Bank of New York Mellon violates FCPA. The United States Securities and Exchange Commission (SEC) announced in

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1 Bank of New York Mellon violates FCPA The United States Securities and Exchange Commission (SEC) announced in August that Bank of New York Mellon (BNY Mellon) agreed to pay USD 14.8 million (including USD 8.3 million in disgorgement, USD 1.5 million in prejudgment interest, and a USD 5 million penalty) to settle charges that it violated the Foreign Corrupt Practices Act (FCPA) by providing student internships to the children of Middle Eastern officials associated with a regional sovereign wealth fund. The bank agreed to these fines without admitting any wrongdoing, often referred to as a Deferred Prosecution Agreement (DPA). According to the SEC, "An SEC investigation found that BNY Mellon did not evaluate or hire the family members through its existing, highly competitive internship programs that have stringent hiring standards and require a minimum grade point average and multiple interviews (Cassin). This case marks the first time that the SEC has considered internships as a bribe, setting a precedent for many similar cases pending at banks such as J.P. Morgan Chase & Co., Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group Inc., Morgan Stanley and UBS Group AG (HUANG and GLAZER). In this analysis, the author will analyze the case of BNY Mellon to determine whether the bank violated the FCPA when it offered internships to the children of PEPs (politically exposed persons) outside of its typical hiring system. The author will present the cases for and against, ultimately offering an informed conclusion. Before delving into the particulars of this case, it will be useful to first familiarize the reader with the FCPA. The law was passed in 1977, and criminalizes companies and their management who seek to influence foreign officials with personal payments or

2 Borgia 2 rewards. The law includes extraterritorial provisions, allowing the SEC and Department of Justice (DoJ) to prosecute any company who does business in the US, including companies whose money moves through US banks. The sections of FCPA, which is part of Title 15 of the United States Code, that will be most relevant are 78dd-1 [Section 30A of the Securities & Exchange Act of 1934], part a, which states: It shall be unlawful for any issuer which has a class of securities registered pursuant to section 78l of this title or which is required to file reports under section 78o(d) of this title, or for any officer, director, employee, or agent of such issuer or any stockholder thereof acting on behalf of such issuer, to make use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value to any foreign official for purposes of influencing any act or decision of such foreign official in his official capacity, (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advantage; or inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person (US Department of Justice) and subsections (b) and (c), which offer exceptions: Subsections (a) and (g) of this section shall not apply to any facilitating or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official, political party, or party official. (US Department of Justice) It shall be an affirmative defense to actions under subsection (a) or (g) of this section that: the payment, gift, offer, or promise of anything of value that was made, was lawful under the written laws and regulations of the foreign official s, political party s, party official s, or candidate s country; or the payment, gift, offer, or promise of anything of value that was made, was a reasonable and bona fide expenditure, such as travel and lodging expenses, incurred by or on behalf of a foreign official, party, party official, or candidate and was directly related to the promotion, demonstration, or explanation of products or services; or the execution or performance of a

3 Borgia 3 contract with a foreign government or agency thereof. (US Department of Justice) With these sections of the law in mind, we can now move forward with an understanding of what constitutes an FCPA violation, and what exceptions and defenses are allowed. BNY Mellon violated the FCPA when it offered internships to the children of PEPs outside of its typical hiring system. First, the author will demonstrate that the bank was subject to the law. Part (a) clarifies any issuer which has a class of securities registered pursuant to section 78l of this title or which is required to file reports under section 78o(d) of this title, or for any officer, director, employee, or agent of such issuer or any stockholder thereof acting on behalf of such issuer is subject to the law. Referring to section 78l of Title 15, those entities subject to it are: Every issuer which is engaged in interstate commerce, or in a business affecting interstate commerce, or whose securities are traded by use of the mails or any means or instrumentality of interstate commerce (US Department of Justice). Consequently, because BNY Mellon is an American multinational banking and financial services corporation (Reuters) operating across state lines, it qualifies as an entity involved in interstate commerce, thus being subject to 78l and, consequently, 78dd (the FCPA provisions of Title 15). Second, the author will show that offering internships constitutes an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value, as prohibited by FCPA. It was already shown in the opening paragraph that the questionable interns were hired through its existing, highly competitive internship programs that have stringent hiring standards and require a minimum grade point average and multiple interviews.

