Global Financial Integrity

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An Indictment of Financial Crime Enforcement

Joshua Simmons

A Year after HSBC, Is the U.S. Doing Enough to Fight Money Laundering?

This article was originally published by the Thomson Reuters Foundation.

Writing in the current New York Review of Books, Jed S. Rakoff castigates the U.S. government for failing to prosecute any executives of financial institutions responsible for the recent, world-shaking financial crisis. As a judge on the U.S. District Court for the Southern District of New York, Rakoff has witnessed firsthand much of the legal denouement of the crisis, and his disappointment with the government’s inadequate response carries a great deal of weight. Rakoff questions the government’s reasoning in generally not even threatening criminal charges for executives, despite overwhelming evidence that knowledge and responsibility for the mortgage-backed asset bubble predicating the financial crisis rose to the highest levels in many banks.

But this hesitancy to prosecute individuals is a much broader phenomenon, afflicting recent government investigations into all types of financial tomfoolery. The American financial system continues to launder criminal and terrorist money from all over the globe on a daily basis, often right under the noses of executives in the banks responsible. Massive breakdowns of the compliance programs legally required under the Bank Secrecy Act (BSA) have led to tens of billions of dollars in fines, but almost no repercussions for the responsible individuals—and none at all for the high-level executives who enabled their behavior.

The most infuriating example is HSBC, which allowed $200 trillion (yes, trillion) in wire transfers to pass through its accounts over the course of a decade without any monitoring for the risk that the money was laundered criminal proceeds or connected to terrorist organizations. HSBC handled money from sanctioned countries including Iran, North Korea, Sudan, Libya, and Cuba, and hundreds of millions of dollars for multiple drug cartels, through schemes set up for the specific purpose of doing so. This scandalous behavior was a direct result of its employees’ actions, often deliberate and with the imprimatur of higher-ups, and yet not a single employee or executive was criminally punished for it.

The list goes on. Wachovia also laundered massive amounts of drug money, Standard Chartered helped move large chunks of money for Iran and terrorist organizations, and Chase acted as Bernie Madoff’s primary banker, asking no questions along the way. All of these banks paid hefty fines to avoid prosecution and no executive of these banks has been charged with a crime for their role in these massive failures of corporate compliance.

Rakoff speculates that prosecutors hesitate to target individuals because it is easier to negotiate a deferred prosecution agreement with the bank than put in the legwork to build an airtight case against a single individual. But DPAs are generally designed to at least “fix the problem,” and when the punishment does not even include removing individuals responsible from their jobs, it can hardly be considered an effective fix.

Rakoff also suggests that the government’s partial responsibility for the asset bubble leading to the financial crisis has caused sheepish prosecutors to avoid putting executives in a position where they could blame the government for their actions. Similarly, the government shares some blame for the recent spate of money laundering cases through its own record of regulatory inaction. Authority to enforce the BSA and supervise massive financial institutions has become hopelessly Balkanized, currently spread between nine agencies. This has led to confusion and occasionally dereliction of crucial supervisory duties, allowing banks to maintain lax compliance programs for years without penalty.

bill currently pending in Congress would begin to solve the problem, providing prosecutors with more and better tools for going after individuals responsible for financial crimes and shedding light on prosecutors’ reasoning when they decline to do so. While Congress cannot compel prosecutors to pursue any particular case, the bill would require the Department of Justice to report their reasoning to Congress for any BSA case in which DOJ elects to accept only monetary penalties. The bill would also require financial institutions to establish clear lines of responsibility for money laundering compliance, to avoid the flurries of finger-pointing that tend to accompany major compliance breakdowns, and expand the Financial Crimes Enforcement Network (FinCEN)’s power to ban wrongdoers from working in the financial industry, deterring bank leaders from reckless complacency toward their legal responsibilities. Finally, the bill would require every agency with BSA enforcement authority to report their supervisory activities to FinCEN, ensuring that investigations are better coordinated and accountable.

In concluding his essay, Rakoff exposes the basic illogic behind the government’s position:

“[Y]ou don’t go after the companies, at least not criminally, because they are too big to jail; and you don’t go after the individuals, because that would involve the kind of years-long investigations that you no longer have the experience or resources to pursue.”

Of course, this begs the question: what are enforcement officials doing? Congress and the American public deserve an answer.

Joshua Simmons is a Policy Counsel at Global Financial Integrity, a non-partisan, non-profit research and advocacy organization based in Washington, DC. 

This article was originally published by the Thomson Reuters Foundation.  Any views expressed in this article are those of the author and not of Thomson Reuters Foundation.