By Steptoe & Johnson LLP | August 26th, 2015

By Lucinda Low and Kaitlin Cassel

On August 18, 2015, the US Securities and Exchange Commission (SEC) announced a settlement with New York-based bank and investment company, Bank of New York Mellon (BNY Mellon or the Bank) for violations of the anti-bribery and internal control provisions of the US Foreign Corrupt Practices Act (FCPA) in connection with internships the Bank provided to family members of foreign government officials affiliated with a Middle Eastern sovereign wealth fund (the Fund).

This settlement concludes the SEC’s investigation of BNY Mellon, and appears to represent the first enforcement action in which internships for relatives of alleged “foreign officials,” as opposed to money payments, constituted the alleged bribe. The SEC press release notes that the FCPA prohibits companies from improperly influencing foreign officials with “anything of value,” including internships.  Without admitting or denying the SEC’s findings, BNY Mellon agreed to a cease-and-desist order (the Order), and to pay sanctions consisting of $8.3 million in disgorgement, $1.5 million in prejudgment interest, and a $5 million civil penalty.  While neither the Order nor the SEC’s press release gives any insight into how these sanctions were derived, language in the Order suggests the civil penalty was reduced to $5 million based on BNY Mellon’s cooperation with the investigation.

This enforcement action appears to be the first based entirely on a theory of improper hiring and internship practices, but it is unlikely to be the last.  Multiple US companies have been reported to be under similar scrutiny. As this settlement suggests, the SEC is likely to be increasing its focus on companies’ hiring and internship practices.  Going forward, companies should ensure their own compliance programs have procedures in place to address the specific corruption risks associated with their hiring processes.

BNY Mellon’s Relationship with the Fund and the Allegedly Inappropriate Internships

According to the SEC’s cease-and-desist order, BNY Mellon collected fees for services provided to the Fund related to its safekeeping and administration of assets of the Fund.  The Fund is not named in the Order, but is described as a government body responsible for the management and administration of the assets of a Middle Eastern country. The Fund had been a client of BNY Mellon since 2000. BNY Mellon’s fees arose from government contracts awarded to the Bank through a process requiring approval from foreign government officials, and from additional assets allocated to BNY Mellon under existing contracts at the discretion of foreign government officials. During the relevant time period, BNY Mellon held approximately $55 billion of the Fund’s assets in its global asset servicing unit and $711 million of assets under its global investment management business division. The Fund transferred an additional $689,000 to BNY Mellon’s management business division in June 2010. During this time, BNY Mellon was seeking to increase the amount of assets of the Fund under its custody and management.

In the Order, the SEC focuses on two unnamed Officials at the Fund who made repeated requests that BNY Mellon provide their family members (the son and nephew of one Official and the son of the other Official) with valuable internships.  One such Official is described as a Fund department head with authority over the allocations of new assets to existing managers, and was viewed as a “key decision maker” at the Fund.  The other Official is described as a senior official at the Fund’s European office with the authority to make decisions directly affecting BNY Mellon and who was “crucial to both retaining and gaining new business,” according to BNY Mellon documents.  The Officials presented the internships as an opportunity for BNY Mellon and made clear they could secure internships for their relatives at BNY Mellon’s competitors if they were not satisfied.  Statements cited in the SEC Order from BNY Mellon documents demonstrated that its employees viewed granting the internships as necessary to retain or grow business with the Fund.  These statements include that BNY Mellon was “not in a position to reject the request from a commercial point of view” and that it was the “only way” to increase BNY Mellon’s share of the business from the Fund’s European office, aside from obtaining assets in new countries.

BNY Mellon allegedly granted these internships to the three family members of these Officials with the knowledge and approval of senior BNY Mellon employees.  The family members interned at BNY Mellon during 2010 and 2011.  BNY Mellon was subsequently able to retain and grow its business with the Fund, including the transfer of further assets to BNY Mellon from one of the Official’s department at the Fund.

Significantly, these family members were allegedly granted internships despite not meeting BNY Mellon’s established internship program’s rigorous admissions criteria, including minimum academic grade point averages and professional credentials.  Additionally, the BNY Mellon internship programs were for undergraduates or postgraduates actively pursuing an MBA or similar degree, yet the family members were recent graduates not enrolled in any degree program. They were not interviewed before being hired, despite multiple rounds of interviews for other hires. They were given opportunities not accorded to members of the regular internship program. And their performance during the internships was noted to be less than exemplary.

