Global Policy Forum

Lax Controls at Banks, or Systemic Rot?

A report from the Senate subcommittee revealed that the global bank HSBC, as well as the government regulators, failed to report money laundering. HSBC has facilitated illegal transfer of billions of dollars from Mexican drug dealers, Saudis with terrorist connections, and Iranians bypassing sanctions. But the regulators ignored warnings for more than a decade. Are regulators -and therefore governments themselves- complicit in the corruption of the global financial system?

By Scott Johnson 

July 17, 2012

At what point will we start to ask, after digesting the details of each new banking scandal, “Next?”

Readers could be forgiven for wondering after the latest jaw-dropping report on a bank’s alleged misdeeds.

Officials from HSBC, Europe’s largest bank, will testify before the U.S. Senate’s Permanent Subcommittee on Investigations on Tuesday about whether the bank facilitated the transfer of billions of dollars in illicit funds.

According to the panel’s 335-page report, which was released on Monday, HSBC officials left open the way for the illegal transfers of huge sums of money by warring Mexican drug dealers, as well as Saudis with ties to terrorist organizations, including Al Qaeda, and Iranians eager to bypass sanctions.

And just as the new HSBC scandal comes to light, the now-old Libor scandal is widening. The latest turn involves the Royal Bank of Scotland refusing to cooperate with the Canadian authorities investigating the bank’s possible role in the rate-setting scandal. The bank’s lack of cooperation, given the fact that it is 82-percent owned by the British government, is gobsmacking, as they say.

RBS, one of more than 10 banks under scrutiny from authorities around the globe, is refusing to turn over crucial information to Canadian regulators, DealBook reports.

DealBook also has chapter and verse on the HSBC scandal. U.S. investigators have been looking into HSBC for a year, and the bank is just the latest casualty in a string of investigations and sanctions.

Last month two of Europe’s largest financial institutions were forced to pay large fines for violations. London-based Barclays paid a $453 million settlement to U.S. regulators for manipulating interest rates, while the Dutch bank ING paid $619 million for violating the rules governing sanctions imposed on Cuba and Iran. Several other banks have also paid fines and more may be coming soon, Bloomberg reports.

HSBC is being used as exhibit A in an ongoing effort by the Obama administration to shut down, or at least slow down, the use of global financial institutions as tax shelters, transit points and hiding spots for dirty, dangerous money. The report revealed that the bank’s Mexico office transferred upwards of $7 billion in cash from so-called “casas de cambio” (exchange houses) to its U.S. offices over the course of 2007 and 2008 — transactions officials said would have been impossible unless they included a significant amount of illegal drug proceeds.

Parts of the report — including a mind-boggling section detailing how HSBC’s Mexico staff ran a $2.1 billion subsidiary operation in the Cayman Islands for tens of thousands of customers with no staff and no offices — read more like a passage from a John Grisham novel than a government account:

Two years later, in 2008, John Root, senior HSBC Group Compliance officer, rediscovered the 2006 audit when examining KYC (Know Your Customer) problems in the Cayman accounts. He wrote: “The real surprise was the existence of an HBMX audit in January 2006 on KYC for the USD Cayman accounts. It is not clear who in AML responded, and how. Blank looks all around.” His supervisor, Mr. Bagley, later jokingly remarked to the Head of Group Audit for Latin America and the Caribbean, Graham Thomson: “I do find it surprising that there can have been no response and yet the audit was closed out. Is this a breach or are you in audit becoming softer.”

Other infractions are alleged to have dated back more than 10 years, including some 25,000 transactions with Iran worth close to $20 billion.

The Senate report also found that HSBC officials repeatedly ignored warnings about the state of its regulatory environment. In 2010, the Office of the Comptroller of the Currency, an organization that purports to “ensure a safe and sound national banking system for all Americans,” cited HSBC for deficiencies in its anti-money-laundering controls, for maintaining a backlog of some 17,000 alerts to suspicious activity on accounts and a “failure to monitor” $60 trillion in wire transfers.

Yet Monday’s report also took the O.C.C. to task for repeatedly ignoring warning signs for more than a decade, raising questions as to whether the regulators are, themselves, being adequately regulated.

HSBC officials will likely apologize to the Senate committee today, as they already have on numerous previous occasions, as the BBC reports. The bank has apparently cooperated fully with investigators in terms of providing documents and officials for interviews. But as the head of the Senate panel pointed out on Monday, the bank has said the right things, all the while doing the wrong thing, many times before.

All of this raises questions: Are regulators and therefore governments themselves complicit (at best) in the corruption that seems to riddle the global financial system; and at what point is the capitalist system itself called into question? To what extent are these scandals the result of the system’s own values?


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