The Yale Law Journal

VOLUME
126
2016-2017
Forum

The Rise of Bank Prosecutions

23 May 2016
Brandon L. Garrett

Introduction

Before 2008, prosecutions of banks had been quite rare in the federal courts, and the criminal liability of banks and bankers was not a topic that received much public or scholarly attention. In the wake of the last financial crisis, however, critics have begun to ask whether prosecutors adequately held banks and bankers accountable for their crimes. Senator Jeff Merkley complained: “[A]fter the financial crisis, the [Justice] Department appears to have firmly set the precedent that no bank, bank employee, or bank executive can be prosecuted.”1Federal judge Jed Rakoff and many others asked why prosecutors brought, with one or two low-level exceptions, no prosecutions of bankers in the wake of the 2007-2008 financial crisis and whether they were too quick to settle corporate cases by merely compelling fines and “window-dressing” compliance reforms.2The response from the Department of Justice (DOJ) to criticism of its approach towards corporate and financial prosecutions has ranged from stern denial that it had been remiss—as when Attorney General Eric Holder announced in a video message in 2014 that “[t]here is no such thing as too big to jail” and that no financial institution “should be considered immune from prosecution”3—to reform in the face of acknowledged lack of public confidence in its approach—as when the DOJ in 2015 adopted policies designed to make corporate prosecutions more effective.4

In this Essay, I describe the remarkable rise in the number of bank prosecutions in recent years, as well as the still steeper rise in criminal penalties imposed on banks. 2015 was the year that bank prosecutions finally came into their own, both in the record-breaking size of the fines and in the numbers of cases resolved. While the DOJ can claim marked achievements in recent years, which I detail here, I nevertheless caution against treating these data as fully answering critics’ concerns. Despite the apparent rise of bank prosecutions, important “too big to jail” concerns remain: prosecution deals are inadequate both as punishments and as rehabilitative efforts designed to promote compliance. Upon closer examination, the recent string of bank prosecutions, while noteworthy, fails to address persistent concerns that deterrent fines are not routinely imposed, that compliance terms designed to rehabilitate firms are not used effectively, and that individuals remain largely un-prosecuted.5

In the sections that follow, I first describe the data on increasing corporate penalties generally, as well as penalties levied by prosecutors against financial institutions specifically, with a focus on 2015, a year in which prosecutors obtained record bank fines and numbers of bank prosecutions.6 Second, I will ask whether those penalties are adequate, by examining how seemingly large sums paid may actually represent highly reduced penalties given what prosecutors could have imposed on banks for the alleged conduct. Third, I ask whether banks are being adequately deterred or rehabilitated, where some of the same banks have engaged in repeated violations without suffering more serious consequences, compliance terms appear not to be taken seriously or compliance is unknown, and individuals are prosecuted only in a minority of these cases. I conclude by discussing what might further enhance the ability of prosecutors to deter bank crime and rehabilitate banks, and I suggest that we have reason to be optimistic that reforms will be taken seriously.

i. rise in bank penalties

In 2015, federal prosecutors settled a record number of cases with banks, and in the process imposed record criminal penalties, which critics had complained DOJ had failed to do in the past.7 Corporations paid record sums exceeding $9 billion in penalties to federal prosecutors in 2015, and paid still more to regulators and others. In the last decade, my data show that federal prosecutors have set new records each year in corporate fines, breaking the ones set the previous year. The figure below illustrates these data, hand-collected from federal dockets in cases of plea agreements with companies and from deferred and non-prosecution agreements with companies.8

Figure 1.

corporate criminal penalties, 2001-2015

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In 2015, almost $7 billion of the total $9 billion in corporate penalties paid to federal prosecutors came from banks. The two Appendices to this Essay detail each of the prosecution agreements reached with banks and financial institutions from 2001 to 2014, and then in 2015, as well as the penalties imposed in each case. Over $22 billion in penalties have been paid to federal prosecutors by financial institutions from 2001-2015; over $15 billion was paid just in the last five years, from 2011 to 2015.9 The figure below depicts the startling rise in penalties paid by financial institutions, defined to include banks and other financial institutions like hedge funds and insurance companies. One can see how few financial institutions were prosecuted from 2001-2014, with fewer than ten cases in each year prior to 2010. The first billion-dollar criminal penalty was imposed on a bank (UBS) in 2009, and many more have followed.10

