In the summer of 2009, Jennifer Sharkey was moving in select company. As a Manhattan-based vice president at JPMorgan Chase & Co.’s Private Wealth Management group, she juggled relationships with 75 “high net worth” clients with assets totaling more than half a billion dollars.
Things changed for her, she claims, after she raised doubts about a “suspect” foreign client who had millions stashed in various accounts at the bank.
The client was making questionable cash transfers and concealing who actually owned certain accounts, according to a lawsuit Sharkey is pursuing in federal court in Manhattan. She also found evidence, her suit claims, that the client had falsified financial statements for one of his companies and that he’d been involved in the “unexplained disappearance” of millions of dollars in merchandise in another venture.
After she warned high-level bank officials that the client might be involved in fraud and money laundering, her suit claims, JPMorgan moved to silence her — pressuring her to stop raising questions about the client, assigning her other clients to junior colleagues and, finally, firing her.
“I was just doing my job,” Sharkey said in an interview with the International Consortium of Investigative Journalists (ICIJ). But for the bank, she said, “it was more important to keep this client than to do the right thing.”
JPMorgan denies it retaliated against Sharkey for pushing the bank to exit its relationship with the client — and it denies that the customer was either a foreign client or engaged in suspect activities. The bank says it goes to great lengths to identify and block money laundering, terrorism financing and other illicit transactions.
Over the years, JPMorgan Chase and its corporate forebears have been accused of serving as conduits for money controlled by drug smugglers, mobsters and political despots and acting as magnets for “flight capital” from rich tax dodgers from Latin America and other regions. The bank also played a part, lawsuits alleged, in massive tax haven-enabled frauds in the Enron and Madoff scandals.
An examination of JPMorgan’s record in policing suspect cash and offshore deals offers a case study of how big banks deal with dirty money and transnational corruption — and a window onto the decades-long history of the banking industry’s fraught relationship with the offshore world.
When people think about secret accounts and money laundering, they often imagine the Cayman Islands or some other sultry paradise. But the enablers of cross-border corruption aren’t located only in flyspeck island havens, white-collar crime experts say.
Criminals and connivers rely on easy access to banks in the U.S., the UK and other rich nations to hide their assets from investigators and tax collectors and shift money in and out of offshore hideaways.
Without this access, their shell games wouldn’t be possible.
In 2003, New York prosecutors claimed that an unlicensed money-transfer firm in Manhattan directed $9 billion in wire transactions through three dozen accounts at JPMorgan, moving money around the world for drug dealers and other dodgy characters.
In 2011, the bank paid nearly $90 million to settle regulators’ claims that it had violated economic sanctions against Iran, Cuba and other countries under U.S. embargoes.
In January, a consent order from JPMorgan’s main federal regulator, the Office of the Comptroller of the Currency, cited the bank for “critical deficiencies” in its anti-money-laundering controls, including inadequate procedures for monitoring transactions at foreign branches.
In the 2003 case, the bank acknowledged it had been “too slow and not forceful enough” in vetting the money-transfer firm, but said it was working to tighten its money laundering safeguards. In the 2011 case, the bank said the sanction violations were isolated incidents. In the wake of the comptroller’s case, the bank told the New York Times that it has been “working hard to fully remediate the issues identified.”
Mark Kornblau, a JPMorgan spokesman, declined to answer detailed questions for this story.
In a brief written statement, he told ICIJ that complying with anti-money-laundering rules “is a top priority for us. We have already made progress addressing the issues cited in the consent orders, which contain no allegations of intentional misconduct by the firm or any of its employees.”
JPMorgan isn’t alone when it comes to taking heat for failing to do enough to stop the flow of suspect cash. Last year U.S. authorities reached settlements with HSBC, Citigroup and UK-headquartered Standard Chartered Bank over alleged money-laundering compliance failures.
HSBC agreed in December to pay more than $1.9 billion to settle an investigation into evidence it shifted cash for rogue nations, terrorists and Mexican drug lords.
U.S. Senator Carl Levin of Michigan said a “pervasively polluted” culture at HSBC allowed billions in suspect dollars to flow through the bank. Senate investigators said HSBC ignored warnings from Mexican and U.S. authorities that the gush of money flowing into the bank from Mexico was so large it could only be sustained by the proceeds from narcotics trafficking.
HSBC said in a statement last year that it was “profoundly sorry” for its “past mistakes.”
