Cronyism and Corruption

Cronyism and corruption

With JP Morgan falling foul of the US FCPA for the hiring of “princelings”, Nicholas Querée warns that similar hiring practices may create UK Bribery Act risk

n 17 November 2016, the US bank JP Morgan positions with the bank. In return, JP Morgan would be Chase (JP Morgan) and a Hong Kong subsidiary granted preferment in respect of banking mandates for Oagreed to pay USD $264m to settle investigations lucrative IPO work on the Hong Kong exchange. As one JP by the US Department of Justice, Securities and Exchange Morgan investment banker wrote to a colleague, “[t]hey Commission (SEC) and other regulators into its practice [the prospective client] are close to mandating banks for of hiring so-called Chinese “princelings” – the friends their IPO. We are a strong contender. Blink blink nod nod, and relatives of senior executives in state-run Chinese can we find a place for his son (they have only approached businesses – in order to win business. The bank had faced us in this regard)?” scrutiny for possible breaches of the US Foreign Corrupt The programme was prolific. It emerged that, at one Practices Act (FCPA), which attaches potential civil and stage, JP Morgan was employing the friends and family criminal sanctions to the bribery of foreign public ofcials members of executives at three-quarters of the major by US-based or US-listed companies, wherever in the world Chinese companies it took public. It was also expressly the unlawful conduct occurs. transactional. Bank employees produced spreadsheets The settlement raises a number of important issues. tracking revenue to particular employees hired under the Alongside the prevalence of this practice in financial programme. Overall revenue derived from the programme institutions and other global businesses, both in relation to was estimated to be in the range of the hundreds of the specific recruitment of “princelings” and more widely, a millions of US dollars. critical question is the extent to which similar conduct may The employees themselves were often (albeit not give rise to liability for UK-based entities under both the exclusively) below standard when compared with others Bribery Act 2010 (the Bribery Act), and other criminal and recruited outside the programme: “[w]orst business analyst regulatory provisions. candidate ever seen” was the description of one intern, the son of a government ofcial. “Immature, irresponsible and “Sons and Daughters” unreliable. Sent out sexually inappropriate emails”. The US investigation centred on JP Morgan’s so-called JP Morgan’s systems and controls were found by the “Sons and Daughters” programme, which ran from 2004 US investigators to be deficient. At least superficially, the to 2012. Under the programme, unqualified candidates – recruitment of so-called “client referrals” was subject to typically the sons of senior ofcials in Chinese state-owned close monitoring by JP Morgan HR and compliance staf, businesses – were ofered lucrative and highly sought after and the use of client referral placements in exchange

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for business was expressly prohibited. In response, internal carries on business, or part of a business, in the UK. Should documents were simply doctored to reflect the suggestion circumstances similar to JP Morgan’s arise in the context of that candidates under the programme had been hired a UK investigation it would be no answer to argue that the for legitimate business purposes, rather than for the ofending conduct took place in China and Hong Kong (nor express purpose of benefitting the bank. On occasion this will attempting to use subsidiary companies as a legal firewall fabrication was undertaken by back-ofce compliance and be successful). HR staf working for JP Morgan itself. The Bribery Act also carries the risk of significant fines on conviction. In February 2016, Sweet Group plc, the UK-listed Other institutions engineering firm, became the first company to plead guilty Reportedly the practice of hiring “princelings” is now to the section 7 ofence for failing to prevent bribery in largely at an end, at least in relation to Chinese state obtaining a contract for construction work in the UAE. The industries, for the simple reason that the fee income company was fined GBP £2.25m, which, although small in from IPOs has seemingly dried up. That said, financial comparison with the USD $264m meted out to JP Morgan, is institutions other than JP Morgan reportedly remain under a not insubstantial sum. investigation on account of suspected historic conduct that is in breach of the FCPA. Other regulatory risk But is the problem a wider one? It would be naïve to In addition to potential criminal risk under the Bribery Act, believe that these issues are limited only to one firm. The regulated firms in the UK financial services sector may be at SEC has reportedly made enquires of five US-listed financial risk of regulatory enforcement action by the Financial Conduct institutions other than JP Morgan, all operating in Hong Authority (FCA). Authorised firms are required to establish, Kong and mainland China, about their hiring practices. implement and maintain adequate policies and procedures Recent enforcement actions by the SEC have confirmed sufcient to ensure compliance of the firm with its obligations that issues surrounding the hiring of staf have given rise under the regulatory system and for countering the risk that to liability under the FCPA in other markets, and outside the firm might be used to further financial crime. the financial services. In August 2015, another US bank The FCA has taken action against a number of firms for – BNY Mellon – paid USD $14.8m to settle SEC charges anti-bribery and corruption systems and controls failings. that it violated the FCPA by giving student internships Whilst to date enforcement activity has focused on failings to family members of ofcials afliated with a Middle in the commercial insurance broking sector, and in particular Eastern sovereign wealth fund. In March this year, wireless in relation to the use of agents, in a March 2012 report into technology group Qualcomm paid the SEC USD $7.5m bribery and corruption systems and controls, the Financial to settle FCPA ofenses for hiring relatives of Chinese Services Authority (as the FCA then was) did identify a government ofcials to win sales. number of deficiencies in firms’ HR processes. The FCA found that one large firm, for example, could not Liability under the Bribery Act identify which roles involved high bribery and corruption Similar conduct would be more than capable of giving rise risks, and only one large firm carried out proactive staf to criminal liability under the Bribery Act. Whilst the UK screening against a database of politically exposed persons operates a more restrictive theory of corporate criminal (PEPs) as part of the vetting process. liability than the US, section 7 of the 2010 Act has created a novel ofence, which is committed where an act of bribery Wider lessons takes place to further the company’s commercial interests What does this mean in practice? Firms – whether in the and the company has failed to put in place adequate financial services or otherwise – should by now be more procedures to prevent bribery. than aware of the need to have robust systems and controls Bribery is defined by the Bribery Act as including where in place to prevent bribery. Whilst HR may well have played a person “ofers, promises or gives a financial or other second fiddle to more obvious areas of risk such as sales, advantage to another person”, with the intention of inducing the JP Morgan “Sons and Daughters programme” shows a person to perform improperly a relevant function or that, particularly in some high-risk industries and high-risk activity, or rewarding a person for the improper performance jurisdictions, a lack of focus on firms’ HR compliance policies of such a function or activity (where the person receiving may give rise to criminal and/or regulatory liability. the bribe is a public ofcial, that test is broader still). The Compliance ofcers will need to give some careful thought person to whom the advantage is given, and the person to how hiring policies and practices may be scrutinised, to improperly performing their duties, need not necessarily be ensure that well-paid “internships” or similar roles are not the same, and it is arguably plain that a job ofer would fall used as bargaining chips with public ofcials, particularly in squarely within the concept of a “financial advantage” as jurisdictions which are known to present significant bribery contemplated by the Act. and corruption risk. As with the FCPA, the UK Bribery Act also has extraterritorial efect, meaning that a company may be Nicholas Querée is an Associate at Peters & prosecuted for the section 7 ofence before the UK courts Peters LLP irrespective of where in the world the ofending conduct takes place, so long as the company is UK-registered, or

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