JP Morgan, Sons & Daughters, and the Rule of Law

One of the more interesting ongoing Foreign Corrupt Practices Act investigations involves allegations that the investment banking giant JP Morgan’s “sons and daughters” program in China. According to media reports, JP Morgan’s China and Hong Kong offices offered jobs, and in some cases consulting contracts, to the children of well-connected officials in China (including the heads of state-owned enterprises and senior party officials) in return for lucrative business opportunities in the Chinese market (see, for example, here and here). The case is still under investigation, the facts are still in dispute, and the government enforcement agencies have not yet accused JP Morgan of any of its executives of any wrongdoing. Yet there have been hints that if the facts turn out to be as bad as they look, the U.S. government will consider JP Morgan’s so-called “sons & daughters” hiring program to have violated the FCPA’s anti-bribery provisions. That conclusion would depend crucially on the premise that providing a job to the (adult, non-dependent) child of a foreign official counts as providing “anything of value” to the official. (Things would be different if there were evidence that the officials’ children funneled some of the money back to their parents, but at the moment no such evidence has come to light.)

About six months ago, Professor Andrew Spalding (who has also contributed a number of insightful posts to this blog – see here, here, and here) published a provocative four-part series at the FCPA Blog (see here, here, here, and here) raising serious concerns about this legal theory, and suggests that applying it in JP Morgan’s case would be not only inappropriate, but a serious affront to fundamental legal principles. Somewhat unusually, I find myself in disagreement with Professor Spalding. Indeed, if the facts turn out to be as bad as early media reports suggest, I think that this is an easy case. To my mind, it’s straightforward that offering a benefit to a third party can count as offering “anything of value” to a foreign official under the FCPA, and nothing in the DOJ’s prior opinion releases would constrain the U.S. government from applying that principle in this case.

To explain my disagreement with Professor Spalding, I first need to say a bit more about his position. Simplifying a bit, Professor Spalding makes three main arguments:

  • First, he asserts that in the 1980s the Department of Justice published a pair of Opinion Releases (Release 82-04 and Release 84-01) that established a “very clean, very simple” bright-line rule, according to which (in Professor Spalding’s words) “the job [for an official’s relative] is not itself a ‘thing of value’ to the official” and that “as long as nothing of value — money or otherwise — passes from the hired relative to the official, hiring that relative does not violate the FCPA.”
  • Second, Professor Spalding acknowledges the government’s position–spelled out clearly in the FCPA Resource Guide–that donations to a foreign official’s favorite charity can count as a “[]thing of value” for FCPA purposes, and he recognizes that this could be considered an analogous case to giving a job to an official’s relative. But Professor Spalding views this a close question that would need additional explanation. (He characterizes this analogy as “not … counter-intuitive, but it requires some explaining [and] we still need a legal theory.”)
  • Third, he suggests that even if the above theory is plausible, if the U.S. government were to adopt that theory and apply it in JP Morgan’s case, notwithstanding the earlier Opinion Releases, it would be “contrary to the rule of law on the most fundamental level,” and moreover that if the SEC and DOJ resolve this case without “lay[ing] down a clear rule for all to follow,” it would show the world that the FCPA does not in fact promote the rule of law.

My take is a bit different. Before addressing the relevance, if any of the DOJ’s prior Opinion Releases, let me first make the case that offering a benefit to a third party can count as a bribe to a foreign official is consistent with the language and purpose of the statute. The FCPA makes it unlawful to provide anything of value to a foreign official, without regard to why the official places value on that thing. The choice of terms seems deliberately broad. That understanding is much more consistent with the purpose of the FCPA, which after all is to prevent entities under US jurisdiction from distorting decision-making by foreign officials through improper inducements. From the perspective of the foreign government and its citizens, it doesn’t much matter what those inducements are, or whether the official was motivated by personal greed or by a desire to help friends, family, or pet causes (no matter how worthy). If the purpose of the statute were to prevent the enrichment of foreign officials, that would be another matter. But it’s not. The FCPA’s purpose (as reflected by the text, structure, and context of the statute) is to prevent entities subject to FCPA jurisdiction from distorting foreign government decisions by offering improper inducements, and so it doesn’t matter what those inducements are.

