Today, a Senate Banking Committee hearing will examine the extent, causes, and consequences of banks' failure to adhere to anti-money laundering laws, and the laxity of regulators who are meant to keep the banks in line.
The hearing -- entitled "Patterns of Abuse: Assessing Bank Secrecy Act Compliance and Enforcement" -- follows a string of banking scandals that have raised serious questions about financial institutions' compliance with anti-money laundering rules. Illicit flows of money through the financial system have been linked to corruption, international drug trafficking organizations, terrorist groups and sanctioned nations.
One recent example is HSBC, which was fined a record $1.9 billion in December by the U.S. authorities for doing business with Mexican drug lords, terrorists and pariah states, including Cuba, Iran, Sudan and Burma.
And yet, even though HSBC admitted failing to apply legally required money-laundering controls to $200 trillion in wire transfers, there have been no criminal prosecutions.
These are not victimless crimes, but have a very serious human cost: 47,000 people have died in drug-related violence while HSBC was laundering drug money. Questions are rightly being asked as to the degree to which the Treasury Department influenced the decision not to prosecute HSBC. Rumors are circulating that the DOJ even had indictments ready to go but that Treasury insisted that they be held back.
The worrying signals sent by the HSBC affair are that profit trumps the law and banks and bankers will continue to get away with wrongdoing -- regardless of any change in rhetoric. For the banks, the potential rewards far exceed the possible fines, and are not offset by the apparently minimal risk of prosecution. So why should they change their behavior?
If Congress wants to take a serious role in ensuring oversight and adequate enforcement of banks' compliance, senators must ask tough questions about why HSBC is supposedly "too big to jail" and why no individual bankers have been indicted.
Earlier this week HSBC announced their 2012 profits which were some of the biggest in banking history, enabling it to distribute $8 billion in dividends, and bonuses greater than $1 million for at least 200 staff, including a $3 million bonus for its CEO, despite the fine. This is a perfect example of how the incentives for banks to stop taking illegal money are insufficiently strong. Fines by themselves don't work as they don't hurt the people responsible. And even if they were more targeted, why would banks do anything differently when the fine levied is a fraction of the money that went through the bank without the proper checks?
If there are never any repercussions for the bankers who make the decisions, and if bonuses continue to be paid out regardless, why would any individual choose not to do the same thing next time? Bonuses for senior bankers should be tied to banks' compliance performance. When compliance fails, bonuses should be clawed back and the individuals responsible should be blacklisted from working in the financial sector. In the most serious cases, like HSBC, senior bankers should be indicted and face jail time if convicted.
There is a clear role for the Treasury, and senators should use today's hearing to clarify it. If the Treasury has a responsibility to coordinate and ensure regulatory oversight of U.S. financial institutions, then what is it doing to ensure financial regulators provide stronger oversight? And how will the Treasury tackle the current paradigm of "too big to jail" and ensure that senior bankers are held legally responsible for their banks' anti-money laundering compliance, which must include criminal prosecution for the most egregious cases?
Notably, the deferred prosecution agreement with HSBC does not preclude prosecution of individuals. Senators would do well to ask today whether the government plans to issue individual indictments.
The system isn't working; there is no incentive to comply with the law when there are no personal consequences for getting it wrong. Until the punishment fits the crime, bankers will continue to disregard their anti-money laundering obligations and banks will continue to take dirty money from criminals and corrupt officials. Today's hearing is a chance to start changing this.
This op-ed was originally published on The Hill.
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