DOJ/SEC FCPA Settlement Targets Hiring Practices Used As Bribes
Summary: On July 5, 2018, the SEC and the Department of Justice announced that a large financial institution, has agreed to pay nearly $76 million to settle charges that its Hong Kong-based subsidiary, violated the Foreign Corrupt Practices Act.
The case is another example of the U.S. government’s pursuit of companies that hire so-called “princelings,” a term used in Asia to refer to the young relatives of key executives or political figures. According to the DOJ press release, the company “engaged in a practice to hire, promote and retain candidates referred by or related to government officials and executives of clients that were state-owned entities [SOE’s]” between 2007 and 2013. Internally referred to as “relationship hires” or “referral hires,” the hiring of some of the individuals appeared to be done in a manner that reflected a quid pro quo exchange for business from the referral source.
This marks the fourth FCPA settlement involving a company’s hiring practices. Past SEC and DOJ investigations have established that hiring relatives of foreign officials with the explicit intent to either obtain or retain business can be the basis of an FCPA violation. This is especially true where the company does not follow its usual hiring process, the candidates have weak qualifications, or the candidates exhibit poor performance post-hire. The financial institution’s investigation listed several examples of improper preferential treatment of “connected” employment candidates:
- a referral hire without investment banking qualifications that management acknowledged “most likely…will not be good.” Nevertheless, management instructed that the candidate be hired in order to “open doors on SOE fronts which we are in lack of and our marketing effort has been handicapped, including [the referrer’s SOE].”
- a referral hire whose resume was augmented by the financial institution’s employees before forwarding, and who wasn’t subjected to the established interview process on the basis that she was “a princess [who was] not used to too many rounds of interview.”
- a client executive who reminded a the financial institution’s banker that the company “need[ed] to pay [the SOE’s] relationship hire…well at the year-end bonus.”
Such hiring practices could potentially give rise to government prosecution under anti-corruption laws in France and the UK, although there have been no prosecutions to date. UK Ministry of Justice guidance specifically refers to recruitment procedures, so prosecution of a corporate under Section 7 of the Bribery Act is entirely possible. In the financial services sector, the Financial Conduct Authority could see relationship hires as a systems and controls failure. France also considers bribery accomplished by paying employees for false or nonexistent jobs to be a prosecutable offense. Given that the UK and French bribery authorities cooperate closely with US enforcers, it is likely that they too will be on the lookout for companies that have not incorporated hiring practices into their anti-corruption risk map.
Hiring the relative of a business contact is not, in and of itself, a violation of the FCPA. This settlement, however, reminds companies that in establishing and strengthening their anti-corruption policies, they need to consider any corruption risks associated with the HR process and to adapt procedures to minimize that risk. In the context of listing Credit Cuisse’s remedial measures, the Non-Prosecution Agreement provides insight on the potential procedures that companies that do face this risk can consider implementing to deal with this kind of corruption risk. The following are questions that your company can ask:
- Are there controls to ensure the identification of and anti-corruption vetting for all candidates referred for employment by government officials and employees of SOEs?
- Are all candidates for employment screened by an independent service for connections to government officials, SOE employees and other “politically exposed persons” (“PEPs”) and can the company verify the efficacy of such screening?
- Are there additional post-hire controls on employees linked to government officials and SOE employees, such as ring fencing them from work involving such officials and SOE employees, and requiring compliance personnel to track their performance?
- Are there periodic reviews that evaluate the hiring controls?
- Are there yearly headcount reviews to ensure accurate record-keeping concerning hiring?
- Is there anti-corruption training for all staff, including job-specific training for recruiters, human resources, and compliance personnel?
Not all companies face this particular risk, but if your company does have corruption risk in this area, the above questions will help formulate appropriate procedures to mitigate the risk.
In this case, both the SEC and the DOJ noted that the company had a written, global anti-bribery policy in place that prohibited the hiring of candidates referred by or related to government officials in order to obtain or retain business, but those policies were not meaningfully enforced. This allowed employees of this particular financial institution to hire princelings outside the established process without the knowledge or input of its legal and compliance departments. Robust hiring controls will help prevent such violations. This is an area that should be on companies’ risk radars.
Authors: Mark A. Srere, Kristin Robinson, Oran Gelb, Andrew Tuson, David Père and Cécile Terret