It’s Official: Hiring a Foreign Official’s Relative in Exchange for Business Violates the FCPA

The U.S. Foreign Corrupt Practices Act (FCPA) prohibits the entities it covers from corruptly offering “anything of value” to a foreign official for the purposes of obtaining or retaining business. In most cases, the “thing of value” offered is a traditional bribe—money, expensive gifts, lavish vacations, etc. But in some cases, firms do “favors” for foreign officials that are less direct, and do not conform quite so obviously to traditional notion of bribery. Making a generous donations to the official’s favorite charity is one example; another, which has become increasingly prominent in recent FCPA investigations—primarily in cases involving China—is preferential hiring of the relatives of the foreign officials in exchange for business opportunities. This issue got a lot of press particularly in connection with the SEC’s investigation of hiring practices at JP Morgan and other investment banks in China, but the issue is more pervasive.

These investigations raised an interesting legal question: Can providing a job or internship to the adult relative of a foreign official ever count as providing “anything of value” to the official him- or herself? To my mind, the answer is a clear yes, but not everyone agrees. Last year, Professor Andy Spalding and I engaged in a spirited and constructive debate on this question (see here, here, here, and here)—and though I think in the end our positions (mostly) converged, there was perhaps still some lingering doubt (though not in my mind) as to whether the U.S. government would or should adopt the view that offering a bribe to an official’s relative can count as offering something of value to the official.

That doubt has been laid to rest. In the BNY Mellon settlement from last August, the settlement document explicitly endorsed the view that the firm’s decision to provide internships to foreign officials’ relatives counted as providing “anything of value,” because “[t]he internships were valuable work experience, and the requesting family members derived significant personal value in being able to confer this benefit on their family members.” And last week, the SEC announced a settlement with Qualcomm regarding investigations into Qualcomm’s alleged FCPA violations in China; although the violations included more traditional bribes (such as lavish gifts, travel, and entertainment), the settlement focuses substantially on Qualcomm’s practice of hiring the relatives of Chinese officials (and executives at state-owned enterprises, who count as foreign officials for FCPA purposes) in exchange for favorable treatment—even when these candidates would not meet Qualcomm’s normal hiring standards.

As GAB readers know, I think that this view is legally correct, good policy, and entirely consistent with the DOJ and SEC’s past statements on this issue, including the FCPA Resource Guide (which admittedly doesn’t discuss this specific scenario explicitly). The recent settlements in BNY Mellon and Qualcomm do not, of course, have any bearing on whether I’m correct in those views. But insofar as there might have been any uncertainty about the U.S. government’s position, it has been eliminated. This is likely bad news for J.P. Morgan, but good news for the world. Why do I think it’s good news for the world? Three main reasons:

  • First, and most straightforwardly, bribery is bad. All of the policy arguments in favor of the FCPA apply just as much to non-traditional bribes (like hiring a foreign official’s relative) as to traditional bribes (like paying for a foreign official’s luxury vacation). This point may seem banal, and I guess it is–but it’s worth making in light of the fact that many people seem to think that there’s some significant qualitative difference in these sorts of bribes. If bribery distorts markets, undermines fair competition, etc., then we should prohibit all forms of bribery, not just those that involve suitcases full of cash. And, by the way, the “everyone does it” argument cuts no more ice with this sort of preferential hiring than it does with traditional “gifts” and other material favors. (Of course, in some cases a legitimate transaction may be harder to distinguish from a bribe. There’s not really any legitimate reason to hand a foreign official a suitcase full of cash. There may well be legitimate reasons to hire an official’s relative. But this goes to the problem of proof of corrupt intent and business purpose, not to any categorical exclusion of non-traditional bribes from the “anything of value” category.)
  • Second, a sometimes-overlooked additional adverse effect of this sort of preferential hiring is the impact on qualified, highly-motivated, and unconnected young people in the societies where this sort of hiring is pervasive (like China). Promoting meritocracy in systems where opportunities for advancement have traditionally been based on personal connections is a good thing. Cultivating the image that U.S. companies (or other Western countries) have a different approach to business–one that emphasizes capabilities rather than background–is a good thing. And in many countries (China included), work opportunities at these firms are sufficiently prized, relative to domestic firms, that collective adherence to a different, higher standard could actually make a positive difference.
  • Third, as many have pointed out, the SEC and DOJ’s decision to go after these sorts of preferential hiring practices in China calls attention to the extent to which similar practices are prevalent in the U.S. domestic market. I think the accusations of a “double standard” are somewhat overstated, given that in the FCPA context, the cases so far (including BNY Mellon, Qualcomm, and–according to media reports–JP Morgan) involve relatively crude and clear quid pro quos; the U.S. government has not suggested in these cases that merely hiring well-connected individuals, and hoping to benefit (in a diffuse way) from their connections is illegal. And indeed, if a U.S. attorney got hold of documents indicating that a firm had promised a federal official to hire his child in exchange for favorable regulatory treatment or a big government contract, I actually think there would be little doubt that prosecution would be both warranted and forthcoming. But the larger point–that these aggressive investigations into oversees preferential hiring calls attention to the preferential hiring of the children of the powerful and well-connected in the U.S.–is likely correct. But to my mind, this is all to the good. Just because certain practices are widespread doesn’t mean that they’re good. And often U.S. foreign policy interests have had desirable collateral effects back home–for example, when the tension between American Cold War rhetoric about “freedom” contrasted uncomfortably with pervasive discrimination against African-Americans. Again, I’m not really convinced that the contrast between foreign and domestic approaches to preferential hiring are actually “hypocritical“, but even if it were, why isn’t the right answer to “level up” rather than “level down”?