Furthermore, this view is consistent with the DOJ and SEC’s clearly stated position (in the FCPA Resource Guide, the most definitive guidance document the US government has released on the subject) on charitable giving–as Professor Spalding essentially concedes. Although though such giving is often a legitimate way to build goodwill, in certain circumstances agreeing to make a donation to an official’s preferred charity in direct exchange for a particular business benefit can count as an unlawful bribe. (Professor Spalding correctly notes that the case the Resource Guide uses to make this point, In re Schering-Plough Corp., was settled on the basis of books-and-records violations, rather than anti-bribery violations. But for present purposes that’s beside the point: the Resource Guide makes clear that it’s using the case as an example to illustrate the more general point that “us[ing] charitable donations … to induce [an] official to direct business to the company” is an unlawful bribe; even if it’s a “bona fide charitable organization,” a bribe has taken place — according to the Resource Guide — if “the payments were not viewed [by the company] as charitable contributions but rather as ‘dues’ [that it] was required to pay for assistance from the government official.”) Of course, it may be harder to prove an unlawful quid pro quo when the benefit does not take the form of a material payment to the official him- or herself. There are many more legitimate reasons why a firm might hire an official’s relatives, or make donations to an official’s favorite charity, than there are for handing an official a briefcase full of cash or a luxury car. But that goes to the government’s burden to prove that the offer was made “corruptly” and for purposes of influencing the foreign official to use her authority to help the defendant obtain or retain business, not to whether, at least in principle, conferring a benefit on a third party can count as a bribe to the official.

So to my mind, if we were writing on a blank slate, or basing the decision solely on the guidance offered in the Resource Guide, it’s entirely unproblematic to conclude that hiring an official’s relative can count as providing something of value to the official, particularly when the firm and the official reach a clear (though perhaps tacit) understanding that the job is being given to the relative in exchange for the official using his or her power to benefit the firm. But what about Professor Spalding’s claim that we are not in fact writing on a blank slate? The core of his main argument, particularly his rule-of-law critique, is that the US government already adopted, in two DOJ opinion releases from the early 1980s, the “bright-line rule [that] [for a relative] is not a thing of value (under the FCPA) to the public official … [no] matter how much the official might appreciate the hiring of his relative.” Here, I want to respectfully suggest that Professor Spalding is drastically over-reading these two releases, and perhaps (in my view) misinterpreting or exaggerating the function of the Opinion Release procedure.

  • First, although both Opinion Releases in question do involve situations in which a company was contemplating a relative (or relatives) of a foreign government as representative agents, in neither release does the DOJ explicitly state the bright-line rule that Professor Spalding derives. Professor Spalding’s derivation of this “clean, simple” rule is based entirely on the Opinion Release’s silence on that point (coupled with the DOJ’s ultimate conclusion that it would not take enforcement action in the circumstances described).
  • But that doesn’t follow. There does not appear to have been any suggestion, in either case, that the foreign officials in those cases viewed the retention of their relatives’ firms as itself a quid pro quo, offered in exchange for business. Indeed, as far as one can tell from the Opinion Releases, nobody appears to have contemplated that possibility, perhaps because the facts and circumstances were so different from the JP Morgan Sons & Daughters case. To read into these Releases an across-the-board rejection of the possibility that a job offer to a relative could ever be a thing “of value” to a foreign official–when the facts and circumstances of those particular cases seem not to have raised that as a concern–would, in my view, be a drastic over-reading of these documents.
  • Related to that latter point about the fact-bound nature of the Opinion Releases, it’s important to keep in mind that the DOJ has always insisted that they apply only to the particular transaction that is the subject of the request for an opinion, given the particular facts and circumstances described in that request. Both of the Releases Professor Spalding cites (indeed, all the DOJ Opinion Releases) close with the disclaimer that the Release “[has] no binding application to any party which did not join in the request and can be relied upon by the requesting party only to the extent that the disclosure of facts and circumstances in the request is accurate and complete and continues to accurately and completely reflect such facts and circumstances.” Of course, given the dearth of FCPA case law, parties naturally look to the Opinion Releases, along with settlement agreements, for guidance as to how the DOJ (and SEC) interpret the statute. But to say that these prior Opinion Releases established a clear, prospective, across-the-board rule on which parties are entitled to rely strikes me as inconsistent not only with the language of these releases, but with the purpose of the Opinion Releases more generally.
  • Finally, it’s worth noting that the FCPA Resource Guide–a more recent and more definitive guidance document than the 30-year-old Opinion Releases–explicitly says that even a donation to a bona fide charity can be a bribe if the donation was viewed as the “dues” that a company had to pay to a foreign official to get favorable treatment. The analogy to hiring an official’s relative (also as “dues” for favorable treatment) is so close that I think it’s unfair to suggest that, if the U.S. government takes this position in the JP Morgan case, it would be (in Professor Spalding’s words) “a reversal of prior guidance” that is “contrary to the rule of law on the most fundamental level.”  True, the Resource Guide doesn’t address this particular situation, but as I argued above, the Opinion Letters don’t either

In sum, my position (which I expect is the government’s position as well) is that a job for an official’s relative, if offered corruptly in order to influence the official to use his or her official position to help that firm obtain or retain business, can be an unlawful bribe under the FCPA. That position is not inconsistent with any explicit language in prior Opinion Releases, and is consistent with the most closely analogous case discussed in the Resource Guide. So, there’s no problem. Am I wrong?

