Bank of New York Mellon Settles FCPA Charges Regarding Internships for Relatives of Sovereign Wealth Fund Officials
On August 18, 2015, the Securities and Exchange Commission (“SEC”) announced that the Bank of New York Mellon Corporation (“BNY Mellon”) had agreed to settle administrative charges that it violated the Foreign Corrupt Practices Act (“FCPA”) by providing internships and work experiences to family members of officials of a Middle Eastern sovereign wealth fund (the “Fund”). The resolution with BNY Mellon continues a trend of aggressive FCPA enforcement by the SEC and marks the first time that the influencing of officials of a sovereign wealth fund has been the basis of an FCPA enforcement action.1
The SEC resolved the charges against BNY Mellon through an administrative proceeding in which BNY Mellon neither admitted nor denied it had violated the FCPA’s anti-bribery and internal controls provisions. In addition to a cease-and-desist order, BNY Mellon agreed to pay $8.3 million in disgorgement, $1.5 million in pre-judgment interest, and a $5 million civil penalty. In announcing the settlement, the Director of the SEC’s Enforcement Division commented that “BNY Mellon deserved a significant sanction for providing valuable student internships to family members of foreign officials to influence their actions.”2 According to the SEC press release, the Commission “considered the company’s remedial acts and its cooperation with the investigation” in deciding to accept the settlement.3
Fund Officials Requested Internships for Family Members
According to the SEC’s Order,4 in 2010 and 2011 BNY Mellon provided internships and work experience for family members of officials of the Fund at the officials’ request. The Order found that the Fund officials were government officials for purposes of the FCPA. According to the SEC Order, in February 2010 one official “made a personal and discreet request” for internships for his son and a nephew.5 The SEC alleged that this official was viewed by BNY Mellon personnel as a “key decision maker” within the Fund.6 The SEC further alleged that the official persisted in his requests for these internships, at one point suggesting that the requests represented an “opportunity” for BNY Mellon and that the official could secure internships from a BNY Mellon competitor if the request was not granted.7 The SEC Order cites internal BNY Mellon emails discussing the official’s request, including one in which an employee noted that “by not allowing the internships to take place, we potentially jeopardize our mandate with” the Fund.8 The official’s request was ultimately granted and both the son and nephew were provided with approximately six-month internships at the bank’s Boston office.
The SEC also alleged that at about the same time as the request from the first Fund official, a second official at a European office of the Fund requested an internship for his son. According to the SEC Order, internal BNY Mellon documents suggested that this official was “crucial to retaining and gaining new business” for the bank and that granting this official’s request was likely to “influence any future decisions taken within” the Fund.9 The bank ultimately granted the request and the official’s son was given a six-month internship at the bank’s London office.
The SEC alleged that the internships granted to the officials’ relatives “were neither inexpensive nor easy for BNY Mellon to structure.”10 According to the Order, the interns “did not meet the criteria of BNY Mellon’s existing internship program.”11 And, instead of participating in the existing BNY Mellon internship program, the interns received “customized one-of-a-kind training programs” that the SEC Order described as “bespoke.”12 The SEC Order also alleged that the interns were hired “with the knowledge and approval of senior BNY Mellon employees,” and noted that the “blessing” of one senior BNY Mellon employee was required to get the process moving.13 According to the SEC, the interns proved to be “less than exemplary employees” of the bank, and noted two of the interns had repeated absences from work while the third was not hardworking.14
BNY Mellon’s FCPA Policies & Controls
The SEC Order alleged that while BNY Mellon had both a code of conduct and a specific FCPA policy, the bank had provided “little additional guidance that was tailored to the types of risks related to hiring.”15 The Order found that “BNY Mellon had few specific controls relating to the hiring of customers and relatives of customers, including foreign government officials,” noting, among other things, that bank senior managers were able to approve such hires without review by anyone with a legal or compliance background.16 Further, the SEC alleged that 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.”17
The SEC’s interest in sovereign wealth funds and in the provision of internships for relatives of foreign government officials has been publicized for several years.18 This settlement represents a combination of both areas of concern. There are several notable elements of the SEC’s Order.
First, although the SEC charged BNY Mellon with violations of both the anti-bribery and internal controls provisions of the FCPA, it settled the charges without requiring an admission of the alleged facts. Other than the SEC’s indication that BNY Mellon cooperated with the investigation, neither the Order nor the accompanying Enforcement Release indicate why this matter was not one requiring factual admissions.
Second, while the SEC Order requires disgorgement, it is silent as to the value of the business earned or generated by the provision of the internships, and does not explain the basis of the disgorgement or how it was calculated. The SEC’s Order fails to connect the granting of three internships to family members of two Fund officials with any tangible benefit aside from good relations and good rapport. A civil injunction or cease-and-desist order with a modest penalty would undoubtedly serve the purpose of identifying this kind of conduct as impermissible and highlighting the need for more thorough FCPA due diligence with respect to hiring relatives of foreign officials. Disgorgement is a powerful enforcement remedy; it should be used transparently and with fairness to purge only those gains clearly related to corrupt conduct.19
Third, one must wonder whether this case provides a broader lesson about the future of internal controls liability. Is the SEC saying that there is always a failure of an issuer’s internal controls when the company hires an intern or employee who is recommended by a non-governmental customer or client but does not meet the company’s normal hiring standards? Will the SEC seek to impose such significant sanctions on other banks and companies who deviate from their normal hiring practices? Or will sanctions only arise when those deviations involve referrals from government officials? Put another way, how far will the SEC extend the internal control provisions of the FCPA in evaluating the sufficiency of other non-financial business practices.
Finally, the BNY Mellon resolution is likely the first in a series of enforcement actions against companies and banks for referral hiring. Other banks and firms are under active investigation for potential violations of the FCPA emanating from similar conduct.20 All public issuers and companies subject to the FCPA should heed the lessons from this enforcement action and ensure that they have adequate guidance and controls in place around the hiring of employees.
1 News of the SEC’s investigations of banks’ relationships with sovereign wealth funds first emerged in January 2011. See, e.g., Dionne Searcey & Randall Smith, SEC Probes Banks, Buyout Shops Over Dealings With Sovereign Funds, Wall St. J. (Jan. 14, 2011), http://www.wsj.com/articles/SB10001424052748704307404576080403625366100.
2 Press Release, SEC, SEC Charges BNY Mellon With FCPA Violations (Aug. 18, 2015), http://www.sec.gov/news/pressrelease/2015-170.html.
4 Bank of N.Y. Mellon Corp., Exchange Act Release No. 75720 (Aug. 18, 2015), http://www.sec.gov/litigation/admin/2015/34-75720.pdf [hereinafter “Order”].
12 Interestingly, the SEC Order noted that the internships in question had been specially tailored to the recipients. Apparently, the interns did not take the place of interns whose selection was conditioned upon meeting specific standards, and they were not hired with an expectation of continued employment. Thus, the very specialty of these internships may signify their lesser value, particularly in relation to any significant business which BNY Mellon had with the Fund.
19 See, e.g., SEC v. Contorinis, 743 F.3d 296, 301 (2d Cir. 2014) (reiterating the “well-established principle in disgorgement law . . . that the court may only exercise its equitable power only over property causally related to the wrongdoing”) (citations omitted).
20 See, e.g., Ned Levin et al., In J.P. Morgan Emails, a Tale of China and Connections, Wall St. J. (Feb. 6, 2015), http://www.wsj.com/articles/in-j-p-morgan-emails-a-tale-of-china-and-connections-1423241289.