Justice News

Deputy Attorney General James M. Cole at the Government Enforcement Institute at the University of Texas School of Law
United States
Wednesday, May 21, 2014

Thank you, Steve, for that kind introduction.  And thank you to the University of Texas School of Law for having me here today.  It is an honor to be here with you for the inaugural Government Enforcement Institute, and I am pleased to see so many well respected colleagues devoting valuable time to discussing important subjects like investigating improper conduct at companies, cooperating with the government in its investigation of wrongdoing, and implementing effective compliance programs to prevent wrongful conduct.

 I want to talk with you today about a topic you will be hearing about later in the conference – the integrity of our financial systems and the vital importance of financial institutions’ compliance with the laws.  As you all know, banking and financial services play an essential role in our economy.  Among other things, they encourage investment, spread risk, provide a secure home for savings, and facilitate job creation.  Without them, much of our success as a nation would not be possible. 

 However, like other companies, financial institutions are susceptible to abuse by criminals of all stripes.  They can be used by terrorist or criminal organizations to launder and house their illegal proceeds.  They can be used in fraudulent ways to create wealth for a select few while victimizing many.  The broad reach of our financial systems makes the potential abuse of financial institutions extremely dangerous – both to individuals and companies. 

 Given that the stakes are so high, the Department is taking a hard look at the conduct of financial institutions in a wide variety of areas and we are committed to holding banks and their employees responsible for their misconduct. 

 Let me repeat that, we will hold banks and their employees responsible for their misconduct – no individual and no business, including a financial institution, is immune from prosecution.  When a company breaks the law, and the evidence supports criminal charges, we will never be deterred from a prosecution because of the company’s size. 

 In recent years, the Department has proven its determination to pursue a wide range of complex financial crimes.  These crimes are challenging to investigate, as they are often perpetrated by sophisticated individuals and hidden in complex financial transactions.  But while these circumstances may result in it taking longer to put a case together, those challenges to do not stand in the way of our prosecuting wrongdoing and ensuring the integrity of our financial systems. 
In recent years, we have proven our determination to pursue a range of challenging and complex financial crimes.  Indeed, since 2009, financial institutions have paid penalties of over $50 billion in connection with civil and criminal cases involving the Department of Justice.   One example is the investigations by the Department and other law enforcement agencies and regulators around the world into the manipulation of LIBOR and other benchmark interest rates.  As you all know, LIBOR serves as the premier benchmark for short-term interest rates around the globe.  Hundreds of trillions of dollars in financial derivatives, corporate debt, credit card debt, mortgages, student loans, and other financial instruments worldwide are tied to LIBOR.  But LIBOR necessarily depends on the integrity of the rate setting process and the bankers who provide input into that process.  Unfortunately, we’ve learned that certain banks and bank employees sought to manipulate LIBOR for their own ends.  Some banks were trying to manipulate their LIBOR submissions in the hopes of affecting the final published LIBOR fix – thereby increasing their trading profits.  Some coordinated with traders at other banks and interdealer brokers to try to get several banks to submit LIBORs favorable to their trading positions.  Some even artificially lowered their LIBORs in order to appear more credit-worthy during the financial crisis.  To date, the Department has secured corporate resolutions with four large financial institutions and has charged eight individuals, and our investigation is not over.

As you recently saw, the Department is involved in investigating and prosecuting banks, bankers, and consultants for assisting US taxpayers in hiding their assets in order to evade paying their taxes.  For the past several years we have been pursuing this investigation and recently took a plea from Credit Suisse, one of the world’s largest financial institutions, to conspiracy to aid US taxpayers in filing false tax returns.  We also have 13 other Swiss banks under investigation, have indicted numerous Swiss bankers (some of whom have pled guilty), have developed a program under which Swiss banks that aren’t even under investigation can come forward to pay penalties and disclose information that will lead to the identities of their US account holders -- to date over 100 Swiss banks have signed up-- and as a result of these efforts, over 43,000 US taxpayers have entered into a voluntary disclosure program run by the IRS and paid over $6 billion in taxes and penalties.  Clearly this is a priority area for the Department and our efforts are having an impact.

 The Department has also pursued cases involving violations of the money laundering statutes, the Bank Secrecy Act; IEEPA violations in connection with the circumvention of sanctions against Cuba and Iran; Residential Mortgage Backed Securities fraud and mortgage origination fraud; anti-trust violations; and civil rights violations for discriminatory lending practices.

