August 24th, 2015

Do Your Hiring Practices Live Up To The SEC’s New Expectations?

HRAs highlighted several times on FCPA Professor, there are two distinct questions that can be asked in connection with many instances of Foreign Corrupt Practices Act scrutiny and enforcement.

The first is whether, given the DOJ’s and/or SEC’s enforcement theories, the conduct at issue can expose a company to FCPA scrutiny and an FCPA enforcement action?

The second is whether Congress in passing the FCPA intended to capture the alleged conduct at issue and whether a court would find the alleged conduct in violation of the FCPA?

In a legal system based on the rule of law, the second question of course is more important, but as a practical matter risk averse business organizations care more about the first question.

Previous posts (here and here) highlighted critical questions concerning last week’s SEC enforcement action against BNY Mellon based on the company’s alleged internship hiring practices – an enforcement action that is expected to be the first of similar actions expected in coming months.

Now that the dust has settled, and until a business organization stands up to the SEC (small chance that will happen as the SEC has never been put to its burden of proof in a corporate FCPA enforcement action in history), issuers would be wise to ask whether its hiring practices live up to the SEC’s new expectations.

Those expectations, articulated by the SEC in the BNY Mellon action, are phrased below in the form of questions.

  • Does the company’s anti-corruption policy “explicitly address the hiring of government officials’ relatives”?
  • Does the company require “that every application for a full-time hire or an internship be routed through a centralized HR application process”?
  • Does the company’s Code of Conduct “require that every year each employee certify that he or she is not responsible for hiring through a non-centralized channel”?
  • Does the company’s application process require “that each applicant indicate whether he/she is a close personal associate of a government official or has recently been a government official?”

Even if your company is not an issuer subject to SEC jurisdiction, all business organizations should ask the above questions given that the SEC also charged BNY Mellon with FCPA anti-bribery violations – provisions which apply to all forms of business organization.

In short, the compliance message from the BNY Mellon enforcement action is that FCPA compliance is not just a legal function, not just a finance, accounting and auditing function, but now also a human resources function.

Posted by Mike Koehler at 12:05 am. Post Categories: BNY MellonComplianceHuman Resources

August 21st, 2015

Friday Roundup

Roundup2Wal-Mart related, quotable, spot-on, scrutiny alerts and updates and prosecutorial common law defeat. It’s all here in the Friday roundup.

Wal-Mart Related

In its recent 2Q FY2016 earnings call Wal-Mart stated:

“FCPA and compliance-related costs were approximately $30 million, comprised of approximately $23 million for the ongoing inquiries and investigations, and approximately $7 million for our global compliance program and organizational enhancements. Last year, FCPA and compliance-related costs were $43 million in the second quarter. We expect FCPA-related expenses to continue to trend down, so we now expect our full year FCPA-related expenses to range between $130 million and $150 million. This compares to our guidance in February of $160 to $180 million.”

Doing the math, Wal-Mart’s 2Q FCPA and compliance-related costs is approximately $470,000 per working day.

Over the past approximate four years, I have tracked Wal-Mart’s quarterly disclosed pre-enforcement action professional fees and expenses. While some pundits have ridiculed me for doing so, such figures are notable because, as has been noted in prior posts and in my article “Foreign Corrupt Practices Act Ripples,” settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from corporate FCPA scrutiny.  Pre-enforcement action professional fees and expenses are typically the largest (in many cases to a degree of 3, 5, 10 or higher than settlement amounts) financial hit to a company under FCPA scrutiny.

While $470,000 per working day remains eye-popping, Wal-Mart’s recent figure suggests that the company’s pre-enforcement action professional fees and expenses have crested as the figures for the past seven quarters have been approximately $516,000, $563,000, $640,000, $662,000, $855,000, $1.1 million and $1.3 million per working day.

In the aggregate, Wal-Mart’s disclosed pre-enforcement professional fees and expenses are as follows.

FY 2013 = $157 million.

FY 2014 = $282 million.

FY 2015  = $173 million.

FY 2016 = $63 million (projections for the remainder of the FY of approximately $67 – $87 million)


Regarding the recent BNY Mellon enforcement action, Jay Darden (Paul Hastings and recently the Assistant Chief of the DOJ’s Fraud Section) stated: “it’s not the U.S. government’s job to regulate hiring policy.” (See here).


In this Corporate Crime Reporter, Lamia Matta (Miller & Chevalier) states:

“Companies are less aggressive in [voluntarily] reporting. Companies are finding that they don’t save a whole lot by going in and self-reporting as soon as they find a problem. They are still subject to extensive investigation. The cost is the same if they self-report and then cooperate as it would be if they just cooperate. The agencies say that is not the case. But if you look at the trends, that does seem to be the case.”

