The SEC has brought two Foreign Corrupt Practices Act enforcement actions based on internship and other hiring practices involving family members of alleged “foreign officials.”
As highlighted here  and here , in August 2015 BNY Mellon agreed, without admitting or denying the SEC’s findings in an administrative order, to pay $14.8 million to resolve findings that the company provided “valuable student internships to family members of foreign government officials affiliated with a Middle Eastern sovereign wealth fund.”
As highlighted here  and here , in March 2016 Qualcomm agreed, without admitting or denying the SEC’s findings in an administrative order, to pay $7.5 million to resolve findings that the company “provided or offered full-time employment and paid internships to family members and other referrals” of alleged “foreign officials” at state-owned or state-controlled enterprises.
The narrative in both enforcement actions was that providing an internship or job to a family member of an alleged “foreign official” represented an attempt to improperly influence the “foreign official” who then exercised discretion – presumably because of the internship or job provided to a family member – to benefit the company.
It is this narrative that has resulted in several other companies, including Goldman Sachs, being under FCPA scrutiny. Yet last week this narrative was rejected by a London judge in a closely watched civil action between the Libyan Investment Authority (LIA) and Goldman Sachs.
In terms of background, the LIA brought a civil against Goldman Sachs to rescind certain transactions and to obtain the repayment of premiums from Goldman Sachs. The LIA’s main claim asserted that Goldman Sachs procured the LIA to enter into the transactions by the exercise of undue influence and as to a certain transaction (the so-called April Trades) the LIA alleged that “Goldman Sachs improperly influenced the deputy chairman of the LIA, Mustafa Zarti, to cause the LIA to agree to the trades by offering his younger brother, Haitem Zarti, a prestigious internship at the bank.”
Nearly 9 pages of Justice Rose’s decision rejecting the LIA’s claim  concerns the internship issue. In pertinent part, Justice Rose stated:
“In my judgement it is going much too far to say that the internship influenced Mr. Zarti to place more business with Goldman Sachs than he otherwise would have done or that the offer had a material influence over the LIA’s decision to enter into the April Trades.”
The remainder of this post excerpts Justice Rose’s decision on the internship issue.
“The LIA rely on a specific act of misconduct on the part of Goldman Sachs in relation to the April Trades. It is alleged that Goldman Sachs improperly influenced the LIA to enter into the April Trades by the favourable treatment it conferred on Mustafa Zarti’s younger brother Haitem by offering him employment as an intern, together with training and ‘extensive corporate hospitality’. I shall refer to Mustafa Zarti as Mr Zarti and to his younger brother as Haitem. The Particulars of Claim aver that “it would have been obvious” to Goldman Sachs that its favourable treatment of Haitem was influencing and would continue to influence Mr Zarti’s decision-making process.
The LIA allege that the offer of the internship was improper in various ways; it was not offered to Haitem because of his own merits as a potential investment banker; it was offered in contravention of Goldman Sachs’ own internal policy about recruitment of interns and Goldman Sachs knew or intended that it would encourage Mr Zarti to put more of the LIA’s business with Goldman Sachs.
The LIA also rely on the extensive and lavish hospitality offered to Haitem particularly by Mr Kabbaj. In addition to many meals in expensive restaurants in London and the Middle East, Goldman Sachs paid for accommodation for Haitem in smart hotels and Mr Kabbaj took Haitem on extravagant trips to Morocco and Dubai, either just the two of them or with other members of the Equity Team, when the men were together on training programmes at Goldman Sachs’ offices in London.
On the facts, Goldman Sachs say, there is no evidence that there was anything improper about the offer of the internship and it is unrealistic to suppose that the offer of a few months’ training and work experience would have had any material influence on Mr Zarti’s decision to go ahead with the April Trades.
In the light of that, I consider I should only arrive at a conclusion on this difficult legal point if it is necessary to do so on the facts. I turn therefore to examine the factual basis of the claim.
This much is common ground. Haitem was offered an internship with Goldman Sachs which was not part of its usual summer intern programme but a bespoke arrangement organised to allow him to gain experience working with a range of departments within Goldman Sachs, to receive training and to get to know people in the Goldman Sachs London office. He was engaged as an intern at a rate of £36,000 gross per annum plus a £1,000 housing allowance. This is the same remuneration that is paid to other interns.
