Federal and state authorities are investigating a handful of major American banks for failing to monitor cash transactions in and out of their branches, a lapse that may have enabled drug dealers and terrorists to launder tainted money, according to officials who spoke on the condition of anonymity.
These officials say they are beginning one of the most aggressive crackdowns on money-laundering in decades, intended to send a signal to the nation's biggest banks that weak compliance is unacceptable.
Regulators, led by the Office of the Comptroller of the Currency, are close to taking action against JPMorgan Chase for insufficient safeguards, the officials said. The agency is also scrutinizing several other Wall Street giants, including Bank of America.
The comptroller's office could issue a cease-and-desist order to JPMorgan in coming months, an action that would force the bank to plug any gaps in oversight, according to several people knowledgeable about the matter. But the agency, which oversees the nation's biggest banks, has not yet completed its case. JPMorgan is in the spotlight partly because federal authorities accused the bank last year of transferring money in violation of United States sanctions against Cuba and Iran.
In addition to the comptroller, prosecutors from the Justice Department and the Manhattan district attorney's office are investigating several financial institutions in the United States, according to law enforcement officials.
The surge in investigations, compliance experts say, is coming now because authorities were previously inundated with problems stemming from the 2008 financial turmoil. "These issues may have been put on hold during the financial crisis, and now regulators can go back to focus on money-laundering and other compliance problems," said Alma M. Angotti, a director at Navigant, a consulting firm that advises banks on complying with anti-money-laundering rules.
Until now, investigators have primarily focused on financial transactions at European banks, most recently Standard Chartered. The authorities accused several foreign banks of flouting American law by transferring billions of dollars on behalf of sanctioned nations.
As the investigation shifts to American shores, the Justice Department and the Manhattan district attorney's office are moving beyond those violations to focus on money-laundering, in which criminals around the globe try to hide illicit funds in United States bank accounts. If these new cases follow the pattern of previous ones, prosecutors could follow up on regulatory actions with their own complaints.
Despite shortcomings, banks spend millions of dollars a year to guard against money-laundering. Compliance experts argue that violations are typically unintentional and often harmless because they aren't always exploited by criminals.
Still, prosecutors and regulators have spotted gulfs in the way financial institutions oversee suspicious cash transfers, according to the federal and state officials. Under the Bank Secrecy Act, financial institutions like banks and check-cashers must report any cash transaction of more than $10,000 and bring any dubious activity to the attention of regulators. The federal law also requires banks to have complex controls in place to detect any criminal activity.
The comptroller's office, JPMorgan and Bank of America declined to comment.
The investigations are gaining momentum as concern is growing in Washington that illicit money is coursing through the American financial system.
Back in July the Senate Permanent Subcommittee on Investigations accused HSBC of exposing "the U.S. financial system to money-laundering and terrorist financing risks" between 2001 and 2010. The British bank, which is also under investigation by federal and state prosecutors, is suspected of funneling cash for Saudi Arabian banks with ties to terrorists, according to federal authorities with direct knowledge of the investigations. HSBC officials have pointed out that they had strengthened controls to prevent money-laundering and replaced employees tainted by the allegations. Standard Chartered maintains that "99.9 percent" of the transactions under scrutiny complied with that rule and involved legitimate Iranian banks and corporations.
The case against HSBC alarmed banking regulators, who wondered if monitoring flaws could be pervasive in the banking industry. The comptroller's office, which lawmakers accused of missing warning signs about HSBC's weaknesses, has stepped up its scrutiny of American banks in recent months.
In April, the regulator issued a cease-and-desist order against Citigroup for gaps in its oversight of cash transactions. The order cited "internal control weaknesses including the incomplete identification of high-risk customers in multiple areas of the bank." A person close to the bank attributed part of the problem to an accident when a computer was unplugged from anti-money-laundering systems.
Citi did not admit or deny wrongdoing, but said in April that it had already undertaken many of the reforms required.
Federal officials are now examining whether problems run even deeper and if criminals have managed to exploit these vulnerabilities. An example of how criminals can evade the system surfaced publicly in a federal drug case in a Texas court this summer. Mexican drug cartels hid proceeds from cocaine-trafficking in two accounts at Bank of America, according to law enforcement testimony in the case, and some of the money was used to buy racehorses.
Bank of America was not accused of wrongdoing, and the comptroller's office has said privately it is unlikely to bring an action related to the case, according to a person with knowledge of the matter.
Authorities have not disclosed the scope of their inquiries at Bank of America and JPMorgan, or the period being examined.
Any regulatory action against JPMorgan would be another black eye for its chief executive, Jamie Dimon, and the bank, which was rattled this spring by a $5.8 billion trading loss. That misstep brought additional scrutiny of the bank's risk controls and compliance efforts.
Last year, JPMorgan agreed to pay $88.3 million to the Treasury Department, which had accused the bank of thwarting United States sanctions by processing roughly $178.5 million for Cubans in 2005 and 2006. Even after bank officials spotted the questionable transactions in 2005, the Treasury said, they failed to report the problem to federal authorities. JPMorgan also made an improper $2.9 million loan in 2009 to a bank tied to Iran's government-owned shipping line, according to the Treasury Department.
In a 2011 statement, Treasury officials called the bank's actions "egregious," adding that JPMorgan's "managers and supervisors acted with knowledge of the conduct constituting the apparent violations and recklessly failed to exercise a minimal degree of caution or care." At the time, JPMorgan said that it had not dealt directly with institutions in Cuba and Iran and that it had merely acted as a middleman.