by William K. Black.
One of the “tells” that reveals how embarrassed Lanny Breuer (head of the Criminal Division) and Eric Holder (AG) are by the disgraceful refusal to prosecute HSBC and its officers for their tens of thousands of felonies are the false and misleading statements made by the Department of Justice (DOJ) about the settlement. The same pattern has been demonstrated by other writers in the case of the false and disingenuous statistics DOJ has trumpeted to attempt to disguise the abject failure of their efforts to prosecute the elite officers who directed the “epidemic” (FBI 2004) of mortgage fraud.
HSBC was one of the largest originators of fraudulent mortgage loans through its acquisition of Household Finance.
Three recent books by “insiders” have confirmed earlier articles revealing the decisive role that Treasury Secretary Geithner has played in opposing criminal prosecutions of the elite banksters and banks whose frauds drove the financial crisis and the Great Recession.
Bair, Sheila, Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself” (2012); Barofsky, Neil, Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street (2012); Connaughton, Jeff, The Payoff: Why Wall Street Always Wins (2012).
Geithner’s fear is that the vigorous enforcement of the law against the systemically dangerous institutions (SDIs) that caused the crisis could destabilize the system and cause a renewed global crisis. I have often expressed my view that the theory that leaving felons in power over our largest financial institutions is essential to producing financial stability is insane. Geithner, it turns out, is very sensitive to that criticism. I will return to that subject after setting the stage.
The UK authorities admit openly the arrival of “too big to prosecute”
The title of the article in The Daily Telegraph says it all: “Banks are ‘too big to prosecute’, says FSA’s Andrew Bailey.”
The FSA was the U.K.’s faux financial regulator during the run-up to the crisis. The U.K. “won” the regulatory “race to the bottom” that destroyed effective regulation and supervision in the U.K. and Europe and helped degrade to near impotence in the U.S. The FSA’s goal was to attract the world largest financial firms to relocate much of their operations to the City of London. The FSA offered “light touch” (non) regulation and (non) supervision to firms operating in the City of London. The results were the typical result – the City of London attracted the worst of the worst. The “control frauds” produced a “Gresham’s” dynamic (Akerlof 1970) because the frauds gained a crippling competitive advantage over honest competitors and dishonest and unethical officers became wealthy through fraud and modern executive compensation’s perverse incentives. “Control fraud” refers to criminal enterprises in which the people that control a seemingly legitimate enterprise use it as a “weapon” to defraud. Control frauds can create a Gresham’s dynamic causes markets to become so perverse that bad ethics drive good ethics out of the marketplace. The result was that the City of London became an intensely criminogenic environment and many of the largest financial firms in the world became criminal enterprises.
The newly designated head of the FSA decided to endorse the concept of “too big to prosecute.”
Mr Bailey told The Daily Telegraph that some banks had grown too large to prosecute. “It would be a very destabilising issue. It’s another version of too important to fail,” he said,
“Because of the confidence issue with banks, a major criminal indictment, which we haven’t seen and I’m not saying we are going to see… this is not an ordinary criminal indictment,” he said.
His comments come days after HSBC’s record $1.9bn (£1.2bn) settlement with the US authorities over money-laundering linked to drug-trafficking. US assistant attorney general Lanny Breuer said of the decision not to prosecute: “In this day and age we have to evaluate that innocent people will face very big consequences if you make a decision.”
The U.S. and U.K. have made noise lately about how they had ended the pernicious doctrine of “too big to fail.” As I explained in a prior column, this pretense lasted about four hours before both nations’ true preferences were revealed. The systemically dangerous institutions (SDIs) already had crippling competitive advantages because the government bailed out their general creditors. Conservative economists agreed that this advantage was so large that it made “free markets” a farce. The doctrine “too big to prosecute” grants SDIs that are control frauds two additional advantages over their smaller, honest competitors. First, fraud pays enormously for the controlling officers. It is a “sure thing.” (Akerlof & Romer 1993.) The HSBC compliance officers (the minnows) may lose, but the controlling officers were made very wealthy by HSBC’s manifold frauds.
Second, over time the best people at a control fraud leave in disgust. The worst people stay or take promotions at other fraudulent firms. As ethics degrade and the SDI’s fraudulent profits (whether reported or real) surge the controlling officers will use the bank’s seeming respectability and wealth to secure greater political power, favors, and protection (“rent seeking” behavior in economics jargon). Crony capitalism can produce additional advantages that smaller, honest banks cannot match. The fraudulent SDIs’ advantages are cumulative. They have all the massive advantages of honest SDIs plus the far greater competitive advantages that come from control fraud. Remember that their controlling officers can become wealthy from these advantages even if the bank suffers losses.
