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.