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By Steptoe & Johnson LLP | May 27th, 2015

By Lucinda A. Low and Tom Best

On May 20, 2015, the US Securities and Exchange Commission (SEC) announced a settled enforcement action against Anglo-Australian extractive company BHP Billiton (BHPB or the company) for violations of the US Foreign Corrupt Practices Act (FCPA) in connection with the hospitality program it conducted at the 2008 Beijing Olympic Games. This settlement concludes the SEC’s investigation of BHPB, which began in 2009, and represents one of the most aggressive uses by the SEC to date of its accounting, and particularly its internal controls, authorities in an FCPA context.  Instead of being predicated on specific questionable payments, the factual basis of the charges was that the company recognized the risk that improper quid pro quo arrangements could develop in connection with the hospitality program, and that such risks were not appropriately managed by the company’s program, including through the manner in which they were documented in company compliance approval tracking forms.  In connection with the settlement, BHP Billiton agreed to pay a $25 million civil penalty to the SEC, to a cease-and-desist order, and to a one-year reporting period to the SEC regarding its ongoing FCPA/anti-corruption compliance efforts.

This settlement raises significant questions regarding the manner in which SEC enforcement of the FCPA’s accounting provisions continues to evolve.  As regular consumers of SEC FCPA enforcement actions will know, in recent years, leadership of the SEC’s FCPA Unit has consistently asserted that it views an effective FCPA compliance program as essential to satisfying the FCPA’s legal requirement to “devise and maintain a system of internal accountingcontrols sufficient …” to ensure that “transactions are executed in accordance with management’s general or specific authorization”, and related tracking requirements.

The charges in this settlement take that position – which has not been litigated – a step further.  They appear to raise the prospect that companies could be charged with violations of the FCPA’s accounting provisions where their compliance programs do not maintain all elements of what the SEC would deem an effective compliance program – even where no underlying bribery (or at least payment arrangements suggesting some kind of improper quid pro quo, for example), has taken place.

The case also suggests that programs in the areas of hospitality and sponsorship – common and recurring areas of activity for many companies – may face enhanced scrutiny for systemic adequacy from a regulatory point of view, at least where larger amounts are involved.  Such a position – if the SEC indeed intends to pursue enforcement actions on this basis as a matter of enforcement policy – would significantly expand the scope of risks facing US issuers with appreciable FCPA/anti-corruption risks to their business.

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By Steptoe & Johnson LLP | November 6th, 2014

By Susan Munro, Lucinda Low, Bo Yue, and Yongli Xu

As part of the Chinese government’s ongoing initiatives to strengthen anti-corruption measures, the PRC Supreme People’s Procuratorate amended its Rules of the People’s Procuratorates on Whistleblowing Work (SPP Rules) on October 27, 2014.  It is noteworthy that the recent amendments were released immediately after the conclusion of the fourth plenary session of the eighteenth Communist Party of China, which among other things urged the administration to focus on advancing the rule of law.

The stated aim of the SPP Rules is to “guarantee the smooth progress of whistleblowing work” within the jurisdiction of the people’s procuratorates.  In addition to their authority to prosecute, people’s procuratorates are tasked with investigating public corruption and other duty-related crimes committed by Chinese officials.  Therefore, the rules provide for the people’s procuratorates’ whistleblowing responsibilities in connection with their investigative activities, but they do not apply to government agencies that are responsible for investigating commercial bribery, or to any other Chinese authorities.

Statutory whistleblower protection in connection with criminal investigations has been provided for in China for almost 20 years.  The SPP Rules were issued in 1996 and later amended in 2009; however, the recent amendments are the most comprehensive rules issued to date.  The new SPP Rules contain detailed provisions governing how whistleblowers should be handled and their rights.  They encourage whistleblowers to give their real names when making reports, although whistleblowers are permitted to remain anonymous if they prefer, and provide that reports can be made in person, or through letter, fax, or phone, or via the procuratorates’ official websites.

Additionally, the new SPP Rules adopt measures to promote whistleblowing and require procuratorates to inform whistleblowers of their rights, including:

  • The right to apply for withdrawal of certain people’s procuratorates staff involved with a case
  • The right to inquire with the relevant procuratorate if the whistleblower has not received a response within a period of time
  • The right to appeal or apply for reconsideration if a  procuratorate decides not to file a case
  • The right to apply for protection if the whistleblower’s personal safety or property is threatened
  • The right to receive rewards in connection with whistleblowing

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By Steptoe & Johnson LLP | July 8th, 2014

By Lucinda Low, Tom Best and Andrew M. Bardi

On July 3, 2014, only a week before trial was scheduled to begin, a former Noble Corp. (Noble) CEO Mark Jackson and the former Nigeria country manager, James Ruehlen, agreed to settle the US Securities and Exchange Commission’s (SEC) pending enforcement action for violations of various provisions of the US Foreign Corrupt Practices Act (FCPA).  These settlements represent some of the last pending enforcement actions arising from the US government’s enforcement efforts against Panalpina World Transport (Holding) Ltd. (Panalpina) and certain of its customers relating to payments made through customs brokers to government officials in Nigeria and other countries to secure temporary importation permits and extensions necessary to allow their drilling rigs and other equipment to operate in Nigeria.

