Posted: December 12, 2012
For punishments to work, they need to be both swift and meaningful. The HSBC settlement may be neither.
If a kid does something bad and you want to discipline him — give him a timeout, say, or take away a toy — there are some basic principles that seem to work.
The punishment needs to happen quickly after the bad behavior. And it needs to be significant enough to get noticed. Those rules aren't just for kids; they need to hold true for any type of punishment to be effective.
But if you're a federal regulator punishing a bank, it can be tough to be swift enough and to levee a penalty that's severe enough to make a difference.
Take HSBC, the bank that just agreed to pay the U.S. government $1.9 billion to settle allegations that it laundered money for Mexican drug dealers.
The bank's dealing with the drug dealers took place over a decade.
"This is justice very much delayed, and that may be to a degree justice denied," says John Coffee, a law professor at Columbia and an expert in prosecuting white-collar crime.
Simply punishing the corporation, years after the crime, might not send the message you want, according to Coffee.
"The taking of billions of dollars in cash from Mexican drug cartels and funneling it into the U.S. into legitimate investments, that was done by individuals who knew what they were doing, and no one has been held accountable who is a flesh-and-blood human being," Coffee says.
Then there's the amount of the penalty.
"These fines are large from the perspective of you and me," says William K. Black, a former federal regulator. "From the perspective of the institution, they are simply a cost of doing business."
Black points out that the $1.9 billion fine amounts to about one month of profits for the bank.
There was something that the federal government could have done to punish the bank that really would have hurt: It could have indicted HSBC for laundering money for drug cartels. It could have revoked HSBC's federal insurance and made it impossible for the bank to operate in the United States.
But Lanny Breuer from the Justice Department says the government didn't want to punish all of the innocent people who worked for the bank who would lose their jobs. He said when he announced the settlement this week that HSBC had cleaned house, was promising to have more oversight and was cooperating.
"We've gone after the cartels, we've gone after the traffickers," Breuer said. "And in this particular case, we have held a financial institution absolutely accountable."
But is $1.9 billion enough of a punishment to make all the other banks take notice? Will it scare bank managers out of doing business with shady clients?
Clearly, no institution wants this kind of bad publicity. But in the past, Coffee says, the lessons that really shook up industries involved criminal indictments, not just money.
Decades ago, for example, junk bond king Micheal Milken was charged with insider trading and went to jail.
"I think that sent a message for a decade to Wall Street that this was very dangerous behavior — don't go anywhere near it," Coffee says. "And I think that message was internalized. I think most people did understand and did obey that norm."
HSBC agreed to pay money, sure. But the settlement was over quickly. So far, even the stock price is holding steady.
Clarification: In an early radio version of this story, a former regulator was quoted speculating that Treasury Secretary Timothy Geithner did not want to put HSBC out of business. We should have made it clear that it is the Justice Department, not the Treasury Department, that made the decision to defer prosecution of HSBC.
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