Keep these words of the Nobel Laureate in Economics (2001), George Akerlof, in mind from his most famous article on markets for “lemons” (1970) when evaluating Breuer’s claim that selling indulgences to SDIs – and their officers – is essential to protect “innocent” people. The quotation is part of his explanation of how business frauds produce a Gresham’s dynamic and the injury that dynamic causes.
“[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.” George Akerlof (1970).
Akerlof was not the first perceptive observer to describe this dynamic. Jonathan Swift described it in Gulliver’s Travels.
“The Lilliputians look upon fraud as a greater crime than theft. For, they allege, care and vigilance, with a very common understanding, can protect a man’s goods from thieves, but honesty hath no fence against superior cunning. . . where fraud is permitted or connived at, or hath no law to punish it, the honest dealer is always undone, and the knave gets the advantage.”
Breuer’s argument is facially absurd. Prosecuting HSBC’s fraudulent controlling managers would not harm anyone innocent other than their families – and virtually all prosecutions hurt some family members. Breuer claims that virtually all of HSBC’s senior officers have been removed, so his argument is doubly absurd. Mostly, however, Breuer ignores all of the innocents harmed by the control frauds. SDIs that are control frauds are weapons of mass economic destruction that drive global crises and are the greatest enemy of “free” markets. They are also the greatest threat to democracy, for they create crony capitalism. We are all innocent victims of these control frauds – and the Obama and Cameron governments are allowing them to commit their frauds with impunity from criminal prosecutions. The controlling officers get wealthy without fear of prosecution. The SDIs controlled by fraudulent officers have to purchase an indulgence, but the price of the indulgence is capped by the “too big to prosecute” doctrine at a level that will not cause it any real distress. Breuer’s and Bailey’s embrace of too big to prosecute should have led to their immediate dismissals. Obama and Cameron should either fire them or announce that they stand with the criminal enterprises and their fraudulent controlling officers against their citizens.
Breuer: Apologist in Chief for Elite Felons
Breuer gives banksters the game plan to avoid prosecution for their frauds
Breuer has been a fount of excuses for why he has made elite banksters and banks immune from criminal prosecution. I have explained the infamous speech that Breuer gave on September 13, 2012 to (mostly) attorneys for banks and corporations providing them with the roadmap they should follow to argue that their clients’ felonies should not be prosecuted.
Fiat Justitia? Breuer fires blanks on elite financial frauds
The great thing about Breuer’s provision of a road map to defense counsel on how to avoid prosecution of their corporate clients’ crimes is that it was available only to large corporations. Breuer explained to defense counsel how they should hire economists to conduct studies that would give Breuer an excuse not to prosecute. The key was having lots of employees – and holding their jobs hostage. The corporation had to claim that being prosecuted for its crimes would cause large numbers of people to lose their jobs.
Breuer announces the lawyer loophole
One month after his infamous roadmap to immunity speech, Breuer doubled down on the reasons why he refused to prosecute the frauds by elite banks and banksters that caused the crisis.
“The securitisation cases at the corporate level are challenging because the things that are so disheartening and contributed to the financial crisis are not activities that violated criminal law,” says Lanny Breuer, US assistant attorney-general for the criminal division. “There were lawyers involved on both sides of transactions … That doesn’t mean that we like those transactions or that we condone them, but criminal law is not the way to resolve them.”
Instead, the DoJ has filed lawsuits against several banks, with the latest – a $1bn civil case against Bank of America for allegedly selling defective loans to Fannie Mae and Freddie Mac – filed last week.
The levels of dishonesty in Lanny Breuer’s statements are impressive. Why were “the things that … contributed to the financial crisis” “not activities that violated the criminal law”? “There were lawyers involved on both sides of transactions….” When corporations hire lawyers “criminal” prosecutions are not kosher.
Before beginning to dissect Lanny’s “logic” I wish to make an admission. I never cashed in. I had lots of opportunities to do so, but I’m an old fashioned mid-westerner. But under Lanny’s License to Loot via Lawyers (4L) I’m sorely tempted to cash in for one giant score. I figure with my reputation I should be able to bless ten thousand fraudulent bank transactions and help get an SDI off with no prosecution of the bank or the officers and a fine representing a week’s worth of profits. That’s worth several billion dollars to the banksters, so I should be able to command a fee of at least $100 million. I figure I’ll give $99 million to charity to salve my conscience and retire on the remaining $1 million. Even mid-westerners can fantasize.
Attempting to return from fantasy to Lanny’s logic forces one back into multiple levels of fantasy. Let us count the ways. First, why would the fact that “both sides of transactions” have lawyers make fraudulent transactions immune from prosecution? I have been active in or studying these matters for four decades and I never heard of the 4L doctrine until I read the Financial Times’ October 29, 2012 article announcing Lanny’s invention of the doctrine.
