It is common knowledge that for many of the less fortunate members of American society, the criminal justice system has become a veritable chamber of horrors. Some of this has to do with general institutional mindlessness, but the erosion of “justice for all” and the rule of law also flow from the top down. After all, privileged elites are much less likely to become agitated about all the injustices faced by ordinary people if they rarely encounter such injustices themselves, let alone admit to themselves that the entire judicial playing field is tilted decisively in their favor.
For those who care about basic democratic principles like the rule of law and “justice for all,” therefore, one disturbing recent trend in rich and poor countries alike is that the system for prosecuting transnational white-collar financial crimes has broken down almost completely.
Indeed, given the low risks of getting caught, the time required to investigate complex financial crimes now typically spread across national jurisdictions, the growing propensity of prosecutors to negotiate generous fines rather than pursue cases to trial, and the huge potential upfront profits from such misbehavior, the expected net present value of committing many white-collar financial crimes is not only positive but increasing. The result is a kind of elaborate show-trial kabuki amounting to a system of organized impunity that often achieves the exact opposite of crime deterrence.
The good news is that this problem does not require elegant or especially complex solutions. The most important requirement is for stiffer penalties for white-collar crimes, including serious jail time and personal financial sanctions for white-collar offenders and their bosses. Much tougher organization-wide sanctions must also be imposed for those firms that have become serial enablers of others’ illicit activity. Because of the white-collar defense backlash that this will provoke, real change may require some more prosecutorial resources, but we can also manage the law enforcement resources already on hand more efficiently by consolidating overlapping regulation and by decriminalizing other areas of “victimless” white-collar conduct.
All this is just part of a great rebalancing so badly needed in the U.S. criminal justice system. On this side of the tracks, we need to recriminalize the kind of irresponsible financial misconduct that has ruined so many more lives than street crime during the past decade, not only in the United States but all over the world.
We can illustrate all these points by examining the 2008-09 global financial crisis (GFC)-related “bankster”/”enabler” crime wave in the United States, and then look quickly at one of its spinoffs, a disturbing series of ongoing white-collar financial crimes that include money laundering and the facilitation of kleptocracy abroad undertaken through premier foreign banks, accounting firms, asset managers, and consulting firms in Africa.1
A final preliminary remark: Other commentators have also recently criticized the U.S. white-collar criminal justice system harshly, but it seems to me that the problem cries out for more precise, less anecdotal diagnosis.2 Most important, it needs a clearer focus on the key actors: the transnational enablers themselves, who not only have starring roles in the play, but have helped set the stage and write the script.
The Global Bankster Crime Wave
One clear indication of the breakdown in global white-collar law enforcement is the striking incidence of high-level bankster crime. For example, since the late 1990s, and especially during the run-up to the 2008 global financial crisis, the world’s top 22 banks have been implicated in literally hundreds of cases of serious financial misconduct all over the globe (see attached table). In addition, the “Big Six” global accounting firms, many top law firms, consulting firms, headhunters, asset managers, insurance companies, hedge funds, and private equity firms have also provided a strong supporting cast of “enablers” for this activity.
None of these institutions have been very particular about which financial crimes they commit. In the case of the big banks, for example, the chicanery has ranged from tax dodging, money laundry and outright bribery to illegal trading, mortgage fraud, securities fraud, illegal foreclosures, and the rigging of global energy, foreign exchange, and debt markets.
The effort to investigate and prosecute this torrent of white-collar financial crime continues to this day. This has already cost American taxpayers a fortune in prosecutorial resources, but in terms of both deterrence and even sheer retribution, the results have been disappointing.
True, between 1998 and 2017 the world’s top 22 banks have had to fork over more than $300 billion in fines and settlements to compensate for their involvement in all this financial chicanery. It is also true that many of these institutions have had to sign “deferred prosecution agreements” that supposedly committed them to cleaning up their acts, on pain of having prosecutors reopen their cases. Yet very few of these deferred prosecutions are ever reopened. This is partly just because prosecutors, having put their points on the board, have moved on to other cases or “revolved” into much more lucrative private white-collar criminal defense work.
Most important, while the profits resulting from illegal activities arrive very early in the process, the resulting fines and settlements tend to arrive years later. On an expected net present value/discounted cash flow basis, therefore, given all the lags and uncertainties in the system, white-collar financial crime may turn out to be a winning proposition even if the ultimate fines and settlement costs are substantial.
But even when they actually arrive, the absolute value of all these fines and settlements has generally only been a miniscule fraction of the institutional perpetrator’s cash flow or wealth. Furthermore, most of the costs associated with defending white-collar prosecutions and related private law suits, and even parts of the fines and settlements themselves, are tax deductible, an “ordinary cost of doing business.”3 And the portion of such fines that is not tax-deductible can often just be passed along to customers, especially by global financial institutions that are not exactly operating in perfectly competitive market environments.
