http://online.wsj.com/article_print/0,,SB107878833057749707,00.html
The Wall Street Journal
March 9, 2004
J.P. Morgan
Is Facing Heat
Of Patriot Act
By RANDALL SMITH
Staff Reporter of THE WALL STREET JOURNAL
NEW YORK -- Manhattan District Attorney Robert Morgenthau has asked banking
regulators to examine documents from the recent criminal conviction of an
unlicensed money-transfer operation to determine whether J.P. Morgan Chase
& Co. or its predecessor banks violated "know your customer" rules.
Staffers in Mr. Morgenthau's office last year turned over to regulators
court papers from its investigation of Beacon Hill Service Corp., which was
convicted Feb. 23 in state criminal court in Manhattan of four felony
counts of operating as an unlicensed money transmitter, Mr. Morgenthau said.
The regulators include the New York State Banking Department and the
Federal Reserve Bank of New York, Mr. Morgenthau added. Neither agency
would comment on the action. However, the state agency has been reviewing
the case, according to one person familiar with the matter.
J.P. Morgan Chase, which declined to comment on any possible rule
violations, said it has been working with regulators to tighten its
standards. "We agree with regulators that financial institutions should
continually raise standards on know-your-customer policies, and have worked
with them to ensure that we tighten ours and strive to exceed the law," a
bank spokeswoman said.
The USA Patriot Act, adopted in October 2001, expanded the scope of U.S.
money-laundering rules in order to make it harder for terrorists to move
money without attracting attention. It includes beefed-up
know-your-customer requirements for some financial institutions, according
to some legal experts.
Beacon Hill took deposits and transmitted money on behalf of clients in
Central and South America, including wealthy individuals and money-exchange
houses, according to a filing by prosecutors in the criminal case. J.P.
Morgan Chase was Beacon Hill's bank and accepted deposits from Beacon until
Beacon's office was searched by Mr. Morgenthau's agents on Feb. 4, 2003,
according to an affidavit by a lawyer for Beacon Hill.
Beacon Hill, which began operating in 1994, originally had an account with
Chemical Bank, which later merged with Chase Manhattan Corp., which in turn
merged with J.P. Morgan & Co. in 2000 to become J.P. Morgan Chase. Beacon
had 49 customers as of mid-2002, 36 of them in a "pooled" account that
shielded their identities from the bank, according to a report by a
consultant to Beacon Hill that is part of the court record.
At Beacon Hill, $5.5 billion "went in and out between 1997 and 2002," Mr.
Morgenthau said. Yet, such pooled arrangements meant J.P. Morgan, its
predecessor banks and other banks who have dealt with money-transfer
businesses in similar fashion have transferred large sums -- a lot of it
"to secrecy jurisdictions" -- without knowing whose money it really was, he
said. Such banks "were not observing the know-your-customer rule."
He said that there isn't an accusation that J.P. Morgan was dealing with
illegal money. The question, he said, is this: "Should they have taken
money from an unlicensed money transmitter? That's a matter for State
Banking and the Federal Reserve to be concerned about." He asserted, "They
just weren't asking the questions under know-your-customer [that] they were
required to ask."
The New York licensing requirement for money transmitters, originally
adopted as a consumer-protection measure in 1963 to guard against fraud or
insolvency, was amended in 1990 to combat money laundering, according to
the banking department. The licensing process requires money transmitters
to have antimoney-laundering programs and to file suspicious activity
reports about large cash transactions, according to Betty Santangelo, a
money-laundering expert at law firm Schulte Roth & Zabel LLP.
Although an official at J.P. Morgan Chase asked Beacon Hill as early as
1998 if it needed a license to operate as a money transmitter, lawyers for
Beacon Hill said they weren't able to get an answer from the state Banking
Department, according to court filings. One reason the Banking Department
didn't answer faster, prosecutors said in court, was that Beacon Hill's
lawyer asked the question in October 2000 about a client identified only as
"XYZ Corp.," without disclosing that it already was engaging in the
activities described.
At one point, prosecutors contended that a senior Chase official lied to a
state regulator to cover for Beacon Hill. After Beacon Hill's lawyer told
state banking officials at a meeting in January 2001 that XYZ planned to
bank at Chase, a Banking Department lawyer, Sara Kelsey, followed up with
Chase's compliance chief, Greg Meredith. Mr. Meredith "deceitfully
confirmed that the business was not yet in operation," according to
grand-jury minutes described in a memorandum of law submitted by Mr.
Morgenthau on Oct. 21, 2003, as part of the Beacon Hill case. Mr. Meredith
told Beacon Hill it would have to hire an outside consultant to review its
regulatory compliance, according to a filing by prosecutors. Although Chase
wanted an audit of Beacon Hill, its owner, Anibal Contreras, restricted the
outside consultant to a review of its policies and procedures, the filing
said.
Mr. Meredith didn't return a call, and a J.P. Morgan Chase spokeswoman said
he wouldn't have any comment. Mr. Meredith no longer serves as the bank's
head of compliance, according to one person familiar with the bank, in part
owing to his failure to take more aggressive action in dealing with Beacon
Hill.
The J.P. Morgan Chase spokeswoman said the bank first asked Beacon Hill to
obtain "an outside compliance review," which showed "no indication of money
laundering." The bank then asked for an outside legal opinion about whether
Beacon Hill "needed a license, and the opinion said they didn't," she
added. Eventually, the bank asked Beacon Hill to seek an opinion from
regulators. "Our steps were directionally correct but too slow and not
forceful enough," she said.
J.P. Morgan Chase since has exited the business of dealing with wholesale
money remitters, she added. The bank also has tightened its
money-laundering controls, put in new monitoring systems, and "made
organizational changes in an effort to meet the higher standards financial
institutions are being held to," she said.
Mr. Morgenthau said that the issue of identifying customers of
money-transmitting businesses is "a very serious problem," but "I'm having
trouble convincing people of that: the regulators and the banks
themselves." One problem, he said, is what he called the "patchwork system
of regulation," with some bank units also regulated by the U.S. Comptroller
of the Currency, the Federal Deposit Insurance Corp. and other entities.
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R. A. Hettinga