2015 • Volume 40 • Number 1

Reining in Recidivist Financial Institutions

Joel Slawotsky

Large financial institutions have demonstrated a systemic disregard for U.S. laws and international sanctions, repeatedly engaging in severe illegal conduct. In 2014 alone, in addition to numerous “lesser”settlements, BNP paid nearly $9 billion and Bank of America paid nearly $17 billion to resolve various investigations. The criminal conduct admitted to by these financial institutions includes violating international law, rigging interest rates, enabling tax evasion, engaging in market fraud, manipulating currencies, and bribing officials.

These activities have caused numerous primary adverse results, such as human rights violations, terrorism, tremendous economic losses, and even possible contribution to the global financial crisis. Secondary negative results include loss of faith and confidence in American political institutions, democracy, and fair play, as well as a sense that a double standard exists wherein large corporations can commit crimes with impunity.

Some financial institutions have become serial lawbreakers, violating not only civil,but also criminal laws. Many of the institutions are subject to multiple investigations, and some of them previously assured prosecutors and regulators that criminal activity would not be repeated after they were involved in what was widely considered a historic settlement. Financial corporations’ systemic violation of the law reveals that financial institutional misconduct is widespread, deeply embedded, and broad based.

Despite the imposition of large monetary fines, regulatory and prosecutorial efforts have largely failed to stem large final institutions’ criminal activities. The government ensures that waivers are granted so that the financial institution suffers no loss in its ability to conduct commerce. Essentially, the financial institutions are welcomed back immediately after paying a fine. Market reaction is generally positive as reputational harm is nonexistent, and business continues as usual. No prison sentences are meted out for managers or officers, and the corporation’s guilty plea is seen as the cost of pursuing a profitable course of action.

Neither government fines nor penalties seem to have a meaningful effect on the misconduct. A new approach is therefore needed that will serve as an adequate punishment and deter such wrongdoing. This article proposes that, under certain circumstances, the law should provide for the extraordinary punishment of breaking up a corporation by selling units to rival entities. This punishment would be reserved for outrageous misconduct that endangers national security, imperils financial markets, or is undertaken by a serial wrongdoer. Moreover, only misconduct directly or indirectly approved or ratified by managers or directors would be subject to this punishment. Actions taken by a rogue employee would not qualify. Additionally, the level of misconduct would track the standard for punitive damages and not be the result of ordinary negligence.