TOO BIG TO JAIL AND THE EFFECTIVENESS OF THE ANTI-MONEY LAUNDERING PROVISIONS
Money laundering has been defined to mean the process of making illegally gained proceeds appear legal . The process of money laundering often involves a three-part process of: (i) placement of the funds into the financial system; (ii) layering by filtering the money around to create confusion; and (iii) integration into the financial system to develop the illusion of legitimacy.
In an attempt to curb the increasing challenges of money laundering, the U.S Congress passed the Currency and Foreign Transaction Reporting Act of 1970 (commonly known as the Bank Secrecy Act (BSA)). At its core, the BSA established requirements for recordkeeping and reporting by banks and financial institutions and was designed to identify funds or currency transferred in the U.S through financial institutions. Congress further enacted several statutes with provisions relating to money laundering, including establishing money laundering as a federal crime and expanding the definition of financial institutions subject to anti money laundering regulations. Of note is the Money Laundering Control Act of 1986 (MCLA) which required that financial institutions develop procedures to monitor compliance with the BSA.
The Financial crimes Enforcement Network (FinCEN) was established as the administrator of the BSA, with its primary duty to “safeguard the financial system from the abuses of financial crime, including terrorist financing, money laundering and other illicit activity.” In the fulfilment of its duties, the FinCEN regularly enacts several rules and guidelines to banks and financial institutions to ensure BSA/AML compliance, in accordance with the current vices and security risks. The Department of Justice (DoJ) is charged with the investigation and prosecution of money laundering violations, which is a federal crime. The Money Laundering and Asset Recovery Section of the DOJ is primarily focusing on money laundering services.
STANDARDS FOR AML COMPLIANCE BY BANKS AND OTHER FIANNCIAL INSTITUTIONS
Pursuant to Title 31, U.S.C § 5318(h)(l) and 12 C.F.R. §21.21, financial institutions are required to establish and maintain an AML compliance program that, at a minimum provides for:
a) Internal policies, procedures, and controls designed to guard against money laundering;
b) An individual or individuals to coordinate and monitor day-today compliance with the BSA and AML requirements;
c) An ongoing employee training program; and
d) And independent and audit function to test compliance programs.
Amongst other requirements, financial institutions are also expected to: (i) file a Suspicious Activity report (SAR) if it is suspected that any suspicious activity is found in regard to a customer’s account; (ii) report currency transactions of more than $10,000. Banks that manage private banking or correspondent accounts in the US for non-U.S persons are also expected to establish due diligence, policy and procedure designed to detect and report suspicious activity relating to specified accounts .
The MCLA also provides penalties for willful violation of the BSA, subjecting a person (including a bank employee) to a fine of up to $250,000 or five years in prison, or both. Financial institutions who violate certain BSA provisions are also subject to criminal penalties “not less than 2 times the amount of the transaction, but not more than $1,000,000” .
These AML compliance regulations were primarily enacted to monitor the financial market and encourage financial institutions to be diligent in ensuring AML compliance.
Punishment Regime by the DoJ
Since the financial crisis of 2008, regulators and prosecutors have dealt with financial institutions by instituting corporate liability suits against the financial institutions and settling for a Deferred Prosecution Agreement (DPA) where it agrees to suspend the BSA/AML charges against the bank for a limited period, on the condition that the banks pay a fine and agree to comply with certain AML compliance procedures.
This paper will briefly examine the DPA entered into between the U.S government (represented by the DoJ) and English bank HSBC. In late 2012, the US government filed an information against HSBC Bank USA, N.A and HSBC Holdings (collectively, HSBC), with the information containing several charges against HSBC, including willfully failing to maintain an effective AML program. Both HSBC and the government entered into a DPA, requesting that the court hold the case in abeyance for five years on the condition that if HSBC complies with hits terms and provisions as stated in the DPA, the information will be dismissed.
According to the statement of facts, HSBC operated for 3 years under a written agreement from its regulators asking the bank to correct operational deficiencies by enhancing customer due diligence profiles and monitoring of fund transfers for suspicious or unusual activity. The DPA states that from 2006- 2010, HSBC ignored the money laundering risks associated with doing business with certain Mexican customers and failed to implement a BSA/AML program that was adequate to monitor suspicious transactions from Mexico, while HSBC’s Mexican counterpart also suffered some AML deficiencies. The DPA claims that this lapse by HSBC caused at least $881 million in drug trafficking proceeds to be laundered through HSBC without being detected. The main charges against HSBC was for failure to conduct due diligence on customers of its group affiliates, and to monitor Banknotes’ transactions with its group affiliates who were non U.S entities for whom HSBC maintained correspondent accounts. HSBC was also accused of setting threshold for review for suspicious activity as a low standard so that certain customers will not be subject to automated monitoring. The DPA claims that because of these actions, over $200 trillion in wire transfers were not reviewed by HSBC’s monitoring program.
The DPA reported that HSBC fully cooperated with the US governments investigation by producing documents, making employees available to be questioned and investing money to remediate shortcoming in their BSA/AML programs. Other remedial steps include employing a new CEO and other top management and low-level compliance officers. It is reported that HSBC Group (including its affiliates) spent about $700 million in revamping its BSA/AML compliance program over 5 years. In total, the DoJ only required HSBC to forfeit about $1.25 billion as a fine in the DPA.
