Are Regulatory Orders Against JPMorgan Just a 'Slap on the Wrist'?

WASHINGTON — Roughly eight months after the disclosure of JPMorgan Chase's multibillion loss related to trading activities in London, federal regulators publicly unveiled enforcement orders related to the doomed trades.

But the orders -at least for now — included no monetary penalties, prompting questions about their severity. The Federal Reserve Board and Office of the Comptroller of the Currency ordered the bank to fix its internal controls and devote more resources and oversight to its trading activities, but stopped short of mandating sweeping changes.

The regulators also released a separate enforcement action against JPMorgan related to its anti-money laundering activities, saying the bank had failed to detect and report on suspicious activities by its customers. It was not immediately clear if the anti-laundering orders were directly related to the London Whale trades, or constituted a completely new concern. But those orders, too, were devoid of any monetary penalty, requiring the bank to step up its anti-laundering procedures.

"The content of both orders are really no more than what was required by law absent of this consent order — so this really is a slap on the wrist," said Ann Graham, professor of law at the Hamline University School of Law and a former attorney at the Federal Deposit Insurance Corp. "It's not new news to the bank that it should have been doing these requirements all along."

But others said it wasn't that unusual that JPMorgan did not receive a monetary penalty.

"Generally when there is just a compliance deficiency that is self-contained, where the regulators have identified it, it's not a criminal violation and the institution is fully capable of instituting remedial measures on its own, then you often do not see a monetary penalty," said Peter Djinis, a private attorney who specializes in anti-laundering compliance programs.

JPMorgan Chase has been under intense scrutiny since last spring following its announcement of what is now an estimated $6 billion in losses from synthetic credit derivatives traded out of its Chief Investment Office based in London.

But while the regulators cited problems in the bank's risk management related to that office, they did not stop there, ordering a series of changes through its Bank Secrecy Act program to improve monitoring of suspicious transactions.

"The bank has an inadequate system of internal controls and independent testing," the OCC said of JPMorgan Chase's AML program in one of the two consent orders lodged at the banking company's subsidiaries.

The OCC also noted that "the bank's oversight and governance of the credit derivatives trading conducted by the" bank's Chief Investment Office "were inadequate to protect the bank from material risks in those trading strategies, activities and positions,"

The Fed, which released two orders against the bank's holding company, ordered JPMorgan Chase's board to ensure the parent company was acting as a "source of strength" to it primary bank subsidiary. Among other requirements, the company must also submit a plan within 60 days of the enforcement action for continuing improvements in the overall risk management program, as well as a plan within 90 days for how it will continue to improve its internal auditing.

The central bank said the Federal Reserve Bank of New York, "identified deficiencies in the risk management function's oversight of the risks associated with the synthetic credit portfolio; the model governance function's oversight of the model validation processes relating to the CIO; the finance function's development of appropriate internal financial reporting for the CIO; the internal audit function's assessment of the CIO's internal controls; and senior management's elevation of issues to the board of directors, which did not allow for the board of directors' meaningful consideration of such issues."

In a statement emailed to American Banker, a spokesman for JPMorgan Chase said the bank has "been working hard to fully remediate the issues identified in the consent order" related to the bank's Chief Investment Office.

On its Bank Secrecy Act program, the spokesman, Joseph Evangelisti, said, "Complying with AML responsibilities 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," he said.

In one order, the OCC essentially found that the CIO increased the bank's risk position in certain credit derivatives, "and ultimately losses, without sufficiently effective intervention by the bank's control groups."

"The bank's oversight and governance of the credit derivatives trading conducted by the CIO were inadequate to protect the bank from material risks in those trading strategies, activities and positions," the agency said.

The agency ordered the bank to set up a special compliance committee for complying with the order, among other requirements. The bank must come up with an action plan that, at a minimum, ensures that trading strategies are "conducted in a manner consistent with safe and sound banking practices." Within 90 days of the order, the bank must submit a plan outlining risk management procedures for "covered trading" activities.

But both the Fed and the OCC also addressed in detail JPMorgan Chase's BSA compliance. The Fed outlined a series of steps related to board oversight JPMorgan Chase's AML program and ensuring that the bank has adequate staff to address BSA monitoring.

Graham said regulators should have gone further, including issuing a penalty in addition to the losses the bank already incurred.

"This is another argument for curbing too big to fail," she said. "I don't believe that it's the case that JPMorgan would be damaged in any material way by a civil money penalty to make this a true deterrent. But if they're too big to fine, they're definitely too big to fail."