“The other thing is that the decision to self-report is taking a lot longer than it once used to. Companies might think — it may make sense to self-report, but we are going to wait it out a bit before we do so. The process is now much more considered than it once used to be.”

“And companies are not as inclined to buy into the agencies’ aggressive theories of jurisdiction as they might have once been. For all of these reasons, you are seeing companies being less quick to self report. I don’t know if the self-reporting numbers are down or not. They are difficult to track.”


This Bryan Cave alert regarding the recent order in the DOJ’s enforcement action against Lawrence Hoskins (see here for the prior post) is spot-on.

It states:

“This holding directly contradicts the “guidance” provided by the U.S. in its Resource Guide, published jointly by the Department of Justice and the Securities and Exchange Commission. That guidance states unequivocally:

‘Individuals and companies, including foreign nationals and companies, may also be liable for conspiring to violate     the FCPA—i.e., for agreeing to commit an FCPA violation—even if they are not, or could not be, independently charged with a substantive FCPA violation.

* * *

A foreign company or individual may be held liable for aiding and abetting an FCPA violation or for conspiring to violate the FCPA, even if the foreign company or individual did not take any act in furtherance of the corrupt payment while in the territory of the United States.’

This Order reminds companies and individuals that some of the legal principles surrounding the FCPA recently have been developed out of settlements with the government instead of through the courts. On issues as important as these, it can be worthwhile to test some of the government’s theories in the only place they can be adjudicated.”

To learn about other selective information, half-truths, and information that is demonstratively false in the FCPA Guidance see “Grading the Foreign Corrupt Practices Act Guidance.”

Scrutiny Alerts and Updates

Ford Motor Co.

Reuters reports:

“The [SEC] is helping German prosecutors to investigate the alleged payment of bribes by Ford to speed the passage of containers through Russian customs, a source at the U.S. carmaker said on Tuesday. Ford and Schenker, the freight business of state-owned German rail company Deutsche Bahn, have been under investigation in Germany since 2013 over suspected bribery and other offences related to the busy Russian port of St. Petersburg. The port is Russia’s European gateway with more than 2,000 companies using it for shipments, according to its website, but it is also known among customers for notoriously long delays. The [SEC] has now joined investigations by prosecutors in Cologne, where Ford’s European headquarters are based, a source at the carmaker told Reuters, confirming a report in Tuesday’s Sueddeutsche Zeitung newspaper. Two Ford employees, eight current and former workers at Schenker and one staffer from a Russian contractor are under investigation, a spokesman at the Cologne prosecutor’s office said.”


In regards to this recent media report, the company stated in this filing:

“Petrobras hereby declares that, in relation to news published in the media concerning the payment of a fine to the U.S. authorities, there are no ongoing negotiations regarding the eventual payment of a fine for the winding up of civil and criminal investigations in the United States regarding the violation of the anti-corruption legislation. Nor has there been any decision by the U.S. authorities regarding the merit of such an investigation or the eventual amounts involved.”

SciClone Pharmaceuticals

One of the longest instances of FCPA scrutiny concerns SciClone Pharmaceuticals.  As highlighted in this prior post, in August 2010 the company disclosed:

“On August 5, 2010 SciClone was contacted by the SEC and advised that the SEC has initiated a formal, non-public investigation of SciClone. In connection with this investigation, the SEC issued a subpoena to SciClone requesting a variety of documents and other information. The subpoena requests documents relating to a range of matters including interactions with regulators and government-owned entities in China, activities relating to sales in China and documents relating to certain company financial and other disclosures. On August 6, 2010, the Company received a letter from the DOJ indicating that the DOJ was investigating Foreign Corrupt Practices Act issues in the pharmaceutical industry generally, and had received information about the Company’s practices suggesting possible violations.”

Recently the company disclosed:

“In July 2015, SciClone reached an agreement in principle with the staff of the US Securities and Exchange Commission (SEC) for a proposed settlement for a range of matters, including without admitting or denying possible violations of the Foreign Corrupt Practices Act (FCPA). The agreement, which includes disgorgement, prejudgment interest, and penalties totaling $12.8 million, is contingent upon the execution of formal settlement documents and approval of the settlement by the SEC’s governing Commission. The Company has not yet reached a resolution of these matters with the Department of Justice (DOJ) and management continues to work diligently to obtain closure on this matter.”

Akamai Technologies 

The company updated its previous FCPA-related disclosure as follows:

“We are conducting an internal investigation, with the assistance of outside counsel, relating to sales practices in a country outside the U.S. that represented less than 1% of our revenue during the three and six months ended June 30, 2015, and in each of the years ended December 31, 2014, 2013 and 2012. The internal investigation includes a review of compliance with the requirements of the U.S. Foreign Corrupt Practices Act and other applicable laws and regulations by employees in that market.  In February 2015, we voluntarily contacted the U.S. Securities and Exchange Commission and Department of Justice to advise both agencies of this internal investigation. We are cooperating with those agencies. As of the filing of this quarterly report on Form 10-Q, we cannot predict the outcome of this matter. No provision with respect to this matter has been made in our consolidated financial statements.”

