Cognizant of how indicting of one of the world’s largest banks could affect the rest of the international financial system and still moribund economy, and not wanting to alienate a longtime US ally, a recent US Congressional report states that top officials at the Department of Justice overruled a recommendation to criminally charge HSBC in 2012 for financial crime compliance failures.
Those are just some of the findings of a nearly 300-page report authored by Republican lawmakers on the House of Representatives Financial Services Committee that gave a glimpse into some of the behind-the-scenes harried meetings, political wrangling and horse trading that occurred during the typically secret negotiations leading to a then-record $1.9 billion anti-money laundering (AML) and sanctions-related deferred prosecution agreement (DPA) with HSBC.
The documents also detail how challenging it is to actually criminally prosecute a bank, or even individuals in a bank, even when there appears to be a mountain of evidence consisting of thousands upon thousands of transactions representing billions of dollars, some of which are clearly tied to organized criminal groups, occurring for several years.
The report centers on a question that while easily asked, is not easily answered: what is the appropriate punishment for longstanding and lax financial crime compliance failures – involving programs that are a mix of policies, procedures, systems, and oversight involving people within and without the compliance department – that helped criminals launder money?
Democrats on the committee did not take part in the report, suggesting the report and its findings are at least partially a byproduct of the hyper-partisan wrangling that characterizes current Congressional politics. One of the primary criticisms leveled by Republicans in the report is that then-Attorney General Eric Holder chose not to follow through on recommendations by Jennifer Shasky Calvery, then the head of the Justice Department’s Asset Forfeiture and Money Laundering Section (AFMLS), to criminally prosecute HSBC for failing to monitor hundreds of billions of dollars in wires and cash transactions, some of which were later linked to the most dangerous and violent drug cartels in the world.
Holder apparently overruled Shasky Calvery because of “DOJ leadership’s concern that prosecuting the bank would have serious adverse consequences on the financial system,” due to the size and interconnected nature of the institution around the world, according to the report.
Currently, depending on the source, HSBC is ranked among the top 10 and even top five largest banks in the world.
It’s fair to criticize the HSBC settlement because it was a “borderline case” that had some parts of the Justice Department pushing for a guilty plea or indictment, said an individual familiar with the matter, who asked not to be named.
The bank’s actions were “serious and egregious, so you can make a case to indict the institution or require it to plead guilty,” said the person.
“But to try to portray that the DPA was weak or in any kind of way a cowardly decision” is a detriment to the hard work of the attorneys and investigators involved, and completely disregards the eventual outcome that led to a bank with a much stronger compliance department, the individual noted.
For instance, while the bank spent nearly $2 billion dollars on the penalty itself, it has also spent “billions of dollars on compliance to improve the program. So it’s not just that the bank just paid a couple of [billion dollars] and that’s it. The penalty reflected the seriousness of the offenses.”
The British are coming
As well, the report notes that the Holder and others feared that the prosecution could upset a political ally, the United Kingdom, where HSBC is headquartered. Their concerns were heightened in light of other British banks, such as Standard Chartered, being battered by US regulators due to sanctions violations and eventually paying hundreds of millions of dollars in penalties.
The attention and influence of the UK’s Financial Services Authority “appears to have hampered the U.S. government’s investigations and influenced DOJ’s decision not to prosecute HSBC,” according to the report. Top British politicians sent letters to high-ranking US officials stating they were being unfairly targeted.
The report, citing court documents, noted that, from 2006 to 2010, HSBC Bank USA “severely understaffed its AML compliance function” and failed to implement an AML program capable of “adequately monitoring suspicious transactions and activities from HSBC Group Affiliates, particularly HSBC Mexico, one of HSBC Bank USA’s largest Mexican customers.”
One major issue was that, despite evidence of “serious money laundering risks associated with doing business in Mexico,” from at least 2006 to 2009, HSBC Bank USA rated Mexico as “standard” risk, its lowest AML risk category.
As a result, HSBC Bank USA failed to monitor over $670 billion in wire transfers and over $9.4 billion in purchases of physical U.S. dollars from HSBC Mexico during this period, when HSBC Mexico’s “own lax AML controls caused it to be the preferred financial institution for drug cartels and money launderers.”
As well, due to HSBC USA’s AML failures, at least $881 million in drug trafficking proceeds—including proceeds of drug trafficking by the Sinaloa Cartel in Mexico and the Norte del Valle Cartel in Colombia—were laundered through HSBC Bank USA, according to the report.
Studying the ‘collateral consequences’
Even with those damning figures, investigative and prosecutorial decisions are not made in a vacuum, apart from the final tallies of penalties for laws broken, amount laundered or illicit profits tallied, said the individual familiar with the matter.
The Justice Department must “consider the collateral consequences” of prosecuting a company and effectively putting it out of business, said the person.
