Of Prince-lings and Princess-lings – Does Their Employment Have Corrupt Intent?

This article was reprinted with permission from Tom Fox’s FCPA Compliance and Ethics Blog.

little princeThere was an excellent article recently in the Financial Times (FT), entitled “Finance: Plugged Into the Party,” in which reporters Henry Sender and Tom Mitchell explored the hiring of sons and daughters of Chinese government officials, in what now might be called the “Era of the Prince-lings.” However, it appears that this period is closing; they noted, “amid a U.S. regulatory probe and a new political climate in China, the era is coming to an end.” The article detailed how the practice of hiring the sons and daughters of high government officials began in the early 1990s. The practice seems to have begun with the hiring of the first princess-ling – Margaret Ren, the daughter-in-law of a former Chinese Premier.

Given this longstanding practice, I wondered how it might be viewed under the Foreign Corrupt Practices Act (FCPA). Last year’s FCPA Guidance stated that to violate the FCPA, an offer, promise or authorization of a payment, or a payment, to a government official must be made “corruptly.” As Congress noted when adopting the FCPA, the word “corruptly” means with an intent or desire to wrongfully influence the recipient:

In order for a corporation to be criminally liable under the FCPA, it must be found to have acted corruptly. The word “corruptly” is used in order to make clear that the offer, payment, promise or gift must be intended to induce the recipient to misuse his official position; for example, wrongfully to direct business to the payor or his client, to obtain preferential legislation or regulations, or to induce a foreign official to fail to perform an official function.

The Guidance goes on to relate that the FCPA focuses on intent, so that it does not require that a corrupt act succeed in its purpose. Further, a foreign official need not solicit, accept or indeed receive a bribe for the FCPA to be violated. The Guidance points to the Innospec enforcement action, in which “a specialty chemical company promised Iraqi government officials approximately $850,000 in bribes for an upcoming contract. Although the company did not, in the end, make the payment (the scheme was thwarted by the U.S. government’s investigation), the company still violated the FCPA and was held accountable.” Further, this is why “Regardless of size, for a gift or other payment to violate the statute, the payor must have corrupt intent—that is, the intent to improperly influence the government official. The corrupt intent requirement protects companies that engage in the ordinary and legitimate promotion of their businesses while targeting conduct that seeks to improperly induce officials into misusing their positions.”

But, beyond acting with corrupt intent, for an individual to be criminally liable under the FCPA, that person must act “willfully.” The Guidance notes that the FCPA does not define “willfully” but the Guidance points to its construction by federal court decisions. Indeed, in U.S. v. Kay, the U.S. Supreme Court-upheld jury instructions defined “willfully” as with “knowledge that [a defendant] was doing a ‘bad’ act under the general rules of law,” the connotation being that a willful act is one which is committed both voluntarily and purposefully, and with a nefarious purpose in mind. The Guidance went on to cite the U.S. Supreme Court in Bryan v. United States for the proposition that “[a]s a general matter, when used in the criminal context, a ‘willful’ act is one undertaken with a ‘bad purpose.’ In other words, in order to establish a ‘willful’ violation of a statute, ‘the Government must prove that the defendant acted with knowledge that his conduct was unlawful.’”

So what if we look at JPMorgan Chase through the lens of the above statements. The FT article reports that the Securities and Exchange Commission (SEC) is looking into whether the bank hired the sons of two government officials to “get lucrative mandates from the Chinese Ministry of Railways and Everbright Bank.” Further, this investigation has “turned up internal documents linking hires to mandates JPMorgan was trying to win, raising questions about whether the recruits were signed up on merit or purely for their pedigree.”

The article goes on to indicate that that any possible enforcement actions for such hiring of Prince-lings could well be complicated by the fact that “many of the prince-lings can boast impressive qualifications, such as an Ivy League education.” They can also be “highly experienced, highly qualified people in their own right.” Even if these people were well-connected in mainland China, and that this was one of the reasons they were hired, does this rise to the level of corruption?  Further, what if there is some type of mixed motive but no outward indication of corruption; is that sufficient to bring an FCPA violation?

I do not pretend to have any insight into how the JPMorgan Chase investigation will turn out. Last week, it JPMorgan Chase indicated that the dreaded ‘Where Else’ question of FCPA investigations had been asked when it revealed that the original investigation in hiring practices had expanded into other countries. However, I believe that the practice of hiring sons and daughters of government officials alone does not violate the FCPA. There still must be corrupt intent. To overcome any such suspicion, I think the key is to “document, document and document” your hiring practices to demonstrate that any family members of government officials are qualified for any position that you might offer them and they went through the same hiring process as all other candidates.

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 advice, 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.

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About the Author

Thomas Fox

Tom Fox headshot updated - CopyThomas Fox has practiced law in Houston for 25 years. He is now assisting companies with FCPA compliance, risk management and international transactions. He was most recently the General Counsel at Drilling Controls, Inc., a worldwide oilfield manufacturing and service company. He was previously Division Counsel with Halliburton Energy Services, Inc. where he supported Halliburton’s software division and its downhole division, which included the logging, directional drilling and drill bit business units. Tom attended undergraduate school at the University of Texas, graduate school at Michigan State University and law school at the University of Michigan. Tom writes and speaks nationally and internationally on a wide variety of topics, ranging from FCPA compliance, indemnities and other forms of risk management for a worldwide energy practice, tax issues faced by multi-national US companies, insurance coverage issues and protection of trade secrets. Thomas Fox can be contacted via email at tfox@tfoxlaw.com or through his website www.tfoxlaw.com. Follow this link to see all of his articles.