On top of all this, the outrageous fact is that, to date, no major financial institution, accounting firm, or law firm has lost its license to operate in any leading Western country as a result of felonious behavior during the GCF.4 Nor has it led to any jail time or fines for any of the senior executives or partners of any of these august institutions. As noted by other experts,5 this is a striking contrast to the “Savings & Loan banking crisis” of the late 1980s, a crisis only 1/70th as costly as the GFC, but which led to more than 30,000 criminal referrals by U.S. bank regulators, a thousand felony convictions of U.S. bankers and their associates, and the outright closure of many fraud-tainted institutions.
This time around, in contrast, key financial services regulators like the FDIC, the Federal Reserve, the Office of Thrift Supervision, and the OCC (Office of the Comptroller of the Currency), as well as the FBI, simply decided they had better things to do despite clear evidence that outright fraud and other financial crimes had become far more pervasive since the 1980s. During this recent peak white-collar crime wave, from 2000 right up to the present, there have been almost no criminal referrals of individual bank executives. In Professor William Black’s well-worn phrase, the world’s largest financial institutions—most of which received ample government assistance during the GCF, even while their private banking arms and trade finance arms were helping wealthy taxpayers and multinational corporations to dodge taxes—have effectively become “too big to jail” as well as “too big to fail.”
This reluctance to prosecute white-collar financial crime effectively is partly due to simple understaffing. The entire U.S. criminal justice system has less than 2,500 investigators assigned to white-collar corporate crime. Only a small fraction of them can focus on banksters, and much of their time is consumed by the need to respond to complaints from larger banksters about smaller competitors.
Meanwhile, since the late 1980s, white-collar criminal law, as well as global financial regulation and global taxation, have become much more complex. Many of the country’s most talented financial crimes prosecutors seem to feel entitled, after a modest period of government service (and training), to “revolve” over to into joining the world’s most talented, highly-paid mercenary army of white-collar defense lawyers, specializing in, as Thorstein Veblen put it years ago, “clever chicanery.”6
But the overwhelming factor behind “too big to jail” is not on the supply side. Since the late 1980s, there has been a dramatic increase in the demand for financial chicanery, as instantiated by the sheer political clout of the global financial services industry. Recent U.S. political events have shown this only too clearly.
After besmirching Hillary Clinton’s run for the presidency with its gild-edged speaking fees, Goldman Sachs has achieved in just one year the ultimate shape-shift: At last count, at least 14 of its former senior partners are busy beavering away in the upper echelons of the Trump Administration on a whole host of issues, from corporate taxation and electronic currency to antitrust, intellectual property, NAFTA, and Chinese trade matters. If the Obama Administration had effectively prosecuted these or other Goldman executives, Goldman Sachs itself, or, indeed, any other top-tier financial institution, for mortgage fraud, securities fraud, insider trading, or any of their many other crimes, it is hard to imagine that they would be exerting such outsized influence today.
Many observers—like former Senator Carl Levin, who chaired the for now-moribund U.S. Senate Permanent Subcommittee on Investigations—believe they could have been prosecuted. But, as its top executives have admitted, the Obama DOJ simply lacked the will. Had they found it, the Democratic Party, perhaps along with some decent moderate Republicans, might well have been able to stand tall, bankster-free, and victorious in the last election.
But now, however, prosecuting white-collar financial crimes is no longer on anyone’s priority list in Washington, DC. Federal prosecutors and bank regulators, including the Federal Reserve, are even more passive than they were under Obama. The FBI’s new head is a long-time lawyer who has specialized in defending white-collar financial crimes and many of the world’s largest banks for twelve straight years over two thirds of his legal career.
Overall, the U.S. government has become the world’s most recent example of “bank capture,” a dubious status usually associated with wealthy parasitic monocultures like Switzerland, Luxembourg, Singapore, Dubai, or the City of London. On a host of policy issues, the United States has become a one-party state, presided over by the Bankster Party and its revolving doormen.
And the sad reality is that, just like Trump’s innumerable dodgy Russia mob connections, all this might well have been prevented during the Obama tenure had it had not been so studiously ignored.
1The following analysis builds on an earlier one published by Oxford University Press in 2016. For a detailed summary of the “Financial Crimes Data Base,” see James S. Henry, “Let’s Tax Anonymous Wealth,” pp.30-95, at 56-78, in Prof. Thomas Pogge and Krishen Mehta, ed. Global Tax Fairness. (Oxford U. Press, 2016).
2See Bill Moyer’s outstanding 2013 interview with Prof. William Black, a former federal bank regulator. See also Jesse Eisinger, The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives. (Simon & Schuster, 2017).
3In the case of the May 2014 $2.6 billion levy by U.S. authorities against Credit Suisse for facilitating U.S. tax dodging, for example, the levy was fully deductible against the income of the parent company in Switzerland, Credit Suisse AG. Furthermore, all litigation expenses associated with defending such charges are routinely deducted against taxes as business expenses.
4The giant “Big Five” accounting firm Arthur Anderson was compelled to cease operations in 2002 after it was convicted of obstruction of justice in the Enron affair. This conviction was reversed on appeal by the U.S. Supreme Court in 2005.
5See Prof. Black’s outstanding interview, op. cit.
6For a glaring recent example, see James S. Henry, “No Wray,” The American Interest, July 28, 2017.