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Fifty Shades of Law: America, Banking and World War III

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. 

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.

sounds a bit extreme, but it made some sense as the conversation developed.

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. 

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can point to payments before November 2008, when the U-turn exception was
revoked, and prove these were allowable under US law. 


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

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. 

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

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

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?

at insider trading.

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.

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.

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. 

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?  

you seen headlines about major fines for breaking money laundering sanctions
with any US bank?

you honestly believe that any American bank wasn’t dealing with Iran, Mexico
and other nations in a way that might have allowed laundering?

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.

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.

will happen in the same way that Financial Services Club speaker David
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.

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

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.


About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • KTQ

    I’ve been saying for a long time that money laundering prosecutions were a competitive tool used deliberately to undermine foreign banks. It’s always good politics in the US to attack foreigners. It’s always bad politics for a US regulator to go after banks who own senators and congressmen who can cut their budget.
    Also, historically, US banks have always been at the forefront of providing services to the black money economy – and it is a very profitable clientele to have. The US banks have an interest in keeping that clientele to themselves. BCCI vilified. Riggs Bank (where Bush’s uncle was on the board) – never investigated.