It’s All Relative – The Risks of Office Nepotism

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Federal authorities recently commenced an investigation targeting a global financial services firm’s alleged practice of hiring the children of powerful Chinese officials, often through a program that used lower hiring standards for those with elite pedigrees, to help the firm win lucrative business in China. The investigation provides an excellent backdrop to discuss the risks associated with nepotism in the workplace.

Nepotism is not generally illegal unless it crosses the line into bribery. In recent years, the SEC and the Justice Department have increased their enforcement of the Foreign Corrupt Practices Act, a 1977 federal law that bans U.S. companies from giving “anything of value” to a foreign official to win “an improper advantage” in retaining business. The FCPA prohibits the hiring of a foreign official’s relative if the job was offered to obtain or retain business. The crux is whether the relative was hired with “a corrupt intent,”  i.e. the express hope of winning specific business as a result of the hire.

The recent investigation is a reminder to businesses to be wary of conduct that may create the appearance of nepotistic practices. While some argue that there are legitimate benefits to hiring relatives – they may be well-educated, connected and suited to a particular industry – but all employers should still be aware of best practices to lessen the risk of FCPA violations or other employment related lawsuits. Even those that are not bound by the FCPA could still be vulnerable to actions by employees, since nepotism’s effects may violate other laws, such as those regarding discrimination and hostile work environment.

Some practice-pointers for those engaged in international business or business with a government-controlled entity include:

  • Use of a retention database similar to that of a conflict-of-interest report to avoid the improper hiring of “related” employees, unless specifically cleared by the compliance or legal department.
  • Maintaining an accounting for all payments and documentation of all employment decisions, including how individuals were hired, and why.
  • Fill jobs that actually exist (as opposed to creating a new position for the relative).
  • Hire individuals qualified for the work and ensure they perform satisfactorily.