Bill Black: Lanny Breuer’s Defense of Not Prosecuting HSBC and its Officers

Yves here. Bill Black shreds not simply Lanny Breuer’s lame justification for not prosecuting HSBC officers and employees, but also by implication, Loretta Lynch’s. And the Lynch nomination reveals the deadly confines of the two party system. Elizabeth Warren made a bold speech last week in which she called for far more fundamental bank reform. She also reaffirmed her criticism of the failure to lodge criminal charges against any major bank executives. Yet as a Senator, she can’t afford to buck the Lynch nomination, since she apparently feels it would cost her too much in terms of moving the other elements of her program forward. But isn’t this arguably the most important issue?

By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Jointly published with New Economic Perspectives

I have been researching the HSBC frauds for a column I am doing about Loretta Lynch, the U.S. Attorney who refused to prosecute HSBC or any of its officers for the largest and most destructive money laundering and anti-terror finance sanctions-busting in history and continues to fail to do so even though her own appointed monitor at HSBC reports that HSBC is not complying with the sweetheart deal Lynch gifted them and even though she is now aware (of something she should have been well aware of for years) that senior HSBC officials continued to violate the laws to aid the wealthy and criminal evade taxes while HSBC’s lawyers were negotiating the sweetheart deal with Lynch about other mass felonies. That research caused me to reexamine Lanny Breuer’s statements at the press conference celebrating the great Department of Justice (DOJ) “victory” in failing to hold any HSBC officer or employee accountable and for the anti-regulators acting to ensure that the bank was not held accountable for those crimes in any meaningful fashion.

The obvious aspect of Breuer’s statements that right drew scorn was his embrace of the concept that the systemically dangerous institutions (SDIs), particularly the largest banks, were “too big to prosecute.” Bloomberg describes the two most distressing aspects of Breuer’s explanation for why DOJ, as always, refused to prosecute the bankers who grew wealthy from leading the largest and most destructive fraud schemes in banking history.

“The decision not to prosecute HSBC was a decision of the Justice Department and was influenced by factors including the impact of the probe on the company’s employees and the potential economic effect,” Breuer said.

“As bad has HSBC’s conduct was, this is not a case where the HSBC people intended to create money laundering,” Breuer said. “What they did do was they affirmatively violated the Bank Secrecy Act, they did not have the controls in place that they needed to do. This was insidious and wrong and had occurred over decades of time and we’ve held them very much accountable. I’m not sure you can find a more robust resolution.”

The first paragraph asserts that the SDIs are too big to prosecute even when they commit massive frauds for many years. Three points need to be made.

• None of this logic remotely applies to prosecuting the officers and employees who violated the law. There was no excuse for Lynch refusing to prosecute the officers.

• Conservative economists love the concept of “creative destruction” of bad businesses. There can be no more creative form of destruction than putting a corruptly-run bank through a receivership and putting in place honest, competent controlling officers. The conservative economists that successfully terrorized Breuer about the horrors of receivership, breaking HSBC up into manageable banks (in their “defense” of their crimes HSBC essentially said that it was too large to manage) that no longer posed a systemic danger to the global financial system, and putting in place honest, competent managers were lying through their teeth.

• The incentives created by treating the bank and the banksters as too big to be prosecuted (even when Standard Chartered and HSBC violate their non-prosecution agreement commitments) are so perverse that they guarantee just what developed – recurrent, massive crimes by the largest banks. In a prior column about Lynch I explained that even the NYT’s Wall Street Sorkiophants at DealBook admit that the response to DOJ’s failure to prosecute has been “repeat offenses on Wall Street” establishing a “pattern of corporate recidivism” by the banks that pose grave systemic risks to the global economy.

It is Breuer’s second paragraph that I focus on in this column.

“As bad has HSBC’s conduct was, this is not a case where the HSBC people intended to create money laundering,” Breuer said. “What they did do was they affirmatively violated the Bank Secrecy Act, they did not have the controls in place that they needed to do. This was insidious and wrong and had occurred over decades of time and we’ve held them very much accountable. I’m not sure you can find a more robust resolution.”

His claim is that HSBC’s senior officers deliberately decided to violate the laws designed to prevent banks from aiding and abetting money laundering, but “HSBC people” did not intend to “create money laundering” even though that was the inevitable result of their actions, and even though they knew that the inevitable result was occurring. Note the sneaky use of the word “create.” Right, HSBC officials knew that the Sinaloa drug cartel would “create” the money laundering – the HSBC’s officials’ function was to make sure that no one at HSBC got in the way of the money laundering. The facts at HSBC, however, according to a senior DOJ official, refute Breuer who (characteristically) slipped into his defense counsel persona. The senior DOJ official stated that HSBC’s officers and employees engaged in the following conduct.

