JPMorgan Chase will pay $1.7 billion dollars as part of a deferred prosecution agreement reached with the U.S. Attorney's office for the Southern District of New York on charges its failure to maintain an effective anti-money laundering program facilitated the multibillion-dollar Ponzi Scheme orchestrated by infamous New York broker Bernard Madoff.

The monetary settlement, announced on Tuesday, is the largest ever bank forfeiture by the Department of Justice for a Bank Secrecy Act violation. It will be distributed to victims of the fraud at Bernard L. Madoff Investment Securities, and its predecessor Bernard L. Madoff Investment Securities. The bank is prohibited from taking any tax deduction or tax credit for the payment to U.S. Treasury.

As part of the settlement, JPMorgan agreed to “accept and acknowledge responsibility for its conduct.” It will also be under heightened regulatory scrutiny for the next two years, during which time it promises to: improve its Bank Secrecy Act and AML compliance program; report any deficiencies in those programs; fully cooperate with investigations by the FBI or regulators; and bring forward any evidence of criminal conduct by employees.

Madoff was sentenced to 150 years in prison in 2009 as a consequence of his three-decade-old Ponzi scheme's collapse. At the time of its failure in December 2008, Madoff Securities maintained more than 4,000 client accounts. Although those accounts held a combined balance of $65 billion, the firm had only $300 million in assets on hand.

According to the Justice Department, the Ponzi scheme was conducted almost exclusively through a demand deposit account and other linked cash and brokerage accounts held at JPMorgan Chase. Nearly all client investments and redemptions were paid from a linked disbursement account held by Madoff at the bank.

The crux of the complaint by federal prosecutors is that the bank maintained that relationship despite internal concerns and red flags. The bank's London-based Equity Exotics Desk, in an October 2008 memo, cited an “inability to validate Madoff's trading activity, or even custody of assets.” It also questioned his “odd choice” of a small, unknown accounting firm and fretted that the bank was relying on Madoff's integrity with little reason to do so. Also flagged was the feeder funds managers' “apparent fear of Madoff, where no one dares ask any serious questions so long as performance is good.”

On Oct. 29, 2008, the London unit filed a report with the UK's Serious Organised Crime Agency. “The investment performance achieved by [the Madoff Securities] funds is so consistently and significantly ahead of its peers year-to-year, even in the prevailing market conditions, as to appear too good to be true – meaning that it probably is.”

Those concerns, however, failed to generate a Suspicious Activity Report back in the U.S. According to the Justice Department, concerns addressed in the UK memo were never communicated to AML compliance personnel in the U.S. and there was “no meaningful effort” to examine the concerns.

These failings underlie demands that JPMorgan work closely with regulators over the next two years to overhaul its AML and BSA programs, which were found to have “systematic deficiencies” and reflected “a failure to maintain adequate policies, procedures, and controls to ensure compliance.”

It was also announced on Tuesday that the Office of the Comptroller of the Currency assessed a $350 million civil penalty against JPMorgan Chase. It follows a January 2013 cease and desist order in which the OCC directed three of its affiliated banks to correct deficiencies in their compliance programs.

The OCC found “critical and widespread deficiencies” in the banks' BSA and AML compliance programs with respect to suspicious activity reporting, monitoring of transactions for suspicious activity, the conduct of customer due diligence and risk assessments, and internal controls and independent testing.

That penalty is based in part on the failure to report and respond to suspicions about Madoff's firm and other cases of suspicious activity. Concurrent with the OCC's enforcement action, the Treasury Department's Financial Crimes Enforcement Network also assessed a $461 million civil money penalty.

Responding to the settlements, FinCEN Director Jennifer Shasky Calvery said there was a lesson to be learned for financial institutions.

“It is my hope that financial institutions learn from what has happened in this case, that they pay close attention to their AML programs, promote a culture of compliance, and file SARs when suspicions arise,” she said. “As a result, not only will they protect their institution's bottom line, but they could potentially protect untold numbers of innocent people from falling victim to a similar devastating fraud.”