No, it’s not about flagellation and sado-masochism, although the current regulatory regime is not far off that. It’s also true that the regulatory regime is pretty mind-boggling these days, with fifty shades of interpretation of fifty shades of law. This was made clear to me in dialogue with a group of European banks involved in the LIBOR fixing program last week.
We were talking about the likely implications of American regulatory retaliation, and they made it clear to me that the United States is using LIBOR and money laundering as pure extortion from foreign banks to bolster their political coffers.
That sounds a bit extreme, but it made some sense as the conversation developed.
It began with a lot of anti-American jibes about how the issues at StanChart and HSBC had been pure examples of American sabre rattling.
One of the bankers claimed that the example of Benjamin Lawsky had been pure extortion and, in retrospect, it was. Pay or we’ll shut you down.
Another banker said that what the Americans have now outlawed was actually acceptable until very recently, even in the USA.
For example, processing payments with and for Iranian banks or companies may well be unlawful today, but some of those payments were under a U-turn exception. A U-turn exception was a specific exception the USA introduced, when all trading with Iran was banned back in 1997. The exception allowed trading with oil firms to continue, as there would have been an unacceptable inflationary bubble in oil prices otherwise. So banks can point to payments before November 2008, when the U-turn exception was revoked, and prove these were allowable under US law.
That was for payments then and it shouldn’t be allowed.
The bank replied that this was for payments then and that having an exception was just that: an exception.
Not anymore: pay or we’ll shut you down.
We then got into the whole debate about the US versus the UK political and legal system, and how the UK system tries to be fair. The US system does not, according to the guys round the table.
My American colleagues may say this is just a bunch of whinging pohms (Prisoners of Her Majesty) but I put it down to these shades of legal grey.
For example, American law is completely intertwined with a political agenda. State attorneys become senators by being hard on law. That is why Lawsky did what he did, and Spitzer and Cuomo before him.
Senior lawyers become successful after an interim period at the Department of Justice (DoJ), which makes the DoJ a career moment on the way to the top. This makes the Department a pretty effective enforcer.
Over here, the governmental authorities are seen as dead-end jobs that have no stature or end result. You gather cobwebs as a fraud investigator and end up being a button punching, ineffective jobsworth.
Just look at how effective the Serious Fraud Office has been. With a budget of over £36 million last year (a typical banker’s bonus), the office convicted 38 people last year. Wow! 38 convictions. Do we honestly believe there’s only 38 people convicting fraud from a UK population of sixty million people?
Look at insider trading.
In the UK, for the first eight years of the existence of the Financial Services Authority (FSA), there were no convictions for insider trading, even though ti is rife, as demonstrated by the fact that once the authorities did crackdown on this, they found a rich seam of convicts. For example, between 2009 and 2012, the FSA secured 14 convictions in relation to insider dealing with more on the way.
Compare that with the USA, where case after case is listed on the Securities and Exchange Commission’s website. Similarly, the Southern District of New York’s attorney’s office has a conviction rate of 100% since 2009. Not bad.
This is down to that senior professional intertwined legal, political and regulatory process in the USA.
For example, the US Senate's Permanent Subcommittee on Investigations (PSI) is a great interrogator and investigator, as they have the legal resources and staff that are second-to-none to investigate market abuse practices promptly and properly.
Finally, the legal process in the USA can easily go after foreign banks as:
- they’re easy targets;
- it makes great political headlines; and
- it’s a non-intrusive way of bolstering the government budget by billions, without any domestic impact.
This is why the US regulators are being particularly ruthless on foreign banks rather than domestic banks, and why there will be many more foreign banks brought to justice this year, particularly as part of the LIBOR scandal.
Do you think American banks weren’t involved in LIBOR rate fixing?
Have you seen headlines about major fines for breaking money laundering sanctions with any US bank?
Do you honestly believe that any American bank wasn’t dealing with Iran, Mexico and other nations in a way that might have allowed laundering?
These are all good questions. I could answer some of them by saying that I had seen American banks involved in money laundering issues, for example, but they didn’t get the book thrown out them, making global or even national headlines.
Then the really scary part is what will happen to individuals.
Individuals like Tom Hayes, the UBS LIBOR trader arrested in December. There is a major row starting between the UK and USA over this individual already, and I fully expect he’ll be extradited to find a lengthy jail term ahead.
This will happen in the same way that Financial Services Club speaker David Bermingham was extradited, because it’s useful for domestic political and legal purposes.
And there will be more, particularly if it proves useful to the US authorities to have these individuals jailed in the USA for political purposes, either for headlines or for bringing other heads to bear domestically.
So the witch hunt for LIBOR rate fixing traders is on and regardless of whether these traders should really be subject to the regulatory mandates of the UK, Switzerland, Japan or somewhere else, I fully expect – after this conversation – to see the USA hauling them all over to New York using one-sided extradition treaties that give the USA all the muscle and the rest of the world none.
The end of the conversation raised a final note of fear.
Apparently, the Iranian AML sanction infringements apply equally to other banks, and US investigations into sanction breaking is still extremely active. As a result, expect French, German, Swiss and even Chinese banks to be brought into the Senate Committee hearings over the next year or so.
A Chinese bank brought into the US courtrooms over breaking sanctions with Iran?
At this point, the sabre rattling becomes full-scale economic war, as this international diplomatic and global financial crackdown that America singlehandedly feels it controls causes an international meltdown.
Is that just needlessly and erroneously crying wolf, I wonder?
Of course, as America’s global diplomacy is far more effective than causing a needless war isn’t it?
A good example of American regulators looking after their own whilst being tough on foreign banks came out the same day as I published this blog. Here's the story from Reuters:
U.S. banking regulators on Monday ordered JPMorgan Chase & Co (JPM.N) to tighten its risk controls after the bank lost billions of dollars due to bad bets from a trader known as the "London Whale."
The Federal Reserve and the Office of the Comptroller of the Currency issued the consent orders which levy no monetary penalties and place no specific blame on any individuals.
Instead, JPMorgan and its board agreed to submit an improvement plan to the Fed within 60 days, including taking risk outcomes into account when considering top executives' pay packages.
In a separate action, the banking regulators also ordered JPMorgan to improve its compliance with the Bank Secrecy Act and anti-money laundering requirements.