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Court Hides Monitor’s Hand in HSBC Drug-Money Deal

Nearly five years after HSBC paid a $1.92 billion settlement for money laundering involving drug cartels, the Second Circuit sidelined scrutiny Wednesday of the bank’s compliance with reforms.

MANHATTAN (CN) — When HSBC paid $1.92 billion in 2012 to settle a civil case over money laundering for drug cartels, the fine was widely viewed as a slap on the wrist to avoid criminal prosecution.

HSBC’s compliance with the deferred prosecution agreement has remained under wraps, however, and will stay that way following a reversal Wednesday by the Second Circuit.

The bank had sought relief from the appeals court after a federal judge sided with mortgage holder Hubert Dean Moore Jr., who had been fighting to unveil a 1,000-page report compiled by a court-appointed monitor on HSBC’s reforms.

Even though the monitor's report was filed in a court, the government argued that it did not qualify as a judicial document. The Second Circuit endorsed that view, prompting dismay from Levin Sullivan Koch & Schulz attorney David Schulz.

"Since the financial collapse in 2008, the use of these agreements has exploded," Schulz said of deferred prosecution agreements. "They have become widely used have let corporations and their responsible officers off the hook for criminal violations, while creating a shadow system of Wall Street regulation by prosecutors operating with no oversight from the courts or expert bank regulators.”

The Reporters Committee for Freedom of the Press, a Washington-based media advocacy group, had supported the effort to disclose the monitor's report with a friend-of-the-court brief.

In a phone interview, the committee's legal defense director Gregg Leslie expressed his disappointment in the ruling, but predicted that its fallout would be limited. Today's precedent will apply only to monitor's reports filed pursuant to deferred prosecution agreements.

"It’s a very bad decision for a very narrow class of documents," Leslie said.

"It’s disturbing, but at least it’s limited to that class of cases," Leslie added.

In the lower-court ruling that favored transparency last year, U.S. District Judge John Gleeson had called it “easy to imagine circumstances in which a deferred prosecution agreement, or the implementation of such an agreement, so transgresses the bounds of lawfulness or propriety as to warrant judicial intervention to protect the integrity of the court.”

The Second Circuit countered Thursday, however, that courts must presume the government’s good faith.

“We agree that it is not difficult to imagine such circumstances,” U.S. Circuit Judge Robert Katzmann wrote for a three-person panel. “But the problem with this reasoning is that it runs headlong into the presumption of regularity that federal courts are obliged to ascribe to prosecutorial conduct and decision-making.”

That presumption could change if a whistleblower shows malfeasance between the U.S. government and the megabank.

“To be sure, in its history, this nation has not been free of executive misconduct and abuse of power,” the 40-page ruling states. “And if misconduct in the implementation of a DPA came to a district court’s attention (for example, through a whistle-blower filing a letter with the court), the district court might very well be justified in invoking its supervisory power sua sponte to monitor the implementation of the DPA or to take other appropriate action.”

U.S. Circuit Judge Gerard Lynch concurred, as did U.S. Circuit Judge Rosemary Pooler, who penned a concurring opinion that calls for Congress to make the laws governing deferred prosecution agreements tougher.

Pooler said DPAs were crafted to keep flesh-and-blood defendants on pretrial probation but have become more helpful in recent years to corporations than to individual defendants. “Unlike individuals, corporations are not diverted into probation‐like programs supervised by paraprofessionals,” Pooler wrote. “Rather, they enter into negotiated agreements with prosecutors that set forth the facts to which the corporation admits and a remedy that typically includes both a fine and an agreement for the corporation to make structural changes.”

Partially defending the system, Pooler wrote: “Using DPAs in this manner is neither improper nor undesirable.”

“An indictment alone can deal a death blow to a corporation, with severe collateral consequences for blameless employees and shareholders,” she added. “As the law governing DPAs stands now, however, the prosecution exercises the core judicial functions of adjudicating guilt and imposing sentence with no meaningful oversight from the courts.”

Rep. Bill Pascrell, D-N.J., sponsored legislation in 2014 called the Accountability in Deferred Prosecution Agreement that would have increased court oversight.

Pooler urged legislators to revisit that bill, or something like it. 

Adding his voice to the chorus, Schulz seconded the call for legislative action.

"As Judge Pooler stressed in a separate opinion, Congress needs to address this unintended and unfortunate development," the attorney said said.

As part of its 2012 DPA, HSBC admitted it had helped funnel at least $881 million in drug money, including from the Sinaloa Cartel in Mexico and the Norte del Valle Cartel in Colombia.

The British bank also copped to violations of multiple U.S. laws and sanctions against Cuba, Iran, Libya, Sudan and Burma, including the Bank Secrecy Act, the International Emergency Economic Powers Act and the Trading With the Enemy Act.

By one estimate, HSBC’s cash settlement for this conduct represented only five weeks of the bank’s income, and the deal kept its executives out of prison. Prosecutors justified the deal by pointing out that it included a consent decree forcing the bank to institute reforms and tighten internal controls.

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