In the aftermath of the financial crisis, and the growing number of bank failures -- approximately 350 during the last 3 years -- there has been an outcry from the public, politicians, regulators and law enforcement calling for criminal prosecution of executives from these failed banks. They cite the aggressive criminal prosecution of executives (approximately 1800 criminal cases) from the failed savings and loan crisis which occurred in the late 1980s and early 1990s.
Wall Street has become the symbol of this outcry. Prosecutors, however, have been focusing more on community banks across the country rather than some of the more significant Wall Street actors.
So far, the cases which have been brought reflect a need for vigilance as to internal controls and active oversight. Many more cases have been brought against mortgage brokers and borrowers rather than bank executives.
The Justice Department has made numerous statements of its intent to prosecute bank executives from failed banks. The FDIC has confirmed that it is investigating executives from 50 failed banks.
Building a criminal case against bank executives is time consuming and resource intensive. It is difficult to distinguish between business conduct which is criminal and conduct which reflects valid business judgments which turned out poorly because of unforeseen events.
Nonetheless, the extensive regulation of banks creates legal risks for directors, officers, and other “institution-affiliated parties.” Banks and their directors and officers should carefully consider their compliance programs and create a culture of compliance within their organization, including appropriate internal controls and effective insider trading policies. Prompt filing of confidential suspicious activity reports (“SARs”) should be made timely and provided to the bank’s board of directors whenever there is a known or suspected violation of federal law or a suspected money laundering activity or Bank Secrecy Act violation. Bank directors should make sure their bank has appropriate procedures for timely filing SARs. Banks in trouble and their boards of directors should be sensitive to potential civil and possibly criminal charges if their institutions fail, and they should be fully informed as to how to minimize these risks.