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Sparing the Rod Is Spoiling the Bankers

We have been far too lenient in dealing with, what are defined in law, as criminal actions in banking and finance. It is time to get tough, set examples and hope that fear of jail and personal degradation may make those susceptible to avarice think twice, or perhaps even see company policies, procedures and codes of conduct as desirable individual goals.

Our friends in the U.K. have seen the light. Recently, three individuals were arrested for questioning related to interest rate fixing for Euribor, the eurozone equivalent of Libor. In both rate-rigging cases, the pressure to move from a self-policing setup to more centralized control has grown in both London and Frankfurt. The recent meeting of eurozone finance ministers resulted in an agreement to move forward toward a zone-wide overseeing authority for all major banks. This authority, when established, would either control the Euribor function or have oversight of the Brussels-based organization currently managing the operation.

On Dec. 17 two former hedge fund managers were found guilty of conspiracy and fraud. These convictions by the Manhattan District Attorney bring the totals to 72 indictments and 71 guilty pleas or convictions since 2009. One might ask, if hedge fund managers are criminals, what about bank managers found guilty of money laundering, interest rate tampering or fraudulent reporting?

Numerous actions have been taken by U.S. regulatory agencies against financial institutions for money laundering and sanction violations. However, many indictments of firms and individuals have been made on a civil law basis. The reasons for not following through with referrals by the regulatory agencies to the Department of Justice for criminal indictments are reasonable for large banks. Regulators are reluctant to ask for criminal indictments on banks "Too Big to Jail." Like AIG, a major bank has far too many links to others in the global financial structure and putting one out of business would have major impact throughout the system.

For instance, a criminal indictment by the Federal Department of Justice would provide New York State with a valid basis for pulling that bank's license to do business in New York. But, as in the recent Standard Chartered case, the New York Attorney General chose a big fine over any criminal action. Perhaps the bank proved much too important to the New York financial center to put it out of business. But what about the individuals who violated the law?  Why are executives being sent to jail for insider trading, but few criminal indictments are being brought against individuals in major banks?

Governing or controlling ethical behavior dates back as far as the Old Testament. In the 1960s, behavioral scientists introduced motivation as an alternative to punishment for influencing individual good behavior. Since 1999, the emphasis on good corporate governance has been made at board and top management levels throughout industries.

The DOJ is so eager to separate the bad from the evil that it revised its Federal Court Sentencing advisory guidelines in 2011 to suggest leniency where the board and management of a corporation have made an earnest effort to install and manage ethical policies and controls of illegal actions. As such, in setting up policies and procedures, most corporate codes of conduct set forth guidelines controlling ethical behavior stipulating both a fear factor (the stick) and motivation factors (the carrot).

Financial institutions have always been in the forefront of the carrot approach with bonuses some deem as obscene. It will be interesting to see if Dodd-Frank rules awaiting implementation will affect executive compensation, because, thus far, the deluge of new rules and regulations under the reform has done little or nothing to change the internal environments within financial institutions. In fact, in concentrating on these new rules, the eye on the ball may actually have been distracted from the older and more punitive laws. Money laundering laws go back to 1970, sanctions regulations to 1812 (updated in 1940 and strengthened by Article III of the Patriot Act in 2001).

Who pays the price of these huge fines instead of criminal indictments?  Unfortunately, it is the shareholders and customers who end up with the short end of the stick. It is time we pay more attention to placing blame where it exists and punishment where it is warranted, not foisting penalties off on shareholders, investors, customers and employees.

John Alan James is executive director of the Center for Global Governance, Reporting and Regulation at Pace University's Lubin School of Business in New York City. He is also program director of Pace University's Certified Compliance and Regulatory Professional certificate program.


(4) Comments



Comments (4)
New regulations and more vigorous regulatory oversight will not stop bad actors from doing bad things. The fact that some individuals within an institution engage in illegal activities does not in any way reflect on the entire institution. What is does indicate is that institutions need better internal controls and supervision of individuals in a position to gain financially from unethical or criminal activities. Compensation plans tied to short term performance may play a major role in the problem. The move toward longer term incentives is a move in the right direction.
Posted by seljer | Thursday, December 20 2012 at 1:24PM ET
The biggest unaddressed kahuna of the moment is Jon Corzine and his missing billions. Not a hint of any prosecution, unlike Bernie Madoff, Martha Stewart, and others who have stepped over the legal line. Why is that? Is he so politically connected with Bernanke, Geithner, Holder et al that he has been given a pass? Such an oversight didn't occur with Ken Lay, Jeff Skilling, Bernie Ebbers, etc., so why shouldn't Corzine be pursued these many months after the gross negligence verging on fraud he exhibited, and the attempt to blame underlings for his abject failures? Some articles have suggested he will be allowed to re-enter the securities business at some future point when no one is looking or remembers his misdeeds and AWOL management. SEC/CFPB/FINRA/Sar-Box regulators, where are you?
Posted by brent57 | Thursday, December 20 2012 at 1:04PM ET
Everyone hears 'people, people,people' shouts at business award functions and HR conferences but not at business failures. There it is, more often than not, 'system failure'; and the Government's favorite response, an enactment of a new law or constitution of a new regulatory authority. Businesses are run by 'principle of controllability'; that is, hold a person accountable for what is under his/her control.Focusing on people for punishment, as much as awards, will be good business and good governance.
Posted by Center for Safe and Sound Banking | Thursday, December 20 2012 at 1:04PM ET
Overall..we do not need as much new regulations. We need solid robust enforcement of existing regulations that will and can lead to personal liability.
Posted by onecalifornia | Thursday, December 20 2012 at 12:45PM ET
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