As detailed in the New York Times's Dealbook, "Federal prosecutors in Manhattan imposed a $1.7 billion penalty on JPMorgan, striking a criminal settlement deal involving two felony violations. The prosecutors, essentially accusing the nation’s biggest bank of turning a blind eye to Mr. Madoff’s fraud, will force JPMorgan to pay the sum to his victims. Later on Tuesday, federal regulators are expected to announce their own rebuke of the bank in a civil case. All told, JPMorgan is likely to pay some $2 billion to resolve the Madoff investigations..."
In assessing these penalties, the government determined that JPMorgan failed to properly report Madoff's activities in violation of well-established Bank Secrecy Act and Anti-Money Laundering ("BSA/AML") requirements which require banks to file suspicious-activity reports, or SARs, when they "detect certain known or suspected violations of federal law or suspicious transactions." As detailed in Dealbook, a JPMorgan spokesman acknowledged that the bank “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 made clear that JPMorgan "did not believe that any JPMorgan Chase employee knowingly assisted Madoff’s Ponzi scheme.” He added that “Madoff’s scheme was an unprecedented and widespread fraud that deceived thousands, including us, and caused many people to suffer substantial losses.”
Setting aside the fact that other government regulators had been on notice of Madoff's nefarious activities, yet did nothing to stop him (see the Wall Street Journal's analysis of this point), the government's actions should put other financial institutions on notice: financial institutions are to be the first line of defense in ferreting out any criminal activity that their customers may be engaging in. Accordingly, all financial institutions should review, among other things, their Bank Secrecy Act, Anti-Money Laundering, Know Your Customer, Enhanced Due Diligence, and Suspicious Activity Reporting policies to ensure that customer activity is being properly monitored and -- when appropriate -- reported to the government.
Of course, whenever the government throws a red flag, private parties often pick it up and wave it. In 2008, I wrote an article entitled "There Is A Reason That RICO is a Four Letter Word" which analyzed how victims of fraud were suing banks based upon the same theory that the government used against JPMorgan: had the bank been more vigilant, it would have caught the bad guy and stopped the fraud before it began. As detailed in that article, fraud victims attempt to use the BSA/AML requirements to establish common-law duties owed to them and attempt to use these alleged duties to assert negligence, fraud, RICO and/or aiding and abetting claims against the banks. The government's high-profile treatment of JPMorgan may re-ignite this smoldering trend.
Banks are vital to the health of our economy and, for the protection of the public, the banking industry is one of the most highly regulated and supervised industries in the world. For tens of millions of Americans, banks are the first choice for saving, borrowing and investing. More often than not, banks are nothing more than a conduit for transactions. Unfortunately, the things that make banks so important to our society also make them the targets of people -- and in JPMorgan's case, the government -- who see them as deep pockets.