18 thoughts on “It’s Official: Hiring a Foreign Official’s Relative in Exchange for Business Violates the FCPA

  1. Just because the SEC is able to extract a settlement (not subjected to any judicial scrutiny) from a risk averse company based on enforcement theory x, does not mean that the viability of that enforcement theory has been laid to rest.

    On an unrelated point, prior to Qualcomm and BNY Mellon, at least five other FCPA enforcement actions were based, at least in part, on hiring family members of alleged “foreign officials.”

    http://fcpaprofessor.com/jpmorgans-hiring-practices-in-china-under-scrutiny/

    • But Matthew makes an awfully strong case why, if a court were asked to rule on the challenged practice, it would come down on the government’s side. Are there arguments why the practice is lawful?

    • Your first point, that the fact of an SEC settlement does not mean the government’s legal views are correct, goes without saying. (Though I did, in fact, say it — see the 2nd sentence of the 4th paragraph.) That said, I happen to think the U.S. government’s position on this issue is both legally sound and good public policy, for the reasons given in this post and my previous posts on the topic (especially my debate with Andy Spalding).

      Your second point is very helpful. I wasn’t aware of the extent to which the hiring of relatives had played such a significant role in prior FCPA enforcement actions, so thanks very much for the info and the link. I suppose someone like Professor Spalding might argue that in some/all of these cases, the concern was that the payments to the relative were really a way to funnel money to the official him/herself. But while that might be true for one or two of the five cases mentioned in your link (e.g., Tyson Foods), it doesn’t seem to me to capture all of them.

      Insofar as there was any lingering doubt, it seems to me BNY Mellon and Qualcomm resolve it–but I think you’re probably right that there really wasn’t much doubt in the first place about the U.S. government’s position on this issue.

  2. Naive questions:

    1. If I advertise publicly for jobs and internships stating weak minimum criteria (say, a university degree plus English language skills) and out of 1,000 applicants I then hire the cousin of Senator X on a market rate salary, could this still entail legal consequences?

    2. If the cousin of Senator X is the most qualified applicant for a job and I hire him on that basis, where does the burden of proof lie?

    I think question (2) is especially relevant in small countries with tiny elites. I’m currently living in Dominica, population 72,000, and I don’t think anyone here is ***not*** related to some minister or senior civil servant or party official. Plus, I wouldn’t want to discriminate against anyone because of their family background.

    I’ve come across this problem before in a country of 4 million inhabitants and it’s an extremely uncomfortable situation on all fronts – legally, ethically, and in terms of potential reputational hazard. We advertised nationally for a job and everyone who walked in through the door was related to somebody important, or was a personal acquaintance, or both.

    • The short, slightly simplified answer to your questions is that there almost certainly would not be FCPA liability in the cases you describe (with two caveats that I’ll get to in a moment).

      To convict under the FCPA’s anti-bribery provisions, the government must show that the defendant corruptly offered something of value to a foreign official in order to obtain or retain business. The burden of proof is on the government for each of these elements of the offence. There is certainly nothing per se illegal with a firm hiring the relative of a foreign government official, and in the scenarios you describe, it would be very difficult for the government to demonstrate that the job was offered to the relative as part of a corrupt quid pro quo with the foreign official. Cases like those described in the post, and the investigations of JP Morgan and other banks in China, are quite different, in that they involved–according to the government–express quid pro quos, and often (though not always) involved hiring relatives who were under-qualified and/or did not do any real work. The idea that the enforcement actions in these cases are making it illegal to hire foreign officials’ relatives is a red herring.

