The SEC and DOJ have stepped up enforcement against financial institutions in the past year. Now, several regulators are taking aim at two financial institutions based overseas, Credit Suisse and BNP Paribas. The settlement of these two cases has the potential to include fines over $1 billion each and guilty pleas to criminal charges.
BNP Paribas, the largest French bank, is accused of doing business in Cuba and Iran in violation of federal sanctions. The U.S. is seeking more than $3 billion from BNP Paribas.
Credit Suisse is under investigation for assisting U.S. citizens in tax evasion. The Justice Department and NYS Department of Financial Services are seeking a total of more than $2 billion in order for Credit Suisse to settle the claims against it.
In an effort to convince the Department of Justice, the Federal Reserve Bank of New York and the New York State Department of Financial Services to take the criminal charges off the table, the financial institutions have argued that a criminal conviction could threaten their ability to continue operating and result in substantial harm to the economy.
Perhaps they should have thought more about the potential consequences for their business before violating the law.
Neither case is an isolated incident in the industry. For violating U.S. sanctions, Credit Suisse, Barclays, ING Bank and the Royal Bank of Scotland have all faced penalties. For assisting in tax evasion, UBS agreed to pay $780 million to the U.S. government to avoid criminal prosecution in 2009. The government was aided in its investigation of UBS by whistleblower Brad Birkenfeld, who received more than $100 million.
If the threat of substantial monetary fines aren’t sufficient to deter misconduct by banks, then they need to know that criminal penalties are once again an option. The only way to do that is to convict one of them.
In the past, large businesses have been allowed to fail.
The guilty plea by Drexel Burnham Lambert to six counts of mail and securities fraud in 1989 resulted in their closure shortly thereafter. Drexel, which became famous for its role in high-yield junk bonds, admitted manipulating stock prices and defrauding shareholders. The firm also agreed to pay more than $500 million to the Government in connection with the settlement and establish a shareholder fund with an additional $150 million.
Accounting firm Arthur Anderson also closed following its 2002 felony conviction for obstructing the federal investigation into Enron. Although the conviction was overturned by the U.S. Supreme Court in 2005, the company had shut down its audit activities and was unable to recover.
Too big to fail, the popular Wall Street argument for government intervention during the financial crisis of 2008, was the precursor to too big to jail. Regulators allowed Lehman Brothers to fail in September of 2008 in order to show investment banks that they should not rely on the prospect of government intervention. The impact on investor confidence forced the government to intervene in the market and provide loans to major financial institutions because of concerns about liquidity problems. More than five years later, our nation is still struggling with the question of how to deal with large corporations when they become in legal or financial trouble.
Too big to jail, the public catch-phrase for the bank’s current argument, became widespread last year when British banks HSBC and Standard Chartered avoided criminal penalties for money laundering. At a news conference following their settlements, the head of the Justice Department criminal division, Lanny Breuer, indicated that they considered and rejected criminal prosecution of HSBC because of the risks to the bank’s viability and the American economy.
When violations of the law can be resolved by writing a large check, they become a strategic decision about whether it is better to pay the fine when caught or miss out on a potential business opportunity. If banks know that regulators cannot actually impose a greater punishment, they may be more willing to engage in risky behavior. That is why sending the message to large financial institutions that they need to respect the law is important.
Regulators appear to be moving in this direction.
Last year, the Securities and Exchange Commission announced that it was reviewing its practice of allowing defendants to settle cases without admitting wrongdoing. Mary Jo White, SEC Chairman, indicated that its new policy would most likely be applied to cases of significant investor harm and egregious fraud. When it negotiated a settlement of its charges against JPMorgan Chase in September 2013, it followed through. JPMorgan admitted it violated securities law in connection with a $6 billion loss by trader Bruno Iksil, known as the London Whale.
If the banks are right that they are too big to punish criminally without destroying the economy, it is time to take another look at how to deal with large corporations in America. They should not be able to get off the hook for serious violations of the law simply because they are large and important. As large and important institutions, it is critical that they actually are following the law.