Saudi Arabia risks destroying Opec and feeding the Isil monster

'Saudi Arabia is acting directly against the interests of half the cartel and is running Opec over a cliff,' says RBC

Ambrose Evans-Pritchard in the Telegraph

The rumblings of revolt against Saudi Arabia and the Opec Gulf states are growing louder as half a trillion dollars goes up in smoke, and each month that goes by fails to bring about the long-awaited killer blow against the US shale industry.

"Saudi Arabia is acting directly against the interests of half the cartel and is running Opec over a cliff"

Helima Croft, RBC Capital Markets

Algeria's former energy minister, Nordine Aït-Laoussine, says the time has come to consider suspending his country's Opec membership if the cartel is unwilling to defend oil prices and merely serves as the tool of a Saudi regime pursuing its own self-interest. "Why remain in an organisation that no longer serves any purpose?" he asked.

Saudi Arabia can, of course, do whatever it wants at the Opec summit in Vienna on December 4. As the cartel hegemon, it can continue to flood the global market with crude oil and hold prices below $50.

It can ignore desperate pleas from Venezuela, Ecuador and Algeria, among others, for concerted cuts in output in order to soak the world glut of 2m barrels a day, and lift prices to around $75. But to do so is to violate the Opec charter safeguarding the welfare of all member states.

"Saudi Arabia is acting directly against the interests of half the cartel and is running Opec over a cliff. There could be a total blow-out in Vienna," said Helima Croft, a former oil analyst at the US Central Intelligence Agency and now at RBC Capital Markets.

The Saudis need Opec. It is the instrument through which they leverage their global power and influence, much as Germany attains world rank through the amplification effect of the EU.

The 29-year-old deputy crown prince now running Saudi Arabia, Mohammad bin Salman, has to tread with care. He may have inherited the steel will and vaulting ambitions of his grandfather, the terrifying Ibn Saud, but he has ruffled many feathers and cannot lightly detonate a crisis within Opec just months after entangling his country in a calamitous war in Yemen. "It would fuel discontent in the Kingdom and play to the sense that they don't know what they are doing," she said.

"We are feeling the pain and we’re taking it like a God-driven crisis"

Mohammed Bin Hamad Al Rumhy, Oman's oil minister

The International Energy Agency (IEA) estimates that the oil price crash has cut Opec revenues from $1 trillion a year to $550bn, setting off a fiscal crisis that has already been going on long enough to mutate into a bigger geostrategic crisis.

Mohammed Bin Hamad Al Rumhy, Oman's (non-Opec) oil minister, said the Saudi bloc has blundered into a trap of their own making - a view shared by many within Saudi Arabia itself.

“If you have 1m barrels a day extra in the market, you just destroy the market. We are feeling the pain and we’re taking it like a God-driven crisis. Sorry, I don’t buy this, I think we’ve created it ourselves,” he said.

The Saudis tell us with a straight face that they are letting the market set prices, a claim that brings a wry smile to energy veterans. One might legitimately suspect that they will revert to cartel practices when they have smashed their rivals, if they succeed in doing so.

One might also suspect that part of their game is to check the advance of solar and wind power in a last-ditch effort to stop the renewable juggernaut and win another reprieve for the status quo. If so, they are too late. That error was made five or six years ago when they allowed oil prices to stay above $100 for too long. But Opec can throw sand in the wheels.

At root is a failure to grasp how quickly the ground has already shifted from under the feet of the petro-rentier regimes. Opec forecasts that oil demand will keep rising relentlessly, adding 21m barrels of oil per day (b/d) to 111m by 2040 as if nothing had changed. They have their heads in the sand.

The climate pledges made for the COP21 summit in Paris by the US, China and India - to name a few - imply a radical shift in the global energy landscape. Subsequent deals by 2025 may well bring a "two degree world" within sight.

The IEA says oil demand will be just 103m b/d in 2040 even under modest carbon curbs. It would collapse to 83.4m b/d if global leaders grasp the nettle. My own view is that it will happen by natural market forces.

The next leap foward in technology is going to be in energy storage. Teams of scientists at Harvard, MIT and the world's elite universities are in a race to slash the cost of batteries - big and small - and overcome the curse of intermittency for wind and solar.