In every case involving a financial institution, we are guided in our decision about how or whether to proceed with a prosecution by the Principles of Federal Prosecution of Business Organizations, which identifies nine factors to consider when determining whether to charge a corporation.  Those factors include, among others: the nature and seriousness of the offense; the pervasiveness of wrongdoing within the corporation, including the complicity of corporate management; the corporation’s history of similar misconduct, including prior criminal, civil, and regulatory actions against it; the adequacy of a corporation’s pre-existing compliance program; the corporation’s timely and voluntary disclosure of wrongdoing and its cooperation with our investigation; and collateral consequences, including whether there is disproportionate harm to shareholders, employees, and others not proven personally culpable, as well as impact on the public arising from the prosecution. 

 I want to focus on three of those areas today -- the prevalence of misconduct in the corporation, the importance of cooperation, and the way we approach issues of collateral consequences. 

You’ve heard a great deal about the importance of “tone at the top.”  Indeed, companies regularly argue during negotiations that they have taken various steps to set the right tone at the highest levels of their institutions.  But based on what we have seen, we cannot help but feel concerned that the message is not getting through often, or clearly, enough.

     Despite years of admonitions by government officials that compliance must be an important part of a corporation’s culture, we continue to see significant violations of law at banks, inadequate compliance programs, and missed opportunities to prevent and detect crimes.
We see criminal violations in multiple business units or locations.  We see compliance programs that are not robust, or are not funded, or lack sufficient resources to be effective.  We see repeat players – such as banks that have received non-prosecution agreements or deferred prosecution agreements with the Department, and that have come under scrutiny again for other violations of law.

Recently, we have too often seen instances of criminal conduct within disparate business units in the same financial institutions.  Each time a different example of criminal conduct is uncovered, we hear the institution’s lawyers say:  “It’s an isolated instance of bad actors in a single business unit.  The institution as a whole should not be held accountable.”  But when a bank’s employees repeatedly engage in criminal misconduct, the institution as a whole is the entity that is appropriately held accountable.  When the failure of the compliance function is systemic and institutional, it is a strong indicator that the tone at the top is in the wrong key, that compliance is not stressed or rewarded, and that the incentives in place are misaligned and encourage conduct that is harmful to the corporation.  When we find that, we will not hesitate to use all of the tools available to us to hold banks answerable for any crimes that have been committed.

Even when a financial institution has a good compliance program in place, violations can still occur.  When that happens, a critical factor in the Department’s prosecutorial decision-making process is the extent and nature of the entity’s cooperation.  But I want to make clear what we mean by cooperation.  In order to receive credit for cooperation, companies – including financial institutions – must provide useful and complete facts and do so in a timely manner.  To that end, a truly cooperating company will disclose improper conduct, before we know about it; it will secure relevant documents and information promptly; it will conduct its own internal investigations and share with us relevant information it uncovers; it will identify relevant actors within and outside the company, including, if applicable, senior executives; it will make their employees available for interviews; and it will take remedial action to correct the problems and discipline employees.  I'm not telling you anything new.  You have all known for years what constitutes real cooperation and what does not. 

But what I do want to emphasize is that genuine cooperation has tangible benefits for a corporation.  Let me give you an example.  Last year, we announced the guilty plea of a former managing director of Morgan Stanley – Garth Peterson – to a violation of the Foreign Corrupt Practices Act.  Peterson admitted that he had conspired to evade Morgan Stanley’s internal accounting controls in order to transfer a multi-million dollar ownership interest in a Shanghai building to himself and a Chinese public official.  At the conclusion of the investigation the Department announced that it was declining to bring any enforcement action against Morgan Stanley – in large part because the bank had voluntarily disclosed Peterson’s conduct, cooperated throughout the investigation, and had constructed and maintained a system of internal controls that provided reasonable assurances that its employees were not bribing government officials. 
In contrast, however, a company that does not whole-heartedly cooperate in our investigation should not expect much credit.

 This was demonstrated just two days ago when Credit Suisse pleaded guilty in federal district court in Virginia and agreed to pay over $2.5 billion for conspiring to assist U.S. taxpayers in hiding accounts from the IRS and evading U.S. income taxes.  As part of its guilty plea, Credit Suisse admitted to operating an illegal cross-border banking business that assisted thousands of U.S. taxpayers in opening and maintaining undeclared accounts and concealing their offshore assets and income from the IRS.

