Intertwined and Interconnected: HSBC in a Spider's Web

Compliance with the law? Or compliance with greed & fear?

We have linked briefly earlier on this story, but it deserves closer attention. An article by Nick Mathiason in The Observer reports on HSBC being accused of helping enrich senior Egyptian political and business figures now at the centre of corruption investigations.

Research by the Bureau of Investigative Journalism, a not-for-profit body based at London's City University, has concluded that HSBC:

■ raised more than £450m for two of Egypt's biggest and most controversial property developers now embroiled in corruption court cases (shares in those companies have subsequently dived);

■ was the most active European investment bank in Egypt;

■ had on its Egyptian board two directors who in 2004 went on to become ministers of state overseeing land sales and privatisations under Mubarak.

And we are wearily unsurprised to learn that:

The bank's involvement with controversial Egyptian tycoons has raised questions about the role played by its former chairman, Lord Green, who in January was appointed by David Cameron [the UK Prime Minister] as government trade and investment minister

(And on Stephen Green - this article is worth remembering.) The finger is to be pointed not just towards developing country kleptocrats and local cronies - but also to people in power in the developed world and the major financial centres who are deeply involved, and mired in the dirt.

The article goes on to quote the banks' PR:

In a statement, HSBC said: "Each of these transactions… was subject to thorough due diligence to meet international standards of regulation. This is standard HSBC policy in every capital market transaction in which we participate.

"None of the companies or their principals was under Egyptian, United Nations, United States or European Union sanctions of any kind at the time of these transactions. The Arab Republic of Egypt was not under any sanction at the time of these transactions."

As we have been pointed out earlier - the money should not have been taken in by the bank in the first place, when adequate due diligence should have revealed the parties involved to be politically connected and with a high risk of the funds and transactions being connected to illicit activity.

HSBC has more:

HSBC states it has stringent corruption protocols that come into play when dealing with overseas governments. These include so-called Know Your Customer checks, anti-money-laundering checks and extra scrutiny for "Politically Exposed Persons" (PEPs) – in other words, people entrusted with a prominent public function.

But Anthea Lawson of our friends at Global Witness is cited as so rightly observing:

"This case raises huge questions about HSBC's approach to corruption. What due diligence has HSBC done to reassure itself that it's OK to run the share issue for a developer that has allegedly bought up state land at a pittance and sold it on at vast profit while two cabinet members are shareholders? Who in the bank was responsible for making the decision to go ahead with these deals, and what does this say about the tick-box approach that banks are getting away with when it comes to corruption and senior political figures?"

People within financial institutions who would abhor the idea that they are involved in illicit, dark and dirty activity (and such people certainly do exist), can either be blind to the fact that it is happening, or their voices of concern are ignored. Generally, the regular workers are unaware of what is really going on: it is the senior people who know the realities behind the deals done.

As many of our regular readers will know - within a financial institution, the official job of raising concerns and reporting on suspicions of money laundering - and raising the red flag to deter the taking-on of dodgy business - is held by the designated money laundering compliance/reporting officer (MLRO). Many compliance officers are ethical, diligent employees who are concerned to ensure a clean business. But they are caught between the proverbial rock and a hard place. Global Witness, in their report Undue Diligence: How Banks Do Business with Corrupt Regimes, speaks of how compliance officers in financial institutions are often faced with a situation that is at best frustrating, and at worst terrifying, when they raise concerns of illicit activity to their powers-that-be. Compliance officers can tend to face being ignored, or face the fear of job loss, or worse.

Chris Mathers, a former undercover officer for the Royal Canadian Mounted Police, who has also worked for the FBI, Interpol, and Scotland Yard, in his book "Crime School: Money Laundering, describes how for the compliance officer (or MLRO):

... more often the term "pain in the ass" springs to mind. In spite of being absolutely necessary, s/he is generally considered a nuisance by the financial services industry. Talk about a thankless job. Typically, the people MLRO's supervise see them as an impediment to business. And the board of directors and the and the executive director of an institution see them as the appropriate people to take the heat if ever there is any kind of money laundering problem [ie. one that actually gets exposed - TJN's note] ... being responsible for anti-money laundering compliance can even be dangerous. When I was in Colombia, a senior banking official asked me how many bodyguards a compliance officer in my country would employ. Apparently, down there, they are getting knocked off all the time.

There are those in high places who genuinely want and work for greater equality and for justice, but there are those who are too interconnected with the spider's web to act with real integrity.

So when policymakers call for reform of secrecy jurisdictions or tax havenry activity, watch out for the fig leaves. See here for example. Also, we'd like to remind you of a beautiful quote we highlighted in our blog "Peace and all good to Goldman Sachs" "shining a spotlight keeps the pressure on..."

For deep insights on the Spider's Web of offshore and secrecy - read Treasure Islands.