This week the Senate enjoys an opportunity to secure a commitment that criminal mega-banks and their executives will be held to the same legal standards as smaller crooks.
On Jan. 28, 2015, the Senate Judiciary Committee opens two days of hearings to consider President Obama's nomination of Loretta Lynch to be Attorney General (AG) of the United States. She would be the chief law enforcer for the United States. Currently, she is the U.S. Attorney for the Eastern District of New York. In this New York office, she brokered what's called a deferred prosecution agreement (DPA) with HSBC, one of the world's largest banks. HSBC admitted to massive criminal money laundering. Rather than indict the firm or any individuals, the DPA required HSBC to pay a fine -- $1.9 billion, or roughly a month's profit. Sen. Charles Grassley (D-Iowa), who will chair the Senate Judiciary Committee hearings, asked current AG Eric Holder why the U.S. Department of Justice (DOJ) didn't bring criminal charges against HSBC in a hearing two years ago. Holder responded that some firms are just too big.
Here are some questions that senators should ask to make sure that size no longer shields a company from the rule of law.
· Some cite the government's criminal case against the Enron accounting firm Arthur Andersen, which subsequently closed its doors, as a reason to avoid bringing a criminal case against any major company. Some contend that filing a criminal charge against a large bank isn't fair since the criminal activity may be limited to only a portion of the bank, or that it is difficult to make sure that all the rules are obliged when a bank is so large. Do you sympathize with thes arguments? If a bank is so large that it's impossible to ensure that all the laws are followed, should we break it up?
· Even when the DOJ has brought criminal cases, there seems to be little real punishment. Business continues. Executives remain in their jobs. Bonuses are paid. The JP Morgan board doubled CEO Jamie Dimon's pay because of the massive legal settlements. Do you think the DOJ is doing its job if banks commit massive violations, but no individuals seem to suffer penalties?
· When the government has brought cases against smaller banks, such as Riggs Bank, the end result is that the banking business is taken over by another bank. PNC took over the Riggs operations. HSBC's American operations result from its acquisition of Marine Midland Bank and Republic National Bank. Couldn't a DOJ criminal case simply lead to the sale of its American banking business to another owner?
· HSBC's money laundering violations are huge. The bank failed to report $200 trillion worth of transactions. It laundered $881 million for drug cartels, changing its teller windows to fit the pre-fabricated boxes of cash from the narco-traffickers. It laundered money for despots and terrorists. It laundered money even after regulators caught and scolded them for it. Apparently, however, this activity wasn't sufficient for the DOJ to bring a criminal case. Do you think the failure to bring a criminal case compromises deterrence? Would other firms see that major money laundering violations will only result in a fine?
· Despite massive crimes committed by all the mega-banks leading to the 2008 financial crash, the DOJ has brought no criminal case, nor has it charged any senior executive. Can you comment on these theories:
a. The DOJ is out-lawyered by the mega-banks who retain DOJ alumni;
b. The DOJ misunderstands the law, as Judge Jed Rakoff claims;
c. The DOJ considers that the odds of a settlement (deferred prosecution agreement) are far better than risking a trial.
· AG Holder explained to Sen. Grassley that the DOJ did not consult experts outside the government as they weighed a prosecution and/or penalties for HSBC. It has been reported that HSBC did make a case that a prosecution would lead to global financial tremors. Should the DOJ report to Congress on the analysis it does when it settles a major financial crime case short of a criminal prosecution? Should the DOJ enjoy the sole discretion on whether to choose a private settlement over a public trial with a mega-bank, given that the victims of a massive crime may be numerous?
· In defending its DPA settlement with HSBC, assistant attorney general Lanny Breuer said there was a "sword of Damocles" hanging over the bank. Said Breuer, "HSBC is paying a heavy price for its conduct and, under the terms of today's agreement, if the bank fails to comply with this agreement in any way -- any way at all -- we of course, the government, reserve the right to prosecute the bank." As you know, HSBC has subsequently paid fines for foreign exchange manipulation and other violations. HSBC has been charged with tax fraud in Belgium and France, and with aiding tax evasion in Argentina. On Jan. 20 the DOJ received a report from the HSBC independent monitor. News reports say it contains information about further problems. Can you provide this monitor report to us now as we consider your nomination? Further, the DOJ has issued a summons to HSBC related to an investigation of a firm that may help clients escape income taxes. Its website is offshore-protection.com. The DOJ says it requested information from HSBC about people who "who may be evading or have evaded federal taxes." Since HSBC is supposed to know its clients and why they use HSBC, HSBC should have declined any relationship with a firm that the government officially and publicly believes may be helping people evade taxes. Since the DPA authorizes the DOJ to decide when there is a crime, will you now take this opportunity to void the DPA and file criminal charges against HSBC and HSBC executives?
· In the last two years the DOJ reached civil settlements with all the major U.S. banks for numerous, massive frauds. In each case, however, the firms paid the fines, which are effectively funded by shareholders, not the individuals responsible for the infractions. Should individuals pay fines? Several bank regulators claim a culture of crime infects Wall Street. Martin Wheatley, the UK's chief bank crime regulator, recently observed that when an industry attracts workers who essentially want to make money, the ethical challenge is "built in." A Dodd-Frank section (956) provides that banker pay can be reformed so that pay can be deferred and used to pay fines. New York Federal Reserve Bank President William Dudley has proposed that banks fund an account from deferred pay for senior executives. As the nation's senior legal advisor, do you support this idea?