All Fine? Let’s Talk Financial Penalties
Three weeks ago Hong Kong’s financial regulator fined Goldman Sachs $350m over the 1MDB scandal, a record for the HK regulator (previously $51m). This is perhaps the least of Goldman’s troubles though, as the company agreed to pay $3.9bn to settle a Malaysian criminal probe and $2bn to US regulators. Without going into too much detail, Goldman was found complicit in the misappropriation of billions of dollars, $6.5bn of which it raised through bond offerings with myriad red flags. The now primarily missing money was initially for the Malaysian sovereign wealth fund intended to improve the country and help its people; instead it was embezzled and used to enrich a handful of people around the world, including the Malaysian Prime Minister himself — over $600m was found in his offshore accounts and $4.5bn is still missing. This story begs the question, do fines actually deter banks from breaking the law?
Clearly fines are favored by the SEC and it seems to be the only way banks ever get penalized. Yet, is this really the best course of action to correct bad behavior? Credit card companies factor in that 5% of the money they lend they will not see back — “bad debt” they call it. Banks in particular have similarly factored in fines as just the cost of doing business. Should this be the reality, then fines do not serve as a deterrent to bad behavior at all.
As of 2018, banks have been fined a total of $243bn since the financial crisis, 93% of which is from just 13 banks. While this may seem like a staggering sum to some, profits during this time have continued to soar and banks seem little effected, if at all, by these financial blows. Despite the damage caused to the economy and regular Americans across the country, no CEOs went to jail after the financial crisis and only one executive spent any jail time at all. Fines were the only punishment. One unattributed quote I found quite apt is, “If somebody broke into your home and stole your belongings, you’d expect to see some serious consequences if they got caught. But when banks and financial firms rob, defraud and mismanage the money of Americans — and even cast them out of their own homes illegally — the worst that usually happens is a fine.”
Tim Leissner, the Goldman mastermind behind the bond issuances for 1MDB, will not receive any criminal charges; his only punishment is to forfeit the $47.5 million he made off the fraudulent deals he orchestrated and agree to be barred by the SEC for future securities transactions. Malaysia has also agreed to bring no criminal charges against Goldman in exchange for a $2.5bn fine and $1.4bn in any proceeds from 1MDB assets.
While these fines certainly hurt the bottom line, a familiar pattern repeats itself and with the current system there is no end in sight; there is no real accountability. Furthering the problem, the fines collected go into federal and state coffers with no earmarked purpose. So, if we can’t find a better deterrent than fines, perhaps we could make it so at least the fines collected serve a more important purpose than being lost in the vast government budget — funding for public schools, improving roads, public transportation, cancer research funding, alternative fuel research? Just to name a few.
So, should we be holding bad-actor executives more responsible for their actions? It is often regular working people — e.g., Wells Fargo, sub-prime lending during the GFC, and the peddling of CDOs to main street — that bear the brunt of frauds and misleading securities transactions; yet, when those same people break the law, they go to jail while banks and their bankers are seemingly immune to punishment. Until this issue is addressed, to disagree with Mark Twain (or at least an aphorism often attributed to him), it seems history won’t only rhyme but is destined to repeat itself.
Jake Greenwald, Business Development
According to a study by Duff and Phelps, Anti-Money Laundering fines for global banks in 2020 have already surpassed the total for 2019 as of August. $444 million in fines were given out for violating AML laws in 2019 and the current total for August 2020 is $706 million. Duff and Phelps expect this upward trend to only continue as competition among bank’s private wealth divisions increase.
Many people are turning away from traditional banks and choosing to put their money with fintech banks that don’t have large infrastructures to support and thus have less incentive to gouge customers with hidden fees. Here are a few of the more popular ones, particularly among millennials:
Simple
Chime
Aspiration
Moven
Varo
If you haven’t yet read Billion Dollar Whale by Tom Wright & Bradley Hope, I highly suggest it. Not only is it a fascinatingly informative tale of the 1MDB scandal, but a very enjoyable read in itself.
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