JPMorgan Case Offers Trifecta of Off-the-Rails FCPA Enforcement

The Foreign Corrupt Practices Act has specific elements that must be met in order for there to be a violation.  However, with increasing frequency it appears that the Department of Justice and the Securities and Exchange Commission have transformed FCPA enforcement into a free-for-all corporate ethics statute in which any conduct the enforcement agencies find objectionable is fair game to extract a multi-million dollar settlement from a risk-averse corporation.

A recent example is the $202.6 million FCPA enforcement action against JPMorgan based on alleged improper hiring and internship practices in the Asia-Pacific region The SEC’s administrative order, not subjected to any judicial scrutiny, found in summary fashion that: “Investment bankers at JPMorgan’s subsidiary in Asia, JPMorgan Securities (Asia Pacific) Limited (“JPMorgan APAC”), created a client referral hiring program to leverage the promise of well-paying, career building JPMorgan employment for the relatives and friends of senior officials with its clients in order to assist JPMorgan APAC in obtaining or retaining business.” According to the SEC, many of JPMorgan APAC’s clients were state-owned entities, and the jobs and internships to relatives and friends of alleged “foreign officials” constituted a “personal benefit to the requesting officials in order to obtain or retain investment banking business or other benefits from the firm.”

While the SEC’s order contains extensive findings regarding JPMorgan APAC personnel (a separate and distinct legal entity from JPMorgan), the order contains nary a meaningful substantive finding regarding individuals at JPMorgan (the actual respondent in the SEC’s action). For instance, there was no finding or inference that anyone at JPMorgan had corrupt intent, a required statutory element.

Indeed the SEC’s many other findings about JPMorgan’s FCPA compliance program strongly suggest the absence of corrupt intent. For instance, the SEC acknowledged, among other things, that JPMorgan “recognized the FCPA risks in hiring the relatives of foreign government officials,” “took steps to educate its employees on the potential dangers,” and “instituted training for employees in the [APAC] region specifying that pre-clearance from compliance was required before JPMorgan APAC could hire Referral Hires.”

Rather, the SEC’s order simply states in conclusory fashion that, “JPMorgan violated the [FCPA] anti-bribery provisions … by corruptly providing valuable internships and employment to relatives and friends of foreign government officials in order to assist JPMorgan in retaining and obtaining business.”

In other words, the SEC allowed legal liability to hop, skip, and jump around JPMorgan’s organizational structure even though – to use the terms found in the DOJ and SEC’s FCPA Guidance – there were no findings that JPMorgan itself “participated sufficiently in the activity, directed its subsidiary’s misconduct or otherwise directly participated in the bribe scheme,” or had “knowledge and direct[ed] the subsidiary’s actions.”

Even if the corrupt intent of JPMorgan APAC employees could somehow be imputed to JPMorgan (and black letter law strongly cautions against this), the problematic issue still remains: As required by the FCPA’s anti-bribery provisions, what thing of value did the alleged Chinese “foreign officials” receive?

Surely the internships and jobs constituted a thing of value to the individuals who received them, but the FCPA’s statutory provisions clearly state that the thing of value must go “to” a foreign official. Perhaps recognizing this statutory requirement, the SEC creatively found that the internships and jobs to relatives were a “personal benefit to the requesting officials.” Whether a court would agree with this dubious assertion is an open question (as are many other issues in certain recent FCPA enforcement actions), because there was no judicial scrutiny of the SEC’s enforcement action against JPMorgan.

Around the same time the JPMorgan enforcement action was resolved in the absence of judicial scrutiny, there was judicial scrutiny of the same enforcement narrative in two other cases.

In the first, the Libyan Investment Authority (LIA) brought a civil action in a United Kingdom court against Goldman Sachs to rescind certain transactions and to obtain the repayment of premiums from Goldman Sachs. The LIA’s main claim asserted that Goldman Sachs procured the LIA to enter into the transactions by the exercise of undue influence and as to a certain transaction (the so-called April Trades) the LIA alleged that “Goldman Sachs improperly influenced the deputy chairman of the LIA, Mustafa Zarti, to cause the LIA to agree to the trades by offering his younger brother, Haitem Zarti, a prestigious internship at the bank.” However, the judge concluded:

In my judgment it is going much too far to say that the internship influenced Mr. Zarti to place more business with Goldman Sachs than he otherwise would have done or that the offer had a material influence over the LIA’s decision to enter into the April Trades. […] I find that Mr Mustafa Zarti was keen for his younger brother to work as an intern, though there is no evidence as to why he thought this was important. Although the offer of the internship may have contributed to a friendly and productive atmosphere during the negotiation of the April Trades, it did not have a material influence on the decision of Mr Zarti and the LIA to enter into the April Trades.

In the second case, U.S. v. Tavares, the government alleged that defendants ran a corrupt hiring scheme at the Massachusetts Office of the Commissioner of Probation (OCP) by catering to hiring requests from members of the state legislature with the hope of obtaining favorable legislation for the Department of Probation and OCP. At trial, the defendants were convicted of various criminal offenses, and an appeal followed. The  U.S. Court of Appeals for th First Circuit began its opinion by noting that the defendants “misran the Probation Department and made efforts to conceal the patronage hiring system.” However, the court noted, “bad men, like good men, are entitled to be tried and sentenced in accordance with the law” and that “not all unappealing conduct is criminal.”