“Say there is a company in a small town doing a lot of polluting,” said the person. “The department has to consider: Do you really want to indict the company and put 500 people out of a job? Or is there something else you can do to allow the company to keep operating, but require it to clean up what it has done and pay for what it has done wrong. Those are all part of the questions a prosecutor is going to ask.”
As well, the “larger the case, the higher levels it’s going to go” in terms of Justice Department ranks, so it’s not unrealistic to think that top officials would realize the stress that the British banking system was under and the impact of one of the largest banks in the world losing out on access to the US market would have on the broader global financial system, said the person.
In those cases, the Justice Department, as in the case of HSBC, may coordinate and get guidance from the US Treasury and even the foreign regulator in the bank’s home country to see what is appropriate from both a financial crime and fiduciary perspective.
For instance, if HSBC had lost access to the US financial system, that would be a drawback for US investigative agencies as they would lose intelligence on transactions passing through HSBC that could help current or future investigations. US officials would then have to go through mutual legal assistance treaties, which would be a slower process.
With so much focus on if the Justice Department followed proper prosecutorial protocols related to the DPA and penalty with HSBC rather than an indictment, the question arises: So what are the factors prosecutors must weigh? Here is your answer:
Factors to Be Considered
General Principle:Generally, prosecutors apply the same factors in determining whether to charge a corporation as they do with respect to individuals. SeeUSAM 9-27.220 et seq. Thus, the prosecutor must weigh all of the factors normally considered in the sound exercise of prosecutorial judgment: the sufficiency of the evidence; the likelihood of success at trial; the probable deterrent, rehabilitative, and other consequences of conviction; and the adequacy of noncriminal approaches. See id. However, due to the nature of the corporate “person,” some additional factors are present. In conducting an investigation, determining whether to bring charges, and negotiating plea or other agreements, prosecutors should consider the following factors in reaching a decision as to the proper treatment of a corporate target:
- the nature and seriousness of the offense, including the risk of harm to the public, and applicable policies and priorities, if any, governing the prosecution of corporations for particular categories of crime (seeUSAM 9-28.400);
- the pervasiveness of wrongdoing within the corporation, including the complicity in, or the condoning of, the wrongdoing by corporate management (seeUSAM 9-28.500);
- the corporation’s history of similar misconduct, including prior criminal, civil, and regulatory enforcement actions against it (seeUSAM 9-28.600);
- the corporation’s willingness to cooperate in the investigation of its agents (seeUSAM 9-28.700);
- the existence and effectiveness of the corporation’s pre-existing compliance program (seeUSAM 9-28.800);
- the corporation’s timely and voluntary disclosure of wrongdoing (seeUSAM 9-28.900);
- the corporation’s remedial actions, including any efforts to implement an effective corporate compliance program or to improve an existing one, to replace responsible management, to discipline or terminate wrongdoers, to pay restitution, and to cooperate with the relevant government agencies (seeUSAM 9-28.1000);
- collateral consequences, including whether there is disproportionate harm to shareholders, pension holders, employees, and others not proven personally culpable, as well as impact on the public arising from the prosecution (seeUSAM 9-28.1100);
- the adequacy of remedies such as civil or regulatory enforcement actions (seeUSAM 9-28.1200); and
- the adequacy of the prosecution of individuals responsible for the corporation’s malfeasance (seeUSAM 9-28.1300)
Comment: The factors listed in this section are intended to be illustrative of those that should be evaluated and are not an exhaustive list of potentially relevant considerations. Some of these factors may not apply to specific cases, and in some cases one factor may override all others. For example, the nature and seriousness of the offense may be such as to warrant prosecution regardless of the other factors. In most cases, however, no single factor will be dispositive. In addition, national law enforcement policies in various enforcement areas may require that more or less weight be given to certain of these factors than to others. Of course, prosecutors must exercise their thoughtful and pragmatic judgment in applying and balancing these factors, so as to achieve a fair and just outcome and promote respect for the law.
Standard Chartered charter scare
The report also details that the Justice Department felt pressure not just from foreign regulators, but its own state regulator, the New York State Department of Financial Services (NYDFS) and then hard-charging leader, Benjamin Lawsky.
The Justice Department and federal financial regulators were “rushing at what one Treasury official described as ‘alarming speed’ to complete their investigations and enforcement actions involving HSBC in order to beat the” NYDFS, according to the report.
The report argues that as part of that “haste to complete its enforcement action against HSBC, the DOJ transmitted settlement numbers to HSBC before consulting with Treasury’s Office of Foreign Asset Control to ensure that the settlement amount accurately reflected the full degree of HSBC’s sanctions violations.”
The NYDFS had previously front-ran every other federal investigative agency and regulator in a $340 million sanctions settlement with British Bank Standard Chartered in August 2012, using what some considered a strong arm tactic to force a quick settlement by threatening the bank with losing its license to operate in the state. The NYDFS argued that due to Standard Chartered violating federal sanctions rules, it had also broken state “books and records” rules, giving the regulator more leverage.
