Senators blast financial regulators over 'prosecution-free zone for large banks'

Financial regulators faced relentless questioning Thursday from senators frustrated the nation's largest financial institutions haven't faced tougher penalties and more prosecutions for corporate malfeasance.

ADVERTISEMENT
For several hours, top officials from the Treasury Department, Federal Reserve and Office of the Comptroller of the Currency were on the defensive, as member after member accused them of slapping banks on the wrist for regular and repeated violations of anti-money laundering laws, including the complete lack of criminal prosecutions for those involved.

"If you're caught with an ounce of cocaine, the chances are good you're going to jail," said Sen. Elizabeth Warren (D-Mass.) at the Banking Committee hearing. "Evidently, if you launder nearly $1 billion for drug cartels and violate our international sanctions, your company pays a fine and you go home and sleep in your own bed at night."

Much of the ire was directed toward the government's December decision to levy a $1.9 billion fine against HSBC for years of money laundering for Mexican drug cartels and violating sanctions by doing business in nations including Iran, Libya, Sudan, Burma and Cuba. 

Despite repeated warnings, the deal reached by the Justice Department did not include any criminal charges against the institution or individuals.

Further drawing lawmakers' ire were comments made by Attorney General Eric Holder on Wednesday. 

Holder told the Senate Judiciary Committee he was concerned that the size of some banks had made prosecuting them difficult because their downfall could damage the financial system and economy.

Sen. Jeff Merkley (D-Ore.) contended that this claim suggested that "we have a prosecution-free zone for large banks in America."

"Does this create a fundamental concern about a fair system of justice across America?" he asked.

"Yes," responded Federal Reserve Governor Jerome Powell.

Regulators tried to defend their actions, pointing out that the HSBC fine was the largest they had ever levied against a financial institution, and suggested the Justice Department was the proper place to direct complaints.

"We of course were working on this investigation with the Justice Department, but at the end of the day it is the Justice Department's sole prerogative," said David Cohen, the Treasury's under secretary for terrorism and financial intelligence.

"The Justice Department makes that decision. We play a role," agreed Powell. "When they make these decisions, they make them themselves."

Regulators noted that they would not have the power to take dramatic action like revoking a bank's charter to do business in the United States without a criminal conviction. And pursuing criminal charges is the Justice Department's call.

But senators remained critical of the response from financial regulators. 

Sen. Mark Warner (D-Va.), who chaired the hearing, reminded them that beyond fines, regulators still had other tools they could use, like issuing injunctions or barring individuals from working in the field — tools they were not utilizing.

"There are things short of simply punting this to the Justice Department," he said, accusing regulators of playing "pass the potato" with responsibility.

A growing number of lawmakers in both parties have become increasingly concerned about whether large financial institutions are becoming "too big to jail." The Justice Department has said it consults with experts on the economic impact of bringing charges, and Holder's comments indicated federal prosecutors were worried about dropping the hammer on banks because of negative collateral damage in markets and the economy.

Under questioning, Cohen told members that the Justice Department asked for the Treasury's assessment on the economic impact of bringing charges against HSBC but the Treasury declined to offer an opinion.

"We told the Justice Department that we weren't in any position to offer any meaningful assessment," he said.

Powell said the Fed was not specifically asked about the economic impact. Thomas Curry, the Comptroller of the Currency, said he discussed revoking the bank's charter with the Justice Department, but did not offer an economic assessment.

"Our position was that that's a criminal justice determination that's left to the discretion of the Justice Department," he said.

Sen. Joe Manchin (D-W.Va.) suggested the matter would not end at the close of the hearing, requesting the DOJ officials be summoned before the committee to explain their rationale for not pursuing criminal charges. Warner said he would take up the matter with the committee's chairman, Sen. Tim Johnson (D-S.D.), who attended another hearing.

The hearing was almost exclusively attended by Democrats, but members ranging from liberal favorites like Warren to more business-friendly ones like Warner were unanimous in criticizing the regulatory response to banks' bad behavior.

The lone Republican who attended the hearing, Sen. Mark Kirk (R-Ill.), joined in the lambasting.

"You would think there would be one hell of a penalty," he said.

At one point, he joked that he and Warren should open a bank that handles just money laundering for drugs and terrorism.

"I think we can make a killing that way, and no danger of prosecution," he said.