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


Baghdad's Burning… And It's (Kind of) Our Fault

What Iraq's implosion can teach us about Afghanistan's future.

Two years after the last American combat troops left Iraq, the country is in flames. The violence raging there poses a serious policy challenge for the Obama administration -- and offers a cautionary tale of what could happen in Afghanistan if all American troops are withdrawn from that country as well.

Iraqi Prime Minister Nouri al-Maliki visits Washington this week to plead for American help in his fight against the Islamist militants who have killed more than 5,000 Iraqis since the start of the year, including roughly 600 this month alone. On Sunday, a spate of car bombings killed at least 60 Iraqi civilians and security personnel, pushing this year's death toll to levels not seen since the height of the country's civil war.

There's a painful irony to Maliki's trip. In the fall of 2011, the Obama administration and the Maliki government were locked in negotiations over a pact that would have cleared the way for a continued U.S. military presence in the country by guaranteeing the Americans full immunity from criminal prosecution. Obama yanked all U.S. combat troops out of the country when Maliki made clear that he wouldn't or couldn't deliver such an agreement. Two years later, Maliki is desperately trying to turn back the clock and get Washington to increase its security cooperation with his government.

Afghanistan is not Iraq, but Afghan President Hamid Karzai is facing a similar dilemma when it comes to the future U.S. military presence in his country. Washington is demanding that Afghanistan give its troops the kind of immunity it wanted in Iraq, and Karzai -- like Maliki -- is publicly opposed to providing it. The impasse has led the Obama administration to consider something that would have been unthinkable even a few months ago: a complete withdrawal of all American combat troops from Afghanistan, the original battlefield of the war on terror.

The Obama administration has made no secret of its desire to get out of Afghanistan, which many senior military and civilian officials increasingly see as a lost cause.  Even if the White House orders a complete military withdrawal, however, Iraq's rapid deterioration suggests that the U.S. should look for creative ways of helping Afghanistan fill the void that would be left behind. That could include helping Kabul recruit -- and pay for -- Western contractors that specialize in intelligence collection and analysis, a vitally important part of counter-terrorism. Washington and its allies could also make it easier for Afghanistan to contract with firms that handle logistics like the deliveries of gasoline and ammunition, both areas where the Afghans have severe shortcomings.

Karzai is a master negotiator who has remained in power for more than a decade by knowing exactly how far he could push the U.S. without triggering a total break between Washington and Kabul. This time around, though, Karzai's intransigence on the troop issue could give the White House a final reason to leave.

"Never underestimate the capacity of foreign leaders to misunderstand where we really do have red lines," said Douglas Ollivant, a retired Army officer who served as the Iraq director at the National Security Council during both the Bush and Obama administrations and recently spent a year in Afghanistan. "Maliki thought we might settle for something less than guaranteed immunity, and he was wrong. Karzai might also misunderstand that this is a red line for us."

It wasn't supposed to play out this way in either country. In Iraq, a bilateral agreement in 2008 between Maliki and then-President George W. Bush called for all U.S. ground troops to leave Iraq at the end of 2011, a deadline that few officials in either country thought would be enforced. As late as the fall of 2011, senior U.S. military officers were still privately saying that they expected a deal that would allow 8,000-15,000 troops to remain in Iraq indefinitely. They were wrong: when Maliki wouldn't budge on the immunity issue, Obama stunned the Pentagon by ordering all U.S. troops out of the country by December 31st, 2011.

The withdrawal had an immediate impact on Iraq's nascent military. In a flash, the Iraqis lost the embedded American military trainers who were living with, and fighting alongside, many of their most elite combat personnel. The specialized U.S. military personnel who were helping the Iraqis collect and analyze battlefield intelligence were also pulled out of the country, sharply reducing the amount of information Iraqi security personnel had about key al-Qaeda leaders or potential future attacks.

It's impossible to say how much of Iraq's current carnage could have been prevented by a continued U.S. military presence in the country, but a pair of retired officers with long experience in the country said the withdrawal of elite Special Operations Forces like the Navy SEALs and the Army's Delta Force made it significantly harder for the Iraqis to track down and kill individual militants. The withdrawal also meant that Iraqi troops were no longer receiving video footage from U.S. drones and surveillance aircraft. Iraq recently asked the U.S. to send the drone aircraft back to the country, but the White House said no.

Karzai could get a similar cold shoulder from the administration, which has made clear that it's running out of patience with Karzai's dithering over a troop immunity deal. Secretary of State John Kerry spent two days in Kabul earlier this month trying to get Karzai to budge, but the Afghan leader said he opposed giving troops protecting from Afghan law and would instead refer the matter to a gathering of key Afghan tribal and religious leaders known as a Loya Jirga.

The Obama administration wanted to close the Afghan deal by the end of October, a deadline which now seems impossible, and White House officials are now openly saying that they might pull all U.S. troops out of Afghanistan at the end of 2014, when most foreign troops are already set to leave the country.

A full U.S. withdrawal from Afghanistan could be even more damaging to Karzai's military than it was to Maliki's. When U.S. troops left Iraq in 2011, the Iraqi military was relatively well-trained and well-armed. The Iraqis didn't have advanced U.S. warplanes or attack helicopters, but they had Humvees, armored vehicles and significant numbers of soldiers who were ready to fight. Baghdad has since announced plans to buy more than $10 billion of advanced American aircraft or armaments, though the purchases have been held up in Congress.

Karzai's forces are far less prepared to operate on their own. The Afghan military suffers from such high rates of illiteracy and attrition that commanders have to spend significant amounts of time teaching their troops rudimentary reading skills and recruiting new personnel to replace those who quit. The Afghan military also has virtually no logistical systems in place, which means that troops in remote parts of the country can't get spare parts or proper quantities of fuel and ammunition.

Maliki's arrival Friday is a cautionary tale for the White House as well. Thousands of American troops lost their lives in Iraq, and tens of thousands returned home with severe physical or psychological wounds. Successive presidential administrations said the enormous human toll had bought Iraq a chance at a stable future free of the al Qaeda attacks that had terrorized the country for years. Those security gains have vanished, however, and Washington now faces the real possibility that many of the American deaths will prove to have been in vain.

The U.S. hasn't lost as many troops in Afghanistan, but nearly 2,300 troops have given their lives to oust al Qaeda from the country and leave behind an Afghan military that is strong enough to prevent the militants from returning. Those missions will be difficult even if U.S. troops remain in the country; they may be almost impossible if all Western troops leave.

In the end, though, the decision about whether U.S. troops stay in Afghanistan will be made by Karzai, just as the one about whether U.S. troops stayed in Iraq was made by Maliki. Karzai might want to take a close look at the chaos in Iraq before he makes up his mind.