JPMorgan Chase's China Syndrome: Nepotism

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JPMorgan Chase (JPM) has spent much of the post-financial crisis years fending off lawsuits in the U.S. Even more so than fellow lawsuit targets from that era Citigroup (C), Bank of America (BAC), or Wells Fargo (WFC), JPMorgan Chase has been through a slew of legal proceedings with various arms of the federal and local governments, as well as other disgruntled entities.

But America isn't the only place where the bank is bumping into the long arm of regulators. Its actions in China have come under increased scrutiny, and the company is squirming under the magnifying glass.

Who's In Charge of Hiring?

In late March, JPMorgan Chase announced via internal memo that Fang Fang, its long-standing chief executive for China investment banking, was leaving the company. Within days, his Hong Kong office was searched by officials from the local anti-corruption agency.

That was the latest in a string of incidents that began last August in which the Securities and Exchange Commission was compelled to open an investigation into the hiring practices of JPMorgan Chase's China arm. The regulator is concerned that the bank might be violating the Foreign Corrupt Practices Act, a fairly stringent set of rules making it illegal for "certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business."

JPMorgan Chase has only itself to blame for this heightened interest. It once employed Tang Xiaoning, the son of Tang Shuangning, the chairman of state-owned conglomerate China Everbright Group. That entity is the parent company of China Everbright Bank, which launched the biggest IPO of 2013 on the Hong Kong market this past December. PMorgan Chase had been a financial adviser to China Eversight Bank, and it was to be an underwriter of the IPO before pulling out several weeks ahead of the issue.

Compounding this, last November a New York Times expose revealed that the bank used the services of a consulting firm headed by young financier Lily Chang, which was an alias of Wen Ruchun, the daughter of longtime Chinese Prime Minister Wen Jiabao. The elder Wen was in power during the association of his daughter's company with JPMorgan Chase.

And this past February, indications surfaced that this habit might have spread across the Pacific. It recently came to light that in 2012, company CEO Jamie Dimon received a personal request to hire a family friend of one of China's top insurance regulators, Xiang Junbo. The friend subsequently landed on JPMorgan Chase's payroll.


Although JPMorgan Chase has been largely mum on the subject of China and nepotism, it appears the bank is cooperating to some degree with the regulator and conducting its own internal investigation.

This doesn't appear to be the company's only attempt at avoiding at least the appearance of impropriety. In 2006 it launched a program, called "Sons and Daughters," aimed at putting candidates with such strong family connections through a different, more stringent hiring process with more oversight. The idea was to ensure that their employ wouldn't be directly connected to any business dealings with associated entities.

That was a noble goal, but apparently it faltered soon after launch. Media reports have it that at least a few candidates sailed through the hiring process, facing less oversight than their more "ordinary" peers and defeating the purpose of the program.

Long Arm of the Law

The Foreign Corrupt Practices Act is a serious piece of legislation. For instance, in 2005, the Department of Justice, charged agribusiness conglomerate Monsanto (MON) with affecting a bribe for a state official in Indonesia to help repeal an environmental ruling that went against the firm. %VIRTUAL-article-sponsoredlinks%Monsanto was forced to pay $1.5 million in fines to the Department of Justice and the SEC in reparation for the bribe as well as other suspicious payments.

This is a drop in the bucket for such a large firm, but the damage to its reputation wasn't so easily repaired. That outcome might very well befall JPMorgan Chase, too, if the current investigation finds the bank culpable.

So JPMorgan Chase is playing it smart by cooperating with the SEC's China investigation. The bank still faces a raft of lawsuits at home, which it seems tired of fighting, as evidenced by its recent settlements (particularly a walloping $13 billion pact reached last year with the Justice Department). The company is pushing to retire those legal problems and get on with business. Considering that, it's very much in the bank's interest to get past this case and to be more careful about whom it hires and how in its important foreign branches.

On April 11, JPMorgan Chase reports quarterly results, and analysts see profitability declining.

Motley Fool contributor Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo, and owns shares of Bank of America, Citigroup, JPMorgan Chase and Wells Fargo.

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