Six Takeaways from Senate Bruising of Regulators on 'Too Big to Jail'

WASHINGTON — Lawmakers savaged the Treasury Department and banking regulators on Thursday over their failure to enforce anti-money laundering laws and the lack of criminal prosecutions against large banks for violating those provisions.

Although the focus of a Senate Banking Committee hearing was meant to be anti-money laundering, the surprising comments by Attorney General Eric Holder on Wednesday — in which he said big banks were difficult to prosecute because of their systemic importance — overshadowed much of the discussion.

Several lawmakers, including Sens. Elizabeth Warren, Mark Warner and Jeff Merkley, seized on those comments while pressing regulators on why more was not done to punish HSBC last year for its mass of money-laundering problems. The bank settled for $1.92 billion — a record fine — but neither the institution nor its executives have faced criminal prosecution, a decision lawmakers could not understand.

Following are key takeaways from the hearing and what it means for banks' anti-laundering rules and the battle over "too big to jail."

1. Senators want blood.

Democratic lawmakers pulled no punches in expressing their frustration with regulators and Treasury over what they described as an inability to get tough on big banks.

"HSBC paid a fine, but no one individual went to trial, no individual was banned from banking and there was no period to consider shutting down HSBC's activities here in the United States," said Warren, D-Mass. who made waves during her first hearing on the panel earlier this year for expressing similar concerns about the lack of criminal prosecutions.

"So what I want, is you're the experts on money laundering, I'd like your opinion -- what does it take, how many billions of dollars do you have launder from druglords and how many economic sanctions do you have violate before someone will consider shutting down a financial institution like this?"

2. Regulators struggled to explain why HSBC wasn't prosecuted.

Witnesses warded off attacks from Warren and others by arguing that those decisions remain in the hands of DOJ, a point lawmakers were quick to dismiss.

"How would you explain it to your neighbor asking you?" asked Merkley, D-Oregon.

David Cohen, the Treasury undersecretary for terrorism and financial intelligence, responded, "What I would tell my neighbor is the agencies within my area of responsibility took action in this circumstance in an extraordinarily aggressive way."

"We're working on this investigation with the Justice Department, but at the end of the day it's the Justice Department's sole prerogative to determine who to prosecute, when to prosecute and what to charge," he said.

But the Federal Reserve Board Gov. Jerome Powell acknowledged that the current process raises very real questions about the fairness of the system — questions that he said he would find difficult to answer at this juncture.

"It's absolutely fundamental that we're all equal under the law. And that's why we're all committed to ending 'too big to fail.' In the first instance, Congress has passed Dodd-Frank, and the agencies are vigorously implementing title I and title II," he said. "The question in the end is, is that enough? And I think we'll know the answer to that in the relatively near future. It's a game plan that cannot be implemented overnight. Until we finish that, I'm not sure I could look that guy [my neighbor] in the eye, if you asked me to say how it's fair."

3. Lawmakers aren't just talking about bank prosecutions, and regulators are stepping up efforts to target individual bank executives.

Several lawmakers also raised concerns that regulators have more at their disposal than fines to punish institutions violating the law, including injunctive action, and that they shouldn't simply wait for Justice to file criminal charges.

"The point that we've all been raising is … while each of you kind of say, 'all right, let's pass the potato over to the Justice Department,' you have other remedies other than fines in terms of injunctive action and other authority that has not been used. It's not an either-or as you've responded to these other senators," Warner, D-Va., who led most of the hearing, told witnesses.

To those concerns, regulators and the Treasury Department appeared open to exploring other avenues going forward.

"We will go back and look at whether there's a possibility of taking injunctive action during the course of an investigation as a sort of preliminary measure to ensure that the conduct stops before we get to the finish line," said Cohen.

Comptroller of the Currency Thomas Curry added that his agency already orders illegal activity to stop as soon as an examination uncovers it. He also spoke during the hearing about ongoing work to hold top executives more accountable for institutional violations.

"We believe at the OCC that you need to hold the CEOs and the boards of directors accountable for BSA-AML policies and procedures and their compliance programs. You need to establish that basic premise first before you can start assessing criminal or civil liability," said Curry.

