In three coordinated settlements this week, JPMorgan paid approximately $2.5 billion mostly based on its failure to alert US authorities to the Madoff fraud. Employees of JPMorgan, which had banking and investing relationships with Madoff, had periodically questioned the legitimacy of his activities. In mid-2007, JPMorgan employees discussed rumors about Madoff, but, as one senior employee asked, could a firm regulated by the Securities and Exchange Commission and other securities regulators really be perpetrating a massive fraud? Over the next year, certain employees of JPMorgan continued puzzling over how Madoff was earning his returns. In October 2008, they formally notified British authorities about the bank's deepening concerns and its plans to reduce its Madoff exposures. This week's settlements fault JPMorgan for not simultaneously filing anti-money laundering reports in the United States. Settlement documents reveal that suspicions about Madoff also were not effectively communicated within JPMorgan to US operations that had significant exposure to Madoff.
JPMorgan's failures aren't too surprising for a large bureaucratic institution. Had JPMorgan notified the Department of Treasury's anti-money laundering arm in October 2008 (ahead of Madoff's December arrest) when it made its filing with UK officials, would Treasury have reacted in time to meaningfully limit the investor losses? Unlikely. Had JPMorgan responded to earlier red flags and filed a "suspicious activity report" with Treasury, would investors have been spared some of their pain? Perhaps, but another part of the government's large bureaucracy--the Securities and Exchange Commission--already had information about the fraud and didn't use it or pass it on to other agencies that could have used it. Large institutions--private and public--struggle to collect, share, and use information well.
As part of the settlement, JPMorgan promised to whip its anti-money laundering system into shape to make sure no future red flags fall through the cracks. If it manages to do so, government agencies might be able to learn a lesson or two from it.