Probe focuses on JPMorgan's monitoring of suspect transactions

Mon Sep 17, 2012 7:19am IST

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* OCC probe focused on systems, personnel - sources

* OCC examiner for JPM known for tough oversight

* JPMorgan may be hit by regulatory order from OCC

By Carrick Mollenkamp and Brett Wolf

Sept 16 (Reuters) - A U.S. regulatory probe of JPMorgan Chase & Co's anti-money laundering systems is focusing on potential lapses in how the largest U.S. bank monitors suspect money transactions, according to people familiar with the situation.

The probe appears to be focused on the systems and personnel that JPMorgan uses to safeguard against illicit money flows, the sources said, declining to be identified because they were not authorized to speak to the media.

One specific angle of the probe is how the bank's systems were set up to review a high volume of suspect transactions.

Banks are required to file reports of suspicious activity but that can add to costs. Regulators and banks sometimes disagree over whether those reviews produce reports that actually identify financing tied to illegal narcotics, terrorism or sanctioned countries.

JPMorgan faces being hit with a regulatory order by the U.S. Office of the Comptroller of the Currency, which regulates national banks. That order would identify lapses and require the bank to tighten the anti-money laundering systems it uses.

The OCC and the bank declined to discuss the details of the probe.

The probe adds to problems facing CEO Jamie Dimon, whose reputation for running one of the safest U.S. banks was dealt a blow earlier this year when it suffered a $5.8 billion trading loss. A U.S. Senate committee has launched a probe into the "London Whale" trading losses.

The OCC probe - and potentially inquiries by other regulators such as the U.S. Justice Department - could still widen and identify specific transactions that allowed illicit funds to move through the bank.

A lead OCC examiner in charge of overseeing JPMorgan has a reputation for a hard-nosed approach to uncovering money laundering at major banks, according to other people familiar with the situation.

The OCC probe comes at a time when U.S. authorities have launched a broad crackdown on money laundering. This year, a U.S. Senate probe of British bank HSBC Holdings Plc and a New York investigation into Standard Chartered Plc, also of the U.K., identified transactions tied to drug cartels in Mexico and sanctioned countries such as Iran.

HSBC set aside $700 million to cover potential settlement or fines, while Standard Chartered reached a $340 million settlement with the New York banking regulator.

In August of last year, a U.S. Treasury department that oversees violations against U.S. sanctions fined JPMorgan $88.3 million for what it called "egregious" violations of U.S. economic sanctions programs.

The OCC, which is now investigating the bank, is a separate unit within the Treasury Department.

The OCC has also come under increasing pressure to ferret out problems inside the banks it regulates. As part of the Senate probe of HSBC, the Senate panel said the OCC allowed compliance problems to "fester" at HSBC and that it failed to take action to correct the problems.

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The OCC probe of JPMorgan pinpoints problems at anti-money laundering offices the bank operates in cities such as Columbus, Ohio; Wilmington, Delaware; Arlington and San Antonio, Texas; and Phoenix, Arizona.

Those offices and its New York headquarters are JPMorgan's line of defense against allowing foreign banks to improperly access the U.S. banking system. For years, U.S. regulators have identified weakness in the way U.S. banks police against foreign banks moving shadowy money into the U.S. financial system.

A template for the action JPMorgan faces could be the regulatory step taken against rival Citigroup Inc in April. The bank entered into a consent order with the OCC and agreed to improve its anti-money laundering systems. Citigroup didn't admit or deny wrongdoing and it didn't pay a monetary penalty.

At the time, the OCC identified a weakness in how Citigroup processes deposits from foreign banks seeking access to the U.S. banking system. Citigroup, as part of the consent order, agreed to hire an independent consultant to review bank records to determine whether the bank identified suspicious transactions in a timely manner.

Citigroup said in April it had fixed problems identified by the OCC.

The scrutiny of JPMorgan comes amid a change at the top of the bank's anti-money laundering division.

William Langford, a respected bank official and former Treasury official, is in the process of shifting to JPMorgan's general counsel office from his post as head of JPMorgan's global anti-money laundering team.

Langford joined the bank in 2006 and recently had been seen as a potential candidate for the top spot at the Treasury Department's anti-money laundering unit, the Financial Crimes Enforcement Network, or Fincen.

A person familiar with the job change for Langford said it was unrelated to the regulatory inquiry and it was a move he had long planned.

JPMorgan has hired an official from Citigroup to replace Langford. Last month, the Treasury Department said a Justice Department expert in money laundering, Jennifer Shasky Calvery, would become the director of Fincen.

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