9 thoughts on “JP Morgan, Sons & Daughters, and the Rule of Law

  1. You’re certainly not wrong. I am a fan of some of Professor Spalding’s writings, but I was left shaking my head when I first came across this multipart argument on the FCPA Blog. There are a number of flaws which you have compellingly identified; in essence, it seems that Professor Spalding is attempting to read his preferred “clean, simple” rule into the silence of a very old nonbinding advisory document despite its limited precedential value and the inherent tension between that preferred position and a straightforward textualist interpretation of the FCPA’s anti-bribery provisions. As you pointed out, Professor Spalding’s argument gets off track at the very beginning — he frankly disregards what I regard to be a component of the FCPA that exists plain meaning. There is no doubt that the statute prohibits offering “anything of value” in order to induce an alteration in the foreign official’s actions or decisionmaking. This is not so narrowly drawn as, say, an embezzlement statute that would prohibit placing money directly into the pocket (or bank account) of a foreign official. And once you recognize this point, the absurdity of Professor Spalding’s attempt to distinguish between the “charitable giving” and “jobs for relatives” cases becomes clear. Money is fungible, so it makes little sense to prohibit giving money to a foreign official, knowing or having reason to know he’ll use it to support his family, but to permit a company to give money directly to the foreign official’s family members at the official’s implicit or explicit direction. The effect is essentially the same.

    And this leads to another mistake which I’d like to highlight. Too often commentators in the FCPA arena mistake difficult cases — those where particular factual circumstances will make it harder to meet the burden of proof — with conduct that should fall outside the scope of the statute. Admittedly, it will be tougher to prove a proper quid pro quo where the alleged “something of value” was a charitable contribution or job offered to a third party. But that does not mean that the conduct cannot fall within the expansive scope of the FCPA; it merely means that it will be more difficult to prove that it does.

  2. With respect to the two Review Procedure releases, I agree with your reading. The only point that I would add is that in 84-01, the requestor explicitly stated that the business of the foreign official’s relative would not “induce the official to use his influence to the [relative’s] benefit.” The requestor also stated that the requestor’s agreement with the business of the relative would be void ab initio if the relative’s business “induced [an official] to use his influence with the foreign government to influence the government’s decision concerning the retention” of the requestor.

    If, instead, the requestor had said that the relative would induce the related foreign official to use his influence to the requestor’s benefit, I imagine the outcome of the release would have been different. As you said, the relevant analysis isn’t whether a job for a relative can be something of value – it can – the analysis is whether it’s being provided corruptly for the purpose of obtaining or retaining business.

    All that said, I think you may be giving short shrift to the importance of Review/Opinion Procedure releases. There are a number of reasons to believe that these releases have a quasi-precedential function (at least with respect to the agency’s exercise of its discretion – obviously not with the courts):

    • In the Resource Guide, the government explicitly states that the releases are meant to be guidance for the business community at large: “In order to provide non-binding guidance to the business community, DOJ makes versions of its opinions publicly available on its website.”
    • At times, the Resource Guide relies exclusively on releases for its analysis. See, e.g., FN 104, 107-110, 146-158, 329, etc.
    • The Deputy Assistant Attorney General testified to Congress that enforcement actions can provide guidance to companies. If enforcement actions provide guidance to other companies, then surely the legislatively created mechanism for providing guidance—the Opinion Procedure—does so as well.
    • At any conference with DOJ participants, they point to the releases as providing guidance to the business community at large.

    There are ways to undercut each of those points, of course. The releases obviously have standard disclaimers, and DOJ officials always state that they’re speaking in their personal capacities. But if you rely too heavily on the disclaimers, you run the risk of letting the agency have it both ways – point to the releases when it’s helpful, rely on the disclaimer when it’s not.

    Legally, I agree that any defendant who attempted a motion for acquittal on the basis of a pre-existing release would (and should) lose. But I do think that there could be rule-of-law concerns if the DOJ brought an enforcement action predicated on similar facts to an Opinion Procedure release.

