Wednesday, December 12, 2012

Does failure to prosecute HSBC represent the end of regulation of TBTF?

The Guardian carried an article looking at why US authorities chose to fine HSBC for money laundering rather than prosecute HSBC and potentially suffer 'collateral consequences' in the form of higher unemployment from job losses at HSBC's US bank or destabilizing the financial system.

With this decision, US authorities have effectively put the large global Too Big to Fail banks beyond the reach of both the law and regulation as there is always the possibility of 'collateral consequences'.

What incentive do these banks have to obey either regulations or the law?  If they get caught, they pay the equivalent of a parking ticket.
US authorities defended their decision not to prosecute HSBC for accepting the tainted money of rogue states and drug lords on Tuesday, insisting that a $1.9bn fine for a litany of offences was preferable to the "collateral consequences" of taking the bank to court. 
Announcing the record fine at a press conference in New York, assistant attorney general Lanny Breuer said that despite HSBC"s "blatant failure" to implement anti-money laundering controls and its wilful flouting of US sanctions, the consequences of a criminal prosecution would have been dire. 
Had the US authorities decided to press criminal charges, HSBC would almost certainly have lost its banking licence in the US, the future of the institution would have been under threat and the entire banking system would have been destabilised....
Breuer was pressed on why the US authorities had agreed to a deferred prosecution deal for the bank. He dismissed accusations that prosecutors had not been hard enough and said that the Justice Department had looked at the "collateral consequences" to prosecuting the HSBC or taking away its US banking licence. Such a move could have cost thousands of jobs, he said.... 
Breuer added that a "sword of Damocles" was now hanging over HSBC and that any future transgressions would have dire consequences for the bank. "HSBC is being held accountable for stunning failures of oversight – and worse, that led the bank to permit narcotics traffickers and others to launder hundreds of millions of dollars through HSBC subsidiaries and to facilitate hundreds of millions more in transactions with sanctioned countries."
It is not believable that if HSBC did not lose its banking charter in the US for massive amounts of money laundering because of 'collateral consequences' that there will ever be a time when there will be 'dire consequences for the bank'.

We are talking about parking tickets for violating laws and regulations.  The cost of these parking tickets of course is built into what the bank charges.
John Coffee, a professor of law at Columbia Law School in New York, said
the fine was consistent with how US regulators have been treating bank infractions in recent years. "These days they rarely sue individuals in any meaningful way when the entity will settle. This is largely a function of resource constraints, but also risk aversion, and a willingness to take the course of least resistance," he said....
Right, the banks would fight being held responsible for obeying the law and regulations.
Ian Gordon, banks analyst at Investec, said the fine was slightly lower than the $2bn he had been pencilling in to his forecasts. But he said: ... Given HSBC's ongoing US business and other continuing conduct investigations, this sword of Damocles is not without teeth, albeit based on what we know, we are regarding the $1.921bn settlement as de facto 'final'."
Translation, there is no reason to ever expect this sword of Damocles to be used even when HSBC continues to launder money as the 'collateral consequences' are just to great for HSBC to receive anything other than a parking ticket.

The Guardian reports that Deutsche Bank was raided by police in connection with a tax evasion inquiry.

What makes this notable is that one of the individuals who is potentially involved is the co-chief executive.

This raises the stakes to the level of potential collateral consequences.  Hence, we are talking are looking at a stern speech and a fine.

Update II
From a column in the Guardian by Glenn Greenwald,

Over the last year, federal investigators found that one of the world's largest banks, HSBCspent years committing serious crimes, involving money laundering for terrorists; "facilitat[ing] money laundering by Mexican drug cartels"; and "mov[ing] tainted money for Saudi banks tied to terrorist groups". 
Those investigations uncovered substantial evidence "that senior bank officials were complicit in the illegal activity." As but one example, "an HSBC executive at one point argued that the bank should continue working with the Saudi Al Rajhi bank, which has supported Al Qaeda." 
Needless to say, these are the kinds of crimes for which ordinary and powerless people are prosecuted and imprisoned with the greatest aggression possible. If you're Muslim and your conduct gets anywhere near helping a terrorist group, even by accident, you're going to prison for a long, long time. In fact, powerless, obscure, low-level employees are routinely sentenced to long prison terms for engaging in relatively petty money laundering schemes, unrelated to terrorism, and on a scale that is a tiny fraction of what HSBC and its senior officials are alleged to have done. 
But not HSBC. On Tuesday, not only did the US Justice Department announce that HSBC would not be criminally prosecuted, but outright claimed that the reason is that they are too important, too instrumental to subject them to such disruptions. 
In other words, shielding them from the system of criminal sanction to which the rest of us are subject is not for their good, but for our common good. We should not be angry, but grateful, for the extraordinary gift bestowed on the global banking giant.... 
The New York Times Editors this morning announced: "It is a dark day for the rule of law." There is, said the NYT editors, "no doubt that the wrongdoing at HSBC was serious and pervasive." But the bank is simply too big, too powerful, too important to prosecute. 
That's not merely a dark day for the rule of law. It's a wholesale repudiation of it. The US government is expressly saying that banking giants reside outside of - above - the rule of law, that they will not be punished when they get caught red-handed committing criminal offenses for which ordinary people are imprisoned for decades. Aside from the grotesque injustice, the signal it sends is as clear as it is destructive: you are free to commit whatever crimes you want without fear of prosecution. And obviously, if the US government would not prosecute these banks on the ground that they're too big and important, it would - yet again, or rather still - never let them fail.

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