JPMorgan pays $264 million FCPA penalty for gifting jobs to win new Asian business
Thursday, November 17, 2016
Posted by: Brian Monroe
By Brian Monroe
November 17, 2016
The largest US bank will pay more than $260 million to settle federal charges it sought to corruptly influence Chinese officials into giving it preferential treatment in regional business and finance deals by awarding jobs and internships to their relatives and friends.
In the non-prosecution agreement, JPMorgan Chase will pay $264 million to an array of government agencies, including the Securities Exchange Commission (SEC), U.S. Department of Justice and Federal Reserve, for violating the Foreign Corrupt Practices Act (FCPA) tied to referral hiring practices that granted jobs to unqualified individuals due to their connections to government officials.
The non-prosecution agreement is rarer than the more oft-used deferred-prosecution agreement, which in some recent enforcement cases has come with requirements the institution plead guilty.
As in many other cases, the JPMorgan action comes with no individual penalties or top executives being hauled away in handcuffs to face jail time, a criticism of recent government enforcement philosophies for financial crime compliance failures, even as some penalties against banks have in the last few years hit record levels as high as $9 billion.
The investigation is part of a broader initiative by the U.S. government to sanction companies for engaging in these “quid pro quo” hiring practices in regions where corruption is endemic and such practices are considered customary, including Asia, where hiring the relative of a powerful government or political figure can mean choice access to new markets and opportunities.
In the scheme, investment bankers at JPMorgan’s subsidiary in the Asian Pacific Region (APAC), JPMorgan Securities Limited, “created a client referral hiring program that bypassed the firm’s normal hiring process and rewarded job candidates referred by client executives and influential government officials with well-paying, career-building JPMorgan employment,” according to the Securities Exchange Commission.
Investigators revealed that over a seven-year period, JPMorgan hired some 100 interns and full-time employees at the request of foreign government officials across 10 different government agencies, enabling the operation to “win or retain business resulting in more than $100 million in revenues to JPMorgan,” according to the SEC.
The SEC believes there could be more banks beyond JPMorgan that could have engaged in similar actions, and may even be a problem “industry wide,” according to news outlets, citing a call with reporters, noting that more cases could result “from this sweep.”
The settlement occurs in a time of transition. The SEC is seeing its leader, Mary Jo White resigning in January, and president-elect Donald Trump, who has criticized the FCPA in the past, will be taking over as president next year.
Strong FCPA enforcement to continue
"This case is an indication that both the DOJ and the SEC will continue to conduct laborious investigations into the practices of foreign financial services industries even where the ultimate connection to a foreign official is tenuous,” said Paul Pelletier, a partner in the Washington, D.C. office of Pepper Hamilton
“My overarching perspective is that companies better keep their ethics and compliance programs in order because the government has a big stick here,” he said, adding that were the same actions to occur in another country where financial services are not considered a government entity, the actions may not have been FCPA violations, though they were clearly ethically dubious.
“Even in the area where you have tenuous actual liability under the FCPA, there is still enough smoke for the government to extract these big settlements,” he said.
Despite reports of SEC and DOJ scrutiny into both the financial services sector and company hiring practices over the past several years, only a handful of enforcement actions have emerged.
Below are other FCPA penalties against financial institutions, along with a telecommunications firm included because the violations are similar. The Sands penalty is for different issues, but is still considered a “financial institution” under anti-money laundering rules:
- Las Vegas Sands - The casino and resort company agreed to pay $9 million to settle charges that it failed to properly authorize or document millions of dollars in payments to a consultant facilitating business activities in China and Macao. (4/7/16)
- BNY Mellon - SEC charged the global investment company with violating the FCPA by providing valuable student internships to family members of foreign government officials affiliated with a Middle Eastern sovereign wealth fund. BNY Mellon agreed to pay $14.8 million to settle charges. (8/18/15)
- Och-Ziff Capital Management - The New York hedge fund entered into a deferred prosecution agreement and paid $412 million in combined penalties for bribing government officials in Libya, the Democratic Republic of Congo, and other African nations.
- Qualcomm - The San Diego-based company agreed to pay $7.5 million to settle charges that it violated the FCPA when it hired relatives of Chinese officials deciding whether to select the company's products. (3/1/16)
The penalty, while higher than the only other bank-related FCPA penalty, is actually “lower than you typically see in FCPA cases,” for longstanding and institutionalized abuses, said Thomas Fox, founder of the Houston-based boutique law firm tomfoxlaw.com, and contributor to the fcpablog.com.
That is chiefly due to the nature of the corrupt acts, Fox said. Instead of direct payments to foreign government officials, JPMorgan used indirect hiring to influence future business, he said, adding that the ceiling for FCPA penalties has hit $800 million.
Even so, there are clear reasons why the penalty, even with the bank getting credit for cooperation, remediation and firing and fining internal staff, is so much higher than BNY and Qualcomm penalties, which had similar dynamics of graft-tainted hiring practices.
