Two Big Takeaways From the Madoff/JPMC Compliance Settlement

Today's post is by guest blogger, Michael Blaes.

On Tuesday, JP Morgan Chase (JPMC) and U.S. District Attorney Preet Bharaha announced a landmark settlement of claims arising from the fraudulent schemes perpetrated by Bernard Madoff.
As reported in the New York Law Journal (subscription required), Bharaha took the opportunity to highlight the message that it should stand as a clear and critical message on reporting compliance for banks and as a harbinger of things to come.

The article and the investigation both demonstrate a principle I like to call the “Mosaic Theory” of non-compliance. Each of the myriad compliance failures, while serious, could not possibly justify the magnitude of enforcement action taken against JPMC. When viewed as a whole, with the benefit of hindsight, though, each insular failure becomes part of terribly damaging portrait of systemic insufficiency.

It is not as though no oversight was being performed. It was. The investigation highlights many points at which the oversight of the Madoff accounts roused the suspicion of qualified employees. But, JPMC’s failure to aggregate the points of suspicion into one holistic body of evidence eventually damned them.

When the scheme inevitably came toppling down, a sober review of the evidence showed that JPMC, at various points, knew that suspicious activity existed in the accounts and either didn’t investigate further or even allow their own disparate points of suspicion to coalesce into the necessary motivation to sound the alarm bells with the government. Ultimately, it appears JPMC decided not to file Suspicious Activity Reports many times. Although each decision may have been defensible, the government nonetheless held the company responsible because taking no action, given so many points of concern, was not.

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