A scheme by investment bank JP Morgan Chase & Co to hire the children of top Chinese officials and businessmen has provided a rare spotlight into how hard it is for foreign investment banks to make money in China.
The Wall Street bank has been fined $US264 million ($350 million) by US regulators for its "sons and daughters program," which senior bankers in the Asia-Pacific used to circumvent JP Morgan's normal hiring procedures.
The scheme rewarded clients with 100 full-time jobs and internships for their children in return for commercial business. It generated $US35 million in profits and $US100 million over six years - about $US1 million per child.
China and other developing parts of Asia are notoriously difficult markets for foreign investment banks. In the past few weeks Goldman Sachs has fired bankers in the region because they aren't making enough money. Australia has been spared the cuts because the business is profitable.
Many of the hires, who were usually employed as associates, analysts or summer interns, weren't successful bankers. One was described by a JP Morgan employee as "the worst [business analyst] candidate they had ever see[n]." Another napped at work. Yet another was considered only good enough for photocopying work.
They were paid the same as entry-level bankers even if they did no productive work. Two were posted to the bank's New York office.
Blatant misconduct
"The misconduct was so blatant that JPMorgan investment bankers created 'Referral Hires vs Revenue' spreadsheets to track the money flow from clients whose referrals were rewarded with jobs," said Kara Brockmeyer, the chief of the division at the US Securities and Exchange Commission that prosecuted the bank.
"The firm's internal controls were so weak that not a single referral hire request was denied."
The bankers running the program acknowledged to themselves that it was against the rules. In early 2006 a managing director in the Asia-Pacific region sent an email to all his fellow regional investment bankers setting out the bank's policy and a way around it.
"As you know, the firm does not condone the hiring of the children or other relatives of clients or potential clients of the Firm . . . for the purpose of securing or potentially securing business for the Firm," he wrote, according to legal filings.
"In fact, the firm's policies expressly forbid this. There are no exceptions.
"In light of that, the firm has developed a 'Sons & Daughters' program that sets out clear parameters within which we are prepared to analyze and potentially make such offers."
To obtain approval for their hires, bankers and administrative staff lied on company questionnaires, according to US regulators.
After a year, they used a compliance questionnaire where some answers were already filled in, including the words 'No expected benefit' in response to a question that asked the benefit of hiring a person referred by a client.
More than two dozen JP Morgan employees have been fired or disciplined as a consequence of the the investigation, which the bank said it cooperated with.
Several other banks are also under investigation for similar practices, including Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC Holdings, Morgan Stanley and UBS, The Wall Street Journal reported.