Figure 2.

financial institution prosecutions and penalties

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In 2015, a remarkable number of banks—eighty of them—finalized cases with prosecutors. This constitutes about one-half of the organizations that entered prosecution agreements during the entire year, whether plea agreements11 or deferred and non-prosecution agreements.12Each of these bank prosecutions is detailed in Appendix B.13 In 2015, bank prosecutions with large fines, apart from the record-setting BNP Paribas case, included the cases of: Deutsche Bank, which paid $625 million in an antitrust case; Commerzbank, which paid $641 million; and Crédit Agricole, which paid $156 million in money laundering and export violation cases. Upon closer inspection, it is not surprising that $7 billion of $9 billion in fines levied by federal prosecutions in 2015 came from cases involving banks. The only really substantial settlements from 2015 that did not involve banks were two that made up most of the $2 billion remainder: the $900 million paid by General Motors pursuant to a deferred prosecution agreement and the $772 million paid by Alstom S.A. in a Foreign Corrupt Practices Act (FCPA) case.14

The bulk of the banks that settled prosecutions in 2015 did so as part of a “Swiss Bank Program,” a remarkable effort by the DOJ’s Tax Division designed to combat marketing of illegal tax shelters. Scores of Swiss banks paid almost $1 billion in these settlements of tax prosecutions in 2015. The DOJ’s Program was designed to give incentives, via non-prosecution agreements, to the banks that fully cooperated and disclosed names of tax evaders in the U.S. that the banks enabled.15 The unusual and one-off Swiss Bank program is winding down, but in 2016 we will still see additional cases resolved with Swiss banks that will not receive such lenient non-prosecution deals. The first such settlement has been announced: Bank Julius Baer & Co. recently settled in a deferred prosecution agreement and agreed to pay $547 million.16

It is noteworthy how many financial institutions are now being prosecuted—and with some regularity—such that they are no longer functionally immune from criminal prosecution. In contrast to this recent flurry of activity, very few financial institutions had been prosecuted in decades past. It was almost vanishingly rare for banks to be convicted of crimes, as Appendix A shows. From 2001-2012, I located just four bank convictions: those of Crédit Lyonnais, Delta National Bank & Trust Co., Pamrapo Savings Bank, and Riggs Bank.17 In the past decade and before, when banks were charged, they routinely received non-prosecution agreements not filed in court, much less resulting in an indictment or a conviction, as Appendix A also depicts. It was apparently a sign of additional vigilance that prosecutors slowly, in the past few years, began to insist on deferred prosecution agreements for major banks that are at least initially filed in court.18 Prosecutors announced convictions for SAC Capital in 2013, Japanese subsidiaries of UBS and Royal Bank of Scotland in 2013, and Crédit Suisse and BNP Paribas in 2014.19 Now prosecutors routinely pursue banks, and in some of the most serious cases, they now seek a conviction through a guilty plea. Nevertheless, despite these important changes, the question remains whether these agreements impose adequate fines, function as deterrence, and facilitate the rehabilitation of banks and bankers.

ii. criminal fines and deterrence of bank crime

These billions of dollars in fines imposed in recent years are not all that they appear. The staggering fines cited above are dominated by a handful of blockbuster cases, and should not suggest that federal prosecutors have necessarily become more aggressive across the board.20 While bank prosecutions have increased in number and size, in general, neither the number of companies prosecuted nor the number of public companies prosecuted has increased since 2001.21 The number of banks prosecuted had risen modestly, particularly from 2011-2014, and then the numbers shot up due to the Swiss Bank Program cases in 2015. However, with the Swiss Bank Program winding down, the number of bank prosecutions is likely to return to prior levels of roughly ten per year in the future.