“From 2006 to 2010, the Sinaloa Cartel in Mexico, the Norte del Valle Cartel in Colombia, and other drug traffickers laundered at least $881 million in illegal narcotics trafficking proceeds through HSBC Bank USA. These traffickers didn’t have to try very hard. They would sometimes deposit hundreds of thousands of dollars in cash, in a single day, into a single account, using boxes designed to fit the precise dimensions of the teller windows in HSBC Mexico’s branches.

In total, HSBC Bank USA failed to monitor over $670 billion in wire transfers from HSBC Mexico between 2006 and 2009, and failed to monitor over $9.4 billion in purchases of physical U.S. dollars from HSBC Mexico over that same period.

In addition to this egregious lack of oversight, from the mid-1990s through at least September 2006, HSBC knowingly allowed hundreds of millions of dollars to move through the U.S. financial system on behalf of banks located in countries subject to U.S. sanctions, including Cuba, Iran and Sudan. On at least one occasion, HSBC instructed a bank in Iran on how to format payment messages so that the transactions would not be blocked or rejected by the United States.

As part of today’s resolution, HSBC has admitted that it violated the Bank Secrecy Act, the International Emergency Economic Powers Act and the Trading With the Enemy Act, and it has agreed to forfeit over $1.25 billion – by far the largest forfeiture ever in a case involving a bank. HSBC has also agreed to pay $665 million in civil penalties, bringing the total cost of this resolution to the bank to nearly $2 billion. HSBC will also be subject to strict oversight by a corporate monitor for the next five years – the duration of the deferred prosecution agreement – and it must further enhance its compliance structure.

As a result of the government’s investigation, HSBC has replaced virtually all of its senior management, “clawed back” deferred compensation bonuses given to some of its most senior U.S. anti-money laundering and compliance officers, and agreed to partially defer bonus compensation for its most senior officials during the five-year period of the deferred prosecution agreement.

The record of dysfunction that prevailed at HSBC for many years was astonishing. Today, HSBC is paying a heavy price for its conduct, and, under the terms of today’s agreement, if the bank fails to comply with the agreement in any way, we reserve the right to fully prosecute it.”

Here is what we can learn from this senior DOJ’s officials’ none too candid explanation of the massive crimes at HSBC.

• “HSBC has admitted that it violated the Bank Secrecy Act, the International Emergency Economic Powers Act and the Trading With the Enemy Act….”

• There is no dispute but that HSBC’s senior managers deliberately decided to violate the International Emergency Economic Powers Act and the Trading With the Enemy Act.” Internal communications demonstrate that HSBC’s responsible officers decided that the bank had a wonderful strategic opportunity, given U.S. sanctions against Iran deterring less dishonest bankers from dealing with Iran, to greatly expand banking revenues from Iran by adopting twin policies of violating U.S. sanctions and deceiving U.S. regulators and law enforcement personnel to prevent them from learning about HSBC’s violation of U.S. sanctions with Iran (and other nations supporting terrorism).

• The senior DOJ official outlined facts that would normally lead not only to vigorous prosecutions of the corporate officers, but a DOJ request for a maximum sentence given that the corrupt culture persisted for a decade. Note that the senior DOJ official improperly uses the term “HSBC” alone rather than explaining that he is referring to senior HSBC officers’ crimes (for which HSBC is legally culpable under U.S. law).

[F]rom the mid-1990s through at least September 2006, HSBC knowingly allowed hundreds of millions of dollars to move through the U.S. financial system on behalf of banks located in countries subject to U.S. sanctions, including Cuba, Iran and Sudan. On at least one occasion, HSBC instructed a bank in Iran on how to format payment messages so that the transactions would not be blocked or rejected by the United States.

• Under the senior DOJ leader’s own logic, therefore, DOJ could and should have prosecuted dozens of HSBC’s officers for these multiple crimes involving breaking U.S. sanctions on assisting financing to nations supporting terror.

