Big Banks Are Knee-Deep in the Dirty Money-Laundering Business

In the 1980s, Antonio Gebauer was J.P. Morgan & Co.'s top man South of the Border, lauded by a Morgan spokesman as  "the most highly esteemed banker in Latin America." Gebauer specialized in putting together multi-million-dollar loan deals across the region. He also oversaw covert New York bank accounts for a handful of wealthy Brazilians, among them a great-grandson of the founder of Brazilian Republic.

Brazilian authorities later questioned whether the money was unreported capital. Gebauer's attorney said the accounts had been set up under  "the unusual and Byzantine relationships that often exist between bankers and flight capitalists."

The secret deposits might have remained secret if Gebauer hadn't been caught embezzling more than $4 million from his clients' accounts. In 1987, a U.S. judge sentenced him to 3½ years in prison, calling him " a fallen angel of the banking world."

U.S. media touched on the flight capital issue briefly, and the government of Brazil filed a treaty request asking U.S. authorities to subpoena account details from Morgan officials.

The bank won a court decision blocking Brazil's push to get more information. And Gebauer's guilty pleas allowed the House of Morgan to avoid a messy trial that have might revealed  "the seamier side" of its Latin American operations, according to Henry's 2003 book on the dark side of global finance,  Blood Bankers.

Post-9/11 World

The issue of dark money didn't go away after J.P. Morgan & Co. and Chase Manhattan Corp. merged in late 2000, creating JPMorgan Chase & Co.

In March 2001, a U.S. Senate investigation revealed Chase Manhattan had been among big firms that had provided correspondent accounts to offshore banks involved in criminal activity. Investigators found that Antigua-licensed American International Bank moved $116 million through its account at Chase even as it was engaging in frauds in the U.S. and working hand-in-hand with convicted felons.

After the Sept. 11, 2001, terrorist attacks, tracking illicit cash became a bigger concern for U.S. authorities. Lormel, the former FBI official, says JPMorgan representatives were among the compliance specialists from various banks who pitched in after Sept. 11 and helped efforts to track terrorists.

"Whatever we wanted, within the limits of the law, the bankers were incredibly helpful," he recalls.

JPMorgan's post-9/11 record wasn't spotless, however.

In January 2003, federal authorities raided a business in Brooklyn called Carnival French Ice Cream, a convenience store with a limited supply of food and sundries and two soft-serve ice cream machines. During their search, investigators found paperwork that led them to conclude that, over a six-year period, the store's proprietor had laundered millions of dollars through a JPMorgan account on its way to Yemen, China and other places.

Some of the money, investigators believed, went to a Yemeni cleric who later pleaded guilty to charges that he had conspired to aid terrorists.

In February 2003, a month after the ice-cream shop raid, investigators for then-Manhattan District Attorney Robert Morgenthau raided an unlicensed money transfer firm, Beacon Hill Services Corp., that maintained dozens of accounts with JPMorgan.

Morgenthau said Beacon Hill was able to wire $9 billion through these accounts because the JPMorgan's compliance unit "fell down on the job," ignoring "numerous red flags for money laundering." A sizeable chunk of the money, he said, came from drug dealers and tax dodgers, and some ended up in the Middle East, possibly in the hands of terrorists.

No criminal charges were filed against JPMorgan in the case.

In the wake of these cases, industry officials argued it wasn't fair to expect banks to catch every questionable transaction amid trillions of dollars in daily cash flows.