By Aruna Viswanatha and Emily Flitter

The U.S. Justice Department is probing Morgan Stanley for its hiring practices in China as part of an industry-wide investigation by the government into whether banks' employment of politically connected Chinese breached U.S. bribery laws, according to people familiar with the matter.

As part of the industry sweep, the U.S. Securities and Exchange Commission sent letters to Morgan Stanley and other banks, including Goldman Sachs and Citigroup, seeking information about their hiring practices, according to several people familiar with the matter.

The SEC has asked the financial services firms to provide information about their hiring of the relatives of government officials in China, said two people, who were not authorised to speak publicly.

The SEC passed information relating to specific hires and investment banking deals at Morgan Stanley, which has a long history in China, to the Justice Department, one of the people said.

Wesley McDade, a spokesman for Morgan Stanley; Mark Costiglio, a spokesman for Citigroup; and Andrew Williams, a spokesman for Goldman Sachs all declined to comment.

U.S. authorities' interest in the hiring practices of banks operating in China first came to light in August when media reports disclosed that the U.S. Securities and Exchange Commission was looking at whether JPMorgan Chase & Co's Hong Kong office hired the children of powerful heads of state-owned companies in China with the express purpose of winning underwriting business and other contracts.

JPMorgan has said it is cooperating with the probe.

Apart from the four banks named in this story, Reuters could not determine how many other banks are under scrutiny.

Another source confirmed Morgan Stanley did receive a letter from the SEC asking for information about its China hiring practices. The source said the firm has not been contacted by the Justice Department, which may indicate that the DOJ's criminal probe is at an early stage.

It is unclear if the Justice Department's interest in Morgan Stanley and other firms will lead to any action against them.

Authorities' scrutiny of Morgan Stanley's dealings in China comes after Justice Department officials repeatedly praised the bank's "rigorous compliance programme" to prevent corruption. In various speeches encouraging firms to better police for bribery, officials have pointed to Morgan Stanley's vigilance as the reason why the bank did not face charges after its former top real estate dealmaker in China pleaded guilty last year to conspiring to evade internal controls to enrich himself and a Chinese government official.

Morgan Stanley was early to spot China's economic promise, purchasing a stake in an investment bank there in 1995. It now has more than 20 dedicated China investment bankers, the most among foreign banks, and has worked on some of the largest IPOs there in recent years.

A former Morgan Stanley investment banker said the firm would flag the resumes of the children of important people in China applying for entry-level positions. The former banker, who declined to be named, said the applicants came from top-tier schools and that such practices were common across the industry.

Sending chills

JPMorgan said in a regulatory filing earlier this month that it is cooperating with requests for information, including subpoenas, from the SEC and the Justice Department about its hiring practices in the Asia Pacific region.

One source said that probe began based on information provided by a JPMorgan insider.

The investigation has sent chills across global banks. It has become a common practice for investment banks to hire people with government connections. This is especially prevalent in China due to the role the ruling Communist Party plays in the country's business.

The SEC and criminal prosecutors at the Justice Department are examining whether hiring practices violated the Foreign Corrupt Practices Act, a U.S. law that bars bribes or special favours to foreign government officials in exchange for business.

At issue is whether the banks hired unqualified applicants as a favour to a government official who was in a position to award them business.

One person familiar with the SEC inquiry said it closely resembles a previous investigation U.S. authorities conducted into whether oil and gas companies paid bribes to circumvent import regulations in Africa and elsewhere.

Six companies including Royal Dutch Shell Plc, Transocean Inc and Tidewater Inc and their shared freight forwarder Panalpina Inc paid a total of $236 million in 2010 to resolve related investigations.

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