International business practices are complicated – many times what’s considered normal in one country is outlawed in another. Although the global community is moving more towards a universal standard for corruption compliance, one can still find big names coming under fire for breaking such rules. JP Morgan Chase’s dealings with Chinese partners is one of the latest examples, as they became caught up in Guanxi corruption…
International Corruption Based on Ancient Concepts
With the global community looking more and more towards a unified front against corruption, the need for recognition of potentially harmful practices with global partners is growing. Aside from multilingual compliance services, such as translation services, companies also need to set standard procedures for guarding against practices that aren’t written down. A recent development in the anti-corruption world centered around a Chinese practice known as Guanxi.
The Chinese concept of Guanxi, or Guanshi, increasingly draws Western attention while the international corruption crusade is gaining momentum. The practice is based on Confucian social philosophy with an emphasis on the hierarchical order of personal relationships, the presence of patron and client and the mutual exchange of favors.
Guanxi is prevalent in the Chinese business community, government and politics. People who belong to different organizations, companies and state departments are often found to be linked by personal relationships. This network allows the sharing of insider information and news, while most importantly allowing people to solve business problems on a personal level without interference of official authorities. This is precisely what makes the practice a target for international compliance and anti-corruption laws and regulations.
How Guanxi Corruption Cost JP Millions
In November JPMorgan Chase, the largest bank in the U.S., agreed to pay $264.4 million to resolve FCPA- related charges. The policy in question linked to Guanxi corruption practices – the so called “Sons & Daughter Program” – was a Client Referral program that operated from 2006 until 2013. To be hired, a referred candidate had to have a “directly attributable linkage to business opportunity” or in other words, had to be referred to the bank by clients and government officials. Employees hired under the Sons and Daughters Program were given entry-level titles of investment bankers and were paid accordingly, however many of them performed auxiliary tasks like proofreading.
One example in 2009 involved a Chinese government official telling a senior JPMorgan banker that hiring a referred candidate would influence the bank’s role in an upcoming initial public offering for a Chinese state-owned company. The candidate was soon given a position in the NYC subsidiary of JPMorgan. More than 100 young adults participated in the “Sons and Daughters program”, and the estimated overall profit resulting from business opportunities gained through the Client Referral Program is more than $100 million.
According to Leslie Caldwell, chief of the Department of Justice’s criminal division: the ”So- called Sons and Daughters Program was nothing more than bribery by another name”. The DOJ used a non-prosecution agreement to resolve the offences, as JPMorgan took significant action against six employees believed to be the key participants of the misconduct. Despite the non- prosecution agreement, it’s difficult to say that JPMorgan got off the hook easily. $130.5 million in disgorgements only, lands it 7th on the list of the top 10 FCPA disgorgements. This is also the first time, when the Federal Reserve got involved in an FCPA case by issuing a consent cease-and-desist order with a $61.9 million civil penalty.
Will We See More of Guanxi Corruption In The Future?
The line drawn between ethical and unethical mutual obligations in the framework of Guanxi corruption is still very much unclear. The fate of Guanxi- the descendant of a two and a half millennium old social philosophical concept – is ambiguous. With that in mind, it is still wise to engage in due diligence as a global company. Regularly undergoing legal document review via legal translation services, and training employees to avoid behaviors like Guanxi that could potentially be viewed as corrupt, could end up saving hundreds of millions of dollars down the line.
Although Guanxi isn’t favored in many Western countries, the global market isn’t ready to economically isolate China based on this questionable practice. Chinese Mandarin is becoming more popular and widespread in the West as a foreign language to learn; especially for those interested in pursuing international business From 2004 to 2010 the number of people who took Chinese Proficiency Test increased by 26.52% worldwide, and that number is still growing. So while the international community is still inclined to learn the language of the world’s second largest economy, it may also be seeing more cases of Chinese compliance document review and translation in the future.
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