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JPMorgan Faces Fresh Rounds of Probe in China Hiring Case

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The investigation surrounding JPMorgan Chase & Co.’s (JPM - Free Report) hiring of relatives and children of Chinese government officials has extended further. Since Aug 2013, the bank has been facing a federal bribery scrutiny. Moreover, just as it was about to settle with the Justice Department and the U.S. Securities Exchange Commission (SEC), another round of enquiry has emerged.

Heightened Investigations & the Charges Ahead

The Federal Reserve and the Office of the Comptroller of the Currency (OCC) have now joined the investigations and are seeking to impose their own penalties, according to people familiar with the matter. The bank has been slapped with charges of inappropriately hiring the children of Chinese officials in order to secure business with Chinese government-run companies. While the Fed is seeking a fine of $62 million from the bank, the OCC is also expected to seek damages for the same.

The question that arises is whether hiring relatives of influential Chinese officials was equivalent to bribing a foreign official to secure business with a government entity. Such malpractice is clearly prohibited under the Foreign Corrupt Practices Act, 1977.

On the other hand, the banking regulators are currently focusing on the breakdown in controls and practices, which made way for the improper hiring. Further, JPMorgan is likely to pay a fine of $200 million to the federal prosecutors in Brooklyn and the SEC, the majority of which is anticipated to go to the SEC.

Nonetheless, JPMorgan has achieved a moral victory by escaping the criminal charges and negotiating a rare prosecution agreement with the prosecutors. However, involvement of the Fed and the OCC has complicated the case’s outcome. It has also raised uncertainties over timing of the settlement.

Regulatory Concerns

Since the fallout from the 2008 financial crisis, regulators have been demanding a tightened control system for the big banks. They further want the banks to increase the oversight over their employees. Banks that have failed to do so have paid tens of billions of dollars in fines. Notably, JPMorgan’s China hiring case represents one of the top settlements being negotiated with the SEC and the federal prosecutors.

Also, it is one of the first major crackdowns on a big bank for violation of the Foreign Corrupt Practices Act. However, JPMorgan is not the only bank charged with such accusations. Last year, The Bank of New York Mellon Corporation (BK - Free Report) paid $14.8 million to the SEC for settling similar accusations.

While the Justice Department’s probe is initially focused on JPMorgan, it is expected to extend further to the hiring practices of other banks, including HSBC Holdings plc (HSBC - Free Report) and Deutsche Bank AG (DB - Free Report) , which have publicly disclosed the existence of such investigations.

Currently, JPMorgan holds a Zacks Rank #4 (Sell). If you want to have a look at some of our better-ranked stocks, you can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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