(Updates with Bank Secrecy Act in sixth paragraph.)
Jan. 7 (Bloomberg) -- JPMorgan Chase & Co., which agreed to pay $2.6 billion to resolve criminal and civil allegations it facilitated Bernard Madoff’s Ponzi scheme, “failed miserably” as a financial institution, Manhattan U.S. Attorney Preet Bharara said.
“One reason, among others, that Madoff was able to get away with his crime for so long was that JPMorgan had an inadequate and inefficient anti-money-laundering program,” Bharara said at a press conference today.
JPMorgan, the biggest bank in the U.S. by assets, avoided prosecution by entering into an accord with Bharara’s office that acknowledged oversight lapses related to an account Madoff used to fund his fraud. The bank said it will pay $1.7 billion to settle the U.S. allegations, $350 million in a related case by the Office of the Comptroller of the Currency, plus $543 million to cover separate private claims.
“The bank connected the dots when it came to its own profits, but not when it came to its own legal obligations,” Bharara said, adding that the bank was aware of Madoff’s questionable transactions as early as 1994.
The New York-based bank didn’t file any suspicious activity reports required under federal banking rules, Bharara said.
“The Bank Secrecy Act is a law that requires financial institutions to establish and maintain effective anti-money laundering compliance programs and to know their customer,” Bharara said. “It is not a tip. It is not a suggestion. It is a legal requirement enforceable through criminal sanction. Today’s charges have been filed because in this regard, JPMorgan as an institution failed and failed miserably.”
At the press conference, Bharara displayed a timeline chart with comments by JPMorgan employees who suspected Madoff’s fraud, which ended when he was arrested in December 2008 and cost investors about $17 billion. Madoff is serving a 150-year federal prison sentence in North Carolina.
A JPMorgan fund manager wrote in December 1998 that Madoff’s returns are “possibly too good to be true” and that there were “too many red flags” for the bank to do business with Madoff, according to the timeline.
In June 2007, a senior JPMorgan chief risk officer said “there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme,” according to the exhibit.
The U.S. agreement includes the largest ever bank forfeiture and also the largest ever Department of Justice penalty, Bharara said. JPMorgan, led by Chief Executive Officer Jamie Dimon, agreed in 2013 to pay $15.7 billion to resolve other U.S. regulatory probes into practices including mortgage- bond sales and energy trading.
“We recognize we could have done a better job pulling together various pieces of information and concerns about Madoff from different parts of the bank over time,” Joseph Evangelisti, a spokesman for JPMorgan, said in an e-mailed statement. “We do not believe that any JPMorgan Chase employee knowingly assisted Madoff’s Ponzi scheme.”
From late 1986 to the Madoff firm’s collapse, the Ponzi scheme “was conducted almost exclusively through a demand deposit account and other linked cash and brokerage accounts held at JPMorgan,” prosecutors said in a criminal information in Manhattan federal court. “Virtually all client investments were deposited into the primary Madoff Securities account at JPMorgan Chase Bank N.A. and virtually all client ‘redemptions’ were paid from a linked disbursement account.”
“JPMorgan, because of its vantage point as Madoff’s banker, had plenty of reasons to be uniquely suspicious about him. Warning signs abounded,” Bharara said.
The volume, movement and use of funds should have generated suspicions among JPMorgan employees, Bharara said. From 1986 to 2008 “an astounding $150 billion” went in and out of Madoff’s JPMorgan account.
In 2006, a derivatives trading desk in JPMorgan’s London office offered products linked to Madoff’s performance and invested its own money in Madoff’s feeder funds, Bharara said. By October 2008, the bank was so concerned about Madoff’s returns that it redeemed $275 million it had in the funds, he said.
In the mid-1990s, the bank learned Madoff and a client of JPMorgan’s Private Bank were engaged in questionable banking processes known as “round-trip transactions” that amounted to what Bharara said was a “check-kiting scheme.”
These transactions were so questionable that another U.S. bank involved in the transactions filed a suspicious activity report and closed Madoff’s account, Bharara said. JPMorgan allowed the transactions to continue for close to a decade, he said.
“It took until after the arrest of Madoff, one of the worst crooks this office has ever seen, for JPMorgan to alert authorities to what the world already knew,” George Venizelos, the FBI assistant director in charge, said in a statement today. “We all need to be invested in making our markets safer and more equitable. The FBI can’t do it alone. Traders, compliance officers, analysts, bankers, and executives are the gatekeepers of the financial industry. We need their help protecting our markets.”
Bharara said today his office plans for “every penny” of the $1.7 billion to go to “help make Bernie Madoff’s victims closer to whole.”
--Editors: Mary Romano, Peter Blumberg