JPMorgan Chase to Pay $264 Million to Settle Foreign Bribery Case
Vying for lucrative deals in China, JPMorgan Chase deployed all the usual wining-and-dining tactics that big banks use to woo clients. JPMorgan, federal authorities now say, also had ways of sweetening the deal that crossed a legal line.
Federal prosecutors and regulators announced on Thursday a settlement of roughly $264 million with the bank and its Hong Kong subsidiary, accusing them of a vast foreign bribery scheme that may have spread to a number of Wall Street banks.
The case centered on JPMorgan’s hiring practices in China, where it hired the children of Chinese leaders to win business in the fast-growing nation. Some of the well-connected candidates were unqualified, the authorities said, and often “performed ancillary work” — telltale signs of hidden bribery.
The case could lay the groundwork for the authorities to pursue penalties against other big banks as well. Banks including HSBC, Goldman Sachs and Deutsche Bank have hinted that they face investigations into their hiring practices in China as part of a larger sweep by the agency that began in 2013.“We do not expect this to be the last action resulting from that sweep,” Andrew J. Ceresney, the head of enforcement at the Securities and Exchange Commission, told reporters on Thursday.It is unclear what will happen to the investigation under the president-elect, Donald. J. Trump. Mr. Ceresney and other officials who led the investigation are expected to leave the government in the coming weeks.In the investigation of JPMorgan, it was not immediately apparent whether the bank would be accused of carrying out a quid pro quo arrangement, an issue at the heart of whether JPMorgan violated United States law governing foreign bribery.The bank argued that the hiring of well-connected employees was routine in China, and that its own hires fell into a gray area of foreign bribery laws.But the prosecutors and regulators say that as JPMorgan hired more and more candidates based on referrals from Chinese leaders, senior bankers in several instances explicitly tied those jobs or internships to securing deals with Chinese government-run companies.To be hired, a referred candidate had to have, in the bank’s own words, a “directly attributable linkage to business opportunity,” a scheme that enabled the company to win or retain business resulting in more than $100 million in revenue for the bank or its affiliates, prosecutors and regulators said.“The common refrain that this is simply how business is done overseas is no defense,” said Robert L. Capers, the United States attorney in Brooklyn, whose office helped lead the criminal investigation into the bank. “This is no longer business as usual; it is corruption.”Still, the authorities acknowledged that JPMorgan cooperated extensively with the investigation and they lowered the penalty accordingly. The bank, the authorities stated, also disciplined nearly two dozen employees and “took significant employment action” that led to the departure of six employees who participated in the misconduct.“We’re pleased that our cooperation was acknowledged,” a JPMorgan spokesman, Brian Marchiony, said in a statement. “The conduct was unacceptable.”“We stopped the hiring program in 2013 and took action against the individuals involved,” Mr. Marchiony added. “We have also made improvements to our hiring procedures and reinforced the high standards of conduct expected of our people.”When the China hiring investigation first came to light in a front-page article in The New York Times three years ago, it topped a growing list of regulatory problems at the bank. In addition to the $6 billion so-called London whale trading scandal, the bank reached a $13 billion settlement with the Justice Department over its sale of mortgage securities in the lead-up to the 2008 financial crisis. The settlement in the China hiring case puts to rest one of JPMorgan’s last big regulatory headaches.For all the scrutiny of big banks, no top bankers have gone to jail since the financial crisis — an absence that has drawn much criticism and public debate.Even President-elect Donald J. Trump joined the chorus of critics this year during his campaign, saying bankers should “absolutely” go to jail if they had done something “purposely illegal.”
The foreign bribery case against JPMorgan will not alleviate those concerns.
The United States attorney’s office in Brooklyn and the Justice Department’s criminal division in Washington imposed a $72 million penalty on the bank but did not charge any of the bankers who doled out the jobs, though the investigation is ongoing.
The bank itself also secured a moral victory by avoiding criminal charges, and instead negotiated a rare nonprosecution agreement.
The S.E.C. will assess the largest punishment, about $130 million of the overall $264 million settlement, while the Fed will impose a roughly $62 million penalty.
JPMorgan competed with other big global banks to secure lucrative assignments in China as state-controlled companies were selecting banks to help them go public. And at one point, some JPMorgan bankers concluded that they needed to escalate their hiring to better compete with their rivals.
“We lost a deal to DB today because they got chairman’s daughter work for them this summer,” one JPMorgan investment banking executive remarked to colleagues, using the initials for Deutsche Bank.
Another JPMorgan managing director in Asia wrote that bank needed to ramp up its client referral program, adding that people thought the other banks “are doing a much better job.” It was later decided that referrals by so-called decision makers — Chinese clients who had the ability to influence a deal — would receive priority.
JPMorgan’s hiring effort, known within the bank as the Sons and Daughters program, began a decade ago. Initially, the program sought to prevent violations of the Foreign Corrupt Practices Act, the law that underpins the case against JPMorgan and essentially bans United States companies from giving “anything of value” to a foreign official to win “an improper advantage” in retaining business.
But as the bank faced increased competition, and it expanded the program in 2009, senior JPMorgan bankers “institutionalized” the hiring, federal authorities say.
They explicitly tied those jobs or internships to securing deals with Chinese government-run companies, the prosecutors and regulators say, using them as “a tool to influence senior officials.”
“The so-called Sons and Daughters program was nothing more than bribery by another name,” Leslie R. Caldwell, the head of the Justice Department’s criminal division, said in a statement.
Over a seven-year period, JPMorgan hired about 200 interns and full-time employees at the request of clients, potential clients and foreign government officials, authorities say. Around half of these candidates were referred by government officials at Chinese state-owned companies and government agencies. JPMorgan’s executives in Asia then used their connections with these government agencies to help the company and clients navigate tangled regulatory landscapes.
In late 2010, a JPMorgan employee in Hong Kong created a spreadsheet that tracked hires to specific clients. The spreadsheet included a column for the amount of revenue attributable to the hire.
Many of the job candidates were unqualified, the authorities said, but JPMorgan hired them anyway.
There was the hire whose productivity was described as “photocopier” level, and the son of a powerful executive who had a Wharton degree but a “not very impressive, poor G.P.A.” and had both an “attitude issue” and a “napping problem.”
Then there was the son of a Chinese official who did “very, very poorly” in his interviews but still secured a position in New York only to be transferred again. A JPMorgan banker later reported that the hire “sent out an e-mail (which he inadvertently copied to an H.R. person), where he made some inappropriate sexual remarks.” Ultimately, his peers described him as “immature, irresponsible and unreliable,” but he kept his job.
The internal cost of the Sons and Daughters program would later be chalked up to “a marketing expense,” prosecutors and regulators said. When JPMorgan executives in New York complained, executives in Asia would step in. On at least one occasion, the Asia unit created a position in New York and diverted some of its budget to pay the candidates.
Kara Brockmeyer, the head of the S.E.C.’s foreign bribery unit, noted that the bank’s “internal controls were so weak that not a single referral hire request was denied.”
The bank’s internal emails also show reluctance to hire well-connected candidates unless doing so would definitely lead JPMorgan to win business.
In one email, bankers discussed the possibility of honoring a hiring request from a senior executive of a private Chinese manufacturing company that was preparing an initial public offering of stock. When the offering was postponed and one of the bankers inquired whether it was worth hiring the person, a JPMorgan executive in Hong Kong responded: “I am supportive of bringing her on board given what’s at stake,” while adding, “How do you get the best quid pro quo from the relationship upon confirmation of the offer?”
A banker responded: “The client has communicated clearly the quid pro quo on this hire.” The company ultimately chose JPMorgan to work on the offering.