For more than 15 years, there were signs something was amiss with what federal prosecutors in Manhattan call the “703 account” at JPMorgan Chase & Co.
Money was being transferred back and forth for no reason. The account holder was recording double-digit returns on investments that were too good to be true. The bank itself was worried enough about possible fraud to withdraw its own investments from him.
The name on the account was Bernard Madoff, and on Tuesday, JPMorgan paid a steep price for keeping quiet about its suspicions.
US federal authorities announced that the nation’s largest bank will add to its other costly financial woes by forfeiting a record US$1.7 billion to settle criminal charges alleging it turned a blind eye to the Madoff fraud, plus pay an additional US$543 million to settle civil claims by people who lost money.
It also will pay another US$350 million civil penalty for what the US Treasury Department called “critical and widespread deficiencies” in its programs to prevent money laundering and other suspicious activity.
The bank failed to carry out its legal obligations to guard against money laundering while Madoff “built his massive house of cards,” George Venizelos, head of the FBI’s New York office, said at a news conference.
Madoff banked at JPMorgan through what court papers referred to as the “703 account.” In 2008, the bank’s London desk circulated a memo describing JPMorgan’s inability to validate his trading activity or custody of assets and his “odd choice” of a one-man accounting firm, the government said.
In late October 2008, it filed a suspicious activity report with British officials. In the weeks that followed, JPMorgan withdrew about US$300 million of its own money from Madoff feeder funds. The fraud was revealed when Madoff was arrested in December 2008.
“Despite all these alarm bells, JPMorgan never closed or even seriously questioned Madoff’s Ponzi-enabling 703 account,” US Attorney Preet Bharara said. “On the other hand, when it came to its own money, JPMorgan knew how to connect the dots and take action to protect itself against risk.”
In a statement, JPMorgan said it recognized it “could have done a better job pulling together various pieces of information and concerns about Madoff from different parts of the bank over time.”
It added: “We do not believe that any JPMorgan Chase employee knowingly assisted Madoff’s Ponzi scheme.”
US prosecutors called the US$1.7 billion the largest forfeiture by a US bank and the largest US Department of Justice penalty for a Bank Secrecy Act violation.
The settlement includes a so-called deferred prosecution agreement that requires the bank to acknowledge failures in its protections against money laundering, but also allows it to avoid criminal charges. No individual executives were accused of wrongdoing.
The agreement resolves two felony violations of the Bank Secrecy Act in connection with the bank’s relationship with Bernard L. Madoff Investment Securities, the private-investment arm of Madoff’s former business. The civil penalty was imposed by the US Treasury Department’s Office of the Comptroller of the Currency.
Criminal charges will be deferred for two years as JPMorgan admits to its conduct, pays the US$1.7 billion to a fund established for people who lost money to Madoff’s fraud and reforms its anti-money-laundering policies, prosecutors said.