To be kind, there is no logic to Lanny’s logic. Lawyers are frequently on both sides of fraudulent transactions that are successfully prosecuted. There are multiple scenarios. The lawyer(s) can be aware of the fraud, in which case the corporation, officers and lawyers who knew of the fraud and aided it can all be prosecuted. The lawyers can be unaware of the fraud, in which case the officers and the corporation can be prosecuted. Lawyers are not some magic vaccine that prevents a corporation from being defrauded or from committing fraud.
In fairness to Lanny, he doesn’t really believe something so absurd as his 4L doctrine. What he really believes is his last line: “criminal law is not the way to resolve” frauds by elites represented by lawyers. As white-collar criminologists we frequently see this reaction from elite lawyers like Breuer and Holder. It’s all about elites protecting their social class and their guild (lawyers). Times are tough for the legal profession and 4L doctrine would instantly bring full employment for lawyers.
Consider the counter-factual – assume for purposes of analysis that the head of the Criminal Division is seriously signaling to bank CEOs that:
- They can achieve total immunity from criminal prosecution if they involve a lawyer in their transactions even if those
- “Disheartening” transactions “contributed” to the financial crisis
- Because anytime both parties to a transaction have lawyers the resulting transaction is inherently incapable of “violat[ing] the criminal law.”
If those three facts were true, then corporations could freely become control frauds with absolute impunity from prosecution. The resultant “Gresham’s” dynamic would drive ethical firms from the marketplace because the fraudulent firms would gain a crippling competitive advantage (Akerlof 1970). Control frauds cause greater economic losses than all other forms of property crime – combined. Epidemics of accounting control fraud drive our recurrent, intensifying financial crises. The L4 doctrine would condemn the world to catastrophe. If Breuer were seriously proposing that we were helpless to prosecute even the most destructive fraud epidemics than surely he would be warning America of the critical need to adopt emergency legislation ending this existential risk to our nation. Breuer has made no such warning or plea for emergency legislation. Even more obviously, Breuer, Holder, Geithner, and President Obama would have made such emergency legislation their highest priority when drafting the Dodd-Frank Act. Instead, the administration treated us to the sounds of silence with regard to ending the grave danger posed by Lanny’s license to loot.
To this point I have only been discussing frauds that cause property losses, but white-collar crime also kills and maims enormous numbers of people. Lawyers are commonly involved in both sides of the transactions that maim and kill people. Is Breuer so depraved that he would apply his L4 doctrine to give immunity to those who maim and kill through transactions in which a lawyer is present on both sides? Will any reporter ask him tough questions like this?
There’s an important technical reason why announcing the L4 doctrine makes no sense for the head of the Criminal Division. It’s one thing to say “some” of the acts that cause losses were not criminal or that it is “difficult” to bring criminal cases against elite banks and banksters. It is a very different thing for the head of the Criminal Division to state that if there “are lawyers involved on both sides of transactions” the transaction cannot “violate criminal law.” That statement could be used by defense counsel to defeat prosecutions should Breuer ever be replaced by a prosecutor instead of another apologist for the banksters. Breuer’s statements could become a self-fulfilling prophecy – they could make it impossible to convict the banksters. Breuer’s statements are not only false but also grossly irresponsible and harmful. They may harm the nation for decades.
The incoherence of Breuer’s position is illustrated the example he provided to the Financial Times reporter when he announced his invention of the L4 doctrine.
That doesn’t mean that we like those transactions or that we condone them, but criminal law is not the way to resolve them.”
Instead, the DoJ has filed lawsuits against several banks, with the latest – a $1bn civil case against Bank of America for allegedly selling defective loans to Fannie Mae and Freddie Mac – filed last week.
It was DOJ that described Bank of America’s (B of A) control fraud as “brazen.” It was DOJ that filed a complaint alleging that senior officers were warned in advance that the incentive system for loan officers’ compensation would lead to widespread fraud, warned once the program began operating that it was causing widespread fraudulent loans, responded to these warnings by covering up the evidence of fraud and increasing the perversity of the incentives for the loan officers, made false representations to Fannie and Freddie about loan quality, and then stonewalled them on the obligation to repurchase the fraudulent loans. The actions described in the complaint were criminal frauds. The case could and should have been brought as a criminal prosecution rather than a civil case. But B of A is an SDI and the senior officers who led the fraud are elites so Breuer failed, as always, to prosecute the banksters who caused the crisis. The example that Breuer cited to the reporter, the B of A fraud case, falsifies Breuer’s claim that he cannot prosecute the securitization frauds. His own example demonstrates that the problem is that he lacks the will to enforce the rule of law against SDIs and elite banksters. I discussed the B of A case in detail in a prior article.
Lanny’s concern for HSBC’s employees
NPR broadcast a program on the HSBC settlement that contained comments from interviews with Breuer and me.
