Ethics Case Study of the Week: (In)Adequate Anti-Corruption Policies?

By Gary Sarkissian posted 03-28-2022 08:00

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CFA Institute’s Code of Ethics and Standards of Professional Conduct outline the ethical guidelines for the investment profession that are critical to maintaining the integrity of capital markets and investor trust. Members, candidates, and even firms make a commitment to uphold these standards as they help elevate ethical decision-making universally around the globe.

As investment professionals, we face important ethical decisions in our day-to-day activities. Some scenarios we encounter will be straightforward, while others may be more complex. No matter the circumstances, continuous learning remains imperative in an evolving investment industry and an adapting regulatory environment.

For that reason, each week we feature a sample case from CFA Institute’s Ethics in Practice Casebook. Many cases are built upon real-life examples that may involve a regulatory matter or even a CFA Institute Professional Conduct investigation. At the end of each case is a multiple-choice question that addresses the ethical nature of the actions taken in that case.

This week’s case involves Standard IV(C) Responsibilities of Supervisors.

(In)Adequate Anti-Corruption Policies?
Estevez is the chief compliance officer of a global financial services corporation. He and his staff develop and implement policies and procedures to address antibribery and corruption issues. The policies prohibit employees from providing “anything of value” to government officials to gain an improper business advantage. The policies specifically define “value” to include job offers or employment to individuals at the request of a client, potential client, or official of a government or state owned enterprise. The policy also prohibits employees from hiring anyone as a temporary employee, intern, or in other roles in an attempt to evade the policy. The company uses a questionnaire that requires employees seeking to hire a referral candidate to disclose the source of the referral, identify whether the referral source is a client or prospective client, and disclose whether the potential hire was referred by or related to a government official. The compliance policies require the questionnaire to be submitted to both the compliance and the human resources departments for approval.

On multiple occasions, senior members of the company’s Asia-Pacific (APAC) office, seeking to obtain or retain business, attempt to hire relatives of state-owned enterprises and government officials, but these applications are rejected by Estevez as violations of the firm’s compliance policies. The firm’s APAC officials then direct a regional-affiliated organization to hire the referred individuals. As employees of the affiliate, these referral hires are permitted to do work for the firm. Several months later, the employees, having gained experience, are brought into the firm as lateral hires from the firm’s affiliate. Choose the response that best describes how Estevez met his professional responsibilities with respect to the CFA Institute Code of Ethics and Standards of Professional Conduct (Code and Standards). Estevez

A. drafted comprehensive compliance policies regarding referral hires.
B. fulfilled his responsibilities because he rejected the APAC officials’ attempts to hire individuals in violation of the firm’s policies.
C. properly allowed referred hires to gain experience at an affiliate prior to joining the firm.
D. did not appropriately meet his professional responsibilities under the Code and Standards.
E. none of the above.

Click the “Analysis” button below to see the analysis for this case, and feel free to discuss in the comments below. The completion of this case qualifies for 0.25 hour of Standards, Ethics, and Regulation (SER) credit.

This case relates to effective implementation of compliance policies and supervision of employees. CFA Institute Standard IV(C): Responsibilities of Supervisors requires CFA Institute members to make reasonable efforts to ensure that anyone subject to their authority complies with applicable rules and regulations. As chief compliance officer for the firm, Estevez is responsible for developing and implementing effective compliance policies and has effective supervisory responsibility over firm employees. He recognizes that hiring relatives of foreign government officials and other clients in exchange for business could violate antibribery laws. He drafts written hiring policies and a questionnaire to address these types of hires as a way to detect and prevent corrupt hiring practices.

But these policies do not apply to all categories of hires, are easily circumvented, and are not effectively enforced. Although Estevez rejects referred candidates for employment that violate firm policies, senior members of the firm’s APAC offices regularly get around the policies by hiring rejected candidates as employees of a regional affiliate that is apparently not covered by the firm’s compliance procedures. Referred candidates hired by the affiliate engage in work for the firm and are eventually hired as full-time employees at the firm. The compliance procedures thus do not effectively mitigate known corruption risks and allow APAC employees to award valuable employment opportunities to the relatives of foreign government officials as a personal benefit to the officials in an attempt to improperly influence them to assist the firm in obtaining or retaining business or other benefits. Choice D is the best response.

This case is based on an August 2019 US SEC enforcement action.

Image by mohamed Hassan from Pixabay

© 2019 CFA Institute. All rights reserved. You may copy and distribute this content, without modification and for non-commercial purposes, provided you attribute the content to CFA Institute and retain this copyright notice. This case was written as a basis for discussion and is not prescriptive of how a business situation or professional conduct matter should or should not be handled or addressed. Certain characters mentioned are fictional to facilitate discussion, and any resemblance to actual persons is coincidental.

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