There is little doubt whom federal prosecutors blame for the recent legal problems at JPMorgan Chase & Co. (JPMC). The feds used extensive details in a deferred prosecution agreement signed Jan. 6 to spank the bank’s in-house lawyers, along with its risk and compliance officers.
And by signing the deal on behalf of the bank, general counsel Stephen Cutler was forced to publicly “accept and acknowledge” the problems. The agreement relates to how now-convicted felon Bernard Madoff was able to use the bank for nearly two decades to run the world’s largest known Ponzi scheme.
The document outlines how JPMC committed two felonies by failing to comply with the Bank Secrecy Act’s requirements on maintaining an effective anti–money laundering program and on reporting suspicious banking activity. Bank spokesperson Jennifer Kim said neither Cutler nor other bank officials would comment on the settlement.
While fuller details will have to wait for the March issue of Corporate Counsel magazine, here is a preview of what the case documents reveal:
In the fall of 2008 a compliance officer and a bank lawyer, both based in the United Kingdom, contacted the U.S.-based global head of equities to discuss their deep concerns about Madoff’s suspicious banking activities. After all, Madoff’s operations and main accounts were based in New York, and most of his clients were in the U.S.
The U.K. employees wanted U.S. executives to know that they were about to file a “suspicious activity report” on Madoff with U.K. regulators. The global executive supported “taking any necessary steps with regard to disclosure to U.S./U.K. regulators” and said he “assumed JPMC’s general counsel would be involved in the ultimate decision.”
However, someone just left the ball lying on the court. “No disclosure was made to U.S. regulators and no report was made to JPMC’s general counsel,” the documents say.
In another example, the documents tell how a computerized alert system at the bank twice generated red flags around suspicious banking activity in the Madoff account. In both cases the anti–money laundering investigators said they received “error messages” when they tried to access the required bank client records on Madoff. So they simply Googled Madoff and reviewed his company’s website.
“In both cases the investigators closed the alerts with a notation that the transactions did not appear to be unusual for the account,” the documents note.
As Floyd Norris wrote in The New York Times, what the documents show “is a huge bureaucracy where employees stuck to their own silos and did not communicate well with others … a combination of turf wars and incompetence.”
In the end, federal prosecutors imposed a $1.7 billion penalty on the country’s largest bank for failing to communicate—a record penalty for violations of the Bank Secrecy Act. A simple phone call to the general counsel’s office would have cost so much less.
