Senators demand details from DOJ on soft treatment of lawbreaking banks, ponder new law

When multinational financial institutions found themselves teetering on insolvency during the 2008 financial meltdown, their advocates argued for a taxpayer-backed bailout because these institutions were “too big to fail.” Now, three US Senators are asking if the same economic justifications have spawned excessively lenient treatment of lawbreaking financial institutions and eliminated criminal prosecutions of institution executives, effectively making them “too big to jail.”

Last week, the Chairman of the US Senate Banking Subcommittee on Financial Institutions and Consumer Protection, Senator Sherrod Brown, Democrat of Ohio, together with Senator Chuck E. Grassley, Republican of Iowa, the Ranking Minority Member of the Senate Judiciary Committee, released a letter addressed to Attorney General Eric Holder. In it, they asked tough questions about the soft treatment large financial institutions receive after they are caught engaging in longstanding criminal activity, in violation of laws aimed at defending the nation against terrorism and drug trafficking.

Their letter of January 29 condemned the practice of giving big banks a refuge against criminal sanctions. They said that categorizing them as “’too big to fail’” allows “Wall Street banks (to) enjoy a favored status… in enforcement policy” of the department. This “perception undermines the public’s confidence in our institutions and the principle that the law is applied equally in all cases,” they said.

Sen. Brown, who requested a prompt answer from Holder, has not decided on his next move, although it is possible he may consider proposed legislation in collaboration with Sen. Grassley.

DOJ deal with UBS for LIBOR rigging also in line of fire

The senators also criticized the soft treatment of the Swiss banking giant, UBS, for its long-standing manipulation of the London interbank offered rate, which is known as LIBOR. In a December 19 settlement with UBS, the Justice Department charged the Japanese affiliate of UBS with fraud, to which the affiliate pleaded guilty. In addition, UBS paid a $1.5 billion penalty and forfeiture for its role in the six-year conspiracy. At the time of the settlement, Holder held it up as an example of rigorous enforcement by the Justice Department.

The Senators disagree with that view.

“Many of the settlements between large… institutions and the… government involve penalties that are disproportionately low, both in relation to the profits which resulted from those wrongful actions as well as in relation to the costs imposed upon consumers, investors, and the market,” they said.

Brown and Grassley asked Holder for six elements of information:

  1. If the Justice Department has “designated certain institutions whose failure could jeopardize the stability of the financial markets and are thus, “too big to jail,” The senators ask Holder to name them, if there are any.
  2. If the Department ever failed to bring a prosecution against an institution because of concern “their failure could jeopardize financial markets”?
  3. If there are entities the department with which it has entered into settlements where the amount of the settlement reflected a concern that markets could be impacted by the settlement The senators, again, asked for their names, if any.
  4. The names of “all outside experts consulted” by the department “in making prosecutorial decisions regarding financial institutions with over $1 billion in assets,”
  5. The compensation contracts for these individuals,
  6. How the department assures that the experts gave “unconflicted and unbiased advice” to the department,

The two senators argue that the financial markets would be bolstered by vigorous and consistent enforcement policies.

“Confidence [in financial markets] can only be restored by demonstrating that there are consistent rules in place that provide accountability for wrongdoing and deter financial predators,” they said.

Grassley has directed sharp words at Holder in connection with prior bank settlements. After the deferred prosecution agreement in December 2012 with HSBC, Grassley criticized the Justice Department for an “inexplicable unwillingness to prosecute and convict those responsible for aiding and abetting drug lords and terrorists.” He called the settlement “hardly even a slap on the wrist.”

Merkley also questions Justice Department HSBC settlement

Senator Jeff Merkley, Democrat of Oregon, who is a member of the subcommittee chaired by Brown, wrote to Holder on December 13, challenging the Justice Department Deferred Prosecution Agreement (DPA) with HSBC. The huge UK-based global institution was found to have laundered hundreds of millions of dollars for Mexican drug cartels and Iranian institutions with whom financial transactions are prohibited under the US sanctions laws.

Under the DPA, HSBC avoided indictment and paid $1.9 billion, a record sum.

By failing to pursue criminal charges against HSBC, Merkley said the Justice Department was turning its back on the letter of the law and the intent of Congress.

“This ‘too big to jail’ approach to law enforcement, which deeply offends the public’s sense of justice, effectively vitiates the law as written by Congress,” Merkley said.

“Had Congress wished to declare that violations of money laundering, terrorist financing, fraud, and a number of other illicit financial actions would only constitute civil violations, it could have done so. It did not,” he continued. “Congress deemed criminal law the appropriate tool for punishing and deterring actions that have such serious and damaging public consequences.”

Justice Department fears ‘collateral consequences’ without DPAs

In explaining the department’s decision in a December 11 news conference to not prosecute HSBC, the recently departed Assistant Attorney General Breuer said the department considered the “collateral consequences” of an indictment.

“If you prosecute one of the largest banks in the world, do you risk that people will lose jobs, other financial institutions and other parties will leave the bank, and there will be some kind of event in the world economy?” Breuer argued.

Senator ‘deeply concerned’ about effectiveness of DPAs

Under the terms of a typical DPA, the Justice Department allows a company or individual to avoid indictment by promising to abstain from criminal behavior for a specified period and enhance internal monitoring controls. A fine or forfeiture is usually assessed. If the institution fails to honor the terms and the DPA is broken and prosecution may proceed.

Merkley questioned the use of DPAs as punishment for criminal behavior.

Merkley said, “I am deeply concerned 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 even for serious criminal actions if that bank is a large, systemically important financial institution.”

In a speech to the New York City Bar Association last September, Breuer said, “Over the last ten years, DPA’s have become a mainstay for white collar criminal law enforcement….The results have been… unequivocally far greater accountability for corporate wrongdoing. Companies now know that avoiding the disaster snare of an indictment does not mean an escape from accountability. They must prove to us that they are serious about compliance.”

The Justice Department response to the letters will determine, in large measure, the next steps the senators take.