Day 3 of One Month to Better Compliance Through HR

FCPA Compliance Report

Today, I conclude my review of FCPA enforcement actions that involved the corporate hiring function. From these three cases I have considered, it is clear that HR must be involved in compliance and if HR hiring controls are over-ridden there must be an appropriate consideration of the risk management issues.

In November 2016, JP Morgan Chase (JPM) and its subsidiary, JPMorgan Securities (Asia Pacific) Limited (JPM-APAC) resolved its FCPA matter, obtaining a NPA from the DOJ with a penalty of $72MM, agreeing to a Cease and Desist Order (“Order”) from the SEC, with a penalty consisting of profit disgorgement and interest of $135MM, and reaching an agreement with the Federal Reserve Bank (Fed) for a Consent Cease and Desist Order (Fed Order) to put in place a best practices compliance program and pay a penalty of $61MM. The total fines and penalties paid by JPM for its violation of the FCPA was $268 MM.

The conduct involved JPM-APAC’s Client Referral Program, named the “Sons & Daughters Program” (Sons and Daughters), which targeted children of high Chinese government officials and employees of state-owned enterprises, other close family members and even close friends and associates of foreign officials and employees of state-owned enterprises for hiring in a blatant attempt to win business. It was designed, created and implemented by the top management of JPM-APAC, which went so far as to keep a tally of those persons hired by JPM-APAC and JPM tied to specific business development. As noted in the NPA, “certain senior executives and employees of (JPM-APAC) conspired to engage in quid pro quo agreements with Chinese officials”. The language quid pro quo is replete throughout the settlement documents because that is the specific language used by JPM-APAC personnel when discussing Sons and Daughters.

These actions led to over $100MM in profit to JPM. While JPM was certainly aware that many of these hires did not meet the companies stringent hiring requirements, there never seemed to be oversight of this illegal program or even investigation into the clear red flags presented by the company’s actions. What is more JPM knew the high-risk in hiring family members of foreign officials as far back as 2001 and indeed, had a written policy prohibiting such conduct. However, in 2006, this program morphed into a targeted program “directly attributable linkage to business opportunity”, and lasted until 2013. Over seven years, over 100 family members went through the program, with parents in more than 10 different Chinese government agencies. The program extended from new hires to summer internships to lateral hires.

JPM-APAC tracked the metrics of Sons and Daughters, the with “a spreadsheet that tracked hires to specific clients, while also tracking revenue attributable to those hires.” This spreadsheet was so detailed that it delineated “columns for each hire, the referring client, the relationship of the candidate, and the amount of revenue generated attributable to the hire in U.S. dollars.” Finally as noted in the NPA, a of the purpose of this level of documentation “was to track deals that resulted from the hires and measure revenue associated with Client Referral Program hires.” So the corruption scheme and the benefits obtained therefrom were fully documented.

The Son and Daughters program began as a FCPA risk management tool and listed five requirements to be considered for hire at JPM-APAC: “(1) whether the applicant was qualified for the position; (2) whether the applicant had gone through the normal interviewing process; (3) whether the referring client/potential client was government-related; (4) whether the firm was actively pitching for any business from the client/potential client; and (5) whether there was an “expected benefit to JPMorgan” for hiring the referred candidate.” These criteria were designed to act as internal control to prevent illegal hiring under the FCPA but it morphed into a program to disguise the true reason for these hires.

Worse, it appears that both the HR and compliance functions were complicit in the scheme to violate the FCPA because on at least one instance where the JPM-APAC business unit sponsor noted on the form “[t]he hiring of this candidate will place JPMorgan in a more favorable position for securing future business from the client.” This business justification morphed into the next iteration, “The candidate will be trained by JPMorgan for couple of years and then go to local bank. Thus, will bring more business”; all because the company’s compliance and HR functions “instructed the JPMorgan-APAC employee to remove the offending language, writing, “[h]iring of the candidate should not be for the purposes of securing future business of the firm. Please remove.” Further damning to the JPM-APAC compliance and HR functions was that of the more than 200 candidates hired through the Sons and Daughters program, none were rejected by either HR or compliance.

