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    HSBC and the Era of Too Big to Fail

    Advocates of extensive government regulation of private markets often argue that such measures are necessary to prevent large companies from abusing their market power for illicit gain. What is seldom highlighted, however is that big government and big business inevitably go hand in hand, and that  it is impossible to support one without supporting the other.

    The latest example of corporate cronyism was on display in the DOJ’s recent refusal to prosecute HSBC over accusations of money laundering. The bank admitted that it failed to apply legally required money laundering controls to $200 trillion in wire transfers alone, in only a three year period, $670 billion of which came from Mexico, and that “at least $881 million in drug trafficking proceeds, including proceeds of drug trafficking by the Sinaloa Cartel in Mexico and the Norte del Valle Cartel in Columbia, were laundered through HSBC Bank U.S.A without being detected.” (source)

    In lieu of criminal prosecution, HSBC agreed to pay the sum $1.92 billion in fines, on the condition that it strengthen its internal controls and stay out of trouble for the next five years. (source) This is a miniscule settlement compared the amount of money involved in the laundering scheme, and the idea that slap-on-the-wrist punishments such as this will serve as an effective deterrent to other banks in the future is laughable.

    So why does HSBC get off with such a token punishment instead of being prosecuted for the criminal behavior of which it is admittedly guilty? The DOJ has argued that a criminal conviction could cause HSBC to collapse, a result that they fear would cause substantial damage to the world’s financial system as whole and were therefore unwilling to tolerate. (source) HSBC is currently the third largest publicly held bank and the sixth largest public company in the world, a fact which apparently shields it from responsibility for its criminal actions. (source)

    People, banks included, can be relied upon to make rational decisions involving risky behavior. If the benefit of engaging in an illegal activity is greater than the probability of detection multiplied by the cost of any imposed penalty, then it is reasonable to assume that they will go ahead and take that risk.

    This is the inherent problem with the “too big to fail” mentality that has become the status quo in Washington. When banks see the costs of bad behavior diminish, they will almost certainly engage in more of it. For all the hand wringing and combative rhetoric about the evils of big banks and their role in the 2008 financial crisis, the federal government has shown itself to be toothless in enforcing its own rules, thereby opening the door for the same problems to be repeated in the future. Furthermore, the policies adopted by the DOJ have ignored the role of Wall Street executives in propitiating the crisis, despite evidence that many of them may have violated the Sarbanes-Oxley Act, which requires disclosure of financial activity and the detection of any fraudulent activity. (source) The selective enforcement of the law to reward politically connected groups is a hallmark of government corruption.

    The Department of Justice ostensibly exists to preserve competitive markets, ensuring that certain firms do not become excessively powerful, but in practice its policies have resulted in exactly the opposite result. By signalling its unwillingness to prosecute bad actors of a certain size, the DOJ has essentially granted them a license to misbehave, something not afforded to smaller, more competitive firms.

    Compare the response to HSBC with the DOJ’s recent prosecution of internet activist Aaron Swartz, who was faced with up to 35 years in prison after publishing content from JSTOR, a popular source for academic papers, online free of charge. Swartz ultimately decided to take his own life rather than face these excessively severe charges. (source)

    Although the DOJ is supposed to be an independent organization, the White House has allegedly been applying considerable pressure to avoid criminal prosecutions of big donors and political allies. (source) As long as the Department of Justice bows to this pressure and continues to protect huge corporations from the consequences of their actions, we can expect no end to this kind of criminal misbehavior in the foreseeable future.