Federal authorities have opened a bribery investigation into whether JPMorgan Chase hired the children of powerful Chinese officials to help the bank win lucrative business in the booming nation, according to a confidential U.S. government document.
In one instance, the bank hired the son of a former Chinese banking regulator who is now the chairman of the China Everbright Group, a state-controlled financial conglomerate, according to the document as well as public records. After the chairman's son came on board, JPMorgan secured multiple coveted assignments from the Chinese conglomerate, including advising a subsidiary of the company on a stock offering, records show.
The Hong Kong office of JPMorgan also hired the daughter of a Chinese railway official. That official was later detained on accusations of doling out government contracts in exchange for cash bribes, the government document and public records show.
The former official's daughter came to JPMorgan at an opportune time for the New York City-based bank: The China Railway Group, a state-controlled construction company that builds railways for the Chinese government, was in the process of selecting JPMorgan to advise on its plans to become a public company, a common move in China for businesses affiliated with the government. With JPMorgan's help, China Railway raised more than $5 billion when it went public in 2007.
The focus of the civil investigation by the Securities and Exchange Commission's anti-bribery unit has not been previously reported. JPMorgan -- which has had a number of run-ins lately with regulators, including one over a multibillion-dollar trading loss last year -- made an oblique reference to the inquiry in its quarterly filing this month. The filing stated that the SEC had sought information about JPMorgan's "employment of certain former employees in Hong Kong and its business relationships with certain clients."
In May, according to a copy of the confidential government document, the SEC's anti-bribery unit requested from JPMorgan a battery of records about Tang Xiaoning. He is the son of Tang Shuangning, who since 2007 has been chairman of the China Everbright Group. Before that, the elder Mr. Tang was the vice chairman of China's top banking regulator.
The agency also inquired about JPMorgan's hiring of Zhang Xixi, the daughter of the railway official. Among other information, the SEC sought "documents sufficient to identify all persons involved in the decision to hire" her.
The government document and public records do not definitively link JPMorgan's hiring practices to its ability to win business, nor do they suggest that the employees were unqualified. Furthermore, the records do not indicate that the employees helped JPMorgan secure business. The bank has not been accused of any wrongdoing.
Yet the SEC's request outlined in the confidential document hints at a broader hiring strategy at JPMorgan's Chinese offices. Authorities suspect that JPMorgan routinely hired young associates who hailed from well-connected Chinese families that ultimately offered the bank business. Beyond the daughter of the railway official, the SEC document inquired about "all JPMorgan employees who performed work for or on behalf of the Ministry of Railways" over the last six-plus years.
A spokesman for JPMorgan said, "We publicly disclosed this matter in our 10-Q filing last week, and are fully cooperating with regulators."
The Ministry of Railways, which has since been restructured into various agencies, and the China Everbright Group did not respond to requests for comment. A spokeswoman for the SEC declined to comment.
Attempts over the weekend to reach Ms. Zhang and Tang Xiaoning, both of whom have left JPMorgan, were unsuccessful.
Western companies have been aggressive in trying to snag a share of riches in China's fast-growing economy in recent years. Some have come under fire over their business practices there, including GlaxoSmithKline, whose employees are said by Chinese officials to have confessed to bribing doctors to increase pharmaceutical sales.
Global companies also routinely hire the sons and daughters of leading Chinese politicians. What is unusual about JPMorgan is that it hired the children of officials of state-controlled companies.
It is even less common for U.S. authorities to scrutinize such practices. Only a handful of Wall Street employees have ever faced bribery accusations, including a former Morgan Stanley executive in China who pleaded guilty to criminal charges in 2012, admitting to "an effort to enrich himself and a Chinese government official."
In recent years, the SEC and the Justice Department each have stepped up their enforcement of the Foreign Corrupt Practices Act, a 1977 federal law that essentially bans U.S. companies from giving "anything of value" to a foreign official to win "an improper advantage" in retaining business.
The SEC created its own corrupt practices unit, which since 2010 has filed about 40 cases against companies like Tyco and Ralph Lauren. Over that same period, the Justice Department has leveled charges in more than 60 cases.
Legal experts note that there is nothing inherently illicit about hiring well-connected people. To run afoul of the law, a company must act with "corrupt" intent, or with the expectation of offering a job in exchange for government business.
"While the hire of a son or daughter itself is not illegal, red flags would be raised if the person hired was not qualified for the position, or, for example, if a firm never received business before and then, lo and behold, the hire brought in business," said Michael Koehler, an expert on the corrupt practices act who is an assistant professor at the Southern Illinois University School of Law.
The inquiry into JPMorgan comes when the bank is already the focus of investigations in the United States by at least eight federal agencies, a state regulator and two foreign nations. Many of the cases, including a civil and criminal investigation in California, involve JPMorgan's financial-crisis-era mortgage business.
The multitude of cases has led some lawmakers to question whether JPMorgan, which has operations in more than 60 countries, is too big to manage.
The potential perils of JPMorgan's size also came to light with a multibillion-dollar trading blowup last year that came to be known as the "London Whale." The trading losses, stemming from a bad bet on the exotic financial instruments known as derivatives, prompted congressional hearings and wide-ranging investigations.