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In July of 2012, after several investigations by the U.S. government, it was publicly reported that a large bank was guilty of serious financial misdealing due to money laundering, involving everything from drug cartels in Mexico to terrorist regimes in Syria.  A scandal of epic proportions occurred: Not only did the Department of Justice (DOJ) allege that a major international bank involved owed the government over $1 billion, but it followed on the heels of another bank scandal. In December 2012, after months of litigation, the bank received a deferred prosecution agreement from the DOJ, where it agreed to pay $1.92 billion in fines to the U.S.


What implications does this massive scandal and litigation have for today and the future?  At a minimum, it indicates a tendency of increased scrutiny by the U.S. and other nations of banking and financial institutions.  More importantly, however, it underscores the need for credible banking and securities expert witnesses, who can explain whether and why financial entities should be held accountable for actions of this sort and what the appropriate remedy/measure of damages should be in the event the company is legally responsible.

In determining whether a bank or financial organization is liable for its activities, even those that certain officials and employees were unaware of, inquiries center on the legal issue of whether the defendant performed due diligence in monitoring its conduct.  In a large bank, it is unlikely that every employee knew about or participated in its unlawful acts.  However, Enron, Standard & Poor, and even Barclay’s indicate that it is generally an invalid defense to claim a corporation lacked knowledge of illegal behavior.  Financial institutions and publicly-held corporations are typically held to a more stringent legal standard: Did the entity conduct “due diligence” in approving its activities?  Did it carefully monitor what was occurring?

The bank involved, as a result of a careful, comprehensive probe by financial & securities experts associated with the government, was forced to publicly admit it did not “conduct basic due diligence on…account holders.”  Id. However, future inquires of the financial sector is by no means over.  As Senator Carl Levin, head of the Senate sub-committee probe expressed, “This settlement sends a powerful wakeup call to multinational banks about the consequences of disregarding their anti-money laundering obligations.”  Id.

Given that many U.S.-based banks are some of the largest corporations in the world and that watchdog agencies are increasing scrutiny of financial concerns, particularly ones with international holdings, who do business internationally (nearly all large ones do) or who are on Forbes’ list of large banks, the wisest policy for today’s banking sector is to retain financial experts to carefully monitor past and current transactions, particularly where litigation will likely arise.

Accounting, banking, and financial experts are crucial, given the way federal litigation has changed.  Rather than indicting individuals in a given bank or securities concern, the current strategy is to utilize deferred prosecution, setting aside criminal charges if companies agree to pay fines and more carefully regulate their actions.  See Reuters, supra. What this means for corporations and attorneys is that the focus should not be on criminal law experts, but should instead center on objective financial analysts, securities experts, accountants, and the like.  In criminal cases, the prosecution must prove its case beyond a “reasonable doubt,” whereas civil matters require only a showing of a “preponderance of evidence” (or 51%), a much easier standard to prove.

In light of the government’s new strategy with respect to banks it considers worth scrutinizing, an ounce of prevention may go a long way for prospective defendants.  To secure that prevention, banks and financial firms must retain objective experts and repeatedly consult them whenever a questionable transaction arises.  If such firms are savvy, they will hire well-reputed accounting, credit rating, and banking experts, who can advise them ahead of time whether a decision might be subject to judicial inquiry and, if so, advise against the decision or provide a well-founded opinion in the firm’s defense.  Both domestic and international1 firms, including banks, credit-rating agencies, lenders, and any entity providing financial services should be aware of government scrutiny and act beforehand if at all possible, by utilizing independent, consulting experts with proficiency in corporate lending, financing, securities, currency valuation, and the like.

However, for institutions that may be prospective defendants, because of the DOJ trend of trying to recoup federal monies from companies allegedly violating particular banking norms and who failed to conduct due diligence, even inadvertently, it may not be enough to simply utilize preventive measures.  Those firms that learn of a questionable past practice or that their current monitoring system detected a red flag and determined something has gone wrong must retain experts immediately.  If any amelioration can be made, securities and banking experts are needed to guide companies in making whatever amends they can before a lawsuit is filed.  In this way, firms may have some defenses and be able to argue that they did perform due diligence.

Utilization of banking and securities experts in this manner helps companies in two ways: (1) They can argue that the proactive measures they took, with the help of uninterested, banking experts, were an exercise of due diligence and they did everything within their power to know what was taking place within their enterprise and prevent illegal acts, and (2) They can potentially mitigate damages and causation, claiming that as soon as independent financial experts told them of potentially dangerous transactions, they addressed the problem to minimize prospective harm.  In this way, the banking and securities sector can potentially avoid a similar scenario.  Armed with the knowledge that the government now defers prosecutions and instead, pursues civil penalties, banking concerns can restructure their organization and hire experts to protect themselves from the government’s latest strategy of getting companies to make concessions, knowing prosecutors have a much lower burden of proof (needing only to establish preponderance instead of reasonable doubt) and from extremely large fines.  That knowledge will assist them in knowing how to avoid, to whatever extent possible, becoming a defendant in litigation, by cooperating with the securities analysts and financial consultants they retain.  Moreover, if a financial institution can prove that it not only took preventive measures but also addressed potential problems before litigation occurred, it may be able to prove a measure of good faith and due diligence. Ultimately, by taking its responsibilities seriously, it enhances its legal and public position.

Britain’s largest bank provided lessons for future parties to litigation in the financial sector.  Those who consult their experts quickly and often, and try to comply with the laws as diligently as possible will learn quite a bit and potentially avoid a serious scandal.    In the case of the bank, a large portion of the penalties they owe the U.S. were due to inadequate monitoring of banking activities.  The government did not adopt the strategy that specific bank employees knew about its illegal acts, but chose a more compelling (and more easily provable, as negligence requires a lesser burden of proof than charging a party with knowledge/intent) argument.  The DOJ simply claimed the bank had not deployed the level of expertise necessary to prevent the problems from occurring.  It has been said that knowledge is power. If knowledge is power, in this case, having adequate, objective financial experts to consult as early as possible places today’s financial institutions in the best possible light, from a litigation standpoint and to prevent damage to the reputations of banks and entities who may be similarly situated.

By: Kat Hatziavramidis, Attorney-at-Law