A team in Cambridge says it has cracked the technology for lithium-air batteries that cut costs by four-fifths and enable car journeys of hundreds of miles on a single charge. By the time we reach 2040, it is a fair bet the only petrol cars still on the road will be relics, if they can find fuel at all.

"Everything will be electrified. The internal combustion engine is a dead-end. We all know that, and the car companies ought to know that," said one official handling the COP21 talks.

Opec might be better advised to target prices of $75 to $80 and maximize revenues while it still can, taking advantage of a last window to break reliance on energy and diversify their economies.

The current war of attrition against shale is a hard slog. US output has dropped by 500,000 b/d since April, but the fall in October slowed to 40,000 b/d. Total production of 9.1m b/d is roughly where it was a year ago when the price war began.

"The expectation that a swift tailing-off in tight oil would lead to a rapid rebalancing in the market has proved to be misplaced," said the IEA. Costs are plummeting as rig fees drop and drilling time is slashed.

There is a time-lag effect. Shale cannot keep switching to high-yielding wells forever. Their hedging contracts are running out. The US energy departmentexpects a further erosion of 600,000 b/d next year, but this is not a collapse.

By then Opec will have foregone another half trillion dollars. "What is winning supposed to look like for the Saudis? Can they really endure another year of this?" said Ms Croft.

Opec can certainly bankrupt high-debt frackers but this does not shut down US shale in any meaningful way. The infrastructure and technology will remain. Stronger players will move in. Output will bounce back as soon as oil nears $60.

Shale frackers will respond with lightning speed to any rebound and create a permanent headwind for Opec over years to come, or a sort of "whack-a-mole" effect, contrary to warnings by the IEA this week that Mid-East producers may regain their 1970s stranglehold once rivals are cleared out.

What is clear is that the Opec squeeze has killed off $200bn of upstream oil investment, mostly in offshore projects, Canadian oil sands and Arctic ventures. That will cut oil output in the distant future, but it is a different story.

Saudi Arabia has certainly regained market share, but the cost is causing many in Riyadh to ask whether the brash new team in power has thought through the trade-off. While the Kingdom has deep pockets, they are not limitless. Kuwait, Qatar and Abu Dhabi all have foreign reserves that are three higher per capita.

It has been downgraded to A+ by Standard & Poor's and has a budget deficit of $100bn a year, forcing it to burn through reserves at a commensurate pace and now to tap the global bond market.

Austerity has finally arrived, a nasty shock that was not in the original plan. A confidential order from King Salman - marked "highly urgent" - has frozen new hiring by the state, stopped property contracts and purchases of cars, and halted a long list of projects. The Kingdom will have to slim down the edifice of subsidies and social patronage that keeps the lid on protest.

It is far from clear whether Saudi Arabia can continue to prop up allies in the region and bankroll Egypt, already struggling to defeat Isil forces in the Sinai. An Isil cell captured - and beheaded - a Croatian engineer on the outskirts of Cairo in August, even before the suspected bombing of a Russian airline this month.

The Isil brand has established a front in Libya and has launched attacks in Algeria, where the old regime is fraying, and oil and gas revenues fund the vitally-needed social welfare net.

Iraq is pumping oil a record pace but it is nevertheless spiraling into economic crisis, with a budget deficit of 23pc of GDP. Public sector wages are to be cut. The austerity budget for 2016 - based on $45 oil, down from $80 last year - has set off a political storm.

The government has slashed funding for the "Popular Mobilization" militia fighting Isil. "The Iraqi state faces a grave challenge. The budget crisis makes the status quo intractable," says Patrick Martin from the Institute for the Study of War.

Helima Croft says Isil is now operating close to Iraq's oil facilities near Basra, detonating a car bomb at a market in Zubayr last month. They clearly have the ability to attack energy targets, and have an incentive to do so since oil production within their Caliphate heartland is their main source of income.

Al Qaeda in the Islamic Maghreb showed it could launch a devastating surprise when it crossed into the Sahara two years ago and seized the Amenas gas facility in Algeria, killing 39 foreign hostages. Variants of Isil can strike anywhere they find a weak link.

"We remain concerned that they may eventually set their sights on a major oil facility. These are obvious targets of choice, and none of this geopolitical risk is priced into the market," she said.

Saudi Arabia itself is vulnerable. There have been five Isil-linked terrorist acts on Saudi soil since May. They include an attack on a security facility near the giant oil installation at Abqaiq, where clusters of pipelines offer the most inviting sabotage target in the petroleum world and where the aggrieved Shia minority sit on the Kingdom's oil reserves.