• Given that HSBC’s officers decided to violate the two other U.S. sanction statutes in order to make more money, and the fact that Breuer concedes that HSBC officers deliberately violated the anti-money laundering (AML) statute (which bears the confusingly name “Bank Secrecy Act”) why is Breuer so sure that the HSBC managers did not violate the AML statute in order to secure large, low-cost deposits on which they could charge fees for money transfers? Why else would the HSBC officers deliberately violate an AML statute – in Mexico, which is notorious for money laundering for the drug cartels?

• HSBC officers took many incriminating steps indicating that the reason they violated the AML was to aid money laundering. They classified Mexico as being in the lowest risk category for money laundering! That would be very funny if the results were not so tragic. They knew they were receiving massive amounts of cash that could not be explained by legal enterprises. They knew that they were receiving cash from individual “depositors” in increments of hundreds of thousands of dollars, which almost invariably indicates money laundering (and tax evasion). They knew that their largest cash customers were publicly reported to be associates of the Sinaloa cartel. HSBC paid its AML specialists bonuses while they failed to take even the most basic AML steps.

• Large banks do not maintain “astonishing” degrees of “dysfunction” for many years without a strong reason why its senior managers and controls allow the “dysfunction” to continue for many years. Typically, persistent dysfunction of this nature indicates that management wants internal controls to be poor to facilitate the commission of fraud.

• Note that the senior DOJ official is dramatically understating the volumes of money that HSBC laundered and helped evade U.S. terror sanctions, using “millions” when his own data show that he should be using “tens of billions.”

Consider two related facts about the senior DOJ official’s statement about HSBC. The senior DOJ official promised that DOJ could prosecute the original charges if HSBC did not comply with the sweetheart deal Lynch cut with HSBC. Lynch’s own monitor has reported that HSBC did not comply with the deal, but Lynch often praised HSBC’s management rather than prosecuting.

The senior DOJ official is very proud that HSBC “clawed back” the (relatively tiny) bonuses to HSBC’s AML and compliance specialists. No one thinks that the idea for HSBC to violate the AML statutes arose with the AML specialists as opposed to HSBC’s senior managers. What about the vastly larger bonuses that HSBC’s senior managers received due to the massive money laundering for the drug cartels and the sanction violations? According to the senior DOJ official, none of those crime proceeds were clawed back.

Instead, Lynch agreed that the senior HSBC officials that led the massive crimes at the bank could keep their salaries and bonuses generated almost entirely by criminal and abusive conduct (see my articles about PPI sales in the UK). HSBC’s wealthy officers suffered the mild inconvenience that HSBC will “partially defer bonus compensation for its most senior officials during the five-year period of the deferred prosecution agreement.” Lynch did not even insist on a claw back of these proceeds of fraud and abuse when her own monitor reported that HSBC has not complied with the sweetheart deal that Lynch gifted HSBC.

Conclusion

As readers may have already guessed or checked, the “senior DOJ official” that refuted Breuer’s claim that there was no basis for prosecuting any HSBC officer or employee was Lanny Breuer, in his prepared written statement for the December 11, 2012 press conference he staged to celebrate the sweetheart deal with HSBC.

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13 comments

  1. ambrit

    If I read this correctly, the DoJ fits the definition of a ‘Racketeer Influenced and Corrupt Organization.’ Talk about your conflicts of interest!
    By the way, could some ‘civic minded citizen’ pull off a “Citizens Arrest” of Lynch and try to turn her over to the DoJ for prosecution? That would be wonderful political theatre.

    1. diptherio

      Who watches the watchmen?

      On a totally unrelated note, I found a great book the other day on a friend’s bookshelf about the Montana Vigilantes…

      The first successful uplift movement in Montana was conceived and accomplished by the Vigilantes. Crude in plan and rude in perfomance, there was an uprising which destroyed the last doubt in lawless minds with respect to the efficiency of government “of the people, by the people, for the people”. It demonstrated that absence of law afforded no excuse for crime and gave security to life and property without increase of taxation. In some of the valleys where the Vigilantes rode, less than half a century ago, land now has a market value of as much as one thousand dollars per acre for orchard home uses, but the most profitable crop which ever hung from Montana trees was in the gruesome forms of dead outlaws. Then and there was implanted a respect for the penalties of wrong-doing and a regard for the rights of others which has endured against the insidious influence of wholesale corruption and the most subtle encroachments upon the powers of government, to the present time. It is today more dangerous in the state of Montana to steal a horse than to loot a bank or to bribe a legislative majority, chiefly because the Vigilantes failed to furnish a precedent in justice for bank-looting and legislative corruption as they did for horse thieving; while later administrators of justice, in the approved manner of courts, have regarded precedent and form and ceremony above the purpose of the law and the effect of justice.

