The U.S. government has been investigating the hiring practices of U.S. businesses and has taken the position that hiring relatives of government officials in exchange for government business or government action violates corruption laws. Businesses should consider reviewing and revamping anticorruption policies and hiring procedures to ensure legal and ethical hiring practices.
In August 2015, the SEC reached a settlement with BNY Mellon based on allegations that the firm gave internships to relatives of officials at a Middle Eastern sovereign-wealth fund in exchange for business. Similarly in March 2016 Qualcomm settled with the SEC for allegedly giving jobs to relatives of government officials to obtain both government business and government favors in China. Further, HSBC Holdings PLC, JP Morgan, and other financial institutions are facing investigations for supposedly giving jobs to relatives of government officials in exchange for government business or government action.
Wall Street firms disagree with the government’s position that their hiring practices are illegal. Banks assert that the government is criminalizing standard hiring practices and that the prosecutions will impact overseas hiring.
Either way, a business can take some practical steps to demonstrate that their hiring practices are objective and not a “bribe” intended to obtain government business or government favors whether the business is working with foreign or domestic governments.
Selected Laws and Regulations
Before reviewing these steps, it’s important to appreciate the laws and regulations the government may use to mount these prosecutions. Doing so establishes a framework for effective internal controls to manage corruption risk in the hiring process. Although the recent prosecutions have focused on interactions with foreign government officials, similar risks of corruption exist when interacting with federal, state, and local government officials in the United States.
Generally, exchanging “anything of value” for government business or government action is bribery whether a foreign government official or a government official in the United States. The U.S. federal government can use its domestic bribery statute to prosecute instances where an individual or business unlawfully influences a government official to act or to refrain from acting by offering, promising, or giving something of value. Most states have similar statutes prohibiting bribery.
If a foreign government official is involved, the U.S. government can use the Foreign Corrupt Practices Act, which essentially prohibits offering or promising anything of value to obtain or retain business or to gain a government advantage or to influence a government decision.
Given the settlements with BNY Mellon and Qualcomm, along with the other federal investigations into hiring practices, it is clear that U.S. prosecutors consider a job or even an internship to be “something of value” that if exchanged for government business or government action merits investigation and possible prosecution.
But, corruption laws are not the only legal construct that prohibits providing “favors” such as jobs to government officials. Both the U.S. federal government as well as state and local governments have ethics laws that essentially prohibit government officials from soliciting or accepting, either directly or indirectly, any gratuity, gift, favor, loan, or anything of monetary value from anyone who has business with the government or who has any other interests that may be substantially impacted by the government official’s duties. (See e.g. Standards of Ethical Conduct 5 C.F.R. Part 2635; 48 C.F.R. § 3.101; Conflicts of Interest, 18 U.S.C. §§ 202-209). When developing protocols to mitigate the risk of illegal or unethical hiring practices, these ethics laws and regulations should also be considered and incorporated.
Definition of Government Official
To adequately address corruption risk around hiring, businesses also need to consider the definition of “government official” as well as how the business interacts with government officials. Here in the United States, persons elected or appointed to government positions or who work for a government entity are government officials and, for the most part that is clear.
Identifying who may be a government official when working internationally is not so clear. In many countries the government, a royal family, or a political party may own, manage, or work in business and they are all considered government officials. Further, the Foreign Corrupt Practices Act defines employees of the UN, World Bank, and similar organizations as government employees.
Business can interact with government officials as potential customers, customers, or as a regulator. However, an often overlooked relationship with government officials is the fact that a business may actually employ a government official or a close family member of a government official. For example, a business may have a U.S. employee who is the mayor of a small town, a member of a school board, or a member of a port authority commission. All would be considered government officials. Similarly, a business may have an employee who has a close family member who is a government official.
Internal Controls Requirements
Businesses are not only prohibited from engaging in corrupt activity but are legally mandated to have some system of internal controls that give it assurance that its employees and agents are not acting contrary to the law when interacting with government officials. Further, businesses are expected to have methods to prevent and detect criminal activity as well as to encourage ethical business conduct and compliance with laws.
