J.P. Morgan Chase Hit For $461M For Madoff-Related Bank Secrecy Act Violations

The Financial Crimes Enforcement Network (FinCEN) today fined J.P. Morgan Chase Bank, N.A. $461 million for willfully violating the Bank Secrecy Act (BSA) by failing to report suspicious transactions arising out of Bernard L. Madoff’s decades-long, multi-billion dollar fraudulent investment scheme. In consenting to the civil money penalty, JPMorgan admitted to the facts set forth by FinCEN and that its conduct violated the Bank Secrecy Act.

FinCEN’s anti-money laundering regulations require financial institutions to report transactions to FinCEN that the financial institution “knows, suspects, or has reason to suspect” are suspicious. Among other things, a transaction is “suspicious” if it involves funds derived from illegal activities, or is conducted to disguise the funds derived from illegal activities, and the financial institution knows of no reasonable explanation for the transaction. FinCEN then makes these suspicious activity reports available to law enforcement and regulators, such as the Securities and Exchange Commission, to pursue appropriate enforcement action.

In 2007, JPMorgan had concerns that BLM could be engaged in fraud that culminated in the identification of several “red flags” by 2008. These red flags included: (1) BLM’s investment performance appeared too good to be true; (2) BLM’s trading techniques and investment activity lacked expected transparency; (3) BLM used a small, unknown auditor; and (4) BLM repeatedly refused to provide full information to JPMorgan as part of its due diligence reviews. In the Fall of 2008, JPMorgan took steps to protect its own business interests yet failed to notify FinCEN of the same suspicious, potentially fraudulent, activities and failed to file any Suspicious Activity Report (SAR) with FinCEN as required by the BSA.

In October 2008, JPMorgan filed a SAR-equivalent with FinCEN’s counterpart in the United Kingdom, the Serious Organised Crime Agency, identifying their concerns about potential fraud. JPMorgan did not file a SAR with FinCEN until after Mr. Madoff’s arrest in December 2008. During the intervening time, JPMorgan redeemed approximately $275 million of its own investments from the BLM feeder funds, which in turn drew the funds out of BLM’s JPMorgan accounts in the United States. Mr. Madoff also drained billions of dollars out of BLM’s JPMorgan accounts during this time period. When Mr. Madoff was arrested on December 11, 2008, JPMorgan booked a loss of approximately $40 million, substantially less than it would have lost but for its transactions in the Fall of 2008.

Workingwith the U.S. Attorney’s Office for the Southern District of New York (SDNY) and the Office of the Comptroller of the Currency (OCC), FinCEN has determined that the penalty for this misconduct will be $461 million, based on the suspicious transactions that flowed through Mr. Madoff’s primary account at JPMorgan during 2008. The OCC will collect a $350 million fine. SDNY will collect $1.7 billion through asset forfeiture and has stated that the funds collected will be contributed to the recovery fund for Mr. Madoff’s victims. To ensure the maximum amount of money for the victims, FinCEN deemed its penalty satisfied by JPMorgan’s payment to SDNY. In total, JPMorgan has agreed to a combined collection amount of $2.05 billion.

FinCEN’s Enforcement Division, established in June 2013 is charged with seeking to protect the U.S. financial system from being exploited by illicit actors. Its efforts focus on compromised financial institutions and their officers, managers, and employees; compromised jurisdictions; and third party money launderers. The division has a broad array of enforcement authorities to target both domestic and foreign actors affecting the U.S. financial system.

Today’s civil monetary penalty is one of a growing list of sanctions and enforcement actions arising out of the massive investment scandle carried out by Madoff.

For Help or More Information

If you need help with human resources and internal controls, compliance and risk management, or other business and performance management concerns please contact the author of this update, Cynthia Marcotte Stamer.

A Board Certified Labor and Employment attorney, Fellow in the American Bar Association, Texas Bar Association and American College of Employee Benefit Council, Ms. Stamer is recognized, internationally, nationally and locally for her work for her extensive and creative knowledge and experience helping businesses and government manage people, process and risk.

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One Response to J.P. Morgan Chase Hit For $461M For Madoff-Related Bank Secrecy Act Violations

Cynthia Marcotte Stamer says:

January 8, 2014 at 6:22 am

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