In those prior penalties, the awards were to less than a handful of individuals, while in the JPMorgan case, “you had an entire program to target and hire the sons and daughters of government officials” that included dozens of individuals with knowledge and approval of top regional bank officials, Fox said.
In the Federal Reserve action, the regulator, which usually weighs in on anti-money laundering (AML) program failures, laid out several steps to improve corruption compliance, including the groundbreaking step of formally linking human resources duties and anti-bribery laws by requiring them to understand related regulations and look for hiring irregularities potentially tied to graft.
The remediation for such an initiative could be challenging, and entail the bank weaving together its human resources systems to its, in many cases private, third-party, politically-exposed person (PEP) databases, ensuring that HR people can look for connections or, conversely, that AML compliance officers can scrub new hires for government connections, just as they would new and existing accounts.
On the subject of corruption compliance, the Fed stated the bank must bolster oversight in a bevy of areas, including:
- Measures to ensure compliance with applicable anti-bribery laws and policies within all business lines, legal entities and their respective compliance functions, including, but not limited to, human resources;
- The duties and responsibilities of personnel responsible for overseeing compliance with policies and procedures relating to Referral Hiring Practices, including the reporting lines within the Firm, and those with oversight of anti-bribery laws and policies;
- Human resources written policies and procedures designed to ensure compliance with applicable anti-bribery laws and policies within all business lines; and
- Training for appropriate Firm personnel regarding appropriate hiring practices and compliance with applicable anti-bribery laws and policies.
‘Blatant misconduct’ revenue on a spreadsheet
“JPMorgan 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,” said Andrew Ceresney, Director of the SEC Enforcement Division.
“JPMorgan 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.”
As well, JPMorgan APAC bankers “leveraged connections with these government agencies to assist other JPMorgan APAC clients and the firm itself in navigating complicated regulatory landscapes.”
Other JPMorgan APAC investment bankers “understood the true purpose of the program and the potential benefits to JPMorgan APAC’s business from hiring Referral Hires and the potential for inroads tied to a state-owned entity (SOE)." Some examples include:
- In 2008, one junior banker wrote to a JPMorgan APAC investment banker that she had “reconfirmed that [the requested Referral Hire] is very important to our relationship with [SOE]. [SOE] has a pending placement subject to market condition, and [referring client] made it clear that [referral candidate] is our ticket to this mandate.”
- In discussing a potential Referral Hire in 2010 from a private sector client, a senior JPMorgan APAC investment banker wrote to another asking him to interview a referral candidate, writing: “The last thing I want is we go slow and they ask another bank and I am sure someone will give him a full time offer given the mandate up for grabs here. We can give him an offer under the new ‘sons and daughters’ one year program…They are interested.” The second banker noted “Happy to speak with son asap. Seen this movie a lot before, we should consider it part of the pursuit immediately.”
- In 2010, a senior JPMorgan APAC investment banker wrote to a colleague regarding a Referral Hire from a private sector client: “They are close to mandating banks for their IPO. We are a strong contender. Blink blink nod nod, can we find a place for his son (they have only approached us in this regard)?”
JPMorgan APAC employees commented on the lack of capabilities of many Referral Hires, with some employees referring to them as “photocopiers,” according to the SEC. Referral Hires “were sometimes given special consideration regarding work assignments and promotions and protected from rigorous work schedules.”
Steering clear of party officials is a particular challenge in China as many financial services are considered state-owned entities.
“The misconduct was so blatant that JPMorgan investment bankers created ‘Referral Hires vs. Revenue’ spreadsheets to track the money flow from clients whose referrals were rewarded with jobs,” said Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit.
“The firm’s internal controls were so weak that not a single referral hire request was denied.”
Those weaknesses have in some measures been shored up, according to JPMorgan.
“The conduct was unacceptable,” the bank said in a prepared statement, adding that the “Sons and Daughters” hiring program was scuttled in 2013. JPMorgan also “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.”
Running interference, countering corruption compliance
Critical to keeping the improper hiring practices going was evading compliance questions, requests and the ever tightening standards by JPMorgan globally to crack down on corrupt hiring practices. During the time of the "Sons and Daughters" program, the bank had created training specifically telling employees not to hire someone connected to a government official that could be interpreted as currying favor.
JPMorgan APAC employees “understood that hiring relatives and friends of foreign government officials for the purpose of obtaining or retaining business posed the risk of violating the FCPA,” according to the SEC order.
Nonetheless, JPMorgan APAC investment bankers and supporting personnel “often provided inaccurate or incomplete information as part of the legal and compliance review designed to prevent these violations or withheld key information so that the Referral Hires would pass compliance review,” according to the SEC.
The subterfuge of APAC investment bankers was so thorough that “of all the candidates that passed through JPMorgan APAC’s Client Referral Program, none were rejected by the legal and compliance review,” even though several were flagged and in a few cases, given a cursory evaluation by compliance officers, yet easily explained away and overruled by investment banking staff.
