Thursday, December 13, 2012

Why I am so angry about the regulatory failures which have resulted in our banking sector becoming a global pariah!

"...You British think that those people who are responsible for the management of other people's money are gentlemen, and you are shocked and surprised when you find out that the opposite is true. We Americans assume that everyone who handles someone else's money has the propensity to be a crook, and we legislate for the likelihood. You guys can talk about financial regulation for as long as you like but, until you come to terms with the reality of what financial regulation really means, and stop pretending that it can be carried out by gentlemen in their spare time between deals, then you will continue to suffer from the sort of scandals that make you a joke. When you take the issue of regulation seriously and make the money available to finance those intentions, then we'll take you seriously. Until then, don't waste our time..!"

John Fedders, Director of Enforcement, Securities Exchange Commission, 1984.
In 1984, I was sent by the Commander of the Metropolitan and City Police Company Fraud Department to study financial regulation in the USA.

I started with the Securities Exchange Commission in Washington, closely followed by the Commodity Futures Trading Commission.

I spent time later with the National Association of Securities Dealers, the National Futures Association, and I visited the OTC market-making system, the NASDAQ.

Subsequently I travelled to Chicago, Philadelphia and New York where I visited and studied with each of their respective securities, options and futures exchanges.

I also spent time with the Manhattan District Attorney's specialist Fraud Office Squad, who were the men and women charged with the investigation and prosecution of major financial crime in Manhattan.

At the time, I was a detective at the Fraud Squad, and I was sent to the US to study their experiences in dealing with major financial crime, because we were beginning to experience significantly growing levels of such frauds in the UK, following the election of Margaret Thatcher, and her ambitions to turn Britain into an equity-owning democracy.

When I left for America, the City of London was routinely, and ineffectually regulated by a series of toothless, City, self-regulating organisations which were frankly, little more than select dining clubs; and the Department of Trade and Industry. The place was run like a private gentleman's club, with arcane rules, rituals and funny handshakes, and it was a place where a man could make a great deal of money as long as he played by the unwritten rules, didn't get too greedy, allowed his friends to 'wet their beak' in his good fortune, to use the old mafiosi expression,  and didn't tell tales out of school.

Scandals were few because they were routinely hushed up, and a house with a good reputation, (for doing the right thing by the chaps) could usually count on its friends to rally round if it fell on hard times, and get it back on its financial feet.

While I was in America, the Conservative Government published its White Paper for the future conduct and regulation of the City, and it was that document which prompted John Fedders, the Enforcement Director of the SEC to share his opinions of the British way of financial regulation with me.

He was scathing in his derision of the plans being drawn up, because they smacked, all too much, of the old days and the old ways, and John knew they wouldn't work any better than they had worked before. What concerned him was that American banks and securities houses were clamouring to come to Britain to take part in the financial free-for-all which was being promised by the new deregulatory changes, and their British counterparts had smelt the money which was on offer, and like sharks scenting blood in the water, were already circling round the Square Mile, jostling for advantage in the new 24/7 market that was projected.

John knew only too well that without the almost draconian powers that the SEC enjoyed in those days, before they too had their teeth blunted and muzzled and their claws drawn by Republican administrations under Reagan and then the younger Bush, the transplanted American banks and their employees, would completely change the culture and the face of banking in London, and none of it would be for the better.

"...These people are madmen..." he used to say. "...They are worse than madmen, they are deranged imbeciles, they worship only money, and they don't care how it comes. You let them loose in London and they will screw you...They don't take any notice of laws, regulations are there to be ignored at best and got round at worst, a lot of them are little more than criminals, and you guys better make sure you have got some tough cops on the street to deal with them..."

The men and women that John employed were young criminal lawyers, with good degrees from the best universities. They were ambitious, hungry for success, some had been policemen before qualifying and had worked at night school to get law degrees. They were not the kind of lawyers who would usually get into the exclusive  'white shoe' firms on Wall Street, because most of them came from working-class families from the wrong side of the tracks. This didn't mean that they were not going to make great careers, in fact, it was almost a sine qua non for any young lawyer who wanted to get on in politics, that he or she had been an aggressive and dynamic prosecutor in a Government agency such as the SEC, the Justice Department, the CFTC, or one of the Law Enforcement Agencies, such as the District Attorney's offices.

The one thing that all these men and women had in common was that they understood the mentality of those whom they regulated, and they understood that in order to make these people toe the line, they had to hit them hard, fast and often. They understood the criminogenic potential of those who made up the financial market and they made it their business to go after the biggest and the hardest of them all, because that was how they made a reputation, and got hired into big law-firms later, or got on the rungs of the political ladder.

Men like Rudy Giuliani, who was a very hard-hitting prosecutor with the Federal Southern District of Manhattan and who broke up the huge mafia heroin trafficking ring which became known as the Pizza Connection. before he went into politics and ended up as Mayor of New York.

