When Free Labor Isn’t Free: FCPA Risks Inherent in Hiring Decisions

Companies increasingly are hiring college students as interns for the summer. Such corporate internships often are viewed as a good, low-cost recruiting tool for US companies, particularly in overseas locations where the pool of quality candidates may be limited. At the same time, many corporate executives are approached by their friends, relatives, and business contacts to hire their children as interns. While corporate executives might agree as a painless favor for their friend, relative, or business contact, such favors recently have drawn the attention of the government as potential FCPA violations. Over the past few years a number of banking and financial institutions – including HSBC¹ and JP Morgan,² to name a few – have announced that they are facing scrutiny from the SEC or DOJ for hiring relatives of foreign officials as interns. Two such institutions have recently reached settlements with the SEC: BNY Mellon agreed to pay US$14.8 million for hiring three interns at the request of two senior officials who controlled asset management at a Middle Eastern Sovereign Wealth Fund.³ Qualcomm Inc. agreed to pay US$7.5 million for hiring relatives of Chinese foreign officials, as well as for providing gifts, travel, and other entertainment, in order to gain favorable positioning for its wireless communication technologies.⁴

While it cannot be the case that companies are completely foreclosed from offering legitimate employment opportunities to relatives or friends of foreign officials, it's clear that the SEC (and possibly the DOJ) considers employment opportunities (including unpaid internships) a "thing of value" that can trigger FCPA liability. And, indeed, in both settlements to date, the SEC was careful to highlight the evidence that the jobs in question were not legitimate, but rather intended to influence government action. For example, the SEC pointed to numerous internal BNY Mellon emails describing the internships as an expensive "favor," that "help influence who ends up with more assets / retaining dominant position."

In any case, the two "Sons and Daughters" settlements point to which factors are most likely to get a company into trouble, and which might save a company from SEC scrutiny.

• Don't create jobs as a "personal favor" to foreign officials. Qualcomm Inc. got into hot water, in part, because it created new positions in which to place foreign officials' family members within the company. Although BNY Mellon had an existing internship program, it nonetheless modified the positions so that it could place the family members in more desirable locations for a longer duration of time.
• Make sure the candidates are qualified for the job. Both BNY Mellon and Qualcomm hired family members who were not qualified for the position. For example, BNY Mellon's internship positions were designed for students enrolled in degree programs. BNY nonetheless offered positions to recent graduates who were not enrolled in any program and who did not meet the requisite academic or professional credentials. And Qualcomm offered positions to some candidates at the request of foreign officials who had previously failed to obtain employment "through the standard hiring process."
• Don't let candidates bypass standard hiring practices. BNY Mellon had a standard practice of interviewing candidates prior to offering employment positions. Contrary to this standard practice, BNY Mellon offered positions "before even meeting or interviewing" the candidates. While it may not be practical for a company to implement standard hiring practices across all locations, permitting candidates to bypass such hiring practices is a signal to the SEC that the position may not be legitimate.
• Implement company policies and train human resources employees on FCPA risks. Neither BNY Mellon nor Qualcomm had FCPA policies in place that addressed hiring practices. Moreover, neither company trained its human resources employees to flag potentially problematic hires or raise concerns with the compliance department. The SEC also highlighted the wide latitude BNY Mellon afforded its sales staff and client relationship managers in hiring decisions. At the same time, the SEC applauded the steps BNY Mellon took to revise its FCPA policies.
• Ensure that there is no quid pro quo. Both BNY Mellon and Qualcomm offered internships to family members of foreign officials who were in a position to directly influence government actions that affected their business. Indeed, the SEC highlighted that BNY Mellon offered internships at the request of officials who were "likely to influence future decisions" with respect to where the Middle Eastern Sovereign Wealth Fund would place additional assets. To the extent a company offers employment positions at the request of a foreign official, it should take special care to consider whether that official is in a position to influence any current or future government actions that affect the company's business.

The SEC has focused its attention on financial and banking institutions operating in Asia-Pacific. But that's not to say that companies across all sectors can't – or shouldn't – evaluate potential FCPA risks in its own hiring practices. Companies looking to reduce their own risk should review their hiring practices and consider revising their existing anti-corruption policies to:

• Specifically identify employment and internship opportunities as a "thing of value" that cannot be offered to influence government action, and address FCPA risks associated with hiring relatives or friends of foreign officials.
• Require all candidates – including interns – to go through a centralized human resources application process to reduce freedom afforded to business-side employees in hiring decisions. This has the added benefit of charging a single department with responsibility (and the opportunity!) to identify potentially problematic hires for further evaluation.
• Require all candidates to identify whether he or she is a relative of a foreign official and require all company-employee referrals to identify whether the referral is being made on behalf of a foreign official. Any such candidates should be evaluated for potential FCPA violations before offers are made.
• If a potential hire has been referred or recommended by a foreign official, require approval from the Compliance Department or Law Department before extending an employment offer.