      Now, the two caveats: (1) Companies are unlikely to want to challenge the government if it brings an enforcement action, and if the government strongly suspects that the hiring decisions were not, in fact, based on merit, the company might be reluctant to challenge this even if the company thinks that the government’s allegations are wrong. (2) There’s a risk (not a big one, in my view, but I acknowledge it) that some companies might just decide the risks associated with officials’ relatives aren’t worth it, because of the extra scrutiny such hires might attract. That might lead to the sort of “discrimination” you mention in your post. But I don’t think that’s at all likely. Much more likely (and desirable, in my view) is that companies will put in place safeguards so that their hiring looks more like what you describe, rather than these cases where banks and other companies are creating special hiring tracks for well-connected applicants, and expressly offering them jobs in order to get business from their parents.

      • One afterthought: I recently lived in Mauritania and there the govt mandates that foreign investors in some sectors hire a certain % of local workers. However, qualified Mauritanians are thin on the ground, and hard-working Mauritanians have rarely been sighted anywhere inside the country (they tend to leave).

        I heard the story of a company where there was a kind of “tea table” in the corner of the office where the quota locals were left to celebrate their idleness, as a kind of inevitable overhead cost, if they turned up at all. The company wasn’t providing training because it was cheaper (and probably more realistic) just to park this deadweight in the corner.

        There was reportedly no corruption involved, but it could easily look that way, as everyone is related to everyone else in Mauritania and these guys took home good salaries for zero work.

        Just sharing a funny observation…

        • Till, you point to an interesting and common practice; I can envision a contract award being based, at least in part, on the most favorable local-content, local-labor, or human capital investment provisions. But I think those provisions often result in (or are at least ostensibly aimed at) public, not private, gain, so there’s no abuse of power. Of course, similar transactions that are more suspicious are probably not uncommon. For example, if foreign companies are statutorily required to bid with a local partner and the investor chooses a local partner whose beneficial owner sits on the bid evaluation committee, that choice could certainly be “something of value.”

          I’m getting into a separate conversation but I can’t help defending “lazy” Mauritanians. Although it was on an entirely different scale than the business you discuss, I’ve managed small infrastructure projects in an endemically corrupt West African country and the local laborers began disappearing on my first project, too. The problem was not at all that they were not hard-working – on the contrary, they were some of the most hard-working people I knew. Rather, I soon discovered, they were not being paid. The (local) supervising engineer I had retained to oversee construction and labor had basically stolen all of the money for wages (and most of the money for material and equipment). When I found out, I replaced him with a much better, more trustworthy (local) supervisor. As soon as the new supervisor showed that he would pay them appropriately, the laborers returned and finished the job. I understand that there was no corruption involved in your anecdote but, as you know, the Mauritanian laborers work in communities where corruption is the norm, not the exception. In this sort of environment, salary outputs have very little relation to labor inputs, and people (quite understandably) take what they can get when they can get it, with limited regard for future costs and benefits. Again, I know nothing about the facts of the situation you describe, but it’s little surprise to me that workers don’t rise to the occasion when they are perceived as “quota locals” and “deadweight” by their employer (on a somewhat related note, see the behavioral economic analysis of anticorruption measures that appeared on this blog a few weeks ago). I’m not saying every Mauritanian is an honest, hardworking person, but I also don’t think that every Mauritanian who tries to game the system (in a country where gaming the system is how you get ahead) is a bad person. To me, these individual, attitudinal effects are some of the biggest, most under-appreciated costs of corruption. And that’s why I find Matthew’s second point very compelling.

  3. I agree that hiring someone’s child can be a thing of value to him or her, and I share your general inclination that the prosecution of these types of cases is a good thing. Encouraging meritocratic hiring is critical, and combating the entrenchment of privilege is something that — to put my political cards on the table — I think the United States needs to do a whole lot more of. That said, I’d like to play the devils advocate here, or at least try to better pin down your thoughts on the more difficult versions of these questions that I think animate some peoples’ hesitation to adopt your view.

    I think the concern is less what happens when the police have evidence of an explicit quid pro quo agreement than when they don’t but want to prosecute anyway. Something that looks circumstantially like a bribe involving hiring could also be a normal business practice. If a business person refers her qualified son to a particular company that she has done business with and that company hires him, that hiring could be a product of bribery. Or it could be that the son was the best person for the job. What about the harder case where the company has limited resources and it is thus inclined to hire the qualified son when referred rather than waste time looking for someone better? Further, people do have mixed motives. They may hire someone because they think that person is qualified AND because think it will have a positive impact on future business. That new hire’s mother may decide to contract with that company because she thinks it will be a good business decision AND because the company hired her son. How do we tease that out?

