Global Banks are the Financial Services wing of the Drug Cartels

As HSBC executives apologise to the US Senate for laundering drugs money, the fact is that nothing changes

• 
• • Ed Vulliamy
  • guardian.co.uk, Saturday 21 July 2012 13.01 BST

A Colombian soldier inspects the harvest of a 50-acre coca plantation: fines for laundering drugs money may seem huge, but banks pay them out of petty cash. Photograph: Efrain Patino/AP

"Steal a little," wrote Bob Dylan, "they throw you in jail; steal a lot and they make you a king." These days, he might recraft the line to read: deal a little dope, they throw you in jail; launder the narco billions, they'll make you apologise to the US Senate.

Two months ago in Washington DC, a poor black man called Edward Dorsey Sr was convicted of peddling 5.5 grams of crack cocaine. Because he was charged before a recent relative amelioration in sentencing, he was given a mandatory 10 years in jail.

Last week, managers from Britain's biggest bank, HSBC, lined up before the Senate's permanent sub-committee on investigations – just across the Potomac river from the scene of Dorsey's crime – to be asked questions such as: "It took three or four years to close a suspicious account. Is there any way that should be allowed to happen?"

The "suspicious account" was that of a "casa de cambio", a currency exchange house operated in Mexico on behalf of the largest criminal syndicate in the world and one of the most savage, the Sinaloa drug-trafficking cartel. The dealings had been flagged up toHSBC bosses by an anti-money laundering officer, but to no avail – the dirty business continued. "No, senator," came the reply from a bespectacled Brit called Paul Thurston, chief executive, retail banking and wealth management, HSBC Holdings plc.

The same casa de cambio, called Puebla, was known to be under investigation in another case involving the Wachovia bank during the time HSBC was entertaining its money. US authorities had seized $11m from Wachovia's Miami office, on the way to securing the biggest settlement in banking history with Wachovia in March 2010, detailed in this newspaper last year.

Wachovia was fined $50m and made to surrender $110m in proven drug profits, but was shown to have inadequately monitored a staggering $376bn through the casa de cambio over four years, of which $10bn was in cash. The whistleblower in the case, an Englishman working as an anti-money laundering officer in the bank's London office, Martin Woods, was disciplined for trying to alert his superiors, and won a settlement after bringing a claim for unfair dismissal.

No one from Wachovia went to jail – and, said Woods at the time of the settlement: "These are the proceeds of murder and misery in Mexico, and of drugs sold around the world. But no one goes to jail. What does the settlement do to fight the cartels? Nothing. It encourages the cartels and anyone who wants to make money by laundering their blood dollars."

HSBC has been found to have handled $7bn in narco cash, "and this is the starter for 10", Woods now says. "We'll get the full picture over time. But what's the sanction on these banks? What's their risk? The cartels should renegotiate their charges with the banks. They're being priced for a risk element that isn't there."

Wachovia was not the first, neither will HSBC be the last. Six years ago, a subsidiary of Barclays – Barclays Private Bank – was exposed as having been used to launder drug money from Colombia through five accounts linked to the infamous Medellín cartel. By an ironic twist, Barclays continued to entertain the funds after British police had become involved after a tip-off, from HSBC.

And the issue is wider than drug-money. It is about where banks, law enforcement officers and the regulators – and politics and society generally – want to draw the line between the criminal and supposed "legal" economies, if there is one.

Take the top-drawer bank to the elite and Her Majesty the Queen, Coutts, part of the bailed-out Royal Bank of Scotland. On 23 March, the UK Financial Services Authority issued a final notice to Coutts, fixing a penalty of £8.75m for breach of its money-laundering code.

The FSA reviewed 103 "high-risk customer files" and "identified deficiencies in 73 files", showing "failure to conduct appropriate ongoing monitoring" over three years. In two cases, private bankers involved had "failed to identify serious criminal allegations against those customers". Rory Tapner, chief executive of the wealth division of RBS said that "since concerns were first identified by the FSA, Coutts & Co has enhanced its client relationship management process". The refrain was the same from HSBC last week, and every other bank after every other shameful revelation: we went awry, but we've fixed it.

Wouldn't it be interesting, though, to know Coutts's private view of Wachovia's case – or, at least of people such as Woods who do root out criminal laundering?