General Cable 

The company recently disclosed the following regarding its previously disclosed FCPA scrutiny.

“We have been reviewing, with the assistance of external counsel, certain commission payments involving sales to customers of our subsidiary in Angola. The review has focused upon payment practices with respect to employees of public utility companies, use of agents in connection with such payment practices, and the manner in which the payments were reflected in our books and records. We have determined at this time that certain employees in our Portugal and Angola subsidiaries directly and indirectly made or directed payments at various times from 2002 through 2013 to officials of Angola government-owned public utilities that raise concerns under the FCPA and possibly under the laws of other jurisdictions. Based on an analysis completed with the assistance of our external counsel and forensic accountants, we have concluded at this time, that we are able to reasonably estimate the profit derived from sales made to the Angolan government-owned public utilities in connection with the payments described above which we believe is likely to ultimately be disgorged. As a result, we recorded an estimated charge in the amount of $24 million as an accrual as of December 31, 2014. There was no change to the accrual in the second quarter of 2015. The accrued amount reflects the probable and estimable amount of the Angola-related profits that the Company believes is subject to being disgorged, and does not include any provision for any fines, civil or criminal penalties, or other relief, any or all of which could be substantial.
We also have been reviewing, with the assistance of external counsel, our use and payment of agents in connection with our Thailand and India operations and certain transactions in our Egypt and China businesses, which may have implications under the FCPA. We have voluntarily disclosed these matters to the SEC and the DOJ and have provided them with additional information at their request, including information in response to an SEC subpoena. The SEC and DOJ inquiries into these matters are ongoing. We continue to cooperate with the DOJ and the SEC with respect to these matters. At this time, we are unable to predict the nature of any action that may be taken by the DOJ or SEC or any remedies these agencies may pursue as a result of such actions. We are continuing to implement a third party screening process on sales agents that we use outside of the United States, including, among other things, a review of the agreements under which they were retained and a risk-based assessment of such agents to determine the scope of due diligence measures to be performed by a third-party investigative firm. We also have provided anti-corruption training to our global sales force, and ultimately will provide such training to all salaried employees. In addition, we have hired a Chief Compliance Officer, who is responsible for the day-to-day management of our compliance function. The Chief Compliance Officer reports to our Chief Executive Officer, and also has a reporting relationship with the Audit Committee.”
Another Prosecutorial Common Law Defeat

Related to the above, one of the best guest posts in FCPA Professor history was this 2011 post from Michael Levy in which he described the concept of prosecutorial common law.  Prosecutorial common law is all around us.  Take a look at the footnotes of the FCPA Guidance - most of the “authority” cited for “legal” propositions is DOJ or SEC settlements.

For obvious reasons, prosecutorial common law does not sit well with federal court judges.  For instance, in U.S. v. Bodmer, Judge Shira Scheindlin of the Southern District of New York, in rejecting the DOJ’s position that the FCPA’s criminal penalty provisions applied to a foreign national prior to the 1998 FCPA amendments, noted as follows – “the Government’s charging decision, standing alone, does not establish the applicability of the statute.”  Likewise as noted in this previous post about the Giffen enforcement action, Judge William Pauley of the Southern District of New York stated that prosecutorial common law ”is not the kind or quality of precedent this Court need consider.”

Prosecutorial common law recently suffered another defeat when the Southern District of New York ruled that the Food & Drug Administration can’t bar a drug company from marketing a pill for off-label use as long as the claims are truthful.  (See here for the Wall Street Journal article).

The decision follows a 2012 decision in U.S. v. Caronia (see here for the prior post) in which the Second Circuit concluded that the DOJ’s theory of prosecution concerning so-called off-label promotion of drugs was invalid. Prior to Caronia and even after Caronia, the DOJ has used the theory of prosecution to secure billions in settlement against risk-averse pharmaceutical companies.

A good weekend to all.



August 20th, 2015

Issues To Consider From The BNY Mellon Enforcement Action

IssuesThis recent post highlighted and offered initial commentary on the SEC’s FCPA enforcement action against BNY Mellon.  This post continues the analysis by highlighting other issues to consider.

First Ever

FCPA practitioners would likely be hard pressed to imagine an enforcement action that includes alleged violations of the FCPA’s anti-bribery provisions and internal controls provisions, without alleged violations of the books and records provisions

There would be good reason for the struggle – it has never happened before – until earlier this week.

The BNY Mellon enforcement action is believed to be the first-ever SEC FCPA enforcement action not to include allegations or findings regarding books and records violations.  A future post will explore this issue in more detail.

