Crime and Punishment in International Banking: You Can’t Follow the Players without a Scorecard

The airwaves are once again crackling with the saga of crime and punishment in the international banking sector. HSBC has been penalized $1.92 billion for money laundering in the service of rogue states, but has engaged in even more money laundering for Mexican and Colombian drug cartels. It is reported that a Mexican drug lord was taped saying that, if you are interested in laundering your money, HSBC is the place to go. Can’t this get onto Saturday Night Live as a spoof ad for HSBC?

It is time to review the scoring in in 2012 as the New Year approaches. It is like a tournament of rogue financiers, with two brackets – money laundering and LIBOR manipulation. 

So far, in the combined brackets, the score stands at: International regulators $4.5 billion, Banks 0. That understates the matter because the banks seem to be running legal fees at the rate of 50 cents for every dollar of penalty they incur. 

On the other hand, no bank has been indicted for the patently criminal behavior in which they have engaged because the Justice Department and its fellow authorities are terrified of igniting a second financial crisis. You see, if a bank were indicted, it would no longer be able to do business with many pension funds, endowments, state and local governments and, depending on the offense, the US Government. It could also lose its charter to do business in the United States. That would precipitate the “fail” part of too-big-to-fail.

Applying these penalties to a mega-bank does seem frightening. But not applying them is also unfair. This is especially so since it indirectly protects senior management, whose prosecution presumably would not threaten the world economy. The logic is that, if the corporation is not indicted, how can the individuals who directed the bad actions be prosecuted. 

In fact, Lord Green, who was Chairman and CEO of HSBC while the laundry was in full operation is currently the UK Minister of Trade and very much un-indicted. He said he was sorry that the bank behaved so badly, by the way. 

The time has come to own up to the constraints of too-big-to-fail and proceed with indicting the individuals who are truly culpable.

The money laundering investigation has so far ensnared some of the biggest names in international banking: HSBC, Standard Chartered, Credit Suisse, Barclays and ING. We can only assume that there is more to come. The behavior cited by the authorities is not merely aggressive interpretation of rules. It involves actively camouflaging the activity by alteration of documents and promotion of business activities that could only be laundering by senior management. (Whiting out the name “Iran;” $7 billion in cash transfers from and to small Mexican entities – how could one fail to conclude that these banks intended to break the law?

But the scorecard for the second bracket of bank felons is also active. Three traders were arrested in London yesterday for providing the trading side of the fraud that commenced with manipulation of LIBOR interest rates. This is an important development. Somehow manipulation of LIBOR to save the bank by hiding its weakness (and also misleading investors and creditors, by the way) seems less morally corrupt than outright theft. Barclays was fined $450 million, but much of what it did was to ward off a government takeover during the height of the crisis. Justified or not, collusion between officials that provide data that goes into LIBOR and traders who traffic in LIBOR denominated debt will be viewed as far more venal and the consequences will reflect this fact.

The LIBOR investigation is widespread, so far ensnaring Barclays, Royal Bank of Scotland (who has warned that a settlement is imminent), HSBC, Deutsche Bank, UBS, JP Morgan and Citigroup. It will go on for many months, with one settlement following another as banks cop pleas to avoid the virtual death sentence of an indictment. If it emerges that banks colluded by putting one bank’s traders in touch with another bank’s LIBOR data reporters to smother wrongdoing, the investigation will take on a completely new direction. Predatory collusion among international banks is even more dangerous than rigging the market in favor of in-house traders.

So, be sure to keep track as these mega-scandals unfold. I recommend adapting the ubiquitous college basketball tournament bracket as a device for easy reference. Perhaps you can induce your colleagues to fill in the brackets with predicted fines and jail times with the most accurate bracket winning at year’s end.