Earlier today, the DOJ and SEC announced (here and here) a $202.6 million FCPA enforcement action against J.P. Morgan (and a related entity) based on its alleged improper hiring and internship practices that the U.S. government has labeled bribery and corruption.
While the enforcement action was expected to focus on alleged improper hiring and internship practices involving so-called Chinese “princelings” (family members of alleged Chinese foreign officials), a meaningful component of the DOJ’s enforcement action involves hiring and internship practices involving family members of private individuals. Specifically, the DOJ’s non-prosecution agreement highlights 5 examples of “Quid Pro Quo Hiring” and 2 examples (40%) concern private companies: “a private Chinese manufacturing company” and a “Taiwanese private financial holding company.”
Numerous ironies, contradictions, and rule of law concerns abound in the enforcement action that will be explored in more detail in future posts. (In this clip, I talk to National Public Radio about one).
For present purposes, it is important to understand that the enforcement action contains nary a meaningful, substantive allegation or finding about individuals at JP Morgan as opposed to JPMorgan Securities (Asia Pacific) Limited (“JPMorgan-APAC), a wholly subsidiary of JP Morgan headquartered in Hong Kong. Nevertheless, the SEC found that JP Morgan violated the FCPA’s anti-bribery provisions (as well as the books and records and internal controls provisions).
It is also important to understand, in the words of the DOJ, that JPMorgan had existing controls and procedures that were “supposed to ensure compliance with JPMorgan’s anti-corruption policies including that referred candidates were not hired as part of quid pro quo arrangements, whereby the Company would win business from the referral source in exchange for hiring the applicant.” Nevertheless, according to the DOJ, between 2006 and 2012 JPMorgan-APAC bankers set up and used a program “to achieve the very quid pro quo arrangements the compliance review process and JPMorgan’s policies sought to prevent.” According to the NPA, JPMorgan-APAC bankers and supporting personnel “provided incorrect, misleading, and untruthful responses,” “falsely used” forms and “paper[ed] over corrupt business arrangements.”
In the words of the SEC, “JPMorgan APAC investment bankers and supporting personnel often provided inaccurate or incomplete information as part of the legal and compliance review designed to prevent these violations or withhold key information so that the Referral Hires would pass compliance review.” Elsewhere, the SEC states “JPMorgan APAC employees took steps to hide the magnitude and purpose of the Client Referral Program from others within the firm, and devised a way to avoid having certain Referral Hires in APAC counted within JPMorgan APAC’s internal year-end headcount calculations.”
The FCPA enforcement action involved:
a DOJ non-prosecution agreement involving JPMorgan Securities (Asia Pacific) Limited (“JPMorgan-APAC), a wholly subsidiary of JP Morgan headquartered in Hong Kong, that was resolved via a $72 million criminal penalty; and
an SEC administrative cease and desist order against JP Morgan in which the company agreed to pay disgorgement and prejudgment interest of approximately $130.6 million.
As noted in the DOJ and SEC releases, the Federal Reserve Board also announced that JP Morgan agreed to “pay a $61.9 million civil money 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.” Because the Federal Reserve Board does not have FCPA enforcement authority and because FCPA Professor tracks and publishes statistics about FCPA enforcement actions, the JP Morgan FCPA enforcement action is a $202.6 million FCPA enforcement action and will be categorized as such going forward for statistical purposes.
DOJ Action
The NPA’s Statement of Facts describes JPMorgan-APAC as a wholly-owned subsidiary of JP Morgan headquartered in Hong Kong that “principally carried out investment banking under the “JP Morgan” brand for the Asia-Pacific Region. According to the NPA, “many of JPMorgan-APAC’s clients in China were state-owned enterprises (SOEs) which were owned or controlled by the government of China and performed a function that the government treated as its own, and thus were each an ‘instrumentality’ within the meaning of the FCPA.”
Under the heading “Overview of the Scheme” the NPA states:
“In or about and between 2006 and 2013, JPMorgan-APAC had a compliance review process to screen candidates for employment who had been referred to the Company by its clients, potential clients, and government officials. This process was supposed to ensure compliance with JPMorgan’s anti-corruption policies including that referred candidates were not hired as part of quid pro quo arrangements, whereby the Company would win business from the referral source in exchange for hiring the applicant.
Beginning in or about 2006 and continuing until at least in or about 2012, however, JPMorgan-APAC bankers set up and used a program (the “Client Referral Program”) to hire referred candidates specifically for the purpose of influencing senior officials at clients to award business to the Company and, in certain instances, to achieve the very quid pro quo arrangements the compliance review process and JPMorgan’s policies sought to prevent. Company employees sometimes referred to the Client Referral Program as the “Sons and Daughters Program.”
Although such quid pro quo hiring arrangements initially occurred in certain instances, in or about November 2009, JPMorgan-APAC executives and senior bankers institutionalized the practice of making hires for the purpose of winning specific business mandates, and revamped the Client Referral Program to improve its efficacy by prioritizing those hires linked to upcoming client transactions. The changes to the Client Referral Program were made by senior JPMorgan-APAC investment bankers. Under the revamped Client Referral Program, referred candidates for employment needed, to quote a presentation prepared by JPMorgan-APAC employees responsible for implementing the program, a “[d]irectly attributable linkage to business opportunity” to be considered for a job.
As a result of the scheme to corruptly influence senior officials at clients and potential clients through the Client Referral Program, the Company received investment banking mandates from Chinese SOEs whose executives referred candidates to the Company. The Company earned at least $35 million in profits from those mandates.”
