Last month, JP Morgan entered into a landmark settlement agreement in which it agreed to pay $264.4 million to the DOJ, SEC, and Federal Reserve to resolve Foreign Corrupt Practices Act (“FCPA”) offenses for providing jobs to the relatives of Chinese government officials to secure the underwriting of Chinese state-owned companies’ initial public offerings (“IPO”). While this is not the first time an American company has settled an FCPA case on similar facts, the JP Morgan investigation trumps all others in terms of its scope and the audacity of the alleged bribery scheme. The bank’s so-called “Sons and Daughters” program allegedly tracked and prioritized individual hires based the potential deals their family members could refer to the bank, while the candidates were underqualified for the positions or performed ancillary work once they joined the bank.
According to the DOJ, the quid pro quo relationship of the program was “nothing more than bribery by another name.” The bank was also chastised for the compliance failures that permitted the program to continue unabated for many years. But perhaps most significantly, the JP Morgan settlement is the latest in a series of enforcement actions that has seen the U.S. government expand the definition of “anything of value” under the law.
Congress enacted the FCPA in 1977 in the wake of the Watergate investigation and in response to reports of widespread bribery of foreign officials by U.S. companies. The FCPA prohibits U.S. persons, companies, and issuers from, among other things, bribing or attempting to bribe a foreign official in order to secure an improper business advantage. In basic terms, the elements of an FCPA bribery charge include (1) offering, paying, or authorizing, (2) “anything of value,” (3) directly or indirectly, (4) to a foreign official, (5) to improperly gain a business advantage.
For decades, the FCPA laid relatively dormant. In recent years, however, the DOJ and SEC have dramatically stepped up enforcement of the Act. For instance, since 2008, the top ten FCPA enforcement actions have cost those ten companies a total of $4.8 billion in fines and disgorgement. During the FCPA’s renaissance, the government has actively sought to extend the jurisdictional reach of the Act, as well as expand the definition of the five elements of a bribery charge. The evolving definition and interpretation of each element, let alone all five, is beyond the scope of this article.
Since the JP Morgan investigation was first disclosed in 2013, one of the most interesting developments has been the evolving meaning of “anything of value” in relation to U.S. companies hiring the children of influential foreign officials, or “princelings” as they are referred to in China. For years, it has been standard practice for western banks to hire relatives or close friends of senior Chinese officials in order to build up “guanxi” (meaning “networks” or “connections”).
As you might expect, the government’s theory is that the job or internship constitutes something of value under the FCPA and that it is being offered to improperly gain a business advantage. The interesting question becomes, however, does network-building or even blatant nepotism rise to the level of an FCPA violation? The answer appears to be “yes.”
What constitutes something of value is not always easy to answer. Sometimes the answer is very clear. The proverbial suitcase full of unmarked bills delivered in a dark alley to a foreign minister in exchange for a lucrative government contract is a clear violation. Cash is certainly something of “value.” But what if the thing of value is not promised or delivered directly “to” the official? For instance, in SEC v. Schering-Plough Corp., No. 04-CV-00945 (D.D.C. June 16, 2004), the Commission argued that gifts given to a third-party charity were intended to influence the charity’s founder, a senior Polish official. The charity was legitimate and the donation never went into the personal coffers of the official, but the government staked a clear position as to what it considers to be something of “value” for the purposes of the FCPA.
Returning to the recent princeling cases, can a job (even an unpaid internship) offered to a relative of a foreign official inure to the benefit of the official himself? If the job is lucrative, then arguably the salary received by the relative is a savings to the official, but that assumes some level of financial dependence. One could also argue that there is an intrinsic or prestige value associated with working at a reputable financial services firm, but it is very hard to gauge such benefits.
Hiring a family member of a government official is not necessarily a violation of the FCPA’s anti-bribery provisions. But if a company does so with the intent to induce the official to do something in their official capacity, such as award a contract or approve a deal, that hire would potentially cross the line.
In prosecuting this recent line of princeling cases, the DOJ and SEC are sending a very clear signal that they are continuing to seek ways to expand the reach and scope of the FCPA. The princeling investigations to date have been settled, so there is no case law to help companies determine the left and right bounds when it comes to hiring the relatives of foreign officials. The U.S. government’s public statements on these cases, however, are certainly instructive.
First, companies that might hire a relative of a foreign official should not change their hiring standards. Although certainly not dispositive, it will be much easier to allege improper motive if the hire in question is not even remotely qualified for the position. Jobs at the world’s leading investment banks, for instance, are highly coveted and competitive even among the best credentialed graduates. Of course, “princelings” by definition tend to have greater access to prestigious educational opportunities and may nevertheless be qualified. Second, ensure that you follow the same hiring process for all applicants, regardless of their familial connections. Third, ensure your business units and human resources department are well trained and resourced to identify potentially problematic candidates and ensure that any hiring is done in accordance with your company’s anti-corruption policy. Of course, when in doubt, consult with an FCPA expert.
The princeling investigations have not been limited to financial services firms operating in Asia. In August 2015, BNY Mellon agreed to pay the SEC $14.8 million to settle FCPA charges in connection with providing student internships to family members of foreign officials affiliated with a Middle Eastern sovereign wealth fund. Earlier in 2016, Qualcomm paid the SEC $7.5 million to settle FCPA charges for hiring relatives of Chinese government officials to increase sales. You can bet that the government has its eye on hiring practices at U.S. companies and issuers operating in different industries and in other corners of the world. Stay tuned.