Data locked in silos and the lack of a common customer identifier that could link accounts were to blame for JPMorgan Chase's failure to identify Bernard Madoff's massive fraud, according to an article in Wednesday's Wall Street Journal.
(Madoff, who was arrested in 2008, stole about $18 billion from clients, sending them fake monthly statements reflecting fake trades, assuring customers they were getting high returns when in fact their money was gone.)
Madoff Investment Securities maintained several linked checking and brokerage accounts at JPMorgan Chase, its primary bank, for 22 years. The bank structured and sold investment vehicles tied to the firm's purported returns. The bank has agreed to pay $2.7 billion in fines to the federal government for failing to report warning signs of Madoff's scheme.
"Despite recognizing suspicious activity in its U.K. unit in 2008 — and notifying U.K. regulators that Mr. Madoff's returns were 'too good to be true' — the bank didn't notify its own U.S.-based AML staff or American authorities. AML experts say that JPMorgan's anti-fraud systems should have automatically flagged Madoff accounts across the company," the paper reports. In one of the terms of the bank's settlement, JPMorgan has agreed to continue reforms of its Bank Secrecy Act/Anti-Money Laundering compliance program.
Customer data that's strewn across a company and not linked has been a problem that has plagued large banks for many years. A London division of a bank could have no idea of the activity of a customer in New York, for example, creating fraud as well as customer service issues. Shortly before the financial crisis, several large banks appointed C-level data management chiefs (called chief data officers) and had them start creating unified customer data warehouses in which all accounts, transactions and other activity related to a customer could be gathered in one place. Bank of the West recently completed such a project.
During the financial crisis, these large, multi-year projects with an elusive ROI were put aside. Recently, with the dust settling, a few banks have been turning their attention again to customer data management.
But software can only do so much. The other side to this is that in Manhattan U.S. Attorney Preet Bharara's criminal charges against JPMorgan Chase, a pattern of willful ignorance is described. Time and time again, according to the U.S. Attorney's office, the bank had strong reason to suspect Madoff's firm of fraud. For instance, in the early 1990s the bank learned that Madoff and a prominent client of JPMorgan's Private Bank were engaged in what looked check-kiting transactions. Another bank involved in these transactions recognized them as suspicious, filed a suspicious activity report with law enforcement, and closed down Madoff's account. As a result, Madoff moved all of his accounts from the second bank to JPMorgan, where the size of these transactions became much larger. For example, in December 2001 alone, the private bank client engaged in approximately $6.8 billion worth of transactions with Madoff through a series of circular $90 million transfers.
Other red flags occurred over the years, such as the time the bank's chief risk officer was told by a senior colleague that there is a "well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme."
No software will make someone pay attention to an unpleasant truth they'd rather push aside.
This story was originally published by Bank Technology News.