As it happens, through a rare glimpse, we do. Last year, the Wachovia whistleblower was offered a job at Coutts. But the bank suddenly withdrew its job offer. An internal email sent by the interviewer to a director of Coutts's wealth management programme explained the bank had "a very generic reason for our decision, citing the fact that we had become aware of an incident at Wachovia, one of Martin Woods's previous employers, and that Coutts was keen to avoid any risk of reputational damage that might relate to the incident".

The thought occurs to Woods, who is taking legal action against Coutts for mistreatment of a whistleblower, that he was too tenacious at Wachovia. Coutts declined to comment.

No one at Coutts was called to account for the FSA's alarming findings. No one was sanctioned under criminal law last month when the ING bank was fined $619m for illegally moving billions of dollars into the US banking system, in breach of sanctions – as HSBC has done with money from North Korea and Iran. Neither were they in 2009, when Lloyds TSB – 43% owned by the British taxpayer – was fined $350m for whitewashing Iranian money into the US. The fines seem huge to us, but banks pay them from petty cash.

If there is a prosecution, it is always "deferred", as with Wachovia, and a Californian bank called Sigue used by HSBC to receive the Mexican drug money. Be good for a year, and we'll forget about it. Since when did the likes of Edward Dorsey of Washington enjoy that kind of leniency?

A foremost trainer of anti-money laundering officers in the US is Robert Mazur, who infiltrated the Medellín cartel during the prosecution and collapse of the BCCI bank in 1991, and who tells the Observer that "the only thing that will make the banks properly vigilant to what is happening is when they hear the rattle of handcuffs in the boardroom".

It remains to be seen whether HSBC's barons will, like Wachovia's, avoid Dorsey's fate.

"People don't like to ask how close the banker's finger is to the trigger of the killer's gun," says Woods.

But in this newspaper – when we revealed the original "cease and desist" order against HSBC – the former head of the UN Office on Drugs and Crime, Antonio Maria Costa, posited that four pillars of the international banking system are: drug-money laundering, sanctions busting, tax evasion and arms trafficking.

The response of politicians is to cower from any serious legal assault on this reality, for the simple reasons that the money is too big (plus consultancies to be had after leaving office). The British government recruits a former chairman of HSBC as trade secretary just as the drug-laundering scandal breaks.

Herein, along with Dylan's dictum, lies the problem. We don't think of those banking barons as the financial services wing of the Sinaloa cartel.

The stark truth is that the cartels' best friends are those people in pin-stripes who, after a rap on the knuckles, return to their golf in Connecticut and drinks parties in Holland Park.

The notion of any dichotomy between the global criminal economy and the "legal" one is fantasy. Worse, it is a lie. They are seamless, mutually interdependent – one and the same.

Beyond Goldman Sachs: the nasty culture

Greg Smith's portrait of Goldman Sachs is shocking, but investment banks treat their clients as poorly as they do their staff

• 
• • Joris Luyendijk
  • guardian.co.uk, Wednesday 14 March 2012 14.32 GMT

In his resignation letter, Greg Smith described the environment at Goldman Sachs as 'toxic and destructive'. Photograph: Bloomberg via Getty Images

 

The resignation letter on the New York Times opinion page today by Goldman Sachs executive director Greg Smith is shocking. But dozens of interviews with people working in finance in London over the past months for the banking blog suggest that it's not only Goldman Sachs where clients are treated like "muppets" getting their "eyeballs" ripped out. And it's not only clients that are exploited. Investment banks treat their own employees exactly the same way.

Investment banking breaks roughly into two main areas: the financial markets that Smith was working in, and deal-making such as mergers and acquisitions. This is how a young banker in M&A at a major bank described his experiences:

"There's this idea of bankers, especially in a prestigious sector like M&A, as very sophisticated and civil. But you do hear things like 'We're gonna suck this client dry.' … When we'd discuss a pitch or potential project with the team, nine out of 10 times the first question would be: 'Where's the "fee event"? How can we make money from this?' I mean, I understand banks need to make money, but you can't think of yourself as 'trusted adviser' – the big term in M&A – while at the same time putting your own fee first?"

Or listen to this risk and compliance officer at another major bank:

"I remember in my first few weeks I sat down with one of the structured products guys. He was selling so-called PFI deals, where local authorities buy a complicated financial instrument to pay for, say, a hospital. I asked him: where's the benefit for the local authorities in this? He was aghast. "What are you, a socialist?""