    2. Vatch

      I’m not a lawyer, however, I think there’s a very strong case that both Breuer and Lynch committed obstruction of justice, a crime for which they could be prosecuted. They won’t be, of course. But in an alternate universe, they would already have been arrested, prosecuted, and convicted.

    3. NotTimothyGeithner

      On a more positive note, I think Democrats misunderstood the anti-Holder sentiment. Team Blue expected outrage over the GOP holding up Lynch’s nomination when she could have easily been passed after the election or even given a recess appointment. My guess is the tabled the vote to rally the troops, and I don’t think anyone cares if AL Sharpton were to go on a real hunter strike.

      Instead, Team Blue is reminding everyone why they keep losing by allowing this story to fester.

    4. human

      “By the way, could some ‘civic minded citizen’ pull off a “Citizens Arrest…”

      Been there. Done that. Bush, Cheney, Clinton (both), Gore (don’t ask)… with the forseeable results of being manhandled by The System as an undesireable.

      Hell, Badnarik and Cobb were both arrested trying to serve papers to The Committee at the ’04 presidential debate in St Paul and Stein was arrested in New York in ’12! Not exactly the same scenario, but what chance does a nobody have?

  2. diptherio

    Dear America,

    You have been, and currently still are, the victim of a fraud. People you trust have, in fact, been scamming you and playing you for the fool. Everybody can see it except for you. I hate to be the one to have to break it to you, but I do it only because I love you, even though I know it will be painful for you to hear and even more so to accept: your government has been fooling around on you.

    Despite its protestations of faithfulness and concern for your wellbeing, your spouse of these last 239 years has been secretly screwing around on you with a bunch of those hot foreign banks that have been hanging around lately. You know the ones I’m talking about. And, honestly, not just foreign banks, either. There’s just something about banks your government seems to find irresistible. You’ve probably guessed as much already.

    If you’ve been wondering why your joint checking account has been so low lately, it’s because your “sweetie” has been giving all your money to its mistresses. And then it has the nerve to tell you that you need to work harder and contribute more to the relationship! The nerve of that a-hole! It was just killing me to see you made such a fool of and abused so badly, so I had to finally say something.

    Call me if you need to talk.

  3. Clive

    Yeah, but… At least all of HSBC’s employees worldwide will have to do mandatory training.(i.e. sit in front of their computer for half an hour clicking through slides then doing a quiz with multiple choices and multiple attempts allowed) which will of course show that the board have taken really, really firm action to prevent any future wrongdoing.

    A sound flogging with a piece of limp lettuce. That’ll surely teach ’em.

    1. cyclist

      Heh, that sort of ‘training’ is very familiar!

      My late parents had banked with Marine Midland Bank, later to become part of HSBC USA, for many decades. In the past, the branch they used had many long time employees (now a rarity) and they were greeted by name whenever they came in. Fast forward to the years when the above money laundering was taking place, my poor mother was lying in a nursing home and wished to have my name put on a small HSBC savings account (probably < $1000) so that I could pay bills, etc. You wouldn't believe the hoops they made me jump through to establish this joint account (my mother never drove, nor did she have a passport: try to come up with all the pieces of acceptable ID). Branch employees were very apologetic: 'but sir, we are required, post 9/11, to make sure accounts are not used for money laundering, etc. etc…."

  4. dutch

    Just as in the case of HSBC where the dysfunction was the outcome intended by senior management, so too is the dysfunction (non-function) at DOJ the intended outcome of the US president. Obama has obstructed justice as a matter of policy, not just in relation to the banks, but also with regard to torture, extra-judicial killing, and mass surveillance of US citizens. Talk about a pattern of criminal behavior. No one can bring a president to justice except the congress, but there is no will to do so. In fact, the president’s criminal acts are the only ones that congress seems to approve of.

  5. Bottom Gun

    Bill Black is way overthinking this. Does anybody happen to have a copy of Covington and Burling’s current client list?

  6. Marc b.

    I’m no expert, but the state seizes property all the time under asset forfeiture laws. These can’t be applied to HSBC?

  7. steelhead23

    Yves, I simply wish to comment on your intro. You betcha’. If Senator Warren wishes to be more than a nag, she should do all she can to derail Lynch’s nomination. This is one place where as senator, she has the power to affect policy. Please Senator Warren, don’t waste it.

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