One might counter that it is not the number of cases but the size of the penalties in the largest cases that has exponentially increased and should be our focus. Yet even these fines are often not all that they could be. In general, in almost half of the deferred and non-prosecution agreements with companies from 2001-2012, no criminal fine was imposed at all.22 When sentencing calculations were provided, the agreements typically stated that fines were at the bottom or below the bottom of the applicable range.23 I also found that for public companies prosecuted from 2001-2012, fines averaged only 0.04 percent of market capitalization, while total payments made to prosecutors averaged just 0.09 percent.24 To be sure, very few prosecutions of financial institutions, as the Appendices illustrate, involve no criminal fine at all. However, from the information disclosed, it appears the fines imposed were often dramatically reduced. To provide one example: in the Standard Chartered case, the bank admitted to having processed over $240 billion in illegal transactions with Iranian clients, resulting in almost $7 billion in pre-tax profits, yet the bank paid only $674 million in combined civil and criminal penalties.25

The largest criminal penalty of all time is another remarkable case in point. The bulk of the corporate criminal fines in 2015 came from the single record-shattering case of the French bank BNP Paribas, which paid $4 billion to prosecutors and an additional almost $5 billion to regulators and local prosecutors.26 The prosecutors described a pattern of years of deliberate deception designed to conceal transactions with sanctioned regimes, particularly with Sudan. Despite the fact that federal prosecutors highlighted how upper-level management condoned the sanctions violations and how bankers tried to cover up the transactions—calling it “truly a tour de fraud”—no individual bank employees were charged.27 The almost $9 billion in combined penalties—representing the total proceeds of the criminal activity prosecutors felt they could prove moved through the U.S. financial system—may have seemed quite large; even just the portion denominated as a criminal penalty was record-sized. But in fact, over $190 billion in transactions may have been involved, and the fine calculation was, as is typical in such cases, highly non-transparent.28 Forfeiting just the proceeds of a crime is certainly a starting point in a criminal case, but a corporation may also face fines of up to double the gain (or harm to victims).29 BNP paid only $140 million denominated as a criminal fine for purposes of punishment; the remainder of the payment was denominated as forfeiture30 (although one advantage of that denomination is that the funds may be used to compensate individuals “who may have been harmed by the regimes of Sudan, Iran and Cuba”—an effort that the DOJ is “exploring”).31 Thus, the record penalty may actually be far lower than what could have been imposed, and the lack of transparency in the calculation of the fine amount makes it difficult to know how much larger the fine could have been and what kind of bargain prosecutors struck.

iii. recidivism, deterrence, and rehabilitation

Recidivism by major banks further calls into question the effectiveness of these prosecution agreements. Federal prosecutors have repeatedly settled cases with the same major banks in a short span of years. Recidivist financial institutions include AIG (deferred and non-prosecution agreements entered by two subsidiaries in 2004 and a non-prosecution agreement in 2006), Barclays (a deferred prosecution agreement in 2010, a non-prosecution agreement in 2012, and a guilty plea pending), Crédit Suisse (a deferred prosecution agreement in 2009 and a plea agreement in 2014), HSBC (a non-prosecution agreement in 2001 and a deferred prosecution agreement in 2012), JP Morgan (a non-prosecution agreement in 2011, a deferred prosecution agreement in 2014, and a plea agreement pending currently), Lloyds (a deferred prosecution agreement in 2009 and a deferred prosecution agreement in 2014), the Royal Bank of Scotland (a deferred prosecution agreement in 2013, a guilty plea by a subsidiary in 2013, and a guilty plea currently pending), UBS (a deferred prosecution agreement in 2009, a non-prosecution agreement in 2011, a non-prosecution agreement in 2012, a guilty plea by a subsidiary in 2013, and a guilty plea currently pending), and Wachovia (a deferred prosecution agreement in 2010 and a non-prosecution agreement in 2011).32 While the cases cited are only the instances in which banks were repeatedly criminally prosecuted, still more banks have settled multiple civil enforcement cases with regulators (in some instances large numbers of civil cases).33 One wonders how seriously prosecutors take recidivism among major financial institutions and how effective prosecutions have been in changing any underlying culture of law-breaking.