It would be a macabre irony if Saudi Arabia's high-risk oil strategy so enflamed a region already in the grip of four civil wars that the Kingdom was hoisted by its own petard. That would certainly clear the global glut of crude oil.

Right to 30-day refund becomes law

Brian Milligan in BBC News


New consumer protection measures - including longer refund rights - have come into force under the Consumer Rights Act.

For the first time anyone who buys faulty goods will be entitled to a full refund for up to 30 days after the purchase.

Previously consumers were only entitled to refunds for a "reasonable time".

There will also be new protection for people who buy digital content, such as ebooks or online films and music.

They will be entitled to a full refund, or a replacement, if the goods are faulty.

The Act also covers second-hand goods, when bought through a retailer.

People buying services - like a garage repair or a haircut - will also have stronger rights.

Under the new Act, providers who do not carry out the work with reasonable care, as agreed with the consumer, will be obliged to put things right.

Or they may have to give some money back.

'Fit for purpose'

"The new laws coming in today should make it easier for people to understand and use their rights, regardless of what goods or services they buy," said Gillian Guy the chief executive of Citizens Advice.

When disputes occur, consumers will now be able to take their complaints to certified Alternative Dispute Resolution (ADR) providers, a cheaper route than going through the courts.

The Consumer Rights Act says that goods 

- must be of satisfactory quality, based on what a reasonable person would expect, taking into account the price 

- must be fit for purpose. If the consumer has a particular purpose in mind, he or she should make that clear

- must meet the expectations of the consumer

The Act has been welcomed by many consumer rights groups and further information can be found here.

"Now, if you buy a product - whether physical or digital - and discover a fault within 30 days you'll be entitled to a full refund," said Hannah Maundrell, the editor of money.co.uk. "The party really is over for retailers that try to argue the point."

The Act also enacts a legal change that will enable British courts to hear US-style class action lawsuits, where one or several people can sue on behalf of a much larger group.

It will make it far easier for groups of consumers or small businesses to seek compensation from firms that have fixed prices and formed cartels.

The world is run by sociopaths – but we still demand honesty at the till

The worldview of Which? has a moral clarity that is missing from nearly every other sphere of life these days

• 
• • Zoe Williams
  • The Guardian, Sunday 16 November 2014 16.29 GMT

‘Somehow we’ve retained this elemental demand for fairness. “Buyer beware” doesn’t cut it: the seller also has a responsibility not to con people.’ Photograph: Larry Lilac / Alamy

As supermarket giants puzzle over their profit warnings and the nation readies itself to spend a household average of 800 quid it doesn’t have, here’s a quick rundown of festive scams. I don’t mean drunk people in reindeer horns pretending to have lost their wallet and asking for two pounds; that’s next month.

No, I mean the ways we are ripped off in shops. I quite like an old-fashioned swindle, it gives me a sense of continuity: the person who designed the chocolate finger packet so it contains more air than finger is descended on a direct moral line from the grocer of olden days who used to hide a clog in a bag of flour. It is reassuringly simple: most of gangster capitalism is only barely understood by the people perpetrating it, and makes the victim feel foolish, not only for having been the mark in the first place but also for the sudden spotlight on their ignorance. I personally would like to see someone go to prison every time one of us is required to learn a new acronym: if we’d instituted that after the Libor scandal, would there ever have been a Forex?

Clearly, retailers couldn’t stay competitive if they didn’t keep up with the modern world of the corporate predator. Not every consumer shakedown is a period piece: the great cheese swindle, in which wholesale prices have gone down while supermarkets – apparently by wild coincidence, and certainly not because anybody thinks they’re operating as a cartel – put their prices up, has a lot in common with today’s energy market. What we need is some kind of regulatory body to monitor the undulations of milk protein. We could call it Ofcheese. I will happily take charge of that, when the time comes.