HSBC is a classic example of a series of massive white-collar crimes that continued for over a decade and could maim and kill hundreds of thousands of people. Multiple U.S. government investigations concluded that HSBC:
- Laundered billions of dollars for some of the most murderous drug gangs in the world. These gangs have murdered many thousands of Mexicans and devastated much of the nation.
- Aided Iranian entities to evade U.S. financial sanctions on Iran. If Iran is actually developing a nuclear weapon and if it uses such a weapon to attack it could kill tens of thousands of people and HSBC and Standard Chartered will likely have proven useful to Iran in developing the weapon..
- Aided Hamas, Hezbollah, and al Qaeda to evade U.S. financial sanctions. These U.S. considers them terrorist organizations.
Breuer’s great concern, however, is that HSBC employees not be harmed by a criminal prosecution of HSBC’s massive, long-running, and murderous frauds. NPR summarized his position.
“But Lanny Breuer from the Justice Department says the government didn’t want to punish all of the innocent people who worked for the bank who would lose their jobs. He said when he announced the settlement this week that HSBC had cleaned house, was promising to have more oversight and was cooperating.”
This statement is false or misleading on multiple levels. First, there were plenty of choices other than causing employees to “lose their jobs.” DOJ could have prosecuted HSBC’s officers who committed the felonies. No “innocent people” would “lose their jobs.” If HSBC had indeed “cleaned house” and already fired the officers and employees who committed the frauds no one would lose their job – innocent or otherwise. DOJ could announce that all the officers and employees who committed the frauds or knowingly permitted them to occur had already been fired when HSBC “cleaned house.” If HSBC was really “cooperating” with DOJ and its regulators its house cleaning would have already removed the thousands of HSBC employees and officers who committed the frauds or knowingly permitted the frauds to continue. After all, DOJ and regulators should not have had to take any action. HSBC should have wanted on its own initiative for its own purposes to fire all the frauds and all the officers who knew of the frauds and did not act to end the frauds.
HSBC was a profoundly and pervasively criminal enterprise for at least 15 years. Many of its fraudsters doubtless moved to other banks, often with promotions. DOJ and the regulators have not indicated any intention to prosecute them or remove them from office. The great length of HSBC’s frauds demonstrates that there are limits to the “innocence” of HSBC employees. People who continued to work for a pervasively fraudulent firm for many years have self-selected. They were willing to stay at a criminal enterprise even when the job market was hot and they could have left.
Contrast HSBC’s employees’ situation with that of the typical blue collar defendant. Prosecutors routinely prosecute those who use illegal drugs without a thought to the injury caused to their innocent children or spouses.
Breuer didn’t mention the HSBC employees who are the real innocent victims of HSBC’s frauds. These are the former HSBC employees who left in disgust and are unemployed or took salary cuts. These are the current HSBC employees who were demoted or had their careers derailed because they objected to the frauds. If Breuer understood banking or justice these are the people to whom he would have required HSBC to provide immediate redress and promotions. Of course, if HSBC were an honest bank Breuer would not have had to require such redress and promotions for HSBC would have recognized that it was the employees who showed integrity in the midst of a criminal enterprise that should be running HSBC and scouring its Stygian stables. If Breuer, HSBC’s regulators, or Geithner understood honest banks and banking they would have realized that HSBC’s failure to provide on their own initiative the redress and promotions demonstrated that HSBC’s controlling officers were not competent to understand how to run a bank based on integrity.
Breuer also failed to mention what should have been the U.S. and U.K. response to HSBC’s crimes. I explained why President Obama and Prime Minister Cameron should have used their leverage to compel HSBC to shrink to the point that it no longer posed a systemic risk of global financial crisis. There did not have to be any firing of innocent employees.
Breuer’s faux ode to HSBC and the refusal to prosecute
“Lanny Breuer, an assistant attorney general who oversees the Justice Department’s criminal division, called the settlement historic and criticized the bank’s ‘stunning failures of oversight.’
‘The record of dysfunction that prevailed at HSBC for many years was simply astonishing,’ Breuer told reporters at the U.S. attorney’s office in Brooklyn.
Breuer defended the settlement, saying HSBC did not get a pass and will pay a heavy price. The bank has clawed back bonuses awarded to its compliance officials and agreed to partially defer senior executives’ bonuses, Breuer noted.”
“Our goal is not to bring HSBC down,” Breuer said. “It’s not to cause a systemic effect on the economy.”
Breuer’s comments are disingenuous. “Dysfunction” – does Breuer think he is a family psychologist? The facts show that HSBC functioned as it was designed by its senior managers – as a criminal enterprise. HSBC’s senior managers shaped incentive compensation systems that were intensely criminogenic. The compensation and promotion system rewarded managers who increased profits through fraud. Violating U.S. financial sanctions and serving clients that are brutal, murderous, and terrorists is exceptionally lucrative for fraudulent banks like HSBC. It produced a huge competitive advantage over honest competitor. Fraud increased HSBC’s revenues and cut its expenses (it was not necessary to hire an adequate compliance staff when the goal was not eto comply with the law but rather to violate it). By increasing HSBC’s revenues all of HSBC’s senior officers were made much wealthier. The failure of “oversight” was not “stunning” – HSBC’s perverse executive compensation system produced the normal result, an abject failure to prevent frauds over at least a 15 year period.
