Lawmakers rip into regulators over money laundering prosecution


Attorney General Eric Holder listens as he testifies on Capitol Hill in Washington, Wednesday, March 6, 2013, before the Senate Judiciary Committee hearing. (Evan Vucci/AP)

Senate Democrats lit into Treasury and Federal Reserve officials Thursday over the handling of ­anti-money-laundering cases, questioning whether regulators are treating big banks accused of violating U.S. laws with kid gloves.

The heated debate unfolded even as bank regulators told lawmakers that they plan to step up efforts to remove bank employees and executives who don’t stop criminals and terrorists from moving money through the U.S. financial system — though so far that has been more common at small banks than large ones. Regulators can also issue civil money penalties or hit banks with enforcement orders when laws are broken.

Critics say such actions have not acted as a deterrent because megabanks can easily absorb hefty fines, with little or no reputational risk. Authorities, they say, need to hand down more criminal indictments and start treating bankers like any other citizens.

“If you’re caught with an ounce of cocaine, chances are good you’re going to go to jail,” Sen. Elizabeth Warren (D-Mass.) said during a Senate banking committee hearing Thursday. “Evidentially, if you laundered nearly a billion dollars for drug cartels . . . your company pays a fine and you go home and sleep in your own bed.”

Warren’s remarks arose out of a discussion about regulators’ decision not to shut down HSBC or remove any of its employees for allegedly laundering money for Mexican drug cartels. The British bank agreed to pay $1.9 billion in December to settle charges raised in a 340-page report from the Senate’s permanent subcommittee on investigations.

The report detailed years of poor monitoring practices at HSBC’s affiliate in Mexico, including instances of affiliates flouting government safeguards meant to block funding for terrorists. Lawmakers were puzzled when no criminal charges were filed despite the evidence.

Referencing that case, members of the committee voiced concerns about comments made a day earlier by U.S. Attorney General Eric H. Holder Jr., who said the size of financial institutions may inhibit prosecution.

Holder, the top Justice Department official, had told the Senate Judiciary Committee that he worried that bringing criminal charges against globally connected megabanks could have a negative impact on the economy.

Sen. Jeff Merkley (D-Ore.) argued that Holder’s claim suggested “we have a prosecution-free zone for large banks in America.”

“Does this create a fundamental concern about a fair system of justice across America?” he asked.

“Yes,” responded Federal Reserve Governor Jerome Powell.

Regulators were visibly put off by the line of questioning. They defended their record, stressing that the HSBC penalty was the largest they had ever levied against a financial firm. They also noted that only the Justice Department has to power to file criminal charges, and only a criminal conviction could serve as the basis for revoking a bank’s charter.

“We of course were working on this investigation with the Justice Department, but at the end of the day, it is the Justice Department’s sole prerogative,” said David Cohen, the Treasury’s undersecretary for terrorism and financial intelligence.

Banking experts caution against regulators ramping up punishments against banks, which can be unwitting participants in criminals’ efforts to launder money. Federal authorities already have a full arsenal of weapons they can use against institutions, making the enhancement of regulations to remove bank officials unnecessary, said attorney D. Jean Veta of Covington & Burling.

“In most cases, it makes no sense to pursue onerous sanctions against individual bankers,” she said. “It’s often only in hindsight that these patterns of illicit conduct are identified.”

Comptroller of the Currency Thomas Curry told senators that many institutions have sophisticated systems that screen transactions to identify and report suspicious activity to law enforcement. There are some 5.6 million of these reports in a centralized database maintained by the Financial Crimes Enforcement Network, he said.

Nevertheless, Curry said, “compliance is inherently difficult, combining the challenges of sifting through large volumes of transactions to identify features that are suspicious, with the presence of criminal and possibly terrorist elements dedicated to, and expert in, concealing the true nature of the transactions.”

But other analysts wonder whether regulators have sophisticated enough systems to properly monitor the biggest banks.

