J’accuse the Mafia banking sector of wholesale criminality

Standard and Poor’s report that 2015 will be worst in history for bank fines for outright criminality!

According to a report by Standard & Poor’s, Royal Bank of Scotland, Lloyds, HSBC and Barclays will pay more in fines for mis-selling (institutionalised fraud) and market manipulation in 2015 than in any year to date. 

S&P predicts that the big four’s bill for misconduct fines and compensation for PPI and interest rate product mis-selling will hit almost £14bn this year. 

RBS, HSBC and Barclays are still expecting to be hit with fines for foreign exchange manipulation this year, while RBS is due to receive a multi-billion pound fine for mis-selling mortgage-backed securities. 

S&P believes that this will be the biggest year yet for litigation fines, meaning a record combined pay-out from RBS, Barclays, HSBC and Lloyds. The four banks have borne £42bn in conduct and litigation charges in the last five years, but can expect £19bn more in the next two, according to S&P.

Yesterday’s Daily Telegraph Business section ran a shocking story that not only confirmed these figures, but also set out the statistics for financial criminality in all the British banks for the past 5 years.

In it he notes that S&P now believe that bank fines are now a ‘way of life’.

The statistics for these fines and the crimes they represent make for sorry reading, and the list below identifies the worst offenders and the crimes they committed.

Before reading, reflect, all these offences were admitted from the start – the banks effectively pleaded guilty to these crimes without any contested trials. This is a level of criminality which is so vast and so damaging that I believe the next Government needs to seek a Royal Commission to enquire into this level of blatant thieving.

If crime of this level of seriousness was being admitted in any other business of public sector industry, the Government would be calling for major anti-crime initiatives, police task forces would be deployed, and heads would be rolling across the sector, and people would be going to prison.

1. UBS: £233,814,000 (FX rate fixing)

This huge, nearly a quarter of a billion pound-fine is actually a 30 per cent discount because all the five banks involved in the forex scandal pleaded guilty early in the investigative process. Combined with its fine from US financial regulator the Commodity Futures Trading Commission (CTFC), its total fines were a massive £503m. 

2. Citibank: £225,575,000 (FX rate fixing)

Much like UBS and the other banks involved in the forex rate-fixing scandal, Citibank rolled over early in the case. It was also received a £194.6m fine from the CFTC.

3. J.P MorganChase: £222,166,000 (FX rate fixing)

This bank has featured almost every year for the past five years. However, this is the largest fine the bank has ever received, with combined total fines of £417m over the scandal, including £195m from the CFTC.

4.RBS: £217,000,000 (FX rate fixing)

RBS total fines over the forex rate fixing scandal were £399m including £182m by the CFTC.

5. HSBC: £216,363,000 (FX rate fixing)

HSBC has confirmed it has set aside $378m (£249m) aside for fines - although combined with penalties from the US regulator, HSBC’s total over the rate fixing scandal hit £389m.

6. Lloyds and Bank of Scotland: £105,000,000 (Libor)

2014’s other major financial scandal was Libor, where several banks (Lloyds among them) colluded to fix the London Interbank Offered Rate (Libor) - the rate at which banks lend to each other. 

7. RBS, Natwest and Ulster Bank: £42,000,000 (Failing to provide adequate IT systems)

8. Barclays.  £37,745,000 (failing to properly protect £16bn of clients’ custody assets)

Barclays isn't the only bank to feature twice on this list- but it does so while also being investigated for both the Libor and forex - more fines are expected to follow. The bank was fined by the FCA in September when it failed to protect funds a client had entrusted to them in custody. 

9. HomeServe: £30,647,400 (mis-sold insurance policies)

The only non-bank to make the top 10 this year HomeServe, which was slapped with a massive £30m fine after it was found it had not only mis-sold insurance to its clients, but also failed to investigate claims in a timely manner. 

10. Barclays: £26,033,500 (failing to manage conflict of interests) 

What these figures demonstrate is an era of Organised Crime on a hitherto unimaginable scale. It is clear that these banks, in order to maintain the level of revenues they required to support their over-inflated share prices, had to engage in wholesale criminality to make their numbers.