A Step Further Than Schering-Plough and Eli Lilly

The FCPA’s anti-bribery provisions expressly state, in pertinent part, that money, a gift, or anything of value must be given to, offered to, or promised to: (1) a foreign official; (2) a foreign political party of official or candidate for foreign political office; or (3) any person “while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official, to any foreign political party or official thereof, or to any candidate for foreign political office …”.

Regardless of the prong, as evident from the statutory text, the thing of value must ultimately be intended for a “foreign official.”

Previously in the Schering-Plough and Eli Lilly enforcement actions the SEC alleged that the companies violated the FCPA by making charitable contributions to a bona fide Polish charity dedicated to restoring historical cases.  However, as alleged by the SEC, the charity was a pet project of an alleged Polish official with discretionary authority over the purchase of pharmaceuticals.

While perhaps a distinction without a difference, the charges/findings in both cases as to the above conduct were limited to the FCPA’s books and records and internal control provisions.

Even so, the enforcement theory was clear: in analyzing “anything of value” the enforcement agencies will put themselves in the shoes of the alleged “foreign official” and ask how the recipient perceived the thing of value and whether the recipient subjectively valued the thing of value.

The BNY Mellon enforcement action goes a step further than Schering-Plough and Eli Lilly by finding violations of the FCPA’s anti-bribery provisions.  The key language from the SEC is the following: “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.” (emphasis added).

Notable Findings

Notwithstanding the SEC’s findings that the Interns did not meet BNY’s Mellon’s supposed “rigorous criteria” for hiring and were not evaluated and hired through the company’s “established internship programs,” the following SEC findings are notable.

One of the Interns (Intern C) was not paid.

As to the other two interns, the SEC’s order states: “because Interns A and B had already graduated from college” BNY paid the interns “above the normal salary scale for BNY Mellon undergraduate interns but below the scale for postgraduate interns.”

In other words, the SEC found that BNY Mellon violated the FCPA’s anti-bribery provisions, not necessarily because of the compensation offered to the Interns, but rather the SEC’s belief that the Interns should never have been interns at BNY Mellon in the first place and because of this – again in the words of the SEC – the alleged “foreign officials” “derived significant personal value in being able to confer this benefit on their family members.”

Time Line

According to BNY Mellon’s disclosures: “in January 2011, the Enforcement Division of the U.S. Securities and Exchange Commission (the “SEC Staff”) informed several financial institutions, including BNY Mellon, that it had commenced an inquiry into certain of their business practices and relationships with sovereign wealth fund clients.”

Thus, BNY Mellon was under FCPA scrutiny for approximately 4.5 years.

Posted by Mike Koehler at 12:03 am. Post Categories: Anything of ValueBNY MellonBooks and RecordsFCPA Statistics

August 19th, 2015

BNY Mellon Becomes The First – Of What Is Expected To Be Several Financial Services Companies – To Pony Up Millions Based On Its Internship Practices

BNY MellonCongress never intended the Foreign Corrupt Practices Act to be an all-purpose corporate ethics statute.  But with increasing frequency, this is what the DOJ and SEC have converted the FCPA into based on enforcement theories that are rarely subject to judicial scrutiny.

Previously there have been FCPA enforcement actions that included allegations of improper hiring of spouses or children of alleged “foreign officials” (see here for a prior post), but until yesterday there has not been, it is believed, an enforcement action based exclusively on such a theory.

The financial industry has been under intense FCPA scrutiny the past two years (see here for a prior post) concerning its alleged hiring and internship practices. This scrutiny has generated a significant amount of critical commentary.  For instance, in this Wall Street Journal editorial former SEC Commissioner Arthur Levitt called the FCPA scrutiny of the financial industry “scurrilous and hypocritical.”  He wrote:

“If you walk the halls of any institution in the U.S.—Congress, federal courthouses, large corporations, the White House, American embassies and even the offices of the SEC—you are likely to run into friends and family members of powerful and wealthy people.”

Yesterday this scrutiny yielded the first – of what is expected to be many in coming months – enforcement action.

It was against BNY Mellon Corp. (see here for the SEC’s press release) and the action was based on findings the company provided “valuable student internships to family members of foreign government officials affiliated with a Middle Eastern sovereign wealth fund.”

Internships of course have been provided to relatives of customers so long as their have been internships.  For the U.S. government to now equate this with corrupt intent and bribery is questionable.  But then again, FCPA enforcement is not necessarily about the law, but more a game of the SEC using its leverage against risk averse corporations to extract settlement amounts.

Without admitting or denying the SEC’s findings, and based on an enforcement theory not subjected to any judicial scrutiny, BNY Mellon ponied up $14.8 million dollars rather than engage its principal government regulator in litigation.

