On The Chopping Block: Banks And Financial Institutions

by Michael Volkov

creditsuisse4The Department of Justice has had enough.  Banks and other financial institutions are not just on the radar screen – they are on the chopping block.  One-by-one watch out – banks and other financial institutions are coming under prosecutorial scrutiny.

DOJ is flexing its muscle and doing so openly and notoriously.  Like I always say – the government tells you what they are going to do and then they do it.  For anyone in the industry to act surprised, they must have been living in a cave for the last five years.

Let’s look at what has happened.  DOJ warned the industry years ago that they were going to increase AML enforcement.  Banks took notice.  What they did not expect was that DOJ would pin its aggressive enforcement strategy to sanctions violations.  Bank after bank fell under the sword of export/sanctions violations.  Banks were too busy focusing on “traditional”  AML controls (and doing a much job of compliance in that area).

Several months ago, Mythaili Raman, acting AAG for the Criminal Division announced that DOJ was not satisfied with bank compliance programs and wanted to see banks improve in this area.  Warning Shot No. 1.

Around this same time, banks and investment banks came under scrutiny for hiring practices in foreign countries for possible violations of the FCPA.  JP Morgan, a proverbial whipping post, created a chart tying together hiring of relatives in China to specific contract decisions at state-owned banks and financial institutions.  DOJ and the SEC launched an industry-wide inquiry into banks and other financial institutions’ hiring practices in China.  Warning Shot No. 2.

The last piece in this perfect storm – enter the Swiss Banks and FATCA.  Swiss banks have historically resisted attempts to disclose account ownership information but in response to a global trend for such disclosure have been slowly giving in to requests for account information.  Federal prosecutors in the Southern District of New York have spent years fighting Swiss banks and their long-standing complaints have been resonating in the halls of DOJ.  Warning Shot No. 3.creditsuisse

As a final piece in this puzzle (although there are more trends and context to consider), consider that the Department of Treasury for the first time proposed to require banks to require new account applicants to disclose beneficial ownership information concerning the account holder.  Banks quivered and fought back against such a regulatory requirement.  Warning Shot No. 4.

To add one last significant political factor, Attorney General Holder faces criticism each day on the Obama Administration’s “failure” to prosecute banks and executives for the 2008-2009 financial crisis.

Add all this up and what do you have?  A perfect storm against banks and financial institutions.  We are watching as this storm plays out – Credit Suisse pleads guilty to tax evasion and pays 2.6 billion.

Next up, BNP Paribas, which resisted DOJ’s attempts to investigate and secure cooperation (yet another French company failing to cooperate) and is negotiating an appropriate settlement for sanctions violations into the billions of dollars.

DOJ has been patient and steady.  They have been clear about its expectations.  It cannot go on forever turning its cheek.

Prosecutors have a lot of power.  They can extract significant penalties and impose significant punishments, especially when their aggressive tactics combine with political winds and leadership decisions at the Justice Department.

creditsuisse2We are seeing this trend play out.  Banks and financial institutions are now being subjected to the full range of potential federal enforcement penalties which range from AML/Sanctions, FCPA, and Tax Evasion.

What does it take for banks and financial institutions to wake up.  How many billions will it take for the board members to demand greater accountability from management?

The answer to this question will play out in headlines over the next few years.




DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Michael Volkov, The Volkov Law Group | Attorney Advertising

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Michael Volkov

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