Said Mark Williams, a former bank examiner who teaches finance at Boston University: “The level of this money laundering and the fact it’s gone on for so long meant that regulators have been asleep.”

by Danielle Douglas

Senate Democrats lit into Treasury and Federal Reserve officials Thursday over the handling of ­anti-money-laundering cases, questioning whether regulators are treating big banks accused of violating U.S. laws with kid gloves.

The heated debate unfolded even as bank regulators told lawmakers that they plan to step up efforts to remove bank employees and executives who don’t stop criminals and terrorists from moving money through the U.S. financial system — though so far that has been more common at small banks than large ones. Regulators can also issue civil money penalties or hit banks with enforcement orders when laws are broken.

Critics say such actions have not acted as a deterrent because megabanks can easily absorb hefty fines, with little or no reputational risk. Authorities, they say, need to hand down more criminal indictments and start treating bankers like any other citizens.

“If you’re caught with an ounce of cocaine, chances are good you’re going to go to jail,” Sen. Elizabeth Warren (D-Mass.) said during a Senate banking committee hearing Thursday. “Evidentially, if you laundered nearly a billion dollars for drug cartels . . . your company pays a fine and you go home and sleep in your own bed.”

Warren’s remarks arose out of a discussion about regulators’ decision not to shut down HSBC or remove any of its employees for allegedly laundering money for Mexican drug cartels. The British bank agreed to pay $1.9 billion in December to settle charges raised in a 340-page report from the Senate’s permanent subcommittee on investigations.

The report detailed years of poor monitoring practices at HSBC’s affiliate in Mexico, including instances of affiliates flouting government safeguards meant to block funding for terrorists. Lawmakers were puzzled when no criminal charges were filed despite the evidence.

Referencing that case, members of the committee voiced concerns about comments made a day earlier by U.S. Attorney General Eric H. Holder Jr., who said the size of financial institutions may inhibit prosecution.

Holder, the top Justice Department official, had told the Senate Judiciary Committee that he worried that bringing criminal charges against globally connected megabanks could have a negative impact on the economy.

Sen. Jeff Merkley (D-Ore.) argued that Holder’s claim suggested “we have a prosecution-free zone for large banks in America.”

“Does this create a fundamental concern about a fair system of justice across America?” he asked.

“Yes,” responded Federal Reserve Governor Jerome Powell.

Regulators were visibly put off by the line of questioning. They defended their record, stressing that the HSBC penalty was the largest they had ever levied against a financial firm. They also noted that only the Justice Department has to power to file criminal charges, and only a criminal conviction could serve as the basis for revoking a bank’s charter.

“We of course were working on this investigation with the Justice Department, but at the end of the day, it is the Justice Department’s sole prerogative,” said David Cohen, the Treasury’s undersecretary for terrorism and financial intelligence.

Banking experts caution against regulators ramping up punishments against banks, which can be unwitting participants in criminals’ efforts to launder money. Federal authorities already have a full arsenal of weapons they can use against institutions, making the enhancement of regulations to remove bank officials unnecessary, said attorney D. Jean Veta of Covington & Burling.

“In most cases, it makes no sense to pursue onerous sanctions against individual bankers,” she said. “It’s often only in hindsight that these patterns of illicit conduct are identified.”

Comptroller of the Currency Thomas Curry told senators that many institutions have sophisticated systems that screen transactions to identify and report suspicious activity to law enforcement. There are some 5.6 million of these reports in a centralized database maintained by the Financial Crimes Enforcement Network, he said.

Nevertheless, Curry said, “compliance is inherently difficult, combining the challenges of sifting through large volumes of transactions to identify features that are suspicious, with the presence of criminal and possibly terrorist elements dedicated to, and expert in, concealing the true nature of the transactions.”

But other analysts wonder whether regulators have sophisticated enough systems to properly monitor the biggest banks.

Said Mark Williams, a former bank examiner who teaches finance at Boston University: “The level of this money laundering and the fact it’s gone on for so long meant that regulators have been asleep.”

Danielle Douglas covers the banking industry for The Washington Post.
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