The Anti-Mafia Law Used to Go After JPMorgan

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Seth Wenig / AP

JPMorgan Chase & Co. headquarters in New York CIty, on Oct. 21, 2013.

JPMorgan has been slapped with yet another fine, this time a $2.6 billion penalty for violations associated with the Bernie Madoff pyramid scheme. In announcing the settlement, U.S. Attorney Preet Bharara accused the bank of “connecting the dots” when it came to protecting it’s own money from the Madoff scam, but said the bank “was not so dilligent otherwise.”

Because of a 43-year-old law known as the “Bank Secrecy Act,” JPMorgan has the legal responsibility to do more than just look out for itself. It’s actually supposed to help the U.S. government police the financial system as well.

So what exactly is the Bank Secrecy Act? In reality, it’s a collection of laws that have been passed over the past forty-plus years which require financial institutions to keep close watch on their customers and make sure they’re not engaged in illegal behavior. Here’s 4 things to know about this law, which is one of the linchpins of modern law enforcement.

1. It was first passed to combat the mob: In December of 1968, the House Committee on Banking and Currency held hearings on the practice of foreign banking in the United States. Law enforcement had long complained that the mafia and other criminal syndicates made use of secret foreign bank accounts in their illegal plots. Those hearings ultimately led to the passage of the “Banks Records and Foreign Transactions Act,” known colloquially as the Bank Secrecy Act.

2. Then to combat the drug trade: As scrutiny over the U.S.-based mafia receded, and the war on international drug cartels heated up, the Bank Secrecy Act began to be used by law enforcement as a way to fight the drug trade. In fact, that remains one of its primary uses today. One of the largest violations of the Act came in 2010, when Wachovia (now owned by Wells Fargo) settled with authorties for $160 million for failing to alert authorities to the transfer of hundreds of billions of dollars by Mexican drug cartels.

3. Al Quaida is well versed in the Bank Secrecy Act: The law is also used to fight terrorism. And as former Justice Department national security lawyer Jeffrey Breinholt has pointed out, a smart terrorist knows the law like the back of his hand. He writes,

“Zacarias Moussaoui deprived us of the opportunity to charge him with bulk cash smuggling, because he actually filed a Currency and Monetary Instrument Report (CMIR) when he flew into the U.S. through Chicago O’Hare in February 2001 with in excess of $30,000 on his person. This means that al Qaida knows our Bank Secrecy Act, and trains its operatives in how to avoid trouble by not violating it.”

4. It could be one of the biggest hurdles to wider adoption of Bitcoin: In March of last year, the Financial Crimes Enforcement Network (FinCEN), the arm of the Treasury tasked with enforcing the Bank Secrecy Act, issued a ruling stating that those participating in the transmission of bitcoins were subject to the Bank Secrecy Act.

As Ryan Straus a financial services attorney at Graham & Dunn wrote last year in American Banker, part of Bitcoin’s appeal is its ability to allow users to remain anonymous. But that anonymity is in direct opposition to the intent of the BSA. And the compliance costs of the BSA, Strauss argues, will cause the cost of Bitcoin use to rise. And if the BSA causes Bitcoins use to be both non-anonymous and expensive, the logic of their appeal becomes less obvious.