Welcome to my annual Venice travel edition. This week I will have a series of Venice themed posts all centered around a deep dive in to the JP Morgan Chase FCPA enforcement action. We arrived this weekend to find Venice shrouded in a deep fog, which seem an appropriate visual representation of this enforcement action. Once again we have a Chinese business unit of a major US entity which engages in conduct, with clear intent to hide its actions from corporate parent. And, once again, we see a corporate parent who is reluctant to look very closely at a business unit in a high-risk jurisdiction, engaging in conduct identified by the corporate parent as high risk, which somehow cannot seem to see the illegal conduct for at least seven years.
JP Morgan Chase (JPM) and its subsidiary, JPMorgan Securities (Asia Pacific) Limited (JPM-APAC) resolved its Foreign Corrupt Practices Act (FCPA) matter last week, obtaining a Non-Prosecution Agreement (NPA) from the Department of Justice (DOJ) with a penalty of $72MM, agreeing to a Cease and Desist Order (Order) from the Securities and Exchange Commission (SEC), with a penalty consisting of profit disgorgement and interest of $135MM, and reaching an agreement with the Federal Reserve Bank (Fed) for a Consent Cease and Desist Order (Fed Order) to put in place a best practices compliance program and pay a penalty of $61MM. The total fines and penalties paid by JPM for its violation of the FCPA was $268 MM. This week I will review the underlying facts of the enforcement action, consider the penalties, the egregious conduct and attempts to hide their actions and discuss the multiple lessons to be garnered for the compliance professional.
The conduct involved JPM-APAC’s Client Referral Program, named the “Sons & Daughters Program” (Sons and Daughters), which targeted children of high Chinese government officials and employees of state owned enterprises, together with other close family members and even close friends and associates of these officials and employees for hiring in a blatant attempt to win business. It was designed, created and implemented by the top management of JPM-APAC, which went so far as to keep a tally of those persons hired by JPM-APAC and JPM to specific business development. As noted in the NPA, “certain senior executives and employees of (JPM-APAC) conspired to engage in quid pro quo agreements with Chinese officials to obtain investment-banking business, planned and executed a program to provide specific personal benefits to senior Chinese officials in the position to award or influence the award of banking mandates, and repeatedly falsified or caused to be falsified internal compliance documents in place to prevent the specific conduct at issue”. The language quid pro quo is replete throughout the settlement documents because that is the specific language used by JPM-APAC personnel when discussing Sons and Daughters.
These actions led to over $100MM in profit to JPM. While JPM was certainly aware that many of these hires did not meet the companies stringent hiring requirements, there never seemed to be oversight of JPM-APAC over this illegal program or even investigation into the clear red flags presented throughout the conduct at issue. What is more JPM knew the high-risk in hiring family members of government officials as far back as 2001 and indeed, had a written policy prohibiting such conduct. However, in 2006, this program morphed into a targeted program “directly attributable linkage to business opportunity”, and lasted until 2013.
According to the Order, “Over this seven-year period, JPMorgan hired approximately 200 interns and full-time employees at the request of its APAC clients, prospective clients, and foreign government officials. This included nearly 100 candidates referred by foreign government officials at more than twenty different Chinese SOEs. A number of the referral hires resulted in business for JPMorgan APAC…. JPMorgan also hired referrals from more than 10 different government agencies.” Sons and Daughters involved several different hiring programs at JPM, including new hires out of university, summer interns and lateral hires.
As noted above JPM-APAC tracked the metrics of Sons and Daughters, the “employee, whose responsibilities included supervising employees hired under the Client Referral Program, created and then updated a spreadsheet that tracked hires to specific clients, while also tracking revenue attributable to those hires. The spreadsheet included columns for each hire, the referring client, the relationship of the candidate, and the amount of revenue generated attributable to the hire in U.S. dollars. One of the purposes of the spreadsheet was to track deals that resulted from the hires and measure revenue associated with Client Referral Program hires.” So the corruption scheme and the benefits obtained therefrom were fully documented.
