In May of 2014, Zurich, Switzerland-based Credit Suisse became the first major bank to plead guilty to criminal charges in the United States, offering a mea culpa to aiding tax evasion on behalf of its American clients. Two months later, the French bank BNP Paribas pleaded guilty to criminal charges involving violations of laws regarding countries sanctioned by the United States such as Iran and Sudan, and settled with U.S. regulators for close to $9 billion. (Banks are not supposed to aid transactions with countries hostile to the United States.) With news of some of the first criminal prosecutions of major banks since the financial crisis, Bank Director decided to ask a panel of legal experts whether smaller banks had cause for concern.
What does the shift toward criminal prosecutions of some of the largest banks mean for smaller or regional banks, if anything?
It is my belief that the criminal prosecutions at the larger banks are intended to have a preventative effect on smaller or regional banks. The idea is that if they can go after the big guys then they certainly can go after those of us that are smaller as well. But, smaller organizations should use it as a marketing strategy to show the differences between the large banks and more community or smaller banks who are not engaged in the types of activities that draw scrutiny.
—Philip K. Smith, Gerrish McCreary Smith
The danger is that smaller banks may conclude that the Department of Justice (DOJ) would consider criminal penalties for only the largest, and possibly non-US banks. In reality, it is very possible that under the right circumstances, the DOJ could seek a criminal conviction of a smaller bank. For example, if a bank has committed [anti-money laundering] violations on several occasions, DOJ might want to make an example for similar institutions. It’s happened at least once before, although with different facts. Moreover, the possible systemic repercussions of such a prosecution could be perceived as relatively minor. There have been complaints that DOJ has not brought enough criminal cases following the financial crisis, so widening the net to include smaller entities may be perceived as a credible response to those criticisms.
—Donald N. Lamson, Shearman & Sterling LLP
Nothing. There’s a rush to say that holding gigantic institutions criminally accountable means that smaller institutions will be next. But that doesn’t apply here, where you have criminal sanctions for conduct that occurred back in 2006 to 2007. Nothing changes this past conduct —the sanctions are aimed at punishment instead of other common goals (like deterrence, incapacitation, rehabilitation, or restitution). The lesson is more subtle: In the big banks’ bad conduct, licensed professionals knew what was going on but didn’t stop it. Absent collusion by the people entrusted to serve as gatekeepers to the financial system, the mortgage-backed securities could not have made their way into the mainstream and contributed to the market crash. So the easiest way to avoid criminal accountability is to maintain the integrity and independence of your gatekeepers. That’s what the big banks failed to do—and why they were held criminally accountable.
—Shamoil T. Shipchandler, Bracewell Giuliani LLP
While it is never comforting to learn that federal prosecutors are turning their investigative and prosecutorial eyes toward your industry, small and regional banks should not lose sleep over the fact that the feds are seeking criminal prosecutions at the biggest banks. The targets have been the largest of the large Wall Street and multinational banks; the ones the media and politicians have conditioned the public to despise. It will be a long time, if ever (most likely), that the criminal focus turns to main street banks.
—Michael Dailey, Dinsmore & Shohl LLP
Attorney General [Eric] Holder famously asserted that while a corporation could be prosecuted just as any other “person,” prosecutors should consider the “collateral consequences” on “innocent third parties” including the “corporation’s officers, directors, employees, and shareholders.” Criminal prosecutions of large banks have potentially huge collateral consequences. These collateral consequences are not as pronounced with regard to a smaller bank, but nevertheless will (and perhaps should) cause the prosecutor to think twice. On the other hand, it is also easier for a prosecutor to prove criminal intent in a smaller institution, which is less layered and siloed.
—Clifford S. Stanford, Alston & Bird, LLP