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 email@example.com