FCPA Liability For Hiring Practices Gains New Credence
The U.S. Department of Justice and the U.S. Securities and Exchange Commission have stood by an expansive theory of anti-bribery liability under the Foreign Corrupt Practices Act for corrupt hiring schemes. Even as some still questioned the commitment of the Trump administration to enforcement of the FCPA, publicly traded Credit Suisse AG and its Hong Kong subsidiary agreed this May and July 2018 to pay total penalties of $77 million for violations in connection with employing the family and friends of Chinese governmental officials.[1] Legal, compliance and human resources professionals can take away from this latest disposition sound indicators for when making a so-called “referral hire” crosses the line from being an innocent practice into being a “thing of value” corruptly offered or provided to the referring official in order to obtain or retain business. However, the CS resolutions also hint at where the government may struggle to establish all elements required for an anti-bribery violation of the FCPA. Building cases against individual defendants may be particularly challenging.
A Short History of the FCPA Hiring Cases
Just a few years ago, it was controversial (and in some quarters, worthy of derision) to posit that hiring a foreign official’s family and friends could confer a benefit on the official that is cognizable as a bribe under the FCPA. Early reports focused on hires of the children (sometimes called “princelings”) of decision makers at Chinese state-owned enterprises investing with, or otherwise giving business, to financial firms. Critics pointed out that this appeared to be a common practice at companies across various industries, here in the United States and abroad.
But through a steady enforcement focus on pursuing cases with the worst documents for the company, a theory of FCPA liability developed momentum. Since 2014, the U.S. government has resolved cases about corrupt hiring practices overseas by three other companies — BNY Mellon (SEC, 2015), Qualcomm (SEC, 2016), and JPMorgan (DOJ and SEC, 2016). In addition, securities filings with the SEC indicate that several more banks opened investigations into hiring practices since 2013 that may yet result in further enforcement.
Around the time the Trump administration took office in 2017, there were multiple reports of the president’s hostility to the FCPA. Political opponents and media outlets have accused the president and his family of nepotism and influence-peddling. Such an environment may have cast doubt on a continued line of actions cracking down on the family-and-friends hiring practices. However, the DOJ and SEC have persisted in bringing all manner of FCPA cases as before, with hiring cases now being no exception.
Overview of Credit Suisse’s Case
Credit Suisse’s settlements in the past two months involve a series of hires between 2007 and 2013.
By the outset of the relevant events at Credit Suisse, the Swiss firm had a global anti-bribery policy that was, in fact, already forward-leaning on this issue: “’Offers of employment, including internships, to Government Officials, their family members, or associates,’ could be considered to be ‘things of value’ under the FCPA, and were prohibited if offered ‘to obtain or retain business, or otherwise secure an improper advantage.’”[2] Thus, leadership at CS headquarters was far from sharing the disdain for this notion expressed by some in the defense bar when the investigations of these “hiring cases” surfaced in 2013. There was recognition at Credit Suisse that competitors’ practices were changing, too, in view of the legal risk. However, implementing procedures on referral hiring met pushback when rolled out at the Hong Kong subsidiary, where at least one banker believed restrictions would “kill” their business.[3] Senior managers directed CS employees to pretend that “normal hiring processes were being followed for referral hires when they were not.”[4]
The stipulated statement of facts attached to the CS resolution with the DOJ highlights four detailed, individual episodes of corrupt hiring and, importantly, post-hiring personnel practices at the Hong Kong sub. The SEC adds to these more examples drawn from among more than 100 family and friends of governmental officials whom, the SEC says, Credit Suisse hired in the Asia-Pacific region during that time period. Presumably the most blatant, these examples establish that unmerited, sham and/or grossly overcompensated jobs for family and friends were traded for the officials’ actions.
The Princess Bribe
Take one young Chinese woman courted for a job by CS bankers in Hong Kong so that her powerful mother would award the bank a lucrative role on a deal. The mother was a high-ranking official at a state-owned Chinese power company. In whisking the daughter past other candidates to a job offer, one manager explained to a colleague that she was “a princess [who was] not used to too many rounds of interview.” Bank employees prepared a fictionalized resume for her HR file to beef up her qualifications, and bypassed other screening or approval requirements. Emails tightly correlated discussion of the daughter’s rigged job offer with a CS drive for the mother to deliver a mandate from the power company. The plan was to give the daughter the offer letter “asap,” at which point she would “push her mum” on getting Credit Suisse onto a deal. And so the bank garnered a mandate paying hefty fees.[5]
Once hired, the daughter missed mandatory boot camp, was routinely absent without leave and committed other unprofessional conduct, including apparent cheating. The mother hovered protectively over her, attended CS trainings with her, traveled with her on business trips, approved a list of client deals for her to work on, and requested that she be promoted by Credit Suisse.[6] The term “politically exposed person,” or PEP, does not suffice; what we have here is a PEP combined with a helicopter parent — so, a helicopter PEP?
Managers finessed the daughter’s comical performance review, which one banker sought to avoid altogether based on her “special situation.” Ultimately, she received this feedback: “Pls come to the office more often — we would like to see more of your smiling face,” and, “Come to the office, answer your phone, don’t be rude.” Yet hoping that she would help bring work on a $2 billion deal through the mother’s employer, a CS manager recommended to “say we will promote her to associate 1 if she delivers.” The mother indeed continued to feed work through her daughter to Credit Suisse, earning it fees in seven figures. The daughter received a hefty bonus and the promotion her mother requested, which management expedited through misrepresenting her class year. Deemed a “star,” she took in $1 million in total compensation over time.[7] It is almost as though every answer to this princess was: “As you wish.”[8]
The stipulated facts indicate that this was just one episode of a corrupt and deliberate scheme at the subsidiary to provide employment for underqualified, underperforming and overcompensated family and friends, in clear violation of CS policies. CS employees tracked the referral hires on a spreadsheet, noting the client or government relationship behind the reference, and the “contributions” by the hire, including deals attributable to that relationship. The fees earned through the scheme totaled in excess of $46 million.[9]
Court Decisions Framing a Theory of Quid Pro Quo Bribery in Hiring Cases
No FCPA hiring case has been tested in court. However, a theory of quid pro quo bribery discernible in the CS resolutions draws support and structure from federal court decisions interpreting other bribery statutes.
