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JPMorgan (JPM) to Pay $264M Fine for China Hiring Scandal

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Putting an end to an almost a three-year old investigation related to alleged violation of the Foreign Corrupt Practices Act (FCPA), JPMorgan Chase & Co. (JPM - Free Report) has agreed to pay $246 million in aggregate to the U.S. regulators. The bank was accused of hiring the relatives of Chinese officials, with an aim to win banking deals.

Of the total fine, the U.S. Securities and Exchange Commission (SEC) will get $130 million, the Department of Justice (DOJ) will receive $72 and the remaining amount will go the U.S. Federal Reserve. Notably, JPMorgan did not accept or deny any of the charges. Nonetheless, as part of its deal with the DOJ, a Hong Kong unit of the company acknowledged making quid pro quo hiring agreements with Chinese officials to secure businesses.

Assistant Attorney General Caldwell said, “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.”

Hiring of Chinese "Princelings" to Win New Business

The settlement documents laid bare to show that JPMorgan had set up a proper structure, called “the Sons and Daughters program”, in place allowing clients and powerful government officials to refer potential candidates to win deals. Such potential candidates received preferential treatment, step siding normal company hiring procedure.  

During 2006–2013, JPMorgan had appointed nearly 100 interns and full-time employees with such references. Per the SEC finding, this enabled the bank to secure or keep businesses resulting in over $100 million in revenues.

Kara Brockmeyer, the 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.”

Further, as JPMorgan faced intense competition, it extended its hiring program, with senior bankers institutionalizing such hiring practices. These were exclusively tied to win deals with Chinese government-led companies.  

What Next?

JPMorgan spokesperson mentioned, “The conduct was unacceptable. We stopped the hiring programme in 2013 and took action against the individuals involved. We have also made improvements to our hiring procedures and reinforced the high standards of conduct expected of our people.”

Notably, as part of the resolution deal, JPMorgan will continue to cooperate with the regulators in any “ongoing investigations and prosecutions relating to the conduct.” The Office of the Comptroller of the Currency is also probing similar allegations against the bank.

While this settlement is a relief for JPMorgan, it has opened can of worms for other global banks, including The Goldman Sachs Group, Inc. (GS - Free Report) , HSBC Holdings plc (HSBC - Free Report) and Deutsche Bank AG (DB - Free Report) . These banks have publicly disclosed investigations in to their hiring practices in Asia.

Therefore, in the coming days we expect similar resolution deals could be announced.

Currently, JPMorgan carries a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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