The new report reveals that move actually altered the negotiations with the Department of Justice, US Treasury’s Office of the Comptroller of the Currency (OCC) and Federal Reserve as they settled with Standard Chartered a few months later for $327 million, significantly lower than the $390 million they had originally wanted to levy.
The threat of NYDFS yanking Standard Chartered’s banking license is also what garnered the attention of top British authorities, who were “alarmed” that something like that could happen at HSBC. The report states that when Shasky Calvery stated her team’s contemplation of a guilty plea, it was a “bombshell.” Guilty pleas are a rare occurrence in AML settlements, with one of the only examples being the June 2014 $9 billion BNP Paribas enforcement action.
In a call with various US agencies involved in the HSBC case, Shasky Calvery stated that her group was “very strongly considering a prosecution” of the bank with a caveat that more senior officials “want to better understand the collateral consequences of a conviction/plea before taking such a dramatic step,” according to an email cited in the report.
Considering those related or even unintended consequences is more complex with large banks than with people.
Typically, with individuals, when people “do something wrong, and it’s not just that they followed bad policies or procedures, and I mean really go out of their way to do something illegal, they should get criminally charged, whether their actions are inside or outside a bank,” said Chris Focacci, the Chief Information Officer at New Jersey-based TransparINT, a compliance technology firm.
“But when you get into criminal charges against a bank, there are so many other repercussions that have to be considered,” said Focacci, a former compliance officer at several large domestic and international banks.
“You could pull a bank’s license in the US or maybe other parts of the world, but the bad guys will just go elsewhere. So you can argue it makes more sense to keep the bank open and require it to clean house instead. It’s a grayer area.”
Prosecutors must also take into account that creating AML systems for banks, and training staff in and out of the compliance department, can be “really big complex problems” that magnify exponentially at larger banks operating in multiple jurisdictions, Focacci said.
“There are banks that are really trying to solve those problems, but it’s really hard to do,” and can be beyond a particular institution’s current expertise, budgets or systems, he said.
Did Holder hold the line?
The report centers much of its criticism against Holder for testifying in March 2013 before the Senate Judiciary Committee that the size of certain financial institutions made them difficult to prosecute because such prosecutions could have a “negative impact on the national economy, perhaps even the world economy.”
Some institutions have become “too large” and that size “has an inhibiting influence” in certain cases for some resolution types, he said. The report also notes that Holder sought guidance from David Cohen, the then-Treasury Under Secretary for Terrorism and Financial Intelligence, on the impact to the economy of a criminal prosecution of HSBC.
The report later details that Holder took back these statements and said the Justice Department would and could prosecute any bank regardless of its size and relation to the broader financial markets, but that the decision to not prosecute HSBC was based more on evidentiary challenges.
Those statements are not just backpedaling. There are also logistical hurdles to consider when prosecuting a large international bank and trying to place blame on the institution or individuals working there, said the individual familiar with the matter.
To build a case and gather strong evidence against a bank to support an indictment or sway a jury, investigators and prosecutors must find out who actually created the policies that lead to the illicit actions, but that can be “nearly impossible” at a large bank where improper activities could have been occurring for decades, said the individual.
“If you look at some of the stripping cases, they were going on for 10, 15, 20 years,” said the person. “So the individual who actually made the decisions to engage in the illicit activity is probably gone. And when you ask around, other people say, well, I was told, this is just how we do things here.”
Then the investigator starts digging to get to the bottom of a policy, and it becomes a telephone game down the rabbit hole.
In a hypothetical example, an investigator tries to find the origin of an unwritten policy followed by a large group of people, and is told by a staff member, “oh, Joe told me. Then the investigator goes to Joe, and Joe says, ‘well, Bill told me to do this.’ And then the investigator tries to find Bill, and finds out Bill retired 20 years ago.”
Bad people or bad decisions?
One of the main issues in the HSBC case also came about as a very bad compliance decision, but not as the result of a nefarious cabal of financial crime compliance officers conspiring in a secret base to aid traffickers and boost sales: The choice to believe that affiliates, even ones in Mexico, are low risk.
“That is a bad decision,” said the person. “But it’s not like a group of bankers and compliance people are sitting around in a room scheming to make more money by helping the cartels. Unless a banker or compliance person is in bed with a bad guy, it’s not just hard to levy an individual prosecution, it’s impossible. You simply don’t have the evidence.”
The report concludes that the internal Treasury documents acquired by the committee – after some three years of requests and subpoenas – “raise very serious concerns” about the deal.
“A nation governed by the rule of law cannot have a two-tiered system of justice – one for the largest banks, and another for everyone else. Accordingly, inasmuch as DOJ continues to believe that certain financial institutions are too large to effectively prosecute, it is imperative that DOJ promptly inform the Congress of this fact, so that Congress can seek to address the problem of ‘too big to jail’ through its legislative function.”