA violation. What the SEC and the Justice Department will take issue with is when the intent of that employment is an indirect method of providing something of value to a government official to obtain or retain business.

“Perhaps in the past people didn’t think of internships or jobs as a thing of value that could trigger an FCPA investigation,” says Kristy Grant-Hart, managing director of Spark Compliance Consulting and former chief compliance officer of United International Pictures. Current FCPA investigations and enforcement actions suggest otherwise and, more importantly, that any industry could put themselves at risk.|

Compliance officers looking for a real-world example of hiring practices that will trigger an FCPA investigation and enforcement action don’t have to look any further than Qualcomm. The wireless telecommunications maker this month agreed to 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 to family members of Chinese government officials to obtain business.

In one example, Qualcomm agreed to hire an intern at the request of the director general of a Chinese agency. Human resources department e-mails described the intern as a “must place” and described the hiring as “quite important from a customer relationship perspective,” according to the SEC order.

In another 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.’”

“Companies must effectively design and implement internal controls across all business operations to prevent FCPA violations, including its hiring practices.”
Michele Wein Layne, Director, Los Angeles Office, SEC

That should have been the end of it, but a director in human resources at the direction of the executive vice president of Qualcomm’s Global Business Operations, advocated for the hire: “We’re operating under a different paradigm here than a normal ‘no hire’ decision tree.”

The Qualcomm resolution marks the second time in less than a year that a company has resolved charges for FCPA violations related to the hiring of foreign government officials’ relatives. In August 2015, the Bank of New York Mellon 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.

“BNY Mellon provided the internships without following its standard hiring procedures for interns, and the interns were not qualified for BNY Mellon’s existing internship programs,” the SEC stated.

Compliance lessons

?The overall message that both the Qualcomm and BNY Mellon enforcement actions 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.

Enhance internal controls. According to a recent SEC statement, companies must effectively design and implement internal controls across all business operations to prevent FCPA violations, including hiring practices.To avoid a finding of corrupt intent, companies should conduct proper due diligence on all new hires, including querying them as to their relationship and affiliation with foreign government officials.

“Many companies have questionnaires that specifically ask that questions, ‘Are you a government official? Are you related to a government official?’ They give examples of what a government official is,” says Sharie Brown, a partner at law firm Troutman Sanders and former compliance officer at Mobil Oil.


Below is an excerpt from the SEC order, describing Qualcomm’s hiring practices of the relatives of Chinese officials.
Qualcomm provided or offered full-time employment and paid internships to family members and other referrals of foreign officials at SOE 1, SOE 2 and Agency—often at the request of these foreign officials. Qualcomm referred to some of these individuals as “must place” or “special” hires.
Qualcomm offered employment to certain foreign officials’ family members and referrals despite concerns, in some cases, that the individuals did not satisfy Qualcomm’s hiring standards. Certain hires also had previously failed to obtain employment with Qualcomm through the standard hiring process. And in some cases, new positions were created for these hires.
Qualcomm provided or offered full-time employment and paid internships to family members and other referrals of foreign officials with the purpose of trying to influence those officials to take actions that would assist Qualcomm in obtaining or retaining business in China.
In one case, the Deputy General Manager of a subsidiary of SOE 2 asked Qualcomm employees in 2010 to find an internship at Qualcomm for her daughter. As one Qualcomm employee noted, “We received a request from the GM of [the telecom company’s subsidiary] to help find an internship position for her daughter (currently studying in the U.S.) within QC. I discussed this with [high level official] and determined that it would be important for us to support given our cooperation with [the subsidiary].” Qualcomm employees understood that the daughter’s “parents are [SOE 2 subsidiary] Dept. GM level and gave us great help for Q.C. new business development.” Because “[the regional branch] is our strategic partner in China and plays an important role in leading all [the telecom company] adopting Qualcomm's technologies,” Qualcomm employees believed that the internship “would be important for us to support given our cooperation with [the subsidiary].” Specifically, the internship “would be good because we are doing quite a bit with [the subsidiary], e.g., QChat and Rev. B.”
In another case, between 2006 and 2010, Qualcomm provided the son of an executive responsible for network planning, construction, and maintenance at SOE 1, with: (1) support from a $75,000 research grant to an American university where he was studying, allowing him to retain his position in a PhD program and renew his student visa; (2) a Qualcomm internship; (3) subsequent permanent employment despite interviewers concluding that he did not meet Qualcomm’s hiring standards for the position; and (4) a business trip to China followed by leave to visit his parents over the Chinese New Year, despite other employees expressing concern regarding his qualifications for the assignment. The EVP also personally provided this employee with a $70,000 loan to buy a home.
Source: Securities and Exchange Commission

For its part, Qualcomm said it has since taken steps to enhance its existing internal controls. In a statement, the company said it “now closely monitors to determine if a candidate has any relationship with an employee of a government agency or state-owned entity, and applies a stricter standard of scrutiny in an effort to avoid potential FCPA risks in the future.”

Train those with hiring authority. Compliance officers should train human resources and any other employee with hiring authority on red flags related to hiring practices that would trigger FCPA exposure.

In Qualcomm’s case, for example, most employees who worked in human resources did not receive FCPA training. “As a result, when Qualcomm offered paid internships or full-time employment to family members or referrals of Chinese foreign officials, it did not evaluate or attempt to mitigate the potential FCPA risks associated with such hires,” the SEC order on Qualcomm stated.

FCPA risks to watch out for, like those cited in the Qualcomm and BNY Mellon enforcement actions, include requests for special treatment of applicants with associations to a foreign government official or a candidate’s lack of qualifications. “In both cases, the candidates did not meet the baseline requirements for the particular positions,” says Brown.

Document hiring decisions. The company should provide and maintain a job description at the outset, explaining the basic skills, abilities, and experience required to perform the job. “You need to be able to show that the person you hired was as qualified, if not more qualified, than the other applicants,” says Jeremy Levin, a partner at law firm Baker Botts.

Compliance and HR departments should pay particular attention to potential hires that come by referral from a client or another person important to your business. “Instantly, that should raise a red flag,” says Levin. “There has to be an authentic business purpose for making a hire—and that business purpose can’t be that you’re trying to get business.”

More on the way?

?More enforcement actions, particularly in the financial services industry, may be on the way. Barclays this month became the latest bank to disclose in a securities filing that it is cooperating with the Justice Department and SEC “in relation to an investigation into certain of its hiring practices in Asia.”

Just days earlier, HSBC similarly disclosed that the SEC is investigating the bank’s “hiring practices of candidates referred by, or related to, government officials or employees of state-owned enterprises in Asia-Pacific.” In a third example, JPMorgan said in a securities filing in 2013 that the SEC was seeking information and documents relating to the bank’s “employment of certain former employees in Hong Kong and its business relationships with certain clients.” That investigation remains ongoing.

In the aftermath of the Qualcomm and BNY Mellon enforcement actions, compliance and HR will need to jointly revisit their hiring policies to ensure they provide for adequate due diligence and keep the proper documentation necessary to refute any allegations of wrongdoing.