JPMorgan’s Sons and Daughters Program: Corrupt or Just Competitive?
Wall Street has pretty much been a regulatory punching bag ever since the financial crisis. Vindicated by the errors — and in some cases, institutional incompetence — of the financial industry, regulators have investigated and prosecuted their way through nearly every closet of the big banks, shaking out the dust and cleaning out the skeletons where they found them.
JPMorgan Chase (NYSE:JPM) has been at the heart of these efforts recently, and following a record-setting $13 billion penalty issued for the bank’s involvement in selling toxic mortgages, regulators have moved on to investigating claims that it violated the Foreign Corrupt Practices Act.
Specifically, U.S. officials are investigating whether JPMorgan’s hiring of or business dealings with the children of well-connected people in China — such as leaders within the Communist party or top executives at state-run enterprises — violated the act, which forbids bribery. While there is no law preventing companies from hiring well-connected executives or practicing nepotism, hiring their children with the explicit goal of using the act to land new business could be considered bribery.
In August, sources familiar with the situation told Reuters that the case appeared to deal primarily with JPMorgan’s relationship with two particular families. Deals secured with the state-owned financial conglomerate China Everbright group reportedly increased significantly after JPMorgan hired the son of Tang Shuangning, who is chair of the conglomerate. The firm also hired Zhang Xixi, the daughter of a former railway official who oversaw a company that builds railways for the Chinese government that JPMorgan advised.
At the heart of the matter is an allegedly damning piece of evidence: an internal spreadsheet that associates the appointment of interns and/or full-time employees with specific deals related to those people, Reuters reports.
That big banks and other major financial institutions walk a line between what is legal and what is illegal is not news to Main Street observers. The late-2000s financial crisis appeared to prove what many already believed: If left to its own devices, without regulatory or public scrutiny, Wall Street will get into trouble — lots of trouble, and the kind that has deep and far-reaching consequences. Regulators have used the wave of post-crisis negative sentiment toward Wall Street as a platform for reform, and record settlements are evidence of some degree of success.
But watchdogs would be damned if they gave up the chase simply because they caught the London Whale or because they penalized JPMorgan into negative earnings territory. The scope of reform desired by the public and by financial watchdogs like U.S. Attorney for the Southern District of New York Preet Bharara and New York Attorney General Eric Schneiderman extends beyond levying penalties and looks into the fundamental way that Wall Street operates and does business.
At a glance, it’s easy to interpret the recent investigations into JPMorgan as simply the latest pursuit of financial watchdogs, but reports from The New York Times suggest that there may be more going on with JPMorgan’s China business than malicious corruption. Emails reviewed by the publication show that top executives at JPMorgan may have signed off on the hiring program, known as Sons and Daughters, because of competitive pressures.
The emails reported reveal that before JPMorgan initiated the program, it was at the bottom of the ladder as far as acquiring new business in China was concerned. Although correlation does not imply causation, JPMorgan began acquiring much more business in China in the period after the program was implemented, which has raised red Foreign Corrupt Practices Act-related red flags.
The New York Times reports that as many as six other major banks — Citigroup (NYSE:C), Credit Suisse (NYSE:CS), Deutsche Bank (NYSE:DB), Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), and UBS AG (NYSE:UBS) — have shown up on the act’s radar. None of the banks have been accused of wrongdoing yet, but some have announced that they would be freezing all hiring in areas under scrutiny, as well as not accepting any new business.
At this point it’s unclear if any real legal action will evolve from the investigations, but the simple fact that watchdogs are snooping around under the banner of the Foreign Corrupt Practices Act could help rein in some of the more dubious behavior by these banks.