By Kevin Scura, ACLR Featured Blogger


I. Introduction


             In December, the Department of Justice (DOJ) ceased its prosecution of the international banking giant HSBC for money laundering, in return for the bank accepting a plea deal in which it paid a record $1.92 billion (a $1.2 billion forfeiture along with approximately $700 million in remedial measures).[1] While the sum may seem impressive (although not compared to HSBC’s annual $46 billion in profits[2]), and its status as a record punishment provides some solace for fans of justice,[3] there is no question that HSBC could have faced much worse. The New York Times wrote, “[s]tate and federal authorities decided against indicting HSBC in a money-laundering case over concerns that criminal charges could jeopardize the world’s largest banks and ultimately destabilize the global financial system.”[4] Problematically, no top-level executives were indicted.[5] Needless to say, this case portends poorly for the rule of law, driving a tank-sized hole through the notion that the criminal justice system is something that applies equally to all citizens.

            The charges were stunning. First, the DOJ accused HSBC of knowingly and willfully failing to implement a monitoring system to prevent money laundering.[6] It also alleged that HSBC had failed to undertake the required due diligence regarding its foreign customers when such reasonable diligence would have discovered suspicious activity.[7] These monitoring failures contributed to the bank processing transactions for, among others, members of Mexican drug cartels and Saudi banks with ties to terrorist organizations.[8] The DOJ further accused HSBC of knowingly and willfully facilitating prohibited transactions with Iran, Libya, Sudan, and Burma, in violation of the International Emergency Economic Powers Act (“IEEPA”), and with Cuba, in violation of the Trading With the Enemy Act (“TWEA”).[9]

            Obviously there are reasons (perhaps principally the terrifying consequences of the collapse of Lehman Brothers) that the DOJ chose not to prosecute, and the purpose of this paper is not to question that decision (although other commentators do, including speculating that the fine payments were, in total, less than the profits the bank made on its prohibited transactions, which would indicate a massive failure to adequately deter this type of crime). Rather, the question here is what impacts this plea bargain, and specifically the avowed reason given by the DOJ, might have for future criminal prosecutions of corporations. The first part of the paper describes the actual deferred prosecution agreement HSBC entered with prosecutors. The second part outlines how the decision not to prosecute HSBC could have negative consequences for deterring corporate criminality, and the third part focuses on possible strategies for overcoming those negative effects.


II. The Deferred Prosecution Agreement


            In lieu of further prosecution for money laundering, IEEPA, and TWEA violations, the government entered a deferred prosecution with HSBC.[10] The agreement had four parts.[11] To avoid prosecution, HSBC was required to accept responsibility for the charged activity, pay a forfeiture, cooperate with government investigations, and install remedial measures and compliance mechanisms.[12]

            The acceptance of responsibility was rather straightforward. The four counts charged were “Failure to Maintain an Effective Money Laundering Program,” “Failure to Conduct Due Diligence on Correspondent Bank Accounts Involving Foreign Persons,” violating the IEEPA, and violating the TWEA.[13] HSBC acknowledged that the charges were true and accepted responsibility for the corporate actors who committed the crimes.[14]

            Next, HSBC agreed to pay a forfeiture.[15] The parties agreed that at least $1.256 Billion was involved in the criminal transactions and thus HSBC forfeited that sum.[16]

            The third part of HSBC’s deferred prosecution agreement involved the bank agreeing to cooperate with government investigations.[17] The cooperation agreement applies to “any and all investigations,” and involves the provision of “information, materials, documents, databases, or transaction data” to which HSBC has access, and making available “current and former officers, directors, employees, agents and consultants.” [18]

            Finally, HSBC also agreed to a series of remedial measures, which, in total, will cost the bank in excess of $700 million.[19] The remedial measures include the prohibition of any cross-border transactions involving nations subject to trade sanctions under the IEEPA or the TWEA, an implementation of compliance and education programs to prevent future violations, maintenance of an electronic database, and the adoption of additional procedures with respect to mergers and acquisitions.[20]