The possibility of an internship for Haitem first seems to be mentioned around 18 January 2008 when Mr Murgian of Goldman Sachs emailed Mr Kabbaj to say that GSAM was probably going to offer training to Haitem for a couple of weeks. Mr Kabbaj replied that Mr Zarti had been visiting London and asked Mr Ben-Brahim to arrange an internship for Haitem so that they might take him for one week in London too. In fact rather than becoming an intern at that point, Haitem came to London to have some individual training from 28 January to 8 February 2008. He then returned to Goldman Sachs in London as part of the group from the LIA’s Equity Team to take part in a training programme for two weeks in February 2008. Mr Vella met him then, although he did not appreciate at that time that Haitem was not in fact one of the Equity Team.
It also appears that in the middle weekend of the training period in February 2008 Mr Kabbaj took Haitem for a weekend trip to Marrakesh in Morocco. I fully accept that the extent of the entertainment offered by Mr Kabbaj to Haitem was inappropriate and in flagrant breach of Goldman Sachs’ policy on entertaining clients. However, it does not seem to me relevant to the matters I have to decide. There is no evidence that Mr Zarti knew the nature and extent of the entertainment provided to his brother or that it influenced his behaviour – indeed it is not clear to me that he would have taken a positive view of what went on. He may well have been less, rather than more inclined, to give Goldman Sachs more business if he had found out about what went on.
Haitem returned to Goldman Sachs’ offices in London for more training in April 2008. He attended with four LIA employees, Mr Matri, Mr El Harati, Mr Zekri and Mr Bouhadi. This time Mr Kabbaj took all five of them to Morocco on the weekend in the middle of the fortnight’s training.
The discussion about Haitem’s internship started in earnest in April 2008. There was considerable resistance from the human resources department in Goldman Sachs to including Haitem on the regular internship programme. Mr Kabbaj sent Haitem’s curriculum vitae to them on 7 April 2008 saying: “Haitem has been referred to us by the Libyan Investment Authority, one of our strategic accounts in the MENA [sc. Middle East North Africa] region, that has produced this year almost $100m in revenues. We know that this is a very short notice but we would be grateful if you can try to get him a seat. Andrea Vella and Wassim Younan PMD, are both very supportive of this recruitment.”
A senior person in Goldman Sachs Human Resources then got involved and suggested an alternative programme for ‘client referrals’. But this, it turned out, was a three day internship in June aimed at school children taking their GCSEs and so was clearly not suitable. After some more toing and froing, Mr Ben-Brahim stepped in to say “We are running the risk of “upsetting” Zarti”. The discussion then turned to a more bespoke arrangement combining parts of the regular programme with time spent on a sales desk in London working on a project with a SWF or in North Africa. Mr Aliredha noted that putting Haitem in the regular intern programme ‘will do more damage than help’ because Haitem would not be able to perform to the level of the other interns. Human Resources then effectively made it clear that they were not prepared to allow a place on the regular programme to be taken up by someone who was not being chosen on merit and who was not in the running for an offer of permanent employment at the end of the programme.
There was then a discussion via email about putting together a programme for Haitem visiting various teams within Goldman Sachs. On 14 April 2008, Mr Kabbaj was about to fly back to Tripoli. He asked Mr Ben-Brahim for an update on the internship plans since he expected that Mr Zarti would ask him about this. This request was passed on to Mr Vella who advised Mr Kabbaj to write to him and the head of Human Resources asking for a plan and added that he would be happy to have Haitem working for him (Mr Vella) in the sovereign wealth fund group. Once he was out in Tripoli on 17 April, Mr Kabbaj reported that Mr Zarti was asking whether his brother could be included in the regular summer programme. Mr Vella forwarded to Mr Kabbaj the exchanges with Ms Pingerra. Mr Kabbaj was quick to let Mr Zarti know the positive outcome. He texted Mr Zarti: “Good news, Haitem is gonna receive an offer from Goldman Sachs to join the sovereign team in London for 6-12 weeks renewable if he is good. He will be paid as Goldman Sachs entry level analyst (5000-7000 dollars a month). Contract next week. Can start whenever he wants. Also, we still have the two seats for Dubai. Is it possible to allow Haitem and Anass Bouhadi or only Haitem as they are the only ones to have European passports? We will pay for plane and hotel. It can be a great experience as all the SWFs are represented.”
