The nation assailed Mitt Romney back in 2011 for insisting that corporations are people. His words came out ridiculously, but Romney’s point was that any money paid by corporations in higher taxes would ultimately be borne by people, whether executives at the firm or shareholders or their customers. (Where Romney and I differ comes from looking at record corporate profits and knowing that the people who would pay those additional corporate taxes could easily afford them, especially since customers have the choice of choosing where to purchase their goods and services.)
The Justice Department hasn’t internalized Romney’s lesson. Officials there clearly view the “corporations are people” line in the most superficial way, believing that if they force guilty pleas out of corporations, particularly big banks, they will have silenced critics who condemn the lack of accountability for anyone involved in the financial crisis. But the real point behind “corporations are people,” transferred to the financial fraud space, is that individuals commit whatever crime occurs, not the faceless legal entity owned by shareholders.
Related: How Wall Street Is Fighting to Rip Off Your Retirement Money
So forcing the corporation to plead guilty, especially when the Justice Department clears the way by eliminating any consequences from that plea, allows the people behind the corporation to get away with breaking the law. It only infuriates critics more to witness the smug self-satisfaction of Attorney General Eric Holder and his colleagues, boasting of their ultimately empty “get-tough” attitude.
Keep in mind that the Justice Department had to be pushed into doing even this. Prior to this interest in the guilty plea, it mostly enacted “deferred prosecution agreements” with corporations, agreeing not to seek criminal charges in exchange for a cash settlement and some enhanced supervision and monitoring. The U.S. Attorneys’ Manual literally calls these “agreements not to enforce the law under particular conditions.” The conceit is that DoJ can change corporate behavior from the inside with a gentle nudge rather than with the hammer of prosecutions. This predictably leads to failure. Shareholders, not executives, paid the fines. And government reports argue that DoJ cannot even evaluate whether its efforts to alter corporate governance have worked.
Related: Eric Holder’s Shameful Legacy on Wall Street Fraud
The Justice Department has engaged in over 140 deferred prosecution agreements since 2010, including a $1.9 billion deal with HSBC over a decade of money laundering. HSBC was revealed through a massive disclosure this week as a corporate recidivist, repeatedly violating international tax laws by helping 100,000 bank clients avoid their obligations. Questions have been raised about just how much Loretta Lynch, President Obama’s nominee to succeed Holder as Attorney General, knew about that tax fraud when she was heading up the money laundering case as U.S. Attorney for the Eastern District of New York.
Widespread scrutiny over the Justice Departments deferred prosecution deals led to the next innovation: forcing some out-of-the-way unit of the corporate parent to admit guilt. When DoJ settled with the Royal Bank of Scotland in 2013 over rigging Libor, the benchmark interest rate, it forced a guilty plea out of the bank’s Japanese subsidiary. It made a similar maneuver with the Japanese unit of UBS.
Those Japanese subsidiaries did not operate in the United States, and the convictions did not deter the U.S. business of RBS or UBS in any way. Ultimately, the international agency overseeing those Japanese entities sentenced them to just a one-week ban on derivative trading. Japanese authorities did nothing. And this week it was revealed that UBS has continued to break U.S. laws, ignoring a prior deferred prosecution agreement with DoJ, which obviously had no impact on their behavior.
When this “guilty plea at the off-shore subsidiary” gambit faced criticism, DoJ changed tactics again. It obtained guilty pleas from major banks for facilitating tax evasion. Only it chose two foreign banks: BNP Paribas and Credit Suisse. This limited the impact on the U.S. financial system. And DoJ cleared the way even more by removing all the punitive implications of the guilty pleas.
Related: A Modest Proposal for Eric Holder — Back Off the Banks
For example, BNP Paribas reached a deal to retain access to dollar clearing services for six months, giving the bank time to make other arrangements for clients. It also had to fire two dozen employees, all of whom had already left the bank. Similarly, the Justice Department ensured that Credit Suisse would get exemptions from forfeiting its investment-advisory services, supposed to be an automatic penalty for banks that plead guilty. And no business licenses were threatened.
After being blasted for disparate treatment of foreign banks compared to their domestic counterparts, this week, DoJ gave word that it would seek guilty pleas from JPMorgan Chase and Citigroup, among others, for their role in artificially driving up the price of global currency markets. But both the banks and the markets know this is a public relations display at this point. In fact, Credit Suisse and BNP Paribas stocks went up after they pleaded guilty.
No top executive fears the corporate guilty plea. The industry, using the case study of Arthur Andersen in 2002, successfully asserted that any serious loss to their business would impact the entire financial system and put innocent employees out of work. This happens to be a myth (legal analyst Gabriel Markoff found that “no publicly traded company failed because of a conviction in the years 2001-2010”), but DoJ bought it, and created a whole apparatus to defang the collateral consequences of any conviction.
By now, a corporate guilty plea has been rendered as meaningless as a deferred prosecution agreement. Subsidiaries can take the blow rather than the parent company; regulators and law enforcement can remove the implications; and most important, organizations plead guilty rather than people.
If the fear is that pushing too hard to hold corporations accountable can send a ripple effect through the economy and harm innocent bystanders, the best way to get around that is by charging the actual individuals responsible. No corporation ever failed because an executive had to be replaced, and if it does collapse, it probably isn’t a very stable corporation to begin with.
The lack of sanction for individuals drives financial crime. After all, the Justice Department has pursued its prosecution strategy for many years, and new crimes get revealed seemingly with each passing day. Putting individual lawbreakers first could at least make executives think twice about using their corporation as a criminal front.
Related: The Justice Department’s Phony Fight Against Mortgage Fraud
Last December, New York Department of Financial Services superintendent Benjamin Lawsky forced the CEO of mortgage servicing company Ocwen, William Erbey, to resign as part of a settlement over abusive practices toward homeowners. It wasn’t a prosecution (Lawsky doesn’t have the authority to do that) but it did signal that individuals will have to answer for their own misdeeds. As Lawsky has said, “When a corporation does wrong, it has to be that individuals who work at the corporation have done wrong.”
People like me who harp on this point are not seeking random vengeance. We’re interested in the integrity of the criminal justice system. With a separate tier for the rich and the powerful to shield them from prosecution, you can’t actually have a truly advanced country. The Justice Department, with its “corporations are people” game, is facilitating America’s slide into a banana republic.
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