How are governments responding these days to bankers who profit through criminal fraud, and ruin others’ economic lives? Depends on the country:
In Iran, the report came Monday from state media of four death sentences for billion-dollar bank fraud. According to Reuters, the sentences resulted from a $2.6 billion bank loan embezzlement scheme “exposed last year and by allegations it was carried out by people close to the political elite or with their assent.”
In all, 39 persons were tried for fraud, with four sentenced to hang, two to life in prison, and others with jail sentences ranging to 25 years.
Prosecutor general Gholam-Hossein Mohseni-Ejei told the IRNA state media, “The government, parliament, and all available devices were used to pursue the issue so that corruption can be fought in an open manner.” But one defendant complained that the prosecutor went only after low-level execs, while senior-level officials had gone unpunished.
Also, in Great Britain, the government’s Serious Fraud Office (SFO) is reportedly moving closer to bringing criminal charges against bankers involved in rigging the key Libor interest rate. Libor is the London Interbank Offered Rate, the average interest rate London’s leading banks estimate they’ll be charged when borrowing money from other banks. The market involves $350 trillion in banking products.
The rigging scandal began with Barclay’s being fined ¬£290 million for admitting taking part in the fraud.
Then, on Monday the SFO announced, “The Director of the Serious Fraud Office, David Green QC, is satisfied that existing criminal offences are capable of covering conduct in relation to the alleged manipulation of Libor and related interest rates. The investigation, announced on 6 July, involves a number of financial institutions.”
So far, the Royal Bank of Scotland has warned it also expects fines for attempting to influence the rate.
Meanwhile in the U.S., on July 29 we “celebrated” the 10-year birthday of the Sarbanes-Oxley Act. The federal law established criminal penalties for CEOs and CFOs who falsely certify financial statements, for anyone influencing federal agencies investigating improper conduct of public companies, and for retaliation against whistleblowers.
Sarbanes-Oxley came about as a result of accounting-manipulation scandals involving major companies such as Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom. Investors lost billions of dollars due to collapsed share prices followed by the companies folding.
On Monday, the two lawmakers who created the legislation, former U.S. Sen. Paul Sarbanes and former U.S. Rep. Michael Oxley, expressed concern the law was being eroded by more recent legislation, including the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the Jumpstart Our Business Startups (JOBS) Act approved in April.
“Sarbanes called the JOBS Act exemptions ‘a scandal waiting to happen,’ according to the Journal of Accountancy, “because of the number and size of emerging growth companies that could be exempt for five years from the SOX 404(b) internal control provisions” of Sarbanes-Oxley.
“Oxley appeared to agree, the journal reported: “They are going to have a scandal, and then the investors are going to complain that the regulators screwed it up, or it’s Sarbanes-Oxley’s fault, or something else…It will be interesting to see the revisionist history after that happens.”
Also on Monday, James Rickards wrote in U.S. News and World Report “Why Big Banks Are Above the Law.” Rickards, an investment banker/commentator, said, “Two developments in the banking industry with roots in the 1980s have now converged to give immunity to bankers for their criminal acts including mortgage fraud, accounting fraud, and LIBOR rate-rigging.”
The first development, in the 1980s found two investment banks, Drexel Burnham and Salomon Brothers, both in court basically for criminal fraud. But a run on both banks led to their collapse and ended any prosecutions.
The second development: “the rise of the ‘too big to fail’ doctrine,” says Rickard:
Many observers believe too big to fail is a product of the 2008 panic and TARP bailout, but the policy is much older. In 1984, Continental Illinois, the seventh largest bank in the United States, suffered a run on the bank. Contrary to established regulatory practice of bank closure or purchase by another bank, the regulators provided open bank assistance. In defending this action, the Comptroller of the Currency explicitly stated that it was the policy of the United States not to let any of the 11 largest banks in the country fail. By 2011, that list had expanded to 29 firms including Citibank, J.P. Morgan, and Bank of America.
For further explanation, read Rickard’s article here, and weep.