Judging from the settlements’ terms – which did not require any admissions of wrongdoing, or include any monetary sanctions – the settlements represent significant victories for the individuals, who are required only to agree to injunctions against involvement in any future conduct by others that may violate the accounting provisions of the FCPA.  Whether these resolutions will affect how the SEC approaches FCPA enforcement against individuals going forward, in particular where litigation is likely, is unclear.  What is clear, however, is that these settlements leave unaddressed a number of key legal questions under the FCPA – the scope and meaning of the “facilitating payments” exception and the intent requirement for individual defendants in particular – which were poised to be litigated at trial for the first time.

The Litigation

Noble, an offshore drilling contractor headquartered in London, England with substantial operations in Houston, Texas, was one of several companies implicated in the SEC’s and US Department of Justice’s (DOJ) multi-year investigation into Panalpina and certain of its customers.  On November 4, 2010, those agencies announced that they had reached settlements with Panalpina and six of its customers – including Noble – to resolve a host of customs-related (and other), FCPA violations spanning several years and occurring in multiple countries. In total, the seven companies agreed to pay over $236 million in criminal and civil monetary sanctions to resolve the matters.

For its part, Noble (the only company to receive a non-prosecution agreement in the November 2010 round of settlements), agreed to pay approximately $8.2 million in total monetary sanctions to the SEC and DOJ to resolve allegations that it had paid bribes through customs brokers to Nigerian Customs Service (NCS) officials in order to circumvent certain Nigerian laws and regulations requiring “temporary import permits” (TIP) (or extensions of such permits), in lieu of paying customs duties upon importation of the drilling rigs necessary for conducting Noble’s business.  In addition to making payments to NCS officials, Noble allegedly falsified documents provided to the NCS whose purpose was to demonstrate compliance with other regulatory requirements.  Noble also allegedly recorded the payments to NCS officials in its books and records as “facilitating payments,” even though, according to the SEC and DOJ, some of the payments in question did not meet the requirements of that exception to the FCPA’s anti-bribery provisions.

Fifteen months after the Noble SEC and DOJ settlements, on February 24, 2012, the SEC charged Messrs. Jackson (the former CEO) and Ruehlen (the Division Manager of Noble-Nigeria at the time of the conduct and the current Vice President and General Manager of the company’s Mexico division), for their alleged individual roles in the payments to NCS officials that had been the subject of the Noble settlements. The SEC also filed a settled complaint on that day against former Noble corporate controller Thomas O’Rourke.  Without admitting or denying wrongdoing, Mr. O’Rourke agreed to the payment of a civil penalty of $35,000 and an injunction against future violations.

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By Steptoe & Johnson LLP | January 31st, 2014

ByLucinda Low, Brigida Benitez and Tom Best

Case Shows Risks to Parent of Managing Global Lines of Business

Background: On Jan. 9, 2014, global aluminum producer Alcoa Inc. and subsidiary Alcoa World Alumina LLC agreed to pay $384 million to settle Foreign Corrupt Practices Act allegations with U.S. authorities. It was the fifth largest monetary sanction levied in a U.S. Foreign Corrupt Practices Act settlement to date and the third largest disgorgement – $161 million – in FCPA history.  Alcoa  is now one of two U.S.companies on the list of ten largest FCPA settlements. …

Beyond the headline reporting of the size of the penalties, there are a number of noteworthy features of the settlement, in particular concerning the SEC’s theory of the parent’s liability for the conduct of its subsidiaries. …

Excerpt - Noteworthy Features of the Case

Although pleas from subsidiaries have been common features of FCPA settlements in recent years, they are often accompanied by deferred or non-prosecution agreements with the parent companies. There is no such agreement here ….

The SEC’s findings on the basis for the parent’s responsibility for the conduct of its subsidiaries represent one of the most interesting aspects of the settlement. The SEC Order makes clear that it “makes no findings that any officer, director or employee of [parent] Alcoa knowingly engaged in bribery.” Rather, Alcoa Inc.’s liability was based on the theory that its subsidiaries acted as agents of Alcoa Inc. The SEC also cited a number of factors that may point to an alternate theory beyond agency for parent responsibility.  …

In addition … [w]hile other cases have involved civil and criminal forfeitures, the civil forfeiture of $14 million to the IRS appears to be a new feature for an FCPA settlement. …

The DoJ fine represents a discount of more than 50% off the bottom of the Sentencing Guidelines range. Interestingly, however, the DoJ explicitly credits the SEC’s disgorgement. Both agencies credit the civil forfeiture. Adding in the disgorgement and forfeiture numbers brings the discount to a level more consistent with recent cases. Whether this signals a trend or is simply a response to the economics of this case remains to be seen. …

The settlements likely do not end the matter. Although the Dahdeleh prosecution has failed as noted above, there may be other individuals still in the sights of the US authorities. …

Finally, this matter underscores the recent trend of foreign enforcement authorities’ cooperation with the DoJ and SEC in the investigation and prosecution of violations of the FCPA, and the increasingly diverse ways in which FCPA-related investigations become known to enforcement agencies. … READ MORE

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ANALYSIS: The Internships that Backfired: BNY Mellon Settles FCPA Investigation over Intern Hiring Practices

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