The SEC’s administrative cease and desist order states in summary fashion:

“This matter concerns violations of the anti-bribery and internal accounting controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by BNY Mellon. The violations took place during 2010 and 2011, when employees of BNY Mellon sought to corruptly influence foreign officials in order to retain and win business managing and servicing the assets of a Middle Eastern sovereign wealth fund.

These officials sought, and BNY Mellon agreed to provide, valuable internships for their family members. 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.

BNY Mellon failed to devise and maintain a system of internal accounting controls around its hiring practices sufficient to provide reasonable assurances that its employees were not bribing foreign officials in contravention of company policy.”

Under the heading “BNY Mellon’s Business with the Middle Eastern Sovereign Wealth Fund” the order states:

“During the relevant time period, BNY Mellon’s business in the EMEA region collected fees for services provided to the Middle Eastern Sovereign Wealth Fund. [The Middle Eastern Sovereign Wealth Fund is described as follows.  ”[A] government body responsible for management and administration of assets of a Middle Eastern country, as entrusted to it by that country’s Minister of Finance. The Middle Eastern Sovereign Wealth Fund is wholly owned by that country and was created to perform the function of generating revenue for it. The Minister of Finance serves as Chairman of the Middle Eastern Sovereign Wealth Fund’s Board of Directors and its most senior members are political appointees. The Middle Eastern Sovereign Wealth Fund generally hires external managers to make day-to-day investment decisions concerning its assets.”] Those fees arose from government contracts awarded to BNY Mellon through a process requiring approval from certain foreign government officials, and also from additional assets allocated to BNY Mellon under existing contracts at the discretion of certain foreign government officials.

The Middle Eastern Sovereign Wealth Fund first became a client of BNYM Asset Servicing in 2000, when the European Office [The European Office is described as follows:  ”[T]he Middle Eastern Sovereign Wealth Fund’s office in Europe. The European Office is responsible for managing a portion of the assets entrusted to the Middle Eastern Sovereign Wealth Fund. Unlike the Middle Eastern Sovereign Wealth Fund, its parent, the European Office generally uses its own inhouse investment professionals to actively manage assets for which it is responsible.”] awarded to BNY Mellon custody of certain assets. Since then, BNY Mellon has earned regular fees for the safekeeping and administration of Middle Eastern Sovereign Wealth Fund assets. According to the terms of the custody agreement, these fees are subject to increase from time to time as the European Office allocates additional assets to BNY Mellon. While the total amount of Middle Eastern Sovereign Wealth Fund assets under custody by BNY Mellon has varied over time, during the relevant time period BNY Mellon held Middle Eastern Sovereign Wealth Fund assets totaling approximately $55 billion.

BNY Mellon entered an additional agreement with the European Office in 2003 permitting BNYM Asset Servicing to loan out certain of the Middle Eastern Sovereign Wealth Fund assets under custody within set guidelines, which varied over time.

This securities lending arrangement significantly increased BNY Mellon’s revenues from its dealings with the Middle Eastern Sovereign Wealth Fund. In 2010 and 2011, BNYM Asset Servicing repeatedly sought to modify the lending guidelines, which had been significantly restricted following the 2008 economic crash, in order to bring the guidelines back to pre- 2008 levels and further grow the securities lending business with the Middle Eastern Sovereign Wealth Fund. During the relevant time period, BNYM Asset Servicing sought to increase the amount of assets under custody from the European Office.

In 2009, the Middle Eastern Sovereign Wealth Fund became a client of BNYM Asset Management when the fund entered into an investment management agreement designating the Boutique [described as a wholly owned asset management firm operating within BNYM Asset Management] to manage assets worth approximately $711 million (the “Boutique mandate”). The bulk of the assets under the investment management agreement were funded in November 2009, with an additional portion transferring to BNY Mellon in June 2010. Official X [described as a senior official with the Middle Eastern Sovereign Wealth Fund during the relevant time period] was BNYM Asset Management’s principal point of contact in connection with the Boutique mandate. According to the terms of the agreement, the amount of assets under management was subject to change, as the Middle Eastern Sovereign Wealth Fund could allocate additional assets to the Boutique mandate at any time. In June 2010, the Middle Eastern Sovereign Wealth Fund transferred an additional $689,000 to BNY Mellon under the Boutique mandate. During the relevant time period, BNY Mellon sought to increase the amount of its Middle Eastern Sovereign Wealth Fund assets under management.”

Under the heading “The Internships” the order states:

“Officials X and Y [described as was a senior official at the European Office during the relevant time period] requested that BNY Mellon provide their family members with valuable internships. Officials X and Y made numerous follow-up requests about the status, timing and other details of the internships for their relatives after the internships had been offered, and delivering the internships as requested was seen by certain relevant BNY Mellon employees as a way to influence the officials’ decisions.

