JPMorgan’s ‘Sons and Daughters’ fine won’t stop Wall Street’s unethical hiring practices
Hiring well connected Chinese princelings to win lucrative deals has never been a revelation in Hong Kong. But when JPMorgan agreed to pay a US$264 million fine to resolve criminal and civil matters relating to its “Sons and Daughters” recruitment programme, its sheer size warrants a second look. The cost of doing business in China just went up.
The US Security and Exchange Commission’s 26 page summary of JPMorgan’s Sons and Daughters programme, which started in 2006, reads like a satire of Game of Thrones – infused with nepotism and medieval like privilege. The Department of Justice assessed that the scheme increased profits at JPMorgan by at least US$35 million.
“The so-called Sons and Daughters Programme was nothing more than bribery by another name,” said assistant attorney-general Leslie Caldwell. “Awarding prestigious employment opportunities to unqualified individuals in order to influence government officials is corruption, plain and simple.”
She added that, “Most of those offered jobs through the programme lacked the education and experience of other new hires.” The bank admitted that some of these candidates did little more than proof read although they were paid the same salary as entry-level analysts.
Besides the evident absence of hiring compliance at JPMorgan it is a shame that the fine will probably be absorbed by JPMorgan’s shareholders rather than clawed back from their bankers’ bonuses.
JPMorgan’s big mistake was to document the quid pro quos accurately in their spreadsheets and emails to justify the programme to their bosses. Other foreign banks employed the similar practices to win mandates, but it appears that JPMorgan executives left an incriminating email trail.
For example, Goldman’s employee roster briefly included the grandson of the former Chinese president Jiang Zemin. And Merrill Lynch employed Fen Shaodong, the son-in-law of a high ranking Communist Party official.
A period of financial deregulation in Washington peaked with a fast growing Chinese economy. Tougher post crisis regulations covered risk and capital requirements rather than hiring practices. They enabled questionable recruitment practices to escape regulatory scrutiny.
This practice will only worsen as US investment banks aggressively expand into domestic Chinese banking products and services. Beijing is contemplating the next step in the US-China trade and investment framework, which may allow Wall Street banks to operate their businesses in China without a mainland partner. This will give them greater access to China’s domestic banking markets, which they have long sought to enter.
Today, China is potentially the world’s biggest market for a long menu of financial products needed to service a modern economy, like securitised assets including credit cards to automobile loans.
The banking market in China may have changed since 2013. SOE-led mandates have given way to more private sector clients and start-ups. However, Chinese guanxi is unlikely to diminish anytime soon. Indeed, recruitment executives remark that more mainland bank executives will be required if foreign banks expand operations.
Wall Street banks have always made hypocritical exceptions for ethically challenged hiring practices. So hiring sons and daughters of party officials is now bad. But hiring fraternity brothers is good. And it’s still okay to tell their Chinese clients that their lack of morals won’t affect their credit rating.
The pervasive Wall Street ethos continues: It matters not “What is legal?”, but instead, “What are others doing and getting away with?”