Why it matters: On November 17, 2016, JPMorgan Chase & Co. and its Hong Kong-based subsidiary JPMorgan Securities (Asia Pacific) Limited agreed to pay an aggregate amount of approximately $264.4 million to the DOJ, SEC and Federal Reserve in parallel investigations into the subsidiary’s “Sons and Daughters” program, under which the investment banking firm and its subsidiary allegedly won lucrative banking deals in China by awarding prestigious jobs to often unqualified relatives and friends of Chinese government officials. The “Sons and Daughters” moniker appears to be the new name for the “Princelings” Foreign Corrupt Practices Act investigations that have been conducted in recent years by the government into suspect corrupt hiring practices throughout the Middle East and Asia.
Detailed discussion: On November 17, 2016, investment banking firm JPMorgan Chase & Co. (JPMC) and its Hong Kong-based subsidiary JPMorgan Securities (Asia Pacific) Limited (JPMorgan APAC) agreed to pay an aggregate amount of approximately $264.4 million to the DOJ, SEC and Federal Reserve in parallel investigations into JPMC APAC’s “Sons and Daughters” program, under which it, to quote the DOJ, “corruptly gain[ed] advantages in winning banking deals by awarding prestigious jobs to relatives and friends of Chinese government officials.” The “Sons and Daughters” moniker appears to be the new name for the “Princelings” Foreign Corrupt Practices Act (FCPA) investigations that have been conducted in recent years by the government into suspect corrupt hiring practices throughout the Middle East and Asia. We last reported on the Princelings investigations in our March 2016 newsletter.
We’ve recapped each of the three separate government resolutions into JPMC APAC’s “Sons and Daughters” hiring program below. First, the relevant facts: According to admissions made by JPMorgan APAC in connection with the resolution with the DOJ: (1) beginning in 2006, JPMorgan APAC senior Hong Kong-based investment bankers established a “client referral program,” also referred to as the “Sons and Daughters Program,” to hire candidates referred by clients and government officials, which program was used “as a means to influence those same officials to award investment deals to JPMorgan APAC”; (2) by late 2009, JPMorgan APAC executives and senior bankers revamped the client referral program to prioritize those hires linked to upcoming client transactions, such that in order to be hired, a referred candidate had to have a “directly attributable linkage to business opportunity”; and (3) candidates hired under the program were given the same titles and paid the same amount 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.”
According to the SEC’s order, as a result of the “Sons and Daughters” program, “[d]uring a seven-year period, [JPMC] hired approximately 100 interns and full-time employees at the request of foreign government officials, enabling the firm to win or retain business resulting in more than $100 million in revenues to [JPMC].”
In addition, the DOJ said that the subsidiary JPMorgan APAC earned almost $35 million in profits under its “Sons and Daughters” program “from business mandates with Chinese state-owned companies.”
The DOJ announced that JPMorgan APAC agreed to pay a criminal penalty of $72 million and enter into a non-prosecution agreement (NPA) pursuant to which it agreed to continue to cooperate with ongoing investigations and prosecutions, including of individuals, to enhance its compliance program, and to report to the DOJ on the implementation of its enhanced compliance program. The DOJ said that its decision to grant the NPA and take “25 percent off of the bottom of the U.S. Sentencing Guidelines fine range” was based on a number of factors, including (i) even though JPMorgan APAC did not voluntarily or timely disclose its conduct, it received full credit for its and JPMC’s cooperation with the criminal investigation, including “conducting a thorough internal investigation, making foreign-based employees available for interviews in the United States and producing documents to the government from foreign countries in ways that did not implicate foreign data privacy laws”; (ii) JPMorgan APAC took “significant employment action” by firing 6 employees directly involved in the misconduct and disciplining 23 others who “failed to effectively detect the misconduct or supervise those engaged in it”; and (iii) JPMorgan APAC imposed more than $18.3 million in financial sanctions on former or current employees in connection with the remediation efforts.
The SEC announced that JPMC agreed to pay over $130 million (consisting of $105,507,668 in disgorgement plus $25,083,737 in interest) to settle charges that it “won business from clients and corruptly influenced government officials in the Asia-Pacific region by giving jobs and internships to their relatives and friends” in violation of the anti-bribery, books and records, and internal controls provisions of the FCPA. The SEC said that it considered “the company’s remedial acts and its cooperation with the investigation when determining the settlement.”
Federal Reserve resolution
The Board of Governors of the Federal Reserve System (Federal Reserve) announced that it had ordered JPMC to pay a $61.9 million civil penalty for “unsafe and unsound practices related to the firm’s practice of hiring individuals referred by foreign officials and other clients in order to obtain improper business advantages for the firm.” The Federal Reserve found that JPMC “did not 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.” The Federal Reserve’s order (i) requires JPMC to “enhance the effectiveness of senior management oversight and controls relating to the firm’s referral hiring practices and anti-bribery policies” and to “cooperate in its investigation of the individuals involved in the conduct underlying these enforcement actions”; and (ii) prohibits “the organizations from re-employing or otherwise engaging individuals who were involved in unsafe and unsound conduct.”