American regulators investigate JPMorgan Chase’s hiring in China
OF ALL the investigations and lawsuits affecting financial firms in
America, few have wider ramifications than a reported probe by the
Securities and Exchange Commission (SEC) into whether JPMorgan Chase
hired the children of senior Chinese officials in order to help the bank
win business. One recruit was the son of an ex-banking regulator who is
now the chairman of the China Everbright Group; another the daughter of
a railway official. (JPMorgan Chase has not been accused of wrongdoing
and says it is co-operating with the investigation.)
The probe will cause amazement in China, a country in which the idea of guanxi—loosely
translated, relationships—is ingrained. Familial connections are rife
across government and commerce. The investigation will also cause
consternation at Western firms hoping to do business in the country.
Investment banks in Hong Kong privately concede that finding a
“princeling” who is valuable for reasons other than their connections is
the exception, not the rule. Although America’s Foreign Corrupt
Practices Act (FCPA) specifically targets the bribery of government
officials, many of China’s largest companies retain strong government
ties so may come within its ambit. The SEC’s scrutiny comes after the
conviction last August of a Shanghai-based employee of Morgan Stanley
for bribing a government official.
Some banks are now considering whether unpaid internships could be
considered bribes by American regulators. Even an uncompensated spell at
a prestigious firm has genuine value for the recipient, and could
provide a useful contact for the bank. If hiring princelings becomes a
potential red flag to investigators, banks will presumably have to
demonstrate that people are being hired on their own merits. But how to
define “merit”? For young employees, the universities they attended are
often cited as proof of ability, but in many countries, not least
America, entry to the best universities can also be a product of family
relationships.
Chinese entities are not the only ones where these issues arise.
American investigators are also interested in sovereign-wealth funds,
another messy meld of government, commerce and money. Banks will think
twice about hiring people with relatives at these funds.
Connections also count in the West, of course. Following initial reports of the SEC’s investigation in the New York Times, a flood of stories have noted the jobs held in politically sensitive American firms by the sprogs of American politicians.
Even when offspring are not involved, the revolving door between the
public and private sectors raises questions about why people are hired.
JPMorgan Chase did not hire Tony Blair as a senior adviser for his
knowledge of risk weights, after all. Mary Schapiro, a former head of
the SEC, recently joined Promontory, a consultancy packed with
ex-regulators used by banks to cope with regulation (she has said she
will not lobby any government body in her new role). If it is unfair to
cite these names, it is only because there are so many others. If the
regulators genuinely fret about why firms make hiring decisions, they
may want to extend their inquiries to Washington, DC, and New York as
well.