The only “claw back” is of unidentified “compliance officials.” Reporters need to demand the specifics: how many compliance officers (there were hundreds engaged in HSBC’s crimes) had what percentage of their bonuses clawed back? What about their promotions? Were they clawed back? Why were only some compliance officers’ bonuses clawed back? Why not the “C suite” and operational officers who bear the principal culpability? The DOJ press conference provided this clue as to how few “compliance officials” are likely to be involved and how low-level they are likely to be.
“HSBC’s compliance employees were vastly outnumbered, according to prosecutors. Less than a handful of bank employees, for example, were charged with reviewing 13,000 to 15,000 suspicious alerts generated monthly, they said.”
Why would HSBC – a criminal enterprise for at least 15 years that has been involved in three scandals that are the subject of the settlement and at least five other scandals in which it defrauded customers and its regulators, and an institution that covered up its frauds to deceive the regulators – be permitted to pay any bonuses to “senior executives”? Their prior salaries, promotions, and bonuses should have been largely clawed back, their future bonuses cancelled, and the entire HSBC compensation system fixed so that it no longer creates perverse incentives. Breuer is ballyhooing minor compensation bandages that we would have routinely slapped on a poorly managed S&L that violated no laws. HSBC has been a massive, criminal operation for at least 15 years according to a series of U.S. government investigations. HSBC’s crimes cost people their lives, aided terrorists, and funded brutal nations, some of which may pose grave risks to the U.S.
Breuer explained why the criminal enterprise known as HSBC was not really that bad.
“Later, [Breuer] said that while HSBC permitted itself to be an essential element in money laundering, it was not the mastermind. ‘They are not the Sinaloa cartel,’ he said.”
Well, great, the largest bank in Europe, knowingly serviced the Sinaloa cartel’s money laundering needs in order to make greater profits – but HSBC wasn’t “the mastermind” so there’s no reason to prosecute them. As all readers know, we only prosecute criminally the “mastermind” of drug cartels – never the people that manufacture, transport, sell, or consume drugs or launder funds. That is why our prisons have virtually no prisoners. Remember, this is the head of the Criminal Division spouting this nonsense at a press conference – with a “stern face.”
And then, finally, Breuer let slip the truth. The administration’s overriding goal was to avoid a “systemic” financial crisis being triggered by “bring[ing] HSBC down.” But Breuer and Holder have no expertise in evaluating what penalty could “bring HSBC down” and cause a “systemic” crisis. That (purported) expertise would have to come from Geithner.
And what was the stock market reaction to this supposedly powerful DOJ action against HSBC?
“HSBC shares closed up 0.6 percent in London on Tuesday, and its Hong Kong-listed shares were up about 0.25 percent by late morning on Wednesday.”
Contrast that fact from the NYT article about the HSBC with the title of the article.
“HSBC Became Bank to Drug Cartels, Pays Big for Lapses.”
“Lapses” – seriously? HSBC violates the law for 15 years to make money by illegally aiding the worst and most dangerous entities in the world escape vital financial safeguards and it gets trivialized as “lapses.” This is precisely what happens when DOJ fails to prosecute because of fears that if the SDIs are held accountable for their crimes there will be a global systemic crisis. What was the market reaction to this supposedly huge penalty? Hot damn, they got off cheap, let’s buy HSBC shares. What a powerful message of deterrence.
The text of the NYT article does eventually (many paragraphs in, where few readers venture) note:
“Drug cartels earn an estimated $60 billion a year from trafficking in the United States, according to the United Nations. Half of that money is routed back to Mexico to pay off politicians, fund private arsenals and fuel violence that killed more than 60,000 people over the past six years.”
As a criminologist, I urge the legalization of these drugs to ruin the cartels and terrorists that finance their violence through sales of drugs (not because I have any romantic notion that the drugs are benign). The devastation that the U.S. drug war has caused in many Latin American nations is obscene. But that is not the world we live in. We live in a world where the most elite banks in the world move massive amounts of money for murderous drug gangs and terrorists and when they are caught red-handed the head of the Criminal Division says: of course we won’t prosecute them – the banks aren’t the “masterminds” of the Sinaloa cartel. No, the elite banks and banksters simply help the cartels and the terrorists get the laundered funds that help them murder their victims. No harm; no foul.
Breuer then hatched another example of our family rule that it is impossible to compete with unintentional self-parody. You see, HSBC was really the victim, not the perpetrator. Indeed, Breuer seems to think that HSBC is an innocent 15 year old American girl plied with liquor by an older Mexican guy intent on “taking advantage” of her.
