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Wednesday
Jun112014

The princeling problem: In search of a legal theory (Part 1)

Recently, I had the good fortune of hearing a partner from a leading FCPA practice discuss JP Morgan's hiring of Chinese princelings.

Although this conduct had always seemed to me a FCPA violation, it occurred to me at that moment that I wasn't sure exactly how it violated the FCPA. 

Two different theories came to mind, and I asked the presenter, "Does the government believe that the princeling is a third party through whom something of value passes to the foreign official? Or does it hold that hiring an official’s adult child actually has inherent value to the official?"

She replied: "On that point, the government has not been terribly clear."

This series of posts is a plea for clarity. I hope it will both encourage and assist the government in developing and articulating a much-needed theory: how hiring the adult, financially independent son or daughter of a foreign official violates the FCPA. I will not here argue for a particular theory; rather, I will explore several possible theories and put them in context of existing FCPA settlements, opinion releases, and the Guidance.

 We'll then leave it to our enforcement officials to do the rest. 

We should of course begin with what the government has already said about hiring the close relatives of foreign officials.

Very early on in FCPA history the government published two closely related opinion releases. Release 82-04 (that's the fourth release of 1982) concerned hiring the brother of a government official. Similarly, Release 84-01 (the first release of 1984) concerned hiring the close relative (unspecified) of a head of state. 

These releases provided identical guidance, thus producing an imminently clear and reliable theory. Both releases held 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.  

Very clean, very simple. But notice a couple important implications. First, the rule is based on a third-party theory: the relative is a third party through whom something of value might potentially pass to the official.  The government told us that as long as nothing so passes, there is no violation. (And we would later confirm in U.S. v. Martin Eric Self , No. 8:08-cr-110-AG-1 (C.D. Ca. 2008), that when something of value does so pass, a violation has occurred.)

Notice too a second, closely related implication: the job is not itself a "thing of value" to the official. That's worth underscoring. The hiring was not an inherent violation because no matter how much value the job had to the hired relative, it did not have value under the FCPA to the public official.  

Note that the government did not find it necessary to do a fact-specific inquiry concerning how close the relative and public official were personally, whether hiring the relative might have "meant a lot" to the official, and so on.

Rather, they laid down a bright-line rule: the job is not itself a thing of value (under the FCPA) to the public official, and no violation occurs as long as the relative does not serve as a third party through whom things of value pass. It simply doesn't (didn't?) matter how much the official might appreciate the hiring of his relative.

Wait a minute, you say: hiring a son or daughter is different, because the parent official bears financial responsibility. Well, that would certainly be true if the child were a minor, or even a financially dependent adult. But what if the child is indeed a financially independent adult? Is it so different then? And if so, how would we articulate the rule that distinguishes the two?

Let's come back to that in the next post.

_______

Andy Spalding is a senior editor of the FCPA Blog. He's an Assistant Professor at the University of Richmond School of Law. He can be contacted here.

Reader Comments (2)

I think there is a big culture difference in the views regarding "a child who is indeed a financially independent adult".

In a western eye, people might have the tendency to see this child as the equivalent to a close relative who's financially independent.

But in Chinese culture or any other culture which has been heavily influenced by the Chinese culture, namely most of the countries in Northeast Asia. A child is always a child to the parents, no matter how old and "independent" the child is. Chinese parents see their children as their private properties, their investments, an integral part of their own families and bodies, and in most cases more important than their own lives. Therefore, the successes and happiness of their children often mean everything to the Chinese parents. The ties bound the Chinese parents and their children are much closer and more powerful. As a westerner, you may be shocked at and/or may never understand how many sacrifices that Chinese parents are ready to make for their children, even when the children are already adults, financially independent, parents or grandparents by themselves etc.

Therefore, my point is when looking at this kind of FCPA issues (gift is another example), you cannot simply apply the same standard everywhere in the world. You have to give a lot of consideration to the local culture and custom before you can reach an opinion. In this particular issue of princeling, I am very confident that 9 out 10 Chinese people will tell you the hiring of the children of Chinese government officials will be extremely appreciated by these officials, which has the same effects as directly hiring the officials themselves. Such hiring practice is an outright bribery case.
June 11, 2014 | Unregistered CommenterChinese viewpoint
Perhaps instead of viewing the hiring of the princeling as a bribe paid to the official, the focus should be on the princeling and the princelings conduct. The princeling is an adult,and may or not be qualified,may or may not conduct themselves appropriately. The important fact is the princeling is a politically exposed person whose conduct and decisions deserve an increased level of scrutiny.The accountability for hiring the princeling must go higher than the individual that did the hiring.
June 11, 2014 | Unregistered Commenterlameslave 13
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