Image Source: Reuter's
Recent reports in financial crimes compliance detail a dangerous yet unsurprising glide path in that regulatory framework’s enforcement strategy. $5 billion in fines in 2022. $55 billion since 2008. [1] Despite these sums, financial crimes enforcement is and has been unacceptably ineffective in changing behaviors and, thus, preventing illicit acts and funds from exploiting the global financial system.
The parallel, when it comes to regulatory enforcement behaviors and ESG, is dire, because if regulators do not change their methods, the consequences of ongoing ESG corporate failures will, unlike financial crimes on Wall Street, do more than harm the pocketbook and spare no one.
Last July, Bloomberg reported that the SEC’s “war on greenwashing has begun.” [2] The SEC’s Climate and ESG Task Force was now walking the beat to “develop initiatives to proactively identify ESG-related misconduct,” “use sophisticated data analysis to mine and assess information across registrants,” and “identify potential violations including material gaps or misstatements in issuers’ disclosures of climate risks,” all outlined on the SEC’s website. [3]
“There’s now little doubt that the [SEC] actually means business,” Bloomberg concluded.
Enforcement-wise, the SEC has touted ESG-related actions across various industries for, among other shortcomings: failing to follow policies and procedures, misleading and making false statements to clients and investors, omissions related to ESG considerations, and fraud involving alternative fuel vehicles, automobile emissions, water desalination, and “environmentally-friendly” bottling, building panel recycling, agriculture and cleaning production facilities.
This is not encouraging.
Rather, these early ESG enforcement behaviors mirror exactly what has occurred in the financial crimes environment for two generations, with the effects of the first generation’s enforcement failures most tragically on display on 9/11 and through the second, woefully disappointing post- USA PATRIOT Act and Dodd-Frank Wall Street Reform Act.
Jesse Eisinger’s compelling book, The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives, explains a significant root cause within all of the major regulatory agencies. In the opening chapter, Eisinger recounts how James Comey, the newly appointed U.S. Attorney for the Southern District of New York, delivered one of his first speeches to the criminal prosecution division. The year was 2002, and the assistant prosecutors were seated in a courtroom of the Old Courthouse in lower Manhattan one evening.
“Who here has never had an acquittal or a hung jury?” Comey asked the elite bunch.
Hands proudly punched into the air.
“Me and my friends have a name for you guys,” Comey responded.
“You are members of what we like to call the Chickenshit Club.”
It’s a thought-provoking book that examines the theme of corporate greed over nearly forty years and prosecutors’ inconsistent and underwhelming response to it. [4] While I did not agree with all of Eisinger’s thesis-like but easily delivered arguments, I can relate his main point to the recent surge in those financial crimes compliance fines. $5 billion…$55 billion…
They are meaningless.
Financial services firms have gotten no better at policing themselves, in part because the punitive measures just aren’t punitive. They are, as has been widely acknowledged, the cost of doing business.
Meanwhile, the magnitude of harm that can befall the public remains uncapped with Bernie Madoff and Sam Bankman-Fried serving as comically ripe bookends since 2008. The former’s Ponzi scheme had been “gift wrapped” for the SEC multiple times and years before his own sons turned him in, and the latter operated with Holmesian (“Elizabethan” was taken) brazenness and even more incredibly without any regulatory supervision. [5] All the while, financial services firms like HSBC have demonstrated a near constant ability to fail in effective compliance. [6]
The corporate world is no better, mind you, and so for the SEC and its peer regulators, I one singular piece of advice. It is not revolutionary. But, it’s where the heart of true change lies, and thus far, regulators have failed to achieve it.
Demonstrate actual accountability, regardless of the offending company’s size or the corporate executives’ or their lawyers’ (or their lobbyists’) clout.
The SEC’s early ESG enforcement returns are bleak, however. All of the actions settled over the past five years demonstrate zero accountability by the offending company or the responsible executives. While the press releases spell out the penalties extracted – multiple million-dollar fines (though woefully low), agreements to retain independent compliance consultants, cease-and-desist orders, disgorgements (plus interest), a “censure,” not one of the companies pled guilty or even admitted anything. In each of the actions, the SEC agreed to the inclusion of the following corporate face-saving, and, I’ll say it, chickenshit, phrase:
“[Insert Company Name] neither admitted nor denied the SEC’s findings.” [7]
The litany of the SEC’s defendants is also not a list of the who’s who of global players or systemically important. Rather it lists Goldman Sachs subsidiary Goldman Sachs Asset Management, Compass Minerals, Health Insurance Innovation, BNY Mellon Investment Adviser, Wahed Invest, Fiat Chrysler, Bounty of the Ocean and its affiliate Ocean Harvest.
If corporate ESG behaviors are to walk the walk, regulators need a much different strategy. It is not…it cannot be…the one they have used to police financial crimes. Yes, that should start within the companies themselves, their boards and executives. But, it’s with the global, public sector stewards where success and safety reside.
Paul Caulfield is an Adjunct Professor at Fordham Law School where he teaches financial crimes compliance and effective risk management. He was previously the Chief Risk Officer of IDB Bank, Israel’s largest foreign financial institution, and U.S. Head of Commercial Compliance for Citibank, N.A. He began his career with the Manhattan District Attorney’s Office.
Sources
[5] https://youtu.be/uw_Tgu0txS0; https://www.npr.org/2010/03/02/124208012/madoff-whistleblower-sec-failed-to-do-the-math; https://www.forbes.com/sites/joemoglia/2022/12/12/regulators-must-take-responsibility-for-the-ftx-and-sbf-meltdown/?sh=22b6060e5fe4
[6] https://www.reuters.com/business/finance/us-fed-terminates-enforcement-action-against-hsbc-2022-09-02/; https://www.theguardian.com/business/2021/jul/28/hsbc-faces-questions-over-disclosure-of-alleged-money-laundering-to-monitors
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