Thus, any compliance controls designed to mitigate the risk of improper hiring should include measures to avoid actions that may be construed as a bribe. But the controls also need to include direction on complying with ethics laws as well as providing sufficient guidance to identify who may be a government official. Finally, controls should be responsive to how a business interacts with government officials, to include possibly having employees that are government officials.
Steps to Mitigate Improper Hiring
The BNY Mellon and Qualcomm settlement agreements provide insight into the facts the government relied on to prosecute them. A review of these facts will inform businesses of approaches to mitigate key risk areas that may subject a corporation to similar investigations and prosecutions over hiring practices.
BNY Mellon settled, without admitting to, SEC claims that it violated the FCPA bribery prohibitions and the FCPA internal control requirements because of its hiring practices. According to the settlement, BNY Mellon managed the assets of a Middle Eastern sovereign wealth fund and wanted additional business from the fund. The SEC alleged that the government officials who managed the sovereign wealth funds repeatedly asked BNY Mellon to provide their family members with BNY Mellon internships. The settlement referenced BNY Mellon e-mails that demonstrated BNY Mellon employees believed that by giving the internships to the government officials’ family member, BNY Mellon would benefit from additional business from the funds. The SEC also pled in the settlement that BNY Mellon’s system of internal controls was inadequate to fully effectuate BNY Mellon’s anti-bribery policy.
Similarly Qualcomm settled, without admitting liability, SEC claims that it violated the FCPA bribery prohibitions and the FCPA internal control requirements because of its hiring practices. (The SEC Qualcomm allegations included other allegations beyond hiring practices.) According to the facts in the Qualcomm settlement, government officials from two Chinese state-owned telecommunications enterprises (SOEs), requested that Qualcomm provide internships, educational payments, and eventual full-time employment to their family members. The Qualcomm settlement documents referenced acknowledgment by Qualcomm employees via e-mails that the internships were important to maintain ongoing business relationships with the SOEs and certain “customer relationship benefits” would accrue, or be withheld, if the government official’s family member were not hired. The SEC also accused Qualcomm of not having adequate internal controls to assure its employees were not providing “anything of value” to government officials.
It is clear from these settlements that the government now considers a job for a family member of a government official as something of value for purposes of corruption statutes. These cases also reiterate that organizations must have controls in place to avoid running afoul of corruption laws. The following suggestions on revamping hiring practices may demonstrate to prosecutors that a businesses hiring is ethical and legal.
- Clarify Your Anticorruption Policy
In its settlement with the government, BNY Mellon explicitly agreed to address hiring government officials’ relatives in its anticorruption policy. So anticorruption policies should clearly state that hiring someone in exchange for government business or a government favor is illegal and violates policy. In fact, the policy should make it clear that the business does not give favors, jobs, money, gifts, entertainment, or anything of value to a government official, foreign or domestic, in exchange for some government business or government benefit.
- Standardize Aspects of the Hiring Process
The interns that BNY Mellon hired at the behest of the government officials were hired before being interviewed and BNY Mellon sales and client relationship employees had wide discretion to make initial hiring decisions. Although BNY Mellon had a standard process for hiring interns, apparently these interns did not go through that process. As part of its settlement, BNY Mellon agreed to set up a centralized hiring process so every applicant for a full-time hire or an internship had to be routed through the centralized human resource application process.
By creating a standardized application process, a business eliminates the opportunity for employees to independently make a hiring decision for improper reasons. A centralized process that requires recruiting professionals and human resource professionals to manage the hiring process enables hiring recommendations based on objectivity, since human resource professionals are not involved in the sales process. It also assures that hiring decisions are informed with the subject matter expertise of those charged with managing human capital for a business, human resources, rather than being left to the sales team.