How is it that no-one has gone to prison for these crimes. How is it that bank senior executives have not been called to account?

Every time we see a Parliamentary Committee sitting in judgement on these creatures, we see them slipping, sliding, evading the questions, sometimes being economical with the truth, sometimes downright lying, but never any question of anyone being required to resign.

While these statistics reflect an unacceptable level of organised crime within these banks, they also reflect an almost complete absence of any kind of pro-active activity on the part of the regulators.

The role of all law enforcement agencies, (and financial regulators do perform a policing function, no matter how much they may deny it and seek to wriggle out of their responsibilities for ‘policing’ the market), is to prevent crime in their market, industry or social sector.

Crime prevention is a pro-active science, where those charged with the duties of regulating the market should be adopting integrated and pro-active techniques and strategies to identify and disrupt such activities in the market, in the first place.

Waiting until the horse has bolted and the cat is out of the bag (how I do love a mixed metaphor), is futile. It means that the regulators are always responding after the event, and always too little, too late!

These latest statistics must be a clarion call to Government, because these fines are being loaded on to the shoulders of the shareholders, and they are not impacting on the most egregious criminals themselves, the banks and their management.

We simply cannot go on watching this pantomime being played out, where fines, the size of which would pay to support the NHS for years to come, are being levied against criminal enterprises who show no signs of conforming to law.

As a matter of course, any bank director whose institution is fined sums of this magnitude should be facing the wrath of the English Courts as well as the demands o out-of-pocket shareholders.

The SFO and the City of London Police should be harmonizing their approaches to these criminal allegations, and should be working out a list of those they would wish to interview.

In no other walk of life would such dishonest and egregious business practices be tolerated.

This must now become a priority for Government – It already is an electoral issue for me!

HSBC threatens to relocate its business centre to avoid regulatory requirements.

HSBC has threatened to relocate its headquarters outside the UK, in a move promoted by the Chairman, Douglas Flint, in response to "regulatory and structural reforms", including the requirement for banks to separate their investment arm from the retail divisions, which was instituted after the 2008 financial crash.

The bank has also been hit by the UK bank levy, which last year cost it 1.1 billion US dollars (£730 million), up 200 million US dollars (£130 million) in 2013. Flint's announcement sparked a claim that the "regulatory pendulum has swung too far".

Flint disclosed the review at the company's AGM in London, where the board faced a torrid time from angry shareholders over the potential move. They were also castigated for a series of financial scandals that have engulfed the bank, marking it out as one of the most egregious financial mafias operating out of the UK.

One investor, Michael Mason-Mahon, said: "Which country are you likely to go to? How many countries have you not committed illegal and criminal behaviour in?"

These are, rightly, very difficult times for HSBC, and its aggressive and pompous response to legitimate international concerns at its concerted organised criminal behaviour, does not indicate that they have learned any lessons from their wrong-doing.

OK, so the chairman of HSBC has admitted his shame at the “horrible reputational damage” the bank has suffered following the revelations of the systematic aiding of tax avoidance at its Swiss subsidiary, but he has refused to take personal responsibility for the failings.

I mean, he was only a very senior director of this major bank at the time, but this still doesn’t mean that he feels he should accept any responsibility.

Douglas Flint, who was finance director at the time HSBC took over the Swiss subsidiary, infuriated members of the Treasury select committee by blaming the failings at the Swiss unit on local managers and said that the secrecy surrounding banking in the country made it difficult for him to have a direct line of sight of what has happening at the bank.

If that was the case, why did he not demand access to the information and require it to be shown to him, if he felt he was in charge of business conduct he could not properly identify?

Flint, who has been chairman of the bank since the end of 2010, said: “I believe in personal accountability and I do believe people should be held responsible for what they have direct oversight over when they have failed”.

OK, fine, all well and good, but how does he avoid the allegation that the overwhelming reason he did not ask to see the evidence identified was because he did not want to see it for fear it would implicate him in unacceptable activities which he would then have had to disclose to British financial regulators and law enforcement agencies?

