Alert January 22, 2013

FRB and OCC Issue Cease and Desist Orders Against JPMorgan Chase Requiring Enhancements to Risk Management Program Related to Derivatives Trading Activity and to Bank Secrecy Act/Anti-Money Laundering Compliance Program

The FRB issued two Cease and Desist orders, by consent, against JPMorgan Chase & Co. (“JPMC”).  The first FRB order requires JPMC to enhance its risk management program and its finance and internal audit functions and, in particular, its investment and investment oversight functions and Chief Investment Office (“CIO”).  The FRB states that the first FRB order “follows the disclosure of significant losses in a large synthetic credit portfolio that was managed by the CIO.”  The second FRB order requires JPMC to enhance its Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) compliance programs at JPMC’s subsidiaries.

In separate but related actions, the OCC issued a derivatives trading cease and desist order, by consent, against JP Morgan Chase, N.A. (“JPM N.A.”) concerning unsafe and unsound practices and violations of law and regulation related to derivatives trading activities by the CIO and a BSA/AML cease and desist order, by consent, against JPM, N.A. and two other depository institution subsidiaries of JPMC concerning deficiencies in the banks’ overall BSA/AML compliance programs.  In the derivatives trading cease and desist order the OCC asserted that JPM N.A.’s internal controls failed to identify and prevent more than $6 billion of losses related to credit derivatives trading conducted by the CIO.

The OCC’s BSA/AML cease and desist order states the JPM N.A.’s and its sister banks’ BSA/AML compliance programs had critical deficiencies in connection with the reporting of suspicious activities, monitoring of transactions, conducting customer due diligence and risk assessments as well as in implementing adequate systems of internal controls and independent testing.

Neither the orders issued by the FRB nor the orders issued by the OCC assessed any monetary penalties or took actions against any individuals.