FCPA Compliance and Ethics Blog

August 19, 2013

GSK in China: A Game Changer in Compliance

I have published my first eBook-GSK in China: A Game Changer in Compliance. In this eBook, I review the information on the GlaxoSmithKline bribery and corruption allegations in China to-date, what you can do about it as a compliance practitioner and what it may all mean for international companies doing business in China.

I am sure that you will find it useful going forward to your compliance challenges. It is available through Kindle for only $4.99. You can download a copy here and start reading about it now.

Welcome Back My Friends To The Show That Never Ends

Welcome back my friends, to the show that never end;

We’re so glad you could attend, come inside, come inside;

There behind the glass stands a real blade of grass;

Be careful as you pass, move along, move along.


Those lines come from the Emerson, Lake & Palmer (ELP) song, Karn Evil No. 9: First Impression, Part 2. I was introduced to the progressive rock trio, through the album Welcome Back, My Friends, to the Show That Never Ends…Ladies and Gentlemen, Emerson, Lake & Palmer, which was released on this date 39 years ago. I still think that this is the greatest live 3 disc album release by a single group ever. To say that the album blew me away would be an understatement. I was not exposed to too much prog rock in my podunk little hometown and even the signals of decent FM radio stations were fleeting, so this album was a revelation. I had been a rocker for some time but the musicianship of Keith Emerson, Greg Lake and Carl Palmer was simply unbelievable. For me the centerpiece was the epic three song trilogy of Karn Evil No. 9. So here’s to you lads, and I hope that you will do a full US reunion tour one day.

“Welcome back my friends” would certainly seem to be an excellent way to introduce today’s topic; that being the stunning report in the Sunday New York Times (NYT), that JP Morgan is under Foreign Corrupt Practices Act (FCPA) scrutiny in China for its hiring practices. In an article, entitled “Hiring in China By JPMorgan Under Scrutiny”, reporters Jessica Silver-Greenberg, Ben Protess and David Barboza broke the story that the Securities and Exchange Commission (SEC) is investigating JP Morgan Chase to determine “whether JPMorgan Chase hired the children of powerful Chinese officials to help the bank win lucrative business in the booming nation.” The article is based upon “a confidential United States government document”.

The article details several situations where JPMorgan hired the children of Chinese government officials and sometime thereafter the bank was able to secure work from the business or industry of a parent of a hired employee. The examples included the hiring of a “son of a former Chinese banking regulator who is now the chairman of the China Everbright Group, a state-controlled financial conglomerate, according to the document, which was reviewed by The New York Times, as well as public records. After the chairman’s son came on board, JPMorgan secured multiple coveted assignments from the Chinese conglomerate, including advising a subsidiary of the company on a stock offering, records show.” In another instance, the bank hired the daughter of a Chinese railway official. After hiring the daughter, JP Morgan was hired to assist the company to go public.

The FCPA Professor was quoted in the NYT article for the following, “While the hire of a son or daughter itself is not illegal, red flags would be raised if the person hired was not qualified for the position, or, for example, if a firm never received business before and then lo and behold, the hire brought in business.” In blog post, entitled “JPMorgan’s Hiring Practices In China Under Scrutiny”, the FCPA Professor reviewed some enforcement actions “where the conduct at issue involved the hiring of children or spouses of alleged “foreign officials.”” He pointed to the “Tyson Foods enforcement action, part of the FCPA conspiracy alleged was “to place the wives of the [Mexican government] veterinarians on [a subsidiary company’s] payroll, providing them with a salary and benefits, knowing that the wives did not actually perform any services…”. According to the Department of Justice (DOJ), approximately $260,000 “in improper payments were made to the … veterinarians, both indirectly and directly, including through payments to wives of [the] veterinarians.” Next, in the UTStarcom enforcement action, the FCPA Professor noted that the “SEC’s allegations included that the company provided foreign government customers or their family members with work visas and purportedly hired them to work for [the company] in the U.S., when in reality they did no work for the company.” Finally, the Houston-based company Paradigm, got into FCPA hot water “during the same time frame as [a business deal was being discussed with an alleged Mexican “foreign official”], the same [alleged “foreign official”] requested that Paradigm Mexico hire his brother.” The DOJ stated: “Paradigm Mexico acquiesced to that demand and hired the decision maker’s brother as a driver. While employed at Paradigm Mexico, the brother did perform some work as a driver.”

The NYT notes that “there is nothing inherently illicit about hiring well-connected people. To run afoul of the law, a company must act with “corrupt” intent, or with the expectation of offering a job in exchange for government business.” However a company needs to be very careful when hiring such a family member. Indeed, I advise clients that the following definition should be used for a government official”

A “Foreign Official” for purposes of the FCPA and UK Bribery Act mean any:

  • non-U.S. government official (includes municipal, provincial, central, federal or any other level of government);
  • officer or employee of a foreign government, or any department, agency, ministry or instrumentality thereof (includes executive, legislative, judicial or regulatory);
  • person acting in an official capacity on behalf of a foreign government or any department, agency, ministry or instrumentality thereof;
  • officer or employee of a company or business owned or controlled in whole or in part by a foreign (non-U.S.) government (“state owned enterprise”);
  • officer or employee of a public international organization such as the United Nations or World Bank;
  • member of a royal family;
  • foreign political party, member, or official thereof;
  • candidate for foreign political office; and
  • elected officials of foreign countries, civil servants and military personnel.

The term also includes the children, spouse or other close relatives of Foreign Officials. If a child, spouse or other close relative is hired there should be close scrutiny of how the request for the hire was made, who made the request and what are the qualifications of the child, spouse or other close relative for the job in question? There should also be a close look at the work of the proposed candidate to ascertain if anything they might do for the prospective employer would in any way touch upon the business relationship with the government official.

JP Morgan has come under quite a bit of regulatory scrutiny lately. The NYT notes that is the “focus of investigations in the United States by at least eight federal agencies, a state regulator and two foreign nations.” Most of these investigations revolve around the financial crisis and its aftermath or the London Whale incident. Even if one discount’s the ‘too big to manage’ moniker, the NYT does note that a FCPA investigation and any enforcement action can be quite different. “The agency’s bribery inquiry could pose an even steeper challenge to JPMorgan. Although banks are prone to the occasional trading blunder — JPMorgan produced record quarterly profits despite the losses in London last year — a corruption inquiry could leave a more lasting mark on its reputation. It might also spur the Justice Department to open a criminal investigation.”

So after the GlaxoSmithKline PLC (GSK) bribery and corruption investigation has quieted down and settled in for the long haul, the NYT breaks this story about yet another avenue for potential corruption in China. As ELP might say “Welcome back my friends, to the show that never ends.”

For a video clip of ELP playing Karn Evil No. 9, First Impression, Pt. 2 at the 1974 California Jam, click here.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2013

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