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JP Morgan Testing the Boundaries of FCPA Foreign Bribery Rules

Posted  September 12, 2013

By Gordon Schnell

It is a practice that apparently has been going on for years by Wall Street’s biggest banks.  Hire the children of high-up Chinese officials and use them to secure big deals in China’s ever-expanding economy.  There is nothing inherently wrong with hiring well-connected people.  After all, relationships are what matter most in the business world.  The problem is that when it comes to doing business abroad, the rules of fair play can be a bit murky.  What may be considered a legitimate and commonplace business strategy to getting the deal done may be viewed by the government as something quite different.

That appears to be the case with the fresh look the government is giving this age-old hiring strategy.  Both the SEC and DOJ are investigating whether the hiring of these so-called princelings — the sons and daughters of China’s political elite — violates the Foreign Corrupt Practices Act (FCPA).  This is the statute that bars U.S. companies from bribing foreign officials or otherwise trying to improperly influence their government decision making.  And it is JP Morgan Chase, with its aptly named “Sons and Daughters” program, that seems to be the one in the cross hairs of the government’s newfound concern over this practice.

The bank started the program in 2006 for the very purpose of ensuring that its politically connected hires in Asia, of which there have been many, stayed on the right side of the FCPA line.  They were supposed to be subject to heightened scrutiny and reviewed on a separate track from ordinary job applicants so there could be no suggestion of nepotism or of favoritism to win business.  But according to a New York Times investigation, this program that was supposed to ward off questionable hiring practices actually fostered them instead.  “Applicants from prominent Chinese families . . . often faced few job interviews and relaxed standards.  While many candidates met or exceeded the bank’s requirements, some had subpar academic records and lacked relevant experience.”

The reason for the program’s change in direction is clear.  It would bring in business.  Based on one internal document the Times obtained, these favored hires were actually linked to the “revenue” JP Morgan obtained from companies run by the very Chinese officials to whom the hires were related.  Even more potentially damning for the bank, Bloomberg reports of an internal spreadsheet that directly connects certain hiring decisions to specific transactions the bank was pursuing.

Of special interest to government enforcers seems to be JP Morgan’s hiring of two particularly well-placed princelings.  One is the son of Tang Shuangning, chairman of the China Everbright Group, a state-owned financial conglomerate.  The other is the daughter of Zhang Shuguang, a senior official connected with the China Railways Group, a state-controlled construction company that builds railways for the Chinese government.  After these two came on board, JP Morgan won major deals from each of these entities.   Interestingly, Mr. Zhang was subsequently detained on corruption charges and the railways ministry was disbanded this year over a series of corruption scandals.

Whether these hires specifically, and JP Morgan’s Chinese hiring practices more generally, rise to the level of a bribe under the FCPA is not so clear.  Traditionally, the government has limited its FCPA enforcement actions to more concrete exchanges — money, gifts, entertainment, travel — made directly to a foreign official for the purpose of securing a specific contract or favorable action by the foreign government.  The mere hiring of a relative to strengthen the overseas relationship or gain a more favorable reception there arguably does not go as far in demonstrating this kind of corrupt intent.

But the FCPA is a notoriously flexible statute with lots of room for the government to cast a wide net on what it considers to be an illicit exchange.  And the government has stepped up its foreign bribery enforcement efforts over the past few years, filing dozens of cases since 2010.  What it likely will come down to for the agencies investigating JP Morgan and, according to the Wall Street Journal, numerous other banks and hedge funds, is whether they can uncover any serious red flags in the foreign hiring practices of these financial institutions.

These markers might include the hiring of politically-placed individuals not qualified for the position or who do not perform any real work or even show up at the office.  Even more striking would be the securing of business immediately following the hiring and from a company with which there was no previous business relationship.  That may be what has made the government so interested in JP Morgan.  It was only after the hiring of the chairman’s son that the bank suddenly received a steady flow of business from the Everbright Group.  A similar pattern of work flow from the Railway Group apparently followed the bank’s hiring of Zhang.

The ultimate question in all of this is whether the government can show “corrupt intent” — that the favored hire was made in exchange for, or for the purpose of securing, government business.  Whether the government can get that far with JP Morgan remains to be seen.  The bank has yet to be accused of any wrongdoing and is fully cooperating with the government’s investigation.  Whatever happens, the government has certainly put the banking world on notice that it should tread very carefully when playing the relationship game with its overseas hiring practices.

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