Just How Much of Big Bank Fines Are Actually Paid and Who Profits?


Respectfully submitted by Lawrence E. Rafferty (rafflaw)- Weekend Contributor

It should not surprise any of the regular visitors to this blog that I have written many articles detailing the abuses of many of the Big Banks and the resulting fines that they have paid on multiple occasions.  When a taxpayer reads about Billion dollar settlements being paid by Banks and financial companies as a result of a Justice Department investigation, they probably assume that the entire amount of the fine is being paid.

Those very same taxpayers may be surprised to learn that in many cases, the Banks are able to deduct from their taxes up to 75% of the fines and settlements made with the Justice Department.

“Deep in the legalese weeds of the settlement documents lies buried treasure. Big banks such as Bank of America and JPMorgan Chase will receive deductions against the corporate tax that will amount to between half and nearly three-quarters of their multibillion-dollar settlements, at least. Meanwhile, midsized banks and nonbank lenders generally get to deduct the whole shebang.

Under Attorney General Eric Holder, whose agency has not prosecuted a single major bank or executive in the aftermath of the 2008 meltdown, the Justice Department has been criticized, not least by Democrats, for believing banks are too big to fail and their top brass too big to jail. But here’s the twist. It turns out that banks are also too big to tax: Windfall tax deductions set against the civil settlements imposed by the Justice Department total more than $44 billion, according to Newsweek estimates.” Reader Supported News

It may also be quite shocking to learn that the reason that the Big Banks agree to the large settlements is that they know that a large percentage of the fines are tax-deductible.  Would it surprise you to learn that even the Justice Department can gain from these large multi-billion dollar “settlements”?

“But there’s another, more self-serving reason for the Justice Department to hike civil settlement payments while allowing for most of the sum to be tax-deductible. The agency receives a cut of up to 3 percent of its share of the total settlements for its Working Capital Fund, a slush fund common across major government agencies. For example, the Treasury Department’s fund, according to a 2012 Government Accountability Office report, ‘“is intended to provide increased efficiencies in how the department funds and offers shared services—such as payroll, telecommunications, financial services, mail, and publications—valued at over $1 billion annually.”’ Reader Supported News

The idea that the Justice Department can profit from agreeing to let Banks and Banksters deduct most of their “fines” is quite disturbing.  While the SEC has disallowed any of its fines to be deducted by the “guilty” financial companies since 2003, the Justice Department continues to allow American companies to deduct a large portion of their fines.

When the Justice Department can gain up to 3% of the settlement amount as its fee, it begs the question if the Justice Department is allowing the Banksters to deduct their fines as a quid pro quo to hiking up the settlement amounts.  As one tax law professor states, allowing the Banksters to deduct significant portions of their settlements and fines shifts a large portion of the “fine” to taxpayers!

“Federal law allows companies to deduct large portions of the costs of settling with federal agencies on their tax returns. But that effectively shifts part of the settlement’s burden to taxpayers, and some lawmakers and consumer advocates have expressed concerns that the public can be misled when regulators tout giant settlement amounts that companies aren’t fully paying. …” TaxProf

When the Banksters and financial companies are allowed to “pay” civil fines and penalties that can be deducted from their corporate taxes, just how is this process providing any incentive for the banks to stop breaking the law?  Since the Justice Department itself can profit from the settlement designed to allow for the deduction of these fines, where is the incentive for the Justice Department to actually prosecute these Banksters on criminal charges?

There is some possible good news on the horizon.  Legislation has been introduced to attempt to force disclosure of the true cost of these fines and settlements and to attempt to find out why the Justice Department has not forwarded any Banksters for criminal prosecution.

“It appears that some in Congress are taking notice of the gap between settlements and federal receipts. Last month, the House Committee on Oversight and Government Reform asked the Justice Department to provide internal documents detailing the reasons for its decisions not to prosecute banks through the criminal courts. “We’re trying to determine why these things were civil, not criminal,” says a committee staffer who declined to be named, adding that the Justice Department’s slush fund “raises eyebrows because it signals an institutional interest in getting big numbers.”

