Big banks must behave
Hong-kong and Shanghai Banking Corporation (HSBC) is the second largest banking and financial services group in the world. It has over 7,200 offices in 85 countries and territories, and boasts of 89 million customers. Its total assets stand at $2.6 trillion. Of this, half is in Europe. The remainder is located in the Americas and Asia.
This behemoth has a listing in the London Stock Exchange as well as secondary listings in Hong Kong Stock Exchange and the New York Stock Exchange. Its head office is in London.
Last week, a US Senate sub-committee released a report which gave some startling information about the activities of this bank. The Senate's permanent sub-committee on investigations in a 340 page damning report described a decade of compliance failures by this financial institution. It squarely condemned HSBC and its American affiliate HBUS for "poor anti money laundering controls" and "incident after incident of managers turning a blind eye" to such malfeasance.
The report stated that HBUS exposed the US financial system to illegal funds from Saudi Arabian terrorists, Mexican drug cartels and recalcitrant regimes in North Korea, and Iran. It played "fast and loose with US banking rules" and exposed it to "drug money, suspicious travelers' cheques, bearer share corporations and rogue jurisdictions." HSBC is also accused of helping to slip in billions in Iranian funds past American regulators. The report mentioned that the HSBC US affiliate "offered services to Saudi Arabian and Bangladeshi banks that are known to have ties to terrorist funding." The Senate report blamed regulators at the US Office of the Comptroller of the Currency for allowing this state of affairs and for ignoring red flags.
The two Bangladeshi banks that had been offered HBUS services were the Islami Bank of Bangladesh (IBBL) and the Social Islami Bank Ltd (SIBL). The report indicates that they may have used HBUS to fund illegal activities. Saudi Arabia's Al Rajhi Bank, which was reported earlier to have funded terrorist activities, holds 37% direct ownership stake at the IBBL. SIBL has partnership with a Saudi Arabian charity called the International Relief Organization (IRO), which is a US listed institution that is under suspicion as an organisation that funds terrorism.
Both Bangladeshi banks have publicly denied the allegations leveled against them in the report. SIBL has also added that it was never involved in any money laundering or illegal transactions. The country's financial regulator, the Bangladesh Bank, has also dismissed the allegations of involvement of these two banks in the HSBC scandal of terrorism financing and money laundering. It said that "it was an old issue. The authority concerned took regulatory actions at that time. We are examining the US Senate report and we will take action if there is any current issue."
It is no surprise that big banks around the world have seen their status slide since the start of the recent financial crises. The American Banker magazine in a recent survey said that the ratings of 22 of 30 such large banks have fallen drastically. Even those who scored 70 on a 100 point scale, like the ING Direct and the Bank of the West, did not do well. They performed below the level that would indicate a strong corporate reputation.
This survey, however, was conducted before J P Morgan Chase made a trading loss of $5.8 billion. It was also made before Moody's downgraded the credit ratings of 15 global banks and before Barclay's Bank in the UK admitted to manipulating a benchmark interest rate. The HSBC fiasco also took place after the American Banker survey.
So why do big banks behave so badly? This is because, as another survey found, professional financial practitioners associate success with cheating. Many of them find that their competitors succeed by bending or breaking the rules. They think that in order to be successful the rules need to be broken. Besides, regulators do not scare them. Most of them know that those who oversee their activity are rarely effective.
Profit and money are no doubt key motivators for the bad behaviour of big global banks. The professionals feel great pressure because they may lose their bonus or their enhanced pay if they do not achieve their profit targets. Any loss of financial incentives acts as a deterrent for good behaviour. Another major cause behind the HSBC scandal of lax enforcement of anti money laundering safeguards is pure greed. It drove HSBC to ignore what the Senate Committee reported, billions of US dollars coming from drug traffickers, or to work with Arab or Middle Eastern banks with alleged links to terrorism. The result of such poor behaviour led to these banks' "business and risk profile grow faster than its infrastructure!"
However, questions are also being asked whether pursuit of profit and constant quest for growth explain all the recent bank scandals. A professor from the Chicago Business School has created an index which measures financial trust. He says that there is a drop in ethical standards, and graduate schools that turn out banking professionals are partly to blame. Most of these schools encourage amorality by the way they teach ethics to MBA students. According to him, the solution should start from the classroom.
For the present, the Senate sub committee has recommended a number of changes at HSBC's US bank, including higher scrutiny of HSBC's affiliates for money laundering risk, closing of accounts of banks linked to terror financing, and steps to ensure that the bank does not process transactions with prohibited entities such as terrorists, drug lords and rogue regimes. It also recommends overhauling controls and eliminating bearer share accounts.
We in Bangladesh should take a cue from these recommendations too. Our regulatory authority, Bangladesh Bank, must put in place strict oversight mechanisms to see that our banks are closely monitored and infractions checked. Compliance to the rules must be ensured at all costs. However, though the US Senate sub committee refers to Iran, Cuba and North Korea as "rogue regimes," they are countries with whom we have diplomatic relations, which the US does not. So here we need to be circumspect. But, indeed, we cannot allow any financial or ethical wrongdoing by any country. Caution is therefore the name of the game.
A wise man had once said: "Better be wise by the misfortune of others than by your own." The HSBC fiasco should be looked at by us in that light.
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