A joint investigation by the U.S. Department of Justice, Hong Kong Department of Justice and the UK Ministry of Justice into accusations that American investment banks hired the children of powerful Asian officials to secure lucrative securities business may have just ensnared JPMorgan Chase CEO Jamie Dimon. According to confidential emails recently turned over to federal authorities, as part of an investigation into bank hiring practices, a top Chinese regulator personally went to Mr. Dimon's New York office in June 2012 to ask for a "favor" to hire a young a family friend, who later was provided an intern job and now works at JPMorgan. Investigation centers on whether the banks' hiring of Asian family members to obtain is a violation of the Foreign Corrupt Practices Act of 1977, which makes it illegal to provide pay-to-play incentives to foreign officials.

Several people have acknowledged "target letters" were sent to JPMorgan, Goldman Sachs Group Inc.,and Morgan Stanley by the enforcement division of the Securities and Exchange Commission (SEC) and the Justice Department prosecutors in Brooklyn that are handling the investigation. Subpoenas requested documents from the banks leading Initial Public Offerings" (IPOs) for Chinese companies over the last five years. The investigation seeks information about the investment banks' hiring practices as it relates to the "employment of children of senior officials" at four of China's biggest state-owned enterprises that provided significant business to the banks.

The industry investigation accelerated last year after the SEC obtained a JP Morgan spreadsheet showing the bank was tracking how many underwritings they won in relationship to each Asian applicant they hired. It appears the Justice Department then began looking into possible violations of securities and bribery laws.

On February 9th it was revealed that Mr. Dimon as CEO of JPMorgan met in June 2012 with Mr. Xiang Junbo, an alternate member to the Central Committee of the Communist Party of China and the nation's top insurance regulator. At the time of the meeting, JPMorgan was seeking lucrative work from several Chinese insurance companies. As regulator, Mr. Xiang was expected to influence all Chinese insurers' financial dealings.

According to a report in New York Times, "The applicant acted as an interpreter for the Chinese insurance regulator." Although Mr. Dimon supposedly did not know that Mr. Xiang would ask the bank to hire the interpreter at the meeting, it was later revealed that "JPMorgan bankers in Hong Kong, hoping to help her job prospects, knew in advance that she would attend."As the meeting with Mr. Dimon was wrapping up, interviews and the confidential email show, Mr. Xiang switched subjects and introduced his interpreter to Mr. Dimon as the daughter of a close friend and a potential JPMorgan employee. The interpreter translated as Mr. Xiang praised the benefits she could offer to JPMorgan. Mr. Dimon then told Mr. Xiang that the bank would "do what we can."

In the confidential email sent after the meeting, a JPMorgan banker in Hong Kong recounted how Mr. Xiang asked Mr. Dimon "for favor to retain her in US team." The banker, who worked on Chinese-based insurance company "deals," emphasized "the importance of this relationship and specialty in the insurance area." He added that "we will be expected to find a solution for her quickly."

Following approval by the bank's compliance department and the vetting of the applicant through a series of interviews, JPMorgan created a "special internship" to accommodate the applicant. In early 2013, JPMorgan assigned her to the insurance group at the bank's New York headquarters where she became a full-time employee.

JP Morgan was hired by The People's Insurance Company of China, a state-owned insurer, for its November 2012 I.P.O that raised $3.1 billion. That same month, JPMorgan was also co-lead underwriter on China Taiping Capital Ltd.'s $297 million debt offering. The holding company of China Taiping again hired JPMorgan as an adviser when the insurer acquired stakes in a number of subsidiaries last May.

A JPMorgan spokesman stated that Mr. Dimon is not under investigation and had nothing to do with the decision to hire the young woman, whom the bank described as "well qualified." He also emphasized that "like the C.E.O. of any large company, Mr. Dimon can be expected to meet with many people in a given day."

Investigators are questioning at least seven banks about whether "pay-to-play" hiring practices by the banks might involve some improper relationships. Goldman Sachs, the leader in international equity offerings of Chinese companies in 2013, hired children of senior executives at New China Life Insurance Co. and China Petrochemical Corp., referred to as Sinopec Group, and Morgan Stanley brought in an analyst whose father is both a top official of the Chairman of China National Building Material Co. and China National Pharmaceutical Group Corp., referred to as Sinopharm.

Federal authorities could bring charges against up to seven investment banks if their hiring practices were designed explicitly to win business from Chinese companies. The Foreign Corrupt Practices Act of 1977 (FCPA) make it illegal to provide pay-to-play incentives to foreign officials in the form of an "offer, payment, promise to pay, or authorization of the payment of money or anything of value to any person" to influence the foreign official in his or her official capacity.

Since 2009, the Department of Justice has entered into more than 40 corporate settlements for violation of the FCPA. Settlements for 2012, the most recent year records are available, disclose that $2 billion in monetary fines were collected. Given the many billions of dollars in fees were generated by Chinese initial public offerings over the last few years, violations of the FCPA by U.S. investment banks could be subject to record fines and possible criminal penalties for pay-to-pay in China.

The author welcomes feedback @ chriss@chrissstreetandcompany.com
Chriss Street is teaching microeconomic at University of California, Irvine this spring from March 31 - June 8, 2014. Call Student Services at (949) 824-5414 or visit http://unex.uci.edu/courses to enroll!