A Christmas Carol for Bankers

We all know the moral of Charles Dickens' A Christmas Carol, the story of Ebenezer Scrooge. He was a banker "who lent money at usurious rates to the subprime sector in Victorian London," said London's Mayor Boris Johnson, when comparing him to modern financial villains. With the help of three ghosts, Scrooge finally reached redemption by learning to give to others. As events of the past two weeks have shown, modern bankers have their own ghosts to face: federal prosecutors.

The Ghost of Christmas Present. Our massive multinational financial institutions are waking up from a very different bad dream, with prosecutors showing them the criminal consequences of their actions. Scrooge certainly didn't learn his lesson by paying criminal fines. But as the holidays approach, the Department of Justice has announced one major prosecution agreement after another with major financial institutions. This fall, MoneyGram International Inc. paid $100 million to settle violations relating to consumer fraud and lack of an effective anti-money laundering program. Two weeks ago, HSBC agreed to pay $1.9 billion to settle charges of massive money laundering around the globe -- to Mexican drug cartels, terrorist financiers and regimes like those in Iran, North Korea and Sudan that are subject to U.S. economic sanctions. And this past week UBS agreed to pay U.S. prosecutors and regulators $1.5 billion in fines and disgorgement of profits for its role in manipulating key benchmark interest rates used in trillions of dollars of transactions worldwide.

The Ghost of Christmas Past. Prominent voices, including journalists and U.S. Senators, have asked if banks are being treated as "too big to jail." After all, these prosecution agreements allow the bank to avoid a criminal conviction (although UBS' Japanese subsidiary will plead guilty to fraud). For example, Oregon Sen. Jeff Merkley objected to the HSBC prosecution agreement, calling it a "too-big-to-jail approach." He wrote to Attorney General Eric Holder that "four years after the financial crisis, the Department appears to have firmly set the precedent that no bank, bank employee or bank executive can be prosecuted."

What HSBC apparently tolerated for years was deeply reprehensible. But thanks to DOJ actions and those of regulators, the company is starting to make amends. The DOJ did, in fact, prosecute HSBC. Like the vast majority of criminal defendants, the company settled the case, albeit without a conviction. Banks, like any corporation, cannot be put in jail literally, of course. They can pay mammoth fines, but prosecutors rightly not only on demand payment of fines, but focus on reforming the company itself. Thanks to the top-to-bottom structural reforms required by the settlement, HSBC is changing the culture of an entire institution. HSBC replaced all of its top leadership, from the CEO down. They spent hundreds of millions on anti-money laundering efforts and ramped up anti-money laundering from 92 full-time employees to 880 such employees. The company embarked on a $700 million review of all of their clients and adopted new automated systems to monitor wire transfers and transactions.

People still go to jail. Two UBS employees are being prosecuted for rate manipulation, and prosecutors have the help of the most powerful informant imaginable: UBS, the company. If prosecutors are able to prove that individuals committed crimes, it will be because the companies themselves turned over millions of pages of documents and emails. Earlier this year Barclays was the first to settle charges relating to the wide-ranging rate-manipulation scheme, paying $453 million. Barclays agreed to cooperate against other banks involved, and while UBS is the second to be prosecuted, more are yet to come.

The Ghost of Christmases Yet to Come. Like Scrooge, bankers at the top paid themselves well over the years. Charles Dickens' great-great grandson has commented that, "If you look at the whole issue of bankers' bonuses, it sums A Christmas Carol up in a nutshell." Yet prosecutors have addressed bonuses, as well. Perhaps more powerful than making examples of a handful of employees, prosecutors have made ethics and compliance a condition for all senior executive pay at HSBC. The bank clawed back bonuses for senior officers. The prosecution agreement has a remarkable provision: going forward, all bonuses will be based on "the extent to which the senior executive meets compliance standards and values."

This may be a sign of things to come. The MoneyGram prosecution agreement from earlier this fall also provided for "claw back" of prior bonuses, and to change its "bonus system" so that each executive is evaluated on compliance. For the Scrooges in the office, future Christmases may be glum: "a failing score in compliance will make the executive ineligible for any bonus for that year."

The so-called "too-big-to-jail approach," is not a bad thing at all. Rather than focus on convicting an artificial scapegoat -- a company -- prosecutors rightly focus on structural reforms. The approach is not perfect. It should be strengthened, with stronger reforms and more judicial oversight. But recent agreements altering executive compensation, imposing monitors, and implementing detailed compliance reforms are exactly what we need. We should focus on how to better reform institutions, and cheerfully tell the critics of federal prosecutors: "Bah, humbug!"

Brandon L. Garrett, the Roy L. and Rosamund Woodruff Morgan Professor of Law at the University of Virginia School of Law, is under contract with Harvard University Press to write a book about corporate prosecutions, and recently wrote 'Convicting the Innocent: Where Criminal Prosecutions Go Wrong.'