Lessons in failure!

The United Kingdom-based Financial Conduct Authority has fined the UK subsidiary of the Guaranty Trust Bank over £500,000 for failing to do thorough anti-money laundering checks on its potential clients from high-risk countries.

Why has no-one inside this egregious banking institution been prosecuted for their repeated failure to comply with the money laundering regulations? It would have had far more effect and sent a much stronger message to the banking sector, but yet again, the FCA has bottled the opportunity.

The banking and financial scandals which have cost us all so dearly were the direct outcome of a culture of failure to understand how to regulate the business sector in a way which would have prevented the worst excesses from causing the damage which resulted.

I believe that this culture represents something quintessentially 'British', which believes that there is something special about the management of our important public affairs, by 'enthusiastic amateurs', people who are imbued with a certain kind of ethic which is instantly recognisable to those who manage the affairs of these organisations.

This culture seems to inform the British Civil Service Model, a sort of 'Good Chaps' syndrome, where almost any kind of required administrative ability can be safely left in the 'safe pairs of hands' of people who have no special skills or training, but who can be relied upon not to rock the boat or tell tales out of school if things go wrong.

For far too long, this 'cult of the amateur' has underpinned the way in which the financial sector has been regulated, and as I have observed many times, there appears to be a marked reluctance to engage in any form of prosecution, when the criminal law is broken.

This unwillingness to engage the criminal law is possessed of a very complex series of reasons and stimulii, but I have come to the realisation over the years, that it has a great deal to do with class. Criminalisation is something that we reserve for the dangerous underclass, for the 'criminal class' of society. Occasionally, where there is a danger that the actions of a specific individual might cause grave embarrassment to a specific element of that sector of society who might otherwise expect to be protected, we will resort to the use of the criminal law (Nick Leeson was an example), but generally, the financial sector class do not expect to be so confronted.

It is as was once said to me by a board member of Barclays Bank, "...We are a protected species..."

The problem is however, that without the recourse to the use of the criminal law and the power to criminalise, all too often the financial sector views the activities of the regulatory sector with a degree of benign contempt.

Banks and financial services enterprises can be subject to the criminal law, but they know that they are never going to be subject to its constraints, and so they feel comfortable in being able to ignore its requirements for as long as it suits them.

This, essentially, was one of the leading lessons we should have learned from the financial crisis, because what appeared to be all too often the leitmotif of the criminal activities of the banks was that they knew there was no danger of their being prosecuted for their wrong doing.

Even when the Banking Commission was engaged in its deliberations, Andrew Tyrie, the Chairman, would repeatedly ask 'why has no-one been brought to trial for these actions?'

Again, I have said this before, but the only way to ensure that any form of regulatory requirement is adhered to, is to find the influence which has the greatest impact upon the mind of the person required to comply, and criminalisation is the strongest influence that has any meaning for white-collar offenders.

That is why I am simply unable to understand why the new FCA is making all the same mistakes as its disgraced predecessor, the FSA, when it comes to dealing with regulated firms who are blatantly ignoring the requirements of the anti-money laundering regulations.

Examining the case of Guaranty Trust Bank, The FCA said that between May 2008 and July 2010, the bank had failed to assess potential money-laundering risks, screen customers against sanction lists, establish the purpose of the accounts being opened in their London branch or review the activity of “high risk” accounts, Reuters’ report said.

Guaranty Trust Bank opened a UK office in 2008 offering retail and wholesale banking to private and corporate clients, according to the regulator.

Specifically, the FCA said in a statement that it had levied a £525,000 fine on the UK subsidiary of the bank after it looked at the bank’s systems as part of a wider review into anti-money laundering controls among banks.

A similar report by the Financial Times quoted the regulator as saying that the bank was not rigorous enough in pressing potential customers on their sources of wealth.

So, for two years, this Nigerian bank had completely failed to address the issue of the potential for criminal wrong-doing by its clients. The Bank had failed to do any of the most important steps mandated by law to prevent money laundering.

This wasn't a minor accident, or a slight oversight, this was a concerted and deliberate business-case policy decision, a specific refusal to obey the law, undertaken at a time when the bank would have known full well what its legal obligations were and why they were required to provide them.

This was a bare-faced two fingers to the regulatory agency from a bank with a higher-than-normal likelihood for high-risk clients, and still the FCA has done nothing about prosecuting the bank or its directors for their egregious failures.

It gets worse. The bank failed (refused) to press a client, who was a so-called politically exposed person “wanted by the UK authorities in connection with laundering millions of dollars of embezzled public funds”, on the ultimate source of a cheque for £500,000 that he deposited from an offshore account, according to the regulator’s final investigative report.

Excuse me, sorry, but let us be clear on this point, the bank were willing to entertain a client who was already in a high-risk category (a PEP), and who was on the run from the UK authorities and wanted for money laundering! This fugitive from British justice had an account with the bank, but they hadn't pressed him on the ultimate source of of £500,000 of funds coming from an offshore account?

Now, this may just be my suspicious mind, but I would have thought that under these circumstances, this would be sufficient evidence to  begin an immediate investigation into a possible charge of money laundering against the bank! There is also enough evidence to charge an offence of failing to make a suspicious disclosure, I mean what happened to these offences, doesn't anyone enforce them any more?

The regulator, in its exercise of fearless regulatory action however, declined to identify the individual concerned!

The Nigerian authorities in 2007 named GTB’s parent bank, the first African bank to list in London, as one of two banks used by the former Governor of Delta State, James Ibori, who was found guilty of money-laundering and fraud worth £50m last year at Southwark Crown Court and sentenced to 13 years, following an investigation and prosecution by the UK authorities.

The UK regulator and its predecessor, the Financial Services Authority, have made anti-money laundering controls a priority over the past two years as tighter directives from Europe and new UK anti-bribery legislation have taken effect.

However, until such time as breaches of the Money Laundering Regulations are more rigorously pursued and prosecuted by the FCA, then the financial sector will gain increasing comfort from the knowledge that the regulator intends to do very little to impose the law on money laundering, and it will continue to be ignored.