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DOJ Bank Settlements Renew Debate Over Deferred Prosecutions
The National Law Journal
The U.S. Justice Department last week heralded blockbuster deals with British banks that netted more than $2 billion in criminal fines and penalties for violations that included transactions with countries subject to U.S. sanctions. But questions persist over whether prosecutors are being aggressive enough in combating corporate misconduct.
Lanny Breuer, the head of DOJ's Criminal Division, said HSBC Holdings PLC, one of Europe's largest banks, is being held responsible for "stunning failures of oversight" that allowed Mexican drug traffickers and others to launder hundreds of millions of dollars through the bank's subsidiaries.
"The record of dysfunction that prevailed at HSBC for many years was astonishing," Breuer said in unveiling the case on December 11. A day earlier, Standard Chartered PLC said it will pay $327 million for processing payments on behalf of countries that included Iran and Sudan. No individual officers were charged in either case.
The prosecutions marked a high point in the department's growing anti-money laundering fight against the banking industry. Yet the two deals also simultaneously renewed debate over whether deferred-prosecution agreements rather than criminal indictments are sufficient to punish corporate wrongdoing and to serve as a deterrent against future malfeasance. As the year draws to a close, DOJ has moved ahead of last year's number of deferred and nonprosecution agreements and could eclipse the 39 deals executed in 2010.
"The goal is not to bring HSBC down," Breuer told reporters at a news conference in Brooklyn, N.Y., where the case against HSBC was filed. The deferred-prosecution agreement, Breuer insisted, will remain a "sword of Damocles" hanging over the bank. "It's fiction to suggest this is not a robust result," Breuer said, refuting the notion that the bank is "getting a pass here."
Senator Chuck Grassley (R-Iowa) excoriated DOJ in a December 13 letter to Attorney General Eric Holder Jr., saying: "What I have seen from the department is an inexplicable unwillingness to prosecute and convict those responsible for aiding and abetting drug lords and terrorists." DOJ, Grassley said, is "allowing lawbreakers to escape justice." He noted a New York Times editorial, titled "Too Big to Indict," that said the government's deal with HSBC marked a "dark day in the rule of law."
Prosecutors charged HSBC in a four-count criminal information with, among other crimes, failing to maintain an effective anti-money laundering program. The bank entered a deferred-prosecution agreement with DOJ in which charges will be dismissed after five years if the bank complies with the terms, which included enhanced anti-money laundering compliance and structural changes. Prosecutors in the case against Standard Chartered will recommend the dismissal of the charges after two years.
Lawyers from Sullivan & Cromwell represented both banks and declined to comment on the cases. "We accept responsibility for our past mistakes. We have said we are profoundly sorry for them, and we do so again," HSBC Group chief executive Stuart Gulliver said in a statement. The bank, under new senior leadership, has taken "concrete steps to put right what went wrong," he said.
IRAN AND CUBA
The cases against HSBC and Standard Chartered represent the latest in a series of prosecutions of banks for violations of anti-money laundering controls and regulations concerning financial transactions with banks in certain countries. In one recent case, ING Groep N.V. of Amsterdam in June agreed to forfeit $619 million for its role in processing billions of dollars in transactions flowing from countries that included Iran and Cuba. The deal, at the time, marked the largest-ever case against a bank targeted in an investigation over violations of U.S. sanctions.
In the prosecution of HSBC, whose lawyers include Sullivan partner Samuel Seymour and Cahill Gordon & Reindel partner David Kelley, DOJ lawyers said HSBC Bank USA allowed more than $881 million in proceeds from drug trafficking outfits in Mexico and in Colombia to pass through the bank's system. The government also alleged bank officials processed hundreds of millions of dollars on behalf of banks in countries that included Cuba and Sudan.
Prosecutors said Standard Chartered, which was charged in U.S. District Court for the District of Columbia, processed more than $200 million in transactions that government regulators would have otherwise rejected, blocked or stopped for investigation. The bank, according to charging documents, replaced references to sanctioned countries in payment messages.
Including the cases against Standard Chartered and HSBC, DOJ has entered 32 deferred-prosecution or nonprosecution agreements with corporations this year, according to an analysis by Gibson, Dunn & Crutcher. F. Joseph Warin, who leads Gibson's litigation practice in Washington, said he's working on "several" deferred-prosecution agreements at the moment, but he did not identify the clients. He said the deals are "hard fought" and far from any gift from enforcement authorities.
"What you're seeing is an effective prosecution vehicle being used across a wide swath of enforcement matters," Warin said. "You're in the Justice Department's cocoon for a long period of time, which is not a holiday party you'd want to be invited to."
In a speech in September in New York, Breuer defended the agreements as a key tool in the fight against corporate corruption and in the push for greater accountability. Deferred-prosecution agreements, he argued, have the same punitive, deterrent and rehabilitative effect as a guilty plea. "I've heard people criticize them and I've heard people praise them," he said. "What I'm here to tell you is that, along with the other tools we have, DPAs have had a truly transformative effect on particular companies and, more generally, on corporate culture across the globe."
DOJ officials are quick to argue that the increasing number of deferred-prosecution agreements has created a "sea change" in corporate compliance efforts. "Our prosecutors are sophisticated. They know the difference between a real compliance program and a make-believe one," Breuer said. "They know the difference between actual cooperation with a government investigation and make-believe cooperation."
White & Case partner Ernest Patrikis, who served 30 years at the Federal Reserve Bank of New York, compared a criminal indictment against HSBC to an explosion that could have wide consequences for the financial industry. "No one wants to drop a nuclear bomb on HSBC," he said. "What are the implications of that in terms of business closing down in the United States? These guys will pay one way or the other. It's the cost of doing business."
This article originally appeared in The National Law Journal.