Under the heading “Relevant JPMorgan-APAC Policies and Hiring Procedures” the NPA states:
“In or about 2001, JPMorgan established a policy that applied to, among other entities, JPMorgan-APAC and which prohibited the hiring of children or relatives of clients and potential clients in order to obtain business. On or about March 31, 2006, a JPMorgan-APAC managing director sent an e-mail to all JPMorgan-APAC investment bankers reiterating that policy and stating, in part:
‘As you know, the firm does not condone the hiring of the children or other relatives of clients or potential clients of the Firm . . . for the purpose of securing or potentially securing business for the Firm. In fact, the firm’s policies expressly forbid this. There are no exceptions. . . . [T]he Firm recognizes that from time to time we want to make offers to people who may raise the appearance of a conflict of interest or even a regulatory issue, with respect to their parents or relatives holding senior ownership or management positions in companies that the Firm may have or wish to have as its clients, or other regulatory or governmental or quasigovernmental positions. In light of that, the firm has developed a “Sons & Daughters” program that sets out clear parameters within which we are prepared to analyze and potentially make such offers.’
Thereafter, JPMorgan-APAC’s Legal and Compliance Department circulated a “Questionnaire for Potential Hire Under the ‘Sons & Daughters Program’” (the “Compliance Questionnaire”) to be used as part of the compliance screening process. The Compliance Questionnaire focused on FCPA and other risks and required the bankers who wanted to hire applicants who had been referred by both private and SOE clients and potential clients and government officials, to disclose, among other things: (1) whether the applicant was qualified for the position; (2) whether the applicant had gone through the normal interviewing process; (3) whether the referring client/potential client was government-related; (4) whether the firm was actively pitching for any business from the client/potential client; and (5) whether there was an “expected benefit to JPMorgan” for hiring the referred candidate.
In or about September 2007, JPMorgan broadened its FCPA policy into a global anti-corruption policy, which applied to JPMorgan-APAC and provided that “the offer of internships or training for relatives of a public official” required legal and compliance preclearance and that hiring to win business was prohibited. At or around the same time, in connection with the new policy, JPMorgan-APAC compliance employees trained bankers that pre-clearance was required from the legal and compliance department because “[a]n offer of internship to a relative of a non-U.S. public official suggests an advantage by causing the official to misuse his or her position.”
In or about June 2011, JPMorgan implemented an updated global Anti-Corruption Policy, which applied to JPMorgan-APAC. A training presentation on this policy advised that “almost anything can meet the definition of a ‘bribe,’ including . . . . internships [and] employment.” The updated policy further advised that “[n]o employee may directly or indirectly A-6 offer, promise, grant or authorize the giving of money or anything else of value to a government official to influence official action or obtain an improper advantage.”
The NPA next contains a paragraph titled “The Corrupt Use of the Client Referral Program” which states:
“Beginning no later than in or about late 2007, JPMorgan-APAC investment bankers used the hiring of client-referred candidates in certain instances as a tool to influence senior officials at clients and prospective clients to obtain banking business. During this period, the Compliance Questionnaire was routinely used by both JPMorgan-APAC investment bankers and personnel responsible for compliance matters. To obtain approval to make these hires, JPMorgan-APAC bankers and supporting personnel provided incorrect, misleading, and untruthful responses to the Compliance Questionnaire. Rather than using the Compliance Questionnaire to determine if a referral hire was done for the purpose of obtaining or retaining business, JPMorgan-APAC employees, including support personnel, falsely used the forms to justify and paper over corrupt business arrangements. In addition, JPMorgan-APAC compliance personnel drafted and modified Compliance Questionnaires that failed to state the true purpose for hiring some referred candidates. For instance, in or about January 2007, JPMorgan-APAC employees, including compliance employees, began using a template for the Compliance Questionnaire with certain answers pre-filled in, including the answer “No expected benefit” in response to a question requiring an explanation for what was the intended benefit to the firm from the referral hire.”
The NPA next contains a section titled “JPMorgan-APAC Management Refocused the Client Referral Program to Corruptly Obtain Business Mandates” which states in pertinent part:
“In or about September 2009, JPMorgan-APAC bankers sought to expand and further capitalize on the use of improper referral hiring. On or about September 5, 2009, a JPMorgan-APAC managing director (“JPMorgan-APAC Employee 1”) wrote an e-mail to his JPMorgan supervisor that stated:
‘One specific item that we may need your help is how to run a better sons and daughters program, which has an almost linear relationship with mandates in China. People believe [other investment banks] are doing a much better job. On the other hand, we J.P.Morgan have had a few disas[t]rous cases which I can share with you later. We have more LoBs [lines of business] in China therefore in theory we can accommodate more ‘powerful’ sons and daughters that could benefit the entire platform.’
Following this e-mail, various senior members of JPMorgan-APAC management met on repeated occasions to discuss revamping the Client Referral Program to improve JPMorgan-APAC’s ability to obtain specific client business mandates. Among other matters, it was agreed that the Client Referral Program would be used to prioritize referral requests that JPMorgan-APAC received from “decision-makers” or those who had the ability to influence an upcoming banking mandate, preferably in the near term. Thus, for example, on or about September 22, 2009, a JPMorgan-APAC executive who was responsible for supervising Client Referral Program hires (“JPMorgan-APAC Employee 2”) wrote in an e-mail that he wanted to revisit the Client Referral Program “to plan [for] better . . . deal conversion or revenue attribution and relationship.”
