20140110 USD2,000 million fine? Where’s the outcry?

At long last the US has taken action against one of the entities that failed to properly monitor the fraudulent activities of Bernard Madoff. One has to hope that the investigation does not stop there: his activities were not, presumably, conducted only through JP Morgan.


The bank failed to identify his actions and the associated money laundering and therefore did not file SARs. Tellingly, the case broke days after a FinCEN spokesman announced the withdrawal of a counter-money laundering compliance regime for so-called hedge funds saying “we have eyes on the money through the banks.” Well, that only works if the banks open their eyes. The Madoff scam went on for year after year and no bank filed any SAR.

While the Manhattan DA’s office (it still feels like it’s Robert Morganthau’s domain even though he’s now two DAs ago) is proud that it has secured an agreement for the “largest ever bank forfeiture and largest ever [Department of Justice] penalty for a Bank Secrecy Act violation,” It means “breach” – why do Americans have to try to make everything sound bigger. “Violation” is a serious word and should be reserved for especially horrible offences like rape and child abuse.

It wasn’t as if JPM was not on notice: in 1999 they were warned by a fund manager that Madoff’s figures didn’t make sense. In addition, the bank had sufficient information within its own books to build convincing suspicion – it just didn’t do it. And while all kinds of motives are ascribed to the failure, the bottom line is that it doesn’t matter.  There were facts. If they were joined up a reasonable man would have been suspicious. There was evidence that individuals within the bank were actually suspicious. There is no question: SARs should have been filed. They were not. Quod erat demonstrandum. Why they were not is irrelevant as to guilt, only as to motive.(*)

Note that the bank has not been charged with money laundering but only with technical offences and even then no officers have been charged or subjected to regulatory sanctions. But it will almost certainly avoid conviction: the deal it has done with prosecutors and regulators is for a “deferred prosecution.” What that means is this: the bank consented to the laying of charges and the commencement of a criminal prosecution. Prosecutors agreed to take no further action provided that the bank paid a substantial amount of money and agreed to undertake a major review of its money laundering risk management and compliance systems and to file progress reports. Provided it keeps its nose clean for two years, prosecutors will withdraw the case.

In most deals of this sort, the payment of moneys is tantamount to (depending on one’s position) a bribe or extortion, albeit one sanctioned by the Court. But in this case it’s more like blood money: the USD1,700m “fine” will actually pass to the Madoff estate to compensate victims of the fraud. However, there is, as yet, no word as to whether that payment will result in a settlement between the bank and those who claim it failed to exercise due diligence and therefore they lost money.

Yet there is another question: where is the public outcry over the penalties relating to the Madoff affair? Why is the US media not stirring up a storm, why are the regulators not pushing the story? It is because it’s a US bank that’s in trouble? When the same regulators chase a UK or Swiss Bank, the public ire that is stirred up is close to hysteria. Why, then, when it’s a home-grown scandal is it shrugged off? It’s a big story: not because of the penalty although that’s been the headline grabbing feature. The big story is that a major US bank failed to take its financial crime risk management obligations seriously at a time that the USA is battering the rest of the world. The story is the systemic management failures, the top-to-bottom culture and the arrogance.

The penalty isn’t going to harm the bank’s balance sheet nor have any lasting impact on its share price. The failure to draw attention to the failings in 36 point type means that its reputation will suffer minor cuts that will heal quickly. Whereas the world’s media repeatedly brings up UBS, Lloyds, HSBC and StanChart’s cases, the JPM case will drift quietly into the backwoods.

And yet the bottom line is this: financial entities that do perform risk management assessments on counter-parties now have clear evidence: JPM has not, for several years, performed adequate due diligence on major clients. That makes dealing with the bank a higher risk. While shareholders and the media may shrug off the findings, those who have been dealing with the bank should question how much dirty money JPM has passed to them.

The case demonstrates, yet again, that it is a fallacy to rely on the presumption that any financial sector company operating in an FATF country is safe to deal with. While some are worried that a bank might be “too big to fail” a bigger concern is whether it thinks itself “too big to comply.”

JPM: Just Print Money. And pay nor more than lip service legal and regulatory obligations.

* extracted from my book Understanding Suspicion in Financial Crime

© 2014 Nigel Morris-Cotterill
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