“Truth in Settlements” legislation that has been proposed in the House and Senate would force the Justice Department and other federal agencies to disclose hidden tax deductions in settlements and whether total numbers are inflated for “credits” that can be offset in other areas. “When government agencies reach settlements with companies that break the law, they should disclose the terms of those deals to the public,” Senator Elizabeth Warren, a co-sponsor of the Senate bill who chaired a congressional oversight panel for the bailout, tells Newsweek.” Reader Supported News

True accountability for financial crimes can only be had if criminal prosecutions are brought against the guilty individuals and the guilty institutions.  It seems obvious that the financial industry is in bed with the Justice Department.  I guess that should not surprise anyone since it has been reported that Citigroup actually wrote the amendment to the recent Omnibus bill that reduced the regulatory impact of the Dodd-Frank bill which benefits Big Banks.

Money talks and Washington is listening to the Banksters very carefully.  Who listens to the regular taxpayer?

“The views expressed in this posting are the author’s alone and not those of the blog, the host, or other bloggers. As an open forum, weekend bloggers post independently without pre-approval or review. Content and any displays or art are solely their decision and responsibility.”

22 thoughts on “Just How Much of Big Bank Fines Are Actually Paid and Who Profits?”

  1. It’d be nice if a lawyer posting on a law blog would present the most relevant legal aspects of the topic on which he’s ranting. But apparently on weekends that task falls to the commentariat here.

    However, compensatory damages paid to a government do not constitute a fine or penalty. For example, in Southern Pacific Transportation Co. v. Commissioner, 75 T.C. 497 (1980), the tax court addressed the applicability of the Internal Revenue Code, specifically Section 162(f), in terms of the purpose of civil settlement payments. The court characterized Southern Pacific payments as either “remedial” (in which event they are deductible) or “punitive” (in which instance the payments are not deductible).

    A rational discussion of the classification of “the banksters’ ” payments into their “remedial” vs. “punitive” proportions would’ve been enlightening. But Mr. Rafferty chose instead to lump them together as “fines and settlements”, which seems very much like intentional obfuscation. A post that was truly “respectfully submitted” would attempt to clarify, not muddle, the key issues it raised.

    In general I find it odd that so many commenters here blame bank executives for the way the law has been written by the Congress and interpreted by the IRS and the tax court. One might say that makes them poorly informed government sycophants, if one were to lower oneself to the level of discourse on this oh-so-civil blog.

  2. Well done rafflaw. Clearly many people should have been jailed for the deception, fraud…….excuse me MASSIVE FRAUD….
    …..perpetrated on the American public. But to know that even after trillions were given, guarateed, etc….. to the bankers that taxpayers fund a significant portion of the fine should be distressing. The malaise in this country on an issue far more threatening then terrorism is scary.

    The Justice Dept. funding mechanism angle is interesting and should be drawing out all the rapid anti government types.

    Please continue to post on US financial crimes and ignore the poorly informed bankster sycophants.

  3. There is only one way to deal with the crooks. Put them in jail a la Madoff. A regular sentencing of three to four hundred years with no chance of parole will do more to curb the crime at the top than fines. Fines are money and money flows both ways. If the banks really did have to pay the fines and there were no tax breaks etc. then we, the consumer would end up paying. There are a very few at the top of the banking structure and the insurance structure that set the points. No government can do anything to deal with this financially. The way to get their attention is to put two or three hundred of them in jail for ever asap. Set the laws and regulations and then see what happens. A thief is a thief is a thief, with or without the mask.

  4. It is obvious that we are in a second gilded age, the day of the robber barons II. The whole of our economy has been rigged to benefit the 1%. The laws give them so many tax loopholes and subsidies, and even when they’re caught cheating us (and if you read the newspapers, this happens several times a week), the law allows them favorable tax write offs so they wind up paying a fraction of the fine, and nobody goes to jail. The only one whose gone to jail was Bernie Madoff, and that’s because he stole from rich people. We have reached the point where for every dollar spent on the social safety net programs, five dollars are given to the rich.