- Disclose Relations with Government Officials
BNY Mellon’s settlement agreement required that it establish methods for applicants to disclose relationships with government officials and that anticorruption officers had to review the disclosure, approving any hires with these connections. According to the Qualcomm settlement, one applicant was referred to during the Qualcomm hiring process as “must place” and as having influence with Chinese government officials.
Developing a standard application process that requires applicants to disclose personal or business relationships with government officials or whether the applicant ever worked for the government will furnish recruiting and human resource with information to detect hires that may expose the business to corruption. The process should also include steps to conduct further due diligence on the hire when a relationship with a government official is disclosed. Implementing a two-tiered review system in the hiring process, disclosing relationships and then conducting due diligence on any disclosures, affords the business the opportunity to not only have visibility on hires with relationships with government officials but creates an avenue to review whether the hire is in exchange for government business or government favors.
However, this process must clearly define the relationships that the applicant must disclose because failing to do so will impede the process with too many disclosures. For example, must an applicant disclose a relationship with a cousin, an uncle, or just parents and siblings? This decision should be informed by each business’ operations such as where it does business and how often potential clients refer hires to the business. Additionally, the process should be clear on the extent of any due diligence to be conducted on the applicant who discloses a relationship with the government. Finally, the process must define who is responsible for reviewing the due diligence and who has the final authority on whether the candidate continues through the hiring process.
- Have Written Standards on Who Gets Hired
In both the BNY Mellon case and the Qualcomm case, facts in the settlement documents demonstrate that the hires made at the behest of the government officials did not meet either organization’s hiring standards. BNY Mellon required candidates to be from select schools, have a specific GPA, leadership skills as well as have an affinity for financial services. However, the interns it hired at the request of the government official did not meet these requirements. Likewise, in the Qualcomm case, the settlement indicated that one candidate who was hired at the request of the government official had previously been a “no hire” since the candidate’s skills did not match the job.
To avoid the reality or the perception of making a hire in exchange for government business or government favors, an organization should have written, defined education and experience requirements as well as clearly articulated soft skills such as leadership ability, emotional intelligence and maturity. Then, any applicant needs to meet those requirements. Doing so sets a definitive standard for all applicants minimizing the risk of an unqualified person being hired simply because of their connections with a government official.
- Conduct Training and Message the Policy and the Processes
The SEC noted in the Qualcomm settlement that certain employees had not been trained on the FCPA. Additionally, according to the Qualcomm settlement, Qualcomm did not have a sufficient bench of compliance officers to oversee corruptions risks so, without this support employees were not well situated to identify potential risks of corruption. BNY Mellon likewise had not trained HR professionals. BNY Mellon was also faulted because it did not assure all employees completed the corruption training and because some employees did not “understand” the training.
Anticorruption policies and the processes developed to enable compliance with those policies must be systematically communicated throughout the organization and to third parties. The board, executives, employees and third parties need to be given training, messages, and the opportunity to raise questions or concerns on corruption policies and adherence to procedures. Employees and leaders in high-risk groups, like recruiting, HR, and business development should be trained more regularly and should receive more regular communications reminding them of the policies and procedures. Further, the training should be designed to assure it is effective – that is, that employees understand the requirements and are able to execute. This can be done either by conducting live training that includes a question and answer period or through computer-based training that includes testing to complete the course.
Also, it is vital to assure that all those who must take the training do so and that the business documents who took the training and who received the communications. In 2012, Morgan Stanley avoided an FCPA prosecution in part because it was able to inform DOJ the precise number of times it had tried certain employees on its corruption policies and the precise number of times the offending employee and been reminded about complying with anticorruption laws.
- Monitor Compliance With Policies
According to the Qualcomm settlement, although it had standards around its hiring practices, employees deviated from the standard hiring practices by hiring individuals that did not meet the minimum qualifications of the position.
