One of the most dreaded questions in any Foreign Corrupt Practices Act (FCPA) investigation is: Where Else? By this I mean that if you have a systemic failure of internal controls in one geographic area it may well be that there are other failures in other areas. Of course once a company begins any investigation; they may, as co-founder of thebriberyact.com Barry Vitou has famously said, well discover other “imperfections”. British understatement at its finest wouldn’t you say. This past weekend we saw another example of this in the JP Morgan Chase inquiry into its hiring of family members of government officials.
Back in August, the New York Times (NYT) reported that JP Morgan came under FCPA scrutiny in China for its hiring practices. In an article, entitled “Hiring in China By JPMorgan Under Scrutiny”, reporters Jessica Silver-Greenberg, Ben Protess and David Barboza broke the story that the Securities and Exchange Commission (SEC) had initiated an investigation into JP Morgan Chase to determine “whether JPMorgan Chase hired the children of powerful Chinese officials to help the bank win lucrative business in the booming nation.”
Hiring of a family member of a foreign government official is not illegal under the FCPA. The FCPA Professor was quoted in the NYT article as saying “While the hire of a son or daughter itself is not illegal, red flags would be raised if the person hired was not qualified for the position, or, for example, if a firm never received business before and then lo and behold, the hire brought in business.” In later blog post, entitled “JPMorgan’s Hiring Practices In China Under Scrutiny”, the FCPA Professor reviewed some enforcement actions “where the conduct at issue involved the hiring of children or spouses of alleged “foreign officials.”” In each of the FCPA enforcement actions, there was a quid pro quo for the hiring of the family member. In other words, the company received some benefit for the hiring of the government official’s family member; so the Department of Justice (DOJ) interpreted the hiring as ‘something of value’ going to the government official and thereby violating the FCPA.
The NYT article detailed several situations where JPMorgan hired the children of Chinese government officials and sometime thereafter the bank was able to secure work from the business or industry of a parent of a hired employee. The examples included the hiring of a “son of a former Chinese banking regulator who is now the chairman of the China Everbright Group, a state-controlled financial conglomerate, according to the document reviewed by the NYT, as well as public records. After the chairman’s son came on board, JPMorgan Chase secured multiple coveted assignments from the Chinese conglomerate, including advising a subsidiary of the company on a stock offering, records show.” In another instance, the bank hired the daughter of a Chinese railway official. After hiring the daughter, JP Morgan Chase was hired to assist the company to go public.
Things got worse for JP Morgan Chase when Dawn Kopecki, in a Bloomberg article entitled “JPMorgan Bribe Probe Said to Expand in Asia as Spreadsheet Is Found”, reported that there was “an internal spreadsheet that linked appointments to specific deals pursued by the bank”. She noted that the original investigation, which began in Hong Kong, has now been expanded to other countries in Asia and that JP Morgan Chase “has opened an internal investigation that has flagged more than 200 hires for review, said two people with knowledge of the examination, results of which JPMorgan Chase is sharing with regulators.” Kopecki quoted Dan Hurson, a former US prosecutor and SEC lawyer, who said that the “SEC will hunt for evidence showing “these weren’t real jobs, that they were only there because their father or mother were important public officials””; and “If the public official requested the job for the child, that would be a strong indication to the company that the official was seeking and receiving something of value.” Perhaps more damaging was that the spreadsheet had information which apparently linked “some hiring decisions to specific transactions pursued by the bank.” In a later NYT article, entitled “JPMorgan Hiring Put China’s Elite on an Easy Track”, Jessica Silver-Greenberg and Ben Protess further reported that the JP Morgan Chase hiring program even had its own name, which was ‘Sons & Daughters’.
Now JP Morgan Chase has disclosed in a securities filing that “its business relationships with certain related clients in the Asia Pacific region and its engagement of consultants in the Asia Pacific region.” As reported in another NYT article, entitled “U.S. Inquiry Broadens Into Bank’s Asia Hiring”, “government authorities are examining JPMorgan’s hiring practices throughout Asia, focusing on South Korea, Singapore and India. That scrutiny comes after JPMorgan itself flagged those countries for further review, the people said.” In addition to possible FCPA issues, the NYT article reported that Hong Kong and British authorities “are also investigating the bank’s hiring practices.” In a Wall Street Journal (WSJ) article, entitled “Probe Expands Into J.P. Morgan Hiring”, Dan Fitzpatrick reported that the SEC has issued subpoenas to JP Morgan Chase for not only the ‘Sons & Daughters’ hiring program but also “the use of certain consultants in the Asian-Pacific region.”
All of this compounds the bad news for JP Morgan Chase and the difficult period it is going through with several legal and regulatory investigations. However, this investigation regarding hiring practices has the possibility of expanding into enforcement actions with several different anti-corruption enforcement agencies, such as the DOJ and SEC and the UK Serious Fraud Office (SFO) and perhaps Hong Kong and Chinese regulators as well. So the dreaded “Where Else?” may well lead to the unearthing of further ‘imperfections’. At this point, about all I can say is ‘Stay tuned for further developments’.
This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at email@example.com.
© Thomas R. Fox, 2013