There have been a few major headlines lately about the American fines of banks.
I’ve blogged about some of them like Standard Chartered and HSBC, but the news has recently seen several more major headlines such as Credit Suisse today being fined $2.6 billion for criminally aiding US citizens in tax evasion (watch my interview on Bloomberg if interested).
BNP Paribas are also due to be fined somewhere around $3 billion for money laundering sanctions. That follows on from the HSBC fine of $1.9 billion for the same issue.
But what gets me is that these fines are disproportionate and clearly show American parochialism. The banks the US Authorities seek to punish are mainly the large European banks whilst, when it comes to its own, it is far more lenient.
When JPMorgan were found guilty of money laundering in 2011, they were fined $90 million ($3 billion for BNP?); when Citigroup were found guilty of aiding citizens in tax evasion, they were fined just $600,000 ($2.6 billion for Credit Suisse?).
Now OK, there are differences.
Supposedly, BNP and Credit Suisse purposefully tried to avoid investigation and actively tried to block the US authorities in their efforts. However, I’m not sure that JPM or Citi actively fessed up and admitted their wrong-doing.
Even when the banks are held accountable in the US, they are treated differently. For example, Bank of America and JPMorgan have both been fined heavily for the criminal mis-selling of mortgage bonds but were not made to pay for their crime.
Credit Suisse, on the other hand, has not only been forced to admit criminal wrong-doing, but they have a number of staff now under indictment for such wrong-doing, as do Barclays and others for LIBOR rigging.
In fact, last year, fines and settlements paid to U.S. federal and state authorities cost banks more than $40 billion this year, led by JPMorgan’s record $13 billion payout for mis-selling mortgage bonds.
Admittedly, payments in the United States are swelled by the large number of watchdogs involved from national authorities such as the SEC and Federal Reserve to Fannie Mae and Freddie Mac to the National Credit Union Administration (NCUA) and the energy market regulator, as well as individual states.
JPMorgan’s mortgage bond settlement, for example, included a $2 billion civil penalty with the Justice Department, $1.4 billion to the NCUA, $4 billion in relief for consumers, and payouts to five states, including $299 million for California and $20 million for Delaware.
As a Reuters report at the end of last year stated:
Two trends are clear: regulators are slapping bigger fines on banks in an effort to clean up standards; and regulators appear to be working better with each other as they all strive to get a piece of any payouts. “The level of cooperation and coordination between international regulators is an increasing threat to regulated firms,” said Richard Burger, partner at British law firm RPC. “There is enormous political pressure on every single regulator to be seen to be taking their pound of flesh when there is a regulatory failing that crosses borders.”
I agree with this, but also think it’s clear that the USA is on a witch hunt for low hanging fruit and easy pickings from foreign banks.
Just checkout this chart from The Economist:
Urmm … where are the American banks on this list?
In 2003, New York prosecutors claimed that an unlicensed money-transfer firm in Manhattan directed $9 billion in wire transactions through three dozen accounts at JPMorgan, moving money around the world for drug dealers and other dodgy characters.
In 2011, the bank paid nearly $90 million to settle regulators’ claims that it had violated economic sanctions against Iran, Cuba and other countries under U.S. embargoes.
In January 2013, a consent order from JPMorgan’s main federal regulator, the Office of the Comptroller of the Currency, cited the bank for “critical deficiencies” in its anti-money-laundering controls, including inadequate procedures for monitoring transactions at foreign branches In the wake of the comptroller’s case, the bank told the New York Times that it has been “working hard to fully remediate the issues identified”.
An example of how criminals can evade the system surfaced publicly in a federal drug case in a Texas court this summer. Mexican drug cartels hid proceeds from cocaine-trafficking in two accounts at Bank of America, according to law enforcement testimony in the case, and some of the money was used to buy racehorses. Bank of America was not accused of wrongdoing, and the comptroller’s office has said privately it is unlikely to bring an action related to the case (news story highlighted by this article).
The US Federal Reserve has ordered Citigroup to improve its compliance with anti-money laundering rules, citing deficiencies at an affiliate of Banamex, its prized Mexican banking arm.
Citi is required to develop plans to strengthen its anti-money laundering procedures and adequately fund its risk-management programmes. There were no fines as part of the Fed order.
Oh, and talking about Credit Suisse getting fined $2.6 billion for helping American citizens evade tax?
Citigroup Inc. was fined $600,000 by the Financial Industry Regulatory Authority (FINRA) formerly known as the National Association of Securities Dealers, a private-sector regulator of U.S. broker dealers with supervisory authority over 4,800 U.S. brokerages, which determined that Citigroup Global Markets assisted their clients to avoid paying billions of dollars of U.S. taxes.
It does not mean that the US is wrong, but it does mean that this disproportionate action of avoiding any criminal wrongdoing, jailing or charges against their own banks makes their actions look highly hypocritical when it comes to their targeting foreign banks.
Meanwhile, all of this is creating a challenge for maintaining effective operational risk controls.
Harsher regulatory penalties in the US and UK, for retail mis-selling, Libor-rigging and mortgage-related offences among others, have helped to make operational risk losses for banks in these two jurisdictions far higher than for banks elsewhere. US banks' operational risk losses averaged 0.029% of Tier I capital; UK banks averaged 0.011%. No other jurisdictions saw average losses over 0.01% of capital.
My recommendation: increase bank reserves for further American fines in the future.