III. Prosecuting Corporate Crime


A. Prosecution

            Corporations are situated differently than natural persons with respect to criminal prosecution.[21] While humans can face jail time, corporations cannot. Instead corporations face various sanctions.[22] As such, the considerations governing prosecutions are different than the corresponding considerations for natural persons. The DOJ circulated a memo to U.S. Attorneys outlining factors to consider when deciding whether and to what extent to prosecute corporations. It is worth quoting at length:


In conducting an investigation, determining whether to bring charges, and negotiating plea agreements, prosecutors should consider the following factors in reaching decision as to the proper treatment of a corporate target:

1.     the nature and seriousness of the offense, including risk of harm to the public, and applicable policies and priorities, if any, governing the prosecution of corporations for particular categories of crime;

2.     the pervasiveness of wrongdoing within the corporation, including the complicity in, or condonation of, the wrongdoing by corporate management;

3.     the corporation’s history of similar conduct, including prior criminal, civil, and regulatory enforcement actions against it;

4.     the corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents, including, if necessary, the waiver of the corporate attorney-client and work product privileges;

5.     the existence and adequacy of the corporation’s compliance program;

6.     the corporation’s remedial actions, including any efforts to implement an effective corporate compliance program or to improve an exiting one, to replace responsible management, to discipline or terminate wrongdoers, to pay restitution, and to cooperate with the relevant government agencies;

7.     collateral consequences, including disproportionate harm to shareholders and employees not proven personally culpable; and

8.     the adequacy of non-criminal remedies, such as civil or regulatory enforcement actions.[23]


One effect of the DOJ’s decision not to prosecute HSBC is the effective inclusion of a new factor on the list: whether the corporation is so vital to the larger economy that prosecution may have important ruinous effects on the public (although it could conceivably be subsumed into number 1).

            It is now clear that the DOJ will take it easy on corporations that are “too big to fail,” out of fear of the economic consequences. What isn’t quite as clear is who makes those determinations. After the failure of Lehman Brothers in 2008, economic experts at the Federal Reserve and the Treasury Department worked together with Congress to structure a bailout that prevented widespread economic disaster at the lowest cost and risk to the American public.[24] Similarly, the auto industry bailout was structured by experts and passed through Congress. Here, however, it is unclear who was involved in determining HSBC was “too big to fail.”

            The process of such a decision is important for two reasons. First is the troubling possibility that government prosecutors made this decision alone. While prosecutorial discretion is an important part of our justice system, making  judgments about complex economic questions may be beyond the qualifications of some prosecutors. The job requirements of prosecutors involve an intimate knowledge of the statutes with which they work and litigation skills, but not necessarily any knowledge of economics.

            Second, the process should be transparent. The criminal justice system is supposed to apply to all equally, prohibiting conduct that undermines the social fabric and punishing deviants to deter violation, incapacitate offenders, and express societal disapproval.[25] A key part of the justice system is its transparency.[26] Anyone who wants can look up state and federal criminal statutes to see what types of conduct are prohibited and behave accordingly. Prosecutorial discretion has often allowed minor violations to go unprosecuted or under-punished in order to focus resources on major violations. But HSBC is a major violator. It laundered money for drug cartels and banks with ties to terrorists. Certainly, HSBC did not escape punishment, but it did escape the fullest possible prosecution. The public deserves to know why such serious offenders avoid full prosecution, who decides if they avoid it, and what criteria are used.


B. Deterrence

             Deterrence of individuals and deterrence of corporations are likely to be somewhat different.[27] There is scholarly disagreement as to whether natural persons calculate the benefits, costs, and risks of committing a particular crime.[28] Even if such calculations do occur, they are likely to include personal, intangible factors, such as reputation, individual satisfaction, and the way that the crime affects relationships, all of which vary widely from person to person and case to case.[29] This makes the deterring individuals from committing crimes a complex and difficult task.