In February 2010, at the conclusion of a business meeting, Official X made a personal and discreet request that BNY Mellon provide internships to two of his relatives: his son, Intern A [described as a recent college graduate], and nephew, Intern B [also described as a recent college graduate]. 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. The same BNY Mellon employee later wrote to a BNY Mellon colleague that Official X had become “angry” because BNY Mellon was experiencing delays in delivering the internships, and had openly questioned the employee’s job performance and professionalism because of the delays.

As reflected in contemporaneous e-mails and other documents, BNY Mellon delivered the valuable internship sought by Official X in order to assist BNY Mellon in obtaining or retaining business. For example:

A Boutique account manager wrote in a February 2010 e-mail concerning the internship request for Interns A and B that 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].”

In June 2010, an employee of BNY Mellon with primary responsibility for the Asset Management relationship with the Middle Eastern Sovereign Wealth Fund wrote of the internships for Interns A and B: “I want more money for this. I expect more for this. . . . We’re doing [Official X] a favor.”

In a separate e-mail to a different BNY Mellon colleague, the same employee stated “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).”

The same employee advised a colleague in human resources: “[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.”

After granting Official X’s request to hire Interns A and B, BNY Mellon retained the Boutique mandate, and further assets were transferred to BNY Mellon by Official X’s department within a few months.

In February 2010, around the same time that Official X made his initial internship request, Official Y asked through a subordinate European Office employee that BNY Mellon provide an internship to the official’s son, Intern C [also described as a recent college graduate]. 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.

The BNY Mellon employee with primary responsibility for managing the custody relationship with the European Office viewed Official Y’s request as important to assist BNYM Asset Servicing in obtaining or retaining business. For example:

The BNY Mellon custody relationship manager explained to more senior officers within BNY Mellon that granting Official Y’s request was likely to “influence any future decisions taken within [the Middle Eastern Sovereign Wealth Fund].”

The same BNY Mellon relationship manager expressed to colleagues his concern that one of BNY Mellon’s competitors would agree to hire Intern C if BNY Mellon would not, and that BNY Mellon might lose market share to the competitor as a result.

The relationship manager wrote: “Its [sic] silly things like this that help influence who ends up with more assets / retaining dominant position.”

The relationship manager separately wrote that meeting Official Y’s requests was the “only way” to increase BNY Mellon’s share of business from the European Office, aside from obtaining assets in new countries.

After granting Official Y’s request to hire his son, Intern C, BNY Mellon retained its existing custody and securities lending business from the European Office, which continued to grow.

During the relevant time period, BNY Mellon had an established summer internship program 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. To recruit postgraduates, BNY Mellon had relationships with a small number of the most highly selective schools in the United States and the United Kingdom from which it sourced candidates. 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. BNY Mellon also placed an emphasis on relevant leadership experience.

The Interns did not meet these rigorous criteria and BNY Mellon did not evaluate or hire the Interns through its established internship programs. For example, as recent graduates not enrolled in any degree program, the Interns did not meet the basic entrance standard for a BNY Mellon postgraduate internship. Further, contrary to BNY Mellon’s goal of converting student interns to full-time hires, the Interns were to return to the Middle East at the conclusion of their internship and BNY Mellon had no plan to hire them as full-time employees. Nor did the individual Interns have the requisite academic or professional credentials for its existing internship programs.

Though they did not meet the criteria of BNY Mellon’s existing internship programs, BNY Mellon hired Interns A, B and C. Contrary to its standard practice, BNY Mellon decided to hire the Interns before even meeting or interviewing them. Indeed, the special “work experiences” sought by Officials X and Y 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. As requested by Officials X and Y, BNY Mellon designed customized work experiences for the Interns. These 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. Interns A and B were placed in Boston, Massachusetts and were employed by BNY Mellon from August 6, 2010 through February 25, 2011. Intern C was onboarded and placed in London, England and interned with BNY Mellon from July 4, 2010 through December 17, 2010. These approximately six-month internships were significantly longer than the work experiences typically afforded to BNY Mellon interns through the normal summer internship program.

The internships were neither inexpensive nor easy for BNY Mellon to structure. 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.

BNY Mellon hired all three of the Interns, with the knowledge and approval of senior BNY Mellon employees:

According to the BNY Mellon Asset Management employee with primary responsibility for arranging the internships for Interns A and B, he had initially struggled to deliver the internships as requested by Official X until the internships had the “blessing” of a senior BNY Mellon employee, after which “it started to move.” The senior employee facilitated the internships by contacting human resources on behalf of the Interns, forwarding their resumes and stating that he “would like us to support.”

The BNY Mellon relationship manager with lead responsibility for arranging the internship for Intern C sent an e-mail to two senior BNYM Asset Servicing officers describing Official Y’s request and seeking their “support” for the internship. The same relationship manager later wrote to BNY Mellon colleagues seeking assistance in arranging the internship and stating “[p]lease know that this request has the backing of both [senior officers].”

