Corporate crime pays

Convictions Without Consequences

By Phil Mattera, Dirt Diggers Digest

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In the years following the financial meltdown, corporate critics complained that the big banks were not facing serious legal consequences for their misconduct. They were being allowed to essentially buy their way out of jeopardy through financial settlements under which they admitted no wrongdoing.

In 2012 the Justice Department gave in to the pressure and extracteda guilty plea, but it was made by an obscure subsidiary of a foreign bank, Switzerland’s UBS, to resolve a charge of felony wire fraud in connection with the long-running manipulation of LIBOR benchmark interest rates. 

The plea seemed to do little to impede UBS’s operations. The bank dodged one serious consequence when it received an exemption from the Labor Department from a rule that should have disqualified it from continuing to serve as an investment advisor for pension funds.

Things would be different, critics said, when a criminal conviction involved a parent company. Last year, that happened when another Swiss bank, Credit Suisse, pleaded guilty to conspiracy charges of assisting U.S. taxpayers in dodging taxes by filing false returns with the Internal Revenue Service. Subsequently, Credit Suisse applied for its own exemption from the Labor Department; a decision is pending but is likely to go in the bank’s favor.

Now, at last, the Justice Department has gotten major two major U.S. banks — Citicorp and JPMorgan Chase — to plead guilty to something, which turned out to be felony charges of conspiring to manipulate foreign exchange markets. Two foreign banks — Barclays and Royal Bank of Scotland — also agreed to guilty pleas in the case.

The four financial institutions will together pay criminal fines of just over $2.5 billion. Additional fines were assessed by their regulator, the Federal Reserve.

It’s not clear they will suffer much more than those easily affordable financial penalties. Along with likely exemptions from the Labor Department, the banks have already been granted waivers from SEC rules barring criminals from engaging in the securities business. The banks will be on probation for three years, but keep in mind that BP was on probation at the time of the Gulf of Mexico disaster.

A somewhat higher hurdle may be faced by UBS, which the Justice Department announced has entered a new guilty plea (this time by the parent company) after being found to be in breach of the 2012 non-prosecution agreement it signed when the Japanese subsidiary pleaded guilty.

While newly designated criminals such as Citibank and JPMorgan can claim they will never break the law again, UBS is already found to have violated its commitment to be law-abiding by participating in the foreign exchange conspiracy and engaging in other forms of misconduct.

Taken together, all these developments illustrate the farce that is law enforcement when large corporations are involved. For years they were freed from serious consequences through the use of deferred- and non-prosecution agreements. The size of the financial settlements they had to pay rose into the billions, but these were still affordable costs of doing business.

Now corporations are starting to plead guilty to felony charges, but the practical implications of those convictions are being undermined by regulatory agencies. 

Having a criminal record is not pleasing to corporations, but if they can continue to do business as usual, they will learn to live with that stigma.

When street crime was on the rise a few decades ago, public officials fell over themselves to enact harsh punishments. Now is the time for a serious discussion of how to get tough on crime in the suites.