JPMorgan’s hiring investigated in China

It looks like JPMorgan Chase is once again in the press. For a bank that made it through the financial crisis relatively unscathed, the public relations hits seem to keep coming this year.

Here’s the story from the New York Times that’s putting the bank’s Chinese hiring practices in the spotlight:

Federal authorities have opened a bribery investigation into whether JPMorgan Chase hired the children of powerful Chinese officials to help the bank win lucrative business in the booming nation, according to a confidential United States government document.

In one instance, the bank hired the son of a former Chinese banking regulator who is now the chairman of the China Everbright Group, a state-controlled financial conglomerate, according to the document, which was reviewed by The New York Times, as well as public records. After the chairman’s son came on board, JPMorgan secured multiple coveted assignments from the Chinese conglomerate, including advising a subsidiary of the company on a stock offering, records show.

The Hong Kong office of JPMorgan also hired the daughter of a Chinese railway official. That official was later detained on accusations of doling out government contracts in exchange for cash bribes, the government document and public records show.

The former official’s daughter came to JPMorgan at an opportune time for the New York-based bank: The China Railway Group, a state-controlled construction company that builds railways for the Chinese government, was in the process of selecting JPMorgan to advise on its plans to become a public company, a common move in China for businesses affiliated with the government. With JPMorgan’s help, China Railway raised more than $5 billion when it went public in 2007.

The focus of the civil investigation by the Securities and Exchange Commission’s anti-bribery unit has not been previously reported. JPMorgan — which has had a number of run-ins lately with regulators, including one over a multibillion-dollar trading loss last year — made an oblique reference to the inquiry in its quarterly filing this month. The filing stated that the S.E.C. had sought information about JPMorgan’s “employment of certain former employees in Hong Kong and its business relationships with certain clients.”

The Wall Street Journal said that hiring the children of senior Chinese officials was a common practice in the country:

Many investment banks and other multinationals have hired children of senior Communist Party figures who are commonly known as “princelings.” They may help multinational companies develop relationships in China. International investment banks including Credit Suisse, Goldman Sachs, Citigroup, Bank of America and Macquarie Group have all brought the children of current or former political officials on board, according to previous reporting by The Wall Street Journal.

The story goes on to detail people hired by many top investment banks and the roles they held. The WSJ also reported that it wasn’t just financial firms that handed out jobs as several other multinational companies had also engaged in the practice:

Representatives for Credit Suisse, Bank of America Merrill Lynch, BNP Paribas, Goldman Sachs and Citigroup weren’t immediately available for comment. A Macquarie spokeswoman didn’t immediately have a comment on the matter.

There is nothing illegal about hiring the children of top officials, and most are well-qualified graduates of prestigious U.S. universities. None of the banks or the people they hired have been accused of any wrongdoing.

The Financial Times reported that there was no investigation from the Chinese government and the practice was common in the country:

A senior Chinese official told the Financial Times that the Chinese government had not launched its own investigation into JPMorgan or its hiring practices in the country, but that the revelations are causing concern because the practice of hiring the children of senior officials to work at financial institutions is very common.

Some individual Chinese officials are worried their own children could also be named in media reports or in investigations in the US, the senior official said.

Two people familiar with the matter confirmed that Tang Xiaoning and Zhang Xixi had previously worked at JPMorgan and that Mr Tang left the company in December 2012. Attempts to reach Mr Tang and Ms Zhang were unsuccessful.

A spokesman for the SEC declined to comment on the investigation, which was first reported by the New York Times.

US authorities have to date rarely investigated Wall Street’s business practices in China, though a former Morgan Stanley adviser was last year sent to prison after bribing a Chinese official to win lucrative real estate investments for the bank.

In recent years, foreign banks are said to have found it increasingly difficult to attract the offspring of the country’s most senior leaders thanks to the rise of a domestic private equity industry that provides lucrative opportunities for Chinese investors with powerful family backgrounds.

The New York Times, which broke the story, did note that the SEC was stepping up its enforcement of some regulations related to foreign operations and comes at a time when the bank is a focus of investigations from eight federal agencies, a state and two foreign governments:

In recent years, the S.E.C. and the Justice Department have each stepped up their enforcement of the Foreign Corrupt Practices Act, a 1977 federal law that essentially bans United States companies from giving “anything of value” to a foreign official to win “an improper advantage” in retaining business.

The S.E.C. created its own corrupt practices unit, which since 2010 has filed about 40 cases against companies like Tyco and Ralph Lauren. Over that same period, the Justice Department has leveled charges in more than 60 cases.

Legal experts note that there is nothing inherently illicit about hiring well-connected people. To run afoul of the law, a company must act with “corrupt” intent, or with the expectation of offering a job in exchange for government business.

It will be interesting to see how the firm weathers this next crisis. While each story itself may not be too damaging, it all adds up to a reputation that’s less than what the bank previously enjoyed. What is certain is that it doesn’t seem to be hurting business. The bank reported net income of $6.5 billion in the second quarter.