The start date took some time to be settled. On 23 April Mr Kabbaj texted Haitem asking: “Can you start May 1? June 1? Mustafa wants you to start asap”
Haitem replied that he would start on 1 June to which Mr Kabbaj responded: “Ok. How long? Mustafa is killing us”
Mr Vella did not remember the matter of the internship being raised when he met Mr Zarti in Tripoli on 23 April 2008. It was put to him that it was discussed and it was perfectly clear to him how important this was to Mr Zarti. It was also put to him that he could have been in no doubt that if the internship had not been offered then it would have been a serious barrier to doing more business with the LIA. Mr Vella denied this.
Haitem started the internship in June 2008. Shortly after the matter came to the attention of the compliance department at Goldman Sachs. James Peters wrote to Mr Vella and the head of Human Resources on 23 July 2008 saying: “Andrea/Michelle – I’ve just learned of a temporary client placement into Andrea’s private-side team, Haitem Zarti. Going toward please come to me first on client placements – we always do everything we can to avoid them anywhere in IBD – they raise multiple issues. To the extent we have permitted them they’ve been carefully orchestrated to minimise the risks. Is Haitem still here? When is he leaving? Thanks. James”
Mr Vella replied: “He’s not a client, he’s the brother of a client, but I see the point. He is still here, working mostly with Alessandro Dusi on the sovereign debt and derivatives team. He’s supposed to finish in three months, and possibly rotate between now and then. Let’s talk Andrea”
Ms Pingerra added ‘This sounds like a “friends and family” placement rather than a client placement – I would have imagined that was far less of an issue?’ 182. The period of the internship was extended a number of times and lasted in all 11 months, until the middle of May 2009. This therefore included a period after the relationship between Goldman Sachs and the LIA went sour after the Stormy Meeting. Haitem was given a glowing appraisal by Mr Kabbaj in August 2008.
The LIA drew my attention to the on-going investigation by the United States Securities and Exchange Commission (‘SEC’) into the grant of the internship to Haitem. I have seen a letter dated 23 June 2015 from the lawyers acting for Goldman Sachs sent to the SEC answering various questions posed about this. The letter informs the SEC that the documents suggest that there were discussions with the compliance department about the offer of the internship to Haitem but that given the passage of time it was not possible to obtain additional details about the content of those discussions.
Whether the internship complied with internal Goldman Sachs rules or whether it falls foul of external regulatory standards is not a matter that I have to decide. I note that there is no evidence before me as to whether Mr Zarti kept the internship secret from Mr Layas or the Board of Directors or whether in fact the Board knew that Haitem was spending several months in the Goldman Sachs offices. The training and hospitality offered to Haitem in London certainly was not carried out in a covert manner since other members of the Equity Team were included.
What was the motivation behind offering the internship to Haitem? Mr Vella accepted that Goldman Sachs internships are highly sought after by young would-be bankers and that candidates usually undergo a formal and rigorous application process. He also accepted that Haitem did not go through the normal process and that he was not offered the internship on merit. Goldman Sachs say that they offered Haitem the internship because they thought that he might be posted to London to head a branch of the LIA here. They wanted to be sure that if Haitem was put in a position to conduct business in London on behalf of the LIA, then his first inclination would be to turn to Goldman Sachs because he would already know the people there and the way that the Goldman Sachs’ operation worked. They deny that there was any link between the internship offered to Haitem and Mr Zarti’s approval of the April Trades, beyond the coincidence of timing. Mr Vella denied that he would not have approved the internship but for the fact that Mr Zarti made it clear that he was expecting this to be arranged. Mr Vella’s evidence on this was as follows:
“Q. And as I understand it, you say that the internship which was then offered — we will look at the correspondence in a moment — to Haitem Zarti, was offered for the purposes of training him as part of Goldman Sachs’ ongoing efforts to train and develop all LIA employees? A. That was one of the reasons. Q. Tell me the other one? A. The other important reason, from my perspective at the time and today, is that knowing that he would have a job of responsibility at the LIA in London or elsewhere, but the London — the thinking was around this London office that the LIA eventually opened. It would be a great opportunity for us to be in front of him, establish a relationship across different parts of the business. And if you spend time with someone and they spend time on your desk to work or, you know, the equity derivatives desk, on the fixed income desk, on the investment grading, investment banking, when they have that job responsibility and they have personal