So, I am saying that I have seen the US regulatory agencies with my own eyes, I have worked with them, I have studied their methods, I have watched them bring their cases, and I know exactly what can be achieved in the regulation of financial markets.

It was only after the SEC had been routinely stripped of a lot of its intervention powers, and a lot of important laws to protect the US share-buyer were repealed by a de-regulatory-driven Republican political agenda, that the financial sector began to go on its debt-fuelled suicidal rampage which has ended up with the financial melt-down we have all witnessed and from which we are all still suffering.

And now, we are forced to watch the British banking sector reduced to a collection of organised criminal enterprises, run by men who had become so infatuated with their own perceived cleverness, whose arrogance and hubris carried them over the line into financial lunacy, whose pay and perks blinded them to the ordinary rules of prudency and best banking practice, and which resulted in vast losses which had to be picked up by the tax-payer, while these men continued to pick up their salaries, their bonuses, their pay-offs and their pension funds, as if nothing had happened.

When we ask the financial regulators what they were doing while this orgy of self-destruction was going on, all we get are vapid policy statements and denials that they have or had any responsibility for preventing these excesses.

It is the duty of the financial regulator to bring order and discipline to the financial sector it is supposed to police. Yes, I use the 'police' word, even though it is routinely denied by every in-house compliance officer that their activities involve any element of providing a policing function.

So, I want to know why and how our British financial services market has become an international byword for sharp practice, fraud and every kind of deceit. Every time I open a newspaper these days or listen to the news, there is a story of banking fraud, penalties being issued for wrongdoing in the financial sector, fines  which now exceed a billion pounds being levied against British institutions by foreign regulators, coupled with deferred prosecutions for wholesale criminal activities. And why is the FSA taking no criminal justice proceedings against HSBC for money laundering and other financial crimes?

Make no mistake, HSBC is now for ever tainted as a major and deliberate money laundering enterprise. They have admitted the facts, and those admissions cannot be conveniently swept under the carpet. HSBC is now an admitted organised criminal group, where money laundering on a global scale was carried on under the nose and on the watch of Lord Green, The current trade minister, Lord Green, was HSBC's chairman from 2006 to 2010, after serving as its chief executive between 2003 and 2006, and who is now a member of David Cameron's cabinet.
Now, HSBC could also be formally dragged into the Libor investigation after it emerged links between one of its traders and peers at other banks were at the centre of investigations by financial regulators.

And have we heard any mention of personal responsibility being accepted by Lord Green? Have we hell as like! There was a time when Ministers caught up in scandalous conduct resigned from public life, but not anymore. No-one takes the rap these days, not when there are even bigger fees to be earned and more public honours to be granted, and peerages to be dished out. Today it is an issue of 'oh that was then and this is now'!

Well, I would like to know what the FSA was doing all this time. I would like to know how HSBC came out in the FSA's last Money Laundering Review, the scandalous results of which were published in 2011. Were HSBC one of the banks singled out for anonymous criticism and challenge regarding their money laundering practices and procedures, and if they were, what did the FSA do about it?

Did the FSA know that HSBC were running a secretive bank in Mexico, a bank 99.99% owned by another HSBC entity, itself owned 99.99% by yet another HSBC entity with an address in Canary Wharf? Exactly the sort of corporate magical mystery tour usually operated by criminals and money launderers.  A US Senate investigative committee reported earlier this year that in 2007 and 2008, HSBC Mexico sent about $7bn (£4.35bn) in cash to the US. The committee said such an amount of cash pointed to illegal drug proceeds.

If the FSA did know, didn't they smell something, even a small rat? Don't they know about Mexican money laundering methods and Peso exchange operations and how they run their drug profits around the world. If they didn't know about this, what sort of enquiries were they making? What sort of criminal intelligence were they operating on, what analyses had they made of such activities, who was briefing the Enforcement Group on the likelihood of criminality through this avenue of operation? What pro-active regulatory processes were they adopting to be aware of the possibility of wrong-doing? Or were they, as is so often reported by banks who have received FSA visits, just ticking the relevant boxes, because AML is considered to be a box-ticking exercise!

If they knew about HSBC Mexico, did no-one ask the simple question; 'Oh that sounds interesting, what kind of business does HSBC do down there?' Perhaps undertake a sample review of KYC procedures, or a business review.

Oh, sorry, I forgot, Lord Sassoon went to great lengths to exonerate the FSA from any criticism in this case because he opined that they have no authority over a Mexican bank, even one wholly-owned by a bank in London. So that's alright then!

