By Julie Steinberg
J.P. Morgan Chase & Co. is reviewing its relationships with
several hundred U.S. clients that use the bank for back-office
functions such as processing trades, said people close to the
situation.
The bank has been examining its relationships with so-called
domestic correspondent banks, for which it clears payments and
processes other transactions, the people said. The industrywide
review started in January and comes as J.P. Morgan tries to shore
up controls in a period of heightened regulatory scrutiny and
record fines.
As part of the review, J.P. Morgan stopped soliciting new
business from its few hundred domestic-correspondent-banking
clients. The bank, the largest in the U.S. by assets, also stopped
accepting new clients while the review of internal controls and
clients continues, the people added.
Ultimately, the bank may decide to cull a small number of
clients as a result of the review, one of the people said.
One of the companies J.P. Morgan is reviewing: a Citigroup Inc.
unit, Banamex USA, that is facing a Justice Department inquiry,
according to one of the people familiar with the situation. Banamex
isn't being singled out and is among many firms being reviewed, one
of these people said.
Besides Banamex USA, J.P. Morgan's clients in the business
include Zions Bancorp. and Regions Financial Corp., according to a
website maintained by Clearing House Payments Co., which tracks
correspondent-banking relationships.
A J.P. Morgan spokesman said the firm isn't exiting from
domestic correspondent banking and pointed to comments he made last
August that "serving other financial institutions in correspondent
banking has been, and will continue to be, a core strength of
ours."
A spokeswoman for Citigroup declined to comment on Banamex's
inclusion in J.P. Morgan's review. Spokespeople for Regions and
Zions declined to comment on the review.
Banamex USA, a Century City, Calif., unit of Citigroup, serves
customers doing business in Mexico and the U.S. and is considered a
domestic client of J.P. Morgan's.
In April, The Wall Street Journal reported that U.S. prosecutors
are investigating whether Banamex USA failed to alert the U.S.
government to suspicious banking transactions along the U.S.-Mexico
border. Citigroup has said it is cooperating with the
inquiries.
The Federal Reserve had also previously ordered improvements in
the unit's anti-money-laundering procedures. A Citigroup
spokeswoman said at the time the bank "has made substantial
progress in strengthening" its compliance with rules to prevent
money laundering.
Government inquiries into Banamex USA didn't spur J.P. Morgan's
review of the account but they come as J.P. Morgan decides whether
to continue its relationship.
The Banamex USA account is a legacy of a Banamex predecessor and
today is rarely used, with no transactions flowing from Banamex
through J.P. Morgan in 2014, according to a person familiar with
the matter.
Earlier, Banamex had used the account to sell its customers
travelers' checks issued by J.P. Morgan, the person added.
In domestic-correspondent-banking relationships, smaller banks
rely on larger global banks to provide crucial services such as
processing, clearing and financing that they may not be able to do
as efficiently by themselves.
Small banks could, for example, use correspondent relationships
with larger banks to process fixed-income trades they conduct on
behalf of institutional clients.
J.P. Morgan's review of domestic-correspondent-banking
relationships branched out from a larger survey begun last summer
of its foreign correspondent banking business, the people familiar
with the matter said.
A memo sent internally in January informed J.P. Morgan employees
the bank was expanding the focus of the review to include domestic
as well as foreign correspondent banking relationships, according
to people who have reviewed the memo.
Domestic correspondent banks are thought to be less risky than
foreign correspondent banks, but they still raise some of the same
so-called know-your-customer and money-laundering concerns. J.P.
Morgan, among other banks, in recent months has been strengthening
its know-your-customer procedures to learn as much as it can about
not only its clients but the people or firms its clients do
business with, people familiar with the matter said.
"No matter where it's coming from, the goal is to prevent bad
money from getting into the system," said a person familiar with
the review.
It isn't known how large the correspondent-banking business is
for J.P. Morgan, although it is a subset of the treasury-services
group, which reported $4.13 billion in revenue in 2013.
J.P. Morgan, run by Chairman and Chief Executive James Dimon,
last year began inspecting its relationships with thousands of
foreign correspondent banks to ensure those institutions were "safe
and secure," a person familiar with the matter said at the
time.
In October, the bank said it was planning to discontinue
providing clearing services to about 500 foreign banks, a process a
person familiar with the matter said this past week is "a good way
through." The bank has more than 4,000
foreign-correspondent-banking clients, said another person familiar
with the matter.
The effort comes as the U.S.'s largest bank by assets tries to
assuage regulators by strengthening controls within units across
J.P. Morgan.
In recent years, J.P. Morgan has agreed to pay more than $20
billion to settle lawsuits and government probes.
Write to Julie Steinberg at julie.steinberg@wsj.com
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