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

Fed. regulators grilled on DOJ's decision to not prosecute HSBC.

ByMatthew Mosk
March 07, 2013, 5:10 PM

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?'"

Cohen did not provide an answer. He said only that Justice officials sought guidance from the Treasury Department about the broader economic impact a prosecution of HSBC could have, but that his office declined to provide an answer.

"We informed the Justice Department that … we were not in a position to offer any meaningful guidance to department in that matter," he said.

The response seemed only to further perturb Warren, who was elected to the Senate last fall on a promise to crack down on Wall Street, and who found in Thursday's hearing an opportunity to show she is pursuing that mandate.

"So you just said to the Justice Department, 'You're on your own in figuring this out,'" she said, not waiting for a reply.

Sen. Heidi Heidkamp, a North Dakota Democrat, asked the three witnesses to give the Senate their word that they would to push harder for a prosecution in the future.

"If we leave here without a commitment from all of you that you will vigorously encourage, and suggest, and recommend, that the Justice Department prosecute cases that must be prosecuted in order to insure equal justice under the law in this country, then we failed," she said.

None of the men offered that pledge.

As the dressing down continued, members of the committee said they wanted to see Justice Department officials brought before them to offer their explanation for why the HSBC case ended with a settlement. Whether that will occur remains to be seen. Advocates who have pushed for the U.S. to take a tougher posture against banks that launder money said they hope the committee continues to push.

"What is clear is that the system isn't working," said Stefanie Ostfeld, a policy advisor with Global Witness, an international advocacy organization that works to root out financial crimes and corruption. "There is no incentive for bankers to comply with the law when there are no personal consequences for getting it wrong. Until senior bankers are held legally responsible for the bank's compliance, the U.S. financial system will remain vulnerable to terrorist finance and the proceeds of corruption and drug trafficking."

Only one Republican from the banking committee attended today's hearing. Sen. Mark Kirk of Illinois stopped short of grilling the regulators, but joked with Warren that the two should consider opening their own bank for terrorists and drug lords.

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

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