Last week Credit Suisse Group AG (CSAG) and Credit Suisse (Hong Kong) Limited (CSHK), a subsidiary of CSAFG, settled a Foreign Corrupt Practices Act (FCPA) enforcement action for just over $77 million for the illegal hiring of family members and close personal friends of Chinese government employees and employees in Chinese state-owned enterprises. CSHK obtained a Non-Prosecution Agreement (NPA) from the Department of Justice (DOJ) and CSAG entered into an agreed Cease and Desist Order(Order) with the Securities and Exchange Commission (SEC). Collectively, they paid a criminal fine to the DOJ in the amount of $47 million and disgorgement to the SEC in the amount of $24.9 million with interest of $4.8 million for a total to the SEC of $29.8 million. This penalty was based on some very bad facts.

The FCPA enforcement matter was concluded with a substantial positive for CSAG given its conduct surrounding the affair. CSHK employees worked actively to circumvent, over-ride and hide their actions; clearly indicating the intent to provide benefits to foreign government officials in return for significant benefits. Over these series of blog posts, I will be considering this FCPA enforcement, lessons to be learned for the compliance practitioner and how CSHK was able to garner such a superior NPA result. Today I consider some of the facts which provided some very detailed and specific examples of how the Referral Hires were treated by CSHK and the organization.

Referral Hire 1

This woman was described as “a princess [who was] not used to too many rounds of interview”. Her mother was a high-ranking official at a power company which was a state-owned enterprise (SOE). Referral Hire 1’s resume was so poor it required an internal upgrade by CSHK employees. During her probationary period Referral Hire 1 continually demonstrated unprofessional behavior which would have been little tolerated of other CSAG probationary hires. She failed to attend mandatory training events, was caught cheating on internal examinations and when she did bother to turn up for some training events, she inevitably left early. These and other incidents earned her the sobriquet “the most famous intern ever.”

Referral Hire 2

Referral Hire 2 was a direct business referral from a family member who was a high ranking SOE official. During his employment, the family member of Referral Hire 2 consistently sent business to CSHK. Referral Hire 2 was favored over other more competent CSHK employees during his tenure with the company and was even spared layoff when several more senior and more technically competent analysts were laid off in the CSHK office. CSHK even used Referral Hire 2 to intercede directly with his family relationship when they got wind that its competitors had received certain choice business, from which Referral Hire 2 was paid a bonus.

Referral Hire 3

Referral Hire 3 was the daughter of a high ranking foreign governmental official. She was enrolled in the CSAG first-year analyst program based solely on this relationship. In addition to not meeting CSAG’s minimum educational and professional requirements, she does not appear to have even met the basic skill level required, with one CSHK employee cited in the NPA, stating “he had “doubts about her abilities beyond getting a meeting and completing a ppt slide for a pitchbook” and that “if you have met her you might not even believe that!”” In addition to her base compensation, she received additional compensation in the form of relocation expenses, annual housing allowance and bonuses which were not available to similarly situated CSHK analysts. Referral Hire 3 was also paid beyond her class year’s salary as she was “paid the salary of a third-year employee, rather than a second-year employee.” Finally, and at the specific insistence of her mother, she was promoted when she did not meet any of the requirements for an internal promotion.

Referral Hire 4

Referral Hire 4 was hired to start as an Associate at CSHK but was promoted to Vice President in the same year, less than two months after he was hired. The NPA stated, “In a prior email exchange between Employee #2 and Credit Suisse employees in London and New York about the requested promotion for Referral Hire #4, a London employee noted that the promotion request was “abnormal.” In a Credit Suisse internal spreadsheet that listed specific deals attributable to relationship hires, “[SOE #4]” was listed as Referral Hire #4’s “[c]ontribution” to the company. Referral Hire #4 was terminated approximately one year after starting at Credit Suisse.”

These bad facts were compounded by the clear knowledge by CSHK of the prohibition of hiring family members of foreign government officials and SOE employees. The Order related a situation in 2009 where CSHK attempted to hire two family members of SOE employees. The Legal and Compliance Department (LCD) made clear such actions were not to be allowed. The Order stated, ““[a]fter consultation with the Bank’s Anti Corruption Team in New York, LCD in [sic] have deemed both requests to be potential violations of the Foreign Corrupt Practices Act and as such are too risky a venture for the Bank to pursue.”” The company’s compliance practitioner concluded, ““I am sorry for this news, however given the increased attention the regulators are now dedicating to this area and the fact that all of our key competitors have either disbanded their similar programmes, or are in the final stages of doing so, [LCD] in deeming the provision of these types of work experience or internships to FCPA subject parties to be too great a risk to enter into are simply adhering to what is now the industry practice.””

Finally, there is the following from the Order, “in April 2010 LCD officials informed a Human Resources officer of a problem with hiring a client referral from an Indonesian SOE, noting “[a]s such, there is a blanket ban on offering these internships to anyone with direct government or SOE relations.” Clearly CSHK was on notice not to engage in such hiring practices and intentionally violated this internal prohibition.

Tomorrow I will consider how CSHK  and CSAG were able to obtain such a superior result in the face of such (very) bad facts and conclude with some risk management strategies around the hiring of family members of foreign government officials and employees of state-owned enterprises.

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