A Bank Too Big to Jail
By GRETCHEN MORGENSON
New York Times
JULY 15, 2016
Lanny Breuer, at lectern, head of the Justice Department’s criminal division, announced the HSBC penalty and settlement in 2012. Credit Richard Drew/Associated Press
Have you ever wondered why the crippling 2008 financial crisis generated almost no criminal prosecutions of large banks and their top executives?
Then take a moment to read the congressional report issued on July 11 titled “Too Big to Jail.” Citing internal documents that the United States Treasury took three years to produce, the report shows how regulators and prosecutors turned a potential criminal prosecution of a large global bank — HSBC — into a watered-down settlement that insulated its executives and failed to take into account the full scope of the bank’s violations.
The report, prepared by the Republican staff of the House Financial Services Committee, does not examine a matter related to the mortgage crisis. Rather, it looks at the Department of Justice’s 2012 settlement with HSBC, the British banking behemoth, after accusations that it laundered nearly $900 million for drug traffickers and processed transactions on behalf of Cuba, Iran, Libya, Sudan and Myanmar, or Burma, when those countries were subject to United States sanctions.
HSBC and its American subsidiary, HSBC Bank USA, agreed to pay almost $2 billion under the settlement, striking a deferred prosecution arrangement that remains in place. Under such deals, the government agrees to delay or forgo prosecution of a company if it promises to change its behavior.
In spite of the settlement’s size, it did not represent a body blow to the bank. Announced in late 2012, the HSBC agreement was almost a footnote to the earlier fallout from the mortgage crisis. Still, the facts outlined by prosecutors were damning enough to raise questions about why the bank had not been subject to harsher treatment, fueling the view that large financial institutions are not only too big to be allowed to fail but also are too significant to be prosecuted criminally.
The report on HSBC was not adopted by the full House committee, but neither did it generate a dissent from others on the committee. It was released, the staff said, “to shed light on whether D.O.J. is making prosecutorial decisions based on the size of financial institutions and D.O.J.’s belief that such prosecutions could negatively impact the economy.”
There doesn’t seem to be much doubt about that. Indeed, the report concluded that the Justice Department’s leadership overruled an internal recommendation to prosecute HSBC, citing concerns “that prosecuting the bank ‘could result in a global financial disaster.’”
This will surprise few Americans who learned during the financial crisis that banks and their officials are rarely held to account.
Peter Carr, a spokesman for the Justice Department, said it was “committed to aggressively investigating allegations of wrongdoing at financial institutions, and, along with our law enforcement partners, holding individuals and corporations responsible for their conduct.” Since 2014, he said, It has prosecuted numerous individuals for corporate misconduct, including top executives.
Eric H. Holder Jr., the former attorney general, did not return a phone call seeking comment about the report.
Quoting from internal Treasury records, the report said that once the Justice Department decided not to prosecute HSBC, its officials began softening the deal offered to the bank. One change involved releasing the bank’s employees, officers and directors from potential prosecution.
The original agreement provided no protection from prosecution for employees who “knowingly and willfully” processed financial transactions with countries under American sanctions, the report said.
But the final deferred prosecution agreement gave a conditional release from liability for transactions disclosed to investigators during the period covered by the settlement.
David A. Skeel, a professor of corporate law at the University of Pennsylvania Law School, said he was struck by this change. “This is one case where it looks like the government might have been able to prosecute misbehaving executives during the crisis period, yet it waived its right to do so,” he said in an email.
Another modification involved penalties to be exacted from executives if HSBC failed to live up to compliance requirements.
While initial terms called for voiding the entire year’s bonus compensation at the bank if it did not meet compliance hurdles, the final deferred prosecution agreement said only that a failure could potentially void the bonuses. This revision, the report said, “apparently leaves open the possibility for executives to get their bonuses, despite failing to meet compliance standards.”
Another disturbing element turned up by the House committee: The settlement terms were given to HSBC before officials in the Treasury’s Office of Foreign Assets Control, or O.F.A.C., had assessed the full extent of the bank’s sanctions violations.
The Justice Department called for HSBC to pay $375 million to settle the sanctions violations. But officials in charge of analyzing those violations were still awaiting additional information from the bank when this figure was submitted. Therefore, they could not be sure the amount was adequate.
“No matter that our sanctions numbers might come in higher than that,” an official at the Treasury office wrote in an email to colleagues. “We weren’t consulted. We were told.”
As a result, the report said, officials of the Office of Foreign Assets Control “decided to hastily resolve internal concerns about the extent of HSBC’s sanctions violations and ‘frame’ O.F.A.C.’s final settlement number to mirror the $375 million ‘deemed settled’ value proposed” by the Justice Department.