Smith's letter is ultimately about loyalty between a bank and its clients, and the alleged lack thereof at Goldman Sachs. This word "loyalty" comes up in many interviews, but mostly when people describe their relation to their own bank. Here's a head of marketing at a bank in the City: "Anyone here can lose their job at any time. One moment you're working on a project, the next you're hugging and saying, 'Well, bye' because the other has just been made redundant and is being led out of the building by security."

That's right. In most financial firms you can be marched out of the building by security at five minutes' notice. Your email is blocked, as well as your phone and your security pass, and there you are, literally on the pavement as you wait for someone else to collect your personal stuff from your desk. An IT consultant with another bank said: "People just disappear. They're called in, fired and led out. And you don't get info on who has been made redundant."

I could give many more quotes like these. In fact, almost everyone in finance has a redundancy horror story to tell. This banker recently got "the call". Looking back, she said:

"I may have been overly loyal to my dysfunctional family – the bank I worked in. I was making £80,000 a year, not including bonuses – though bonuses were negligible in the last few years. I could have made more, probably, had I done what many do: change jobs every 18 months to two years. Come in, make an impact, and move on … This summer I turned down a pretty awesome job, as I was dedicated to my bank. I am not sure if this is a female thing, to be overly loyal, but it's definitely a mistake I'll never make again."

There is no reason to feel sorry for people in investment banks, and I've met very few, if any, who want our pity. They enter the sector of their own free will, they earn well (though rarely the "telephone number bonuses" you read about) and nobody forces them to stay. But people working in banks are on their own and their employer has zero loyalty to them. One wonders: how realistic is it to expect investment bankers to treat clients any better than they are treated themselves?

In praise of Public Sector Banks

Black sheep of finance
By Ellen Brown in Asia Times Online

Once the black sheep of high finance, government owned banks can reassure depositors about the safety of their savings and can help maintain a focus on productive investment in a world in which effective financial regulation remains more of an aspiration than a reality. - Centre for Economic Policy Research, VoxEU.org (January 2010). [1]

Public sector banking is a concept that is relatively unknown in the United States. Only one state - North Dakota - owns its own bank. North Dakota is also the only state to escape the credit crisis of 2008, sporting a budget surplus every year since; but skeptics write this off to coincidence or other factors.

The common perception is that government bureaucrats are bad businessmen. To determine whether government-owned banks are assets or liabilities, then, we need to look farther afield.

When we remove our myopic US blinders, it turns out that globally, not only are publicly owned banks quite common but that countries with strong public banking sectors generally have strong, stable economies.

According to an Inter-American Development Bank paper presented in 2005, the percentage of state ownership in the banking industry globally by the mid-nineties was over 40%. [2] The BRIC countries - Brazil, Russia, India, and China - contain nearly three billion of the world’s seven billion people, or 40% of the global population. The BRICs all make heavy use of public sector banks, which compose about 75% of the banks in India, 69% or more in China, 45% in Brazil, and 60% in Russia.

The BRICs have been the main locus of world economic growth in the last decade. China Daily reports, "Between 2000 and 2010, BRIC's GDP grew by an incredible 92.7%, compared to a global GDP growth of just 32%, with industrialized economies having a very modest 15.5%."

All the leading banks in the BRIC half of the globe are state-owned. [3] In fact the largest banks globally are state-owned, including:

