Holy Crap this seems bizarre. This isn't even really a case of "know your customers", but "know your customers' customers", isn't it? Is this some kind of "snipe hunt" or mere "Brazil"-like government incompetence and mindless application of half-baked laws? -TD

From: "R. A. Hettinga" <rah@shipwright.com> To: cypherpunks@al-qaeda.net, e$@vmeng.com Subject: J.P. Morgan Is Facing Heat Of Patriot Act Date: Tue, 9 Mar 2004 18:13:40 -0500

<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.

-- ----------------- R. A. Hettinga <mailto: rah@ibuc.com> The Internet Bearer Underwriting Corporation <http://www.ibuc.com/> 44 Farquhar Street, Boston, MA 02131 USA "... however it may deserve respect for its usefulness and antiquity, [predicting the end of the world] has not been found agreeable to experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'

_________________________________________________________________ Create a Job Alert on MSN Careers and enter for a chance to win $1000! http://msn.careerbuilder.com/promo/kaday.htm?siteid=CBMSN_1K&sc_extcmp=JS_JASweep_MSNHotm2