Referred candidates hired under the revamped Client Referral Program typically were less qualified for the position of associate, analyst, or summer intern when compared with the regular pool of such candidates hired through JPMorgan-APAC’s standard hiring programs. Referred candidates who met JPMorgan-APAC’s hiring standards typically were directed to apply for jobs through the normal hiring channels. Referred candidates who did not meet JPMorgan-APAC’s hiring criteria for its standard hiring programs were hired through the Client Referral Program. Despite the fact that the Client Referral Program hires typically lacked the record of academic achievement and finance background that JPMorgan required under its standard hiring programs, Compliance Questionnaires submitted for Client Referral Program hires routinely stated that the Client Referral Program candidates were as qualified as other applicants for positions as associates, analysts, and summer interns.
[…]
As with the earlier ad hoc quid pro quo hires made prior to 2009, JPMorgan-APAC continued to use the existing Compliance Questionnaire to obtain pre-clearance to hire candidates selected under the revamped Client Referral Program. Both investment bankers and support personnel routinely provided inaccurate, misleading, and untruthful answers to the Compliance Questionnaire.
Referred candidates hired under the Client Referral Program were typically given the same titles and paid the same amount as entry-level investment bankers, despite the fact that many Client Referral Program hires performed ancillary work such as proof reading and provided little real value to any deliverable product.
[…]
JPMorgan-APAC, through its employees or agents, took acts in furtherance of the corrupt scheme while in the territory of the United States, including sending e-mails while in the United States in furtherance of hiring the referred candidates in order to assist in obtaining and retaining business, and placing certain of the referred candidates in New York in order to assist in obtaining and retaining business. A banker who was based in New York and who reported into JPMorgan-APAC (the “New York Banker”) was directly responsible together with JPMorgan-APAC bankers for placing at least two of the referred candidates in New York, and JPMorgan ultimately profited from the illegal scheme.”
The NPA next alleges “Examples of JPMorgan-APAC’s Quid Pro Quo Hiring.”
The first example states:
“in or around 2007, a senior official from Client 1 [a SOE financial services firm] referred another senior official’s son to a JPMorgan-APAC investment banker in Hong Kong. […] In or about mid-2008, JPMorgan-APAC became the exclusive financial advisor to Client 1 on a transaction yielding profits to the Company of approximately $4.82 million.”
The second example states:
“on or about May 29, 2008, a JPMorgan-APAC investment banker received a referral hiring request from a senior executive of Client 2 [a private Chinese manufacturing company]. At the time of the referral, JPMorgan-APAC was actively pitching to be a ‘joint bookrunner’ (i.e. a leader underwriter in a securities issuance) in the initial public offering (IPO) for Client 2. […] JPMorgan-APAC was selected along with another investment bank as a bookrunner on the IPO. The internal Compliance Questionnaire did not include the information concerning the quid pro quo arrangement with Client 2, and in response to the question “What is the expected benefit to JPMorgan in employing the candidate,” the answer provided was “[n]o expected benefit” from the hire.”
The third example states:
“in or about February 2009, JPMorgan-APAC received a request to hire the son of the Vice-Chairman of Client 3 [a Taiwanese private financial holding company], who also held a senior position at another JPMorgan-APAC Client. […] On or about October 29, 2010, the son of the Vice-Chairman of Client 3 was offered a full-time position as an analyst at JPMorgan in New York. A JPMorgan banker noted in an October 29, 2010 e-mail sent to a JPMorgan-APAC banker based in Asia and other JPMorgan bankers that because of the job offer the son was a “happy young man! And his dad will also be very pleased.”
On or about January 27, 2011, JPMorgan received a mandate for an equity offering from Client 3. On or about the same date, a high-level JPMorgan executive sent an email to another high-level executive, stating, “[Vice Chairman of Client 3] certainly followed through on his unspoken promises. We must make absolutely sure we keep a close eye on his son whom I continue to mentor on a regular basis.” The JPMorgan executive then sent an e-mail to a JPMorgan-APAC banker stating, “This win is really down to you. We would never have got a chance without your help and guidance and your relationships.”
The NPA next contains a separate section titled “JPMorgan-APAC’s Use of Referral Hiring to Secure Business Generally by Chinese Official 1” which states:
“JPMorgan-APAC hired the son of Chinese Official 1 [the Deputy Minister of a Chinese government agency], who was then a deputy minister at a Chinese government agency. On or about July 21, 2006, a JPMorgan-APAC investment banker attempted to place a candidate referred by Chinese Official 1 in an investment banking position in JPMorgan’s New York office. Several days later, in describing the importance of Chinese Official 1, the JPMorgan-APAC investment banker e-mailed a high-level executive at JPMorgan describing the influence of Chinese Official 1:
‘Although he is now promoted to be a government official, his influence remains strong both personally as well as in an official capacity [at the Chinese Ministry] . . . [and] a good in[-]depth relationship with the Ministry will pave the ground for us in many large and important industries in China as well as large cap companies, despite the fact some of them are ‘independent’ commercial entities, a unique feature of the Chinese/government business alliance.’
