Overview
On August 18, 2015, the US Securities and Exchange Commission (SEC) announced a settlement with New York-based bank and investment company, Bank of New York Mellon (BNY Mellon or the Bank) for violations of the anti-bribery and internal control provisions of the US Foreign Corrupt Practices Act (FCPA) in connection with internships the Bank provided to family members of foreign government officials affiliated with a Middle Eastern sovereign wealth fund (the Fund).[i]
This settlement concludes the SEC’s investigation of BNY Mellon, and appears to represent the first enforcement action in which internships for relatives of alleged “foreign officials,” as opposed to money payments, constituted the alleged bribe.[ii] The SEC press release notes that the FCPA prohibits companies from improperly influencing foreign officials with “anything of value,” including internships. Without admitting or denying the SEC’s findings, BNY Mellon agreed to a cease-and-desist order (the Order), and to pay sanctions consisting of $8.3 million in disgorgement, $1.5 million in prejudgment interest, and a $5 million civil penalty. While neither the Order nor the SEC’s press release gives any insight into how these sanctions were derived, language in the Order suggests the civil penalty was reduced to $5 million based on BNY Mellon’s cooperation with the investigation.
This enforcement action appears to be the first based entirely on a theory of improper hiring and internship practices,[iii] but it is unlikely to be the last. Multiple US companies have been reported to be under similar scrutiny.[iv] As this settlement suggests, the SEC is likely to be increasing its focus on companies’ hiring and internship practices. Going forward, companies should ensure their own compliance programs have procedures in place to address the specific corruption risks associated with their hiring processes.
BNY Mellon’s Relationship with the Fund and the Allegedly Inappropriate Internships
According to the SEC’s cease-and-desist order, BNY Mellon collected fees for services provided to the Fund related to its safekeeping and administration of assets of the Fund. The Fund is not named in the Order, but is described as a government body responsible for the management and administration of the assets of a Middle Eastern country.[v] The Fund had been a client of BNY Mellon since 2000.[vi] BNY Mellon’s fees arose from government contracts awarded to the Bank through a process requiring approval from foreign government officials, and from additional assets allocated to BNY Mellon under existing contracts at the discretion of foreign government officials.[vii] During the relevant time period, BNY Mellon held approximately $55 billion of the Fund’s assets in its global asset servicing unit and $711 million of assets under its global investment management business division.[viii] The Fund transferred an additional $689,000 to BNY Mellon’s management business division in June 2010.[ix] During this time, BNY Mellon was seeking to increase the amount of assets of the Fund under its custody and management.[x]
In the Order, the SEC focuses on two unnamed Officials at the Fund who made repeated requests that BNY Mellon provide their family members (the son and nephew of one Official and the son of the other Official) with valuable internships. One such Official is described as a Fund department head with authority over the allocations of new assets to existing managers, and was viewed as a “key decision maker” at the Fund. The other Official is described as a senior official at the Fund’s European office with the authority to make decisions directly affecting BNY Mellon and who was “crucial to both retaining and gaining new business,” according to BNY Mellon documents. The Officials presented the internships as an opportunity for BNY Mellon and made clear they could secure internships for their relatives at BNY Mellon’s competitors if they were not satisfied. Statements cited in the SEC Order from BNY Mellon documents demonstrated that its employees viewed granting the internships as necessary to retain or grow business with the Fund. These statements include that BNY Mellon was “not in a position to reject the request from a commercial point of view” and that it was the “only way” to increase BNY Mellon’s share of the business from the Fund’s European office, aside from obtaining assets in new countries.
