On March 1, 2016, the SEC announced that Qualcomm Incorporated, a San Diego-based wireless telecommunication product company, has agreed to pay $7.5 million to settle charges that its actions violated the Foreign Corrupt Practices Act. In the agreement, Qualcomm did not admit or deny the charges.

The case is part of an SEC crackdown on the hiring of so-called “princelings,” a term used in Asia to refer to the young relatives of key executives or political figures. According to the SEC investigation of Qualcomm, the company gave internships and other staff positions to the relatives of foreign officials as well as managers at Chinese state-owned telecommunications companies from 2002 to 2012. The SEC stated that the officials and managers were later credited with helping Qualcomm’s business development efforts. The agency also said that Qualcomm offered these key individuals gifts, travel, and entertainment while misrepresenting the luxuries as legitimate business expenses in the company’s books and records.

Previous SEC investigations of several large financial institutions have established that hiring relatives of foreign officials explicitly intended to either obtain or retain business will be considered violations of the FCPA. This is especially true where the company does not follow its usual hiring process, the candidates have weak qualifications, or exhibit poor performance post-hire. See our previous alert. The Qualcomm investigation listed several examples of improper preferential treatment of “connected” employment candidates:

  • An intern described in Human Resources department emails as a “must place” candidate who was “quite important from a customer relationship perspective;”
  • A request, and Qualcomm’s agreement, to find an internship for a young woman whose parents provided “great help” for the company’s business development efforts;
  • The provision of an internship, and later a permanent position, to the son of a foreign official described in internal emails as a “no hire” without “a skills match” who did “not meet the minimum requirements for moving forward with an offer” and “who would be a drain on teams he would join;” and
  • Other communications referring to “special” hires for whom new positions were specifically created.

Hiring the relative of a business contact is not, in and of itself, a violation of the FCPA. However, companies should ensure that every employee with hiring authority has been trained on the FCPA in order to identify and mitigate the risks associated with these types of hires. It is especially essential that those involved in the hiring function know and adhere to the principle that the best way to avoid an FCPA violation is to put all job applicants through the same hiring process. In other words, every job applicant should be evaluated according to the knowledge, skills, and abilities necessary to perform the applicable job functions. To avoid any inference of impropriety, employers should be able to demonstrate that a new hire was the most qualified applicant for the position. In Qualcomm’s case, the SEC noted that the Human Resources employees received no FCPA training and the company lacked internal controls. This left Qualcomm vulnerable to FCPA violations that its employees did not recognize and its compliance function did not detect.

The SEC action also alleged that Qualcomm provided frequent meals, gifts, and entertainment, including travel for sightseeing purposes, to foreign officials to influence their contractual decisions. In addition, Qualcomm provided “lavish hospitality packagaes” for foreign officials to attend premier events. All of this evidence the lack of internal controls and the lack of a proper anti-corruption compliance program. In particular, the SEC noted “the absence of someone whose full-time responsibility was to act as a company-wide chief compliance officer and the absence of an FCPA compliance officer in China.” Moreover, the SEC noted the lack of training and that “several important business functions such as human resources and hospitality planning were not considered in Qualcomm’s FCPA compliance program.” The SEC’s action here is consistent with its recent focus on what it perceives to be weaknesses in a company’s anti-corruption compliance program. See our previous alert.