WASHINGTON — Earlier this month a federal court sentenced Karen Gasparian, head manager of a Los Angeles check-cashing company, to five years in jail after she pleaded guilty to a series of money laundering charges. The company's compliance officer, Humberto Sanchez, was sentenced to eight months.

G&A Check Cashing was fined nearly $1 million and will be on probation for two years. Gasparian and the company were also ordered to forfeit just under a quarter million dollars related to funds that had moved through the check cashing company illegally.

Top officials at the Department of Justice had tough words for the defendants, who pleaded guilty to charges of conspiring to fail to file currency transaction reports — required documentation for payments or transfers of more than $10,000 — and of failing to have an effective anti-laundering program.

Gasparian, Sanchez and G&A "purposefully thwarted the Bank Secrecy Act, making it easier for others to use G&A to commit illegal activity," Lanny Breuer, assistant attorney general of the Justice Department's criminal division, said in a Jan. 14 press release. "They knew they were required to report transactions over $10,000, but deliberately failed to do so. As this case shows, check-cashing businesses must adhere to our anti-money-laundering rules, or else pay the consequences."

But the case also highlighted the disparate treatment of certain institutions for violations of anti-laundering laws.

While G&A was hit with criminal penalties, the Justice Department took no criminal action against the much larger HSBC, either individually or at the bank itself, despite the fact that it was accused of arguably worse crimes, including enabling drug runners and terrorist financing.

Although HSBC ultimately agreed to a costly settlement, a number of critics are asking if large institutions are receiving lighter treatment because of their size, while smaller banks and nonbanks get the book thrown at them.

The G&A case "clearly demonstrates that these laws can be enforced through the criminal process, and that the process can establish sufficient guilt to jail offenders," said Lawrence Baxter, a former Wachovia executive now teaching at Duke University's law school. "But for the lack of publicity surrounding the L.A. convictions, I am confident that there would be public indignation at the differential treatment that those convictions and the never-ending series of 'settlements' reached with most of the large banks over AML violations seem to suggest."

It is hardly just HSBC. Regulators have hit other institutions in recent weeks, including Standard Chartered Bank and JPMorgan Chase, for significant violations of anti-laundering laws, yet so far there have been no criminal prosecutions. The concerns extend beyond anti-laundering charges to other types of cases. Several critics, for example, have warned about the dearth of criminal prosecutions against bank executives for transgressions in the mortgage industry and elsewhere leading up to the financial crisis.

Observers say concerns about the basic fairness of the U.S. justice system have real potential to further erode public trust in the biggest institutions and the government officials that oversee them.

In an American Banker reader poll conducted from Dec. 17 to Dec. 23, a mere 8% of respondents thought authorities took the right course with HSBC. Just under half, 47%, said that the Justice Department should have prosecuted the bank; 45% said that authorities should have gone after the individuals responsible for the violations.

"The Justice Department has undermined public confidence in the fairness of our system through its repeated use of deferred prosecution agreements for 'too big to fail' banks and its consistent failure to prosecute senior executives of those banks," said Arthur Wilmarth, a professor at George Washington University's law school. "Concerns about the 'stability' of the financial system do not justify DOJ's policy of leniency for TBTF banks and their executives, especially when DOJ routinely indicts smaller institutions and sends their managers to jail for similar offenses."

Collateral Damage

The DOJ and regulators announced the record $1.92 billion settlement with HSBC last month as part of a deferred prosecution agreement with the bank for a number of crimes. As part of the agreement, HSBC admitted guilt to a host of violations — standing by as drug traffickers laundered hundreds of millions of dollars, failing to monitor billions of dollars in wire transfers and knowingly permitting hundreds of millions of dollars to move through the financial system on behalf of banks in Cuba, Iran and Sudan, despite U.S. sanctions against those countries.

Observers said that Breuer offered a rare window into the Justice Department's thinking last fall, during a speech before the New York City Bar, on the rise of deferred prosecution and nonprosecution agreements. Both are deals made with the government in which a company or individual defendant agrees to make certain changes in exchange for having those charges dismissed or not filed in court. If the contract is breached, the government reserves the right to renew the charges.

The Justice Department's Breuer described how such agreements can help the government avoid some of the collateral damage associated with indicting a company, including harm to the larger economy.

"In my conference room, over the years, I have heard sober predictions that a company or bank might fail if we indict, that innocent employees could lose their jobs, that entire industries may be affected, and even that global markets will feel the effects. Sometimes — though, let me stress, not always — these presentations are compelling," Breuer said in the speech.

