Thursday, 9 August 2012

Filthy Lucre

Politicians and the press have got themselves in a tizzy over the money-laundering charges announced against Standard Chartered Bank, with even a Labour MP crying wolf over the assumed plot to dethrone London as the world capital of funny money. (Tip to John Mann: when you find yourself in agreement with Boris Johnson, you really should pause for reflection). Banking is a supra-national industry, so the idea that London and New York are direct competitors in a zero-sum game is risible, which even the Bank of England's own Bagpuss concedes. Johnson's tub-thumping for London masks the reality that his endeavours in support of banking benefit American firms as much as British ones.

The irony of the "wild west" jibe (which appears to have originated with John Mann) is not merely that this is a metaphor trademarked by the USA, but that the fast and loose attitude was imported from New York to London in the 80s as American banks and brokers moved in following deregulation (they also imported the convention of big bonuses for traders). And while the US has started to re-tighten regulation on their side of the pond, this has been a series of small steps following their own large deregulatory strides in the 90s.

What's really bonkers is the implicit suggestion that greater regulation and more vigorous pursuit of crime in New York will somehow attract business away from London. They're not going to win the Iran account, for starters. This week's revelation of the "fucking Americans" quote is actually an excellent advertisement for the independence of British banks. If you don't want the FBI poking their noses into your affairs, you now know where to go. The claim that this is actually about reputational damage is eyewash. No one who hasn't been hiding in a cave for the last five years is under any illusions about what banks do, and a few thousand individuals dropping Barclays for the Co-op won't change the fundamentals. The adjustment in the Standard Chartered share price reflects the risk of profits lost to fines (usually much bigger in the US than the UK), not the risk of business drying-up.

The charges against Standard Chartered are very serious, though the bank does contest the scale and degree of complicity, and the New York regulator may well be guilty of trying to make a name for himself. However, even if this fizzles out, there is no question that there is something systemically wrong with the banking industry. But the suggestion that this is peculiar to London is absurd. While light-touch regulation went down a storm here, other banking centres are hardly noted for their high ethical standards or diligent regulators. Switzerland did not build a banking industry on transparency, and it has no intention of changing its ways. New York gave us the "giant vampire squid". Banks everywhere are prone to scandals because they deal in money, and a large portion of the world's money has been secured illegally and/or unethically. As the wealth of the world expands, both the quantum and the proportion that is "ill-gotten" increases, the latter because so many nations are (for now) wholly or partly kleptocracies. Even in established democracies, the increase in inequality leads to more funny money as greater amounts are funnelled offshore to dodge tax.

The banking scandals this year can be divided into three types. First, there is common-or-garden incompetence, where greed all the way up the management tree leads to excessive risk-taking (rogue traders etc). Second, there are simple conspiracies to game the system by insiders at the expense of outsiders. LIBOR rate-rigging is the standout example, though an honourable mention should go to Goldman Sach's "muppetgate" (London pointing the finger at New York on that occasion). The other type of scandal concerns dodgy money: the HSBC laundering of drug profits, Standard Chartered's (alleged) laundering of Iranian trade deals, and the wealth-management (i.e. laundering) of funds extracted by "politically exposed persons", the euphemism for dictators, their cronies, and corrupt officials everywhere.

Some dictators are now finding the hosts of their foreign assets less hospitable than before, though this sudden fit of moral opprobrium tends to signal a shift in the political wind, as Mubrarak and Assad have found, rather than any persistent distaste for ill-gotten gains. There is a strong overlap here with tax dodging: blatant evasion will be (occasionally) prosecuted, but avoidance will be treated as morally neutral, so long as you don't attract attention by shitting on the carpet, a la Jimmy Carr. This "pragmatism" is the fundamental problem. Incompetence and greed can be tackled within banking (though nobody seems to be trying too hard), and there are technical means to limit insider-dealing and market-rigging, but the temptation to deal in dodgy money will never go away because the money won't. In fact, the temptation increases because the amount of dodgy money increases. This is simply too big a market for most banks to ignore. It is far easier to redefine "dodgy". A report by the FSA last year, into money-laundering risks faced by UK banks, came to some revealing conclusions in this regard (see page 4, points 7 and 10):

Some banks appeared unwilling to turn away, or exit, very profitable business relationships when there appeared to be an unacceptable risk of handling the proceeds of crime. Around a third of banks, including the private banking arms of some major banking groups, appeared willing to accept very high levels of money-laundering risk if the immediate reputational and regulatory risk was acceptable.

Three quarters of the banks in our sample failed to take adequate measures to establish the legitimacy of the source of wealth and source of funds to be used in the business relationship. This was of concern in particular where the bank was aware of significant adverse information about the customer’s or beneficial owner’s integrity.

As banks have become larger and more global, and as the percentage of ill-gotten gains and money avoiding tax has grown, the likelihood that banks will be managing dodgy money has increased. The days when this blind-eye activity was the preserve of only a few specialist banking centres, such as Zurich and Geneva, are long gone. The attitude of the industry is that money is money and intrinsically blameless. Ethical scruples are an "inefficiency" in market terms. Competition, allied to an operating mentality based on personal enrichment, means that banks cannot and will not be choosy. Mexican drug profits and Iranian sanctions-busting are just business. The only solution to money-laundering is a political decision to enforce transparency, but that means removing the same veil that protects and enables tax avoidance. Unsurprisingly, the political will is lacking.

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