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JPMorgan Chase & Co. (JPM - Analyst Report) is facing an inquiry by the Federal authorities over alleged inconsistencies in its hiring practices in Hong Kong. The bank has been accused of employing the children of influential Chinese officials in order to gain profitable business deals in the thriving nation.  

JPMorgan has been requested by the US Securities and Exchange Commission to disclose information regarding the bank’s employment of some former employees in Hong Kong and its business relationships with certain clients.

It has been reported that JPMorgan hired the son of a former banking regulator who is currently the chairman of the China Everbright Group, a state-controlled financial conglomerate. This helped JPMorgan seal various vital assignments from the Chinese conglomerate that consisted of providing advice to a subsidiary of the company on stock offering.

Moreover, JPMorgan hired the daughter of a former Chinese railway official of The China Railway Group, a state-controlled construction company. The bank provided counsel to the company over its plans to convert into a public entity. Further, in 2007 China Railway Group raised over $5 billion with JPMorgan’s assistance.

In the past, many Wall Street and European financial institutions with operations in China have hired children of Chinese officials in an attempt to capitalize on the promising growth opportunities in the Chinese economy. The Goldman Sachs Group, Inc. (GS - Analyst Report) had once hired the former Chinese president Jiang Zemin for its private investment arm.

Moreover, in 2012, a former Morgan Stanley (MS - Analyst Report) adviser was imprisoned after he was accused of bribing a Chinese official to win profitable real estate investments for the bank.

In recent years, the hiring of children of prominent Chinese leaders has become increasingly difficult due to the growth of the domestic private equity industry. These domestic industries provide profitable opportunities to Chinese investors with powerful family backgrounds.

The probe is a matter of concern for both JPMorgan and influential Chinese officials since the hiring of the children of renowned bureaucrats is a common practice among financial institutions. Moreover, it provides a path for the banks to secure its new businesses in China. The scrutiny is expected to bring up more names of the children of several Chinese officials.

Moreover, the probe is expected to heighten JPMorgan’s legal woes. The bank is already encountering a series of regulatory investigations pertaining to the sale of risky MBS preceding the financial crisis as well as the $6 billion trading loss it incurred in the London whale derivatives scandal. All these factors are expected to add to JPMorgan’s anticipated legal expenses in the near term.

JPMorgan currently carries a Zacks Rank #3 (Hold). In the same industry, BankUnited, Inc. (BKU - Analyst Report) is performing well and carries a Zacks Rank #1 (Strong Buy).

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