Big Banks Have a Get-Out-of-Jail-Free Card

Large banks are now virtually immune from criminal prosecution.

It's true and not for any of the dark or nefarious reasons that some would have you believe. The reason for their potential immunity can be traced back to a 1999 pronouncement by the Department of Justice regarding the federal prosecution of corporations.

In that memo addressed to all U.S. Attorneys, the DOJ outlined the factors to be considered in determining whether to prosecute corporations. One of those factors is "collateral consequences". In determining whether to file criminal charges against a bank, or any corporation, U.S. Attorneys were ordered to weigh the impact that the prosecution would have on unrelated parties. The prosecutors were to take into account the "disproportionate harm to shareholders and employees not proven personally culpable". It is this concern for innocent parties that may make banks practically bullet proof (at least from criminal charges).

The top ten banks in this country currently employ over a million Americans. Millions more are shareholders in major banks, either directly or through investment funds. Any criminal action brought against one of the larger banks would almost certainly cause serious collateral consequences. How serious? Well, consider that during Rudolph Giuliani's term as U.S. Attorney for the Southern District of New York he brought criminal charges against four financial firms: Drexel Burnham, Republic New York Corporation, Bankers Trust and Daiwa Bank. Of the four, Drexel was closed, Republic and Bankers Trust were acquired and Daiwa no longer has branches in the U.S.  Each outcome resulted in significant layoffs and substantial losses for their investors. Yet these firms combined had less than a quarter of the employees of today's megabanks.  

So while it is prudent to consider all the reasonable options when trying to determine how best to chastise wrongdoers in the financial community, I would argue that criminal prosecution is no longer a viable option. Anyone who has ever worked at a large global bank knows that it is only possible to manage such behemoths by creating silos or fiefdoms within these giants. While a few in senior management may have some sense of what is happening throughout the organization, there are tens of thousands of regular employees who know little of what is happening outside of their branch or department.

Prosecutors recognize that the likelihood that "criminal enterprise" runs throughout an institution or permeates the culture is minimal. There are probably a few "bad eggs" in any large organization, but a criminal prosecution of one of the nation's megabanks would have far-reaching consequences. The benefit of ridding the financial world of such malefactors would be far outweighed by the harm to the multitudes of innocent parties.

To be clear, the guidelines on federal prosecution of corporations do not preclude bringing criminal charges against a company. The memorandum recognizes that some collateral consequence is to be expected, stating, "Virtually every conviction of a corporation, like virtually every conviction of an individual, will have an impact on innocent third parties, and the mere existence of such an effect is not sufficient to preclude prosecution of the corporation."

But it is time that we addressed the matter frankly. The idea of bringing criminal charges against one of the nation's larger banks has become untenable. The potential cost in jobs, probable shareholder losses and market turmoil would be horrific. The satisfaction of pursuing criminal charges against a major financial institution cannot be justified in exchange for rooting out what is likely only a handful of wrongdoers. Our prosecutors are sensible enough to recognize that despite the potential short-term fanfare that such a criminal filing might bring, it cannot justify the awful cost in jobs and market losses that is certain to occur.

Criminal charges will still be brought against individuals. Civil fines will continue to be levied against banks with the dual purpose of compensating injured parties and modifying illicit behavior. However, we must accept that the collateral consequences of bringing criminal actions against major banks have become too great and any threat to prosecute is almost certainly an idle one.

Richard Magrann-Wells is a senior vice president and the Financial Services Practice Leader for Willis North America.