Goldman’s Malaysian Scandal Revives the ‘Too Big to Jail’ Debate

Calls to charge companies returned after the financial crisis of 2008, when there was clear evidence of widespread wrongdoing at banks. But the government feared that the global financial system was still not strong enough to bear the consequences of charges against a large bank and held off taking criminal actions. (It did, however, bring civil actions that resulted in multibillion-dollar fines.)

As the banking system steadied and prosecutors wanted to hold bankers accountable, the Obama administrations started to obtain guilty pleas from banks on criminal charges.

The government tried to limit the collateral damage. Sometimes, prosecutors charged a single foreign subsidiary of a bank rather than its parent company. Waivers were granted that allowed banks to continue doing certain types of business. When a division of a French bank faced a ban on dollar clearing, it paid others to do the activity.

But even if the government softens the blow, guilty pleas still have bite. They strengthen the hand of prosecutors if the company were to commit more wrongdoing. “If you are on a guilty plea, you are on probation, and the consequences of a violation are more serious,” says Brandon L. Garrett, a law professor at Duke.

Senior officials in President Trump’s Justice Department have not stated publicly their position on the criminal prosecution of companies, but the federal agencies that pursue misconduct so far appear to have a lighter touch, according to a recent article in The New York Times that showed a drop in penalties.

At the same time, if evidence of serious wrongdoing is found at Goldman, prosecutors are likely to take stringent action. Much depends on how many high-level employees were complicit or negligent and whether there were significant weaknesses in Goldman’s controls. In their charges against one of the former Goldman bankers, prosecutors said the bank at times prioritized deals “ahead of the proper operation of its compliance function.” The government, however, has not publicly provided much supporting detail for that assertion.

Short of a guilty plea by Goldman, the Department of Justice could push the bank to enter a deferred prosecution agreement, under which the government outlines charges but asks that they be postponed for a period during which the bank promises to revamp its compliance. Softer still is a non-prosecution agreement, in which the government would not file charges but may still require that the bank commit to an overhaul.

Some legal scholars recognize that the government is not going to take the sort of criminal action against banks that could do serious harm to their businesses. As a result, they contend, if prosecutors want to deter wrongdoing on Wall Street, they need to focus on getting jail time for individuals convicted of white-collar crime. “How do you really put in place some deterrent?” said Jimmy Gurulé, a law professor at Notre Dame. “Somebody has to go to prison. But that is as rare as a bank losing its license.”