Penalties Getting Tougher for Wayward Financial Institutions

25 February 2013 Consumer Class Defense Counsel Blog

Senator Elizabeth Warren wants regulators to take more banks accused of financial misconduct to trial instead of settling with them before trial. But she is not the only one in Washington looking for ways to send a message to financial institutions that they had better not violate the law. The Justice Department (DOJ) is already implementing a new approach to dealing with banks it is prosecuting. Prosecutors have been pushing for guilty pleas, in addition to fines and reforms, in settling financial fraud cases. See

So far, the DOJ has extracted guilty pleas only from remote subsidiaries of big foreign banks. In recent settlements with UBS and Royal Bank of Scotland (RBS), which were accused of manipulating LIBOR interest rates, the banks’ Japanese subsidiaries pleaded guilty to felony wire fraud. This is a new strategy for the DOJ, since it was previously feared that requiring guilty pleas would destroy the banks. By going after these remote foreign subsidiaries, however, instead of the large parent banks, the DOJ shields the parent company from losing its license, but still sends a message to the financial industry. This strategy also protects the larger economy by avoiding the extensive layoffs that occur when a large financial institution goes out of business.

In the UBS case, the bank paid $1.5 billion in fines, agreed to bolster its internal controls, and agreed to have its Japanese subsidiary unit plead guilty. RBS then followed by paying $612 million in fines and agreeing to have its Japanese subsidiary unit plead guilty. According to the New York Times, the DOJ intends to use these same tools in dealing with other banks it is now investigating. However, it remains to be seen whether the DOJ will be able to force any units of American banks to enter guilty pleas to felony charges as well. If not, Senator Warren, and others, will be watching to see if the authorities take any of these people or entities to trial.

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