In addition to the tying of business to the hiring’s under the Sons and Daughters program, there was the additional problem that these hires did not meet JPM’s basic hiring and retention standards. According to the Order, one JPM-APAC representative described those hired under the program “as a protected species requiring [senior management] input. His reporting line to you is accountable but like national service.” Both the Order and NPA were replete with document evidence that the hires under Sons and Daughters did not meet minimum hiring standards and they often failed to meet minimum standards for retention at the company. The Box Score is a summary from the NPA of some of the candidates which clearly did not meet JPM hiring standards, yet who were hired and where such hires under the Sons and Daughters program brought benefits to JPM.

Foreign Official or SOE employee	Reasons for hire	Candidate deficiencies	Deficiencies as JPM employee	Benefit tied to hire
Client 1	Maintain good relationship with client			$4.82MM profit
Client 2	Quid pro quo for business			JPM-APAC lead underwriter on IPO
Client 3		Not very impressive, poor GPA	Attitude issue. He doesn’t seem to care about work. Don’t need to have an intern doing nothing	JPM-APAC lead underwriter on IPO
Client 4	Promised IPO work	Not qualified for job at JPM. Tech and quantitative skills ‘light’	Communication skills and interest in work lagged his peers	JPM-APAC lead underwriter on IPO. $23.4MM profit
Government Official 1	Father would go the extra mile to help JPM	Worst business analyst candidate ever seen	Immature, irresponsible and unreliable. Sent out sexually inappropriate emails	JPM-APAC lead underwriter on IPO
Government Official 2	Hire would ‘significantly’ influence role of JPM-APAC	Unlikely to meet hiring standard	New York not comfortable with his work. Recommends he follow a different career path	JPM-APAC lead underwriter on IPO

One thing that the resolution decidedly does not stand for is the proposition that a company can never hire a family member of a foreign official or employee of a state-owned enterprise. Indeed, it was one JPM-APAC compliance officer (albeit a new one) in 2013 who stopped the entire Sons and Daughters program with the following reason for denying a family member a position at the company, writing, “I’m afraid from an anti bribery [sic] and corruption standpoint, we cannot create positions to accommodate client requests….”. This statement clearly shows that when an official refers a family member for hire, a red flag should go up. It also demonstrates why compliance should be involved in any high-risk endeavor. If there is no position which the candidate can fill based upon their own qualifications at your company, that should be the end of the discussion, full stop.

What are the criteria compliance can advise to HR to operationalize the compliance issues in hiring? There are three questions I suggest be used to analyze the hiring of a family member of foreign official or state-owned enterprise. They can also be installed as internal controls.

1. Does the candidate meet your firm’s hiring criteria?
2. Did the foreign official whose family member you are considering for hire demand or even suggest your company hire the candidate?
3. Has the foreign official made or will make a decision that will benefit your company?

If the answer to the first question is “No” and the second two “Yes”, you may well be in a high-risk area of violating the FCPA. You should investigate the matter quite thoroughly and carefully. Finally, whatever you do, Document, Document, and Document your investigation, both the findings and the conclusions.

These questions can be set up as internal controls. This is another example of how a company can operationalize compliance and burn it into the fabric and DNA of an organization. Further, it provides another level of oversight or “a second set of eyes” on the hiring process around hires that are high-risk under the FCPA or other anti-bribery/anti-corruption regime such as the UK Bribery Act.

Three Key Takeaways

1. Never institutionalize your illegal conduct.
2. Develop a set of HR internal controls around hiring and compliance.
3. Always put a second set of eyes on any exceptions granted.

This month’s series is sponsored by Advanced Compliance Solutions and its new service offering the “Compliance Alliance” which is a three-step program that will provide you and your team a background into compliance and the FCPA so you can consider how your product or service fits into the needs of a compliance officer. It includes a FCPA and compliance boot camp, sponsorship of a one-month podcast series, and in-person training. Each section builds on the other and provides your customer service and sales teams with the knowledge they need to have intelligent conversations with compliance officers and decision makers. When the program is complete, your teams will be armed with the knowledge they need to sell and service every new client. Interested parties should contact Tom Fox.

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