17 Sep 2015
As the pendulum begins to swing away from banker bashing there is a risk that the nature and extent of the sickness that has gripped the sector has not been fully diagnosed or treated. Akin to a patient with a contagious illness, banks are about to be released from quarantine despite continuing to pose a danger to themselves and to others.
The opportunity to cure the banks was missed because of a failure to recognise the sector’s responsibility for a spectrum of abusive conduct ranging from reckless risk taking of the type that led to 2008, mis-selling, market rigging, sanctions evasion, money laundering and the facilitation of crime – each symptoms of a serious malady. Effective treatment requires much closer analysis of the worst symptom – the way in which banks help criminals to commit crimes.
Earlier this year HSBC was pilloried for allegedly assisting customers to evade UK tax. In 2009 UBS paid a $780m fine for conspiring to defraud the US by impeding the IRS. In 2014 JP Morgan entered into a deferred prosecution agreement and paid a $2bn fine for failing to have sufficiently robust controls that may have helped prevent the Madoff Ponzi scheme which prosecutors alleged was conducted almost exclusively through accounts with the bank. In each case the role of the banks was integral to the underlying criminality. Whether banks facilitate crimes perpetrated by others intentionally or not matters little – the end effect for the victims is much the same. Corruption, once again in the spotlight because of FIFA is a crime that places particular reliance on the banking sector for its success. Numerous corruption scandals dating back to the investigation that revealed the methods used by the former Nigerian dictator Sani Abacha teach us that both bribe payers and bribe receivers exploit the banking sector to achieve their objectives – in the case of the bribe payers to disguise their involvement in the payment of bribes and in the case of corrupt officials to distance whatever form of benefit they eventually enjoy by obfuscating their connection with the property through the use of intermediary ownership vehicles banked by the world’s largest financial institutions.
Despite the considerable investment made by banks to prevent financial crime in recent years the focus upon forestalling money laundering has come at the expense of identifying relationships in which customers commit crimes such as corruption. Bankers are erroneously taught to be alert to laundering activity described as taking place in three stages: placement, layering and integration collectively making up a laundering cycle. Quite apart from being misleading – money laundering often doesn’t follow such a pattern, bankers first and foremost need to be more alive to the risk that they may be facilitating crimes before worrying about whether they are also being used to launder the proceeds that derive from them.
Tougher laws to prevent bribery do not reduce the number of bribes that are paid, they simply force bribe payers to become more inventive in the methods they employ. Whilst the allegations of FIFA corruption read like a case study in rooky bribe paying errors involving brief cases full of cash and the use of U.S. bank accounts, much more sophisticated schemes are often employed at the heart of the banking sector. One method involves the transfer of slush funds from entities masquerading as off balance sheet special purpose vehicles to companies under cover of master consultancy contracts for the supply of intangible ‘agency’ services. From there the money is transferred onward to its destination, under the aegis of sub-consultancy agreements the terms of which mirror the master agreements, evidencing to the bank compliance departments who care to ask, a symmetry that provides rationale and comfort. The contracts, drawn by expensive firms of lawyers in London or Switzerland look convincing but no services are ever actually delivered in return for the payments. The wire transfers legitimised by the theatre of the financial sector, and its vernacular are simply bribes. Long before the corrupt official considers how to launder his ill-gotten gains, the banking sector has facilitated serious wrongdoing.
The sums of money involved are vast. Sometimes, particularly in the armaments industry, the value of the contracts on offer are so immense that companies are prepared to pay a bribe simply to make it on to a short list of contenders. $20m for the chance of a $4bn economic opportunity can seem like good business provided you don’t get caught by having bankers and trust and company officers do your bidding.
Though rules exist to compel financial institutions to identify and apply enhanced due diligence to Politically Exposed Persons (PEP’s) that is to say the bribe receivers, they do not extend to bribe payers. Practical compliance with the PEP rules can be undermined within banks by commercial pressure and human factors which conspire on occasions to create a reluctance in the mind of Client Relationship Managers to ‘report’ suspicions about PEP customers who they know are powerful, and often important to their employers. What Relationship Manager whose bonus is calibrated by reference to the total assets under management of his client pool will rush to tell his boss that an important PEP client has decided to terminate his relationship with the bank and transfer all of his cash to a competitor because he took umbrage at intrusive questioning about his source of funds? Some CRM’s take their chances reckoning their short term financial interests outweigh the very slim longer term chance that they will be held to account by the authorities. No doubt the absence of news images of bankers in handcuffs or orange jump suits fortifies them as they weigh the risks.
