Thursday, 17 January 2013

Are International Banks Making Side Deals with Prosecuters (Deferred Prosecution Agreements)

Radio Shalom, Money and Business – Jack Bensimon, Host
January 9, 2013 -- Show 22 – Banking and Securities Regulatory Compliance
“Deferred Prosecution Agreements (DPAs):
Are they Effective Tools of Securities Enforcement”
with Jack J. Bensimon, Managing Director, Black Swan Diagnostics


   listen to first part of show

part 2

Today’s topic of discussion: 
“Deferred Prosecution Agreements (DPAs): Are they effective tools for securities enforcement?”
Securities regulatory enforcement has long been a serious concern among securities regulators around the world. Self-reporting of companies committing white collar offenses is rare. Resource constraints at regulators have yielded unfavorable outcomes and minimal sentences for perpetrators.
DPAs give issuers an option to resolve potential securities breaches before escalation. They allow issuers to secure a global settlement while cooperating with regulatory authorities that may span multiple jurisdictions.
On this show, we will discuss this and other issues, risks, and concerns around DPAs with a focus on how they can impact capital market investors.

Radio Show host

NEW YORK (AFP) - HSBC intentionally broke United States (US) sanctions on Iran and other countries, and laundered Mexican drug money to build its business, the US said on Tuesday as it socked the global banking giant with US$1.92 billion (S$2.35 billion) in fines.
US authorities blasted the British bank's internal controls as "knowingly and willfully" lax as it enabled forbidden financial transactions with Iran, Libya, Sudan, Cuba and Myanmar from the 1990s to 2006.
Its Mexico branch also freely allowed hundreds of millions of dollars to be laundered through HSBC by drug groups, the Justice Department said.
The US said the bank violated US sanctions laws, the Cold War-era Trading with the Enemy Act aimed at Cuba, and numerous banking regulations as it exposed the US financial system to terrorists and drug cartels.


Jack Bensimon
Our guest today is Jack Bensimon, Managing Director of Black Swan Diagnostics Inc., an independent securities regulatory compliance consulting firm located in Toronto’s Bay St. core. He has worked in the securities industry for over 19 years, mainly acting as Chief Compliance Officer (CCO) for banks, investment banking and counselling firms, trust companies, and broker-dealers. He has testified as an expert anti-money laundering witness in federal court for a major banking litigation case.

He is a graduate of the University of Toronto, The Wharton School, University of Pennsylvania (Investment Management). Jack has a Master of Laws (LL.M.) in Business Law from the University of Toronto, Faculty of Law. Jack also has an LL.M. in Securities Law and an LL.M. in the General stream, both from Osgoode Hall Law School (York University). He is chair of the subcommittee and board member of the Canadian Technion Society. The Technion-Israel Institute of Technology is based in Haifa, Israel. He can be reached at

Segment I: Introduction to DPAs

[Maurice to jack ]  Q1: What is a Deferred Prosecution Agreement (DPA), or otherwise known as a “DPA”?
 A Deferred Prosecution Agreement, or otherwise known as a DPA, is an agreement between the crown and the company, which is a legal deal that allows the company to settle a fraud investigation with the government. In return, the company settling with the government pays an agreed sum as a fine to the crown. This prevents litigants from what is known as “jurisdiction shopping” whereby the parties look to sue in states  that are most favorable or likely to secure a win.

[Maurice to Jack] Q2:DPAs are sometimes referred to as NPAs (Non Prosecution Agreements) –why is that?
It allows companies to admit wrongdoing, especially important where fraud allegations and charges are made, pay fines, and allow independent monitors to supervise outcomes.  In exchange for this agreement, prosecutors agree to suspend charges, although they may not drop charges. In other words, it buys the company some time concerning the fraud charges, which carry potential criminal indictments.
DPAs are being used to fight against economic crimes – including many types of frauds in the marketplace. Securities fraud just being one of them, of course.