While he said he felt “very ashamed” of events at the bank, he said he would not forfeit past bonus payments in response, telling MPs: “I don’t feel that proximate to what was happening in the private bank.”

Hmmmm, interesting weasel word that ‘proximate’. He should have known what was going on, he should have engineered greater proximity, how else could he have exercised his duties and responsibilities as a senior director?

And what about his noble Lordship, Lord ‘See No Evil, Hear No Evil’ Green, an ordained Tory minister, who has repeatedly refused to answer questions in public about the scandal – citing a “point of principle”. 

Flint added: “Most accountable, I think, are the management in Switzerland. It’s very difficult for people outside Switzerland to get any access to the detailed account-level information in Switzerland. That’s something only the management on the ground can have access to for all the privacy and secrecy reasons...”

With very little respect, that is not good enough!  As Chairman, you are bloody well entitled to know, you ought to know and you should have demanded to know. Not asking taints you and your actions deeply, you are complicit sir,!

Having bamboozled the Parliamentary Select Committee, and not being likely to face any kind of investigation from the FCA, it would seem that HSBC Board members may feel that they have avoided the worst kind of allegation which would under most other circumstances have caused resignations.

Directors of the kidney of HSBC men do not rise to their exalted heights by readily admitting their culpability!

So, instead of adopting a more humbled stance and expressing contrition at the way in which they and their senior executives have behaved in recent years, they have behaved like a spoilt child, thrown an enormous hissy-fit, and started to threaten to relocate their non-retail business to a jurisdiction where they won’t have to comply with a series of regulations designed to make their risky business activities, less likely to bring the entire financial house down, in the event of an adverse market reaction. 

What this demonstrates is that the basic commercial culture of HSBC is designed to avoid as many prudential regulatory requirements as possible, because, presumably, they get in the way of the bank’s ability to make money, quickly, easily and without too many awkward questions being asked!

The reason we have bank regulations is to keep the banks honest, or as honest as it is possible to get. The aim is to ensure that they do not have a sudden rush of blood to the head and run out and stick the entire Treasury reserve on red at the casino in Monte Carlo, or short every trade on the New York Stock Exchange Big Board in an attempt to undermine the market.

Most banks know this, and despite having spent a lot of money with their lawyers and PR advisers trying to oppose these regulatory changes, they will grudgingly fall in line in time.

Not so HSBC it seems.

Well, frankly, if HSBC wants to relocate its HQ to some Asian centre, good luck to them and good riddance.

The reason why I suspect the move is going to be very difficult to achieve is because I seriously doubt that many of the senior executives’ wives will be very happy about relocating to Hong Kong for the foreseeable future, and live under the benign control of the PRC.

Can you imagine what it will be like for these gilded and privileged individuals to be forced to move out of their Notting Hill enclaves and take up residence in some crowded Hong Kong high rise apartment? I mean there is a limit to the amount of Sushi and lemon chicken one can consume!

By setting this rabbit running, HSBC have made a strong public statement that they have no interest in doing business in a regulated business environment and are about to engage in an exercise in regulatory arbitrage.

They, like other banks, are beginning to discover that they cannot make the same level of profit working in a firmly regulated financial arena, so they must look around for a less-regulated environment, where they can engage in their anomic conduct to their heart’s content.

The air will be a lot sweeter without them!

Integrity in Financial Services – A question of real leadership

An important story in today’s newspapers deals with former trader Paul Robson who has been banned for life from the UK financial services industry by the FCA following a conviction for fraud in America, the regulator's first public action against a trader for manipulating Libor submissions.

In 2014 Robson, who worked at Rabobank, pleaded guilty in a New York court in August 2015 to his part in a conspiracy to manipulate Rabobank’s Yen Libor submissions to benefit trading positions.

As a result, he has been banned for lacking ‘honesty and integrity'. 

