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Banking sector, Blogs

The hidden truth of banks enabling corruption and the devastating human cost

There has been no shortage of highly publicized scandals involving the financial sector in recent years, from the crash in 2008 onwards. A much less known, yet equally shocking, one is the key role banks play in enabling corruption, which has a devastating impact on people around the world. This is the focus of Banks and Dirty Money, a recently published report by Global Witness. It highlights how regulatory failure lies at heart of this problem too.

Corruption is “public enemy number one” in the developing world, according to Jim Yong Kim, the President of the Word Bank. In poor countries it kills people and traps millions more in poverty. When unscrupulous officials steal vast sums of state money, they decimate funds that should be spent on vital services like health care, education and infrastructure.

It has other damaging impacts that are felt by all countries. The B-team, a group of eminent business leaders have shown how corruption adds 10% on to the cost of doing business around the world, stifling the global economy. It also leads to a lack of confidence in government institutions, which can lead to insecurity and in some cases failed states that in turn breed terrorism which is exported around the world, threatening the national security of countries everywhere.

The largely hidden truth is that banks play an integral role in enabling this devastating corruption. The days when large scale corruption involved briefcases full of money are largely confined to the past. Corrupt officials now tend to rely on banks to hide the money they plunder and then make it appear “clean.” A World Bank study of 213 grand corruption cases showed that from this sample alone government budgets around the world lost out on $56.4 billion. Global Witness analysed this data and found that at least 140 banks were involved in handing these corrupt funds, including over a third of the current 50 biggest banks in the world.

Most countries have laws and regulations, based on internationally agreed standards, which require banks to spot when they are being used to launder the proceeds of corruption and other crimes. However, while some banks are upholding these anti-money laundering requirements, a large number are not. For example, a damning report by the UK regulator in 2011 found that 75 per cent of banks were violating the rules designed to keep dirty money out of the system in some way. As a result, many banks around the world are leaving the door wide open for not just corrupt officials, but tax evaders, drug cartels, and other criminals to launder their funds undetected.

In common with other recent banking misconduct, skewed incentives are the major underlying cause. Banks stand to make significant profit from taking money that has been embezzled, or earned in other illegitimate ways. Yet there is often very little downside. The regulations are poorly enforced, and where penalties are handed out, they tend to be fines given to a bank as a corporation. Senior executives with ultimate oversight rarely face consequences themselves.

A prime example of this was exposed last year when BNP Paribas, France’s largest bank, was fined $8.9 billion dollars by the U.S. for breaking international sanctions to Sudan and other countries. Senior managers at the bank ignored warnings from compliance staff that they were breaking the law, because the profits were too good to turn down. The New York banking regulator laid bare the full scale of the wrongdoing by declaring “[BNP Paribas] – with the full knowledge of multiple senior executives – engaged in a long-standing scheme that illegally funneled money to countries involved in terrorism and genocide”.

The most effective way to change the persisent rule breaking would be to hold senior executives personally responsible for upholding anti-money laundering regulations. It is not until they start losing their jobs, being personally fined, having bonuses withdrawn, being barred from their profession, or in the worst cases face criminal prosecution and jail, that the people who run banks will take these regulations seriously .

There are some chinks of light. In the BNP Paribas case, the New York regulator insisted that five senior executives be fired. This is almost unique, and other regulators around the world should take note. A few months ago the UK’s banking regulator, the FCA, published the details of a poineering measure – the Senior Managers Regime – which include the requirement for a named senior executive at UK banks to be held personally responsible for complying with anti-money laundering regulations. This is hugely welcome. However, the true test will be whether the FCA implements this effectively when it comes into force next March.

Last week, Hilary Clinton declared that she would hold senior bankers accountable for failures if she became President. If she did get the job, introducing a measure like the Senior Manager Regime would be a good place for her to start.

In a recent speech, the UK’s Prime Minister called corruption “one of the greatest enemies of progress in our time” and announced the UK will be hosting an Anti-Corruption Summit next year. He would secure a huge step forward if other countries at the Summit agreed to hold their senior bankers personally responsible for denying corrupt officials the opportunity to hide and launder their ill-gotten gains.

Stuart McWilliam is Senior Campaigner for Money Laundering at Global Witness

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