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From Securities Regulation Daily, August 18, 2015

SEC brings first FCPA case against a financial institution and first involving internships

By Jacquelyn Lumb

The SEC has settled its first Foreign Corrupt Practices Act case involving internships and its first FCPA case against a financial institution, in which BNY Mellon provided internships in order to retain and grow sovereign investment fund assets under its management. The arrangements violated the FCPA, which prohibits companies from improperly influencing foreign officials with anything of value. BNY Mellon settled the charges, without admitting or denying the allegations, by paying $8.3 million in disgorgement, $1.5 million in prejudgment interest, and a $5 million penalty. The SEC took into consideration BNY Mellon’s remedial acts and its cooperation with the SEC’s investigation in determining the settlement (In the Matter of The Bank of New York Mellon Corporation, 34-75720, August 18, 2015).

Requests for internships. According to the SEC’s order, a senior government official at the Middle Eastern Sovereign Wealth Fund and one at its European office sought internships at BNY Mellon for the son and nephew of the first, and the son of the other. The requests for the internships were seen by relevant BNY Mellon employees as a way to influence the officials’ decisions. After granting the officials’ requests to hire the interns, further assets were transferred to BNY Mellon by the first official and BNY retained the custody and securities lending business of the official from the European office.

Unqualified as interns. The SEC said the interns did not meet the rigorous criteria that BNY had established for its intern program. They did not have the requisite academic or professional credentials. In addition, at the request of the foreign officials, BNY designed customized work for the interns that went beyond the work experience provided to other interns. These internships were not inexpensive or easy to structure, according to the SEC’s findings. The SEC also found that the interns turned out to be less than exemplary employees—two had repeated absences from work and the other was not as hard working as hoped.

Insufficient controls. The SEC said that BNY Mellon had few specific controls relating to the hiring of customers and relatives of customers, including foreign government officials. The firm’s system of internal accounting controls was insufficiently tailored to the corruption risks inherent in the hiring of client referrals and did not fully effectuate its policy against the bribery of foreign officials.

Remedial actions. The SEC noted that, prior to the SEC’s investigation, BNY Mellon had begun to enhance its anti-corruption compliance program related to the hiring of government officials’ relatives, to enhance its code of conduct, and to require as part of the application process that applicants disclose whether they were close personal associates or had been government officials, which would merit an additional review.

Sanctions. In addition to the disgorgement and civil penalty, BNY Mellon was ordered to cease and desist from committing any further violations and any future violations of Exchange Act Sections 30A and 13(b)(2)(B). BNY Mellon acknowledged that the SEC was not imposing a civil penalty in excess of $5 million based on its cooperation with the investigation. If the SEC finds that the firm provided materially false or misleading information, it may reopen the matter and seek an order directing BNY Mellon to pay an additional civil penalty.

Unique risks. In a news conference, Enforcement Director Andrew Ceresney noted that financial institutions face unique risks when participating in foreign markets and those risks may require different internal controls than those for a company in the manufacturing sector, for example. Ceresney would not comment on whether other investigations were underway involving interns, but he said the division is actively focused on any area where a potential thing of value is given in return for business.

The release is No. 34-75720.

MainStory: TopStory Enforcement

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