The Fourteenth Banker Blog

July 5, 2010

Our Vichy Regime Regulators.

Filed under: Running Commentary — thefourteenthbanker @ 1:41 AM

A few days ago a news story broke about Wachovia (now part of Wells Fargo) laundering money for Mexican Drug Cartels.  Mish adds color commentary in this piece.

From the original news story:

Wachovia admitted it didn’t do enough to spot illicit funds in handling $378.4 billion for Mexican-currency-exchange houses from 2004 to 2007. That’s the largest violation of the Bank Secrecy Act, an anti-money-laundering law, in U.S. history — a sum equal to one-third of Mexico’s current gross domestic product.

“Wachovia’s blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations,” says Jeffrey Sloman, the federal prosecutor who handled the case.

And here’s the rationale for the kid gloves treatment:

No big U.S. bank — Wells Fargo included — has ever been indicted for violating the Bank Secrecy Act or any other federal law. Instead, the Justice Department settles criminal charges by using deferred-prosecution agreements, in which a bank pays a fine and promises not to break the law again.

‘No Capacity to Regulate’

Large banks are protected from indictments by a variant of the too-big-to-fail theory.

Indicting a big bank could trigger a mad dash by investors to dump shares and cause panic in financial markets, says Jack Blum, a U.S. Senate investigator for 14 years and a consultant to international banks and brokerage firms on money laundering.

The theory is like a get-out-of-jail-free card for big banks, Blum says.

“There’s no capacity to regulate or punish them because they’re too big to be threatened with failure,” Blum says. “They seem to be willing to do anything that improves their bottom line, until they’re caught.”

There are consequences for some however:

Twenty million people in the U.S. regularly use illegal drugs, spurring street crime and wrecking families. Narcotics cost the U.S. economy $215 billion a year — enough to cover health care for 30.9 million Americans — in overburdened courts, prisons and hospitals and lost productivity, the department says.

“It’s the banks laundering money for the cartels that finances the tragedy,” says Martin Woods, director of Wachovia’s anti-money-laundering unit in London from 2006 to 2009. Woods says he quit the bank in disgust after executives ignored his documentation that drug dealers were funneling money through Wachovia’s branch network.

“If you don’t see the correlation between the money laundering by banks and the 22,000 people killed in Mexico, you’re missing the point,” Woods says.

So now I suppose we can say that TBTF in addition to all the other economic damages and risks, adds additional dimensions of suffering. This is just one small part of the human cost. Imagine the money laundered for human trafficking, prostitution, illegal arms sales, protection rackets, and other organized and disorganized crime.

These kinds of press reports leave bloody hands as clean.  In allowing the corporations to take the blame and provide legal amnesty for the culpable individuals, we fail to address the most basic causal factors. I can surmise several things. One, the individuals that allowed the funds to be laundered were paid handsomely to do so through their incentive plans. Some were probably recognized as top performers in their firm. In producing all this business, they also earned their managers bonuses and recognition. As the excerpt shows, people knew. People higher than the individual producers and their managers. Someone higher in the organization listened to Mr. Woods and then disregarded his recommendations. These people have blood on their hands as surely as terrorist front organizations funneling money abroad.

The bonuses paid and recognition provided folks doubtlessly known as ethically challenged among peers also sets up a cognitive dissonance to which other employees will act in a predictable variety of ways. Some will learn to cheat. Some will leave in disgust. Some will live with it and seek escape in addiction. Some will become depressed. These management decisions are a betrayal of the employees in organizations that are supposed to be about trust.

Our regulators and prosecutors also fail us when they do not bring stern cases against the corporation and both front line and senior bank officers that participate. These officers continue with reputations unsullied in their communities. Further, when regulators fail to expose the cognitive systems that underlie such crime they ensure that these episodes will be repeated. We can do better.

What is the Vichy regime? During WW II, the Vichy regime was the official government of France under German control. The regime actively collaborated with the Nazis, even to the extent of participating in their racial policies. Meaning, they supported the denouncing of Jews and French resistance with the inevitable consequences. Frenchmen were in an intolerable situation and had to choose sides. Some chose wrongly.

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4 Comments »

  1. Meanwhile the only industries prospering these days are Banking and Prisons.

    Now there’s a track record to be ashamed of.

    The same honest, hardworking, non-violent, taxpayers who are paying to support these drug mafia bankers, when caught with even small amounts of marijuana, are INCARCERATED FOR YEARS. The bankers, on the other hand, get big bonuses fueled by drug money laundering, and are lauded as respectable members of our society.

    A prime example of our institutionalized moral hazard: the bigger the crime, the less time.

    Is this the American Dream?

    Next time, and there will be a next time, we’re all bedazzled by the laissez-faire deregulation Ayn Rand Club – please remember where this kind of thinking gets us – in the CRAPPER.

    Comment by Lucy Honeychurch — July 5, 2010 @ 12:26 PM | Reply

  2. “Indicting a big bank could trigger a mad dash by investors to dump shares and cause panic in financial markets, says Jack Blum…”

    This is grade-AAA hogwash. Federal prosecutors ought to investigate with the goal of finding who were the executives that gave the order to disregard the findings from the anti-laundering unit, as well as the warnings Wachovia received from the DEA itself. The DEA warned every bank NOT to deal with the infamous casas de cambio, known to launder money from the cartels. Wachovia willfully ignored this warning.

    Then, indict these executives under the bevy of laws we have on the books for these cases. That is guaranteed to get the undivided attention of every executive in any industry in the US of A. Since executives are replaceable, pray tell where would be the market panic? A day or two of volatility and that’s it.

    Moreover, I’d love to see one court in the nation that would have the audacity to thwart these indictments under the pretext of the corporate shield doctrine. Can anyone imagine the incredible political uproar of watching executives indicted for drug-money laundering walking away scott free from the court because “they did it as officers of a corporation” and thus, cannot be be held personally liable?

    Oh wait! Could this be the reason WHY there are no indictments in the first place? The powers that be can’t have this stuff exposed too clearly to the masses now, can they?

    Comment by Dr. Frankie — July 5, 2010 @ 1:10 PM | Reply

  3. BRAVO Dr. Frankie!

    Comment by Lucy Honeychurch — July 5, 2010 @ 3:28 PM | Reply

  4. 14th, Dr. Frankie and Lucy Honeychurch

    Thanks for your morale outrage !!! Banks that facilitate money laundering are benefiting from organized crime. Another indication the financial system is rotting from within.

    Comment by tippygolden — July 5, 2010 @ 9:45 PM | Reply


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