Similar warnings were made at a press conference announcing the HSBC agreement.

"If you think that by doing a certain thing you risk either a charter being revoked, you think that counterparties in a massive financial institution may go away, you think that there is a risk that many, many innocent people will be harmed from a resolution, and by another resolution you think you can mitigate the risk of innocent people suffering, the economy being affected, and you can home in on those and the institutions and address the issues underlying, to the Department of Justice, that's a very real factor, and so it is a fact that you consider. It's one factor," Breuer said.

Observers agree that minimizing damage is an important social goal, one that should be considered as prosecutors review the merits and challenges of a case.

"The reason we do it this way is corporations aren't people, and we don't want to impose the costs on society. There are other people not involved in the offense," said Samuel Buell, a professor at Duke University's law school and former federal prosecutor. "If we can get everything we can get in a criminal case anyway and all the criminal case does is create ripple effects that hit other people, then let's skip that part."

But such considerations appear not to apply in cases involving small, closely held firms, said Jennifer Arlen, a professor at New York University's law school.

"It's quite likely that when a closely held firm commits a crime, the owner of the firm either helped commit the crime or was complicit in it. In those cases, a conviction of the firm and corporate debarment may be the most effective way to punish the person," she said.

Others emphasized the goal of rehabilitation, arguing that Justice's settlements go a long way toward righting the wrongs within a company.

"I always felt that the enforcement goal is to remedy the long-term practices," said Richard Riese, a senior vice president handling compliance issues at the American Bankers Association.

In addition to its monetary fine, HSBC must overhaul its anti-money-laundering program, "claw back" deferred compensation bonuses given to some senior executives and compliance officers and retain an independent compliance monitor for five years. Its leaders say that process is already underway.

"The HSBC of today is a fundamentally different organization from the one that made those mistakes. Over the last two years, under new senior leadership, we have been taking concrete steps to put right what went wrong and to participate actively with government authorities in bringing to light and addressing these matters," Stuart Gulliver, group chief executive at HSBC, said in a Dec. 11 statement. An HSBC spokesman declined to comment beyond that release.

In addition to bringing in new senior leadership, including former top anti-laundering Treasury officials Stuart Levey and Robert Werner, and restructuring its compliance and AML programs, the bank has also said it has increased its anti-laundering spending ninefold from 2009 to 2011, and its relevant staff by tenfold from 2010 to 2012.

"How much do those improvements change if there's criminal prosecution? I'm not convinced they do," said John Byrne, executive vice president of the Association of Certified Anti-Money Laundering Specialists.

The DOJ added that it can still pursue the case if the bank fails to make agreed upon changes.

"Deferred Prosecution Agreements do not prevent prosecutions of culpable employees, and they do not let banks off the hook. Banks can still face charges if they do not make specific, fundamental changes to culture and practices as required by the agreements," said Rebekah Carmichael, a spokeswoman for the Justice Department.

'Ultimate Insult'

Still, many have responded to the settlement with disdain for the basic message they said it sent about parity under the law. For some, a basic and almost instinctive sense of unfairness trumps practical justifications about economic damage and even innocent employees and shareholders. To them, the deal just doesn't sit right given the scope and severity of HSBC's lapses.

Several lawmakers, including former Rep. Barney Frank, D-Mass., and Sens. Jeff Merkley, D-Ore., and Chuck Grassley, R-Iowa, wrote letters to the Justice Department expressing frustration with the agency's handling of the case. The issue may continue to be a focus on Capitol Hill this year as part of lawmakers' efforts to further address concerns over "too big to fail" institutions.

"The Banking Committee will continue its oversight of the financial services industry to help ensure there is a level playing field and all financial services institutions are held accountable for their actions," said a Democratic Senate Banking Committee aide, speaking on condition of anonymity. "Throughout the last Congress, the committee conducted careful oversight on a wide range of anti-money-laundering and Bank Secrecy Act issues that have arisen in recent years. The committee plans to build on those efforts early this Congress by holding a full committee hearing on these important issues."

Some in the media also voiced strong outrage and concern over the Justice Department's handling of the case, warning that it undermined the government's strong stance on the "drug war."

"If you've ever been arrested on a drug charge, if you've ever spent even a day in jail for having a stem of marijuana in your pocket or 'drug paraphernalia' in your gym bag, Assistant Attorney General and longtime Bill Clinton pal Lanny Breuer has a message for you: Bite me," Rolling Stone's Matt Taibbi wrote in a Dec. 13 blog post. He called the HSBC settlement "the ultimate insult to every ordinary person who's ever had his life altered by a narcotics charge."