But back to the shops, where a new Which? survey suggests there are three broad categories of swindle: making you buy a thing because you think it’s better quality than it is; because you think it’s better value than it is; or because you think it’s healthier than it is. The tricks are so craven, it’s a little embarrassing to name them. The own brand might be designed to be indistinguishable from the branded version. Goodfella’s pizzas print calorie counts based on a person eating only one quarter of a pizza, which nobody has ever done since pizzas were invented. Biscuits loaded with sugar are called “light” because they have reduced their proportion of fat (what with the scandal of the air-Fingers on one hand, and McVitie’s “lite” digestives on the other, I think we could also make a case for the creation of Ofbiscuit). Fruit juices that are mainly apple are adorned with two strawberries and called “strawberry smoothie”. This has solved two mysteries that have plagued me throughout my child-rearing years: how can anyone afford to produce 300ml of pure strawberry juice? (Because that’s not what it is.) And what is the point of the word “smoothie”? (Unlike “juice”, there is no widely understood definition of the word, separate from the product. So you don’t have to name it after what it’s actually made of; you can name it after something it reminds you of.)

Department stores hunt bigger game, packaging things as “gift sets” in order to stick an unwarranted 20% on their prices. We’ve known that for years. And they engage in affective propaganda, trying to manipulate your gift-giving mindset to include people like cousins. You can snort at this, confident you will never be so sheep-like as to buy a pepper grinder for someone whose name you have been known to get wrong. But consider: do you do Halloween? There is no such thing as the successful refusnik of marketing strategies, only variations of late adopter.

What I really love about Which? surveys – indeed, the existence of Which? as an institution – is the sense of moral clarity. There is very broad-based agreement, across the political spectrum, that people selling things ought to be open and honest about what they’re selling. There is total consensus in the shopping universe that markets are social spaces, and like any other social space will only function if people treat others as they themselves would want to be treated. This certainty has gone missing from conversations elsewhere: a banking scandal always comes garnished with people arguing that the financial sector is so wedged with talent that it should be unleashed from moral codes, the better to dazzle us with its heady ambitions. Business is increasingly presented as a quixotic, ungovernable process, upon which we all rely so heavily, and to which we should render such gratitude, that it is not for us to question it. Inevitably, this comes with the expectation that the successful entrepreneur or innovator will be sociopathic – indeed, that that’s what marks him or her out as so special: the ability to separate themselves from the muddled matters of trust and sympathy that beset the world of the non-entrepreneur. And yet, somehow, we’ve retained this elemental demand for fairness at the till. “Buyer beware” doesn’t cut it: the seller also has a responsibility not to con people. Granted, it’s not a responsibility they take very seriously, least of all at Christmas, but it’s heartening that we’re still bothering to articulate it.

Incidentally, the way to prevent overspending in supermarkets and department stores is to wear headphones piping extremely loud, motivational music; it doesn’t have to be anti-consumerist in content, just bouncy, the kind of thing joggers listen to. It does more than speed up your progress around the shop, it taps into a part of your psyche that doesn’t need unnecessary stuff because it already feels great. Complaining about shops and their moral deficiencies is necessary but insufficient. I would like to see shops treated a bit more like shoplifters – prosecuted for dishonesty even when it seems petty – and shoplifters treated a bit more like shops.

For now I just need an iPod, and my red-blooded resistance will commence.

Our banks are not merely out of control. They're beyond control

Jailing reckless bankers is a dangerously incomplete solution. The market is bust. Institutions that are too big to fail are too big to exist

• 
• • Joris Luyendijk
  • The Guardian, Wednesday 19 June 2013 20.35 BST

'The banking system is highly dysfunctional, deeply entrenched, and enormously abusive, both to its own workers and the society it operates in.' Photograph: Adrian Dennis/AFP/Getty

Seeing the British establishment struggle with the financial sector is like watching an alcoholic who still resists the idea that something drastic needs to happen for him to turn his life around. Until 2008 there was denial over what finance had become. When a series of bank failures made this impossible, there was widespread anger, leading to the public humiliation of symbolic figures. But the scandals kept coming, and so we entered stage three – what therapists call "bargaining". A broad section of the political class now recognises the need for change but remains unable to see the necessity of a fundamental overhaul. Instead it offers fixes and patches, from tiny increases in leverage ratios tobonus clawbacks and "electrified ring fences".

Today's report by the parliamentary commission on banking standards (to which I gave evidence) is a perfect example of this tendency to fight the symptoms while keeping the dysfunctional system itself intact. The commission, set up after last year's Libor scandal, identifies all the structural problems and nails the fundamental flaw in finance today: "Too many bankers, especially at the most senior levels, have operated in an environment with insufficient personal responsibility." Indeed, as they like to say in the City, running a mega-bank these days is like "Catholicism without a hell", or "playing russian roulette with someone else's head".