[Maurice to Jack] Q3:Are these mainly US instruments, or do they also exit in Canada and other common law countries?
In the US, for 2012 alone, DPAs resulted in criminal indictments exceeding $9B in penalties for corporate wrongdoers. This is a major win for prosecutors given that these cases are settled quickly and efficiently without a full trial proceeding. They are increasingly used to resolve front-page corporate crime offenses. They are popular among major law enforcement agencies, including the DOJ and SEC.
They have been recently introduced in the UK in conjunction with the Serious Fraud Office (SFO). Two elements were missing with the SFO -- sentencing principles and transparency for proportionate penalties. The new DPA regime in the UK attempts to reconcile both of those gaps.

[Maurice to Jack] Q4:  Which countries are making increasing use of DPAs and why?
The most obvious example, as mentioned before, is the UK. There are a number of reasons why the UK is converging towards this practice. First, regulatory enforcement agencies, overall, have not ben successful in prosecuting white collar crimes. The existing prosecution system is not working well in fighting against economic crimes.
The second reason is that from an efficiency perspective, the government reduces their costs by reaching a global settlement and avoiding a full trial – which can be very costly for the taxpayer, with no guarantee of prosecutions secured. It becomes a cheaper way for the government to prosecute white collar crime.
Third, it allows the crown to make more efficient use of their resources by reaching mutually acceptable settlements in return for admission of wrongdoing. The crown already has limited resources in fighting against frauds, and DPAs can short-circuit the trial, settlement, and prosecution stages.

[Maurice to Jack] Q5:Do you see this global trend of DPAs among common law countries becoming more pervasive?
Securities regulators have come to realize that criminal prosecutions under a securities law / criminal setting are very difficult to secure prosecutions for white collar offenses. Hence, the shift towards prosecutors looking at alternative ways to mediate these white collar offenses in a way that is quicker, less costly, and more efficient.
The US has made the greatest use of DPAs and we’re seeing the greatest increase in cases since 2006. For example, in 2006, there were 24 agreements DPAs entered, increasing to 35 in 2012. 35 of these were with the DOJ, and on with the SEC. The monetary recoveries relating to DPAs and NPAs is encouraging – with $5.9B in 2006, to $9B in 2012. As for the low SEC number, this is troubling as we’ve seen the proliferation of Wall Street comes with the onset of the global credit crisis in late 2007. Although this almost a 50% increase, we are starting from a small absolute base and is indicative that there is potential for far more DPAs to be agreed to.

Credit Suisse's Secret Deals
Bank Gave Iran, Other 'Rogue' Players Access to U.S. Dollars; $536 Million Settlement

Segment II: Are DPAs effective in serving the public interest?

[Sam to Jack] Q1: There has been a lot of media and academic coverage about whether DPAs serve the “public interest”  Can you explain what this means?
To serve the public interest refers to – who actually benefits from these agreements – the public (meaning the capital market investor) or the regulator – such as DOJ, SEC, or any other regulator involved in using DPAs. In an ideal world, the way criminal offenses and prosecutions are handled and settled should be done in a way so as to benefit the public – the taxpayer.  However, we don`t live in an ideal world.
The reality is that legislation can often serve the needs of the government (in this case – prosecutors) since as they see it, it is a more cost efficient way of getting through more cases in a shorter period of time. It saves them time, money, aggravation, and the prospect of not securing any prosecutions at all.  Does the public benefit from these benefits that accrue to the government? It depends on which side of the coin you’re on.
If you’re on the investor side and you have been wronged by an issuer through fraud or some other white collar criminal offense, then you want a strong enforcement system that maximizes damages and liability owed to shareholders. In that sense, DPAs may not serve the public interest, if the public is defined to be the average John Q. Public investor.
On the other hand, however, if you are an issuer and you have wronged investor and are looking for a lighter punishment with reduced penalties and consequences (i.e., lower monetary penalties recovered by the government on behalf of investors), then DPAs may serve the interests of issuers. If the public interest is defined to include individuals who represent the management of issuers, then DPAs serve this limited population of the public interest. In other words, it depends on which side of the coin you’re on and when.
[Sam to Jack] Q2: What types of requirements can prosecutors impose as part of a DPA?
Regulatory suspensions (SEC) – FINRA, CFTC
Corporate governance – abstaining from sitting on public boards for a certain period of time
[Sam to Jack] Q3:   What evidence exists to suggest that DPAs incent companies to self-report white collar crimes?
Lack of evidence, easy for prosecutors
[Sam to Jack] Q4:   What factors determine the timelines associated with DPA compliance?

