Why putting bank bosses behind bars is still nigh on impossible

Bankers are known to have been ‘brazen’ in their illegal behaviour, but apart from in Iceland, few top directors have been jailed – for reasons that may start with fear of an Arthur Andersen outrage

US attorney general Loretta Lynch declared last week that five major banks had engaged in “brazenly illegal behaviour” on a “near-daily basis” in rigging foreign exchange markets. But no sooner had she imposed record £2.6bn fines on the banks and extracted guilty pleas from four of them – including Royal Bank of Scotland and Barclays – than she was facing questions about why no charges were brought against individuals.

This is a familiar refrain ever since the 2008 banking crisis led to multibillion-pound bailouts. Some bankers have ended up behind bars: Iceland currently has four former bank bosses in jail, while in the US a few junior bankers have been convicted. Ireland convicted two former executives of Anglo Irish Bank, but did not jail them.

However, to many, the list seems short when compared with the $235bn of fines that Reuters calculates have been imposed on 20 major banks in the past seven years for market rigging, sanctions busting, money laundering and mis-selling mortgage bonds in the runup to the 2008 crisis.

Robert Jenkins, a former Bank of England policymaker, reels off a long list of reasons for the lack of action. Now a senior fellow at thinktank Better Markets, Jenkins reckons one reason regulators backed away from proceedings against individuals is fear, and says this dates back to 2002, when accountancy firm Arthur Andersen was convicted of destroying documents related to its audits of Enron. The prosecution was overturned in 2005, too late to save what had been one of the world’s biggest accountants from collapse. There was, Jenkins said, “fear by the US authorities of a banking version of Arthur Andersen at a time of financial fragility”

But he lists other problems, from difficulties in proving criminal intent to lobbying by bankers and the naivete of regulators, who really thought they were dealing with a “few bad apples”. Jenkins says there were also fears that a heavy crackdown would lead to banks draining credit from the economy.

Mistakes were made from the outset of the crisis, he says. “From the very beginning those on both sides of the table – bankers and policymakers –have been behind the curve on what needed to be done, what could have been done, and what the public understood should have been done.”

In Iceland a special prosecutor, Ólafur Hauksson, was appointed to look through the wreckage of Kaupthing, Landsbanki and Glitnir banks. He has prosecuted 60 individuals through 22 indictments and is often asked why other countries have not done the same. He says Iceland just got started rapidly: “We were more focused on those cases in the beginning and that meant we had to specialise in cases relating to financial institutions.”

Even now, seven years on, cases are still going through the courts. One, relating to the collapse of Kaupthing and involving nine individuals, ended only two days ago.

Deciding on the correct charge is another problem. Hauksson is bringing charges for market manipulation, fraud, embezzlement and fraudulent loans. New UK laws should make prosecutions in the banking sector easier: a seven-year jail term for reckless misconduct was introduced, but prosecutors will have to prove that bankers knew their decisions would cause a bank to collapse. New offences forrigging a range of benchmarks came into effect this year but are not retrospective, so cannot be used against the traders whose actions prompted the latest vast fines.

Last week Lynch, who is barely a month into her role, said she was “not able to comment on whether or not we will be bringing additional charges against individuals” because the investigation into currency rigging was continuing. She pointed out that the US had charged 12 people for Libor-rigging offences. In the UK the Serious Fraud Office has charged 13 – its first trial starts on Tuesday – but they are all junior staff: no bank bosses have so far faced charges.

Jimmy Gurulé, law professor at the US’s University of Notre Dame and a former assistant attorney general, is hoping Lynch will take a tougher stance. She said at her confirmation hearing that “no individual is too big to jail”.

Jenkins added the banks should also face the threat of being broken up: “When it comes to the systematic wrongdoing on their watch, either the senior executives knew, did not know or cannot be expected to know. If they knew they are complicit. If they did not know they are incompetent. And if the banks are so large and complex that they cannot be expected to know, then they are a walking argument for breaking up the banks.”

Source: http://www.theguardian.com/business/2015/may/23/putting-bankers-in-jail-nigh-on-impossible