Imagine if a bank that wrongfully foreclosed on hundreds of homeowners couldn't issue mortgages for a year. Or an institution that sold billions of dollars worth of bonds full of toxic loans couldn't sell securities for six months. And dozens of employees, including senior managers, involved in either case were fired.
This is the sort punishment that New York's Department of Financial Services chief Benjamin Lawsky doled out to France's BNP Paribas on Monday for processing transactions in violation of U.S. sanctions against Iran, Cuba and Sudan.
The state regulator banned the bank from converting foreign currency into U.S. dollars through its New York office for a year and forced it to can 13 employees, including the chief operating officer. The Justice Department also exacted a guilty plea from the bank and helped orchestrate a $8.9 billion settlement with several U.S. agencies.
The fine and the criminal charges are nothing to sneeze at, but the management shake out and dollar-clearing suspension arguably accomplished what some say is a rare feat in financial justice: a punishment proportional to the crime.
Handling money for Iran, Cuba and Sudan
BNP stands guilty of illegally processing about $190 billion, according to Lawsky's estimates, for clients in Iran, Cuba and Sudan for nearly a decade. The bank went to such elaborate lengths to throw U.S. regulators off that it routed money through a network of regional banks in the Middle East, Europe and Africa with their own clearing codes.
Given the nature of the crime, New York's top financial regulator choose to temporarily suspend BNP's ability to process dollar payments--a critical step in handling client transactions from paying suppliers to managing payroll.
It is a common-sense approach to punishment, especially for firms who can recover from multibillion-dollar fines with a few quarters' profits, advocates say. Shareholders are never pleased to see billions of dollars go to pay fines, but couple that payout with revenue lost from a profitable line of business and they might force a management change.
Kicking banks out of certain markets
But if all regulators barred banks from the activities at the heart of their misdeeds, what kind impact would that have on the industry, the markets or the economy?
Prudential regulators--the Office of the Comptroller of the Currency, the Federal Reserve and Federal Deposit Insurance Corp.--have the authority to ban executives and force banks to "cease and desist" any activity they believe threaten the "safety and soundness" of the institution. And they have used those powers to prevent institutions from keeping embezzling bankers on the board, opening branches or growing certain lines of business.
Just a few weeks ago, the FDIC banned Bancorp Bank, known for backing prepaid debit cards, from issuing any general-purpose prepaid cards until it could clean up its lax money laundering controls. The OCC, nearly a decade ago, even handed down an order against Arab Bank, one of the largest financial players in the Middle East, similar to the BNP order--banning the bank from money transfers and from taking new deposits.
But Arab Bank isn't exactly Bank of America or Wells Fargo, whose alleged misdeeds in the mortgage market--peddling shoddy home loans to unqualified consumers or steering minorities into unsustainable mortgages--affected millions of Americans.
Could this happen a U.S. bank?
When the Fed took action in 2011 against Wells Fargo for steering people with good credit--prime borrowers--into costly subprime mortgages, the order mandated a slew of changes to correct the problem. But none of the individuals involved were fired or banned from banking, nor did the company have to stop making home loans for any period of time. The same can be said of the dozens of other mortgage-related regulatory orders involving big banks.
Considering that Wells Fargo controls more than a third of the mortgage market--from making home loans to servicing them--a six-month suspension from the business might hurt consumers as much as the bank. Or it could go a long way in helping the bank's competitors.
"If regulators push too hard on the suspension side, you end up anointing winners and losers in a particularly industry," said Jim Angel, a finance professor at Georgetown University. "On the other hand, if the business you fine sees it as a random tax you have to pay from time to time, then the fines lose their deterrent affect."
Angel said suspensions should be an option in a "diversified portfolio of tools" to punish bad behavior, but one that is used carefully and sparingly.
"If you ban a bank from a certain line of business, it does have effect of hitting them in the pocketbook. But it is also going to hurt them in the long run and perhaps force them to withdraw altogether," he said.
Customers, he added, will likely migrate to competitors and employees could be laid off during the suspension. "Regulators really need to ask do we really want to push them out of the industry because that is the real risk."
Would it even be enough without charges?
Some argue that suspensions and firings, while welcomed punishments, are far from enough to deter white collar crime. Revenue and clients lost during a suspension can be recouped, while executives pushed out of a company tend to leave with a fat compensation package.
"What the controlling officers care about is not being prosecuted, having proceeds clawed back and not having their reputation besmirched," said William K. Black, a former bank regulator who teaches economics and law at the University of Missouri.
He added: "They will trade of billions of dollars in fines to the corporation to ensure that their objectives are met. And a credulous public will be misled by the size to think that something really serious in deterrence may be going on."
Black applauds Lawsky's effort to ratchet up punishment and calls on other regulators to do the same, but questions why prosecutors decided not to bring charges against individuals.
"If you don't prosecute any individual, even the most culpable at the top, in a case like this...then what are you going to prosecute? This is an entity that they say led to the funding of a genocidal regime in Sudan. What would it take to prosecute?"