[Sam to Jack] Q5: What is the role of judges in either serving or working against the public interest in DPAs?
HSBC Bank USA N.A. and HSBC Bank Holdings plc, its parent company, agreed to forfeiture and penalties of a more than $1.9 billion dollars for systemic and willful violations of U.S. anti-money laundering and foreign sanctions laws. $1.9 billion may sounds like a lot, but does the penalty fit the crime? It’s not entirely clear if it does.

US senators hear humiliating apologies from executives from HSBC

From the mid-1990s through at least September 2006, HSBC violated U.S. and New York State criminal laws by knowingly and willfully moving or permitting to be moved illegally hundreds of millions of dollars through the U.S. financial system on behalf of banks located in Cuba, Iran, Libya, Sudan, and Burma, and persons listed as parties or jurisdictions sanctioned by the Office of Foreign Assets Control of the United States Department of the Treasury (“OFAC”) (collectively, the “Sanctioned Entities”) in violation of U.S. economic sanctions.
HSBC Bank USA was already fingered for substantial problems with its anti-money laundering regime, before so this is the not the first run-in in breaching federal laws:

For example, from 2003 to 2006, HSBC had a written agreement with regulators for formal supervisory action that requires a financial institution to correct operational deficiencies. The written agreement required HSBC to improve its AML compliance with the BSA, and specifically required HSBC to enhance its customer due diligence or “know your customer” (“KYC”) profiles and the monitoring of funds transfers for suspicious or unusual activity. They failed to comply with this and breached federal banking, AML and privacy statutes.

[Sam to Jack] Q2: What additional challenges do you see in ensuring DPA effectiveness?
[Sam to Jack] Q3: Are they likely to stem the tide against large-scale corporate frauds?

I would like to thank Jack Bensimon for speaking on our show and providing insights in reviewing and analyzing the various aspects of DPAs and NPAs – their design, purpose and public policy objectives. Jack Bensimon can be reached at 416-985-0757,
Jack J. Bensimon, B.A. (Hons), LL.M. (Sec), LL.M. (Bus), LL.M. (Gen), CIMA, CAMS, CFSA, CCSA

Andrew Harrer/Bloomberg News
Senator Carl Levin criticized HSBC for laundering money and the Office of the Comptroller of the Currency for not stopping it.

The Permanent Subcommittee On Investigations> Hearings
U.S. Vulnerabilities to Money Laundering, Drugs, and Terrorist Financing: HSBC Case History

The Permanent Subcommittee On Investigations>Hearings
U.S. Vulnerabilities to Money Laundering, Drugs, and Terrorist Financing: HSBC Case History
Permanent Subcommittee on Investigations

July 17, 2012 09:30AM
Location: Room 106, Dirksen Senate Office Building

Member Statements

Chairman, Permanent Subcommittee on Investigations CARL LEVIN D (MI)

Download Statement (93.9 KB)

Ranking Minority Member, Permanent Subcommittee on Investigations TOM COBURN R (OK)

Download Statement (33.7 KB)


The Permanent Subcommittee on Investigations held a hearing, "U.S. Vulnerabilities to Money Laundering, Drugs, and Terrorist Financing: HSBC Case History," on Tuesday, July 17, 2012, at 9:30 a.m., in Room 106 of the Dirksen Senate Office Building.The Subcommittee hearing examined the issue of money laundering and terrorist financing vulnerabilities created when a global bank uses its U.S. affiliate to provide U.S. dollars, U.S. dollar services, and access to the U.S. financial system to high risk affiliates, high risk correspondent banks, and high risk clients, using HSBC as a case study.