Senators: 'Prosecution-Free Zone' for Big Banks?

March 7, 2013 — -- Members of a U.S. Senate banking committee blasted federal regulators Thursday for allowing Europe's largest bank to dodge a potentially crippling criminal prosecution after it had allegedly laundered millions of dollars for terrorist financiers, rogue states and Mexican drug cartels.

The U.S. Department of Justice's recent decision not to prosecute London-based HSBC, despite what officials said was a mountain of evidence against the bank, signaled that there is "a prosecution-free zone for large banks in America," said Sen. Jeff Merkley, an Oregon Democrat.

"If you're caught with an ounce of cocaine, the chances are good you're going to jail," said Sen. Elizabeth Warren (D-Mass.). "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."

READ: HSBC Exec Announces Resignation During Senate Hearing

What appeared to distress the senators the most were statements from the Justice Department indicating that the decision not to prosecute HSBC was made in part out of fears that a prosecution could destabilize the world economy.

Attorney General Eric Holder confirmed that reasoning in comments before a different Senate panel Wednesday when he said, "It does become difficult for us to prosecute when we are hit with indications that if we do... it will have a negative impact on the national economy, perhaps even the world economy."

On the receiving end of Thursday's tongue lashing from senators at the Banking, Housing and Urban Affairs Committee hearing were officials from the U.S. Treasury Department, the Federal Reserve and the Comptroller of the Currency – three of the nation's most powerful financial regulators -- but no representatives from the Justice Department.

All three of the regulators said the decision forgo a prosecution of HSBC in favor of a record $1.92 billion settlement was reached with minimal input from them – and instead was the domain of Justice Department lawyers. Sen. Mark Warner (D-Virginia), accused the men of playing "pass the potato."

Warner said the regulators had plenty of tools in their arsenal to go after HSBC, but failed to use them.

There was little question that a criminal prosecution was the most aggressive approach the government could have taken in response to HSBC's actions. A conviction would have automatically launched a process that could have led to the government revoking the bank's license to do business in the United States, which in turn could have put HSBC out of business.

But the senators were incredulous that a bank of HSBC's size and reach around the globe could avoid prosecution for that reason – that they were, in Merkley's words, "too big to prosecute."

Warren grilled the regulators on this point, asking if they could identify a case of money laundering egregious enough to trigger a prosecution.

"What I'd like is your opinion," she pressed. "How many billions of dollars of drug money do you have to launder before someone will consider shutting down a bank?"

David Cohen, the Treasury's under secretary for terrorism and financial intelligence, seemed to equivocate in his first attempt at a reply. Warren came right back at him.

"I'm not hearing your opinion on this," she said. "What I'm asking is, what does it take even to say: 'Here is where the line is and if you cross that line you're at risk of having your bank shut down?'"