4 Borgia 4 Moreover, the foreign officials (the interns family members) repeatedly asked about the internships after bluntly requesting that the bank offer their children the positions (Cassin). According to the Wall Street Journal, The interns the sons of two officials and the nephew of one of those officials didn t meet the bank s standards for interns, including minimum grade point average, according to the agency. The interns were recent college graduates. In one cited in government filings, a BNY Mellon employee allegedly wrote, I want more money for this. I expect more for this. [ ] We re doing [the official] a favor. Despite repeated absences and comments from managers criticizing their work ethic, the interns were able to extend their positions to six months, significantly longer than the duration afforded through the normal summer internship program, the SEC said. (HUANG and GLAZER) With these pieces of information in mind, plus the knowledge that these were paid internships, it is evident that the interns in question would not have had these positions without the interference of the PEPs. Moreover and this will be discussed shortly in more detail the request from the PEPs was made in such a manner as to suggest a quid pro quo arrangement, where the internships were requisite for a better deal. So, the internship constitutes an offer of something of value. Now, we must show that the offer was made to secure the performance of a routine governmental action by a foreign official, political party, or party official. In the announcement, the SEC alleged that one key official was viewed by BNY Mellon executives as a key decision maker within the Fund, further alleging that the official persisted in requests for internships for his son and nephew, even suggesting that the requests represented an opportunity for BNY Mellon and that the official could secure internships from a competitor should the request not be granted. The SEC cited internal BNY Mellon s discussing the official s request, including one in which an employee noted that by not allowing the

5 Borgia 5 internships to take place, we potentially jeopardize our mandate with the Fund (Cadwalader, Wickersham & Taft LLP). A second official at a European office of the fund who BNY Mellon described as crucial to retaining and gaining new business requested an internship for his son. BNY Mellon s showed that the bank executives believed that granting this official s request was likely to influence any future decisions taken within the Fund. This evidence demonstrates that the internships were offered in an attempt to secure future business with the sovereign wealth fund, and that is was understood by bank employees that the internships were a) a valuable offering that b) would engender positive business relations for BNY Mellon. With this in mind, it is clear that the Bank of New York Mellon violated the FCPA anti-bribery provisions. Regarding the exceptions, because the sovereign wealth fund in question has not been identified, it is impossible to say with certainty that the offer was not legal in the foreign officials country. However, every country in the Middle East (excepting Syria) is a signatory to the United Nations Convention Against Corruption (UNCAC), which requires parties to implement anti-corruption measures, including those against bribery. So, the reader can safely assume that the sovereign wealth fund operates in a nation where bribery is illegal. Second, the internships were not a reasonable and bona fide expenditure, such as travel and lodging expenses, as they were not germane to the business deals potentially at hand. Finally, because the officials were not government representatives, the final exception cannot apply. Thus, having determined that BNY Mellon violated FCPA anti-bribery provisions, and having demonstrated that the codified exceptions do not apply, it is concluded that Bank of New York Mellon is responsible for the fines levied (as settled in the DPA).

