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09 Jan 2014

Cross-Border Money laundering reporting lessons from the latest JP Morgan case in the USA

In this latest post-2008 banking crisis case, JP Morgan Chase Bank has been ordered to pay $1.7 billion in compensation to Madoff victims as part of a US Deferred Prosecution Agreement (DPA) entered into with the US Department of Justice.

To look on the bright side of this case for a moment, the reaction of the bank’s UK operation to its exposure to the Madoff funds might be regarded as pretty impressive; at least if you compare it to the complete failure of the US regulators in particular to take any action at all against Madoff until it was too late.  On one view it shows that the UK money laundering reporting regime, despites the many criticisms made of it over the years, might not be so bad after all.  Certainly the bank in 2008 did what would be expected of them, in the UK at least.  The compliance failure at the centre of the DPA arose because of the absence of communication within the bank about the potentially serious criminal consequences that might flow from a failure by the bank’s US operation to investigate its relationship with Madoff in the light of the reports made to the UK authorities.

In London, senior figures within the bank were concerned about the significant value of the derivative products it was issuing linked to Madoff “feeder funds”.  As a result a committee convened in 2007 by the Chief Risk Officer in London rejected a request to invest over $1.3 billion of the bank’s own capital in Madoff funds.  The committee was told about the “well known cloud” over Madoff and of speculation that his returns might be part of a Ponzi scheme.  The bank’s staff in London increased their due diligence resources to investigate the Madoff funds further and in October 2008 the bank filed a Suspicious Activity Report with the Serious Organised Crime Agency in London (now the National Crime Agency).  That report listed Madoff Securities as the Main Suspect and it concluded that the Madoff returns were probably too good to be true.  A further SAR was filed in London with SOCA on 19 November 2008 lest the bank might “be considered party to laundering the proceeds of crime”.

The problem was that, despite a senior official in the bank’s US operation being notified of the concerns being raised in their London office, it did not make similar anti-money laundering reports to the US authorities.  There was no effective intra bank protocol for sharing information about suspicious transaction reports made in one jurisdiction with the bank’s compliance staff in another jurisdiction.

Instead of reporting the matter to the US authorities, the bank continued to reduce its exposure to Madoff funds and on 11 December 2008 Madoff was arrested by the FBI.

So the lesson to be learned must be that merely making a Suspicious Activity Report to the UK authorities will not be enough where there is a clear risk of exposure to allegations of money laundering, fraud or serious compliance failure in another country.  Sometimes it really is important to ensure that the right hand not only knows what the left hand is doing but also fully understands the consequences.

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