Under well-settled federal bribery law, giving a payment or direct financial benefit to an official is not the only way of providing a “thing of value” — doing “favors” for the official is another.[10] Another way of phrasing the bribe is as the “opportunity” given to the official “to fill a position” with someone whom the official chooses.[11] The unpublished decision this year by the Second Circuit in the bribery case of a former New York state Senate leader upheld the theory that providing a child with a “no-show” job at the request of the parent was a cognizable benefit to the parent.[12] In contrast, paying a bona fide salary or fee for services rendered in the ordinary course of business is specifically excluded from the scope of one widely used domestic bribery law.[13] A salary is not bona fide if the job is obtained in active violation of policies against conflicts of interest or preferential treatment,[14] or as a cover for providing the primary service of delivering on a quid pro quo arrangement,[15] or (of course) if the hire is not expected to be at work.[16]
Consistent with this decisional backdrop and with other FCPA hiring cases settled so far, Credit Suisse’s dispositions do not characterize as illegal simply any referral hire it made with the expectation of receiving business in return. Rather, with rather elaborate supporting factual detail, this case turns on employment for family and friends that was awarded or maintained:
1. At the request of the referring official with the understanding of receiving official action in return; and
2. As a sham, including being:
a) Unmerited based on the hire’s abilities and performance in the job (that is, setting aside the hire’s value in the quid pro quo arrangement);
b) Materially overcompensated; and/or
c) In violation of personnel compliance policies, especially those applicable to referral hires.
Despite this guidance, a company’s legal, compliance and HR personnel are still in an unenviable position. They will have to deal with an endless stream of employment scenarios that involve at least some degree of subjective judgment, and do not often fit neatly, indisputably under the above factors. As a practical matter, some companies will err on the side of safety and decide not to hire family and friends referred by governmental officials at all.
Potential Defenses to Other Elements of a Violation
Credit Suisse resolved this case with the DOJ in a nonprosecution agreement, the most favorable form of a DOJ resolution short of a declination. DOJ often lets a company go with an NPA where it deems cooperation with the investigation and remediation of wrongdoing to be satisfactory, as in the hiring case of JPMorgan two years ago.[17] However, DOJ gave Credit Suisse only partial credit on these scores.[18] This resolution may have been driven by potential defense avenues.
First, the DOJ may have expected some difficulty in proving beyond a reasonable doubt that referral hires amounting to quid pro quo bribery had a sufficient “U.S. nexus.” Because Credit Suisse AG is a foreign issuer of securities, the DOJ would have to prove the use of “any means or instrumentality of [U.S.] interstate commerce in furtherance of” the corrupt act.[19] It is unclear whether the DOJ could sufficiently match up facts involving the New York operations that are referenced in the stipulated facts with the commission of instances of quid pro quo bribery. However, there may be additional evidence left out of these stipulated facts (such as evidence referenced in the SEC order) that could supply the required U.S. nexus.
Second, the government would have to prove that CS employees had sufficient knowledge of the facts establishing the core of corrupt conduct, including that the referring officials were “foreign officials” within the meaning of the FCPA.[20] Knowledge of the governmental nature of the officials only appears clear in the DOJ resolution as to one of the four specific examples establishing a quid pro quo. (In resolving, Credit Suisse did concede that all of the referring officials individually referenced in the stipulated facts were, indeed, “foreign officials.”) More generally, the government could attempt to prove the element of knowledge against the company by aggregating what multiple employees knew, under the doctrine of “collective knowledge,”[21] but this is a theory that by now has been significantly limited by courts and seems not often chanced in recent years by the DOJ in contested criminal cases.
Further Enforcement Against Individuals?
Left for speculation by outside observers is the possibility of follow-on enforcement action by the SEC and DOJ in the Credit Suisse case against individual corporate employees. These individuals would not be beyond the jurisdiction asserted by the government simply because they were employees of the Hong Kong subsidiary and not the parent issuer. In an indictment earlier this year, the DOJ charged the employee of an agent of a company subject to FCPA jurisdiction with violating and conspiring to violate the anti-bribery provisions.[22] Proving the additional element of “willfulness,” i.e., specific intent to act in some unlawful manner, would be required for prosecution of individuals (versus legal persons) for anti-bribery violations.[23] Moreover, potential problems as to the elements of proof discussed above could factor against charging individuals, especially issues of knowledge that must be proven for the individual alone.
The public findings so far, especially those in the SEC order, indicate there may be evidence of a willful circumvention by CS employees of internal controls, in violation of the FCPA’s accounting provisions.[24] It is difficult to assess this possibility as to any particular individual referenced anonymously in the public record.
Weighing on any prosecution decision as to individuals would be the passage of time, creating a potential statute of limitations issue as well as problems with witness recollections of events that occurred from 2007 to 2013.
Conclusion
The theory of FCPA bribery by hiring family and friends of officials was once considered overreach, but now appears to be here to stay after the resolutions for Credit Suisse. More granular aspects of these hiring cases will continue to offer ample grounds for argument. Nevertheless, companies need to re-evaluate their hiring practices to mitigate the corruption risk illustrated by this case.
By Bruce Searby
July 25, 2018
https://www.law360.com/articles/1066561/fcpa-liability-for-hiring-practices-gains-new-credence
