Last May, according to a report by the New York Times, JPMorgan Chase received a request from the antibribery unit at the US Securities and Exchange Commission. The company complied, providing information on the hiring of Zhang XiXi. In August, the company disclosed it had also provided information on a second hire, that of Tang Xiaoning.
Why were these Chinese employees of interest to the SEC? Both are the children of current or former high-ranking Chinese officials. These types of hires, and there are scores of them across Wall Street banks, are the focus of a current SEC investigation into whether or not US banks have been offering “princelings”—the sons and daughters of China’s ruling elite—jobs or contracts in direct exchange for business.
Doing so would be in violation of the Foreign Corrupt Practices Act, a 1977 federal law that forbids US companies from offering a long list of items, from cash to plane tickets to parties to gifts, to a foreign official in exchange for business.
At this time, neither JPMorgan, nor any other US bank, has been formally accused of unethical behavior. Certainly, hiring children of the well-connected has long been a global business practice. But as the New York Times put it, “What is unusual about JP Morgan is that it hired the children of officials of state-controlled companies.”
Extensive reporting by the New York Times (see here and here) and Bloomberg (see here and here) exhaustively tracks the timeline from the point of hire of these individuals to, in many cases, a steep increase in business deals with companies run by their parents.
Consider Tang. He is the son of Tang Shuangning, a former Chinese banking regulator and the chairman of China Everbright Group, a financial conglomerate. It was only after the hiring of the younger Tang that JPMorgan secured significant business with his father’s company. As the Times put it, the company soon became one of JPMorgan’s “most prizes Asia clients” handling deals worth several hundred million dollars.
Zhang’s father, Zhang Shuguang, was at one point the deputy chief engineer for China Railway. After her hire, China Railways brought JPMorgan on board to help raise more than $5 billion in advance of the company’s initial public offering. Following the Beijing-Shanghai high-speed train collision in 2011, a similar deal in the works with JPMorgan fell through. The Chinese government, incidentally, found Zhang’s father guilty of corruption in accepting cash bribes for government contracts related to railway business and removed him from office.
But the most headline-grabbing revelation, tied to the highest-ranking official, was a November report by the New York Times on JPMorgan’s hiring of Lily Chang. Chang ran Fullmark Consulting, headquartered in Beijing, and was retained explicitly to secure business in China. She was paid, according to reports reviewed by the Times, $1.8 million dollars between 2006 and 2008. Chang reportedly received an MBA from the University of Delaware. But the name Lily Chang was a government-approved alias for Wen Ruchun, the only daughter of China’s former vice premier, Wen Jiabao.
Still, nepotism is not illegal. As one Chinese friend told me, “That’s the way it works in China.” Add to that the intense focus China’s elite families have on educating their children in the best western universities, and it is entirely plausible these young men and women are qualified employees.
Under the umbrella of the Foreign Corrupt Practices Act, in addition to parties and plane tickets, the term, “anything of value” is banned from being offered to secure an “improper advantage in retaining business.” Does the Chang, Zhang, or Tang case fall under this definition? Were their jobs, at the end of the day, simply bribes for business? That is for the SEC to prove. JPMorgan, to its credit, established in 2006 its own “Sons and Daughters” program to police its own hiring practices. Whether or not it did this successfully will be for the SEC to decide as well, and soon.
