About the best thing that you can say for the Houston Texans is that they did not lose on Sunday. Of course they did not play on Sunday, pathetically losing Week 14’s game last Thursday. For their season’s effort, the head coach was fired the next day. At least in the National Football League (NFL) there is accountability.
On the other hand, the hits just keep on coming for JP Morgan Chase. On the front page of Sunday’s New York Times (NYT), in an article entitled “Bank Tracked Business Linked to China Hiring”, reporters Ben Protess and Jessica Silver-Greenburg reviewed yet more potentially damning evidence in the Bank’s Foreign Corrupt Practices Act (FCPA) investigation. They were able to view documents which had been recently disclosed by JP Morgan Chase to the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) in connection with the bank’s ongoing internal investigation into its ‘Sons and Daughters’ hiring program which apparently targeted the children of communist party officials and high ranking officials of state owned enterprises for employment in order to obtain business from their parents. The reporters noted, “Until now, the indications of a connection between the hires and business deals have not been so explicit.”
Emails, Spreadsheets and Whistleblowers
The reporters studied both documents and emails which seemed to indicate that the bank thought hiring of these sons and daughters would and did contribute in bringing business to the bank. The documents included spreadsheets “that list the bank’s “track record” for converting hires into business deals”. Another set of documents discussed in the article were described as “historical deal conversion” spreadsheets. The article went on to detail that in one column there was a list of the job candidates and in another column “the bank recorded its track record for winning business from the companies tied to the candidates.” There were other spreadsheets which listed the hires of well-connected children and the revenue that the bank earned from deals involving with hires linked to those companies. These other documents included spreadsheets which discussed “about 30 employees with ties to state-owned companies or Communist Party officials, including the daughter of the deputy minister of propaganda, a relative of a Chinese financial regulator and the nephew of the executive chairman at Sinotruk, which is part of a state-owned trucking enterprise.”
There were also emails cited in the article which seemed to indicate that depth and pervasiveness of the ‘sons and daughters’ hiring program. One email discussed “the “existing and potential business opportunities,” a senior JPMorgan executive in Hong Kong emphasized that the father of a job candidate was the chairman of the China Everbright Group, a state-controlled financial conglomerate. The executive also extolled the broader benefits of the hiring program, telling colleagues in another email: “You all know I have always been a big believer of the Sons and Daughters program — it almost has a linear relationship” with winning assignments to advise Chinese companies.”
In addition to these emails and documents discussed in the NYT article, the reporters also interviewed current and former bank employees. Apparently at least two whistleblowers came forward to identify the hiring scheme, “with one filing a complaint in April 2011 with the Hong Kong stock exchange and another coming forward to American authorities this year.” It has not been clear when JP Morgan Chase began its internal investigation or what was the genesis of the investigation.
The Tang Xiaoning Hiring
The article went into specifics with one of the hiring’s, that of “Tang Xiaoning, a onetime Goldman and Citigroup employee whose father is the chairman of the China Everbright Group, appeared to encapsulate the spirit of the “Sons and Daughters” program for state-owned clients. The father, approached a JPMorgan executive in Hong Kong in March 2010 about a position for his son, records and interviews show. The executive, who led JPMorgan’s China investment banking unit, welcomed the request and urged his colleagues in an email a day later to discuss “how we can leverage more on this account going forward.” But in an internal compliance form, the executive played down the significance of hiring Mr. Tang, documents show, saying there was “no expected benefit.”
Tang Xiaoning was subsequently hired on a one-year employment agreement. Thereafter his father, Tang Shuangning, who had done little if any business with the bank prior to the hiring of his son. But thereafter, “a China Everbright subsidiary hired the bank to advise on a $300 million private offering of shares, according to interviews. And in 2011, after Mr. Tang worked at JPMorgan for several months, China Everbright’s banking subsidiary hired JPMorgan as one of several financial advisers on its decision to become a public company, a deal that was delayed amid turmoil on the world’s markets.” In 2012, after two successive one-year extensions of his employment agreement, “China Everbright International, a subsidiary focused on alternative energy businesses, hired JPMorgan to advise on a $162 million sale of shares, according to Standard & Poor’s Capital IQ, a research service.” When the issue of a third one-year employment agreement it was clear what bank officials in China thought of the situation. The NYT article quoted an email which read, ““Given where we are on China Everbright, I think we may need another contract for Xiaoning,” the executive wrote.”
The article notes that the origins of the ‘Sons and Daughters’ hiring program was to comply with the FCPA. The reporters noted, “According to documents and interviews with current and former employees, JPMorgan created the “Sons and Daughters” program in 2006 with the expectation that the hires would receive heightened scrutiny. But by 2009, the “Sons and Daughters” program was putting the job candidates on the fast track to employment. The documents show that applicants from prominent Chinese families faced less stringent hiring standards — and fewer job interviews — than the average junior-level hire.” Moreover, there has apparently been no direct evidence of knowledge by the program at the corporate headquarters in New York.
Ongoing Monitoring is Critical
So for the compliance professional what are some of the lessons that can be drawn from this matter? First and foremost is that there needs to be ongoing monitoring to determine whether employees are staying within the compliance program. Even after all the important ethical messages from management have been communicated to the appropriate audiences and key standards and controls are in place, there should still be a question of whether the company’s employees are adhering to the compliance program. Two of the seven compliance elements in the Federal Sentencing Guidelines call for companies to monitor, audit, and respond quickly to allegations of misconduct. These three highlighted activities are key components enforcement officials look for when determining whether companies maintain adequate oversight of their compliance programs.
Your company should establish a regular monitoring system to spot issues and address them. Effective monitoring means applying a consistent set of protocols, checks, and controls tailored to your company’s risks to detect and remediate compliance problems on an ongoing basis. To address this, your compliance team should be checking in routinely with local Finance departments in your foreign offices to ask if they’ve noticed recent accounting irregularities. Regional directors should be required to keep tabs on potential improper activity in the countries in which they manage. Additionally, the global compliance committee should meet or communicate as often as every month to discuss issues as they arise. These ongoing efforts demonstrate that your company is serious about compliance.
This means that you may want to walk down the hall and talk to your company’s Human Resources (HR) Department to see if there is anything around hiring of the children or family members of government officials. You might also do some transaction monitoring to see if there are new clients, customers or projects which popped up suddenly as new business for the company. Or take it a step further to see if there were contracts or business retained because of any hiring.
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© Thomas R. Fox, 2013