Neil Barofsky, the former inspector general for the Troubled Asset Relief Program, wrote that the Justice deal with HSBC was "beyond unfair" in a Dec. 12 column on The New Republic's website.

"They are downright terrifying for weakening the general deterrence for megabanks, both foreign and domestic, which could rationally interpret yesterday's actions as a license to steal," Barofsky added.

Some have even argued that the anti-laundering lapses are grounds for the regulators to revoke the bank's license to operate in the United States or break up the company into small businesses.

Comptroller of the Currency Thomas Curry fielded several questions about the bank's license at the press conference announcing the settlement, arguing that provisions to rescind it were not triggered because the bank was not formally prosecuted, even though it had admitted guilt to the charges as part of the deferred prosecution agreement.

In an interview last week, Curry said bank regulators were more focused on getting problems corrected rather than criminal penalties. "From our standpoint, as a bank regulatory agency, our job is to, one, identify the problems and then mandate that they get fixed," he said. "I don't think it's our role to avenge or to punish per se."

Still, he acknowledged that if "someone violates a criminal law in banking, they ought to be prosecuted."

William Black, a professor at University of Missouri-Kansas City's law school, has argued that the Dodd-Frank reform law contains language that would allow regulators to wind down the bank and break it up into smaller entities now.

"They're telling us they now have a system in place for resolution. If they're not going to use it to resolve fraudulent places, what's the point?" said Black, a former Office of Thrift Supervision official and author of "The Best Way to Rob a Bank Is to Own One." "That's precisely the type of place you'd want to fix before there's a catastrophic collapse," Black said.

Guilty Parties

Moreover, others watching the case argued that the debate over whether or not to indict corporations is misplaced, because the emphasis should be on the guilty employees individually.

"To me, prosecutors considering nonlegal reasons not to indict a TBTF bank is a straw man argument," said Jeff Connaughton, a former White House attorney, lobbyist and author of the recently published "The Payoff: Why Wall Street Always Wins." "Why not target individuals, in fact, the highest people in the organization who had actual knowledge the violations were occurring? No individual is too big to prosecute or too big to jail."

The DOJ said investigating wrongdoing by employees at a firm remains a top priority.

"Regardless of the size of a company or the role of an employee, the Justice Department must have evidence that a person knowingly broke the law in order to bring a criminal charge — which is the department's legal obligation. The department does not shy away from prosecuting individuals when the evidence is there to prove a crime, and diligently seeks that evidence," Carmichael said.

But it turns out that is also a tricky proposition. The bar to convict individuals of a crime is high, and criminal activity can be difficult to detect, especially when workers and executives are part of a large, publicly held firm.

"Most corporate crimes are very complicated and involve behaviors — for example, the release of financial statements — that look a lot like normal business practices," Arlen said. "They do not announce themselves. There is no dead body on the street. There is no drug transaction."

That's part of why prosecutors have moved to using deferred prosecution agreements to encourage cooperation with companies as a way at getting at the guilty individuals. But there are still concerns about whether those individuals are ever actually held accountable.

"If you create an environment where employees recognize that they will be liable even if they are following orders, you'd get more resistance" to doing something illegal "and more actions by employees to document managerial involvement and therefore more ability to get the managers," Arlen said, adding that stronger whistle-blower laws and better funding of enforcement agencies could help.

Meanwhile, there are other cases pending that could redeem the perception of the government by pursuing individual prosecutions, including its handling of a long-running rate-manipulation scheme involving the London interbank offered rate.

The Justice Department settled with UBS last month, and has filed charges against two of the bank's former traders. A number of investigations against other banks involved in the Libor scandal are still pending, according to press reports.

"Libor is a new set of issues, and it may be that a very slow-to-gear-up Justice Department and FBI are now more organized in a resource-heavy way and may do a more credible and thorough investigation on Libor than they did on HSBC or the financial crisis," said Connaughton.

Changes in management at the top of Barclays as a result of the Libor crisis may be evidence of how corporate cultures can be changed as a result of vigorous prosecution.

"Anthony Jenkins, who replaced Bob Diamond as CEO at Barclays in the wake of the Libor scandal, … has been steadily taking Barclays back to its more traditional, much less freewheeling culture," Baxter said. "This … is a salutary example of how vigorous enforcement action can help change the culture of greed at financial institutions, and that Jenkins is displaying the kind of leadership that offers hope of real transformation of the industry for the better."

Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access