JPMorgan Chase and a Hong Kong subsidiary agreed Thursday to pay $264.4 million to the DOJ, SEC, and Federal Reserve to resolve FCPA offenses for awarding prestigious jobs to relatives and friends of Chinese government officials to win banking deals.
The Hong Kong unit — JPMorgan Securities (Asia Pacific) Limited (JPMorgan APAC) — agreed to pay a $72 million criminal penalty as part of a non-prosecution agreement (pdf) with the DOJ.
The SEC Thursday filed a cease and desist order (pdf) against JPMorgan Chase & Co. The bank agreed to disgorge $130.5 million, including prejudgment interest. That’s the seventh biggest disgorgement in an FCPA case.
The Federal Reserve System’s Board of Governors also issued a consent cease-and-desist order (pdf) Thursday that assessed a $61.9 million civil penalty against JPMorgan Chase.
This is apparently the first FCPA enforcement action involving the Federal Reserve.
The Fed said JPMorgan Chase didn’t have “adequate enterprise-wide controls to ensure that referred candidates were appropriately vetted and hired in accordance with applicable anti-bribery laws and firm policies.”
JPMorgan Chase violated the FCPA books and records, internal controls, and anti-bribery provisions, the SEC said. The agency brought the charges in an internal administrative order and didn’t go to court.
Mark Mendelsohn of Paul Weiss represented JPMorgan APAC. He formerly headed the DOJ’s FCPA unit.
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Hiring a family member or friend of a government official isn’t always a violation of the FCPA. But a hiring decision intended to reward or induce an official to award work can be an offense.
In August 2015, BNY Mellon paid $14.8 million to settle SEC charges that it violated the FCPA by giving student internships to family members of officials affiliated with a Middle Eastern sovereign wealth fund.
In March this year, Qualcomm paid the SEC $7.5 million to settle FCPA offenses for hiring relatives of Chinese government officials to win sales.
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In a statement Thursday, Leslie Caldwell, chief of the DOJ’s criminal division, said JPMorgan APAC’s “so-called Sons and Daughters Program was nothing more than bribery by another name.”
JPMorgan APAC admitted that beginning in 2006, senior Hong Kong-based investment bankers set up and used a “Client Referral Program,” also called the Sons and Daughters Program, to hire candidates referred by clients and government officials.
By late 2009, JPMorgan APAC executives and senior bankers revamped the Client Referral Program “to improve its efficacy by prioritizing those hires linked to upcoming client transactions,” the DOJ said.
Candidates hired under the Sons & Daughters Progam were typically given the same titles and paid the same as entry-level investment bankers, “despite the fact that many of these hires performed ancillary work such as proofreading and provided little real value to any deliverable product,” the DOJ said.
To be hired, a referred candidate had to have a “directly attributable linkage to business opportunity,” the DOJ said.
The quid pro quo arrangements were discussed internally among JPMorgan APAC bankers.
For example, in late 2009, a Chinese government official told a senior JPMorgan APAC banker that hiring a referred candidate would influence the bank’s role in an upcoming initial public offering for a Chinese state-owned company.
The banker told several senior colleagues, who then spent several months trying to place the referred candidate in an investment banking position in New York.
The DOJ said,
Despite learning from personnel in New York that this referred candidate was not qualified for an investment banking position, senior JPMorgan APAC bankers created a new position for the candidate in New York, and JPMorgan APAC thereafter obtained a leading role in the IPO.
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JPMorgan APAC employees misused compliance questionnaires to justify and paper over corrupt business arrangements.
They created a template with pre-filled answers, including that there was “no expected benefit” from the hire.
The SEC said JPMorgan APAC legal and compliance personnel knew about the FCPA risks of hiring relatives of Chinese officials and warned the bankers.
But “due to the misconduct of JPMorgan APAC investment bankers and the failures of APAC legal and compliance staff,” there weren’t effective checks on potential violations.
Compliance personnel drafted and modified questionnaires “that failed to state the true purpose of the hire,” the DOJ said.
According to the SEC,
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. This was due in part to JPMorgan APAC investment bankers failing to share complete information about the Client Referral Program with legal and compliance personnel. It was also due to a fundamental misunderstanding of the Client Referral Program by JPMorgan APAC legal and compliance, and a failure to investigate potential issues when they arose.
But the DOJ said it used a non-prosecution agreement to resolve the offenses partly because JPMorgan APAC “took significant employment action against six employees who participated in the misconduct resulting in their departure from the bank.”
JPMorgan APAC disciplined 23 other employees “who, although not involved in the misconduct, failed to effectively detect the misconduct or supervise those engaged in it,” the DOJ said.
The Hong Kong unit also imposed more than $18.3 million in financial sanctions on former or current employees as part of the remediation efforts.
The DOJ said in the non-prosecution agreement that JPMorgan APAC didn’t “voluntarily and timely disclose” the FCPA offenses.
But the bank received full credit for its cooperation with the DOJ.
The cooperation included-
- conducting a thorough internal investigation
- making regular factual presentations to the DOJ, voluntarily making foreign-based employees available for interviews in the United States
- producing documents to the DOJ from foreign countries in ways that did not implicate foreign data privacy laws, and
- collecting, analyzing, and organizing voluminous evidence and information for the DOJ.
Richard L. Cassin is the publisher and editor of the FCPA Blog.