A DUAL SYSTEM OF JUSTICE: FINANCIAL INSTITUTIONS AND WHITE-COLLAR CRIMINAL ENFORCEMENT.

• Author: Bellm, Sebastian

INTRODUCTION

In 2013, Deutsche Bank established a relationship with Jeffrey Epstein that was estimated to generate revenues of up to $4 million a year. (1) Seven years later, as a result of its dealings with Mr. Epstein, Deutsche Bank agreed to pay a fine of $150 million. (2) New York state regulators accused the bank of allowing "significant compliance failures" when processing hundreds of transactions for the late financier. (3) Throughout the relationship, regulators asserted that the bank had not properly addressed a plethora of red flags: Mr. Epstein's controversial past and criminal history of sexual misconduct, 120 wire transfers totaling $2.65 million to women with Eastern European surnames, suspicious payments to past coconspirators, (4) and suspiciously large cash withdrawals, including a cash withdrawal of $100,000 for "tips and household expenses." (5) Regulators identified a number of control failures that allowed for Mr. Epstein's assets to be used for criminal misconduct. For example, when setting conditions for monitoring Epstein's activity, bank executives poorly communicated the criteria for flagging suspicious transactions, creating confusion within the internal anti-money laundering division. (6) As a result, "specialists interpreted the guidance to mean that unusual activity should be flagged only if it was unusual for Mr. Epstein--which led to an alert about payments to a Russian model and a Russian publicity agent being dismissed because the transactions were 'normal for this client.'" (7)

At first, one might think that such a hefty fine of $150 million would induce Deutsche Bank to correct these failures. Yet, perhaps surprisingly, such fines are not uncommon for the bank. (8) Deutsche Bank, "a symbol of corporate recidivism[,]... has paid more than $9 billion in fines since 2008 related to a litany of alleged and admitted financial crimes." (9) In 2016 alone, Deutsche Bank was involved in 7800 different legal disputes, with an estimated litigation reserve of $5.7 billion. (10) Since the relationship between Deutsche Bank and Mr. Epstein began in 2013, the bank agreed to pay the following: $2.5 billion in fines for its involvement in the 2002 LIBOR scandal; (11) $7.2 billion in a settlement over its role in the 2008 financial crisis; (12) $258 million for doing business with Libya, Myanmar, Sudan, Iran, and Syria in violation of U.S. economic sanctions; (13) $425 million for its role in laundering $10 billion out of Russia; (14) and $7.5 million to settle charges of improperly handling "pre-released" American depository receipts. (15)

The relationship between Deutsche Bank and Jeffrey Epstein exemplifies a pattern as old as white-collar crime itself, in which an organization found to have violated the rules designed to protect the public agrees to pay a considerable fine for its wrongdoing. However, Deutsche Bank, like almost all large international banks, is a public corporation. This means that when these fines are levied against the bank, the burden ultimately falls on the corporation's public shareholders, rather than falling on the individuals responsible for breaking the law. As of June 30, 2020, the approximate date of the Epstein fine, Deutsche Bank had 2.11 billion outstanding shares. (16) Therefore, the $150 million fine imposed on the bank had the ultimate effect of fining each individual shareholder just over seven cents.

However, it is not corporations that commit crimes, it is people. (17) Jim Stewart, a lawyer and New York Times columnist, argued that, "Individuals do the bad things. The shareholders didn't do it, and the bank, in the abstract, didn't do it. So I'm all for punishing the people who did it and holding them accountable." (18) Yet, while the fining of corporations is well publicized and often makes front-page news, the individuals who committed the acts behind the fine are rarely held personally accountable.

It is rare for companies and regulators that are settling allegations of crimes or other misconduct to name the individuals responsible for those misdeeds--a practice that perpetuates the myth that such acts were inadvertently committed by a faceless institution and were not the consequence of decisions made by human beings. (19) The impact of distributing the burden of the fines to the shareholders, rather than the individual actors, is clear. "When those individuals bear no discernible consequences, the result is an astonishing rate of recidivism." (20) Deutsche Bank is not alone. White-collar crime permeates the financial sector and, as a result, places an immense cost on society.