In short, the First Circuit found that the “government has not in fact demonstrated that the conduct satisfies the appropriate criminal statutes.” Citing the Supreme Court’s opinion in U.S. v. Sun-Diamond Growers of Cal. 526 U.S. 398 (1999), the court stated that the “government must prove a link between a thing of value conferred upon a public official and a specific official act for or because of which it was given.” The court next stated:

In that vein, the Government cannot show the requisite linkage merely be demonstrating that the gratuity was given ‘to build a reservoir of goodwill that might ultimately affect one or more of a multitude of unspecified acts, now and in the future.

[…]

The Government’s evidence as to the gratuities predicates does not show adequate linkage between the thing of “substantial value” conferred by [defendant] (the jobs) and an “official act” performed or to be performed. […] Many of the Government’s arguments are predicated on bootstrapping: because [defendant] was constantly conferring with legislators and hiring based on legislative preferences, any “official act” taken by an affected legislator must satisfy the nexus requirement. But we do not read the gratuities statute so broadly: the Supreme Court in Sun–Diamond “offered a strictly worded requirement that the government show a link to a ‘specific official act’ to supply a limiting principle that would distinguish an illegal gratuity from a legal one,” a principle unnecessary “in the extortion or bribery contexts.” Given a choice between treating a gratuities statute as “a meat axe or a scalpel,” the Supreme Court chose the latter, and we follow suit.

It is hard to ignore the parallels from the two recent contested actions including the First Circuit’s reminder that “not all unappealing conduct” is in violation of potentially relevant statutes. Yet, it sure seems that the enforcement agencies have transformed FCPA enforcement into a free-for-all corporate ethics statute in which any conduct the enforcement agencies find objectionable is fair game to extract a multi-million dollar settlement from a risk-averse corporation, and the JPMorgan action is merely the latest example.

The SEC’s finding that JPMorgan violated the FCPA’s anti-bribery provisions is merely one component of the trifecta of off-the-rails FCPA enforcement represented by the JPMorgan enforcement action. A second component relates to the SEC’s finding that JPMorgan violated the FCPA’s books and records provisions. In prior FCPA guidance, even the SEC has acknowledged that “records which are not related to internal or external audits or to the four internal control objectives set forth in the [FCPA] are not within the purview of the [FCPA’s] accounting provisions.”

In this regard, it is notable that the only books and records the SEC found to be problematic were JPMorgan APAC questionnaires and other internal records related to its internship and hiring program. No JPMorgan books or records were found to be problematic, and even the problematic JPMorgan APAC books and records were clearly not financial or accounting documents which reflect “transactions and disposition of the assets” of JPMorgan as required by the FCPA’s provisions.

The third component of the trifecta of off-the-rails FCPA enforcement represented by the JPMorgan enforcement action relates to the SEC’s finding that JPMorgan violated the FCPA’s internal controls provisions.

The SEC’s findings were alarming on several levels. For starters, the statutory standard is that JPMorgan was required to have internal accounting controls “sufficient to provide reasonable assurance” that the statutory objectives are met, with “reasonable” specifically defined to mean “such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.” The SEC’s finding that JPMorgan lacked an “effective system of internal controls” or that its controls were “insufficient to prevent or detect” the problematic internships or hires are simply standards that do not exist in the FCPA.

Not only are these SEC articulated standards not found in the FCPA, but the only judicial decision to directly address the substance of the internal controls provisions specifically states that “the definition of accounting controls … comprehend[s] reasonable, but not absolute, assurances ….” Moreover, even SEC guidance relevant to the internal controls provisions states that the “accounting provisions principal objective is to reaching knowing or reckless conduct” by the issuer.

Further alarming is that many of the internal controls the SEC found most problematic were those of JPMorgan APAC, not JPMorgan the actual respondent in the SEC’s enforcement action. Per the SEC’s own findings, JPMorgan had existing internal controls relevant to internship and hiring practices, but JPMorgan APAC employees acted “in contravention of company policy” and failed to “follow the firm’s internal accounting controls.” Per the SEC’s own findings, JPMorgan APAC employees “often provided inaccurate or incomplete information as part of the legal and compliance review designed to prevent these violations or withheld key information so that the Referral Hires would pass compliance review” and otherwise “provided inaccurate or incomplete answers to secure approval for hires without revealing the links to business as a result of certain Referral Hires.”

Against this backdrop, it is nothing short of astonishing that the SEC found JPMorgan in violation of the internal controls provisions, which require issuers to “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances” that the statutory objectives are satisfied.

In short, it is difficult to square existing legal authority, as well as enforcement agency guidance, with the findings in the JPMorgan enforcement action, and anyone who values the rule of law should be alarmed.

This post comes to us from Mike Koehler, who is a professor at the Southern Illinois University School of Law and the founder and editor of the FCPA Professor website. The post is based on his recent article, “JPMorgan – A Trifecta of Off-the-Rails FCPA Enforcement,” available here.

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