The Princeling Problem: Is Your Company Avoiding Corrupt Hiring Practices?

Scott Moritz, Managing Director Protiviti Forensic
November 13-19 is Fraud Awareness Week. Once again, we are celebrating by highlighting the perspectives of leaders in the Protiviti Forensic practice and other fraud and anti-corruption professionals. To learn more, visit Protiviti Forensic online.

One of the more interesting threads to come out of panel discussions at Protiviti’s inaugural Foreign Corrupt Practices Act and Anti-Kleptocracy Conference this summer was a discussion of the Securities and Exchange Commission’s (SEC) crackdown on hiring the offspring of foreign officials to gain business advantage. Chuck Duross, Head of the Anti-Corruption Practice at Morrison & Foerster, Matt Tanzer, Chief Ethics and Compliance Officer at Johnson Controls, and Raja Chatterjee, Chief Risk Officer at Tishman Speyer, discussed the topic during our FCPA Compliance Success Stories panel moderated by Protiviti Director Pam Verick. Below, I’d like to offer you a recap of the perspectives they provided, with which I, and many anti-corruption advisory practitioners very much agree.

Anyone with hiring authority has likely been approached by a friend, a customer, or an important business contact, seeking to leverage the relationship on behalf of a family member seeking a job or internship. In fact, employee referrals are often encouraged and even institutionalized since such recruiting channels are a much lower-cost alternative to the use of outside recruiters. Even when the identification of candidates through referrals is not programmatic, the practice is common. Thus, the old saying: “It’s not what you know, but who you know.”

The rules are different, however, when the person doing the asking is a foreign government official, and the employment offer could be construed as “something of value” that has been offered in exchange for an unfair business advantage. Such quid pro quo arrangements fall under rules of the Foreign Corrupt Practices Act (FCPA). The practice has come to be known as the “princeling” problem — because many of the beneficiaries, especially in China, are the offspring of senior Chinese government officials, often referred to as “princelings” — and the SEC has been particularly focused on the practice.

The FCPA prohibits companies from improperly influencing foreign officials with anything of value, including cash payments, gifts, or in this case, jobs or internships.

In one high-profile case, a telecom company agreed to pay almost $8 million to settle an FCPA enforcement action for hiring relatives of Chinese government officials. In another, a major financial holding company paid almost twice that for providing student internships to family members of foreign government officials affiliated with a Middle Eastern sovereign wealth fund. The latter case raised a lot of eyebrows, because two of the internships in question were unpaid. The SEC contended that the value was in the internship itself, which was a coveted and highly competitive position.

It’s easy to see how a company could get into trouble. Executives tend to be sales-focused when meeting with clients, so there’s a natural tendency to accommodate an important business contact when they mention that a family member needs help finding a job. The resulting internal efforts undertaken on behalf of the candidate most often occur by email. Resumes are communicated by email and then are forwarded along to someone in a recruiting role along with some context as to who the candidate is. It wouldn’t be unusual if that email overstated the importance of the relationship with the business contact asking for the favor in an effort to ensure that that the candidate gets the desired attention. Those emails, which may even include the original email from the foreign official who transmitted the candidate’s resume in the first place, can make it very difficult to deny a quid pro quo. The trouble is multiplied if the business contact making the request is a foreign official who wields influence over the company’s business and especially if the candidate is not someone who meets the company’s hiring criteria for the position. This is when the FCPA gets involved.

From a compliance perspective, the key to avoiding trouble is to have a structure in place to prevent such conflicts from developing. One of the best ways to do that is through segregation of duties — separating sales from hiring decisions. Taking executives out of the hiring loop allows them to be gracious in the moment, by agreeing, perhaps, to accept a resume, but with the understanding that they have no sway in the decision-making process. Empowering the Human Resource department to function independently helps to ensure that all hiring decisions are made based on objective qualifications, independent of any business dealings.

In addition, documented policies and procedures, and a clear paper trail, can ultimately serve as a backstop in the event of, say, a whistleblower compliant. If the company has a record, it can demonstrate to investigators that the position was open, the applicant was qualified, and the hiring followed normal vetting procedures.

By and large, human resources and recruiting personnel want what is best for the organization, and they understand the importance of compliance. Aligning an organization’s hiring practices with the anti-corruption program by communicating and applying proper hiring procedures that separate the recipients of backchannel candidates from the hiring decisions may look like unnecessary hoops to jump through but can mean the difference between being the latest example of “the princeling problem” or not.