“Breuer defended the government’s agreement with HSBC. He said that U.S. employees in particular seemed duped by criminal enterprises taking advantage of HSBC oversight policies that over decades became increasingly lax.
Court documents showed that the bank let over $200 trillion between 2006 and 2009 slip through relatively unmonitored, including more than $670 billion in wire transfers from HSBC Mexico, making it a favorite of drug cartels and money launderers. HSBC Bank USA at the time rated Mexico in its lowest risk category.
Top executives who felt “the pressure of the bottom line” continually cut staff that might have discovered how criminal enterprises were taking advantage of the bank, Breuer said.”
Breuer is, of course, incapable of providing a coherent logical argument supporting his self-parody. “Top executives” designed perverse executive compensation systems that made them exceptionally wealthy if they improved “the bottom line” by “continually cut[ting compliance] staff” to ensure that they did not “discover how criminal enterprises were taking advantage of the bank.” If they gutted the compliance staff the “top executives” ensured a five wins that were guaranteed to make them wealthy.
- Their branches and operations would increase their revenues enormously by laundering billions of dollars for drug cartels and terrorists
- Their costs would be dramatically be reduced by not hiring compliance people, and
- Their reported profits and executive bonuses would surge, while the destruction of compliance would
- Ensure deniability by failing to identify their rampant crimes, and lead a
- Breuer of very little brain to say that their crimes should not be prosecuted because the banks and bankers were “tak[en] advantage of” by the cartels and terrorists
Note that this five-part scenario can be followed easily by any bank and provide immunity from criminal prosecution to the banksters and the bank engaged in “control fraud.” Breuer has created another road map to elite fraud with impunity.
How completely did HSBC’s “top executives” deliberately destroy compliance?
“Before the government stepped in, HSBC used only one or two compliance officers to monitor its banknotes business – the wholesale buying and selling of bulk cash around the world – even though the business is highly vulnerable to money launderers.
Despite the high risk, discrepancies and suspicious activity in banknotes transactions were not reported from July 2006 to July 2009, when the banks’ compliance staffing was at its worst.
In March 2008, when 13,000 to 15,000 suspicious wire alerts were generated per month by such transactions, only four employees were around to review them, according to court papers. HSBC Bank USA now has 430 employees reviewing suspicious wire alerts.”
It’s hard to believe that DOJ will ever get a clearer case of a massive bank’s “top management” deliberately designing a compliance system to fail so that they could maximize their bonuses through massive money laundering. The pass that Breuer gave to HSBC – and its officers – demonstrates the ability of SDIs to commit fraud with impunity from the criminal laws. Breuer’s effort to deny this point actually proved it.
“‘I think it’s a disservice to suggest that anyone’s getting a pass here,’ Breuer said.
Asked repeatedly why no bank executives were being prosecuted, Breuer said, ‘I’m not here to defend HSBC.’ Yet, he added: ‘Our goal is not to bring HSBC down.’
He said to do so would affect the economy and cost thousands of people their jobs. He said no criminal charges would be brought unless it could be proved that executives purposely tried to let criminal organizations launder money.”
Breuer’s logic again collapses. He did give a pass to HSBC and it appears that he gave it to HSBC’s officers and employees. If the Obama administration takes the position that large corporations cannot be prosecuted because doing so would harm “the economy,” then “deferred” prosecution agreements are non-prosecution agreements. I have explained previously why Breuer provided no basis for refusing to prosecute the “bank executives” who broke the law because doing so would help, not harm HSBC. Indeed, under Breuer’s logic there is every reason to prosecute them because Breuer is claiming that all the executives involved in HSBC’s frauds have already been fired. The last sentence constitutes yet another example of Breuer refusing to prosecute elite white-collar criminals. The government investigations demonstrated that HSBC employees and officers violated multiple laws including 18 U.S.C. § 1956(a)(2).
Breuer confirmed that DOJ had evidence that HSBC knowingly aided clients in violating U.S. law. “HSBC even instructed an Iranian bank in one instance how to format messages so that its financial transactions would not be blocked, Breuer said at a news conference announcing the settlement.” AP reported that Breuer viewed HSBC as too big to prosecute.
“The U.S. stopped short of charging executives, citing the bank’s immediate, full cooperation and the damage that an assault on the company might cause on economies and people, including thousands who would lose jobs if the bank collapsed.
Outside experts said it was evidence that a doctrine of “too big to fail,” or at least “too big to prosecute,” was alive and well four years after the financial crisis.
The settlement avoided a legal battle that could have further savaged the bank’s reputation and undermined confidence in the banking system.”