How well major banks screen customers and cash flows is important because, in a digitally connected world, dirty money no longer travels as stacks of bills stuffed into suitcases. It moves by the click of a computer key. This makes big banks crucial gatekeepers in the financial system, giving them the power to cut off the flow of corrupt cash or allow it to roam free.
The offshore system can’t be reformed, money laundering experts say, without cooperation and compliance from the banking system’s biggest players.
Dennis Lormel, former chief of the FBI’s financial crimes program, says compliance watchdogs working on the payroll of big banks strive to do the right thing, but they’re often locked in losing battles with bankers who are more concerned about booking deposits and doing deals than making sure the money coming in is clean.
“The business culture usually wins,” Lormel says. “The business people take the risks and the compliance people are left to clean up the mess.”
JPMorgan and other major banks have increased their risks and rewards in the offshore world by weaving a web of branches and subsidiaries across places that have been tagged as havens for financial secrecy and criminal activity.
Secret records obtained by ICIJ reveal how many of the world’s top banks – including UBS and Clariden in Switzerland, ING and ABN Amro in the Netherlands and Deutsche Bank in Germany – have worked to set up their customers with secrecy-cloaked companies in the British Virgin Islands, the Cook Islands and other offshore locales.
The banks deny wrongdoing.
A 2008 U.S. government report found JPMorgan had 50 subsidiaries in Bermuda, the Bahamas and other places labeled as tax havens or secrecy jurisdictions, tied for 11th highest among the 100 largest U.S. companies.
Since then the bank has expanded its reach in some offshore centers. Its tally of subsidiaries in the Cayman Islands grew from seven in 2007 to 20 at the end of 2012, securities filings show. Over that span its subsidiaries in Mauritius — a tiny isle off Africa’s eastern coast that’s been called “a Cayman Islands to India” — grew from eight to 14.
While the bank helps move money around the world via its tax haven subsidiaries, JPMorgan’s international private banking network attracts large deposits to the U.S. from rich customers in Latin America and other regions. Much of this money isn’t reported to tax authorities in the depositors’ home countries, according to a study last year by James S. Henry, former chief economist at McKinsey & Company and a board member of Tax Justice Network, an advocacy group that favors tighter regulation of the offshore system.
The study estimates JPMorgan’s private banking operations boosted their assets under management from $187 billion in 2005 to $284 billion in late 2010 — ranking it among an elite group of giant private banking institutions whose mission, the report claims, is to “entice the elites of rich and poor countries alike to shelter their wealth tax-free offshore.”
JPMorgan Chase is an amalgam of America’s two most storied banks. Historian Ron Chernow called the Morgan banking dynasty perhaps “the most formidable financial combine in history.” Chase Manhattan traced its roots to 1799 and claimed Aaron Burr, the nation’s third vice president, as its founder.
Before the mega-merger that brought the Morgan and Chase empires together at the turn of this century, both played roles in the emergence of tax havens — and in the controversies that grew out of the offshore system’s rise.
Chase and Morgan were early players, in the 1960s, in the growth of the Bahamas as an overseas financial center. Chase was one of the banks of choice for Philippine President Ferdinand Marcos and the Shah of Iran, strongmen who looted their countries’ treasuries during their decades in power. Relations between Chase officials and the Shah were so close in the 1960s and ’70s, Henry says, that Chase Chairman David Rockefeller was essentially “the Shah’s private banker.”
Chase played a cameo role in an offshore money-laundering thread of the Watergate scandal, serving as a conduit for an illegal $55,000 contribution that American Airlines laundered through a foreign source and funneled into President Nixon’s re-election campaign. Federal authorities fined the airline, but apparently took no action against Chase.
In 1973, a mobster turned informer told a congressional committee that Chase and other firms helped him cook up bogus covers for illegal transactions in stolen and counterfeit securities that had been laundered through Switzerland and Belgium and then brought back to the U.S. The witness testified Chase bankers accepted the “flimsiest of proof” as to his identity when they signed off on documents that made his transactions possible.
In another case, the infamous “Pizza Connection” heroin ring used Chase to channel cash overseas, according to an account in The Money Launderers, a book by former U.S. Treasury enforcement official Robert E. Powis. In July 1980, a bagman for the ring entered Chase Manhattan’s headquarters with four leather bags stuffed with $550,000 in fives, tens and twenties. The bank accepted the money, counted it, then transferred it to a Swiss account, according to Powis.