This ban comes ahead of Robson's 2017 sentencing in the US and the FCA's proceedings were stayed due to ongoing criminal proceedings since they issued Robson with a warning notice in 2013.

FCA acting director of enforcement and market oversight Georgina Philippou said: 'No excuse can be made for Mr Robson’s behaviour, which was particularly serious. He was the primary submitter of Yen Libor at Rabobank for a number of years and experienced in the market. 

'He knew what he was doing was wrong. This ban reinforces our expectation that individuals and firms take responsibility for ensuring market integrity and reminds them of the consequences if they fall short of our standards.'

This story is important for a number of issues.

Firstly, it raises the vexed question of the lack of dynamic action by the FCA and the SFO against a UK-registered individual for a particularly dishonest and grubby criminal offence involving the criminal manipulation of the LIBOR benchmark. Why was the criminal case left to the Americans?

Now, it may be that the SFO had decided to let the case lie while they observed what their US counterparts wanted to do about it. It would not be too far from reality to observe that if there were US defendants involved in the conspiracy, and the US prosecutors had taken the lead in the investigation, then the trial might more properly be allowed to take place in New York.

It seems this is probably what has happened, and Robson will later be sentenced by the New York Courts in 2017, no doubt when other similar cases arising out of the same circumstances have been finalised.

This case does raise more issues however, issues which have to do with integrity and moral transparency, and which underpin an argument for the need for a greater degree of strategic leadership.

This issue of strategic leadership was also amplified by the actions of former HSBC boss, Lord Green, the former chief executive and chairman of HSBC, who has just revealed his “dismay” and “deep regret” over the tax evasion row that has engulfed the bank. 

The HSBC veteran admitted that management had made mistakes during his time at the lender, which coincided with alleged moves by its Swiss private bank to help wealthy clients hide billions of pounds in order to escape taxes in the mid-2000s. 

What sheer bloody hypocrisy!

This man, who refuses to answer any questions over what he knew and how he knew it about the tax evasion scandal was a career banker. I have every expectation that he knew all about Swiss banking methods and tax evasion issues. If he didn’t, which I don’t for one second believe, then he was remarkably ill-informed, but his career tells a different story.

In January 2005, Green became Chairman of HSBC Bank plc, the group's UK clearing bank subsidiary, and Group Executive Chairman in June 2006. In its July 2005 issue, Bloomberg Markets magazine reported that HSBC was allowing money laundering by drug dealers and state sponsors of terrorism; the magazine alleged that this had included a transfer of $100,000 in April 2000 to the Taliban in Afghanistan which had subsequently resulted in a fine levied by the US Treasury Department. 

Green denied the allegations, calling them “a singular and wholly irresponsible attack on the bank’s international compliance procedures”. Subsequent investigations however, confirmed that money laundering had taken place at the bank for several years throughout Green's tenure as Chief Executive and Chairman, chiefly for the Sinaloa Cartel.  It is widely reported that Stephen Green earned well over 25 million pounds per year at the time, although it is hard to quantify the exact amount. 

Green's successor as the top of HSBC, Stuart Gulliver, said “between 2004 and 2010, our anti-money laundering controls should have been stronger and more effective and we failed to spot and deal with unacceptable behaviour”.

So what did ‘Lord Green of See No Evil’ think his Swiss Bank was doing for UK clients, selling cuckoo clocks?

For this man to talk about setting high standards, is a travesty and an abuse of the ordinary meaning of words. This was not leadership, it was a deliberate and willing avoidance of the truth, and he needs to go and ponder the parable about camels, rich men and the eyes of needles before he spouts any more hypocritical tosh!

Edwin Sutherland, the US criminologist tried to enunciate an explanation for such behaviour among white collar workers, in his book ‘White Collar Crime’, in 1939. Sutherland defined it as;

“...A crime committed by a person of respectability and high social status in the course of his occupation...“

In other words, a crime committed by someone who would otherwise not be thought of as a typical criminal type or a person likely to commit crimes.