            In contrast, the deterrence of corporate crime should, theoretically, be relatively simple. Corporations are (mostly, at least) profit-maximizing entities.[30] Deterrence should be accomplished, then, by setting the fine equal to or larger than the product of the profit of the crime and the inverse of the likelihood of conviction.  For example, if the crime nets the corporation $1,000, and there is a 50% likelihood the corporation will be caught and convicted, the fine should be at least $1,000*(1/0.50)=$2,000 (this formula is, of course, somewhat simplified, as it does not consider the time value of money, which would push the minimal deterring fine higher, or the costs of defending against prosecution, which would push the minimal deterring fine lower).[NJ1]

            In reality, however, deterring corporate crime is slightly more complex. A corporation is, of course, a single legal entity. But bigger ones (such as those who might be affected by the reverberations of the HSBC deferred prosecution agreement) are comprised of a great deal of moving parts. Shareholders, managers, and employees are all in different positions at different levels of control, and each is subject to his or her own individual cocktail of motivations. It might be entirely rational for an individual within the corporate hierarchy to commit the corporation to criminal conduct, even if the corporation would not like him or her to do so. For example, a corporate manager with an employment contract which rewards short term gains but does not punish long term losses might engage in profitable illegal conduct because of its immediate benefits, knowing the risk of detection and the magnitude of the fine combine to make the decision a bad one for the corporation as a whole.

            In 2002 Arthur Andersen refused to accept a deferred prosecution agreement for its misconduct in the course of auditing work for Enron, and faced an indictment that effectively eliminated any hopes the corporation had of remaining viable.[31] That incident illustrated that the federal government was willing to prosecute large corporations and impressed upon those corporations the importance of accepting deferred prosecution agreements.[32]

            The HSBC deferred prosecution agreement has changed that calculus. It alerts corporations that the government will not, in fact, prosecute corporations whose failure could result in a destabilization of the economy. When big corporations, especially banks, go to the negotiating table with government prosecutors, the HSBC deal and the government’s admission that it eased off the prosecution because of concern for the larger economy will be hanging in the air. How will prosecutors convince banks to accept large punishments when the bank knows it won’t be fully prosecuted?



IV. Strategies for Deterrence


            There are four basic strategies that should, theoretically, effectuate better deterrence of corporate crime: improving detection of violations, increasing fines, increasing other sanctions, and increasing the prosecution of individuals within the corporation bearing responsibility for the criminal conduct. The HSBC deferred prosecution agreement and the DOJ’s surrounding comments have made it clear that it will not pursue fines or sanctions that will cripple a corporation determined to be vital to the continued health of the economy. That leaves two strategies for deterrence: improving detection and increasing prosecution of responsible individuals.

            Increasing detection is difficult and expensive. With the types of large firms that might be too bid to indict, the government often has trouble detecting criminal activity.[33] In fact, corporate criminal enforcement systems depend heavily on the corporations (and the various individuals playing roles within the corporation) to detect and report violations.[34] This process usually involves mandating the implementation of compliance and monitoring schemes.[35] These compliance schemes, however, have two important flaws (beyond relying on self-reporting). First, they punish corporations who have not committed crimes the same as corporations who have committed crimes. Second, they can impose large costs on the corporations, which can have negative effects on the efficiency of markets and ultimately harm consumers.

            Prosecuting individual wrongdoers is also difficult. It is hard to detect criminal conduct, and individuals have often avoided sanctions.[36] One bar to individual prosecutions is the American evidence system, with its prohibition of hearsay and character evidence.[37] Additionally, the fact that an army of attorneys is often necessary to avoid prosecution, and the corporation’s army of attorneys protects all employees and officers makes it hard to find whistleblowers to determine which individuals were responsible for the corporation’s criminal behavior.[38]


V. Conclusion


            The HSBC deferred prosecution agreement presents troubling hurdles for deterring criminal conduct by very large corporations, especially large banks. When the government’s unwillingness to punish “too big to indict” corporations is coupled with the realities making it hard to detect corporate wrongdoing the situation seems even more dire. The best hope for deterrence is to take a strong stand on prosecuting responsible individuals. If officers and employees know that they cannot mask their own crimes as corporate ones, and that they will be punished individually, individuals associated with large corporations will be unwilling to commit crimes in the corporation’s name.