How many stern warnings does a bank get before it winds up in real trouble?

Barclays settled with US regulators over its role in the fiasco about manipulating Libor. I’ve mentioned that mess in my other blog. As a part of that settlement, they signed a deferred prosecution agreement.

They were already on probation for an earlier deferred prosecution agreement for money laundering.

A Wall Street Journal article, Corporate Probation: Punishing or Punting? by Michael Rothfeld, gives the details (article behind paywall).

Deferred prosecution agreements are things the US government uses to settle cases. The subject of an investigation doesn’t admit to doing anything wrong and promises not to do it again for a certain period of time. (Mild joke intended.) If they stay out of trouble, the government won’t prosecute. 

The alternative for the government is to indict and risk a loss in court. The alternative for the accused company is to incur the publicity of a criminal indictment, the cost of a trial, and the risk of losing a felony case. For a financial firm, I think that would likely be fatal.

There is a strong argument in favor of such enforcement. Mr. Rothfeld says:

Proponents say the pacts force companies to accept responsibility without crippling them. Some critics say they are used by prosecutors who can’t make strong cases. Others argue the government falls back on them because a “too big to indict” attitude developed after accounting firm Arthur Andersen’s 2002 conviction that essentially put it out of business.

The challenge this time is that Barclays was already under probation for money laundering:

What fueled controversy is that the agreement came less than two years after another Barclays deal with the U.S. government in which the bank received a deferred prosecution agreement and paid $298 million to settle accusations it hid payments flowing into the U.S. from sanctioned countries including Cuba and Iran. U.S. officials said Barclays was rewarded for cooperating with both probes.

U.S. District Judge Emmet G. Sullivan in the District of Columbia issued an order in June asking the Justice Department and Barclays to explain the ramifications of the Libor deal on the earlier case, in which a two-year probationary period expired earlier this month.

Looks to me like the deferred prosecution agreements show the bank helped cooked Libor and also blew off U.S. money laundering rules.

The Justice Department and Barclays responded to the judge by saying the Libor actions took place from 2005 through 2009, which is outside the probationary timeframe of the existing deferred prosecution agreement.

So I suppose that is a valid argument, but it is rather legalistic. The newly discovered bad behavior is outside the timeframe the bank promised to behave itself. Sort of like telling your probation officer that your new arrest for DUI was a week after probation from a prior DUI expired, so get lost.

This also enters into the issues in the capital punishment post I wrote earlier on my other blog.

Not sure how I fit all these things together in my mind. Just pondering at the moment as I connect the dots between current news events.  But I am wondering if there is an upper limit to how many deferred prosecution agreements a big organization can have at any one time.

Update:  Standard Chartered had an enforcement action running in the middle of thier 7 year money laundering program. See post here.

4 thoughts on “How many stern warnings does a bank get before it winds up in real trouble?

  1. All in all it seems you say banks are given too much power, and perhaps there should be greater consequences. I agree with you that banks should not be able to break rules and regulations without more severe consequences simply because the laws they are disobeying are different than before. What would you recommend as punishment for firms that take advantage of these deferred prosecution agreements? What should this “upper limit” be?

    1. Hi Alex:

      I don’t know. That is why I’m scratching my head. A full blown criminal trial and conviction could put a bank out of business. That’s really severe.

      On the other hand, there’s something wrong in a bank that has a structured program to remove identification from wire transfers in order to avoid detection that the wires are going somewhere the US has banned trade.

      See this post:

      Yet on the other hand, there are probably too many individuals involved to find one or a handful to prosecute.

      So, I’m left pondering.

      What do you think?


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