 Credit Suisse also admitted that, notwithstanding its knowledge of several criminal tax investigations by the Department for conduct similar to that of Credit Suisse, it delayed conducting an internal investigation into improper conduct at the company.  It also delayed implementing document retention policies and interviewing relevant individuals.  It delayed taking adequate remedial measures.  In the resolution papers, Credit Suisse acknowledged that its delay hindered its ability to uncover facts and encumbered the scope and progress of the government’s investigation.  This inadequate cooperation weighed heavily in the decision to require Credit Suisse to enter a guilty plea in this case.

Now assisting US taxpayers in evading taxes on a large scale is bad enough, but Credit Suisse’s lack of effective cooperation was an important additional factor in determining the resolution of the case. 
 Put simply, cooperation matters.  This is a principle that we have applied for every type of criminal case for decades.  If a company works with us, it not only helps the Department, but it helps itself.  We have provided, and will continue providing, tangible benefits to companies that work with us.  But if a company chooses not to cooperate, that choice will have consequences.

 Finally there is the issue of collateral consequences.  As you might imagine, this is a topic that gets raised quite often when dealing with financial institutions.  They claim that if we bring criminal charges or require a criminal plea from them, it will have a catastrophic impact on the global economy.  But we need to keep in mind that we did not create this situation.  The situation was created by the financial institution and the wrongdoing that it and its employees engaged in.  Obviously, we cannot allow the size or global reach of any entity insulate it from criminal responsibility for its actions.  That kind of impunity could result in far worse outcomes for the economy and society. 

So how do we deal with this situation?  How do we make sure we reach the right resolutions. 

First of all, we can and do take collateral consequences into account when making prosecutive decisions.  It is explicitly set out as one of the nine factors we use in deciding whether to prosecute a corporation.  But it is only one of the nine factors.  We still have to keep in mind that it is the mission of the Department of Justice to enforce the law and ensure that people know that there will be serious consequences for serious violations of the law. 
Secondly, the Department is not the only player in this area.  The financial regulators have an even greater responsibility to look out for the health of the financial system and economy as a whole.  The main collateral consequence feared in most financial institution cases is the loss of a license or charter to operate.  That is a matter over which the Department of Justice has no real control.  In fact, even if we decline prosecution in a given case, if the conduct is serious enough from a regulatory point of view, the regulators could still take drastic action. 

Finally, none of this is has to be either all black or all white.  There is no reason why the consequences of a guilty plea can’t be focused and proportionate to the specific wrongdoing involved in the case.  Not every criminal conviction of a financial institution has to result in a death penalty. 

As we pursue these cases, we work with the financial regulators to make sure that the banks and their relevant employees are held accountable for their crimes, while still being mindful and responsible concerning the impacts these actions can have on depositors, the American people and truly innocent employees.  In other words, we have a number of tools at our disposal that we can use to deal with potential collateral consequences. 

 Now the question is what can you do?  I am asking those you who represent financial institutions, and for that matter any corporate entity, to help us with these areas and by doing so help your clients.  The goal is to change corporate behavior.  At the end of the day I would prefer that the Department of Justice prosecute fewer cases against corporations, but only because corporations are committing fewer crimes.  I would like you to tell your clients how the Department is focused on the “tone at the top” and what it is we really mean by that phrase.  I’m asking you to tell them that if incidents of wrong doing start to multiply at a given institution, that institution better wake up, take a good look at what’s going on, and put its house in order.  When misconduct does occur, and they hire you to represent them, you should tell them how important it is to cooperate effectively, from the beginning, and how by doing that the corporation can earn some significant benefits.  And I’m asking you to tell your clients that the dire pleas to withhold prosecution because of the potential catastrophic impact of collateral consequences are not the magic trump card that will keep a financial institution from being prosecuted.  It is certainly a valid consideration in our analysis, but there are numerous ways to deal with legitimate claims of disproportionate collateral consequences besides just giving every large financial institution a free pass to commit crimes. 

At the end of the day, if by working together we do change behavior at financial institutions, it will result in better returns for its investors, a safer environment for its depositors, better operations in the corporate boardrooms, and a better, more stable economy.  Unfortunately, it may also result in less business for you.  But I do hope you will join me in trying to spread this message and I thank you for the opportunity to share some of my thoughts with you this morning.

Updated September 17, 2014