The U.S. government’s bribery investigation into JPMorgan’s employment of at least two Chinese bankers has prompted banks and other corporations across the globe to take a close look at their hiring practices.
One strategy that is certain to come under scrutiny is the “client hire.”
Enlisting the relative of a top customer for a summer internship or an entry-level job is common to businesses worldwide, but it’s especially rife in banking.
The industry has held strong to a well-worn mechanism where clients will “pass on” CVs or resumes of their relatives or friends to coverage bankers, whose role is to visit top executives of companies in a particular industry or sector and sell them the bank’s services.
The bankers, in turn, make sure those CVs reach the staff in charge of that year’s intern list.
“It happens all the time where a coverage guy will toss over some client kid’s CV,” said a Hong Kong based investment banker. “Finance is about doing favors for people. It’s what makes the world go round.”
Client hires don’t necessarily by-pass the usual battery of rigorous tests and interviews that other applicants must take.
But, according to headhunters and bankers interviewed by Reuters, when it comes down to two otherwise similarly qualified candidates, the one with influential connections will win out.
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 violations of the U.S. Foreign Corrupt Practices Act.
“Frankly, we’ve got a list of all our Chinese nationals and are going through it right now checking all the connections just to be safe,” said a source at a U.S. bank in Hong Kong.
‘Politically Exposed Persons’
The practice is more prevalent in China, bankers say, because the culture in business of “guanxi”, based around connections and the exchange of favors, encourages clients to push CVs on bankers, while having an “in” with state-owned firms is seen as more effective in winning deals than elsewhere.
Some banks have become more rigorous in vetting potential China hires in recent years as the result of increased regulatory scrutiny, sources at those firms say. These checks can include a “PEP” (Politically Exposed Person) check on various databases.
Following the conviction in 2012 of Morgan Stanley’s Garth Peterson for FCPA violations including bribery of a Chinese official, the U.S. investment bank has become extremely rigorous in vetting potential hires and their backgrounds, sources at the bank told Reuters.
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 FCPA, a source told Reuters.
FCPA violations can come with criminal liability, though lawyers say civil fines and admission of wrongdoing is a more likely outcome for JPMorgan should the government win its case.
Neither of these outcomes is something banks wish to face, meaning their list of well-connected employees is getting added attention since news of the JPMorgan probe.
“Any lawyer or compliance person sitting in Asia who read about the JPMorgan probe will have gone straight to HR and said ‘give me a list’ and started conducting reviews. I’d be very surprised if anyone’s sitting still on this,” said William McGovern, partner at law firm Kobre & Kim in Hong Kong and a former branch chief at the SEC in Washington and New York.
Productive Professionals, Or Not…
Some of these princeling hires are productive professionals. Others are not.
“He was totally useless, would turn up late, always had doctor’s appointments, would cancel catch-up coffees…,” said another banker of an intern at his firm who was the son of an African government official.
In another example, a China-based investment banker at a U.S. firm said a private equity client slid the CV of a “close friend” across the table at the end of a long meeting discussing potential investments the fund might make, asking if the banker knew of any starting positions available.
“We took him on as an intern, but he would come in at 10 a.m. every morning and do nothing all day,” the banker said.
When the nephew of a prominent diplomat won a role a European bank as a level 1 analyst in its M&A division, he would have beaten thousands of applicants with top grades from the world’s elite universities who apply for such coveted starter positions in the financial industry every year.
But the nephew proved a disappointment.
“He was a complete donkey. But of course there was no way to get rid of him. After 2-3 years, he finally left the bank and everyone was relieved,” said a Paris-based banker familiar with the situation.
While the majority of such hires are qualified to perform their jobs and do indeed work hard, the practice of tolerating those like the diplomat’s nephew who coast on their connections could come under increased scrutiny given that so-called ‘sham’ positions could trigger an FCPA violation.
“The message is not that you can’t hire relatives of clients or government officials, which is a pervasive practice, it’s that you have to make sure you know what these folks have been hired to do and ensure they are actually doing it,” said Kobre & Kim’s McGovern.