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A post-TARP proposal: Make CEOs certify banks are fraud-free

Joe Mont | October 27, 2016

Bank executives, critics might say, were coated in Teflon throughout the financial crisis of 2008 and its aftermath. Attempts to level crimnal charges and personal liability against them for risky bets that contributed to the crisis and post-recession sins have never quite stuck.

Now, amid an increased call for criminal liability in the wake of a scandal that saw Wells Fargo employees opening nearly 2.5 million unauthorized customer accounts and credit cards, there is a renewed focus on punishing executives for compliance failures and criminal activity that gestate under their watch. The latest pitch: forcing top executives to certify that their institutions are free of criminal conduct and civil fraud.

The proposal, by Christy Romero, special inspector general for the Troubled Asset Relief Program, was detailed in a quarterly report to Congress that was made public on Oc. 26.

Romero’s proposal calls upon government agencies to “remove the insulation around Wall Street CEOs and other high-level officials” by requiring that the CEO, CFO, and other senior executives sign an annual certification that they have conducted due diligence within their organization and can attest there is no criminal conduct or civil fraud in their organization.

Modeled after annual Sarbanes-Oxley certifications, a crime and fraud certification would create an incentive for top executives to institute strong anti-fraud internal controls on lower level executives and managers. It would also motivate lower level executives and managers to have conversations with leaders of the organization if fraud or crime is occurring, she says.

SIGTARP, which investigates crime at companies that took TARP bailout funds, has had success in the prosecution of senior executives at medium sized banks and smaller banks. Its investigations have led to criminal charges against 85 bankers at medium and smaller banks, including more than 10 bank CEOs. To date, 37 bankers have already been sentenced to prison, with others awaiting trial or sentencing. Investigations with the Department of Justice have led to recoveries of just under $9 billion from Wall Street banks.

That success, however, is tempered by “significant difficulties” in proving criminal intent of senior executives in large organizations that are “purposely designed to insulate top officials from knowing about crime or civil fraud,” Romero says.

“Orchestrated in boardrooms and law firms, this insulation often puts senior executives ‘in the dark’ and therefore just out of reach of prosecution,” she wrote. “Currently, Wall Street CEOs and other high-level executives do not have an incentive to identify crime and civil fraud in their organization. They can hide behind the idea that because their firm is so big, they cannot be expected to know everything that happens within it.”

Crime or fraud in an organization’s business practices should be detected in the due diligence and rise to the CEO. If executives cannot certify, they should immediately contact law enforcement officials or regulators, she added.

If a smaller crime by a rogue employee escapes the due diligence, it is not likely that there would be sufficient criminal intent for prosecution. Law enforcement agencies would not be relieved of their burden to prove criminal intent. If, however, after learning about fraud the CEO and senior officers knowingly file false statements with the Federal Deposit Insurance Corporation or Securities and Exchange Commission, “they would be more in the reach of law enforcement than in the past,” Romero wrote.  In SIGTARP’s investigations, the annual Sarbanes-Oxley certifications can serve as evidence to prove that executives (CEO, CFO, or others who signed sub-certifications) with knowledge of the fraud also knew that they were filing false financial statements, leading to charges such as bank fraud. A similar certification could do the same for crime and fraud at large banks.

“This reform would be a significant step forward toward greater accountability,” Romero wrote. “It would benefit large financial institutions by giving the CEO and other leaders the opportunity and accountability to stop fraud, fix it, and report it to law enforcement, such as SIGTARP. If leadership fails to act, it gives law enforcement a path to bring justice to the ‘insulated CEO’ and other senior executives.”

“If a CEO says that their institution is too big or too complex to be able to certify about crime or fraud, then they have a much bigger problem, one that should be unacceptable, particularly at banks deemed so systemic that taxpayers bailed them out,” she added. “When Sarbanes-Oxley was passed, many said CEO and CFO certifications would be impossible. But, of course, even the biggest firms certify every year.”