Thursday, December 13, 2012

Ferociousness Contained: Banks Settle Money Laundering Cases


Ferociousness Contained: Banks Settle Money Laundering Cases

If you walked down a block and saw a huge dog growling and straining against a lead, you’d be a bit fearful and steer a wide berth.  However, if you observed that the dog was attached to a massive and well-anchored chain, and that it was behind a high voltage electric fence, you wouldn’t alter your course.  When it comes to big financial institutions, the US Department of Justice barks, growls, and froths at the mouth.  However, it is firmly tethered and completely confined, so Wall Street knows it only has to pay lip service.

Reverse Side (1995)

The DoJ has announced civil settlements with a series of foreign banks.  The banks were charged with failing to monitor or report suspected money laundering.  Whether it was the funds of drug cartels, terrorists, or the Iranian government, these banks were willing to let the money flow through their institutions.  In the most recent case, the DoJ has settled with HSBC for $1.9 billion.  While that sounds like a lot of money, it’s only two months of earnings.  This case was originally a criminal prosecution, but DoJ determined that a criminal conviction of HSBC could put the bank out of business, and HSBC is too big to fail.  A conviction could lead to a loss of institutional funding or the revocation of the bank’s US charter.  You might recall that the accounting firm Arthur Anderson was put out of business after its criminal conviction in the aftermath of the Enron bankruptcy.  As a result of these concerns, DoJ settled this as a civil matter.

The settlement states that the prosecution can be reinstated (known as a deferred prosecution) if the bank violates the money laundering laws in the future.  Here’s the proof that DoJ can bark, but that it can’t bite.  If HSBC is too big to fail, then any subsequent violation cannot be met with criminal charges.  The deferred prosecution sounds ominous, but it’s hard to see how it would be enforced.  SEC settlements routinely include the same type of warning.  We know that the major Wall Street banks have been serial violators, but the words and consequences of the old settlements never resurface.

If the bank isn’t subject to criminal prosecution, why not charge the executives?  I’ve read several dozen news accounts and searched the Internet for some indication that charges are pending against individuals.  In fact, the articles don’t mention anyone connected with the HSBC’s failure to detect or monitor money laundering.  To read these articles is to think that the bank’s failings were entirely the work of invisible forces.  HSBC’s management says that they deeply regret the bank’s transgressions.  I suspect that they are elated that the focus was on the institution and not them.

The settlements with HSBC, Standard Charter, Credit Suisse, Barclays, and ING are another lost opportunity to bring accountability and discipline to the financial system.  The penalties make for great headlines on the regulators’ websites, but that’s about it.

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