In October 2010, Official Y made a further request that BNY Mellon modify the custom internship it had created for Intern C so that he could rotate through an additional BNY Mellon business unit. This request was also granted with the knowledge and approval of senior BNY Mellon employees.

The Interns were less than exemplary employees. On at least one occasion, Interns A and B were confronted by a BNY Mellon human resources employee concerning their repeated absences from work. A Boutique portfolio manager who worked with Intern C observed that his performance was “okay” and that “he wasn’t actually as hardworking as I would have hoped.” Despite these issues, BNY Mellon accommodated the Interns in order to favorably influence Officials X and Y.

Under the heading “BNY Mellon’s FCPA-Related Policies, Training and Internal Controls” the order states:

During the relevant time period, BNY Mellon had a code of conduct, as well as a specific FCPA policy, which prohibited BNY Mellon employees from violating the statute. 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 with little additional guidance that was tailored to the types of risks related to hiring faced by BNY Mellon’s international asset servicing unit and asset management business division.

During the relevant time period, BNY Mellon provided training on employees’ obligations under the FCPA and BNY Mellon’s policies, but did not ensure that all employees took the training or understood BNY Mellon’s policies.

During the relevant time period, BNY Mellon had few specific controls relating to the hiring of customers and relatives of customers, including foreign government officials. Sales staff and client relationship managers were permitted wide discretion in making initial hiring decisions and human resources was not trained to flag hires that were potentially problematic. Senior managers were able to approve hires requested by foreign officials with no mechanism to ensure that potential hiring violations were reviewed by anyone with a legal or compliance background. BNY Mellon’s system of internal accounting controls was insufficiently tailored to the corruption risks inherent in the hiring of client referrals, and therefore inadequate to fully effectuate BNY Mellon’s policy against bribery of foreign officials.”

Based on the above, the order finds:

“BNY Mellon violated [the FCPA's anti-bribery provisions] by corruptly providing valuable internships to relatives of foreign officials from the Middle Eastern Sovereign Wealth Fund in order to assist BNY Mellon in retaining and obtaining business. BNY Mellon also violated [the FCPA's internal controls provisions], by failing to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that its employees were not bribing foreign officials.”

Under the heading “Commission Consideration of BNY Mellon’s Cooperation and Remedial Efforts” the order states:

“In determining to accept the Offer, the Commission considered cooperation BNY Mellon afforded to the Commission staff and the remedial acts undertaken by BNY Mellon. 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.”

In the SEC’s press release, Andrew Ceresney (Director of the SEC Enforcement Division) stated:

“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’s FCPA Unit) stated:

“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.”

As noted in the release:

“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.”

Yesterday BNY Mellon’s share price closed up .7%.

Jay Holtmeier (Wilmer Cutler Pickering Hale and Dorr) represented the company.

August 18th, 2015

The Success Of “Soft Enforcement” In The U.K.

Success3As distinguished from “hard” enforcement of a law by enforcement agencies, “soft” enforcement generally refers to a law’s ability to facilitate self-policing and compliance to a greater degree than can be accomplished through “hard” enforcement alone.

Those subject to the law, whether a traffic law or otherwise, comply with the law’s prohibitions because they “could” be found to be in violation of the law, even though the prospect of “hard” detection and enforcement of the violation is low.

Indeed, one of the most notable statements from the FCPA’s legislative history was made by the Chairman of Lockheed who stated:

“So it is true that we knew about the practice of payments on some occasions to foreign officials. But so did everyone else who was at all knowledgeable about foreign sales. There were no U.S. rules or laws which banned the practice or made it illegal.  […] If Congress passes laws dealing with commissions and direct or indirect payments to foreign officials in other countries, Lockheed, of course, will fully comply with them.” (See Lockheed Bribery: Hearings Before the S. Comm on Banking, Hous., and Urban Affairs, 94th Cong. (1975).

In passing the FCPA, Congress anticipated that the “criminalization of foreign corporate bribery will to a significant extent act as a self-enforcing preventative mechanism.” (See S. Rep. No. 93-114, at 10 (1977). Likewise since the FCPA’s earliest days, the DOJ has recognized that the “most efficient means of implementing the FCPA is voluntary compliance by the American business community.” (See “Justice Outlines Priorities in Prosecuting Violations of For. Corrupt Practices Act,” The American Banker (Nov. 21, 1979).

In this regard, a former DOJ prosecutor responsible for investigating and prosecuting FCPA cases rightly observed that “this new era of more aggressive [FCPA] prosecution has, in turn, encouraged corporations to pay even greater attention to their internal compliance programs, matching the ‘hard’ enforcement with ‘soft’ enforcement.” (See Philip Urofsky, et al, “How Should We Measure the Effectiveness of the Foreign Corrupt Practices Act? Don’t Break What Isn’t Broken—The Fallacies of Reform,” 73 The Ohio Law Journal 1145 (2012).

