Why Is JPMorgan Facing Bribery Investigations in China?

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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 item on federal regulators’ radars, it certainly isn’t the only thing.

Earlier in August, JPMorgan — the largest bank by assets in the United States — reported in its second-quarter 10-Q filing that possible losses associated with its ongoing and pending legal proceedings could be as high as $6.8 billion. Although this is the high end of the range and losses are likely to fall somewhere below it, the figure is up from $6 billion in the first quarter. The news followed shortly after regulators announced that the bank settled for $410 million over allegations of energy market manipulation in California. At about the same time, JPMorgan was accused of fraudulently masking the risk of financial instruments sold in Italy — and to round it out, the bank is still cleaning up after the acquisition of Bear Stearns.

And now, the Securities and Exchange Commission is investigating the bank’s hiring practices in China under the Foreign Corrupt Practices Act.

A source familiar with the situation told Reuters that U.S. officials are investigating whether JPMorgan’s hiring of the children of well-connected people in China violates the Foreign Corrupt Practices Act. While there is no law preventing companies from hiring well-connected executives, hiring their children in order to land new business — mostly underwriting contracts, in this case — could be considered as bribery.

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 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 officials have submitted requests for additional information related to the hirings.

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.”

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.

But despite the legal trouble, JPMorgan has performed well recently. Shares are up nearly 20 percent this year to date. Performance on the stock chart has not been quite as strong as some of its peers, but JPMorgan also didn’t fall as hard during the financial crisis as Bank of America (NYSE:BAC) or Citgroup (NYSE:C) did. The sector as whole climbed nearly 25 percent over the same period. Citigroup has been one of the stronger performers this year to date, with 28.5 percent returns.

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