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SIGTARP REPORT | A PROPOSAL TO BRING ACCOUNTABILITY TO THE “INSULATED CEO” aka BANKERS

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LETTER FROM THE SPECIAL INSPECTOR GENERAL

In an exciting time of presidential transition, the American people can count on SIGTARP to remain the same, as an independent watchdog and law enforcement agency. No one – Republican or Democrat – wants taxpayer money lost to crime or waste. No one wants those who break the law to go without repercussion or prosecution. Fraud, waste, and abuse will continue to occur. SIGTARP is there to stop it, to bring accountability, and enforce the law.

The American people have called for stronger reforms on Wall Street, frustrated by the lack of senior executive accountability at the largest banks. I have called for Wall Street reform based on the difficulties SIGTARP has faced as a law enforcement agency in proving criminal intent of senior executives at large institutions given how isolated they are from knowledge of fraud in their company. This isolation is part of the culture at large institutions, and is something that is unlikely to change absent reform. That is why I am proposing a reform to bring accountability to the “Insulated CEO” and other high-level executives.

“I propose that Congress remove the insulation around Wall Street CEOs and other high-level officials by requiring the CEO, CFO and certain other senior executives to sign an annual certification that they have conducted due diligence within their organization and can certify that that there is no criminal conduct or civil fraud in their organization” – Christy Goldsmith Romero, Special Inspector General (SIGTARP)

No longer allowed to stay “in the dark”, a crime and fraud certification forces the CEO to be “in the know.” Crime and fraud cannot be allowed to go unchecked at our largest institutions. Modeled after the annual Sarbanes-Oxley certification, this crime and fraud certification would create an incentive for top executives to institute strong antifraud internal controls on lower level executives and managers. It will also motivate lower level executives and managers to have conversations with leaders of the organization if fraud or crime is occurring.i

SIGTARP, which investigates crime at companies that took TARP bailout funds, has had significant success in the prosecution of senior executives at medium sized banks and smaller banks. Knowledge of fraud often rises to top executives where the companies are not big enough to insulate senior leaders. SIGTARP has been able to meet the standards required by criminal law to prove criminal intent because of that knowledge. Our investigations have led to criminal charges against 85 bankers at medium and smaller banks, including more than 10 bank CEOs. To date, 37 bankers investigated by SIGTARP have already been sentenced to prison, with others awaiting trial or sentencing.

Bringing accountability to senior executives at the largest banks has been another matter. From a civil remedy standpoint, SIGTARP’s investigations with DOJ have led to recoveries of just under $9 billion to American taxpayers from Wall Street banks such as Goldman Sachs, Bank of America and Morgan Stanley, and led to changes designed to prevent future fraud. In addition, our investigation of Bank of America led to the New York Attorney General banning the former CEO and CFO from the industry

A company should know what is going on so if there are violations of the law happening at any level of the organization . . . it should rise up and be stopped. – Christy Goldsmith Romero, Special Inspector General (SIGTARP), as reported by American Banker, September 9, 2016

We have faced significant difficulties in proving criminal intent of senior officials in large organizations that are purposely designed to insulate top officials from knowing about crime or civil fraud. Orchestrated in boardrooms and law firms, this insulation often puts senior executives “in the dark” and therefore just out of reach of prosecution.

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. This insulation presents a serious challenge to law enforcement to prove criminal intent – a challenge that requires a permanent incentive for CEOs and other high-level executives to be “in the know.”

To bring accountability to the “Insulated CEO” and other senior executives on Wall Street, incentives are needed to raise knowledge of crime and civil fraud to the highest levels of financial institutions. We know that the financial crisis, TARP bailout, and subsequent fraud scandals have not provided enough incentive.

Crime or fraud in an organization’s business practices should be detected in the due diligence and rise to the CEO. And if executives cannot certify, they should call law enforcement, such as SIGTARP, immediately.

Law enforcement agencies would not be relieved of their burden to prove criminal intent. That’s a bedrock principle of our justice system. However, this due diligence would make knowledge of the crime or fraud more likely to rise up to top leaders – leaders who can no longer stay insulated from the crime or fraud.ii Criminal intent depends on what those leaders do with that knowledge. Stopping fraud and immediately reporting it to law enforcement is the right response. On the other hand, if after learning about the fraud, the CEO and senior officers knowingly file false statements with the FDIC or SEC, they would be more in the reach of law enforcement than in the past. 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. 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. And it would give the public more confidence that the law applies to everyone, whether they sit in a cubicle or corner office.

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. When Sarbanes-Oxley was passed, many said CEO and CFO certifications would be impossible. But, of course, even the biggest firms certify every year.

Examples of Wall Street culture driven by dollars without regard for consequences are too well known, and examples of wrongdoing have become too many to accept. But our nation also has a culture, one that rewards integrity, transparency, and accountability – not a CEO that insulates themselves from knowing about crime and fraud in their organization. The time is ripe to make a difference for the future. Otherwise, without reform, history will repeat itself. Our nation must have one system of justice that applies equally. To do that, we should stop allowing Wall Street leaders to insulate themselves from justice.

Respectfully,

CHRISTY GOLDSMITH ROMERO Special Inspector General

 

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