    As the recent budget bill showed, when it negated that part of Dodd-Frank that protected the taxpayer against being financially responsible when risky derivative trading goes south, the entire Republican Party and over half of the Democrats are in on the corrupt scam. The number of people in Congress who speak for us is a decided minority — we can’t expect much of any help from the politicians.

    We can continue to make feeble, feel good comments, or we can figure out a way to organize, and become a political force, not only on wealth inequality, but also on the environment, and other issues as well. The last gilded age was fought by the unions, but they’ve pretty much gone the way of the pay phone. We’re going to have to do it ourselves. Suggestions, anyone.

  5. Who listens to the regular taxpayer? – The IRS removed the requirement for individuals to claim taxable income for the foregivness of debt. So many people could do a cash our refinance and maybe take out hundreds of thousands in cash. Then allow the loan to go into foreclosure. Keep the cash but owe no tax. They go the best deal. Those of us who did not do this will be the ones to pay.

  6. Good Post rafflaw – banks are a favorite subject of mine to get me foaming at the mouth 🙂

  7. raff – are you upset the government is just not getting more from the banks? I am not sure exactly how the tax code works out over this, but I am hard pressed to believe the government makes this a zero sum game.

    And, what Olly said!

  8. What does the law say? Internal Revenue Code section 162(a) permits businesses to deduct certain everyday expenses. To be deductible, an expense must be “ordinary and necessary.” Examples include salaries, wages, advertising, insurance premiums and rental costs. Payments made in settlement of legal claims also may constitute ordinary and necessary expenses. So the settlements get deducted and who is really paying for them? Taxpayers. (It has been said that EXXON made out like a bandit on the Exxon Valdez settlements.)
    Other provisions of the Code, however, bar the deduction of certain disfavored expenses. Section 162(f) provides that “no deduction shall be allowed for any fine or similar penalty paid to the government for the violation of any law.” By enacting 162(f), Congress made a policy decision that those who pay fines or penalties in connection with alleged wrongdoing should not be allowed what constitutes a taxpayer funded discount.

    So why does the DOJ enter into agreements that run counter to the policy decision made by Congress regarding fines and penalties. Why doesnt it disallow the deduction of any of the “settlements” it makes? Guess!

  9. How about a teeny bit of algebra here?

    If you want to impose a penalty in the amount “X” on a company that pays a tax rate of “t”, and you know that penalty is a tax-deductible expense, you simply set the nominal penalty at amount “Y” such that Y = X/(1-t).

    If Y is greater than the firms gross taxable income in that year, the balance can be carried over to future years.

    Now for a question: How do you know this isn’t already being done?

  10. Sigh, these should be editable. “…deducts a tax as an expense…” no “or”

  11. I wonder if fines and penalties are deductible for ordinary businesses. I know that civil settlements for say liabilities are deductible. With regard to these banks are they different according to the tax code??

  12. They are too big to fail. They are to big to bail. They are too big. The Federal Reserve — a private consortium of a dozen banks.

    I recall our currency when the phrase “Redeemable for lawful money at any Federal Reserve Bank” was removed. Lawful money was redeemable in silver or gold at the US Treasury. I’ve heard that bad money (with green seals) drives out good (blue or red seals).

    A currency needs a standard, and it is established by price-control of something. Currency is inflating when that price is raised.

    Today we price-control one hour of unskilled labor. Raising that is inflation.

    That they exist is a crime. That we have an inflating fiat currency is a crime. Metaphorically, at least.

    It would be fine if any fine to any corporation had to be paid by shareholders. The fine to be paid in corporate stock which will be marketed uniformly for the next year sounds like a sound plan. The fine not passed on to the customers.

    When a corporation deducts a tax or as an expense that is passed on to the customers. Corporate tax is a sales tax because it is passed on to customers.

    When a corporation deducts a fine that, too, becomes a sales tax on the products or services of that corporation.

    The fine must impact Owner’s Equity to be meaningful, right?

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