BNY Mellon allegedly granted these internships to the three family members of these Officials with the knowledge and approval of senior BNY Mellon employees. The family members interned at BNY Mellon during 2010 and 2011. BNY Mellon was subsequently able to retain and grow its business with the Fund, including the transfer of further assets to BNY Mellon from one of the Official’s department at the Fund.[xi]
Significantly, these family members were allegedly granted internships despite not meeting BNY Mellon’s established internship program’s rigorous admissions criteria, including minimum academic grade point averages and professional credentials. Additionally, the BNY Mellon internship programs were for undergraduates or postgraduates actively pursuing an MBA or similar degree, yet the family members were recent graduates not enrolled in any degree program.[xii] They were not interviewed before being hired, despite multiple rounds of interviews for other hires.[xiii] They were given opportunities not accorded to members of the regular internship program.[xiv] And their performance during the internships was noted to be less than exemplary.[xv]
“Anything of Value” Includes Internships for Family Members
In the Order, the SEC emphasizes the “value” of the internships for the alleged “foreign officials.” Specifically, the SEC states the Officials “derived significant personal value” in being able to confer this benefit for their family members. The SEC also notes the value of the internships themselves and the work experience provided to the interns, as well as the opportunities that BNY Mellon made available to the family members that were not available to other interns. These opportunities included customized, one-of-a-kind, training programs, and internships that were rotational and allowed the family members to work in a number of different BNY Mellon business units. Additionally, the length of the internships—six months—was significantly longer than the work experiences typically afforded to interns.
The SEC also highlights the direct monetary expense for BNY Mellon to provide the internships. It notes that while one intern was unpaid, the other two interns were paid above the normal salary scale for undergraduate interns but below the scale for postgraduates. It also states that BNY Mellon coordinated obtaining visas for each intern so that they could travel from the Middle East to the countries in which they were placed, and that BNY Mellon paid the legal fees and filing costs related to the visas.
Adequate Internal Controls Should Include Policies Specific to Hiring Practices
In bringing the action against the company, the SEC found that BNY Mellon violated both the FCPA’s anti-bribery and internal controls provisions. As to the internal controls-related charges, the SEC noted in its Order that BNY Mellon did have a code of conduct and a specific FCPA policy that prohibited employees from violating the statute. However, it highlighted the fact that, while BNY Mellon’s policies stated that “any money. . . gift . . . or anything of value” provided to a foreign official might constitute a bribe, employees were provided little guidance that was tailored to the types of risks related to hiring. The SEC noted that during the relevant time period, BNY Mellon had few specific controls relating to hiring of customers and relatives of customers, including foreign government officials.[xvi] It found that sales staff and client relationship managers had wide discretion to make initial hiring decisions, and that human resources (HR) was not trained to flag potentially problematic hires. Additionally, senior managers were able to approve hires requested by foreign officials with no mechanism for review by anyone with a legal or compliance background. The SEC concluded that BNY Mellon’s system of internal accounting controls was insufficiently tailored to the corruption risks inherent in hiring of client referrals and therefore inadequate to provide reasonable assurances that BNY Mellon employees did not violate its policy against bribery of foreign officials.
The SEC stated, however, that its Order took into consideration the remedial actions taken by BNY Mellon to begin the process of enhancing its anti-corruption compliance program, including actions taken prior to the SEC’s investigation. These remedial actions were extensive and included:
- Changing its anti-corruption policy to explicitly address hiring of government officials’ relatives
- Requiring that every full-time hire or internship application be routed through a centralized HR application process
- Enhancing its Code of Conduct to require every year each employee to certify that he or she is not responsible for hiring through a non-centralized channel
- Requiring that, as part of the centralized application process, each applicant indicate whether he or she, or a close personal associate, is or has recently been a government official, and, if so, mandating an additional review by BNY Mellon’s anti-corruption office
While these remedial actions were taken by BNY Mellon and not mandated by the Order, they are likely indicative of the nature of procedures that the SEC would deem adequately tailored to prevent the corruption risks inherent in hiring practices.