Against this backdrop, the U.K. government recently released this ”Impact of the Bribery Act 2010 on SMEs” (as in small and medium size enterprises). In examining the findings of the report, it is important to be mindful that the report categorizes medium sized enterprises as having between 50 to 250 employees; small enterprises as having between 10 to 49 employees; and micro enterprises as having less than 10 employees.
According to the report:

Two-thirds (66%) of the SMEs surveyed had either heard of the Bribery Act 2010 or were aware of its corporate liability for failure to prevent bribery. Awareness was greater among SMEs exporting to regions that are less developed, including the Middle East, Asia, Africa and South and Central America (68%) compared to those companies only exporting to developed regions including Europe, North America and Australia (56%).

The proportion of SMEs that had heard of the Act by name increased with business size. Only 42% of micro sized companies had heard of the Act compared to 54% of small companies and 78% of medium sized companies. Furthermore, those exporting to higher risk regions, as defined by the Corruption Perception Index (including the Middle East, Asia, Africa and South and Central America), were more likely to have heard of the Bribery Act (58%) compared to those companies only exporting to regions at less risk including Europe, North America and Australia (41%)

In addition to whether SMEs had heard of the Bribery Act by name, SMEs were asked whether they were aware of the corporate failure to prevent bribery offence at section 7 of the Act (as described in the introduction). Just over half of all SMEs (53%) were aware of it. Awareness was linked with company size with only 39% of micro companies being aware, compared to 53% of small companies and 73% of medium sized companies.

SMEs were also asked if they had sought any professional advice about the Bribery Act or about bribery prevention. Around a quarter (24%) of SMEs who were aware of the Bribery Act or its corporate failure to prevent provisions had sought such advice, which was most commonly offered by legal professionals (54% of those seeking professional advice).

Around four in ten SMEs (42%) said that they had put bribery prevention procedures in place; defined as anything that they thought helped prevent bribery. Among SMEs that did have procedures in place, these procedures were most typically financial and commercial controls such as bookkeeping, auditing and approval of expenditure (94%) or a top level commitment that the company does not win business through bribery (88%). Just under half of those with procedures in place had written staff policy documents about bribery prevention which are signed by staff (48%) or raised awareness and provided training about the threats posed by bribery in the sector or areas in which the organisation operates (44%). Again, SMEs exporting to the less developed export regions (45%) and especially China (59%) were more likely to have bribery prevention procedures in place.

Those more likely to have bribery prevention procedures in place included: Medium sized companies (60%), compared to small companies (43%) and micro companies (29%).

To some, the above numbers represent a failure of the U.K. Bribery Act (such opinions have mostly been from Bribery Act Inc. participants who have used the report to market their compliance services).

However, the above number represent the success of “soft enforcement” of the Bribery Act in the U.K.

Consider these facts: the U.K. Bribery Act only went live in July 2011 and there has not yet been any enforcement of the FCPA-like provisions in the U.K. Bribery Act.

The relevant analogy would be how many U.S. small to medium size enterprises during the first five years of the FCPA’s existence had heard of the FCPA and developed and put in place preventative procedures?

Fast forward today and query, if one would survey SME managers, nearly 40 years after the FCPA was enacted against the backdrop of the current enforcement climate what the numbers would look like?

Would nearly 70% of U.S. SME managers be aware of the FCPA? Would nearly 40% of managers of micro companies (those with less than 10 employees) be aware of the FCPA? Would 60% of medium size companies, approximately 45% of small companies, and nearly 30% of micro companies have pro-active preventative procedures in place?

I highly doubt it.

Thus, what the recent U.K. report demonstrates is that even in the absence of any “hard” enforcement of the FCPA-like provisions of the U.K. Bribery Act, the U.K. Bribery Act – no doubt because of its adequate procedures defense – is having, even at this early stage, a positive impact of “soft enforcement.”

And kudos to the U.K. government for recognizing this.  The report rightly notes that the purpose of the adequate procedures defense is “to influence behaviour and encourage bribery prevention as part of corporate good governance.”

There are several commentators who are opposed to an FCPA compliance defense.  However, noticeably absent for the critiques is any discussion of how a compliance defense can have a positive impact on “soft enforcement” of the FCPA.

As highlighted in my article “Revisiting a Foreign Corrupt Practices Act Compliance Defense” and numerous posts thereafter (hereherehere and here), a compliance defense might very well lead to a minor reduction in “hard enforcement” of the FCPA,” but the expected increase in “soft enforcement” of the FCPA makes a compliance defense sound public policy.

Posted by Mike Koehler at 12:03 am. Post Categories: Compliance DefenseLegislative HistoryU.K. Bribery ActUnited Kingdom