[ by Howard Haykin ]

On Tuesday, Europe's largest bank, HSBC, agreed to pay a multi-billion fines to settle several multi-year investigations by the U.S. Justice Department and other federal agencies.  Collectively, HSBC will pay a $1.92 billion fine and will repair its porous and ineffectual AML policies and procedures.

The deal was arranged as a deferred prosecution agreement, which has become the norm for resolving investigations into misconduct by financial institutions.  Others to have received a deferred prosecution agreement include:

• Standard Chartered, which announced on Monday that would pay $327 million to avoid charges over its dealings with companies doing business in Iran and Sudan.
• ING Group agreed back in June to pay $619 million for transactions it conducted with entities of Iran and Cuba.

Advantage of Deferred Prosecution

By using deferred prosecution agreements, the Justice Department gets most of what it wants out of a case: an admission of violations, a significant monetary penalty and a promise of future compliance. But the frequent use of these agreements raises the question of whether banks have come to regard them as just another cost of doing business.

HSBC and Standard Chartered both pointed to the new leaf they have turned over in response to the investigations. A statement by Standard Chartered said, "In the more than five years since the events giving rise to today's settlements, the bank has completed a comprehensive review and upgrade of its compliance systems and procedures." For its part, HSBC's statement proclaimed that it had "taken extensive and concerted steps to put in place the highest standards for the future."

As part of its settlement, HSBC will have to pay for an independent monitor for the next five years, and the bank said it would spend approximately $700 million to review all of its files to help weed out questionable accounts.

HSBC is still part of a wide-ranging investigation into the manipulation of the London interbank offered rate, or Libor, a case in which two other banks, UBS and Barclays, have reached settlements. Resolving the case will cost HSBC more money, especially because of the potential for private lawsuits claiming violations of antitrust laws, which can result in triple damages.

HSBC has also been implicated in tax evasion investigations by account holders using its branches in offshore tax havens. The penalties in those cases could easily run into hundreds of millions of dollars.

Entering into a deferred prosecution agreement allows a bank to avoid having the black mark of a criminal conviction on their record. While the bank admits to the facts constituting a violation, compliance with the terms of the agreement means that prosecutors will not file charges. That is important because under federal law, the Federal Deposit Insurance Corporation can revoke a bank's insurance for engaging "in unsafe or unsound practices in conducting the business of the depository institution" that results in a criminal conviction.

Prosecutors have only rarely filed charges against bank insiders for serious violations like those which HSBC and Standard Chartered have admitted took place. Indeed, this is the recurring pattern in the settlements reached by the Justice Department: the company acknowledges guilt, pays a large penalty and promises not to violate the law again.

While the Justice Department would doubtless like to go after some bank executives, pursuing cases against individuals can be much more difficult because proof of intent to violate the law is hard to establish when an employee is just one tiny part of a larger organization. In a civil fraud trial last summer involving the sale of a troubled security, the defendant successfully offered the "Where's Waldo?" defense to deflect blame onto more senior corporate officials involved in the deal.

Pursuing charges against senior officers can be even more difficult. These managers may well turn a blind eye to what is happening, happy to see the profits roll in from questionable transactions, but that is usually not enough to prove a willful violation of the law.

It remains frustrating that cases involving major criminal misconduct by financial institutions most often result in a large fine and a commitment to follow the law, while individuals are not held to account - leaving the impression that, for the banking sector, these settlements have become little more than expensive parking tickets.

For further details, go to:   [Dealbook, 12/12/12].