Thursday, July 5, 2018

When to Prosecute a Bank?

Earlier today, the Justice Department announced that it had reached a non-prosecution agreement with Credit Suisse.  The bank admitted to hiring the relatives of Chinese government officials and exempting them from performance reviews in order to curry favor.  The DOJ press release lays out the issue:

“In the banking industry, not every undertaking is fair game,” said Assistant Director-in-Charge Sweeney.  “Trading employment opportunities for less-than-qualified individuals in exchange for lucrative business deals is an example of nepotism at its finest. The criminal penalty imposed today provides explicit insight into the level of corruption that took place at the hands of Credit Suisse Group AG’s Hong Kong-based subsidiary.”

According to CSHK’s admissions, between 2007 and 2013, several senior CSHK managers in the Asia Pacific (APAC) region engaged in a practice to hire, promote and retain candidates referred by or related to government officials and executives of clients that were state-owned entities (SOEs).  The employment of these “relationship hires” or “referral hires” was part of a quid pro quo with the officials who referred the candidates for employment, whereby CSHK bankers sought to and did win business from the referral sources.  Employees of other subsidiaries of CSAG were aware of the referral hires and facilitated the conduct.

In situations like this, DOJ may be unlikely to ever actually indict a major bank because of fears about what the indictment would do to global markets.  Andrew Baker has flagged this issue, explaining that:

the DOJ also instructs their attorneys to consider the “collateral consequences” associated with prosecuting corporations when considering whether to seek charges. Following the indictment and subsequent collapse of the accounting firm Arthur Andersen, federal prosecutors became excessively risk-averse, relying on the collateral consequences carve-out to justify an increasing reliance on alternative corporate prosecution agreements. This shift in practice was misplaced but predictable given the public backlash to Arthur Andersen’s prosecution and the DOJ’s lack of subject matter expertise in determining corporate systemic importance. To regain the public’s trust in equality before the law, the DOJ should divest its undue collateral consequences determination to an agency with the requisite expertise, and such a determination should be made formally and should be subject to public inspection.

From what I know about this particular situation, I don't think it would be appropriate to indict the bank as a whole here for an issue isolated to a Hong Kong subsidiary.  Still, it would be worthwhile to get more insight into how fears about collateral consequences compel the decision to go for a non-prosecution agreement.  It might make sense to break up banks that frequently benefit from this doctrine.

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Bloomberg's Matt Levine's column today has a wonderful take on the issues involved.

Posted by: Craig Sparks | Jul 6, 2018 12:41:06 PM

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