"And that's where we're going. That's why we're looking under our authority under section 8 of the [Federal Deposit Insurance Corporation] Act to actually remove from office or prohibit from banking those individuals that violate BSA programs. So we're looking to try to tighten up the legal duties and authorities of individuals at banks to enable us to take the appropriate level of civil and administrative and potentially assist the criminal authorities."

4. Regulators, Treasury and Justice need to collaborate more.

Warren and others also raised concerns about the agencies' ability to coordinate their efforts and work together toward a common cause.

"Why aren't the four departments trying to figure out money laundering? I read through your reports — they seemed to overlap significantly, they seemed to have a lot of people with the same expertise and yet not quite the same expertise. Why is this not consolidated into a single function?" Warren asked the panel.

The Fed's Powell acknowledged her concern.

"Twenty years ago when I was in the first Bush administration, we proposed to merge some of them and they're still not merged. … I think there have been a lot of attempts over the years," he said. "But more to the point, this is our system and I think the obligation is on us to play as a team and collaborate and I think we try very hard at that, and I would say particularly in recent years you see a lot of inter-agency collaboration."

Sen. Heidi Heitkamp, D-N.D., a former state attorney general, also pressed regulators on the impact they can have in helping Justice reach a conclusion about whether or not to prosecute.

"Any of us who have ever done any kind of civil regulation, which could impact the criminal, knows that it is the civil regulators that have the knowledge and can encourage and can be the pain in the room when that decision gets made, and if you aren't willing to play that role then we've failed," she said.

Heitkamp added: "I understand that you cannot dictate to the Department of Justice that they prosecute cases. But you can be a very strong voice. You can either play the role of saying, 'here's the case and good luck,' or 'here's the case, we will help. We strongly urge you and encourage you and if you just decline it, we are going to ask serious questions of you as to why you declined to prosecute this case.'"

5. Treasury declined to weigh in on the economic consequences of an HSBC prosecution when Justice asked.

Cohen reiterated earlier statements that the Justice Department approached the Treasury Department to weigh in on the possible impacts to the financial system of pursuing a criminal case, but that the agency refused to offer its opinion. This has been a key point raised by observers who argue that some institutions are "too big to prosecute," because of the damage it could cause to the larger economy.

While Holder did not comment on the HSBC case specifically, one of his top lieutenants suggested last fall it was a key reason Justice did not pursue criminal prosecutions against the bank.

But Cohen said if someone advised them that prosecuting HSBC hurt the economy, it wasn't Treasury.

"The Justice Department contacted us, asked whether we could provide guidance on what the impact to the financial system may be of a criminal disposition in the HSBC case," said Cohen. "We informed the Justice Department that given the complexity of the potential dispositions, given the fact that we're not a financial regulator, given the fact that we're not privy to the different charges that the Justice Department may bring, and we're not privy to the responses that the regulators may have to the variety of ways that the Justice Department may develop the case, that we were not in a position to offer any meaningful advice to the Justice Department in that matter."

But that answer still did not sit well with lawmakers.

"So you just said to the Justice Department that you're on your own in figuring this out," Warren said.

Powell and Curry, meanwhile, said Justice officials didn't question their respective agencies specifically about the economic impact of criminal prosecution.

6. Banks have scaled back considerably on anti-money laundering resources at a time when illegal activity is becoming harder to detect.

Regulators also spoke of the hurdles facing them, including overseeing banks that have been investing less in critical compliance programs during lean economic times.

"In the wake of the financial crisis, too many banks inappropriately cut staffing and spending for [Bank Secrecy Act] and anti-money laundering compliance as austerity measures, and our examiners are now working to ensure that these institutions have resources they need to maintain solid BSA-AML programs," said Curry.

Those cuts come as online banking and alternative payment methods like prepaid cards have exploded, making regulators' jobs all the more difficult.

"The bad guys have huge incentives to find new ways to penetrate, and the issue is we have to stay ahead of that," said Powell. "They're very well-funded, have really great resources, and you've got this global financial system with prepayment cards and mobile payments and all that kind of thing. We're in a race with them to do that, and that is the risk."