Some readers may want to take a walk after this one. Three banking regulators testified before a skeleton crew at the Senate Banking Committee on the state of enforcement of anti-money laundering (AML) regulations at a hearing titled “Patterns of Abuse: Assessing Bank Secrecy Act Compliance and Enforcement.” Committee Chairman Tim Johnson, D-S.D., left to go to another meeting, and the ranking Republican, Michael Crapo, R-Idaho, was ill, so the meeting was chaired by Mark Warner, D-Va. Mark Kirk, R-Ill., was the only Republican who attended, but he played an active role in a rare appearance following a lengthy recuperation from a stroke.
The hearing had the potential to be a real snore, like so many over the 40 years since the Bank Secrecy Act (BSA) was enacted. Perhaps the senators would skate by the wave of money-laundering scandals involving some, if not most, of the biggest names in banking, but it was the regulators who seemed unprepared for the sharp questioning of the senators.
A look at the cast of witnesses would be interesting to students of the phenomenon of “regulatory capture.” The lead witness was David Cohen, under secretary for terrorism and financial intelligence at the Treasury, who is in charge of the Financial Crimes Enforcement Network and the Office of Foreign Assets Control, the agencies with the largest roles in enforcing the BSA. The BSA includes the requirements that banks file currency transaction reports (CTRs), report cash transactions of $10,000 or more and provide suspicious activity reports to report transactions that raise suspicion of money laundering, regardless of the amount.
Cohen practiced at the prominent law firm of Wilmer Cutler, whose clients include the “too big to fail” banks. Cohen was joined by Thomas Curry, Comptroller of the Currency, and Jerome Powell, a member of the Federal Reserve Board.
Curry is a former superintendent of banking of the State of New York, which brought him into intimate contact with leading too big to fail banks, and Powell worked for the Carlyle Group before joining the Fed. The theory of regulatory capture holds that regulators identify with the interests of the institutions they regulate, often because they worked for these institutions before they joined the government, and they probably plan or hope to return to the banks, most likely at a higher level, after they leave government.
Credit the Committee Democrats for not being shy about aggressively raising recent statements by the highest Department of Justice (DOJ) officials that the too big to fail banks are too important to the financial system to prosecute for financial crimes. A recent George Washington University conference on regulatory capture was abuzz over the statement by Lanny Breuer, recently departed chief of the DOJ’s Criminal Division, that it could be disruptive to the financial system to prosecute the largest banks. Observers will be interested to see where Breuer winds up now that he has left the DOJ. There can be little comfort in his leaving, though, because in the meantime, Attorney General Eric Holder has confirmed this policy.
The duo of Warner and Elizabeth Warren, D-Mass., wanted to know why HSBC was allowed to operate for 10 years when it continuously committed violations that allowed the Iranians to evade financial sanctions against the country. Warner accused the regulators of “passing the potato” among themselves, and Warren demanded to know, given that individual citizens are jailed for possessing as little as an ounce of cocaine, why bankers who violate AML laws are allowed to sleep in their own beds and just what it would take for the regulators to impose more than a token fine.
Jeff Merkley, D-Ore., recalled hearing as a child that Vice President Spiro Agnew had been convicted of receiving a $100,000 bribe and fined only $10,000. He suggested that the regulators allow banks to treat money-laundering fines as just a cost of doing business.
Kirk quipped that perhaps the senators could set up a money-laundering operation, since the regulators don’t seem to mind. He admonished the regulators to press their counterparts in Europe to bar Iranian banks from using the payments system, as the United States has done, to enforce sanctions provided in legislation sponsored by himself and Robert Menendez, D-N.J.
Curry told the senators that the Office of the Comptroller of the Currency (OCC) doesn’t shut down banks unless they’re convicted of a crime. But the OCC itself has only civil authority, and we already know that the DOJ will not prosecute big banks.
Cohen said that his department defers entirely to DOJ. The fact that all roads lead to the Justice Department is the reason Joe Manchin, D-W.Va., asked Warner to call a representative of DOJ to testify. It will be interesting to see what the Committee does about this; it will probably require negotiations with the Judiciary Committee, which has the jurisdiction over the Justice Department.
After Warren and Cohen went back and forth over her question regarding what it would take to shut down one of the big banks that is violating money-laundering laws, Cohen shot back, “I’m not going to get into hypothetical matters.”
But the matter was hardly hypothetical. Warren had stated specifically at the outset that she was referring to HSBC Bank: “In December, HSBC admitted to money laundering $881 million, that we know of, for Mexican and Columbian drug cartels, and also admitted to violating our sanctions for Iran, Burma, Cuba, Libya, the Sudan, and they didn’t do it just one time; it wasn’t like a mistake. They did it over and over and over again, across a period of years, and they were caught doing it, warned not to do it and kept right on doing it, and making profits doing it.
“Now, HSBC paid a fine, but no one individual went to trial, no individual was banned from banking, and there was no hearing to consider shutting down HSBC’s activities here in the United States.”
The regulators’ responses were accompanied by “What, Me Worry?” passive-aggressive body language.
Ironically, the hearing occurred on the very same day that the Federal Reserve announced that the too big to fail banks have passed its so-called “stress tests,” the first step in allowing these government-supported institutions to increase dividends to shareholders and buy back stock.
Most of them have been paying generous salaries and bonuses all the way back to the 2008 episode under a clause that then-Sen. Christ Dodd, D-Conn., then chairman of the Senate Banking Committee, inserted into the Troubled Asset Relief Program legislation.
Among the measures the Committee may consider could be a requirement for senior executives of banks to make Sarbanes-Oxley-type certifications that they have adequate AML measures in place and the information technology resources to support them.
No one has yet suggested that performance in this area should be taken into account in setting policy on dividends and stock buybacks. That would be sure to get the attention of management.
Another idea would be to impose a conservatorship on chronic violators that would authorize government agents to take over the compliance function for recalcitrant banks.
This hearing begged the question of why the largest, supposedly most sophisticated, and clearly the most dangerous banks should not be held to a higher standard, since they are, in effect, government contractors backed by the federal safety net.
Highly motivated, imaginative thinkers could certainly come up with other ideas, such as trying once again to remove the bank regulation function from agencies such as the OCC and Fed that are so closely tied to the banking industry that they see themselves as advocates for the too big to fail banks.
For the record, the following is the list of banks mentioned by Johnson in his opening statement as subjects of enforcement actions for AML violations: AMN Amro, Lloyds, Credit Suisse, Wachovia (now Wells Fargo), Barclays, ING, Standard Chartered, HSBC, Citibank and JPMorgan Chase.
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