In or about December 2006, the son of Chinese Official 1 completed interviews for a position in New York. A New York employee e-mailed a JPMorgan-APAC banker that the referral “did very very poorly in interviews – some [managing directors] said he was the worst BA [business analyst] candidate they had ever see[n] – and we obviously had to extend him an offer . . . [o]bviously, we will need to accommodate due to client pressure, but we’re going to have to handle this very carefully.”
In or about mid-2007, JPMorgan-APAC created a position in New York to place the son into a one-year term position.
In May 2008, during the first year of the son’s work at JPMorgan in New York, Chinese Official 1 requested that JPMorgan-APAC Employee 1 provide the son with another job after his one-year term position expired. On or about June 8, 2008, JPMorgan-APAC Employee 1 sent an e-mail discussing the business case for finding the referral candidate another position, which stated, in part:
‘The father indicated to me repeatedly that he is willing to go extra miles to help JPM in whatever way we think he can. And I do have a few cases where I think we can leverage the father’s connection. . . . [G]iven the above, I’d like to discuss with you and seek your advice/support on how to handle the son in NY and leverage the father in China. Many thanks.’
In or about July 2008, the New York Banker offered a position in his group to the referral candidate. On or about August 11, 2008, the New York Banker informed JPMorgan-APAC Employee 1: “I don’t have the details of the incident but apparently last Friday when I was out of the office, [the referral] sent out an e-mail (which he inadvertently copied to an HR person), where he made some inappropriate sexual remarks.”
After learning of the e-mail, various JPMorgan-APAC executives undertook to keep Chinese Official 1’s son in the position. On or about August 12, 2008, the New York Banker sent a follow up e-mail stating:
‘[T]here is general consensus among the seniors in our group as well reports from people in his previous group that [the referral] is immature, irresponsible and unreliable. [A banker in the] European Clients Group with whom we share the analyst pool where [the referral] sits, is no longer willing to have [the referral] as part of the pool. That means that our Asia Group must take him on exclusively and in addition to all else, there is also concern about his reliability on confidentiality of client records/documents which means that we may not be able to let him have access to sensitive transactional records/documents.’
The next day, the New York Banker e-mailed a colleague: “[A]s I suspected, we will need to manage this situation in our group for which I will need your input/support.” Despite the referral’s performance, he was kept on until his position was eliminated as part of a reduction in force exercise ten months later.”
The NPA next contains a section titled “JPMorgan-APAC’s Use of Referral Hiring to Secure a Major Hong Kong IPO” and states:
“Beginning no later than in or about early 2009, Client 4 [a state-owned and controlled Chinese bank and financial services firm] commenced the process for an IPO. JPMorgan-APAC was actively competing with other investment banks for a lead role on that IPO and had been informally pitching for such a role since 2007. When Client 4 went public in 2010, the IPO raised billions of dollars.
As part of pitching for a role in the Client 4 IPO, JPMorgan-APAC identified several key decision-makers at Client 4 who were understood to have significant influence over awarding roles in the IPO to the competing investment banks. One of these key decision-makers was Chinese Official 2 [an Executive Vice President of Client 4].
On or about November 13, 2009, several months before JPMorgan-APAC submitted a formal proposal for the IPO, Chinese Official 2 e-mailed a letter to a JPMorganAPAC Employee 1 and attached the resume of a referred candidate. This referred candidate wanted a position in JPMorgan’s New York office. In e-mails, JPMorgan-APAC Employee 1 repeatedly described the referred candidate as Chinese Official 2’s nephew, although in reality there was no blood relation between the referred candidate and Chinese Official 2. The referred candidate’s father was an executive at a Chinese state-owned energy company, from which JPMorgan-APAC was also seeking business.
[…]
In or about December 2009 and January 2010, JPMorgan-APAC executives received multiple inquiries and repeated pressure from Chinese Official 2 and another official to hire the candidate referred by Chinese Official 2. On or about December 22, 2009, JPMorganAPAC Employee 1 e-mailed the New York Banker to offer his appreciation for the New York Banker’s assistance and stated that the candidate’s “father and his uncle have separately approached so many different people at J.P. Morgan.”
[…]
By the end of January 2010, JPMorgan-APAC employees attempting to find a job for the candidate referred by Chinese Official 2 had been unsuccessful. On or about January 21, 2010, a New York-based JPMorgan employee who had interviewed the referred candidate reported that the candidate’s “communication skills and his interest in Investment Banking lagged that of his peers . . . . Based on the feedback, the FIG [Financial Institutions Group] New York team is not comfortable moving forward with an offer.” After receiving pushback from the New York Banker to reconsider, the interviewer wrote:
‘[T]he recruitment process for our analyst program in the Investment Bank is highly competitive. I have personally interviewed and interacted with dozens of highly talented analyst candidates that have had a more well-rounded skill-set than [the referred candidate] that we’ve also chosen not to pursue . . . . In summary, [the referred candidate’s] current skill-set falls short in some of the categories I mentioned above and I would recommend he pursue a different career track.’
On or about January 22, 2010, the New York Banker received a follow up e-mail from a human-resources employee recommending that he “be honest with the individual (and the client) and let him know that we don’t want to place him in a situation where it will be difficult to succeed and advise (and help) him pursue other opportunities that might be better ‘fits’ for his skill set and will provide a better opportunity to be successful.”
