United States: Financial Services Committee Report Faults DOJ And Treasury For Failure To Prosecute Major Banking Institution

Last Updated: July 18 2016
Article by Steven D. Lofchie

Most Read Contributor in United States, September 2017

In a recent report, Republican staff of the House Financial Services Committee (the "Committee") investigated whether the decision of the U.S. Department of Justice ("DOJ") not to prosecute HSBC for "serious violations of U.S. anti-money laundering ("AML") laws and related offenses" was "based on the size of [the] financial institutions and [a] belief that such prosecutions could negatively impact the economy."

Committee staff analyzed internal records from the U.S. Treasury Department ("Treasury") that were obtained approximately three years after initial inquiries. Subsequent findings indicated that:

  • despite the DOJ's contrary representations to Congress, internal Treasury documents show that DOJ senior officials chose not to pursue the Asset Forfeiture and Money-Laundering Section's recommendation to prosecute HSBC due to concern about the "serious collateral consequences" for the bank and the financial system if the DOJ were to prosecute HSBC for its criminal conduct;
  • the DOJ missed the Attorney General's November 14, 2012 settlement deadline and agreed to accept "significant alternatives" to the Deputy Prosecuting Attorney's terms during negotiations with HSBC;
  • the DOJ and federal financial regulators "scrambl[ed]" at an "alarming speed" to complete their investigations of HSBC and enforcement actions against it in order to "beat" the New York Department of Financial Services;
  • DOJ transmitted settlement numbers to HSBC before the DOJ or regulators could confer with the Office of Foreign Assets Control, which would have ensured that the settlement amount reflected the full extent of HSBC's sanctions violations accurately;
  • the involvement of the UK Financial Services Authority in the U.S. government's HSBC investigations and enforcement actions appears to have hampered the investigations and influenced the DOJ's decision not to prosecute HSBC;
  • Attorney General Eric Holder misled Congress concerning the DOJ's reasons for not prosecuting HSBC, particularly with his assertion before the House Judiciary Committee that "banks are not too big to jail"; and
  • the DOJ and the Treasury's longstanding efforts to impede the Committee's investigation over the past three years constitute contempt for and the obstruction of Congress.

The Committee released the report stating:

The American people and their representatives in Congress deserve to know the truth about any difficulties that might exist in prosecuting large financial institutions and their employees who have engaged in serious criminal conduct, so that these difficulties can be properly addressed.

Commentary / Steven Lofchie

It appears that the actions of the New York Department of Financial Services ("NYDFS") comprised a crucial part of the unfolding events. The report concludes that the NYDFS effectively pressured U.S. federal regulators to move more quickly than they had desired. That is disquieting. AML regulation is a matter of federal interest. Something must be very wrong when New York regulators act in ways that are inconsistent with federal regulatory priorities. This concern prompts serious questions. How is it that New York State received a wildly disproportionate share of the fines paid by Standard Chartered Bank for AML violations? Does that explain why New York State regulators were anxious to single out HSBC first – without any regard for national regulatory interests? See, e.g., certain parts of the discussion on page 24 of the report. See also  page 43 of the report, where UK government officials express appropriate concern about the markets' reaction to the NY Department of Financial Services' language describing Standard Chartered as a "rogue institution," and about the New York regulator's failure to coordinate their actions with U.S. federal regulators on a matter that fundamentally is of interest nationally (and not primarily to New York State).

Conversely, it seems perfectly appropriate that U.S. regulators consulted with regulators from the UK concerning the appropriate sanctions to be brought against a major UK bank and the effect of those sanctions. U.S. and New York regulators had just issued sanctions against another UK bank, Standard Chartered, that proved remarkably severe given the general understanding that New York regulators acted independently of federal regulators and without regard to federal interests. If it is true that bringing the harshest possible sanctions against HSBC would have resulted in a "global financial disaster," then it was perfectly reasonable for the U.S. regulators not to impose such sanctions. It usually is a bad idea to cut off one's nose in order to spite one's face.

The mere fact that an institution is so big that regulators should avoid driving it out of business does not mean that it is exempt from significant fines, or that the individuals employed by it should be excluded from enforcement actions or even jail time. The government has enough latitude to impose the kinds of penalties that can make firms and their individual officers rue the day that laws were broken without driving those firms out of business, destroying the economy in the process, and putting everyone who works for them on the dole.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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