Canada: BNY Mellon Fined $15 Million By SEC In Financial Industry Anti-Corruption Sweep

Bank of New York Mellon (BNY Mellon) has agreed to pay a fine to the U.S. Securities and Exchange Commission (SEC) in the amount of US$14.8 million. According to the SEC, BNY Mellon bribed foreign public officials of a Middle Eastern country's sovereign wealth fund (SWF) by extending three student internships to their family members. The SEC also found that BNY Mellon, despite having a written anti-corruption compliance program, did not maintain adequate internal control systems to effectively implement the program. This is the first case flowing from the SEC's industry-wide investigative sweep of SWFs and financial institutions, with possibly more to follow.

However, this case's significance extends beyond the U.S. foreign anti-corruption legislation and its application to U.S. financial institutions, as it highlights for Canadian financial institutions and other businesses the potential wide scope of the applicable domestic and foreign anti-bribery provisions in Canada's own statutes.

It also confirms that effective internal control systems are as critical as having written ethical business conduct policies to regulate activities of the company, including in the hiring processes.



The SEC found that BNY Mellon's hiring practices in these instances violated the U.S. Foreign Corrupt Practices Act's (FCPA) anti-bribery provision, which makes it illegal for companies to improperly influence foreign public officials by offering or giving them "anything of value" in order to obtain or retain business.

According to the SEC's Cease-And-Desist Order, BNY Mellon hired three interns outside of its normal practices in order to retain and win business from a Middle Eastern country's SWF. The interns were related to senior officials of the wholly government-owned fund. BNY Mellon hired the interns after the officials' specific and repeated requests, and after internal discussions resulted in a decision that the hires were necessary to obtain the SWF's business.

The interns bypassed the rigorous selection criteria of BNY Mellon's highly competitive internship programs, and their experiences went beyond that normally provided to BNY Mellon interns. BNY Mellon also incurred extra costs to arrange for the internships. In these circumstances, the SEC determined that the requesting officials "derived significant personal value" by benefitting their family members.

Internal Controls

In addition to the bribery charge, the SEC found that BNY Mellon failed to devise and maintain a system of internal controls sufficient to prevent the bribes. In particular, the SEC discovered that specific controls were lacking in relation to the hiring relatives of clients. Employees had wide discretion in making initial hiring decisions, human resources was not trained to flag potentially problematic hires, and senior managers were able to approve hires requested by foreign officials without further review. The SEC suggested that the internal controls system should have been "tailored to the corruption risks inherent in the hiring of client referrals."


Increased scrutiny of financial institutions and SWFs

The BNY Mellon case is particularly important for financial institutions, both U.S. and foreign, that are subject to the jurisdiction of the SEC. In a related press release, in effect to send a clear message to financial institutions and SWFs, the Chief of the SEC Enforcement Division's FCPA Unit stated, "Financial services providers face unique corruption risks when seeking to win business in international markets, and we will continue to scrutinize industries that have not been vigilant about complying with the FCPA."

As the first FCPA settlement related to a financial institution's hiring practices, BNY Mellon provides useful illustration of the wide ambit of conduct that may attract penalties. As previously noted, this is also the first case to arise from the SEC's enforcement sweep of SWFs. Among others, it is publicly known that Goldman Sachs Group Inc.'s hiring practices as well as those of JP Morgan Chase Co. in China are under scrutiny.

Financial institutions, including Canadian financial institutions, should note the particular corruption risks identified in relation to SWFs. Many Canadian financial institutions face the risk of enforcement from both the SEC and the Canadian enforcement authorities.

Wide scope of anti-bribery provisions

Beyond the U.S. legislative context, the BNY Mellon case is an example of the wide scope of conduct or activities that may constitute a bribe. Canada's Corruption of Foreign Public Officials Act (CFPOA) contains broad language similar to the FCPA, extending the definition of bribe to include "benefit of any kind." Bribery is not limited to the exchange of money. As a result, Canadian companies conducting business domestically and abroad should be diligent in assessing the full extent of potential liability under anti-corruption laws, including hiring practices. While the CFPOA applies to bribes paid outside Canada to foreign public officials, the Criminal Code (Canada) has similar application for actions taken within Canada.

Importance of effective internal control systems

Finally, and related to the scope of anti-bribery provisions, the BNY Mellon case highlights the importance of effective internal control systems. For example, Canadian companies conducting business in certain foreign countries may find that relatives of foreign officials necessarily make up a substantial portion of eligible job candidates due to overlap between the higher educated pool of potential employees and those that are politically connected. In these circumstances, it is especially important to consider implementing rigorous hiring procedures with an eye to corruption related risks.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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