JPMorgan case tests U.S. law on buying influence abroad

Reports that JPMorgan Chase hired scores of children of powerful government officials throughout Asia have put the bank squarely in the sights of the United States government for violating the Foreign Corrupt Practices Act. An investigation will test how broadly the law applies to almost commonplace conduct by firms seeking any small advantage over rivals to win business from foreign governments.

DealBook reported last week that JPMorgan adopted a program called Sons and Daughters that initially sought to avoid the appearance of favoritism for the offspring of officials but morphed into a means to lower the hiring requirements. According to Bloomberg, an internal spreadsheet even connects certain hires to deals being pursued by the bank, the kind of link that raises questions about whether there were any explicit benefits provided in exchange for receiving business.

JPMorgan has not been accused of any violations, and the bank is cooperating in the government investigation. No one is surprised that those with powerful connections often have an inside track to coveted jobs. In family-run businesses, it is a cliché that the underachieving offspring receive favored positions despite a lack of obvious qualifications, as any fan of the movie "Tommy Boy" can attest.

The Foreign Corrupt Practices Act focuses on bribery of overseas officials, and the easy case would be if a company had agreed to hire someone's child in exchange for getting business from a government-controlled entity. For instance, a 2011 case against Tyson Foods involved seeking favor from Mexican government officials by hiring their wives for no-show jobs, a clear violation of the law.

A case gets more difficult if the job is given to obtain a favorable view of the company but the person hired actually does credible work. That would not seem to fit comfortably in the traditional understanding of a bribe as an illicit benefit conferred on the official. But the Foreign Corrupt Practices Act is flexible, and even buying a positive reaction could be enough to violate the statute.

The benefit JPMorgan may have accrued from hiring the children of government officials — known as "princelings" in China — may have been just getting a more favorable reception when it sought underwriting and transactional advisory business. Investment banking is about building relationships. So even if a son or daughter had outstanding credentials, a job offer could still help the bank get its foot in the door.

The statute requires proof that the defendant acted "corruptly," a notoriously vague term that the Supreme Court described in Arthur Andersen LLP v. United States as something "normally associated with wrongful, immoral, depraved, or evil." Although one or two questionable hires might not prove an intent that was "wrongful" or "evil," a pattern of hiring like the one used in the Sons and Daughters program could be enough to meet this standard.

Using corporate resources to buy favor from public officials is certainly not unknown, even in this country. Countrywide Financial had a program called Friends of Angelo, named after its chief executive, Angelo R. Mozilo, that gave discounted mortgages to some members of Congress and their staff. No criminal or civil charges were ever filed related to the loans.

A federal statute prohibits providing a gift to an official "for or because of any official act." In United States v. Sun-Diamond Growers, the Supreme Court rejected the government's interpretation of the law that giving a gratuity to an official so that the person would favor the donor at some point in the future constituted a violation. Instead, the court required that the gratuity be linked to a specific exercise of governmental authority.

The Foreign Corrupt Practices Act is much broader in covering efforts to buy influence that might escape charges in the United States. The statue prohibits paying money or anything of value for the purpose of "securing any improper advantage." Hiring a child can certainly qualify as a gift, even if there is no direct benefit to the official, and the purpose need not be linked to any particular exercise of authority so long as it is intended to generate an advantage not enjoyed by competitors.

Nor must the benefit result in the receipt of a specific contract or agreement with the foreign government, only that it be intended to assist in "obtaining or retaining business." The official need not solicit the benefit, or even know the reason it was provided. There is a violation once the benefit is corruptly conferred. So a bank cannot defend itself by arguing that it ended up not participating in any deals despite hiring an official's child.

The United States government is unlikely to care much about a few questionable hires, even if those people were less qualified than other applicants. The government is not going to get into a fight about who had the necessary credentials to work in the world of high finance.

Still, the breadth of the overseas bribery law puts JPMorgan — and no doubt other Wall Street banks that engaged in similar practices — in a difficult position. The government will look for a pattern of misconduct. And as information about the hiring of more children emerges, there is a greater likelihood that the government will file charges for a violation because the banks will have a harder time claiming that each one was done solely on the merits.

Like most such investigations, the inquiry is likely to drag on because the government depends on companies to undertake an internal investigation to identify potential violations and then turn over the results. For JPMorgan and other global banks that may have engaged in questionable hiring, this means spending millions of dollars on outside lawyers who dig through the company's hiring practices going back years to ferret out potential misconduct.

This is yet another dent in JPMorgan's armor as it works to resolve investigations over its mortgage-backed securities sales and losses from the "London Whale" trades. So add millions of dollars more to the costs the bank will have to pay to investigate potential wrongdoing and, quite possibly, settle with the United States government.

(Published by NYT - September 3, 2013)