The illegal activities started in 2006, when JPMorgan APAC’s investment banking group created and implemented a referral hiring program, referred to colloquially during the relevant time period as the “Sons & Daughters Program,” whereby “certain internships and short-term, entry-level employment opportunities were made available only to Referral Hires.”
JPMorgan APAC created the “Sons & Daughters” program based on requests from outside senior executives or government officials and a “perception of similar actions being taken by its competitors.”
“From the outset, the primary goal of client referral hiring was to generate revenue for JPMorgan APAC by extending personal favors to client executives and government officials through hiring their relatives and friends,” according to the SEC.
The case also showed a broad array of compliance and control failures in both New York and Asia, including corruption officers not probing deeper and verifying when investment bankers repeatedly stated no individuals were being hired tied to future business with relatives employed in influential government positions, Fox said.
Going further, there was also “clearly a human resources failure,” he said. “These people were not qualified to work at JPMorgan. They were hired simply because of a family connection. Either human resources or internal audit should have made the connection that when you hire someone who doesn’t meet the bank’s minimum hiring standards, that is where you get into trouble.”
Creative insiders thwart more aggressive corruption training
The actions by APAC employees controverted internal company provisions that were spelled out in FCPA compliance policies that ratcheted higher between 2001 and 2011, but were disregarded and in some cases actively evaded.
JPMorgan’s 2001 FCPA Compliance Policy noted that the “[h]iring of family members of foreign officials as employees, agents or consultants” was a “red flag… that could result in [an] FCPA violation.”
Then again, in 2005, JPMorgan’s anti-bribery training included an example where “[a]s an understood part of the deal, the company will hire…the daughter of a government official from that country, for an unpaid summer internship.” This training noted that the hiring of the daughter could be a bribe because the “internship has some value and is a requirement for the deal to happen.”
In September 2007, JPMorgan instituted a new Anti-Corruption Policy which provided that “the offer of internships or training for relatives of a public official” required legal and compliance pre-clearance. It also “indicated that hiring individuals in order to win business was prohibited.”
More recently, in June 2011, JPMorgan implemented an updated Anti-Corruption Policy and related training noting that “almost anything can meet the definition of a ‘bribe,’ including… internships [and] employment.”
The Policy went on to make clear that “[n]o employee may directly or indirectly offer, promise, grant or authorize the giving of money or anything else of value to a government official to influence official action or obtain an improper advantage.”
Compliance creates corruption questionnaire, to no avail
Based on the recognition of potential FCPA issues in hiring Referral Hires, in or about 2006, JPMorgan APAC’s legal and compliance personnel developed a process to screen prospective Referral Hires for potential FCPA and other risks, creating a “Sons & Daughters” questionnaire to elicit information regarding the potential Referral Hire.
Under the process as it was intended to work, each requesting banker was required to fill out the questionnaire for each specific hire, and then submit that questionnaire to JPMorgan APAC legal and compliance staff for review and approval, covering issues such as special treatment, qualifications, comparison to other applicants and connections to ongoing deals.
But, “due to the misconduct of JPMorgan APAC investment bankers and the failures of APAC legal and compliance staff, the ‘Sons & Daughters’ questionnaire process was an ineffective review that failed to operate as an effective check on potential violations.”
Part and parcel of the issue was that JPMorgan APAC legal and compliance staff “did not understand the actual nature and operation of the Client Referral Program, and did not take adequate steps to fully investigate the extent and purpose of the Program during the relevant time period.”
The SEC gives this example, stating that in 2007 as part of the review of Referral Hires, an attorney with JPMorgan’s global legal team conveyed to his colleague in JPMorgan APAC that he thought the sons and daughters program had ended, adding that compliance personnel had stated it doesn’t work from an FCPA standpoint.
In response, a JPMorgan APAC compliance attorney noted that “‘Sons & Daughters’ is not an active programme to solicit connected persons to work for us in the hope of obtaining business.” Rather, it was described as a “filter process” involving a questionnaire and review by the legal staff.
The attorney went on to note: “If we take a Son or Daughter, it is because they have applied for an internship like thousands of others, meet objective academic requirements, there are no FCPA concerns. No favours are done. They get treated like everyone else.”
The SEC, rather wryly, concluded that “this JPMorgan APAC compliance professional’s understanding was not an accurate description of the Client Referral Program at the time.”
Just two years later, however, JPMorgan APAC investment bankers did the opposite, and began a review to see how they could expand the program to make even more money.
Referring bankers were asked to list each client referred hire and to provide the “client affiliation” and “the importance of retaining them from a client/revenue standpoint.”
In September 2009, a senior JPMorgan APAC investment banker wrote to the chief executive officer of JPMorgan APAC that: “One specific item that we may need your help is how to run a better sons and daughters program, which has an almost linear relationship with mandates in China. People believe [other investment banks] are doing a much better job.
“On the other hand, we J.P. Morgan have had a few disas[t]rous cases which I can share with you later. We have more [lines of business] in China therefore in theory we can accomodate [sic] more ‘powerful’ sons and daughters that could benefit the entire platform.”