This trend was repeated in many more DPAs, with other slight additional requirements such as requiring that banks admit responsibility for its AML violations, and sometimes require that a special AML compliance officer is employed to monitor the bank’s compliance measures . Many parties have argued that this consistent trend of entering into DPA with defaulting banks does not serve the principal purpose of the BSA/AML compliance requirements, and the general purpose of sanctions.
The root of the expression “Too big to jail” stems from a referral to failures to prosecute Wall Street banks because they are considered to be too valuable to the economy to hold them accountable for their crimes by criminal conviction. By continuously entering into DPAs, the DoJ has ineffectively created a regime where financial institutions are to some level untouchable and cannot be held liable for their crimes past a certain extent.
Prosecutors however, are of the view that a larger punishment on banks, especially for BSA/AML compliance may be too harsh and some firms have become “so large” that a criminal charge could endanger the world economy and trigger worse sanctions by regulatory bodies . It may be argued however, that the dangers feared by the prosecutors may not come into play, as the bank customers are backed up by deposit insurance, and they might remain largely unaffected if they are managed by another existing bank .
The following options for reform are
The natural principles of law dictate that when a person is found guilty of violating the law, he/she should be punished for such actions. The Supreme Court in New York Central & Hudson River Railroad v. United States also agreed that corporations could be constitutionally prosecuted for a federal crime. One of the more common ways of ensuring that a corporation is adequately punished is by imposing fines on the corporation for its wrongdoings, but this where the mere imposition of fines and the enforcement of a BSA/AML compliance regime is insufficient to adequately punish corporations, other alternatives should be considered.
The effectiveness of enforcing fines as penalty can also be called into question, as the fine is ultimately paid by the shareholders of the company, for crimes committed by a management over whom the shareholders may have limited power.
Another challenge of the current sanction regime is the effectiveness of the fines imposed to the gravity of crime committed. This practice also violates the deterrence principle of criminal justice, as the fines protect the banks from actual criminal conviction and barely matches the severity of the crimes committed. As seen in the HSBC DPA, the $1.256 billion fine hardly matches the $200 trillion amount of money that should have been subject to AML compliance.
It is doubtful whether the constant practice of entering into DPA’s have successfully deterred other banks and financial institutions from engaging in BSA/AML violations. While many banks may claim that a lot of money is spent on ensuring developing a BSA/AML compliance program,
Lifting the Corporate veil and the trail of persons that might be affected
In 2014, several instances arose where regulatory bodies prosecuted individuals for AML violations with sanctions such as penalty fines, suspension and preventing said individual from participating in the management of any financial institution for a term of years . In enforcing this position, the DOJ issued a “Yates Memo” expressing its intent to ensure accountability from individuals who perpetuate wrongdoing and deter future wrongdoing .
If this line of reasoning is strictly pursued, prosecutors may encounter a hard time of tracing down liability amongst the individuals within the bank. It begs the question of who exactly should be held to the chopping block, whether it would only be the top management or every supervisor and bank teller who aided the money laundering services in any form or the other.
Are the fines really effective? (statistics on fines vs. actual amount of money laundered)
Proposed remedies to the sanction regime.
One of the proposals being made to fix the challenges faced by the AML violations regime is the establishment of a “performance bond” to be sequestered out of the pay of senior bankers and said bond will be forfeited if the bank is held liable for AML violations.
Another proposed reform is the inclusion of a penalty that may mandate the loss of certain privileges that the financial institutions may have under its bank charter. This privilege could be one vital enough to affect the company and deter other financial institutions form performing the same crime, while ensuring that the bank remains a going concern . Reference can be made to the BNP Paribas penalty, where global bank BNP Paribas were the bank was sentenced to a five-year term of probation and suspended from its U.S Dollar clearing operations for one year as penalty for willfully structuring and concealing U.S Dollar transactions in the U.S using banks and other financial institutions .
The enigma of a ‘too big to jail’ bank may hold some merit, as a criminal conviction may lead the office of the Comptroller-General of Currency (OCC) to exercise its statutory power to revoke the charter of a bank if it is determined that the bank’s board of directors knowingly permitted banking law violations . Similarly the FDIC may also employ its power to terminate a bank’s deposit insurance if it is found that the bank or its directors have engaged in unsafe or unsound practices . A conviction may also lead to a massive dump of shares of the bank by investors and ultimately trigger a financial conundrum. The DoJ may be reluctant to convict, and regulators reluctant to employ their powers because of the ultimate consequences of the failure of the bank on the commonfolk, but it is important that the alike may be reluctant to employ these powers.
A more effective way to administer punishment for BSA/AML violations would be to increase penalties payable from performance bonds and focus more on individual liability across top and middle management. It may also be necessary to enact statutes to empower regulatory bodies such as the OCC and FDIC to impose other sanctions on financial institutions that do not trigger the failure of the bank, but exposes it to enough sanctions that discourage more BSA/AML violations by other banks.