In response, the commission proposes jailing reckless bankers. Restoring the link between risk, reward and responsibility is a crucial step towards a robust and stable financial sector. But the report's focus on individual responsibility is also dangerously incomplete because it implies that the sector is merely out of control. This plays into the narrative that things can be fixed by tweaking rules and realigning incentives; in other words, by bargaining.

In reality the financial sector is not out of control. It's beyond control. During the past two years I have interviewed almost 200 people working in finance in London: "front office" bankers with telephone-number bonuses as well as those in "risk and compliance" who are meant to stop them being reckless. I have also spoken to many internal and external accountants, lawyers and consultants.

The picture emerging from those interviews is of big banks not as coherent units run by top bankers who know what they are doing. Instead these banks seem, in the words of Manchester University anthropologist Karel Williams, "loose federations of money-making franchises". One risk analyst talked about her bank as "a nation engaged in perpetual civil war", while a trader said, "You have to understand, it's us against the bank."

I could give 50 similar quotes. Taken together, they leave but one conclusion: employees at the big banks themselves do not believe their top people know what's going on; the big banks have simply become too complex and too big to manage. If this is true, the solution is not so much to jail the top bankers when something goes wrong, it is to break up the banks into manageable parts. But the British establishment still seems incapable of accepting the notion that a bank that is too big to fail or manage is a also bank that is too big to exist.

The same seems to apply to the need to restore market forces in the financial sector: the second source of structural dysfunctionality. Imagine a restaurant had served up product as toxic as that which big banks, credit rating agencies and accountancy firms were churning out until 2008. You would expect that restaurant to have closed. You would also expect new restaurants to have opened up in the area. This is how a free market should work: competition drives out bad practices.

But where are the new credit-rating agencies, accountancy firms or big banks? Even worse, not only are there just four major accountancy firms, they are also financially dependent on the very banks they are supposed to audit critically. It's the same with thethree credit-rating agencies dominating the market.

And it gets worse. Imagine that a restaurant in your neighbourhood made the kind of money paid to top employees in banking, credit-rating and accountancy firms. You'd expect people rushing to open more restaurants, and with that increased competition you'd expect wages to come down. Again, this is how competition works. There are thousands and thousands of young graduates aching to get into investment banking, so no shortage of prospective chefs. So where are the new players in high finance?

The reality is that global high finance is de facto a set of interlocking cartels that divide the market among themselves and use their advantages to keep out competitors. Cartels can extract huge premiums over what would be normal profits in a functioning market, and part of those profits go to keeping the cartel intact: huge PR efforts, a permanent recruiting circus drawing in top academic talent; clever sponsoring of, say, an ambitious politician's cycling scheme; vast lobbying efforts behind the scenes; and highly lucrative second careers for ex-politicians. There is also plenty of money to offer talented regulators three or four times their salary.

Capitalists have an expression for this, and it's "market failure". Here is the source of so many of the perversities in modern finance, and the solution is not only to denounce those who can't resist its temptations, it's to take away those temptations. That probably means smaller banks, smaller and independent accountancy firms and credit-rating agencies, simpler financial products, and much higher capital requirements.

Before studying bankers I spent many years researching Islam and Muslims. I set out with images in my mind of angry bearded men burning American flags, but as the years went by I became more and more optimistic: beyond the frightening rhetoric and sensationalist television footage, ordinary Muslim people go about their day like all other human beings. The problem of radical Islam is smaller and more containable than Islamophobes believe.

With bankers I have experienced an opposite trajectory. I started with the reassuring images in my mind of well-dressed bankers and their lobbyists; surely at some basic level these people knew what they were doing? But after two years I feel myself becoming deeply pessimistic and genuinely terrified. This system is highly dysfunctional, deeply entrenched, and enormously abusive, both to its own workers and the society it operates in. The problem really is exactly as bad as the "banker bashers" believe.

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.

The case for the legalisation of drugs

• By Alexander Wickham
• Opinion
• Thursday, 2 February 2012 at 4:15 pm

Sir Richard Branson is a fascinating figure. His politics are surprisingly convoluted for a billionaire businessman; at times he has resembled a Thatcherite neo-classical and at others he has been a Labour-supporting proponent of humanitarian issues and environmentalism. Last week the Virgin Group boss addressed the home affairs select committee on another issue he has championed down the years, calling on the government to implement a liberalisation of drugs policy. Interestingly, what he had to say made a lot of sense.