6 Borgia 6 BNY Mellon did not violate the FCPA when it offered internships to the children of PEPs outside of its typical hiring system. This is because the text of the law offers exceptions for both facilitation payments and reasonable expenses. The text reads, Subsections (a) and (g) of this section shall not apply to any facilitating or expediting payment to a foreign official, political party, or party official the purpose of which is to expedite or to secure the performance of a routine action. So, payments made to facilitate something that would happen anyway are not a violation of FCPA anti-bribery provisions. While the internal s do suggest that the sovereign wealth fund PEPs were persistent in asking about the internships, they do not prove or demonstrate that the PEPs would have operated differently in business dealings had the internships not materialized. With this view, the internships come to be seen as a way to hasten and improve business dealings by improving business relations, though the same result, namely business deals between BNY Mellon and the sovereign wealth fund, would have plausibly occurred in the absence of these internships. Furthermore, the dismissal of the internships as a reasonable and bona fide expenditure betrays a lack of understanding about Middle Eastern culture, where gifts and favors are a legitimate and recognized part of the business framework. Where these internships may not be a reasonable expenditure in the United States or Europe, they are reasonable in the Middle East. For instance, Communicaid, a marketing agency, says that In the Middle East for instance, being generous is highly valued and offering a gift tends to be seen as a strong mark of friendship as well as a necessary step towards building a profitable business relationship. Generosity is also illustrated by the price and value of the gift, meaning that business presents are sometimes incredibly luxurious in the Middle East. Refusing a present is a terrible faux pas that can lead to a cultural clash or to the end of a promising contract or business partnership. A lack of

7 Borgia 7 intercultural awareness on gift giving in the Middle East can significantly hinder the relationship or break organisational policies around gift giving. (MacLachlan) BNY Mellon employees have the intercultural training to operate within the Middle Eastern culture, where gift giving is a reasonable and cultural part of ordinary business expenditures. My conclusion is that BNY Mellon violated the FCPA when it offered internships to the children of PEPs outside of its typical hiring system, and that the exceptions do not apply. The bank is unquestionably subject to the FCPA provisions of Title 15, as demonstrated in the preceding paragraphs. Moreover, the internships, because they were paid, and because internships are understood to have value in building career experience, constituted an item of value. Additionally, because of the implication from the internal s that the PEPs would move the business to a BNY Mellon competitor should the internships not materialize, the internships are a bribe as opposed to a facilitation payment. In regards to the exceptions, the first does not apply, as the internships were demonstrated to be a bribe as opposed to a facilitation payment. As to the reasonable expense argument, it is true that gift giving is an important part of Middle East culture. However, FCPA provisions still apply; it s treacherous territory, but there are guidelines and help available. For instance, BNY Mellon could have contacted the FCPA hotline at the DoJ or SEC to explain the situation and determine the best course of action. These violations happened because of a failure of internal controls, where the compliance department which oversaw FCPA compliance was removed from hiring controls and procedures. The SEC indicated that BNY Mellon had few specific controls

8 Borgia 8 relating to the hiring of customers and relatives of customers, including foreign government (Cadwalader, Wickersham & Taft LLP). Because a number of other banks are currently being investigated for similar FCPA violations, this is an occasion to reexamine compliance regimes, and how they can become more expansive and inclusive, recognizing compliance risks in every segment of an organization. Finally, it is important to consider the effects that this case will have on the banking industry in the future. The culture of US banks is one where networking and referrals is key to employment, success, and ascension. The SEC was willing to prosecute based on internships given as favors; will it likewise pursue other hiring procedures that favor any components other than merit? Works Cited Cadwalader, Wickersham & Taft LLP. "Bank of New York Mellon Settles FCPA Charges Regarding Internships for Relatives of Sovereign Wealth Fund Officials - See more at: FCPA & Compliance Law Blog 25 August Cassin, Richard L. "BNY Mellon pays $15 million in FCPA settlement for internship hiring practices." The FCPA Blog. 15 August HUANG, DANIEL and EMILY GLAZER. "Are Wall Street Interns the Latest Regulatory Target?" The Wall Street Journal. 18 August 2015.

9 Borgia 9 MacLachlan, Matthew. Communicaid. 7 January October 2015 < Reuters. Bank of New York Mellon Corp. 30 October 2015 < US Department of Justice. "Anti-Bribery and Books & Records Provisions of The Foreign Corrupt Practices Act." 22 July October 2015 < "Cornell University Law School." 15 U.S. Code 78l - Registration requirements for securities. 30 October 2015 <