Recently, for the first time since 1989, the U.S. government launched criminal prosecutions against a financial institution and its traders. The charges against the Japanese arm of Swiss banking conglomerate UBS were brought at the tail end of a month that also saw the largest British bank HSBS receive the largest civil penalty in the history of American banking regulations, a staggering 1.9 billion dollars. The question then, is why one bank received the criminal sanction, while the other got only a civil fine, when onlookers speculate that HSBC committed the greater crime.
To begin, it is probably helpful to have a brief overview of both the scandals. UBS was involved in the sort of oddly complicated, plainly unethical, and dubiously legal scheme most of the world has come to expect of the financial services industry. The scheme involved trades made by UBS bankers and brokers where they essentially made bets on what the London interbank offer rate (“LIBOR”), the rate at which banks lend money to one another, would be at some certain point in the future. The problem is that the LIBOR was determined not by some objective market metric, but by polling the major banks and asking them what they thought their offer rates would be. This included a poll of UBS. UBS naturally began manipulating the LIBOR poll, sometimes alone, sometimes in collusion with other LIBOR banks, in a manner that allowed it to handily win these bets.
HSBC, on the other hand, was accused of laundering money for Mexican drug cartels, terrorist organizations, and rogue states. US banking laws, in contrast to those of Switzerland or the Cayman Islands, require banks to report, flag, and in some cases halt a wide number of transactions based on a number of factors including country of origin or size of transaction. HSBC was circumventing these regulations through a combination of passively failing to monitor transactions adequately and actively attempting to circumvent the regulations. Of particular note is HSBC’s attempt to avoid the OFAC filter, which is a mechanism whereby transactions from nations such as North Korea and Iran, which the U.S. Treasury Department have concluded are universally suspect, are supposed to be automatically halted while they are investigated. HSBC was apparently scrubbing origin information from wire transfers in order to circumvent these security measures.
Now, at first glance, it certainly seems that HSBC and its officers would be more worthy of criminal prosecution. Certainly the potential harm caused by HSBC was the more severe, because people might well have died as the results of HSBC facilitating wire transfers for dangerous criminal organizations, and it is almost certain that drugs, guns, and worse were bought and sold in contravention of American law. In contrast, UBS’s actions resulted in indeterminate losses to a series of sophisticated investors, many of whom were likely aware of HSBC’s tactics, making calculated bets (with the possibility that there were secondary effects on mortgage markets and other lending pegged to the LIBOR).
HSBC’s actions also appear to be a more clear and flagrant violation of the law. Treasury department regulations, many of which stem from the Patriot Act, set up very clear requirements that HSBC disregarded in both letter and spirit. By contrast, while UBS’s actions are clearly unethical, they were not self-evidently illegal. The banks have no primary duty to report a LIBOR at all, and the charges against them are based on the theory that their counterparts in these bets were unaware that they were willing and able to manipulate the LIBOR, constituting fraud.
I see only one distinction between the acts of HSBC and UBS that explains why UBS and its traders face criminal charges and HSBC and its traders do not. The difference is that the actions of UBS can more easily be characterized as the actions of a rogue group within the bank, whilst HSBC’s actions seem to stem from high-level decisions implicating the bank as a whole. Because of this, the Department of Justice could file criminal charges against only relatively low-level traders, and only the Japanese arm of the bank for which they worked. The Japanese arm, since it is not a US bank, cannot have its charter revoked. Essentially, the DOJ decided that both banks were, as former TARP commissioner Neil Barofsky put it, “too big to jail,” so it give criminal sanctions only to the bank that it could not really hurt. If this is so, it would seem to set another rather alarming precedent, encouraging banks to break the law whenever the benefits of doing so outweigh the likely fine (in this case HSBC’s fine represents about 4 weeks of profits). One can of course understand a certain hesitancy to potentially put a large bank out of business with memories of the financial crisis still so fresh, but it seems that the line really must be drawn somewhere, and there must be some conduct so egregiously illegal and dangerous that the risk is justified. If it is not here, I have difficulty imagining where it might be.