Branson began, naturally, with cannabis. He insisted that the decriminalisation, regulation and taxation of the drug libertarians have traditionally seen as a start-point for reform would reap widespread rewards for society as a whole. Responsibility for drugs policy should shift from the Home Office to the Department of Health, he argued, quite compellingly enquiring of his inquisitors whether, upon finding out that their own son or daughter had a drug problem, would they rather seek medical help or be having to deal with the police? Tellingly, they offered no answer. In Portugal, where even heroin addicts are hospitalised rather than arrested, drug use has fallen by 50% as a result of legalisation. Each year some 75,000 young Britons have their futures ruined by receiving criminal records for minor drugs offences. Treating drug users as patients rather than criminals would be an important first step to a more effective drugs policy.

Following decriminalisation, Branson admitted that regulation would inevitably be required. I have previously argued that carefully regulating the legal sale of drugs would do more than anything else to save lives. Last November two young men died after taking a fatally potent form of ecstasy (MDMA) at a London music venue. Due to the covert nature of acquiring drugs they had no way of knowing what they were buying; drug dealers are not thoughtful enough to label their products with an ingredients sticker. At present drug users are clueless about whether they are actually taking what they think they are, the extent to which it has been cut with other noxious substances, or even if they have been given a new and untested form of drug. It doesn’t take a rocket scientist to work out why people are dying. Legalisation and regulation would require sellers – licensed by the state – to only offer a genuine product with clear guidelines for safe usage. It may have saved the lives of the two young men last November, and would save countless more in the future.

If the practical case for a more liberal drugs policy is fairly straightforward, the economic argument is somewhat more complex. Branson convincingly articulated the basics last week. Home Office figures show that £535 million of taxpayers’ money is spent each year on the enforcement of laws relating to the possession or supplying of drugs. Conversely, only 3% of total expenditure on drugs is through health service use, and just 1% on social care. A staggering 20% of all police time is devoted to arresting drug users and sellers. The balance between policing and treatment clearly seems skewed, but in this age of austerity these figures are especially unforgivable. At a time when the Coalition is controversially cutting welfare, why do we accept huge spending on a law and order policy that has failed to reduce the prevalence of drugs in society? As Branson succinctly puts it, the money saved through decriminalisation and taxation would surely be better spent elsewhere: ‘it’s win-win all round’.

Now on to the more technical side of things. While the supply-side economist Milton Friedman is of course celebrated for his writings on neo-liberalism, his less well-known contribution to the debate on drugs was also quite brilliant. Friedman argued that the danger of arrest has incentivised drug producers to grow more potent forms of their products. The creation of crack cocaine and stronger forms of cannabis (and evidently MDMA as shown above) is, he claims, the direct result of criminalisation encouraging producers to strive for a more attractive risk-reward ratio. Moreover, drug prohibition directly causes poverty and violent crime. Supply is suppressed by interdiction and prosecution therefore prices rise. Users are forced by their addictions to pay the going rate, then turn to crime to fund their habit as they are plunged into poverty. Finally, and perversely, the government effectively provides protection for major drug cartels. Producing and selling drugs is a risky and expensive business so only serious organised crime gangs can afford to stay in the game. All the money goes to the top. It is, as Friedman notes, ‘a monopolist’s dream’.

The deleterious and unforeseen economic consequences of criminalisation are, one you get your head round them, pretty persuasive. There is, however, one last point worth considering: the moral perspective. You may hate the idea of drugs, most people do. Yet what right does the state have to tell someone what they can and cannot do in the privacy of their own home? John Stuart Mill, the great liberal philosopher, famously declared that ‘the only purpose for which power can be rightfully exercised over any member of a civilised community, against his will, is to prevent harm to others. His own good, either physical or moral, is not sufficient warrant’. The act of taking drugs is an entirely personal choice that affects no one but the individual himself. Can the state therefore justify impinging upon his personal liberty? Mill would say no. This is a question that deserves serious thought.

Sir Richard Branson is a maverick. A week ago most people would have been against a liberalisation of drugs policy. After listening to what Branson had to say many will have changed their minds.