The New York Banker did not deliver this message to the referred candidate or Chinese Official 2. Instead, JPMorgan-APAC bankers created a position for the referred candidate in the New York office funded out of JPMorgan-APAC’s budget. On or about February 2, 2010, a JPMorgan-APAC banker leading the pitch for Client 4’s IPO e-mailed three senior colleagues about the referral candidate:
‘[W]e have now reached consensus among us to offer [the referred candidate] a one year fixed term position at [the New York Banker’s] team in our new york office. We understand that you have been always supportive of this hire. it is time to ask your approval to proceed on that basis. [Chinese Official 2] called and sent sms to [JPMorgan-APAC Employee 1] and me several times to ask the status. If we can get this hire done soon, that will be very helpful.
On or about February 10, 2010, the firm hired the candidate referred by Chinese Official 2 and attributed the headcount to JPMorgan-APAC; no Compliance Questionnaire was submitted for this hire to Legal and Compliance.
Thereafter, in the second quarter of 2010, JPMorgan-APAC was selected as a joint bookrunner for Client 4’s IPO. On or about June 7, 2010, JPMorgan-APAC Employee 1 sent an e-mail to the New York Banker: “I understand from his father that [the referred hire] will start today in office. His uncle [Chinese Official 2] did deliver [the Client 4] IPO and his father is helping us on a [different] ipo.”
In or about mid-2010, a senior official at Client 4 informed a banker at one of JPMorgan-APAC’s competitors that the selection criteria for investment banks to underwrite the Client 4 IPO had included whether the investment bank had hired candidates referred by Client 4 officials.
[…]
JPMorgan-APAC received profits of at least $23.8 million as a result of the Client 4 IPO.”
In the three-year NPA, JPMorgan-APAC admitted, accepted, and acknowledged responsibility for the conduct set forth in the Statement of Facts and agreed to a so-called “muzzle clause” in which it, and others on its behalf, will not contract the acceptance of responsibility by the company or the conduct described in the Statement of Facts.
According to NPA, the agreement was “based on the individual facts and circumstances presented by this case and the Company, including:
a) the Company did not receive voluntary disclosure credit because neither it nor JPMC voluntarily and timely disclosed to the Offices the conduct described in the Statement of Facts …;
b) the Company received full credit for its and JPMC’s cooperation with the Offices’ investigation, including conducting a thorough internal investigation, making regular factual presentations to the Offices, voluntarily making foreign-based employees available for interviews in the United States, producing documents to the Offices from foreign countries in ways that did not implicate foreign data privacy laws, and collecting, analyzing, and organizing voluminous evidence and information for the Offices;
c) by the conclusion of the investigation, JPMC provided to the Offices all relevant facts known to it, including information about individuals involved in the misconduct;
d) the Company and JPMC engaged in extensive remedial measures, including: (1) causing five employees who participated in the misconduct described in the Statement of Facts to separate from the Company—one employee resigned after being placed on leave, one employee received a notice of separation while on leave, and three employees resigned or retired after receiving a notice of separation; (2) causing one employee who failed to identify issues with referral hiring and failed to take appropriate steps to mitigate risks to separate from the Company; (3) disciplining an additional twenty-three employees who failed to detect the misconduct, failed to supervise effectively those who were engaged in the misconduct, failed to take appropriate steps to mitigate corruption and compliance risks, and/or who were lower-level employees engaged in the misconduct at the direction of supervisors; (4) imposing more than $18.3 million in financial sanctions on former or current employees in connection with the remediation efforts; (5) conducting individualized training for certain remaining employees; (6) adopting heightened controls related to their hiring programs, including standardizing hiring programs and requiring that every application for a hire be routed through a centralized human resources application process; (7) more than doubling their resources devoted to compliance, particularly in the AsiaPacific region; and (8) requiring improved Foreign Corrupt Practices Act (“FCPA”) training;
e) the Company and JPMC have enhanced and are committed to continuing to enhance their compliance programs and internal controls, including ensuring that their compliance programs satisfy the minimum elements set forth in Attachment B to [the NPA] (Corporate Compliance Program);
f) accordingly, after considering (a) through (e) above, the Company received an aggregate discount of 25% off of the bottom of the U.S. Sentencing Guidelines fine range;
g) based on the Company’s and JPMC’s remediation and the state of their compliance programs, and the Company’s and JPMC’s agreement to report to the Offices as set forth in Attachment C to [the NPA] (Corporate Compliance Reporting), the Offices determined that an independent compliance monitor was unnecessary;
h) the nature and seriousness of the offense conduct, including that certain senior executives and employees of the Company conspired to engage in quid pro quo agreements with Chinese officials to obtain investment-banking business, planned and executed a program to provide specific personal benefits to senior Chinese officials in the position to award or influence the award of banking mandates, and repeatedly falsified or caused to be falsified internal compliance documents in place to prevent the specific conduct at issue here; and
i) the Company and JPMC (on its behalf and through its subsidiaries and affiliates) have agreed to continue to cooperate with the Offices in any ongoing investigation of the conduct of the Company, JPMC, their subsidiaries and affiliates and their officers, directors, employees, agents, business partners, distributors, and consultants relating to violations of the FCPA.”
Pursuant to the NPA, JPMorgan-APAC and JPMorgan agreed to report to the DOJ annually “regarding remediation and implementation of the compliance measures” required by the NPA.
In the DOJ’s release, Assistant Attorney General Leslie Caldwell stated:
“The so-called Sons and Daughters Program was nothing more than bribery by another name. Awarding prestigious employment opportunities to unqualified individuals in order to influence government officials is corruption, plain and simple. This case demonstrates the Criminal Division’s commitment to uncovering corruption no matter the form of the scheme.”
