The recent JP Morgan FCPA settlement – can a job offer be a bribe?

April 2017  |  LEGAL & REGULATORY|  FRAUD & CORRUPTION

Financier Worldwide Magazine

April 2017 Issue

April 2017 Issue


The US Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act 2010 operate to prohibit the use of illicit payments – i.e., bribes – to foreign public officials by corporations seeking to obtain preferment in their business dealings. But what constitutes a bribe? In most cases, this will be a straightforward question to answer: providing the foreign public official with access to an offshore bank account, or a disguised beneficial interest in a joint venture, cannot be understood as anything other than an improper payment. But what if the public official never receives any personal benefit, but rather it is a family member who gains from the corrupt relationship? And what if the benefit is not cash, or shares, or other store of value, but is instead an offer of employment made to that family member? Would that be a bribe for the purpose of the FCPA, or the Bribery Act? As the US bank, JP Morgan Chase discovered recently, the answer would appear to be yes, at least insofar as the FCPA is concerned.

JP Morgan’s ‘sons and daughters’ programme

In November 2016, JP Morgan – along with a Hong Kong subsidiary – agreed to pay $264m to settle investigations by the US Department of Justice, Securities and Exchange Commission (SEC), and other regulators, into its practice of hiring so-called Chinese ‘princelings’ – the friends and relatives of senior executives in state run Chinese businesses – in order to win business.

The US investigation centred on JP Morgan’s so-called ‘sons and daughters’ programme, which ran from 2004 to 2012. Under the programme, unqualified candidates – typically the sons of senior officials in Chinese state-owned businesses – were offered lucrative and highly sought after positions with the bank. In return, JP Morgan would be granted preferment in respect of banking mandates for lucrative IPO work on the Hong Kong exchange. As one JP Morgan investment banker wrote to a colleague, “[t]hey” – the prospective client – “are close to mandating banks for their IPO. We are a strong contender. Blink blink nod nod, can we find a place for his son (they have only approached us in this regard)?”

The programme was prolific. It emerged that, at one stage, JP Morgan was employing the friends and family members of executives at three-quarters of the major Chinese companies it took public. It was also expressly transactional. Bank employees produced spreadsheets tracking revenue to particular employees hired under the programme. Overall revenue derived from the programme was estimated to be in the hundreds of millions of dollars.

The employees themselves were often (albeit not exclusively) below standard compared with others recruited outside the programme: “[w]orst business analyst candidate ever seen” was the description of one intern, the son of a government official. “Immature, irresponsible and unreliable. Sent out sexually inappropriate emails.”

JP Morgan’s systems and controls were found by the US investigators to be deficient. At least superficially, the recruitment of so-called ‘client referrals’ was subject to close monitoring by JP Morgan HR and compliance staff, and the use of client referral placements in exchange for business was expressly prohibited. In response, internal documents were simply doctored to reflect the suggestion that candidates under the programme had been hired for legitimate business purposes, rather than for the express purpose of benefitting the bank. On occasion, this fabrication was undertaken by back-office compliance and HR staff working for JP Morgan itself.

Other institutions

Reportedly the practice of hiring ‘princelings’ is now largely at an end, at least in relation to Chinese state industries, for the simple reason that the fee income from IPOs has seemingly dried up. That said, financial institutions other than JP Morgan reportedly remain under investigation on account of suspected historic conduct which is in breach of the FCPA.

Is the problem a wider one? It would be naïve to believe that these issues are limited only to one firm. The SEC has reportedly made enquires of five US-listed financial institutions other than JP Morgan, all operating in Hong Kong and mainland China, about their hiring practices. Recent, enforcement actions by the SEC have confirmed that issues surrounding hiring staff have given rise to liability under the FCPA in other markets, and outside financial services. In August 2015, another US bank, BNY Mellon, paid $14.8m to settle SEC charges that it violated the FCPA by giving student internships to family members of officials affiliated with a Middle Eastern sovereign wealth fund. In March this year, wireless technology group Qualcomm paid the SEC $7.5m to settle FCPA offences for hiring relatives of Chinese government officials to win sales.

Liability under the Bribery Act

Similar conduct would be more than capable of giving rise to criminal liability under the Bribery Act. While the UK operates a more restrictive theory of corporate criminal liability than the US, section 7 of the 2010 Act has created a novel offence which is committed where an act of bribery takes place to further the company’s commercial interests, and the company has failed to put in place adequate procedures to prevent bribery.

Bribery is defined by the Bribery Act as including where a person “offers, promises or gives a financial or other advantage to another person”, with the intention of inducing a person to perform improperly a relevant function or activity, or rewarding a person for the improper performance of such a function or activity (where the person receiving the bribe is a public official, that test is broader still). The person to whom the advantage is given, and the person improperly performing their duties, need not necessarily be the same, and it is arguably plain that a job offer would fall squarely within the concept of a “financial advantage” as contemplated by the Act.

As with the FCPA, the UK Bribery Act also has extraterritorial effect, meaning that a company may be prosecuted for the section 7 offence before the UK courts, irrespective of where in the world the offending conduct takes place, so long as the company is UK-registered, or carries on business, or part of a business, in the UK. Should circumstances similar to JP Morgan’s arise in the context of a UK investigation it would be no use arguing that the offending conduct took place in China and Hong Kong (nor will attempting to use subsidiary companies as a legal firewall be successful).

The Bribery Act also carries the risk of significant fines on conviction. In February 2016, Sweett Group plc, the UK-listed engineering firm, became the first company to plead guilty to the section 7 offence for failing to prevent bribery in obtaining a contract for construction work in the UAE. The company was fined £2.25m, which, although small in comparison with the $264m fine meted out to JP Morgan, is still a substantial sum.

Other regulatory risk

In addition to potential criminal risk under the Bribery Act, regulated firms in the financial services sector may be at risk of regulatory enforcement action by the Financial Conduct Authority (FCA). Authorised firms are required to establish, implement and maintain adequate policies and procedures sufficient to ensure compliance of the firm with its obligations under the regulatory system and for countering the risk that the firm might be used to further financial crime.

The FCA has taken action against a number of firms for anti bribery and corruption systems and controls failings. While to date that enforcement activity has focused on failings in the commercial insurance broking sector, and in particular in relation to the use of agents, in a March 2012 report into bribery and corruption systems and controls, the Financial Services Authority (as the FCA then was) did identify a number of deficiencies in firms’ HR processes.

The FCA found that one large firm, for example, could not identify which roles involved high bribery and corruption risks, and only one large firm carried out proactive staff screening against a database of politically exposed persons (PEPs) as part of the vetting process.

Wider lessons

What does this mean in practice? Firms, whether in financial services or otherwise, should be more than aware by now of the need to have robust systems and controls in place to prevent bribery. While HR may well have played second fiddle to more obvious areas of risk, such as sales, the JP Morgan ‘sons and daughters’ programme shows that, particularly in some high-risk industries, and high-risk jurisdictions, a lack of focus on firms’ HR compliance policies may give rise to criminal or regulatory liability.

Compliance officers will need to give some careful consideration to how hiring policies and practices may be scrutinised to ensure that well-paid ‘internships’ or similar roles are used as bargaining chips with public officials, particularly in jurisdictions which are known to present significant bribery and corruption risk.

 

Nicholas Querée is an associate at Peters & Peters. He can be contacted on +44 (0)20 7822 7733 or by email: nqueree@petersandpeters.com.

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Nicholas Querée

Peters & Peters


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