In his theory of “Differential Association”, Sutherland posited that criminal behaviour is a result of a process of socialization, during which criminal “definitions” (ideas) are not only transmitted culturally,  but are actually learned through social interactions with trusted intimate groups.

Learned behaviour is neither invented, nor inherited. The skills and techniques required for criminal activity are not innovations, and they are not automatically obtained from birth.

Criminal behaviour is learned. Just as one learns to prepare a meal, so too one learns to cheat a client or manipulate a benchmark.

They are acquired through a process of learning from others in the same milieu.

Sutherland states that one learns criminal behaviour through social interaction and communication with others in the same ‘trusted’ group. 

This communication-based discovery occurs during the learning process about criminal activities. One may come to learn about bank crime through discussion with others, but also by witnessing the responses of the others towards the activity, such as maintaining a group silence about the practice, if questioned by supervisors.

Most learning of crime and deviance takes place in interaction with members of intimate, personal groups, such as fellow employees in a department or on a trading desk. 

The greater implication of this proposition is that it locates trust at the root of those social interactions which encourage deviance. 

New employees would be likely to first learn how to mis-sell products or manipulate a benchmark from their close associates within the close group or team, rather than from mere general acquaintances.

Sutherland’s concept of learning identifies what is acquired through communication with intimates that facilitates criminal activity. 

Through this learning process an individual gains not only the skills and techniques required to commit the crime, but also what Sutherland called the “motives, drives, rationalizations, and attitudes” that accompany the behaviour. 

Not every employee who learns, commits offences. Instead, Sutherland calls attention to a subjective component which individuals also have to learn, or adopt, the social, cultural and psychological attitudes that drive a violation of the law.

Such rationalizations and attitudes also explain the common excuse for criminal behaviour which is that it is warranted or deserved. 

“There are no laws against it”.

“Everyone is doing it – it must be ok” What David Matza would later call ‘Techniques of Neutralization”.

If what they do is not perceived by themselves, their sub-cultural peers or professional colleagues to be criminal because they have jointly accepted that the law does not apply to them in these circumstances, then regardless of Parliamentary intention or definition, any attempt by legislators to provide systems of regulatory control, particularly those which depend upon self-regulation for their authoritative administration become futile.

 

This is why there is such a need for strong moral leadership within the banking milieu!

If employees learn that their colleagues are rewarded for cheating, stealing, manipulating benchmarks or otherwise indulging in thinly disguised criminal behaviour, the more likely they will be to indulge in the same dishonest conduct themselves.

If earning objectives are set so high that it means that employees will need to cheat and steal to achieve those targets, then there should be no surprise if that is what happens.

Once management has instilled the idea that criminality is rewarded, while turning a blind eye to the provenance of the revenues being driven, employees will adopt these methods as a matter of course.

Remember, criminal conduct is what Sutherland defined as a ‘learned process’, and being rewarded for doing wrong is the fastest way to create an unstable and dysfunctional workforce.

So, when Paul Robson was engaging in his dishonest conduct, he was merely demonstrating his teaching and demonstrating that he had learned well.

What on earth would have possibly otherwise encouraged a man with a senior (and presumably well-paid job) to engage in such blatant criminal conduct. He must have known that what he was doing was dishonest, so why did he do it?

Clearly he had observed too many examples of others getting away with similar behaviour until such a time when it became unremarkable to him. However, he must also have known that management would remain untroubled by his actions, as long as he was making a profit!

Where management fail to provide the necessary degree of example of good business models and fair conduct, then their staff and direct reports will quickly learn how to manipulate the working environment to their own benefit.

This is why I suggest that senior directors of banks who conduct themselves like Lord Green of ‘Hear no Evil’, fail to provide the necessary degree of leadership and good example to their staff which will overcome the tendency to resort to criminal conduct.

Banking crime is not necessarily a foregone conclusion, nor does it need to be, but until such time as bank Boards start demonstrating a far greater degree of leadership and ethical suasion, and stop making pious excuses when it can be amply demonstrated that they were failing to lead the enterprise in an effective manner, cases such as that demonstrated by Paukl Robson will continue to proliferate.