Two big British banks reach controversial settlements
TOO harsh or too soft? Standard Chartered and HSBC both agreed to settlements with American regulators over money-laundering allegations this week. On December 10th Standard Chartered agreed to pay a fine of $327m, on top of an earlier $340m penalty; a day later HSBC stumped up $1.9 billion. The penalties are record-breaking by historical standards (see table) but aggravated controversy over how large financial firms are prosecuted.
Both of the banks signed statements acknowledging they had facilitated illicit financial transfers on behalf of Iran, Sudan, Myanmar and Libya. HSBC was also faulted for its relationships with Cuba and most significantly, with Mexican and Colombian drug cartels. Each agreed to abide by conditions, such as monitoring of their compliance processes, as part of a period of supervised probation.
Defenders of the banks claim the size of the fines reflects the fact that they are based abroad, with no domestic political base to speak up for them. Rumours are rife that the settlement numbers changed constantly during the negotiations between the banks and the multiple government agencies involved, in part because no regulator wanted to be seen to get less from a settlement than its peers. Such complaints reinforce concerns about the opacity and arbitrariness of the settlement process, where fines reflect no known economic rationale.
But there were also criticisms that the settlements were too small. The agreements put an end to uncertainty over the banks’ ability to operate within America, a key link in their global networks; their share prices both rose on the day the fines were announced. And the penalties are, in effect, levied on shareholders; not one corporate employee faces charges (although HSBC, at least, has clawed back payments to those responsible).
Indeed, at a news conference this week Lanny Breuer, head of the Justice Department’s criminal division, suggested that an outright prosecution of HSBC was considered and rejected because of how damaging the impact could be on the bank’s viability, and thus on jobs and the American economy. Has a handful of banks become not too big to fail, but too big to jail?
The cases will nonetheless have a lasting impact. The risks of ending up on the wrong side of American foreign policy in some emerging markets have been underlined. Back in August, when New York state’s Department of Financial Services accused Standard Chartered of participating in 60,000 illicit transactions with Iran, the bank at first issued a strong denial. In its statement Standard Chartered acknowledged only 488 illegal transactions, worth $24m (it also admitted $97m in illicit transactions with Sudan, and $12m with Libya). It says that most of its $250 billion-worth of activity with Iran was legal at the time. But the bigger point is that even very large businesses in controversial countries can quickly fall foul of the law.
HSBC was involved in even larger illicit transactions with all these countries, as well as with Cuba. Its most serious violations occurred in Latin America as various drug gangs used its wire- and cash-transfer services to launder hundreds of millions of dollars. Abundant warnings were issued to the bank but its response was bungled, in part because the balkanised way HSBC managed its operations crimped the flow of information, and because rounds of cost cuts devastated its compliance department. The idea of running a genuinely global network, let alone doing so frugally, is on trial—even if the banks themselves have escaped prosecution.
Courtesy : www.economist.com