Having great policies and standard processes will be of no help if employees feel they do not have to follow them if the right business opportunity presents itself. So, in addition to creating the policies and procedures which are designed to help employees avoid corrupt activity, a business needs to conduct regular audits of these policies and procedures to assure employees are not circumventing them. If these audits identify instances of noncompliance, employees, regardless of role in the business, need to be disciplined. Further, audit findings should also be used to assess whether the policies and procedures are effective in achieving the goal of hiring without corrupt influence. If the findings reveal that processes are ineffective in doing so, policies and processes should be updated to be responsive.
- Empower Recruiting and HR to Bring Issues Forward
The SEC described in the Qualcomm settlement that Qualcomm HR personnel responded to internal pressure from a vice president to hire a government official’s son despite an assessment that the individual would “be a drain on teams.” When questioned about the hiring decision, the HR employee explained that “we’re operating under a different paradigm here than a normal hire/no hire decision tree.” The HR employee was referencing the government official’s suggestion that Qualcomm needed to make the hire to continue to benefit from its relationship with the government.
In matters of improper hiring practices, recruiters and human resources are the front line in identifying red flags around a potential hire. Therefore, recruiters and human resource professionals must be empowered to question the motives for a particular hire. They also must clearly understand where they can go for legal counsel in the event they encounter a hiring situation that seems suspicious. Finally, they must be able to seek legal counsel without getting grief for doing so.
- Have Employees Certify to Complying with Policy
BNY Mellon’s settlement noted that as part of its annual certification to comply with the BNY Mellon’s Code of Conduct, BNY Mellon agreed to have its employees annually certify compliance with the centralized hiring process.
Once a business establishes policies and procedures and trains on those policies and procedures, it should also require employees to annually certify that they have followed the policy and processes. The certification should not only give employees the option to affirm compliance but it should also give employees the option to indicate that before making a certification, they must talk with the anticorruption policy owner, ethics or legal about any actions they are now questioning. Certifications, while valuable, can be harmful if employees are asked to reveal instances of policy violations that may implicate a violation of corruption laws.
- Document Decisions
In the BNY Mellon settlement BNY Mellon senior managers had the authority to approve the hires that the government officials had requested without legal, compliance or human resources review of the decision. As a result, the SEC claimed that BNY Mellon did not have the necessary controls to assure compliance with law.
As discussed above, a standard hiring process that removes hiring authority from business development and instead requires human resource oversight should limit hiring decisions based on illicit requests from government officials. Similarly, having defined hiring criteria; requiring an applicant to disclose relationships with government officials; conducting due diligence on those disclosures; and requiring legal or compliance review of those disclosures creates the controls that assure compliance with law.
However, to effectively manage these controls and to address instances when it is ethically and legally appropriate to circumvent policy, decisions need to be documented. Further, the standard hiring process should document whether the candidate fit the hiring criteria or not and it should document why the candidate was hired or not hired.
Also, if the decision is made to hire someone who does not have the required background or there was a decision to circumvent hiring processes, the decision and why it was made should be explained and documented. The assessment should include an opinion on the legality of the transaction as well as the impact a hiring decision, even if legal, would have on the business’ reputation.
- Investigative Processes
Finally, when a recruiting or hiring issue appears to be inconsistent with policy or occurred outside of the standard hiring processes, an organization should have a defined method to investigate the matter. The investigative findings should be documented and any decision, either to hire or to abort the hire, should be noted. Lawyers, consulting with human resources and impartial business leaders, need to be able to call foul and stop a hire.
Finally, depending on what the investigation reveals and the nature of the business, lawyers will need to work with business leaders to determine if in fact the practices need to be disclosed to the government.
Ultimately, an organization needs to analyze its hiring practices in light of the U.S. government’s increased focus on prosecuting businesses for hiring practices that may violate corruption laws. The review should consider not only the organization’s current hiring methods but also the countries where it recruits and hires. But, hiring practices in the United States should not be ignored because those too can expose a business to a corruption allegation. The results of that review should inform on the need to develop or refine policies and procedures for protecting itself from accusations of illegal or unethical hiring. Compliant and ethical hiring can mitigate the exposure of bribery, other criminal charges, or regulatory violations by eliminating trading jobs for government favoritism.