April 1 (Bloomberg) — Money laundering by large international banks has reached epidemic proportions, and U.S. authorities are supposedly looking into Citigroup Inc. and JPMorgan Chase & Co.

Governor Jerome Powell, on behalf of the Board of Governors of the Federal Reserve System, recently testified to Congress on the issue, and he sounded serious. But international criminals and terrorists needn’t worry. This is window dressing: Complicit bankers have nothing to fear from the U.S. justice system.

To be on the safe side, though, miscreants should be sure to use a really large global bank for all their money-laundering needs.

There may be fines, but the largest financial companies are unlikely to face criminal actions or meaningful sanctions. The Department of Justice has decided that these banks are too big to prosecute to the full extent of the law, though why this also gets employees and executives off the hook remains a mystery. And the Federal Reserve refuses to rescind bank licenses, undermining the credibility, legitimacy and stability of the financial system.

To see this perverse incentive program in action, consider the recent case of a big money-laundering bank that violated a deferred prosecution agreement with the Justice Department, openly broke U.S. securities law and stuck its finger in the eye of the Fed. This is what John Peace, the chairman of Standard Chartered Plc, and his colleagues managed to get away with on March 5. The meaningful consequences for him or his company are precisely zero.

At one level, this is farce. Standard Chartered has long conceded that it broke U.S. money-laundering laws in spectacular and prolonged fashion. In late 2012, it entered into a deferred prosecution agreement with the Justice Department, agreeing to pay a fine that amounts to little more than a slap on the wrist (in any case, such penalties are paid by shareholders, not management).

Then, on a March 5 conference call with investors, Peace denied that his bank and its employees had willfully broken U.S. law with their money-laundering activities. This statement was a clear breach of the deferred prosecution agreement (see paragraph 12 on page 10, where the bank agreed that none of its officers should make “any public statement contradicting the acceptance of responsibility by SCB set forth above or the facts described in the Factual Statement”). Any such statement constitutes a willful and material breach of the agreement.

This is where the theater of the absurd begins. For some reason, it took the bank 11 business days, not the required five, to issue a retraction. No doubt a number of people, in the private and public sectors, were asleep at the switch. (The Justice Department and Standard Chartered rebuffed my requests for details on the timeline.)

The implications of the affair are twofold. First, with his eventual retraction, Peace admitted that he misled investors. It also was an implicit admission that he had failed to issue a timely correction. Waiting 11 days to correct a material factual error is a serious breach of U.S. securities law for any nonfinancial company. Wake me when the Securities and Exchange Commission brings a case against Standard Chartered.

Of course, it’s possible that Peace didn’t deliberately violate the deferred prosecution agreement because he hadn’t read it, or at least not all the way to page 10. Peace is an accomplished professional with a long and distinguished track record. Everyone can have a forgetful moment. That still doesn’t explain why the bank took so long to correct the facts.

Tone at the top matters, as reporting around JPMorgan Chase and its relationship with regulators makes clear. Will Chief Executive Officer Jamie Dimon be more cooperative than he was, for example, in August 2011 when he refused to provide detailed information on the goings-on in his investment bank?

Why hasn’t Standard Chartered’s board, which is made up of talented and experienced individuals, forced out Peace as a result of this bungling? (I called for his resignation on my blog last week.)

The only possible explanation is that the board thinks Peace did nothing wrong. They may even regard U.S. laws as onerous and the Department of Justice as heavy-handed.

They would be entitled to their opinions, of course. But if they would like their bank to do business in the U.S., the rules are (supposedly) the rules. If used appropriately, permission to operate a bank in the U.S. grants the opportunity to earn a great deal of profit.

At a recent congressional hearing, Senator Elizabeth Warren of Massachusetts asked what it would take for a company to lose its U.S. banking license. Specifically, “How many billions of dollars do you have to launder for drug lords?”

Powell, the Fed governor, replied that pulling a bank’s license may be “appropriate when there’s a criminal conviction.”

I have failed to find any cases of the Fed ordering the termination of banking activities in the U.S. for a foreign bank after a criminal conviction for money laundering. Nor, for that matter, has the Fed taken action to shut down a bank that signed a deferred prosecution agreement, which, in the case of Standard Chartered, was an acknowledgment of criminal wrongdoing. Nor has it taken action when such an agreement was violated.

To see what the Fed is empowered to do under the International Banking Act, and working with state authorities, look at the case of Daiwa Bank, which received an Order to Terminate United States Banking Activities in 1995. Note to big banks: Don’t allow illegal trading in the U.S. Treasury market; on this, we may still have standards. By the way, in the case of Daiwa, there was no criminal conviction.

Last summer, when Barclays’ Chief Executive Officer Robert Diamond was less than fully cooperative with the Bank of England in providing details of the Libor scandal, he was gone within 24 hours. Any bank supervisor has the right and the obligation to force out a manager who impedes the proper functioning of the financial system.

The new CEO of Barclays is trying to clean house. The obstreperous approach of the previous management set the tone for the entire organization, creating a mess of macroeconomic proportions.

Will any senior executives at Standard Chartered be forced out? Could the bank lose its ability to operate in the U.S.? Based on what we have seen so far, neither seems plausible.

If Standard Chartered violates its cease-and-desist order with the Fed, would it then lose its license? Not according to what Powell said in his congressional testimony. The Fed has no teeth whatsoever, at least when it comes to global megabanks, hence the continuing pattern of defiance from JPMorgan and Dimon.

If you or I tried to launder money, even on a small scale, we would probably go to jail. But when the employees of a very big bank do so — on a grand scale and over many years — there are no meaningful consequences.

(Simon Johnson, a professor at the MIT Sloan School of Management as well as a senior fellow at the Peterson Institute for International Economics, is co-author of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You. The opinions expressed are his own.)

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