Red Flags: JPMorgan Pinned Down Over Bribery Allegations in China


The gusto with which federal authorities are going after JPMorgan (NYSE:JPM) is, to put it one way, alarming. The firm’s legal troubles began with the post-crisis regulatory crackdown on complex financial instruments and more or less crescendoed with the London Whale loss in 2012. However, while a $6.2 billion trading error may be the biggest blip on the regulatory radar, it certainly isn’t the only one.

Recent reports have surfaced claiming that the Securities and Exchange Commission and the Justice Department are investigating the bank — America’s largest by assets — over alleged violations of the Foreign Corrupt Practices Act. The act, passed in 1977, deals with the accounting transparency and the bribery of foreign officials. It’s the latter aspect that has the bank under the microscope.

Specifically, sources told Bloomberg that the SEC and the DoJ are investigating if JPMorgan hired the children of well-connected people in China in order to land new wealth-management business or, in one particular case, new underwriting contracts.

At the heart of the matter is a reportedly 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. While there is no rule against hiring well-connected executives, an interpretation of the Foreign Corrupt Practices Act could find that the hiring of a child or relative constitutes as giving a gift of some kind — the language in the act itself is broad — if new business is received in exchange.

A person familiar with the situation told Reuters that the investigation looks as if it will focus primarily on 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 chairman of the conglomerate, The New York Times reports. 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.

There have been no accusations of wrongdoing yet, but U.S. officials have submitted requests for additional information related to the hirings. As many as 200 hires have been flagged for review.

The company’s last 10-Q filing states that one of the regulatory inquiries it is dealing with includes “A request from the SEC Division of Enforcement seeking information and documents relating to, among other matters, the Firm’s employment of certain former employees in Hong Kong and its business relationships with certain clients.”

Perhaps as a result of the increased regulatory pressure, JPMorgan is reportedly putting a hold on engaging in new business with foreign financial institutions. The Wall Street Journal recently reported that JPMorgan company memos indicate the bank has no plans to initiate new relationships with foreign banks, nor will it entertain offers from them to add to the company’s international portfolio.

At the same time, the memo aims to reassure employees — and investors, if leaked — that the banking giant had no plans to end any of its profitable enterprises overseas. Instead, it will focus on a thorough evaluation of the business it already has.

It’s unclear how much more trouble JPMorgan could find itself in as a result of the investigation, but it’s sure to add to the bank’s enormous legal bill. The firm has spent nearly $5 billion defending itself from litigation and settling with regulators in the past two years and more than $21 billion from a massive legal bill that is pretty much only rivaled by the legal expenses of other major financial institutions. The combined legal costs for the six largest U.S. banks have topped $100 billion.

Bank of America (NYSE:BAC) has logged total legal costs of $19.1 billion so far. Combined with JPMorgan, the two make up about 75 percent of the legal costs of the top six banks.

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