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From Securities Regulation Daily, November 17, 2016

JPMorgan Chase settles SEC charges that it hired clients' relatives

By Rodney F. Tonkovic, J.D.

JPMorgan Chase & Co. has agreed to pay over $130 million to settle charges that its hiring practices in the Asia-Pacific region violated the FCPA. According to the Commission, JPMorgan provided jobs and internships to relatives and friends of client executives and influential government officials. The goal of the referral program was to retain or keep business from the hires' well-placed relatives, and this practice resulted in more than $100 million in revenues over a seven-year period. In addition to the disgorgement and interest to be paid to settle the SEC's case, JPMorgan also is expected to pay $72 million to the Justice Department and $61.9 million to the Federal Reserve Board of Governors (In the Matter of JPMorgan Chase & Co.Release No. 34-79335, November 17, 2016).

"JPMorgan engaged in a systematic bribery scheme by hiring children of government officials and other favored referrals who were typically unqualified for the positions on their own merit," Andrew J. Ceresney, Director of the SEC Enforcement Division said. "JPMorgan employees knew the firm was potentially violating the FCPA yet persisted with the improper hiring program because the business rewards and new deals were deemed too lucrative." Kara Brockmeyer, Chief of the SEC Enforcement Division's FCPA Unit, added: "The misconduct was so blatant that JPMorgan investment bankers created 'Referral Hires vs Revenue' spreadsheets to track the money flow from clients whose referrals were rewarded with jobs. The firm's internal controls were so weak that not a single referral hire request was denied."

Sons and daughters. According to the Commission, between 2006 and 2013, investment bankers at JPMorgan's Asian subsidiary created a client referral hiring program (the "Sons and Daughters Program") that gave well-paying jobs to candidates referred by client executives and influential government officials. The referral program bypassed JPMorgan's normal hiring process and these hires were generally less-qualified than those that went through the firm's non-referral hiring programs. These employees were instead hired based on their links to investment banking revenue that could be generated from the referring client in exchange for the hire.

Over the period at issue, JPMorgan hired approximately 200 interns and full-time employees through the referral program, nearly half of which were referred by government officials at state-owned entities. The state-owned entities entered into transactions allowing the firm to win or retain business resulting in over $100 million in revenue.

The Commission found that JPMorgan's employees knew that they were potentially violating the FCPA. To avoid violations, the legal and compliance review of the referral hires became a mere formality, and inaccurate information was supplied to secure approval for the hires without revealing their links. JPMorgan itself lacked a system of internal controls sufficient to assure that employees were not bribing foreign officials. The firm also violated the books and records provisions of the FCPA through the creation of an inaccurate system of records concerning the referral hires.

Sanctions. The Commission found that JPMorgan violated the Exchange Act's anti-bribery, books and records, and internal controls provisions. The firm was ordered to pay disgorgement of $105,507,668 and prejudgment interest of $25,083,737.

JPMorgan entered into a non-prosecution agreement with the Department of Justice and agreed to pay a criminal penalty of $72 million to resolve the matter. While JPMorgan did not voluntarily disclose the misconduct, it cooperated with the criminal investigation. The DOJ noted further that six employees involved in the referral program were terminated, and an additional 23 were disciplined.

"The so-called Sons and Daughters Program was nothing more than bribery by another name," said Assistant Attorney General Leslie R. Caldwell. "Awarding prestigious employment opportunities to unqualified individuals in order to influence government officials is corruption, plain and simple."

The release is No. 34-79335.

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