Financial internships and the Foreign Corrupt Practices Act

American regulators have recently been scrutinizing financial institutions’ internship programs for potential violations of the Foreign Corrupt Practices Act.1 The United States Securities and Exchange Commission recently announced its first internship-related FCPA settlement with Bank of New York Mellon Corp.  

Since many large financial institutions operate internship programs and occasionally receive requests from clients to consider specific individuals for these programs, the settlement is likely to have significant implications for the financial industry as a whole. 

The FCPA  

The FCPA is an extraterritorial anti-bribery statute. It prohibits U.S. companies and certain non-U.S. companies from giving:

  • Anything of value to – (1) any foreign official for purposes of (A)
  • (i) influencing any act or decision of such foreign official in his official capacity,
  • (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or
  • (iii) securing any improper advantage; or (B) inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality.

The Obama administration has made FCPA enforcement one of its main priorities. Nevertheless, when the media first reported that the SEC and U.S. Department of Justice were investigating financial institutions’ internship programs, some commentators expressed skepticism that hiring foreign officials’ relatives could constitute a FCPA violation.2 Although the SEC and DOJ have brought enforcement actions with respect to “relationship hires” in the past, these actions pertained to the creation of sham jobs that would serve to augment officials’ salaries.3 Financial internships may be highly sought after but admitting a foreign official’s relative into an internship program does not directly remunerate the foreign official.4

The BNY settlement 

BNY Mellon is a large banking and financial services firm that is headquartered in New York City.5 On Aug. 18, BNY Mellon reached an $18.5 million settlement with the SEC concerning its alleged securing of internships for three individuals related to two high-ranking officials of a Middle Eastern Sovereign Wealth Fund.6 In agreeing to settle charges under 15 U.S.C. §§ 78m(b)(2)(B) and 78dd-1, BNY Mellon neither admitted nor denied any of the SEC’s allegations.7 The sovereign wealth fund was a client of BNY Mellon’s asset and wealth management division and is not named in the SEC’s order. 

The central allegations against BNY Mellon are as follows. BNY Mellon was actively seeking to increase the amount of sovereign wealth fund assets under its management. In early 2010, two sovereign wealth fund officials separately sought BNY Mellon internships for their relatives.  Both officials were in a position to be able to direct additional business to BNY Mellon. One of the officials characterized the internships as a business opportunity and chastised BNY Mellon when it delayed hiring his relatives. He also warned that he could secure the internships from one of BNY’s competitors.

The other foreign official did not make similar pronouncements, but BNY Mellon personnel nevertheless feared that failing to fulfill his request would lead the bank to lose some of the sovereign wealth fund’s business.

BNY Mellon ultimately hired three of the foreign officials’ relatives as interns. BNY Mellon personnel did not meet with these individuals prior to hiring them, and the interns lacked the academic and professional credentials normally required to be admitted into the competitive summer internship program. The internships were also of a longer duration and involved more interaction with BNY Mellon business units than traditional internships. All three interns proved to be mediocre employees.

Since the banking internships were highly sought after and were allegedly integral to retaining and obtaining the sovereign wealth fund’s business, the SEC concluded that BNY Mellon’s hiring of the foreign officials’ relatives violated the FCPA. In accepting BNY’s $18.5 million settlement offer, the SEC noted that, inter alia, BNY had modified its anti-corruption compliance program to address the hiring of government officials’ relatives.

Unanswered questions 

The enforcement action against BNY Mellon signifies that the SEC will continue to scrutinize financial institutions’ internship programs for FCPA violations. Nevertheless, because of the unusual circumstances surrounding the BNY Mellon settlement, its precise legal implications are uncertain.

First, it is unclear how “anything of value” is to be assessed under the FCPA. The BNY Mellon interns’ salaries were modest, and one of the interns drew no salary. Does the mere fact that the sovereign wealth fund officials actively sought these internships for their relatives prove that they personally regarded them as valuable?

Clients not infrequently make personal requests of financial firms, and presumably not every request, if granted, would constitute a violation of the FCPA. In this regard, it is noteworthy that only one of sovereign wealth fund officials explicitly connected the internships to BNY’s ability to retain or secure future business, and the internships did not appear to cause the sovereign wealth fund to entrust more assets to BNY Mellon. 

Second, the relatives of the sovereign wealth fund managers apparently lacked the necessary credentials to obtain their positions and did not progress through the normal hiring process.  Assuming, however, that the relatives had possessed the requisite credentials and had been hired through normal channels, would BNY Mellon still have been prohibited from hiring them? 

More generally, when choosing among equally qualified candidates for internships, should financial institutions be prohibited from taking into account that certain interns have desirable connections, be they familial or otherwise, to foreign officials?

Lastly, the BNY settlement does not specify to what extent a financial firm is permitted to accommodate foreign officials’ concerns about its hiring practices. For example, foreign officials might be dismayed by the lack of language skills among its bank’s interns and express this sentiment to certain managers. Would a firm that revamped its internship program in response possibly subject itself to FCPA scrutiny? One would expect not, but the SEC appears to regard the involvement of business personnel in hiring as unusual and potentially actionable.    

Best practices for hiring  

The SEC and DOJ are likely to announce future settlements pertaining to firms’ internship programs. In the meantime, firms would be wise to modify anti-corruption policies to specifically address the hiring of government officials’ relatives. Human resources professionals should also receive FCPA compliance training and be allowed to manage hiring without interference from business personnel who interact with foreign officials.

ENDNOTES 

  1. See Daniel Huang & Emily Glazer, Are Wall Street Interns the Latest Regulatory Target?, WALL ST. J., Aug. 18, 2015, available at http://www.wsj.com/articles/bank-of-ny-mellon-to-pay-14-8-million-to-settle-fcpa-probe-1439915579
  2. See, e.g., Arthur Levitt, Influence Peddling Makes the World Go Round, Wall St. J., Dec. 27, 2013; Mike Koehler, Regarding Princelings and Family Members, Aug. 21, 2013, at http://www.fcpaprofessor.com/regarding-princelings-and-family-members (“There is nothing inherently illegal about hiring family members of alleged “foreign officials.”). 
  3. See Shinjini Chatterjee, Dangerous Liaisons: Criminalization of “Relationship Hires”, 163 U. PA. L. REV. 1771, 1793 (2015).
  4. See Debevoise & Plimpton, FCPA Update, Vol. 7, No. 1, pg. 5, at http://www.debevoise.com/~/media/files/insights/publications/2015/08/fcpa_update_august_2015.pdf.
  5. See Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order, Release No. 75720, Aug. 18, 2015, available at https://www.sec.gov/litigation/admin/2015/34-75720.pdf.
  6. Id.
  7. Id. at 1.

 

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Milan Markovic

My research primarily focuses on the duties of lawyers and judges in transnational contexts. I am also increasingly concerned with the future of the legal ​profession. I enjoy challenging my students’ conceptions of what lawyers do. The media rarely focuses on lawyers outside of litigation contexts, and advising a transactional or regulatory client is very different from making arguments in a courtroom.

Milan Markovic
Associate Professor of Law
Texas A&M University

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