Ever since the collapse of Lehman Brothers and the ensuing financial crisis in the US and Europe, governments in many major financial hubs have taken various steps to address issues that are related to the financial crisis and to take investors to the next level. HAMUD BALFAS expounds further.
The US legislative branches have for instance submitted and passed a law that is known as the Dodd–Frank Wall Street Reform and Consumer Protection Act (the Dodd–Frank Act).
The Dodd Frank Act contains various provisions including various matters with respect to the following issues:
- The consolidation of regulatory agencies and a new oversight council to evaluate systemic risk
- Comprehensive regulation of financial markets, including increased transparency of derivatives and other financial products that financial institutions sell to its customers (both individuals as well as institutions)
- Consumer protection reforms including the introduction of a new consumer protection agency
- Tools for financial crises, including a ‘resolution regime’ (complementing the existing authority of the Federal Deposit Insurance Corporation that allows for the orderly winding down of bankrupt firms
- Various measures aimed at increasing international standards and cooperation
- Proposals related to improved accounting and tightened regulations of credit rating agencies which many experts consider as sources of financial crisis
- Improvement to the regulations of asset-backed securities, and
- Improvement to regulatory enforcement and remedies.
One of the most influential provisions of the Dodd Frank Act that has affected many financial institutions is the introduction of the Volker Rule in the Act that basically restricts (the US) banks from making certain kinds of speculative investments that do not benefit their customers.
On the regulatory enforcement issue, the Dodd Frank Act clearly has enhanced the ability of regulators and other law enforcement agencies and pushes them further to pursuing irregularities in the market as well as monitoring the behavior of financial institutions. This has resulted not only in prosecutions and fines imposed on financial institutions by their respective regulators but also the widening of participation of other law enforcement agencies.
Prosecutions do not only involve securities and banking laws but also money laundering activities, interest rate and exchange rate manipulation as well as illegal practices related to the marketing of a bank’s products such as credit cards and investment products. All of a sudden there is a lot of news in the media that big banks that are long believed to have ‘first class’ compliance with laws and regulations have become suspects in the crackdowns. The prosecutions have also eroded banking secrecy laws in countries like Switzerland which has long been regarded as the country with the safest banks for keeping banking secrets in the world.
What surprises us in cases where the US government pursues money laundering activities are that those money laundering activities do not only involve governments that are under sanctions by the United Nations or the US government, but also involve the laundering of money from drug dealers and cartels.
Bloomberg has recently reported on many cases involving these big banks. HSBC, for instance, has been accused of failing to monitor more than US$670 billion in wire transfers and more than US$9.4 billion in purchases of the US currency from HSBC Mexico, allowing for money laundering, prosecutors said. The bank also violated US economic sanctions against Iran, Libya, Sudan, Burma and Cuba, according to criminal information filed in the case.
On another report published by Bloomberg, a branch of the huge Dutch co-operative bank Rabobank in the US-Mexican border town of Calexico is reported to have been involved in money laundering activities that involved money from Mexican drug cartels. The report states that US investigators now have evidence that some bank officials may have impeded internal efforts to scrutinize customer accounts and to report suspicious transactions. Some of the activities the authorities are said to be looking at occurred under the watch of a compliance officer who Rabobank poached directly from its regulator to get its house in order.
For Rabobank itself, the criminal action related to the anti-money laundering probe brought against its branch in Calexico would become ‘double trouble’ for it as it is still bound by the 2013 deferred prosecution agreement with the US Justice Department over a case involving its manipulation of benchmark interest rates. The deferred prosecution agreement which expired on the 29th October 2015 would only allow the bank to escape criminal charges if Rabobank avoids further criminal allegations in the US.
Various US government prosecutions over criminal activities of the big banks have not only damaged the banks’ reputations but has also resulted in billions of dollars of damages that the banks have to pay. Big banks like JPMorgan and HSBC have each paid around US$2 billion each to settle their disputes with the US over violations of money laundering laws, while other banks like Commerzbank has paid US$1.45 billion, Standard Chartered US$740 million and Citigroup US$140 million. In addition to the US$140 million for money laundering activities, Citigroup has also been ordered to pay the US government US$925 million as a result of a guilty plea by its unit Citicorp to a felony charge of conspiring to manipulate the price of US dollars and euros. The Consumer Financial Protection Bureau also ordered the bank to pay US$700 million to its customers for illegal practices related to the marketing of credit card add-on products.
The long arm of US law has not only reached banks that operate in the US. Many private banks operating out of Switzerland have also been subject to investigation by the US Justice Department over allegations of tax evasion by US citizens. As a result of the investigations and their process of collecting information from the Swiss banks, the US authorities have now been able to build cases on other banks in other ‘tax heavens’ including Singapore, Israel and other jurisdictions where its citizens try to hide their money and run from their obligations at home.
Hamud Balfas is a lawyer in Jakarta with ABNR. He can be contacted at [email protected].