On August 18, Bank of New York Mellon Corp. settled with the Securities and Exchange Commission for violating the Foreign Corrupt Practices Act (FCPA). An employee in BNY Mellon’s asset management unit hired interns from the family of an official at a Middle Eastern sovereign wealth fund to secure current and additional business, according to the SEC’s administrative notice. The bank, which didn’t admit or deny guilt in the settlement, will pay a $14.8 million fine.
Although the violation and settlement were fairly minor, the BNY Mellon case is notable because it was the first brought against a bank under the FCPA; also, the violation focused on hiring practices. The SEC action offers a glimpse into a new area of enforcement that financial firms can’t ignore.
The employee e-mails in the SEC’s administrative filing are explicit when it comes to the BNY Mellon charge. According to the document, “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].’”
Other e-mails are equally candid. “I want more money for this,” one reads. “I expect more for this. . . . We’re doing [Official X] a favor.”
Although it’s legal to hire an intern from any family, doing so to keep or expand a client relationship is an FCPA violation. The order shows that once the hires were made, BNY Mellon kept the sovereign fund’s business and won more.
The FCPA has been around since 1977; historically, the SEC has used it to pursue individuals and corporations for run-of-the-mill bribery like paying off a foreign official to approve a permit or taking kickbacks as part of a project. For financial firms, though, the stakes are higher, and the commission is taking a close look.
Regulatory filings show that FCPA investigations are under way at every major bank, including Citigroup, Credit Suisse Group, Deutsche Bank, Goldman Sachs Group, JPMorgan Chase & Co., Morgan Stanley and UBS. The FCPA has also come up as part of SEC examinations of private equity firms and large hedge fund managers.
“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,” said Kara Brockmeyer, chief of the SEC Division of Enforcement’s FCPA unit, in a statement after the settlement with BNY Mellon was announced.
As with insider trading investigations, the SEC, the Department of Justice and the Federal Bureau of Investigation are all involved in monitoring activity under the FCPA. Big banks with well-equipped compliance departments have an advantage in dealing with supervision by several U.S. government agencies. But for private equity and hedge fund firms, which tend to be smaller, understanding the FCPA’s compliance requirements calls for extra work, as well as disclosure to investors.
The BNY Mellon case highlights the need for stringent hiring controls and a broad-based approach to compliance. Financial firms must take stock of their entire operation, according to Mitchell Ettinger, a Washington-based partner at law firm Skadden, Arps, Slate, Meagher & Flom.
Tightening up hiring practices and introducing more rigorous know-your-customer policies are a good starting point, but only that, says Ettinger, who has expertise in FCPA cases and has helped financial services firms with compliance. For financial players, and specifically alternative-investment managers, hiring and asset raising don’t take in the whole picture.
“Hiring is a new angle for enforcement,” notes John Rollins, a New York–based director with the financial investigations and dispute advisory practice at accounting and advisory firm McGladrey. “Typically, financial firms have been kept out of FCPA investigations because they have been more about moving products from A to B through corrupt regimes. This angle is going to make financial firms rethink their compliance processes.”
Looking beyond internal controls, Ettinger says, investment managers will need to know the business model of foreign portfolio companies, securities exposures and other assets so they can address the compliance risks that could trigger an FCPA violation.
For example, he asks, does the entity use third-party consultants? If so, how are they chosen, vetted and paid? If the business deals with government or state-owned entities, what controls are in place? Does it interact with foreign government agents in the context of customs, tax or other regulatory issues?
For their part, investors must seek to understand the allocations that a general partner or investment manager is making. That means adding FCPA-related questions to the due diligence process and requiring financial firms to be transparent about how they came to be involved with any investment.
If an FCPA investigation does take place, it doesn’t always mean that there’s been a violation. In its guidance to investors, the SEC suggests that there are exceptions within the law. In any investigation, Ettinger says, containment is key: “It is imperative to determine whether there is the potential for ongoing violations and, if so, to remediate that situation without delay.”
The firm will need to determine if the investigation stems from a single bad actor or broader exposure to a corrupt foreign company or official. FCPA provisions allow investigators to examine past problems too, so financial managers must be ready to show when a potentially troublesome relationship began and ended.
Investigators can look at books and records, internal controls, business processes or instances of possible bribery under the FCPA. They can bring separate allegations in each of these areas, so determining the scope of an investigation is critical for firms and investors.
“The principal issue in any FCPA investigation is the provision about something of value to a foreign official or a family member of a foreign official,” Ettinger says. “Investigators will look at the motivation for providing that thing of value, the manner by which the expenditure is recorded in the company’s books and records, and the adequacy of the internal controls to detect improper payments.”
Ettinger and McGladrey’s Rollins both advise caution and stress the importance of a compliance-focused culture. “In these investigations the commission is always looking for tone at the top, so if they come in on FCPA and FCPA isn’t on the radar for folks at the top of an organization, investigators are going to take note of that,” Rollins says.