Mary Kreiner Ramirez, a professor at Washburn University School of Law in Topeka, Kan., and a former assistant United States attorney, said she was startled by how much influence officials at the Financial Services Authority — Britain’s top financial regulator at the time — had on the Justice Department’s process in the HSBC matter, according to the report.
“It would seem that in making the decision with respect to HSBC, Holder gave more attention to the concerns expressed by the F.S.A. than he did with respect to our own agencies,” Ms. Ramirez said in an interview. “And think about it: Congress spent three years trying to uncover this information that F.S.A. was getting at the time the events were unfolding.”
That it took the House committee so long to receive the information from the Treasury Department once again raises questions about transparency in government, something the Obama administration has called a top priority.
“Treasury improperly impeded the committee’s investigation” for nearly three years before producing certain subpoenaed records, the report said. The department’s production of records “is missing dozens, if not hundreds, of pages,” the report said.
Joshua Drobnyk, a Treasury spokesman, disputed this characterization, saying the department had cooperated extensively with Congress. “Treasury made hundreds of pages of documents available to the committee more than two years ago, in April 2014, and committee staff reviewed the materials five separate times,” Mr. Drobnyk said in a statement.
But Jeb Hensarling, the Texas Republican who heads the House Financial Services Committee, doesn’t buy it. “If an incomplete response to the committee after three years and the threat of deposition subpoenas isn’t stonewalling, I don’t know what is,” he said in a statement. “After these revelations, if the Obama administration refuses to be transparent, produce the documents that it is withholding and address the urgent questions that this report has raised, the American people need to ask why.”
By shedding light on the HSBC matter, the report is “the best kind of anticorruption action,” said Edward J. Kane, a professor of finance at Boston College and an authority on regulatory failures. “The fact that so many of these cases are settled rather than going to court means we don’t get an airing of facts and challenges of facts.”
The report should be viewed as “evidence of an abuse of the regulatory system,” Mr. Kane added. “And unless proven otherwise, this is just the tip of the iceberg.”
Twitter: @gmorgenson
A version of this article appears in print on July 17, 2016, on page BU1 of the New York edition with the headline: Kid Gloves for a Bank With Clout. Order Reprints| Today's Paper|Subscribe
New York Times
JULY 15, 2016
Lanny Breuer, at lectern, head of the Justice Department’s criminal division, announced the HSBC penalty and settlement in 2012. Credit Richard Drew/Associated Press
Have you ever wondered why the crippling 2008 financial crisis generated almost no criminal prosecutions of large banks and their top executives?
Then take a moment to read the congressional report issued on July 11 titled “Too Big to Jail.” Citing internal documents that the United States Treasury took three years to produce, the report shows how regulators and prosecutors turned a potential criminal prosecution of a large global bank — HSBC — into a watered-down settlement that insulated its executives and failed to take into account the full scope of the bank’s violations.
The report, prepared by the Republican staff of the House Financial Services Committee, does not examine a matter related to the mortgage crisis. Rather, it looks at the Department of Justice’s 2012 settlement with HSBC, the British banking behemoth, after accusations that it laundered nearly $900 million for drug traffickers and processed transactions on behalf of Cuba, Iran, Libya, Sudan and Myanmar, or Burma, when those countries were subject to United States sanctions.
HSBC and its American subsidiary, HSBC Bank USA, agreed to pay almost $2 billion under the settlement, striking a deferred prosecution arrangement that remains in place. Under such deals, the government agrees to delay or forgo prosecution of a company if it promises to change its behavior.
In spite of the settlement’s size, it did not represent a body blow to the bank. Announced in late 2012, the HSBC agreement was almost a footnote to the earlier fallout from the mortgage crisis. Still, the facts outlined by prosecutors were damning enough to raise questions about why the bank had not been subject to harsher treatment, fueling the view that large financial institutions are not only too big to be allowed to fail but also are too significant to be prosecuted criminally.
The report on HSBC was not adopted by the full House committee, but neither did it generate a dissent from others on the committee. It was released, the staff said, “to shed light on whether D.O.J. is making prosecutorial decisions based on the size of financial institutions and D.O.J.’s belief that such prosecutions could negatively impact the economy.”
There doesn’t seem to be much doubt about that. Indeed, the report concluded that the Justice Department’s leadership overruled an internal recommendation to prosecute HSBC, citing concerns “that prosecuting the bank ‘could result in a global financial disaster.’”
This will surprise few Americans who learned during the financial crisis that banks and their officials are rarely held to account.
