On January 7, 2014, a deferred prosecution agreement was released, describing the settlement between J.P. Morgan Chase & Co. (“J.P. Morgan”) and U.S. prosecutors regarding J.P. Morgan’s compliance failures in its dealings with Bernard Madoff (“Madoff”) and his firm Bernard L. Madoff Investment Securities, LLC.
In 2008, Madoff was charged with securities fraud for a multi-billion dollar Ponzi scheme he used to defraud his advisory clients. J.P. Morgan served as the primary bank handling Madoff’s accounts during that time. J.P. Morgan has been ordered to pay an astounding $2.6 billion in federal fines due to its failure to identify and report suspicious activities in relation to Madoff’s funds. The firm said in a filing that the bank will pay $1.7 billion to settle the government’s charges, $350 million in a related case by the Office of the Comptroller of the Currency, and $543 million to cover private claims.
The charges surrounding the case involve J.P. Morgan’s violations of the Bank Secrecy Act, which requires banks to have an effective Anti-Money Laundering (“AML”) program in place designed to detect and report suspicious activity. Specifically, J.P. Morgan’s London office detected a “red flag” where it could not validate Madoff’s trading activity or custody of assets. Moreover, J.P. Morgan’s AML software identified at least two red flags that were ignored by bank employees. Wire transfers of $757 million occurred in one day, which were 27 times the average daily value, but there was no investigation. J.P. Morgan’s awareness of these suspicious activities, and failure to properly report them to the Financial Crimes Enforcement Network (“FinCEN”) by filing a Suspicious Activity Report (“SAR”), further exasperated the wrongdoing.
This case exemplifies the importance of developing strong AML programs, and more importantly, testing to ensure that such programs are adhered to. Banks, broker-dealers and other financial institutions need to ensure their AML programs are effective through training and continuous review for potential “red flags” of money laundering activities.