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China Hiring Probe Extends to Morgan Stanley, Citigroup

Zacks Equity Research

The probe on hiring practices of Wall Street biggies in China has extended to Morgan Stanley (MS) and Citigroup Inc. (C) with the these two banks facing similar investigations. The Department of Justice (:DOJ) and the Securities and Exchange Commission (:SEC) are probing as to whether the banks’ hiring of offspring of Chinese bureaucrats breached the US Foreign Corrupt Practices Act.

In Aug 2013, JPMorgan Chase & Co. (JPM) revealed that it faced an inquiry from the Federal authorities over alleged inconsistencies in its hiring practices. Allegedly, the company lured people with jobs, and in return, the newly recruited employees had to boost business by exploiting their government contacts and records. JPMorgan continues to cooperate with the regulators.

Being an emerging economy, China is a lucrative market for companies across the globe . Hence, the U.S. banks are eyeing the region in an attempt to strengthen their foothold in Chinese market.

Several Wall Street and European financial institutions with operations in China hired offspring of Chinese officials in an attempt to capitalize on the developing country’s growth opportunities. These institutions included banks such as Morgan Stanley, Citigroup, JPMorgan and The Goldman Sachs Group, Inc. (GS).

While it is not a crime to appoint officials with influence, creating perfunctory positions for fortifying the business is illegal. However, it is not known whether this investigation will actually lead to any legal action against these banks.

For these banks, if these allegations are proved, it will add to the mounting legal woes. The banks are facing several probes pertaining to their conduct preceding the financial crisis.

 Currently, Morgan Stanley and Citigroup carry a Zacks Rank #3 (Hold).

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