Getting serious on banks that take dictators’ loot

April 6th, 2012

Last week Coutts, banker to the Queen, was fined £8.75 million for failing to take corruption risk seriously enough. The Financial Services Authority (FSA) found problems with over 70 percent of the client files they reviewed; in some cases, allegations that customers were involved in looting state funds were brushed aside by bankers keen to increase the bank’s profits – and presumably their own bonuses.

This fine is part of a belated crackdown by a financial regulator that has, at least a decade too late, finally woken up to the fact that British banks are looking the other way when it comes to potentially corrupt customers.

Last year a damning FSA report found that in far too many cases banks were ignoring an extremely high risk that they were handling the proceeds of corruption, if the bank felt that they would not get caught or suffer bad publicity. The FSA rather sheepishly admitted that not much had changed since its previous review 10 years ago, after a billion pounds of funds linked to former Nigerian dictator Sani Abacha were found to have flowed through British bank accounts.

Another FSA report last week highlighted how investment banks were failing to ensure that their employees were not paying backhanders in order to get business. In a damning statement the report concluded that “firms’ understanding of bribery and corruption was often very limited”.

Why does this matter? Because the corruption that keeps poor countries poor cannot happen without a bank to move the money.

So the now-recognised catastrophic failure of “light touch” regulation did not just allow reckless gambling with customers’ money and lead to massive bailouts (including of Coutts’ own parent bank RBS). It also permitted banks to continue in their facilitation of corruption in some of the poorest countries in the world, as Global Witness’s investigations have shown.

Regulators are now trying to show their teeth and make up for past failures. The FSA has promised that rather than just looking at a bank’s policies – as it did in the pre-crash halcyon days – it will now carry out spot checks on individual client files. Another four banks are being investigated for failures similar to those found at Coutts. This is part of a new purportedly intensive approach to regulation.

This should be welcomed. Anything that makes high paid bankers pause for thought before accepting money from corrupt politicians or other unsavoury clients is good.

However, will this new approach really bring the necessary changes? RBS’s ‘Wealth’ division – which is basically Coutts – made an operating profit of £321 million last year. RBS overall saw its profits rise 11% to £1.9 billion. It’s arguable that a £8.75 million fine can still just be a cost of doing lucrative business. It’s a lot less than the £97 million in increased business costs that the RBS wealth division faced in 2011 thanks to exchange rates and new hires. Penalties like this can easily be absorbed, along with the day’s worth of bad headlines that accompany them.

The billions of pounds of assets linked to Mubarak, Ben Ali and Gaddafi frozen in western countries, including in the UK, following the Arab Spring demonstrated quite how easy it was for kleptocratic rulers to bring their ill-gotten gains into world’s financial system. Without access to banks it would be considerably harder for these individuals to steal state assets in the first place.

So what is really needed to get banks to turn down corrupt politicians’ loot or other funds of murky origin? What will it take to ensure that it is as unacceptable for banks to facilitate corruption as it is for BP to pollute the Gulf of Mexico?

Regulators have to get real about the size of penalties required. In the United States they are unafraid of issuing really substantial fines. For example, Lloyds had to pay $350 million for sanctions busting in relation to Iran. That sort of financial hit would make bank staff think twice before turning a blind eye to potential money laundering.

In the worst cases bankers should face criminal fines or go to jail. There are criminal penalties for those who grossly fail to carry out their legal obligations to check for suspicious transactions. Yet these have never been used.

Only by getting serious on the banks that accept corrupt money will we ensure that state funds are used in developing countries to lift some of the poorest people out of poverty, rather than to supply corrupt leaders with fast cars, private jets and the other trappings of their luxurious yet tainted lifestyles.

Written by Robert Palmer

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