US Senate AML hearing emits the expected sparks as DOJ, regulators and HSBC feel heat

Demanding answers from the US Department of Justice and bank regulators on why some global institutions are “too big to jail” when they are caught committing serious crimes that threaten the nation’s security, the full US Senate Committee on Banking, Housing and Urban Affairs grilled top federal regulators last week about their perceived lax enforcement of US money laundering laws, the Bank Secrecy Act, and sanctions requirements.

The committee, led by Senator Tim Johnson, Democrat of South Dakota, and Ranking Member Mike Crapo, Republican of Idaho, on March 7, pointed questions at David S. Cohen, the U.S. Treasury Department’s Undersecretary for Terrorism and Financial Intelligence, Thomas J. Curry, Comptroller of the Comptroller of the Currency, and Jerome H. Powell, a Federal Reserve governor.

Their primary focus was the recent government settlement with the global giant, HSBC, that had been exposed as having perpetrated a global, multifaceted crime wave that included billions of dollars in funds laundered for Mexican drug cartels and public and private sector institutions in Iran, which is the subject of sanctions imposed by the United States and other national governments. The British institution also admitted to numerous transactions with Libya, Cuba, Burma and Sudan, which also are on the US sanctions lists.

Senators challenged the Justice Department and regulators to explain why large multinational institutions seemed to be exempt from criminal prosecution and why they seemed to feel that monetary penalties on financial institutions that earn billions of dollars a year in profits are alone an effective enforcement tool. They also asked why no individuals at the institutions have been called to account under US criminal laws.

Senator Mark Warner, Democrat of Virginia, said, “I do not… believe that it can be the position of the United States government that any institution should be too large to prosecute.”

The regulators assured the committee that measures are being taken across the board to strengthen compliance by institutions, but provided few details on what their agencies are doing to strengthen enforcement and the resulting penalties against financial institutions.

Senators probe lenient HSBC treatment and look for answers 

HSBC was allowed to avoid criminal prosecution in its deferred prosecution agreement with the Justice Department and paid a penalty of $1.92 billion.

“HSBC paid a fine, but no individual went to trial, no individual was banned from banking, and there was no hearing to consider shutting down HSBC’s activities here in the United States,” said Senator Elizabeth Warren, Democrat of Massachusetts, who won her seat in a contentious race last November.

“You are the experts on money laundering. What does it take, how many billions of dollars do you have to launder, and how many economic sanctions do you have to violate before someone will consider shutting down a financial institution like this?,” she continued.

Warren was appointed to the banking committee in December despite heavy lobbying by financial industry associations opposing her appointment.

Warren says unwillingness to prosecute is ‘fundamentally wrong’

In response to Senator’s questioning, Cohen cited the record penalty as an “appropriate response” by the Treasury Department to the HSBC case. He said the Treasury was consulted by the Department of Justice for its opinion on whether to prosecute HSBC and the implicated individuals. He said Treasury told the Department of Justice it was not in a position to assess whether HSBC should be prosecuted.

Powell and Curry said they did not know if the Department of Justice sought the views of their agencies.

Warren responded, “If you’re caught with an ounce of cocaine, the chances are good you’re going to go to jail. If it happens repeatedly, you may go to jail for the rest of your life.”

“But evidently, if you launder nearly a billion dollars for drug cartels and violate our international sanctions, your company pays a fine and you go home and sleep in your own bed at night,” she added. “I think that’s fundamentally wrong.”

Regulators profess commitment to ending ‘too big to jail’ policies

Senator Jeff Merkely, Democrat of Oregon, asked Cohen how he would explain to American citizens that the ability of a financial institution to avoid criminal prosecution through a monetary settlement “is a system of justice in the United States of America.”

Cohen repeated that the Justice Department has the full responsibility for a lack of criminal prosecution of these institutions.

“Governor Powell, does this create a fundamental concern about a fair system of justice across America?” Merkely asked.

“Yes, it’s absolutely fundamental that we are all equal before the law. That’s why we are all committed to ending ‘too big to fail’,” Powell replied.

In December, Merkely was one of three Senators who wrote to Attorney General Eric Holder asking about the lax enforcement of financial institutions, specifically HSBC, and the widespread use of deferred prosecution agreements with them.

Senators Sherrod Brown and Chuck Grassley co-authored a second letter in January asking Holder for details about the process of deciding if an institution should be criminally prosecuted. Spokespersons for Brown told ACFCS.org the he may introduce a bill to set standards in these cases.

Holder says some institutions are ‘too big to jail,’ Bernanke may disagree

Attorney General Eric Holder also testified recently on the issue of the Justice Department’s enforcement of large banks, admitting at a March 6 hearing of the Senate Judiciary Committee that some institutions are too large to prosecute.

“I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy,” he argued.

In a February hearing of the same committee, exploring “Monetary Policy and the Economy,” Warren raised the subject of “too big to fail” with Federal Reserve Chairman Ben Bernanke.

“Big banks are getting a terrific break, and little banks are just getting smashed.”

“I agree with you, 100 percent,” Bernanke stated.