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Is China About to Crack Down on J.P. Morgan, Too?

An aggressive Beijing could be very bad news for the bank -- and lots of other Western businesses operating in China.

J.P. Morgan Chase & Co.'s tangled web of legal troubles just got a little knottier.

The bank said Friday that other countries are looking into the firm's hiring of people close to government officials in Asia, which could mean China is investigating the firm's practices. If that's the case, J.P. Morgan could be facing a whole new front in its battle to resolve a raft of investigations in the U.S and U.S. companies could be in for greater scrutiny of their China operations.

The bank is already dealing with U.S. authorities looking into whether it violated anti-bribery laws by putting well-connected people on the payroll in exchange for business. The New York Times reported in August that the inquiry relates to the hiring of two former Chinese employees who are children of powerful executives in Chinese state-owned companies. But the involvement of Chinese authorities could mean the bank would face a sprawling, unpredictable investigation.

"It's a scarier prospect in terms of transparency and rule of law being a bit more of a concern in China than here in the United States," said Mike Koehler, assistant professor at Southern Illinois University School of Law.

China has not routinely targeted foreign companies for bribery, but an aggressive investigation of U.K. pharmaceutical company GlaxoSmithKline that included detaining Chinese executives of the company earlier this year has raised concerns China is cracking down. The case is not yet resolved, but the drug maker reported last month that sales in China have already dropped by 60 percent.

"This is signaling a new emphasis in going after bribery and it's easier to go after the bribe giver than the bribe taker," said Daniel Chow, professor at Ohio State University College of Law.

Mr. Chow said China's more aggressive stance toward foreign companies is part of a broader crackdown on graft in reaction to a number of high-profile embarrassments involving allegedly corrupt Chinese officials.

Because the Chinese legal system is so opaque and moves quickly, U.S. investigators sometimes fear Chinese authorities will come in and start arresting people before they can collect the evidence required for American cases, according to former U.S. officials who've worked on anti-bribery cases.

"Sometimes as a prosecutor you fear the involvement of the local gendarme because you have no control over them," one of the former officials said.

In contrast, U.S. investigations can often take years to conclude. J.P. Morgan said in a regulatory filing Friday that it had received subpoenas and document requests from U.S. regulators about "hiring practices relating to candidates referred by clients, potential clients and government officials." The Justice Department is interested in the same practices, the company added.

"Separate inquiries on these or similar topics have been made by other authorities, including authorities in other jurisdictions," the bank said in the filing. A spokesman for J.P. Morgan declined to comment on whether China was one of them.

The bank also said that the SEC was interested in the J.P. Morgan's "engagement of consultants in the Asia Pacific region."

The disclosure comes as the bank is also facing legal battles on several other fronts. After emerging from the financial crisis seemingly unscathed, J.P. Morgan has faced an onslaught of legal issues over the past several months.

The bank has been trying to wrap up an array of mortgage-related investigations into a grand settlement with the Department of Justice. A preliminary agreement had J.P. Morgan paying over $13 billion to the government, but negotiations keep getting snagged. Those talks relate to the mortgages the bank bought, sold, and packaged into complex investments before the housing market crashed, as well as the mortgage businesses of two banks that it bought during the financial crisis.

The bank also paid over $1 billion in penalties to the U.S. government earlier this fall to settle allegations related to the "London whale" trading debacle -- large derivatives positions that caught the attention of other traders in early 2012 and ultimately cost the bank over $6 billion. What, if anything, J.P. Morgan will have to give to Chinese authorities is very much an open question.

STR/AFP/Getty Images

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