Citigroup Inc., one of the largest global banks, announced it is under investigation by the U.S. Securities and Exchange Commission (SEC) for hiring candidates based on their relationships with foreign government officials.
In a regulatory filing on Feb. 24, Citigroup announced that the SEC and other agencies are probing “the hiring of candidates referred by or related to foreign government officials.” The bank did not disclose what countries or officials are involved.
The latest inquiry into Citigroup follows and resembles investigations into other global banks and their hiring of so-called “princelings,” or children of government officials or heads of state-owned enterprises in Asia. Companies have hired princelings in hope of winning business from local politicians or business executives, mostly in China.
Such probes into a widespread industry practice have long been expected, but they serve to further crimp the competitiveness of Western banks in an increasingly difficult market.
Starting in 2014, global banks including Goldman Sachs, UBS, HSBC, and Credit Suisse have received letters from the SEC seeking information related to their hiring practices in Asia. The practice is widespread beyond the banking sector: San Diego-based chipmaker Qualcomm, for example, reached a $7.5 million settlement with the SEC last year after it was investigated for hiring princelings.
‘Quid Pro Quo’
Last November, New York-based JPMorgan Chase agreed to pay over $264 million to settle U.S. probes into its hiring of children of well-connected officials and executives in China. JPMorgan was the first global bank to settle with U.S. authorities over hiring practices in China.
“JPMorgan engaged in a systematic bribery scheme by hiring children of government officials and other favored referrals who were typically unqualified for the positions,” said Andrew Ceresney, former director of the SEC’s Enforcement Division, in a press release after the JPMorgan settlement.
According to SEC records, JPMorgan bankers kept spreadsheets to track the hiring of princelings and the new business brought in by these relationships. An email from a Hong Kong banker—who copied then-head of JPMorgan’s Asia-Pacific investment banking—even inquired upon how to “get the best quid pro quo” deal from the parents of such princelings.
Among the hirings probed by regulators was that of Tang Xiaoning, the son of Tang Shuangning, chairman of the government-owned financial conglomerate China Everbright Group. According to government documents obtained by The New York Times in 2013, “JPMorgan secured multiple coveted assignments from the Chinese conglomerate” after the hire.
It’s a tightrope for banks to walk: Investment banking is a relationship business, and the business culture in Asia emphasizes personal relationships, or “guanxi” in Chinese. In some cases, JPMorgan was on the receiving end of referral requests to hire such princelings by senior executives of existing clients, according to SEC records.
Global investment banks rushed into the Chinese market in the early 2000s without the opportunity to build a solid foundation, which requires years of cultivating relationships. The “quid pro quo” practices shown in JPMorgan emails obtained by regulators seemed shallow and lacked real “guanxi.”
JPMorgan was far from the first bank to use its princeling hires as leverage. According to a Bloomberg report, JPMorgan ramped up its hiring program after the bank lost a key deal to competitor Deutsche Bank in 2009. The daughter of the client’s chairman worked for Deutsche.
It’s not hard to see how “quid pro quo” deals could be tempting for global banks operating in an often inhospitable market. Banking is a protected core industry under the Chinese Communist Party, and Western banks have been losing market share to domestic Chinese competitors over the last decade. Advisers to companies raising capital often come across sensitive corporate financial data—information Beijing may not want foreign banks to see.
Take a quick glance at investment banking league tables for the Asia-Pacific region and it becomes evident that foreign banks face an uphill battle in China. Many Western investment banks are retrenching their business in China. Among the top equities advisers in the Asia-Pacific region (excluding Japan), China International Capital Corp. is No. 1 and Goldman Sachs is the only non-Chinese bank among the top five bookrunners, according to Dealogic. There are no foreign banks among the top five Chinese onshore debt advisers.
It’s common for U.S. corporations to hire the sons or daughters of American politicians and business executives. American universities also compete to admit the children of powerful politicians, business executives, and celebrities with the hope of winning students who will not only pay full tuition, but make sizable donations in the future.
But companies operating in emerging markets face greater scrutiny over corruption. The ongoing SEC investigations and settlements reached so far are related to the U.S. Foreign Corrupt Practices Act (FCPA), which bars U.S. corporations from engaging in bribery overseas.
“Anti-bribery provisions of the FCPA prohibit … authorization of the payment of money or anything of value to any person while knowing that all or a portion of such money or thing of value will be offered, given, or promised directly or indirectly to a foreign official to influence … or to secure any improper advantage,” according to the Department of Justice.
The regulators interpret the hiring of princelings to be bribing Chinese officials in order to directly curry favors and win business.
In the case of JPMorgan, the bank’s hiring of princelings clearly wasn’t just a one-off idea or an under-the-table strategy carried out by one department. The bank ran a well-orchestrated program internally named “Sons and Daughters.” The plan was documented and recorded within memos and tracked on spreadsheets, with the specific goal of winning new business through the princelings.
That is the difference between a “wink wink, nudge nudge” arrangement and a documented program. And it came at a cost of $264 million to JPMorgan shareholders.