The settlement, announced Tuesday, includes a so-called deferred prosecution agreement that requires the bank to acknowledge its failures but also allows it to avoid criminal charges, which have been deferred for two years pending reforms at the bank. No individual executives were accused of wrongdoing.
The US attorney's office for the southern district of New York said the bank will be charged with two violations of the Bank Secrecy Act (BSA) in connection with Madoff’s con. The act requires banks to file suspicious activity reports when they "detect certain known or suspected violations of federal law or suspicious transactions".
The fine, which is subject to court approval, is the "largest ever bank forfeiture and largest ever [Department of Justice] penalty for a Bank Secrecy Act violation," according to the attorney’s office.
Manhattan attorney general Preet Bharara will give further details about the fine and JP Morgan’s relationship with Madoff on Tuesday afternoon. Federal regulators are also expected to issue their own rebuke of the bank on Tuesday.
Madoff was arrested at his Manhattan penthouse five years ago last month after his $20bn scam came to light. He is currently serving a 150-year prison sentence. JP Morgan was his bank for two decades and the US authorities charge that the bank continued to service his business even though staff suspected something was wrong.
The fraudster himself predicted the bank would one day face a big fine over their relationship. In a 2011 interview with the Financial Times he said: “JPMorgan doesn’t have a chance in hell of not coming up with a big settlement.” He claimed: “There were people at the bank who knew what was going on.”
The payment brings the total of fines imposed on JP Morgan to nearly $20bn in the past year. The bank has also been fined for its mortgage bond sales and still faces an investigation into its hiring of the children of Chinese officials, a move allegedly made to drum up business.
The bank will have to make quarterly reports to the US authorities for the next two years in order to prove it is in compliance with the BSA and anti-money laundering legislation.
US authorities believe that Madoff Securities operated as a Ponzi scheme for more than three decades. While Madoff claimed to have technical formula that allowed him to produce outsized returns, he was in fact paying people with money taken from new clients in a giant pyramid scheme.
At the time of its collapse in December 2008 Madoff Securities claimed to have assets of more than $65bn. In fact its assets were worth around $300m.
The US authorities claim JP Morgan bankers were aware that Madoff was running a scam, one that was run almost exclusively through the bank. This arrangement continued even as the bank’s own analysts were worried that Madoff was a fraudster.
In October 2008, a derivative analyst wrote a memo in which he questioned Madoff’s alleged investment strategy. The memo questioned Madoff’s “odd choice” of a small, unknown accounting firm to audit his books and that the bank seemed to be relying on “Madoff’s integrity” with little to validate that decision. “There are various elements in the story that could make us nervous,” the memo stated, including an “apparent fear of Madoff, where no one dares ask any serious questions as long as the performance is good.”
According to court papers filed by Irving Picard, the trustee charged with recouping losses for Madoff’s victims, another JP Morgan banker claimed Madoff’s “Oz-like signals” were difficult to ignore some 18 months before the scheme collapsed.
Picard’s filings also quote a June 2007 email from a senior JP Morgan banker warning colleagues that another banker “just told me that there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme.”
In late October 2008 the bank did alert the UK’s serious organised crime agency (SOCA) that Madoff’s returns were “too good to be true – meaning that it probably is.” However it did not file a suspicious activity report with the US authorities.
The attorney general’s agreement states that JP Morgan “Wilfully” failed to report Madoff’s suspicious activity and that its own internal compliance systems were inadequate.
JP Morgan has always denied wrongdoing in the case. In a statement the bank said 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”.
But the bank added that it did not believe any JP Morgan employee had knowingly assisted Madoff’s Ponzi scheme. “Madoff’s scheme was an unprecedented and widespread fraud that deceived thousands, including us, and caused many people to suffer substantial losses,” said the bank.
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image: © U.S. Department of Justice