relationships with people in the firm, you are more likely to do business — Q. So the idea — A. — likely to get that first call when they have to make any of their business decisions or initiatives. Q. We will come to the LIA, then, in a moment. But just so I understand that, the idea was that by giving Haitem Zarti an internship, Goldman Sachs was more likely to get business in the future from the London office of the LIA? A. I think the idea was (1) to show the equipment that we talked about and (2), to structurally create an opportunity for the business people and the client to actually talk business in the dayto-day job, and therefore establish that relationship on which one day they would be deriving business from. Q. Yes. A. Yes. Q. So the idea of the internship, on that part of it, was to — it was given in the hope and expectation that that would encourage Mr Zarti when he joined the LIA in London, if that is what he did, to give Goldman Sachs business? A. It is not really about encouraging. It is about creating the link. If he spends six months with our FIG banker [sc. Financial Institutions Group], not the Lehman Brothers FIG banker, if in future he has a FIG deal to do, he is more likely to call the Goldman Sachs FIG bank. It is just a fact. Q. It was to make it more likely that he would give business to Goldman Sachs? A. I think you could say that, with all the caveats I just spoke about. Q. Looking at the other aspect of it, you say that you thought he was going to become an LIA employee and therefore it was training like you were giving to the other LIA employees; is that what you say? A. It was part of that, you know, pledge and commitment we had made to them, that we would help them train people and transfer knowledge. Q. And so effectively you say he was treated as if he was an LIA employee for that purpose? A. I think so.”
My findings on this are as follows. As is often the case, there was a combination of reasons behind the offer of the internship to Haitem. On balance I am satisfied that the main motivation behind the offer was that Mr Vella and the others at Goldman Sachs thought that Haitem might well be posted to London to head up the LIA’s London office. I recognise that this is not mentioned as a reason in any of the email traffic with the human resources team that I have seen. But most of the emails are about making the arrangements with the human resources team and with compliance and, as Mr Vella said in evidence, there was no reason to explain to them why they wanted to offer this opportunity to Haitem.
Mr Vella could not recall when or how he gained the impression that Haitem might be getting an important role in London or whether he held this impression at the same time as thinking that Haitem was working for the LIA. But he was emphatic that this was his understanding and the reason he supported the idea of the internship. He remembered being excited at the thought that someone who was going to be a key decision maker in the future had the opportunity to familiarise himself with the people and businesses of Goldman Sachs’ financial services firm.
There is support for this idea in the minutes of the LIA’s Board of Directors on 23 January 2008. They contain the following item:
“The members of the committee listened to the presentation by the executive director of the memorandum submitted to request approval to assemble a consulting team to assist the Authority in its activities. In the memorandum he stated that the Authority has a critical need to set up a technical team consisting of experts in the field of investment, to be headquartered in London. This team would take part in studying and issuing technical opinions on the investment offers and opportunities made available to the Authority. It would also take on the function of training Libyan nationals working at the Authority, so that it will be able to keep pace with changes in the international investment market. The executive director also stated that selecting and appointing the members of the consulting team, assessing its performance, and determining its remuneration, would be done in accordance with the rules and criteria set by the Authority. The consulting team would be tasked with administering a single investment portfolio of the Authority, valued at US$500 million and to be held by a company to be established in the Cayman Islands, in exchange for giving the consulting team administrative fees in accordance with market rates. Based on the aforementioned, the executive director requested approval to begin the procedures for setting up a consulting team and setting up a company in the Cayman Islands to administer the portfolios which the consulting team will be tasked with managing. After discussion, the committee made the following decision: Decision No. 08/01/2008 l. Approval to begin setting up a consulting team to assist the Authority in carrying out its activities through a London office. 2. Approval to set up and register a company in the Cayman Islands, to be owned entirely by the Libyan Investment Authority, through which the consulting team will manage the portfolios of the Authority with which it will be tasked. 3. The consulting team will be subordinate to the executive administration of the Authority for approval of all of its investment decisions.”