Actually, it's not alright, it's a typical piece of Mandarin-speak intended to bamboozle the unwary and mislead the ignorant and to give the FSA a 'get out of jail' card for failing to do their job properly regarding HSBC and their money laundering operations! It's what always used to happen when other regulatory agencies get caught falling down on the job, some member of the Great and the Good steps up to say it was not their fault.

What about all the other scandals we have recently witnessed, the PPI frauds, what is the latest set-aside figure to repay the defrauded, £16 billion or is it close to £19 billion now? What about the interest rate swap derivatives frauds, the LIBOR market manipulation, which we were originally told needed new laws to be enacted to deal with the crimes which had been committed. Funny how the SFO seem to have been able to engage with this investigation without new legislation, yet another piece of publicly misleading information from the new head of the FCA!

Then there are the fines imposed on Barclays Bank, Standard Chartered Bank, HBOS, RBS, Lloyds Bank, Santander, all for failings of regulation, including criminal fraud activities. All these actions heap ever more shame upon the name of the British Banking Industry and represent a series of repeated failures by the FSA to be proactive in identifying and recognising potential criminal wrong-doing in the institutions they are supposed to regulate, and it reflects upon a complete failure to oversee and prosecute for breaches of the Money Laundering Regulations.

Of course the FSA don't want to prosecute any of their so-called regulated institutions. They never have and they have adopted this policy since their earliest days, remember when I reported being told that the then Head of the FSA, Sir Howard Davies, didn't want his reputation to be savaged like those of George Staple or Barbara Mills, so the FSA wasn't going to bother to engage in prosecuting anyone!

Lord Turner and Ms McDermott even reported to the Home Affairs Select Committee on Drugs, a couple of weeks ago, that they were not a law enforcement agency and that they did not have prosecuting powers for money laundering. And this is where the real issue resides, there have been no prosecutions of anyone for what has amounted to billions of pounds worth of financial criminality in the form of money laundering.

During their evidence they were cross examined by the Chair, Keith Vaz MP.

Chairman Keith Vaz referred to the US Senate report which castigated HSBC and which detailed what it called a "...pervasively polluted' culture at HSBC which allowed the bank to act as financier to clients seeking to route shadowy funds from the world's most dangerous and secretive corners..."

Chairman Vaz asked Lord Turner whether this report had rung an alarm bell in the FSA, but all Turner could tell him was that it was '...something we are alarmed about...' he said it was '...prima facie, very concerning...' and then '...whether this contained implications for other UK-based banks, we don't know...' and that it will be a '...spur for us to look in more detail in the area of what we are doing in anti-money laundering...'

So much for that ringing endorsement of effective anti-money laundering prevention and control!

The FSA, like their predecessors the SIB and the DTI, have always failed the true tests of what makes an effective regulator as identified by the former SEC Head of Enforcement! They do not employ people in decision-making posts who have skills and expertise in understanding the criminal mind or the criminogenic mentality. They insist on continuing to hire gentlemen with backgrounds in financial services or civil service-style agencies. They continue to maintain the 'good chaps' mentality, but they don't have anyone with any semblance of authority to take on the city criminals in the manner which best demonstrates a complete understanding of their methods.

Until such time as we start to employ such men and women, who have the technical knowledge, and the guts to go after the biggest crooks in the industry, this ridiculous state of affairs will remain the default position for the way in which we in the UK continue to fail the public who have a right to assume that the regulatory process really means something effective!


Jason said...

Nice post Rowan, a very good summary of how the rot has set in.

Not sure if you saw this:

German police raids Deutsche Bank offices in tax fraud probe

I'd love your opinion as to whether this is something that's meant to look like the Germans taking action, or actually the Germans taking action.

The Watchman said...

Back in October this year, the Treasury select committee chair, Andrew Tyrie MP, called for bankers who are guilty of wrongdoing to be put in “orange jump suits” to act as a deterrent in the strengthening of the criminal law.
Let's see if the FSA follows up on this idea or whether it's the inadequate, "business as usual" reponse?

The Watchman said...

By the way, re the Germans, IMHO it is the authorities going after the tax from people and firms to help pay for the bailout of €uro project, rather than a principled position.

Hawkeye said...

Hi Rowan

What an interesting story of your career.

Did you ever come across William K Black, the prosecutor behind the Savings & Loan investigations?

This interview on the Bill Moyers show truly opened my eyes as to the poor state of fraud investigation in the US:

cringing2 said...

Another great post Rowan. But you've let Slick Willy Clinton off the hook.

Most of the gutting of regulation happened under the Clinton/Rubin regime.

And its greatest Frankenstein creation was Citigroup, the biggest financial black hole of all, where Rubin made $100 million plus.

Demetrius said...

Having lived through all this, it tells me a lot. I wish at the time I had known more. As well as wrecking the economy they have sold the UK off and turned us into a colony run by international fraudsters.