In June 1985, the Treasury Department fined Chase and other New York banks for ignoring one of the government’s basic safeguards against financial chicanery — the federal Bank Secrecy Act’s requirement that banks report any transactions involving $10,000 or more in cash. Chase paid a then-record fine of $360,000, based on 1,442 unreported transactions totaling $853 million.
“Some clerical people did not file reports here and there,” a Chase spokesman told The Washington Post at the time. “There was nothing willful about this thing.”
Along with handling money involved in drug smuggling and other underworld activities, big U.S. banks have also attracted deposits from Third World elites who want to hide their wealth from tax collectors. For decades, anti-corruption advocates say, U.S. banks have encouraged this process by dispatching armies of private bankers to solicit flight capital from developing nations.
In the 1980s, Antonio Gebauer was J.P. Morgan & Co.’s top man South of the Border, lauded by a Morgan spokesman as “the most highly esteemed banker in Latin America.” Gebauer specialized in putting together multi-million-dollar loan deals across the region. He also oversaw covert New York bank accounts for a handful of wealthy Brazilians, among them a great-grandson of the founder of Brazilian Republic.
Brazilian authorities later questioned whether the money was unreported capital. Gebauer’s attorney said the accounts had been set up under “the unusual and Byzantine relationships that often exist between bankers and flight capitalists.”
The secret deposits might have remained secret if Gebauer hadn’t been caught embezzling more than $4 million from his clients’ accounts. In 1987, a U.S. judge sentenced him to 3½ years in prison, calling him “a fallen angel of the banking world.”
U.S. media touched on the flight capital issue briefly, and the government of Brazil filed a treaty request asking U.S. authorities to subpoena account details from Morgan officials.
The bank won a court decision blocking Brazil’s push to get more information. And Gebauer’s guilty pleas allowed the House of Morgan to avoid a messy trial that have might revealed “the seamier side” of its Latin American operations, according to Henry’s 2003 book on the dark side of global finance, Blood Bankers.
The issue of dark money didn’t go away after J.P. Morgan & Co. and Chase Manhattan Corp. merged in late 2000, creating JPMorgan Chase & Co.
In March 2001, a U.S. Senate investigation revealed Chase Manhattan had been among big firms that had provided correspondent accounts to offshore banks involved in criminal activity. Investigators found that Antigua-licensed American International Bank moved $116 million through its account at Chase even as it was engaging in frauds in the U.S. and working hand-in-hand with convicted felons.
After the Sept. 11, 2001, terrorist attacks, tracking illicit cash became a bigger concern for U.S. authorities. Lormel, the former FBI official, says JPMorgan representatives were among the compliance specialists from various banks who pitched in after Sept. 11 and helped efforts to track terrorists.
“Whatever we wanted, within the limits of the law, the bankers were incredibly helpful,” he recalls.
JPMorgan’s post-9/11 record wasn’t spotless, however.
In January 2003, federal authorities raided a business in Brooklyn called Carnival French Ice Cream, a convenience store with a limited supply of food and sundries and two soft-serve ice cream machines. During their search, investigators found paperwork that led them to conclude that, over a six-year period, the store’s proprietor had laundered millions of dollars through a JPMorgan account on its way to Yemen, China and other places.
Some of the money, investigators believed, went to a Yemeni cleric who later pleaded guilty to charges that he had conspired to aid terrorists.
In February 2003, a month after the ice-cream shop raid, investigators for then-Manhattan District Attorney Robert Morgenthau raided an unlicensed money transfer firm, Beacon Hill Services Corp., that maintained dozens of accounts with JPMorgan.
Morgenthau said Beacon Hill was able to wire $9 billion through these accounts because the JPMorgan’s compliance unit “fell down on the job,” ignoring “numerous red flags for money laundering.” A sizeable chunk of the money, he said, came from drug dealers and tax dodgers, and some ended up in the Middle East, possibly in the hands of terrorists.
No criminal charges were filed against JPMorgan in the case.
In the wake of these cases, industry officials argued it wasn’t fair to expect banks to catch every questionable transaction amid trillions of dollars in daily cash flows.
JPMorgan’s general counsel told The Wall Street Journal: “Think if you’re running a railroad, and we say to you, ‘We want you to monitor everyone who takes your train and see if their trip is legitimate.’ ”