Peter Carr, a spokesman for the Justice Department, said it was “committed to aggressively investigating allegations of wrongdoing at financial institutions, and, along with our law enforcement partners, holding individuals and corporations responsible for their conduct.” Since 2014, he said, It has prosecuted numerous individuals for corporate misconduct, including top executives.
Eric H. Holder Jr., the former attorney general, did not return a phone call seeking comment about the report.
Quoting from internal Treasury records, the report said that once the Justice Department decided not to prosecute HSBC, its officials began softening the deal offered to the bank. One change involved releasing the bank’s employees, officers and directors from potential prosecution.
The original agreement provided no protection from prosecution for employees who “knowingly and willfully” processed financial transactions with countries under American sanctions, the report said.
But the final deferred prosecution agreement gave a conditional release from liability for transactions disclosed to investigators during the period covered by the settlement.
David A. Skeel, a professor of corporate law at the University of Pennsylvania Law School, said he was struck by this change. “This is one case where it looks like the government might have been able to prosecute misbehaving executives during the crisis period, yet it waived its right to do so,” he said in an email.
Another modification involved penalties to be exacted from executives if HSBC failed to live up to compliance requirements.
While initial terms called for voiding the entire year’s bonus compensation at the bank if it did not meet compliance hurdles, the final deferred prosecution agreement said only that a failure could potentially void the bonuses. This revision, the report said, “apparently leaves open the possibility for executives to get their bonuses, despite failing to meet compliance standards.”
Another disturbing element turned up by the House committee: The settlement terms were given to HSBC before officials in the Treasury’s Office of Foreign Assets Control, or O.F.A.C., had assessed the full extent of the bank’s sanctions violations.
The Justice Department called for HSBC to pay $375 million to settle the sanctions violations. But officials in charge of analyzing those violations were still awaiting additional information from the bank when this figure was submitted. Therefore, they could not be sure the amount was adequate.
“No matter that our sanctions numbers might come in higher than that,” an official at the Treasury office wrote in an email to colleagues. “We weren’t consulted. We were told.”
As a result, the report said, officials of the Office of Foreign Assets Control “decided to hastily resolve internal concerns about the extent of HSBC’s sanctions violations and ‘frame’ O.F.A.C.’s final settlement number to mirror the $375 million ‘deemed settled’ value proposed” by the Justice Department.
Mary Kreiner Ramirez, a professor at Washburn University School of Law in Topeka, Kan., and a former assistant United States attorney, said she was startled by how much influence officials at the Financial Services Authority — Britain’s top financial regulator at the time — had on the Justice Department’s process in the HSBC matter, according to the report.
“It would seem that in making the decision with respect to HSBC, Holder gave more attention to the concerns expressed by the F.S.A. than he did with respect to our own agencies,” Ms. Ramirez said in an interview. “And think about it: Congress spent three years trying to uncover this information that F.S.A. was getting at the time the events were unfolding.”
That it took the House committee so long to receive the information from the Treasury Department once again raises questions about transparency in government, something the Obama administration has called a top priority.
“Treasury improperly impeded the committee’s investigation” for nearly three years before producing certain subpoenaed records, the report said. The department’s production of records “is missing dozens, if not hundreds, of pages,” the report said.
Joshua Drobnyk, a Treasury spokesman, disputed this characterization, saying the department had cooperated extensively with Congress. “Treasury made hundreds of pages of documents available to the committee more than two years ago, in April 2014, and committee staff reviewed the materials five separate times,” Mr. Drobnyk said in a statement.
But Jeb Hensarling, the Texas Republican who heads the House Financial Services Committee, doesn’t buy it. “If an incomplete response to the committee after three years and the threat of deposition subpoenas isn’t stonewalling, I don’t know what is,” he said in a statement. “After these revelations, if the Obama administration refuses to be transparent, produce the documents that it is withholding and address the urgent questions that this report has raised, the American people need to ask why.”
By shedding light on the HSBC matter, the report is “the best kind of anticorruption action,” said Edward J. Kane, a professor of finance at Boston College and an authority on regulatory failures. “The fact that so many of these cases are settled rather than going to court means we don’t get an airing of facts and challenges of facts.”
The report should be viewed as “evidence of an abuse of the regulatory system,” Mr. Kane added. “And unless proven otherwise, this is just the tip of the iceberg.”
Twitter: @gmorgenson
A version of this article appears in print on July 17, 2016, on page BU1 of the New York edition with the headline: Kid Gloves for a Bank With Clout. Order Reprints| Today's Paper|Subscribe
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