One of Wall Street's most aggressive regulators thinks that the problem with banks isn't a cultural one, but one of bad individuals who aren't held accountable for their illegal actions.
"There are certain bad apples in any large institution who are willing to push the limits. And if they don't think there are going to be large consequences for them, they're going to keep doing it," Ben Lawsky, the head of New York's Department of Financial Services, said in an interview with BuzzFeed.
Lawsky, who threatened to pull the banking charter for a British bank accused of years of money-laundering violations, said the move toward identifying and punishing individuals has been part of his office's evolution since it was created and he was named its first head in October 2011. "If people don't feel, as individuals, that there are going to be personal consequences, I don't know if you're accomplishing much by just taking a big settlement form the firm itself."
The way Lawsky sees it, with banks as large as they are today, there will always be some bad actors who need to fear that their bad actions will result in specific negative consequences. "In large institutions, you can have the best managers in the world, but if you don't have individual deterrence, you will continue to have problem after problem, the institutions are just too big."
Lawsky's comments and an earlier interview this week with the Financial Times come amid a debate among regulators and the public about whether a culture of corruption and institutionalized wrongdoing has taken hold in the financial sector.
William Dudley, the president of the Federal Reserve Bank of New York who supervises banks in the region, said in a speech last year, "There is evidence of deep-seated cultural and ethical failures at many large financial institutions." Dudley also told the New York Times this week that he gave the speech to show that "too big to fail" wasn't the only problem bedeviling the banking industry.
But Lawsky's own emphasis as a former federal prosecutor who prosecuted mobsters and terrorists on identifying and punishing specific individuals follows a wave of harsh public criticism of the government's response to wrongdoing in the financial sector. Mortgage fraud, improperly foreclosing on homeowners, manipulating interest rates, transferring billions in violation of international sanctions, and ignoring money laundering have resulted in several billion-dollar-plus fines, but few individuals have been held accountable, let alone criminally charged, convicted, or jailed.
Just yesterday, the Department of Justice's inspector general issued a scathing report saying that the department failed to prioritize mortgage fraud prosecutions and had misrepresented how many cases it had brought.
"If you don't hold them accountable, it's Groundhog Day, you're going to get a big settlement and they're going to do it again in a couple years," Lawsky said.
JPMorgan Chase alone has paid separate multibillion-dollar settlements, including one that totaled $13 billion for inappropriate mortgage securities sales and another for over $2 billion for its dealings with ponzi-schemer Bernie Madoff as his primary bank for more than 20 years. Five banks, including JPMorgan, settled with state attorney generals and federal regulators in a $25 billion settlement over foreclosure practices.
One area where Lawsky has been particularly aggressive has been in enforcing rules on money laundering and illegal bank transfers in violations of international sanctions. DFS threatened in August 2012 to pull the state banking license of British bank Standard Chartered when it accused it of hiding $250 billion worth of transactions with companies or individuals in Iran, and even called the bank a "rogue institution." DFS ultimately settled for a $340 million fine along with installing an external monitor to examine its anti-money-laundering controls; four months later the bank reached a $327 million settlement with federal regulators.
Last year, DFS laid down a $100 million penalty on another foreign bank operating in New York, this time the Royal Bank of Scotland, for having a virtual step-by-step guide for evading U.S. sanctions on Iran and Sudan and asked RBS to remove four employees as part of its settlement.
DFS is a regulator and supervisor of financial institutions in New York state, not a criminal prosecutor (it hands off criminal cases to local prosecutors or to the state attorney general), and Lawsky also says he's focused on maintaining a vibrant financial sector in New York State.
"When you focus a little more on deterring individuals, you stop sending the message to the world that a whole bank is bad, or that a whole sector is bad, or that the financial industry is bad," Lawsky said, "when bad things happen at banks, it's because some person or persons decided that it was worth it for them to commit a bad act."