HSBC Holdings got caught laundering money for drug cartels. It did business with customers linked to Iran and other nations that were off-limits because of U.S. sanctions. For the third time in a decade, investigators found the London-based bank’s compliance practices were a sham. The company did not dispute the allegations. It agreed to pay a record $1.9 billion to the U.S.

Yet under the deal reached with federal prosecutors, HSBC as a firm avoids criminal charges.

Is that the right decision? In this case, yes. Here’s why:

HSBC agreed to what’s called a deferred prosecution agreement. Under these deals, the government stops short of pursuing criminal charges in exchange for restitution and reforms.

By sparing companies from a criminal conviction, prosecutors can reduce the undesirable consequences of innocent employees losing their jobs, investors losing money and markets losing competition.

Deferred prosecution came into vogue a decade ago, after the debacle involving Chicago’s Andersen accounting firm. The Feds indicted Andersen for obstructing the investigation of notorious client Enron Corp. It was a corporate death penalty: Andersen collapsed, throwing 85,000 employees out of work worldwide. In the aftermath, the Justice Department revised its guidelines to give it more options for tailoring penalties in white-collar cases.

The resulting agreements have enabled prosecutors to better fit the punishment to the crime. They have brought greater accountability and stepped-up compliance. They’ve enabled the government to recover huge sums of money and impose extensive reforms without the delay and expense of a trial ― and without wiping out the underlying businesses.

Deferred prosecution of a firm can assist in bringing criminal charges against culpable individuals at the firm. It removes the incentive for companies to cover up details of their crimes, withhold records or refuse to make witnesses available. No HSBC officials have been charged to date, but the bank’s agreement requires it to cooperate in any criminal investigation of “present and former” executives.

HSBC has dumped more than 100 dicey clients, withdrawn from nine countries, exited a business used to launder cash, revamped its leadership team and clawed back compensation that senior executives received during the period under scrutiny. It will invest a fortune to police potentially illicit transactions, under the mandatory supervision of an independent compliance monitor.

Those are transformative changes. And if HSBC fails to abide by the deal, the hammer comes down.

Sometimes there is no substitute for indicting a company ― and, unlike Andersen, not every company collapses under the pressure of criminal charges. Siemens AG, for instance, flouted the Foreign Corrupt Practices Act. The German firm was systematically corrupt “from top to bottom,” as Assistant Attorney General Lanny Breuer recently put it. The company and eight former executives were indicted. Last week, the government announced that Swiss banking giant UBS would plead guilty to a criminal charge for its role in manipulating Libor, the internationally used interest rate mechanism.

Each case is different, and it makes sense to give prosecutors flexibility. Before deferred prosecution agreements became widely used, prosecutors sometimes faced the choice between bringing down companies with a criminal indictment or doing nothing.

The biggest problem with these deals is the public perception that guilty people get an undeserved break. The agreement with HSBC, though, will go a long way toward cleaning up a dirty business, while avoiding the unintended consequences of an Andersen-style wipeout. Innocent workers will continue to be employed. And culpable people are not yet off the hook.

(Chicago Tribune)
(MCT Information Services)