Using the anecdotal example of Deutsche Bank, it is clear that the current scheme of white-collar enforcement is not effective in deterring white-collar criminal activity. This Note will go on to show that Deutsche Bank is not an anomaly. The government's current approach to white-collar criminal enforcement fails to meet any of the following traditional principles of punishment: specific and general deterrence, incapacitation, rehabilitation, or retributivism. An analysis of white-collar enforcement shows a "story of how the most powerful banks in the world are doing business with the worst of humanity, helping them move their money around the globe and making a tidy profit for themselves and their shareholders." (21)

Proposing more severe punishment for white-collar criminals is not a new concept. While many argue for the increased prison time of white-collar offenders, others provide "a counter-perspective on the use of prison sentences." (22) Other areas of academic publication support the convergence of sentencing guidelines for white-collar and drug-related criminals, particularly in light of utilitarian and retributivist principles. (23) Rather than simply recommending that white-collar criminals should be punished more, this Note proposes two distinct structural solutions that reevaluate the current policies directing the punishment of white-collar criminal conduct. Specifically, this Note argues that the Department of Justice (DOJ) should reconsider the practice of levying large fines against corporate entities that, through their public structure, pass the fines on to innocent shareholders.

After evaluating how and why the current approaches to the enforcement of white-collar laws are insufficient and fail to meet the fundamental principles of punishment, this Note proposes two solutions. First, FinCEN, the government organization tasked with combatting financial crimes and money laundering, should develop a more thorough and holistic approach to the reporting requirements of financial institutions. Second, judges should become more involved in the approval of Deferred Prosecution Agreements (DPAs). Rather than viewing DPAs as only bilateral agreements between prosecutors and defendants, judges should serve as the representatives of public interest, similar to their role in plea agreements. These two proposals would strengthen the overall response to corporate white-collar crime by deterring future criminal activity.

1. THE EXPLICIT AND IMPLICIT SOCIETAL COSTS OF WHITE-COLLAR CRIME

   1. The Severity of White-Collar Crime

      Georgie Weatherby, a professor of sociology and criminology at Gonzaga University, claims that the public has a serious misconception about the seriousness of white-collar crime. (24) The root of the misconception is that people do not feel the costs of white-collar crime directly, even though the overarching cost to society is immense. "How safe [people] feel in their homes, where they can walk at night, these are the issues people feel. They are tangible." (25) White-collar crime does not impact society in such a tangible way. However, not only are the societal costs of white-collar crime severe, but they also have been increasing in recent years. (26) "[O]ver the course of two years in the early [twenty-first] century, annual losses from fraudulent use of identity rose by more than $300 million in the United States." (27) Based on FBI estimates, white-collar crime costs the U.S. economy over $300 billion every year, causing significant negative impacts on people's lives. (28)

      For example, consider the effects of one type of white-collar crime: health care fraud. One of the most widespread types of health care fraud is overbilling or "upcoding," where providers change "a patient's diagnosis or treatment code to one reimbursed at a higher level." (29) Other types of health care fraud include providing unnecessary services or billing for "phantom" services not rendered. (30) Not only are the people with tax dollars supporting state Medicare and Medicaid programs victims of such crimes, but also those who pay for health insurance, whether privately or through an employer. Premiums charged by insurance companies directly correlate with the expenses and bills that they are responsible for paying. As fraudulent bills increase, insurance companies charge higher premiums. "Employers, both those that are self-insured and those that buy private insurance, see their health care costs increase every year due to fraud and abuse--and every year they pass the costs onto consumers in the form of higher prices and lower wages." (31) Individual workers eventually see their health care premiums rise, and their health care benefits decline. (32) It has been estimated that the costs of fraud and abuse range from three to ten percent of national health care spending, which have the "potential to become incredibly large because [of] the trickle-down effect" of those costs to the public. (33)

      Contrary to some public perception, white-collar crime is not victimless. (34) A single instance of white-collar criminal activity "can destroy a company, devastate families by wiping out their life savings, or cost investors billions of dollars." (35) Some instances, like the collapse of Enron, which resulted in over 4500 lost jobs and over $1 billion in investment...