NEW YORK — Before Bernard L. Madoff was charged with stealing billions from clients, and before he received a 150-year prison sentence, JPMorgan Chase missed its chance to warn federal authorities about his Ponzi scheme.
On Tuesday, five years after Madoff’s arrest set off a panic on Wall Street and in Washington, Madoff’s main bank got a punishment of its own.
Federal prosecutors in New York imposed a $1.7 billion penalty for two felony violations of the Bank Secrecy Act, a record payout under that 1970 law, which requires banks to alert authorities to suspicious activity. The prosecutors, essentially accusing the nation’s biggest bank of turning a blind eye to Madoff’s fraud, will require JPMorgan to pay the $1.7 billion to his victims. The bank cannot write off the sum as a tax deduction.
US regulators announced their own rebuke of the bank, with the Office of the Comptroller of the Currency striking a $350 million settlement. All told, after these settlements JPMorgan will have doled out some $20 billion to resolve government investigations over the last 12 months.
The criminal element of the case involved a so-called deferred-prosecution agreement with prosecutors in New York, which suspends for two years an indictment as long as JPMorgan admits its actions and overhauls its controls against money laundering. Such agreements, while not as forceful as leveling an indictment or demanding a guilty plea, have been rarely used against a giant US bank and are typically employed only when misconduct is extreme.
“JPMorgan as an institution failed and failed miserably,” said Preet Bharara, the US attorney in New York.
George Venizelos, a senior FBI official, said, “JPMorgan failed to carry out its legal obligations while Bernard Madoff built his massive house of cards.”
JPMorgan, Madoff’s primary bank for more than two decades, had a unique window into his scheme. Prosecutors argued that “the Madoff Ponzi scheme was conducted almost exclusively” through various accounts “held at JPMorgan.”
In 2007 and 2008, JPMorgan’s computer system raised red flags about Madoff, prosecutors said. But both times, bank employees “closed the alerts.”
The FBI and prosecutors traced the problem to JPMorgan’s “willfully” failing to create sufficient controls against money laundering. “There was no meaningful effort by the Bank to examine or investigate the Madoff Securities banking relationship,” prosecutors said.
A JPMorgan spokesman said the bank has poured resources into bolstering its controls but acknowledged it “could have done a better job.”
The spokesman, Joseph M. Evangelisti, defended the bank’s employees, saying, “We do 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.”
Prosecutors did not charge any JPMorgan employees. The bank itself could have faced a harsher punishment, said people briefed on the settlement talks. Ultimately, prosecutors concluded a deferred-prosecution agreement was more appropriate for a case that began as a civil investigation.
The charges against JPMorgan are emblematic of a broader problem among global banks: ignoring the warning signs of fraud. A year ago, the British bank HSBC paid a $1.9 billion fine for money laundering for enabling Mexican drug cartels to move cash.
JPMorgan alerted British authorities in October 2008 that Madoff’s investment returns were “so consistently and significantly ahead of its peers” that they must be “too good to be true.” But JPMorgan never warned US authorities.
Another bank, identified as “Madoff bank 2,” cut ties to Madoff in 1996 and brought its concerns to authorities.
On Tuesday, JPMorgan announced $543 million in payouts to resolve private lawsuits from the trustee overseeing the return of money to Madoff’s victims. The trustee, Irving H. Picard, had initially sought billions.
As JPMorgan continues to post record profits, the cases are a distraction that the bank is aiming to resolve in rapid succession.