    • All of these are good points. On Release 84-01, thanks for pointing out that additional feature of the context, which, as you note, strengthens my main point.

      On the issue of reliance on the DOJ Opinion Releases, your point is well taken. While I do think Professor Spalding overstated the degree to which these releases are binding, I think that in attempting to respond to his point I may have veered to far in the other direction, inadvertently understating or omitting your absolutely correct points about how these documents are indeed intended to provide meaningful guidance, despite the disclaimers. I guess all I would add would be this:

      * Although the releases are indeed intended to provide guidance, they are very fact- and context-specific, such that one must be careful not to extrapolate too far from the circumstances of the individual release. I think that that’s really the nub of my disagreement with Professor Spalding — not the idea that the releases are meant to provide guidance, but the idea that we can infer from these two releases a bright-line rule, applicable in other cases that arise in different factual circumstances not explicitly contemplated by the releases themselves. I’d read the boilerplate disclaimers, more than anything else, as a warning not to do that.

      * Given that the Releases are non-binding guidance, I also think that, insofar as anything in the Resource Guide contradicts a pre-Guide Release, the former should take precedence, both because it’s more general and because it’s more recent. So if early-80s Releases suggested giving something to a third party couldn’t be giving something of value to a foreign official, but the Resource Guide suggests the opposite, the latter should take precedence, because it’s the more recent guidance. (The same would be true of a subsequent Opinion Release.)

      I don’t think we disagree on the substance. I think you’re correct that the language in my original post may have undersold the extent to which the Opinion Releases really are meant to provide meaningful guidance in factually similar circumstances, so I thank you for emphasizing that point.

      • Thanks for the reply; you’re absolutely right that we agree on the substance and I think your post was a great response to Prof. Spalding’s analysis. (With the note that I also appreciate much of what he contributes to the FCPA discussion.)

      • It just occurred to me that the DOJ’s responses to the OECD’s Phase III report are the best indication that it intends Opinion Procedure releases to provide reliable guidance:

        “Participants from the compliance profession, private sector and civil society almost unanimously called for further guidance on the FCPA. On the other hand, the U.S. authorities feel that the FCPA and supplementary information in publicly available documents, such as the Lay Person‘s Guide to the FCPA and Opinion Procedure Releases, provide sufficiently clear information.”

        Obviously, I think your broader points are quite correct (including your point about the later-in-time effects of the Resource Guide), but thought I’d add this in the event that someone later considers our conversation when writing on Opinion Procedure releases…

  3. I suspect in some instances the “real facts” are that the son or daughter was hired not in return for obtaining lucrative business from the parent but in return for the opportunity to make a business proposal, or “pitch,” to the parent. There was no promise that the parent would accept the company’s proposal. All that the company received for hiring the offspring was the chance to make a pitch.

    So if in the job interview the son or daughter says something to the effect that if you hire me, my dad will see you, is that an unlawful quid pro quo? If an appointment is something the official is exchanging in return for the hiring of his child, yes. But if it is something, like insider knowledge of how the Chinese government works, that offspring can deliver because of who he or she is, then no.

    The inquiry will then be what if any understanding the parent and the son or daughter had. Even with all the resources available to the United States Department of Justice, that will be quite a challenge.

    • Yes, I agree that it’s quite a challenge, and I think Jordan’s comment above gets at exactly this issue. Because there are more legitimate reasons for hiring an official’s relative than there are for giving the official a suitcase full of cash, it will be harder for the government to prove, in the former case, that the offer was made “corruptly” in order to “obtain or retain business.” But that doesn’t mean that the job offer for a relative can’t be something “of value” to the foreign official.

      That said, although the difficulty of proving a violation is greater, it may not be impossible, and indeed the JP Morgan case may turn out to be one of the ones where there’s enough evidence that the job offers were, in essence, bribes that the government can force the firm to settle. In several of these cases, it looks like the Chinese officials communicated with JP Morgan executives and said, essentially, if you want this business, make sure you give/extend the contract for my child. And JP Morgan kept a spreadsheet connecting particular princeling hires to particular business deals. Again, as I said in the post, everything is still under investigation, the facts are contested, and the government hasn’t yet accused JP Morgan of wrongdoing. But on the facts that have come out in media reports, it seems plausible that there could be enough there to make out a case.

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  5. Pingback: Hiring A Foreign Official’s Relative In Exchange For Business Violates The FCPA | Anti Corruption Digest

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