Still more mammoth bank cases lumber along in the courts, including several major pending cases that involve repeat-offender banks. In 2015, five major banks agreed to plead guilty in cases relating to foreign exchange (FOREX) currency manipulation.34  Those banks have not yet been sentenced in the federal district court,35 but assuming the judge approves the negotiated plea agreements in their current form, the banks will pay federal prosecutors $5 billion more in fines, making for another year of record-setting corporate and bank penalties. Three of the banks—Barclays, JPMorgan and UBS—had been previously prosecuted in recent years. Prosecutors did say that UBS, when pleading guilty to the new FOREX violations in 2015, was in breach of an earlier 2012 agreement regarding LIBOR manipulation.36 UBS then paid a $203 million fine for that breach. Yet the puzzling consequence of the UBS breach of its prior prosecution agreement was a far smaller fine than what the other banks agreed to pay in the FOREX cases.37 The consequences of recidivism appear highly uneven. The outcomes suggest that the “too big to jail” argument—the notion that banks are so vital to the economy that their crimes should be excused or treated leniently—retains currency, and applies even to banks that commit crimes repeatedly.

It is not clear that these banks are being rehabilitated through compliance terms either. These terms aim to prevent future crimes in a way that the payment of fines—ultimately borne by the shareholders—may not accomplish. We know little about how the compliance terms of prosecution agreements are being implemented, since the process is rarely described publicly by companies or prosecutors, and the reports of independent monitors who are sometimes tasked with supervising compliance are typically not made public.

The HSBC case is a rare case in which the summaries of monitor reports have been made public because Judge John Gleeson insisted that there be some reporting to the court.38 As a result, we know that several years into the five-year term of a deferred prosecution agreement with HSBC, the monitor has reported that compliance is still far from adequate and that reforms met with outright resistance, including in HSBC’s U.S. investment bank.39 The bank has reported that the monitor identified additional “instances of potential financial crimes.”40 The HSBC case raises the question of whether other independent monitors have uncovered similar failures to comply, but in reports that have not been made public. Major banks are massive institutions with global operations, and without substantial compliance efforts, the process may proceed slowly and with poor results. In more recent cases, prosecutors have insisted on guilty pleas, with the result that banks are placed on probation, with more formal court supervision, and with violation of probation as a potential consequence of non-compliance. Whether stricter oversight of compliance results from guilty pleas by banks remains to be seen.

Moreover, while banks pay fines, the actual bankers are not usually charged, much less sentenced to any time, making the individual-level deterrence of criminal conduct still more equivocal. I have found in a study of individual prosecutions accompanying prosecution agreements that among the 306 deferred and non-prosecution agreements from 2001-2014, 66 cases involved financial institutions, including commercial banks, investment banks, insurance companies, and brokerages. Individual prosecutions of officers or employees accompanied a little over one third or 23 of the 66 cases.41 Further, the individuals prosecuted were typically low-level employees;42 perhaps as a result, these individual prosecutions generally resulted in fairly low sentences for those that received any jail time.43

In response to the widespread criticism, the non-prosecution of bank employees may slowly be starting to change. The DOJ announced, as noted, a set of new policies in fall 2015, revising charging guidelines and sharpening the focus on individuals in corporate crime cases.44 A Delaware bank, Wilmington Trust, was indicted and high-level officers charged, including the former President and CFO.45 Two LIBOR rigging cases went to trial in the Southern District of New York, resulting in convictions of former traders. To be sure, none of these cases answers the criticism that bankers were not charged after the last financial crisis; public concerns may understandably be more focused on the conduct that preceded the financial crisis than more recent frauds or violations with less potentially catastrophic consequences.46

Conclusion

Bank prosecutions, virtually unheard of before the past decade, now dominate federal corporate criminal practice. Prosecutors in the United States have taken on complex financial institutions like never before, and in a way that their counterparts around the world have never done as aggressively. The billion dollar fines that prosecutors now routinely negotiate, and the sheer numbers of banks they target, send a deterrent message to the entire financial industry. They also lead to perhaps more punitive results than the use of civil alternatives, such as enforcement actions brought under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA),47 which has been responsible for the bulk of the civil penalties imposed on banks post-financial crisis. The criminal penalties paid by banks in 2015 were no aberration but part of a developing trend that is likely to continue in the years to come, even if the numbers of banks prosecuted will likely decline with the Swiss Bank Program winding down.