This was the same Board meeting at which the approval was given for the Citigroup investment and for the purchase of shares in EdF. It seems to me very likely that this item about a London office was reported back to Mr Kabbaj and other people in Goldman Sachs since it would be of great interest to them. It is also likely that there was discussion about the possibility that Haitem would be sent to run the office. Mr Vella said that he thought that Haitem might get the London job because he was the brother of Mustafa Zarti and as a family they were very close to the Gaddafis. His lack of qualifications would not matter since jobs were allocated on the basis of loyalty rather than competence. Again, this seems to me entirely plausible. Mr Vella said that if it had been someone else, not Mr Zarti’s brother, who they thought would head up the London LIA office and they had had a chance to offer that person an internship they would have done so.
On the other hand I am sure that Mr Zarti was very keen that his brother be offered this opportunity and made this clear to Goldman Sachs. We do not know why Mr Zarti thought this was important. It may well be that the two points were linked and that the Zartis thought that a spell working for Goldman Sachs in London would improve Haitem’s chances of getting the London posting. I accept that this is speculation but in the absence of any evidence from either Mustafa or Haitem Zarti or from Mr Kabbaj, I have to piece together the most likely narrative. I find that Mr Kabbaj certainly thought that it would help the relationship between the LIA and Goldman Sachs to accede to this request of Mr Zarti. But in my judgment it is going much too far to say that the internship influenced Mr Zarti to place more business with Goldman Sachs than he otherwise would have done or that the offer had a material influence over the LIA’s decision to enter into the April Trades. As I have described, there had already been long and detailed discussions about a further substantial investment by the LIA with Goldman Sachs over several weeks preceding the visit on 17 April 2008. The LIA were keen to make a substantial investment in these kinds of companies.
The LIA’s pleaded case highlights the coincidence of timing between the offer of the internship texted to Mr Zarti on the afternoon of 17 April 2008, the discussions at the meeting with Mr Zarti later that day and Mr Kabbaj’s email back to his colleagues in Goldman Sachs on 18 April in which he says “Mustafa wants to give us something”
In my judgment it is reading too much into this to say that Mr Zarti’s wish to enter into further investments with Goldman Sachs was influenced by the offer of the internship. Mr Kabbaj may well have hoped that the offer would sweeten the atmosphere but it seems unrealistic to suppose that Mr Zarti would really be influenced to commit the LIA to investing many hundreds of millions of euros on the basis of a few months’ internship for his brother. The LIA also argue that the fact that Mr Zarti was told about the internship before Haitem was told is striking and conclusive evidence that it was aimed at Mustafa not Haitem Zarti. But I do not accept that the evidence establishes that that is what happened. It is entirely plausible that once Mr Kabbaj had secured the internship he would telephone Haitem to tell him about it, given that they were such good friends. Without any evidence from Haitem or Mr Kabbaj, it is not possible to say that Mr Zarti was informed about the offer before Haitem was.
I bear in mind that, as I described earlier, the LIA does not have to prove that Mr Zarti would not have agreed to the April Trades on 23 and 24 April unless Goldman Sachs had agreed before then to offer Haitem an internship. Even so, I am not satisfied that actual undue influence has been proved here. Everyone working on the deals realised that Mr Zarti was a demanding client with a capricious temperament and that it was important not to upset him. That does not turn every instance of acceding to his demands into unconscionable conduct of the kind that entitles the LIA to rescind the transaction. The main value to Goldman Sachs in making the offer was the chance to form a strong and friendly link with someone who might be leading the LIA London Office. What Mr Zarti’s motivation was remains opaque. I therefore dismiss the LIA’s claim in relation to the April Trades so far as it is based on actual undue influence arising from the favourable treatment offered to Haitem.”
Elsewhere in her ruling, Justice Rose stated:
“I find that the main motivation behind the offer of the Goldman Sachs internship to Haitem Zarti was Goldman Sachs’ belief that he might be chosen to lead the LIA’s new office in London and it would be beneficial for Goldman Sachs’ future business prospects with the LIA for them to establish a good working relationship with him at an early stage. I find that Mr Mustafa Zarti was keen for his younger brother to work as an intern, though there is no evidence as to why he thought this was important. Although the offer of the internship may have contributed to a friendly and productive atmosphere during the negotiation of the April Trades, it did not have a material influence on the decision of Mr Zarti and the LIA to enter into the April Trades.”