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

JPMorgan's general counsel told  The Wall Street Journal: "Think if you're running a railroad, and we say to you, 'We want you to monitor everyone who takes your train and see if their trip is legitimate.' "

'Uniquely situated'

Questions about how well JPMorgan monitors its customers persisted over the past decade, coming up in lawsuits and investigations relating to the Enron and Madoff affairs and other scandals.

Investors, insurers and federal authorities  accused JPMorgan and Enron Corp. of using "special purpose vehicles" based in tax havens in the UK's Channel Islands as part of a scheme to create disguised loans that allowed Enron to hide its debts and book sham profits. The bank, which denied wrongdoing, shelled out more than  $3 billion to settle claims related to Enron's fall.

After the Madoff case broke in 2008, a court-appointed trustee, Irving Picard, invoked Enron in attacking JPMorgan's role in the largest Ponzi scheme in history. JPMorgan turned a blind eye to Madoff's activities, Picard claims, despite its promises to do better after it had been caught "propping up" Enron's frauds.

JPMorgan, Picard asserted, was "at the very center" Madoff's Ponzi scheme. As his primary bank for more than two decades, it "provided the infrastructure for Madoff's deception" and was "uniquely situated to see the likely fraud," the trustee alleged in a lawsuit in federal court.

The bank held as much as $5.5 billion in Madoff-connected cash and, according to court filings by Picard, earned an estimated half-billion dollars from fees and other revenues generated by Madoff's billions.

Any concerns within the bank about Madoff "were suppressed as the drive for fees and profits became a substitute for common sense, ethics and legal obligations," Picard's lawsuit said.

The suit said the bank ignored a key indicator of money laundering or other financial crimes: frequent wire activity with offshore banking centers and financial secrecy havens. Within Madoff's main account at JPMorgan, dollar amounts of wire activity with high- and medium-risk jurisdictions increased 83 percent between 2004 and 2008.

In June 2007, a JPMorgan risk officer raised questions about whether Madoff might be running a Ponzi scheme. Other than asking a junior employee to do a Google search, JPMorgan officials did nothing to dig deeper into Madoff's business model, Picard charged. Madoff's main JPMorgan account was still operating without restrictions when he was arrested at the end of 2008.

The bank calls Picard's allegations "blustering" and "preposterous."

"The trustee's damages claims demand the absurd inference that JPMorgan deliberately joined with Bernard Madoff in a doomed-to-fail Ponzi scheme so that it could earn conventional banking fees,"  the bank said in a court filing.

A judge threw out many of Picard's claims against JPMorgan, ruling that it's up to individual victims rather than the trustee to sue the bank. That decision is on appeal. Other claims are still alive in bankruptcy court.

Last month, the New York Times reported that U.S. prosecutors have opened a new front in the case, investigating whether JPMorgan violated federal law by failing to fully inform authorities about suspicions about Madoff.

A bank spokesman told the Times the JPMorgan employees made "good faith" efforts "to comply with all anti-money-laundering and regulatory obligations."

EL MORGANGATE

As the fallout from Madoff's fraud and the 2008 financial crisis was spreading across Wall Street, JPMorgan was dealing with  another scandal 5,000 miles away.

An Argentine newsmagazine, Crítica de la Argentina, had run an exposé listing the names and deposit balances of some 200 citizens with JPMorgan accounts in the U.S. — including executives associated with the country's largest media company.