“Sons and Daughters” Program Violates FCPA
For seven years between 2006 and 2013, J.P. Morgan Chase hired about a hundred interns and full time employees at the request of government officials in China and Asia as part of its efforts to build banking relationships in the fast-growing region. The hiring, dubbed internally as a “Sons & Daughters Program,” enabled J.P. Morgan to win business that generated $100 million
J.P. Morgan hired friends and family members of executives at three-quarters of the major Chinese companies it took public in Hong Kong during a decade long boom in Chinese IPOs, according to a document compiled by the bank as part of a federal bribery investigation and analyzed by the Wall Street Journal.
The document lists 222 candidates hired by the bank under the program and names the people who referred them—making it the most detailed accounting yet of the overlap between the program and the bank’s business in China.
Under the program, J.P. Morgan took referrals from a broad spectrum of China’s business and political elite, the document shows. Nearly half came from the government, including regulators of the banking, insurance and securities industries, senior executives of major state-owned companies and provincial and central-government officials.
The bank was hired to work on 12 Chinese initial public offerings of $1 billion or more in Hong Kong over the period that was examined, according to an analysis of Dealogic data. The J.P. Morgan document shows the bank hired candidates referred by officials at nine of those companies or their corporate parents.
JP Morgan has been caught in violation of the Federal Foreign Corrupt Practices Act (FCPA) that forbids a U.S. company from making payments to foreign governments and foreign government officials that constitute bribes under the Law. The idea behind the Law is that a U.S. company should not make a payment to a foreign government of foreign official to gain business it would otherwise not necessarily gain but for the illegal payment.
The FCPA sets an ethical standard that levels the playing field between companies that do it the right way and those looking for an unfair competitive advantage. These payments constitute a clear violation of corporate social responsibility and brings into question the entire corporate culture at the Bank.
JP Morgan is set to pay a $264 million fine to settle claims that its hiring violated the FCPA. Last month, the Bank agreed to pay $264 million to settle claims of FCPA violations with three regulators, split between a $130 million payment to the Securities and Exchange Commission, a $72 million fine to the Department of Justice, and a $61.9 million fine to the Federal Reserve.
In an order issued by the SEC, the regulator accused investment bankers at J.P. Morgan’s Asian operations of creating a program that bypassed the firm’s normal hiring process and gave top jobs at J.P. Morgan to candidates referred by client executives or influential government officials. The program helped J.P. Morgan win business mandates in China and other parts of Asia. Ultimately, it generated $100 million in revenues for the bank before being shuttered.
“J.P. Morgan engaged in a systematic bribery scheme by hiring children of government officials and other favored referrals who were typically unqualified for the positions on their own merit,” Andrew J. Ceresney, director of the SEC Enforcement Division, said in a statement. “J.P. Morgan employees knew the firm was potentially violating the FCPA yet persisted with the improper hiring program because the business rewards and new deals were deemed too lucrative,” he added.
Kara Brockmeyer, who heads the SEC’s FCPA enforcement efforts, noted that “the misconduct was so blatant” at J.P. Morgan its bankers created ‘Referral Hires vs Revenue’ spreadsheets to track the money flow from clients whose referrals were rewarded with jobs. Brockmeyer further adds no referral into the J.P. Morgan program was ever denied a job.
The problem with the decision by U.S. regulators is that it fails to hold responsible the individuals who made the illegal decisions once again bypassing individual responsibility for corporate responsibility only. It sends the wrong message to corporate America that individuals can dodge being held for their illegal acts and creates a moral hazard effect.
Blog posted by Steven Mintz, aka Ethics Sage, on November 29, 2016. Dr. Mintz is Professor Emeritus from Cal Poly San Luis Obispo. He also blogs at www.ethicssage.com.