The U.S. government’s plan to extract criminal pleas from five global banks related to currency manipulation, along with penalties of billions of dollars, sounds harsh. It may also, say some former regulators and prosecutors, have little bite.
They might call it “Guilty Lite.”
The threat of criminal prosecution “may be kind of cheapened,” Harvey Pitt, a former chairman of the Securities and Exchange Commission, said of the settlements, which are expected to be rolled out concurrently. If “everybody is getting indicted or prosecuted, then you really haven’t created more and necessary respect for the law.”
Two of the biggest U.S. banks, Citigroup Inc. and JPMorgan Chase & Co., will admit roles in manipulating foreign-exchange markets as soon as Wednesday, people familiar with the talks have said. They’ll pay about a $1 billion each, with Barclays Plc and Royal Bank of Scotland Group Plc striking similar deals, while UBS Group AG is also poised to plead guilty, people familiar with the matter have said.
Those pleas will come, in several cases, from the banks’ parent companies, people familiar with the negotiations said Tuesday.
The deals will be cause for muted celebration on several sides. Many lawmakers and the members of the public, agitating since the financial crisis for Wall Street accountability, will get to see banks admit to criminal behavior. The Justice Department, facing pressure to crack down on institutions long seen as “too big to jail,” will get headlines.
And the banks will take another step beyond authorities’ post-financial crisis scrutiny into whether they underplayed the risks of mortgage bonds, and rigged interest and currency rates. If the recent past is a guide, guilty pleas will fall well short of sending banks and markets into a tailspin, as bank executives have long said they feared could happen.
Accounting firm Arthur Andersen LLP never recovered after a senior partner pleaded guilty to obstruction of justice and testified against the company at a jury trial which delivered a conviction in 2002, even after the Supreme Court reversed that decision. But in recent years, the Justice Department has extracted guilty pleas of some sort from at least five banks, including one last month from Deutsche Bank AG’s London unit, for interest-rate manipulation.
“We’ve gotten past the Arthur Andersen anxiety that if you push the envelope too far, you’ll kill an institution,” said Robertson Park, a former Justice Department prosecutor who investigated Barclays for rigging benchmark interest rates.
That’s in large degree because the process has been stage-managed. Banks have wrangled with prosecutors to have guilty pleas come from parts of the bank that could be shielded from the loss of business that criminal charges could spur. That leaves time to line up waivers from regulators including the Securities and Exchange Commission, if necessary, that will allow impacted areas of business to keep operating.
The Justice Department can gain further public-relations mileage if it extracts pleas from banks’ parent companies, as people familiar with the talks said Tuesday it would. At the same time, banks could sidestep some disruptions to their business units by having these holding companies enter pleas, said people familiar with the deal.
While it’s collusion that helped land the banks in hot water -- the majority face antitrust charges because their traders worked in league to rig currency markets, people familiar with the talks have said –- they are cooperating again, to announce their settlements simultaneously to reduce scrutiny on any one institution.
The announcements, when they come, will follow months of news reports on the status of the probe, and the likely form of the pleas and penalties. There’s a benefit to preparing investors, as some recent guilty pleas extracted by the Justice Department have shown: Shares of both BNP Paribas SA and Credit Suisse Group AG rose after the banks admitted last year to U.S. felony charges.
Not every crime should lead to a death sentence for the offender, said John Arterberry, an adjunct professor at Georgetown Law who spent three decades at the Justice Department.
“One underlying assumption is that the bank is not a criminal operation,” Arterberry said. “It’s a business concern that has lost its way. Getting the institution to focus on that -- to take corrective action and to stay in business -- that’s the rationale that is offered.”
Peter Carr, a Justice Department spokesman, declined to comment.
The question is whether the latest guilty pleas will keep financial institutions from committing future crimes. The settlements, while momentous, will likely leave unanswered questions, said Brandon Garrett, a law professor at the University of Virginia who studies corporate crime enforcement.
“Are the fines adequate? Are meaningful structural reforms imposed? And are individuals held accountable?” he said.
The Justice Department may yet satisfy critics by bringing criminal charges against individuals -- a move that senior prosecutors, among others, have said will ultimately provide a greater deterrent to future wrongdoing.
It’s possible, too, that the latest round of guilty pleas could haunt banks later, former SEC chairman Pitt added.
“They may be more akin to a ticking time bomb,” Pitt said. A bank that attempts to bat down future allegations of wrongdoing, he said, “isn’t going to be allowed, for obvious reasons, to argue that the indictment that was entered was just a way to get rid of the matter. If you plead guilty to a felony count, you’re a criminal felon and there’s no getting away from that.”
In fact, among the five banks expected to settle with the Justice Department and other regulators, two of them have recently admitted to other wrongdoing.
In 2013, RBS’s Japan unit pleaded guilty to wire fraud in order to resolve U.S. allegations that it manipulated the London interbank offered rate, or Libor. As part of that resolution, RBS entered into a deferred prosecution agreement requiring it to refrain from committing other crimes for two years. That agreement expired last month.
UBS entered into a similar agreement in 2012, when its Japan unit pleaded guilty. UBS entered into a non-prosecution agreement that was set to expire last year. The NPA was extended through December as the Justice Department investigated currency rigging.
UBS’s cooperation in the currency probe may help shield it from antitrust charges. However, the bank is expected to plead guilty on other charges, a person familiar with the talks has said. Among the options: The Justice Department could choose to tear up the NPA and prosecute UBS for Libor-rigging. The department has looked into whether any acts of currency manipulation may have placed banks in violation of earlier deals, two people familiar with the situation said in March.
That same month, Leslie Caldwell, the head of the Justice Department’s criminal division, said in a speech that the U.S. is prepared to charge banks for conduct covered by earlier settlements.
“Where banks fail to live up to their commitments, we will hold them accountable,” Caldwell said. “The criminal division will not hesitate to tear up a DPA or NPA and file criminal charges.”