JP Morgan Chase to pay $1.7 bn in penalties for Madoff ties

The US prosecutors have secured a whopping $1.7 billion penalty from banking giant J P Morgan, which has been criminally charged for ignoring warning signs of Bernard Madoff's massive Ponzi scheme and will pay the amount to the victims of the Madoff fraud.

Manhattan's top federal prosecutor India-born Preet Bharara on Tuesday announced an agreement with JPMorgan, under which the bank agreed to accept responsibility for turning a blind eye to the Ponzi scheme run by Madoff.

The Jamie Dimon led-bank agreed to pay a $1.7 billion penalty to the victims of the Madoff fraud through a parallel civil forfeiture complaint; to refrain from future criminal conduct and cooperate fully with the government.

The criminal charges are contained in a two-count felony information.

Assuming the bank's continued compliance with the agreement, the government has agreed to defer prosecution on the information for a period of two years, after which time the government will seek to dismiss the charges.

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The bank is facing a slew of government legal actions and the penalties it has to pay to settle these cases now total $20 billion.

"Today, the largest financial institution in the country stands charged with two criminal offenses.

“Institutions, not just individuals, have an obligation to follow the law and to police themselves.

“They must exercise due care not only with their own money but with other people’s money also," Bharara said at a news conference while announcing the settlement.

He said JPMorgan ‘connected the dots’ when it mattered to its own profit but was not so diligent otherwise.

"The bank has accepted responsibility and agreed to continue reforming its anti-money laundering practices.

“Most importantly, the victims of Bernie Madoff’s epic fraud are $1.7 billion closer to being made whole," he said.

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The criminal charges against JPMorgan Chase consist of two felony violations of the Bank Secrecy Act, in connection with the bank’s relationship with Bernard Madoff Investment Securities.

According to the documents filed in Manhattan federal court, JPMorgan and its predecessor institutions had served as the primary bank since 1986 through which Madoff ran his Ponzi scheme.

JPMorgan had designated a banker as Madoff's relationship manager’, who was principally responsible for Madoff's business with the bank, including certifying that the Madoff relationship complies with relevant legal and regulatory-based policies and that the necessary due diligence has been performed.’

The government said given the ‘unique vantage point’ as the firm's banker, J P Morgan had reason to be ‘suspicious’ about Madoff.

It said other banks involved in certain transactions with Madoff recognised them as suspicious and without any legitimate business purpose.

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Unlike JPMorgan, these banks not only filed a suspicious activity report with law enforcement, but closed down Madoff’s account.

As a result, Madoff moved all of his accounts from these banks to JPMorgan, where the size of these transactions became much larger.

Over the years while JPMorgan filed a report with UK regulators about its concerns relating to Madoff, it failed to do so in the United States.

While the suspicions raised by the UK bankers led to JPMorgan's own redemptions from Madoff feeder funds, during the same time, US-based anti-money laundering compliance officers at JPMorgan never looked into Madoff.

"The US compliance officers did very little to investigate suspicions (over Madoff's investments), failed to raise these concerns with the bank’s anti-money laundering department, and failed to file a SAR," the government said.

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Meanwhile, the balance in the J P Morgan account that held the billions Madoff stole from his customers was being drained.

In August 2008, the account held approximately $5.6 billion.

But by October that year the balance had fallen to $3.7 billion.

Over the next five weeks before Madoff's arrest, a little over $2 billion exited the bank account.

By the time Madoff was arrested on December 11, 2008, only about $234 million remained in his bank account with JP Morgan.

JPMorgan has agreed to waive indictment and to the filing of the information, charging the bank with violations of the Bank Secrecy Act.

Count one of the information charges that JPMorgan failed to maintain an effective anti-money laundering program in 2008, as required under the BSA.