Earlier today, JPMorgan Chase formally admitted that it had failed to stop the largest investment fraud in world financial history. In a sweeping settlement with federal prosecutors in Manhattan, the Office of the Comptroller of the Currency, JPMorgan agreed to pay over $2 billion to settle charges that it failed to alert authorities about fraudulent activity by Bernie Madoff. It also reached a separate settlement with the trustee charged with cleaning up after Madoff. The final bill: almost $2.6 billion, of which $2.1 billion will go to Madoff's victims.
Federal prosecutors in Manhattan imposed a $1.7 billion penalty on JPMorgan for two felony violations of the Bank Secrecy Act, a record payout under that 1970 law, which requires banks to alert authorities to suspicious activity. The prosecutors, essentially accusing the nation’s biggest bank of turning a blind eye to Mr. Madoff’s fraud, will require JPMorgan to pay the $1.7 billion to his victims. The bank cannot write off the sum as a tax deduction.
Federal regulators announced their own rebuke of the bank, with the Office of the Comptroller of the Currency striking a $350 million settlement, citing the Madoff case and broader breakdowns in safeguards against anti-money laundering. All told, after paying these settlements, JPMorgan will have doled out some $20 billion to resolve government investigations over the last 12 months.
The criminal element of the case involved a so-called deferred-prosecution agreement with the prosecutors in Manhattan, an agreement that essentially suspends for two years an indictment as long as 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 giant American bank and are typically employed only when misconduct is extreme.
The deferred prosecution agreement, viewable
here, states that Madoff began his Ponzi scheme in 1986, not long after he opened a business account at Chemical Bank. Chemical merged with Chase Manhattan in 1996; the merged company took the Chase name even though Chemical was the nominal survivor. Chase, in turn, bought JPMorgan in 2000. According to the agreement, suspicions about Madoff's activities cropped up as early as 1994, when money moved between Madoff and another Chemical private banking customer in a manner that looked suspiciously like check-kiting. However, at no time did Chemical/Chase/JPMorgan Chase report this or any of Madoff's other suspicious banking actitivies to federal authorities, as required by the Bank Secrecy Act. According to prosecutors, Chemical/Chase/JPMorgan Chase's behavior contrasts sharply with another bank that not only red-flagged the 1994 transaction, but actually closed Madoff's account there. It also points out that while JPMorgan alerted UK regulators that Madoff's returns were "too good to be true," it not only didn't alert American regulators, but allowed Madoff unfettered access to his money until his 2008 arrest. Small wonder that Manhattan U. S. Attorney Preet Bhahara declared that JPMorgan had "as an institution failed and failed miserably." The agreement also calls for JPMorgan submit quarterly reports regarding improvements to its anti-money laundering procedures for the duration of the agreement. According to
a press release by Bhahara, JPMorgan has agreed to the largest civil forfeiture by a bank in American financial history, as well as the largest ever imposed for a Bank Secrecy Act violation. Take heart, those who are wondering why no individuals are facing charges yet--JPMorgan is required to cooperate with the government in its continuing investigation.
The OCC decree, viewable here, charges that JPMorgan has numerous flaws in its money laundering prevention program, and also failed to address problems pointed out in a 2013 OCC filing.
According to a press release from Picard, the $543 million settlement will cover avoidance claims and a class-action lawsuit. That money will go to Madoff's customers. From the looks of it, the criminal case relied heavily on Picard's claims in his 2011 lawsuit that JPMorgan failed to exercise the most basic oversight over Madoff's banking activities.
JPMorgan really doesn't know how lucky it got. Prosecutors were seriously considering demanding that the bank formally plead guilty to Bank Secrecy Act violations--a move that could have put its banking charter in jeopardy. The OCC would not have stood in the way had Bhahara gone that route. Ultimately, prosecutors opted for a deferred prosecution agreement because the investigation began as a civil matter, not a criminal one. One thing that should make JPMorgan nervous--if I'm reading the agreement right, it doesn't foreclose civil suits. Which means that Jamie Dimon might want to be ready to open the wallet again. Hopefully that will come very soon.