Despite the massive criminal penalties, it is hard to evaluate the significance or adequacy of federal criminal prosecution efforts, and deep concerns remain. Recidivists face little in the way of additional punishment; calculations of penalties are non-transparent and fines may not even be as high as profits from criminal acts; compliance changes are implemented with very little public information; and individuals often remain unprosecuted. How can bank prosecutions be used to deter banks better and to rehabilitate them to prevent future crime? The move towards seeking guilty pleas from banks is an important step in the right direction. In the past, banks could avoid consequences for repeat criminal prosecutions since they lacked a criminal record, having settled prior cases using non-prosecution or deferred prosecution agreements. Now that prosecutors more often insist upon a criminal conviction in the form of a guilty plea in front of a judge, future violations may result in court-supervised compliance and penalties. The compliance terms of these agreements should themselves be taken more seriously, with public accountability in the form of monitors’ reports, and careful auditing of compliance to test its effectiveness. If banks know that independent monitors will be testing compliance and reporting to a court and to the public, the compliance may be far more rigorous. Finally, prosecution of individuals may become more common if the new DOJ guidance takes hold and results in more charging of culpable individuals. Whether that occurs remains to be seen.

More resources may be dedicated to bank prosecutions, perhaps in future administrations.48 Reform may also come from Congress, absent sufficient changes in practice from within the DOJ, or through enhanced supervision by federal judges. Federal legislation could require: (1) greater judicial supervision of deferred prosecution agreements, including through revisions to the Speedy Trial Act;49 (2) revisions to the organizational sentencing guidelines to ensure deterrent fines; (3) longer statutes of limitations to assist in individual prosecutions;50 and (4) greater transparency in corporate settlements, for which legislation recently passed in the U.S. Senate.51 These improvements would all be steps in the right direction, and might also give better incentives to prosecutors to focus on individual prosecutions, more stringent compliance oversight, and stronger penalties for recidivist corporations.

While real changes should be made to strengthen prosecutions of financial institutions, I am also optimistic that the public and political scrutiny of these cases will continue to push prosecutors to respond to the critics. If they do not, other regulators, Congress, and the judiciary may step in. As never before, prosecutors have made the targeting of banks centrally important as a tool for safeguarding the public from fraud and money laundering; enforcement actions against banking violations have grown; and post-Dodd-Frank52 regulation of banks has steadily increased in its reach and complexity.53 Those regulations, among other changes less related to criminal accountability, incentivize whistleblowers to come forward, with the goal of encouraging individuals within banks to report financial misconduct to regulators and to prosecutors.54 While the role of criminal law is and should be limited to only the most severe misconduct, with civil enforcement addressing regulatory violations, prosecutors have come to better appreciate the importance of criminal accountability for truly serious financial crimes. The aftermath of the financial crisis brought home how important it is for even the largest and the most powerful banks and bankers to be held accountable, including for crimes. In the future, hopefully the rise of bank prosecutions will result not just in record monetary penalties, but also in lasting reforms that effectively prevent the recurrence of serious financial crimes.

Brandon L. Garrett is a Justice Thurgood Marshall Distinguished Professor of Law, University of Virginia School of Law. He would like to thank Ankur Desai for superlative research assistance and to UVA reference librarian Jon Ashley for his tireless and ongoing work assisting with data collection and maintaining online resources concerning corporate prosecutions.

Preferred Citation: Brandon L. Garrett, The Rise of Bank Prosecutions, 126 Yale L.J. F. 33 (2016), http://www.yalelawjournal.org/forum/the-rise-of-bank-prosecutions.

For the Appendix to this Essay, please see the PDF version.