Some people see a federal investigation into JPMorgan Chase’s hiring practices as a matter of simple ethics. I think it raises a more complex question: Can American business succeed in China, without really trying?
The investigation’s bottom line, it seems, will be whether the bank’s “Sons and Daughters” program violates America’s Foreign Corrupt Practices Act. It is hard to anticipate the answer, for a variety of reasons. But some context may help us understand why JPMorgan took the risk.
Networking matters in business worldwide, but it matters more in China than in most places. Guanxi, loosely translated from Chinese as “connections” or “relationships,” is a term used to describe the network of personal connections underpinning much of Chinese business. In practice, guanxi often operates as an exchange of private favors, which can result in someone with an inside connection having the upper hand when pursuing orders, landing a job, or obtaining government approvals more quickly.
Business has been done this way in China for decades. Guanxi favors can, and often do, have a financial component that clearly crosses the line into corruption by American or Chinese standards, though in China such corruption is only sporadically prosecuted, and then often for political reasons. The easy answer, if we want to apply U.S. standards to business in China, is just to forswear the use of the guanxi system at all.
But we should at least consider the reality that China, which is the world’s largest country by population and second-largest by GDP, happens to be governed by a self-serving, self-perpetuating elite. Those elite seek to maintain their position by giving the broader citizenry a share of increasing national wealth but allowing everyday Chinese little say in how that wealth is distributed or deployed.
This poses a dilemma for U.S. businesses and regulators.
JPMorgan Chase is currently the focus of a federal investigation, which is posing questions about the bank’s “Sons and Daughters” program. The program, which began in 2006 in an effort to avoid accusations of nepotism and bribery in connection with hiring the friends and family of members of the Chinese upper crust, has become a fast-track system for vetting such potential connections. Last month, The New York Times reported on JPMorgan’s connection to Lily Chang, an alias for Wen Ruchun, the daughter of China’s former prime minister Wen Jiabao. JPMorgan paid Ms. Wen’s consulting firm $900,000 annually between 2006 and 2008.
The bank is cooperating with federal authorities and, according to The Times, is also conducting an internal review. The bank has not been accused of any wrongdoing, but the investigation has expanded to encompass the Asia Pacific region beyond China’s borders. While internal documents show that JPMorgan’s hiring practices aggressively pursued applicants with connections to highly placed Chinese senior officials, it is not at all obvious whether the program crossed the line into illegal activity.
It is clearly illegal to hand money to a government official or corporate executive in exchange for business from one of the big, state-controlled companies that dominate China’s economy. But American executives don’t presently know how far they can go in hiring well-connected Chinese citizens, including relatives of government officials, to make introductions that often ultimately result in winning Chinese business. However the federal authorities handle this case, the investigation demonstrates the murky legal landscape American companies must navigate to find business in China.
Because there is no bright line, American businesses face an unpleasant choice. They can go as far as they dare and hope that changing priorities under different administrations don’t result in their being second-guessed. Or they can hang back and, in many cases, watch Chinese business go to their competitors, foreign or domestic.
What our companies cannot do is change China’s system to make it more transparent or democratic. They must work with Chinese businesses as they are or not at all, and right now American law doesn’t make it clear exactly how far is too far when dealing with Chinese norms.
JPMorgan Chase is a tree that the government currently enjoys shaking, because money keeps falling out. It is unlikely, however, that the bank’s approach to China is unique.
I am all for holding American companies to a high standard of ethics and transparency, but it ought to be up to the government to spell out that standard in advance, before it starts to hold firms accountable for violating it.
If we really cannot compete for Chinese business without violating American law, let’s get that fact on the table. Then we can decide whether we want to do anything about it.