Compliance Officers See Headaches in Amended U.S. White-Collar Crime Policy

07 October 2015

Banks are reconsidering their compliance policies in light of federal guidance issued this month clarifying how prosecutors should build white-collar crime cases against corporations and their employees, according to sources.

In a Sept. 9 memorandum, U.S. Deputy Attorney General Sally Quillian Yates instructed the nation's prosecutors to more frequently hold individuals at corporations liable for criminal violations and regulatory misconduct, in part by pressuring companies to disclose evidence of malfeasance by their senior managers.

U.S. Justice Department officials should require corporations to turn over the names of culpable employees along with details of their alleged violations in order to receive "any" credit for cooperation once the penalty phase of an investigation commences, according to the memo. The named individuals should include those "involved in or responsible for" the purported misconduct, Yates said.

The new guidance has compelled a number of financial institutions to "rethink" how they will conduct internal investigations when anticipating a federal probe, said a compliance officer for a global bank.

Under current practices, bankers and in-house attorneys often confine an internal investigation to one function of the bank, with the goals of determining if allegations of wrongdoing have merit, identifying individual employees responsible for the misconduct, if any, and estimating the company's liability.

Banks are then legally required to notify employees whose names have been submitted to federal prosecutors.

Because Justice Department officials will now want to know of all individuals "involved in" alleged violations, banks may be required to turn over a "bigger list of names, and that means compliance teams, frontline employees, relationship managers, senior managers, possibly board members and attorneys," according to the compliance officer.

"That's a much longer process," said the person. "At what point do you tell those 20 or 30 extra employees that you've handed them over to DOJ? At that point, they are going to be motivated to accuse others to save themselves."

The increased potential for individual liability is likely to compel staffers to split their attention between completing their day-to-day duties and limiting their legal exposure, according to a compliance officer at a midsize financial institution in the Midwest.

"Every decision, every process will have to be written down. That probably means a less effective, certainly a much slower, unit," the person said.

Prosecutors are also barred by the guidance from offering individuals protection from criminal or civil liability as part of a corporate settlement, further limiting the ability of banks to shield their employees from indictment.

Going forward, compliance officers will "be very careful" when filing Bank Secrecy Act reports to ensure that they are accurate and complete, according to Robert Rowe, vice president & associate chief counsel for regulatory compliance at the American Bankers Association.

Those considerations will slow the flow of data sent to the U.S. Treasury Department, which has historically asked banks to expedite their report submissions, he said.

"If nothing else, it's likely to make de-risking more likely. Clearly, with the emphasis on the downside to errors, banks will become more risk-averse and therefore more prone to de-risk any customers that present challenges," said Rowe, citing discussions with senior bank officials.

In recent years, federal officials have extracted billions of dollars of penalties from HSBC, Standard Chartered and others for circumventing sanctions, laundering drug profits and manipulating global lending rates, among other violations.

Efforts to ramp up bank supervision and enforcement culminated last year when BNP Paribas was sentenced to five years of probation and ordered to forfeit nearly $9 billion after pleading guilty to providing sanctioned individuals and governments with illegal access to the U.S. financial system.

Despite a series of record penalties, critics contend that only by charging individuals can the department deter future misconduct.

In the case of BNP Paribas, the French lender's reluctance to disclose all relevant information at an earlier phase of the investigation precluded criminal indictments against employees, according to court documents.

Under the memo, prosecutors are less likely to offer cooperation credit if banks fail to disclose evidence pointing to individuals, said Scott Moritz, a New York-based managing director with Protiviti.

"That's a different bar that has potentially been set in terms of the level of depth of an investigation," he said.

The new guidance also directs federal attorneys to commence investigations with a focus on targeting employees first, and to justify subsequent decisions not to indict.

"This puts the onus on the individual attorney to explain why they chose not to indict someone…because Main Justice has caught a lot of flak for not going after the big money laundering banks," said Peter Henning, a former bank fraud prosecutor with the Justice Department.

"The problem is, if you're going to charge individuals, you have to be prepared to lose some cases, and the guidance does nothing to lower the burden of proof that the government has to meet," said Henning.

Federal prosecutors recently failed to secure convictions against a pair of senior executives overseeing offshore business for global financial institutions accused of facilitating tax evasion.

In November, a federal jury in Florida cleared former UBS AG offshore wealth director Raoul Weil of conspiring to defraud the U.S. government despite the bank's admitted role in helping thousands of wealthy Americans to evade income tax.

Days earlier, federal jurors in Los Angeles acquitted a former vice president of Mizrahi Tefahot Bank of similar charges.

By Colby Adams