U.S. Attorney Robert Capers (E.D.N.Y.) stated:
“U.S. businesses cannot lawfully seek to gain a business advantage by corruptly influencing foreign government officials. The common refrain that this is simply how business is done overseas is no defense. In this case, JPMorgan employees designed a program to hire otherwise unqualified candidates for prestigious investment banking jobs solely because these candidates were referred to the bank by officials in positions to award business to the bank. In certain instances, referred candidates were hired with the understanding that the hiring was linked to the award of specific business. This is no longer business as usual; it is corruption.”
William Sweeney Jr. (Assistant Director in Charge of the FBI’s New York Field Office) stated:
“Creating a barter system in which jobs are awarded to applicants in exchange for lucrative business deals is a corrupt scheme in and of itself. But when foreign officials are among those involved in the bribe, the international free market system and our national security are among the major threats we face. Those engaging in these illegal acts abroad may think they’re out of sight and out of mind, but they’re wrong. The FBI has recently established three dedicated international corruption squads to combat this type of quid pro quo, and we’ll use all resources at our disposal to uncover and put an end to these crimes.”
SEC Action
Based on the same core conduct alleged in the DOJ action, the SEC issued this administrative order. In summary fashion, it states:
“This matter concerns violations of the anti-bribery, books and records, and internal controls provisions of the FCPA by JPMorgan. Between 2006 and 2013, the firm provided valuable jobs and internships to the relatives and friends of certain key executives of its clients, prospective clients, and foreign government officials in the Asia-Pacific region (“APAC”) as a personal benefit to the requesting officials in order to obtain or retain investment banking business or other benefits for the firm. Many of JPMorgan’s clients were state-owned entities (“SOEs”), and therefore the client executives requesting employment for their relatives and friends were foreign government officials under the FCPA.
The firm provided these jobs and internships with the intent to corruptly influence the foreign government officials making the requests. 2. Investment bankers at JPMorgan’s subsidiary in Asia, JPMorgan Securities (Asia Pacific) Limited (“JPMorgan APAC”), created a client referral hiring program to leverage the promise of well-paying, career building JPMorgan employment for the relatives and friends of senior officials with its clients in order to assist JPMorgan APAC in obtaining or retaining business. A special hiring program (“Client Referral Program”) was created at JPMorgan APAC for referred candidates that bypassed the firm’s normal hiring process and was made available exclusively to candidates referred by clients, prospective clients, or foreign government officials (“Referral Hires”). Non-referral JPMorgan APAC hires were subjected to a rigorous screening process and competed against other candidates for a limited number of positions. Referral Hires did not compete against other candidates based on merit and, in most instances, were less qualified than those employees hired through the firm’s nonreferral hiring programs. Instead, Referral Hires were hired based on direct or potential links to investment banking revenue that could be generated from the referring client in exchange for the hire. Referral Hires whose relationships generated sufficient revenue for JPMorgan APAC were offered longer-term jobs, while others were given shorter terms of employment unless the referring client offered additional business to the firm. In 2010 and 2011, JPMorgan APAC employees created spreadsheets to track the revenue to the firm from clients whose candidates were hired through the Client Referral Program.
Over this seven-year period, JPMorgan hired approximately 200 interns and full-time employees at the request of its APAC clients, prospective clients, and foreign government officials. This included nearly 100 candidates referred by foreign government officials at more than twenty different Chinese SOEs. A number of the referral hires resulted in business for JPMorgan APAC. The referring SOEs entered into transactions totaling more than $100,000,000 in revenue for JPMorgan APAC or its affiliates during this period. JPMorgan also hired referrals from more than 10 different government agencies. JPMorgan APAC bankers leveraged connections with these government agencies to assist other JPMorgan APAC clients and the firm itself in navigating complicated regulatory landscapes.
JPMorgan APAC employees understood that hiring relatives and friends of foreign government officials for the purpose of obtaining or retaining business posed the risk of violating the FCPA. Nonetheless, JPMorgan APAC investment bankers and supporting personnel often provided inaccurate or incomplete information as part of the legal and 3 compliance review designed to prevent these violations or withheld key information so that the Referral Hires would pass compliance review. The legal and compliance review of Referral Hires became a formality in which JPMorgan APAC investment bankers and supporting personnel provided inaccurate or incomplete answers to secure approval for hires without revealing the links to business as a result of certain Referral Hires. Of all the candidates that passed through JPMorgan APAC’s Client Referral Program, none were rejected by the legal and compliance review.
JPMorgan failed to devise and maintain a system of internal accounting controls around its hiring practices sufficient to provide reasonable assurances that its employees were not bribing foreign officials in contravention of company policy. Likewise, JPMorgan APAC employees failed to follow the firm’s internal accounting controls, and JPMorgan failed to implement other appropriate accounting controls to detect or prevent the Client Referral Program from being used to improperly benefit government officials. JPMorgan APAC employees took steps to hide the magnitude and purpose of the Client Referral Program from others within the firm, and devised a way to avoid having certain Referral Hires in APAC counted within JPMorgan APAC’s internal year-end headcount calculations. For Referral Hires that originated in APAC but were employed outside of APAC, JPMorgan APAC employees failed to undertake a compliance review or impose conflict of interest restrictions despite knowledge of the FCPA and other risks.