The two largest banks by market capitalization (ICBC and China Construction Bank); The largest bank by deposits (Japan Post Bank); The largest bank by assets (Royal Bank of Scotland, now nationalized); The world's largest development bank (BNDES in Brazil). [4] A May 2010 article in The Economist noted that the strong and stable publicly owned banks of India, China and Brazil helped those countries weather the banking crisis afflicting most of the rest of the world in the last few years. [5] According to Professor Kurt von Mettenheim of the Sao Paulo Business School of Brazil: Government banks provided counter cyclical credit and policy options to counter the effects of the recent financial crisis, while realizing competitive advantage over private and foreign banks. Greater client confidence and official deposits reinforced liability base and lending capacity. The credit policies of BRIC government banks help explain why these countries experienced shorter and milder economic downturns during 2007-2008. [6] Surprising findings In a 2010 research paper summarized on VoxEU.org, economists Svetlana Andrianova, et al, wrote that the post-2008 nationalization of a number of very large banks, including the Royal Bank of Scotland, "offers an opportune moment to reduce the political power of bankers and to carry out much needed financial reforms." [7] But "there are concerns that governments may be unable to run nationalized banks efficiently." Not to worry, say the authors: Follow-on research we have carried out (Andrianova et al, 2009) ... shows that government ownership of banks has, if anything, been robustly associated with higher long run growth rates. Using data from a large number of countries for 1995-2007, we find that, other things equal, countries with high degrees of government ownership of banking have grown faster than countries with little government ownership of banks. We show that this finding is robust to a battery of econometric tests. Expanding on this theme in their research paper, the authors write: While many countries in continental Europe, including Germany and France, have had a fair amount of experience with government-owned banks, the UK and the USA have found themselves in unfamiliar territory. It is therefore perhaps not surprising that there is deeply ingrained hostility in these countries towards the notion that governments can run banks effectively. ... Hostility towards government-owned banks reflects the hypothesis ... that these banks are established by politicians who use them to shore up their power by instructing them to lend to political supporters and government-owned enterprises. In return, politicians receive votes and other favours. This hypothesis also postulates that politically motivated banks make bad lending decisions, resulting in non-performing loans, financial fragility and slower growth. But that is not what the data of these researchers showed: [W]e have found that ... countries with government-owned banks have, on average, grown faster than countries with no or little government ownership of banks. ... This is, of course, a surprising result, especially in light of the widespread belief - typically supported by anecdotal evidence - that " ... bureaucrats are generally bad bankers" ... What accounts for their surprising findings? The authors provide a novel explanation: We suggest that politicians may actually prefer banks not to be in the public sector. ... Conditions of weak corporate governance in banks provide fertile ground for quick enrichment for both bankers and politicians - at the expense ultimately of the taxpayer. In such circumstances politicians can offer bankers a system of weak regulation in exchange for party political contributions, positions on the boards of banks or lucrative consultancies. Activities that are more likely to provide both sides with quick returns are the more speculative ones, especially if they are sufficiently opaque as not to be well understood by the shareholders such as complex derivatives trading. Government-owned banks, on the other hand, have less freedom to engage in speculative strategies that result in quick enrichment for bank insiders and politicians. Moreover, politicians tend to be held accountable for wrongdoings or bad management in the public sector but are typically only indirectly blamed, if at all, for the misdemeanors of private banks. It is the shareholders who are expected to prevent these but lack of transparency and weak governance stops them from doing so in practice. On the other hand, when it comes to banks that are in the public sector, democratic accountability of politicians is more likely to discourage them from engaging in speculation. In such banks, top managers are more likely to be compelled to focus on the more mundane job of financing real businesses and economic growth. The BRICs as a global power Focusing on the financing of real businesses and economic growth seems to be the secret of the BRICs, which are leading the world in economic development today. But the BRIC phenomenon is more than just a growth trend identified by an economist. It is now an international organization, an alliance of countries representing the common interests and goals of its members. The first BRIC meeting, held in 2008, was called a triumph for Russian leader Vladimir Putin's policy of promoting multilateral arrangements that would challenge the United States' concept of a unipolar world. [8] The BRIC countries had their first official summit and became a formal organization in Yekaterinburg, Russia, in 2009. They met in Brazil in 2010 and in China in 2011, and they will meet in India in 2012. In 2010, at China's invitation, South Africa joined the group, making it "BRICS" and adding a strategic presence on the African continent. The BRICS seek more voice in the United Nations, the International Monetary Fund, and the World Bank. They are even discussing their own multicultural bank to fund projects within their own nations, in direct competition with the IMF. They oppose the dollar as global reserve currency. After the Yekaterinburg summit, they called for a new global reserve currency, one that was diversified, stable and predictable; and they have the clout to get it. [9] According to Liam Halligan, writing in The UK's Telegraph: The BRICs account for ... around three-quarters of total currency reserves. They have few serious fiscal issues and all are net external creditors. [10] Western financial interests have long fought to maintain the dollar as global reserve currency, but they are losing that battle, despite economic and military coercion. Russia, China and India are now nuclear powers. The BRICS will have to be negotiated with, and the first step to forming a working relationship is to understand how their economies work.