As London tries to shine, the City is under global regulatory attack
Irony is a much misused word. But in this week, when the world arrives for a celebration of the capital of capital, where the fetishisation of London reaches its apotheosis, it truly is ironic that the towering source of its influence and power appears to be self-immolating.
It was bad enough when half the British banking system went bust in 2008.
There were various disgraces in the way the banks treated consumers and businesses with contempt over purchase insurance and interest rate swaps. But the Libor scandal seemed to be a quite incredible.
Specifically, the revelation of systematic attempts to rig the key benchmark interest rate for “Big Boy” traders personal bonuses.
But today, I think we went a step further with HSBC. The world’s local bank failed utterly to control excesses and lax oversight in its subsidiaries around the world.
Instead of Britain’s once mighty Big Four banks, we now have the full house of financial, moral and legal bankruptcy. RBS – state-owned after going bust in the crisis. Lloyds – bailed out after taking over HBOS. Barclays – caught rigging globally important interest rates.
And now HSBC accused of multiple money-laundering failures by the US senate.
The bank had expanded fast into growth markets such as Mexico.
It bought Bital in 2002, which had a compliance and anti-money laundering function described by HSBC insiders as “virtually non-existent”.
HSBC had been rather proud of its “subsidiarisation” model, which limited risks inside localities of this fast-growing empire. In the details of a staggering 340-page report , HSBC is the case study for the Senate report into US vulnerabilities to money laundering, drug and terrorist financing.
HSBC admits lax controls, but it is left to the Senate to connect the dots with Mexican drug traffickers. HSBC’s own head of anti-money laundering in Mexico warned HQ in 2008 of allegations that HSBC was the conduit for up to 70 per cent of Mexican money laundering.
The Senate pointed to Mexican/ US authorities who said that HSBC’s channelling of a vastly disproportionate $7 billion in banknotes by armoured car from Mexico to the US could only be reached “if they included illegal drug proceeds”. Soon HSBC would stop this flow of banknotes.
The Senate Committee chair said the bank’s internal control culture had been”pervasively polluted for a long time”, raising questions about the bank’s future in the US.
The world and its regulators seem to have spotted a litany (good word) of scandals afflicting our financial system.
2008. Mexico in the grip of an escalating drugs war.
At this time, HSBC Mexico was shipping $7bn in cash in armoured cars to HSBC in the USA – a sum so vast that the authorities were convinced it must include illegal drug proceeds.
The Senate says drug traffickers were funnelling cash through the Mexican arm of HSBC to get it back into the US financial system.
HSBC HQ in London knew there were problems in Mexico but struggled to improve its money laundering controls. The report refers to internal allegations that 70 per cent of all the money laundered Mexico transited through the subsidiaries of this famous British bank.
Dealings with Iran showed not just ignorance but active and wilful concealment by HSBC of transactions that would fall foul of US limits on trading with Iran.
For years HSBC subsidiaries hid such trades. The practice continued even after staff inside the bank repeatedly complained about the deception.
For this the banks head of global compliance fell on his sword in front of the powerful committee of US senators. Questions in Britain will be asked about Stephen (now Lord) Green’s tenure as executive chairman.
But there are also some questions about what appears a low-level war against British banking by US regulators.
US banking giants Wachovia and Wells Fargo were involved in much more suspicious activity with Mexico, $374 billion in wire transfers, and $20 billion in sequentially numbered travellers cheques. the fine: a $160m light slap versus the $1 billion that HSBC is facing.
Senior bankers believe that similar problems at American banks were glossed over by American regulators.
Certainly it is no coincidence that HSBC was chosen as the Senate “case study”. The Libor scandal too has led to US politicians pointing fingers at London and at Barclays, as well as various scandals in the London arms of US banks such as JP Morgan’s London Whale.
In opposition David Cameron once gave a speech extolling the virtues of how the City traditionally benefits when America regulates Wall Street. The US seems to have learnt that lesson, and under the radar, is going for the City. Either the City needs to clean up its act, or the chancellor needs to do it on Britain’s own terms.
Or else the US will do it on their terms.
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