It’s getting harder for politicians to ignore the stench of the financial system anymore, even with the anesthetic of campaign contributions they suck from the rot. On Tuesday, HSBC will appear before the House Banking Committee to discuss a different kind of corruption. It’s not conspiracies to fix LIBOR, while bank regulators, including the New York Fed led by our Secretary of the Treasury, don’t bother warning regular people.
And it’s not the corruption of the fail whale trade from JPMorgan Chase, currently expected to clock in at a $7.5 billion loss, and a much bigger hit to shareholder value, now featuring what amounts to an admission that the financial statements were phony.
One facet of that case leads us to the HSBC hearing. The money used in the Wall Street Casino was “excess deposits”. JPMorgan has about $463 billion in excess deposits, of which $310 billion or so was used for gambling. Even for a really big bank, that’s a lot of checking accounts.
I doubt that that kind of money just walked up to a teller window asking to be held. I’m thinking that there are a bunch of sweet-smelling Armani-clad bankers with the proper socialization and knowledge of the finest Vodkas out there asking rich people and mammoth corporations and sovereign wealth funds and less well-known handlers of big pots of money to drop a few billion into the loving embrace of JPMorgan, all of it no doubt legally obtained. Sadly, some of HSBC’s excess deposits were derived from illegal sources, because the point of Tuesday’s hearing is to look at money-laundering.
It’s probably too soon for the Committee to ask the Bank of America how it managed to miss the fact that a Mexican cocaine-smuggling group, Los Zetas, poured money into the bank for use in Quarter-Horse racing.
A U.S. citizen who is the brother of a top Zetas leader and allegedly served as the front man for the drug cartel’s horse operation moved money in and out of one of these Bank of America accounts and a separate personal Bank of America account, the FBI said in the court filing.
It must be tricky to find this kind of relationship, because BAC swears it has “robust” anti-money laundering systems in place, which is good enough for the regulators. Apparently HSBC didn’t have robust anti-money-laundering systems in place. It was caught in 2003 and given a Stern Warning. It wasn’t enough. Someone leaked a bunch of documents to Reuters ahead of Tuesday’s hearing, including reports of investigations by two US Attorneys.
The bank created an operation that was a “systemically flawed sham paper-product designed solely to make it appear that the Bank has complied” with the Bank Secrecy Act and is able to detect money laundering, wrote William J. Ihlenfeld II, U.S. Attorney for the Northern District of West Virginia, in a draft of a 2010 letter addressed to Justice Department officials.
So much for Stern Warnings.
There is a whole lot of money flowing in and out of the banking system, and the financial system as a whole, hundreds of billions of dollars, Euros, Yen, Pounds Sterling, Yuan, and others every day. Catching money-laundering is crucial to stopping organized terrorist groups and criminal groups. The UN estimates (large .pdf) that in 2009, criminal revenues were about $1.6 trillion, about 2.7% of global GDP. About $870 billion of that is derived from illegal drug trafficking. Detecting this money is a challenge.
The US currently tries to do it by requiring banks to know their customers, and by requiring banks to monitor transactions and file suspicious activity reports in certain situations. It’s obvious that the first is pointless if it can be easily evaded (really, the brother of a cartel leader?)
Computers do the monitoring in all large banks. There are two basic approaches. One is rule-based software that examines all transactions against filters set by the bank for various activities. The other uses data-mining to try to find suspicious patterns. Here’s a simple description of the latter.
Both kinds of monitoring are pretty good at spotting things that banks care about, like check-kiting and Ponzi Schemes. It would help if the banks were required do something, like warn people, when it found that kind of fraud, but they aren’t, and the government is forbidden to publish the information. Really.
It is less clear that current AML systems are working on the problems that law enforcement officials care about, money-laundering and movements of money for criminals and terrorist groups. There is, however a very simple solution, put forward by the Financial Stability Board.
The FSB is an international organization of government agencies charged with regulating the financial system. Their solution is called the Legal Entity Identifier (LEI). Every person who transacts business in the financial system gets a unique identification number and that number has to be attached to every transaction.
Recommendation 12 of the plan of work is:
LEI Implementation Group should as soon as possible develop proposals for additional reference data on the direct and ultimate parent(s) of legal entities and relationship or ownership data more generally and to prepare recommendations by the end of 2012.
Right now, the brother of a leader of a drug gang isn’t a suspicious person. Maybe that enhanced LEI data would make a difference. A representative of Global Financial Integrity has been appointed to work on the project. Their mission is to work towards cutting off illegal money flows. One thing is certain: when the inevitable efforts to water down that recommendation start, we’ll have someone on the inside to report on it.