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Financial Fraud Law

Banks on the Financial Fraud Hot Seat, Deputy Attorney General Warns at Money Laundering Enforcement Conference

 Financial fraud lawsuits against banks and bank settlements with law enforcement and regulatory agencies over allegations of financial fraud seem to be a growing part of what we discuss at the Financial Fraud Law Blog and the Financial Fraud Law Report. For example, LIBOR resolutions with Rabobank, Barclays, UBS, and RBS to date have resulted in about $3.7 billion in penalties paid. And just last month, a jury in the Southern District of New York found Countrywide, Bank of America, and a senior executive liable in connection with Countrywide’s “hustle” mortgage program

It does not look as if this trend is going to be changing anytime soon.

Deputy Attorney General James M. Cole, speaking at a money laundering enforcement conference today in Washington, D.C., seems to be putting the focus directly on banks – and on bankers. Here are excerpts from what he said that highlight that:

“Right now, compliance within financial institutions is of particular concern to the [Justice] Department, because we have recently seen cases that involved not only criminal conduct by bank customers, but – more concerning – serious criminal conduct by bank employees, including managerial employees.”


“We are concerned that too many bank employees and supervisors value coming as close to the line as possible, or even crossing the line, as being ‘competitive’ or ‘aggressive.’  Too many seem to be willing to take advantage of any edge – including those of dubious legality – to make money.  Too many supervisors seem to incentivize excessive risk-taking – knowing that risky products can be unloaded down the road, or anticipating that they will have left for another bank by the time such risks are played out, leaving someone else to deal with the consequences.  And we are troubled that many employees believe that their supervisors, including in some cases corporate management, actually want them to behave this way.  Even a single employee who thinks this way is one too many.  And what we’ve been seeing and making public in a number of our recently-announced resolutions should give everyone pause, and cause all leaders and managers within financial institutions to reflect on how they can do better.”


“Labeling certain behavior ‘shameful’ after being caught is simply too little, too late.

“This is why, when deciding whether to prosecute an institution for the actions of its employees, we look hard at the messages that bank management and supervisors are actually giving to employees in the context of their day-to-day work.  We look at chats, emails, and recorded phone calls – things that are readily available to senior management and compliance professionals.  We talk to witnesses in order to determine what kinds of messages about compliance have been conveyed, or, on the flip side of that coin, what encouragement they may have received to exploit any possible edge to make money.  We examine the incentives that banks provide their employees to either cross the line, or to exhibit compliant behavior.  If a financial institution wants to encourage compliance – if its values are not skewed towards making money at all costs – then that message must be conveyed to employees in a meaningful and effective way if they’d like Department to view it as credible.  To have an effective compliance program, we expect banks to put in place procedures to detect problems, and proactively utilize those procedures – without waiting until the government comes knocking at their door with a subpoena.            

“When a problem is identified, we expect banks to undertake a thorough search – at every level, across the institution – for misconduct that may have been committed elsewhere, by similarly-situated employees or in similar business units.  We expect that banks will not look only at employees in the same positions or in the same offices to determine whether they are violating the law – but that, cognizant of the ways in which violations have occurred, they will also look to other places or other types of employees where similar misconduct could take place.  Whenever employees in different units, or in different office locations, or involved in different product lines, are engaging in criminal conduct at the same institution, it is well past time for that institution to think more broadly about problems that may span across the organization as a whole.  In fact, we have seen this pattern in a number of financial institutions and what this tells us is that even if a specific conduct didn't directly involve senior management, that repetition speaks volumes about the culture senior management has create in the institution.  A culture that breeds violations instead of a culture that encourages compliance.”

These comments – from one of the most senior people at the Justice Department – clearly are intended to send a message to financial institutions:  You must do more to help stop financial fraud, or you will face our wrath.  This is undoubtedly not an idle threat; consider that the investigation of LIBOR, as Cole said, “is far from over.” The bottom line from Cole:  “[W]e are more committed than ever to investigating crimes committed by and within financial institutions, and to hold the perpetrators of those crimes accountable.”  It will be interesting to see what happens the rest of this year – and in 2014.

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