Which leads us to consider the causal factors that underpin the continuum of harmful conduct for which banks bear responsibility. How is rate rigging linked to sanctions evasion and the facilitation of bribery? The answers relate to one over-riding truth, that despite (or perhaps because of) the systemic importance of banks they and their senior officials continue to enjoy beneficial treatment in relation to authorisation, supervision and crucially, enforcement. Despite bringing the world to the edge of economic catastrophe in 2008 UK bank directors to this day need not be professionally qualified. In the U.S. the position is even worse with a requirement that directors only have a ‘basic understanding of the banking industry’. The absence of stringent technical competency requirements has led not to the emergence of a meritocracy but a club. Fifty years ago that didn’t matter terribly much – the risks directors were managing were largely credit related and the level of contagion risk between institutions and countries was significantly lower, but in the 21st century it matters a great deal as the risks inherent in banking products, services and markets have become significantly more complex and inter-related. When banks are required to be investigated in the UK they play a part in selecting who investigates them from a list of approved firms many of which derive significant revenue streams from banking clients. In what other walk of life is such a conflict of interest tolerated? When enforcement action is taken who is it targeted at? Not the directors with the responsibility for the environments in which the conduct has taken place but the corporations that pay the fines. Just as drug dealers and tax evaders take shelter behind anonymous shell companies so bank directors are able to leave the ramparts exposed to attack as they scuttle deep inside their organisations beyond the reach of the law. As the posterchild of most despised bankers, Fred Goodwin soaked up a great deal of limelight that should have been shared with numerous other bank directors who with pensions intact walked away scot free to take up board positions with other FTSE 500 companies. Plans in the UK for a new senior manager’s regime and the introduction of criminal liability for senior bankers in the case of bank failure create a mirage of progress whilst deflecting legitimate questions including why existing rules governing director’s disqualification or prohibition from the financial sector have not been invoked? Prosecutions or regulatory action not against institutions but against directors present an unparalleled opportunity to demonstrate just how serious the consequences are of board level incompetence and would lend the most credence yet to repeated, but hollow claims from politicians that harmful behaviours will not be tolerated.
Even in the U.S. which has filled a vacuum in becoming the world’s policeman of financial markets the automatic reflex of prosecutors is now to enter deferred prosecution agreements with banks in return for the payment of large fines that have come to be viewed simply as a new form of taxation – a cost of accessing the dollar. A petty thief gets a criminal record, a bank gets an invoice. Even for those banks for whom the Department of Justice has favoured a prosecution rather than a deferral, the consequences have been no more severe for the bank directors, rendering the prosecutions damp squibs. If an individual is convicted of a criminal offence it sticks. It has a material impact on their future prospects. Yet in the case of Credit Suisse prosecuted for aiding tax evasion in May 2014, instead of connoting pariah status on the bank, its chief executive is reported to have said on a conference call shortly after the conviction was announced that it would not cause ‘any material impact on our operational or business capabilities’. Can it represent progress since 2008 for a bank and its executives to so easily weather the bank becoming a convicted felon?
How can all of this be explained? Is there a coincidence that shortly after HSBC announced a review of whether to maintain or move its UK Headquarters, the Chancellor George Osborne signalled an end to banker bashing? The truth lies in the mobility of capital and the unique role the banking industry plays in controlling it, relative to other industry sectors. No other sector wields as much power or has the ability to focus the minds of policymakers to the same extent. Capital will always flow to where it is treated most efficiently and its custodians will pull all the levers at their disposal to maximise efficiencies in law, regulation and taxation. When the levers no longer work in one jurisdiction arbitrage opportunities are identified in others and capital flows accordingly. A microcosm of the same dynamic has been in evidence offshore for the past decade. As jurisdictions such as the Channel Islands have cleaned up their act through the introduction and enforcement of more effective anti-money laundering rules, thousands of relationships have left to be administered and banked in the friendlier offshore centres of the Middle East and Asia – jurisdictions that the international community for reasons of geo-political expedience are slower to criticise. The Channel island economies are unlikely ever to recover. In one sense then George Osborne has been right to highlight the dangers of alienating the custodians of large pools of development capital. There is a choice which could have profound economic consequences for Britain – go too far in one direction and we may reduce our tax take and increase unemployment, too far in the other and we may be faced with the cost of further scandals and potentially even further bank bailouts. Now that the allegations of FIFA bribery have been laid bare, it seems clear that the choice for all jurisdictions in defining their approach to the regulation and supervision of banks is not dissimilar to that which has been faced by countries pitching for the FIFA world cup. In playing host to FIFA and banks the question simply is, should we play ball?
Stephen Platt is a barrister, Adjunct Professor of Law at Georgetown University and author of the award winning and best-selling book ‘Criminal Capital – How the Finance Industry Facilitates Crime’.
Advance your CPD minutes for reading this article, by signing up and using the CPD WalletFREE CPD Wallet