    I see several ways to potentially resolve this: 1) Advocate for the DOJ not to prosecute borderline cases because it isn’t worth their time (or for normative reasons), and instead focus on cases where there are explicit agreements and the child is unqualified. 2) To say the burden of proof element will simply take care of these borderline cases and we won’t need to worry about it. 3) To endorse aggressive prosecution and (potentially) casting a net that’s wider than actual bribery because we think it’s important to discourage both bribery and other behavior we don’t like. There are obviously other options as well, but these immediately jump out to me. I’m curious where you fall on this because I think my thoughts on the force of your bullet points will be shaped by your answers.

    • Great questions. I’d go with option #1, which I think is in fact the status quo. Option #2 isn’t really viable, because (as many have pointed out) companies often aren’t willing to litigate these cases because of the collateral costs. (That said, if the DOJ/SEC really started to push the envelope, that might well change.) Option #3 is attractive on the surface (I share some of your basic impulses here), but I do think runs the risk of severe over-inclusiveness. There are things we probably can and should do to get at unfair webs of privilege and the various advantages conferred on the well-connected (and their children), but criminal bribery laws probably aren’t the way to go.

      So, I’m inclined to go with Option #1 — exercise prosecutorial restraint, only going after the cases where the misconduct is quite clear. Again, I think that’s basically what the DOJ/SEC are already doing. Remember, as you and others have pointed out, the practice of hiring the relatives of the wealthy and powerful is already widespread in many industries (perhaps finance especially). But the number of FCPA enforcement actions we’ve seen alleging preferential hiring of relatives is very, very small, and at least on their face (as reported in the media or settlement documents), they involved pretty egregious and obvious quid pro quos.

      A lot of what this all comes down to (in this and other cases, especially FCPA enforcement but other stuff too) is how much you trust federal prosecutors. If you’re pretty confident that they’ll do their jobs in a sensible if imperfect fashion, then you’re more comfortable with a broad legal definition of the offense, because you’re more worried about under-inclusiveness than over-inclusiveness. If you think the prosecutors are crazy zealots who will bring all sorts of ridiculous cases, then you’d be more inclined to draft/interpret the law quite narrowly, because you’re more worried about over-inclusiveness relative to under-inclusiveness. In the FCPA realm, I tend to fall into the former camp, even though with respect to other areas of federal criminal law, I’m more sympathetic to the latter position.

  4. Once one leaves the realm of countries where prosecutors can be trusted, or are subject to sufficient oversight and accountability mechanisms that citizens have confidence they won’t abuse their discretion, then one wants to cabin their discretion through tightly drafted laws that allow for little leeway in their interpretation and enforcement. Rachel Kleinfeld and I wrote about the issue, and the pros and cons of “bright line rules” versus “standards,” in a World Bank policy note, “Writing an Effective Anticorruption Law” which is easily retrievable on-line.

    In a country as large as the U.S. it may be more a question of which prosecution agency or unit. Those in the Department of Justice in Washington investigating white collar crime might be subject to more oversight, both by their superiors and well-paid defense counsel, then a county-level prosecutor in a poor state with a history of racial discrimination where the principal mission is prosecuting street crime.

    P.S. Headline in from March 10, International Business Times: “Malaysia 1MDB Scandal: Goldman Sachs Hired Daughter Of Malaysian Prime Minister Najib Razak’s Close Ally.”

  5. This is all interesting and not sure how deep you can drill or peel the onion!

    A question if I may, What if BNY Mellon hires the wife of the head of the enforcement at a regulator that is regulating one of their branches (Foreign) as a PA for the CEO of the branch? Knowing that she never done a similar job and was not qualified for a PA job. Moreover, this individual get quickly promoted within the firm!

    I think two questions here, would this be a conflict of interest from the site of the regulator to allow this to happen? Second, would this be considered giving something of value to the individual working at the regulator by hiring his wife?

    • Sorry, I was traveling when you posted your comment and somehow missed it–apologies for taking over a month to respond.

      The answer to your first question would depend on the laws of the host country. Countries vary in the strictness of their conflict-of-interest laws.

      As for the second question, I think that hypothetical you describe would be a clear case of an FCPA violation. The evidence is circumstantial, but I think most reasonable observers would conclude that the firm hired the spouse in order to influence the regulator to make decisions favorable to the firm. The fact that she was unqualified and was promoted quickly is strong circumstantial evidence that this was done “corruptly”, that is, with an improper motive. And as discussed in the above post, the job for the spouse could certainly be considered “anything of value” for the official.

  6. Pingback: Does an FCPA Violation Require a Quid Pro Quo? Further Developments in the JP Morgan “Sons & Daughters” Case | GAB | The Global Anticorruption Blog

  7. Pingback: FCPA Follow-On Civil Actions: Frequently Filed, Less Frequently Successful | The D&O Diary

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