Chris FroomeI begin today’s post with a tip of the (cycling) helmet to Englishman Chris Froome who yesterday won his third Tour de France championship. Froome overcame a great many obstacles, not the least of which was being involved a couple of crashes and one very over zealous fan. So here is a nod to Froome and I cannot wait for the 2017 Tour.

Now let us return to the fall of 2013, when New York Times (NYT) reported that JPMorgan Chase (JPMorgan) was under Foreign Corrupt Practices Act (FCPA) scrutiny in China for its hiring practices. In an article entitled “Hiring in China By JPMorgan Under Scrutiny”, Jessica Silver-Greenberg, Ben Protess and David Barboza broke the story that both the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) were investigating JPMorgan to determine “whether JPMorgan Chase hired the children of powerful Chinese officials to help the bank win lucrative business in the booming nation.”

The 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 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, JPMorgan was hired to assist the company to go public.

Things got worse 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, had expanded to other countries in Asia and that JPMorgan “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 is sharing with regulators.” Kopecki quoted Dan Hurson, a former US prosecutor and SEC lawyer, who said 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 that 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 JPMorgan hiring program even had its own name, which was ‘Sons & Daughters’. Although the program was originally set up to provide transparency and visibility into the hiring process that might implicate FCPA issues, they reported that it went badly “off track”. Under the Sons & Daughters hiring program, a two-tiered track was created in the hiring process, one for regular applicants and one for children of Chinese officials. However, as time passed the program began to be used to allow for fewer job interviews and relaxed hiring standards for the candidates in the program. This allowed the company to hire some candidates who had “subpar academic records and lacked relevant expertise.”

All of this came home to roost last week, when Christopher M. Matthews, Emily Glazer and Aruna Viswanatha, reporting in a Wall Street Journal (WSJ) article entitled “J.P. Morgan Chase Nearing Settlement With Prosecutors on Asia Hiring Probes”, wrote “J.P. Morgan Chase & Co. is expected to pay around $200 million to settle federal investigations into whether it tried to win business by hiring the sons and daughters of powerful people in Asia”. The settlement was based on FCPA violations for the bank’s “hiring of “princelings,” the kin of high-ranking Chinese government officials and managers of state-owned companies, allegedly to curry favor in getting deals.”

The WSJ piece described a much more detailed hiring scheme than had been previously reported, “In all, J.P. Morgan hired 222 candidates under a program known internally as “Sons and Daughters” that ran from 2004 to 2013. They included those referred by officials at nine of 12 large Chinese companies that the bank took public in Hong Kong.”

The WSJ article detailed several instances of the bank’s hiring of unqualified applicants, who became employees, without the basic skills to operate in a US based multinational organization. The article discussed one of the hires, Gao Jue, who “did poorly on his job interviews at J.P. Morgan, messed up his work visa, accidentally sent a sexually explicit email to a human-resources employee and was described by a senior banker as “immature, irresponsible and unreliable,” according to internal bank emails reviewed by the Journal and people familiar with the matter.”

In an interesting portion of the article, it said “Both sides have agreed that an executive of a state-owned company is considered a government official, but there is dispute over what conduct is considered corrupt from a legal point of view in cultures where it is common to hire well-connected individuals.” This would appear to be an acknowledgment of the four US courts that have considered this question and all have found this interpretation to be correct.

Further, the WSJ article noted, “U.S. government officials have told the banks that hiring someone with connections to a government official with the intent of winning business is, in itself, a violation of law even if there isn’t an explicit quid pro quo”. Apparently lawyers for the bank “have accused the government of overreaching in the hiring cases by threatening to criminalize standard business practices in some countries”. Yet the key to the DOJ position seems to be the hiring with intent to influence an official to do something. It is not much of a stretch to find a FCPA violation in such conduct, particularly given the reported facts in this matter.

While there have been two prior FCPA enforcement actions involving the hiring of family members of government officials or employees of state owned enterprises, Qualcomm Inc. and The Bank of New York Mellon, the reported JPMorgan resolution amount will dwarf those settlements. But there may be others in the works as well as the WSJ also noted that other banks are under FCPA scrutiny, including “Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group Inc., HSBC Holdings PLC, Morgan Stanley and UBS Group AG, according to regulatory filings.”

 

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 tfox@tfoxlaw.com.

© Thomas R. Fox, 2016

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