By Brett Wolf and Aruna Viswanatha
REUTERS - U.S. regulators plan to fault JPMorgan Chase & Co (JPM.N), which served as Bernie Madoff's main bank for two decades, for failing to conduct adequate due diligence and report suspicious activity, according to a person familiar with the matter.
The Office of the Comptroller of the Currency is expected to issue a cease-and-desist order against JPMorgan, which will require the largest U.S. bank to put an end to the alleged failures in its anti-money laundering practices.
The timing of the order is uncertain but could come later this year, the source said. A fine is not expected. If the OCC is not satisfied with JPMorgan's response, it can take harsher action against the bank, including financial penalties.
OCC spokesman Bryan Hubbard declined comment, as did JPMorgan spokeswoman Jennifer Zuccarelli.
Madoff was arrested in December 2008, pleaded guilty in 2009 to running a massive, decades-long Ponzi scheme, and is serving a 150-year prison sentence.
Irving Picard, a trustee for Madoff's victims, has accused JPMorgan of ignoring warning signs that Madoff's business was a fraud and has attempted to sue the bank. A judge has tossed out all but $425 million of Picard's $19.9 billion lawsuit against JPMorgan. Picard is in the process of appealing the ruling.
JPMorgan has said there was no evidence showing that anyone at the bank knew of Madoff's elaborate scheme. The bank did file a suspicious activity report in London two months before Madoff was arrested, describing his investment performance as "too good to be true," according to Picard's lawsuit.
The OCC will fault JPMorgan for treating Madoff and his related entities as low-risk customers, and find that the bank failed to heed red flags, such as funds being shuffled between accounts without clear business purpose, said the person familiar with the matter. As a result, "suspicious" transactions were not reported to authorities, said the source, who was not authorized to speak publicly about the matter.
The OCC in January ordered JPMorgan to tighten its risk controls and improve its anti-money laundering compliance. But the regulator separated that order from any action related to Madoff's accounts, in a dispute with the bank over which documents it had to turn over as part of the inquiry.
The inspector general of the Treasury Department, which houses the OCC, has since ordered JPMorgan to work with regulators in the Madoff inquiry and rejected the bank's argument that certain documents were protected by attorney-client privilege.
"The matter is still pending," said Richard Delmar, counsel to the Treasury's watchdog office.
JPMorgan has a recent history of tense relations with the OCC. A report released last month by a Senate investigative panel revealed frequent clashes between the regulator and the bank over its $6 billion "London Whale" trading losses.
In a letter to shareholders last Thursday, JPMorgan CEO Jamie Dimon said he expected more regulatory action against the bank in the coming months. "We received regulatory orders requiring improved performance in multiple areas, including mortgage foreclosures, anti-money laundering procedures and others. Unfortunately, we expect we will have more of these in the coming months," Dimon said.
"We need to and will do all the work necessary to complete the needed improvements identified by our regulators," he said.
U.S. authorities have stepped up efforts to police illicit money flows, and have ordered banks like Citigroup (C.N) and Germany's HSH Nordbank to improve their controls.
In December, HSBC (HSBA.L) agreed to pay a record $1.9 billion in civil and criminal fines, largely to resolve charges that it failed to detect money from drug trafficking which was flowing from Mexico into the United States.
And in one of the first bank mergers to be publicly impacted by money-laundering concerns, on Friday M&T Bank Corp (MTB.N) said its proposed purchase of Hudson City Bancorp Inc (HCBK.O) will probably take more time to close because the U.S. Federal Reserve had identified concerns with M&T's anti-money laundering systems.
(Reporting by Brett Wolf in St. Louis and Aruna Viswanatha in Washington D.C.; Editing by Karey Van Hall and Tim Dobbyn)