A Better Approach to Fighting White-Collar Crime


U.S. authorities have lately been taking steps against Wall Street misbehavior, perhaps seeking to respond to criticism that they have been slow to prosecute white-collar crime. Their settlements with two of the country’s largest financial institutions bear many similarities to deals struck in recent years — arrangements that haven’t done enough to deter bad actors. But there are also some encouraging differences.

Companies can’t commit crimes unless people do, so you’d expect holding individuals rather than entire enterprises responsible to be the norm. Lately, that hasn’t been true. Although common after earlier debacles such as the savings-and-loan bust of the 1980s and the accounting scandals of the early 2000s, charges or serious sanctions against individuals have more recently been rare. Rather than doing the hard work of building cases against the people who actually commit the crimes, the Justice Department has preferred to hit up companies for headline-generating monetary settlements.

In these new cases, officials have imposed heavy fines, as before. Last week, Goldman Sachs Group. Inc. agreed to pay $2.3 billion to settle charges of enabling embezzlement at Malaysian development fund 1MDB — the largest penalty in the history of the 1977 U.S. Foreign Corrupt Practices Act. And last month, JPMorgan Chase & Co. was fined $920 million — the largest ever for the Commodity Futures Trading Commission, and the harshest penalty so far in the Justice Department’s campaign to crack down on a form of market manipulation known as “spoofing.” 

These are serious penalties, of course, but will they work as intended? After all, they are built on the assumption that extracting money from shareholders, who were ignorant of the crimes and in no position to stop them, will improve corporate behavior. Experience suggests otherwise. 

Over the past couple decades, the five largest U.S. banks — including Goldman and JPMorgan — have paid more than $170 billion to settle cases involving money laundering, mortgage-backed securities fraud, bribery and more. Though there is often a promise to strengthen controls and report further wrongdoing, transgressions persist. 

In the 1MDB case, Goldman conceded that its officers participated in a bribery scheme that involved issuing $6.5 billion in debt and diverting much of the proceeds to foreign officials and people connected to them. (Some of the money ultimately found its way into a yacht, fine art and the Hollywood movie “The Wolf of Wall Street.”) Dozens of senior Goldman officials reviewed the debt deals, which were approved despite significant red flags, such as a lack of clarity on what the cash was being used for.

JPMorgan, for its part, admitted that even as it pleaded guilty to currency manipulation in 2015, its traders in other markets were bilking counterparties out of more than $300 million, in tens of thousands of separate incidents over many years extending well into 2016. The misconduct occurred not only in precious metals, but also in U.S. Treasury securities, undermining a market that is crucial to government finance and that serves as the foundation for the prices of everything from mortgages to stocks.

The good news is that the settlements aren’t the whole story. This time, there’s a modicum of something that has long been missing in white-collar cases: individual responsibility. 

In Goldman’s case, Justice has criminally charged the two bankers directly involved in the deals (one has pleaded guilty, the other denies wrongdoing), and the Federal Reserve has barred their boss from the banking industry. What’s more, in an unusual and laudable move, Goldman will cut or claw back some $174 million in compensation from its most senior leaders, signaling perhaps a new and important approach to accountability.

In the JPMorgan case, as Bloomberg News has reported in detail, investigators have worked their way up the chain of command, making cooperation deals in order to focus on managers who encouraged unlawful behavior. Novel legal strategies — such as applying the Racketeer Influenced and Corrupt Organizations Act — may further allow them to impose penalties on individuals, such as forfeiture of any ill-gotten gains.

Greater emphasis on individual responsibility is overdue. To that end, Congress and regulators should provide stronger protections for whistleblowers, require prosecutors to charge individuals when bringing cases against companies, strengthen judicial review of deferred prosecution agreements, and create a dedicated corporate crime unit at the Justice Department. With the right policies in place, the Goldman and JPMorgan cases could prove to be a step in a more just direction.

Editorials are written by the Bloomberg Opinion editorial board.

©2020 Bloomberg L.P.

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