If prosecuting SDIs “undermined confidence in the banking system” and risks causing a systemic global crisis then SDIs are too dangerous to exist because they can never be held to account for their crimes. Prosecuting a bank that has become a criminal enterprise is not “an assault on the company.” It is ludicrous to claim that “charging executives” of an SDI would cause a global crisis, and if the claim were true it would prove that our highest priority would have to be shrinking the SDIs to a size that they no longer posed a systemic risk and we could prosecute their executives when they committed crimes without endangering the global economy.
The new, great lie in the AP story is that HSBC provided “immediate, full cooperation.” The government investigations document that HSBC was told many times that it was committing enormous violations of the law that put the world at risk – and frequently responded by making the problem worse, e.g., further cutting the already pathetically inadequate compliance staff. HSBC repeatedly made false representations to U.S. regulators and U.S. bankers.
“Despite a chorus of warnings from federal banking regulators about the vulnerability of HSBC’s operations throughout the world, the bank didn’t fortify its controls, the Senate report found.”
HSBC went so far as to create systems explicitly designed to deceive U.S. regulators, including training HSBC staff on how to instruct Iranian clients to make false entries on documents so that they could evade U.S. financial sanctions. HSBC’s ran a criminal enterprise for at least 15 years and HSBC was a serial violator of laws and ethics that have produced at least eight major scandals in recent years.
The DOJ document on HSBC released at the press conference on the settlement admits that the purported immediate and full cooperation actually constituted at least 15 years of evasions, lies, and cover ups. Breuer’s claim of cooperation isn’t simply false. It’s an insult to our intelligence.
“According to court documents, from the mid-1990s through September 2006, HSBC Group allowed approximately $660 million in OFAC-prohibited transactions to be processed through U.S. financial institutions, including HSBC Bank USA. HSBC Group followed instructions from sanctioned entities such as Iran, Cuba, Sudan, Libya and Burma, to omit their names from U.S. dollar payment messages sent to HSBC Bank USA and other financial institutions located in the United States. The bank also removed information identifying the countries from U.S. dollar payment messages; deliberately used less-transparent payment messages, known as cover payments; and worked with at least one sanctioned entity to format payment messages, which prevented the bank’s filters from blocking prohibited payments.
Specifically, beginning in the 1990s, HSBC Group affiliates worked with sanctioned entities to insert cautionary notes in payment messages including “care sanctioned country,” “do not mention our name in NY,” or “do not mention Iran.” HSBC Group became aware of this improper practice in 2000. In 2003, HSBC Group’s head of compliance acknowledged that amending payment messages “could provide the basis for an action against [HSBC] Group for breach of sanctions.” Notwithstanding instructions from HSBC Group Compliance to terminate this practice, HSBC Group affiliates were permitted to engage in the practice for an additional three years through the granting of dispensations to HSBC Group policy.”
Breuer’s false statement about HSBC’s cooperation and immediate compliance would be exceptionally damaging to DOJ should it ever decide to enforce the law and prosecute HSBC’s and its fraudulent officers’ crimes. He is doing a bang-up job as HSBC’s defense counsel, but he is supposed to be the head of our Criminal Division. His mission is to ensure one our nation’s defining principles that made us great – no man is above the law. Breuer has betrayed his duty and our nation’s core value by accepting Geithner’s demand that the SDIs and their fraudulent officers must above the law – they must be immune from prosecution.
Treasury pushes “too big to prosecute” – and tries to hide its critical role
The New York Times reported from the beginning of the discussion of the HSBC settlement the critical role Treasury and the banking regulators played in urging DOJ not to prosecute HSBC – and Treasury’s effort to deny that role.
“State and federal authorities decided against indicting HSBC in a money-laundering case over concerns that criminal charges could jeopardize one of the world’s largest banks and ultimately destabilize the global financial system.
While the settlement with HSBC is a major victory for the government, the case raises questions about whether certain financial institutions, having grown so large and interconnected, are too big to indict. Four years after the failure of Lehman Brothers nearly toppled the financial system, regulators are still wary that a single institution could undermine the recovery of the industry and the economy.
Behind the scenes, authorities debated for months the advantages and perils of a criminal indictment against HSBC.
Some prosecutors at the Justice Department’s criminal division and the Manhattan district attorney’s office wanted the bank to plead guilty to violations of the federal Bank Secrecy Act, according to the officials with direct knowledge of the matter….
A money-laundering indictment, or a guilty plea over such charges, would essentially be a death sentence for the bank. Such actions could cut off the bank from certain investors like pension funds and ultimately cost it its charter to operate in the United States, officials said.
Despite the Justice Department’s proposed compromise, Treasury Department officials and bank regulators at the Federal Reserve and the Office of the Comptroller of the Currency pointed to potential issues with the aggressive stance, according to the officials briefed on the matter. When approached by the Justice Department for their thoughts, the regulators cautioned about the effect on the broader economy.
