The federal investigations into JPMorgan Chase & Co.'s "sons and daughters" program in China may end up being yet another test of the maxim that too-big-to-fail banks are too big for prosecutors to bust.
Yesterday, the New York Times reported that JPMorgan had dropped out of the running to underwrite a potential $1 billion share sale by a Chinese chemical company, while U.S. authorities are probing the bank's hiring practices in China. Last week, Bloomberg News reported that agents from the Federal Bureau of Investigation had questioned a former head of JPMorgan's Asia-Pacific business after stopping him in a New York-area airport. The government is probing whether JPMorgan hired the children of China's elite so that their powerful relatives in government would steer business to the bank.
U.S. officials are trying to determine whether JPMorgan violated the 1977 Foreign Corrupt Practices Act, which makes it illegal to bribe foreign government officials in exchange for getting business. The investigations, which include probes by the Securities and Exchange Commission and the Justice Department, are in uncharted territory in one notable respect, which I haven't seen anyone else point out yet: Neither the Justice Department nor the SEC has ever used this statute against a bank, according to annual lists of cases published on the Justice Department and SEC websites. Yet they routinely bring such cases against large companies in other industries.
Sometimes the Justice Department even gets criminal convictions against companies for violations, including one this month against an Alcoa Inc. subsidiary that pleaded guilty to paying bribes to officials in Bahrain and agreed to pay $384 million in criminal and regulatory penalties. As for banks, there hasn't even been a nonprosecution agreement or a deferred-prosecution agreement over FCPA violations.
There was an FCPA-related case in 2012 in which a former managing director in Morgan Stanley's real-estate business in China pleaded guilty to one count of evading the bank's internal controls to enrich himself and a Chinese government official in a real-estate scheme. However, Morgan Stanley wasn't accused of any wrongdoing.
That fact pattern isn't the norm. As noted in an article this week by Mike Koehler, a law professor at Southern Illinois University, the Justice Department has brought 60 FCPA enforcement actions against corporations since 2008. Of those, 44 haven't resulted in any charges against company employees. In other words, usually it's the company that gets nailed, not individuals.
"The main thing that's confusing about FCPA enforcement is that the outcomes are so divergent," says Brandon Garrett, a University of Virginia law professor who is working on a book about corporate prosecutions. "From the outside it's hard to understand why some companies get purely SEC enforcement, others get a nonprosecution agreement, others get a deferred-prosecution agreement, and others plead guilty and are convicted."
For a manufacturer such as Alcoa, a guilty plea isn't fun, but it probably isn't that big a deal. Customers who need aluminum aren't going to stop doing business with it over reputational concerns. They want the best prices on aluminum products. Likewise, it's unlikely that customers of Weatherford International Ltd., which provides oilfield services, will stop buying its services just because a subsidiary recently pleaded guilty to violating the FCPA's anti-bribery provisions.
Banks, on the other hand, are different. Or at least they often get treated differently. U.S. Attorney General Eric Holder last year told the Senate Judiciary Committee, in essence, that some financial institutions are too big to prosecute, because of the ensuing damage to the economy. Similarly, Lanny Breuer, back when he was head of the Justice Department's criminal division, said in a 2012 speech that "the health of an industry or the markets are a real factor" when considering whether to prosecute some companies criminally.
If the government ever does bring a case against JPMorgan without charging the bank criminally, this could reinforce the widely held perception that prosecutors utilize a double standard when it comes to big banks. JPMorgan already is a repeat offender. It signed a nonprosecution agreement with the Justice Department in 2011 to resolve an antitrust investigation. This month, it entered into a deferred-prosecution agreement with federal prosecutors over its dealings with Ponzi-scheme artist Bernard Madoff. It also has been a frequent defendant in SEC cases.
There is no telling where the JPMorgan investigation might lead or how long it will take. It's conceivable that some individuals might be charged. However, it seems improbable that it will result in anything but a slap on the wrist for the bank itself -- at most a civil settlement or some other deal that lets the bank avoid criminal charges -- no matter what the FBI finds. The presumption remains that JPMorgan and other too-big-to-fail banks are also too big to indict. There has been no sign yet that the government has any desire to disprove this notion.
(Jonathan Weil is a Bloomberg View columnist. Follow him on Twitter.)