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JPMorgan Chase & Co. (JPM - Analyst Report) is the latest bank to be probed for its alleged involvement in money laundering transactions pertaining to drug cartels, especially in Venezuela and several other economically restricted nations. The Office of the Comptroller of the Currency (OCC) – a self-regulating wing of the U.S. Treasury Department – is conducting the investigation.

The current investigation is an outcome of heightened vigilance by the regulatory authorities to crackdown on the doubtful financial activities of the banks, ensuring effective compliance of the U.S. government’s anti-laundering laws.

Last month, JPMorgan had hinted in its quarterly filing with the U.S. Securities and Exchange Commission that the regulators have stepped up their scrutiny. Another financial giant – Bank of America Corporation (BAC - Analyst Report) – is also under the regulatory lens.

At present, the whole scenario, regarding the scope of inquiry and the probable penalties, seems to be vague as the probe is in the initial phase. Further, the Department of Justice (DoJ) is focusing on JPMorgan simply to put the Bank Secrecy Act – a law that requires financial institutions and their employees to take steps to prevent money laundering – into effect.
Other Banks Probed for Money Laundering

In August 2012, Standard Chartered PLC (SCBFF) reached a $340 million settlement with the New York State Department of Financial Services (DFS) pertaining to money laundering in Iran. The agreement came almost a fortnight after the New York’s top regulating authority accused the London-based bank of concealing transactions worth $250 billion (£160 billion) relating to Iran. According to the DFS, these transactions, which took place in the last decade, were in contempt of the U.S. laws and regulations.

Earlier in July 2012, the top executives at HSBC Holdings plc faced a tough inquiry by the congressional committee for their alleged involvement in money laundering during the period 2004-2010. The investigation revealed substantial lapses in the bank's anti-money laundering compliance.

This resulted in a worldwide displacement of funds from riskier nations through the bank.  Controversial transactions pertaining to its Iranian clientele and the illegal narcotics trade in Mexico drew maximum attention. Consequently, the bank was penalized $700 million for its sloppy anti-compliance measures.

In April 2012, OCC accused Citigroup, Inc. (C - Analyst Report) of failing to comply with anti-laundering compliance. Further, it alleged that the bank failed to conduct due diligence on its overseas clientele, had derisory controls and was unable to properly screen its client relationships throughout the bank. The regulator did not penalize Citi, though it said it reserved the right to do so.

Our Take

JPMorgan surely seems to have hit a rough patch somewhere. Earlier this year, all spotlights were on the company for its trading debacle and now the laundering probe is grabbing attention. Additionally, JPMorgan needs to deal with a plenty of other lawsuits. However, the ill effects of all these are likely to be eliminated by the strong fundamentals of the company.

The shares of JPMorgan currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term Neutral recommendation on the stock.

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