JPMorgan Chase Paying $264 Million to Settle Charges of Foreign Bribery
The investment bank was accused of hiring children of Chinese leaders in exchange for business
Investment bank JPMorgan Chase is set to pay approximately $264 million to settle charges that it and its subsidiary in Hong Kong hired friends and relatives of Chinese leaders in order to win more business.
"This is no longer business as usual"
The New York Times (NYT) writes that the case—which is only the first of what could end up being numerous settlements with these banks—focuses on JPMorgan's hiring practices overseas in China. The bank allegedly engaged in nepotistic hiring in order to gain new clients in the quickly-growing country. The authorities said that some of these well-connected candidates were unqualified and frequently "performed ancillary work," both of which often point to hidden bribery.
These practices, reports USA Today, violate the Foreign Corrupt Practices Act (FCPA), a federal law prohibiting the bribing of foreign officials.
Prosecutors and regulators claim that as the bank began hiring more and more employees based on Chinese leaders' referrals, writes NYT, senior bankers explicitly linked those jobs or internships in several instances to the securing of deals with companies run by the Chinese government. These candidates had to have, in JPMorgan's words, a "directly attributable linkage to business opportunity" in order to be hired. The result was that those companies were able to win or keep business, leading to more than $100 million in revenue for JPMorgan or its affiliates.
It was not known until now whether or not authorities would specifically accuse the bank of enacting a quid pro quo arrangement, a matter at the very heart of whether the bank violated U.S. law over foreign bribery.
JPMorgan argued that it was normal in China to hire employees based on their connections and that the hires it made would be governed by foreign bribery laws, which are something of a gray area.
The government, however, disagreed.
"The common refrain that this is simply how business is done overseas is no defense," said Robert L. Capers, the United States attorney whose office helped lead the criminal investigation into the bank. "This is no longer business as usual; it is corruption."
"Bribery by another name"
The penalty was lowered due to JPMorgan's extensive cooperation with the investigation, said the authorities. The bank also disciplined almost 24 employees and "took significant employment action" resulting in six employees leaving the bank who had participated in the practices.
"We're pleased that our cooperation was acknowledged. The conduct was unacceptable," stated JPMorgan spokesman Brian Marchiony. "We stopped the hiring program in 2013 and took action against the individuals involved. We have also made improvements to our hiring procedures and reinforced the high standards of conduct expected of our people."
Although big banks have fallen under more intense scrutiny in recent years, no top banker has gone to jail since the financial crisis, a fact that has attracted great criticism and public debate. This case against JPMorgan will not do anything to reduce such concerns.
The bank was fined $72 million by the U.S. attorney's office in Brooklyn and the Justice Department criminal division in Washington, but none of the bankers who made the nepotistic hires were charged, although the investigation continues. JPMorgan also won something of a moral victory in its avoidance of criminal charges, negotiating a rare nonprosecution agreement.
The Security Exchange Commission (SEC)'s fine will be the largest at roughly $130 million, and the Fed will assess a penalty of approximately $62 million.
Other big banks besides JPMorgan could face consequences arising from this case if it lays the groundwork for the authorities to seek penalties against them. Several of these, including HSBC, Goldman Sachs, and Deutsche Bank have hinted that their hiring practices in China are being investigated.
Those banks were competition for JPMorgan as it worked to obtain profitable assignments in China while companies controlled by the Chinese government were choosing banks to assist them in going public. At one point, some bankers at JPMorgan decided that they needed to increase hiring to compete with the rival banks better.
"We lost a deal to DB [Deutsche Bank] today because they got chairman's daughter work for them this summer," one JPMorgan investment banking executive remarked to colleagues. It was eventually decided that referrals made by so-called "decision makers"—Chinese clients capable of influencing a deal—would get the priority.
Ironically, the bank's hiring effort, known within JPMorgan as the Sons and Daughters program, was begun 10 years ago in an attempt to prevent violations of the FCPA. As competition grew and the bank expanded the program in 2009, said federal authorities, senior bankers "institutionalized" the hiring, linking those jobs and internships specifically to obtaining deals with state-run companies as "a tool to influence senior officials."
Leslie R. Caldwell is the head of the Justice Department's criminal division. "The so-called Sons and Daughters program was nothing more than bribery by another name," she stated.
Toward the end of 2010, a bank employee in Hong Kong made a spreadsheet tracking hires to particular clients. It included a column specifying the amount of revenue that the bank could attribute to the hire.
Many employees hired in this manner were not qualified. One's productivity was described as at "photocopier" level. Another had a degree from Wharton and a father who was a powerful executive, but this employee was described as having an "attitude issue" as well as a "napping problem." Another worker, the son of a Chinese official, did "very, very poorly" during his interviews but was still hired in New York, then transferred. A banker at the company later stated that this employee "sent out an e-mail (which he inadvertently copied to an H.R. person), where he made some inappropriate sexual remarks," and his coworkers described his as being "immature, irresponsible and unreliable." He kept his job in spite of all these factors.
"A marketing expense"
Prosecutors and regulators claimed that the cost of the hiring program would eventually be attributed to "a marketing expense." When bank executives in New York complained about some of the candidates being referred and their professional faults, executives located in Asia would step in. At least once the Asia unit created a position located in New York and then diverted some of its own budget to pay the candidates.
Kate Brockmeyer, head of the SEC's foreign bribery division, pointed out that JPMorgan's "internal controls were so weak that not a single referral hire request was denied."
Internal JPMorgan emails indicate reluctance to hire such well-connected candidates unless it would definitely result in winning more business for the bank.
One such email details the discussion between bankers regarding the possibility of honoring a hiring request from a senior executive of a private Chinese manufacturing company that was working on an initial public stock offering. The offering was postponed and one of the bankers asked whether or not it was still worth hiring the person, a bank executive based in Hong Kong replied: "I am supportive of bringing her on board given what's at stake," and asked "How do you get the best quid pro quo from the relationship upon confirmation of the offer?" Another banked responded, "The client has communicated clearly the quid pro quo on this hire." The company ultimately picked JPMorgan to work on the offering.
Many times, said prosecutors, bank executives ignored JPMorgan's stringent compliance rules because the deals were too good. In April 2011, one executive requested that one person who had been hired through the program be moved into a permanent position, said authorities. While noting the employee's "undeniable underperformance," the executive said that "[T]he deal is large enough and we are pregnant enough with this person, that we'd be crazy not to accommodate her father's wants."