J.P.Morgan Chase Bank, N.A., has admitted that it willfully violated the Bank Secrecy Act (BSA) by failing to report suspicious transactions arising out of Bernard Madoff’s decades-long, multi-billion dollar fraudulent Ponzi scheme.
The bank now has been fined $461 million by the Financial Crimes Enforcement Network (FinCEN) and will forfeit $1.7 billion to the U.S. Attorney’s Office for the Southern District of New York (which will include the FinCEN fine). J.P.Morgan also will pay a $350 million fine to the Office of the Comptroller of the Currency.
“When JPMorgan suspected Mr. Madoff’s fraud, it focused on its own investment exposure and saved itself approximately $250 million,” noted FinCEN Director Jennifer Shasky Calvery. “If it had given the same attention to its anti-money laundering responsibilities, it could have saved itself $2 billion, and potentially saved thousands of other fraud victims untold misery and loss.”
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 Madoff could be engaged in fraud that culminated in the identification of several “red flags” by 2008. These red flags included:
(1) Madoff’s investment performance appeared too good to be true;
(2) Madoff’s trading techniques and investment activity lacked expected transparency;
(3) Madoff used a small, unknown auditor; and
(4) Madoff repeatedly refused to provide full information to JPMorgan as part of its due diligence reviews.
Moreover, according to FinCEN, 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 its 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. Madoff also drained billions of dollars out of BLM’s JPMorgan accounts during this time period. When 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, according to FinCEN.
FinCEN determined that the penalty would be $461 million, based on what it said was the suspicious transactions that flowed through Madoff’s primary account at JPMorgan during 2008.
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