JP Morgan Chase has agreed to pay US$1.7bn penalty to prevent a potential criminal prosecution, after US Federal prosecutors in Manhattan decided that the bank had suspicions about financier Bernard Madoff long before his Ponzi scheme was uncovered, but failed to pass these on to the authorities or to take an action.
According to the office of Preet Bharara, US attorney for the southern district of New York, the penalty represents “the largest-ever bank forfeiture” and follows earlier fines imposed on the largest US bank. The combined amount of penalties in the Madoff case is likely to reach at least US$2bn, with JPMorgan paying further amounts to banking regulators.
The prosecutors in Manhattan decided that JPMorgan was culpable of two felony violations of the Bank Secrecy Act, a 1970 law which requires banks to alert authorities to suspicious activity. Madoff himself predicted the penalty in a 2011 interview with the
, when he told the paper: “JPMorgan doesn’t have a chance in hell of not coming up with a big settlement.”
A so-called deferred-prosecution agreement, reached between the bank and Bharara’s office, essentially suspends for two years an indictment provided that JPMorgan admits its actions and overhauls its controls against money laundering. Deferred-prosecution agreements, while not as forceful as leveling an indictment or demanding a guilty plea, have been rarely used against a major US bank and are usually employed only in cases of extreme misconduct.
As Madoff’s primary bank for more than two decades, JP Morgan had a unique viewpoint of the financier’s operations. In a document outlining the bank’s inaction, prosecutors argued that the Madoff Ponzi scheme was conducted almost exclusively through various accounts held at JPMorgan.
Among their findings were two occasions, in 1998 and 2007 respectively, when JPMorgan’s asset management arm opted not to invest in Madoff funds after one manager suggested that the returns were “possibly too good to be true” and citing Madoff’s refusal to meet them to discuss his strategy. However, his suspicions were not passed on to the bank’s anti-money laundering team.
In 1996 another bank had closed Madoff’s account after investigating a series of round-trip transactions with one of JPMorgan’s largest private clients, identified in previous court filings as Norman Levy, and determining it had no legitimate business purpose. JPMorgan allowed the transactions, which mushroomed to US$6.8bn, to continue and only filed a suspicious activity report in 2008 after Madoff’s arrest.
In October 2008 a JPMorgan analyst based in London wrote an internal email highlighting Madoff’s ‘odd choice’ of a small accounting firm and commented “there are various elements in the story that could make us nervous”. The bank filed a suspicious activity report that month to the UK’s Serious Organised Crime Agency (SOCA) month but did not take the same action in the US.
Prosecutors said the lapses stemmed from JPMorgan ‘willfully’ failing to create sufficient anti-money laundering (AML) controls. “There was no meaningful effort by the bank to examine or investigate the Madoff Securities banking relationship,” they commented.
Bank spokesman Joseph Evangelisti, responding to the penalty, admitted that JP Morgan “could have done a better job pulling together various pieces of information and concerns about Madoff from different parts of the bank over time,” but stressed “we do not believe that any JPMorgan Chase employee knowingly assisted Madoff’s Ponzi scheme.
“Madoff’s scheme was an unprecedented and widespread fraud that deceived thousands, including us, and caused many people to suffer substantial losses,” he added.
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