“The Justice Department asked Treasury for our view about the potential implications of prosecuting a large financial institution,” David S. Cohen, the Treasury’s under secretary for terrorism and financial intelligence, said in a statement. “We did not believe we were in a position to offer any meaningful assessment. The decision of how the Justice Department exercises its prosecutorial discretion is solely theirs and Treasury had no role.”
Still, some prosecutors proposed that Attorney General Eric H. Holder Jr. meet with Treasury Secretary Timothy F. Geithner, people briefed on the matter said. The meeting never took place.”
To sum it up: the regulators and Treasury opposed having HSBC admit the truth – that it violated the money-laundering statutes. They warned that such a guilty plea could cause a systemic crisis because HSBC was an SDI. When Treasury warns DOJ that a prosecution could cause a global crisis there is no chance that the AG will override Treasury’s warning on his own initiative. That is why line prosecutors urged Holder to meet personally with Geithner to urge him to withdraw his objections to the proposed prosecution, but Holder apparently declined to seek a meeting. Instead, Breuer emphasized that DOJ accepted Treasury’s warning that HSBC was too big to prosecute because doing so would cause a global systemic crisis.
Note the disingenuous statement made by the Treasury to the press. Yes, DOJ makes the “decision” whether to prosecute, but if DOJ were to prosecute in a case where Treasury had warned that the sky would fall if there were a prosecution – and the sky did fall – then the DOJ’s leaders would be the idiots who ignored Treasury and blew up the world’s economy.
The Treasury statement completes setting the stage for the tale I promised to complete about Geithner’s sensitivity to his role in blocking prosecutions becoming better known. Breuer and I were interviewed by NPR about the HSBC settlement. I criticized it and I explained why settlement negotiations were unique in such circumstances because the government’s overriding priority was in reducing its fine to a level that it was sure would not pose any meaningful risk to the health of the SDI. When the government fears that any SDI failure will cause a global systemic crisis the government’s paramount priority in negotiating a recovery is to restrict rather than maximize its recovery in order to ensure there is no meaningful risk of the settlement leading to the SDI’s failure. The government’s press flacks find it easy to “spin” settlements with profitable SDIs because their capital and profits are so enormous that the government can negotiate a fine that sounds very large to the public but is relatively minor from the SDI’s perspective. The settlement is both a “record” amount and a modest cost of doing (fraudulent) business for HSBC.
When the NPR story ran originally it contained a quotation from me noting Geithner’s long-standing opposition to prosecuting SDIs and the government’s incentive to reduce greatly the penalties on HSBC because it was an SDI. My quotation mentioning Geithner was removed from the NPR story at the request of Treasury and replaced with this “Clarification.”
Clarification: In an early radio version of this story, a former regulator was quoted speculating that Treasury Secretary Timothy Geithner did not want to put HSBC out of business. We should have made it clear that it is the Justice Department, not the Treasury Department that made the decision to defer prosecution of HSBC.
I was not “speculating” that “Geithner did not want to put HSBC out of business.” My statement was not only factual; it wasn’t controversial given the many insider exposes that have confirmed Geithner’s position on SDIs. (A position now parroted by Breuer.) The statement that Treasury got placed in the “clarification” is the same carefully crafted disingenuous statement that Treasury is using to obscure the continuing success of Geithner’s efforts to prevent prosecutions of the SDIs. What we now know definitively is how hyper-sensitive Geithner is to anything that brings to greater public attention his pusillanimous role in ensuring that fraudulent SDIs and the banksters that control them can commit their crimes with impunity from the criminal laws. As always, I emphasize the ultimate culpability for the shameful “too big to prosecute” indulgence granted to the criminal enterprise known as HSBC rests with President Obama and Prime Minister Cameron. It is also worth noting that the Republican Party and Governor Romney never protested this failure to prosecute and that Obama is largely continuing President Bush’s failure to even investigate seriously the banksters. Welcome to crony capitalism.
William K. Black, J.D., Ph.D. is Associate Professor of Law and Economics at the University of Missouri-Kansas City. Bill Black has testified before the Senate Agricultural Committee on the regulation of financial derivatives and House Governance Committee on the regulation of executive compensation. He was interviewed by Bill Moyers on PBS, which went viral. He gave an invited lecture at UCLA’s Hammer Institute which, when the video was posted on the web, drew so many “hits” that it crashed the UCLA server. He appeared extensively in Michael Moore’s most recent documentary: “Capitalism: A Love Story.” He was featured in the Obama campaign release discussing Senator McCain’s role in the “Keating Five.” (Bill took the notes of that meeting that led to the Senate Ethics investigation of the Keating Five. His testimony was highly critical of all five Senators’ actions.) He is a frequent guest on local, national, and international television and radio and is quoted as an expert by the national and international print media nearly every week. He was the subject of featured interviews in Newsweek, Barron’s, and Village Voice.