With Deutsche Bank Settlement Over Financial Fraud, Justice Deferred Again

Statement of Bartlett Naylor, Financial Policy Advocate, Public Citizen’s Congress Watch Division

Note: U.S. regulatory agencies and the Department of Justice (DOJ) today announced a collection of settlement agreements with Deutsche Bank covering frauds in the manipulation of an interest rate standard known as LIBOR, the London InterBank Offered Rate.

While Public Citizen applauds the guilty plea that law enforcers secured against a Deutsche Bank subsidiary, the actual penalties still reflect that some institutions seem to be deemed “too big to jail.”

Law enforcers found repeated examples of manipulation as they investigated the bank. For example, they discovered pervasive fraudulent practices where traders gave false information about rates at which they borrowed or loaned money with other banks. That established false benchmarks on which other rates were based. That harms average Americans when they agree to mortgages. Law enforcers also found that Deutsche Bank withheld and even destroyed information about the investigation. Yet, surprisingly, despite the severity of these offenses, the government concluded that these crimes should be punished only through a financial penalty.

This settlement, which involves no jail time for any traders, seems out of sync with the problems identified. To make matters worse, many of the traders responsible for the frauds remain employed at Deutsche Bank. The DOJ claims that it may still prosecute individuals, and we hope it will pursue such work. To date, some traders at other firms such as Rabobank have been convicted, but no senior officers of any of the banks involved in the LIBOR case have faced charges.

What’s more, shareholders ‒ not the executives responsible ‒ will be paying this $2.5 billion fine, and taxpayers will subsidize much of it when the company deducts it as a business expense. In addition, Deutsche Bank reported to shareholders Wednesday that the company would face higher “litigation costs,” and this likely will be another cost borne by the corporation’s investors.

The government did secure a guilty plea, but only by a Deutsche Bank subsidiary. A guilty plea by the parent company could have triggered a forfeiture review of the charter for Deutsche Bank’s U.S. bank. Since that might lead to real harm for the company’s operations, we can only speculate that law enforcers agreed to minimize the actual harms to Deutsche Bank’s ongoing business.

Public Citizen has detailed (PDF) the increased and dangerous reliance on the use of deferred prosecution agreements to settle criminal charges against major banks. Fundamentally, these allow the Department of Justice to subcontract the investigation of a fraud to the very company responsible, and then settle with a fine that will be borne by shareholders. Still worse, the settlements allow the bankers to shield individuals from accountability. Such a win-win dynamic for the bad actor undermines the goal of deterring future criminal behavior.