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If you have been following the news these past few days you will have seen that JP Morgan is to pay a further $1.7 billion in fines under a deferred criminal prosecution agreement.
JP Morgan’s problem this time is for failing to catch Bernie Madoff’s Ponzi scheme as it managed his accounts. It wasn’t that Madoff was smarter than the bank – there were dozens of warning signs or “red flags”. The bank folk involved just didn’t take heed of what was before their eyes.
The bank has had to admit that it didn't have the risk management systems in place to catch Madoff and implement them. For the bank’s management this case is a catastrophe worse than the London Whale.
More damming though is the litany of alleged failures at JP Morgan over a period of about 20 years. JPMorgan Chase was Madoff's main banker and was responsible for knowing the business of its customers – and Madoff was a very large customer indeed.
In an earlier lawsuit Irving Picard (the court-appointed trustee tasked with recovering Madoff's clients' funds) it was alleged that JPMorgan "had everything it needed to unmask and stop the fraud - it had unique information from which it could have reached only one plausible conclusion: Madoff was a fraud."
These failures include;
Which brings us back to the question: “How seriously do banks take the question of managing operational risk?”
Regrettably, from the evidence that emerges out of almost every recent major banking disaster, the answer is exactly the same. Banks in their mad dash for greater and greater profits throw caution to the winds and ignore not only common sense operational risk practices, but those mandated by law as well.
This content is provided by an external author without editing by Finextra. It expresses the views and opinions of the author.
Carlo R.W. De Meijer Owner and Economist at MIFSA
30 December
Prashant Bhardwaj Innovation Manager at Crif
29 December
Kaustuv Ghosh CEO at Nxtgencode
Luigi Wewege President at Caye International Bank
27 December
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