JPM China Probe Sends Chills Through Investment Banks

A U.S. banking regulator's probe into JPMorgan's <(NYSE:JPM) hiring practices in China will have rival banks scrambling to review their own records, lawyers say, in a market where ties to political and business leaders can be key to winning big deals.

Banks around the world commonly hire people with government connections, but this is especially prevalent in China due to the role the ruling Communist Party plays in the country's business.

Offering a job to one of China's so-called princelings - the offspring of China's political elite - is now a potential liability, with the U.S. Securities and Exchange Commission (SEC) investigating whether JPMorgan's Hong Kong office hired the children of China's state-owned company executives with the express purpose of winning underwriting business and other contracts, said a person familiar with the matter.

U.S. law does not stop companies from hiring politically connected executives. But hiring people in order to win business from relatives can be bribery, and the SEC is investigating JPMorgan's actions under the U.S. Foreign Corrupt Practices Act (FCPA), the person added.

"If I were a competitor of JPMorgan, I would definitely start to do some internal investigations looking into the relationships with princelings," said a China-based lawyer who works with financial institutions.

Bank of America <BAC.N>, Citigroup <C.N>, Credit Suisse <CSGN.VX>, Goldman Sachs <GS.N> and Macquarie <MQG.AX> are just a few of the banks to have employed relatives of top Chinese officials in the past five years. The banks declined to comment or did not respond to requests for comment.

Marie Cheung, a Hong Kong-based spokeswoman for JPMorgan, declined to comment on the matter beyond what was in the bank's regulatory filings, noting the bank was cooperating with probes.

The distinction between hiring a relative of a foreign official who may be well connected, and offering employment to such a person in the express hope of winning specific business is key to proving FCPA violations, according to a report on the FCPA published last October by law firm Gibson, Dunn & Crutcher.

"DOJ and the SEC will examine the circumstances of the engagement to determine whether the purpose of the relative's hiring is to improperly influence the foreign official," the report noted, adding that in such cases FCPA violations may occur even if the employee is otherwise qualified for the job.

GREY AREA?

"If JPMorgan put the person down in their books as a legitimate hire, and then it turns out that the person is there just to get certain connections, then anything you pay can be considered a bribe," said the China-based lawyer, who was not authorized to speak publicly about the issue.

The SEC probe coincides with a broader focus by the U.S. government on China-related corruption and the impact on U.S. businesses and individuals. Violating the FCPA can result in criminal liabilities, the lawyer said, though in this case a likely outcome, if the U.S. government prevails, would be a civil fine and the admission of wrongdoing.

According to the New York Times, JPMorgan hired Tang Xiaoning, the son of Tang Shuangning, chairman of China Everbright Group <0165.HK>, a state-controlled financial conglomerate, and a former Chinese banking regulator. After the younger Tang joined JPMorgan, the bank secured several important assignments from the Chinese conglomerate, including advising a subsidiary on a stock offering, according to the newspaper.

The SEC is also probing JPMorgan's hiring of Zhang Xixi, the daughter of a now-disgraced Chinese railway official. The bank went on to help advise the official's company, which builds railways for the Chinese government, on its plans to go public, the newspaper said.

The bank has not been accused of wrongdoing, the New York Times said, citing a government document. There is no documentary evidence that Zhang Xixi or Tang Xiaoning were unqualified, but the SEC is checking whether the bank's Hong Kong office routinely won business from companies connected to its employees, the newspaper reported.

PRINCELING BANKERS

It's sometimes overstated how influential such hires can be, bankers and headhunters say.

When UBS Securities won a mandate to handle a more than $6 billion stock offering by PetroChina <601857.SS> in 2007, attention focused on the bank's earlier hiring of the daughter of a top executive at the government-run oil and gas company.

In that case, UBS's <UBSN.VX> investment banking division had no idea that the PetroChina CFO's daughter had been hired as a graduate trainee in the fixed-income division when they pitched for the deal, IFR magazine reported at the time. UBS was then the leading Asian equities franchise and a natural choice for the deal.

It's important to distinguish between well-connected junior hires who may work at a bank for a short time, and similarly connected professionals who go on to carve out a career for themselves in the financial industry.

"The industry is still a meritocracy and over the course of a few years, it pretty readily separates the wheat from the chaff - so even if a 'connected' person is hired, unless they perform, they too are shown the door," wrote Russell Kopp, managing director at Correlate Search, in an email.

The list of prominent princeling bankers in China includes Bank of America's Margaret Ren, the daughter-in-law of former Chinese Premier Zhao Ziyang, who has also worked at Bear Stearns, Citigroup and BNP Paribas <BNPP.PA>. When Ren was at Merrill Lynch, she shared the role of China investment banking chairman with Wilson Feng, whose father in-law is Wu Bangguo, former chairman of the National People's Congress. Feng left banking in 2009 to run an investment fund.

Other high profile names include Credit Suisse's China investment banking chairman Janice Hu, the granddaughter of former party chairman Hu Yaobang and a veteran banker in her own right. Wen Ruchun, the daughter of former premier Wen Jiabao, worked at Credit Suisse's Beijing branch for a year, according to a document obtained by Reuters.

For many children of the Chinese elite who are hired by Wall Street banks, it's their business school credentials as much as their family connections that get them a foot in the door, according to a Hong Kong-based managing director at a U.S. bank who is involved in hiring.

"These kids tend to be well educated. If Harvard Business School or Stanford let these influential people in, and those schools are on the list of places we tend to hire from, it's a natural process," said the banker.