Conclusion
This settlement represents the first enforcement action based entirely on hiring and internship practices, but as noted above it is unlikely to be the last. Such scrutiny from the SEC does not appear to be an isolated occurrence – a number of US banks are reported to be under investigation for similar hiring practices.[xvii] Of course, the position that a job or internship can be something of value should not be surprising as a matter of law. And, not all cases will have the evidence of quid pro quo cited in the Order that would establish an anti-bribery violation, even under a civil standard. However, the key takeaway from this case for all companies—or at least all issuers—is the suggestion in the SEC Order that companies must have policies specific to hiring processes and procedures or face charges of deficient internal controls. This emphasis on detailed policies and procedures that go beyond the pure accounting arena is consistent with other recent SEC enforcement actions expanding the scope of the FCPA’s internal accounting control provisions, for example, the BHP Billiton settlement earlier this year.[xviii] Together, they underscore the importance of having specific controls on risky activities, whether they involve hiring, sponsorships and entertainment, charitable contributions, or M&A transactions. They also both highlight the challenges companies face if they deviate from (as in this case) or fail to fully follow (as was the case in the BHP Billiton matter) established programs or control mechanisms. Companies should ensure that their personnel—including but not limited to HR personnel—are aware of the decision, and should review their policies and programs to ensure that they are not putting themselves at risk by hiring decisions that do not comport with existing policies, or that do not take into account FCPA risks.
[i] Order Instituting Cease-and-Desist Proceedings, In the Matter of the Bank of New York Mellon Corp., Release No. 75720 (Aug. 18, 2015) (Order), available at http://www.sec.gov/litigation/admin/2015/34-75720.pdf; see also Press Release, US Securities and Exchange Commission, SEC Charges BNY Mellon with FCPA Violations (Aug. 18, 2015), available at http://www.sec.gov/news/pressrelease/2015-170.html.
[ii] Nate Raymond & Sarah N. Lynch, BNY Mellon to pay $14.8 million to settle intern bribery probe, Reuters, Aug. 18, 2015, available at http://www.reuters.com/article/2015/08/18/us-bny-mellon-sec-corruption-idUSKCN0QN1PJ20150818.
[iii] There have, however, previously been FCPA enforcement actions in which allegations of improper hiring of relatives of alleged “foreign officials” were part of the issue. See, e.g., SEC v. Tyson Foods, Inc., Civ. No. 1:11-CV-00350 (D.D.C. Feb. 10, 2011); SEC v. UTStarcom, Inc., Case No. CV-09-6094 (JSW) (N.D. Cal. Dec. 31, 2009); United States v. Siemens Bangladesh Ltd., No. 08-CR-369-RJL (D.D.C. Dec. 12, 1008).
[iv] See, e.g., Enda Curran & Jean Eaglesham, Regulators Step Up Probe into Bank Hiring Overseas, The Wall Street Journal, May 6, 2014, available at http://www.wsj.com/articles/SB10001424052702303417104579546190553220338 (describing SEC inquiries into hiring practices of companies including J.P. Morgan Chase & Co., Credit Suisse Group AG, Goldman Sachs Group Inc., Morgan Stanley, Citigroup Inc., and UBS AG).
[v] Order, supra footnote i, ¶ 6. In its Order, the SEC further explains that the Minister of Finance serves as the Chairman of the Fund’s Board of Directors and its most senior members are political appointees. The Fund hires external managers to make day-to-day investment decisions concerning its assets, while its European Office generally uses its own in house investment professionals to manage the assets for which it is responsible. Id. at ¶¶ 6-7. While the alleged “foreign officials” are not named in the Order, the SEC states that they are government officials affiliated with the Fund. One Officer was a “senior official” with the Fund, while the other Officer was a “senior official” at the Fund’s European office. Id. ¶ 8.
[vi] Id. ¶ 11.
[vii] Id. ¶ 10.
[viii] Id. ¶¶ 11-13.
[ix] Id. ¶ 13.
[x] Id. ¶¶ 12-13.
[xi] Id. ¶¶ 16, 18.
[xii] Id. ¶¶ 19-20
[xiii] Id. ¶¶ 19, 21.
[xiv] Id. ¶ 21
[xv] Id. ¶ 24.
[xvi] Id. ¶ 25-27. Additionally, the SEC cites the fact that while BNY Mellon provided training on employee obligations under the FCPA and BNY Mellon’s policies, it did not ensure that all employees took the training or understood the policies. Id. ¶ 26.
[xvii] See supra at footnote iv.