JPMorgan also violated the books and records provisions of the FCPA. JPMorgan APAC personnel created and implemented a system by which inaccurate or incomplete questionnaires were submitted, reviewed, and approved by compliance in contravention of the internal policy created to prevent improper hiring of Referral Hires. The records reflected that they were hired for legitimate business purposes rather than as hires made to improperly benefit JPMorgan APAC investment banking business. JPMorgan APAC’s internal records also inaccurately reflected the true number of client Referral Hires in the APAC region by taking steps to disguise the headcount relating to Referral Hires from others within the firm.”
Like the DOJ’s NPA, the order begins with a section titled “JP Morgan’s Policies Prohibited the Hiring of Client Referrals in Exchange for Business” which is then followed by a section titled “JP Morgan APAC Created a Client Referral Hiring Program in 2006.” This section concludes with the following:
“Due to the misconduct of JPMorgan APAC investment bankers and the failures of APAC legal and compliance staff, the “Sons & Daughters” questionnaire process was an ineffective review that failed to operate as an effective check on potential violations. 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 on 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. For example, in 2007 as part of the review of Referral Hires, an attorney with JPMorgan’s global legal team conveyed to his colleague in JPMorgan APAC that “I thought the Sons & Daughters Program was ended….[JPMorgan Global Compliance officers] are telling …[personnel] that this program doesn’t work from an FCPA standpoint. What are your thoughts?” In response, a JPMorgan APAC compliance attorney noted that “‘Sons & Daughters’ is not an active programme to solicit connected persons to work for us in the hope of obtaining business.” Rather, it was described as a “filter process” involving a questionnaire and review by the legal staff. The attorney went on to note: “If we take a Son or Daughter, it is because they have applied for an internship like thousands of others, meet objective academic requirements, there are no FCPA concerns. No favours are done. They get treated like everyone else.” This JPMorgan APAC compliance professional’s understanding was not an accurate description of the Client Referral Program at the time.”
Like the DOJ’s NPA, the order also states that JP Morgan APAC investment bankers “provided incorrect, misleading, incomplete, or untruthful responses” in connection with internship and hiring decisions. According to the SEC, “for these reasons, the ‘Sons & Daughters’ questionnaire that was designed to prevent FCPA violations was wholly ineffective.”
Unlike the DOJ’s NPA, the order contains a separate section titled “JP Morgan APAC’s Client Referral Summer Internship Programs” which states in pertinent part:
“In addition to providing analyst and associate employment opportunities, in 2009 and 2010 JPMorgan APAC also created summer internship programs to accommodate Referral Hires. Referral Hires were generally not qualified for the regular JPMorgan APAC summer internship program; nonetheless, summer internships in the regular program were sometimes provided by JPMorgan APAC to Referral Hires. In order to accommodate more client referrals, in 2010 JPMorgan APAC also created an unpaid training program in Hong Kong (colloquially referred to as “summer camp”) for Referral Hires seeking summer employment or internships with JPMorgan APAC. The “summer camp” consisted mainly of social events, lectures, and classroom speakers. Although the participants were not employed by JPMorgan APAC and were not paid, participants could list the program on their resumes. APAC Banker B noted that one senior APAC investment banker said that he could “sleep better at night knowing that we now have a structured program to entertain the little darlings.”
JPMorgan APAC undertook no compliance review of participants in the “summer camp.” However, candidates for the “summer camp” were selected based on investment bank client relationships rather than merit. Further, certain client referrals with links to potential revenue were given paid summer internships with JPMorgan APAC rather than the opportunity to participate in the “summer camp.”
Even though the SEC’s order contains nary a meaningful substantive finding regarding individuals at JP Morgan (as opposed to JPMorgan APAC, a separate and distinct entity), the order finds that JP Morgan violated the FCPA’s anti-bribery provisions. In conclusory fashion, the order states:
“JPMorgan violated the anti-bribery provisions of the federal securities laws by corruptly providing valuable internships and employment to relatives and friends of foreign government officials in order to assist JPMorgan in retaining and obtaining business.”
Under the heading “books and records violations,” the order states:
“JPMorgan violated the books and records provisions of the FCPA in conjunction with certain Referral Hires. Under [the books and records provisions] JPMorgan was required to make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer. JPMorgan APAC’s controls required that investment bankers submit accurate questionnaires to compliance for review before client referrals from SOEs and foreign government officials could be hired. Contrary to that requirement, JPMorgan APAC personnel submitted, reviewed, and approved inaccurate compliance questionnaires containing false and incomplete information which failed to disclose the intended, improper purpose of making certain client Referral Hires. JPMorgan’s internal records also inaccurately reflected the true number of client Referral Hires in the APAC region by taking steps to withhold certain headcount information relating to Referral Hires.”
Under the heading “internal controls violations,” the order states:
“JPMorgan violated the internal accounting controls provisions of the FCPA in conjunction with certain Referral Hires. JPMorgan failed to devise and maintain an effective system of internal accounting controls. JPMorgan’s internal accounting controls 22 were insufficiently designed to prevent the corruption risks inherent in the hiring of Referral Hires, and therefore inadequate to enforce or effectuate JPMorgan’s referral hiring policy. JPMorgan recognized the inherent risks in hiring Referral Hires, yet proceeded with a system that failed adequately to address those risks. The safeguards put in place by JPMorgan APAC to minimize compliance and FCPA risks were not effective to curb the true purpose of the Client Referral Program. JPMorgan APAC’s referral hiring questionnaire was designed to ensure that Referral Hires were hired based on merit and not for improper purposes. However, in practice the Client Referral Program operated as a separate tier of employment within JPMorgan APAC where hiring and retention decisions were based on client relationships and potential revenue and not employee merit.
