Could BNP Conviction Signal the End of “Too Big To Jail”?

July 1, 2014

Nearly six years since the peak of the financial crisis, U.S. prosecutors are still battling the perception that banks are “too big to jail.”

A pair of victories over the past two months may serve as a critical first step in helping to reverse that impression. On Monday, France’s biggest bank, BNP Paribas, agreed to plead guilty to criminal charges and pay a record $8.9 billion penalty for violating U.S. sanctions against Iran, Sudan and Cuba.

Watch The Untouchables, FRONTLINE’s 2013 investigation of why Wall Street’s leaders have escaped prosecution for any fraud related to the sale of bad mortgages.

Six weeks earlier, Credit Suisse became the largest bank in 20 years to plead guilty to a criminal charge. The Swiss banking giant agreed to pay a $2.6 billion fine for helping wealthy Americans evade their taxes. The settlement, said Attorney General Eric Holder, “shows that no financial institution, no matter its size or global reach, is above the law.”

For the Justice Department, the push for criminal convictions in these two cases marked a shift in strategy could carry important implications for U.S. banks that run afoul of the law.

Since 2008, the Justice Department has been more likely to use a tactic known as deferred prosecution or non-prosecution agreements with domestic banks. The companies can avoid criminal charges if they pay a fine, improve their compliance programs and agree to cooperate with authorities. In exchange, the firms do not have to plead guilty, they are not convicted of a crime and they don’t receive a criminal sentence.

That the U.S. would test a more aggressive strategy against two foreign banks is not entirely surprising, according to Brandon Garrett, a University of Virginia law professor and author of the forthcoming book, Too Big To Jail: How Prosecutors Compromise with Corporations.

In a 2011 study of corporate prosecutions, Garrett found that all else being equal, foreign corporations face fines that are on average 22 times larger than the penalties given to U.S. companies.

The reasons for this disparity are hard to pinpoint, said Garrett. Higher fines might simply mean that authorities only choose to pursue more serious offenses when they decide to prosecute a non-U.S. firm. Another factor may be that U.S. firms are more likely to cooperate with investigators. Foreign corporations, Garrett noted, have historically been less willing to self-report or adopt reforms in exchange for leniency.

“They basically just didn’t know what the deal was,” said Garrett. “So they would get [hit] with harder punishments because they were absolutely non-cooperative.”

Others point to a third factor at play — the so-called Anderson effect. In 2002, the accounting giant Arthur Anderson went out of business following its conviction for obstruction of justice. Ever since, prosecutors have voiced concern that similar convictions could lead to thousands of additional job losses and disruption in the markets. Last May, Holder made a nod to the case when he told senators that the size of some financial institutions may have “an inhibiting impact on our ability to bring resolutions that I think would be more appropriate.”

Holder has dismissed concerns about the Anderson effect, saying last month that “there is no such thing as ‘too big to jail.'”

Still, it’s clear that U.S. prosecutors have “worked very hard to keep collateral consequences to a minimum,” said Peter Henning, a professor of law at Wayne State University. “Local governments, pension funds, things like that will have rules against dealing with somebody that’s pleaded guilty to a crime,” said Henning. “So in a sense, taking on a foreign bank is easier than a U.S. bank.”

Critics point to the recent deferred prosecution agreement between the Justice Department and JPMorgan Chase as an example of the Anderson effect in action. In January, prosecutors were considering criminal charges against the bank for failing to blow the whistle on its onetime client, Bernard Madoff. It was later reported that the $1.7 billion agreement was finalized after the Justice Department failed to gain assurances from JPMorgan’s regulator, the Office of the Comptroller of the Currency, that the bank’s charter would be safe if federal prosecutors filed criminal charges.

The JPMorgan case aside, prosecutors have begun to learn “that by working things out with the regulators they can assure that a conviction will not destroy the bank or the company,” according to Garrett.

Last year, for example, a study in the University of Pennsylvania Journal of Business Law found that no publicly traded company failed because of a criminal conviction between 2001 and 2010. Mirroring that trend, Credit Suisse saw its shares rise the day its conviction was announced. On Monday, the Bank of France said BNP will be able to withstand both its fine and yearlong ban on clearing certain dollar transactions.

It’s still early, though, and for now legal experts say officials will continue to monitor whether BNP and Credit Suisse can survive their convictions long-term. That could clear the way for what critics have increasingly called for since the 2008 crisis — criminal action against U.S. banking giants.

One early target could be Citigroup, which  The New York Times reported in April, is under criminal investigation for fraud at a Mexican subsidiary. As Garrett said, “It’s not enough just to say we convict banks sometimes now. … I don’t think anyone thinks that a fine is enough to hold a company accountable.”

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