Initially, Son and Daughters had five requirements to be considered for hire at JPM-APAC. As set out in the NPA, they were “(1) whether the applicant was qualified for the position; (2) whether the applicant had gone through the normal interviewing process; (3) whether the referring client/potential client was government-related; (4) whether the firm was actively pitching for any business from the client/potential client; and (5) whether there was an “expected benefit to JPMorgan” for hiring the referred candidate.” Written documentation was prepared and submitted to at least JPM-APAC Human Resources (HR) and compliance functions which disguised the true nature of these hires.
Worse, it appears that both the HR and compliance functions were complicit in the scheme because on at least one instance where the JPM-APAC business unit sponsor noted on the form “[t]he hiring of this candidate will place JPMorgan in a more favorable position for securing future
business from the client.” This somehow morphed into the next iteration, which read, “The candidate will be trained by JPMorgan for couple of years and then go to local bank. Thus, will bring more business.” However, JPM-APAC compliance and HR functions “instructed the JPMorgan-APAC employee to remove the offending language, writing, “[h]iring of the candidate should not be for the purposes of securing future business of the firm. Please remove.” Further damning to the JPM-APAC compliance and HR functions was that of the more than 200 candidates hired through the Sons and Daughters program, none were rejected by either HR or compliance.
In 2009 JPM-APAC even went so far as to refine the Sons and Daughters program. Moreover, after approval by the head of investment banking for APAC, JPM-APAC implemented the revised Client Referral Program. According to the Order, it required each potential hire under the program to have “Clear accountability for deal conversion and accountability for abuse of the program.” The Order went on to note that the “revised program was managed by the JRM business support team with input from senior JPMorgan APAC investment bankers. Certain senior bankers were given a “quota” of Referral Hires that could be made each year. Subsequent JRM reports from 2009 through 2012 contained the same language regarding the “revised” referral hiring program with the selection criteria of a “[d]irectly attributable linkage to business opportunity.” These presentations were discussed with the head of investment banking for JPMorgan APAC and other JPMorgan APAC senior executives.”
In addition to the tying of business to the hirings under the Sons and Daughters program, there was the additional problem that these hires did not meet JPM’s basic hiring and retention standards. According to the Order, one JPM-APAC representative described those hired under the program “as a protected species requiring [senior management] input. His reporting line to you is accountable but like national service.” Both the Order and NPA were replete with document evidence that the hires under Sons and Daughters did not meet minimum hiring standards and they often failed to meet minimum standards for retention at the company. Below is a Box Score summary from the NPA of some of the candidates which clearly did not meet JPM hiring standards, yet who were hired and where such hires under the Sons and Daughters program brought benefits to JPM.
|Foreign Official or SOE employee||Reasons for hire||Candidate deficiencies||Deficiencies as JPM employee||Benefit tied to hire|
|Client 1||Maintain good relationship with client||$4.82MM profit|
|Client 2||Quid pro quo for business||JPM-APAC lead underwriter on IPO|
|Client 3||Not very impressive, poor GPA||Attitude issue. He doesn’t seem to care about work. Don’t need to have an intern doing nothing||JPM-APAC lead underwriter on IPO|
|Client 4||Promised IPO work||Not qualified for job at JPM. Tech and quantitative skills ‘light’||Communication skills and interest in work lagged his peers||JPM-APAC lead underwriter on IPO. $23.4MM profit|
|Government Official 1||Father would go the extra mile to help JPM||Worst business analyst candidate ever seen||Immature, irresponsible and unreliable. Sent out sexually inappropriate emails||JPM-APAC lead underwriter on IPO|
|Government Official 2||Hire would ‘significantly’ influence role of JPM-APAC||Unlikely to meet hiring standard||New York not comfortable with his work. Recommends he follow a different career path||JPM-APAC lead underwriter on IPO|
Probably the most amazing thing about this case is the superior result achieved by JPM in its resolution. Not only did it gain a 25% discount off the bottom of the US Sentencing Guidelines fine range but it received a NPA and not even a Deferred Prosecution Agreement (DPA) and no outside monitor was required of the company going forward. While some of this result is due to having excellent defense counsel, a large part is due to the cooperation by JPM and the remediation engaged in by the company. Tomorrow Commissario Guido Brunetti will inform our discussion of how the company’s actions led to this outstanding result.
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© Thomas R. Fox, 2016