Referral Hires were subject to a completely separate hiring process, and once hired their jobs and terms of employment were likewise different than non-Referral Hires. The interview and screening process for Referral Hires was perfunctory, with candidates receiving an offer based on the perceived strength of the client relationship and prospect for future business. Referral Hires were also generally less qualified than employees hired through the non-referral, entry-level hiring program, and once hired the Referral Hires were generally not expected to do the same work as non-referral employees in similar positions.
JPMorgan APAC attempted to put in place protections to mitigate the inherent conflicts and FCPA risks in hiring Referral Hires. However, these protections were insufficient to prevent the violations. While legal and compliance staff were required to approve Referral Candidates before they could be hired, in practice they never failed to approve a Referral Candidate. In certain cases, the protections were ignored. JPMorgan APAC bankers sought to have certain Referral Hires work outside of APAC at the request of the APAC-based client or prospective client seeking the employment. These Referral Hires did not go through the normal hiring process for that region, and instead were hired based on the perceived benefit to JPMorgan APAC from the hire. In such cases, a compliance questionnaire was not completed and therefore no review was made to analyze the potential conflicts of interest and FCPA violations inherent in referral hiring. In cases in which the Referral Hire was hired outside of APAC, the conflict of interest prohibitions were not imposed or enforced. This led to Referral Hires being staffed on the deal teams for the referring person’s entity, often at the request of the referring person, in direct contravention of the conflict of interest rules imposed on the referral hiring program.”
Under the heading “Commission Consideration of JPMorgan’s Cooperation and Remedial Efforts,” the order states:
“In determining to accept the Offer, the Commission considered cooperation JPMorgan afforded to the Commission staff. Through its counsel, JPMorgan provided thorough, complete, and timely cooperation throughout the investigation. JPMorgan responded promptly to Commission requests for information, retained outside counsel to investigate the conduct, and self-reported much of the conduct described herein. JPMorgan made timely and thorough document productions and provided frequent updates on the status of the company’s internal investigation and the evidence. JPMorgan also made its employees available for interviews upon request, and facilitated the interviews of former employees, including facilitating certain interviewees traveling to the United States from overseas for interviews with the Commission. JPMorgan provided key document binders and factual chronologies to the Commission staff. JPMorgan responded to all requests for information and documents in a timely and efficient manner.
The Commission has also considered the significant remediation efforts undertaken by JPMorgan to address the risks inherent in client referral hiring. Prior to the start of this investigation, JPMorgan had taken steps to cease the Client Referral Program in APAC. Since the outset of the investigation, JPMorgan has enhanced its anticorruption compliance program and hiring practices on a global basis, including: making changes to its Anti-Corruption Policy to further address the hiring of government officials’ relatives; requiring that every hire with JPMorgan, including Referral Hires, be routed through a centralized human resources application process; establishing a control function role for human resources with respect to hiring; requiring that JPMorgan’s anticorruption office reviews and approves each hire of a candidate referred by a client, potential client, or government official; and instituting procedures and practices for the monitoring and auditing of referral hiring. In addition, JPMorgan enhanced its overall compliance function in the APAC region. JPMorgan also undertook employment actions based upon its findings regarding the underlying conduct, and separated from certain employees and made personnel changes to remediate in the APAC region.”
Based on the above, JPMorgan agreed to pay disgorgement of approximately $105.5 million and prejudgment interest of approximately $25.1 million for a total payment of approximately $130.6 million to the SEC.
The order states that the SEC is “not imposing a civil penalty based upon the imposition of a $72 million criminal fine as part of JPMorgan APAC’s settlement with the DOJ.”
Pursuant to the order, JPMorgan agreed to report to the SEC “periodically, at no less than nine-month intervals during a three year term, the status of [its] remediation and implementation of compliance measures.”
In the SEC’s release, Andrew Ceresney (Director of the SEC’s Enforcement Division) stated:
“JPMorgan engaged in a systematic bribery scheme by hiring children of government officials and other favored referrals who were typically unqualified for the positions on their own merit. JPMorgan employees knew the firm was potentially violating the FCPA yet persisted with the improper hiring program because the business rewards and new deals were deemed too lucrative.”
Kara Brockmeyer (Chief of the SEC Enforcement Division’s FCPA Unit) stated:
“The misconduct was so blatant that JPMorgan investment bankers created ‘Referral Hires vs Revenue’ spreadsheets to track the money flow from clients whose referrals were rewarded with jobs. The firm’s internal controls were so weak that not a single referral hire request was denied.”
In this 8-K filing, JP Morgan stated, in pertinent part:
“The program [at issue in the enforcement action] was terminated by the Firm in 2013.
[…] The DOJ has also separately advised that, based upon the information known at this time, it has closed its inquiry regarding JPMSAPL’s use of consultants in the Asia Pacific region.”
J.P. Morgan was represented by Mark Mendelsohn, the former DOJ FCPA Unit Chief and self-described “architect” of the DOJ’s “modern FCPA enforcement program.” As highlighted in this prior post, according to reports, during the settlement negotiation process Mendelsohn reportedly authored a white paper submitted to the DOJ and SEC setting out the bank’s concern about the enforcement approach.
Yesterday, JP Morgan’s stock closed up .8%.
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